Xchange and Rade: The Voluntary Exchange of One Commodity For Another

Module-3
Exchange and Trade:

The voluntary exchange of
one commodity for another
TEACHER’S GUIDE
P. 67 Defined
P. 68 Content standards
P. 69 Materials
P. 69 Procedure
P. 71 Lesson outline
P. 75 Closure
P. 75 Assessment
P. 79 Overheads
P. 96 2Answer key
Visuals N
Visuals for overhead projector.
Copy to transparent paper for overhead.
P. 80 NVisual-1: Trade defined

P. 81 NVisual-2: Trading game
P. 82 NVisual-3: Trade and TC
P. 83 NVisual-4A: PPF with trade
P. 84 NVisual-4B: PPF with trade
Lessons 2
Copy and handout to students.
P. 86 2Lesson-I: Vegetables for beef

P. 88 2Lesson-II: Lost jobs
P. 94 2Lesson assessment
Exchange and Trade
Module-3 The exchange of one
Teacher commodity for another
Defined
T rade is the exchange of one commodity (a good or service) for

another. People trade voluntarily because there are mutual gains
from trade. All participating parties gain, otherwise the voluntary
exchange would not take place.
Suppose you value your car at $15,000. Clearly, you would not
sell the car for $5,000. The purchaser might benefit from such a deal,
but you would not. So, you would not make the trade. On the other
hand, if someone offers you $18,000, you would very likely make
the trade. The $18,000 offered is greater than the value you place on
the car. The purchaser values the car at $18,000 or the offer would
not have been made.
Voluntary trade makes people better off. In the car sale example
above, as the car owner you have gained $3,000, the difference
between your value for the car and the price received. Now sup-
pose the purchaser that offered you $18,000 actually valued the car
at $20,000. The purchaser has gained the car and a benefit worth
$2,000, the difference between the $20,000 value the purchaser
places on the car and the actual purchase price. In the end, both
parties believe they are better off and have gained from the trade.
Now, imagine a world with no trade and in which you must pro-
duce everything that you consume. You would be forced to spend
nearly all your waking hours preparing food, clothing, and shelter.
As a jack of all trades you would have little time to devote to spe-
cializing at any one thing. This is a hard world to imagine given the
world today.
The ability to trade is what enables each of us to focus on a specific
area of specialization. One person can focus on wheat production,
another on building homes. As a jack of all trades it would be dif-
ficult to be proficient at any one thing. Both parties can then benefit
from trade with each other and enhance their well-being.
Sometimes trade doesn’t take place because the costs of carrying
them out may be too high. These are called transaction costs. Now
reconsider the car example. Suppose that the individual that values
your car at $20,000 must fly in from New York. As a result, a lower
offer is made taking into account the cost of negotiating the sale.
If the offer is still above $15,000 you will make the trade and still
benefit. The costs of arranging the sale, including linking the buyer
and seller, are transaction costs. If transaction costs are greater than
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices

67
Exchange and Trade
the difference in value between the buyer and seller, the trade will
not take place. In this case a transaction cost greater than $5,000
will eliminate the sale, and remove mutual gains from trade.
Concepts
1. Trade
2. Transaction cost
3. Mutual benefits from trade
Objectives
1. Understand there are mutual gains from trade.
2. Realize there are transaction costs when trading.
3. Recognize that middlemen can help reduce the transaction costs
of trade.
Content Standards
National Content Standards in Economics
1. (Standard-2) Effective decision making requires comparing the ad-

ditional costs of alternatives with the additional benefits.
2. (Standard-5) Voluntary exchange occurs only when all participating
parties expect to gain.
Montana Social Studies Content (Standard-5)
1. (Benchmark-1) Identify and explain basic economic concepts.

