on November 24, 2009 at 7:15 am

Here is a fun, easy and effective experiment that instructors can use to illustrate the gains from trade.  The instructor puts chocolate bars ("fun-size") or other candy in bags, one bag for each student. (Alternatively, you can use the type of small items that you can find at a dollar store.  Filling the bags is where the most work comes in especially if you have a large class). Students open the bag and are then asked to write down how much they would be willing to pay for the bag's contents.  But before snacking, students are allowed to trade.  After a few minutes of trade, ask the students to write down their valuation again.  Voila!  Gains from trade.  With a few numbers pulled at random from the students you can do a back of the envelope calculation for the total increase in value.  The experiment doesn't take long and the students will appreciate the candy!

A hat tip to Randy Simmons who first introduced this experiment to me.

1 Slocum November 24, 2009 at 7:34 am

Nice. Seems like an approach that would make the experiment more representative AND would produce a greater increase in valuation would be to make sure that every bag, at the beginning, had only one kind of treat (e.g. 3 mini Snickers Bars).

2 Buck Farmer November 24, 2009 at 8:02 am

There’s also a great chance to look at how biases can screw up trade. Mostly, I’m thinking of the endowment effect.

3 Steve Miller November 24, 2009 at 8:42 am

This was recently published in the Journal of Private Enterprise as an educational not, give the authors some credit!

4 Mike Giberson November 24, 2009 at 8:47 am

Steve, do you have an internet link? I don’t find recent issues online, but may be looking in the wrong place.

5 Neal November 24, 2009 at 9:18 am

I think Cecil Bohanon was doing something similar here at Ball State.

My version, for when I someday teach economics to people, is to divide the class in half and gave both halves a Jolly Ranchers / Hershey’s bars PPF. At the start of class, ask each group to “produce” at their optimum. Then distribute candy and write the number on the board. Then ask each group to trade, and distribute candy again. Voila! Gains from trade!

6 Noah Yetter November 24, 2009 at 9:38 am

april blossom, what’s so special about trade that crosses some arbitrary line in the sand? Seems to me it’s the same whether I’m trading with my neighbor or with someone in Japan or England or South Africa.

7 Zamfir November 24, 2009 at 10:37 am

If someone gave me three candybars and asked me “how much I valued them”, I would be hard-pressed to put a number on that. It’s one thing to go to a shop and decide that you value the bar, at that moment, at more than the asking price. Answering how much more is way more difficult.

8 Diversity November 24, 2009 at 11:00 am

Oh obesity; thy name will be Tabarrock!

9 Brian November 24, 2009 at 12:41 pm

Hold on a second. This is the “Bag Game” and has been a staple of teaching economics for MANY years. NCEE (national council on economics education) includes this as one of the better lessons that demonstrates gains from trade. Nice to see it finally get some attention in other types of communities.

You can also have students just rate the contents of the bag, from a scale of 0 – 10 or 0 – 100. Then re-rate the contents after a round or two of trading. Here, you can see total utility of the class increasing.

Also, initially, divide the class in two groups. only allow the groups to trade within the group. Then in a subsequent round, allow the groups to trade together (removing trade barriers), and watch the utility numbers increase.

Also, spend 30 minutes in the dollar store and you can get some fun & cheap items for this.

10 dieter November 24, 2009 at 5:29 pm

Does it still work if you give most of the kids 2 things, a few 5, and a few 20? Or does witnessing the trade power of the 20ers make most of the 2ers value their bags at zero?

Better yet. Have two groups. One homogeneous, the other heterogeneous.

Libertarians see the game as presented as a slam dunk case for selfishness.
My hunch is that progressives would just as quickly jump to the conclusion that at first, you have to spread the wealth around to put everybody on an equal playing field.

Nice idea. But most kids have figured this out by age 7 thanks to the miracle of Pokemon cards.

Except for the kids who will later become economists.

11 rjs November 24, 2009 at 6:28 pm

i think you can also turn this into a lesson about govt handouts as well…

12 April Blossom November 24, 2009 at 7:52 pm

@ Noah. There is more going on than simple exchange – exchange rate adjustments, capital market flows, FDI, etc. All these determine/influence interest rate and exchange rate policy as well as macroeconomic fluctuations more directly. In addition there is the differential impacts on different sectors and different income levels. This can result in different sectoral growth paths and some path dependency. For a recent and extreme example, US-China trade involves all these and has a profound and complicated effect on both economies – far more subtle than simple gains from trade.

13 qq November 24, 2009 at 8:23 pm

More interesting is to divide bags up into 4 groups:

Two Group #1’s (10 % of the people) with Loaded Guns + Barbeques + Raw Steak + Pizza + Chocolate + Gatorade + Beer + Apple Pie + Ipods without batteries + nudie magazines + IOU’s payable from group #3
One Group #2 (25% of the people) with Knives + Kraft Dinner + Apple Juice + Ipod batteries + Propane for barbeques + IOU’s payable from both Group #1’s
One Group #3 (65% of the people) with bags of 80% dirt / 20% rice, some week old bread and some swamp water

Put them in 4 seperate class rooms. Allow for the trade of any sort of physical labour as well. Heck, anything goes!

Lock them away for a month or so. Then come back and tell us about it!

14 hollister uk July 28, 2010 at 4:15 am

dazzling and outstanding; every girl will be happier

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