MEANING, TYPES AND CHARACTERISTICS OF ECONOMIC SYSTEMS

1. Business Environment (CBA21) UNIT-4
Prepared by Dr.T.S.Kumar/AP/BBA Jawahar Science College, Block14,Neyveli. Page 1 of 7
MEANING, TYPES AND CHARACTERISTICS OF
ECONOMIC SYSTEMS
Economic systems provide another basis of classification of government. These systems serve
to explain whether businesses are privately owned or government owned, whether there is a
combination of private and government ownership. Basically three systems can be identified:
Communism/Socialism, Capitalism and Mixed Economic System.
Capitalism
Under capitalism all factor of production that is man, machine land and capital are in individual
hands. They are free to use them to earn profit and are free to not to use them if they wish.
Besides free and unfettered use of property, everybody is free to take up any line of production
he likes and is free to enter into any contract with other fellow citizens for his profit. In the
words of Prof. Louks, “capitalism is a system of economic organization featured by the private
ownership and the use for private profit of man made and nature – made capital”
Features of Capitalism
i. Right of Private Property: Everybody has a right to acquire a property, to keep it and to pass
it on to his heirs.
ii. Freedom of Enterprise: This freedom implies three things:
a) Freedom of enterprise,
b) Freedom to use one’s property,
c) Freedom of contract
iii. Freedom of Choice by Customer: Every consumer enjoys a freedom of choice of the
commodities and service that he wishes to consume.
iv. Profit Motive: In capitalism it is the profit motive which governs the business enterprise. It
is profit motive which induce people to undertake any productive activity.
v. Competition: The producer competes with one another to get the consumer’s choice or in
selling the commodity as much as they can through advertisement, price cuts, concession
etc. Similarly there is competition among workers for job.
vi. Importance of Price System: Capitalism is said to be governed by price. It is the price
mechanism which facilitates the functioning of capitalism. Demand and supply is decided

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by price. Rather it is a two way relation it is price which decides demand and supply and it
is demand and supply which decides the price. So in capitalism there is complex relationship
between prices, supply and demand.
There is hardly any country which can be called in a true sense as capitalist. Though countries
like USA, UK, Japan, South Korea etc. are called capitalist countries but they are examples of
Mixed Capitalist Economy. As here means of production are owned by private enterprise but
the government directly controls and regulate the working of economy through its monetary
and fiscal policy. Once Microsoft has to split its business into two companies because of govt.
intervention. In late 1970s American govt. used quota system to save domestic automobile
industry from Japanese automobile industry. Not only America all the capitalist countries
regulate the business in national interest. That’s why we can call them Mixed Capitalist
Economy.
Socialism
A Swedish king once remarked to his minister, “If one is not a socialist up to the age of twenty-
five, it shows that he has no heart: but if he continues to be a socialist after the age of 25, he has
no head. Socialism is based on the philosophy of equality. It believes in class less society. In
Socialism people are supposed to work according to capacity and get according to need. In the
word of Morrison socialism can be defined as “the important essential of socialism are that all the
great industries and the land should be publicly or collectively owned, and that they should be
conducted (in conformity with a national economic plan) for the common good instead of
private profit.”
General Features of Socialism
i. Social Ownership of Means of Production: In socialism the means of production are the
property of the state and not of private individual. The profit goes to state exchequer.
ii. No Private Enterprise: In socialism production is to be initiated and conducted by the state,
which will pay wages and other costs and keep profits to itself. However in some fields like
agriculture, handicraft and cottage industry co-operative are allowed.
iii. Economic Planning: In socialism state is in charge of production and distribution. States
allocate the scares resources according to the central economic planning. Economic
planning is closely associated with Russian system. Economic planning ensures efficient
and optimum allocation of resources in national interest.

