4. Trade promotes economic progress. 12 Key Elements of Economics

Why Do People Trade? Let’s play a game! Get into groups of four Do not open bags until told to do so! Whatever is in the bag is yours. Game takes about 20 minutes.

What’s in the Bag? Open the bag and look inside WITHOUT showing it to anyone else. Rate your item on a scale from 1-10

Trade with Groups Whatever is in the bag is yours... You may trade it or not, open the package or not, trade parts or all or nothing… Rate your item on a scale from 1-10

Debriefing How many people made trades? What did it cost to trade? Did anyone trade more than once? Did anyone not trade? How did wealth increase when nothing was added?

Why Do People Trade? To get something of value by giving up something of less value People trade because they think they are gaining from it

What did we learn? Property Rights Value Information Choice -> Opportunity Cost Cost/Benefit Analysis = Voluntary Trade Creates Wealth One of the first things you had to discover was that you could trade because of property rights. You had to discover the importance of those rights in an economy. How did you determine the value for the # you chose? Sometimes value comes from doing things for others – charity. You value the feelings you get when you give something away. How many people’s ratings went down? Information is important and it helps us to determine value. Did you look at the price tag? Was this information important to you? If you traded you made a choice. You did a cost/benefit analysis when you traded – if you are rational. Opportunity cost is obvious in this game – when you traded you gave something up.

Voluntary Trade Creates Wealth - ALWAYS International trade National trade Regional trade Local trade

Conditions for Wealth Creation Property Rights Voluntary Exchange – No force, No fraud Does the creation of wealth make everyone “happy”?

International Trade Why do nations trade?

Countries don’t trade – People Trade !

International Trade Why do nations trade? Nations trade because people trade It is the individuals in the nations that trade with each other Nations trade because people benefit from it

People Gain When They Trade Trade (Voluntary Exchange) Moves goods and services from people who value them less to people who value them more. Makes larger output and consumption possible by allowing us to specialize in doing what we do best. Makes larger outputs possible because it facilitates the use of mass production methods. Trade leads to larger output and higher income levels.

5. Transaction costs are an obstacle to trade. 12 Key Elements of Economics

Transaction Costs Transaction costs are resources spent Searching for trading partners Locating product information Negotiating the terms of trade Finalizing and formalizing contracts and agreements

Why are there transaction costs? Physical obstacles Movement of goods from sellers to buyers Lack of information Locate buyers and sellers; assess their reputation; and find best deals Political obstacles Taxes, tariffs, quotas, licensing requirements, and other regulations Middlemen? How do they impact the costs of transacting in a complex world? Have students listen to Podcast on Middlemen - http://www.econtalk.org/archives/2008/10/munger_on_middl.html

Why do transaction costs matter? They reduce the volume of trade and the gains it generates. Economic progress is helped by relatively low transaction costs.

How have the following influenced the volume of trade: The internet? The interstate highway system? Tariffs on goods purchased from sellers in other countries?