Chapter 32: Problem 1051

How are productive resources allocated in the Soviet economy? How does this differ from market allocation?

Short Answer

Expert verified

In the Soviet economy, productive resources were allocated by a central planning agency based on a pre-determined plan, with the state owning and controlling these resources. This differs from a market economy, where resource allocation is determined by supply and demand, with decisions being made by businesses and consumers. Resources in a market economy are primarily privately owned, with the goal being to achieve efficiency and growth through competition and innovation.

Step by step solution

Definition of Productive Resources

Productive resources, also known as economic resources or factors of production, refer to the inputs used in the process of production. These include land(natural resources), labor(the workforce), capital(machinery, buildings, infrastructure) and entrepreneurship(leadership, innovation skills).

Allocation of Productive Resources in the Soviet Economy

The Soviet economy was characterized by a command or centrally planned economy. Here, the government, or more specifically, a central planning agency, decides on the what, how, and for whom to produce. In such an economy, productive resources are owned and controlled by the state. The central planning agency allocates the resources based on a pre-determined plan and set targets for each industrial sector. Production decisions are guided by this plan rather than by market forces of supply and demand.

Allocation of Productive Resources in a Market Economy

In a market economy, the allocation of productive resources is determined by the forces of supply and demand. Producers are guided by profit motives and react to consumer demand. They independently decide what to produce, how to produce it, and for whom to produce it based on market signals. Productive resources in a market economy are primarily privately owned. Decisions regarding investment, production, distribution and pricing are made by businesses looking to maximize profit. Consumers influence the allocation of resources through their purchasing decisions, this way influencing which products should be produced and in what quantity.

Differences in Allocation between Soviet and Market Economies

The main difference in terms of allocation is the decision-making process and who owns the resources. In the Soviet economy, the state made decisions about production, and resources were state-owned. In contrast, a market economy operates based on decentralised decision-making by businesses and consumers, and resources are mainly privately owned. Moreover, while the Soviet economy aimed at achieving socio-economic goals such as full employment and income equality, market economies are driven by the desire to achieve efficiency and growth through competition and innovation.

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