2. (Benchmark-4) Describe how personal economic decisions affect
the lives of people.
3. (Benchmark-6) Explain and evaluate the effects of global economic
interdependence.
Time Required
1-3 class periods

68
Exchange and Trade
Materials Needed
Overhead projector
Transparency pen
Visuals for overhead projector: Copy to transparency.
NVisual-1: Trade defined
NVisual-2: Trading game
NVisual-3: Trade and TC
NVisual-4A: PPF with trade
NVisual-4B: PPF with trade
Lesson worksheets: Copy for each student.
2Lesson-I: Vegetables for beef
2Lesson-II: Lost jobs
2Lesson assessment
Additional items for trading game:
Variety pack of Jolly Ranchers, pens, or dollar toys, one per student—
you must be able to see the variety without opening (leftover Hal-
loween, Christmas, and Easter candy work well).
Small paper bag
Procedure
1. Display NVisual-1: Trade defined and discuss why we trade. Help
students recognize that there are mutual benefits to voluntary trade.
(Note: There may be third parties that are not voluntarily engaged in
the trade but are affected positively or negatively by an exchange.
For example, when a neighbor plants a beautiful garden you may
benefit without negotiating trade. Alternatively, a manufacturing
plant may release chemicals into the air without negotiating with
those downwind. These external effects will be discussed in Mod-
ule-14: Externalities.)
2. Have students imagine what life would be like if there were no trade.
Discuss what this would mean and how most of them would not have
time for school if their families were forced to produce everything
they consumed. Though usually a story of the past, you can imagine
being dropped by plane into a remote Alaskan area with no roads,
transportation, or communication with the outside world. The bulk
of time would be spent producing the necessities for life.

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Exchange and Trade
3. The Trading game.

a. Place the candies, pens, or toys, in the paper bag. Tell students
you are going to play a game. You are going to give them an
item that they may look at but they cannot eat or trade it, yet.
Tell them to compare their item with other’s in the class.
b. Handout the different items, one to each student.
c. Remind students they own the candy. It is theirs to keep. Have
students value their item on a scale of zero to five, zero being
lowest, five highest. Have students write their value on a scrap
piece of paper and pass them to the front of the class.
d. Tally the values or have a student do it for you. Display
NVisual-2: Trading game. Fill in the box for the value of
candies without trade.
e. Now tell students they are free to trade if they wish. Give
them a few minutes to trade. Encourage them to trade for their
favorite flavor.
f. Have the students value their candies again, zero being lowest,
five highest. Again, have them write their value on a piece of
paper and pass it forward.
g. Tally the new value and fill in the box for the value of candies
with trade. Students now have full ownership over their candy
and may eat it or trade as they wish, as long as they are not
disruptive to the class.
h. Note that the value of the candy has increased through trade.
Without producing anything new, trade is productive. By
moving products to end users that value them most, trade
increases economic well-being. Some students may claim their
value has decreased.
LQuestion: Ask them why they traded. They may not have
included some intrinsic value, such as the benefit they received
by making someone else better off. If they did not gain from the
trade, the trade would not have voluntarily taken place.
i. It is unlikely that every student traded even if they did not start
with their favorite flavor. Display NVisual-3: Trade and TC.
There are transaction costs to trading. Resources must be spent
to negotiate the trade. Standing up and moving around the
room to find one’s favorite flavor may have a greater cost than
the perceived benefits of the trade for some students. Discuss
the idea that there are costs to negotiating trade. Have students
think about ways to reduce transaction costs. Middlemen such

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as car salesmen and grocers can reduce transaction costs and

help bring buyers and sellers together. E-bay has drastically
reduced the transaction costs of the sale of odd items.
j. Variations to this game can further enhance learning about
the potential gains from trade. Restrictions on the first round
of trade that limit trading partners to only a section of the
room, only allowing trades with others of the same sex, or
only those with the same colored shirt are possible variations.
Tally the value of candies and follow with a final round that
is unrestricted. Total value should again increase with more
trading partners. Another option is to use small, inexpensive
items, rather than candy. This can include pencils, note pads,
and jump ropes. You may wish to have students bring in a small
item to trade but make it clear they will be giving the item
away.
4. Given an understanding of trade, let’s turn to the production side.

LQuestion: Ask students what they want to be when they ‘grow up?’
Through Socratic discussion, think about what it is that each pro-
fession is producing. Clearly a rancher is producing cattle or other
livestock, and a butcher the meat. A wheat farmer is producing wheat
turned to flour by the mill. What is the grocer producing? Though
not producing a new product, the grocer is providing convenience
through location, hence producing a valuable product to most of us
who would rather not drive to the butcher for beef and to the mill
for flour. The grocer is lowering the transaction costs of obtaining
everything from beef and bread to bananas in Montana. The real
estate agent, car salesman, and the librarian are producing informa-
tion. They too are making the life of the typical consumer easier by
lowering the cost of obtaining the information the consumer needs
to make the transaction. They are lowering the transaction costs.
Middlemen lower the costs of trade and expand the opportunities
available.
Lesson outline
Lesson-I: Vegetables for beef

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Materials:
2Lesson-I: Vegetables for beef
NVisual-4B: PPF with trade
Recall the Vegan or meat eater exercise from previous modules.

