The Magic of Markets

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How Trade Creates Wealth

Introduction:

Trade is the voluntary exchange of goods and services. The decision to trade is made because two or more parties involved in the exchanges expect to gain. When one or both of the trading partners believe they can no longer gain from trading, the exchanges will stop.

Concepts:

Trade
Incentives
Costs
Benefits

Economic Content Standard:

Standard 5 - Voluntary exchange occurs only when all participating parties expect to gain. This is true for trade among individuals or organizations within a nation, and among individuals or organizations in different nations.

Benchmarks: Students will know that:

Exchange is trading goods and services with people for other goods and services or money.
People voluntarily exchange goods and services because they expect to be better off after the exchange.
When people buy something, they value it more than it costs them; when people sell something, they value it less than the payment they receive.

Lesson Description:

This lesson involves students in a trading simulation designed to illustrate a complex marketplace in which goods and services are traded. Students use this experience to investigate the conditions that encourage or discourage trade among individuals.

Time Required: One class period.

Materials:

A large number of small, easy to exchange items - such as miniature candy bars, small boxes of raisins, inexpensive small toys, package of paper clips, pencils, stickers, library passes, hall passes, answers to a quiz, etc., and enough small brown bags for each student.

Procedure:

Before beginning the simulation, place the trading articles, unequally, in brown paper bags and seal them. Divide the bags into groups of about 5 or 6, depending on class size, and mark all bags in each group with the same colored dot. Mix all the bags together in a large box or trash bag.

Explain to students that today they have an opportunity to participate in a trading activity. The purpose of the activity is to explore why people trade.

Ask, "Why do people trade?" Put some student responses on the board and indicate that these responses are hypotheses. Explain to the class that today’s activity will give the students information and experience with which to test the hypotheses.

Describe the following situation to the class. Imagine that a teenage music lover walks into a music store, picks out the latest CD by his favorite artist and pays the owner $18. Who gained and who lost in this situation? (Both people gained in the trade. The music lover gave up something of lesser value, $18, to get something of more value, the CD. The owner gave up something of lesser value, the CD, to get something of more value, $18. Both the music lover and owner ended up with something of more value to them. Hence, they both gain.)

Randomly distribute the bags. Ask students with the same colored dots to form groups in designated places around the room BEFORE opening the bags. Distribute to each student 3 or 4 blank index cards or small sheets of paper. (The number of sheets each student will need is determined by the number of trading rounds you intend to conduct.)

Ask students to open their bags and look at the object WITHOUT removing it from the bag or showing anyone else. Each student is to rate his/her initial satisfaction with the object in his/her bag and record the rating on a slip of paper. (Use a 1 to 5 rating system, with 5 being very high satisfaction. Collect all the rating slips. (Alternative - Simply ask for a show of hands for each rating - 1, 2, 3, etc., and record each tally on the board. Caution: This method is quicker, but you must be careful to ensure that every student votes in each round.)

Tell the students that they may trade within their groups. After the trading round is complete, have students once again rate their satisfaction with the items they have. Students who chose not to trade should record the same level of satisfaction as in the first rating. Collect the rating slips or count hands.

Conduct one or more additional trading rounds, combining groups, etc. with the last round involving all class members. In each successive round, increase the size of the trading groups by combining colored dots. (For example, blues and greens may trade, yellows and reds may trade, etc.) In the last round allow students to trade with anyone in the class. When the last trading round is completed, have students indicate their final level of satisfaction. (All students may change their ratings, even if they have never traded.)

While the students are trading, or after all trading is completed, tally the satisfaction ratings, and display the results on the board. (Ratings tally can be expressed simply as a total.)

Debriefing Questions:

How many people made trades? Ask several traders what they traded and why. (Generally most of the students will have made trades; however, there will be a few who were either satisfied with what they had and did not trade, or who had something that no one would trade to obtain.)
Which items were most popular? Which were least popular? Why?
Did anyone trade more than once? Why? Did anyone not trade? Why? (Several people should have made numerous trades.)
Discuss the tally of satisfaction points on the board. How might we explain the changes in satisfaction from round to round? (Teacher note: As the number of potential trading partners increased, more people were able to find and trade for something they liked better. Thus, the total level of satisfaction increased as the size of the trading group increased.)
Why do people trade? (People trade to get something of more value by giving up something of less value.)
Did the trading behavior confirm or contradict the hypotheses we listed at the beginning of the activity? (Often the initial responses are "to get something they don’t have, or to take advantage or sucker someone." Students should see that trade only takes place when both parties expect to gain.)
What was the cost and what was the benefit of each trade? (What was traded away was the cost of the trade. What was received was the benefit.)
Was everyone happy with their trades? (Probably not. Students who had little to trade may not have been pleased. Students who couldn’t find what they wanted may have been dissatisfied. Students who traded and then realized they missed a better trade may have been unhappy. Finally, students who either underestimated the costs of a trade or overestimated its benefits — or both — may have been unhappy. Trading doesn’t guarantee happiness. Economists merely maintain that trade will continue if people anticipate that they will be better off after the trade than if they do not trade al all.)
If we were to observe twenty people buying items at a grocery store, what could we conclude about their gains and losses? Their wealth? (Each transaction takes place because both parties expect to gain. If one party does not expect to gain, there is no transaction and we would have nothing to observe! Therefore, we observe people trading money for groceries we can conclude their wealth and the wealth of the grocery store has increased.)

The Magic Of Markets combines procedures used in "Why Do People Trade," Master Curriculum Guide In Economics International Trade, by Donald R. Wentworth and Kenneth E. Leonard (Copyright 1988 by the National Council on Economic Education, 1140 Avenue of the Americas, New York, NY 10036. All rights reserved. No part of the Master Curriculum Guide In Economics International Trade materials may be kept in an information storage or retrieval system, transmitted, or reproduced in any form or by any means without permission in writing from the National Council. Used with Permission.) Questioning strategies and procedures developed by Kathy Ratté and Kenneth Leonard for the Foundation for Teaching Economics.