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ECONOMIC SYSTEMS
There are a number of ways in which a government can organize its economy.
An economic system is the way in which a country uses its available resources (land, workers, natural resources, machinery, etc.) to satisfy the demand of its inhabitants for goods and services.
There are three main economic systems:
Planned economies.
Planned economies are sometimes called “command economies”. These are economies with a large amount of central planning and direction. The government takes all the decisions, the government decides production and consumption. Command or planned economies have a number of common features in all states.
First, the state decides what the nation will produce. It usually plans five years ahead.
Secondly, industries must comply with these plans and each industry and factory is set a production target to meet.
Planned economies have a number of advantages:
- everyone in society receives enough goods and services for a basic standard of living;
- the state can control the economy and divert resources to wherever it wants. As a result, it can be sure that everyone receives a good education, proper health care and so on.
Several disadvantages also exist:
- there is no incentive for individuals to work hard in planned economies;
- any profits are paid to the government;
- citizens cannot start their own business and new ideas rarely come forward and as a result, industries in planned economies can be very inefficient;
- planners cannot predict changes in demand, so some items may be underproduced the others may be overproduced.
Market economies.
In a true market economy the government plays no role in the management of the economy.
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