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Types of Economic Systems IBUS 330 Term Paper Spring Semester 2015 This paper will describe what economic systems are which generally includes the structures as well as the procedures that any given State utilizes in its allocation of nances and also how it carries out its respective business transactions Since there is no single country that exhibits an allinclusive course this study will demonstrate how economies utilize various forms and types of measures in their economic systems The research study will then tackle a centrally planned economy that incorporates property factories as well as other nancial resources that are owned by the State or government and also include the mixed economy which will demonstrate how the resources are uniformly divided between private and governmental ownership Market economy will also be discussed which includes the three resources stated above Factors that are determined by price mechanism such as supply demand origins of the market Economy characteristics of a market economy and govemment s role in a market Economy will also be discussed Additionally the study will include a brief discussion of development which compares the economic welfare of different nations This will mainly target the agricultural infrastructure industrial health education culture politics and economic differences Economic transition will also be discussed which chie y entails the transition of a country s main economic organization as well as establishment of fresh freemarket institutions Various reforms will be introduced under this topic which includes hindrances to changeover lack of managerial expertise and de ciency of capital ethnical differences ecological degradation and upandcoming market concentration The conclusion of the research paper will highlight the probable recommendations to be implemented in the economic systems of the respective nations Economic systems The different de nitions of economic systems may include the government policies that are extremely crucial in these modern times An economic system can therefore be de ned as the organized way in which a state or a nation will distribute and allocate its resources and apportions of its goods and services within its national community This study of economic systems will represent how various institutions and organizations are linked to each other This study includes how information ows between the different agencies Economic systems define the interaction of the various entities in economies An economic system serves the purpose of coordinating a set of both formal and informal institutions Economic systems are very important as they lay the devices that form the framework through which the economic activities take place In the olden days people participated in barter trade which was extremely straightforward and very simple It had very few treaties and rules of trade As Britton 2013 states the simplicity came in the fact that one only exchanged goods However the modern day economies are very complicated The huge and established companies in uences how business are conducted The today s government signs numerous treaties and agreements which are aimed at def1ning trade This numerous laws warrant the need for more comprehensive definitions and structures of the economic systems The economic systems of today involve more activities than just trade they give the values of a particular society or even a country They also define the political structure of that given society The study of economics answers four basic questions the first question is which goods are to be produced The other question that economics will address is how the particular goods will be produced Economics will also answer who the target consumers are Finally this study will address how change will be effected in a society and how the society will accommodate the said changes An effective economic system should be structured to answer all these four questions In order to be effective this economic system will have to come up with rules on how the different participants in an economy will play their roles Desai 1980 Numerous governments have their own economic systems which are unique to them and which are speci c to their needs and aspirations Nevertheless there are three main categories of economic systems These economic systems are the market economy the centrally planned economy and the mixed economy Centrally planned economic system In a centrally planned economic system the management and the development of a country are under the government The government plans and manages all the development activities of its country In the central planning there is capitalism is characterized by the private sector which controls the various business activities of production distribution and consumption of the produced goods and services In this economy capitalism works so that it can satisfy the growing market demand Under this economy capitalism poses as an economic asset and not a political stronghold This economy portrays a strong political front and shows strong links between the community production and the socialist government It is very efficient at the micro levels as it provides a channel to scarce resources so as to gain economic prowess A good example of a country which exhibits this economy is a nation with an economy at war For instance the production of nylon was essential during the World War II According to Osteuropa 1991 this was attributed to the fact that there was a very limited supply of nylon the government therefore had to plan and ready itself for the production of the muchneeded commodity nylon Following this example it s evident that the future supply of nylon was meant for cosmetic reasons and not military purposes This example re ects an essential characteristic of a centrally planned economy Another important feature of the centrally planned