Centrally Planned Economy

A centrally planned economy is an economic system in which the government controls the production and distribution of goods and services. In this type of economic system, government favors the elimination of private property and promotes a common or collective ownership ideology.

It is also known as a command economy, exhibiting strong government interventions and making people follow a planned economy. It follows the principles of socialism and communism and portrays an economic system opposite in nature when compared to other economic systems like capitalism or market economy.

• A centrally planned economy is an economic system where the government controls the factors of production. The government centrally plans, implements and controls economic activities.
• Such a system exists to attain social development and harmony in society.
• It is associated with socialism and communism. Examples of countries following a command economic system are Cuba, North Korea, Belarus, China, Iran, and Russia.
• Some of the advantages are the equal distribution of wealth, reduced inequality, low level of unemployment, and maximized social welfare. Disadvantages include lack of freedom, competition, innovation, and incentives to work hard.

A centrally planned economy is an economic system in which the government plays a prominent role in planning, implementing, and controlling economic activities. It involves designing the economic policies focussing on maximizing the role of government in the economy and gaining significant control over the factors of production. Furthermore, the government decides what to produce, when to produce, and how to produce, which leaves the private entities with minimum options to choose from.

Under this system, the government formulate the central plan to utilize the resources effectively and allocates resources based on the plan. The government gives importance to supplying the necessary goods to the public satisfactorily. Furthermore, government intervention and policies restrict the market forces like supply and demand from influencing the production, distribution, and pricing of goods and services.

The system exists to achieve the overall growth and development of the society under the supervision of one entity: the government. If the economic system follows pure communism principles, everything will be owned by the government, may not let new businesses grow, and entities are not incentivized to improve or innovate. However, in some scenarios, the forced rule and regulation reflect the elements of dictatorship opposing a democratic and flexible environment in the nation.

The countries following such a system are less in the modern world because nations are more into a capitalistic or mixed economy like the United States, where new ideas and entrepreneurship are promoted, and competition leads to innovations. Even countries that were planned economies are trying to change their economic system to take advantage of globalization and industrialization.

Following are some of the significant characteristics exhibited:

• Favor collective ownership and disfavor private ownership
• The government controls factors of production
• The government controls pricing, production, and distribution
• Work towards achieving a classless society

China is one of the best centrally planned economy examples. The Communist party controls the government, police, and military in China. Party control significant bodies like the State Council, the Central Military Commission, and the National People's Congress or parliament. The government controls most of the resources, banks, and key industries. The government has a firm grip on the country's media and the internet. However, due to globalization, increased trade opportunities, and rising competition, signs of capitalism and the associated mixed economy is observable in China's economic system.

Let's look into some of the advantages and disadvantages:

Advantages:

• Ensures equal distribution of wealth
• Reduces inequality and social division in the society
• Low level of unemployment
• Allocation of resources to maximize social welfare
• Eliminate monopolies

Disadvantages:

• Lack of competition and associated efficiency
• Lack of freedom
• Lack of innovation
• Lack of incentive for hard work
• Increased chance of corruption

This has been a Guide to What is centrally planned economy and its definition. We explain its characteristics, examples, advantages, and disadvantages. You can learn more about accounting from the articles below –

• Traditional Economy
• Developing Economy
• Knowledge Economy