|Classroom Expernomics: Volume 10 (Fall 2001)|
Paul M. Mason
Department of Economics
University of North Florida
A few years ago I read "A Simple Experiment of Comparative Advantage" by Jim Stodder, in Volume 3, Number 1 (Spring, 1994) at this site. Since I actively search out and also design experiments that I can use in my classes, Stodders brief discourse motivated me to develop similar experiments for my principles of microeconomics classes. The experiments discussed here operationalize Stodders experiment in both linear and non-linear forms, with emphasis on identifying how both countries can improve their positions through trade.
This experiment is designed to introduce students to the ramifications of comparative advantage theory after the completion of a discussion of the basics of production possibility analysis. Generally, a thorough discussion of both linear and concave production possibility curves is necessary to prepare the students to undertake this task. The students are notified that they will be conducting an experiment from which effective partners can generate extra credit for each or one of them (typically one point on their final exam). However, they must both protect their own self-interest as well as maximizing joint benefit.
At the beginning of the class period in which the experiment takes place, I split the class into two lines starting from opposite sides of the room. They then approach the front to form pairs, one from each line, to become either the Mexican trade representative or the trade representative of the United States their choice. The purpose of this procedure is to pair them with someone they are unlikely to know, which assists them in performing their country representative role better, and also introduces them to a classmate. I tell them that they may use the textbook, that they may want to look elsewhere in the book than the chapter we covered last, and that I will circulate to answer questions while they negotiate. Before setting them loose I discuss the implications of trade versus autarky.
After the pair of students decide who will represent each country, they must construct the production possibility curves for each country and discuss the most desirable pre-trade combination of the two goods (trucks and computers). Thereafter, they are told to discuss trading ratios that would be fair to both countries and yet make both countries able to access more of both goods. Encouraging the students to write out the production possibility tables as well as drawing the graphs helps them decide how to proceed.
You will notice in Handout 1 that the production possibilities relationships are designed strategically such that the internal exchange values of trucks for computers in the United States is 1C = 1T while for Mexico it is 1C = 3T. Once the pairs discover this trade-off, they naturally gravitate to assuming a 1C = 2T mutually beneficial trading ratio.
Thereafter, following the template in Handout 1 they need to determine how many of each to produce in each country to maximize the total available and to determine how many to trade to their partner (counterpart). Those that are astute enough to determine the trading terms generally proceed quickly to the realization that specialization by Mexico in trucks maximizes total production, but the U.S. production can combine any combination of computers and trucks that satisfied the most desired outcome. As the theory implies, Handout 1 dictates. However, routinely, only about 10 15% of the trading pairs arrive at one of the right answers. I generally collect the forms from all those pairs who think that they have any chance of having arrived at a right answer, and grade them right away since the correct answers are so obvious. In some pairs only one member gets extra credit while the other does not when they arrive at the proper specialization but with the rewarded representative negotiating more favorable terms. However, most often the fair terms of trade result, and both or neither get credit.
Either at the end of the class period in which Handout 1 is employed, or at the beginning of the following class, I go over the results. I also post representative results on my website that can be downloaded and kept. I emphasize why Mexico should specialize, why it is not necessary for the U.S. to also do so, why trade is beneficial, and that the results are at least partially the result of the linear production possibility properties.
Thereafter, I form new pairs of trading partners (separating both those who achieved one of the correct solutions to Handout 1, and those who could not), and distribute Handout 2. Following the theory, complete specialization by either party is not necessary in this example, but movement towards specialization by both is most desirable. The students soon recognize that the trading terms are not nearly as easy to determine as in the previous experiment, and that where you start and finish determines the degree to which trade is advantageous. Those that succeeded the first time generally do again, dragging their new partner to prosperity but not always.
The conclusion of this second experiment, which provides the same compensation, is also followed up by a discussion of the results, and another posting on my website. I emphasize that the more realistic non-linear production possibility curves make the trade negotiating process more complicated, and establishing equity in the trading process more difficult, but that trade employing comparative advantage can improve the well being of the citizens of trading partners under almost all circumstances.
Experiments in the principles of economics classroom both liven up the presentation and invoke considerably more interest from students who generally are in the class only because the course is required. Majors in upper division classes may not need such stimuli, but even they enjoy the diversion from lecture - discussion classes if understanding of the material is enhanced. While Stodder laid the groundwork, I hope that these templates will allow more instructors in principles of economics to adopt these experiments and expand their use. Comparative advantage is one of the most important and fundamental topics in economics, and obviously one of the most ignored in real world practices, otherwise trade would be considerably freer. Enlightening a new generation of students to this concept can only enhance the likelihood that trade advantages arise in the future.