How does a command economy produce goods and services?

Command economy is a system where the government decides goods production, process, quantity, and price in a country. In this system, the government also manages income and investments. A communist nation like the former Soviet Union, Cuba, and North Korea work according to this system.

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Explanation
Characteristics
Examples of Command Economy
Command Economy Advantages
Disadvantages
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How are goods and services distributed in a command economy?
How will the goods and services be produced?
How does a command economy determine what to produce?
How does a command economy work?

Explanation

The market decides goods and services in demand in a free economy and arranges supply, production process, and price. Such a market generally operates as per customer choice, factors like demand and supply, price of the product, and services generally available in a market. But, in a command economy, production, process, price, and quantity (supply) of goods and services are planned, managed, and controlled by government authorities.
In recent years, many command economies have been trying to mix certain aspects of capitalism in their economy, resulting in a mixed economic systemMixed Economic SystemA mixed economic system is one that combines capitalist and socialist ideals. It allows for the protection of private assets while also allowing for liberty in use of capital and federal intervention in economic decisions.read more that is helping them achieve economic growth.

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Characteristics

#1 – Government Control

The government of a nation creates a centralized plan for the economy, generally for five years where they concentrate on social and economic goals for the country depending on factors like sectors and region, while the budget is planned and managed every year to observe the completion of goals and make necessary changes in policy if the situation demands.

#2 – Budget and Allocation of Resources

After setting goals for five years, the government also makes policies, allocates resources to various sectors, and observes growth. The government utilizes natural resources, and capital depends on every sector’s objectives, plans, and progress. The government also decides against reducing unemployment in a country.

#3 – Prioritization

As per the situation, the government creates a plan on production, process, price, and quantity of goods and services produced in a country. For example, food, clothing, and shelter for all can be set as a national priority by the government, and they can create a plan and allocate necessary resources to work on that goal.

#4 – No Competition

Since the government controls almost every economic aspect, private companies have no competition. For example, the government of a nation controls major sectors like finance, automobiles, information technology, and utilities.

#5 – Authority

Since the government is the only decision-making authority for important decisions in such an economy, they create policies, rules, regulations, targets, prices, and quantity in a centralized economic plan. Therefore, even if the private sectorPrivate SectorThe private sector is a section of the national economy that the government does not own. The business conducted under this sector is carried out by companies or entrepreneurs who focus on profit maximization and customer satisfaction.read more exists, all companies have to follow the rules and regulations set by the government and cannot act on free will.

Examples of Command Economy

Soviet Union: All states under the USSR worked as per the command economy from 1930 until 1991. The Government made all the important decisions for the entire country.
China: After the second world war, China worked under a society ruled by communismCommunismCommunism is an ideology that bases itself on the belief that the means of production in a society should belong to the state.read more, where the government created a plan for economic growth. Although now the country operates under mixed economies, its government still creates five-year plans for economic growth and objectives.
Cuba: Since the 1959 revolution, Cuba worked as per command economy, now moving towards a mixed economy to increase growth.
Dictatorship: These are countries where the authority of one person controls the government. They also work in a command economy where the government controls many business sectors. For example, some middle east countries like Egypt, Iran, Libya, etc., run under a dictatorship.

Command Economy Advantages

Mobilization of Resources: In a mixed economy, since the government has all control, they can make quick decisions regarding the utilization of resources, start big projects and make changes to achieve economic and social goals.
No Interruptions: Due to government control, decisions and projects cannot be slowed by individual lawsuits against them.
Unique Vision: It works as per the unique vision set by the government, and all people in the economy work towards that goal, which makes the country achieve its social and economic objectives in a better way.
Direct Utilization of Resources: The government decides the utilization of resources through a five-year plan and manages the budget through a single financial year to observe growth.

Disadvantages

Complete Control to Government: In this economy, the country’s administration takes all decisions, and people must follow them. The system’s capacity is often ignored in this process, and people are forced to act on them.
Development of Shadow Economy/Black Market: When the needs of people in this economy are not satisfied, markets operate through the shadow economy/black market where the market provides goods and services which the government does not provide with an additional price tag. Such markets create illegal wealth and money flowMoney FlowMoney flow (MF) refers to a mathematical function used to analyze changes in the value of a security by multiplying its typical price by daily trading volume.read more, weakening the entire economic and social system.
Lack of Understanding: Many governments in command economies face the challenge of understanding updates on the market’s needs, making it difficult for them to match consumer needs and prices.
Discourage Competition and Innovation: It discourages innovation and competition, leading to a slowdown in the economy as the global market works and operates on innovation, competition, and adaptation of new technology. For this, it is always a big challenge to satisfy the needs of the consumer market in terms of the domestic and global economy.

Conclusion

A command economy works with centralized control, which does not allow important factors like demand and supply to decide on production, process, quantity, and price of goods and services produced in a country. It also discourages competition and innovation, which are important aspects of today’s world economy.
Although the government focuses on allocating resources to achieve economic and social welfare over time, many countries under command economies have failed to match that objective. However, there are certain advantages of the command economy where the government can take rapid decisions as per the requirement of the market to achieve its economic goals.
As time passes in a new age, especially after the collapse of the Soviet Union in 1991, many economies in the world include capitalism aspects which have created a concept of mixed economies where competition and innovation are promoted. However, certain goods and services remain under government control while most sectors are now controlled by demand and supply.

How are goods and services distributed in a command economy?

In a command economy, the central government dictates the level of production of goods and controls their distribution and prices. Proponents of command economies argue government control rather than private enterprise can ensure the fair distribution of goods and services.

How will the goods and services be produced?

Resources are combined to produce goods and services. Land and natural resources provide the needed raw materials. Labor transforms raw materials into goods and services. Capital (equipment, buildings, vehicles, cash, and so forth) are needed for the production process.

How does a command economy determine what to produce?

In a command economy, the government owns some or all of the industries that produce goods and services. The government makes decisions regarding pricing and production. Government agencies decide production in a command economy. They pick the goods that are most socially efficient to produce.

How does a command economy work?

A command economy, also known as a planned economy, is one in which the central government plans, organizes, and controls all economic activities to maximize social welfare. Command economies, as opposed to free-market economies, do not allow market forces like supply and demand to determine production or prices.