Lesson 1 - Why People Trade

INTRODUCTION CONCEPTS
Economics Barriers to trade
Because students often take part in activities Benefits of trade
such as athletic competitions where one side Incentives
wins and one side loses, they may not recog- Trade
nize that both sides win in voluntary trade. Voluntary exchange
This is true because anyone who does not (Optional) Utility
expect to gain from a trade would not volun-
tarily agree to do it. Trade is the exchange of CONTENT STANDARDS
goods and services. People decide to trade 4. People respond predictably to positive and
because they expect to benefit from it. When negative incentives.
one or both parties cease to reap benefits from
an exchange, or when they believe they can no 5. Voluntary exchange occurs only when all
longer gain from trading, exchanges stop. The participating parties expect to gain. This
idea that both sides benefit from voluntary is true for trade among individuals or
trade is one of the most important concepts in organizations within a nation, and among
economics and leads to the conclusion that, individuals or organizations in different
typically, the benefits of free trade far out- nations.
weigh the costs. This idea applies to exchange
among individuals and businesses as well as to OBJECTIVES
trade among nations.
Students will
1. Participate in a trading activity and
Reasoning
describe the incentives that encourage
The economic way of thinking implies that
trade.
people judge their satisfaction from a trade by
weighing the expected benefits against the
2. Explain the outcomes of voluntary trade.
expected costs. Economic reasoning also tells
us that different people place different margin-
3. Explain why there arenÕt any direct losers
al values on goods and services, making bene-
from voluntary trade.
fits from trade possible. With voluntary trade,
both sides expect that the value of what they
LESSON DESCRIPTION
gain will be greater than the value of what
they give up. The benefits of trade should Students participate in a trading simulation
become clear from this lesson: that is, volun- and use this experience to discover the benefits
tary exchange can make both individuals and of free trade. In a class discussion, they relate
nations better off. the simulation to concepts of regional versus
universal trade, trade barriers and diminish-
ing marginal value. They explain why both
parties benefit from the trade.

TIME REQUIRED
45 minutes

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LESSON 1 - WHY PEOPLE TRADE

MATERIALS the gains were greater than the losses.

1. One brown paper bag for each student in If this were not true, the teenager
the class would have kept the money and the
station owner would have kept the
2. A large number of small items that are gas.
easy to exchange (miniature candy bars,
small boxes of raisins, pencils, stickers, 2. Tell students that in todayÕs class they will
fruit, small boxes of juice, library passes). participate in a trading activity. The pur-
Before class, distribute the goods unequal- pose of the activity is to explore the rea-
ly in the bags; for instance, put only candy sons people, organizations and nations
in some bags but give several items trade.
including candy to others. Give a few
unlucky students only one or two less-pop- 3. Ask the class, ÒWhy do people trade?Ó
ular items and give a few students an Compile a list of answers on the board.
abundance of several different items such Do not discourage any answers at this
as candy, pencils and stickers. Try to cre- point. Explain that these responses repre-
ate obvious contrasts among the contents sent hypotheses. Now the class must find
of the bags. evidence to support or reject these
(Optional) Instead of preparing bags, ask hypotheses.
students in advance to bring from home
one or more small items to trade that they 4. Distribute to each student a bag with
no longer want. small items to trade. Assure students that
they may keep whichever items they still
PROCEDURE possess at the end of the simulation.
While students are still in their seats,
1. Discuss the following situation with the
have everyone privately examine the con-
class: Imagine that Donna, a teenage dri-
tents of their bags. Tell them not to show
ver, pulls up to a local gas station and
the contents to anyone.
puts $15 worth of gas in the tank. She
then pays the station owner $15. Point out
TRADING ROUND 1
that this is an example of an exchange or
a trade because $15 was traded for gas.
5. Divide the class in half. Announce that
Who gained and who lost in this situation?
students will now have the opportunity to
One way of looking at this is that both
trade. Explain that they may trade any or
people simultaneously gained some-
all of the contents of their bags, but they
thing and lost or gave up something:
may trade only with people on their side
The driver gave up $15 worth of pur-
of the room. No one is required to partici-
chasing power but gained several gal-
pate in a trade. Allow five to 10 minutes
lons of gasoline. The station owner
for students to trade.
gave up several gallons of gas but
gained $15 in purchasing power.
6. At the end of this first trading round, call
Another way of looking at this is
students back together. Ask the following
that both parties had overall, or net,
questions:
gains. Both people likely feel better off
A. How many students made a trade?
because each now has something they
Responses will vary.
value more than what they gave up:
B. Ask everyone who made at least one
The teenager likely values the full
trade to stand up. Why did they decide to
tank of gas more than the $15, while
trade? Responses will vary but should
the station owner likely values the $15
point to the idea that the trades made
more than the gas. For each person,
them better off because they preferred

