Centrally Planned Economy Flashcards, test questions and answers

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What is Centrally Planned Economy?

A centrally planned economy is an economic system in which the government makes all decisions regarding production, allocation of resources and pricing of goods. This type of economic system has been used by many countries throughout history, although it is not as common today as free market systems.The primary benefit of a centrally planned economy is that the government can control prices, wages and production levels to promote social goals such as full employment or a guaranteed minimum standard of living. This allows for greater income equality than in a free-market where incomes are largely determined by an individual’s abilities and luck. In addition, centrally planned economies often result in more efficient use of resources since fewer decisions need to be made on an individual basis about what products should be produced or how resources should be allocated. However, this type of system also has some major drawbacks associated with it. One issue is that without competition from other producers there is no incentive to innovate or improve quality in order to gain better profits through higher sales volumes. Without competition and incentives, producers have little motivation to produce high-quality products unless they are mandated by the government or they face penalties if they do not comply with certain standards. Additionally, decision making under central planning tends to be slow and inefficient due to bureaucratic procedures required for approval before changes can take effect resulting in slower rates of growth and development compared with free-market systems where decisions about investment can be made quickly based on supply and demand principles rather than political considerations. In conclusion, while a centrally planned economy may offer benefits related to price stability and greater income equality compared with free market systems these advantages must always be weighed against potential downsides such as slower growth rates due to inefficient decision making processes which could lead ultimately lead any country down the road towards stagnation instead of progress.