Theorganization’s CEO is focused on the concern of the fact that members of thestrategic planning committee are not accustomed with current economic thoughtsand principles. With this in mind, the introduction of the principles andthoughts are a necessity in order for the strategic planning committee tofamiliarize themselves with it. It seems that economists are both scientistsand policymakers because they believe in the principles of society used toallocate scare resources, how the economy coordinates society’s independenteconomy, product GDP and how it is defined and calculated and how the consumerprice index, CPI, is constructed any it is an imperfect measurement of the costof living. Respectfully,economists have similar traits with scientists. This is due to the fact thatthey must be able to hypothesis and develop models that can be tested by usingvariable data. These models and the tests that need to be done in order to getresults can give predictions. At times the data can vary with incorrect orinaccurate results, just like any test results. With the data collected,economists are able to review and determine the objective analysis.
This is used to determine what has been happeningin the economy and used as the future statements about the economy. People use thetradeoffs among alternatives, the foregone opportunities as well as theirrationale and incentives they face to allocate the scarce resources dependingwith the abilities, desires and efforts of the members. The circular flow modeldescribes how resources, goods, money and services flow through an economy. Withinthe process of flow through the economy, this shows that the income andspending has connections between different parts of the economy. Based on themodel, there seems to be two important players, which are the Goods & ServicesMarkets and Factor Market. The Factor Markets are the companies that producethe goods and services in the economy, while the Goods & Services areallocated to the to the major consumers. The major exchanges represented as flows ofmoney, goods and services are between these two economic firms. Economists usethis circular flow model to highlight the connection between households,producers (known as businesses) and the government.
According toMacroeconomics (Mankiw, 2015, pg. 196-197, the waythe economy coordinates society’s independent economic actors is by using amethod called, “Gross Domestic Product”. Gross Domestic Product or GDP, “is themarket value of all final goods and services produced within a country in agiven period of time” (Mankiw, 2015, pg. 199). Its job is to determine how wellan economy is doing by looking at the total income that everyone in the economyis making (Mankiw, 2015, pg. 196).Todo this, GDP measures the total income for everyone in the economy and thetotal expenditure of the economy’s output of goods and services.
It can rangefrom food, land, cars and clothing. What the GDP does not measure is anythingillegal such as illegal drugs. It also excludes any homemade products thatnever made it to the market. An example that was given in the chapter wasvegetables.
For instance, if you purchased vegetables at a grocery store it ispart of GDP but if you grew them in your own garden it is not. This means thatthe value is left out of the market (Mankiw, 205, pg 198). Another example would begoods and services being purchased in other countries which is also not part ofGDP. Economists study the various components of the varioustypes of spending of GDP.
GDP is made up of consumption (C), investment (I),government purchases (G) and net exports (NX). Consumption is spending byhousehold goods and services with exception of purchases of new housing.Investment is the purchase goods that will be used in the future to producemore goods and services. Government purchases is spending on goods and servicesby local, state and federal governments. Net exports are spending ondomestically produced goods by foreign exports.GDP, which stands for gross domestic product, is oftenreferenced and cited in a variety of reports, banks and throughout allbusinesses. It is commonly used as a basis for the condition of health ofnational as well as global economies. Itis a measure of the income and expenditures of an economy.
When the GDP Is growing, workers and business are doingwell. GDP is calculated for a specific period of time, usually during a year orquarters. Within an economy, GDP Is the monetary value of all final goods andservices produced. The market values of a variety of goods and services must becalculated to determine the GDP. A consumer price index (CPI) measures changes in the pricelevel of a market basket of consumer goods and services purchased by theaverage typical consumer. This is a more direct measurement of per capita GDPof standard of living in a country.
Itsbasis on the overall cost of the fixed basket of goods and services purchased. Byincluding a broad range of thousands of goods and services with the fixedbasket, the CPI can obtain a more accurate estimate of the cost of living. Consumer price index is fixed and when the marketchanges like introduction of new goods, CPI does not account for that. Even inchange in quality of things because nothing stays the same.
However, consumerprice index does not reflect change in quality. Also the CPI is a statisticalestimate constructed using the prices of a sample of representative items whoseprices are collected periodically.