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Types of Economies

They say money makes the world go round! Well, not literally- but each country's approach to money will determine how citizens live their lives. The different types of economies, and their associated systems, have effects on how resources are managed and organised, while different levels of development influence the job opportunities available locally. Let's take a look at the different types of economies, different economic sectors, and how economic wealth can affect a person's well-being. 

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Types of Economies

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They say money makes the world go round! Well, not literally- but each country's approach to money will determine how citizens live their lives. The different types of economies, and their associated systems, have effects on how resources are managed and organised, while different levels of development influence the job opportunities available locally. Let's take a look at the different types of economies, different economic sectors, and how economic wealth can affect a person's well-being.

Different Types of Economies in the World

There are four main different types of economies: traditional economies, market economies, command economies, and mixed economies. Although each economy is unique, they all share overlapping features and characteristics.

Type of economy
Traditional economyA traditional economy is an economy that focuses on goods and services that match customs, beliefs, and history. Traditional economies use barter/trade systems without currency or money, focusing on tribes or families. This economy is often used by rural and farm-based countries, especially in developing countries.
Market economyA market economy relies on the free market and the trends produced by it. Market economies are not directly controlled by a central power, so the economy is determined by the law of supply and demand. One form of market economy is the free-market economy, in which there is no government intervention in the economy at all. While many countries and international unions, such as the European Union, base their economies around a market economy system, pure market economies are rare and free-market economies are virtually non-existent.
Command economyA command economy is the opposite of a free-market economy. There is one centralised power (usually the central government) that controls the decisions made for the economy. Rather than letting the market determine the price for goods and services, the prices are artificially set by the government based on what they conclude are the needs of the population. Examples of countries that have a command economy are China and North Korea.
Mixed economy

Lastly, a mixed economy is a blend of a command economy and a market economy. The economy is mostly free from the intervention of centralised power, but will have regulations on sensitive areas such as transportation, public services, and defence. Most countries, to a certain extent, have some sort of mixed economic system, including the European Union, the United Kingdom, and the United States.

Types of Economic Systems

Each type of economy is associated with a separate economic system. An economic system is a method by which resources are organised. At opposite ends of the spectrum are capitalism and communism.

A capitalist economic system revolves around wage labour and the private ownership of property, businesses, industry, and resources. Capitalists believe that, compared to private enterprises, governments do not use economic resources efficiently, so society would be better off with a privately-managed economy. Capitalism is associated with market economies and usually serves as the basis for mixed economies.

Communism, on the other hand, advocates for the public ownership of property and businesses. Communism extends beyond an economic system into an ideological system, in which the end goal is perfect equality and the dissolution of institutions- even a government. In order to transition to this end goal, communist governments centralise the means of production and completely eliminate (or heavily regulate) private businesses.

A related economic system, socialism, advocates for the social ownership of property and businesses. Socialists believe in the redistribution of wealth among all people in order to create equality, with the government serving as the arbiter of redistribution. Like a communist government, a socialist government will also take control of the means of production. Because they depend on centralisation, communism and socialism are both associated with command economies.

Capitalism more-or-less emerged organically from traditional economies as currency supplanted barter systems. Instead of trading goods, private citizens exchanged money for goods. As individuals and businesses became larger and more powerful through the exchange and retention of capital, European thinkers like Adam Smith and Vincent de Gournay explored and developed the concept of capitalism as a large-scale economic system.

Communism was largely conceived by one man: Karl Marx. Responding to flaws he identified in the capitalist system, Karl Marx wrote The Communist Manifesto in 1848, in which he reframed human history as a perpetual struggle between economic classes. Marx advocated for the violent overthrow of existing institutions, which he saw as hopelessly corrupt, to be replaced by temporary institutions that would guide their countries to a communist end goal: a stateless, classless society where everyone is perfectly equal.

