Economists are qualified as both scientists and policymakers for a variety of reasons. They are classed in both ways based on their work. They are scientists because they develop models and hypotheses that can be tested using data. Economists are concerned with the distribution of resources such as raw materials, labor, land, and machinery in the creation of commodities and services. They use scientific tools to conduct research, gather data, make predictions, and monitor economic trends on a wide range of topics such as unemployment rates, taxation, business cycles, exchange rates, inflation, interest rates, and so on. Furthermore, economists develop scientific data collection models. For instance, they apply sampling techniques to gather information and use mathematics to develop empirical models used in making forecasts (Audretsch et al., 2002).
On the other hand, economists are policymakers. They help in guiding various aspects which govern on how the economy runs. For example, micro-economists monitor the demand and of people and firms and efficiently advise manufacturers on the optimal amount of goods and services to be produced thus helping in maximizing company profits. Besides, organizational and industrial economists research on the market structure of particular sectors of the economy in terms of some competing firms and help managers and business leaders to make appropriate policies on monopolies and competitive companies. Also, deductions from studies carried out by economic experts assist the government in its policy making and plans (Audretsch et al., 2002). The society uses two most important principles to allocate resources. First, price signals are employed in the market system to allocate resources. Secondly, political choices are used in command systems to allocate scarce resources (Audretsch et al., 2002).
Question two
The circular flow model
Source: Hollingsworth & Boyer (1997).
The circular flow model is one of the simplest models which explain the movement of goods, services, and money in the entire economy. The model takes into account all players in an economy as either firms or households, and it classifies the economy into two broad categories: first, goods and services market. Secondly, production factors market.
i. Market for goods and services
In this market, households purchase manufactured or finished products from firms aiming to sell their goods. In this transaction, money moves from the households to the enterprise as shown by the arrows labelled “$$$$” which link the products and services box. Similarly, manufactured or finished goods flow to households from firms is indicated by “finished products” arrows. The movement of arrows in opposite directions reveals that market players exchange money for goods and other stuff (Hollingsworth & Boyer, 1997).
ii. Factors of production market
Factors of production are all inputs used by firms to produce final products. They include land, labor, capital, etc. in this market both companies and households play diverse roles, more than what they do in goods and services. Households are a source of capital, labour and other factors necessary for production as shown by the lines on “land, labour, and capital, etc.” On the opposite end, firms give money as wages for the provision of factors of production as indicated by “$$$$” arrows which link the factor markets (Hollingsworth & Boyer, 1997).
Question three
Coordination of main actors in the economy
The primary economic actors include firms, households, and the government. The household plays a significant role in the purchase of goods and services from the market first, and secondly, by providing resources, labour, and land to the market. Economists postulate that every household makes independent decisions. Further, they assume that members of the family strive to maximize utility through consumption of the available resources (Hollingsworth & Boyer, 1997).
On the other hand, firms are major economic agents established by merchants who use factors of production to come up with goods and services and trade them in the market. In addition to this, economists use the price system to coordinate independent economic players and the society. Major participants in the economy are coordinated through the price system (Hollingsworth & Boyer, 1997). Besides, the price system enables the purchase of commodities from manufacturers. Further, the system aids agents to have particular price structures to make available wants of all consumers. The production of goods is another factor which influences economic coordination. For efficient production by a firm, it needs to utilize and follow a certain basic procedure that optimizes prices and reduces costs (Hollingsworth & Boyer, 1997). Goods and services distribution plays a significant role as they are made easily accessible.
Question four
Definition and measurement of GDP
Gross domestic product is the assignment of monetary value all finished goods and services within the boundaries of an individual country in a specified period. Usually, GDP is calculated annually, but it can be enumerated quarterly. GDP takes into account all private and public consumption, investments, the balance of payment (subtraction of imports and addition of exports), private inventories, etc. In simple terms, GDP is the measurement of a country’s entire economic activity (Cunado, J., & De Gracia, 2005). There are three methods of GDP calculation (Mankiw, 2014).
i. The expenditure approach. The method calculates GDP through the summation of the four main types of expenses as shown:
GDP = Consumption + Investment + Government spending/purchases + net exportsii. Product approach: involves the calculation of the market valuation of all services and goods produced.
iii. Income method: includes the summation of all benefits earned by all producers in the economy.
QUESTION 5:
Construction of the consumer price index (CPI) and its limitation
The CPI is measured by taking into consideration all costs of services and goods bought by a household. Its construction entails four steps which include (Cunado, J., & De Gracia, 2005):
i. Definition of the fixed basket of goods and services. This involves pointing out where typical consumers spend their money. This information is gathered by the Bureau of Labour Statistics.
ii. Finding the prices of all items in the fixed basket. Because a similar basket of goods is used across a period to establish CPI change, thus the price of every commodity in the fixed basket must be found.
iii. Calculation of the cost of the fixed basket of goods and services across all time periods. The total cost of the fixed basket is determined by multiplying each item in the basket by its respective price.
iv. Selection of the base year and computation of the CPI. The price for every fixed basket of goods and services for all years under study is divided by the price of the fixed basket of the base year. The answer is then multiplied by 100 to show the relative cost of living level between the comparison years and the base year.
Limitation of the CPI
The CPI is short of new living spaces. It takes some time to get data on the cost of living and by the time that information is gathered new living spaces with updated structures which may reduce the cost of living have been discovered. Besides, the buyers may be getting more value for the money with the new systems even though they may not need all systems (Cunado, J., & De Gracia, 2005).
References
Audretsch, D. B., Bozeman, B., Combs, K. L., Feldman, M., Link, A. N., Siegel, D. S., ... & Wessner, C. (2002). The economics of science and technology. The Journal of Technology Transfer, 27(2), 155-203.
Cunado, J., & De Gracia, F. P. (2005). Oil prices, economic activity and inflation: evidence for some Asian countries. The Quarterly Review of Economics and Finance, 45(1), 65-83.
Hollingsworth, J. R., & Boyer, R. (1997). Coordination of economic actors and social systems of production. Contemporary capitalism: the embeddedness of institutions, 1-47.
Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.
