Definition
A command economy is a system where the government, rather than the free market, determines what goods should be produced, how much should be produced, and the price at which the goods are offered for sale. It also decides investments and incomes. This system is often associated with socialism and communism.
Key Takeaways
- In a command economy, a central governmental authority dictates the production, distribution, and consumption of goods and services. This central authority plans and controls all economic-related activities to meet the state’s objectives.
- A command economy restricts individual freedom since the government makes all decisions regarding businesses and the workforce. This system often leads to a lack of competition, innovation, and efficiency in industries.
- While a command economy may lead to stability and a focus on societal goals, it often struggles with resource allocation and quality of goods and services due to the absence of market forces. It can also end up in economic imbalances like surpluses and shortages.
Importance
Command Economy is an important finance term because it refers to an economic model in which the government has primary control over what is produced, how it is produced, and how it is distributed.
This structure is critical in understanding the allocation of resources and the direction of economic activities in countries where the state exercises significant control over the economy.
This type of economy is key in comprehending government intervention economic models, where decisions are centralized rather than determined by the market forces of supply and demand.
Its understanding is crucial in assessing the pros and cons of different economic systems and their impact on societal development and individual welfare.
Explanation
The primary purpose of a Command Economy, also known as a planned economy, is to create absolute economic equality among the populace. This system operates on the principle that the government, instead of market forces, determines what is produced, how it’s produced, and who gets the resulting goods and services. As a significant central authority, the government attempts to eliminate economic disparities and achieve a balanced distribution of wealth amongst the populace.
It makes essential decisions regarding the allocation of resources, production goals, and pricing to fulfill the societal and collective needs and to ensure that everyone’s basic needs are met. Command Economies are used for various purposes, mainly to stabilize the economy, encourage economic growth, and ensure equitable distribution of wealth. In times of economic instability, a strong central authority can provide order and direction.
Through comprehensive planning, the government can spur economic growth by focusing resources on certain sectors or industries. Moreover, by managing production and prices, the government seeks to ensure that even the most vulnerable citizens have access to necessary resources. However, it should be noted that in practice, the effectiveness of these economies can be limited by the difficulty of managing all parts of the economy.
Examples of Command Economy
North Korea: The North Korean economy is one of the most well-known examples of a command economy. The government makes all decisions pertaining to the economy, including what goods will be produced, how they will be produced, and the allocation of resources. It decides on everything from what the farmers will plant and harvest to what the factory workers will produce.
Cuba: The Cuban economy has been a command economy since Fidel Castro’s revolution in
The State controls and directs the majority of the country’s economic activity through state-run enterprises, controlling wages, setting prices, and creating economic plans.
Soviet Union (1928-1991): The former Soviet Union operated a centrally planned economy. The government controlled all production and distribution of goods and services. The central planning committee determined what would be produced, in what quantity, and the prices at which items would be sold. While this ended with the fall of the USSR, it remains one of the most well-known examples.
FAQs about Command Economy
What is a Command Economy?
A command economy is a system where the government, rather than the free market, determines what goods should be produced, how much should be produced, and the price at which the goods are offered for sale.
What are the key features of a Command Economy?
The key features of a command economy include the government making all economic decisions, centralized planning, and the absence of competition.
What is the role of government in a Command Economy?
In a command economy, the government controls all aspects of economic activity. This includes planning, production, distribution, and pricing of all goods and services.
What are the pros and cons of a Command Economy?
The pros of a command economy include efficient resource allocation, social welfare, and stability. The cons include lack of competition, lack of economic freedom, and inefficient resource distribution.
Can you give examples of a Command Economy?
North Korea and Cuba are often cited as current examples of command economies. Historically, Soviet Union was one of the most notable examples of a command economy.
Related Entrepreneurship Terms
- Central Planning Authority
- Public Ownership
- Economic Equality
- Five-Year Plans
- Resource Allocation
Sources for More Information
- Investopedia – A comprehensive source for financial education that contains an extensive dictionary of financial and investment terms.
- Britannica – An online encyclopedia that provides reliable information on a wide variety of topics including economics.
- Economics Help – A dedicated site for economics information providing articles on economic theories, terms, and principles.
- Corporate Finance Institute – An educational platform offering courses and articles related to finance, accounting, and economics topics.
