Economy is a system of socially and legally acceptable ways by which people get a living. An economy is also looked at as a system of cooperation for the satisfaction of human wants.
In a modern complex economy, the cooperation exists in the form "you do this for me and I will do that for you is not enough". The cooperation can be seen across national boundaries. Thus economy can be seen as a system of mutual cooperation and exchanges.
Economy can be classified into the following three categories on the basis of ownership and control over means of production.
- Capitalist Economy
- Socialist Economy
- Mixed Economy
Economy can be classified into the following two categories on the basis of level of development.
- Developed Economy
- Developing Economy
Capitalist Economy gives much importance to individual freedom and competition. Consumers behave like a king and play a significant role in the allocation of resources through price system, profit motive and markets.
Socialist Economy gives too much importance to collective ownership, society’s welfare and economic planning. The inequalities are reduced and class conflict is avoided.
Mixed economy gives importance to the merits of both the systems. Here public and private sectors coexist. Public sector works on the basis of socialist economy whereas the private sector works on the basis of capitalist economy.
Developed rich countries have higher per capita income and better standard of living and quality of life. Underdeveloped or poor countries on the other hand have low income, savings and investment and therefore they have poor standard of living.
The process of economic development is determined by number of economic and non-economic factors. There is a difference between development and economic growth. Generally, economic growth refers to short-run improvements in a few selected sectors and variables. The economic development on the other hand refers to long run increase in national and per capita income along with many other non-economy factors that improve overall quality of life.