economy is the savings certi cate which according to Osteuropa is a savings scheme usually mobilized and run by the Government Since most of the consumer goods production is marked by poor quality and the lack of choices in such similar cases the government is able to determine the supply line in this type of economy Mixed economic systems It is also known as a dual economy as it is a combination of many economic systems Mixed economic systems basically refer to the mixture of the market and the command economy Plenty of variations exist in some mixed economies which are part of the free market but are also under the control of the government Market economy These economies are very similar to free markets Under this economy the government does not control the essential resources the variable goods or any part of the economy How this economy runs and functions is determined by organizations These organizations also generate supplies and demands when necessary There is no free market economy that truly exists in the world For instance America happens to be a capitalist nation in which the government still regulates some government programs monopolies and moral businesses hence leading to fair trade According to Mahoney amp Chi 2001 market economy boasts of the advantage of separating market and the government In this way it prevents the government from attaining too much power It also hinders the government from becoming too controlling this ensures that governments do not oppress their citizens as it survives and lives lavishly on the controlled resources They also provide incentives for individuals in terms of resource allocation among them labor and capital Opponents argue that the free market economy cannot ensure the basic social values This economy is not equitable to alleviate poverty or distribute income fairly to all people Since free markets cannot eradicate poverty the planned economies have to take up this task This economy allows for the accumulation of vast amounts of wealth and power these qualities threaten the survival of political freedom Government39s role in a market economy The government in a market economy deals with the problems connected with market failure Market failure will have a negative impact on the economy as the allocation and distribution of goods and services in this economy will not be efficient This menace of market failure can be caused by the existence of a monopoly of power that is exhibited by certain parties and groups In the event that the prices of resources are higher than marginal costs then the economy will suffer ineff1cient allocation of these resources Inequality when it comes to distribution of resources can cause market failure As Nee 2000 asserts the government can play the role of correcting market failure by implementing actions and decisions which will lower the inequality rates brought about by changes in the tax so as to benefit the national minimum wage The government will exercise its authority to enforce the property rights of ownership protecting public property encourage production as well as the exchange of goods and services The government is tasked with the role of enabling the country to attain economic stability and growth The government will do this by maintaining a steady growth whilst providing avenues for high levels of employment The government also takes care of the price stability in the market By providing pivotal support to the public the government can slow down or speed out the growth of the economy Grossman 1967 Economic Development This is the sustained and coordinated action of different policy makers and communities who aim at promoting the standards of living of people as well as their economic health The concept of economic development has become a recent point of attention for various governments around the world Research has it that strict economics provides the necessary foundation for economic development of a country Therefore from research it can be argued that economic development depicts the capacity of a national economy in which the initial conditions have been almost static for some time Economic development is faced with the task of generating and sustaining an annual increment in the Gross National Product of the respective country Aidt 2009 Defining the economic development is a slippery issue since its definition has evolved and changed over the years Studies have indicated that as the economic growth levels are being attained by the developing nations the living standards of people are not improving For some developing nations the living standards of people are deteriorating For this reason these developing countries have redef1ned economic development so that it can incorporate the lowering of the levels of poverty diminishing inequality and eradicating unemployment Growing the economy is advantageous in very many ways It actually leads to the creation of good and wellpaying jobs which are fundamental for the growth of a country The creation of good jobs will lead to an increment in opportunities and security in the country even in the future Good jobs go hand in hand with good and quality education This will mean that more and more people will embrace formal education this will lead to improvement education standards in the developing country To develop a good education system strategic investments have to be put in place for the purpose of harnessing the talents and skills of the people from early childhood all the way to retirement According to Nafziger 2012 in order to improve the sector of employment and education the government has to develop and fund the construction of modern infrastructure that will create a comfortable and moving economy The government has to build good and wellequipped schools to ensure that the future generation is well armed with knowledge that will steer the country forward This exquisite infrastructure will be supported by a dynamic