Question

Which of these encourages economic growth?

Answer 1

Market economies are those economies in which economic activities are left to the free play of the market forces. Producers are free to produce those goods and services which are high in demand, so that they are able to maximise their profits. Consumers are free to buy goods and services in accordance with their choice and preference, so that they are able to maximise their satisfaction. There is no interference by the government regarding what and how much to produce and what or how much to consume.

Centrally planned economies are those economies in which the course of economic activities is dictated or decided by some central authority or by the government. A central authority decides how much of wheat and how much of rice are to be produced. Only a central authority decides the overall basket of goods and services that the people can consume. From the economics point of view, a centrally planned economy is not a free economy. While market economy is a free economy.

In market economy, self-interest is the prime consideration in a centrally planned economy, social welfare or collective welfare is the prime consideration behind allocation of resources to the production of different goods and services.

Therefore, market economy encourages economic growth because producers are free to produce any amount of goods and services. While centrally planned market limits economic growth.