IAS Prelims 2015: Basic Economics : Classification of Economy

This article would help candidate to understand different forms of economy.

Created On: Sep 30, 2014 17:50 IST
Modified On: Feb 26, 2015 18:24 IST

According to A.J. Brown, “An economy is a system by which people get living”. The way man attempts to get a living differs in major respects from time to time and from place to place. Every nation has its own way of exploitation of resources, production, distribution and consumption. On the basis of how these things are done, there are basically four different forms of economy.

1.    Traditional economy: Traditional economic system is shaped by beliefs, customs, traditions, religions, etc. The occupation, production, distribution, exchange and consumption of goods and services tend to follow long-established traditions. These economic systems are not very dynamic. Standards of living are static; individuals don’t enjoy much financial or occupational mobility.

Economic activities in traditional economies are not aimed at producing surplus or making profit. If any surplus is created, it is distributed, wasted, or paid to some authority that has been given power. The people in traditional economies are very close-knit and socially satisfied.

Examples of this kind of economy can be found among Australian aborigines and some isolated tribes in the Amazon.

2.    Command economy or Planned economy: This type of economic system is characterized by centralized planning and control of economic activities by the government. The state decides how to use and distribute resources according to the needs of people.

All major decisions related to the production, distribution, commodity and service prices, are all made by the government.  The government regulates prices and wages. It may even determine what sorts of work individuals do. Market forces have very little say in such an economy. It lacks the kind of flexibility that is present a market economy.

Socialism is a type of command economic system. This kind of economy was found in Soviet Union before its disintegration in 1991.

3.    Market economy or Free enterprise economy:
The main features of this type of economy include private property, freedom of enterprise, profit motive, competition among enterprises, absence of central planning and absence of government interference.

Market economies run on the basis of principle of lassez-faire that is minimum or no interference by the government in the economy. Organizations run by the people determine how the economy runs, how supply is generated, what demands are necessary, etc. Market decisions are mainly dominated by supply and demand.

The role of the government in a market economy is to simply make sure that the market is stable enough to carry out its economic activities properly. Within a pure market economy the government is entirely absent from economic affairs. Pure market economy is not seen in the world now-a-days.

4.    Mixed economy or Dual economy: A mixed economic system combines elements of the market and command economy. The main features of this type of economy include co-existence of public and private sectors, economic planning, individual freedom, welfare approach towards underprivileged section of the society.

The areas of economic activities of each sector are generally demarcated. Government uses its various policies e.g. licensing policy, taxation policy, price policy, monetary policy and fiscal policy to control and regulate the private sector. Individuals and enterprises are free to maximize their income, choose any occupation and consume as per their choice. But producers are not given the freedom to exploit consumers and labourers. Thus in a mixed economy people at large enjoy individual freedom and government support to protect the interests of weaker sections of the society.

Indian economy is considered a mixed economy as it has well defined areas for functioning of public and private sectors and economic planning. Even countries such as USA, UK, etc. which were known as capitalistic countries are also called mixed economies now because of active role of their government in economic development.

Types of Economics on the Basis of Level of Development

On the basis of level of development economies can be classified in two categories:

1.     Developed economy: Developed economy is characterized by higher national and per-capita income, high savings and investment, educated human resources, better civic facilities, health and sanitation facilities, low birth rate, low death rate, low infant mortality, developed industrial and social infrastructures and a strong financial and capital market. Overall people in these economies have a high standard of living. Examples include US, UK, Japan, etc.

2.     Developing economy: Main features of developing economies include low national and per capita income, low savings, investment and capital formation, poor health and sanitation, high infant mortality, high birth rate and death rates and poor infrastructure. Overall people in these have a low standard of living. These economies usually exports agricultural goods or natural resources and imports value added goods from developed countries. Countries like India, Brazil, and Indonesia have this kind of economy.

Click here for IAS Prelims Economics Study Material


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