Centrally Planned Economy

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DEFINITION of 'Centrally Planned Economy'

An economic system in which economic decisions are made by the state or government rather than by the interaction between consumers and businesses. Unlike a market economy in which production decisions are made by private citizens and business owners, a centrally planned economy seeks to control what is produced and how resources are distributed and used. The production of goods and services is undertaken by state-owned enterprises.

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BREAKING DOWN 'Centrally Planned Economy'

Centrally planned economies assume that the market does not work in the best interest of the people, and that in order for social and national objectives to be met a central authority needs to make decisions. The state can set prices for goods and determine how much is produced, and can focus labor and resources on industries and projects without having to wait for private investment capital.

Most modern economies are a mixture of centrally planned economies and market economies, with governments controlling some aspects of the economy and the private sector controlling others.

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