We find different people engaged in different activities to earn their living. These activities are concerned with the production and exchange of good and services. Farmers, workers, shop-keepers, manufacturers, teachers, doctor, lawyers, chartered accountants, etc. performs their own piece of work. All of us are concerned with one or the other activity to earn certain sum of money, so that we can meet the necessities of our own and other members of our family. All those activities which are paid are called economic activities. These activities produce goods and services which satisfy human wants.
Economy consists of all agricultural, industrial, manufacturing, construction, mining, business and other productive activities. It also includes services in private institutions and government departments. Professionals like doctors, lawyers, singers, nurses and managers etc. are also the members of economy. Every activity which has economic motive constitutes part of economy.
Goods and services produced by the individuals of the country. The national income indicates the standard of living of the people. In developed economies, the sum total of goods and services produced is very large, so their income and standard of living is higher. In backward economies, large number of hands remain idle and resources unexploited, so their output of goods and services is lesser. Their income is low and standard of living is poor.
Capitalistic economy
Consumers and producers are the two vital elements of an economy. Their economic activities may be controlled by the government or they may not be controlled. In case of capitalist economy individuals are free to own and control their economic resources. Everyone is independent to choose his own business, profession and occupation. Capitalist economy is also known as free trade economy. Prices of the commodities are determined by free interaction of demand and supply. The government does not interfere in the determination of price. Profit motive and earning more and more income is the purpose of all economic activities. Individuals have right to earn income, acquire assets and also to retain them.
Important features
Capitalistic economy has got the following characteristics:
Consumers sovereignty: In the capitalist economy, consumer is the supreme. The industry produces those goods in sufficient quantity, which are demanded by the consumers. The increase in demand of a commodity induces the producer to produce that commodity.
Right to own private property: In case of capitalism every individual has right to own property in his own name. Law of inheritance is applied. After the death of the individual the property is passed on the legal inheritors. Individuals can also own sources of production.
Profit motive : Every economic activity is aimed at earning more and more income. Business activities are carried on with a view to earn profit. As individuals are authorised to maximise their wealth, so they are always busy in acquiring more and more wealth. Profit motive leads towards achievement of this end.
Price mechanism : Price of the commodity is not determined by the government. The government does not intervene in the determination of price. Forces of demand and supply act freely and the price is determined.
Perfect competition : There are sufficient number of the buyers and sellers in the market, so the price tends to be normal. If price of a commodity falls, supply is reduced. With the reduction of supply the price again comes to the normal.
Advantages
Capitalistic economy has the following advantages:
Economic freedom: Every individual is free to adopt business, profession or occupation of his choice. There is no restriction from the government in the matter of business activities are affected by consumers’ preference.
Maximum utilisation of resources: The individuals of the economy make best possible use of land, labour, capital, tools, equipments and other resources, so that they can earn more and more profit. There is competition in the market. Every producer tries to reduce cost of production, so he can sell his goods at more margin of profit.
Higher standard of living: Individuals work very hard to earn more and more income. Increased income results in higher standard of living. Mechanisation and large scale production increase national and per capita income.
Reasonable remuneration: Every individual works very hard to get more and more wages. Due to the competition in the market, workers get reasonable and competitive remuneration. If the worker does not get wages according to the qualification and experience, he moves to some other firms. Wages and salaries tend to be reasonable due to competition.
Disadvantages
The capitalistic economy suffers from the following weaknesses:
Inequality of income: The main disadvantage of capitalistic economy is inequality of income. Rich become richer due to economic freedom to own property and the law inheritance. Poor go on becoming poorer. Wealth is centred in certain hands.
Class struggle: The society is divided in two classes—the rich and the poor. The richer people exploit the poor workers. They are paid low wages. Workers demand higher wages. Employers oppose their demand. The conflict between the workers and capitalist goes on. Strikes and lockouts become the common feature.
