Business, Legal & Accounting Glossary
A system of allocating resources based only on the interaction of market forces, such as supply and demand. A true market economy is free of governmental influence, collusion and other external interference.
A market economy (also known as a free market economy or free economy) is an arrangement of resource allocation that is founded solely on the interplay of market forces like demand and supply.
Based on the principles and mechanisms of a market economy several models were developed to understand and analyze the economic system. There is no intervention of any superior power, including the government, in the activities of any economic market. A market economy is judged by certain criteria. Any economic structure can be regarded as a market economy by judging certain features like convertibility of domestic currencies to foreign currencies, wages in foreign country terms, enablement of joint ventures and investment, and government control and ownerships.
In a market economy, the government plays a very nominal role in driving the economy. Government interventions like subsidies of industries, license quotas and fixing of commodity prices are minimal.
The generally accepted roles for a government in a market economy involve:
This is in contrast with a centrally planned or Command economy, where decisions made by the government have a major influence on a country’s economic activities. In a centrally planned economy, the government (or its agents) will decide for the entire country how much money will be invested in, for example, producing shoes. The government will also set the prices of those shoes, decide how many people will be employed in making shoes, and so forth.
Even mixed economies, like the US, employ subsidies and other government-led regulations that are not attributes of a market economy.
Bailouts like those in the 2008 financial crisis of the US cannot happen in a market economy.
A market economy is in contrast to one which follows Keynesian principles, which endorse government intervention and more extensive regulation.
A market economy gains vibrancy from private enterprises who invest in developing facilities to provide products and services in response to consumer demand. The markets are free to operate based on the fundamentals of a division of labour, and prices are determined by the forces of demand and supply. These are in line with traditional concepts of capitalism.
Market economies have distinctive features. They are decentralized, supple, realistic, and unpredictable in nature. They are not managed by a central actor such as a government ministry. The economist Adam Smith described market forces as the “invisible hand” that guides a market economy. According to Smith this “invisible hand” is responsible for the production of goods and services, and their pricing, in a market economy.
Though a market economy is said to be practical, the elementary theory of individual freedom also plays a major role. In a market economy, a consumer enjoys the privilege of choosing among competitive products and services. A producer has the freedom to expand or start a business on the condition that the rewards and risks both are borne by him, or shared with investors. A worker can choose a job according to his choice; can join any union or organization as permitted by law or change employer according to his choice.
An open economy is largely free from trade restrictions. Import and export activities form a major contribution to the nation’s GDP. A country’s economy can rarely be free from trade barriers. Governments of all countries exert a minimum of control over labour and capital. A country following open economic practices is more sensitive to global economic cycles.
An emerging market economy is a specific country’s economy that is in an early or developmental stage but is growing rapidly. This type of economy is characterized by the presence of liquidity in local equity and debt markets. A regulatory body and market exchange mechanism are usually present. Countries with emerging market economies experience faster economic growth compared to their developed country counterparts. Investors with a greater risk appetite tend to prefer investing in emerging economies. These countries generally have domestic infrastructure problems and currency volatility. The problem of limited-equity opportunities may also be present
An economic notion that a country’s economic arrangement should be guided by free-market forces, and not by the intervention of government, at its most extreme is called a laissez-faire economy.
A benefit gave by a specific country’s government to individuals or groups that generally takes the form of tax reduction or cash payment. Subsidies are usually considered in the public interest and granted to negate some economic burden. The list of subsidies includes farm subsidies, housing loans and welfare payments. Examples can be cited in the form of farming activities that are subsidized in order to enable farmers to compete in a globalized market.
Subsidies are a form of government intervention and therefore go against the principle of a market economy.
In a true market economy, supply and demand are the driving forces for all goods and services available to everyone.
You should always try to follow all of the comings and goings in the market economy to be kept up to speed.
Our market economy strategy had to work and we knew it because we knew what we were doing and had a lot of data on it.
free market economy
free economy
integrated financial market
traditional economy
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This glossary post was last updated: 6th November, 2021 | 0 Views.