What Is Market Economy Economics Essay

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Market economies work on the concept that market forces of demand and supply, should act as the main determinants of what is path taken for the growth of a nation's economy. The government interventions such as price fixing, licenses and industry subsidizations are rare in such economies. While many developed nations today can be regarded as mixed economies, they are often considered to have market economies because they allow market forces to drive most of their activities. Thus government interventions occur only to the extent that it is needed to provide stability to the economy. Although the market economy is clearly the system of choice in today's marketplace, there is significant debate regarding the amount of government intervention that can be considered optimal for efficient operation of economy.

In market economy, people in generally purchase goods of their choice when they have the means to do so. Thus, wealth becomes necessary for life. At such situations people are forced to do anything and to sell anything in order to obtain profits. Thus the sole aim of any production or investment is restricted to maximizing profit rather than satisfying the social needs. Proper discipline over those who produce the wealth of society is no longer exercised by other people, but money and the conditions of work that must be provided in order to earn money is not standardized. The raw materials available today are scarce. But the rationing of these goods takes place based on the strength of money. Thus in a market economy, people with money may control the markets and thus the growth of others. In market economy, equal opportunities are given to all irrespective of their background or skills. But the competition available is too high. In such cases, Darwin's theory of "Survival of the fittest" holds true in an open economy.

Market economy provides ample opportunities for growth for economies due to the freedom and ease provided to the enterprises. This is clearly evident from the differences in growth achieved by the neighboring nation: North and South Korea. After the partition of north and South Korea after the 2nd world war, Democratic People's Republic of Korea was formed in North Korea and Republic of Korea was formed in South Korea. After the partition South Korea adopted a free market economy coupled with large scale industrialization which helped South Korea to ranks 15th in the world by nominal GDP , identifying it as one of the major G-20 economies in the world. South Korea is now a high-income developed country, with a developed market, and is a member of OECD. North Korea has an industrialized, highly centralized command economy. North Korea is one of only two states with an almost entirely government-planned, state-owned economy. North Korea's policy demands isolation and means that the international trade is highly restricted in North Korea. The GDP growth in North Korea as of 2011 is as low as 0.8% which stands as testimonial to the growth that can be achieved with the help of market economy.

Another example of a state which reaped the benefits of market economy would be China called as socialist market economy. On the eve of the 2001 slowdown, the world economy was expanding at a rate of close to 5% and China as a whole accounted for just over one tenth of that growth. In 2010, as the world bounced back from the worst recession since the Great Depression, and growth was once again close to 5%, China contributed almost one third of global growth. Within a period of 10 years, China had become the world's second- largest economy. While the aggregate growth in the input of labor was small, there has been a massive change in the quality of the labor force, as universal nine year education was achieved, helping a massive reallocation of labor away from (low-productivity) agriculture towards services and manufacturing. High growth has been made possible by very favorable supply side factors but finding the demand to match the increase in supply has also been important. In the past 15 years, external demand has many a times been the principal driving force of the economy. The key function in moving the economy away from labor-intensive industries over the coming period will be improving the capability of the economy to innovate. The opening-up of the economy with respect to foreign trade and inward direct investment has largely been achieved which has greatly influenced the growth of the economy of China. (OECD, March 2011)


Te control of state over the working of enterprises have become zero thus providing increased flexibility and freedom to entrepreneurs to explore different possibilities in production and distribution of various products and services.

Foreign investment is attracted as word gets out about the new opportunities for earning profit. During past 20 years, India has gradually opened its economy to foreign investments. The latest move of India to will allow individual foreign investors direct access to its stock market is the latest step to liberalize Asia's third-largest economy.

Market Economy provide a venue to have healthy competition between different firms, thus leading to increased efficiency, as firms aim at lowering their costs and maximizing their profits. Thus it helps in developing a modern industrial system and in improving core competitiveness among different enterprises. Cross region and cross industry mergers, acquisitions and reorganizations are launched, with the objectives of opening up sectors such as telecommunications, banking and electricity.

There is more innovation around as firms look for new products to sell and cheaper ways to do their work. All sectors including multinational corporate and technological companies are constantly trying to achieve excellence through innovation. Innovation in all sectors will help in creating the conditions that are conducive and that maybe necessary for the operation of a system where innovation and research could be mutually helpful and complementary. Research and development is usually discouraged by all. This chances for innovation and growth is thus diminished. This should be avoided and innovation should be encouraged.

Market Economy has helped people develop their skill set. Many people quickly acquire the technical and social skills and knowledge needed to change themselves with the changing times. Most people work harder as there are motivated to work with the availability of profits for their hardships.

Buyers are free to purchase any commodity which they like and in whatever amounts. The seller of a good or its producer can also produce whichever product they want to and also increase the capacity of any individual commodity depending upon the demand and supply demanded by the market. In free market economy, producers are free to undertake the risks and are rewarded depending on increase in production. There is no intervention of the state in the functioning of the forces of the market. This is beneficial to all because a great variety of consumer goods become available for those who have the money to buy them. Thus both producers and consumers are benefitted in a free market. Market economies can also adjust to changes in demand and supply easily as they base their operation on the market performance.

Resources are allocated by market forces and the price mechanism without government intervention. The free market tries to maximizes the surplus provided that there are no failures or imperfections. Profits obtained act as an incentive to the companies to reduce costs and constantly innovative themselves.

