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Sweet Trade
Here is a fun, easy and effective experiment that instructors can use to illustrate the gains from trade. The instructor puts chocolate bars ("fun-size") or other candy in bags, one bag for each student. (Alternatively, you can use the type of small items that you can find at a dollar store. Filling the bags is where the most work comes in especially if you have a large class). Students open the bag and are then asked to write down how much they would be willing to pay for the bag's contents. But before snacking, students are allowed to trade. After a few minutes of trade, ask the students to write down their valuation again. Voila! Gains from trade. With a few numbers pulled at random from the students you can do a back of the envelope calculation for the total increase in value. The experiment doesn't take long and the students will appreciate the candy!
A hat tip to Randy Simmons who first introduced this experiment to me.
Posted by Alex Tabarrok on November 24, 2009 at 07:15 AM in Economics, Education | Permalink
Comments
Nice. Seems like an approach that would make the experiment more representative AND would produce a greater increase in valuation would be to make sure that every bag, at the beginning, had only one kind of treat (e.g. 3 mini Snickers Bars).
Posted by: Slocum at Nov 24, 2009 7:34:59 AM
I did this with middle school students. I just asked them if they preferred the new allocation and, of course, they all did. All winners, no losers. I think it sunk in.
Posted by: josh at Nov 24, 2009 7:58:50 AM
There's also a great chance to look at how biases can screw up trade. Mostly, I'm thinking of the endowment effect.
Posted by: Buck Farmer at Nov 24, 2009 8:02:16 AM
Hmmm. I only see this working if you first do the verbal work of pointing out that whenever you trade, you are getting something that to you is worth more than what you are giving.
But once you've gotten that across, what further point does the candy make?
Posted by: Glork at Nov 24, 2009 8:40:46 AM
This was recently published in the Journal of Private Enterprise as an educational not, give the authors some credit!
Posted by: Steve Miller at Nov 24, 2009 8:42:20 AM
I hope people don't use this method to teach students the gains from international trade. The costs and benefits from international trade are so much more subtle and this naive approach might be fun and teach the students something - but would be given them a ridiculously simplistic understanding of the benefits of international trade.
Posted by: april blossom at Nov 24, 2009 8:45:16 AM
Steve, do you have an internet link? I don't find recent issues online, but may be looking in the wrong place.
Posted by: Mike Giberson at Nov 24, 2009 8:47:16 AM
I also did something very similar with little prompting in a high school class. They got the trade piece, but we also had a nice discussion about opportunity costs, compliments and substitutes and the subjective nature of demand.
Pretty sure I stole it from here: http://www.marietta.edu/~delemeeg/games/
Posted by: mike@pvl at Nov 24, 2009 8:55:17 AM
I think Cecil Bohanon was doing something similar here at Ball State.
My version, for when I someday teach economics to people, is to divide the class in half and gave both halves a Jolly Ranchers / Hershey's bars PPF. At the start of class, ask each group to "produce" at their optimum. Then distribute candy and write the number on the board. Then ask each group to trade, and distribute candy again. Voila! Gains from trade!
Posted by: Neal at Nov 24, 2009 9:18:47 AM
April Blossom is totally right. The "gains from trade" is a concept that is bandied about in two ways by economics instructors. Both of the observations are true but should be distinguished as separate ideas:
1. This one, the chocolates idea: whenever you make a voluntary trade, you are getting something that you see as more valuable than the thing you're giving up.
2. Countries that specialize can increase their consumption beyond what would be possible if they didn't trade. The increase in goods and services obtained this way over what would have prevailed in the absence of trade is called in econ textbooks "the gains from trade."
Posted by: Glork at Nov 24, 2009 9:35:09 AM
april blossom, what's so special about trade that crosses some arbitrary line in the sand? Seems to me it's the same whether I'm trading with my neighbor or with someone in Japan or England or South Africa.
Posted by: Noah Yetter at Nov 24, 2009 9:38:09 AM
To avoid biases, perhaps it would be good to have them each write down privately what each kind of candy is worth to them, then give out random candies, etc., with both portfolio valuations being based on the already-recorded candy values.
Posted by: Isaac at Nov 24, 2009 9:48:16 AM
If someone gave me three candybars and asked me "how much I valued them", I would be hard-pressed to put a number on that. It's one thing to go to a shop and decide that you value the bar, at that moment, at more than the asking price. Answering how much more is way more difficult.
Posted by: Zamfir at Nov 24, 2009 10:37:54 AM
Nice idea. But most kids have figured this out by age 7 thanks to the miracle of Pokemon cards. (And baseball cards, and Magic cards, etc. etc.)
Posted by: Jim at Nov 24, 2009 10:41:48 AM
Oh obesity; thy name will be Tabarrock!
