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Basic Economic Questions

Every economic system must answer three key questions. The way in which each country answers these economic questions is affected by the government. These three questions are:

  • What will be produced?

  • How will products be produced?

  • How will products be allocated?

Traditional Economic Systems

Traditional economic systems, sometimes called subsistence systems, are based on traditions passed down through the generations. Members of a traditional economic system don’t make many economic decisions. When they make an economic decision, it is based on habits, customs, and beliefs. People produce the same things that their ancestors produced using the same methods of production. Everything that they produce is consumed by the community, with no thought of incomes, prices, or markets. The major disadvantage of traditional economic systems is that there is little opportunity for growth or improvement. Examples of traditional economic systems include rural areas in Africa and villages in the Amazon Rainforest.

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