Table of Contents
Question 1
a (i) A collectivist economy is also known as a command economy. The collectivist economy is an economy where there is government intervention in terms of policy making.
ii. The two other examples of collectivist economies are communist and bureaucratic economies of USSR, Russia and Ujamaa economy of Tanzania. Communism is also applicable in the republic of Cuba. Collectivist economies encourage interdependence among citizens of a nation. There is governmental control over major resources to minimize capitalism among some few traders. These are the elements of a command economy.
1(b) The South Korea operates a free economic system. A free economy is one in which market forces of demand and supply determine the prices of the goods. There is minimal government intervention and control over production resources. The free economy is characterized by flexible wages, product innovation, and price competitiveness. The innovation among individual business people promotes the trading tendencies in the country. There is an easy access to the main production resources. The agents in the economy are free to make sound economic decisions without the fear of state intervention. The interaction of market forces of demand and supply determine competitive prices. There is no interdependence among members of the state. The productive agents avail goods to the market for the other people to buy at the established prices. Sometimes there is a problem of high wages as the small changes in the economy can introduce black market activities. There is a common phenomenon of hoarding of goods among the sellers as they anticipate prices to go up (Trading Economics, 2012).
1(c) a Comparison of Economic Performance of South and North Korea
The real GDP of South Korea is relatively high in relation to that of North Korea. The per capita income for South Korea is also higher in relation to the respective factor of North Korea. For instance, for 2011, the PPP for South Korea is $31, 700 and for North Korea is $1, 800. The industrial sector forms the largest component of the economy in relation to other sectors like agriculture and services. The services sector is the largest component in the economy of South Korea. It is comparatively bigger than sectors like agriculture and industry. The number of people in the labor force is a high of 25.18 in South Korea, while in North Korea it is a figure of 12.2 million people. This means the unemployment rate is relatively low in South Korea as compared to that of North Korea. This implies that the free economy allows people to innovatively engage in productive activities in order to earn a living. The occupation of service sectors is high in South Korea. There is a budget deficit of $0.1 billion in North Korea. The economy of South Korea has a surplus budget of 2% of the total GDP .The overall economic performance of South Korea is improving. There are positive economic indicators in terms of real GDP and the sectored composition of the aggregate GDP (Korea Economic Institute, 2008).
A collectivist economy is characterized by government intervention. The low quality goods do survive in a collectivist economy as the government intervention will enable the economy to sell those types of goods. The government intervenes in terms of subsidies and purchase of the low quality goods for public use. The state in a collectivist economy can also issue quotas. The quotas are meant to limit the production of some goods and encourage the production of other commodities in the market. This is intended to protect infant industries from unhealthy competition.
The market economy is a competitive economy. The buyers will prefer high quality goods to low quality ones. This is because there is a wide variety to choose from in the market. The low quality goods will stagnate in the business. Commodity stagnation will make low quality goods fail to survive. There are no subsidies in the free market economy (Central Intelligence Agency, 2013).
Innovation is the ability to improve the existing products in the market. The idea of innovation is responsible for propelling South Korea to be referred to as “Asian tiger”. This was notable between the years 1960s and 1990s. The major companies based in South Korea are Hyundai, Daewoo, and Samsung. The idea behind growth is the ability to be innovative. There is continuous improvement possibility in the quality of goods being produced in the market. The government intervention is minimal. This is a good indicator of open economy. The market or open economy is free to entrepreneurial spirit.
Innovation is encouraged in the free economy as it is responsible for economic growth. The citizens can easily engage in self-employment. The innovation will result in high quality goods shipped to the market. The innovation aspect is responsible for the high growth rate in the service sector of the economy. The other reason for encouraging innovation is the need to embrace technological advancement. According to a leading economist, Robert Solow, information technology is positively correlated with the economic growth. There is the increased efficiency in the service delivery with the adoption of innovation in a country economy. Innovation enhances economic productivity of a state.
The two figures depict growth patterns in the countries. In figure one there is no stable economic growth seen in North Korea. It is worthwhile to note that negative values do not make sense in economics. The negative economic growth rate depicts a stunted rate in the republic of North Korea. This is observed from the years 1992 to the year 1999. There is a positive economic growth rate as from the year 2000 to the year 2005. The growth rate for the remaining two years is declining. The upwards swings in the economy are referred to as a boom while the downwards are known as a depression. During the boom, there are extensive economic activities, while during the depression there are low economic activities in the country.
The figure 3 represents a depiction of the South Korean case. The swinging economic cycles represent the growth patterns in the economy. The growth rate is relatively stable. This is an attribute of a free market economy. The innovation and price competitiveness boasts economic activities in the country. The swings are the results of individual economic behavior of the economic agents. The behavior may be the outcome of limited economic resources.
Question 2
Advantages of Planned Economy
A planned economy is characterized by government control and intervention especially in the provision of essential commodities. The manufacturing of essential goods is efficiently managed in a planned economy. There is Pareto efficiency in the provision of essential commodities in the planned economy. The right quantity of goods is availed and fair prices are charged for the buyers and citizens of the country. Another advantage is the protection of infant and young industries. This is through the provision of subsidies and quotas. The setting of standards of goods ensures safety of goods being consumed by the people.
Disadvantages of Planned Economy
Planned economy hinders innovation and price competitiveness. This leads to a lag in the economic growth of a country. Some industries remain stagnant for the rest of their useful life due to the perceived state protection. This hinders fast economic growth. Some government legislation will shy off prospective foreign direct investors in the country. This is because of discriminative legislation in regard to taxation.
Advantages of Mixed Economy
A mixed economy is also referred to as free economy with minimal government intervention. The market forces of demand and supply determine prices, thus encourage price competitiveness in the economy. The spirit of innovation is high as the players’ strife to remain relevant in the market. There are many players in the economy. This improves the quality of goods being provided in the market. There is the need for strategic position of the industries due to the prevailing competition. The sellers embrace technology in order to attain market growth.
Disadvantages of Mixed Economies
The first disadvantage is the emergency of black market activities. This involves hoarding of goods so as to earn high profits. There is the anticipation of price increase in the market. The stiff competition will force some firms to exit the industry as they cannot sustain the competitiveness from their opponents. There is also inefficiency in the provision of essential commodities. This is as a result of minimal government intervention and low provision of subsidies.
There is the need to have a command economy. The state will legislate in policy decisions so as protect the infant industries. The quality of goods is essential in every economy. There is also the need for the government to set standards in order to protect people from unhealthy consumption of goods.
