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October 31, 2014 

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PHYSICAL FLOW: In the circular flow, the counter-clockwise transfer of goods and services from the business sector to the household sector and the transfer of resource services from the household sector to the business sector. The payment flow moves in the opposite direction. The physical flow, the physical movement of goods and services, is the foundation of the economy's circular flow. The fundamental problem of scarcity is addressed by physically transforming scarce resources into goods and services that are then used to satisfy wants and needs.

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PLANNED ECONOMY:

An economy, or economic system, that relies heavily on central planning by government to allocate resources and answer the three basic questions of allocation. A planned economy is often a type of command economy, in which government uses its coercive powers to implement central planning allocation decisions.
A planned economy is one in which government commands (directs, orders, or dictates) the vast majority of resource allocation decisions according to a central plan. The contrasting economic system is a market-oriented economy, in which resource allocation decisions are achieved primarily through voluntary market exchanges.

The goal of a planned economy is to avoid or correct the failings and imperfections of capitalism and a market-oriented economy. The primary imperfections are:

  • Market failure inefficiencies, especially market control.
  • Business cycle instability that creates unemployment problems.
  • Concentration of wealth and income and resulting inequality problems.
In theory, a planned economy can avoid these problems with a well-conceived, well-executed plan governing the allocation of resources, goods, and services. Communist and socialist countries, especially China and the former Soviet Union, provide the primary examples of centrally planned economies.

The level of detail needed in planned economies is extensive. Every input, every output, every intermediate good, every worker, every resource is allocated based on a predetermined plan. Such planning is inherently less flexible and less efficient than markets.

In practice, a planned economy tends to be inefficient because:

  • One, the resources used for the central planning process cannot be used to undertake actual production. In other words, a person (the planner) who spends eight hours calculating how much flour is needed to produce bread, is not actually producing any bread.

  • Two, the central planning process, being developed and implemented by mere humans, is inherently flawed. Mistakes happen. Inputs are sent to the wrong factories. A decimal point is misplaced. Too much of one good is produced and too little of another. All of these mistakes mean less output is produced with available resources.

While communism and socialism are the primary examples of planned economies, market-oriented economies such as that found in the United States, are also planned economies to some degree. Federal government agencies and leaders (President, Congress, Federal Reserve System, etc.) develop and implement broad plans for the economy. Most state and local governments also have plans for their own particular segments of the economy. These market-oriented plans, however, are not nearly as detailed as those found in command economies and they tend to rely heavily on markets.

<= PHYSICAL WEALTH, AGGREGATE EXPENDITURES DETERMINANTPLANNING HORIZON =>


Recommended Citation:

PLANNED ECONOMY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2014. [Accessed: October 31, 2014].


Check Out These Related Terms...

     | central planning | command economy | pure command economy | market-oriented economy |


Or For A Little Background...

     | economic system | three questions of allocation | fifth rule of imperfection | efficiency | equity | communism | socialism | capitalism | public sector | incentive |


And For Further Study...

     | government functions | economic goals | four estates | distribution standards | gross domestic product | inflation | unemployment |


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State of the ECONOMY

Real GDP
Second Quarter 2014
$17,328.2 Billion (Annual Rate) Source: BEA
Up 4.6% 3rd Estimate

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