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 WHY PEOPLE TRADE - LESSON 1

what they got to what they gave up. H. How did this trade restriction affect
C. Ask for a show of hands: Of those trading decisions? Many students will
who made trades, how many are better off likely answer that they wanted to
as a result of the trades? Generally, trade with someone in the other
everyone who traded should be better group. If anyone violated the rule
off. Since trading was voluntary, if that they could trade only with people
they did not expect to be better off, on one side of the room, it points out a
they should not have traded. This is problem with trade barriers: When
the major point of this activity: forces such as trade barriers interfere
Voluntary trade makes both parties with peopleÕs incentives, there are
who traded better off. Make sure this incentives to violate the rules.
point is clear before going on.
D. If anyone who traded said that he or TRADING ROUND 2
she is not better off, ask him or her to
explain why. Sometimes students will 7. Announce that you will allow one more
say they thought they were trading for round of trading. This time there wonÕt be
something better than what they actu- any restrictions: Students may trade any
ally got. Explain that this is a prob- item(s) with any other student(s) in the
lem of poor information but not a room if they choose to do so. Again, allow
problem of trading per se. Sometimes five to 10 minutes for trading.
students will say they felt sorry for
someone who didnÕt have as much as 8. Call students back together. Ask the fol-
they did; so to help this person, they lowing questions:
made a trade that caused them to be A. How many students made a trade in
worse off. Explain that they probably this round? Responses will vary, but
feel better off as a result of helping you should find that students made
others, so they have still gained. These more trades after the restrictions were
situations do not contradict the point removed.
of the activity. B. How did the elimination of trade
E. Why did some students decide not to restrictions affect trading? As trade was
trade? Responses will vary. Some stu- opened up, more students were able to
dents may say they were happy or sat- find beneficial exchanges. This
isfied with what they had and didnÕt demonstrates the gains from free
want what others were willing to trade compared with restricted trade.
trade. This demonstrates that volun- C. Did anyone make more than one
tary exchanges stop when both sides trade? Again, this number is likely to
do not expect to gain. Some students be larger than in the first round.
will say they were not able to get what D. Why did you trade? Answers will
they wanted. However, everyone who vary but should point to the fact that
does decide to trade is better off to trade made them better off than
some degree or they wouldnÕt have vol- before.
untarily traded. E. Of those who made trades, how
F. Did anyone trade more than once? many are better off as a result of the
Why? Several students probably made trades? All students who traded should
numerous trades because they contin- be better off from the trade if the
ued to become better off with each trades were voluntary. Point out that
trade. those who traded in both Round 1 and
G. Were any restrictions placed on Round 2 should be even better off after
trades? Yes, students could trade only Round 2 trades.
with people on their side of the room.

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LESSON 1 - WHY PEOPLE TRADE

F. Identify some students who had a people trade? Answers will vary. Refer
large number of the same item. Did any- to the hypotheses on the board and
one trade away some, but not all, of the compare them with the reasons stu-
item? If this occurred, it is a demon- dents gave for trading.
stration of the law of diminishing K. What conclusions can you draw from
marginal value (utility): The more you this simulation? Again, answers will
have of something, the less you value vary but should include some mention
one more unit of it. For example, your of the gains from trade and the con-
tenth piece of candy is more easily cept that both sides benefit and no one
given up than the only candy bar you loses.
possess; the marginal utility it pro-
vides is not as great as that of the first 9. (Optional) Here is an alternative way to
piece. conduct the trading activity that uses
G. Some people had more items Ð and numbers to show gains from trade.
more valuable items Ð to trade than oth- Distribute the bags with the trading items
ers, just as with some countries. If you to students as before. Ask students to rate,
were one of the ÒpoorerÓ students, were on a scale of one to five, their satisfaction
you able to trade? Probably yes, unless with their bagÕs contents, with five being
some bags contained only items with very satisfied and one being dissatisfied.
no value to any student. Instruct students to write the number on
H. Did any very poor students trade the bag. Explain that economists use the
with any very ÒrichÓ students? Probably term utility to describe the satisfaction
yes. This demonstrates that people in people receive from things Ð in this case,
wealthy nations arenÕt the only ones the contents of their bag. Ask for a show of
who benefit from trade and that mutu- hands and count how many students rated
ally beneficial trade can take place their utility at 5, 4, 3, 2 and 1, and keep a
between people in wealthy countries tally on the board.
and poor countries.
I. Was everyone totally happy with his After the Round 1 trading session, ask
or her trades? Probably not, but empha- students to rate their satisfaction with the
size that this is not the point. Students items they now have and to again record
who had little to trade may not have their satisfaction by writing a number
been as pleased as those with a larger from one to five on their bag. Survey the
number of items. Some students may class regarding their utility and record the
have traded merely to avoid feeling responses on the board. The numbers
left out. Some students may not have should be higher than before trading,
been able to find something they were demonstrating the benefits from trade.
interested in at all. Students who
traded and then realized they missed After the Round 2 trading session, ask
a better trade may have been unhap- students to rate their satisfaction with the
py. Finally, students who underesti- items they now have and to again record
mated the costs of trade or overesti- the number on their bag. Survey the class
mated its benefits Ð or both Ð may have again regarding their utility and write the
been unhappy. Trading doesnÕt guar- numbers on the board. Students who trad-
antee happiness. Economists merely ed should rank their utility higher than
maintain that trade will continue if they did in the first round of trading.
people are better off after the trade Students should also note that the overall
than if they had not traded at all. utility rankings for the class have
J. Did your trading behavior support or increased with each trading round.
disprove the classÕs hypotheses about why

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 WHY PEOPLE TRADE - LESSON 1

CLOSURE
Summarize the lesson by having students dis-
cuss how the trading sessions resembled trad-
ing in the real world. Some differences are
obvious: Students didnÕt exchange money and
they didnÕt have to work Ð i.e., incur produc-
tion costs Ð to get the items they traded.
Compare this session with the gasoline sce-
nario from the beginning of the lesson and
notice the many similarities. You may wish to
point out that an idea underlying free trade is
that different people place different marginal
values on items. People tend to give up items
they value less than the item they are getting
in exchange. In this way, students ended the
activity with an item they valued more than
the one they had when trading began.

ECONOMICS IN ACTION, © NATIONAL COUNCIL ON ECONOMIC EDUCATION, NEW YORK, N.Y. 5