Handout 2Lesson-I: Vegetables for beef, and have students answer
questions #1 and #2. Assume that veggie lovin’ Val can produce the
500 bushels of vegetables or ten cows as shown before. Val has a large
family that prefers some beef in their diet. Her production possibili-
ties frontier (PPF) is the same as before and is shown in the production
possibilities frontier for veggie lovin’ Val. Meat eatin’ Max lives next
door. Max also has 10 acres of productive farm land. But Max is slightly
better at producing cattle than vegetables. Max can produce as many
as 25 cattle on his ten acres or he can produce up to 250 bushels of
vegetables. He too has a large family, and his preference is to include
vegetables and beef in his family’s diet. The exercise asks students to
draw in the PPF for Max and determine his opportunity cost for pro-
ducing beef and vegetables (production possibilities frontier for meat
eatin’ Max).
Display NVisual-4A: PPF with trade. Recall, that without trade,
Val and Max can consume anywhere along (or inside) their PPF
but they cannot consume beyond it. As long as technology and the

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Exchange and Trade
resources used in production remain the same, Val and Max cannot
produce beyond their PPF. Discuss with students that consumption
is limited to a single point on or below the PPF if technology and
resources are constant, and there is no trade. Have students think
about what would happen if Val and Max combine their efforts.
Together, if Max and Val both specialize in producing vegetables,
they can produce up to 750 bushels (Val’s 500 bushels plus Max’s
250 bushels). Using NVisual-4B: PPF with trade (production pos-
sibilities frontier for Val and Max with Trade), plot the point, 750
bushels of vegetables and zero cows. Have students do the same on
their handout. Working on their own, have students determine where
the intercept would be if both Val and Max produced cows and no
vegetables. Tell students not to connect the points. Mark the point,
zero bushels of vegetables and 35 cows on the graph.
The combined PPF that includes trade is not a linear line between
these two points, rather it has a kink. If Val and Max both specialize
where they have the lower opportunity cost to produce, Val produc-
ing 500 bushels of vegetables and Max producing 25 cows, we can
find a point on the combined PPF that allows for trade and sits be-
yond the original PPF for either Val or Max. Connecting this point
to the intercepts where both specialize in the same good, produces

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Exchange and Trade
the new PPF. Max and Val can now consume well beyond what they
can each produce alone.
Have students plot the third point on the PPF with trade. Have them
draw a line between each intercept point and the third point. This is the
new PPF allowing for trade. The new PPF sits above the PPFs for both
Val and Max. As a result, the two families can consume more when they
combine their efforts and allow for trade than when they produce for
their own consumption. This is shown in NVisual-4B: PPF with trade:
Production possibilities frontier for Val and Max with Trade.
Lesson-II: Lost jobs
Materials:
2Lesson-II: Lost jobs
Have students read the article in 2Lesson-II: Lost jobs. Discuss

the implications of becoming entirely self-sufficient.
LQuestion: Do students perceive they would have more or less
income? Remember, wealth is not just about financial income, but
about overall well-being. Note that by becoming self-sufficient the
family had to work extremely hard to keep themselves fed, clothed,
and sheltered. They had little time for hobbies and doing things that
they enjoyed.
Over time it was realized that if the family produced the small
carvings, they could trade for everything else. Through specializing
in carving and trading for other goods the family income increased
and they had more time to do the things they desired.
Outsourcing jobs is something many people fear in the United
States, just like professor Mercantilio. Without question, when pro-
duction is sent overseas some people lose their jobs. But in the
process these people become more productive in areas where they
have a lower opportunity cost. This is sometimes referred to as cre-
ative destruction because the evolutionary process of a capitalist
economy destroys the inefficient areas of production while creating
new more efficient ones. This is not to say that some people don’t
lose, they do. But society as a whole gains from trade when people
specialize and produce where they have the lower opportunity cost
and trade for the rest.

