Answer to Question #65660 in Macroeconomics for Ralph Luaifoa

Question

Develop a 875-word report to the members of the strategic planning committee explaining the following information:

What principles society uses to allocate its scarce resources
Using the circular flow model, explain the flow of money and resources in an economy.
A country's gross domestic product (GDP) and how it is defined and calculated. Be sure to include the differences between real GDP and nominal GDP
How the consumer price index (CPI) is defined and constructed? Research the current CPI and inflation rate of US. And explain the importance of CPI on the cost of living measurement.

Answer 1

Allocative efficiency is a state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing. In the single-price model, at the point of allocative efficiency, price is equal to marginal cost. At this point the social surplus is maximized with no deadweight loss, or the value society puts on that level of output produced minus the value of resources used to achieve that level, yet can be applied to other things such as level of pollution. Allocative efficiency is the main tool of welfare analysis to measure the impact of markets and public policy upon society and subgroups being made better or worse off. [1]
The circular flow of income or circular flow is a model of the economy in which the major exchanges are represented as flows of money, goods and services, etc. between economic agents. The flows of money and goods exchanged in a closed circuit correspond in value, but run in the opposite direction. The circular flow analysis is the basis of national accounts and hence of macroeconomics. [2]
Gross domestic product (GDP) is a monetary measure of the market value of all final goods and services produced in a period (quarterly or yearly). Nominal GDP estimates are commonly used to determine the economic performance of a whole country or region, and to make international comparisons. The GDP adjusted for changes in money value in this way is called the real. [3]
A consumer price index (CPI) measures changes in the price level of market basket of consumer goods and services purchased by households. The CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically. [4]

References:
1) https://en.wikipedia.org/wiki/Allocative_efficiency
2) https://en.wikipedia.org/wiki/Circular_flow_of_income
3) https://en.wikipedia.org/wiki/Gross_domestic_product
4) https://en.wikipedia.org/wiki/Consumer_price_index