Economics may seem like a complex idea, but it is actually an insight that humanity already has. A lot of decisions we make are in the study area of economics. But what is an economic system? Well, it is basically 3 answers to 3 basic questions. They are:
-What should we produce?
-How should we produce?
-How should we allocate these products?
Different responses to these questions create different economic systems. In this post, we will discover the 3 central economic systems.
The Command Economy
The responder to all the questions in the command economy is the government. This means that the government decides how to use the resources; thus, resources belong to the state. Moreover, the government chooses the production method and the product receivers. In brief, the government is in total charge of the system. Some features of a pure command economy are:
-Everything is centralized: The government makes all decisions concerning the economy, and there is no such thing as specialization.
-Prices are determined by the state: Supply and demand don’t determine the prices.
-No private ownership: The government owns everything.
-Equality is valued: The government determines the income and unemployment is low
-Uncompetitive: Since the government controls the industries, the rivalry does not exist.
Communism is an ideology that uses a command economy. The effects of the command economy can be seen in states such as China, Cuba, Vietnam, and North Korea. However, the pure command economy does not exist; nonetheless, North Korea is the country closest to the pure command economy.
The Market Economy
This economy is actually the opposite of the command economy. Individuals and businesses determine the answer to these questions. This is a free economy where individuals make the decisions. Some features of a pure market economy are:
-Everything is specialized: Centralization does not exist.
-Supply and demand influence the prices: Government has no effect on prices
-Private ownership is the key: Individuals have freehold.
-Inequality is tolerated: Incomes depend on the resources and is an incentive. Unemployment is higher.
-Competition: Since the businesses are free, a rivalry exists.
Capitalism uses this economic system. The influences of the market economy can be seen in countries such as Singapore, Switzerland, the United States, and New Zealand. As in the command economy, a pure market economy also does not exist. However, Singapore’s economy is closest to being a pure market economy.
The Mixed Economy
This economy is in between the two extreme sides: command and market. While some free businesses create the system, the government regulates and has the right to interfere with the system. We can say that nearly all economies on the earth follow this system. Nevertheless, the level of government influence differs within countries. For example:
– The economy of New Zealand is under the influence of a market economy and specialization. Still, the government owns some lands, which makes this economy mixed.
-The economy of China is under the influence of a command economy. Still, some private businesses, such as “Alibaba” exist within the economic system.
Conclusion
We can infer that pure command and pure market economy are nearly impossible. It is unfeasible for a government to have complete control of an economy or no influence. All countries fall between the spectrum of command and market systems, closer to one side.
You can also take a look at our other posts in Economics!
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