Reading: Lesson 1 – Gains from Trade

Required Materials

• A number of small, inexpensive items to use in the Trading Game. A variety of items such as toys, candy, stickers, and school supplies works well. The more variety the better! Note: Some teachers have also had success asking students to bring in a few small items they are willing to trade. Inexpensive items can be purchased from Oriental Trading.
• Brown paper lunch bags (one per student).
• Trading Game Spreadsheet, or tally sheets to count and display results.
• Stopwatch or way to keep time.

Preparation for this Activity:

1. Divide the total lunch bags (one for each student) into four equal groups. Assign each group of bags a color, and mark the bags in the group with the group color (red, green, blue, yellow).
2. Place items for trade in each of the brown paper bags. Introduce variety by placing different items and varying quantities in each bag. The game seems to work well if you concentrate item types by color as well. For example, the red team might have most of the bouncy balls and the green team might have most of the finger traps to simulate comparative advantage.
3. Prepare a score sheet on the board, or prepare the Trading Game Spreadsheet to tally and display results.   
4. Place bags of like color in each of the four corners of the room.

Directions:

1. To begin the Trading Game, divide the students into four equal groups by color and ask the students to select one bag from their assigned color. Tell your students not to look into the bag.
2. Explain the rules of the Trading Game to your students:
   1. The Trading Game will have four rounds, each with different rules. I will explain the rules before each round. Things might get loud and hectic, so I need everyone to pay attention to my instructions.
   2. At the end of each round we are going to rate your individual satisfaction on a scale of 1 to 5. A score of 1 means you are very unsatisfied and a score of 5 indicates you are very happy with the contents of your bag.
   3. Play the Trading Game in four rounds using the instruction below.

The Trading Game

Round 1 – No Trade

1. In Round 1, students have 2 minutes to open their bag to review the contents. Inform students that items in their bag now belong to them. It is their property.  Instruct students not to remove items from the bag and not to let anyone else see what they have in their bag.
2. At the end of 2 minutes, ask students to rate their satisfaction level on a scale of 1 – 5, and record the number of students at each individual satisfaction level. Place the totals on the board or in Trading Game spreadsheet.
3. Calculate the total satisfaction level by adding the products of the level of satisfaction and the number of students (example below), and briefly share the results for Round 1 with the class.

Round 2 – Limited Trade

1. In Round 2, students have 5 minutes to trade with anyone in their group (e.g. a member of the Green group can only trade with other members of the Green group). Instruct students to make voluntary trades only. They do not have to trade if they are satisfied with the contents of their bag.
2. At the end of 5 minutes, ask students to rate their satisfaction level on a scale of 1 – 5, and record the number of students at each individual satisfaction level and place the totals on the board or in the Trading Game Spreadsheet.
3. Calculate the total satisfaction level, and briefly share the results for Round 2 with the class.

Round 3 – Expanding Trade

1. In Round 3, students have 5 minutes to trade with anyone in their half of the room. Members of the Green and Red groups can now trade with each other. Members of the Blue and Yellow groups can now trade with each other.
2. At the end of 5 minutes, ask students to rate their satisfaction level on a scale of 1 – 5, and record the number of students at each individual satisfaction level and place the totals on the board or in the Trading Game Spreadsheet.
3. Calculate the total satisfaction level, and briefly share the results for Round 3 with the class.

Round 4 – Free Trade

1. In Round 4, students have 5 minutes to trade with anyone in the room. Free trade!
2. At the end of 5 minutes, ask students to rate their satisfaction level on a scale of 1 – 5, and record the number of students at each individual satisfaction level and place the totals on the board or in the Trading Game Spreadsheet.
3. Calculate the total satisfaction level, and briefly share the results for Round 4 with the class.

Discussion Questions: Compile the results from the four rounds and plot the results on a graph for the class.  Discuss the results:

1.  Why do people trade?

1. People trade when they expect the value of what they are getting from the trade to be worth more than what they are giving up. The upward sloping graph can be described as gains from trade.  Gains from trade are not a “zero sum” game. When someone trades voluntarily and is made better off, it does not mean that someone else has been made worse off. Trade is a “positive sum” game. Both parties win.
2. As the size of the trading pool increases and restrictions on trade decrease, we are able to realize greater gains from trade. The more people there are with which we are able to trade, the greater the opportunity for prosperity. Much of the existing poverty in the world today is a direct result of trade restrictions.

2.  Does anyone have a success story they would like to share? (You may try to touch on the points below as students share their stories)

1. We learn that people value things differently. They can value the same items very differently, and individual preferences for an item may change over time.
2. The value of each item is determined by the value an individual places on it. This is what economists call subjective value. Sometimes we even see satisfaction levels decrease between Rounds 1 and 2 when students learn what kinds of items other people have.
3. Sometimes people will trade for something they don’t want. They trade for an item because they know that someone else wants it, and they may be able to use the item to get something else they want.
4. We observe that the more choices people have and the more freedom to trade, the easier it is for people to increase their satisfaction in the marketplace. They increase their satisfaction while increasing the satisfaction of their trading partner at the same time.

