An economy is a system that provides people with goods and services and directly or indirectly satisfies their wants.
Types of Economy
- Types of Economy on the Basis of Nature
- Types of Economy on the Basis of Ownership over the Means of Production
- Types of Economy on the Basis of Level of Development
Types of Economy on the Basis of Nature
On the basis of their nature, there are 8 types of economy:
- Simple and complex economy
- Closed and open economy
- Planned and unplanned economy
- The agricultural and industrial economy
Simple and Complex Economy
Simple Economy Definition
A simple economy refers to a system wherein people produce simple goods in limited numbers/quantities for the satisfaction of their wants. The barter system of exchange prevails in this economy. These types of economies existed in Indian villages in olden times.
Complex Economy Definition
A complex economy refers to a system wherein several kinds of goods are produced in large quantities. The process of production in these economies is highly complex and advanced. Money is widely used as a medium of exchange. This economy came into existence in the Post-Industrial Revolution period.
Difference between Simple and Complex Economy
| Simple Economy | Complex Economy |
|---|---|
| Only simple goods are produced to satisfy basic human wants. | A variety of goods are produced in large quantities. |
| Techniques used in the production process are simple. | Techniques used in production are complex and highly advanced. |
| A barter system is used for buying and selling goods. | Money is used as a medium of exchange for goods and services. |
| Wants are limited as people live in isolation and are self-sufficient. | Goods are produced in large quantities not only for self-use but also to be supplied and sold to distant markets. |
| It is a self-reliant economy. | It is a modern economy. |
Closed and Open Economy
Definition of Open Economy
An open economy is an economy that is involved in the process of production within its own country and participates in the production process anywhere in the world.
Definition of Closed Economy
A closed economy is an economy that has no economic transactions with any other country.
Difference between Closed and Open Economy
| Closed Economy | Open Economy |
|---|---|
| Does not have economic relations with the rest of the world. | Has economic relations with other countries. |
| Activities taking place outside the territory do not affect economic activities. | The economic activities of such an economy are affected by international fluctuations. |
| There is no difference between national income and domestic income. | The size of national income may be greater or smaller than domestic income. |
| It is an imaginary economy. | It is a real economy. |
Planned and Unplanned Economy
- A planned economy is also known as a controlled economy. In this kind of economy, the government/state has full control over all the economic activities/matters of the country.
- An unplanned economy is one in which economic activities and central problems are determined by the free play of market forces of demand and supply.
Agricultural and Industrial Economy
Definition of Industrial Economy
Industry and trade are the main occupations in this economy. Agricultural share is less in national income. Modern and complex techniques of production are used in this economy. Infrastructural facilities are well provided for in this economy.
Examples of industrial economies are the United States of America, the United Kingdom, Japan, and Germany.
Definition of Agricultural Economy
Agriculture is the main occupation in this economy. Agriculture constitutes a large share of the national income. Traditional techniques of production are used in this economy. Basic infrastructural facilities
are absent.
Examples of Agricultural Economics are Brazil, Pakistan, Myanmar, Sri Lanka
Difference between Agricultural and Industrial Economy
| Agricultural Economy | Industrial Economy |
|---|---|
| Agriculture is the main occupation in this economy. | Industry and trade are the main occupations in this economy. |
| Agriculture constitutes a large share of the national income. | Agricultural share is less in national income. |
| Traditional techniques of production are used in this economy. | Modern and complex techniques of production are used in this economy. |
| Basic infrastructural facilities are absent. | Infrastructural facilities are well provided for in this economy. |
| Examples of the agricultural economies include Brazil, Pakistan, Myanmar, Sri Lanka | Examples of the industrial economy include the United States of America, the United Kingdom, Japan, German |
Types of Economy on the Basis of Ownership over the Means of Production
On the basis of ownership over the means of production, there are three types of economy
- Capitalist economy
- Socialist economy
- Mixed economy
Definition of Capitalist Economy
It refers to a type of economy wherein private owners own the means of production such as land and capital. There is no kind of interference from the government in the economic activities of the country.
