Types of Economies

Introduction

An economic system is the combination of various agencies, entities that decides the economic structure of a social community. The economies are classified into various categories on various bases. The World Bank in its world development report 2011 has classified various countries on the basis of GNP per capita of 2009 into three categories:

    Low income countries: GNP per capita of US $995 or less

    Middle income countries: GNP per capita ranging between US $996 and $12,195, and

    High income countries: GNP per capita US $12,196 or more

On the basis of development, economies are classified as: rich and poor or developed economy and underdeveloped or developing economy.

An underdeveloped or developing country is a country in which real per capita income is low and has the potential to develop. It is characterised by low standard of living. There is a presence of widespread poverty. Agriculture is the main source of income and employment.

A developed country is defined as the country that has a higher real per capita income. There is higher standard of living and low incidence of poverty. There is high share of industrial and service sector in national product and labour force and the growth rate of population is low.

There are some other classifications, they are: Simple and Complex Economies.

Simple economy is an economy in which each individual specialises in the production of only one commodity. Complex economy is an economy in which there is a high degree of specialisation, complex division of labour and mutual dependence.

Closed and Open economy: A closed economy is an economy in which no economic activities are undertaken with the outside economies. Open economy refers to an economy in which various economic activities are undertaken with the other countries.

Apart from these classifications, there are also few important global economic groups. Some of them are: South Asian Association for Regional Cooperation or SAARC, The Association of Southeast Asian Countries or ASEAN, European Union or EU, The group of twenty or G 20, The group of twenty four or G 24, etc.

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  • Q1

    Differentiate between agricultural economy and industrial economy.

    Marks:2
    Answer:

    Differences between agricultural economy and industrial economy are:

    Agricultural economy: It refers to an economy which is primarily engaged in agricultural activities. Majority of the people in such an economy live in rural areas and the contribution of agricultural sector towards national income is very high for these economies. Most of the agricultural economies are underdeveloped economies.

    Industrial economy: It refers to an economy which is primarily engaged in industrial activities. The share of industrial sector in national income is very high. These economies are characterized by concentration of population in urban areas. Developed countries are mostly industrial economies.

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  • Q2

    Give the difference between Simple and complex economies.

    Marks:3
    Answer:

    Differences between simple economy and complex economy are:

    Simple economy: It is an economy in which each individual specializes in the production of only one commodity. For example, the production of cloth or production of baskets etc. There is social division of labour. Trading is done by the means of barter, i.e. exchange of goods directly for other goods.

    Complex economy: It is an economy in which there is a high degree of specialisation, complex division of labour and mutual dependence. A labour does not produce a complete good; each individual performs only one task that may be a small part of complete production of complete good. For example, an assembly line production. Production is organised at a very large scale with use of advanced technology.

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  • Q3

    Differentiate between closed and open economy.

    Marks:3
    Answer:

    The differences between closed economy and open economy are:

    Closed Economy Open Economy
    No export & import activities take place in this economy. Export & import activities take place this economy.
    A price fluctuation in international market does not affect economic activities in this economy. Price fluctuations in international market affect economic activities in this economy.

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  • Q4

    Discuss how the UN has classified countries.

    Marks:1
    Answer:

    The World Bank in its World Development Report 2011 has classified various countries on the basis of GNP per capita of 2009 into three categories:

    1. Low income countries: GNP per capita of US $1,005 or less.

    2. Middle income countries: GNP per capita ranging between US $1,006 and $12,235.

    3. High income country: GNP per capita of US $12,236 or more.

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  • Q5

    What do you mean by Economic system?

    Marks:1
    Answer:

    Economic system is the broad institutional framework within which production, consumption and distribution of goods and services take place in a country or region. The economic system is a combination of various agencies, entities that decides the economic structure of a social community.

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