Four Main Types of Economic Systems

MIXED ECONOMIC SYSTEM

NIGERIA

Mixed economic system is the type of system which exhibits the features of both market and centrally planned economy, where production takes place in accordance to maximize the profit but along with this welfare of society is also considered. In short, there is a right balance between the private and the public sectors. The system doesn’t block the private sectors from profit-seeking but do monitor profit levels, while the government is involved in planning the use of resources and can exert control over businesses in the private sector. For example, prices are fixed by the forces of market-demand and supply as well as the government.

One example of country that adopts this economic system is Nigeria. It has an economic freedom score of 55, which means 55% market economy and 45% command economy. The Nigerian economy is one of the most developed economies in Africa. According to the UN classification, Nigeria is a middle-income nation with developed financial, communication and transport sectors. It has the second largest stock exchange in the continent. The economy has stumbled for years due to political unrest, corruption and poor fiscal policies. However, the country is growing at a fast pace since the restoration of democracy and introduction of economic reforms. 

The petroleum industry is central to the Nigerian economic profile. It is the 12^th largest producer of petroleum products in the world. The industry accounts for almost 80% of the GDP share and above 90% of the total exports. Outside the petroleum sector, the Nigerian economy is highly amorphous and lacks basic infrastructure. Several failed efforts have been made after 1990 to develop other industrial sectors.

Benefits

• Producers and consumer have sovereignty to choose what to produce and consume but production and consumption of harmful goods and services may be stopped by the government.
• Social cost of business activities may be reduced by carrying out cost-benefit analysis by the government.
• As compared to market economy, a mixed economy may have less income inequality due to the role played by the government. Monopolies may be existing but under close supervision of the government.

Disadvantages

• Since welfare of society is important in a mixed economy it leads to lower than optimum use of the resources because government mobilize the resources towards the production of those goods and services which are beneficial for the society as a whole rather than producing those goods and services which in economic terms are more beneficial for an economy.
• Under mixed economy private enterprises have to face lot of difficulty because of various government loopholes like favoritism and bureaucratic nature which is prevalent in mixed economy.

TRADITIONAL ECONOMIC SYSTEM

THE INUIT

A traditional economy is defined by three characteristics : First, it is based on agriculture, fishing, hunting, gathering or some combination of the above. Second, it is guided by traditions. Third, it may use barter instead of money. For these reasons, people who live in a traditional economy appear to be living in poverty, even if their daily needs are being met. Most traditional economies operate in emerging markets, or the Third World countries. They are usually located in Africa, Asia, Latin America and the Middle East. However, pockets of traditional economies can be found throughout the world.

At its most basic level, a traditional economy exists in a hunter/gatherer and nomadic society. These groups live in families or tribes, and cover wide areas to find enough food to support them. They follow the herds of animals that sustain them. They may also move to follow the seasons, whether it’s winter/summer or wet/dry season. At the next level, hunter/gatherers find a fertile area they can cultivate, and become farmers. They can support more people using fewer resources. This allows them to erect permanent structures, and trade with other groups. Since traditional economies center around a family or tribe, it is easy to use traditions gained from the experience of the elders to guide day-to-day life. Economic decisions are based on these traditions.

The Inuit are indigenous people who have learned to survive in the tundra of Northern Canada and other Arctic regions. About half of them live in Nunavut, a territory that includes most of Canada’s Arctic islands, in small coastal towns that are far apart from each other. Nunavut’s people elect an assembly of 19 people who choose a government leader and ministers.

For more than 4000 years, the Inuit have relied on the Arctic’s resources to live. They made tents or built igloos, depending on the season. The Inuit hunted animals such as caribou and sea mammals for food, and used animal bones to make harpoons and fishbooks. They live in extended families, with each member contributing to the work. Hunting, cooking, and making warm, waterproof clothing were important jobs. Children learned survival skills and about the past from elders.

In the past, the Inuit didn’t use money but hunted, gathered, or made everything they used. Today many Inuit have jobs to earn money and pay for goods and services such as electricity and Internet access. Many still live in remote areas but use modern technologies such as eceltric heaters and snowmobiles.

Benefits

• Nurturing a feeling of unity among individuals, helping in the development of a social bond and sense within them by reducing mutual hostilities.
• The feeling of psychologically more free, comfortable and secured, which increase their working abilities million fold.
• It brings down the rate of unemployment, therefore their mind never sit idle to plan criminal activities.
• It permits people to enjoy more independence against minimum or no financial expenses.

Disadvantages

• Resistant to change since they tend to think that methods and procedures which are followed by their ancestors for generations are correct, hence in turn leads to lower productivity, standard of living and development of the society or the country as a whole.
• People have to do jobs which they are told to but also which they might dislike, therefore it also lowers the productivity.

