THE WORLD GAME OF ECONOMICS:  LESSON 5
Focus on International Trade & Finance

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

Preliminary Discussion:   The interdependency of nations increased dramatically in the 20th century, especially the second half.  For many countries, the trade sector was consistently the fastest growing sector of the economy.  While there are tremendous gains in efficiency from expanding world trade, individual countries have become more vulnerable to external shocks. The economic performance and policies of trading nations are now significantly intertwined.  One country's performance affects that of other countries.

The combined forces of Aggregate Demand and Aggregate Supply determine the level of output, prices, and employment for countries in the global economy.  Aggregate Demand (AD) is the amount of total spending on the part of consumers, businesses, government, and net exports at different prices.  Spending is inversely related to prices.  Aggregate Supply is the amount of output on the part of producers at different prices.  Production is directly related to prices.  The equilibrium level of output and prices for a given economy is where Aggregate Demand is equal to Aggregate Supply.

The Aggregate Demand schedule will move to a different location whenever there is a change in net exports (i.e., Exports - Imports).  Exchange rates, tariffs, and direct foreign investment affect Aggregate Demand.

The Aggregate Supply schedule will move to a different location whenever there is a change in the cost or availability or resources from abroad.  It is also affected by the number of sellers in the domestic market.  Direct foreign investment, for example, increases Aggregate Supply in the host country.

Trade policy affects both Aggregate Demand and Aggregate Supply, and it affects other countries.  For example, tariffs will increase domestic Aggregate Demand (diverting purchases away from imports) and decrease domestic Aggregate Supply (due to the higher cost of imported resources) in the economy imposing the tariffs.  Tariffs have the opposite effect in the country against which the tariffs are levied.

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, including trade policy.The objective is to implement timely and appropriate economic polices to improve the overall economic performance of your country.  Good luck and have fun!

1.  Play The World Game of Economics to 100 points against up to six other countries that are either computer-managed (i.e., advised by Professor N. D. Cator) or Laissez Faire.  Note:  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.  You are the chief economic adviser to which country?  _______________________.
3.  How many other computer-managed countries are you playing against?  ________.

SOMETIME AFTER THE 3RD YEAR AND BEFORE THE 10TH YEAR OF THE GAME COMPLETE THIS EXERCISE.

4.  Which year have you chosen to complete this exercise?  __________.
5. Click on the Economic Indicator, the Current Event, and Economic Policy to get to the Policy Screen.  Select your Fiscal Policy.

6.  On the template below, indicate where your economy and each of the other countries are currently positioned before selecting your Trade Policy.  Use a colored felt pen to sketch flags or use abbreviations (e.g., USA = United States).  Note:  If you know how to use "Print Screen" tools, then use that method and attach to this exercise  Circle the current position of your country.

7.  Considering the current position of your country and assuming you have all Trade Policy options, which Trade Policy would you recommend for your country?  (Circle One)

  Depreciate Currency [-CV]                   Appreciate Currency [+CV]
 Attract Foreign Investment [+FI]             Discourage Foreign Investment (-FI)
  Lower Tariffs [-t]                                   Raise Tariffs [+t]
  Lower Trade Restrictions [-TR)]            Raise Trade Restrictions [+TR]
  None/Pass

8.  If you selected "None/Pass," briefly explain why?

9. Look at the Aggregate Demand and Aggregate Supply diagram below.  Assuming your economy is at E0 before your trade policy, in which direction would your recommended policy move your economy.  (Circle One)

                                E0     E1     E2     E3     E4     E5     E6     E7     E8

10.  Which change or combination of changes in Aggregate Demand and Aggregate Supply does the direction of your recommended policy represent?  (Circle One)

+AD    +AD&+AS    +AS    -AD&+AS    -AD    -AD&-AS    -AS    +AD&-AS   None

SELECT YOUR TRADE POLICY.  COMPLETE THIS GAME.  Print the final score and attach it to this exercise.

ANSWER QUESTIONS 11 –15.  (Circle the letter before the best single answer).

11. An increase in tariffs on foreign products:
(a) causes inflation and primarily protects the most inefficient domestic producers.
(b) effectively helped countries get out of the Great Depression during the 1930's.
(c) protects only the most efficient domestic producers and industries.
(d) is the most effective trade policy when the economy is in Stagflation, because it reduces unemployment and inflation.
(e) is better for everyone, because it keeps foreign products out of the domestic market.

12. When a nation's currency depreciates, it:
(a) causes inflation, because domestic aggregate supply increases.
(b) causes deflation, because exports are cheaper to foreigners.
(c) causes inflation, because foreign goods are now more expensive.
(d) causes deflation, because aggregate supply decreases.
(e) causes unemployment to increase, because exports fall.

13.  A country's currency will depreciate whenever:
(a) exports exceed imports and/or the central bank buys significant amounts of its own currency in foreign exchange markets.
(b) imports exceed exports and/or the central bank buys significant amounts of its own currency in foreign exchange markets.
(c) exports exceed imports and/or the central bank sells significant amounts foreign currencies (from their reserves) in foreign exchange markets.
(d) Foreign investors are attracted to build factories and deposit money in the country.
(e) imports exceed exports, foreign investors pull their money out of the country, and/or the central bank sells significant amounts of its own currency in foreign exchange markets.

14.  Attracting foreign investment into a country:
(a) decreases the GDP and causes unemployment, because it discourages domestic private investment.
(b) Increases the GDP,  because the number of sellers and competitiveness in the domestic market increases.
(c) is impossible if your country has a smaller GDP than other countries.
(d) could be accomplished by raising taxes.
(e) is undesirable, because it's always better if production facilities are owned by the citizens of a country.

15.  If your country were in the very center of the playing area of The World Game of Economics and you diminished Trade Restrictions [-TR], making it easier for foreign products to enter your country:
(a) GDP would decline and there would be an increase in cyclical unemployment.
(b) GDP and the general price level would both increase.
(c) GDP would decline and the general price level would increase.
(d) GDP would increase, prices would fall, and structural unemployment would increase.
(e) GDP would not change, prices would rise, and unemployment would decrease.

End of Lesson 5

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

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

Examples:  If you play against 6 other countries and you place 1st, then you get 10 extra points!  If you play against 4 other countries and you place 3rd, then you get 6 extra points.  If you play against two other countries and you place 2nd, then you get 5 extra points.  In each case if you place last, then you get only 4 more points.

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.  For example, 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 computer managed countries away from the center at the same time that you improve your own country’s position.
 

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