Posted by: Diversity at Nov 24, 2009 11:00:14 AM
The endowment effect isn't a bias. It is strategic behavior that forms the underpinnings of property rights.
A world with doves is efficient but unstable. A world with hawks is inefficient but stable. The evolutionary biologist John Maynard Smith found the answer - the bourgeois strategy. That means "play hawk when you own the prize and dove when someone else does." A world of bourgeoisie is efficient because it eliminates fighting as effectively as the dove strategy. It is also an evolutionary stable strategy that cannot be invaded by hawks.
Posted by: Justin Martyr at Nov 24, 2009 11:07:28 AM
Hold on a second. This is the "Bag Game" and has been a staple of teaching economics for MANY years. NCEE (national council on economics education) includes this as one of the better lessons that demonstrates gains from trade. Nice to see it finally get some attention in other types of communities.
You can also have students just rate the contents of the bag, from a scale of 0 - 10 or 0 - 100. Then re-rate the contents after a round or two of trading. Here, you can see total utility of the class increasing.
Also, initially, divide the class in two groups. only allow the groups to trade within the group. Then in a subsequent round, allow the groups to trade together (removing trade barriers), and watch the utility numbers increase.
Also, spend 30 minutes in the dollar store and you can get some fun & cheap items for this.
Posted by: Brian at Nov 24, 2009 12:41:43 PM
Hmm...
Does it still work if you give most of the kids 2 things, a few 5, and a few 20? Or does witnessing the trade power of the 20ers make most of the 2ers value their bags at zero?
Posted by: J. Goard at Nov 24, 2009 12:52:35 PM
Does it still work if you give most of the kids 2 things, a few 5, and a few 20? Or does witnessing the trade power of the 20ers make most of the 2ers value their bags at zero?Better yet. Have two groups. One homogeneous, the other heterogeneous.
Libertarians see the game as presented as a slam dunk case for selfishness.
My hunch is that progressives would just as quickly jump to the conclusion that at first, you have to spread the wealth around to put everybody on an equal playing field.
Nice idea. But most kids have figured this out by age 7 thanks to the miracle of Pokemon cards.Except for the kids who will later become economists.
Posted by: dieter at Nov 24, 2009 5:29:05 PM
Kids learn this every Halloween when they trade candy with their siblings and friends. If you are teaching this to anyone over 7 you are wasting your time and money.
Posted by: Jay at Nov 24, 2009 6:25:14 PM
i think you can also turn this into a lesson about govt handouts as well...
Posted by: rjs at Nov 24, 2009 6:28:25 PM
Seems more like the power of velocity of exchange to me. Have all students exchange goodies twenty times and total the results. I would be surprised if values didn't push higher still.
Posted by: steve from virginia at Nov 24, 2009 6:41:19 PM
@ Noah. There is more going on than simple exchange - exchange rate adjustments, capital market flows, FDI, etc. All these determine/influence interest rate and exchange rate policy as well as macroeconomic fluctuations more directly. In addition there is the differential impacts on different sectors and different income levels. This can result in different sectoral growth paths and some path dependency. For a recent and extreme example, US-China trade involves all these and has a profound and complicated effect on both economies - far more subtle than simple gains from trade.
Posted by: April Blossom at Nov 24, 2009 7:52:04 PM
@ Noah. There is more going on than simple exchange - exchange rate adjustments, capital market flows, FDI, etc. All these determine/influence interest rate and exchange rate policy as well as macroeconomic fluctuations more directly. In addition there is the differential impacts on different sectors and different income levels. This can result in different sectoral growth paths and some path dependency. For a recent and extreme example, US-China trade involves all these and has a profound and complicated effect on both economies - far more subtle than simple gains from trade.
Posted by: April Blossom at Nov 24, 2009 7:52:25 PM
More interesting is to divide bags up into 4 groups:
Two Group #1's (10 % of the people) with Loaded Guns + Barbeques + Raw Steak + Pizza + Chocolate + Gatorade + Beer + Apple Pie + Ipods without batteries + nudie magazines + IOU's payable from group #3
One Group #2 (25% of the people) with Knives + Kraft Dinner + Apple Juice + Ipod batteries + Propane for barbeques + IOU's payable from both Group #1's
One Group #3 (65% of the people) with bags of 80% dirt / 20% rice, some week old bread and some swamp water
Put them in 4 seperate class rooms. Allow for the trade of any sort of physical labour as well. Heck, anything goes!
Lock them away for a month or so. Then come back and tell us about it!
Posted by: qq at Nov 24, 2009 8:23:37 PM
Fun-size? What is fun about getting less candy?
Posted by: James W. at Nov 24, 2009 9:56:22 PM
