An economy is a system in which goods are produced and then exchanged. A state will most probably collapse without a viable economy. Every economy in the world is unique in itself in some way or the other. Economies are never identical.
Still, these economies have many similarities in the case of their features and characteristics.
There are four types of economies- free-market economy, command economy, traditional economy, and mixed economy.
The Four types of Economies
- Free-Market Economies are specifically capitalist economies in which businesses and individuals bear the freedom to pursue their self satisfying economic interests.
- It also includes freedom of buying and the selling of goods in a competitive market which naturally defines and stands out with a fair price for goods and services.
- A free-market economy entirely depends on free markets and free-market trends.
- There is no involvement or interference of the government or any other controlling power.
- Hence there are no rules or regulations imposed on any of the buyers or sellers.
- The participants of the economy and the laws of demand and supply defines the entire economy in this case.
- A free-market economy shows very high levels of growth. It shapes the private organisations to get very powerful and influential in the nation.
- Hence it may create an imbalance of wealth and builds a scenario where the rich gets more affluent, and the poor gets poorer.
- In reality, there are no perfect free-market economies in the world. Every economy has a certain level of government regulation as it finds this necessary.
- A Command Economy is also known as the “Centrally Planned Economy” because the central or national government plans the economy.
- A command economy is just the opposite of a free-market economy. In a command economy system, there is only one unified incorporated power.
- The government itself makes all the decisions regarding the economy.
- It controls the production of goods and services and also contains the quantities.
- The price is determined by such centralised power itself instead of by market forces.
- Usually, communist states bear the command economies.
- In a communist society, the central government empowers and controls the entire economic system and allocates resources, and dictates prices for goods and services.
- Command economies are usually most of the times very inefficient because they ignore and alter the laws of supply and demand.
- Overall economic growth is slower than the states with a free market economy.
- As the name already suggests- “traditional economy” is entirely based on a traditional slant. These economies have old rules, and hence they are the most basic type of economy.
- In a traditional economy, the focus is only on the goods and services that preferably match their beliefs, customs, and history.
- Such economies tend to focus primarily on agriculture, cattle herding, fishing, etc.
- A traditional economy uses the barter system and therefore has no concept of currency or money. Traditional economies circle their tribes or families.
- These types of economies believe in producing what they require and also how much they need it.
- They do not find it necessary to produce any market surplus. So basically, there is no concept of trading.
- If such a traditional economy does not modify itself, it will become very vulnerable to change in the environment.
- Once the traditional economy evolves, they begin to adopt farming.
- They even start trading their surplus crop and start flourishing from this traditional economy. And when a traditional economy interacts with a market or a command economy, it becomes a traditional mixed economy.
- And ultimately money also starts to get importance in each of their lives. This type of economy is undoubtedly suited to underdevelop and developing economies.
- Even today, such economies are still in practice in some parts of Africa and the Middle East.
- A Mixed Economy merges the elements of free-market and command economies.
- Even in free-marketing states, the government very often takes some actions to direct the economy.
- The decisions made by the government aid in protecting the interests of specific industries to ensure the livelihood of those industrial workers. In economic language, this means that the states have mixed economies.
- Its examples include- Agricultural subsidies, which do exist in many countries like the U.S. While in some cases, this kind of policy enables us to keep food prices low without bankrupting the farmers. In other cases, they work to protect domestic agriculture. The government policies in the U.S. even strongly influences the cost of the milk.
- A mixed economy is a kind of perfect match between a command economy and a free-market economy.
- The economy, in this case, is free of government intervention.
- But the government regulates and oversees the particularly sensitive areas of the economy, which includes transportation, public services, defense, etc.
- This economy is also known as a dual economy. Some of the best examples of a mixed economy are India and France.
- A mixed economy premises private businesses with the freedom to operate in the economy with minimum oversight.
- While at the same time, the government also has the power to regulate the economy, and hence it does not affect the public interests in any negative or significant way.
- Both the public and private sectors can co-exist peacefully under one economy itself.
It is the absolute whisk of socialism and capitalism. Most of the economies in the world are currently mixed economies.