Economic environment Economic System and economic policies
Economic environment Economic System and economic policies: An economic system is a way for communities or governments to organise and distribute resources, services, and products throughout a geographical area or nation. The components of production, such as land, capital, labour, and physical resources, are regulated by economic systems. An economic system is made up of a variety of organisations, agencies, companies, decision-making processes, and consumption patterns that make up a community’s economic structure.
An economic system, sometimes known as an economic order, is a method of producing, allocating resources, and distributing commodities and services within a community or geographical region. It is made up of the different organisations, agencies, entities, decision-making processes, and consumption patterns that make up a community’s economic structure.
A social system is a form of economic system. A similar idea is the method of production. All economic systems must address and resolve three basic economic issues: what types and quantities of things will be created, what and how much economic resources will be employed, and how will the output be divided.
Economic systems encompass the study of how these many agencies and organisations are connected to one another, how information travels between them, and the social ties that exist inside the system (including property rights and the structure of management). The traditional emphasis of economic system analysis has been on the contrasts and parallels between market and planned economies, as well as between capitalism and socialism. Following that, the classification of economic systems was broadened to cover new issues and models that did not fit well into the old dichotomy.
Market-oriented mixed economies are now the most common type of economic structure on a global scale. An economic system is a component of the social system, and it is hierarchically equivalent to the legal, political, and cultural systems. There is often a strong link between particular ideologies, political systems, and economic systems (see the many definitions of the word “communism”). Many economic systems overlap in different ways (the phrase “mixed economy,” for example, might be argued to encompass components from a variety of systems). There are also a number of hierarchical categorizations that are mutually exclusive.
Economic environment Economic System and economic policies
Economic Systems Types
Around the globe, there are many different sorts of economies. Although they all share certain fundamental qualities, each has its own distinct attributes. Each economy is built on its own set of circumstances and assumptions. Traditional economies, command economies, mixed economies, and market economies are the four primary kinds of economic systems.
Economic system of the past
The conventional economic system is founded on the exchange of products, services, and labour, all of which follow well-established patterns. It is heavily reliant on individuals, with minimal division of labour or specialisation. The traditional economy is, in essence, the most fundamental and oldest of the four kinds.
Traditional economic systems still exist in several places of the globe. It’s most widespread in rural areas of second- and third-world countries, where farming and other traditional income-generating industries are the mainstays of the economy.
In communities with conventional economic systems, there are frequently little resources to distribute. Either there are few natural resources in the area, or access to them is limited in some manner. As a result, unlike the other three, the conventional system lacks the ability to produce a surplus. The conventional economic system, however, is very viable precisely because of its rudimentary origin. Furthermore, compared to the other three techniques, there is extremely little waste owing to its limited output.
Economic system based on command
A dominating, centralised authority, generally the government, controls a large chunk of the economic structure under a command system. The command economic system, often known as a planned system, is widespread in communist regimes since production choices are made by the government.
If a country’s economy has a lot of resources, it’s likely that it’ll tilt toward a command economy. In this situation, the government steps in and takes control of the resources. Centralized control is ideal for precious resources like gold or oil. Other, less essential areas of the economy, such as agriculture, are regulated by the people.
The command system works well in principle as long as the central authority exerts control in the best interests of the general people. However, this does not seem to be the case very often. In comparison to other systems, command economies are strict. Because authority is concentrated, they respond slowly to change. As a result, they are prone to economic crises or catastrophes because they are unable to swiftly respond to changing circumstances.
Economic framework based on markets
The principle of free markets underpins market economic systems. To put it another way, the government plays a little role. The government has minimal control over resources and avoids interfering with vital economic sectors. Rather, individuals and the supply-demand connection are the sources of regulation.
The majority of the market economic system is theoretical. That is to say, there is no such thing as a pure market system. Why? All economic systems, after all, are vulnerable to some kind of central authority intervention. Most countries, for example, implement legislation to control fair trade and monopolies.
From a theoretical standpoint, a market economy allows for significant expansion. A market economic system, it is said, produces the most growth.
The biggest disadvantage of a market economy is that it permits individual entities to gain a tremendous deal of economic power, especially those who hold valuable resources. The allocation of resources is inequitable because the wealthiest people control the majority of them.
System with a mix of components
The features of market and command economic systems are combined in mixed systems. As a result, mixed systems are often referred to as dual systems. The word is also used to characterise a market system that is heavily regulated.
A hybrid system is used in several Western nations. The majority of industries are private, while the remainder, largely public services, are under government control.
Globally, mixed systems are the norm. A hybrid system is said to blend the finest qualities of both market and command systems. Mixed economies, on the other hand, have the issue of establishing the correct balance between free markets and government regulation in practise. Governments have a tendency to impose much more control than is required.
Policies affecting the economy
Government economic policy include taxation systems, government budgets, the money supply and interest rates, as well as the labour market, national ownership, and a variety of other areas where the government intervenes in the economy.
Most aspects of economic policy may be classified as either fiscal or monetary policy. Fiscal policy deals with government activities such as taxes and expenditure, while monetary policy deals with central bank actions such as money supply and interest rates.
International organisations such as the International Monetary Fund and the World Bank, as well as political ideas and party objectives, often impact such policies.
Economic policy types
Almost every facet of governance is influenced by economic factors. Here are a few examples of the many types of economic policies that exist:
Macroeconomic stabilisation policy aims to maintain the money supply rising at a pace that avoids excessive inflation while also smoothing out the business cycle.
Tariffs, trade agreements, and the international organisations that administer them are all examples of trade policy.
Policies aimed at boosting economic growth
Policies relating to economic development are referred to as “development economics policies.”
Income, property, and/or wealth redistribution policies are those that deal with redistribution of income, property, and/or wealth.
Regulatory, antitrust, industrial, and technology-based economic growth policies are also included.
Instruments and objectives
Policy is often aimed at achieving certain goals, such as inflation, unemployment, or economic growth targets. Other goals, such as military expenditures or nationalisation, are sometimes relevant.
These are known as policy objectives, and they are the results that economic policy attempts to attain.
Governments employ policy measures that are within their authority to attain these objectives. Interest rates and the money supply, taxes and government expenditures, tariffs, exchange rates, labour market laws, and many other facets of government are all examples of this.
Policy of macroeconomic stabilisation
Stabilization policy aims to either boost an economy out of a slump or limit the money supply to avoid inflation.
Government spending and taxes are used to manage the economy via fiscal policy, which is generally associated with Keynesian economics.
The extent of the deficit or surplus is referred to as fiscal position.
Tax policy refers to the taxes that are utilised to generate revenue for the government.
Government expenditure may be seen in almost every department.
The value of a currency is controlled by monetary policy, which lowers the quantity of money to prevent inflation and raises it to support economic development. It is concerned with the quantity of money in circulation, as well as interest rates and inflation, as a result.
If the government sets interest rates,
Income policies and price restrictions aimed at enforcing non-monetary inflation controls
The money multiplier is affected by reserve requirements.