Question

Describe the concept of material balances as used by centrally planned economies. Explain what it means, how it is used, and how it was done in practice. Finally, what are some critiques of the material balances approach? How is input-output analysis relevant for planning in a centrally planned system?

Answer 1

CONCEPT

Material balance planning substituted for the market as the mechanism for allocating goods in the Soviet economy. Gosplan, the State Planning Committee, was responsible each year for equating supply and demand for the thousands of raw materials and manufactured goods that were used domestically in production processes, allocated to satisfy consumer needs, or earmarked for export. The three-stage process of constructing the annual plan involved identifying the sources and uses for high-priority (funded commodities), medium-priority (planned commodities), and low-priority (decentrally planned) goods, and then establishing a balance between sources and uses. In the first stage, planners sent "control figures" down through the economic hierarchy to the enterprise. Control figures reflected the priorities of top political officials, specified initially as aggregate output targets or percentage growth rates for strategic sectors of the economy, and then disaggregated and matched with projected input requirements by Gosplan. In the second stage, Soviet enterprises provided a detailed listing of the input requirements necessary to fulfill their output targets.

A material balance was achieved when the sources of supply (current production, Qt, inventories, Qt-1, and imports Mt) equaled the sources of demand (inter-industry demand, IDt, household demand, FDt, and exports, Xt). That is, a material balance existed on paper when, for each of the planned goods: Q t + Q t-1 + Mt = IDt + FDt + Xt.

A centrally planned economy, also known as a command economy, is an economic system in which a central authority, such as a government, makes economic decisions regarding the manufacturing and the distribution of products. Centrally planned economies are different from market economies, in which such decisions are traditionally made by businesses and consumers.C

Following are the prictice of central planning economic is often associated with Marxist-Leninist theory and with the former Soviet Union, China, Vietnam, and Cuba.

Following are the critiques of material balances

Critics of planned economies argue that planners cannot detect consumer preferences, shortages and surpluses with sufficient accuracy and therefore cannot efficiently co-ordinate production (in a market economy, a free price system is intended to serve this purpose).

The input–output model is one of the major conceptual models for a centrally planned economy. This model involves the direct determination of physical quantities to be produced in each industry, which are used to formulate a consistent economic plan of resource allocation.