CHAPTER FOUR
ECONOMIC SYSTEM AND DEVELOPMENT
Economic system is the means or structures in a society within which decisions about what, how and
when to produce goods and services and where to allocate them are made and implemented. Examining
the role and functions of world economic organizations such as the World Bank, the International
Monetary Fund (IMF) and the World Trade Organization (WTO) is important.
To achieve economic growth and development, different countries use different economic systems. There
are four major economic systems practiced in the world.
TYPES OF ECONOMIC SYSTEMS
These are; Traditional Economic System, Free Market Economic System, Command Economic
System and Mixed Economic Systems.
1. Traditional Economy
Traditional economic system is the economic way in which the primitive societies activated to
achieve their daily livelihood with the production of little good and services.
Production is geared for subsistence life and basic survival extremely practiced by backward
areas or primitive societies like hunters and gatherers.
Traditional eco. employs simple, backward & traditional means in the process of food production.
Trade mainly practiced by a bartering system an exchange of commodities by commodity.
Basic economic question (what to produce? how to produce? for whom to produce?) answered
by custom, habit, religion, or law in traditional cultures.
Traditional economic activity characterized by: Lack of knowledge of science& technology,
Low productivity and Low level of exchange of goods.
2. Market Economy
Economic system in w/c individuals make the main decisions regarding eco. activities & transactions.
Individuals are free to make economic decisions concerning their overall demand and supply.
The basic economic questions are answered by the interplay of buyers and sellers.
The guiding principle of market systems is self-interest (determined by buyers and sellers) freely.
Characterized with open and free competition index of individuals.
There is no pure free-market economy in the world.
Governments interfere in; dealing with problems of inflation and employment, educating society,
controlling prices of power supply and food, imposing taxes& Strengthening national defence.
Free market economy encourages individual‟s responsibility for decisions.
They also believe that economic freedom is essential to political freedom.
Market economy is characterized by:
Private property. Economic freedom. Prices determined Buyers and sellers.
Decentralized decision making.
3. Command Economy
In a command economy, decisions about production and consumption made totally by the
government. The economic question such as what to produce, how to produce and for whom to
produce answered by the government or a group of planners. All factories, land, housing and
projects owned by the government. Countries such as North Korea, Cuba and China practiced
command economy in the world. Command economy characterized by:
The government develops an nforces plans.
Goods and services are distributed through government agencies.
The Government has power to make economic decisions for the society as a whole.
4. Mixed Economy
Both government and private sectors play an important role in answering the “what”, “how‟ and
“for whom” questions concerning society as a whole. The government may not only own and run
key industries, means of transport, power, and water supply.
Government might influence prices of agricultural products, rather than allowing them to be
influenced by market forces, offer incentives (tax relief, grants, exemptions or penalties) to
encourage particular activities.
Most countries of the world have mixed economies (France and Sweden).
Some are close to command econmy while others rely more on market economy.
In a mixed economy, there is competition between the government and the private sectors.
An over views of world common economic systems
SUSTAINABLE ECONOMIC DEVELOPMENT
Sustainability implies the future growth and overall quality of life in societies. Development is a
process by which members of a society increase their personal and institutional capacities to
mobilize and manage resources to produce sustainable improvements in their quality of life.
Economic development focus in the change in the quality of the products and quality of life of
people. Economic development include enhancement in, productivity, institutions and attitude,
Modern knowledge and Change in economic equalization.
Economic development must involve three core value sustenance, self-respect and freedom
from servitude. The basic Social development is; (Education, health, drinking water and
Infrastructure).The main Settings of development are; Poverty level, Growth, Rural Issues and
Urban Issues and Global Player.
Economic growth versus economic development
Economic Growth
Economic growth is a measure of value output of goods and service within a certain period of time. It
is an increase of the total amount of production and wealth of a given economy.
Economic development
Economic development measure the welfare of human beings in certain state and structural and
technological change. Development is both quantitative and qualitative in that it involves increment
in production, service provision; income implies improvement in overall living condition of
population. Growing economy can definitely promote development
The main objectives development is;
To increase an availability and distribution of basic needs of society such as food, shelter, health
services and clothing.
To raise living standards and levels of income, level of employment, education and attention to
cultural and human values.
To expand the range of economic and social choices.
Creating conducive environment for the establishment of social-political consensuses and self-
esteem to promote dignity and respect.
Economic development strategies need consideration for the sake of increasing the productive
capabilities of human wealth and the health of the environment.
To accomplish the main objectives of economic development, the following points should take in
consideration. These are;
Hardworking and energetic labor force of nation. Improving the skill and the ability of the
working force. Ensuring adequate medical care for active labor force.
Improving technological supply and other know how inputs.
environmental conservation is things to consider.
According to the World Commission of Environment and Development (1987),
Sustainable development is development that meets the needs of the present without
compromising the ability of future generations to meet their own needs”.
Sustainable development has three components. These are; Env’t, Economy and Societies.
an association of environment, society and economy, human wellbeing becomes aggregated.
Generally, Economic development aimed;
Eradicating poverty and Reducing disparities in living standards are essential goals
for achieving sustainable development and meeting the needs of the majority of people.
Indicators of Economic Development
The main indicators of development in the world include;
Per-capita income Gross Domestic Product (GDP Standard of living
1. Gross Domestic Product
GDP is the total value of currently produced final goods and services within a country‟s borders,
usually in a year, irrespective of who owns the outputs. The GDP is a measure of the market value
of commodities.
The GDP in developing regions is very low and are dominated by primary commodities.
The developed regions are dominated highly by secondary and tertiary economic activities why
they are contributed the biggest shares to the GDP.
The higher GDP does not always mean that, the country has high per-capitated.
Higher the population of the country, the lower per-capita will often be.
Per-Capita Income
PCI is the average income earned per person in a given area in specified year.
PCI is a measure of peoples‟ quality of life it is indicative of their standard of living.
The Gross National Product (GNP) is the total value of goods and services produced by a
country in a year, including incomes secured from abroad, through varied activities.
Per-capita income: GDP/Total population
Prepared by- Yonas Aregay
2015 E.C
