Friday - 1
Lesson 9 – Money and Inflation
Key Terms
Money
Discount Rate
Open Market Operations
Inflation
Federal Funds Rate
Monetary Policy
Government Spending
Federal Reserve System
Interest Rate
National Content Standards Addressed
Standard 11: Role of Money
Money makes it easier to trade, borrow, save, invest, and compare the value of goods and
services.
 Money is anything widely accepted as final payment for goods and services.
 Money encourages specialization by decreasing the costs of exchange.
 The basic money supply in the United States consists of currency, coins, and
checking account deposits.
 In many economies, when banks make loans, the money supply increases; when loans
are paid off, the money supply decreases.
Standard 12: Role of Interest Rates
Interest rates, adjusted for inflation, rise and fall to balance the amount saved with the
amount borrowed, which affects the allocation of scarce resources between present and
future uses.
 An interest rate is the price of money that is borrowed or saved.
 Like other prices, interest rates are determined by the forces of supply and demand.
 The real interest rate is the nominal or current market interest rate minus the expected
rate of inflation.
Standard 19: Unemployment and Inflation
Unemployment imposes costs on individuals and nations. Unexpected inflation imposes
costs on many people and benefits some others because it arbitrarily redistributes
purchasing power. Inflation can reduce the rate of growth of national living standards
because individuals and organizations use resources to protect themselves against the
uncertainty of future prices.
 Inflation is an increase in most prices; deflation is a decrease in most prices.
 Inflation reduces the value of money
 When people’s incomes increase more slowly than the inflation rate, their purchasing
power declines.
 The costs of inflation are different for different groups of people. Unexpected
inflation hurts savers and people on fixed incomes; it helps people who have
borrowed money at a fixed rate of interest.
 Inflation imposes costs on people beyond its effects on wealth distribution because
people devote resources to protect themselves from expected inflation.
© Foundation for Teaching Economics, 2008. Permission granted to copy for educational use.
Friday - 2
Standard 20: Monetary and Fiscal Policy
Federal government budgetary policy and the Federal Reserve System's monetary policy
influence the overall levels of employment, output, and prices.
 Monetary policies are decision by the Federal Reserve System that lead to changes in
the supply of money and the availability of credit. Changes in the money supply can
influence overall levels of spending, employment, and prices in the economy by
inducing changes in interest rates charged for credit and by affecting the levels of
personal and business investment spending.
Key Ideas
1. Review:
 Voluntary trade creates wealth.
 Institutions that facilitate trade help to increase wealth and raise standards of
living.
2. Money enhances voluntary trade by reducing transaction costs.
 Money is anything generally accepted in exchange for goods and services.
 Money performs three functions in market economies:
 Money is a store of value
 Money is a standard of value.
 Money is a medium of exchange.
3. The interest rate is the opportunity cost of holding money, because instead of holding
money, people could hold interest-earning assets (such as Certificates of Deposit or
bonds) instead.
4. Interest rates are determined by the interaction of lenders who supply funds, and
borrowers, who demand funds.
 Savers supply funds to be loaned and are paid interest for waiting to consume at a
later date.
 Demanders of these funds are the borrowers, who pay interest in order to have the
right to spend now instead of waiting for future income. This spending might be
on consumption or on investment goods (such as plant and equipment).
 Interest rates vary with the type of market. Rates change within a market in
response to changes in supply and demand for loanable funds.
5. The money supply is a measure of the total amount of money in an economy.
 The money supply changes through activities of the commercial banking system.
 The Federal Reserve System is charged with, among other things, managing the
money supply of the United States. It does this by managing the stock of currency
in circulation and the amount of reserves in the banking system.
 The Federal Reserve uses open market operations to alter the amount of
currency and bank reserves, generally signaling its intentions to do so through
© Foundation for Teaching Economics, 2008. Permission granted to copy for educational use.
Friday - 3
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changes in its target value for the Federal Funds rate and changes in the
Discount rate.
 The Federal Fund rate is the rate of interest at which U.S. banks lend to
one another their excess reserves held on deposit by Federal Reserve
banks.
 The Discount rate is the rate at which member banks may borrow short
term funds directly from a Federal Reserve Bank.
Other policy vehicles available to the Fed include: reserve requirements,
margin requirements on stock loans, credit controls on lending quality, and
changes in eligible “collateral” for direct loans to member banks and other
commercial institutions (e.g., investment banks).
6. Inflation is a general increase in the level of prices throughout the economy.
 The most commonly used measure of inflation is the Consumer Price Index, (or
CPI). The GDP Deflator is another important measure of inflation. Changes in
these price indices indicate changes in the purchasing power of the U.S. dollar.
 Unanticipated inflation alters the normal signals buyers and sellers receive from
prices, changing their behavior in markets.
 Inflation encourages more debt and faster spending as buyers and sellers try to
avoid rising prices.
 Inflation creates uncertainty and makes future planning more difficult.
 Unanticipated inflation erodes the purchasing power of nominal assets, including
money, bonds, and savings accounts. Individuals with fixed incomes also lose.
 Very rapid inflation (a/k/a hyperinflation) causes markets of all types to break
down, for two reasons.
 The extremely high cost of using money during hyperinflations forces people
to resort to barter, which is an inefficient means of transacting.
 A high average rate of inflation is always accompanied by much uncertainty
about the future inflation rate, which makes many contracts more risky.
Greater levels of risk increase the value of the “option to wait,” which delays
many consumption and investment decisions, and thereby slows economic
growth.
7. Inflation is a monetary phenomenon, and almost always occurs because increases in
the stock of money exceed growth in output of goods and services.
 Rapid increases in the money supply can be the result of poor management by the
central bank or by a decision to print money to support government spending.
 A frequent problem in developing nations is that governments without stable
or consistent tax collections often resort to printing money to finance
government spending.
 Inflation increases pressure on government to impose price controls which tends
to make conditions worse instead of better.
 Intended to halt rising prices, price controls instead disguise inflation and
disrupt the allocation of goods and services.
© Foundation for Teaching Economics, 2008. Permission granted to copy for educational use.
Friday - 4
Ideas To Take Away From This Lesson
 Money is an innovation that significantly improved the operation of markets.
 Banks facilitate the operation of markets by expanding the quantity of money in
circulation.
 Inflation is a consequence of the money supply growing faster than production.
 The Fed manages price and interest rate levels by changing the money supply.
 Inflation creates disruptions and losses in the overall economy as buyers and
sellers act to avoid its effects.
© Foundation for Teaching Economics, 2008. Permission granted to copy for educational use.
Notes
© Foundation for Teaching Economics, 2008. Permission granted to copy for educational use.
Friday - 5
Notes
© Foundation for Teaching Economics, 2008. Permission granted to copy for educational use.
Friday - 6
7
Activity:
The “Giant Sucking Sound”– Job Woes or Trade Flows?*
Content Standards Addressed:
Standard 6: Specialization
When individuals, regions, and nations specialize in what they can produce at the lowest cost and
then trade with others, both production and consumption increase.
 Two factors that prompt international trade are international differences in the availability of
productive resources and differences in relative prices.
 Individuals and nations have a comparative advantage in the production of goods or services
if they can produce a product at a lower opportunity cost than other individuals or nations.
 Comparative advantages change over time because of changes in factor endowments,
resource prices, and events that occur in other nations.
Standard 13: Income
Income for most people is determined by the market value of the productive resources they sell.
What workers earn depends, primarily, on the market value of what they produce and how
productive they are.
 Changes in the structure of the economy, the level of gross domestic product, technology,
government policies, and discrimination can influence personal income.
 Changes in the prices for productive resources affect the incomes of the owners of those
productive resources and the combination of those resources used by firms.
Standard 14: Entrepreneurship
Entrepreneurs are people who take the risks of organizing productive resources to make goods
and services. Profit is an important incentive that leads entrepreneurs to accept the risks of
business failure.
 Entrepreneurial decisions affect job opportunities for other workers.
Standard 15: Investment
Investment in factories, machinery, new technology, and the health, education, and training of
people can raise future standards of living.
 Economic growth creates new employment and profit opportunities in some industries, but
growth reduces opportunities in others.
 Investments in physical and human capital can increase productivity, but such investments
entail opportunity costs and economic risks.
Developed by Dr. Ken Leonard and Kathy Ratté, based on The Job Jungle, an activity written for FTE by Prof. R. Pat Fishe,
University of Richmond. Copyright  2001, Revised 2006 The Foundation for Teaching Economics
Permission granted to copy for classroom use
8
Lesson Overview
The “giant sucking sound” was United States Presidential candidate Ross
Perot's colorful phrase for what he believed would be the negative effects of
the North American Free Trade Agreement (NAFTA), which he opposed. The
phrase, coined during the 1992 U.S. presidential campaign, referred to the
sound of U.S. jobs heading south for Mexico should the proposed free-trade
