Benefits of Trade

A quick economics education link for your Friday: Mark Bellemare of Duke University writes about an in-classroom exercise to demonstrate how trade "makes everyone better off".

The Trading Game is pretty simple. Before the start of every semester I have to teach principles of microeconomics, I look at the number of students enrolled in my class, and I head out to the nearest dollar store to buy an equal amounts of trinkets.
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I go around allocating trinkets to students at random.

I then ask students to assign a value to the trinket they have just received ranging from 0 to 10, with higher values meaning cooler trinkets.

We then go around the room recording those values. Because students often bring their laptops to lecture, it is easy to find a volunteer to record those values, but you can have a teaching assistant do it. Once all values are recorded, total welfare (i.e., the sum total of the values students assign to their trinkets) is announced.

I then tell students that they have five minutes to trade voluntarily between themselves, insisting on the fact that trades must be voluntary (i.e., no stealing) and cannot involve dynamic aspects, or credit (i.e., no “I’ll give you my cool dinosaur if you give me your awful trinket and you buy drinks on Friday night.”)

Once students are done trading, we once again go around the room recording the values they assign to their trinkets. Once all values are recorded, total welfare is announced once again.

And that’s usually where the magic happens. When I ran the Trading Game last week, my class’ “aggregate welfare” went from 128 to about 180, if I recall correctly, and you could just see that it had become obvious to students that (in this context of well enforced property rights) trade not only left no one worse off, but it increased aggregate welfare.

This exercise has apparently been around for quote some time and been done, with variations, by lots of teachers. It seems like a very good classroom exercise. I find myself wondering if it would somehow be possible to do a version that would mirror the classic The Economic Organization of a P.O.W. Camp paper dealing with the benefits of middle men.