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Exchange and Trade
Some students may find this article myopic in that it does not dis-
cuss other issues of globalization, like child labor and environmental
stewardship. It is important here to keep the focus on the gains from
trade. Further analysis on these issues will be provided in future
modules. Nonetheless, when imposing our ideals on other people
it is important to understand their perspective. People in countries
that allow child labor are generally very poor. Many of these fami-
lies might be worse off if their children did not work. In fact, many
sweatshops throughout the world pay wages substantially higher than
the regional average. Similarly, most individuals have few concerns
about the environment until they have sufficient income to clothe,
feed, and provide shelter for themselves and their family.
Close this lesson by reminding students that trade increases income.
Whether within a family, state, region, or across countries, producing
goods in which we have the lower opportunity cost and trading for the
rest of the commodities we desire is the best use of resources.
Closure
Lesson review
1.LQuestion: What is opportunity cost?

Answer: The value of the best alternative foregone.
2.LQuestion: Why do we trade?

Answer: There a mutual gains from trade. All parties voluntarily
entering into trade will benefit. Trade increases our consumption
possibilities, it increases well-being.
Assessment
Multiple-choice questions
1. LQuestion: Transaction costs:

a. make free trade impossible.
b. lower the cost of trade.
c. are the costs of negotiating trade.

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d. are the benefits gained by consumers and producers from free

trade.
2. LQuestion: The gains from trade are:

a. received by all parties voluntarily involved.
b. received by only the seller.
c. received by only the producer.
d. received by either the buyer or seller but not both.
3. LQuestion: Which of the following is not a result of trade?

a. There are mutual gains from trade.
b. Trade allows us to specialize to be a better producer of one
thing.
c. While trade benefits one person it is at a cost to another.
d. Trade increases our well-being.
4. LQuestion: What do used car salesmen do?

a. They act as a middleman to lower the transaction costs of trade.
b. They make money by selling cars that buyers do not want.
c. They act as a middleman to raise the transaction costs of trade.
d. They have a higher opportunity cost than other car salesmen.
5. LQuestion: Which of the following is a likely impact of growing

world trade?
a. World wealth will decline as countries become more
dependant upon each other.
b. World wealth will increase as countries benefit from trade with
each other.
c Trade will cause some countries to become wealthier and
others poorer as income is redistributed.
d. Transaction costs will increase as communication and
transportation are improved.
Answers:
1. c
2. a
3. c
4. a
5. b

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Exchange and Trade
Discussion/Essay Questions
1. LQuestion: Middlemen, like grocers and car salesmen, create wealth.
Is this statement true or false? Explain.
Answer: True. Middlemen provide a valuable service, information
and product location. People are willing to trade with middlemen
because they perceive there are gains from the trade. Otherwise they
would not trade with a middleman, instead foregoing the purchase
altogether or buying directly from the producer.
2. LQuestion: The exchange of goods and services is zero sum, that is

one party wins while the other loses. Is this statement true or false?
Explain.
Answer: False. Free trade is mutually beneficial. Both trading parties
must gain from the trade or the exchange would not take place.
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opyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
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Module-3
O ve r h e a d
visuals
Exchange and Trade
Exchange and Trade
Visual commodity for another
Visual-1: Trade defined
The voluntary exchange of

one thing for another
N80
Exchange and Trade
Visual-2: Trading game
Without Trade With Trade

Value
N81
Exchange and Trade
Visual-3: trading AND tc
a d e Is Mutually
Tr Beneficial
The Voluntary Exchange of One Thing

for Another
N82
Exchange and Trade
Visual-4A: PPF with trade
N83
Exchange and Trade
Visual-4B: PPF with trade
N84
Module-3
L e ss o n
w orksh eet s
Exchange and Trade
Exchange and Trade
Lesson commodity for another
Lesson- i : Vegetables for beef
Vegetables for beef
A ssume that veggie lovin’ Val can produce the 500 bushels of vegetables or
ten cows as shown in the vegan or meat eater lessons from the previous
modules. Val has a large family that prefers some beef in their diet. Her produc-
tion possibilities frontier (PPF) is the same as before and is shown below. Meat
eatin’ Max lives next door. Max also has ten acres of productive farm land. But
Max is slightly better at producing cattle than vegetables. Max can produce as
many as 25 cattle on his ten acres or he can produce up to 250 bushels of veg-
etables. He too has a large family and he realizes the importance of including
vegetables and beef in his family’s diet. Draw in the production possibilities
frontier (PPF) for Max on the bottom right graph.
Remember, the opportunity cost is how much of one good must be given up
to produce another.

