Maralit, Nhilriza B.

A traditional economic system is one in which each new generation retains the economic position of its
parents and grandparents. Traditional economies rely on the historic success of social customs. South
America, Asia and Africa support some traditional economies of thriving agricultural villages. Tradition decides
what an individual does for his living, so industry, clothing and shelter are the same as in previous generations.
Market economies are based on consumers and their buying decisions rather than under government control.
Market trends and product popularity generate what businesses produce. The producers choose how to make
products based on the most economically sound decision: that might mean machine labor to save costs or
human labor for specific skills. The buyers decide who gets which products by what they are willing to pay for
what they want. Complete market economies do not utilize price controls or subsidies and prefer less
regulation of industry and production. Market decisions rely on supply and demand for pricing. Government’s
role is to create a stable economy for the market to operate properly. The market system relies on many
factors to ensure its success. The profit motive or incentive for a financial reward for enterprise stimulates
production. Information regarding available products and services needs to be available to producers and
consumers. Producers use the information to set accurate prices and procure supplies at the lowest cost. Price
relates directly to the costs and benefits of product creation and use and required profit.
In a command economy, the government controls all economic activity. One example of a command economy
is communism. In a government-directed economy, the market plays little to no role in production decisions.
Command economies are less flexible than market economies and react slower to changes in consumer
purchasing patterns and fluctuations in supply and demand.
A mixed economy combines qualities of market and command systems into one. In many countries where
neither the government nor the business entities can maintain the economy alone, both sectors are integral to
economic success. Certain resources are allocated through the market and others through the state.
Theoretically, this system should be able to combine the best policies of both systems, but in practice the
proportion government controls and response to market forces varies. Some countries rely more on market
emphasis and others on state planning.
What is 'Econometrics'
Econometrics is the application of statistical and mathematical theories in economics for the purpose of
testing hypotheses and forecasting future trends. It takes economic models, tests them through statistical
trials and then compare and contrast the results against real-life examples. Econometrics can therefore be
subdivided into two major categories: theoretical and applied. Econometrics uses a combination of economic
theory, math and statistical inferences to quantify and analyze economic theories by leveraging tools such as
frequency distributions, probability and probability distributions, statistical inference, simple and multiple
regression analysis, simultaneous equations models and time series methods.
An example of a real-life application of econometrics would be to study the income effect. An economist may
hypothesize that as a person increases his income, his spending will also increase. The hypothesis can be
tested and proven using econometric tools like frequency distributions or multiple regression analysis.
Econometrics was pioneered by Lawrence Klein, Ragnar Frisch and Simon Kuznets. All three won the Nobel
Prize in economics for their contributions