Targeting Teaching: An International Economics Classroom Experiment

[Author Affiliation]Paul Johnson, , , , afprj@uaa.alaska.edu[Acknowledgment]I would like to thank Ben Saylor at the University of Alaska Anchorage Institute of Social and Economic Research for programming the experiment and an anonymous referee for helpful comments.1. IntroductionThe relationship between trade flows and exchange rates is the primary link between the real and monetary dimensions of international trade. Most students have difficulty understanding this relationship because it requires connecting barter-based models of comparative advantage with currency-based models of exchange rate determination.This article describes an international economics market experiment that requires students to cognitively bridge the real/monetary divide by simultaneously trading multiple goods and currencies. Trade flows and exchange rates are determined in general equilibrium as students attempt to maximize their welfare through specializing in production and trading for the currency they need to purchase foreign goods. The experiment is designed for use in international economics courses, although students studying economics principles are perfectly capable of understanding the rules and trading successfully. The parameterization, particularly of the production functions, is flexible.Students trade two goods (blue and red "chips") and two currencies (dollars and yen) in three auction markets (the blue market, the red market, and the foreign exchange market). Goods prices and the dollar/yen exchange rate are determined endogenously.The experiment design replicates a standard two good and two currency trade model where money is not intrinsically valuable but required for trade. Concepts that can be discussed during debriefing include comparative advantage, gains from trade, the determination and behavior of the exchange rate, and the terms of trade.Because this is an experiment, outcomes are not predetermined. Students may make production or trading mistakes along the way. Long-run equilibrium emerges from price discovery during which exchange rates and goods prices may overshoot their long-run values.The experiment has been run 26 times with more than 400 students in principles of economics, money and banking, intermediate macroeconomics, and international economics courses. Students at all levels can participate provided that they work in teams of at least two and are allowed to practice trading in a practice match before competing in a competitive match.The competitive nature of the auction markets combined with a prize of $5 to each member of the best team in each country elicits a surprisingly intense effort from even the less academically motivated students. It is not unusual for these students to outperform the rest of the class.The experiment uses the open source Caltech/UCLA Multistage software platform. Instructors can choose specific parameters and run the experiment without any programming background. Output data are automatically generated as a spreadsheet file for easy analysis. The source code for the experiment can be used, distributed, and modified without restriction.1Most instructors will need the assistance of a computer lab technician for the initial installation of the software in a classroom lab. The process is equivalent to having an econometric software package installed for classroom use.The advantage of this computerized experiment over a hand-run setup is that it allows sufficient events (production choices, bids, asks, and transactions) for markets to approach equilibrium in a reasonable time.2 As a benchmark, eight teams trading in 15 one-minute rounds for a total of 15 minutes will generate over 1500 events--far beyond the trading activity feasible with a hand-run experiment. Every event is recorded in sequence, and the (spreadsheet) data file can be analyzed using Excel. …