Saturday, 11 March 2017

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Planned Economy Explained | Definition, Notes, Advantaged and Disadvantages



Planned economy, as the term suggests, is the economy which is well-planned, where from allocation of goods and services to prices of such goods and services is planned or controlled by an authority. Now, the question arises, who is such authority? And how, this planning is done? Here, in this article, we shall have an understanding of planned economy in brief yet understandable manner.

What is Planned Economy? Explanation and Class Notes

Planned economy or also called a ‘centrally planned economy’ is an economy where the demand and supply of goods and services are controlled by the state. State doesn’t mean Indian states. It means the country itself or the central government of the country. In such economies, consumers do not play any role in business decisions. It’s not a consumer based economy.  In planned economy, government takes major control over the use and distribution of country’s resources.it eliminates the role of private enterprises and gives government an upper hand in all major business decisions.
Government, in such economy, acts as a dictator. This type of economy believes that market can’t be controlled by consumers since, they have negligible knowledge of it & therefore, government takes the responsibility of stabilizing the market and satisfy consumers by fulfilling their needs.

Role of Government in Planned Economy

In centrally planned economies, government takes decisions as to which goods and services shall be produced and rendered in the economy respectively, at what costs & price, these shall be produced and sold respectively in the market. And this becomes one of the best advantages of having a planned economy- stability. Planned economies looks after the needs of consumers and tries to maintain a balance between inflation (rising of prices of products) and deflation (fall in the prices of goods and services).
But since, the role of private enterprises is neglected in such economy, it also keeps the country away from benefits of private enterprise such as innovation, competition, better management etc. planned economy can be assumed as you being controlled by someone. When all your decisions are taken up by other authority. Sometimes, they turns out to be fruitful to you, since they are based on experiences and deep analysis and sometimes, against your choices by neglecting you. !!
This means that planned economy also has some positive as well as negative effects. Let’s discuss some pros and cons of planned economy

 Advantages of Planned Economy

1.            Government guides economic growth- In planned economy, it’s the government taking major business decisions. Therefore, government is not only responsible for the outcomes but also is accountable to people for their decisions. That’s why government deeply analyses the needs of consumers and depending on their requirements allocates the resources for their production leading to stronger economy.

2.            Production based on needs of consumers- in planned economy, government looks after needs of consumers instead of their expending pattern. Unlike free economy, where production is consumer based, in planned economy, necessary goods are produced instead of demanded but not needed goods. For example- people demand for better transport services & at the same time, there is high need to produce defense equipment’s. In such case, government will first allocate its resources & technology in production of defense materials instead of producing automobiles.

3.            Reduces economic disparity- planned economy focuses on welfare of all. It does not aims at favoring richer sections of society more or poorer less. Therefore, all government policies are made focusing overall improvement of society. Due to which deprived section of society gets an equal opportunity for development, leading to reduction of gap between rich & poor.

4.            No monopoly- since, all the means of production falls under government’s hand therefore, there is negligible chances of creation of monopoly in command economies.  Also, less chances of competition among businessmen’s, reducing chances of exploitation of consumers.

5.            Demands are met- since, planned economy has complete control over business, it tries to keep a balance between demand and supply of goods and keeping the prices affordable for all, as compared to other form of economies.

Here, with advantages we shall also cover the Drawbacks of Planned Economy-

1.            Restriction on people- in planned economies, people do not have freedom to choose their area of work. Freedom of choice gets snatched away. Here, people can’t do what they want, but they have to do what government wants, which leads to agitation and dissatisfaction among people.

2.            No innovation- innovation is the key to improvement. Since, private players are not involved anywhere, their creativity is left unused and wasted. Since, Innovation leads to better products, planned economy is deprived of such benefit.

3.            No competition- healthy competition is always appreciated! Planned economy neglects private enterprises. Since, private businessmen runs to win an edge over other. This competition among them leads to better quality products, low prices and avaliblilty of choices to consumers. But, planned economy, does not face any competition, rather it tries to avoid competition and results in slower growth of the economy.

4.            Delay in decision making-   delay in anything invites sorrows whether, life or business. since, government is the major decision making body, and it has to take almost all decisions, therefore at times, crucial areas where decision is quickly required, may escape and leads to downfall of economy. Also, coordination among various aspects of economy, i.e. Production, distribution or consumption of products is not achieved leading to imbalance in an economy.

5.            Emergence of black markets or smuggling- sounds weird but true!  When government produces only needed goods in an economy, then pranksters gets an opportunity to serve such products which government restricts or does not produce. And, it leads to emergence of black markets in planned economies.


Countries like Russia and China, long before, had been purely centrally planned economy. Presently, they are not completely planned. North Korea and Cuba are observed as planned economies in present world, following the above stated system of economies.



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