agreement go into effect.
Perot ultimately lost the election, and the winner, Bill Clinton, supported
NAFTA, which went into effect on January 1, 1994.
The phrase has since come into general use to describe any situation involving
loss of jobs, or fear of a loss of jobs, particularly by one nation to a rival. For
example:
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A European Union representative spoke of worrying “about the giant
sucking sound from Eastern Europe;”
An op-ed writer opined that “the Mexicans... are hearing 'the giant sucking
sound' in stereo these days – from China in one ear and India in the other.”
A columnist used the phrase “That Giant Sucking Sound” to introduce a
comment about a 34% slump in employment in the U. S. airline industry.”
From Wikipedia, the free encyclopedia
Copyright (C) 2000,2001,2002 Free Software Foundation, Inc. 51 Franklin St, Fifth Floor, Boston, MA
02110-1301 USA Everyone is permitted to copy and distribute verbatim copies of this license document,
but changing it is not allowed.
Students role-play employers and workers in the t-shirt industry to demonstrate the impact of
changes in worker productivity on labor markets. Then, using what they discovered in the
simulation, student teams consider whether expanding into international labor markets can
increase profits for a fictional employer, income for workers, and/or wealth for the society as a
whole.
The purpose of this activity is twofold:
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To allow students to experience how the productivity of workers determines the wage rates
they can command in labor markets; and
To help students understand why, in open markets, jobs move to where the level of labor
productivity is consistent with the characteristics of the job.
Developed by Dr. Ken Leonard and Kathy Ratté, based on The Job Jungle, an activity written for FTE by Prof. R. Pat Fishe,
University of Richmond. Copyright  2001, Revised 2006 The Foundation for Teaching Economics
Permission granted to copy for classroom use
9
Students participate in a simulated labor market in the t-shirt industry, acting as either employers
or prospective workers. The t-shirt industry was chosen because it involves both high-skill
(design, marketing, accounting, etc.) and low-skill (cutting, sewing, printing etc.) jobs.
Additionally, the "real world" credentials of the example are impeccable: included in the activity
is an Internet advertisement for workers to cut and sew t-shirts in a Mexican factory that
wholesales to American t-shirt retailers. The ad for the fictitious factory is a compilation of
actual web site advertisements posted in the 1990s by companies located in northern Mexico.
Teacher Background
Ross Perot evoked the "giant sucking sound" to symbolize his opposition to trade policies that he
feared would result in the loss of American jobs to Mexico and a consequent reduction of the
standard of living of American workers. With little reflection on the realities of trade,
employment, and income, the phrase has become cultural shorthand for the "trade costs jobs"
argument, an argument that economic analysis quickly reveals to be without merit. Nonetheless,
"trade costs jobs" seems to have intuitive appeal and persists in the thinking of many. The
challenge for teachers is to move students past the mental roadblock that prevents them from
recognizing the huge benefits of international trade to Americans and to our trading partners.
Student Preparation
Some background preparation is necessary if students are to derive the full value of this exercise.
They should be familiar with the basic tools of economic analysis: understanding of the laws of
supply and demand, market prices, and the determinants of demand and supply. In addition,
students should be comfortable with the reality that:
 Firms in competitive markets, like that for t-shirts, don't set prices; the market does.
 Therefore, a firm's only ability to exert control over profit lies in its control of production
cost.
It is helpful if students have had some practice with marginal analysis, as the employers will be
making decisions based on diminishing marginal returns to labor. However, this is not
prerequisite and can be introduced effectively within the context of the activity.
Conceptual Background
 The demand for labor is derived demand, meaning that the demand for workers is dependent
upon the demand for the product the workers make. If no one wants to purchase the product,
then there will be no demand for the workers who produce it.
 The market price of the product constrains employers' hiring decisions. If the cost of labor is
so high that an employer cannot make a profit by selling the product at the market price, then
the employer will not be willing to pay for the labor. In simplest terms, market prices
influence the wages that employers are willing to pay.
 Wages are also influenced by productivity (output per man-hour of labor). In hiring any
particular worker, the employer must ask how much the worker will contribute to the
business in terms of output. Economists call this the value added or marginal value.
 Worker productivity is determined by a number of factors, some under control of the worker
himself and some the result of the conditions of employment. Examples of productivity
factors include:
 The worker's physical and/or mental abilities;
Developed by Dr. Ken Leonard and Kathy Ratté, based on The Job Jungle, an activity written for FTE by Prof. R. Pat Fishe,
University of Richmond. Copyright  2001, Revised 2006 The Foundation for Teaching Economics
Permission granted to copy for classroom use
10
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The worker's level of education;
The type and amount of equipment (capital) available;
Other factors and conditions in and around the particular job location.
The important new learning for students in this activity is that the number of other workers
already hired impacts a worker's productivity.
In some cases, hiring additional workers increases productivity, as each worker is able to
specialize.
At some point, however, hiring additional workers results in diminishing marginal returns,
meaning that the productivity of the next worker hired will necessarily be less than that of the
worker hired before him. A simple example of this is the "too many cooks spoil the broth"
syndrome. How many cooks could a busy restaurant profitably employ? Common sense
tells us that at some point, the kitchen gets too crowded for effective work. The last cook
hired – the one in everyone's way through no fault of his own, may add very little to the total
number of pizzas produced, or may even prove to be such an obstacle that total production of
pizzas drops!
Time: One-two class periods
Materials:
 Yellow index cards for low-skilled workers (1/student minus # of employers) Randomly
mark a wealth endowment of $4, $5, or $6 at the top of each card.
 Pink index cards (same number as yellow cards) for high skilled workers
 Colored pens or markers - 1 per employer
 Prizes for winning employer and winning worker
 Overhead transparencies:
 Background, Visual #1
 Scenario, Visual #2
 Output, Additional (Marginal) Product, and Additional (Marginal) Revenue, Visual #3
 If You Are a Worker . . . Visual #4
 If You Are an Employer . . . Visual #5
 Employer's Profit Calculation Worksheet, Visual #6
 Simulation Debriefing Questions, Visual #7
 Problem Worksheet, Visual #8
 Peñasa Advertisement, Visual #9
 Discussion Questions, Visual #10
 Student handouts:
 Output, Additional (Marginal) Product, and Additional (Marginal) Revenue - 1 per
employer, Visual #3
 Employer's Profit Calculation Worksheet - 1 per employer, Visual #6
 Problem Worksheet - 1 per student, Visual #8
Developed by Dr. Ken Leonard and Kathy Ratté, based on The Job Jungle, an activity written for FTE by Prof. R. Pat Fishe,
University of Richmond. Copyright  2001, Revised 2006 The Foundation for Teaching Economics
Permission granted to copy for classroom use
11
Procedures
Part 1
1. Explain to students that they will be taking part in a simulated labor market in the t-shirt
industry. They will be assigned roles as either employers or workers, and the winning
employer and the winning worker will each receive a prize.
2. Display the Background Visual #1, and explain that before they can effectively participate in
the simulation, they need to know a little bit about labor markets. Go through the
background with the class as a whole.
1 Kitchen - How Many Cooks?
# cooks
# pizzas
produced
How many
additional pizzas
from hiring this
cook?
0
0
0
No cook, no pizza
1
10
10
Good cook but does everything
himself
2
25
15
1 baker, 1 prep and order taker
3
45
20
1 baker, 1 prep, 1 order taker - what a
system!
4
55
10
An extra guy - helps out when
someone's behind
5
55
0
Things aren't so hectic
6
40
-15
Would you hire 6 cooks?
What happened?
Get him out of the way!
No
What would you need to know to decide how much to pay the cooks you did hire? The price of
pizzas.
If pizzas sell for $10, what's the most you could afford to pay cook #4? $100
3. Display the Scenario Visual #2, explain the nature of the t-shirt industry and discuss the goals
of both the employers and the workers in the simulation.
4. Explain that in this simulation all workers will begin as low skilled (yellow card), but they
will have an opportunity to purchase an education and up-grade themselves to high-skilled
(pink card) workers as the activity progresses.
5. Display the 2nd page of Visual #2, "Output, Added (Marginal) Product, Added (Marginal)
Revenue" overhead and distribute handouts to students. Explain that in this particular
market, the price of t-shirts is $10. Fill in the yellow card chart with the class. Ask students
to fill in the pink card chart individually. Check results and answer any questions.
Developed by Dr. Ken Leonard and Kathy Ratté, based on The Job Jungle, an activity written for FTE by Prof. R. Pat Fishe,
University of Richmond. Copyright  2001, Revised 2006 The Foundation for Teaching Economics
Permission granted to copy for classroom use
12
6. Choose employers and assign the rest of the students to be workers. If your class is large
enough, it is often a good idea to choose a pair of students to play each employer role, so that
they can help each other. If the class is small, you will have fewer employers and can
probably help them yourself.
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For a class of 25 students, use 3 employers (6 students if pairs). Use the teacher's guide
(Visual #3) to figure out how many employers to use. Do not have so many employers
that it is easy for all workers to get relatively high paying jobs.
Note that this is definitely a "the-more-the-merrier" activity. 50 - 60 students (with 5 or 6
employers) is an excellent size for the activity, so you may want to invite another class to
participate with yours.
