Centrally Planned Economy: Definition, Characteristics & Advantages

Centrally Planned Economy: Definition, Characteristics & Advantages
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  • 0:01 Centrally Planned…
  • 1:40 Characteristics
  • 2:35 Advantages
  • 3:26 Lesson Summary
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Lesson Transcript
Instructor: Brianna Whiting
In this lesson, we will determine what is meant by the term 'centrally planned economy.' We'll look at the characteristics and the advantages of this type of economy, and then you can take a quiz to test your knowledge.

Centrally Planned Economy Defined

Most of us go to stores, buy our goods, and go about our everyday lives without thinking much about who decided what products and goods to produce and distribute. We simply know what we need, and hope that the store we visit will have it in stock. However, what would happen if you went to the store one day to buy something - let's say cereal - and found that it was no longer being sold? And not just in your local market, but anywhere? You'd probably ask - why? And who made that decision? Well, the answer to these questions can be determined by exploring the term centrally planned economy.

So what is a centrally planned economy? Well, there are several parts to this definition. They are as follows:

  1. The government makes the economic decisions. This is different from the market economy that we are familiar with, in which businesses decide what they will produce, not the government.
  2. The government controls all aspects of the economic production. In other words, the government decides what goods will be produced and how they will be produced.
  3. The government decides how resources are distributed and used. For example, if the government thinks we need more goods in a particular area, they will make that decision, not the businesses in that area.
  4. The government needs to make the decisions. It is assumed that the needs of the people are not met in a market economy; therefore, in a centrally planned economy, the government controls decision-making.
  5. The government can determine the price of goods and services.

Characteristics

We now know that a centrally planned economy is one in which the government is in control rather than the consumers and businesses. But what characteristics are often found within this type of economy?

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