The Allocation of Resources and Principles of Economics

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TheAllocation of Resources and Principles of Economics

TheAllocation of Resources and Principles of Economics

Froma technical perception, economics denotes the exploration of the waysin which people assess the numerous decision-making choices to bestattain a certain objective. In this regards, it encompasses the studyof processes or structures by which individuals apportion limitedresources to satisfy their infinite wants (Mankiw, 2014). They assignthe resources to the uppermost valued usages through preferences,production, benefits, demand, costs, and supply relationships. Thismeans that economics deal with policymaking, particularly in regardsto resource allocation, the flow of money or goods, and costs ofliving. The report highlights the role of economists as policymakersand scientists, the apportioning of limited resources, thecalculation of GDP, coordination of independent economic actors, andthe reason why people consider CPI a flawed dimension of the cost ofliving.

HowEconomists Act as Scientists and Policymakers

Economistsare essentially scientists because they are charged with thedevelopment of theories and models tested using collected data. Somemodels provide forecasts while others fail completely. Data enableseconomists to offer predictions describing human behaviors throughpositive economics (Mankiw, 2014). For instance, changes in use ofplastic bags resulting in tax increases on polymers. Throughnormative economics, economists are able to determine the rightcourse of action to embark on in combating marine pollution. Thisimplies that economists play a pivotal function in pinpointing losersand winners by advising on changes to particular policies thatinfluence private markets and consumer spending.

Aseconomic institutions, private markets endeavor to allocate limitedresources via a price system. Government regulation works to enforcecontracts and protect rights thus resulting in a symbiotic marketenvironment (Benigno, Converse, &amp Fornaro, 2015). Politicalinstitutions have far-reaching capacities in determining whethermarkets remain viable or exposed to risks. Progressive politicalinstitutions could ban plastics use for packaging consumer goodsspurring innovation and reallocation of limited resources. Economistsas scientists, therefore, enable policy makers to attain tradeoffs.

Flowof Money and Goods in an Economy

Inany given economy, it is the households that are charged withavailing factors of production like rent, labor, and dividends todrive businesses. Businesses employ the various factors of productionto generate services and goods for consumption by households (Mankiw,2014). This implies that households basically earn money or incomegained from selling factors of production to business while thesebusinesses, in turn, solicit revenues selling demanded services andgoods to households. This perpetual process in an economy is referredto as the circular flow of income.

Coordinationof Society`s Independent Economic Actors

Marketsgenerally coordinate various independent economic players interact toeither purchase or sell by offering mechanisms that correlate theunique intentions of the sellers as well as buyers. The four broadeconomic players in any economy are households, businesses or firms,government and the global players (Mankiw, 2014). Householdsbasically entail individuals sharing a common roof such as a familyunit. Households perform two very crucial things necessary for anyeconomy to exist. They demand products which may be goods or servicesneeded for human sustenance. Different households will tend to derivesatisfaction from varying products allowing for diversity within agiven market. Households also perform the all-important tasks ofsupplying necessary capital, labor, land and most importantly,entrepreneurial capacities to an economy’s resource markets. Froman economist’s standpoint, every household is perceived a solitarybut critical resource markets. Specialization has over the yearstranslated to a situation where negligible households can beconsidered as self-sufficient. As more women become economicallyactive, less production is realized at home resulting in greaterdemand for services and products offered in markets. As rationalutility optimizers, income earned from supplying resources is used tofacilitate for consumptions of products made available in the market.

Firmsare economic units established by entrepreneurs to create wealth byemploying diverse resources for the generation of services and goodsfor sale. The government is the third critical economic player whichworks to ensure markets remain viable through a myriad of avenues.The government is charged with the provision of the legislation,regulatory frameworks, and security to appraise the welfare of allother players (Benigno et al., 2015). Therefore, governments offerpublic goods, promote competition, regulating naturally occurringmonopolies and enforcing laws as well as regulatory frameworks.Global players are the fourth actors in an economy which allows forgreater specialization and the informed allocation of scarceresources to business process that offer the greatest utility.

Definitionand Calculation of a Nation’s GDP

GDPis a potent economic tool employed in measuring economic performance.It is the sum value of all services and goods generated by acountry’s firms and households (Mankiw, 2014). It considers globalplayers acting within as either as households or firms and ascontributors to GDP. Economists look to a country’s GDP in aneffort to determine its contraction or expansion as it has thecapacity to impact of employment, investments and personal incomes.It is calculated by employing the formulae: C + I + G + (X-M) where Crepresents household expenditures on consumption, I exemplifiesinvestments, G signifies government expenditures, X characterizesexports while M denotes imports (Mankiw, 2014).

Constructionof the Consumer Price Index (CPI) and its Imperfection

Itmeasures the mean change of prices incurred by consumers over timeand plays an important part in indicating economic performance andadjusting currency exchange rates. The total costs of basket servicesand products purchased by a household relative to the price of thesame particular baskets some time ago provide the CPI. It, therefore,presents estimates on changes in the cost of living. In the US, theBureau of Labor Statistics compiles and publishes monthly CPI bycomputing it through four straightforward steps (Mankiw, 2014).Firstly, the basket of services and goods is well defined. Secondly,each product within the basket is determined for a given period oftime. Thirdly, costs associated with the basket are calculated withreference to a particular period and lastly, a base year is adoptedand the index computed accordingly.

TheCPI is considered imperfect as it fails to offer a truly accurateapproximation on the cost of living. It is inaccurate as it does notconsider substitution bias, the preference of new products andproduct quality changes. It also tends to exaggerate inflation sinceit does not take into consideration improvement in product quality orthe introduction of novel services and goods.


Sinceresources are limited, it is essential for people to cultivatecomprehensive and effective approaches that they utilize to allocatethe wealth to different infinite wants. Individuals must use labor,land, and capital to shape an economy for their benefit, as they makerational decisions geared towards the maximization of self-interest.Furthermore, to evaluate whether the apportioning of wealth iseffective, people utilize the GDP to determine the aggregate incomegenerated in a nation in a given period.


Benigno,G., Converse, N., &amp Fornaro, L. (2015). Large capital inflows,sectoral allocation, and economic performance.&nbspJournalof International Money and Finance,&nbsp55,60-87.

Mankiw,N. G. (2014).&nbspPrinciplesof macroeconomics.Cengage Learning.