The centrally planned economies existed in Soviet Union. The problem in the central economies was its inability to generate wealth and raise the living standard. The production and distribution would come from central government, deciding for the states, what to produce and how to distribute in what quantities. The workforce was assumed to be fully employed and salary was predetermined, regardless of the potential of the worker (Greenspan, 1997).
In these economies there was no effective market clearing mechanism, the result was huge surplus of unwanted goods by population on one side and shortage of goods, which were in needed. This imbalance in demand and supply led to rationing the quota, as the quantity of the goods was limited. As production and planning was followed through state orders rather than by market demand, the finance had no control over the actions that were remotely planned by the center without following the market rules (Greenspan, 1997).
In such economies, there was nothing like credit, interest or market values, as every thing belonged to the state. ...Show more