Module 2 unit 2

Unit 2: Planned Economy

Definition and Characteristics

• A planned economy is characterized by the government owning most resources, including:

  • Factors of production: The government controls all resources and sets output targets for various sectors.

  • Resource Allocation: The government determines and allocates the necessary resources to meet these targets.

  • Income Distribution: Income levels tend to be similar across the population.

Purpose and Structure

• The primary aim of a planned economy is to ensure that everyone lives comfortably.

• In this system:

  • Factors of production are utilized to achieve the government’s economic objectives.

  • Centralized planners hold the power to control production factors and decide which goods and services are necessary.

Types of Planned Economies

Synonyms

• Planned economy is often referred to as:

  • Command economy

  • Communist economy

Examples

• Countries that exemplify planned economies include:

  • Cuba

  • North Korea

  • Saudi Arabia

  • Belarus

  • Myanmar (Burma)

Economic Decision Making

• An economic system in a planned economy makes crucial decisions regarding:

  • What is produced

  • How it is produced

  • How products are distributed

• The government plays a central role in making major economic decisions, idealized as better positioned to meet citizens’ needs due to access to comprehensive information.

Governance and Control

Stability and Control

• A planned economy provides:

  • Stability: Control over all resources and production factors can offer stability.

  • Risks: However, excessive control can also hinder economic growth and development if not managed correctly.

Production Planning

• For effective resource allocation, the government must:

  • Conduct surveys to understand human needs and consumer wants.

  • Control all production factors and systems of distribution.

  • Regulate imports and exports, managing trade overseas.

Advantages and Disadvantages of a Planned Economy

Advantages

• No Unemployment: Full employment is maintained.

• Stability: The economy experiences stability, with no business cycles or unemployment.

• Equal Wealth Distribution: Resources are shared among the population, aiming for equality.

• Universal Services: Services are available to all citizens.

Disadvantages

• Limited Freedom of Choice: Individuals have little to no consumer choice.

• Profit Inhibition: There is no profit incentive driving the economy.

• Government Ownership: The government owns all economic resources.

• Declining Productivity: Lack of competition can lead to reduced productivity.

• Restricted Career Options: Employment opportunities are limited.

• Potential Growth Stagnation: If not carefully managed, government control can stunt economic growth.