7. Distribute the playing materials. All workers receive yellow cards to start the game. Each
employer receives a Profit Calculation Worksheet and a colored pen. Give a different
colored pen to each employer.
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Display the "If You Are an Employer" overhead (Visual #5)
The employer's goal is to make profit – the more, the better!
Display the Visual #3 and review:
 Employers want to hire low-skilled (yellow card) workers to act as cutters, sewers,
and printers.
 Employers want to hire high-skilled (pink card) workers as designers, marketing
specialists, accountants, etc.
 The output scales are independent. If you hire 2 yellow card workers and then hire a
pink card worker, the pink card worker's wage goes on the "1st" line of the pink card
worker chart.
 The wage is for one round only. At the beginning of each round, you start over hiring
workers.
 When you hire a worker, write the wage on his card with your colored pen and initial
it. You may not back out on a deal to hire a worker once you've made an agreement.
 Also record the hire in the wage paid column of your profit calculation sheet.
 At the end of each round, figure profit for that round.
 Reminder to employers: You are trying to make a profit. In order to do so, you must
have workers to produce a product. You are competing against the other employers in
the room to hire workers.
Answer any procedural questions from employers and then direct them to take their
handouts and go set up their offices around the room.
8. Display "If You Are a Worker . . ." (Visual #4) and review the role of the worker.
 The worker's goal is to make an income - the more the better! (This income is what the
worker uses to purchase the goods and services he wants and needs, so the more income
he has, the higher his standard of living.)
 A worker earns income by finding an employer who will hire her at a mutually
acceptable wage.
 All workers start with some money – as indicated on the top of the card. Workers start
with different amounts of money because that's the way things are.
 All workers begin with yellow cards and are unskilled. You may not negotiate for a pink
card job.
Developed by Dr. Ken Leonard and Kathy Ratté, based on The Job Jungle, an activity written for FTE by Prof. R. Pat Fishe,
University of Richmond. Copyright  2001, Revised 2006 The Foundation for Teaching Economics
Permission granted to copy for classroom use
13
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A job lasts for only one round. At the beginning of each round, you are unemployed.
The wage is for the round and you may only be hired once each round.
If you agree to be hired by an employer, have the employer enter the wage on your card
and initial it. Once you make a deal, you may not back out or look for a better offer.
After you get a job, return to your seat and total your income.
At the end of a round, workers may buy an education from the teacher for $25.
To buy an education, you must have $25 on your yellow card. No loans allowed.
The teacher will take your yellow card, subtract $25, and enter any remaining $ on a
pink card. When you have a pink card, you may try to get high skilled jobs.
Teacher Note: Yellow card workers may not accept pink card jobs. Decide whether you
will allow pink card workers to accept yellow card jobs. You may want to try one round
each way. See debriefing questions below for the implications of this decision.)
Reminder: You are competing against other workers for jobs and income.
9. Open the first round of the activity. Allow it to run 6-10 minutes as workers search for better
job offers. (It is better to place a time limit on each round and announce the time remaining
as the end approaches. It's not necessary that all rounds be the same length.)
10. At the end of the round, allow time for workers to buy an education and employers to figure
their profits and consider their strategies for the next round.
11. Run additional rounds. Stop the game after 2-4 rounds. (You may want to play additional
rounds after the debriefing, using some of the variations listed below.)
 Variations:
 Yellow card workers who don't find jobs qualify for $15 public assistance and pink
card workers qualify for $35 public assistance per round.
 Raise or lower the price of t-shirts.
 Raise or lower the amount of public assistance.
12. Identify the winners, check their arithmetic, and award the prizes. In the event of a tie, use a
coin toss to determine the winner.
13. Debriefing Questions:
 Which worker made the most money? How?
 Which employer made the most profit? How?
 Which worker(s) made very little money? Why?
 Which employer(s) made very little profit? Why?
 How many workers up-graded their skills by buying an education? Why?
Generally, the vast majority of workers will buy education and then some can’t find pink
card jobs. Employers will be looking for yellow card workers and there won't be any
available. This is the desirable outcome for the activity, because in the next part of the
simulation, you want employers to struggle with the problem of finding enough yellow
card workers.
 Were all employees equally productive? What made the differences?
Education (skill level) and when they were hired. Help students to see the importance of
this second characteristic.
Developed by Dr. Ken Leonard and Kathy Ratté, based on The Job Jungle, an activity written for FTE by Prof. R. Pat Fishe,
University of Richmond. Copyright  2001, Revised 2006 The Foundation for Teaching Economics
Permission granted to copy for classroom use
14
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Workers, were you paid the same in each round? Why or why not?
The most obvious difference will be workers who paid for an education and went from the
yellow card scale to the pink card scale, showing the higher wages that accompany
greater productivity. Emphasize that the wage increase is the result of the greater
amount the pink card workers produce.
Employers, what determined how much you planned to pay for any particular worker?
Employers know from their output charts how much a worker adds to the employer's
revenue. They are unwilling to hire an additional worker if they have to pay more than
the value the worker produces.
Employers, what determined how much you actually were willing to pay for workers?
The supply of available workers and the demand by other employers (the wages other
employers were offering), the anticipated productivity of the worker being hired, and the
market price of t-shirts.
Employers, how might your hiring decisions have changed if the market price for t-shirts
rose to $15?
Employers would have hired more workers. Use Visual #2 to demonstrate the
profitability of going farther down the hiring scale given a higher t-shirt price.
Would you have paid higher wages?
They could have and still made a profit, but there is no assurance that they would have.
Employers, did you pay all workers of one type (pink or yellow) the same wage? Why or
why not?
Some students may realize that, particularly when there are lots of workers who want
jobs, they can pay all workers the wage of the last worker they would hire.
Are pink card (high-skilled) workers always worth more to employers than yellow card
(low-skilled) workers?
Generally they are, but not always. Looking at Visual #2 clearly shows that the 1st or
even 2nd yellow card worker is worth more to the employer than the 6th pink card worker.
Developed by Dr. Ken Leonard and Kathy Ratté, based on The Job Jungle, an activity written for FTE by Prof. R. Pat Fishe,
University of Richmond. Copyright  2001, Revised 2006 The Foundation for Teaching Economics
Permission granted to copy for classroom use
15
Procedures, Part 2
14. Usually by round three most workers have purchased an education to up-grade their skill
level, resulting in an over-supply of pink card workers and a shortage of yellow card
workers. (If this was not the case, propose the situation to the students. Possible
explanations might include that all the remaining yellow card workers entered a government
sponsored training program and were no longer part of the market. Or announce that the rules
changed and pink card workers are no longer allowed to accept yellow-card jobs.) Discuss:
 Employers, if we play another round of the game, are there enough yellow card workers?
(No)
 Why would you like to have more yellow card workers? (Employers should answer that
this would allow them to make more profit. Encourage students to "translate" this.
Employers are finding out that, for example, it doesn't do any good to hire another t-shirt
designer or marketer if they can't hire people to cut and sew the shirts.)
15. Have students return to the employers who last hired them. Explain that you have a problem
you want them to discuss and solve as a team. If you have students who were not hired,
assign them to teams.
16. Provide each team with a copy of the "Problem" handout. (pp. 161-162) Display Visual #8
on the overhead and read through with the class. Answer any questions and then allow teams
time to work on the solution.
Problem:
You are members of your firm's Make It Work Circle. The firm has adopted a profit-sharing
scheme and created the MIW Circle in which employees, management and ownership meet
regularly to discuss the business. The profit-sharing means that employees have a stake in
the success of the business – if the firm makes more profit, the employee gets more income –
and therefore, employees participate enthusiastically in the MIW meetings.
The market for t-shirts has grown in response to fashion trends and the employer has found a
backer willing to provide the investment funds necessary to triple the size of the company.
However, the human resources director has reported a virtual inability to hire yellow card
workers.
The employer has called an MIW meeting to brainstorm solutions to this labor dilemma.
Make a list of things the company could do to take advantage of the opportunity to expand.
17. Ask teams to share their proposals. Generate a master list of viable possibilities on the board
or overhead. (Expect a variety of answers. Since the direction was to brainstorm, not all will
be practical. Point out possibilities students may have overlooked – like substituting
machines for workers.)
18. Display the overhead of the Peñasa internet advertisement. Direct students to turn to the
discussion questions on the handout. Remind them that, in answering the questions, they
should adopt the point of view of the person they played in the simulation: the employer(s),
the unemployed worker, the skilled worker, the unskilled worker, the skilled worker in an
unskilled job, etc.
19. Debrief the questions with the class:
Developed by Dr. Ken Leonard and Kathy Ratté, based on The Job Jungle, an activity written for FTE by Prof. R. Pat Fishe,
University of Richmond. Copyright  2001, Revised 2006 The Foundation for Teaching Economics
Permission granted to copy for classroom use
16

