Learning about the economy helps residents to understand how it affects their lives and how to make better decisions accordingly. They can better understand tax policies, interest rates, inflation, wealth, etc. There are different types of economies, among which a centrally planned economy is criticised greatly. Do you live in this economy? If you can’t tell, we are here with a detailed blog on centrally planned economies. So, stay tuned with us till the end.
What Is A Centrally Planned Economy?
A centrally planned economy, also known as a command economy, is an economic system in which a government handles decisions related to producing and distributing goods. State-owned enterprises often produce goods, though independent companies are also involved in this process in rare cases. This economy is common in countries with Marxist-Leninist governments, such as the Soviet Union, North Korea, and East Germany.
Advantages Of Centrally Planned Economy
A centrally planned economy has few benefits; however, a few regions have shown that it quite effective. Following are the points that will help you understand the benefits of these economies
- When the government controls the production of goods, it can direct efforts toward a specific goal. Russia efficiently transformed from an agrarian state to an industrial powerhouse in the early 20th century.
- Cuba is fully taking advantage of its commanded economy. The government emphasises the healthcare sector, and as a result, Cuba has one of the best healthcare systems in the world.
- Economic activities can be directed to minimise the harm caused by certain affairs, and schemes that have a positive impact on the nation can be promoted.
Disadvantages Of Centrally Planned Economy
Though the advantages sound good, the disadvantages of a centrally planned economy are far more severe. These are also the reasons why command economies fail most of the time.
- The government fails to detect consumer preferences and shift production when needed in this economy. This leads to an inefficient distribution of goods, also called the local knowledge problem.
- These economies discontinue incentive programs to maximise their benefits from the economy. Thus, people and firms don’t like competing for market share, and innovation is suppressed.
Centrally Planned Economy Countries
In the section below, we have listed a few centrally planned economy countries. Check them out now!
North Korea: Officially known as the People’s Republic of Korea, North Korea has commanded economy and adopted it in 1954
Cuba: Cuba has an economy that is centrally planned since the 1959 revolution when it became a socialist state.
China: China established a command economy after 1949, with the Chinese Communist Party (CCP) implementing the model.
Laos: Laos established this economic model in 1975 after the Lao People’s Revolutionary Party (LPRP) overthrew the monarchy and declared the Lao People’s Democratic Republic.
Former Soviet Union: It started practising central planning in 1918 but fully implemented the model in the 1930s.
Eastern European Countries: Most Eastern European countries are centrally planned economies adopting the model after World War II.
Several countries follow planned economies. Some of them have experienced benefits while disadvantages struck some. Most of the time, planned economies are criticised and can even end up in a doom loop. So, it’s better to move towards a mixed economy when a country is in decline due to the centrally planned economy model.
FAQs
1- What is the difference between the market economy and planned economy?
The main difference between the market economy and planned economy is how economic decisions are made. A government body controls the production of goods in the planned economy, while in the market economy, it’s determined by consumers’ demand.
2- What do you mean by PPC in economics?
In economics, PPC stands for Production, Possibilities, and Curve, a graphical model representing different combinations of two goods that can be produced.
3- Who introduced the planned economy?
Sir M. Visvesvaraya introduced the planned economy in 1934 and is called the father of economic planning in the country.
4- What are the 4 types of economies?
Four types of economies are traditional, command, mixed, and market economy.
5- Which is better, between the market economy and planned economy?
The market economy is considered better and more productive than a centrally planned economy.
