What is the difference between a command economy and a market economy?
Fsp Invest, 08 Jan. 2014
Tags: command economy, market economy, free market economy, how does a command economy work, how does a market economy work, how to make money in a communist country, allocation of scarce resources, difference between a command economy and a market economy
The economic system operating in your country has implications for you as an investor… Because the economic system governs what the country uses the available resources for and which goods and services they produce. And this influences your investment decisions… Let’s take a closer look at the two types of approach a country can take with resource allocation, namely a market approach or a command approach…
The way an economy goes about allocating scarce resources lets us draw a distinction between different types of economic system.
In a centrally planned economy, or a command economy, a central authority (usually the state) makes most of the key decisions about how to allocate resources.
In a free market or capitalist economy, this happens through the market forces of supply and demand.
How does a command economy work?
In a command economy, the state usually controls or owns resources.
They set priorities for their use… They also set production targets for firms. And they own those firms, too.
A command economy is a key feature of a communist society.
China, North Korea, Cuba and the former Soviet Union are all examples of command economies.
As an investor, you can still make money in a command economy, but you must be aware of the risks.
How does a market economy work?
In a free market or capitalist economy, firms and households interact in free markets through the price system.
And the forces of supply and demand determine the allocation of resources.
Generally, free market economies are associated with democratic states.
Private companies and individuals own resources and can allocate them as they wish.
The price mechanism is very effective at allocating resources and as an investor, it’s easier to make profits in a capitalist economy than in a command economy.
So next time you’re considering investing offshore, consider the type of economy you’re looking at.
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