Que5:Explain different types of Economic Systems.

What are the major challenges

faced by the command economies while transiting to a market economy?
Economists generally recognize three distinct types of economic systems. These
are 1) command economies; 2) market economies; 3) Mixed eConomies and 4) traditi
onal economies. Each of these kinds of economies answers the three basic econom
ic questions (What to produce, how to produce it, for whom to produce it) in dif
ferent ways.
1. In a command economy, the government decides the answers to the three basic q
uestions. It decides what will be made, how they will be made, and who will get
them. Recently, pure command economies have usually been communist countries.
Good examples today would be North Korea and China.
2. In a market economy, consumers decide the answers to the three questions. Th
ey do this by their choices of what to buy. No one tells companies what to make
-they make whatever they think will sell. If they choose wrong, they go out of
business. Most developed economies today are predominantly market economies.
The US, Japan and Germany are all market economies.
3.Mixed economic system combines elements of the market and command economy. Man
y economic decisions are made in the market by individuals. But the government a
lso plays a role in the allocation and distribution of resources.
The United States today, like most advanced nations, is a mixed economy. The ete
rnal question for mixed economies is just what the right mix between the public
and private sectors of the economy should be.
4. In a traditional economy, the three questions get answered by referring to tr
adition -- you make what has always been made, in the way it has always been mad
e, etc. There aren't really any countries whose whole economies are traditional
. The closest you could get to this would be Afghanistan or Bhutan -- places wh
ere there is little connection to the global economy.
The major challenges faced by the command economies while transiting to a market
economy:
1. Macro Econ Stabilization
When prices were deregulated, rampant inflation was often a problem. However the
problem with reducing inflation is that it can exacerbate the problem of fallin
g Real GDP.Falling Real GDP poses meant problems for governments there will be e
xtra pressure put on the governments budget, there will be less taxes collected
but increased need for spending
2. Liberalization of Trade
This is important for exploiting comparative advantage however in the short term
the developing economies may struggle to compete.
3. Privatisation
Many state owned industries were very inefficient, with poor quality goods, over
staffing, and lack of incentives etc IN the Short term privatisation caused many
problems such as
-an increase in unemployment and a negative
-Many industries were so bad no body wanted
-Working practices were not relevant to the
-Problem of corruption. Many state managers

multiplier effect
to buy them
free market
converted assets into their private

property
-There was also a need to privatise the elaborate state admin system
4. External Assistance
As a % of GDP East Germany got the most and it was the most successful. Russia g
ot the least and struggled the most
Problems Faced by Russia and other countries making the change
i)GDP fell by 50% between 1989 and 1998
- However GDP was previously overstated
ii) Collapse of the value of the rouble led to a fall in confidence and deterred
foreign investment
iii) Crime and Corruption increased