OBJECTIVE: Students will gain a better understanding of how trade moves in a complex series of transactions involving not only goods, but also services, ideas, and knowledge. This lesson will also illustrate “comparative advantage” as it relates to trade.

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Lesson 2

KEY POINTS:

• Millions of trade transactions of all kinds happen every day
• Trade is a complicated series of interactions, some of which are beyond the control of the participants
• Comparative advantage is a key concept that drives the world economy
• Comparative advantage benefits consumers
• Comparative advantage can challenge producers
• International trade requires understanding of other customs and cultures
• International trade requires negotiation and compromise

PREMISE: The theory of comparative advantage holds that the world economy works best when countries do what they do better or cheaper, export those things (goods, services, raw materials) and use the money to buy what others do better or cheaper.

ACTIVITY: The Trading Game. (Honors 8th and higher)

This activity has five stages: Research, Marketing, Trading, Settling of Accounts and Conclusion.

A. Research
Students or groups select one of the following groups to represent:
Energy Resources (oil, gas)
Edibles (apples, rice, wheat, coffee)
Raw Materials (cotton, steel, and forest products)
Retail Goods (shirts, shoes, and video games)
Durable Goods (appliances, automobiles, computers)
Luxury Goods (jewelry, expensive cars, exotic travel)
Market Forces (cause labor actions, commodity prices, natural disasters and so on to affect trade)

Note: For advanced or older students, and/or for teachers with a higher tolerance for chaos, the game can be more interesting when several countries compete to sell the same goods and/or have more than one item to sell. This can add more competition and activity to the trading session.

Each student or group selects a country other than the U.S. that exports the trade good they have chosen. Using web resources such as CIA World Factbook, World Bank data or U.S. State Department sites, they prepare a brief overview of the country and what it imports and exports. Students use commodity price indexes, local retail prices and other means to estimate what their trade goods are worth. See the country worksheet on the following page as an example as to how students might report their findings.

The class creates a world map showing where each country in the trading game is located. On this map should be listed that country’s annual average wage and their top 5 imports and exports. Students should also report on what kind of standard of living the country’s annual wage offers, including comparisons with prices for common consumer goods in the U.S.

During the research phase, the Market Forces group will use domestic and foreign newspaper sites to come up with actual events and issues that impact trade. Some of these might include:

— SAMPLE COUNTRY WORKSHEET —
A report on Venezuela, an oil exporting country might begin to look like this,
although much more detail is readily available:

Venezuela (compiled from the CIA World Factbook, US State Department, CnnFn)
Size: About twice the size of California
Natural resources: petroleum, natural gas, iron ore, gold, bauxite, other minerals, hydropower, diamonds
Population: (July 2000 estimate) 23,542,649
GDP, per capital, based on PPP (purchase power parity): $8,000
Total exports: $20,900,000,000 (80% is petroleum)
Total imports: $11,800,000,000
Value of exported oil, based on total exports: $16,720,000,000
Crude oil price (per barrel, CnnFn commodities index): $27.20
Leading trading partners:
     Exports – US, Columbia, Brazil, Japan, Germany, Netherlands, Italy
     Imports – US, Japan, Columbia, Italy, Germany, France, Brazil, Canada

Based on the above information, we calculated to following:

Value of exported oil, based on total exports:	$16,720,000,000
Divided by the Crude Oil price (per barrel, CnnFn commodities index)	$27.20
Number of Barrels to sell during trading session equals:	614,705,882

B. Marketing
Each country prepares and presents a sales pitch for their product (why should someone buy your cotton, coffee, technology, etc. instead of someone else’s—cost, quality, uniqueness, financing options, etc.). Encourage the use of printed materials, slides, PowerPoint, video and other types of presentations as resources allow.

C. Trading
Each country sets up a table to sell their goods or services. Encourage students to decorate the table with sales materials, photos from the country and so on. Ambitious students might want to dress up in traditional costumes or as business people.

Each country has a sales sheet offering their product at a given price, based on their calculations from their country worksheet. See the Sample Country Worksheet on the previous page for an example as to how to calculate the price of the product.

Country teams designate a seller who can negotiate the prices for prospective buyers. The country team also designates a buyer who will visit the displays of other countries to buy what they need.

To trade, buyers circulate through the room and sign up for a quantity of product (if any) that they will buy and at what price. Buyers can change their bids as they see how the market is going. Sellers can try to get as much for their products as they think they can.

D. Settling of Accounts
Once the trading session ends, each selling country announces the successful purchasers of their items. But before any money can change hands, these questions must be answered:

1.	If the selling country had to buy something in order to make the products they were trying to sell, were they successful in buying what they needed? If not, they have to cancel their sales.
2.	If the selling country has to sell at a loss, are they willing to do so?
3.	Did the buying country sell enough of their product to be able to afford to buy everything they agreed to buy? If not, do they have enough cash to cover the difference or can they make a deal to trade commodities with a seller?

E. Conclusions
What countries were able to sell their goods?
What commodities sold for more than the asking price and why?
Which ones sold for less than the asking price and why?

Other resources that illustrate the complexities of trade:

“The French Fry Connection” (Special Report from The Oregonian) http://www.pulitzer.org/year/1999/explanatory-reporting/works/day1/page1.html

“I…Pencil” (article from the Foundation for Economic Education)
http://www.fee.org/about/ipencil.html

WTO education—the Nike case
http://www.world-affairs.org/GlobalClassroom/GCResources.htm#WTOonline

P.J. O’Rourke’s book on world economic models, “Eat The Rich”