Economic Fundamentals: Trade and Exchange

John Stossel of ABC News has an excellent post on exchange over at RealClearPolitics. Stossel uses the purchase of a cup of coffee to illustrate the "positive sum" aspect of all trade. To put it another way, every time we purchase something or trade for something, it is a win-win situation. You get what you want; the other party gets what they want. Both parties give up something each perceives as having less value for something perceived as having more. As Stossel points out, it doesn't mean we wouldn't want the object to cost less, "We want the price of everything to be lower (except the price of what we're selling...)."

Stossel uses the concept further to introduce how exchange relates to international trade. His analysis is sound, clear, and helpful for students who tend to let boundaries get in the way.

Exchange is a very important concept and lesson for students learn. The idea of positive-sum is the reason we trade/exchange. This article provides an excellent example for use in the classroom and opens up a lot of potential discussion.

HT to Don Boudreaux at Cafe Hayek.

***Taking the Next Step***
There are additional lessons and ideas that can build off this.

First, and Stossel touches on this, we can use this as a platform to discuss money. Specifically we can use it to discuss what money is. If we use the functional definitions: money is a medium of exchange, money is a measure of value, and money is a store of value. Then we can examine how money facilitates trade. In a barter economy, this coffee purchase would be much more complicated. Stossel alludes to this when he mentions "Few people would want to live on what they themselves could make.”

Second, we can get into the idea of real income. Stossel uses a $1 cup of coffee in his example. You can compare that to other cups at different prices. Start by examining the portion of income represented by $1. Then compare to the portion of income represented by a $2, $3, or $4 cup. The higher the relative price, the greater share of one's income represented by the cup that you choose. Now, talk about relative incomes. Whether $1 or $4, the cup represents a smaller portion of income (and consequently a smaller amount of labor) for someone earning $150,000 per
year vs. someone earning $60,000 per year. Should this/does this enter into the decisions one makes?

Third, this can be used to discuss utility. If you've read this blog before, you've probably seen something about form, place and time utility. The idea being that it is utility that determines value and it is utility that is consumed. Now, you may ask what utility is there in a $4 cup of coffee vs. a $1 cup of coffee? It may be time and place (the coffee shop is here, now). But one cannot dismiss form. Many people can tell the difference in the coffee poured in a $1 a cup diner and $4 a cup bistro. However, form goes beyond that. There is form utility in the cup. Let's face it, the logo emblazoned recycled paper that holds the $4 product has a little more panache than the white styrofoam that carries the $1 product. Does that provide status? (Shades of Thorstein Veblen and conspicuous consumption.)

What other lessons and opportunities can you take from this piece?

Posted by TSchilling at 8:56 AM Comments (0)