Types of Economic Systems

- Overview

Economic systems are characterized by the way economic resources are owned and distributed. An economic system is the means by which a society or government organizes and distributes available resources, services, and goods throughout a geographical area or country. 

The economic system regulates the factors of production, including land, capital, labor, and material resources. An economic system consists of the many institutions, agencies, entities, decision-making processes, and consumption patterns that constitute the economic structure of a given community.

- Types of Economic Systems

There are many types of economies around the world. Although they all share some basic characteristics, they all have their own distinguishing characteristics. Every economy operates on a unique set of conditions and assumptions.

Here are some examples of economic systems:

• Market economy: The government does not control the market; citizens and businesses decide which goods are produced.
• Planned economy: The government coordinates the provision of public services and maintains some control over the allocation and distribution of resources.
• Capitalism: Individuals own and manage property and free market forces determine prices.
• Mixed economy: combines elements of a free market economy and a command economy.
• Socialism: The government owns goods and their production, and shares work and wealth equally among members of society.
• Traditional Economy: Output comes from agriculture, fishing, hunting and gathering, and is traded through a barter system.
• Free market economy: The government does not interfere in the economy.

Other types of economic systems include: 

• Centrally planned economy
• Communist economy

- The Real Economy

The real economy refers to all physical or non-financial elements of an economy. An economy can be described using only real variables. A barter economy is an example of an economy without a financial element. All goods and services are expressed purely at actual value. A barter economy does not require the existence of a base monetary system.

The real economy is the part of a country's economy that produces goods and services. It includes the production, transportation and sale of goods and services. The real economy also includes direct exchange or purchase of goods or services as well as one-step lending or savings services.

The real economy does not include financial services such as banks and stock markets. It also precludes the exchange of paper assets, a concern of the financial world’s “paper” economy.

Real assets include: precious metals, commodities, real estate, land, equipment, and natural resources.

Real economic growth can be calculated as the difference between real GDP in the most recent year and real GDP in the previous year. This difference is then divided by the previous year's real GDP.

When the real economy finally stands up, the central bankers will start to stand down.

- Real Variables

Real variables are economic measures that are adjusted for inflation. Economists and policymakers use real variables to compare the value of economic measures over time. Examples of real variables include: 

• Real GDP
• Real interest rates
• GNP
• Employment
• Real wage rate

Real variables are measured in terms of goods and services to reflect the true economic value at a point in time. They are different from nominal variables, which are measured with respect to money in an economy. Nominal variables reflect the face value of a variable, excluding the effects of price. 

Real variables are determined by real factors such as: 

• Stock of capital
• State of technology
• Marginal physical product of labor
• Households' preferences regarding work and leisure

The Federal Reserve keeps statistics on items such as: 

• Real Change in Private Inventories
• Real Disposable Income
• Real Government Expenditures
• Real Private Residential Fixed Investment

Real variables refer to the amount after adjusting for the inflation and thus, paint a more accurate picture of the change. Whereas nominal variables are those which have not been adjusted for inflation, so they might be misleading.

- Nominal Variables

Nominal variables are economic variables that are measured in money terms. They are expressed in current market prices and are prone to the effects of inflation. Examples of nominal variables include: Wages, Incomes, Nominal GDP, Nominal interest rate, Minimum wage. 

Nominal variables are contrasted with real variables, which are measured in physical units, such as employment or steel production. Real variables are adjusted to reflect the changing purchasing power of money over time. 

Nominal variables are different from unit-free numbers, such as elasticities and percentage shares.

Nominal variables are expressed in current market prices. Real variables are adjusted to reflect the changing purchasing power of money over time (inflation or deflation). For example, the nominal interest rate is the rate that currently prevails in the market