Next video:
Loading the player...

A centrally planned economy is one where the government controls the country’s supply and demand of goods and services. This type of economy is generally associated with communist and socialist governments such as China and the former Soviet Union.

The governments of countries that have a centrally planned economy believe that free market economies do not allocate wealth and resources effectively to all citizens.  So instead, the government takes control of the economy in an attempt to help all citizens share in economic prosperity. 

In a centrally planned economy, the government decides what goods and services will be produced, how much of each good or service will be produced and the price at which those goods and service will be sold. Advocates of central planning argue that this is a much more efficient way to make sure a country’s resources are put to their best and highest use.

Critics of centrally planned economies point out that ultimately, governments are unable to control market forces. In addition, due to the multiple, unknown variables that affect demand, central planners are unable to accurately predict it. As a result, central planning does nothing but create a black market for goods that are under-produced, and wastes goods that are overproduced. 

Most modern economies are a mixture of market-driven forces and central planning. For instance, China once had a totally centrally planned economy, but has since adopted market economy policies and structures to help grow its economy. 

Related Articles
  1. Insights

    How Central Banks Control the Supply of Money

    A look at the ways central banks pump or drain money from the economy to keep it healthy.
  2. Insights

    How the Fed Profits From Quantitative Easing

    Central Banks including the U.S. Federal Reserve are making rich profits from stimulative measures such as Quantitative Easing (QE).
  3. Insights

    Pros and Cons of Capitalist vs Socialist Economies

    Capitalism relies on the markets. Socialism, on government planning. Each system has its pros and cons.
  4. Insights

    The World's Top 10 Economies

    The United States has been the world's largest economy since 1871, but China's growth may soon position it as the leader of the world's top 10 economies.
  5. Investing

    Impact of the Chinese Economy on the U.S. Economy

    The economic growth of China has been decreasing since 2010. What impact does this have on the US and the world economy?
  6. Insights

    How Does China Manage Its Money Supply?

    Here's how the Central Bank of China manages its currency rates and the money supply.
  7. Personal Finance

    What Is the Bank for International Settlements?

    Get the scoop on the structure and functions of the oldest global financial institution.
  8. Tech

    The Economic Fundamentals Of The Sharing Economy

    The sharing economy is reshaping how businesses and consumers interact with each other by lowering costs and increasing operational efficiency.
  9. Insights

    Explaining The World Through Macroeconomic Analysis

    From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
  10. Investing

    Problems Loom For The Chinese Economy

    In 2010 China became the world's second largest economy, yet some analysts see problems ahead. Find out why.
Hot Definitions
  1. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  2. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  3. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  4. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  5. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  6. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
Trading Center