The Principles of Economic Analysis - Essay Example

? ECONOMICS ANALYSIS Introduction Various economists define economics in different ways though generally economics refers to the study on the allocation of the limited resources towards the production, supply, and demand of specific products. As such, economic analysis relates to the study of economic systems in an industry to ascertain the effectiveness of the operations of a given industry with reference to its profitability1. With this, we are able to establish the optimum use of the limited resources to achieve a given economic objective. In doing, economic analysis equally considers the assumptions and constraints in application. At the same time, it considers opportunity costs, probable benefits, and social costs related to a certain economic venture. However, the main objective of an economic analysis is to determine how to allocate goods and services using the most accurate economic tools. Additionally, economic analysis defines how government policies and changes in standard rules in the market can affect the stakeholders. Economic analysis involves cost-benefit analysis to ascertain the level of the gains compared to the losses with an aim of maximizing the gains. Economic analysis equally involves welfare analysis that seeks to foster cost-benefit analysis in relation to promoting social responsibility. Therefore, it establishes the viability of a project, the fiscal impact, the possibility of recovering costs, social welfare, and environmental compliance. As such, economic analysis is most beneficial if it takes place at the initial stages since at later stages it can only determine the going concern of the project2. To achieve this, economic analysis relies on various economic theories, economic models, and economic concepts as articulated by various economists. In arriving at conclusive answers, it uses measurable monetary terms like profits and losses as well as no measurable terms like human suffering and effects on the environment. This paper will carry out an economic analysis on an economic article using relevant economic theories/concepts. Economic theories/concepts Different economists have taken time to research and come up with respective economic theories. Some of the famous economic theorists include Karl Marx, Adam Smith, Friedrich Hayek, John Maynard Keynes, and Milton Friedman3. Indeed, Adam Smith came up with the modern economic theory that sought to establish that individuals pursue their own interests in producing the required goods and services in the market. He concluded that an invisible hand, competition, supply and demand, and self-interest are responsible for allocating scarce resources in the society4. Karl Max on the other hand invented the modern communism theory by incorporation politics in economics. He concluded that workers are part of the production and should thus own part of the production process. However, this theory did not consider profit sharing, incentive, and worker safety standards. On the other hand, Milton Friedman came up with the consumption theory, that later became the monetarism theory. According to him, the government can modulate a natural rate of unemployment at the expense of inflation. He was thus against government regulation and advocated for free market economics. Other theories include classical economics, Keynesian economics, and market socialism theories. We equally have economic concepts that have significant application in economic analysis. Economic concepts include Scarcity that leads to opportunity cost. We also have limits on production that include capital, labor, and natural resources. Then we have globalization that generates costs and benefits. Additionally, there is the Economic growth that emanates from future investments. Moreover, we have the forces of demand and supply that determine market equilibrium. Furthermore, we have unemployment that defines underutilization of available resources. In addition, Government, business, and individuals gauge the costs and benefits of a given project. Indeed, Government involvement in pricing is economically sensible. Then we have Gross domestic product (GDP) that measures the value of marketable goods and services. On the other hand, Potential GDP measures current possibilities. These economic theories and concepts will relevantly help in economic analysis of the economic article5. The economic analysis will refer to the article in The New York Times titled, “U.S. Growth Falls to 1.5%; a Recovery Seems Mired” written by Shaila Dewan on July 27, 20126. In doing the economic analysis, I will relevantly use the economic growth rate concept that originates from future investments in an economy. Early this year the economic growth rate of America was on a higher tread than it is now. Indeed, statistics show that in the second quarter of this year it registered a mere 1.5 percent annual growth rate. This depicts a reduction in future investments due to increased uncertainty about the future. Indeed, the article records the people recorded an increase in total savings and a reduction in household spending. On the other hand, the Government increasingly reduced its spending on future investments hindering economic growth. The gains of increased in exports earlier in the year faced nullification from larger increase in imports that came in the second quarter of the year thus reducing the GDP and