Top 5 Differences between a Capitalist and a Socialist Economy

What is the meaning of a Capitalist Economy?

A Capitalist Economy is an economic system in which private entities control the factors of production. These factors of production include capital goods, natural resources, labour etc. The production and consumption of goods and services in this economy is dependent on demand and supply. These market forces dictate the Capitalist form of economy. The main motive of production in this economy is to earn a profit. There is also a considerable lack of participation of the government in a Capitalist Economy. Since there are multiple businesses in each sector/industry, there is stiff competition between them in the economic system.

What is the meaning of a Socialist Economy?

In a Socialist Economy, the government is the primary entity and it decides on the products and services manufactured in line with society’s requirements. They also have complete control over the factors of production. The main motive for producing goods and services in this economy is social welfare and not profit, and thus the needs and wants of an individual buyer is not essential. In this type of economy, the prices of commodities are under the control of the government. Since the government controls every sector/industry, there is zero competition in this economic system.

Main Differences between a Capitalist and a Socialist Economy

The main differences between a Capitalist and a Socialist Economy are as follows:

Capitalist Economy

Socialist Economy

Definition

A Capitalist Economy is a system where private entities control the factors of production like labour, natural resources or capital goods.

A Socialist Economy is an economic system where the factors of production like labour, natural resources or capital goods are under the control of the government.

Determination of Price

In a Capitalist Economy, the demand and supply forces influence the price of goods and services.

In a Socialist Economy, the price of goods and services is under the government’s supervision and control.

Motive of Production

The main motive of the production of goods and services in a Capitalist Economy is to earn profit.

The main motive of producing goods and services in a Socialist Economy is the welfare of the general public.

Role of Government

There is minimal or no role of the government in a Capitalist Economy when it comes to the production and distribution of goods and services.

In a Socialist Economy, the government has complete control over the production and distribution of goods and services.

Role of Private Sector

The private sector completely dominates the production of goods and services and the distribution within a Capitalist Economy.

The private sector has no role in the production of goods and services and the distribution within a Socialist Economy.

Competition

Competition between multiple businesses is an integral part of a Capitalist Economy.

In a Socialist Economy, there is no competitor to the government.

Distribution of Income

The distribution of income is unequal in a Capitalist Economy.

The distribution of income is more or less equal in a Socialist Economy.

Conclusion

There are several differences between a Capitalist and a Socialist economic system and both of them function at variance with each other. However, both these systems have their own merits and demerits and it is up to an individual country to choose between them.

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