Chapter 2.1, Problem 5R

To determine

To discuss: The four of the economic system that doesn’t follow the circular flow of income.

Explanation of Solution

The four types of economic systems are:

1. Traditional system: It is the system that works on the beliefs and customs that has been passed on by the generation.
2. Command system: It is a system wherein government controls the factors of production and makes decision regarding their use.
3. Capitalist system: It is system individuals own the factors of production and make decisions freely in their own interests.
4. Mixed economy: It is an economy that have factors of more than one type of economy.

Circular flow of income shows that:

1. Business pay for resources to individuals while individuals provide services to the businesses.
2. Businesses sells goods and services to individuals while individuals pay for the goods and services purchased.
3. When government is involved then individual and businesses pay taxes to the government while government provide certain benefits to them.

Now, traditional system follows the old beliefs and customs. The factors of production also remain as followed by older generations. Therefore, traditional system doesn’t follow the circular flow of income.