What is your role? (employer, pink or yellow card worker, employed, unemployed, or
underemployed)

As a member of the MIW Circle, do you think subcontracting all cutting and sewing to
the Mexican factory would be a good idea for the company? (yes)


What would be the advantages for the company? (major advantage would be
lowering production cost)

What would be the disadvantages for the company? (Disadvantages would include
such intangibles as less direct control over the sewing and cutting process and
quality, concerns over community reactions if a number of yellow card workers lose
their jobs, etc.)
Do you (acting in your role) favor the company taking this action?

What would be the advantage for you? (Depends on the student's role. Skilled
workers would not be risking their jobs and would also benefit if the company
becomes more profitable. If the worker is skilled, but working in an unskilled
position, the growth of the company offers the option of moving into a higher skill,
higher paying job. However, the unskilled worker is likely to lose his job.)

What would be the disadvantage for you? (If you're an unskilled worker, you'll lose
your job. If you're a skilled worker in an unskilled position, you may suffer a period
of unemployment before growth allows you to move into a skilled position.)

Suppose that instead of (or in addition to) being a member of the company, you are a
t-shirt buyer. Do you, as a consumer, favor the company subcontracting to the
Mexican company? (Yes, lowering cost means lower prices in a competitive market
like that for t-shirts.)
Developed by Dr. Ken Leonard and Kathy Ratté, based on The Job Jungle, an activity written for FTE by Prof. R. Pat Fishe,
University of Richmond. Copyright  2001, Revised 2006 The Foundation for Teaching Economics
Permission granted to copy for classroom use
17
Teacher Guide to Chart on Student Handout
Who?
Helped or hurt by
"exporting"
unskilled jobs to
Mexico?
Employer
Helped
Lower production cost means better able to
compete, more profit.
US skilled
worker
Helped
As company grows, more skilled positions
available. More profit for company means more
income for skilled worker.
US Unskilled
worker
Short run - hurt
Long run - ???
T-shirt
consumer
Helped
The unskilled worker may lose her job, but more
jobs will be opening up because of the tradeinduced growth. If she gets education or
training to increase her skills, she'll be able to
get a higher paying job.
Lower t-shirt prices.
Mexican
unskilled
worker
Helped
How?
More opportunity for employment and income
(and therefore eventual accumulation of skill,
also).
Developed by Dr. Ken Leonard and Kathy Ratté, based on The Job Jungle, an activity written for FTE by Prof. R. Pat Fishe,
University of Richmond. Copyright  2001, Revised 2006 The Foundation for Teaching Economics
Permission granted to copy for classroom use
18
Closure (use Visual #10)
20. Ross Perot opposed opening up trade between the U.S. and Mexico, predicting that we'd hear
a "giant sucking sound" as American jobs went to Mexico.

Was he right that low-skilled jobs would migrate to Mexico? Why? Yes, in the sense that
jobs seek out locations with the appropriate resources to produce at least cost. (This is a
process that always goes on, however, not something new or just the result of NAFTA as
Perot implied.) The Mexican labor force is, in general, less skilled than the U.S. labor
force, with the result that it is attractive to employers with jobs requiring low skills.

Perot implied that that is necessarily a bad thing. He invoked a picture of jobs
"disappearing," Americans being unemployed, and poverty increasing. Was he right?
The evidence suggests that he was not. While some jobs have "disappeared" from the
U.S. as companies move or subcontract abroad, the total number of jobs has increased,
partly as a result of the efficiencies and wealth created by producing with the lowest cost
resources.

Based on what you've learned in the activity, would subcontracting to Mexico cause jobs
to disappear? No, exactly the opposite. In our scenario, the total number of jobs would
increase as the company expanded. The distribution of jobs between the U.S. and
Mexico, would change. The U.S. office of the t-shirt company would do the high-skilled
jobs and the Mexican factory would do the low-skilled jobs.

Who would be hurt if the low-skilled jobs moved to Mexico?Low-skilled American
workers who could not find other low-skilled jobs would be hurt.

Who would benefit? How? Consumers would benefit from lower prices. Mexican lowskilled workers would benefit from jobs. American skilled workers in low-skilled jobs
would benefit from the increased number of skilled jobs. All of these effects combine to
create more income, greater demand for goods and services, and therefore an increased
number of both low and high-skilled jobs.

Generalize: Why might a company "export" jobs? How does a company "import" jobs?
In general, why do jobs "move" and to where? A company will “export" jobs when the
labor source in its current location does not have the level of skill that matches the job.
Over-skilled workers raise production costs and threaten companies' ability to compete
for profit – or even to continue to exist. An example is our t-shirt company,
subcontracting to Mexico the cutting and sewing of t-shirts because local American
workers are over-qualified and want higher wages.
A company will "import" jobs for the same reason – because it has the labor force to
match the job. An example would be a company that provides highly technical
communications services, contracting to provide those services for Mexican companies
and employing more skilled American workers in the process.
Developed by Dr. Ken Leonard and Kathy Ratté, based on The Job Jungle, an activity written for FTE by Prof. R. Pat Fishe,
University of Richmond. Copyright  2001, Revised 2006 The Foundation for Teaching Economics
Permission granted to copy for classroom use
Visual #1
19
Background

The demand for labor is derived demand. The demand for workers is dependent upon the
demand for the product the workers make. If no one wants to purchase the product, then
there will be no demand for workers to produce it.

