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3. The Economic System & Market Structure

Each society gives the three basic questions different answers, but the economic system of an economy is further determined by the resource ownership(who owns the resources and how owners are paid) and the extent to which the government attempts to coordinate the economic activities in that society.

The U.S. economy is made up of three basic institutional structures, the private sector, the public sector, and the international sector. Private sector consists of private individuals including households, independently owned firms that exist to make a profit and non-profit organizations. Public sector is the government and its agencies at all levels. International sector discusses the part of the economy that deals with imports and exports. Go ahead reading for a little more details.

3.1. Economic Systems

Ranging from the most free to the most regimented type of economy, the market system or the free market is at the opposite end of the spectrum while command system is at the other end. They are the most typical types nowadays, but other mixed and transitional economies also pervade. Practically, no pure market system or pure command system exists today, all countries are at one point of the spectrum that's neither of the extremes. However, for sake of discussion, let's pay more attention to the extreme ones.

Under pure market system, resources are absolutely privately owned and the coordination of economy is ultimately based on the sum total decisions of millions of individuals who pursue their own self-interest without any central direction or regulation. Government is left out, and the market  is the exclusive central institution in which the three basic questions are answered. Buyers and sellers of goods and services, resource owners and bidders interact in no way affected by other force like the government regulation. Their decisions are dependent only on the interest of their own. Consumers dictate what is produced(or the consumer sovereignty) and producers have to produce the goods and services people want, so is the resources allocation process. The distribution of output is also determined in a decentralized way. The amount that any one household gets depends on its income and wealth. The income and wealth are determined by their capabilities and skills as well as the choice whether to go to work or not. In a word, in a pure market system, while non-government members of the society determine their individual actions, they ultimately determine the whole economy.

In a pure command system, resources are directed and production is coordinated based on the command, or central plan, of government rather than by markets. A central authority or agency establishes what will be produced and when, sets production goals, makes rules for distribution and determines how much compensation workers are to receive for their labors. In theory, a pure command system incorporates individual choices into collective ones. In practice, however, it has flaws, most notably are:

1. Since nobody in particular owns resources, people have less incentive to employ them in their highest-valued use; so some resources are wasted.
2. Central plans may reflect more the tastes and preferences of central planners than those of society.
3. Since the central government is responsible for all production, the diversity of products is much more limited than that in a competitive economy.
4. Each individual has less personal freedom in making economic choices.

Because of these limitations, countries have modified the pure command system to allow a role for markets. North Korea is perhaps the most centrally planned economy in the world today.

3.2. The Institutional Structure of the U.S. Economy

The U.S. economy is made up of three basic institutional structures, the private sector, the public sector, and the international sector. Private sector consists of private individuals including households, independently owned firms that exist to make a profit and non-profit organizations. Public sector is the government and its agencies at all levels. International sector discusses the part of the economy that deals with imports and exports. Go ahead reading for a little more details.

3.2.1. The Private Sector

According to Wikipedia,

The private sector of a nation's economy consists of enterprise that is outside the state. It includes a variety of for-profit entities such as private limited companies, partnerships, corporations, banks (other than central banks), as well as individuals not employed by the state. In this sector, different factors of production in various production activities are owned and managed privately by individuals or private corporate bodies. The aim of the enterprise is to make a profit for the owner, by producing goods or services that can be sold to customers.

For a list of different types of private entities, see Business Firms and Industrial Structure.

3.2.2. The Public Sector

See http://en.wikipedia.org/wiki/public_sector.

3.2.3. The International Sector

International sector is the part of an economy that deals with the other economies, or the rest of the world. Basically, from a certain country's perspective, international sector consists of imports and exports with all other countries.

Not only the U.S., but also many other countries have become more and more serious about the international sector of their economies, especially since the great economic lessons of the 1970s and 1980s when all economies, regardless of the sizes, depend to some extent on other economies and are affected by events outside their borders. The U.S. economy is in no way closed or self-sufficient. In the light of the theory of comparative advantage, every country can benefit from participating in the global trading, even if it is absolutely inferior in productivity in every domain. And we are used to it now; none of us solely produce everything we need, instead, we specialize. However, specialization leads to interdependence, which in turn, results in growing exposure of domestic economy to the international sector.

This is one of the reasons that arouse such international economic treaties or organizations as NAFTA(North American Free Trade Agreement) and APEC(Asia-Pacific Economic Cooperation). Because conflicts arise and everyone of the international community is trying solve the problems on an equal and mutual-benefiting basis.

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