The Fundamentals of Trade Chief of Staff Retreat February 22-24, 2008 copies of this presentation can be found at

The Players and the Goals In this experiment, there are CONSUMERS and FIRMS. CONSUMERS buy stuff from the FIRMS. FIRMS make and sell blue stuff and red stuff.

Players Are Divided Into Two Countries WESTEAST

The Players and the Goals Consumers start the simulation with.

The Players and the Goals Firms start the simulation with resources.

The Players and the Goals Firms use resources to produce red stuff and blue stuff.

The Players and the Goals Consumers use to buy red stuff and blue stuff from firms.

The Players and the Goals Consumers get happiness from red stuff and blue stuff. Each consumer’s goal: Maximize happiness

Each firm’s goal: Maximize profit The Players and the Goals The the firm receives from consumers is its profit.

The Objects = 1 unit of blue stuff = 1 unit of red stuff = 1 = Each is 1 unit of resource

Happiness Suppose the consumer has 5 units of red stuff and 7 units of blue stuff. This gives the consumer a happiness of 47. Suppose the consumer has $6 left to spend. Red cost $3 each. Blue cost $2 each. What should the consumer buy?

Happiness What can the consumer buy for $6? The consumer should buy 0 Red and 3 Blue. 2 Red and 0 Blue 1 Red and 1 Blue (with $1 left over) 0 Red and 3 Blue Suppose the consumer has 5 units of red stuff and 7 units of blue stuff.

Profit EAST COUNTRY Units of red stuff produced by 1 unit of resource 1 Units of blue stuff produced by 1 unit of resource 1 WEST COUNTRY Units of red stuff produced by 1 unit of resource 2 Units of blue stuff produced by 1 unit of resource 4

Profit How much should firms charge for red stuff and blue stuff?  The higher the price, the more profit you make.  But, don’t charge so much that you are left with unused resources and unsold stuff. The only thing that counts is how much money you have at the end of the simulation.

For each transaction, record the number of units sold and the total received for the units. Make sure to enter the figures under the correct color.

Trading Rules Firms must remain in their seats at all times. Consumers may only purchase 1 unit of stuff at a time. No cross-country transactions are allowed. No collusion.

Ready to begin…

EAST COUNTRY Units of red stuff produced by 1 unit of resource 1 Units of blue stuff produced by 1 unit of resource 1 WEST COUNTRY Units of red stuff produced by 1 unit of resource 2 Units of blue stuff produced by 1 unit of resource 4

Accounting Consumers report red purchased and blue purchased. Firms report red sold, blue sold, and revenue. Make sure to calculate totals. Round 1

New Rules Globalization opens both countries to free trade. Consumers can now buy from firms in either country.

Ready to begin…

EAST COUNTRY Units of red stuff produced by 1 unit of resource 1 Units of blue stuff produced by 1 unit of resource 1 WEST COUNTRY Units of red stuff produced by 1 unit of resource 2 Units of blue stuff produced by 1 unit of resource 4

Accounting Consumers report red purchased and blue purchased. Firms report red sold, blue sold, and revenue. Make sure to calculate totals. Round 2

Results…

Comparative vs. Absolute Advantage West had the absolute advantage in the production of both goods.  West could produce both red and blue at lower cost than East. West had comparative advantage in the production of blue.  For East to produce 1 blue cost East 1 red.  For West to produce 1 blue cost West ½ red. East had comparative advantage in the production of red.  For West to produce 1 red cost West 2 blue.  For East to produce 1 red cost East 1 blue.

Protectionist Assumption: Trade leads to a centralization of political power, decreased competition, and the concentration of wealth. Free Trade Assumption: Trade leads to a decentralization of political power, increased competition, and the dissemination of wealth.

31 Source:International Financial Statistics, International Monetary Fund, December 2001 Greater per-capita trade is associated with greater per-capita income.

32 Source:International Financial Statistics, International Monetary Fund, December 2001, and Measuring Income Inequality: A New Database, Deininger, Klaus, and Lyn Squire, World Bank, 2002 Greater per-capita trade is associated with more equitable income distributions.

33 Source:International Financial Statistics, International Monetary Fund, December 2001, and Measuring Income Inequality: A New Database, Deininger, Klaus, and Lyn Squire, World Bank, 2002 Greater per-capita trade is also associated with more equitable income distributions among the poorest countries. Thailand Lithuania Fiji Ukraine

34 Greater per-capita trade is associated with greater caloric intake. recommended Source:International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002

35 Source:International Financial Statistics, International Monetary Fund, December 2001, and Human Development Report, United Nations Development Programme, 2002 GDI measures quality of life (longevity, education, literacy, income) for women relative to men. Greater per-capita trade is associated with greater gender equality.

36 Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002 Greater per-capita trade is associated with reduced child labor.

37 Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002 Even among middle-lower and lower income countries, greater per-capita trade is associated with reduced child labor.

38 Source: Bureau of Labor Statistics, and Bureau of Economic Analysis Greater per-capita trade is associated with reduced unemployment.

39 Source: Bureau of Labor Statistics, and Bureau of Economic Analysis Greater per-capita trade is associated with increased real wages.

40 If trade is such a good thing, why are some countries still poor despite ever expanding globalization?

41 Name two metrics that distinguish the first world from the third world.

42 If you hit a light bulb with a hammer, will you make a mess?

43

44

The Fundamentals of Trade Chief of Staff Retreat February 22-24, 2008 copies of this presentation can be found at