Economic Systems
Three basic forms of national economic systems exist today: free market (capitalist), centrally
planned/command (socialist) and mixed.
National economic systems are often classified in terms of whether it is (a) government or (b) private
individuals and private firms that are responsible for providing answers to the following four
questions:
Four questions:
1. Which goods and services should be produced within the nation and in which quantities?
2. How should goods and services be distributed throughout the nation and in which quantities?
3. How should prices of goods and services be determined within the nation?
4. How should scarce resources (human resources, natural resources, capital resources) be allocated
throughout the nation?
In free market (or capitalist) economies, it is private individuals and firms that are responsible for
providing answers to the above four questions.
In centrally planned/command (or socialist) economies, it is government that is responsible for
providing answers to the above four questions.
In mixed economies, it is both private individuals and firms and government that are responsible
for providing answers to the above four questions.
Alternatively, in order to define national economic systems we may simply ask the degree to which
government permits the following four factors:
Four factors:
a. unrestricted accumulation of income and property by private individuals
b. unrestricted accumulation of profit and scarce resources by private firms
c. unrestricted competition in various areas of private and public commercial activity
d. the ability of private individuals/private firms (and market forces of supply and demand) to
determine which goods and services should be produced (including so-called public goods and
services such as health care, education, infrastructure, utilities, waste management, security, etc.)
and how those goods and services should be priced and distributed
Free market (or capitalist) economies tend to permit greater degrees of the above four factors with
little or no intervention on the part of government.
Centrally planned/command (or socialist) economies tend to permit lesser degrees of the above
four factors with significant intervention on the part of government.
Mixed economies tend to permit moderate degrees of the above four factors with limited intervention
on the part of government.
Please note that wealth redistribution via government taxation of private individuals and
corporations (income taxes, payroll taxes, property taxes, sales taxes, excise taxes, probate fees,
etc.) should not be considered a factor in the classification of economic systems because taxation
clearly occurs subsequent to the resolution of the above four questions and the above four factors.
Part 1: Fill in the following table:
Market Economy
Centrally Planned
Economy
Mixed Economy
Describe this system
in terms of property,
profit and
competition
Give an example(s)
and explain how a
country that uses
this system.
Advantage
Disadvantage
Part 2: How would you answer each of the four questions and how would you rate each of the four
factors with respect to the Canadian economy?