Economic system facts for kids

An economic system is how a country or society organizes the making, sharing, and giving out of goods and services. Think of it as the rules and ways people decide what to produce, how to produce it, and who gets it. It includes all the businesses, governments, and people involved in making and using things.

Every economic system tries to answer four big questions:

• What to make? This means deciding what goods (like phones or food) and services (like haircuts or teaching) a society needs. It also means deciding how much of each to make. For example, should a country make more cars or more hospitals?
• How to make it? This is about the best way to produce things. Should factories use more machines or more people? The goal is usually to make things as efficiently as possible.
• Who gets it? This question is about how the goods and services are shared among everyone. How do people get what they need or want? Is it based on how much they work, or something else?
• When to make it? This means thinking about the right time to produce things. For example, some goods are needed more at certain times of the year, like warm clothes in winter.

Studying economic systems helps us understand how different parts of an economy work together. It also shows how information flows and how people relate to each other through things like property rules. For a long time, people mainly compared market economies with planned economies. But now, we know there are many other types too.

Today, most countries use a type of mixed economy that combines ideas from different systems. An economic system is part of a larger social system, just like a country's laws or political system. Often, a country's beliefs and government style are closely linked to its economic system.

Main Types of Economic Systems

There are several ways to organize an economy. Here are some of the main types:

Capitalism

Capitalism is an economic system where most businesses and factories are owned by private individuals or companies, not the government. In capitalism, decisions about what to make and how much it costs are mostly made by the market. This means prices and production are guided by supply and demand.

How Capitalism Works

• Private Ownership: People or companies own the tools, factories, and land used to make goods.
• Market Decisions: What gets made and how much it costs is decided by buyers and sellers. If many people want something, its price might go up, and more of it will be made.
• Competition: Businesses compete with each other to sell their goods and services. This can lead to lower prices and better products for consumers.

In the past, a system called Mercantilism was common. It focused on countries getting rich by exporting more than they imported, often through colonies. Today, modern capitalism often favors free trade between countries.

Mixed Economy

A mixed economy combines elements from both capitalism and other systems. There isn't one exact definition, but it usually means:

What a Mixed Economy Combines

• Public and Private Ownership: Some businesses are owned by private individuals, while others are owned by the government. For example, a country might have private car companies but government-run hospitals.
• Market and Planning: Decisions are made by the market, but the government also steps in to guide the economy or provide certain services.
• Government Involvement: The government plays a role in the economy, for example, by setting rules, collecting taxes, or providing social services like education or healthcare.

Most countries today have a mixed economy. They try to get the benefits of a free market while also making sure everyone has access to important services and that the economy is stable. Examples include the Nordic model in countries like Sweden, which combines strong social programs with a market economy.

Socialist Economy

In a socialist economy, the main tools for production (like factories and farms) are owned by society as a whole, often through the government or worker cooperatives. The main goal is to meet everyone's needs, rather than focusing on making profits for private owners.

How Socialism Aims to Work

• Social Ownership: The community or government owns the means of production. This is different from private ownership in capitalism.
• Meeting Needs: Production is planned to directly satisfy what people need. For example, if a community needs more housing, the system would aim to build it.
• Planning: In some socialist systems, the government or a central group plans what will be produced and how resources will be used. This is called a planned economy. The former Soviet Union used a form of this.
• Market Socialism: Some socialist ideas also include markets, money, and prices, but with social ownership. This is known as market socialist systems.

The idea behind socialist planned economies is to avoid problems like economic ups and downs or overproduction that can happen in capitalist systems. They aim for a more efficient way to use resources and make sure everyone benefits.

Parts of an Economic System

Every economic system has different parts that work together. These parts help decide how resources are used and how goods are shared.

Key Elements of an Economy

• Control over Production: Who owns or controls the factories, land, and tools? This could be private individuals, the government, or groups of workers.
• Decision-Making: Who gets to make choices about economic activities? Is it business owners, government officials, or workers?
• Coordination: How do different parts of the economy work together? This can happen through markets (where buyers and sellers interact) or through planning (where decisions are made centrally). Often, both are used.
• Incentives: What motivates people to work and produce? This could be money, social recognition, or a desire to help the community.
• Organization: Who are the main players? These include households, businesses, and government bodies that set rules.
• Distribution: How are the profits or goods from production shared among people? This includes wages for workers, profits for owners, and taxes for the government.
• Rule-Making: How are laws and rules for the economy created? This is usually done by the government, but other groups can also be involved.

A common way to group economic systems based on who owns resources and how decisions are made.

How We Classify Economic Systems

Economists often group economic systems based on how they answer the basic questions of what, how, and for whom to produce.

By Resource Allocation

This looks at how resources are decided upon and used:

• Market Economy: Decisions are mostly made by supply and demand in markets, with little government involvement.
• Mixed Economy: A blend of market decisions and government planning.
• Planned Economy: Decisions are made by a central authority, like the government.

Other types include:

• Traditional Economy: Based on customs, traditions, and often older ways of doing things.
• Gift Economy: Goods are given without expecting immediate payment.
• Barter Economy: Goods and services are traded directly for other goods and services, without money.

By Ownership of Production

This looks at who owns the means of production:

• Capitalism: Private individuals or companies own the means of production.
• Mixed Economy: Both private and social (government or community) ownership exist.
• Socialist Economy: Society or the community owns the means of production.

By Other Ways

Economic systems can also be described by other features, such as:

• Circular Economy: Focuses on reusing and recycling resources to reduce waste.
• Green Economy: Aims to reduce environmental risks and ecological shortages.
• Digital Economy: Based on digital technologies and the internet.

Some systems are also linked to specific beliefs or types of work, like an Agrarian economy (based on farming) or an Industrial economy (based on factories).

See also

In Spanish: Sistema económico para niños