3.  Besides people having different values and preferences, what other conditions do you think must be present for trade to flourish?

1. Scarcity. We only trade scarce items. We don’t trade non-scarce resources like the air in the classroom. If we were playing the Trading Game while scuba diving then air might be a very valuable scarce resource!
2. People cannot trade what they do not own. Ownership of property is a precondition for trade. 
3. The rule of law is also essential. For trade to flourish there must be a legal system that enforces contracts fairly and protects property rights. People will be less likely to engage in trade if they think their property will be stolen or confiscated. How would different incentiveshave changed your behavior? For example, if I said at the beginning that you don’t get to keep the contents of your bag, would you have tried as hard to trade for the things you wanted? What if we had placed taxes on all trades and you had to give up half of your gains from trade?  

4.  How is this game different from the real world?

1. There was no production in the Trading Game. The amount of goods available for trade did not increase. Even with a static amount of “stuff,” we were still able to witness significant gains from trade.
2. There was no time for significant innovation. We did not have time for entrepreneurs to discover new processes or identify new ways to serve people. We did see people thinking with an entrepreneurial mindset as they found creative ways to trade.
3. We had to rely on barter (the direct exchange of goods for other goods without using money).

5.  What are the main challenges or obstacles that might make trade difficult?

1. We don’t have access to perfect information. It could be very difficult and time consuming for us to get the needed information.
2. Transportation costs due to geographic factors could result in high costs associated with trade.
3. Political barriers increase the cost of trade. Taxes, regulations, and trade quotas make trade more expensive.   
4. Note: Technological advances have helped to reduce both the transportation and information costs associated with trade and have expanded the opportunity for people to create wealth through trade in the global marketplace. Economist Frédéric Bastiat compares government restrictions on trade to a “negative railroad.” Bastiat argues that governments make trade more expensive by restricting trade in much the same way as if we were to break up the tracks on the railroad we use to transport the goods. 

6.  Do you think trade does more to create cooperation or conflict between people?

1. Trade encourages cooperation between people. Humans seem to intuitively understand the fact that trade makes us better off. We thrive when we build strong economic and social relationships that leverage the specialized abilities of our friends, family, communities, and other people in the marketplace. Some scholars even suggest that the emergence of “feelings of sympathy and friendship” are rooted in our understanding that we are better off when with economic cooperation. For more information on the topic, see Competition Is Cooperationby Sheldon Richman in Module 4, Lesson 4.

Sample Trading Game Tally Sheet

Round 1

                                                                                                                                         Total: 

Round 2

                                                                                                                                         Total: 

Round 3

                                                                                                                                         Total: 

Round 4

                                                                                                                                         Total: 

Example chart from the Trading Game Spreadsheet showing gain from trade:

Lesson Recap

• Trade, or voluntary exchange, happens when all parties involved expect to gain.

• Trade creates wealth and directs resources from people who value them less to people who value them more.

• Trade increases the wealth of individuals, societies, and nations.

• Policies and institutions that restrict trade make individuals and societies relatively poorer.

Additional Resources

Article: Trade and the Rise of Freedom by Thomas DiLorenzo (FEE.org)

“It is no exaggeration to say that trade is the keystone of modern civilization…. Human beings cannot truly be free unless there is a high degree of economic freedom—the freedom to collaborate and coordinate plans with other people from literally all around the world. That is the point of Leonard Read’s most famous article, “I, Pencil,” which describes how producing an item as mundane as an ordinary pencil requires the cooperation and collaboration of thousands of people from all around the world, all of whom possess very specific knowledge that allows them to assist in the manufacture and marketing of pencils.”

Article: Free Trade and the Climb Out of Poverty by Steven Horwitz (FEE.org)

"Progress comes from good policies that let individuals use their local knowledge to their own benefit, and in doing so, unintentionally benefit others. The path toward development requires free trade. To restrict it is to condemn to prolonged poverty those who most need to escape it."

Article: Hats Off to Peaceful and Voluntary Exchange by Sarah Skwire (FEE.org)

“Voluntary exchanges make us richer. They also make us kinder.”

Podcast: Narlikar on Fair Trade and Free Trade  (EconTalk, 1:01:21 min)

“Amrita Narlikar of the University of Cambridge talks with EconTalk host Russ Roberts about fair trade and policy issues related to trade. Narlikar argues – based on a recent article with Dan Kim – that the fair trade movement hurts workers outside of the free trade umbrella and does little for those it is trying to help. She advocates free trade, particularly the elimination of agricultural subsidies in the developed world and the best way to help workers in poor nations. Drawing on a recent article with Jagdish Bhagwati, she criticizes the international response to recent deaths in Bangladesh factories. In the last part of the conversation, she defends the World Trade Organization”