Principles of Economics

Principles of Economics
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Principles of Economics
How Economists are both Scientists and Policymakers and Principles Society Uses to allocate its Scarce Resources
Economics is a wide field that necessitates to the integration of complex knowledge and skills. Economists are scientists for the reason that they come up with models and premises that can undergo testing with the utilization of data. The models lead to calculations and prediction of future trends. Therefore, as scientists, economists factually establish and test models as well as assumptions through various scientific techniques. Hence, economists can understand the progress of the economy over time. While studying the financial system, the professionals also make recommendations on the necessary initiatives and modifications to enhance the standards of living of a society (Mankiw, 2015). Thus, economists play a significant part in the development of policies that guide a nation’s economy. Hence, economists are both scientists and policymakers.
In the allocation of scarce resources, people utilize economic principles that guide their decision-making process. One of the notions individuals use is trade-offs. There is nothing that one can acquire for free in the society, for instance, to get one thing, one has to be ready to give up the other. The government can use the tax that rich people pay to offer aid to the poor with the aim of attaining equity. Another principle the society uses is evaluating the costs and benefits of a decision.

People decide based on the benefits of an opportunity over the other within the limits of the resources available. Additionally, people also act according to incentives (Mankiw, 2015). In a society with scarce resources, one would pick an alternative that would bring about rewards to reduce the shortages in the community.
Using the Circular Flow Model, Explain the Flow of Money and Good in an Economy
The circular flow model explains the course of money and products through the economy with an emphasis on the actors in a financial system. The model depicts links between various sectors of an economy. In any society, people go to work in several companies and institutions so that they can earn an income. They then use the money to buy goods as well as services from establishments such as food, health, and clothes among others. Therefore, the living that they get from working flows back to firms forming the circular flow of income. Companies and establishments produce goods or offer services to consumers. To maximize their sales and proceeds, the businesses make use of factors of production including capital, land, and labor to function. For the services they receive from employees, the corporations have to pay the workers their salaries (Mankiw, 2015). It is in that flow that the income is useful in households and for individuals who purchase goods and services from businesses.
How the Economy Coordinates Society’s Independent Economic Actors
Several factors affect the economy comprising inflation, redundancy, and economic growth. Society’s independent economic actors that relate to the market include governments, households, firms, and all individuals. Households are essential to the economy since they require good and services from the market, offer labor, capital, and enable the presence of resources in the financial system. However, the economy directs society’s autonomous economic actors with market power. The concept refers to the capacity of a small group of actors to have sway on the market prices. A good example is a case where a corporation can increase the cost of products due to a shortage of services or merchandise. Therefore Mankiw (2015) explains that the GDP, which is the market charge of all final merchandise and services, coordinates the society’s independent economic actors.
A Country’s Domestic Gross Product (GDP) and how it is Defined and Calculated
The GDP is the market worth of all finished products and services manufactured within a nation in a particular period. GDP utilizes market charges to combine values of various products into a single measure of the assessment of the economic trend. Therefore GDP determines an economy’s entire spending on newly fabricated goods and services, as well as the earnings individuals receive for producing the merchandise or providing assistance. GDP is the best technique to gauge a nation’s economy. There are different components of GDP including consumption (C), investment (I), government expenditure (G), and total net exports (NX). Consumption includes the money that households use to purchase goods and services. Investment comprises the expenses businesses incur to acquire new equipment and facilities. Government disbursement takes account of the produces and services that local, state, and federal administrations spend money to acquire. The total net export on the other side is the entire worth of merchandise manufactured and sold within a nation. Therefore, to calculate the GDP, one uses the formula: Y=C+I+G=NX (Mankiw, 2015).
There are various types of GDP. The nominal GDP is a calculation that incorporates price escalations. The real GDP is a comparison of the economic output of various years through looking into the impacts of inflation. The GDP growth rate is the percentage upsurge in the GDP from time to time. Most nations utilize the real GDP to eliminate the outcome of inflation. The diverse measures of GDP are significant tools for evaluating the economies of other countries or the modifications in a financial system over time. The growth rate calculates whether or not the economy is developing faster or slower than the previous period. In cases where there is no growth of the financial system of a nation, then the GDP growth rate is negative thus indicating a recession (Mankiw, 2015). Therefore the GDP of a nation impacts on personal finance, reserves, and growth.
How the Consumer Price Index (CPI) is Constructed and why it is an Imperfect Measurement of the Cost of Living
A CPI calculates the modifications in the price point of a market basket of customer products and services that household buy. The CPI is a statistical approximation whose construction is through the use of the prices of a model of representative pieces whose costs collection is periodical. Considering the consumer purchases good and services at various points in time, it is essential to constantly calculate the CPI then estimates the average measure of the year. The gauging is through the multiplying the quantity of each piece by its price. Afterwards, one divides the cost by the year to get the base year. The next step is to multiply the value by 100 to get the cost of the base year and previous years. As a result of the computations, one obtains the CPI. However, the CPI is an imperfect measurement of the cost of living since there are introductions of new products in the market now and then and the likelihood of missing out on calculating the modifications in the quality of merchandise. Additionally, a substitution bias can occur compromising the accuracy of the measurement (Mankiw, 2015).
References
Mankiw, N. G. (2015). Principles of Microeconomics. Connecticut: Cengage Learning.