The market price of the product affects employers' hiring decisions. If the cost of labor is
so high that an employer cannot make a profit by selling the product at the market price,
then the employer will not be willing to pay for the labor. In simplest terms, market
prices influence the wages that employers are willing to pay.

Wages are also influenced by productivity (output per man-hour of labor). In hiring any
particular worker, the employer must ask how much the worker will contribute to the
business in terms of output. Economists call this the "value added."

Worker productivity is determined by a number of factors, some under control of the
worker himself and some the result of the conditions of employment. Examples of
productivity factors include:




The worker's physical abilities;

The worker's level of education;

The type and amount of equipment (capital) available;

Other factors and conditions in and around the particular job location.
It's also important to understand that how many other workers have already been hired
affects a worker's productivity.
In some cases, hiring additional workers increases productivity, as each worker is able to
specialize.
At some point, however, hiring additional workers results in diminishing marginal
returns, meaning that the productivity of the next worker hired will necessarily be less
than that of the worker hired before him. A simple example of this is the "too many
cooks spoil the broth" syndrome.
Developed by Dr. Ken Leonard and Kathy Ratté, based on The Job Jungle, an activity written for FTE by Prof. R. Pat Fishe,
University of Richmond. Copyright  2001, Revised 2006 The Foundation for Teaching Economics
Permission granted to copy for classroom use
Visual #1
20
1 Kitchen - How Many Cooks?
How many
additional pizzas
from hiring this
cook?
# cooks
# pizzas
produced
0
0
No cook, no pizza
1
10
Good cook but does everything himself
2
25
1 baker, 1 prep and order taker
3
45
1 baker, 1 prep, 1 order taker - what a
system!
4
55
An extra guy - helps out when someone's
behind
5
55
Things aren't so hectic
6
40
Get him out of the way!
What happened?
Would you hire 6 cooks?
What would you need to know to decide how much to pay the cooks you did hire?
What's the most you'd be willing to pay cook #4?
Developed by Dr. Ken Leonard and Kathy Ratté, based on The Job Jungle, an activity written for FTE by Prof. R. Pat Fishe,
University of Richmond. Copyright  2001, Revised 2006 The Foundation for Teaching Economics
Permission granted to copy for classroom use
Visual #2
21
Scenario
In college, Maria and Mario started a t-shirt business out of their parents' garage. Now they've
graduated, and would like to expand the business and become the bosses instead of the "doeverything" people.
They've made a list of the different tasks involved in the business – most of which they now do
themselves. They figure there are 2 kinds of tasks in the t-shirt business:
Skilled jobs
Unskilled or low-skill jobs
Keeping the books
Taking orders
Drumming up business
Cutting patterns
Designing the shirts and the logos
Sewing
Advertising
Printing logos and designs
Shipping and ordering
Labeling
Packing
Every person they hire means one less thing they have to do themselves – and they can choose to
do the things they enjoy most – like the design and marketing, for example. The question is how
many people to hire.
Based on past experience, here is what they think will happen when they begin to hire workers:
Developed by Dr. Ken Leonard and Kathy Ratté, based on The Job Jungle, an activity written for FTE by Prof. R. Pat Fishe,
University of Richmond. Copyright  2001, Revised 2006 The Foundation for Teaching Economics
Permission granted to copy for classroom use
Visual #3
22
Output, Additional (Marginal) Product, and Additional (Marginal) Revenue
T-shirt price (P) = $_________
YELLOW CARD WORKERS
PINK CARD WORKERS
Worker
Tee shirts Added
Worker
Tee shirts Added
Hired
Produced
Product (MP)
Hired
Produced
Product (MP)
1st
5
5
1st
8
8
2nd
8
3
2nd
14
6
3rd
10
2
3rd
19
5
4th
11
1
4th
22
3
5th
12
1
5th
24
2
6th
12
0
6th
25
1
P x MP
P x MP
Mario and Maria obviously want to hire good workers as cheaply as they can. What do workers
want?
Developed by Dr. Ken Leonard and Kathy Ratté, based on The Job Jungle, an activity written for FTE by Prof. R. Pat Fishe,
University of Richmond. Copyright  2001, Revised 2006 The Foundation for Teaching Economics
Permission granted to copy for classroom use
Visual #3
23
Teacher Guide
Output, Additional (Marginal) Product, and Additional (Marginal) Revenue
T-shirt price (P) = $____10_____
YELLOW CARD WORKERS
PINK CARD WORKERS
Worker
Tee shirts Added
Worker
Tee shirts Added
Hired
Produced
Product (MP)
P x MP
Hired
Produced
Product (MP)
P x MP
1st
5
5
$50
1st
8
8
$80
2nd
8
3
$30
2nd
14
6
$60
3rd
10
2
$20
3rd
19
5
$50
4th
11
1
$10
4th
22
3
$30
5th
12
1
$10
5th
24
2
$20
6th
12
0
0
6th
25
1
$10
Developed by Dr. Ken Leonard and Kathy Ratté, based on The Job Jungle, an activity written for FTE by Prof. R. Pat Fishe,
University of Richmond. Copyright  2001, Revised 2006 The Foundation for Teaching Economics
Permission granted to copy for classroom use
Visual #4
24
If You Are a Worker . . .

Your goal is to make an income – the more the better! (You'll use this income to purchase
the goods and services you want and need. The more income you have, the higher your
standard of living.) The worker with the most income at the end of the game wins a prize.

A worker earns income by finding an employer who will hire her at a mutually acceptable
wage.

All workers start with some money – as indicated on the top of the card. Workers start with
different amounts of money because that's the way things are.

All workers begin with yellow cards and are unskilled. You may not negotiate for a pink
card job when you have a yellow card.

A job lasts for only one round. At the beginning of each round, you are unemployed.

The wage is for the round and you may only be hired once each round.

If you agree to be hired by an employer, have the employer enter the wage on your card and
initial it. Once you make a deal, you may not back out or look for a better offer.

After you get a job, return to your seat and total your income.

At the end of a round, you may buy an education from the teacher for $25.

To buy an education, you must have $25 on your yellow card. No loans allowed.

The teacher will take your yellow card, subtract $25, and enter any remaining $ on a pink
card. When you have a pink card, you may try to get high skilled jobs.

Reminder: You are competing against other workers for jobs and income. (The employers
are not your competitors.)
Developed by Dr. Ken Leonard and Kathy Ratté, based on The Job Jungle, an activity written for FTE by Prof. R. Pat Fishe,
University of Richmond. Copyright  2001, Revised 2006 The Foundation for Teaching Economics
Permission granted to copy for classroom use
Visual #5
25
If You Are an Employer . . .

The employer's goal is to make profit – the more, the better!

To make profit, you have to produce t-shirts. To do that, you have to hire workers:

You hire low-skilled (yellow card) workers to act as cutters, sewers, and printers.

You hire high-skilled (pink card) workers as designers, marketing specialists,
accountants, etc.

Refer to the "Output" charts in making your hiring decisions. Not all workers are of the
same value to you.

The output scales are independent. If you hire 2 yellow card workers and then hire a pink
card worker, the pink card worker's wage goes on the "1st" line of the pink card worker
chart.

The wage is for one round only. At the beginning of each round, you start over hiring
workers.

When you hire a worker, write the wage on his card with your colored pen and initial it.
You may not back out on a deal to hire a worker once you've made an agreement.

Also record the hire in the “wage paid” column of your profit calculation sheet.

