Question

State the two features of a centrally planned economy. Discuss how economic decisions are made in this setting. In the course of your answer, develop an input-output table to complement your discussion.

Answer 1

A centrally planned economy is also known as a socialist economy where the major economic decisions are taken by the government and there is much interference in the functioning of the market economy.It has been conceptualised as a market system which promotes the social welfare.The means of production is owned and managed by the government or the centrally planned authority.This authority takes the all decisions regarding production of goods and services.It decides what to produce,how to produce and the output would be shared among the people of any nation.It also sets the prices of the goods and the services in the market.The policy of laissez-faire is not followed.Hence the 2 main features of such economy can be classified as:-

• Interference by the government and centrally planned authority-It has already been mentioned above that all economic decisions are taken by such authority.
• Inflexible and inefficient allocation of resources-As the decisions by taken by bureaucrats and other authorities,so it becomes extremely difficult to make efficient decisions.Also the focus is people centred.Due to corrupt,inefficient and unresponsive govt. officials decision making is not efficient and it leads to low productivity and higher cost.

How economic decisions are taken have mentioned above a bit,further economic issues are resolved through a combination of state ownership of productive enterprises and cetralised planning.It is the central authority that decides the targets for each public enterprise,allocates resources toi them,fixes prices of goods and services and also the incomes of various types of workers.Every economic decision like consumption,investment etc. are all taken by the govt.Some examples are soviet union,poland,china etc.

Input ouput table is as follows-

Here certain inputs/factors of production is assumed to be constant and one input is increased and output corresponding to it is shown.