Because economic resources are limited, a country must answer three key economic questions. These are: 1) What goods and services should be produced? 2) How should these goods and services be produced? 3) Who consumes these goods and services?
In answering these questions, societies must consider their economic goals. Some goals, such as economic freedom or economic equity, are considered more important in some countries than in others. Other goals, like economic efficiency, are shared by most countries. Another important goal is growth and innovation. A nation’s economy must grow in order to improve its standard of living, or level of prosperity.
Four types of economic systems have developed as societies attempt to answer the three economic questions according to their goals. An economic system is the method a society uses to produce and distribute goods and services. A traditional economy relies on custom to make most economic decisions. People grow up doing what their parents did, and there is little innovation or change. In a market economy, economic decisions are made by individuals and are based on exchange, or trade. Market economies are also known as the free market. In a centrally planned economy, the government makes most economic decisions. Most economies today are mixed economies, a combination of the three other economic systems.