At the end of each round, figure profit for that round.

Reminder to employers: You are trying to make a profit. In order to do so, you must
have workers to produce a product. You are competing against the other employers in the
room to hire workers.
Developed by Dr. Ken Leonard and Kathy Ratté, based on The Job Jungle, an activity written for FTE by Prof. R. Pat Fishe, University of
Richmond. Copyright  2001, Revised 2006 The Foundation for Teaching Economics
Permission granted to copy for classroom use
Visual #6
26
Employer's Profit Calculation Worksheet
Round #1 – Wages Paid
Yellow Card
Pink Card
Worker
Wage
(no pink card workers
Hired
Paid
available in round #1)
1st
2nd
3rd
4th
5th
6th
Round #1 – Profit Calculation
# t-shirts produced (pink + yellow)
X price of t-shirts X
= TOTAL REVENUE = $
— TOTAL COST — $
= PROFIT Round #1 $
Total
Round #2 – Wages Paid
Yellow Card
Pink Card
Worker
Wage
Worker
Wage
Hired
Paid
Hired
Paid
1st
1st
2nd
2nd
rd
3
3rd
4th
4th
th
5
5th
th
6
6th
Round #2 – Profit Calculation
# t-shirts produced (pink+yellow)
X Price of t-shirts X $
= TOTAL REVENUE = $
— TOTAL COST — $
= PROFIT Round #2 $
Sub-total
+Subtotal
=
Total
cost
Round #3 – Wages Paid
Yellow Card
Pink Card
Worker
Wage
Worker
Wage
Hired
Paid
Hired
Paid
st
st
1
1
2nd
2nd
3rd
3rd
4th
4th
th
5
5th
th
6
6th
Round #3 – Profit Calculation
# t-shirts produced (pink+yellow)
X Price of t-shirts X $
= TOTAL REVENUE = $
— TOTAL COST — $
= PROFIT Round #3 $
Sub-total
+ Subtotal
=
Total
cost
Developed by Dr. Ken Leonard and Kathy Ratté, based on The Job Jungle, an activity written for FTE by Prof. R. Pat Fishe,
University of Richmond. Copyright  2001, Revised 2006 The Foundation for Teaching Economics
Permission granted to copy for classroom use
$
Visual #6
27
Round #4 – Wages Paid
Yellow Card
Pink Card
Worker
Wage
Worker
Wage
Hired
Paid
Hired
Paid
1st
1st
2nd
2nd
3rd
3rd
th
4
4th
th
5
5th
th
6
6th
Round #4 – Profit Calculation
# t-shirts produced (pink+yellow)
X Price of t-shirts X $
= TOTAL REVENUE = $
— TOTAL COST — $
= PROFIT Round #4 $
Sub-total
+Subtotal
=
Total
cost
Round #5 – Wages Paid
Yellow Card
Pink Card
Worker
Wage
Worker
Wage
Hired
Paid
Hired
Paid
1st
1st
2nd
2nd
rd
3
3rd
th
4
4th
5th
5th
th
6
6th
Round #5 – Profit Calculation
# t-shirts produced (pink+yellow)
X Price of t-shirts X $
= TOTAL REVENUE = $
— TOTAL COST — $
= PROFIT Round #5 $
Sub-total
+Subtotal
=
Total
cost
Round #6 – Wages Paid
Yellow Card
Pink Card
Worker
Wage
Worker
Wage
Hired
Paid
Hired
Paid
1st
1st
2nd
2nd
3rd
3rd
th
4
4th
th
5
5th
th
6
6th
Round #6 – Profit Calculation
# t-shirts produced (pink+yellow)
X Price of t-shirts X $
= TOTAL REVENUE = $
— TOTAL COST — $
= PROFIT Round #6 $
Sub-total
+Subtotal
=
Total
cost
Total Profit
All Rounds
Developed by Dr. Ken Leonard and Kathy Ratté, based on The Job Jungle, an activity written for FTE by Prof. R. Pat Fishe,
University of Richmond. Copyright  2001, Revised 2006 The Foundation for Teaching Economics
Permission granted to copy for classroom use
Visual #7
28
Simulation Debriefing Questions

Which worker made the most money? How?

Which employer made the most profit? How?

Which worker(s) made very little money? Why?

Which employer(s) made very little profit? Why?

How many workers up-graded their skills by buying an education? Why?

Was the productivity level of each student the same? What made the
differences?

Workers, were you paid the same in each round? Why or why not?

Employers, what determined how much you planned to pay for any particular
worker?

Employers, what determined how much you actually were willing to pay for
workers?

Employers, how might your hiring decisions have changed if the market price
for t-shirts rose to $15?

Employers, did you pay all workers of one type (pink or yellow) the same wage?
Why or why not?

Are pink card (high-skilled) workers always worth more to employers than
yellow card (low-skilled) workers?
Developed by Dr. Ken Leonard and Kathy Ratté, based on The Job Jungle, an activity written for FTE by Prof. R. Pat Fishe,
University of Richmond. Copyright  2001, Revised 2006 The Foundation for Teaching Economics
Permission granted to copy for classroom use
Visual #8, Student handout
29
Problem Scenario, Part 1
You are a member of your firm's Make It Work Circle. The firm has adopted a
profit-sharing scheme and created the MIW Circle in which employees,
management and ownership meet regularly to discuss the business. The profitsharing agreement means that employees have a stake in the success of the business
– if the firm makes more profit, the employee gets more income - and therefore,
employees participate enthusiastically in the MIW meetings.
The market for t-shirts has grown in response to fashion trends and the employer
has found a backer willing to provide the investment funds necessary to triple the
size of the company. However, the company's human resource director has
reported that it's practically impossible to hire yellow card workers.
The employer has called an MIW meeting to brainstorm solutions to this labor
dilemma. Make a list of things the company could do to take advantage of the
opportunity to expand.
Brainstorm List:
Developed by Dr. Ken Leonard and Kathy Ratté, based on The Job Jungle, an activity written for FTE by Prof. R. Pat Fishe,
University of Richmond. Copyright  2001, Revised 2006 The Foundation for Teaching Economics
Permission granted to copy for classroom use
Visual #8, Student handout
30
Problem Discussion, Part 2
What is your role? (employer, pink or yellow card worker, employed, unemployed, or
underemployed)
_______________________________

As a member of the MIW Circle, do you think subcontracting all cutting and sewing
to the Mexican factory would be a good idea for the company?

What would be the advantages for the company?

What would be the disadvantages for the company?

Do you (acting in your role) favor the company taking this action?

What would be the advantage for you?

What would be the disadvantage for you?

Suppose that instead of (or in addition to) being a member of the company, you are a
t-shirt buyer. Do you, as a consumer, favor the company subcontracting to the
Mexican company? Why?
Fill in the chart below:
Who?
Helped or hurt by
"exporting"
unskilled jobs to
Mexico?
How?
Employer
US Skilled
worker
US Unskilled
worker
T-shirt
consumer
Mexican
unskilled
worker
Developed by Dr. Ken Leonard and Kathy Ratté, based on The Job Jungle, an activity written for FTE by Prof. R. Pat Fishe,
University of Richmond. Copyright  2001, Revised 2006 The Foundation for Teaching Economics
Permission granted to copy for classroom use
Visual #9
31
Apparel Sourcing, Cutting, Sewing, Distribution
"A Relationship of Trust and Profitability"

The North America Free Trade Agreement has opened new opportunities for trade in
the apparel industry between Mexico and the United States.

Peñasa was incorporated in 1997 as a garment manufacturing company to service the
U.S. market.

Peñasa's cutting and sewing plant is a world class facility with an output capacity of
60,000 dozens per month with 450 operators.

Peñasa's management team is a blend of experienced professionals from different
fields that fully understand the concept of global sourcing.

Our labor costs are low – average 50%-75% below comparable U.S. rates. Work
quality is high. We guarantee to cut your costs by 30-50%!

