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MACRO AND MICRO ECONOMICS - Research Paper Example

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A command economy one in which the coordination of economic activities are controlled through administrative means rather than market mechanisms. The economic agents particularly the production organizations operate as directed by the governments in place;…
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Download file to see previous pages... Advantages of Command Economy 1. Facilitates the realization of an economy’s long term goals and objectives hence rapid development Central to the command economy is “a central planning authority” (Fernando 2011, p.115). In this kind of economy, the state establishes development goals and targets, which the planning authority plans, executes, supervises, and evaluates. The authority establishes targets and administers control aimed at realization of the overall development and economic growth objectives. The objectives usually include stability of prices, faster economic growth, and reduction of inequalities of income to avoid market failure. 2. Reduction of income and wealth inequality Command economy ensures equitable wealth distribution, which cushions any market failure in the economy. The health and education standards are also relatively higher in a command economy (“Guiding development” n.d.). For instance, in 1980s China and India had similar per capita incomes but China had higher primary education levels and life expectancy (“Guiding development” n.d.). Disadvantages of Command Economy 1). Misplaced Incentives- The producer’s and investors are discouraged since their efforts do not pay off well as they should. In planned economy, the state often rewards the hardworking people only with fame and honors rather than the kind of incentives any investor looks for which is profits. The planned economy focuses on equitable wealth distribution which and therefore the workers and producers are less motivated to put efforts in what they do. 2). Failure of co-ordination- Planned economies try to co-ordinate the entire economic decisions regarding production, investments, consumption, and trade made by producers and consumers. The efficiency of such regulations lacks particularly where mismatch occurs between the supply of products and the demand by consumers. Bottlenecks in production lead to a shortage of some goods. This happens since planners may not necessarily know most essential needs to consumers at every point in time. A good example of the failure in co-ordination is what happened to Soviet Union in the late 1980s- there was a shortage in food storage and transportation while the supply of TV sets was ample (Lipsey & Chrystal 2007, p.3). 3). Slow decision making and wastes of resources- Command economy often needs many planners to run the control system which leads to slow decision making. This single control authority is charged with decisions about allocation of production means among different sectors, branches, and uses as well as the distribution of all goods. Slow decision and action about perishable goods often results in wastes. 4). Less dynamic technology economy- Few incentives to innovate leads to limited innovations. Planned economies remain behind in most of their technology with the exception of military and rocket science. This was seen in Soviet Union, which was using the West’s 1930s technology in 1950s and in China which later borrowed the outdated technology from Soviet Union 5) Political repression- Governments in planned economy own the means of control and dictation of economic production and therefore civil liberties cannot be enjoyed. Conclusion The command economy has very many disadvantages and just a few advantages. Command economy is infamous and has been observed to be unstable in countries like the former Soviet Union and China where it was practiced. Trade between nations Introduction Trade between nations has the benefits for all participating countries. To some extent, all countries rely ...Download file to see next pagesRead More
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