Economic Systems

Three types of economic systems exist, each with their own drawbacks and benefits; the Market Economy, the Planned Economy and the Mixed Economy.An economic system is loosely defined as countrys plan for its services, goods produced, and the exact way in which its economic plan is carried out. In general, there are three major types of economic systems prevailing around the world.

Market Economy
In a free market economy, the invisible hand of supply-and-demand market forces defines what is produced, in what quantity, and at what price. Since free markets are governed by the law of supply and demand, the market itself will determine the price of goods and services, and this information will be made available to all participants. Businesses can decide which goods to produce and in what quantity, and consumers and businesses can decide what they want to purchase and at what price. In a market economy, national and state governments play a minor role. Instead, consumers and their buying decisions drive the economy. In this type of economic system, the assumptions of the market play a major role in deciding the right path for a countrys economic development. Market economies aim to reduce or eliminate entirely subsidies for a particular industry, the pre-determination of prices for different commodities, and the amount of regulation controlling different industrial sectors.

The absence of central planning is one of the major features of this economic system. Market decisions are mainly dominated by supply and demand. The role of the government in a market economy is to simply make sure that the market is stable enough to carry out its economic activity properly.. The main characteristics of a market economy are its flexibility and decentralized nature. This type of economic system is more apt to cope up with ever-changing market trends, making it faster and more reactive.

The role of the national and state governments in the market economy is debatable, although it has been found that government interventions are sometimes necessary. In these cases, the government mainly deals with the formation and implementation of rules and regulations and ensures that monopolistic behavior does not obstruct competition in the marketplace.

Planned Economy
The opposite of a market economy is a planned economy, where the government decides what to produce, in what quantity, and to be sold at what price.

A planned economy is also sometimes called a command economy. The most important aspect of this type of economy is that all major decisions related to the production, distribution, commodity and service prices, are all made by the government. The planned economy is government directed, and market forces have very little say in such an economy. This type of economy lacks the kind of flexibility that is present a market economy, and because of this, the planned economy reacts slower to changes in consumer needs and fluctuating patterns of supply and demand. On the other hand, a planned economy aims at using all available resources for developing production instead of allotting the resources for advertising or marketing.

Mixed economies
Mixed economies blend market and planned economies, meaning that the government will have some role in regulating the market, but all other activity will be driven by the decisions of buyers and sellers. Mixed

Economy can be defined as a form of organization where the elements of both capitalist economy and socialist economy are found.

A mixed economy combines elements of both the planned and the market economies in one cohesive system. This means that certain features from both market and planned economic systems are taken to form this type of economy. This system prevails in many countries where neither the government nor the business entities control the economic activities of that country - both sectors play an important role in the economic decisionmaking of the country. In a mixed economy there is flexibility in some areas and government control in others. Mixed economies include both capitalist and socialist economic policies and often arise in societies that seek to balance a wide range of political and economic views.

Existence Of A Mixed Economy

It is too difficult to define a country's economy as capitalist, socialist, or mixed. But as the experiences tell the role of the Government has increased very fast after the worldwide depression. The was one of the best examples of the Capitalist economy is considered as a mixed type today.

Mixed Economy An Economic Mixture

In a mixed type economy, both the private ownership as well as the state takes part in the means of production, distribution and other types of economic activities.

The mixed economy allows private participation in the field of production in an environment of competition with an objective of attaining profit. On the contrary following to the socialism features it includes public ownership in production for maximizing social welfare

Simply in such type of economy there is the presence of private economic freedom with centralized planning with a common goal of avoiding the problems associated with both capitalism as well as socialism

Capitalist Economy

A capitalist economy otherwise called as the free market economy can be defined as an economic activity, where the means of production are privately owned. Most of the economies over the world have enriched their economic system by implementing capitalist norm in the recent years. Here in such form of economy there is no Government interference. The basic characteristics of such types of economic system are as follows:
y y y y y

More private participation in the field of economic activities; Free environment to compete in the economy; Individuals and firms act for profit motive; High freedom for choice to the consumers; Government acts as a police state

Socialist Economy
In case of a socialist economy, the means of production and distribution are made by the public authority or the Government.

The basic characteristics of such types of economic system are as follows:

y y y y

It's a centrally planned economy; It aims at achieving a better distribution of income and wealth; Objective is to attain social gain; Absence of consumer's sovereignty
y y

Socialist Norms Over The World Though a large numbers of nations over the world are in a trend of following the free market system, still the socialist pattern keeps up its dominance. The USSR and some of the European countries have adopted a fully centralized planned economy. In the past most of the countries over the world hade relied upon these form of economic pattern. India had also adopted the socialist pattern of economy after getting independence for fostering its economic growth rate. Though the country has opened its doors of the market, still the five-year plans in the country holds its relative importance. Even China had adopted a socialist model after the communist victory in the civil war.

India vs. China: Whose Economy Is Better?

