Which of the following is a characteristic of a command economy?
Promotion of foreign direct investment
Allowing prices to be set by the interplay between demand and supply
Limited international trade
Restricted state-ownership of means of production
The correct answer and explanation is :
The correct answer is: Limited international trade.
Explanation:
A command economy is a system where the government or central authority makes most of the economic decisions, including determining what goods and services are produced, how they are produced, and for whom they are produced. It contrasts with a market economy, where decisions are largely driven by the forces of supply and demand in the marketplace.
In a command economy, the government controls major aspects of the economy, including production, pricing, and distribution of goods. This typically results in limited international trade because the state often imposes strict regulations and control over foreign commerce to maintain national self-sufficiency or to protect domestic industries. The central authority in a command economy usually wants to limit reliance on foreign goods, preferring domestic production. This might be a result of nationalist policies, trade restrictions, or a desire to control all economic activities within the country. Therefore, international trade is often restricted or closely monitored.
Here is a breakdown of the other options:
- Promotion of foreign direct investment (FDI): This is generally not a characteristic of command economies. In a command economy, the state controls major industries, and there is often suspicion or hostility towards foreign investments, as the government may view them as an external influence on the domestic economy. Instead, FDI is more common in market-driven economies where the focus is on global competitiveness.
- Allowing prices to be set by the interplay between demand and supply: In a command economy, prices are typically set by the government, not by market forces. The government decides what prices should be for goods and services, rather than allowing market conditions to determine prices through supply and demand. This leads to price controls and, often, inefficiencies.
- Restricted state-ownership of means of production: In a command economy, the state usually has extensive ownership of the means of production, not restricted ownership. The government owns key industries like agriculture, manufacturing, and services, unlike market economies where private ownership is more common.
Therefore, the most accurate characteristic of a command economy is limited international trade due to its focus on self-sufficiency and central control.