Socialism is easily confused with communism. Socialism differs from communism in that it does not share the same end goal of a stateless, classless society. The socialist power structures that redistribute wealth- to create equality- are meant to remain in place indefinitely. Communists frame socialism as an intermediary stage between capitalism and socialism, and in fact, virtually all communist governments are currently practising socialism. However, socialism pre-dates Marx's communism; even ancient Greek thinkers like Plato advocated proto-socialist ideas.

Very few countries claim to be purely communist or socialist. Countries that are committed to communism include China, Cuba, Vietnam, and Laos. The only explicitly socialist country is North Korea. The majority of developed nations today are capitalist with some socialist elements.

Economic Sectors

Economic sectors vary. This reflects the different economic processes that have affected a place over time. The four economic sectors are primary, secondary, tertiary and quaternary. The relative importance of these economic sectors changes based on each place's level of development and role in their respective local and global economy.

The primary economic sector is based on the extraction of raw, natural resources. This includes mining and farming. Places such as Plympton, Dartmoor, and southwest England are characterised by the sector.

The secondary economic sectors are based on the manufacturing and processing of raw resources. This includes iron and steel processing or car manufacturing. The secondary sector has shaped places such as Scunthorpe, Sunderland, and northeast England.

The tertiary economic sector is the service sector and includes industries such as tourism and banking. The tertiary sector supports places such as Aylesbury and southeast England.

The quaternary economic sector deals with research and development (R&D), education, business, and consulting services. Examples are Cambridge and east England.

Types of Economies TATA Steelworks Scunthrope StudySmarterFig. 1 - TATA Steelworks in Scunthorpe is an example of the secondary sector

Clark Fisher Model

The Clark Fisher model was created by Colin Clark and Alan Fisher and showed their three-sector theory of economic activity in the 1930s. The theory envisaged a positive model of change where the countries move from a focus in the primary to the secondary to the tertiary sector alongside development. As the access to education improved and led to higher qualifications, this enabled higher paid employment.

The Clark Fisher model shows how countries move through three phases: pre-industrial, industrial and post-industrial.

During the pre-industrial phase, most of the population works in the primary sector, with only a few people working in the secondary sector.

During the industrial stage, fewer workers are in the primary sector as land is being taken over by manufacturing and imports are becoming more common. There is internal rural-to-urban migration, with workers looking for secondary sector employment for a better quality of life.

During the post-industrial stage, when the country has industrialised, there is a decrease in primary and secondary sector workers but a large increase in tertiary sector workers. There is a demand for entertainment, holidays, and technologies as disposable income grows. The UK is an example of a post-industrial society.

Types of Economies Clarke Fisher model StudySmarterFig. 2 - Clark Fisher model graph

In 1800, the UK was mostly employed in the primary sector. Most citizens made their living farming the land or through similar industries. As industrialisation grew, the secondary sector began to flourish, and with it, many people moved away from rural areas to towns and cities. This increased by jobs in retail, schools and hospitals. By 2019, 81% of the UK workforce was in the tertiary sector, 18% in the secondary sector and only 1% in the primary sector.¹

Types of Employment

The employment structure of how much of the labour force is divided between the different sectors can say a lot about a country's economy. There are various types of employment- part-time/full time, temporary/permanent and employed/self-employed. In the UK, the tertiary sector is growing; with this, the necessity to be flexible to accommodate the global market grows and employing people temporarily becomes more desirable. Businesses prefer to employ workers on temporary contracts rather than permanent contracts. In rural areas, farmers and small businesses are self-employed workers, sometimes with temporary migrant workers coming for seasonal jobs.

Types of Economies of Scale

If a business expands the size of its production, it can usually take advantage of cheaper bulk-sale production costs and can then afford to sell items at a cheaper rate than competitors. This is called economy of scale.

Agatha and Susan both manage poster-printing businesses. Agatha runs a small business, whereas Susan runs a large corporation.

John sells paper to both of them. Agatha purchases 500 sheets of paper at a time, which meets the needs of her small business. To maintain a profit on his paper business, John sells Agatha each sheet of paper for £1 each.

