Command Economy

What is a Command Economy?

Most economic activity in countries around the world exists on a spectrum that ranges from a pure free market economyMarket EconomyMarket economy is defined as a system where the production of goods and services are set according to the changing desires and abilities of to an extreme command economy. The command economy is a type of system where the government plays the principal role in planning and regulating goods and services produced in the country. The state authority determines the types of goods and services to be produced and provided, as well as the quantity and prices that will be offered in the marketplace.

Modern command economies can be identified by the following characteristics:

• Economic plans are centrally created by the government for the majority, if not all, sectors and regions.
• The government distributes the nation’s capital, labor, and natural resources in the means it deems most efficient.
• Production and prices are dictated by the government.
• Businesses in the finance, utilities, and automotive industries are owned and monopolized by state authorities.
• Government policies are created to carry out the centralized economic plan.

This type of economic system is a key feature in communist or socialist countries, such as modern-day North Korea.

Advantages of a Command Economy

If done properly and with adequate resources, a command economy offers the following benefits:

• Society favors social welfare and equity rather than profiteering
• Prevents monopolies by private businesses in identified crucial industries, such as health and energy
• Low levels or elimination of unemployment
• Ensures access to basic necessities

Compare the above with a market-based economyMarket EconomyMarket economy is defined as a system where the production of goods and services are set according to the changing desires and abilities of.

Disadvantages of a Command Economy

On the other hand, even when done “properly”, a pure command economy has significant drawbacks.

• Gluts and shortages of goods are common results, due to fixed prices and quantity of production. Natural equilibrium is more difficult to achieve when price and quantity are not floating.
• Inefficient pricing of goods in relation to supply and demand
• No response or attention to consumer preferences
• Limits liberties and personal rights to pursue financial stability, in favor of social equality
• Highly bureaucratic; all planning and execution carried out by the government
• Not being able to know and respond to consumer preferences or complaints

Additional Resources

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™Program Page - CBCAGet CFI's CBCA™ certification and become a Commercial Banking & Credit Analyst. Enroll and advance your career with our certification programs and courses. certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

• Normative EconomicsNormative EconomicsNormative economics is a school of thought which believes that economics as a subject should pass value statements, judgments, and opinions on
• Economies of ScaleEconomies of ScaleEconomies of scale refer to the cost advantage experienced by a firm when it increases its level of output.The advantage arises due to the
• Economic Value-Add (EVA)Economic Value Added (EVA)Economic Value Added (EVA) shows that real value creation occurs when projects earn rates of return above their cost of capital and this increases value for shareholders. The Residual Income technique that serves as an indicator of the profitability on the premise that real profitability occurs when wealth is
• Financial Modeling GuideFree Financial Modeling GuideThis financial modeling guide covers Excel tips and best practices on assumptions, drivers, forecasting, linking the three statements, DCF analysis, more