86 2
Exchange and Trade
Lesson- i : Vegetables for beef
Questions:
1. LQuestion: What is the opportunity cost for Max to produce vegetables?
2. LQuestion: What is the opportunity cost for Max to produce beef?
3. LQuestion: How many cows and vegetables could Max and Val produce if
they combined their resources? On the figure below draw in the combined
Production possibilities frontier for Max and Val.
4. LQuestion: If Val and Max work together and allow for trade, they can pro-
duce on the new Production possibilities frontier. If they allow for trade can
they consume more than if they each produce everything they consume?

287
Exchange and Trade
Lesson-ii: Lost jobs
Lost jobs
O nce upon a time, there were two

hippies, Jerry and Sarah. Tired of
the rat race of modern life, they found
a deserted valley in a remote region
of the world. They moved there with
their four children. They declared that
the area was now the independent
kingdom of Lost Valley and seceded
from the surrounding nation. Amaz-
ingly, it let them go.
The family lived a harsh life at the
margin of subsistence. Everything that
they needed, besides the few tools
and amenities they brought in with
them, they had to produce themselves.
Having shovels, rakes, wheelbarrows,
quality seeds, and so on made their life
a good bit easier than it would have day, Jerry would spend the evening
been otherwise, but it was hardly com- making charming little woodcarvings.
fortable. Things did ease a bit as the As the years passed he became quite
children grew and did more work. skilled at doing this.
One winter, their youngest son fell
sick. Unable to leave Lost Valley on A visitor to the valley
foot or to bring treatment for him into
the valley, they watched in sorrow as After the family had been in Lost
he died of a treatable illness. Valley for many years, a hiker hap-
Yet they stayed in the valley, want- pened by. Jerry was sitting outside
ing to make a go of the life they had his cabin carving when the hiker
chosen. And their life did have its emerged from the woods. He in-
pleasures. The valley was wild and troduced himself as David. After an
beautiful. The family members were exchange of pleasantries, David re-
all very close to each other. And marked on how much he admired
though they had little spare time, they Jerry’s woodwork. He asked Jerry if
enjoyed what leisure they had. For he had any similar carvings.
example, when work was done for the Jerry took him into the cabin and

88 2
Exchange and Trade
showed him a shelf with several hun- their trade. He noted that since Lost
dred of the little pieces. David asked Valley was Jerry and Sarah’s sover-
if he could buy a dozen of them. He eign country, they would have com-
offered a good price, but Jerry and plete control over who could use the
Sarah had no use for money. So David road.
suggested he simply leave them some Jerry said yes, and soon he was
as a sign of his good faith, promising making monthly deliveries, in ex-
to return later with other goods that change for more supplies. The family
they could use. now had enough free time that the
When David returned in a month, children could concentrate on their
he had two more fellows with him. education. David and his friends had
They were all carrying heavy packs brought another computer, and the
filled with seeds, new tools, medicine kids used it to surf the Internet, learn-
kits, silverware, clothing, soap, and ing more about the outside world.
other household goods. The man told Soon, they created a web site adver-
Jerry he’d like to take one hundred tising Jerry’s statues.
more of the carvings. Orders flooded in. The next time
Jerry was happy to sell his carvings David arrived, Jerry told him he want-
to David. The new goods made his ed to set up his own company, using
family’s life significantly easier. Em- David as his distributor and as a mar-
ploying them to boost their productiv- keting consultant. David was happy to
ity, the rest of Jerry’s family could raise oblige. Sarah became interested in the
enough food for all of them, leaving details of fulfilling orders. She also be-
him more time to work on his art. The gan keeping books for the company,
more he specialized in that one task an activity that made sense now that
the more his skill improved. they were using money.
David and his two friends returned Within a few years, there was a
in the winter, riding three snowmo- thriving business in the woodcarvings
biles that were full of goods. Besides located just over the mountains from
staples, they also brought a computer Jerry and Sarah’s valley. It included
and a satellite dish. They taught Jerry sales, marketing, and distribution
how to retrieve e-mail, and told him departments. There was also a manu-
they would send him custom orders. facturing division producing copies of
In the spring they arrived again. Jerry’s work, since many people liked
Jerry’s carvings were a fantastic suc- it but could not afford originals. Sarah
cess. David asked Jerry if they could was the CEO of the company, travel-
cut a road in to his cabin, to facilitate ing out of the valley three days a week