Sourcing with Peñasa will significantly reduce costs and add value to your entire
operation, allowing you to concentrate on sales, marketing, and management.
Developed by Dr. Ken Leonard and Kathy Ratté, based on The Job Jungle, an activity written for FTE by Prof. R. Pat Fishe,
University of Richmond. Copyright  2001, Revised 2006 The Foundation for Teaching Economics
Permission granted to copy for classroom use
Visual #10
Friday - 32
Closure Discussion Questions
Ross Perot opposed opening up trade between the US and Mexico, predicting that
we'd hear a "giant sucking sound" as American jobs went to Mexico.

Was he right that low-skill jobs would migrate to Mexico? Why?

Perot implied that this is necessarily a bad thing. He invoked a picture of jobs
"disappearing," Americans being unemployed, and poverty increasing. Was he
right?

Based on what you've learned in the activity, would subcontracting to Mexico
cause jobs to "disappear"?

Who would be hurt if the low-skilled jobs moved to Mexico?

Who would benefit? How?

Generalize: Why might a company "export" jobs? How does a company
"import" jobs? In general, why do jobs "move" and to where?
Developed by Dr. Ken Leonard and Kathy Ratté, based on The Job Jungle, an activity written for FTE by Prof. R. Pat Fishe,
University of Richmond. Copyright  2001, Revised 2006 The Foundation for Teaching Economics
Permission granted to copy for classroom use
Notes
Friday - 33
Developed by Dr. Ken Leonard and Kathy Ratté, based on The Job Jungle, an activity written for FTE by Prof. R. Pat Fishe,
University of Richmond. Copyright  2001, Revised 2006 The Foundation for Teaching Economics
Permission granted to copy for classroom use
Friday - 34
Lesson 10 – International Markets
Key Terms
Imports
Exchange Rate
Quotas
Exports
Balance of Payments
Comparative Advantage
Trade Agreements
National Content Standards Addressed
Standard 5: Gains from Voluntary Trade
Voluntary exchange occurs only when all participating parties expect to gain. This is true
for trade among individuals or organizations within a nation, and among individuals or
organizations in different nations.
 People voluntarily exchange goods and services because they expect to be better off
after the exchange.
 Free trade increases world wide material standards of living.
 Despite the mutual benefits from trade among people in different countries, many
nations employ trade barriers to restrict free trade for national defense reasons or
because some companies and workers are hurt by free trade.
 A nation pays for its imports with its exports.
 When imports are restricted by public policies, consumers pay higher prices and job
opportunities and profits in exporting firms decrease.
Standard 6: Specialization and Trade
When individuals, regions, and nations specialize in what they can produce at the lowest
cost and then trade with others, both production and consumption increase.
 Specialization and division of labor usually increase the productivity of workers.
 Like trade among individuals within one country, international trade promotes
specialization and division of labor and increases output and consumption.
 As a result of growing international economic interdependence, economic conditions
and policies in one nation increasingly affect economic conditions and policies in
other nations.
 Transaction costs are costs (other than price) that are associated with the purchase of
a good or service. When transaction costs decrease, trade increases.
 Individuals and nations have a comparative advantage in the production of goods or
services if they can produce a product at a lower opportunity cost than other
individuals or nations.
 Comparative advantages change over time because of changes in factor endowments,
resource prices, and events that occur in other nations.
© Foundation for Teaching Economics, 2008. Permission granted to copy for educational use.
Friday - 35
Standard 7: Markets
Markets exist when buyers and sellers interact. This interaction determines market prices
and thereby allocates scare goods and services.
 An exchange rate is the price of one nation’s currency in terms of another nation’s
currency. Like other prices, exchange rates are determined by the forces of supply
and demand. Foreign exchange markets allocate international currencies.
Key Ideas:
1. Review:
 Voluntary trade creates wealth.
 People trade when they expect to gain from the exchange.
2. Voluntary trade creates wealth whether the trade is domestic or international.
 People – not nations or societies or governments – engage in trade. Nations do,
however, create trade policies that affect people’s willingness and ability to trade.
 The decisions made by people engaged in international trade are not
fundamentally different from those made by people engaged in domestic trade.
 Developments in India and China over the last quarter century are testimony to
the wealth-creating benefits of engaging in voluntary international trade.
3. The wealth-creating benefits of both domestic and international trade derive from
specialization based on the Principle of Comparative Advantage.
 The Principle of Comparative Advantage leads producers to specialize in the
production for which they have the lowest opportunity cost.
 Specialization leads to interdependence and greater cooperation among
nations.
 Specialization lowers production costs and market prices for traded products.
 Trade based on comparative advantage increases production and raises incomes.
4. Transaction costs in international trade are generally higher than in domestic trade.
 Payment systems may require currency conversions at prevailing exchange rates.
 Currency exchange rates reflect the expected relative purchasing power of
national currencies.
 There are benefits and costs to countries from adopting common currencies to
facilitate international trade.
 Some benefits include ease of exchange when crossing borders and the
simplicity of international contracts using the common currency.
 Some costs include the loss of seigniorage to fund domestic government
spending and local control over banking regulations, and, perhaps most
importantly, the loss of control over monetary policy.
 Transportation systems may involve detailed logistics of transfer, warehousing,
and inspections at borders.
 Trade agreements that specify rules, rights and regulations that govern trade
between cooperating countries, may raise or lower transactions costs
© Foundation for Teaching Economics, 2008. Permission granted to copy for educational use.
Friday - 36
5. Policies that restrict international trade inhibit the ability of markets to create wealth.
 Tariffs, quotas, and regulations on content and production processes adversely
affect both buyers and sellers.
 Trade protection policies are often short-sighted, focusing on the benefits to
import-competing industries and ignoring the impact on export-producing
industries and on the prices of traded goods.
 All participating countries benefit from international trade agreements and
associations that reduce barriers to trade.
6. Changes in international exchange rates affect the relative purchasing power of a
nation’s currency.
 When the U.S. dollar falls in value relative to other another country’s currency,
imports from that country become more expensive for American buyers and
exports to that country become cheaper for the foreign buyers.
 When the U.S. dollar rises in value relative to another country’s currency, imports
from that country become less expensive for American buyers and exports to that
country become more expensive for the foreign buyers.
7. The balance of trade always balances.
 The balance of payments measures both goods and services (current account) and
financial (capital account) trade flows.
 A trade deficit occurs when imports of goods and services exceed exports.
However, a deficit in goods and services (current account) must be accompanied
by a surplus in the financial account (capital account.)
 A surplus in financial transactions means Americans are net borrowers from
foreign countries and foreign countries are net investors in the U.S.
Ideas To Take Away From This Lesson
 International trade is similar to all other trade – people choose to trade.
 Trade allows people to specialize in their lowest opportunity cost production.
 Comparative advantage encourages specialization and trade, both domestically
and internationally.
 Specialization increases productivity and economic growth.
 Exchange rates reflect supply and demand for nations’ currencies and changes in
currency values affect the flow of trade.
 Trade in goods, services, capital, and financial assets always balances. Balance of
Payments accounting provides information about exchanges of goods, services,
and financial transactions among people in different countries.
© Foundation for Teaching Economics, 2008. Permission granted to copy for educational use.
Notes
© Foundation for Teaching Economics, 2008. Permission granted to copy for educational use.
Friday - 37
Friday - 38
Activity:
Foreign Currencies and Foreign Exchange
Introduction:
Many international exchanges of goods and services are facilitated by the exchange of the
currencies of the trading countries. Importers often must obtain the currency of the
exporter's country to purchase the goods to be imported. Even when they don't need the
actual currency, they must establish a relative value between currencies. Given the
number of countries, currencies, and trading relationships in the world, this is a
complicated process. International monetary markets serve as the mechanism to set the
relative values of currencies. The actual price (or international value) of currencies is set
through the interaction of supply and demand in these international currency markets.
