10/10/2025

Why my most countries choose a mixed economic system:

The aim is to try and take advantage of a free marker system and blend it with the benefits of a centrally planned economic system.

Benefits of a free market economic system:

  • high levels of productive and allocative efficiency leading to high economic growth. Resource allocation and prices are allocated according to Supply and Demand.

Benefits of centrally planned economic systems:

  • avoid inequality by re-distributing income and wealth using taxes and government spending

  • Prevent under-comsumption/over consumption of merit goods and de-merit goods. Provides public goods. Resource allocation and prices are determined by the government

What is an Open Economy?

Any economy which allows free trade between other economies. This means there are few protectionist barriers such as ‘Tarriffs’ and ‘Quotas’. You can have an open economy if you are a centrally planned economic system.

In reality, most centrally planned economies tend to be closed economies. This is usually to guard against the idea that ‘free market economies’ produce better quality goods and services (allocative efficiency) and much lower price (productive efficiency). It normally threatens a totalitarian regime.

Monetary Policy

The manipulation of interest rates and the money supply to meet a desired government macroeconomic objective.

If inflation is falling below target, lower the base rate of interest and increase the money supply.

Fiscal Policy

This is the manipulation of tax and government spending to meet a desired macroeconomic objective.

Raising taxes and cut government spent spending, reducing the PSBR (Public Sector borrowing Requirement)

Inflation

This is the rate at which average prices rise in an economy over time.

In the UK, this is measured by the Consumer Prices index (CPI). The UK Bank of England has a target of 2.0% CPI inflation - hence ‘Inflation targeting’

It is currently above this target at 3.8% (August 2025)

Balance of Payments

This is the measure of the transactions between the uK and the rest of the world.

There are two components (according to the CISI):

  • the current account

  • The capital account

Current Account:

This measures the value of the trade in goods and services between the UK and the rest of the World.

It is normally divided into two parts:

  • visible trade

    • This measures the VALUE of the trade in goods only between the UK and rest of the world

  • Invisible trade

    • This measures the VALUE of the trade in services only between the UK and the rest of the world

Capital Account:

This measures the VALUE of financial transactions between the UK and the rest of the world.