A modern economic system is a highly complex set up. A wide variety of activities covering consumption, saving, investment, production, research and development, transportation, storage, trading, marketing and so on, have become its integral parts.
It contains a variety of institutions, markets and other arrangements. It is characterised by an intricate mechanism by which product prices and factor prices are determined and revised and in which income and wealth are distributed between members of society.
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A well developed and integrated financial system has also become an essential ingredient of a modern economy. Over and above these physical and financial facilities, it is also characterised by a mechanism which guides its economic decisions and activities. Such a guiding mechanism is usually a mixture of market forces and government regulation.
Lack of Uniformity—Outcome of Several Causal Forces:
Since every society creates its own economic system, there is no reason to expect them to have a standard or a uniform structure, or the same levels of development and efficiency. This is because the evolution and form of an economic system are the result of an infraction between several causal forces.
Each society tries to mould its economic system in line with its own needs and other considerations. It takes into account its historical background as also its social and political institutions, philosophy and work culture.
A host of other relevant influencing factors include the country’s climate, topography and geographical features has also its economic and political relations with other country. It is obvious that the course and pattern of evolution of one economic system is bound to differ from the corresponding experience of other economic systems.
Economic Dynamism:
Economic systems respond to a variety of both short term and long term forces which not only cause fluctuation in their macro variables [like levels of output, employment and income], but also cause a shift in their resource allocation between different employments.
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Evolution and working of modern economies are intricately interwoven with their monetary, financial and fiscal systems, as also with their market and institutional set ups, etc.
They keep experiencing continuous inter-sectoral and intra-sectoral changes. And their rates of growth in population, urbanisation, saving, capital formation, technology, and so on, remains uneven and different from each other.
Interaction between Economies:
There is an on going and complex interaction between the structure, policies and activities of the open economies of the world. This phenomenon makes the subject of international economics a complex and multifaceted one.
Closed versus Open Economy:
In an extreme situation of economic isolation the country in question [the “Home Country”] has no economic transactions with rest of the world and is termed a closed economy.
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It neither exports anything to, nor imports anything from, the rest of the world. Factually, such a state of affairs is not expected to be applicable to any country in today’s world.
However, the extent or degree of integration with the rest of the world would vary from one country to the other. In other words, while a country may have no economic transactions with some countries, it would have varying extent of economic transactions with the rest of the world.
Indicators of Economic Integration:
It should also be noted that several alternative indicators are available for measuring the degree of integration of an economy with the rest of the world.
One such indicator is the proportion of its income from abroad in its GDP. Alternatively, we may use the ratios of its external trade and capital flows to its GDP.
However, irrespective of the way in which the extent of economic integration between countries is measured, the conclusion remains that it has increased in the long run with a corresponding increase in their interdependence.
This is because, by its very nature, a modern economy is so complex and its GDP represents such a vast variety of goods and services, that it cannot produce all of them within its political boundaries. Added to this is the fact that different countries do not have identical factor endowments.
Consequently, a modern economy is not able to produce everything it needs at least not at a cost and price which can always effectively compete with imports. Consequently, every country has to import at least some final products and/or inputs.
For example, mineral reserves are located in the world in such a manner that some countries have a surplus of some minerals while others can meet their need only by importing them.
Another example is Business Process Outsourcing (BPO) call centres in India and other Asian countries are just one instance.