You are on page 1of 6

Economic System

To understand meaning of economic systems, it refers to the role or model of distribution and
production which take place in the society.
Types of Economic Systems
There are four types of economics systems namely

Capitalism or Private Enterprise Economy


Socialism
Communism
Mixed Economy or Government and Private Sector
Capitalism
Capitalism is one of economic systems in which means of production are owned and managed by
private individuals and institutions. State is to take care of only internal and external security of
the country. Normally the activities related to Defence, Police, administration and Courts of
Justice are controlled by the Government.

Socialism
Socialism is that part of economic systems which the means of production are owned and
managed by the State. Private ownership of means of production is not allowed. People can have
personal property which is transferable and inheritable. The anti-social activities like smuggling
and hoarding find no place in socialism. Economic activities are planned with the motive of
social benefit by a central planning authority. North Korea the world's most totalitarian state
is another prominent example of a socialist economy.

Communism
Communism is a part of economic systems, where means of production are controlled and
managed by a Central State authority, and there is also a restriction on the ownership of personal
property. Individuals are assigned work by the State and they are given a bit remuneration of
their services. People get ration from Government department. People do not have choice of their
own. Vietnam (Laos)

Advantages of Communism
Full employment of manpower
Rapid development and economic growth
Equitable distribution of wealth
Disadvantages of Communism
Personal freedom is lost
Workers are treated as machines
Materialistic approaches to life problems

Mixed Economy
Mixed economy is a part of economic systems which combines in itself the features of
Capitalism and that of the Socialism. Unlike a pure capitalistic economy, it has an important
public sector i.e. a number of industries are owned and managed by the state. Private enterprise
is allowed and even encouraged to operate a large number of industries and to own the various
means of production. Thus in a mixed economy, the public and private sectors exists side by
side. India, USA, England, and Canada.

1. Socialism is an economic system while communism is both an economic and political system.

2. In socialism, the resources of the economy are managed and controlled by the people
themselves through communes or councils while in communism, management and control rest
on a few people in a single authoritarian party.

3. Socialists distribute wealth to the people based on an individuals productive efforts while
communists farm out wealth based on an individuals needs.

4. Socialists can own personal properties while communists cannot.

5. Socialism allows capitalism to exist in its midst while communism seeks to get rid of
capitalism.

Comparison Chart

BASIS FOR
CAPITALISM SOCIALISM
COMPARISON

Meaning Capitalism refers to the economic The economic structure in which


system prevalent in the country, the government has ownership
where there is private or corporate and control over the economic
ownership on the trade and activities of the country is known
industry. as Socialism.

Basis Principal of Individual Rights Principal of Equality

Advocates Innovation and individual goals Equality and fairness in society

Means of Production Privately owned Socially owned

Prices Determined by the market forces Determined by the Government

Competition Very High No competition exists between


firms

Degree of distinction in High Low


the class of people
BASIS FOR
CAPITALISM SOCIALISM
COMPARISON

Wealth Each individual works for the Equally shared by all the people of
creation of his own wealth the country

Religion Freedom to follow any religion Freedom to follow any religion but
it encourages secularism

Efficiency Much Less

Government No or marginal Government decides everything


Interference

A mixed economy is that type of economic system in which government and private
companies both carry out the activities in the economy while socialism it is that type of
economic system in which it is only the government which carries out the various
activities in the economy and private parties have no role to play in the economy.
Mixed economy tries to achieve two objectives one is profit objective with the help of
private entities or companies and other is to help socially weak sections of society while
in the case of socialism it tries to achieve only one objective and that is the equal status
for all citizens of the country.
In case of mixed economy since there are private companies also there is competition
among companies for business which results in greater efficiency whereas in case of
socialism since all people know that they will get something from the government in the
form of subsidies without doing anything and hence there is no incentive to do hard work
which results in socialism economic system being less efficient than mixed economy and
capitalism.
In case of mixed economy since private companies are there it gives chance to creative
people and young entrepreneurs to show their talent to the world as they can start
business and earn handsome rewards for the same but as far as socialism is concerned
there is no such scope for creative people and young entrepreneurs which in turn deprive
the nation of great ideas and business.
In case of mixed economy there is gap between rich and poor although not as big as in
the case of capitalism but in the case of socialism government tries to narrow down the
gap between rich and poor

