TheGlobal Economic System
TheGlobal Economic System
Countrieshave different levels of Government intervention over the businessenvironments within their economies. There are three basic primaryeconomic systems that result from this classification. They are basedon the level of control including, planned economies, marketeconomies, and mixed market economies.
Aplanned or controlled economy is a business environment where theGovernment controls key aspects of business within the countrythrough activities like price controls and setting industry quotas.In this type of market economy the state owns all the means ofproduction. Among the key aspects of the economy under the control ofthe government may include commerce, industries, the economicactivity, products and services – a dictatorship system. In thistype of business environments, government-controlled economicactivities contribute the biggest percentage of the countries’Gross Domestic Products (The balance, 2017). This economic system ispreferred for its stability however, it limits private enterpriseand does not support international trade. This is because state ownedenterprises participate in the production of goods and services inthe economy allowing no room for competition.
Inmarket economies there is minimum government control to only thenecessary levels. The main aspects of business within the economyincluding key economic decisions and price are left for determinationby the market forces of demand and supply (Witte, 2015). These marketforces result from numerous uninterrupted business interactions amongthe individuals and corporate entities, within the country. This typeof economy creates free and liberal markets without theinefficiencies associated with a planned economy like protectionism,price controls, and production quotas.
Thisis a market system that allows private enterprises to run the economybut with government intervention to bring some desired social effectsin the business environment. In this market, characteristics of bothplanned and market economies are present (The balance, 2017). Themarket forces of demand and supply are allowed to direct key businessdecisions like prices, products and services, and the distribution offactors of production in the economy. The government collects taxesand uses it or distributing it through welfare and subsidies toeffect the desired change in the economy. Proponents argue that freeaccess to information of a market economic system is not practical inreal-world.
Laborcan be defined as the sum total of human efforts during a productionprocess and can be either physical or mental. In a planned economy,labor is fully controlled by the Government by setting the wage ratesand level of activity in production. The government also limits thechoice of occupation and place of work for its labor. Conversely inboth market and mixed-market economies, wage rates and level ofactivity are set by the market forces. However, there is indirectgovernment intervention in mixed market economies to effect somedesirable social effects into the business environment in form oflabor regulations like minimum wage rates.
Capitalrefers to the tools, buildings, plant and equipment’s used byhumans to facilitate the production process using the other factors.Controls on capital in form of taxes, tariffs, legislations andvolume controls are used by governments in controlled economies tocontrol capital accumulation (Witte, 2015). This may have a negativeeffect on capital accumulation from external sources thusinterrupting international trade. Some of these controls are used inmixed economies to effect some change in the ‘demand andsupply-determined’ capital characteristics within the economy. In afree economy, the market forces of demand and supply dictate thecharacteristics and sources of capital.
Entrepreneurshipcan be defined as the willingness and capacity of the citizens todevelop and manage a business with a profit motive. A controlledeconomy interferes with the entrepreneurial space by limiting theamount of activity and thus actualization of the entrepreneur’sprofit motive. Imposing tough business operating environments for theprivate sector players (The balance, 2017).In controlled economyentrepreneurs compete with the government in the commercial businessventures which is defeatist for them. A free market rewardsentrepreneurship and innovation by allowing businesses to operate attheir fullest possible level and charge prices as high as they wish.
Themajor physical resource used in production is land. However, thereare other naturally occurring resources that are consumed during theproduction process. In a planned economy, the government owns andcontrols the major physical resources of productions. It alsodistributes them as it deems fit without any regard for the marketforces. This limits private commercial enterprise in the economy(Witte, 2015). In a free market, physical resources are distributedby market forces and owned by individuals. In mixed economiesgovernment intervention is aimed at ensuring that the physicalresources are used in the production of the most relevant products.It also limits the production of ‘socially bad goods’ likealcohol into the economy.
Productionof the most necessary goods in an economy requires the decision makerto have the necessary past, present, and private information from themarket and consumers. This includes information like customerpreference, international standards of production and availability ofsubstitutes among others. The government makes all the productiondecisions with incomplete information – past information in acommand economy (The balance, 2017). Mixed-market and full marketeconomic systems use complete information from the market to guidetheir economic decision making. This attracts international trade asthere is possibility of competing with the market than the state.
Thebalance. (2017). Market Economy: Characteristics, Examples, Pros,Cons. Retrieved on 25thmarch 2017 from,https://www.thebalance.com/market-economy-characteristics-examples-pros-cons-3305586
Witte,H. (2015). Sustainablemarket economy: Welfare without self-made crises?.Zurich: LIT