Types of Economy

Economic System Definition

Economic systems are the means that are adopted by governments of respective countries for distribution of resources along with services and goods. Such an arrangement is dependent on production factors – capital, labour, physical resources, entrepreneurs, and information resources. 

Types of Economy 

There are four types of economic systems –

1. Traditional Economic System 

This economic system retains essential characteristics in which there is very less specialisation or division of labour. 

A traditional economic system is most likely to be found in rural settings, or in such developing nations where farming is predominant. Such settings usually have very few resources to share. 

2. Command Economic System 

Command or Socialist economic system has a dominant centralised authority in the form of government. The economy in such a country is controlled by the government. It is the sole decision-making authority for determining production and allocation. 

Ideally, the command system takes into consideration the best interest of its populace. 

3. Market Economic System

Market economic system or capitalist economy involves very less government interference and incorporates the principles of the free market. There is a scant exercise of control over resources. Market forces regulate demand and supply.  

However, there does exist some degree of government intervention in the form of regulations against monopoly, and in favour of fair trade. 

4. Mixed Economic System 

A mixed economic system combines the features of both socialist and free-market economic systems. It is also known as dual systems. Most of the countries today have a mixed economic system with the existence of both public services as well as private industries.

Do you know?

Economic liberalisation in India was initiated in 1991, and Dr ManMohan Singh was the pioneer of this liberalisation. 

In economic liberalisation, government restrictions and regulations are reduced to facilitate the participation of private entities to a much greater extent. It is an inherent principle in Classical Liberalism. "Controls" were removed to drive economic development, which was in a rocky state.

The liberalisation of the Indian economy provided access to foreign investors, which subsequently increased foreign trade. Such changes went on to create higher job opportunities for the people of India. 

Difference between Types of Economy 

Parameters

Market Economic System

Command Economic System

Mixed Economic System

Determination of price 

Demand and supply in a market determine the price

The central authority, most likely the government, decides prices of goods and services 

Price is influenced by market forces of demand and supply as well as government regulations, in certain instances 

Property ownership 

Ownership vests with private entities 

There is public ownership of property 

Property is owned by both public and private entities 

Production 

Production is undertaken only with a profit motive

The underlying objective of production is social welfare

Production in a mixed economy includes both profit motive and social welfare 

Competition 

There exists competition among entities present in such market 

There is no competition in a market owing to State ownership of firms. 

Only entities in private sector experience competition 

Government intervention 

Government has very less role to play in a market economic system 

The government retains full control over firms 

Government has a full holding in the public sector but a limited role in its private counterpart


Economic Sectors 

These can be categorised into the following –

1. Primary Sector 

Primary sector in an economy has a direct interface with the environment for purposes of production. Instances of the primary sector are agriculture, farming, mining, and fishing, among others. 

Importance of the primary sector relates to the harvesting of products or extraction from the environment for procuring basic food and raw material. The end purpose of the primary sector is to utilise natural resources optimally.

2. Secondary Sector 

In the secondary sector of an economy, raw materials are converted into products that are fit for both consumption or sale and helps to move away from a primitive economic system. For example, the secondary sector helps a country to move from agriculture or other similar activities towards a developing market.

In India, the secondary sector holds about 20% of gross domestic product. It helps to provide greater job opportunities to the populace at large. 

3. Tertiary Sector 

The Tertiary sector primarily covers the service sector, and therefore, focuses on service exchanges and production. Examples of the tertiary sector are – insurance, banking, communication and transportation, among others.

The tertiary sector's significance is on the rise due to rapid technological developments in various basic essential services. These basic services include healthcare, police, banking, etc.

A most significant benefit of the tertiary sector is that it has a lower barrier of entry for businesses.

Test Your Yourself –

1. Which economic system takes into account culture and social roles while making economic decisions?

(a) Command economy 

(b) Market economy 

(c) Mixed economy 

(d) Traditional economy 

2. Which of the following is the most elementary economic problem?

(a) Capital 

(b) Labour 

(c) Scarcity 

(d) Greed 

3. What is a trade between nations called?

(a) International trade 

(b) Free trade

(c) Trade barrier 

(d) Voluntary trade 

[Solutions to these questions have been provided at the end of this article]

If you are looking to know more about related topics, refer to the online materials available on Vedantu's platform. 

[Solutions]

1. (d) Traditional economy 

2. (c) Scarcity 

3. (a) International trade 

FAQ (Frequently Asked Questions)

1. What is an Economic System?

Ans. An economic system is an arrangement made by governments to distribute and organise available resources, goods and services all through a country or a geographic region. It takes into account the factors of production – labour, capital, and resource.

2. Mention Major Types of Economic Systems.

Ans. The main types of an economic system are – capitalist economy, socialist economy, mixed economy. Each of these economic systems has its characteristics, and is distinct from one another.

3. What is Meant by a Mixed Economic System?

Ans. A mixed economic system combines both the market economic system and command economic system. Most of the countries, in the present-day context, follow a mixed economic system. It has to maintain a fine balance between government control and the free market.