Economic Systems

An economic system is the process through which a country or society determine the nature of goods to produce with its natural resources and the distribution of those goods to consumers. Economic systems are processes of allocating scarce resources to production of goods and services. New definitions of economic systems include decisions in large enterprises and markets that influence allocation of natural resources. Economic systems are complex and dynamic as players in major markets develop new trading rules. Governments change their policies on resource allocation as societies grow and develop. Hence, a country can grow from one economic system to another over time.

Types of Economic Systems

The major economic systems are traditional, command, market and mixed economies. Traditional economies exist in rural areas where individuals produce goods and services to meet their needs. These economies are based on religion, beliefs and customs. Individuals in such economies earn income from farming and hunting. In command economic, a central power, which is most cases, is the federal government controls national resources. The government manages resources and industrial process in which those resources are used to produce goods and services. This economic system is common in countries with large supplies of valuable resources. In market economies, the law of demand and supply determine the price of goods and services. The government has no control over resources and production process. Organizations run production and distribution process while the law of demand and supply determine wages. Mixed economies are the most common and practical economic systems. Mixed economies combine some features of command and market economies. The government controls and manages some resources and productions processes. These economic systems improve allocation of scarce resources and establish fair market practices. Governments’ intervention in market systems ensures that organizations do not form coalitions to oppress small traders.

The Influence of Political Systems on Economic Systems

Political systems have positive and negative effects on economic systems. A political system can either enhance or hinder economic growth. Political systems influence laws and policies that a country establish to regulate markets. Such laws and policies can either encourage or discourage new businesses in the market. Transparency and accountability in government institutions ensure that market players have equal access to resources. Political systems determine the risks and costs of doing business in a country. Political unrest increases risks and discourage investors from certain markets. Oppressive taxation laws and long registration procedure discourage investors as well. In mixed economies, governments have a responsibility to develop supporting infrastructure to attract investments. In addition, governments should develop and enforce laws that safeguard property and contract rights.