Question

An economy in which people exchange goods and services in a market is called a

		centrally planned economy.
		socialist economy.
		market economy.
		command economy.

Answer 1

Answer is option C: Market Economy.

I will define each type of the economy so that you can understand the basic difference among them.

First, a centrally planned economy is an economy where manufacturing and distribution of goods and services is decided by a central authority. Examples of a central authority might be government of a country. Production of these goods and services is usually undertaken by state owned firms. Centrally planned economies are also known as command economies. Soviet Union and China are such examples.

Secondly, a socialist economy is nearly related to a centrally planned economy. Here, the citizens are provided with everything from food to healthcare, by the government itself. Socialism basically refers to public/collective ownership of all resources. Supporters of socialism say that this type of economic system builds a better society by providing equitable distribution of goods and services.Cuba, Laos, Vietnam are such examples.

Thirdly, in a market economy, there are open markets where all economic agents decide the price and quantities of goods and services by the mechanism of equalising demand and supply. In these types of economies, there is absolutely no or negligible control by the government. Consumers decide to demand the product based on best prices (and other factors), and producers decide to supply the product given that they are able to maximise their profits. America and UK are best examples.

As previously written in the first paragraph, command economy is just another name for centrally planned economy.