COMMAND ECONOMIC SYSTEM

BRITISH DURING WORLD WAR II

A command or planned economy occurs when the government controls all major aspects of the economy and economic production. In a command economy, it is the government that decides what to produce, how to produce goods and how to distribute goods and services within the economy. Command economies were often associated with the political system of Communism. It was Karl Marx, in the Communist manifesto who argued for ‘common ownership of the means of production’. The system works in contrast to free market system.

During World War II the British government controlled the economy to a large extent and the war-time government even controlled what jobs people did in some cases. For example men were conscripted to work in the mines as well as the army, navy, and air-force while women were conscripted to work on farms and in hospitals as well as the armed services.

Many goods were rationed and the home front was managed so that as much as possible went into the war effort. The wartime government wanted to make sure that the British people had the basics they needed to stay fit and healthy, and also to avoid squandering resources that could help defeating Hitler. For the six years that the war lasted the controlled economy worked and helped defeat the Nazis. After the war even the newly elected Labor Government gradually dismantled these controls. Centrally planned economies certainly have a place in managing a war or major crisis.

Benefits

• The government is enabled to overcome market failure, inequality and create a society that maximizes social welfare rather than maximizes profit.
• Preventing abuse of monopoly power and mass unemployment, which are often features of capitalist economies.
• Producing goods which benefit society and ensure everyone has access to basic necessities.

Disadvantages

• Government agencies usually have poor information about what to produce. Centralization means that decisions are taken by people who may have no access to what is actually happening. Command economies, like the Soviet Union often produced goods that weren’t used.
• Unable to respond to consumer preferences.
• Threat to democracy and liberty since it creates a very powerful government which limits individuals rights to pursue economic objectives. This invariably results in a climate where governments can extend their control into other areas of people’s lives.
• Command economies tend to be very bureaucratic with decisions held up by planning and committees.

MARKET ECONOMIC SYSTEM

BRAZIL

A market economy is an economy where most resources are owned and controlled by individuals and are allocated through voluntary market transactions governed by the interaction of supply and demand. People exchange resources, such as money, for other resources, such as goods or services, on a voluntary basis in the market. The value of the resources exchanged is based upon how scarce each resource is and how many people want the resource. If the supply of a resource is low, but demand is high, the price will tend to be high. If the demand is low and the supply high, the price will tend to be low.

Economic growth and development in a market economy is determined by the relative risks and rewards (profits) that particular economic activities presents to individuals. If risks are too high, and rewards are too low, then certain activities probably will not be pursued.

Government involvement in regulating market transactions in a market economy is limited to pretty much ensuring that the rules of the market are enforced and applied fairly to all participants. Additionally government involvement in planning or directing economic development and growth is very limited. In practice, there is no such thing as a pure market economy because that would mean there would be no taxes on economic activities or government regulation of economic activities at all.

Brazil has a moderate free market and export-oriented economy. Measured nominally, its Gross Domestic Product surpasses a trillion dollars, the tenth in the world and the third in the Americas; measured by purchasing power parity, $3.8 trillion, making it the eighth largest economy in the world and the second largest in the Americas, after the United States. Its nominal per capita GDP has surpassed USD9,000 in 2007, due to the strong and continued appreciation of the Real for the first time this decade. Its industrial sector accounts for three fifths of the South American economy’s industrial production. The country’s scientific and technological development is argued to be attractive to foreign direct investment, which has averaged US$ 20 billion per year the last years, compared to only US$ 2 billion/year last decade, thus showing a remarkable growth. The agricultural sector, locally called the agronegócio sector, has also been remarkably dynamic: for two decades this sector has kept Brazil amongst the most highly productive countries in areas related to the rural sector. The agricultural sector and the mining sector also supported trade surpluses which allowed for massive currency gains (rebound) and external debt paydown. Brazil is the 10th largest economic power in the world with a GDP of nearly 800 billion dollars in 2006. President Lula’s prudent fiscal and monetary policies, coupled with necessary microeconomic reforms have restored confidence in this market. However a strict fiscal discipline and restrictive budgetary policies will not allow the government to pursue an ambitious reform agenda and thus will restrain growth.

Benefits

1. Competition tends to lead to efficiency because businesses that have fewer costs are more competitive and make more money.
2. Innovation is encouraged because it provides a competitive edge and increases the chance for wealth.
3. Variety of goods and services are available as businesses try to differentiate themselves in the market.
4. Economic activity is encouraged because you need money to live and need to engage in economic activity (through employment or self-employment) to make money.
5. Freedom of individual choice is possible to the extent that the market provides options for work, developing a business, and purchasing goods and services (so long as you can afford them).

Disadvantages

1. Disparity in wealth and mobility exists in market economies because wealth tends to generate wealth. In other words, it’s easier for wealthy individuals to become wealthier than it is for the poor to become wealthy.
2. Environmental damage and poor working condition result with no government regulations since it’s usually more expensive in an eco-friendly manner as well as considering health and safety cost money, which reduces profits.
3. Reduced social safety including such programs as unemployment insurance, Social Security, and Mediacare, is likely because these programs are supported through taxation.