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Exchange and Trade
to work on site. The children, who no

longer had to work, were thinking of
heading off to college soon. The old-
est, Jerry Jr., seemed to have his fa-
ther’s artistic streak, and was showing
tremendous promise as a painter.
The original rustic cabin had been
expanded several times. The family
now had three wood stoves, which
they fed with logs split with their gas-
powered wood splitter, an electric
generator, a hot tub, and a deck with a
view of the mountains. Everyone had
his own bedroom. If someone in the
family got sick, they could afford to
have a doctor flown in to treat him.
Disaster narrowly averted
However, they were altogether too

complacent. Unbeknownst to them, tenance darkened, although more in
Lost Valley was on the verge of disas- sorrow than in anger. When Jerry had
ter. Luckily another hiker was about finished, Mercantilio looked at him
to wander into it. gravely and said, “I’ve just arrived in
His name was Professor Mercan- the nick of time.”
tilio, and he taught labor studies at “How’s that?” Jerry asked him,
a major university. When Jerry met puzzled.
him on a trail near the cabin, he was “Don’t you understand? Your
immediately impressed by the man’s country’s economy is on the verge of
erudition and his concern for the collapse. You’ve been exporting all of
well-being of his fellow man. He in- your jobs to other nations!”
vited the professor back to the cabin “Huh? What do you mean?”
for lunch. “Just think back to before you
While they ate, Jerry told Mercan- met this David and the other foreign-
tilio the story of his family’s sojourn in ers who beguiled you into shipping
the woods. As he described the events your nation’s jobs overseas.”
of the last few years, his guest’s coun- Jerry nodded slowly, but, frankly,

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Exchange and Trade
he still did not quite get the profes- same time period. Apparel imports
sor’s drift. Mercantilio sensed this have gone from 1% to 97%. Obvious-
and explained further. ly, this trend can’t continue. Without
“Didn’t you once have dozens any production, how will you pay for
of different jobs performed in this your imports? Your economic role as
valley? Farmer, weaver, carpenter, consumers is undermining your role
soap maker, cook, lumberjack, as producers.”
butter manufacturer, herder, shoe- Jerry thought these remarks over.
maker, hunter, fisherman, butcher, It was strange to think that his fami-
and more?” ly’s newfound prosperity was merely
“Well... sure. We sure did.” an illusion. But he knew little about
“And where have those jobs economics, and, after all, this was
gone?” the area Professor Mercantilio had
This was a perplexing question. studied for many years. He must
Just where had they gone, Jerry know what he was talking about.
wondered. “Well,” Jerry asked, “how do we
fix the problem?”
The professor told him: “It’s not going to be easy,” the
professor confessed. “Initially, it will
“To foreigners! They’re all still be- require some sacrifice: Your level of
ing done, just not within this valley consumption will have to drop for a
any more. Why today, you are down while. But better some sacrifice now
to your last two jobs—company di- than a complete economic collapse
rector and sculptor. Tell me, how can later. In the long run, your economy
an economy thrive with only two will be much healthier for it.”
jobs in it, without any manufactur-
ing or agricultural base?” The professor’s program
Jerry said, “Gee, I don’t know.
But we seem to be doing OK!” Over the next several days, Pro-
“Trust me, that’s just an illusion. fessor Mercantilio developed some
Your economy is being hollowed out. sophisticated mathematical models
Your percentage of your agricultural of Lost Valley’s economy, and worked
consumption that you import has out a program of import substitu-
soared from 0% to 98% over the last tion that would get it back on its feet
five years. Your imports of manufac- again. The labor and manufacturing
tured products have gone from 2% to sectors, the heart of any flourishing
99% of total consumption over the economy, would be revitalized. It