Unbalanced growth : Industrialists promote only those industries, where margin of profit is more, so basic, essential and service industries are ignored. Industries tend to concentrate in certain industrial pockets. Certain regions are neglected. Village industries are ignored. There are developed and undeveloped regions in the economy.
Economic insecurity: Inequality of income, regional imbalances, class struggles make the economy very insecure. There is economic unrest. Strikes and lockouts are the features of the day. The conflicts between the workers and management, and have and haves not lead to economic insecurity.
Socialistic economy
It is an economy which is owned and controlled by the society. Economy resources are owned by the society and they are used in the public interest. All important decisions are taken by the government. Individuals in the socialistic economy do not have right to own private properties. The economy is managed and controlled by Planning Commission, the central authority. There is the least inequality of income in this economy. Income is distributed among individuals on the basis of their needs and efficiency.
Basic economic problems of the economy are solved by the central authority of the state i.e., Planning Commission. Price of goods and services is determined by the Government. Public interest is supreme while taking decisions about production, consumption and investment. Employment is provided to every individual. Social insurance schemes are applicable.
Important features
Socialistic economy has got the following important features:
State ownership of resources: Land, labour, capital, equipment and other wealth of the society are owned by the Government. Right to own property is not granted to individuals. Law of inheritance is suspended. All the resources are owned by the state.
Economic welfare: The resources of the economy are used for the welfare of the society. Economic activities are controlled by the state. The government is always above the individual interest and works for the maximum welfare of the economy.
Service motive: Basic problems of the economy are tackled with a view to provide service to the people. Economic decisions are made according to the needs of the society. These decisions are made by the Planning Commission.
Absence of private ownership: Private ownership of the property is not allowed. The resources of the economy are owned and controlled by the government.
Advantages
Socialistic economy has got the following advantages:
Reasonable use of resources: The resources of the society are used reasonably. Wastage of resources are avoided. Economic resources of economy are used according to the needs of the society.
Social insurance: It is the responsibility of the government to offer employment to every individual. There is no unemployment. Old age and disability pension are paid to the people. The government guarantees food, clothes and other necessities to the people.
Supremacy of public interest: Economic resources are owned and controlled by the government. Individual interest subordinate to group or public interest. Basic economic problems are tackled with a view to public interest.
Absence of inequality of income due to ownership of property: The inequality of income which is the disadvantage of the capitalistic economy is not found in socialistic economy. There is no right to an individuals to own property and acquire assets by inheritance, so there is lesser inequality of income.
Planned developmental economy: The economy is controlled by the planning commission of the state. All importance decisions regarding, what to produce, how to produce and for whom to produce are taken by the planning commission, the central agency of the government.
Disadvantages
The socialist economy suffers from the following disadvantages:
Lack of personal initiative: Individuals do not have initiative to work more. They do not have personal interest and attachment with the economic affairs. Wages are paid according to needs and efficiency, so individual interest is lacking.
Concentration of power: Economic power is concentrated in the hands of the state. All the resources of the economy are owned by the government. It kills consumers’ right to consume according to his choice and individuals, right to choose freely their profession, occupation and business.
Inelastic economy: The economy lacks dynamic approach towards production, consumption and investment. The economy becomes stagnant. It is handled by the policy of the government.
Mixed economy
It is the mixed form of socialistic and capitalistic economy. Certain economic activities are fully owned and controlled by the government but all the economic activities are not owned by the Government. Private and public sector both co-exist in the economy. We have adopted mixed economy in India. All the basic industries such as railways, post and telegraph, defence production, atomic energy etc. are in the public sector. Industries dealing with consumer goods are in the private sector. Ours is a welfare state, so the government can nationalise any industry or own any company in the public interest. Mixed economy reduces inequality of income. Due to increased expenditure on public utilities and services, economic benefits to their poor people are provided.
Advantages
Mixed economy has got the following advantages:
Rapid economic development: In mixed economy both private and public sectors work side by side. The combined efforts lead to rapid economic development. The economic resources of the economy are used efficiently. Wastages of resources are minimised.
