People usually produce goods and services that offer them comparative advantage. After this only they trade these goods and services with others. With a proper trade people can earn huge profits. This is absolutely why a perfect coordination is required.
This is exactly what though most of the people lacks. Thus two economic coordination systems are followed. One is quite effective while the other is not so much.
The two are namely:
- Central economic planning and
- Decentralized coordination.
Central economic planning:
This existed in China and Russia. Also, it is still practice in Cuba and North Korea. This system is not at all successful. A lot of resources end up wasted. The government fails to analyse the people’s production preferences. Neither can they guess the production possibilities. This is absolutely why this system is the best avoided.
This system works the best of course. Four important institutions are though in requirement for doing so. The following four are absolutely necessary:
- The Firms,
- The Markets,
- The Property Rights, and
- The Money.
A link exists in all of these of course.