In the inevitable comparisons that economists and businesspeople make between Asia's two rising giants, China and India, China nearly always comes out on top. The Chinese economy historically outpaces India's by just about every measure. China's fast-acting government implements new policies with blinding speed, making India's fractured political system appear sluggish and chaotic. Beijing's shiny new airport and wide freeways are models of modern development, contrasting sharply with the sagging infrastructure of New Delhi and Mumbai. And as the global economy emerges from the Great Recession, India once again seems to be playing second fiddle. Pundits around the world laud China's leadership for its well-devised economic policies during the crisis, which were so effective in restarting economic growth that they helped lift the entire Asian region out of the downturn. Now, however, India may finally have one up on its high-octane rival. Though India still can't compete on top-line economic growth the World Bank projects India's gross domestic product (GDP) will increase 6.4% in 2009, far short of the 8.7% that China announced in mid-January India's economy looks to be rebounding from the downturn in better shape than China's. India doesn't appear to be facing the same degree of potential dangers and downside risks as China, which means policymakers in New Delhi might have a much easier task in maintaining the economy's momentum than their Chinese counterparts. "The way I see it is that the growth in India is much more

sustainable" than the growth in China, says Jim Walker, an economist at Hong Kong based research firm Asianomics. India's edge is due to the different stimulus programs adopted by the two countries to support growth during the downturn. China implemented what Walker calls "the biggest stimulus program in global history." On top of government outlays for new infrastructure and tax breaks, Beijing most significantly counted on massive credit growth to spur the economy. The amount of new loans made in 2009 nearly doubled from the year before to $1.4 trillion representing almost 30% of GDP. The stimulus plan worked wonders, holding up growth even as China's exports dropped 16% in 2009. But now China is facing the consequences of its largesse. Fears are rising that Beijing's easy-money policies have fueled a potential property-price bubble. According to government data, average real estate prices in Chinese cities jumped 7.8% in December from a year earlier the fastest increase in 18 months. The credit boom has also sparked worries about the nation's banking system. Many economists expect the large surge in credit to lead to a growing number of nonperforming loans (NPLs). In a November report, UBS economist Wang Tao calculates that if 20% of all new lending in 2009 and 10% of the amount in 2010 goes bad over the next three to five years, the total amount of NPLs from China's stimulus program would reach $400 billion, or roughly 8% of GDP. Though Wang notes that the total is small compared with the level of NPLs that Chinese banks carried in the past, she still calls the sum "staggering." Policymakers in Beijing are clearly concerned. Since December, they have introduced a series of steps to cool down the housing market and restrict access to credit by, for example, reintroducing taxes on certain property transactions and raising the required level of cash that banks have to keep on hand in an effort to reduce new lending. India, meanwhile, isn't experiencing nearly the same degree of fallout from its recession-fighting methods. The government used the same tools as every other to support growth when the financial crisis hit cutting interest rates, offering tax breaks and increasing fiscal spending but the scale was smaller than in China. Goldman Sachs estimates that India's government stimulus will total $36 billion this fiscal year, or only 3% of GDP. By comparison, China's two-year, $585 billion package is roughly twice as large, at about 6% of GDP per year. Most important, India managed to achieve its substantial growth without putting its banking sector at risk. In fact, India's banks have remained quite conservative through the downturn, especially compared with Chinese lenders. Growth of credit, for example, was actually lower in 2009 than in 2008. As a result, economists see continued strength in India's banks. A January report by economic-research outfit Centennial Asia Advisors noted that based on available data, "there was no sign that domestic banks' nonperforming assets were deteriorating materially." Nor do analysts harbor the same concerns that India's monetary policies are sending prices of Indian real estate to bubble levels. "India's growth, though less stellar, does have the reassuring factor that the [risks of] asset price bubbles are less," says Rajat Nag, managing director general of the Asian Development Bank in Manila. India maintained robust growth without Beijing's hefty stimulus in part because it is less exposed to the international economy. China's exports represented 35% of GDP compared with only 24% for India in 2008. Thus India was afforded more protection from the worst effects of the financial crisis in the West, while China's government

needed to be much more active to replace lost exports to the U.S. More significantly, though, India's domestic economy provides greater cushion from external shocks than China's. Private domestic consumption accounts for 57% of GDP in India compared with only 35% in China. India's confident consumer didn't let the economy down. Passenger car sales in India in December jumped 40% from a year earlier. "What we see [in India] is a fundamental domestic demand story that doesn't stall in the time of a global downturn," says Asianomics' Walker. The Indian economy is not immune to risks. The government has to contend with a yawning budget deficit, and last year's weak monsoon rains will likely undercut agricultural production and soften rural consumer spending. But rapid growth is expected to continue. The World Bank forecasts India's economy will surge 7.6% in 2010 and 8% in 2011, not far behind the 9% rate it predicts for China for each of those years. Indian Prime Minister Manmohan Singh, when speaking about his country's more plodding pace of economic policymaking, has said that "slow and steady will win the race." The Great Recession appears to have proved him right.

Mixed economy will suit india best as it controls excessive privatization and has government control too. Government will play an active role in the economy along with the freedom of privatization to companies. Producers and consumer have sovereignty to choose what to produce and what to consume and production and consumption of harmful goods and services may be stopped by the government. Social cost of business activities is reduced by carrying out cost-benefit analysis by the government. As compared to Market economy, a mixed economy may have less income inequality due to the role played by the government. Monopolies may be existing but under close supervision of the government.Thus mixed economy is the best economy due to the liberties offered by the government and also because of the slight control exercised by them.