What is Capitalist and Socialist Economy?

Economies can be divided into two types as mentioned hereunder:

  1. Formal economies.
  2. Informal economies.

Formal Economies

Formal economies, there are rules and regulations and all the activities are supposedly undertaken systematically.

Informal Economies

In this type of economies, no rules and regulations are prescribed and all the activities are undertaken without any particular system.

When we keep discussing the formal economies we can divide them three further groups namely, the Capitalist, Socialist and Communist. The two most popular out of these are the Capitalist and Socialist systems. The names given to these economies are based on the ownership of the factors of production. These are land, labour, capital and organizations or entrepreneurship. These help the production process to take place.

Capitalist Economy

In this type of economy, the factors of production are owned by individuals, which means the essential feature in this type of economy is a private enterprise and the major motive for production is gaining profit. Most of the developed countries of the world follow this system. The United States of America is a very prominent example of this type of economy. In Capitalist economies, production has to be continuous for the efficient operation of the economy. Since the goal is profit, the resources used in this economy are optimally used.

Socialist Economy

In socialist economies, the factors of production are publicly owned or cooperatives. People are compensated in accordance with the work that they put in and keeping their abilities in sight. The scope of the production in this type of economies is mainly large scale and it includes the reinvestment of the dividends that occur. This economy system comprises a planned economy, which is planned by the government itself.

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