Experiment (for 30 students): Comparative Advantage
Backround:
If you get a World Atlas, and stare very carefully with a high-quality magnifying glass, you
may be able to spot the outline of Ricardo Island, a speck in the mid-Atlantic. Ricardo
Island is divided between two countries, Richland, on the north end of the island, and
Poorland, on the south. Poorland has twice as many people as Richland. Inhabitants of
Ricardo Island produce and consume only two goods, bread and fish. Every islander insists
on consuming bread and fish in fixed proportions-in sandwiches that are made with one
fish and one loaf of bread. The number of sandwiches that an islander can make is equal to
the minimum of the number of fish and the number of loaves of bread that he or she
acquires. The payoff to an islander will be one dollar for each sandwich that he or she can
make at the end of each session. For example, if an islander has 7 fish and 4 loaves of bread
at the end of trading, she can make just 4 sandwiches (4 is the minimum of 4 and 7) and her
payoff is $4. Everyone who lives on the island has 20 hours of labor time that can be
divided between producing fish and producing bread. In Richland, it takes a person 1 hour
to produce a fish and 1.5 hours to produce a loaf of bread. In Poorland, life is harder. It
takes 3 hours to produce a fish and 2 hours to produce a loaf of bread.
Experimental Procedure
In this session you must decide how to allocate your 20 hours of time between producing
fish and bread. Before you decide what to produce, you may want to look around for
possible trading partners and discuss the terms at which you would trade. When you have
decided on your time allocation, the market manager will give you fish and/or bread tickets
that represent the number of fish and loaves of bread that you produced. To simplify
trading, the market manager will not give you tickets for fractional units of bread or fish,
but will round down to the next smaller whole number. After you have received your fish
and bread tickets, you can make trades with anyone living in either country. To make a
trade, simply exchange tickets with someone who is willing to make a deal with you. Trade
in fractional tickets is not allowed, but fractional "prices" can be achieved by, for example,
trading 2 fish for 1 loaf of bread, or 2 fish for 3 loaves of bread. When you have completed
trading, compute your payoff, which is the minimum of the number of fish and the number
of loaves of bread that you have at the end of trading. When trading has ceased, the market
manager will survey the group to determine whether there is anyone who still has extra fish
that are not matched by loaves of bread, or extra loaves of bread that are not matched by
fish. Once again, you must decide how to allocate time between producing fish and
producing bread, and when you receive your tickets you can trade them with anyone
willing to trade. When you have finished trading, calculate your payoff for this round.
Warm-up Exercise