Economic system by Neeraj Bhandari ( Surkhet.Nepal )
Economic System, Planning & Parameters
• Meaning of Economic Systems ( Command, Market & Mixed
• Economic Planning (12th five year Plan)
• Economic Parameters ( GDP, GNP,N.I, Inflation, CAD,FOREX etc.)
The three basic economic problems
• What goods and services should be produced
and in what quantities?
• How should these goods and services be
• For whom should these goods and services be
The Economic System
• Refers to a set of economic institutions that
dominate a given economy with the main
objective of solving the basic economic
Four economic systems or categories:
• Traditional Economy
– 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
– The economy is only its third priority while culture and
religion are its foremost priorities;
– Mines are used to gather raw materials for production.
• Command Economy
– Resource allocation is done by government;
– Presence of central planning of all economic
– There is no free competition (the government is
– 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.
• Market Economy
– The private sector owns and manages the means of
– 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.
• Mixed Economy
– 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
– The combinations of the best features of capitalist
and command economies are observable in the
– 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.
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.
- 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.
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
- 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
1. The unequal distribution of income and wealth
2. The uneven course of economic growth with
periods of boom or bust.
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.
• Economic planning can apply to
production, investment, distribution or all three of these
• 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-
Objectives of Economic Planning
Removal of Unemployment.
Reduction in income inequalities.
Elimination of poverty.
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
• 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
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