We often hear terms that refer to different economic types and models without having any idea what these terms mean. This report will explain to you a group of the most important economic terms.
In a report published by the Spanish magazine “Sichologia e Minti”, the writer Luis Hernandez provides simple definitions of the most prominent types of economic models, and provides an overview of the criteria adopted in classifying each model.
Classification by market system
If we proceed in the analysis of economic models from the concept of ownership, market and economic power, we can distinguish between 3 types.
free market
The free market or capitalism is an economic doctrine prevalent in most Western countries, and is characterized by the application of private ownership to all goods and a large part of the available resources. In this system, the market is organized according to the supply and demand for any commodity in a specified period.
The United States is the most prominent example of this economic model, and the first defender of capitalism and the free market.
socialism
Socialism is a restrictive economic system in which the state is responsible for interfering in the market to ensure the provision of basic goods and services.
The most radical version of the socialist model is communism or Marxism, in which the state not only intervenes to regulate the economy, but also controls all means of production.
In Western countries, we find some applications of socialism within the dominant capitalist model, where the state does not interfere with private property.
mixed model
The third type is the mixed model, which is based on maintaining the free market, but according to the rules imposed by the state, where it is responsible for setting those rules, not the market itself. This model is also known as Keynesian economics.
The United States is the primary defender of capitalism and the free market (Shutterstock)traditional economy
Within this model, economic actors organize their activities and transactions through patterns determined by customs, norms, and beliefs, a model that prevailed in the West before the emergence of modern states and societies.
This simple model can respond to less complex economic problems, but it produces limited benefits, and does not provide opportunities to reinvest money to improve the production system. Currently, we find this model in the poorest countries, which often need assistance from the more prosperous countries.
Classification by scope
There is another way to classify the types of economy, and it is known as classification by scope. Within this classification, we find two sub-types, namely:
Microeconomics
Microeconomics provides models that explain the behavior of firms, consumers, employees, and investors, and studies the relationships among these parties.
When doing economic analyzes within this model, we get data about goods and their prices within the market.
total economy
Macroeconomics is that which studies the behavior of economic agents on a large scale, i.e. analyzes the most complex economic relationships, checking data, statistics, goods produced and price patterns in markets and production resources.
Sort by rating
Another way to classify different types of economy is to evaluate different economic data.
Positive economy
Positive economics is the one that evaluates various economic data in an objective manner without making any judgments, that is, presenting numbers and statistics in a neutral manner without addressing whether they are positive or negative indicators.
For example, a country’s gross domestic product is shown, without assessing whether that number is good or bad.
This applies to unemployment rates, interest rates, the volume of investments, and any other economic data or indicators.
This model is used to prepare reports that predict future developments based on currently available data.
Microeconomics provides models that explain the behavior of companies, consumers, employees and investors (Reuters)Normative economics
In contrast to the previous model, this model is based on making judgments about economic data, and thus it is possible to talk about low or high GDP, alarming unemployment rates, insufficient investment volume, acceptable interest rates or vice versa.
In contrast to positive economics, normative economics attempts to present a picture of the economic situation as it should be, not as it really is, and objective opinions overlap with personal assessments, which opens the way for political bidding, so there is disagreement among experts about numbers and data.
Classification according to academic terms
Other classifications of economics relate to the academic terminology used to define some economic models.
“Orthodox economics”
Orthodox economics perfectly matches the traditional model, a term widely used in academia.
This model is based on the criteria of rationality, individuality and balance, and assumes that economics is a precise science, and works to explain the behavior of the parties to the economic process from a rational perspective and to develop models that allow foreseeing future developments in the markets.
Heterodox economics
This model is based on the analysis of the relationship between institutions, history and the social structure of the market, and it assumes – unlike orthodox economics – that the parties to the economic process may sometimes act in ways that cannot be expected, and therefore no reliable predictive models can be developed.
Classification according to theory and practice
This classification depends on the type of models used in the analysis, and there are two models:
theoretical economics
Theoretical economics is based on the establishment of various models that can – in theory – explain the behavior of economic actors and markets.
experimental economics
Experimental economics is based on testing theoretical models on the ground to verify their effectiveness. Logically, this model is limited because experimentation in real environments and in a field such as economics involves several risks.
