6 Step Financial Management Process

745 Words3 Pages
As of 2013, there are a total of 196 recognized sovereign countries in the world. The economies of each of these 196 countries all face the challenge of trying to tackle the central economic problem of scarcity. There is scarcity because people have infinite wants but the resources available to fulfill these wants are finite. This situation has raised the key economic question of ‘what?’, ‘how?’ and ‘for whom’ to produce. The way in which a country decides to answer this question tends to determine the kind of economic system that the country has in place. An economic system can be defined as a set of rules that governs the production and distribution of goods and services. The economic systems of countries will differ from one another…show more content…
Another important reason for the shift towards a mixed market economy is to curtail inefficient resource distribution. The larger and more complex the economy is, the greater the task of collecting and analyzing information essential to planning. For example, years ago in the Soviet Union, a massive drive towards industrialization took place. To achieve this, the Gosplan, which was the central planning agency in the Soviet Union, was placed with the task of preparing five year plans and annual plans that underlined the general direction in which the Soviet economy was to move. All factories were given targets that it had to achieve. This planning system functioned without the help of a price mechanism and the profit motive. To encourage the managers and workers of a factory, bonuses were promised to them if they could achieve output targets set by the planning agency. However as is the problem of central planning, the Gosplan couldn’t accurately identify consumer preferences, shortages, and surpluses with sufficient accuracy and hence production couldn’t be coordinated at the level of efficiency that the Soviet Government intended. Furthermore the poor flow of information between the planning agency and managers in the state farms and factories led to many inconsistencies in the plans. To compound the problem, the targets set by the Gosplan were often unrealistic and so people hardly ever got bonuses due to the difficulty of trying to meet those
Open Document