Economic system by Neeraj Bhandari ( Surkhet.Nepal )


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Economic system by Neeraj Bhandari ( Surkhet.Nepal )

  1. 1. Unit 2 Economic System, Planning & Parameters • Meaning of Economic Systems ( Command, Market & Mixed Economy) • Economic Planning (12th five year Plan) • Economic Parameters ( GDP, GNP,N.I, Inflation, CAD,FOREX etc.)
  2. 2. The three basic economic problems • What goods and services should be produced and in what quantities? • How should these goods and services be produced? • For whom should these goods and services be produced?
  3. 3. The Economic System • Refers to a set of economic institutions that dominate a given economy with the main objective of solving the basic economic problems.
  4. 4. Four economic systems or categories: • Traditional Economy Essential characteristics: – Communal land ownership; – The leader decides on the management of agricultural production which is the basis of the economy; – The production, distribution, and use of economic resources are based on traditional practices; – New technologies are not welcomed since they are in contrast with the traditional practices of their ancestors; – The economy is only its third priority while culture and religion are its foremost priorities; – Mines are used to gather raw materials for production.
  5. 5. • Command Economy Essential characteristics: – Resource allocation is done by government; – Presence of central planning of all economic activities; – There is no free competition (the government is only seller); – Only the government plays the role in setting legal framework for economic life production and distribution of goods and services; – The products or needs of the people are distributed based on priorities set by the committee.
  6. 6. • Market Economy Essential characteristics: – The private sector owns and manages the means of production; – The price system in a market structure applies to determine how much will be paid for a certain commodity or service; – It is also known as laissez-faire or free enterprise; – There is minimum government interference on decisions pertaining to the management of the economy (protection of the society against internal and external aggression); – Existence of competition often results to monopoly; – There is presence of economic power.
  7. 7. • Mixed Economy Essential characteristics: – The means of production are owned and controlled by the private sector as well as the government; – The people decide on economic activities within the economy; – The combinations of the best features of capitalist and command economies are observable in the market; – The problem of distribution of goods and services and allocation of economic resources are determined through a combination of the market and governmental laws and policies.
  8. 8. Capitalism and Socialism The classification of different societies into traditional, command, market and mixed economic systems spans the entire course of history, but in the last century the world has been divided into great economic and political systems representing socialism and capitalism. • Capitalism - is an economic system in which most resources are privately owned, people are free to choose their occupation, the kind and amount of production is determined by price and people searching for a profit, and there is substantial amount of competition.
  9. 9. Three aspects of Capitalism: – The institution of private ownership is generally accepted. Factories, land, goods, and services are privately owned by individuals or group of individuals like stockholders and shareholders. – Most people are free to pursue their own economic self-interests, that is, to work for personal gain. For this reason, capitalism is often called the free- enterprise system; most people are free to choose their own occupations. – Because people are motivated by self-interest, they compete with one another to get ahead, to make a better product, to control markets in order to maintain or obtain a large profit. There is always a struggle for larger profit lead (usually, but by no means always) to a high degree of competition among business.
  10. 10. • Socialism - is an economic system in which the government owns and operates the major industries of the country. It means also that the government also decides in those major industries the answers to the three economic questions. Socialism does not imply dictatorship. Socialism can exist in democratic countries as well as authoritarian ones. The main reason for socialism’s existence is that socialists hope to overcome capitalism’s two important problems. 1. The unequal distribution of income and wealth 2. The uneven course of economic growth with periods of boom or bust.
  11. 11. What is Economic Planning ?  A plan spells out how the resources of a nation should be put to use.  It should have some general goals as well as specific objectives which are to be achieved with in a specified period of time.  In India plans are of five year duration and are called FIVE YEAR PLAN.
  12. 12. Economic Planning • Economic planning can apply to production, investment, distribution or all three of these functions. • Most economies are mixed economies, incorporating elements of markets and planning for distributing inputs and outputs. The level of centralization of decision-making in the planning process ultimately depends on the type of planning mechanism employed; as such planning need not be centralized and may be based on either centralized or decentralized decision- making.
  13. 13. Objectives of Economic Planning  Economic growth.  Self- Reliance.  Removal of Unemployment.  Reduction in income inequalities.  Elimination of poverty.
  14. 14.  Command economy Planning • A planned economy is an economic system in which decisions regarding production and investment are embodied in a plan formulated by a central authority, usually by a government agency. A command economy is a type of planned economy whereby plan directives are enforced through inducements in a vertical power-structure. • For. Soviet Union Economic Planning.  Market Economy Planning • The Government supplemented the price system with centralized resource allocation and created a number of new agencies to direct important economic sectors; notably the Food Administration, Fuel Administration, Railroad Administration and War Industries Board. • For e.g United States
  15. 15.  Mixed Economy • A decentralized-planned economy is a type of economic system based on decentralized economic planning, in which decision-making is distributed amongst various economic agents or localized within production units. • Decentralized planning is held in contrast to centralized planning where economic information is aggregated and used to formulate a plan for production, investment and resource allocation by a central authority. • For e.g India
  16. 16. Five Year Plans In India Source : Government of India , Planning Commission ,Eleventh Five year Plan, 2007- 12. Vol.1 Table 2.1, pp 25. First Five Year Plan Target Actual First Plan (1951-56) 2.1 4.2 Second plan (1956-61) 4.5 4.2 Third (1961-66) 5.6 2.6 Fourth Plan ( 1969-74) 5.7 3.1 Fifth (1974-79) 4.4 4.9 Sixth (1980-85) 5.2 5.4 Seventh (1985-1990) 5.0 5.5 Eighth(1992-1997) 5.6 6.7 Ninth(1997-2002) 6.5 5.5 Tenth(2002-2007) 8.0 7.5 Eleventh (2007-12) 9.0 7.7 From 1991-92 to 2011-12 - 6.5