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How Economists are both Scientists and Policy Makers

Economists are charged with the role of using scientific methods to create and test economic theories and then make conclusions that they use to predict alterations in the economy. As a result, they are empowered to design policies that ensure the betterment of these economies. This makes them both scientists and policy makers.

In the economy today, our productive resources are limited whereas our wants and needs are unlimited and ever increasing. This is scarcity. We are thus charged with making economic decisions that will create better management of the resources to meet our needs. Some principles we employ include; tradeoffs, where we give up one thing in exchange for another, foregoing opportunities, where options are weighed and the most important selected; people use rationale and respond to incentives by thinking of the best ways to act and the government may intervene to improve functionality of the economy.

CIRCULAR FLOW MODEL

The model of circular flow is a diagram that describes how resources, products and income flow within different structures in an economy with only two key actors; the households and the firms while the markets are divided into production factors' market and goods and services market.

Households supply production factors; labor, capital, land and entrepreneurship to the factor market which then provides necessary factors of production demanded by firms in goods and services production which are then supplied to the goods market and exchanged for money. The goods market then provides households with the necessary goods after which the households provide the production factors and the cycle begins again. In return, as on the outside arrows, the firms pay income to the households, wages for labor provided, rent for land and, interest for capital, these are the incentives for households to provide factors of production to the resource market and is what households use to purchase goods and services from the goods market; profits go to the firms and are used to continue production.

FsoP are the factors of production

How the Economy Coordinates Society's Independent Economic Actors

In any economy, the independent economic actors include; firms, households and governments. Households are major since they not only provide firms with necessary factors of production - labor, capital, land and entrepreneurship, but also purchase finished goods and services from the goods market. This ensures that the economy always operates under the balance of supply and demand forces. Firms are also major since they produce goods and services using resources provided by the households. In this case, households always use their limited resources sparingly in an attempt to maximize utility, while the firms always attempt to maximize profits. The government too plays an important role by regulating resources by setting prices and regulating incomes through taxation to ensure balance in the economy is a major tool used in coordinating these actors. Using price system is a major tool where consumers purchase commodities from people they do not know about and have never been in communication with or from a firm whose existence they are unaware of ensures a familiar price system that uniformly meets all consumers wants. Market power is another tool where a small group of actors in the market can have influence on prices by influencing the supply of certain products.

Gross Domestic Product

GDP is the total market value of all goods and services that are finished, produced inside a certain country over a period, usually one year. It is useful in measuring how the economy is performing by comparing everyone's cumulative incomes against the total spending on the economy. The expenditure method used to calculate GDP is the most common and is: Y= C + I+ G+ (X-M). Where:

Y = cumulative income;

C = shows household spending on goods and services that is the Consumption; I = gross investment; summation of all investment that is domestic;

G is the sum of all domestic government spending

(X-M) is net exports, (NX); shows difference between goods produced domestically but sold abroad, i.e. exported and those produced abroad and sold domestically, i.e. imported)

Other methods used to calculate GDP are the output/value added approach that sums up the monetary/ money value of goods and services produced domestically; it is worked as Y=GDP at factor price -Depreciation+ Net foreign factor income-Net indirect taxes and the Income approach which sums up the income received by all actors in that economy; it is given by: Y=Total National Income + Depreciation + Sales + Taxes Net foreign factor income.

Consumer Price Index:

Consumer Price Index is a mechanism designed to work out by use of appropriate weighing, the average change over time in prices paid by ultimate consumers of a specified quantity of products. It is important in reporting inflation or deflation of an economy. The CPI is constructed by taking the price changes for the goods and services from the basket of commodities and dividing them by the price of a base year, which is usually the period when prices were most stable. The resulting changes are then used to account for the changes in preferences by the consumers.

CPI= Current period price of the good x l00

Previous period price of the good

However, this is not a true reflection of the living costs because of a number of reasons; the CPI assumes that changes in consumption are as a result of living standards while people tend to replace expensive products and services with those that are offered at much cheaper prices. It also neglects changes in purchasing power by consumers who select newer products with more variety other than what they are used to getting. The CPI does not reflect living standards of all populations since the goods mostly consumed by urban people is not always the preference of rural populations. Also, quality of goods and services as well as the value of the dollar may fluctuate with time and this is not captured by the CPL

REFERENCES

The Boundless. "A Circular Flow Model." Boundless Economics Boundless, 26 May. 2016.

Recovered 3 April, 2017. fromhttps://www.boundless.com/economics/textbooks/boundless-economics­ textbook/the-market-system-2/introducing-the-market-system-45/the-circular-flow­ model-168-12266/

Dewatripont, M., Rochet, J. and Tirole, J. (2010) Balancing the Banks: Global Lessons from the Financial Crisis, Princeton University Press

Laffont, J-J. and Tirole, J., (1999). A Theory of Incentives in Procurement and Regulation, MIT Press

Cooper, James C., Daniel P. O'Brien., Luke M.Froeb, and Michael B. Vitta (2005) 'A Comparative study of American States and the European Union approaches to vertical Policy'

George Mason Review of Law (17) v2: pages 289-308.