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An economy is an area of the production, distribution and trade, as well as consumption of goods and services by different agents. But what are the three types of economies and what do they mean?
Other societies have a command economy, one in which a central authority makes most of the what, how, and for whom decisions. Economic decisions are made by the government: the people have little, if any, influence over how the basic economic questions are answered.
There are few command economies in the world today, but they still can be found in North Korea and Cuba. Until recently, the People’s Republic of China, the communist countries of Eastern Europe, and the former Soviet Union also had command economies.
The main strength of a command system is that it can change direction drastically in a relatively short time. The
former Soviet Union went from a rural (or primitive) agricultural society to a leading industrial nation in just a few
decades. It did so by emphasizing heavy industry and industrial growth rather than the production of consumer goods.
One disadvantage of a command system is that it is not designed to meet the wants of consumers, even though
many basic needs are provided. In the case of Soviet industrial development, generations were forced to do without
such consumer goods as cars, home appliances, and adequate housing. People often were told to sacrifice for the good
of the state and the benefit of future generations.
Traditional Economies
In a society with a traditional economy, the allocation of scarce resources, and nearly all other economic activity, stems from ritual, habit, or custom.Individuals are not free to make decisions based on what they want or would like to have. Instead, their roles are defined by the customs of their elders and ancestors.
Many societies – such as the central African Mbuti, the Australian Aborigines, and other indigenous peoples around the world – are examples of traditional economies. The Inuits of northern Canada in the 1800s provide and especially interesting case of a traditional economy.
The main strength of a traditional economy is that everyone knows which role to play. Little uncertainty exists over WHAT to produce. If you are born into a family of hunters, you hunt. If you are born into a family of farmers, you farm.
Being in traditional economies can impact which way that you are headed with your life, if a person are born into hunters, then they might be obligated to follow the tradition that has been going on for several centuries just for the good of other people, even though they have already planned which way THEY would like to go.
A market economy is an economic system in which the decisions regarding investment, production and distribution are guided by the price signals created by the forces of supply and demand.
Many of the largest and most prosperous economies in the world, such as the United States, Canada, Japan, South Korea, Singapore, Germany, France, Great Britain, and other parts of Western Europe, are based on the concept of a market economy. While there are also many significant differences among these countries, the common thread of the market binds them together.
During the gasoline shortage of the 1970s, for example, consumers reduced their demand for large, gas-guzzling automobiles and increased their demands for smaller, fuel-efficient ones. Because auto makers still wanted to sell cars, they moved resources from the production of large cars to small ones.
One advantage of a market economy is that over time, it can adjust to change.
One of the disadvantages of the market economy is that it does not provide for the basic needs of everyone in the society – some members of the society may be too young, too old, or too sick to care for themselves.
Another disadvantage of a market economy is that it does not provide enough of the services that people value highly. For example, private markets cannot adequately supply a system of justice, national defense, universal education, or comprehensive health care.