The biggest advantage that a market-oriented economy enjoys is the determination of a unique price determined by the demand and supply. Here the quality of the product decides the demand for the product which further decides its price. The decision of what they should produce, for whom should they produce and in what quantities is taken by the market forces and not determined by the state. The role of the government is limited to ensuring compliance of rules and proper transparency in the prices charged by the sellers of the concerned commodity. Thus there is an absence of any monopolistic or oligopolistic influences. Prices also perform the primary function of allocating and distributing the country's resources.

Market Economy helps the nation to grow economically thus proving resources to concentrate on social development of the nation. Many social welfare activities to raise the standard of living of the people can be achieved in a stable economy. Poverty reduction is one such social need which can be achieved with growth in economy. China's tremendous economic growth has been very successful and helpful in reducing poverty in China. Two decades ago, 60% of the population in China lived in absolute poverty. But by 2010, the number had fallen to 10%. Thus development of general public becomes possible through free market economy.

Thus in a perfect world, the market economy may lead the state to complete efficiency thus bringing about equal distribution of a country's resources and providing equal opportunities for all to grow.


The latest economic conditions are not as promising as expected. The world economy is on the edge of a major downfall. The output growth in many nations has already slowed considerably during 2011. The declining trend in economy has been both a cause and an effect of a number of happenings including the debt crisis in the euro area, and of fiscal problems that are surfacing around the world. The economic problems in many developed economies are the major threats to the global economy .The latest statistics shows that the growth in economy and trade has been showing a declining trend. This in turn makes the developing countries vulnerable to the downturns in the developed economies.

World Gross Product


The rate of unemployment was averaged 8.6 per cent in developed countries in 2011 which was well above the pre-crisis level of 5.8 per cent registered in 2007.This shows the rise in unemployment and the need for attention. Unemployment rates among youth (persons 15-24 years of age) tend to be higher than any other age groups of labor force. This is a matter of concern for all because it shows the amount of potential that is left untapped and unnoticed. In order to restore the pre-crisis employment and absorb the new labor entrants, an employment deficit, estimated at 64 million jobs in 2011, would need to be eliminated. Persistent high unemployment is holding back wage growth and consumer demand globally and pushing up mortgage payments. Combined with continued financial problems in the developed economies, it is also depressing investment demand and business confidence and holding back economic recovery.


Inflation is showing an increasing trend worldwide. This is driven by a number of factors, particularly the adverse supply-side shocks that have pushed up food and oil prices and an increasing demand in large developing economies as a result of increasing incomes. Reflationary monetary policies adopted in many developed economies have also contributed to upward pressure. Inflation should not be a major policy concern in developed economies but is a bigger concern in a number of developing countries.


The recovery of world trade is showing a decelerating trend. The recovery of world trade slowed down in 2011 as growth in merchandise trade declined to 6.6 per cent, from 12.6 per cent in 2010. In the baseline outlook, world trade growth will continue at a slower pace of 4.4 and 5.7 per cent in 2012 and 2013, respectively. Sloe global economic growth, especially among the major developed nations, is the major factor which has contributed to this deceleration. Commodity prices have increased, but remain highly volatile Trade in services is mirroring developments in merchandise trade. Trade policy prospects are uncertain


Fragilities in the international financial markets are affecting financing for development. This greatly affects the prospects for growth in economies. At such situation, small financial reforms may turn out to be inadequate for containing systemic risks. The international community has thus taken steps to reduce global risks and strengthen the international financial system through the introduction of new financial regulations. Important issues that remain are regarding the sufficiency and composition of both aid and international support. Grants available have increased over time. The problem arises because global aid delivery fell short of amounts pledged.


Developed economies suffer from many weaknesses that mutually reinforce each other: sovereign debt distress, fragile banking sectors, weak aggregate demand and policy paralysis caused by political issues and institutional deficiencies. These weaknesses have always been present, but a further worsening of one of them could set off a vicious circle which may in turn lead to severe financial turmoil and an economic downturn. This will affect the developing countries and other emerging markets. But the contagion of the sovereign debt crisis could trigger a worldwide credit crunch and will wreak havoc in the economies in the regions concerned and beyond. A large number of banks in the euro area are already in the fear of significant losses. Contagion of the sovereign debt crisis to large economies would possibly trigger a worldwide credit crunch and financial market crash. Such a financial meltdown would lead to a deep recession, not only in those economies under sovereign debt distress, but also in all other major economies. This would increase the rate of unemployment, which will further depress the already much-shaken confidence among businesses and households. This again increases the chance for a recession throughout the world.


Overcoming the risks and reinvigorating the global recovery in a balanced and sustainable manner pose enormous policy challenges. Thus many developed countries are now facing difficult policy dilemmas. Because of this developing countries find themselves in a different bind as they are facing different dilemmas. Developing economies need to protect themselves against volatile commodity prices and external financing conditions. They also need to step up investment required to sustain higher growth and help their economies to grow towards more sustainable production and faster poverty reduction. There is a need to redesigning macroeconomic policies for job growth and sustainable development. It is also necessary to address international financial market, commodity price and exchange-rate volatility. More development financing is needed to support the achievement of sustainable development goals.