Economic Systems

When we examine the exchanges that companies and societies make as a whole, we are focusing on the economic systems operating in different nations. An economic system is a society’s way of producing, distributing, and marketing the goods and services desired by its population. The world’s three main economic systems today are capitalism, communism, and socialism.

Communism is an economic system without private property. Under communism, the government owns all factors of production and makes all the business decisions. This system allows citizens the least degree of economic freedom. Such economies are frequently called planned economies. Planned economies have been marked by low standards of living and critical shortages of consumer goods. Planned economies exist in such countries as North Korea and Cuba.

Socialism is an economic system in which the government owns and operates basic industries – postal service, telephone, utilities, transportation, health care, banking, and some manufacturing – but individuals own most businesses. High taxes permit the government to provide many social services such as medical care, education, subsidized houses, etc. Most social nations, such as Sweden, India, and Israel, are democratic and recognize basic individual freedoms.

Capitalism, or free enterprise, is an economic system in which individuals own and operate the majority of businesses that provide goods and services. The right to private property is the most basic freedom under the free enterprise system. Competition, supply, and demand determine which goods and services are produced, how they are produced, and how they are distributed. The United States, Canada, Japan, and Australia are examples of economic systems based on capitalism.

No country practices a pure form of communism, socialism, or capitalism. Most nations operate as mixed market economies, which have elements from more than one economic system. In socialist Sweden, most businesses are owned and operated by private individuals. In capitalist United States, the federal government owns and operates the postal service and the Tennessee Valley Authority, an electric utility. In Great Britain, Israel, and Mexico, the governments are selling off many state-owned businesses to private individuals and companies. In once-communist Russia, Hungary, Poland, and other Eastern European countries, capitalist ideas have been implemented, including private ownership of business.

Nowadays the most striking feature of the world economy is the very great difference between the average incomes of people in developed countries and those in developing countries. Countries which have high standards of living – mainly industrialized countries – are described as developed countries. The total population of these countries is about 800 million, and the gross domestic product (GDP) per capita is more than $20,000. The developed countries (USA, Japan, Canada, Sweden, Germany, etc.) produce about 75 per cent of the world’s output.

Developing countries are ones in which the average standard of living is very low compared with living standards in North America and Western Europe. Such countries are poor and have few industries. The total population of these countries is over 3 billion and GDP per capita is less than $500. The low-income developing counties are often called the Third World countries and they are very much concentrated in Asia, Africa, and South America (Bangladesh, Pakistan, Sudan, Congo, Colombia, etc.). Major economic problems of the Third World countries are low-productivity agriculture, poor natural resources, a shortage of capital, and large-scale unemployment. But there are also some middle-income countries or newly industrialized countries like Mexico, Brazil, Egypt, Turkey, Bulgaria, Hungary, South Africa, etc. in which GDP per head is between $5,000 and $20,000. The total population in these countries is about 1 billion. Some countries, such as the fast-growing economies in SE Asia like Taiwan and Singapore – the Asian tigers – are reaching the West’s levels of wealth and prosperity.