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Exchange and Trade
would mean less attention to man-

agement and design activities, but
these, after all, are only the icing on
the economic cake.
Jerry and Sarah agreed to imple-
ment the professor’s program. Mer-
cantilio returned to his university, and
the residents of Lost Valley returned to
jobs they had neglected for too long.
They weeded and tilled the vegetable
garden, cleaned their hunting rifles,
and took the old sewing machine
out of the attic. The children’s study
time was cut and they resumed many
of their old chores. Sarah had much
less time to devote to running their
company, and Jerry could not spend
as much time creating carvings, but
Mercantilio had convinced them it
would be worth it. expect to compete with farm workers
On his summer vacation a year paid a mere $12 an hour? They have
later, Mercantilio came back to Lost an unfair advantage.”
Valley. The nation had become more
self-sufficient, producing a far greater “So what should we do?”
percentage of its own food and manu-
factured goods. But there was a seri- “If you can’t get foreign govern-
ous difficulty: The kids were still buy- ments to sign trade pacts guarantee-
ing the better-quality, imported food, ing their nation’s workers incomes
clothing, and cosmetics. As a result, of at least several hundred thousand
much of the domestic production was dollars per year, you’ll just have to
going to waste. impose a tariff, raising the price of
Mercantilio analyzed the situa- their products to the level of yours.
tion for Jerry. “You see,” he said, “it’s That will ensure trade that is not only
low-wage foreign workers that are free, but fair as well.”
your problem. You and Sarah have So Jerry and Sarah imposed high
each been making several hundred tariffs on most foreign goods. Left
thousand dollars a year. How can you with little choice, the kids turned to

92 2
Exchange and Trade
the domestic products they had previ- the time of Professor Mercantilio’s
ously disdained. With fewer imported second visit to the valley, is largely
tools to aid the family members in drawn from his ground breaking
their work, it took more and more paper, “The Disappearance of Work
time for them to produce the neces- in the Late Capitalist Economy: The
sities of life. Case of Lost Valley,” published in
A year later, the company selling Sociological Perspectives on Labor
Jerry’s woodcarvings went into bank- Rights, Vol. XII, No. 3. Just last year,
ruptcy and was purchased for a song Professor Mercantilio returned to the
by Warren Buffett. Soon enough, the valley to perform some econometric
money Jerry and Sarah had received studies to help determine the success
from the sale was gone. The road into of his program. Unfortunately, we
Lost Valley gradually became impass- can’t report on the outcome of this
able. Jerry and Sarah’s SUV broke most recent visit, as he has not been
down, and they had no idea how to heard from since.
repair it. Over time, the house be-
gan to fall apart, the hot tub stopped
working, and the computers became
useless. The children abandoned
their plans to attend college. Jerry Jr.
stopped painting, as he had no time
for it. Anyway, the family could no
longer afford paint or canvas for him.
One day, while cutting wood, Jerry Sr.
lopped off a finger from his right hand
with an errant axe blow. He could no
longer carve wood as he used to, and
he lost his interest in the art.
Eventually, the medicine kits were
empty. Doctors could no longer reach
Lost Valley by road and Jerry and
Sarah could not afford to fly them in.
When their daughter caught pneu-
monia, there was little they could do
but watch in sorrow as her condition This article The Nation That Lost Its Jobs, But Got Them Back
by Gene Callahan was posted on the web at www.mises.
worsened and she eventually died. org. Cited Thursday, November 20, 2003. Gene Callahan
The above information, up to is author of Economics for Real People.

293
Exchange and Trade
Lesson assessment
Multiple-choice questions
1. LQuestion: Transaction costs?

a. make free trade impossible.
b. lower the cost of trade.
c. are the costs of negotiating trade.
d. are the benefits gained by consumers and producers from free trade.
2. LQuestion: The gains from trade are?

a. received by all parties voluntarily involved.
b. received by only the seller.
c. received by only the producer.
d. received by either the buyer or seller but not both.
3. LQuestion: Which of the following is not a result of trade?

a. There are mutual gains from trade.
b. Trade allows us to specialize to be a better producer of one thing.
c. While trade benefits one person it is at a cost to another.
d. Trade increases our well-being.
4. LQuestion: What do used car salesmen do?

a. They act as a middleman to lower the transaction costs of trade.
b. They make money by selling cars that buyers do not want.
c. They act as a middleman to raise the transaction costs of trade.
d. They have a higher opportunity cost than other car salesmen.
5. LQuestion: Which of the following is a likely impact of growing world

trade?
a. World wealth will decline as countries become more dependant upon
each other.
b. World wealth will increase as countries benefit from trade with each
other.
c Trade will cause some countries to become wealthier and others
poorer as income is redistributed.
d. Transaction costs will increase as communication and transportation
are improved.

