What is the economic system?How does Australia's economic system attempts to solve the economic problem?
Alice Fisher
Year 11 Economics Essay
What is the economic system?
How does Australia's economic system attempts to solve the economic problem?
Answer:
An economic system is a mechanism that deals with the production, distribution and consumption of goods and services in a particular society, composed of people, institutions and their relationships. The economic problem is what an economic system attempts to solve. There are several basic questions that must be answered in order to resolve the problems of economics satisfactorily. For example, the scarcity problem requires answers to basic questions, such as: what to produce, how to produce it, and who gets what is produced. An economic system is a way of answering these basic questions.
The Basic Economic Problem is a term used in economic theory. It outlines that there are limited resources for infinite human wants and involves what goods and services an economy should produce, and where the emphasis on production should be such as public services, housing, agriculture or manufacturing. It also determines how the goods and services should be produced, capital or labour intensive and the efficiency. Wants and needs are virtually unlimited, because that the majority of goods are non durable, and new or improved products become available on the market, however, every economic system has a limited amount of resources at its disposal, known as the factors of production. Each factor provides a return to the user and producer, they are known as land, labour, capital and enterprise, particular economic systems attempt to deal with the limitations of the factors of production, and place different weight on various commodities. Society then must decide which goods and services to produce.
Any solution to the Economic Problem must als006F find a way to balance the injections and leakages of the circular flow model. The overseas market is a crucial part of this, particularly in Australia, when we import a large amount of commodities, particularly that of the expensive electronics market from Asia, while these imports allow for added commodities to the market, if an equal number of exports are not produced then the Current Account Deficit or Surplus can become unbalanced. An excess of imports into the market will lower domestic production, and raise unemployment, resulting in a dropping on the G.D.P. and result in shrinkage in the Economy. Other leakages and injections in the economy must also be balanced, such as taxation and Government spending, and saving and investment. While they often don't balance perfectly, a long term unbalanced economy will function with difficulty.
Different economic systems answer the Economic Problem differently, and there is often a strong correlation between certain ideologies, political systems and certain economic activities. There are three key economic systems, the market economy, the welfare state economy and the mixed economy, (which is the majority as most individual systems are mixed, as they're a variation that includes elements from various systems). Each of these systems varies in extremity, with the extremes of communism and capitalism, or the extremes of "left" and "right".
Firstly the Market Economy, with right wing, capitalistic ideas. In which economic decisions and the ...
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Different economic systems answer the Economic Problem differently, and there is often a strong correlation between certain ideologies, political systems and certain economic activities. There are three key economic systems, the market economy, the welfare state economy and the mixed economy, (which is the majority as most individual systems are mixed, as they're a variation that includes elements from various systems). Each of these systems varies in extremity, with the extremes of communism and capitalism, or the extremes of "left" and "right".
Firstly the Market Economy, with right wing, capitalistic ideas. In which economic decisions and the pricing of goods and services are guided solely by the aggregate interactions of a country's citizens and businesses and there is little government intervention or central planning. This is the opposite of a welfare state in which government decisions drive most aspects of a country's economic activity. Market economies work on the assumption that market forces, such as supply and demand, are the best determinants of what is right for a nation's well being. These economies rarely engage in government interventions such as price fixing, license quotas and industry subsidisations. While most developed nations today could be classified as having mixed economies, they are often said to have a greater influence of market economy ideals as they allow market forces to drive most of their activities, typically engaging in government intervention only to the extent that it is needed to provide stability. Although the market economy has proven relatively successful in today's global marketplace, there is significant debate regarding the amount of government intervention considered optimal for efficient economic operations. This is the basis for right wing systems such as capitalism, due to its basis around free enterprise and capitalistic ideals, where the majority of the factors of production are controlled by the private sector.
Secondly, the Welfare State Economy, a left wing, socialist inspired economy in which the key aim is to provide all individuals a fair distribution of the basic resources necessary to maintain a good standard of living. While the market, in today's modern welfare state, can, and often does retain some level of private ownership, the Government enacts broad programs of social welfare, such as pensions and public housing, and retains a larger degree of control that a mixed economy. A completely communist state is rare in the modern economy, with few remaining, and most ostracised by the wider world community, such as North Korea, however, there a numerous majority welfare state nations such as Sweden, in which taxation is extremely high but Government services are some of the best in the world, and another form of welfare state, Saudi Arabia, in which a large majority of all commodities are owned by the king.
Thirdly, the mixed economy, on which Australia and the United States are both based around. It is a centrist state, in which capitalism is mixed with socialist ideas, such as a National Health Scheme. In most mixed economies the Market Forces control the nature of production, however the Government can, and does, intervene to alter the out come to change the nature of production and allocation of resources for environmentalism and social justice, or state ownership of some of means of production. There are many variations of the mixed economy, integrating varying degrees of other systems. Some capitalist countries, France, for example, employ what is often called state capitalism. In this form of a mixed economy, the state becomes a major shareholder in private enterprises. An alternative is for the state to own some industries while leaving others in private hands.
An economic system can be considered a part of the social system and hierarchically equal to the law system, political system, cultural system, etc, and in that way, how a country attempts to solve the Economic Problem often relates to its other moral and political views.
Australia, as a mixed economy, attempts to solve the Economic Problem by applying the same principals most mixed economies attempt to use. The Australian economy allows the market to drive production and the flow model while also using a level of Government control to control excess fluctuation in the market. The Australian Government does this by controlling interest rates, and running a surplus or deficit budget by lowering or increasing taxation or lowering or increasing Government Spending. Mixed economy is theoretically co-existence of capitalism and socialism where extremes of capitalism and extremes of socialism are controlled, ideally this should be the best. A mixed economy allows for freedom, entrepreneurship, and welfare that doesn't muffle initiative of the free market. There are several benefits to the regulation of a mixed economy. To discuss the primary benefits which come to mind, it is also important to address each benefit with a drawback to better gain an overall perspective of the differences between a market base economy and mixed economy.
The level of control that the government assumes within a mixed economy leads to the government having a major role in the delivery of its own services. At the same time, the private sector will have an important role in helping to build government infrastructure to deliver these services. This can cause an increase in overall production and/or efficiency. Given this, a drawback would occur if the government failed to clearly identify the method of infrastructure it needs from the private sector. An over or under production can have a ripple effect causing an imbalance in the cycle of production.
Many mixed economies maintain a healthy welfare system to support the wider population, this ensures that the lower level income bracket is able to access a minimum level of welfare. However, certain aspects of the welfare system may be taken advantage of, ultimately leading to a loss of government funds. Professionals may see better business opportunities within the realm of private practice. Certain individuals may want a higher quality level of good or service than is available from government regulated institutions and may not have a choice or freedom to choose, despite their ability to afford a higher rate.
In a welfare state, corporate structure can also be more heavily regulated leading to less corporate greed. An adverse example would be that of the Enron case which left hundreds of employees without a retirement fund. If regulated under state control, the regulations would prevent the degree of which the company heads were allowed to progress, thereby protecting the rights of individuals. However, government interventions doesn't ensure a lack of corruption, one only has to look at the recent Australian Wheat Board Scandal, and its detrimental effect on the Current Account Deficit to realise that government intervention can further corruption rather than controlling it.
The mixed economy is widely viewed to be the most successful in solving the economic problem, however, every mixed economy has some sway to either the welfare state or the market economy, never creating the perfect balance between the two, resulting in an unbalanced economy. So far there has been no economy to perfectly solve the economic problem, however, the changing nature of the Australian Economy has assured that it remains stable.
