Consumer Price Index

The organization’s CEO is focused on the concern of the fact that members of the strategic planning committee are not accustomed to current economic thoughts and principles. With this in mind, the introduction of the principles and thoughts are a necessity in order for the strategic planning committee to familiarize themselves with it. It seems that economists are both scientists and policymakers because they believe in the principles of society used to allocate scarce resources, how the economy coordinates society’s independent economy, product GDP and how it is defined and calculated and how the consumer price index, CPI, is constructed and it is an imperfect measurement of the cost of living.

Respectfully, economists have similar traits with scientists. This is due to the fact that they must be able to hypothesis and develop models that can be tested by using variable data. These models and the tests that need to be done in order to get results can give predictions. At times the data can vary with incorrect or inaccurate 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 happening in the economy and used as future statements about the economy.

People use the tradeoffs among alternatives, the foregone opportunities as well as their rationale and incentives they face to allocate the scarce resources depending on the abilities, desires, and efforts of the members. The circular flow model describes how resources, goods, money, and services flow through an economy. Within the process of flow through the economy, this shows that the income and spending have connections between different parts of the economy.

Based on the model, there seem to be two important players, which are the Goods & Services Markets and Factor Market. The Factor Markets are the companies that produce the goods and services in the economy, while the Goods & Services are allocated to the to the major consumers. The major exchanges represented as flows of money, goods, and services are between these two economic firms. Economists use this circular flow model to highlight the connection between households, producers (known as businesses) and the government.

According to Macroeconomics (Mankiw, 2015, pg. 196-197, the way the economy coordinates society’s independent economic actors is by using a method called, “Gross Domestic Product”. Gross Domestic Product or GDP, “is the market value of all final goods and services produced within a country in a given period of time” (Mankiw, 2015, pg. 199). Its job is to determine how well an economy is doing by looking at the total income that everyone in the economy is making (Mankiw, 2015, pg. 196).

To do this, GDP measures the total income for everyone in the economy and the total expenditure of the economy’s output of goods and services. It can range from food, land, cars, and clothing. What the GDP does not measure is anything illegal such as illegal drugs. It also excludes any homemade products that never made it to the market. An example that was given in the chapter was vegetables. For instance, if you purchased vegetables at a grocery store it is part of GDP but if you grew them in your own garden it is not. This means that the value is left out of the market (Mankiw, 205, pg 198).

Another example would be goods and services being purchased in other countries which are also not part of GDP.

Economists study the various components of the various types of spending of GDP. GDP is made up of consumption (C), investment (I), government purchases (G) and net exports (NX). Consumption is spending by household goods and services with exception of purchases of new housing. Investment is the purchase goods that will be used in the future to produce more goods and services. Government purchases are spending on goods and services by local, state and federal governments. Net exports are spending on domestically produced goods by foreign exports.

GDP, which stands for gross domestic product, is often referenced and cited in a variety of reports, banks and throughout all businesses. It is commonly used as a basis for the condition of health of national as well as global economies. It is a measure of the income and expenditures of an economy.

When the GDP is growing, workers and business are doing well. GDP is calculated for a specific period of time, usually during a year or quarter. Within an economy, GDP Is the monetary value of all final goods and services produced. The market values of a variety of goods and services must be calculated to determine the GDP.

A consumer price index (CPI) measures changes in the price level of a market basket of consumer goods and services purchased by the average typical consumer. This is a more direct measurement of per capita GDP of the standard of living in a country. It's the basis on the overall cost of the fixed basket of goods and services purchased. By including a broad range of thousands of goods and services with a fixed basket, the CPI can obtain a more accurate estimate of the cost of living.

Consumer price index is fixed and when the market changes like the introduction of new goods, CPI does not account for that. Even in a change in the quality of things because nothing stays the same. However, the consumer price index does not reflect the change in quality. Also, the CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically.