Centrally planned economy is an economic system in which the government makes almost all the decisions of a country’s economic activities (“Definition of ‘Centrally Planned Economy’”, 2014). For instance, government takes control on what goods and services is produced and how the resources are disseminated. The purpose of centrally planned economy is to enhance the productivity and management by allowing the planners to take advantage of better information accomplished through a combination of economic resources while making decisions on the topic of investment and also the distributions of economic inputs (“Command economy”, 2014). On the other hand, a market economy is an economic system in which the consumers and businesses who take control on making the economic decisions of a country (“Definition of ‘Market Economy’”, 2014). For instance, consumers and businesses decide the price of goods and services and how much to supply. However, there is little government involvement. In the late 1980s, the decline of the centrally planned economies has downgraded the living standards of the people (“Economic reforms (transition to a market-based economy)”, 2014).
Hence, some of the centrally planned countries such as Poland, Hungary, and Yugoslavia intended to move towards a market economy because this is the only way to conquer the gap between these socialist economies and the western-like market economies (“Economic reforms (transition to a market-based economy)” , 2014). The transformation from a centrally planned economy to a market based economy has never been easy (“Command economy”, 2014). There is only one process of transition is considered as successful which is the People’s Republic of China (“Command economy”, 2014). On the other hand, the Soviet Union’s transition was much more challenging (“Command economy”, 2014). This is because of the creation of price ceilings which is under the soviet’s planning (“Command economy”, 2014).
This has caused the serious problem which is shortages (“Command economy”, 2014). A program of shock therapy has created which is to implement the transition process in a short period of time (“Command economy”, 2014). Hence, a big-scale privatization, budget cuts and liberalization of economy and finance policies. The fundamental economic problem is linked to the concern of scarcity (“The fundamental economic problem”, 2014). Scarcity happens when societies do not have enough resources to satisfy their unlimited needs and wants which is also call demand (“The fundamental economic problem”, 2014). Due to the limited resources and the unlimited demands, producers and consumers have to make a wise decision between competing alternatives (“The fundamental economic problem”, 2014). By making a wise economic decision, the alternatives must be sacrificed which also call the opportunity cost. This is because that they believe that the economic decision they made has a greater benefits than the opportunity cost (“The fundamental economic problem”, 2014).
Thus, firms and households are the components from the circular flow diagram play an important role to deal with the problem of scarcity. However, government may involve in the market and thus government must also need to know which way is the best to use taxpayer’s money in order to enhance the country’s development. According to the America’s first Nobel Prize winner for economics, Paul Samuelson said that in order to solve the problem of scarcity facing by all of the societies, three basic questions must be answered which are what to produce, how to produce and whom to produce (“Samuelson’s three questions”, n.d.). The economic system performs similar function despite the differences in each system. First and foremost, one of the functions stated by College of Agriculture & Life Sciences (n.d), the basic functions of the economic are to determine what and how much to produce. To produce goods and services, firms should analyse on what are the demands and the needs of the society and then produce goods that are highly values by the society.
Therefore, consumers are willing to pay more to satisfy their needs and wants, which also benefits firms where they are able to maximize their supply and also income. Firms also could produce a number of goods depending on the market size. Therefore, there won’t be wastage. Secondly is how are firms going to produce goods? The production of goods and services can be from different type of aspect. For example, firm uses labour production technology to produce their goods. It is because hiring labour from other countries like Bangladesh is cheap. Besides that is by using capital production technology. With the advance of technology, machines or robots are able to help in production by maximizing the use of resources and also maximize production with the resources available. Lastly is for whom the production of goods and services are for? Goods and services are normally produced for everybody as some firms may want to maximize their profits by targeting everybody. However, some firms may want to segment their products to certain segments only.
For instance, a firm which produces baby diapers only target for the baby segment. Some other firms also may target other segments according to race, culture and also age. By this, it will help to maintain the economy and also promote economic progress. Planned economies basically give the government autocracy type dominate over the resources of the nation (“planned economy”, 2014). They mitigate the need of private firms and permits the government to decide everything from allocation to pricing (“Economy system”, n.d.). Planned economies can offer stability, but also can restrict the progress and development of the nation if the government does not distribute resources to the innovative companies (“Economy system”, n.d.). The system rely on partial or total government control of the factors of production. All sources of production are owned and operated by the government (“Economy system”, n.d.).
Individuals are not allowed to possess whichever property. The government programs, arranges, and coordinates the entire production procedure in many industries. Lastly, the government, make the most economic resolution with those on top of the hierarchy (“Economy system”, n.d.). Market Based economy is a free market economy where economic decisions are made. In other words, the production of the goods and services are control by the laws of supply and demand (Amadeo, 2014). Private firms or individuals take control of the allocation resources. Firms sell their goods and services at the highest probable price to maximize profit which consumers are capable and ready to pay (Amadeo, 2014). In a market economy, most goods and services are own privately. These enable private firms and individuals to make decision and choices freely. Owners, consumers and workman are free to trade, purchase, generate resources in the free market (Amadeo, 2014).