Susan usually purchases 500,000 sheets of paper at a time. Based on his own profit margins, John can sell the paper to Susan at £0.01 per sheet. So, even though Susan is paying £5000 for paper while Agatha is paying £500, Susan is paying, proportionally, significantly less for paper. Susan is then able to sell her posters for less money. If Agatha can expand the size of her business, she could experience the same financial benefits as Susan.

Typically, as businesses increase in size, they can decrease relative costs while increasing relative output (and profit). A business that can scale up and take advantage of cheaper prices and higher output can usually outperform and outcompete businesses that cannot.

There are two main ways to classify economies of scale: internal and external. Internal economies of scale are introspective. It is an examination of the factors of scale that can be effected within the company, such as investing in new technology or software that cuts costs. External economies of scale are the opposite. The factors of scale are external to the company, such as better transportation services to allow products to be shipped more cheaply.

Types of Economies Through Economic Activity and Social Factors

Different economic activities affect social factors such as health, life expectancy, and education.

Economic activity's effect on health

How employment affects health is measured according to morbidity and longevity. Where someone works with what kind of employment can affect these measures. For example, people in the primary sector have a higher risk of poor health and dangerous working environments.

Morbidity is the degree of ill health.

Longevity is life expectancy.

Food desserts are where there are high numbers of fast food outlets. This can lead to higher morbidity, as seen in low-income areas. For example, after Hurricane Katrina, parts of New Orleans were left without access to supermarkets or fresh food.²

Economic activity's effect on education

Income levels are linked to levels of education; working-class children have the lowest levels of educational attainment. Low-income households have children who are more likely to drop out of further education, which can be associated with worse health.

Types of Economies - Key Takeaways

  • The different types of economies in the world are traditional economy, command economy, market economy and mixed economy.
  • In terms of economic systems, capitalism and communism are at opposite ends of the spectrum.
  • The four economic sectors are primary, secondary, tertiary and quaternary.
  • The Clark Fisher model shows how countries move through three phases: pre-industrial, industrial and post-industrial.
  • There are various types of employment: part-time/full-time, temporary/permanent, and employed/self-employed.
  • Different economic activities affect social factors such as health, life expectancy, and education.

References

  1. Statista, United Kingdom: Distribution of the workforce across economic sectors from 2009 to 2019, https://www.statista.com/statistics/270382/distribution-of-the-workforce-across-economic-sectors-in-the-united-kingdom/
  2. Eric Goldstein (2011) 10 American Food Deserts Where It Is Impossible To Eat Healthily, https://www.businessinsider.com/food-deserts-urban-2011-10?r=US&IR=T#the-south-and-west-sides-of-chicago-are-chock-full-of-fast-food-not-produce-3
  3. Fig. 1: TATA Steelworks (https://commons.wikimedia.org/wiki/File:The_TATA_steelworks_Briggs_Road,_Scunthorpe_-_geograph.org.uk_-_2244021.jpg) by Ian S (https://www.geograph.org.uk/profile/48731) licensed by CC BY-SA 2.0 (https://creativecommons.org/licenses/by-sa/2.0/deed.en)

Frequently Asked Questions about Types of Economies

  • Market Economy
  • Command Economy
  • Traditional Economy
  • Mixed Economy

The European Union has a mixed economy that is based around a market economy. 

To differentiate economic systems, look at what the systems focus on. If they focus on the basics of goods, services, and work influenced by traditions and beliefs, it is the traditional system. If a centralised authority affects the system, it is a command system, while a market system is swayed by the control of forces of demand and supply. Mixed economies are a combination of command and market systems.

The major types of economies are:

  • Market Economy
  • Command Economy
  • Traditional Economy
  • Mixed Economy

Because communism requires centralisation to accomplish its goals, communist countries have command economies.

Test your knowledge with multiple choice flashcards

What is the primary sector?

What is the secondary sector?

What is the tertiary sector?

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