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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. 

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