94 2
Exchange and Trade
Lesson Assessment
Discussion/essay questions
1. LQuestion: Middlemen, like grocers and car salesmen, create wealth. Is

this statement true or false? Explain.
2. LQuestion: The exchange of goods and services is zero sum, that is one
party wins while the other loses. Is this statement true or false? Explain.

295
Exchange and Trade
Answer commodity for another
Lesson-I: Answer Key
Vegetables for meat
Assume that veggie lovin’ Val can produce the 500 bushels of vegetables or
ten cows as shown in the Vegan or meat eater lessons from the previous mod-
ules. Val has a large family that prefers some beef in their diet. Her production
possibilities frontier (PPF) is the same as before. Meat eatin’ Max lives next
door. Max also has ten acres of productive farm land. But Max is slightly better
at producing cattle than vegetables. Max can produce as many as 25 cattle on
his ten acres or he can produce up to 250 bushels of vegetables. He too has a
large family and he realizes the importance of including vegetables and beef in
his family’s diet. Draw in the production possibilities frontier (PPF) for Max on
the figure below.
Remember, the opportunity cost is how much of one good must be given up
to produce another.
Answer

96 2
Exchange and Trade
Answer commodity for another
Lesson-I: Answer key
Questions:
1. LQuestion: What is the opportunity cost for Max to produce Vegetables?

Answer: 1/10th of a cow
2. LQuestion: What is the opportunity cost for Max to produce beef?

Answer: Ten bushels of vegetables
3. LQuestion: How many cows and vegetables could Max and Val produce if
they combined their resources? On the figure below draw in the combined
production possibilities frontier for Max and Val.
Answer figure below on the right.
4. LQuestion: If Val and Max work together and allow for trade, they can
produce on the combined production possibilities frontier. If they allow for
trade can they consume more than if they each produce everything they
consume?
Answer: Yes. The combined PPF sits above the PPF of both Val and Max. Their
total consumption can increase because their production has increased.

297
Exchange and Trade
NOTES
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98

Xchange and Rade: The Voluntary Exchange of One Commodity For Another

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Xchange and Rade: The Voluntary Exchange of One Commodity For Another

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Module-3

Exchange and Trade:

P. 80 NVisual-1: Trade defined

P. 86 2Lesson-I: Vegetables for beef

T rade is the exchange of one commodity (a good or service) for

Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices

National Content Standards in Economics

1. (Standard-2) Effective decision making requires comparing the ad-

Montana Social Studies Content (Standard-5)

1. (Benchmark-1) Identify and explain basic economic concepts.

Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices

Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices

3. The Trading game.

Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices

as car salesmen and grocers can reduce transaction costs and

4. Given an understanding of trade, let’s turn to the production side.

Lesson-I: Vegetables for beef

Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices

Recall the Vegan or meat eater exercise from previous modules.

Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices

Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices

Lesson-II: Lost jobs

Have students read the article in 2Lesson-II: Lost jobs. Discuss

Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices

1.LQuestion: What is opportunity cost?

2.LQuestion: Why do we trade?

1. LQuestion: Transaction costs:

Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices

d. are the benefits gained by consumers and producers from free

2. LQuestion: The gains from trade are:

3. LQuestion: Which of the following is not a result of trade?

4. LQuestion: What do used car salesmen do?

5. LQuestion: Which of the following is a likely impact of growing

Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices

2. LQuestion: The exchange of goods and services is zero sum, that is

Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices

Visual-1: Trade defined

The voluntary exchange of

Visual-2: Trading game

Without Trade With Trade

Visual-3: trading AND tc

The Voluntary Exchange of One Thing

Visual-4A: PPF with trade

Visual-4B: PPF with trade

Lesson- i : Vegetables for beef

Vegetables for beef

Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices

Lesson- i : Vegetables for beef

1. LQuestion: What is the opportunity cost for Max to produce vegetables?

2. LQuestion: What is the opportunity cost for Max to produce beef?

Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices

Lesson-ii: Lost jobs

O nce upon a time, there were two

Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices

Lesson-ii: Lost jobs

Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices

Lesson-ii: Lost jobs

to work on site. The children, who no

Disaster narrowly averted

However, they were altogether too

Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices

Lesson-ii: Lost jobs

Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices