Types of Economic Systems

Article byPritha Banerjee
Reviewed byDheeraj Vaidya, CFA, FRM

Types of Economic Systems

There are innumerable economies globally, each having a distinctive feature and identity. However, you can still classify them based on common characteristics on a broad level. There are four main types of economic systems – Traditional Economy, Command Economy, Market EconomyMarket EconomyA market economy (ME) refers to a form of economic system where businesses and consumers drive the economy with minimal government intervention. In other words, the laws of demand and supply determine the price and quantity of goods produced in an economy.read more, and Mixed Economy.

In this article, we learn about each of the types of economic system in detail.

Types of Economic-Systems

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#1 – Traditional Economy

This is an economic system based on agriculture, fishing, and hunting. These economies are based on traditional beliefs and ideologies. The goods and services are made based on the occupation of the people. Instead of money, a barter system was used. Most economists believed that most economies started as traditional economies.

Below are the common characteristics of Traditional Economy:-

  • Such economies have a lot of innovation as it has a free flow of ideas.
  • Mostly they have primitive kinds of occupation like farming, hunting, fishing etc.
  • They are self-sustained.
  • This type of economic system does not engage much in trading. They consume whatever they produce and they rely mostly on barter systems.
  • When people in traditional economies engage in farming from hunting, they try to settle down and gradually form a society.

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Advantages of Traditional Economy

  • Less threat to the environment as the people mostly use traditional ways of occupation like farming, fishing, cattle rearing.
  • There is no wastage in this type of economic system. They consume whatever they produce.

Disadvantages of Traditional Economy

  • As the economy is based on hunting and farming, the economy becomes disrupted in the offseason when the weather changes.
  • In such times, people starve as they don’t have goods to survive on.

Now we will discuss some examples of the traditional economy to understand it better.

Some of the countries like Bangladesh, Haiti might still use primitive ways of agriculture but they are not traditional economies as they have modern occupations as well. A traditional economy is about self-sustenance. You can refer to the Jarawa tribe of the Andaman Islands. They use primitive ways for survival.

#2 – Command Economy

This is a type of economic system where the government has a monopoly over the market. It decides which goods will be produced in what quantity. The government also determines the prices of the goods. All the laws and regulations regarding the market are also set by the government. So in this economy, there is no competition as the government decides all the pricing. The government also in charge of allocating the resources.

Below are the common characteristics of command economy:-

  • This type of economic system doesn’t rely on the laws of demand and supply.
  • Only the government decides the economic laws and regulations.
  • The government controls the production of goods and services.

Advantages of Command Economy

  • It doesn’t face inequality problems among the citizens.
  • It also has low levels of unemployment
  • As the government is in control of production, profit is not only the motive of production of goods.
  • The entire society can be transformed according to the government’s economic plan as there is no other free force in the market.

Disadvantages of the Command economy

  • Such economies lack innovation as it doesn’t have any free flow of ideas.
  • This is a type of economic system might ignore the needs of the societies as in such situations black market can emerge as it will supply the goods that the economy is not producing.
  • Supply of goods may not be as par with demand.
  • These economies won’t take the risk of bringing something new as the government has its own set of policies and directives in place.

Some of the countries like North Korea, Cuba are examples of the command economyCommand EconomyCommand economy is a system where the government decides goods production, process, quantity, and price in a country. In this system, the government even manages income and investments. Communist nations like the former Soviet Union, Cuba, North Korea work according to this system.read more.

#3 – Market Economy

This is a type of economic system where the government has no control over the market, the citizens and businesses decide which goods will be produced in what quantity. The pricing is decided by the laws of demand and supply. The government can decide the pricing ceiling so that they do not charge the customer as per their free will. So in this economy, there is competition among the business as there is not much government intervention.

Below are the common characteristics of the market economy:-

  • This is a type of economic system solely relies on the laws of demand and supply.
  • The demand and supply laws control the quantity of production of goods and services.

Advantages of Market economy

Disadvantages of Market Economy

  • It faces inequality problems among the citizens.
  • As the government is in no control of production, profit is the only the motive of production of goods.
  • There might be poor working conditions as there is no government regulation in place.
  • Unemployment may rise as there is no government check in the market.

Some examples of the market economy are the United States, Germany, and Canada.

#4 – Mixed Economy

Mixed economic systemMixed Economic SystemA mixed economic system is one that combines capitalist and socialist ideals. It allows for the protection of private assets while also allowing for liberty in use of capital and federal intervention in economic decisions.read more, where is combined all the above three economies i.e. traditional, command and market. The government has an intervention over the market as well as free forces exist. It decides which goods will be produced in what quantity. The pricing is decided by the laws of demand and supply but the government decides the pricing ceiling and taxation norms. So in this economy, there is competition as well as the government safeguards the interest of the people. The government also in charge of creating an economic plan.

Below are the common characteristics of a mixed economy:-

  • It relies on the laws of demand and supply.
  • The government decides the economic laws and regulations.
  • The government controls the production of goods and services.

Advantages of Mixed Economy

This is a type of economic system has all the advantages of a market economy like there is the free flow of ideas, it allows laws of demand and supply to determine the pricing policy and there is also a creation of wealth.

Disadvantages of Mixed Economy

Similarly, This is a type of economic system has all the disadvantages of the above-discussed economies. Some of them are like there might be wastage of resources, economic decisions might get delayed in execution in the private sectorPrivate SectorThe private sector is a section of the national economy that the government does not own. The business conducted under this sector is carried out by companies or entrepreneurs who focus on profit maximization and customer satisfaction.read more. There also might be poor planning as a large part of the government is not in control of the government.

Examples of a mixed economy are India, France.

This has been a Guide to Types of Economic Systems. Here we discuss the Top 4 main types of Economic Systems including Traditional, Command, Market, and Mixed Economy along with their advantages & disadvantages and examples. You can learn more about Economics from the following articles –