Features of a Capitalist Economy
- Individuals are free to own and control economic resources. Everyone is independent to choose his/her own business, profession and occupation.
- The people’s economic activities may or may not be controlled by the government.
- Prices of commodities are determined by the interaction of demand and supply. The government does not interfere in the determination of the prices.
- Profit and earning more income is the purpose of all economic activities.
- Individuals have the right to earn income, acquire assets and retain them.
- The consumer is sovereign in a capitalist economy.
- Inequality of income and class struggles are important features of this economy.
Definition of Socialist Economy
It refers to a type of economy wherein all the economic activities are controlled and regulated by a community or government so as to ensure welfare, achievements, and equal opportunities for all the people of the country.
Features of a Socialist Economy
- Economic resources are owned by society and are used in the public interest.
- All important decisions are taken by the government.
- Individuals in a socialist economy do not have the right to own private properties.
- The economy is managed and controlled by a ‘Planning Commission, which is the central authority.
- There is less inequality of income in this economy. Income is distributed among individuals on the basis of their needs and efficiency.
- The price of goods and services is determined by the government.
- Public interest is supreme when making decisions about production, consumption and investment.
Definition of Mixed Economy
It refers to a type of economy wherein some important part of production is undertaken by the government, while some are left to private owners. Thus, it is a blend of both capitalist and socialist economies.
Features of a Mixed Economy
- Certain economic activities are fully owned and controlled by the government. All economic activities are not allowed by the government.
- Private and public sectors co-exist in the economy.
- All the basic industries such as railways, electricity, posts and telegraphs, defence production, and atomic energy are in the public sector. Industries dealing with consumer goods are in the private sector.
- A mixed economy reduces inequality of income.
- The presence of the private sector, the right to own property and the law of inheritance encourage individuals to earn more, save more, invest more, acquire more assets and become richer.
Types on the Basis of Level of Development
On the basis of the level of economic development, economies are classified into the following categories:
- Developed economy
- Underdeveloped economy
Definition of Developed Economy
An economy that enjoys a high level of per capita income and a high standard of living is known as a developed economy.
Features of a Developed Economy
- Have a high level of per capita income or output.
- People enjoy a higher quality standard of living.
- Contributions from the industrial and service sectors are very high.
- Available resources are fully exploited and used.
- Have a high degree of technical development.
- Do not have a severe problem of unemployment.
- The slow growth rate of the population.
- A higher level of capital formation and gross domestic savings.
- A high ratio of the urban population.
- Maximum people live above the poverty line
Definition of Underdeveloped Economy
An underdeveloped economy is one in which the per capita income and the standard of living of the people are low.
Features of an underdeveloped economy
- The per capita income in an underdeveloped economy is low, and therefore, the majority of the population lives below the poverty line. Consequently, people in this economy live in miserable conditions.
- In most underdeveloped economies, the population growth rate is very high as compared to other economies. Also, because of improved medical facilities, the mortality rate among all sections of society is reduced. As a result, as the population increases, the consumption of limited resources also increases, resulting in less saving of resources and a slower growth rate.
- For many underdeveloped economies enriched with large and sufficient resources, most of these resources remain underutilized because of a lack of skilled personnel and technology.
- Underdeveloped economies suffer from widespread unemployment. Because of various reasons, such as rapid population growth and lack of investment, unemployment prevails in such an economy.
- Inequality in the distribution of income is prevalent in these economies. As a large part of the national income goes to smaller sections of society, the larger sections of society have to be satisfied with whatever part of income is available to them.
Difference between Developed Economy and Underdeveloped Economy
| Developed Economy | Underdeveloped Economy |
|---|---|
| A high per capita income leads to a higher standard of living. | A low per capita income leads to a low standard of living. |
| The incidence of poverty is low. | The incidence of poverty is high. |
| The Industrial and service sectors are predominant. | Agricultural or the primary sector is predominant. |
| Resources are properly used and highly advanced capital-intensive techniques are used in production. Therefore, productivity is high. | Resources are underused and traditional techniques are used in production. Therefore, productivity is low. |
| The gap between the rich and the poor is narrow. | The gap between the rich and the poor is wide. |
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