Every country has an economic system - that is a way of making economic choices and decisions. No two economic systems are exactly alike. Which system a country follows depends on:
1) who owns and controls the basic resources needed to produce goods and services and;
2) who makes the basic economic decisions.
There are three basic economic systems. They are traditional economies, command economies and market economies.
Nor nation in the world uses one of these systems. Every nation, including the United States and Russia, use a mix of economic systems. Most nations use more of one system than of another.
For the most of human history, people have used the traditional economic system. In a traditional economy, things are done the way they have always been done. Tools, land and equipment are owned by families and tribes. The basic decisions were made in the distant past. Goods and services are produced according to age-old habits and customs. The amount produced how it is produced and the right mix of factors of production are set by ancient practice. In a traditional economy, the son usually does what his father did. The daughter follows the example set by her mother. No one asks the basic economic questions because the answers are always the same. There is a little or no economic growth in such a system. Every generation does things exactly the same way the previous generation did them. There is no investment in new or more efficient machinery. Any changes that do take place are too small to notice. Traditional economy has both advantages and disadvantages. The advantages include the fact that:
A traditional economy is very stable and people know what to expect.
Everyone has a place in the economy. No one is left out. Here are some disadvantages.
Individuals don't have much choice in the type of work they do. Their roles are based on custom.
Change comes very slowly. Today, traditional economies are common only among agricultural societies in Latin America, Asia, and Africa.
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MARKET ECONOMY
The idea of a market economy started about 200 years ago, during the Industrial Revolution in 18th century England. This was the time when goods began to be made in factories with large machines powered by steam or water, instead of being made by hand.
As individual inventors, industrialists, and entrepreneurs became wealthy, they also became more powerful in government. They were not satisfied with an economic system that was designed to benefit the nobles, kings, and landowners. They wanted an economic system that would benefit them.
The market economy is the result of the millions of buying and selling decisions made by millions of individuals. No one runs the economy. It runs itself. Most modern-day economies are basically market economies. Traditionally, a market is a place where people buy and sell things. An example is a farmers market, where you can buy vegetables directly from farmers. But for economists, the word "market" means something slightly different. It refers to the actions of buying and selling, not just to the place where things are bought and sold. A market can exist even if the buyers and sellers never meet - for example, a mail-order business. A market is made up of people and actions. The people in a market are all the buyers and sellers of a product or service. The action on the market is buying and selling, that is, exchanging a product or service for money.
A grocery store is a market. So is a shoe repair shop, a movie theater, or a gas station. So are kids selling cookies at a bake sale. In each of these markets, buyers exchange money for a product or service.
Economic decisions in a pure market economy are made by buyers and sellers in the marketplace. Land and capital goods - factories, tools, etc. are privately owned. A market economy depends on a specialized industrialized society in which most individuals cannot meet their own material needs. People must work because they need money. People meet most of their material needs by buying goods and services with money. Buyers and sellers compete in the marketplace, each working for his or her own best interests.
