Cooperative Learning Exercises to Teach the Gains from Trade
and is replicated here as part of the SERC Pedagogic Service.
As a lead-in to discussions on supply and demand, students need to learn that trade leads to a higher standard of living than self-sufficiency. In the cooperative learning exercise, students are separated into groups representing one of two countries. Each group determines the allocation of hours across goods to maximize utility. Then, the groups/countries get together and try to negotiate trades that will increase their total utility. Because one country has an absolute advantage in both goods, students learn the role of comparative advantage in the gains from trade.
Opportunity Cost and Comparative Advantage
Comparative Advantage and the Gains from Trade
Context for Use
Description and Teaching Materials
Comparative Advantage and the Gains From Trade (Microsoft Word 15kB Mar11 09)
Teaching Notes and Tips
In this exercise, the students are separated into groups. Each group must allocate resources for their country to maximize utility (represented by point totals). Once theyve determined the "solution" for their country, groups from each country are combined. They are told to negotiate a deal that will increase their utility.
Prior to negotiating, the students are prompted as to which country has the absolute advantage in each good (the same country has the absolute advantage in both goods). I ask them if the country with the absolute advantage in both goods has anything to gain by trading. The inevitable answer is "no". Then I allow them to negotiate. At the conclusion, students may fill out one of two "contracts"; one asserts that they cannot gain from trade and have chosen to be self-sufficient. The other contract specifies production and the terms of trade that will work to their mutual advantage.
To help the students understand what underlies trade, I usually go to individual groups and offer to act as chief negotiator. I offer a trade that would not be acceptable to the other side and ask them whats wrong with the offer. I want them to see that the utility obtained through self-sufficiency is a fallback position, and that no one would ever accept an offer that makes them worse off than if they were self-sufficient. I want them to see that in order to gain from trade, an offer made in ones self-interest must be mutually beneficial or else it will be declined.
Based on past experiences, I suspect the performance within the groups during the negotiation stage is strongly correlated with their performance in the course. Invariably, some group members just sit and look at their papers with blank stares while others take pen in hand and diligently play with the numbers to try to find something that works.