business climate which survives and ourishes on innovation creativity and partnerships which bring a bigger prosperity To attain economic development agricultural needs have to be catered for The government should finance the hightech agricultural projects which guarantee a high returns and food security for the nation The agricultural sector should not be neglected it is the backbone of any growing economy and without it the whole country can be paralyzed Transitioning Economies If an economy is changing from being centrally planned to free markets then it can be referred to as a transition economy A big percentage of the transition economies have had to deal with severe shortterm difficulties and the longterm constraints on development A transition economy is often faced with problems such as the escalating levels of unemployment Luke amp turley 2011 This is attributed to the fact that there is the cropping up of newly privatized rms which try to cut back on the number of employees they have Also when these private entrepreneurs in ltrated the market there was cutting back of the labor costs so as to increase ef ciency This implied that most of the people lost their source of income their jobs The fact that there was a reduction in the state of bureaucracy implied that many employees lost their jobs Almost all transition economies experience price in ation which can be attributed to the fact that the price controls imposed by the government were reduced Eidem 1978 Due to this the newly privatized rms took charge of the prices and changed them so that they would re ect the true costs of production This obviously led to shooting of the prices of the commodities which were previously cheaper Another problem which is facing transition economies is the lack of entrepreneurs and entrepreneurial skills This poses as a major issue when it comes to reforming the economies and promoting the market capitalism The skill gap was also another setback in transition economies since it meant that there were few workers who have the necessary skills to perform in the new rms Corruption is another problem that ails the transition economies Halm 1968 Corruption in countries which exhibit transition economies hinders the effective introduction of market reforms As a result of corruption poorly made products ended up being sold in the unregulated and illegal markets which were frequented by criminal gangs Inequality also ails economic transition because some entrepreneurs and traders exploit their positions as the other people are wallowing in unemployment and the rising in ation 10 Importance of Understanding economic systems for International firms During the process of internalization rms increase their involvement of their enterprises in the international markets The internalization decisions of rms are in uenced by many factors but a good understanding of the prevailing economic market will in uence this decision positively According to Britton 2013 the newly internationalizing rms need to understand the everdynamic economic systems and the emergence of new markets Internationalizing rms are venturing into new and foreign countries for this reason they need to be aware of the government policies on these new countries The best way to understand and familiarize with the government policies is to have a sound knowledge of the economic system in the country Understanding the different economic systems and being aware of the system to expect in a given country will enable an internationalizing rm to create a stable environment which will make the business ourish Understanding these systems will enable the rm to merge well with the society as it will be in a better place to understand its needs cultural perspectives and also its respective expectations Conclusion and Future Study The world is on the move and all the countries are developing in their own manageable ways Some countries experience a sequential process of development As proven in the essay economic development is or may not be a gradual process It can also be concluded that some economies are in transition and due to this fact they experience their fair share of problems All the economic systems have their pros and cons and they can work for all nations The trick is establishing a balance between them so that all the activities of the economy can run smoothly 11 References Aidt T S 2009 Corruption institutions and economic development Oxford Review of Economic Policy 252 271291 Bornstein M 1965 Comparative economic systems models and cases Homewood Ill RD Irwin Britton T L 2013 Economic systems Minneapolis MN ABDO Pub Currier G Bosner P Dallas Telecourses Firm Dallas County Community College District Coast Community College District amp Insight Media Firm 1993 Economic systems Dallas TX The District Desai S S M 1980 Economic systems Bombay Himalaya Pub House Eidem R Viotti S amp Eidem R 1978 Economic systems New York Wiley Grossman G 1967 Economic systems Englewood Cliffs NJ PrenticeHall Halm G N 1968 Economic systems A comparative analysis New York Holt Rinehart and Winston International InputOutput Association 1989 Economic systems research Journal of the International InputOutput Association London Routledge Loucks W N 1965 Comparative economic systems New York Harper amp Row Luke P J amp turley g 2011 Transition Economics Two Decades on New York Routledge Mahoney J T amp Chi T 2001 Business strategies in transition economies Academy of Management Review 262 311313 Nafziger E W 2012 Economic development Cambridge Cambridge University Press Nee V 2000 The role of the state in making a market economy Journal of Institutional and Theoretical Economics JITEZeitschrift fu39r die gesamte 12 Staatswissenschaft 6488 OsteuropaInstitut Miinchen 1991 Economic systems Amsterdam ElseVier Science Weber M Henderson A M amp Parsons Talcott 2012 Max Weber The theory of social and economic organization Mans eld Centre CT Martino Publishing