Lesser inequality of income: Right to own property is granted. Law of inheritance is also applied, so certain members of society grow richer and richer. Public sector in the economy tries to provide economic facility to the general masses. It reduces inequality of income.
Balanced regional growth: The planning commission of the country makes policies for the development of every region of the economy. The government tries to develop all regions and every section of population.
Freedom to own private property: Individuals are free to acquire property and retain in their own names, so the initiative to work more and earn more is there. It helps in the rapid development of the economy in the field of agriculture, industry and other services.
Planned development: The planing commission is empowered to make effective plans for the development of the economy. We, in India, have also adopted planned developmental economy and introduced five year plans.
Public interest: The public sector looks into the interest of the general public. The government under this economy is said to be welfare state. It introduces social insurance schemes, incurs expenditure and manages economy in the interest of general masses of the country.
Disadvantages
Inspite of the above advantages, the mixed economy suffers from the following weaknesses:
Fear of nationalisation: Private and public sector coexists. The government has the power to nationalise and own any industry, so private sector remains under a psychological fear that their industry may be nationalised or taken over in the public interest.
Inequality of income: Inspite of all the efforts of the government to bring equality, rich people grow richer and the inequality prevails. Economic resources are concentrated with certain big industries.
Corruption: Corruption is the common feature of mixed economy. Black-marketing, profiteering, dishonest dealings and corruption is seen both at higher and lower levels.
Developed and developing economies
Economies can also be classified on the basic of the standard of living of their citizens. In case of higher standards of living economies are known as developed economies, or modern economies. In case of lower standard of living the economy is termed as backward, under developed or developing economy.
Developed economies
Modern economies are termed as developed economies. The important features of developed economies are as under:
Important Features
Dominance of industrial sector: Industrial and service sectors dominated the economy. Agriculture remains a subsidiary occupation. The major part of national income is obtained through industrial production.
Large scale production: Commodities are produced and manufactured on very large scale. mechanisation is adopted in the industrial production.
Division of work: The work to be performed is divided and subdivided into small pieces and individuals or group is required to perform only a part of the work. The worker becomes specialised in his job by doing the same work again and again. Division of labour and specialisation increase the quantity of work and improves the quality of production.
Supremacy of capital: Capital plays a dominant role in the economy. Capital intensive industries are installed. Village, cottage and small scale industries are neglected.
Profit motive: Human efforts are directed towards earning more and more income.
Dependence: Individuals and even group are not self sufficient. They cannot produce all the commodities they use. Certain commodities used are imported from abroad.
Economies of America, U.K., Russia, France, Germany and Japan etc. are the examples of developed economy.
Developing economies
These economies are the mid-point between developed and undeveloped economy. It has got the features of both the developed and undeveloped economies. Developing economies refer to India, Pakistan, Brazil, Indonesia and etc.
Important features
Dominance of agricultural sector: Major source of income in case of undeveloped and developing economies is agriculture. A large section of population earns living through agriculture. Agriculture is the primary sector of these economies.
Small and large scale of production: Both the private and public sectors exist in the economy side by side. Goods are produced on large and also on small scale by public and private sectors.
Production for self-consumption: A large amount of goods and services produced is consumed by the producers themselves. Majority of farmers grow crops for their own consumption.
Illiteracy: The important feature of developing economy is its illiteracy. Though efforts are made to eradicate illiteracy but there is still considerable illiteracy and unskilled labour.
Under utilisation of resources: Developing economies have got significant amount of natural resources and large number of labour force. Due to lack of technical knowledge, natural resources are not discovered and fully utilised.
Preference to labour intensive industries: Unemployment and under-employment are also the problems of developing economies, so small scale and cottage industries which absorb large number of hands are preferred.
Vicious circle of poverty: Poverty is the vicious problems of developing economy due to poverty there is low income, lesser investment, lesser product in and the result is the poverty again.
Our Indian economy is also termed as developing economy. We have achieved considerable amount of industrialisation at faster rate. In certain industrial and technological field we are at par with developed economies.
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