Economy - Understanding its Importance: Types of Economy and Stages of Economy

What is an economy?
An economy is a system or organisation wherein economic activities take place. 

It is a man-made system for facilitating the satisfaction of the various wants and needs of human beings through the generation of income and the production and consumption of goods and services.

How does an Economy come into Existence?

The system of the economy was created by people to facilitate their existence in society. They had to follow a structured system of enjoying goods and services in order to survive.

As centuries passed, people had to look for better procedures to satisfy their wants in some way or another and to manage their existence in this world. They needed a system for managing and enjoying resources systematically. Because resources are limited in number and confined to certain regions only, they had to be shared and consumed in an economic manner.

In the primitive world, there was no need for any system as populations were low and confined to places where daily needs were available freely.  

Man used to satisfy his wants randomly on his own. He plucked fruits or dug edible roots from the earth and hunted birds & animals to satisfy his hunger. He used to live near water resources to satisfy his thirst. He covered himself with leaves to protect himself from heat, cold, and rain. He never thought of the need for economic institutions, nor did he possess such kind of knowledge.

But, gradually, he learnt to exchange his goods for items available from others (known as the barter system) and then invented coins and currency, production, distribution, and consumption, gradually, to satisfy his ever-growing needs. 

Slowly, he began learning to save or economize goods and resources as the population grew and natural resources seemed insufficient to satisfy his needs. He developed other means, such as improved farming, manufacturing, marketing, and professional services, to earn income and exchange goods with others, and thus the modern economy and economic systems came into existence.

Notable Features of an Economy

• An economy or economic system is man-made to get a living.
• Economies are always susceptible to changes.
• Economies differ according to geographical, cultural, and available natural resources.
• Demand, Production, Consumption, Saving, and Investment are the important activities of an economy. 
• The producer and consumer can be the same person in an economy, as whatever he produces, he consumes also.

Purpose of Economy

• The primary goal of any economy is to satisfy human wants through interactions among people.
• This involves a process of providing goods and services to consumers through various activities of production, supply, and consumption, all supported by available resources and factors of production. 
• To generate income for those involved in economic activities.
• To locate and distribute the resources. 
• Discover new resources or semi-used ones.
• Strengthen the economy through efficient management.

Three Types of Economy

Broadly speaking, there are three types of economy:

Capitalism, Socialism, and Mixed Economy.

 

Let us look at the salient features of these economies.

Capitalist Economy

• Under a capitalist economy, producers are free to make decisions without any interference from government mechanisms.
• They own the property and resources (acquired by them). There are no restrictions as to ownership and boundaries.
• Profit earning is the main force driving the capitalist economy. Producers are interested in increasing their profits, and consumers are interested in availing utmost satisfaction.
• But the capitalist economy has the drawback of monopolising the markets.

Socialist Economy

• Under socialist economic conditions, the common cause of society is considered a more important factor.
• The government interferes in all matters and sets norms and guidelines for producers and businessmen.
• All resources are owned by the government in the interests of the public, and they are allotted to producers and manufacturers according to some procedures and laws established by the government in the interest of the public.
• Social welfare is the main goal in this kind of economy rather than the profit motive.

Mixed Economy

• This is a mixture of capitalism and a socialist economy. The good features of both economies are combined together to form a mixed economy.
• In this mixed economy, both private and public participation are present.
• More essential resources and factors of production, along with business activities, are controlled by the government through the creation of public enterprises and corporations.
• Price mechanisms are controlled by the government, fixing prices of essential commodities and controlling hoarding and black-marketing, etc.
• Annual plans and long-term plans are made by the government to control all financial and economic activities.
• This mixed economy is a good type of economy for the development of society, if both the government and businessmen manage honestly.

Economy vs Economic Development

The economy of any place gets identified by its developed, undeveloped, or underdeveloped nature. 

So, economic development is the standard for identifying economies at any given time.

Meaning of Economic Development

Economic development refers to the overall growth of an economy. It means that the people living in that economy are enjoying a good standard of living by being able to earn ample income, satisfying almost all of their wants. 

Some of the salient features of economic development include the following.

• It is not simply limited to a mere growth of income and standard of living. 
• Economic development implies that people are living a better life in every aspect of life. 
• There is a reduction in poverty, unemployment, and diseases. 
• The gap between rich and poor gets narrowed with more opportunities created to earn income and acquisition of wealth made accessible to the poor also.
• There will be control over population growth and hygienic conditions of the environment.
• The overall expenditures of public and governments will be within the limits of available income and resources.
• A state of improvement in technology and trade relations has been achieved.

Three Stages of Economy Based on Their Development

Based on economic development, economies can be classified into developed, underdeveloped, or developing ones. 

Let us take a look at the features of these economies:

Developed Economy

A country that has achieved strong economic growth and enjoys a relatively high standard of living and quality of life, with higher per capita income, is known as a developed economy. Such countries typically have higher levels of education, better amenities, and lower mortality rates, among other characteristics. 

Indicators of a developed economy include GDP (Gross Domestic Product), Gross National Product, Advanced infrastructure, and the level of industrialization. 

Countries such as the USA, UK, Germany, Japan, and Australia are examples of developed economies.

Underdeveloped Economy

Countries with poor growth and poor standards of living are classified as underdeveloped economies. They are characterized by very low GDP, low per-capita income, poor amenities and standards of living, and high mortality rates. But most of these countries have now moved to the class of developing countries.

Developing Economy

This group consists of all those countries that are still developing but have moved out of the underdeveloped category of economy. 

These countries are characterized by declining growth rates and standards of living, major disparities, and wide economic gaps between classes of people and regions. Resources in these economies are not fully utilized or tapped. 

Countries such as India, Pakistan, Sri Lanka, Brazil, and Mexico are among the many developing countries. But India is developing fast now and reaching the status of a developed economy.