Page 2: What is an economy?
An economy is a system which tries to balance the available resources of a country (land, labour, capital and enterprise) against the wants and needs of consumers. It deals with three key issues:
- what is produced
- how it is produced, and
- who gets what is produced.
There are three main types of economy: planned economy, market economy and mixed economy. Planned (also known as command) types of economies were found in previously communist countries, such as Romania, Bulgaria and Russia, and in North Korea today. In a planned economy the government makes all decisions for society. Producers only make what they are instructed to make. The main benefits are that most workers are employed and most people enjoy a similar basic lifestyle. The problems, however, may be far-reaching:
- a planned economy gives little capacity for development, so growth and investment is limited
- the infrastructure is usually under-developed as government spends on other areas such as defence
- wages are state-controlled, so people have less motivation to perform at higher levels
- prices are fixed by government. Consumers often cannot afford luxury goods such as computers or mobile phones, which are taken for granted in developed countries.
In market economies (also known as free enterprise) the government's role is limited to providing legislation to protect businesses and consumers and making sure no single business or organisation restricts competition. It also provides essential services (like police and defence) and ensures the country's money supply is stable. The main features are:
- businesses are motivated by profits to make products that customers will buy
- customers' demand for products and services affects the levels of supply and the pricing
- if customers do not buy and demand falls, then a business must make less, be more efficient or produce an alternative product.
There are few, if any, examples today of countries with a purely free market economy. A purely market economy could have several drawbacks. It could lead to inequality in society. For example, those who can afford to pay for health care receive it, those who cannot pay, do not. In times of economic crisis, without government intervention, many businesses, such as major banks which have a fundamental role in the nation's economy, would fail.
The mixed economy is a combination of both planned and market economies. Most countries demonstrate a mixed economy, including the most developed countries like the UK and the USA. Even a communist country like China has an economy which relies on a mixture of state and private enterprise:
- In a mixed economy, the government contributes and controls some resources and the market controls the rest.
- The proportion of each contribution may vary. For example, in some Scandinavian countries, the state provides a very high level of social benefits but charges high taxes. In the USA, public benefits (such as free national health care) are minimal. The UK position is somewhere in between.