It is a system of production, resource allocation and distribution of goods and services in a particular geographical region. Every country has its own economic system which can be different from the others. A system determines the mechanism of how economic activities work in a country.
There are a number of economic systems which exist, but some share certain common features therefore, it can be broadly divided into three types:
- Planned economic system – It is a system where government solely controls the work of production, resource allocation and distribution of goods and services. Command economy is somewhat similar to the planned economy but has certain differences as there is considerable public ownership of industry but under the regulation of central authority or government. The planned economy has one major advantage that it focuses more on society than an individual, but taking care of everyone’s need at the same time can be a major challenge for planned economies as they can work only on general population’s best interest. The example of a planned economic system is North Korea where everything is centrally planned and coordinated by the government of the country.
- Market economic system – It is also called a free-market economic system in which production, resource allocation and distribution of goods and services are majorly managed by individuals and businesses with little government’s interference. It is guided by price signals generated by the interaction between demand and supply. As there is no pure market economic system exists, it is subjected to government’s interference especially at the time of market failures. This system may provide more profitable goods and services with a higher growth rate but it may lack in terms of social benefit to a certain extent. For example, as there are no totally free-market economies in the world, there are certain countries which account for a large percentage of free economies like Hong Kong and Singapore with almost 90% of free economies.
- Mixed economic system – It is a system with a blend of elements of both planned and free economy. It is a free market with government intervention in certain essential areas. As it takes the best from both the other economies, private businesses can work more efficiently than in the planned economy but the government can interfere in case of market failures. There are certain times when the government can face problems to maintain stability as sometimes the government’s interference is more than necessary and sometimes it is just not good enough. Many countries follow a mixed economic system, for example, the United States of America and India both are mixed economies.