Absolute and Comparative Advantage

Learning Goals 6. I will be able to explain absolute and comparative advantage 7. I will be able to state some advantages and disadvantages of specilalization 8. I will be able to explain inflation and the causes of inflation 9. I will be able to explain the CPI, GPD and Real GDP

Absolute Advantage The ability of one person, region, or country to produce a good or a service at a cost lower than a competitor. E.g. Manitoba, Alberta and Saskatchewan have an absolute advantage in the production of wheat compared to other provinces. Therefore, it is to the advantage of both countries to specialize in the production of those goods and services in which they have an absolute advantage and then exchange for what they need.

Comparative Advantage The ability of one person, region, or country to provide a good or a service relatively more cheaply than other goods and services. E.g. I can make 5 pianos and 10 guitars in one day. You can make 10 pianos and 5 guitars in a day. It is far more efficient for me to produce 20 guitars and you to produce 20 pianos and then we trade. I have a comparative advantage in guitars and you have a comparative advantage in pianos

Advantages and Disadvantages to Specialization?

What is Inflation? Is the general increase in the prices of goods and services over a period of time. E.g. One dozen eggs $ $ $ $ $1.69 Today – (roughly) $4.00 Therefore the amount of money that a person has could buy more in 1970 than it could today. This is called purchasing power.

Causes of Inflation Demand-Pull inflation – high demand for goods and services increases the price of goods. E.g. people love Apple products, more people want Apple products, Apple can charge more for its products. Cost Push Inflation – occurs when wages or other production costs rise and these costs are then passed onto the sellers. E.g. the cost of producing coffee cups increases and therefore the price of Tim Horton’s coffee increases

Consumer Price Index (CPI) A measure of the general changes in market prices of a selected group of goods and services purchased by a typical urban family. Used to track inflation Components (baskets) of the CPI – food; housing, clothing; transportation; health and personal care; recreation, reading and education; tobacco products and alcoholic beverages. calculator/ calculator/ quotidien/131220/dq131220a-eng.htm

Gross Domestic Product (nominal) Measures the total value at market prices of all final goods and services produced in Canada over a period of time (usually a year) GDP = C + G + I + NX "C” consumer spending (consumption) "G” government spending "I" is the sum of all the country's businesses spending on capital (investments) "NX" is the nation's total net exports, calculated as total exports minus total imports. (NX = Exports - Imports)

Real GDP GDP does not take into account inflation. Therefore, economists also use Real GDP to measure the health of an economy. Real GDP is basically GDP that has been adjusted for inflation. Calculation Real GDP = nominal GDP/GDP deflator x 100 GDP inflator – very similar to the CPI but it accounts for ALL goods and services in Canada not just consumer goods.

What is it for? GDP is commonly used as an economic indicator of the economic health of a country, as well as to gauge a country's standard of living. It basically shows whether an economy is growing or not. What are some other economic indicators that we have studied in class?