Capitalism embraces private ownership of institutions and discourages government


intervention in the economy. The main goal of capitalism is profit.
Another way to describe capitalism is via the French term laissez faire, which asserts
that the government should not intervene in property rights and the economy as a whole.
Capitalism goes hand-in-hand with globalization.
Not all countries embrace capitalism wholly; some choose to maintain a balance between
private and government ownership. Such countries utilize the idea of a mixed economy.
The mixed economy is a balance between socialism and capitalism. As a result, some
institutions are owned and maintained by the government, while others are owned by the
private sector.
The mixed economy allows economic participation from both the private sector and the
government. However, the mixed economy is still biased towards capitalism.

Purchasing Power Parity (PPP) is an economic theory that compares different countries'
currencies through a market "basket of goods" approach. According to this concept, two
currencies are in equilibrium or at par when a market basket of goods (taking into account the
exchange rate) is priced the same in both countries.

This is how the relative version of PPP is calculated:



Where:
"S" represents exchange rate of currency 1 to currency 2
"P1" represents the cost of good "x" in currency 1
"P2" represents the cost of good "x" in currency 2

Purchasing power parity means equalising the purchasing power of two currencies by taking into
account these cost of living and inflation differences. Purchasing power parity (PPP) is a theory
which states that exchange rates between currencies are in equilibrium when their purchasing
power is the same in each of the two countries.

For example: A loaf of bread in the US costs $2, and that in Indian Rupees is Indian Rupee 90,
but a loaf of bread in India costs around Indian Rupee 10, thats about 20 cents. This creates an
arbitrage opportunity where people in India can stock up on bread and bring it to the US and sell
it and make a nice profit. Purchasing Power Parity says that since they are the same goods, the
purchasing power in the countries should be the same. This doesnt mean the exchange rate
should be equal to one; it means the ratio of price to exchange rate should be one. In this
example, it implies that exchange rate should be $2 = Indian Rupee symbol.svg10, $1 = Indian
Rupee symbol.svg5. So, the Rupee here is undervalued.

Inflation is the rate at which the general level of prices for goods and services is rising and,
consequently, the purchasing power of currency is falling. Central banks attempt to limit
inflation, and avoid deflation, in order to keep the economy running smoothly.

Gross Domestic Product - GDP


Gross domestic product (GDP) is the monetary value of all the finished goods and services
produced within a country's borders in a specific time period. Though GDP is usually calculated
on an annual basis, it can be calculated on a quarterly basis as well (in the United States, for
example, the government releases an annualized GDP estimate for each quarter and also for an
entire year). The following equation is used to calculate the GDP: GDP = C + I + G + (X - M) or
GDP = private consumption+ gross investment + government investment + government
spending + (exports - imports).

What is 'Monetary Policy'

Monetary policy consists of the actions of a central bank, currency board or other regulatory
committee that determine the size and rate of growth of the money supply, which in turn affects
interest rates. Economic strategy chosen by a government in deciding expansion or contraction in
the country's money-supply. Applied usually through the central bank, a monetary policy
employs three major tools: (1) buying or selling national debt, (2) changing credit restrictions,
and (3) changing the interest rates by changing reserve requirements.

A tariff is a tax on imports or exports (an international trade tariff) A tax imposed on imported
goods and services. Tariffs are used to restrict trade, as they increase the price of imported goods
and services, making them more expensive to consumers. A specific tariff is levied as a fixed fee
based on the type of item (e.g., $1,000 on any car).