The Fundamentals of Trade
Chief of Staff Retreat
February 22-24, 2008
copies of this presentation can be found at
www.business.duq.edu/faculty/davies
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
WEST
EAST
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
The Players and the Goals
The
the firm receives from consumers is its profit.
Each firm’s goal: Maximize 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?
0
1
2
3
4
5
6
7
8
9
10
0
0
1
2
3
4
5
6
7
8
9
10
1
1
3
5
7
9
11
13
15
17
19
21
2
2
5
8
11
14
17
20
23
26
29
32
3
3
7
11
15
19
23
27
31
35
39
43
4
4
9
14
19
24
29
34
39
44
49
54
5
5
11
17
23
29
35
41
47
53
59
65
6
6
13
20
27
34
41
48
55
62
69
76
7
7
15
23
31
39
47
55
63
71
79
87
8
8
17
26
35
44
53
62
71
80
89
98
9
9
19
29
39
49
59
69
79
89
99
109
10
10
21
32
43
54
65
76
87
98
109
120
Happiness
Suppose the consumer has 5 units of
red stuff and 7 units of blue stuff.
0
1
2
3
4
5
6
7
8
9
10
0
0
1
2
3
4
5
6
7
8
9
10
1
1
3
5
7
9
11
13
15
17
19
21
2
2
5
8
11
14
17
20
23
26
29
32
2 Red and 0 Blue
3
3
7
11
15
19
23
27
31
35
39
43
1 Red and 1 Blue (with $1 left over)
4
4
9
14
19
24
29
34
39
44
49
54
0 Red and 3 Blue
5
5
11
17
23
29
35
41
47
53
59
65
6
6
13
20
27
34
41
48
55
62
69
76
7
7
15
23
31
39
47
55
63
71
79
87
8
8
17
26
35
44
53
62
71
80
89
98
9
9
19
29
39
49
59
69
79
89
99
109
10
10
21
32
43
54
65
76
87
98
109
120
What can the consumer buy for $6?
The consumer should buy 0 Red and
3 Blue.
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.
Red Sales
Units
Total Revenue
Blue Sales
Units
Total Revenue
Red Sales (continued)
Blue Sales (continued)
Units
Units
Total Revenue
Total Revenue
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.
Totals:
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.
Round 1
Red
_________________
Blue
_________________
Firms report red sold,
blue sold, and revenue.
Red Sales (continued)
Blue Sales (continued)
Units
Units
Total Revenue
Make sure to calculate totals.
Total Revenue
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.
Round 2
Red
_________________
Blue
_________________
Firms report red sold,
blue sold, and revenue.
Red Sales (continued)
Blue Sales (continued)
Units
Units
Total Revenue
Make sure to calculate totals.
Total Revenue
Results…
East Consumption
400
350
300
250
200
150
100
50
0
Round 1
Round 2
West Consumption
400
350
300
250
200
150
100
50
0
Round 1
Round 2
East Production
600
500
400
300
200
100
0
Round 1
Round 2
West Production
800
700
600
500
400
300
200
100
0
Round 1
Round 2
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.
$40,000
Greater per-capita trade is associated with greater per-capita income.
$35,000
Per-capita Trade (US$)
$30,000
R2 = 0.56
$25,000
$20,000
$15,000
$10,000
$5,000
$0
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
Per-capita Income (US$)
Source: International Financial Statistics, International Monetary Fund, December 2001
31
$40,000
Greater per-capita trade is associated with
more equitable income distributions.
$35,000
Per-capita Trade (US$)
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
60.0
65.0
Gini Coefficient (0 = equitable, 100 = inequitable)
Source: International Financial Statistics, International Monetary Fund, December 2001, and Measuring Income Inequality: A New Database, Deininger, Klaus,
and Lyn Squire, World Bank, 2002
32
$3,000
Lithuania
Per-capita Trade (US$)
$2,500
Greater per-capita trade is also associated
with more equitable income distributions
among the poorest countries.
$2,000
Fiji
Thailand
$1,500
$1,000
Ukraine
$500
$0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
60.0
65.0
Gini Coefficient (0 = equitable, 100 = inequitable)
Source: International Financial Statistics, International Monetary Fund, December 2001, and Measuring Income Inequality: A New Database, Deininger, Klaus,
and Lyn Squire, World Bank, 2002
33
$100,000
Per-capita Trade (US$, logarithmic scale)
recommended
$10,000
$1,000
$100
$10
Greater per-capita trade is associated
with greater caloric intake.
$1
1,500
2,000
2,500
3,000
3,500
4,000
Daily per capita Supply of Calories
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002
34
Per-capita Trade (US$, logarithmic scale)
$100,000
GDI measures quality of life (longevity,
education, literacy, income) for women
relative to men.
$10,000
Greater per-capita trade is associated
with
R2 = 0.80
greater gender equality.
$1,000
$100
$10
$1
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
Gender Related Development Index (0 = low gender adjusted HDI, 1 = high gender
adjusted HDI)
Source: International Financial Statistics, International Monetary Fund, December 2001, and Human Development Report, United Nations Development
Programme, 2002
35
$100,000
Per-capita Trade (US$, logarithmic scale)
Greater per-capita trade is associated with reduced child labor.
$10,000
$1,000
R2 = 0.54
$100
$10
$1
0
10
20
30
40
50
Children 10 to 14 in the Labor Force (as % of age group)
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002
36
Per-capita Trade (US$, logarithmi c scale)
$10,000
$1,000
$100
$10
Even among middle-lower and lower income countries, greater per-capita
trade is associated with reduced child labor.
$1
0
10
20
30
40
50
60
Children 10 to 14 in the Labor Force (as % of age group)
Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002
37
January 1975 to June 2006
12%
Greater per-capita trade is associated with reduced unemployment.
Unemployment Rate
10%
8%
6%
4%
2%
0%
12%
14%
16%
18%
20%
22%
24%
26%
28%
30%
Trade (imports plus exports) as % of GDP
Source: Bureau of Labor Statistics, and Bureau of Economic Analysis
38
January 1975 to June 2006
$15.00
Average Real Hourly Earnings (2000 $)
Greater per-capita trade is associated with increased real wages.
$14.50
$14.00
$13.50
$13.00
$12.50
$12.00
12%
14%
16%
18%
20%
22%
24%
26%
28%
30%
Trade (imports plus exports) as % of GDP
Source: Bureau of Labor Statistics, and Bureau of Economic Analysis
39
If trade is such a good thing, why are
some countries still poor despite ever
expanding globalization?
40
Name two metrics that distinguish the
first world from the third world.
41
If you hit a light bulb with a
hammer, will you make a mess?
42
43
44
The Fundamentals of Trade
Chief of Staff Retreat
February 22-24, 2008
copies of this presentation can be found at
www.business.duq.edu/faculty/davies