THE WORLD GAME OF ECONOMICS:  LESSON 11
Focus on Comparative Advantage & Free Trade Areas (FTAs)

NOTE:  It is highly recommended that you read over this entire lesson before you begin.

Preliminary Discussion:  The law of comparative advantage is perhaps the most compelling principle in all of economics.  First articulated by David Ricardo in the early 1800's and later refined by other economists, the law of comparative advantage states that if nations specialize in the production of goods and services where they have a comparative cost advantage and trade with each other, then significant economic benefits accrue to their citizens.  All participating countries gain access to lower priced products when they allocate their scarce resources most efficiently.

Ricardo demonstrated that if England specialized in the production of cloth, while Portugal specialized in the production of wine, then the two countries would have more of both products to trade and consume than if each country engaged in self-sufficiency.  This would be true even if England was better than Portugal at producing both products.  The sources of the gains were in specialization and the comparative cost differentials.

If England attempted to be self-sufficient, it would have to give up some cloth to produce wine.  But the relative (opportunity) cost of wine in England was greater than that in Portugal.  Wine would be cheaper for England if it traded cloth for wine from Portugal, because Portugal had a comparative cost advantage in the production of wine.  Portugal did not have to give up as much cloth as England did to produce wine.

This phenomenon is the basis for international trade.  It explains why nations trade and why they form Free Trade Areas (FTAs) such as the European Union (EU) and the North American Free Trade Agreement (NAFTA).  The participants of these "common markets" benefit from a greater selection of products, lower consumer prices, and other efficiencies resulting from greater inter-regional competitiveness.

FTAs permit countries to avoid the adverse consequences of beggar-thy-neighbor protectionist tariff policies and competitive currency manipulations.  They generally permit the free flow of capital across national boundaries, so that it will seek the highest real rate of return.  This stimulates economic growth and development.

In The World Game of Economics you are the chief economic adviser to the leaders of the country of your choice.  You are in charge of economic policy.  You are permitted to form Free Trade Areas (FTAs) with other players.  Good luck and have fun!

1.  Play The World Game of Economics with another student in your class.  The two of you agree at the outset not to engage in trade policies (such as tariffs and currency devaluations) that adversely affect the other player's economy.  Play against 2 or more other countries that are computer-managed (i.e., advised by Professor N. D. Cator).  Direct your trade policies against those other countries.  Develop a mutually beneficial and cooperative strategy with the other player.  Occasionally, you may select trade policies which benefit your country and the other player's economy at the same time. Essentially, you are forming a "common market" with the other player, and the two of you are enforcing a common external trade policy.

Note:  If you cannot get with another student in the class, then manage the two player countries yourself.  If you do not know how to play the game, then select "Tutorial" from the main menu first.  If you already know how to play, then select "New Game."

2.  The two of you are the chief economic advisers to which two countries?  _______________________ and _____________________.
3.  How many other computer-managed countries are the two of you playing against?  ________.

4. Complete the game.  Print a copy of the final score and attach it to your lessons. (Note:  You will turn in both of your lessons together).
 

ANSWER QUESTIONS 5 - 9.  You may work together or independently.  (Circle the letter before the best single answer).

5. Nations benefit from free trade, because:
(a) one country's gain is another country's loss.
(b) scarce global resources are allocated more efficiently.
(c) jobs are created, and none are lost.
(d) some countries do not have a comparative advantage.
(e) All of these statements are true.

6. If Country A could produce either 100 aircraft or 100 tractors and Country B could produce either 200 aircraft or 150 tractors, then:
(a) Country B has no incentive to trade, because it has nothing to gain.
(b) the two countries would benefit from trade if Country A specialized in the production of aircraft and Country B specialized in the production of tractors.
(c) the two countries would benefit from trade if Country A specialized in the production of tractors and Country B specialized in the production of aircraft.
(d) both countries would be better off without trade, if they each produced some aircraft and some tractors.
(e) Country B has an incentive to specialize and trade, but Country A doesn't.
 

7. The transition from self-sufficiency and isolation to global trade and openness is difficult for countries, primarily because:
(a) most people lose and only a few very rich households benefit from trade.
(b) governments can't determine which products to import and which products to export.
(c) countries that have been self-sufficient have not developed a comparative advantage at anything.
(d) relatively inefficient domestic producers are forced out of business, and the workers in those industries lose their jobs.
(e) most people don't know how foreign products work or how to use them.

8. Free Trade Agreements (FTAs):
(a) are common and increasingly more prevalent as time goes on.
(b) are rare.
(c) seldom involve more than two countries.
(d) tend to be based on historical political alliances, common cultures, and similar languages.
(e) have failed to benefit the participating countries to date, but are expected to do so in the future according to economic theory.

9. Politically, Free Trade Agreements (FTAs) are:
(a) relatively easily accomplished, because the vast majority favors them intensively.
(b) relatively easily accomplished, because trade policy is not an important political issue.
(c) relatively difficult to implement, because most citizens do not benefit from them.
(d) relatively difficult to implement, because most government officials are not trained in economics and don't understand how they work.
(e) relatively difficult to implement, because their benefits to consumers are diffused and their adverse effects on some industries and jobs are specific and more obvious.

End of Lesson 11

Note:  At the instructor's discretion, you will receive _____ possible points for this exercise.

Instructor's Option:  At the instructor's discretion, you may each receive additional points according to the schedule below.
 

Winning Strategy Hints:  Winning strategy involves anticipating the Economic Indicator, playing your policy options efficiently, coordinating your range of policies, and using trade policy to prevent one country from getting too far ahead.  Consider your opponents’ options and try to anticipate their trade policies.  Keep in mind that countries tend to use trade restrictions, tariffs, and currency devaluations when they have high unemployment. Be careful not to get caught having too many inappropriate and useless options.  Discard policy gridlock and foreign policy conflict options as frequently as possible.  [You don’t want to be trapped in a Depression like the United States in the 1930s or caught like Germany in Hyperinflation in the early 1920s].  Study the probabilities that are provided in the instructions.  That will help you plan your strategy.

Global interdependency is portrayed both indirectly and directly in The World Game of Economics.  Indirectly, when the Economic Indicator changes direction for one country,  it changes direction for all the other countries.  This demonstrates how economic recessions and recoveries are internationally contagious.  When one country’s economy expands (or contracts), it begins to import more (or less) from other countries.  Directly, one country’s trade policy affects another country.  The two countries move in opposite directions.  For example, when one country depreciates its currency vis-à-vis another country’s currency, exports increase in the former and decrease in the latter.

When planning your trade policy strategy, recall the other countries’ monetary policies.  Note the direction of the Economic Indicator and consider which countries are leading in the game score.  Try to move those countries away from the center at the same time that you improve your own country’s position.

When forming a Free Trade Area (FTA) or common market with other countries, direct trade policy toward non-members.  That is, you will have a common external trade policy.  Tariffs should not be increased against members of your common market.
 

The World Game of Economics   (C) 1999 Ronald W. Schuelke   All Rights Reserved