depreciating the value of the local currency. All these factors led to the fall of the American Economy growth rate by 1.5% in the in the second quarter of this year7. At the same time, we can apply the communism economic theory of Karl Max to analyze the economy of USA. The theory links politics with economics8. Indeed, according to the article and reality, it is a campaign and election-season in USA and hence this reduces the level of confidence in spending by both the government and individuals as seen herein due to increased uncertainty. In fact, the article records that there are uncertainties that emanate from the US presidential race and the fate of numerous federal policies. This derives a negative effect on the economy and thus the reduced growth rate in the second quarter of the year. Indeed, President Obama has a task of convincing the Americans on the recovery of the economy. Additionally, we will apply the monetarism economic theory, which reckons that a government can modulate a natural rate of unemployment at the expense of inflation9. Indeed, the theory advocates for advocated for free market economics instead of government regulation to promote economic growth and reduce unemployment. Indeed the dwindling of auto production, computer sales and large purchases, and continued reduction in government spending propagated the downfall in economic growth. Instead of such government regulations, free market economics would boost the economy and create employment. In fact, according to the unemployment concept, the governments’ cut on spending led to underutilization of available resources and thus unemployment that weakens economic growth rate. Furthermore, according to the Gross domestic product (GDP) concept, that measures the value of marketable goods and services, economic growth experienced adverse effects as the customers chose to save more than to spend10. Indeed, according to revised statistics, the annual economic growth rate is only 2 % due to the demeaning value of marketable goods and services that fell because of reduced spending by the customers and the government. 11 Where GDP1 refers to initial Gross domestic product and GDP2 refers to the current Gross domestic product. 12Moreover, the government involvement concept that defines the economic sense in Government involvement in pricing is applicable in this context. Indeed, the federal government seeks to introduce a financial stimulus and bank bailouts in the market to respond to the crisis. Assuredly, the stimulus and the bank bailouts relevantly save the job opportunities in the current economic growth. Nevertheless, the government needs to put more effort in this case. This is economically sensible as stipulated in the government involvement concept. Another concept that applies in this article is the globalization concept that generates costs and benefits. Indeed, the American economy is subject to uncertainties from overseas companies like Ford that recorded reduced profits. Such effects are global as seen herein they affect the economy both in Europe and in North America. Finally, the monetarism theory states that the government can modulate a natural rate of unemployment at the expense of inflation. Actually, the federal government used financial stimulus and bank bailouts to save job opportunities at the expense of inflation. In fact, the federal government is still contemplating on the next course of action after consumer prices fell by 1.3 % after the financial intervention that saved jobs at the expense of inflation. In conclusion, I realize that economic analysis is important in determine how to allocate goods and services using the most accurate economic tools. Additionally, economic analysis defines how government policies and changes in standard rules in the market can affect the stakeholders. This is in close reference to the federal government’s decision to cut spending which in turn led to decline in economic growth. In addition, the federal government’s strategy to introduce financial stimulus and bank bailouts saves the employment sector at the expense of inflation. The various economists deduce theories like the modern economic theory, monetarism theory, and communism theories are very applicable in economic analysis. In addition economic concepts like the scarcity, limits on production, globalization, economic growth, unemployment, Government involvement, and Gross domestic product concept are very significant in economic analysis. From the analysis, I can confirm there are numerous factors that can cause a decline in economic growth some of which are local while others are global. In this context reduced government spending, global factors, underutilization of resources, poor government strategies, dwindling of auto production, computer sales and large purchases, uncertainties, political factors, increased imports, reduced customer spending, and lack of future investments lead to the decline of economic growth rate in the second quarter of this year in America. Bibliography Belli, Pedro. Anderson, Jock. Barnum, Howard. Dixon, John.Tan, Jee-Peng. “Handbook On Economic Analysis Of Investment Operations.” Operational Core Services Network. Accessed on 27 September 2012. http://siteresources.worldbank.org/INTCDD/Resources/HandbookEA.pdf Dewan, Shaila. “U.S. Growth Falls to 1.5%; a Recovery Seems Mired.” The New York Times. 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