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iv. Classless Society: Socialism believes in class less society. In a socialist state every
individual enjoys equality of opportunity regardless of caste, creed, family and religion.
v. Consumer is not sovereign: In socialism consumer is not sovereign. It is the state which
decides what to supply, how much to supply, how to supply and at what price to supply. So
consumer doesn’t have any choice.
After Russian revolution Russians trued to establish a true socialist state they even abolished
currency but soon they have to re-establish money. China also tried to establish socialism
various other states like Poland, Romania, North Korea, Cuba, East Germany etc tried to
establish socialism, but they couldn’t succeed and they have to surrender to market forces. Now
accept North Korea all other erstwhile communist countries accepted the importance of private
entrepreneurship and are following the Mixed system of economy.
Mixed Economy
Mixed economy is a mixture of two extremes that is socialism and capitalism. In mixed
economy both the private and public sector exist and work together in national interest. The
chief features of the Mixed Economy are:
i. Co-Existence of Public and Private Property: In a mixed economy industry of the country
are divided in two parts. Development of one is the responsibility of state it is usually the
infrastructure part. With the infrastructure state takes the responsibility and have a
monopoly for the development of basic industry as mining, oil, steel, aluminium and other
metal industry, public transport, defence, energy etc. And private entrepreneurship is
allowed in consumer industry.
ii. Price System and Government Directives: In a mixed economy both the price system works
that is administered price which are fixed or directed by government and price based on
market forces such as demand and supply. In critical goods like Oil, LPG, Steel govt. follow
administered price and market forces decides the price of other goods. Even in same
commodity govt. follows administered as well as market price entrepreneur is allowed to
sell part of production at market prices and part of production to govt. at the prices fixed by
the govt.
iii. Govt. Regulate and Control Private Sector: Though in mixed economy private sector is
allowed but it is regulated and controlled by state. The States use various measures like
regulation, licenses, permits and incentives to regulate and to decide the direction of private

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investment. States use all these means so that private enterprises work in harmony with
national priorities.
iv. Consumers’ sovereignty is protected: In mixed economy consumers’ sovereignty is
protected. Consumers are free to buy commodities of their choice, and producers produce
commodities of consumer’s choice. Though in public interest govt. may control the price
of some essential commodities. In fact govt. protects the consumer from the exploitation of
private entrepreneurs.
v. Government Protects Labor Interest: In mixed economy govt. protects the labor and weaker
section from the exploitation by the capitalists.
So we see that in a mixed economy private and public sector operate side by side in coordination
with each other though govt. regulates the private sector. Today almost every country is a mixed
economy either it is a mixed capitalist economy as USA, UK or it is mixed socialist economy
as China and India.
TYPE OF ECONOMY ON THE BASIS OF INCOME
Economies can also be divided on the basis of income level. There are countries, which have a
very high per capita income as Singapore, Switzerland; Sweden etc on the other hand there are
countries where people are dying because of hunger. Even in one country itself there is disparity
in terms of development, which is called dualism. Dualism refers to coexistence of developed
and underdeveloped in a country’s economy side by side.
On the basis of per capita income countries are classified as low income, middle income, and
high income economies.
Low Income Economies: These economies have a very low level of per capita income. All
economies having a per capita GNP of $755 or less in 2000 are considered as low income
countries.
The Middle Income Economies: These economies are subdivided into lower middle income
economies having a per capita GNP between $756 and $ 2,995 in 2000 and upper middle
income having a per capita GNP between $2996 and $ 9265.
High Income Economies: These are the countries having a per capita GNP of $ 9266 or above
in 2000.

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Table : GNP Per Capita and PPP Estimate of GNP Per Capita in US Dollars (2000)
Country/Region GNP GNP (PPP) GNP
Per Capita
GNP (PPP)
Per Capita
$ Billion $ Billion Dollars Dollars
USA 9,646 9646 34,260 34,260
Japan 4,337 3,354 34,210 26,460
Germany 2,058 2,054 25,050 25,010
U.K. 1,464 1,407 24,500 23,550
China 1,065 4,966 840 3,940
Brazil 607 1,245 3,570 7,320
Mexico 498 864 5,080 8,810
India 471 2,432 460 2,390
World Bank, World Development Report 2002
Estimates of GNP per capita are calculated by converting GNP to U.S. Dollars. These estimates
do not tells the true story. The use of purchasing power parity (PPP) provides a better
comparison of average income. If we use PPP estimates of GNP per capita, we find that income
inequalities between developed and underdeveloped countries are somewhat lower than those
we observe on the basis of exchange rates as conversion factors. For example as in the above
table in 2000, the per capita income of India was estimated at $598; in PPP terms it was
estimated at $2840, it means that the goods which costs $598 in India will cost $2840 in USA.
IN other words, having $598 in India is equivalent to having $2840 in USA.
TYPE OF ECONOMIES ON THE BASIS OF DEVELOPMENT
Low and middle income countries are usually considered as developing or
underdeveloped countries and high income countries as developed countries. But it is not
always true. Countries like Kuwait, Iran, UAE, etc. fall in high-income countries but are
considered as developing countries. In fact there is a difference between growth and
development. GDP is a measure of economic growth only which tells about country’s real
output of goods and services in terms of currency. But Economic development is more
comprehensive term. It implies progressive changes in the socio economic structure of a
country. Economic development means steady decline in agriculture’s share in GNP and a
corresponding increase in the share of industries, trade, banking, construction, and services.
The process of development is far more extensive. Apart from rise in output, it involves changes
in the composition of output as well as shift in the allocation of productive resources so as to
ensure social justice. So it is quite obvious that growth and developments is not the same thing.

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MEASUREMENT OF ECONOMIC GROWTH
Economic development is measured in four ways:
1. GNP: According to it economic development is measured as an increase in the economy’s
real national income over a long period of time. But GNP figure does not reveal the costs
to society of environmental pollution, industrialization, and population growth. It tells
nothing about distribution of income.
2. GNP per capita: Meier defines economic development as the process whereby the real per
capita income of a country increases over a long period of time. But such a measure doesn’t
mention any thing about distribution of income, structure of society, resource patterns etc.
3. Welfare: According to Okun and Richardson, economic development is a “sustained, secular
improvement in material wellbeing, which may considered to be reflected in an increasing
flow of goods and services.”
4. Social Indicator: Social indicator includes health, food and nutrition, education including
literacy, and skills, employment, condition of works, consumption of basic necessities,
transportation, housing, including household facilities, clothing, recreation and entertainment,
social security, etc. All these indicators emphasis on the quality of the development process.
In all the above methods the easiest to measure is GNP method so UN organizations use GNP
method to measure development. But form business decision point of view welfare and social
indicators and structure of economy as the share of services and industry in GNP are of critical
importance. Only on the basis of these indicator and organization can forecast or create demand.
Developing economies are basically agrarian economies. In these economies services and
industry may have a large share in GDP as in India but most of the population is dependent on
Agriculture for its livelihood. In developing economies GNP per capita is very low as in India
it is $ 471 in year 2000 and there is wide spread of poverty. There is a scarcity of capital in
developing economies. When the absolute income is high the ability to save is high thus
formation of capital is high. On the other hand in developing economies formation of capital is
low because of low level of income and sway of consumption. Developing economy is also
characterized by rapid population growth, low levels of productivity, technological
backwardness, high level of unemployment and underemployment, lower level of human well
being and wide income inequalities.
On the other hand there are developing economies, which have witnessed rapid industrialization
and rapid growth in GNP in last 20 years. These are new Asian tigers i.e. Hong Kong, South

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Korea, Singapore, Taiwan, Malaysia, Thailand etc. Above mention countries are very affluent
and their GNP is nothing less then some of the developed nations. Because of there strategic
situation and core competency in specific industry they are going to play a decisive role in
world economy in the years to come.
Some economies are referred to as transition economies. These are former centralized/ socialist
economies, which are moving to market economies as Russia, China, eastern European nations,
and India. These transition economies are very big in size in every term. As they are the largest
market in terms of PPP, they are cheapest manufacturing and service producing hub, and they
have wide and in few cases largest natural resources. So from both angle that is demand and
supply they are very rich and will be the playground for all the global organization in coming
era.
Level of income may be low in these economies but even then they are big market. Only thing
is that organizations have to develop product, which these economies can afford. As after a year
research