Just as in any market many factors can influence either the supply of, or the demand for,
a given currency and this will affect the international exchange rate of the currency.
Concepts:
Exchange rates
Money
Markets
Supply
Demand
Economic Content Standards:
Standard 7: Markets
Markets exist when buyers and sellers interact. This interaction determines market prices
and thereby allocates scarce goods and services.
 An exchange rate is the price of one nation’s currency in terms of another nation’s
currency. Like other prices, exchange rates are determined by the forces of
supply and demand. Foreign exchange markets allocate international currencies.
Standard 11: Money
Money makes it easier to trade, borrow, save, invest, and compare the value of goods and
services.
 Money is anything widely accepted as final payment for goods and services.
 People consume goods and services, not money; money is useful primarily
because it can be used to buy goods and services.
 Most countries create their own currency for use as money.
Lesson Description:
This activity provides an opportunity for students to participate in a simulated foreign
exchange market. As they experience the need to exchange currencies to purchase
foreign goods, they learn about the difference between the domestic and international
values of a currency and how factors of supply and demand work to set international
exchange rates.
© Foundation for Teaching Economics, 2001. Permission granted to copy for educational use.
Friday - 39
Time Required:
One class period.
Materials:
 Copies of student reading.
 Bag(s) of M&Ms, or mints, or similar small, inexpensive candies or equally
divisible goods like almonds or peanuts. (a 12 oz. bag should easily be enough for
three classes.)
 Ten-fifteen Saudi Arabian Riyals (copies from sheet provided).
 Ten-fifteen Classroom Bucks (copies from sheet provided).
Procedure:
1.
Distribute two or three riyal notes to each student. Ask them if what you have
distributed is money. (Money is anything acceptable in exchange for goods and
services; if they cannot buy anything with the rivals then it is not money.)
2.
Indicate that you have three candy mints (or other items) for sale and you would
like to know if anyone would like to purchase them. (Usually some students will
begin to offer riyals for the mints.)
3.
Indicate to students that the price of the mints is one Classroom Buck. Show the
students a Buck and tell them that they cannot purchase mints with their riyals.
(Let them solve the problem. Usually, one or more students will quickly try to
buy the classroom Buck with their riyals.)
4.
Begin to auction off each of three Classroom Bucks for round one. (You don’t
need to worry about getting the absolute highest price for each Buck, but do allow
some bidding. You may want to appoint one student as the banker to exchange
currencies and one student to serve as a tally keeper.)
5.
When you have sold all three Bucks, record the prices on the board and tell
students that they can purchase mints with their Bucks if they wish to. (Some
students may chose to hold onto their Bucks and not buy a mint. This is O.K.)
6.
Distribute another four or five riyals to each student.
7.
Announce that you have three more mints for sale at the price of one Buck.
8.
Once again auction the Bucks for riyals. Try to let the bidding go until the prices
exceed those of round one.
9.
Again, let students with Bucks purchase the mints if they wish.
10.
Record the prices paid for Bucks in round two.
© Foundation for Teaching Economics, 2001. Permission granted to copy for educational use.
Friday - 40
11.
Distribute four or five more riyals to each student.
12.
Conduct a third round and record the prices paid.
13.
Debrief activity and distribute student handout for review or future reference.
Debriefing Questions:
1.
Draw students’ attention to the tally on the board. Ask “What was a Buck worth
in this activity?” (The correct answer is one mint. Money is worth the goods and
services for which it can be exchanged.)
2.
Now ask, “What was a riyal worth?” (There may be confusion with this question.
To help clarify, ask what a riyal was worth on the third sale of round one.
Students will want to use attraction of a mint as the answer, i.e. 1/35 of a mint.
This is not correct because they could not exchange riyals for mints. The correct
answer would be some fraction of a buck.)
3.
Ask students, “How can we best express the relationship of riyals to bucks?”
(Someone will come up with terms of 35-1 or 1-40 etc. This is the correct way to
state the relationship.)
4.
Ask students if they know how relative values of international currencies are
expressed. (Explain that they are expressed very much in the same way. You may
want to have a student bring the currency rate tables from the business section of
the daily newspaper or look up the daily rates on the Internet at CNN Financial
online (http.//www.cnnfn.com/markets/currencies.htm.)
5.
Ask students how the value of riyals to bucks was determined in round one.
(Acceptable answers are supply and demand, competition, market interactions of
buyers and sellers, etc.)
6.
Ask students how actual international exchange values are determined. (The same
way as they were in the activity - through the interaction of buyers and sellers of
currencies. You can explain to students that in many international transactions of
goods and services the purchaser must pay in the currency of the country selling
the product or service, just as they had to pay in Classroom Bucks to buy a mint.)
7.
Ask students, “What happened to the value of the riyal relative to the buck in
rounds 2 and 3?” (The value of the rival decreased because it took more riyals to
obtain a buck.)
8.
Did the buck gain in value? (This is a tricky, yet powerful question. The buck can
still purchase one mint, so its domestic value was unchanged. However, because
© Foundation for Teaching Economics, 2001. Permission granted to copy for educational use.
Friday - 41
it now takes more riyals to purchase a buck, the value of the buck relative to
rivals increased.)
9.
In the classroom activity, why do you think the value of the riyal decreased
relative to the buck? (Because the demand for bucks increased, i.e. people were
willing and able to give up more riyals in rounds 2 and 3 than in round 1.)
10.
What caused the change in demand? (The teacher gave out more riyals.)
11.
What sorts of things might cause the demand for a currency to change? (Country
A prints more or less money, or Country A’s goods become more or less desirable
are two of many reasons.)
This lesson has been modified, for use in Foundation for Teaching Economics materials by Kathy Ratté and Kenneth Leonard, from
Foreign Currency And Exchange published in Trees and TVs In The International Marketplace, 1983. Used by permission. Office of
the Superintendent of Public Instruction, State of Washington.
© Foundation for Teaching Economics, 2001. Permission granted to copy for educational use.
Friday - 42
Student reading
Foreign Currency and Exchange
The world of foreign currency often seems confusing. Euros, rubles, yen and yuan are
terms difficult enough to comprehend on their own without adding the task of trying to
figure out what each is worth in terms of United States dollars.
All of these currencies are money, so all serve the same functions. Money is a medium
of exchange, a store of value and a measure of value.
 As a medium of exchange, money is accepted as a means for purchasing goods
and services. Both the consumer and producer agree to the form of money.
 As a store of value, money can be saved for future use, a characteristic that many
items used as barter goods did not have. Where crops would spoil or animals die,
money lasts for a long period of time.
 As a measure of value money allows us to compare the worth of one object with
the worth of another. We can say a car is worth so many dollars, and a record CD
is worth so many dollars.
Foreign currencies all serve the same three functions.
Now to the important question: How do we know how much any currency is worth? The
simple answer is that money is worth whatever people are willing to exchange for it.
This means it is simply a case of supply and demand. If there is little demand for a
country’s currency and it is in large supply, the money will be worth less than if there is a
high demand for it or a small supply of it.
As an example, if the United States buys more imports, there is a greater supply of U.S.
dollars outside the country. As the supply increases, each dollar is worth less. Thus we
say the money is devalued. If on the other hand, there are relatively few U.S. dollars
outside the country and/or many foreigners want U.S. currency, each dollar will be worth
more.
Currency values and exchanges are usually made at currency markets. These are places
where countries and banks can find out relative values of different currencies. Each day
the values change, and often change several times during a single day. In the past,
currency values were set at a rate and maintained for a period of time. Now supply and
demand allows constant fluctuations.
The situation of foreign exchange is eased somewhat because many financial deals are
calculated in United States dollars.
© Foundation for Teaching Economics, 2001. Permission granted to copy for educational use.
Friday - 43
$1
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© Foundation for Teaching Economics, 2001. Permission granted to copy for educational use.
$1
Friday - 44
1
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© Foundation for Teaching Economics, 2001. Permission granted to copy for educational use.
Friday - 45
© Foundation for Teaching Economics, 2001. Permission granted to copy for educational use.