ABSTRACT
The economic reforms that began in 1978 in China can be thought of as the process of “switching tracks” from a planned to a market economy. One fundamental distinction between the two lies in their price-forming mechanisms and the role that prices play in the overall system. In a planned economy, the government sets prices, and prices are merely an accounting device. In a market economy, prices are set through supply and demand and are the vehicle by which resources are allocated.
