Economics is focused on distribution, production and consumption of goods through analysis of the factors affecting the organization internally and externally. Bregory Mankiw is commonly known from hos book in economics that explains the ten principles of economics. Economists as Scientists and policy makers and principles used to allocate resources Economists can be referred to as Scientists due to the craft they perfect at of developing strategies and plans as models that can eventually be used and tested through data. These strategies are usually predictions: hopeful that they may get proper end results, which sometimes don’t apply when, the predictions are totally wrong. Positive economics involves cases where the data collected helps to understand consumer behavior.
If milk taxes were to be altered today, how would the consumption behavior be altered? That is an example positive economics. Economists also recommend what needs to be done. Economists contribute so much to us including raising minimum wage, separating the winners from the losers in policy changes, and sales in multinational companies in very many different levels. In economics, the way of thinking helps one to identify losses and gains and the relocation of resources.
Most of the times, economists use the first4 of the 10 principles of economics to allocate their resources. Trade-off is the first. It is a decision on giving up something for the sake of what society likes instead. In the next principle, comparison of prices and benefits of separate actions is done. This means that with their limited resources, economists must be willing to give up one thing for another that fits their scarce resources.
Realization comes at third. This means that economists take an understanding and that people are rational and that their preferences and efforts are in the interest of the economy in general. The last one is people reacting to incentives.
This helps to involve the people more; providing rewards to keep them more involved and productive. Flow of Money and Goods Through the Circular Flow Model.The Circular Flow Model is a model that represents the economy that depicts clear channels of flow of goods, services and money between organizations and household agents. It focuses on both macro and microeconomics aspects of consumption, distribution and production. It is important in that it depicts the Gross Domestic Produce of a country via calculating the general factors of production and consumption. Quite important is the role it plays of bringing all those independent factors and aspects into one picture that can be clearly understood and comprehended. The flow in a closed circuit corresponds in value but run in the opposite direction of the model. It is the epitome of nationwide accounts.
Leakages can occur in the economy, which then becomes an option for households to save money. Since the excess money cannot be spent, its ideal purpose goes into savings. A leakage can occur from the government sector as well can help in provision of welfare payments to a community. Imports are the main source of leakage from overseas. This means spending by the residents into the entire world. A state of equilibrium is accomplished when all these leakages match injections that are done to the market. The Circular Flow is important in measuring the national income, knowing of the interdependency of the economy, understanding the processes involved in economics; expenditure, production and income and, learning about leakages and injections and the roles that they play in the national and world economy as we know it.
The diagram represents the economy as a whole with its different and diverse activities intertwined and interdependent of each other. It notes that the economy can duplicate itself over and over. However, since there are no self-existing systems, the model requires input of energy to keep the cycle moving through. This model brings all these factors to light and that is exactly how the economy is understood.Gross Domestic Product (GDP)This is one of the most prevalently means used to check on country’s economy. It is defines as the entire marketplace value of all commodities and services in a country for a particular specific period of time.
Most of the time the period used is usually one year that is then compared to the previous year. This measures growth or decline of the country’s GDP. If the GDP drops lower that the previous time it is considered to be lagging.There are three different ways of calculating GDP.
These are production method, income approach and expenditure approach. The production method is simply the final value of all goods and services. It involves three statistics, which are Gross Value Added, Intermediate Consumption and Value of Output. Gross Value Added are an estimation of the total value of different domestic activities. Intermediate Consumption is the evaluation of the cost of the materials and supplies that was used to create the commodities and services. Value of Output represents the deduction of cost of materials, intermediate consumption, from the total value of different domestic activities, gross value added. This, generally, is how GDP is obtained from the production method.
The income approach simply evaluates incomes from all people in a country. Incomes are categorized into wages or salaries, corporate profits, interest and miscellaneous investment income, farmer’s income and income from non-farm unincorporated businesses. After this is done, indirect taxes minus tax subsidies are then added to get the GDP. The expenditure approach involves the measurement of all expenses by persons within a year.
Its components are consumption, investment, government spending and net exports. Consumption is the purchase of good and services. Investment implies capital investments like machinery and software. Government spending is the total amount of expenditure incurred by the government including all paychecks for government officials. Subtracting the value of imports from that of exports gets net exports.
GDP is very important for any country. However it may seem, it is quite useful in the measure of the country’s growth.The Consumer Price Index (CPI).The CPI is measurement done every month that measures the U.
S. prices of goods and services for each household. This is the means in which inflation and deflation are measured. The index is computed as a weighted average of sub-indices of different components of consumer expenditure such as housing, food, and clothing each of which is a contributing factor of the sub-indices. The CPI is an inaccurate measure of the cost of living because it tends to be quality, substitution, new product and outlet bias. When it comes to quality biasness, CPI does not reflect the usefulness of advancements over a period of time.
Since the CPI is a fixed price index, it would not be accurate when consumers substitute one product for another thus being substitution bias. New products are not introduced into the index until they become commonplace. This makes it new product bias. Outlet bias comes with unclear representations when the consumers shift to new outlets.