Introduction
An economy exists when a group of people produce and exchange goods and services (Economic Geography). Additionally, to manage resources, people have devised different economic approaches (Shmoop University). According to Economic Geography, “the way people produce, and exchange goods and services are called an economic system”. Countries use an economic system to confront issues affecting their day-to-day activities (Stallman). Stallman continues to state that consumer needs and inflation are some of these issues. Therefore, all economic activities that satisfy people’s needs take place within an economic system (1). Economic systems can be divided into five categories depending on the way people generate, exchange, and consume goods and services.
The traditional economy
The first type of economic system is the traditional economy. Going by the Economic Geography, in this type of economic system, money is not used in the exchange of goods and services. For that reason, the traditional economy is frequently called the barter trade (1). However, a traditional economy is not dynamic (Shmoop University). This means that things tend to remain the same within it for a long period. For instance, the standards of living remain almost static since financial mobility is limited (Shmoop University). Additionally, in most traditional economies, community interests supersede individual ones (Shmoop University). In some cases, individuals combine efforts and, therefore, rewards are shared equally (Shmoop University). In other cases, individuals are allowed to own some property but have to follow a set of obligations as directed by the community (Shmoop University). According to Stallman, how a traditional economy deals with issues depends on its customs and past experiences. Consequently, room for innovation is limited or absent. Lastly, traditional economies differ from one another because of their diverse customs (Stallman). It is, hence, very difficult to find two traditional economies with the same customs.
The command economy
A command economy is the second type of economic system. At times, people refer to it as a planned economy (Economic Geography). Interestingly, in a command economy, the production of goods and services is controlled by a central government (1). This is because the means of production are owned by the central government (1). Therefore, how resources are generated, distributed, and used is a prerogative of the government (Shmoop University). Shmoop University adds that, in most cases, the government standardizes wages and prices. Occasionally, the government may even decide what kind of work an individual does. Therefore, one of the demerits of this economic system is that individuals have no right to decide for themselves (Stallman). On the other hand, the Government, which is left solely with this duty, cannot exactly establish what is best for each citizen (Stallman). As a result, individuals are not motivated to work hard since the reward system is poor (Stallman). Furthermore, a hardworking person cannot improve on his living standards as he makes as much as a person who works averagely (Stallman). Classic examples of command economies are communism and socialism (Shmoop University). A practical example of a country that still holds on to a command economy is Cuba (Shmoop University). This is because the Cuban government assumes total control over the economy at the expense of its citizens.
The market economy
The third and, perhaps, most widespread economic system is the market economy. This economic system is often referred to as a demand economy or capitalism (Economic Geography). In this case, economic decisions are made by individuals and not governments (Shmoop University). The production of goods and services, in a market economy, is determined by consumer demand (Economic Geography). In addition, what to produce is determined by the prevailing trends in demand (Stallman). This means that goods are produced in line with the most popular trend. Moreover, the interaction between citizens and firms within the market dictates the allocation of resources and distribution of goods and services (Shmoop University). What to produce is, therefore, determined by the consumers since they decide on what to buy (Stallman). This generates a conducive environment for perfect competition. This is because forces of demand and supply are left to drive the economy. Consequently, individuals are left to decide on what investments to undertake, the type of training to embark on, the jobs to undertake, and, most importantly, the goods and services to generate (Shmoop University). Stallman also adds that a market economy motivates people to work hard. This is because people are paid depending on the amount of work done. In this regard, it is easier for people to improve their living standards by generating more income through demanding work (Stallman). However, capitalism can lead to Private ownership (The Center on Capitalism and Society). Private ownership occurs when production leads to inequality in wealth ownership (Center on Capitalism and Society). Finally, a good example of a market economy in the United States (Stallman).
The mixed economy
The fourth type, a mixed economy, is a combination of the command and market economy (Economic Geography). The Economic Geography reiterates that this economic system is fashioned to make sure that all people benefit. According to Shmoop University, most of the economic decisions are arrived at in the market, but the government also participates in resource allocation and distribution. Therefore, producers and the government work closely for the benefit of all (Stallman). This is a classic case of public-private partnership. The Shmoop University also reaffirms that most advanced countries are mixed economies. To some extent, Great Britain and the United States are typical examples of a mixed economy (Stallman). This is because, in the two countries, efforts are made to ensure that all people, including the poor, easily access main services.
Conclusion
In conclusion, what is best for a country dictates the type of economic system it adopts (Shmoop University). In this regard, a country chooses an economic system that helps organize its economy in the best way possible. Consequently, depending on the way people produce exchange, and consume goods and services, four types of economic systems exist. These include the traditional, command, market, and mixed economies. However, how decisions, on the allocation and distributions of resources, are arrived at is the main highlight of these economic systems. For instance, in the traditional and command economies major decisions are made by the government (Stallman). On the other hand, market and mixed economies give individuals an upper hand in decision-making (Stallman). Lastly, one economic system may suit a particular individual but fail to impress another (Stallman). Therefore, knowing how the different types of economic systems work can help a person make informed decisions. This will, then, help the individual to participate in issues revolving around the economy. In so doing, an individual not only helps himself but also the whole country.
Works cited
Economic Geography n.d, Economic Systems. PDF file. Web. 2012.
Shmoop University. Types of Economic Systems. n.d. Web. 2012.
Stallman, Chris. Economic Systems. Find Out the 3 Basic Economic Questions. n.d. Web. 2012.
The Center on Capitalism and Society. Theory of Capitalism. n.d. Web. 2012.