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Economic Systems

Allocating resources efficiently is complicated because there is almost always a very thorny tradeoff between what is efficient and what is “fair.” People and societies organize economic life to deal with the basic problems raised by scarcity and opportunity cost through economic systems. An economic system can be described as the collection of institutions, laws, activities, controlling values, human incentives that collectively provide a framework for economic decision-making. An economic system works via the interaction of three invisible forces: the invisible hand (economic forces), invisible foot (political forces) and invisible handshake (social forces).

Before we discuss how the invisible forces operate, we need to find out what people can reasonably expect from an economic system. There are three basic economic questions that every nation must consider. They are (1) What goods and services shall be produced? (2) How shall they be produced? and (3) For whom shall they be produced?

Any economic system must use one or more decision-making methods or rules. Though the list of ways to make decisions is long, economic systems are classified into four broad categories. These are traditional, command, market, and mixed economies. Each of these systems works well to some degree at different points in time and for different cultures, but some are often better for answering one of the basic economic questions, while other systems may answer other questions more successfully.

Traditional economy is an economic system using social customs to answer the basic economic questions. Nowadays traditional economies are found primarily in the rural, non-industrial areas of the world, tribes in African countries, for example. In such areas, there is no national economy. Instead, there are many small segmented economies, each centred around a family or tribal unit. Each unit produces most of its own goods and consumes what it produces. The basic economic questions of “what”, “how”, and “for whom” are answered directly by the people involved, and the answers are usually based on tradition.

In command or planned economies the basic economic questions are answered by government officials. Command economies are characterized by government ownership of the economy’s natural resources and capital goods. Government leaders decide what goods and services will be produced, how they will be produced, and how they will be distributed. Individuals have little control or influence over the way the basic economic questions are answered. There are very few command economies left in the world, and North Korea is one of the examples.

A market economy or free economy is the opposite of a command economy. In a market economy, basic economic questions are answered by individuals, households and businesses through a system of freely operating markets. In market economies, natural resources and capital goods are usually privately owned. In such economies, buyers and sellers have a great deal of economic freedom, and they send signals to one another as they interact through the system. For example, by purchasing more of an item than usual, buyers send a signal to producers to increase production of that item. Similarly, by reducing their purchases of an item, buyers signal producers to reduce production of that item.

In actual practice, there are no real economies in the world that rely solely on freely operating markets or on government decisions to answer basic economic questions. All major economies are mixed economies. Mixed economy is an economic system that relies on a mixture of markets, government commands and tradition. This type of economic system is used in most countries, in the United States, for example. Most decisions there are made by individuals and firms as they exchange goods, services, and resources in private markets. But some decisions are made through the political process of government.

In the 1990s there appeared a new term transition economy to describe the countries of Eastern Europe and the former Soviet Union. Transition economies faced the task of moving from a centrally-planned system of resource allocation towards a more market-oriented approach.


Ex. 1. Say whether the following characteristics of economic systems are typical for a) traditional economic systems b) command economic systems c) market economic systems.

1. No national economy.

2. The government itself holds a monopoly.

3. Resources are distributed evenly, creating less socio-economic inequality.

4. “Invisible hand” is responsible for the production of goods and services, and their pricing.

5. Prices and supply of goods are controlled by the government.

6. Consumers enjoy the privilege of choosing among competitive products and services.

7. No opportunities for personal profit motives for any producer or consumer.

8. Individuals do not benefit from innovation or product development.


Ex. 2. Say if the statements are true or false.

1. An economic system works via the interaction of three invisible forces: the invisible hand (economic forces), invisible foot (political forces) and invisible handshake (social forces).

2. An economic system is interrelated with a political system.

3. In an autocracy voting procedures determine society’s will.

4. In a democracy a group of individuals decide what society’s desires are.

5. Every nation can produce enough goods and services to satisfy everybody’s wants.

6. Every economic system answers three basic questions: what, how and for whom.

7. In command economies the basic economic questions are answered by government officials.

8. Market economies are often called planned economies.

9. All major economies in the world are market economies.


Ex. 3. Answer the following questions.

1. What is the definition of an economic system?

2. What are the three invisible forces which make economic systems work?

3. What are the three basic economic questions that every nation must answer?

4. What are the three basic approaches to economic decisions based on?

5. What are the basic types of economic systems? What are their advantages and disadvantages?

6. How can you describe the economy of Belarus?




Scan the text and do the following tasks:

A.Choose the headline which best expresses the main idea of each paragraph:

– Economics Theory.

– Descriptive Economics.

– Economic Policy.


B.Reduce the text to one-fifth of its original length giving the most important information in writing. Use the following discourse markers: firstly, secondly, thirdly, besides, moreover, on the contrary, finally/eventually, etc. if necessary.

Date: 2014-12-21; view: 1432

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