According to the law of demand, when the demand of an item increases, the prices will eventually increase (Amadeo, 2014). Besides, the forces of supply and demand are free from the involvement of the government. The duty of the government in market based economy is to simply insure that the market is set up and processing (“market economy”, n.d.) The standard of economic development in centrally planned system is low. It has a bigger agricultural sector as proportion of total productivity, despite on low priority of agriculture in resource distribution. It also has a high standard of forced saving and development was a high priority of centralized distribution. Furthermore, the system has a smaller service sector. Socialist countries less diverse because of not specializing conform to comparative advantage. Prices are also more stable. They inclined to display greater stability after most of the post-war era (economy system, n.d.).
A centrally planned economy can lower unemployment rate, centralize resources on significant objective such as speedy economic growth and prevent wasteful reproduction of economic activities (“the pros of command economy”, 2014). A planned economy is essential at mobilizing economic resources. Firms have the capability to implement big projects, achieve their target and build industrial strength (“the pros of command economy”, 2014). Besides, it can avoid monopoly force misuse (“the pros of command economy”, 2014). Planned economies have the capability to refrain the lavish of monopoly force. It also permits the government to validly conquer market failure, inequality and set up a community that will maximize the welfare of people despite maximizing earnings. The country produces a planning scope of power so as to effectively implement long term goals (“the pros of command economy”, 2014). There is also more fair distribution of income and wealth (economy system, n.d.). On the other hand, planned economies mostly suffer from strict bureaucracy, responsibility problems, deficient decision-making, communication issues, self-serving action and incapable conformity (Chavez III, n.d.).
These issues lead to excessive of shortages and surpluses of goods and services. Unsatisfactory allocation mostly leads to black market economies. The people in this system have a poor level of living and are poorly motivated (Chavez III, n.d.). There are pros and cons in every economy system. Centrally planned economy is fully controlled by the government. Therefore, mentioned by Engrade (n.d), the relative merits for centrally planned economy is whereby the welfare of all citizens is the primary goal. In are other words, the citizen are put as the main priority to any situations. For example, goods are being produced based on the demand from the citizens. Next is prices of goods are being under control by the government so that citizens will be able to afford to consume goods and services. For instance, government provides petrol subsidies to citizens. Other than that is also said by Engrade (n.d), there will be no industrial unrest such as striking or riots as the governments controls it in a systematic manner. For example, the wages of employee or the rights of citizens.
Lastly is whereby government possess information to direct resources. The government have the information to where needs resources and where do not need. By this everything will be under control and there won’t be wastage. Compare to centrally planned economy, market based economy has more freedom as the government do not interfere with citizens doings. With private sector, the country is becoming more powerful. The relative merits of the market based economy is where with the boost of private sector, the country of state will be more updated and have more economic power. Private sector would be also able to bring in advance technology to increase the performance and the productivity of goods produced. Besides that, the prices of goods are determined by the market mechanism which is the types of goods and services of products being produced. Lastly but not least are competition among firms may help to improve the quality of goods produces (Engraded, n.d).
For example, in order to attract more customers, private sector would upgrade the quality and also control the pricing in other to compete with other private sector. By this, I would benefit a lot to consumers and they will be willing to pay for it. Throughout the complete process of economic transformation which began in 1970s and accelerate in the 1980s as the economic conditions worsened (“Economic reforms (transition to a market-based economy)”, 2014). In 1989, the political systems in some of the socialist countries started their unexpected collapses which lead to the neglect of the centrally planned system and slowly transform into a market based economy system (“Economic reforms (transition to a market-based economy)”, 2014). Thus, it has brought some significant effects on the world undeveloped markets and on global trading patterns of countries (“Economic reforms (transition to a market-based economy)”, 2014). In the first stage of the transformation, a number of fundamental economic improvements had to be executing in all these countries (“Economic reforms (transition to a market-based economy)”, 2014).
These modifications were related to liberalization of prices, trade and also foreign exchange (“Economic reforms (transition to a market-based economy)”, 2014). Moreover, the transformation of the economy system also brings macro-economic stabilization to the countries (“Economic reforms (transition to a market-based economy)”, 2014). It helps to deal with the essential external and internal disparities of the national economies which are high or hyper-inflation (“Economic reforms (transition to a market-based economy)”, 2014). Additionally, transition to market based economy also facilitate in the aspect of restoration of private assets, positioning the conditions, legal and organizational structure required for an economy based in personal enterprises and economic activities (“Economic reforms (transition to a market-based economy)” , 2014).
Other than this, it also enabling the reimbursement or re-compromise of the accumulated foreign debt and, overall, it helps to take the advantages of national economy which include the development of the banking and financial segment and the attraction of foreign capitals and investments (“Economic reforms (transition to a market-based economy)”, 2014). The other effect is that it helps the countries to set up a standardized exchange rate (“Economic reforms (transition to a market-based economy)”, 2014). Lastly, the transition towards the market-based economy system had aid the countries in the elimination of state control over foreign trade and established legal regulations in order to stimulate the entrepreneurship development (“Economic reforms (transition to a market-based economy)” , 2014).
In the past decades, millions of countries and people think that planned economy was the best method to operate their economies. There are still some other countries currently under planned system, like North Korea. However, planned system tends to lose out from major inefficiencies and it work out not as successful as other systems. Market and command countries incline to place distinct preference on the part of government in the economy. The essential economic problem is scarcity and choice. Because of scarcity, choices have to be made. The transformation had improved the development of the economy and brings stabilization to the nation. With reinforced globalization, we became more acutely conscious of the mutuality of all countries in our world economy (“COMPARATIVE ECONOMIC SYSTEM”, n.d.).
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