Economic Models Products and Services

Question: Discuss about the Economic Modelsfor Products and Services. Answer: Economic models are essential instruments in the contemporary world. Today, governments rely on these models to predict about various economic scenarios. They are also used in analyzing and solving economic issues (Ouliaris, 2012). Furthermore, they are important in making forecasts about the performance of various government policies and their implications on the general economy. Notably, states use these models in making decisions about the production of goods and services within the country. Moreover, they are also essential in determining production quantities of products and services within the economy. In this regard, it is worth pointing out that economic models are crucial economic tools and governments should implement their predictions. One of the most prominent models in the modern economy is the production possibility frontier (PPF). Primarily, the PPF curve is a representation of the amount of two commodities that can be produced in the country by shifting resources (PPF, n.d.). Using this model, economic agents can determine the optimal production level of services and goods in the economy. According to the model, nations can produce either below their potential, at an optimal level or above the optimal level. Thus, depending on the current level of production in the country, the government can instigate measures to produce at the most efficient level. As such, if it is producing below its optimal level, then it can instigate measures to improve productivity and efficiency. Source: (Khan, n.d.). In addition to this, the model helps governments in deciding on how to best allocate its resources based on its opportunity cost. Predominantly, opportunity cost pertains to the value of the best-foregone alternative. Therefore, using this model, the government can minimize opportunity costs associated with the allocation of resources for the production of various services and goods in the economy. Also, the government utilizes the model in making trade decisions. Particularly, it uses the concept of comparative advantage to make production choices (Beggs, 2014). Essentially, this concept allows the government to specialize in the production of commodities that it has a comparative advantage. This way, the economy benefits more from trade than when it produces products that it has a comparative disadvantage. Furthermore, these models are crucial in the determination of the economys absolute advantage. Markedly, a countrys absolute advantage plays a vital role in the type of goods and services it produces. Typically, a state has an absolute advantage if it is capable of producing high-quality goods at a faster rate than its competitors (Khan, n.d.). Thus, the country identifies and specializes in the production of those commodities that it has an absolute advantage. In turn, this brings about proficiency in the economy through the efficient allocation of resources. Consequently, this allows the country to benefit more from trade while putting its scarce resources to the best possible use. All in all, all things considered, economic models play a significant role in the modern economy. Predominantly, the predictions and assumptions laid out by the models offer a useful foundation and basis for policy making. Largely, governments utilize the ideas and concepts in the models to achieve economic productivity and efficiency. For this reason, it is rational to point out that predictions made by economic models are not false and should, therefore, not be ignored by governments in decision making. References Beggs, J. (2014). Absolute and Comparative Advantage. ThoughtCo.com. Retrieved from https://www.thoughtco.com/absolute-and-comparative-advantage-1146792. Khan, S. Comparative Advantage and Absolute Advantage. Khan Academy. Retrieved from https://www.khanacademy.org/economics-finance-domain/microeconomics/choices-opp-cost-tutorial/gains-from-trade-tutorial/v/comparative-advantage-and-absolute-advantage. Ouliaris, S. (2012). Economic Models: Simulations of Reality. International Monetary Fund. Retrieved from https://www.imf.org/external/pubs/ft/fandd/basics/models.htm Khan, S. Production possibilities frontier. Khan Academy. Retrieved from https://www.khanacademy.org/economics-finance-domain/microeconomics/choices-opp-cost-tutorial/production-possibilities/v/production-possibilities-frontier