International Trade and Money: A Simple Classroom Demonstration

Robert G. Houston Jr.* and Gail M. Hoyt**
* Department of Economics
Eastern Kentucky University
**Department of Economics
University of Kentucky

Introduction

Demonstration can be a powerful strategy to incorporate active learning into the classroom (Nattiv, 1994). Along with verbal explanation, an instructor can show how a process occurs. The activity presented in this paper is designed to demonstrate both gains from trade and the importance of fiat money as a medium of exchange. While this is certainly not the first activity to demonstrate either concept, it does offer the instructor the opportunity to prepare one demonstration for the presentation of multiple topics. This demonstration can be used in both a principles of macroeconomics or microeconomics classroom. It also can be tailored in several ways to reduce the amount of time required or to emphasize a particular topic. Student learning is enhanced as students typically find this activity humorous, adding to their excitement and interest in the topic.

Setup

This experiment is typically conducted in a microeconomic principles course to introduce the topic of gains from international trade or in a macroeconomic principles course to introduce the idea of fiat money as a medium of exchange. Approximately twenty to thirty minutes are required to perform the entire experiment for a class size of thirty, but the instructor can easily tailor the demonstration to accommodate more restrictive time or content constraints. A sample of students may be used to save time or certain rounds of trade may be eliminated depending on the topics the instructor plans to emphasize. Only a few minutes outside of class are required to create a variety of tickets (see Figure 1) and a record sheet (see Figure 2). Some tickets should include events with a high level of appeal (popular music groups, popular sporting event, etc.), others should appeal to specific students (i.e. cultural events) and some should have very little appeal to anyone (i.e. unpopular TV shows or music groups).

At the start of the experiment, split the class into two subgroups representing two different countries. Send students from each country to a different part of the classroom (usually with a physical barrier, like a row of desks, between the two countries). Gender is an easy criteria for separating the class into two countries. You might call the country of males the People’s Republic of Guys (PRG), and the country of females Womanzania (W). Once the class is divided into subgroups, distribute tickets to the class. The tickets should also be divided into two groups before coming to class, those that may generally appeal more to males and those that may appeal more to females. Giving females the tickets that may generally appeal more to males and visa versa will enhance the demonstration results.

An important part of conducting this particular activity is creating a realistic setting for students. Before going any further students are provided with a description of the world they find themselves in. One possible scenario is the following:

"Each of you have recently started your first job. All of you have been hired in the entertainment industry and are using your particular talents. You have been hired as accountants, promoters, camerapersons, managers, and writers to help produce different entertainment products. As part of your compensation package you have received a ticket to the event you are helping to produce."

Figure 1: Sample Tickets

A story along these lines is important to help students understand they are not being given anything, in fact they have "earned" the ticket they received because they helped produce it. This scenario of production is relatively more realistic than just saying that students have been arbitrarily endowed with their tickets.

The Trading Game

Round 1: Once tickets have been distributed to the two subgroups, ask students the following question:

"What is the most you would be willing and able to pay if you had to purchase this ticket from a scalper on the street? Keep in mind that you just started your job so the only money you have available is what you have in the bank right now."

At this time each individual student is asked what ticket they have and the amount they would be willing and able to pay to purchase the ticket. Students cannot give negative values, so the lowest value they are allowed to give for the ticket is zero. The instructor should record these monetary ticket valuations on a record sheet, (see Figure 2). Displaying these figures on an overhead projector, (see Figure 3 for example), allows students to see the recorded values. Assign one student with a calculator to total the ticket values. Calculating the total values yourself will increase the time it takes to conduct the demonstration and reduce your ability to guide discussion.

Round 2: Tell students they may trade with anyone in their own country. Allot a few minutes for students to trade. You will need to monitor trading activity to determine the actual time needed for a sufficient number of trades to occur. When trading is complete, students are again asked what they would be willing and able to pay for the ticket they now possess. Students who possess the same ticket they had in round one are required to report the same dollar value. Again the value is totaled and students can see that each nation has gained from trade by not requiring individuals to consume only what he or she has produced.

Figure 2: Overhead Worksheet

Figure 3: Sample Worksheet

Round 3: Students are given another opportunity to trade. This time the government (i.e. instructor) does not prevent international trade and rather encourages free and open trade if an individual so chooses (i.e. citizens in Womanzania can freely trade with citizens of PRG and visa versa). At this time the instructor should also remove any physical barrier (i.e. desks) that may separate the two countries. After a given amount of time students are asked to indicate the value of the ticket they now hold and those values are again recorded. After summing the new ticket values in each country, students can see that both nations have made significant gains from international trade. Emphasize that we have not increased the number of tickets or the quality of tickets produced in the world. We have only made it easier to put tickets into the hands of people who value them more highly.

It is inevitable that some students will be stuck with a ticket they do not value highly because of the inability to satisfy mutual coincidence of wants. This situation provides an opportunity to explain the historical existence of the barter system and related problems.

Round Four: Select a few tickets that you suspect are undervalued in the market. Big time sporting events are often undervalued in the barter stages of the demonstration. Allow students to make monetary bids on a few of these tickets. This is a good time to include students who were not able to participate if only a sample of students was used. A few such bids will demonstrate the constraints that mutual coincidence of wants places on trade. Students are ripe at this point for a discussion of fiat money and the function of money as a medium of exchange. Students can see that fiat money lowers the "price" of trade and as a result the "quantity of trades demanded" would increase.

Extensions and Conclusions

The value of this experiment is twofold. It can be used in macroeconomics or microeconomics courses. Also, it can be tailored to take as much or as little time as you choose. The impact it has on student learning has not been empirically estimated. However, anecdotal evidence collected from student evaluations and comments would suggest it is an effective tool for emphasizing the importance of free and open markets. Students also seem to better understand that money is only a means and not an end.

References

Fried, Harold O., and Daniel Levy. 1992. "Beans as a Medium of Exchange." Classroom Expernomics 1(1): 3-4.

Nattiv, Amalya. 1994. 111 Active Learning Strategies: Applications for Higher Learning. Eastern New Mexico University: Centers for Teaching Excellence.

Ortmann, Andreas, and David C. Colander. 1995. Experiments in Teaching and in Understanding Economics. Richard D. Irwin Inc.

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