Question

In your own words, discuss each type of economy and its benefit for economic growth.

   (Please consider the questions below when answering.)

What is economics?

How does capitalism create a climate for economic growth?

What is gross domestic product (GDP)?

What are pros and cons of a mixed economy?

Answer 1

Economics can be defined as the study of the ownership, use, and allocation of scarce resources. It is regarded as a social science as it uses scientific methods to build theories which explain the behaviour of individuals, groups and organisations. The study of economics ranges from the very small to the very large. Macro economics analyses the economy as whole (i.e. aggregated production, consumption, savings, and investment) and diversified issues affecting it. Micro economics analyses and examines the behaviour of basic elements in the economy, including individual agents (example, households, firms, buyers, and sellers) and markets, their interactions, and the outcomes of interactions.

Gross domestic product (GDP ) refers to total dollar value of all goods and services produced by all individuals within the boundaries of a nation during a one-year. The components for calculating GDP are as follows

GDP = C + I + G + (X- M)

C = Private consumption expenditure

I = Investment Expenditure

G= Government Consumption Expenditure

X = Value of Exports

M = Value of Imports

The three types of economic systems are: communism, socialism, and mixed economy. The advantages and disadvantages of communism, and socialism are as follows:

1) Capitalism: Capitalism refers to an economic system where the government does not determine any resources or other relevant economic segments. Instead, the entire system is regulated by the private individuals or businesses and law of demand and supply. Capitalism permits the economy to grow exponentially. It is a basic fact of economics that the more money a business makes, the more the firm will have to invest in production, and thus can generate more revenues; thus creating a climate for economic growth

Advantages of Capitalism

--In years 1000–1820 world economy grew nearly six-fold, in years 1820–1998 world economy grew 50-fold due to capitalism

--Provides Choice to customers since the means of production are privately owned and operated for profit

-- Provides valuable goods and services because its primary goal is to earn profits with quality goods and services

--Capitalism actively rewards positive traits such as hard work

--Capitalism punishes negative traits such as laziness and theft

--Capitalism narrows the gap between a common person and rich people

-- It gives an opportunity to realize dreams and desires

-- It often does not have large black markets

-- It is build on democracy and socially good

Disadvantages of Capitalism:

--Capitalism leads to downfall of work ethics

--Free Market and Self Interest because the means for producing and distributing goods (the land, technology, transport system, factories etc) are owned by a small minority of people

--Accumulation of wealth by few wealthy people

-- Encourages inequality in a society because of unequal distribution of wealth

--It often leads to monopolistic tendency

-- It results to an exploitation of human resource

-- Results in great disparities between income of people owning the capital resources and others due to unequal distribution of wealth

2) Socialism: Socialism refers to an economic system where everyone in the society equally owns the factors of production; and the system is controlled as well as regulated by the government to ensure equal opportunity and welfare to the people in a society

Advantages of Socialism

--Socialism ensures better salaries for all as is based on wealth to be distributed as per contributions to society

-- It serves stable environment for all

-- A primary goal is to eliminates poverty and social equality

--Better Products

-- It fulfils survival requirement of all people in society

-- It provides opportunity for citizens to explore non-economically-productive pursuits

Disadvantages of Socialism

-- Distorted price signals as individuals in positions of authority make decisions in the name of the collective group.

-- Suppression of economic democracy as relationships is governed by a political hierarchy.

-- Slow Technological advancements as property is not hold individually

-- Minimize self management

-- It reduces incentives for people in society

3) Mixed economy: A mixed economy refers to an economic system that combines characteristics of both capitalism and socialism. It permits governments to interfere in economic activities in order to achieve social aims; and also protects private property and permit a level of economic freedom in the use of capital

Advantages of Mixed economy:

-- It provides capital by promoting innovation as it promote the value of organizations which are the most efficient

-- It allows spending in systems that a pure capitalist economy does not take into consideration.

-- The benefits of a free-market economy are found in the mixed economy from the distribution perspective as it provides goods or services whenever they’re required

--Mixed economies encourage competition at all levels thus enhances the production levels and overall efficiency rates.

--Mixed economy provides protection of the general wellbeing of the general population

--It gives more opportunities for companies to grow thus consider the wellbeing of everyone

-- It doesn’t allow the government to take full control of private enterprise be defining the role of government within the society

-- Mixed economy creates more employment by permitting the private corporations to build revenue streams that support direct employment opportunities

Disadvantages of Mixed economy

-- Mixed economy creates higher levels of debt.

-- If managed incorrectly it triggers poverty

-- It creates private businesses which could works toward a monopoly and disrupt the economy

-- Mixed economy offers higher tax rates compared to other economy types