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Economist as Both Scientists and Policymakers and Principles Society Uses to Allocate its Scarce Resources

Economics is frequently regarded as a policy science. This means that the theory of economics or the information created by economic research can be utilized and applied in handling public policy problems. Although economists regard their subject to contain policy relevance, the policy formation process has not by its own has not been of great economists interest. Economists are regarded as scientists since they create hypothesis and models which can be tested using data. The models yield to predictions (Mankiw, 2008). Data permit economist to define what people really. As policy makers, economist reviews the past and the current data to understand the trends and use the same data to predict the future aspects of the economy. This assist in making policies that will assist in enhancing the future of the economy. To ensure effective allocation of resources, the policy makers must ensure that there are policies created to control or limit the allocation of scarce resources. The resources should be shared such that their sustainability is ensured. The society should therefore make best use of what is available and share it fairly among themselves (Mankiw, 2008).

Flow of Money and Goods in an Economy

The economy contains millions of individuals engaged in various activities that include manufacturing, buying, hiring, selling, and working among other things. To understand the functionality of the economy, models are used to demonstrate the flow of money. The economy model below demonstrates circular-flow-diagram where the economy is streamlined to engage only two forms of decision makers who include firms and households. Companies create services and goofs by us of inputs that include capital, land, and labor. The inputs are regarded as factors of production. The Factors of production are owned by the households, which also consume the entire services and goods which are created by the companies. This model demonstrates the economy which demonstrates the flow of dollar via markets among firms and households. The inner circular low diagram loop represents the outputs and inputs flows (Mankiw, 2008). The households sell the utilization of their capital, land, and labor to the companies in the markets for the production factors. The company then utilizes these aspects to produce services and goods that are at that point sold to domestic services and goods market. In this regard the flow of factors of production is to the firms from households and the flow of services and goods is to the households from the companies. The circular-flow diagram outer loop stands for the corresponding dollars flow. The money is spent by the households to purchase services and goods from the companies. The companies employ some of the earnings from the sales to pay for the production factors that include the workers’ wages. The remaining amount is the company’s profit which is owned by the owners of the company, who are also households’ members. Thus, spending on services and goods flows from the households to companies involves revenue in the wages forms, as well as the flow of profit from the company’s households (Mankiw, 2008). This is demonstrated in the diagram below (Mankiw, 2008).

Economy Coordination of Society’s Independent Economic Actors

Macroeconomics reviews the trends and forces which impact the entire economy which include the economic growth, unemployment, and inflation. The independent society economic actors who relate in economic markets include the governments, firms, and households among others. Households are very important to the economy since they demand services and goofs from capital, labor supply, and markets. They also provide the aptitude to resource markets. Nevertheless, the economy harmonizes independent economic actors of the society with market power. The market power in this case refers to the aptitude of a minute actors group that contains the market prices influence. This develops a measure a firm can use to increase prices because of lack of products and services.

Gross Domestic Product (GDP) Definition and Computation

The Gross Domestic Product (GDP) is among the prime indicators employed to measure the health of the economy of a country. It is the widest quantitative gauge of the total economic activity of a country. It stands for the total value of dollar of all services and goods produced in a certain time period, within the borders of a country. The GDP is computed as the subtraction of the imports from the summation of the government expenditures (G), consumption (C), export and investment (I). The net export is denoted by NX. There are various elements employed to compute the GDP (Stonecash, Gans, King & Mankiw, 2011). They include durable goods, services and nondurable goods under the consumption element. Under the government expenditures there are schools, roads and defense among others. Under investment there are residential, nonresidential, and business inventories. The exports stands for goods and services the company sells to foreign countries, while imports refers to what is brought in the country from other nations. In this regard, the GDP (Y) of a country can be computed as (Stonecash, Gans, King & Mankiw, 2011):

C + G + I + NX = Y

Construction of Consumer Price Index (CPI) and its Imperfection in Measuring the Cost of Living

Consumer Price Index (CPI) refers to the measure which evaluates the consumers services and goods price weighted average. It is computed by determining the changes of the price for every item in the determined goods’ basket and obtaining their mean. Variations in the CPI are utilized to measure changes in prices related with the cost of living. CPI is frequently utilized to statistically identify the deflation and inflation periods (Stonecash, Gans, King & Mankiw, 2011). CPI is generated each month by the Bureau of Labor Statistics (BLS). The construction of the CPI involves four main steps. A consumer survey is conducted by the BLS on different services and goods together with their prices. Because the purchase varies based on services or goods purchased at various time periods, each price for each product at particular time must be determined by the BSL. This is followed by the computation of every time point by multiplying price with the quantity for every product. The price is then divided by the year to obtain the base year. The output is then multiplied by 100 to obtain the price between the base and other years. This is illustrated by the equation below (Stonecash, Gans, King & Mankiw, 2011):

Rate of inflation in the 2nd year = ((CPI in year 2 –CPI in year 1)/ CPI in Year 1)) x 100.

Nevertheless, it is important to note that CPI is not the most effective way of determining the cost of living. This is because the living space changes swiftly such that by the time data is corrected and analyzed to define the living space, another change has already taken place. This subjects the value given into time related inaccuracy.

References

Mankiw, G. N. (2008). Principles of macroeconomics. New York, NY: Cengage Learning.

Stonecash, R. E., Gans, J., King, S., & Mankiw, N. G. (2011). Principles of macroeconomics. New York, NY: Cengage Learning.