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Different types of economies

Think about where you come from and the economy of your home country for a moment.

If you grew up in a developed nation such as the UK, France, Germany or China, what are your memories regarding buying products and services? Were there many shops and stores selling goods? Was the choice sometimes overwhelming? If you needed services such as healthcare or housing assistance, was it easily available and who provided the services?

Conversely, if you have spent much of your life in a developing country, say in Nigeria or Thailand, how does it compare with a developed country? Is there more choice when it comes to the purchase of goods and services? How much influence does the government have on the availability of products? Are health and social services freely available?

What differentiates a country’s economy? A key distinguishing factor is how product and service markets operate. As already mentioned, markets are mechanisms used to allocate scarce resources in an economy. They ensure that consumers and producers can obtain the goods and services they want. This is a classic problem that economics tries to answer: how to make sure people can get what they need.

Economic theory defines the macroeconomy of a country by the types of markets it encourages, and how much influence governments exert over them. There are two extremes in this definition of an economy and a compromise position. Hence, there are three main types of markets. Each of these markets answer the key scarcity question already discussed in previous sections: what, how and for whom to produce.

Illustration of markets spectrum showing free markets at one extreme, command markets at the other extreme and mixed markets between the two

Command markets

The command market is the first extreme, where all the factors of production are controlled by the state:

  • What to produce is determined by government preferences
  • How to produce is determined by the government and their employees
  • For whom to produce is determined by government preferences

Free markets

The other extreme is free markets, where all the factors of production are decided by consumers’ and producers’ preferences. The free market is dependent on a medium of exchange that has a value, otherwise known as money.

  • What to produce is determined by consumers’ preferences
  • How to produce is determined by producers seeking profit
  • For whom to produce is determined by purchasing power

Mixed markets

Mixed markets are the compromise position, where governments intervene greatly or minimally and free markets allocate everything within the boundaries set by governments.

  • What to produce is determined by consumers’ preferences and partly by government
  • How to produce is determined by producers seeking profits and partly by government
  • For whom to produce is determined by purchasing power and partly by government preferences

There are not really any truly command economies remaining, except for North Korea and Cuba. Conversely, what appear to be free markets, say in Europe or the USA, are actually mixed markets with some government regulation. Nearly all former communist countries, such as China and Russia, which used to practice command economies, have evolved into mixed economies. They tend to have considerable government intervention in their markets.

The simple economy is the mechanism that helps make decisions on how markets can allocate resources.

In summary

To conclude, an economy is just a mechanism for the interaction of the factors of production to allocate scarce resources using the preference of what to produce, how to produce and whom to produce for. The way these decisions are made with the influence of government is what dictates whether an economy is classified as a free market or a command market.

In reality, no country’s economy is completely one or the other, but a mixture of the two. You could argue that China’s economy is controlled more as a command market compared with the USA, because the Chinese government clearly indicates which markets businesses should focus on growing and investing resources in. More free market-based economies let entrepreneurs decide how to allocate the factors of production, and the government doesn’t specify how those markets should behave. Conversely, the Swedish government has plenty of control of the economy’s markets but does not decide how to allocate the factors of production.

Your task

Investigate the economy of a country you’re familiar with. What degree of government influence is there in the mixed market? Classify whether consumer and producer goods markets are restricted by government control. Identify whether social services are provided by the state or have to be purchased via a market like other goods and services.

Compare different economies by discussing your findings with your peers in the comments area.

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This article is from the free online course:

What is Economics in Global Logistics?

Coventry University