Economic systems determine how societies and governments allocate and distribute resources. The government plans on how to allocate and distribute resources in centrally planned economy. Private entities allocate and distribute resources albeit with minimal government intervention in mixed economies.
Centrally planned economy refers to a system controlled by a central power. In this system, the government is the central power in formulating economic plans. The resources allocated by the government align to the central plan formulated (Rosser and Marina 65). The plan also sets the priorities regarding production of goods and how resources are allocated. North Korea operates a centrally planned economic system.
Mixed economy refers to a system in which businesses and households determine how resources are allocated, as well as production and consumption of goods. The government occasionally intervenes to regulate private businesses in this system. In addition, there is personal freedom regarding production of goods (Ostrom 655). The private entities also own property. France operates a mixed economy.
Government influence in resource allocation and distribution is a similarity. However, the degree of government influence varies between centralized and mixed. In a mixed economic system, the government minimally intervenes to regulate the economy. In a centralized economy, the government fully regulates the economy through a central economic plan.
The centrally planned economy can provide adequate jobs to people if policies are executed correctly. The government also focuses on the common good rather than individual gains guaranteeing efficient utilization of resources (Ostrom 661). However, the central planners face a challenge in relation to provision of everyone’s essential needs. Moreover, there is limited innovation as people do not take unnecessary risks, thus pursue jobs fronted by the government.
The less government intervention allows businesses to run efficiently in mixed economies. The government also intervenes to correct market failure in an attempt to safeguard the welfare of consumers (Rosser and Marina 77). Nonetheless, mixed economies are criticized because state-run industries are noncompetitive and may run into debt as their services are subsidized by the government.
Economic systems have unique characteristics. While centralized planned economic systems have centralized authority formulating plans to define economic priorities, mixed economies are driven by profits and welfare fulfillment.
There are broad arrays of business organizations that a person can establish. The type of business established by a person depends on desired degree of control, liability, taxation and business transfer models.
Sole proprietorship is a form of business owned and operated by an individual, also serving as the owner. Local grocery shop is an example of sole proprietorship. Sole proprietorship form of businesses is preferred because all profits are enjoyed by the owner. Further, there is little regulation by the government implying that the owners have full flexibility regarding the running of the business. In addition, sole proprietorships require few legislative requirements and capital to start (Stout 85). However, the business owners are completely liable for the business risk and debts. Furthermore, the business equity is substantially limited to personal resources invested in the business.
Corporations are separate legal entity businesses. In essence, the profits generated by corporations are taxed as personal income and the rest of income distributed among shareholders in the form of dividends (Ciepley 143). General Motors is an example of a corporation. Corporations are preferred because they limit liabilities of shareholders with regards to debts and losses. The process of transferring ownership of a business to new owners is equally easy. Moreover, the personal assets of the shareholders cannot be seized if the business fails to honor its debt obligations. However, operating corporations is costly and complex. In addition, opening corporate entities is complex because extensive paperwork is required.
The partnership is a form of business owned by more than two people who jointly contribute resources to establish the business. Bloomberg is an example of a partnership business. In partnership business, all owners have unlimited liability meaning that creditors can seize personal assets to recover debts owed. Partnership businesses are preferred because owners pool resources to start a business and each partner shares the profits generated. Partnerships are also simple to operate and establish as the legal requirements are few (Ciepley 152). However, each partner is responsible for debts and losses apart from cases they jointly established a limited partnership business. Further, transferring the business is difficult and may end if any partner decides to quit.
Based on my opinion, a corporation is the best form of business. I prefer a corporation because the business ultimately becomes an entity separate from those who created it. Moreover, the shareholders and owners are not personally liable for debts and losses and, as such, personal property cannot be seized by creditors.
Forms of businesses vary in numerous ways. Corporations have a separate legal entity from the owners who also have limited liabilities. Sole proprietorships are owned and operated by the owner who equally bears the risks. Partnerships require more than two people to establish and the partners fully bear all risks encountered.
The stock market provides an avenue for people to invest their capital. The investment decisions are determined by the prevailing market conditions, and people invest using shares, bonds and mutual funds.
The stock market provides capital to companies through investments by people so that these entities can fund and expand their operations. Companies acquire capital by trading their shares instead of borrowing from creditors (Grinblatt et al. 2135). In this way, the companies avoid incurring debts and interests. The stock market also accords investors the opportunity to share profits of publicly traded companies. The investors receive profits from regular dividends paid by companies.
A bull market is a situation is which the economy is favorable for trading stock. During a bull market, the prices of stock are high prompting people to invest in the market (Cieslak 3273). A bull market is caused by a strong economy and surging employment rates across myriad sectors of the economy. Conversely, bear markets are situations occasioned by decline in share prices due to a falling economy.
Stock prices rise or decline due to market forces of demand and supply. In this case, if the investors desire to buy stock rather than sell, the prices surges. However, if the investors desire to sell their stock rather than buy, the prices fall due to an increase in demand.
Diversification is significant in investment decisions because it allows investors to minimize the risk of loss occasioned by business failure. Therein, an investor benefit from a business that performs better over a period, even if another business performs poorly. Diversification is a prudent way of preserving investment capital in the form of savings, especially for people approaching their retirement age.
Stocks are investments made in companies and, are more volatile than bonds. In this way, bonds are a more risky method of investment though returns are frequently greater. Bonds are loans advanced to a company or issued to a government (Cieslak 3280). At the end of maturity period, bond holders receive the principal amount advanced as a loan plus the interest it attracted. Mutual funds, on the other hand, are pool of money collected from diverse investors with the intention of investing in stocks and bonds.
Stock market plays are fundamental role in the economy. The investors can become part of publicly traded companies by trading on shares. However, share prices rise and fall in bull and bear markets respectively due to forces of demand and supply. Investors particularly diversify business investments through issuing bonds, trading in stock and mutual funds.
Ciepley, David. “Beyond Public and Private: Toward a Political Theory of the Corporation.” American Political Science Review, vol. 107, no. 1, 2013, pp. 139–158., doi:10.1017/S0003055412000536.
Cieslak, Anna. “Short-Rate Expectations and Unexpected Returns in Treasury Bonds”. The Review of Financial Studies, Vol. 31, Issue 9, 2018, 3265–3306.
Grinblatt, Mark, Matti, Keloharju and Juhani, Linnainmaa. “IQ and Stock Market Participation”. The Journal of American Finance Association, vol. 66, issue 6, 2011, 2121-2164.
Ostrom, Elinor. “Beyond Markets and States: Polycentric Governance of Complex Economic Systems”. American Economic Review, vol. 100, 2010, 641–672.
Rosser, John and Marina, Rosser. Comparative Economics in a Transforming World Economy. Cambridge, MIT Press, 2018. Print.
Stout, Lynn A. The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public. San Francisco, Berrett-Koehler, 2012.