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Is Trade a Zero-Sum Game? The Answer Lies in Chocolate January 30, 2019 By Christine Smith Is trade a zero-sum game? To help people answer that question for themselves, St. Louis Fed Senior Economic Education Specialist Scott Wolla takes a creative approach. He puts a “spin on a classic trade lesson” by having students, teachers and even members of the general public exchange candy bars with each other and rate their satisfaction. You can follow along or re-create this activity, if you like. What is a Zero-Sum Game? As Wolla explains, a zero-sum game is one in which the existence of a winner must mean there is also a loser. Think football or basketball. “Many people suspect that international trade operates as a zero-sum game. That is, they think it is like a sporting event—a competition with rules that ends with a winner and a loser,” he writes in a 2017 issue of Page One Economics titled Does International Trade Create Winners and Losers? “Specifically, people sometimes think that if our trading partners are gaining through international trade, the United States must be losing. In this view, exported goods represent a ‘win’ for the economy and imported goods represent a ‘loss’ for the economy.” This view has been around for ages, he writes, noting that it dominated economic and political thought from the 16th to 18th centuries: “Known then as mercantilism, it led to government policies that encouraged exports and discouraged imports.” Wolla adds that one of philosopher Adam Smith's purposes in penning The Wealth of Nations (1776) was to “dispel the zero-sum game myth behind mercantilism.” Trading Time: The Candy Experiment Smith’s magnum opus led to the creation of economics as a discipline. As a modern economics educator, Wolla strives to illustrate how trade can be beneficial for parties willing to engage in it. Step 1: Rank your favorite candy bar out of 4 options. Transcript: Rank your favorite candy Welcome to the St. Louis Fed. We're going to play a little game, and in the process of playing this game we're going to answer this question: Is trade a zero-sum game? OK, we're going to describe a-- or define a zero-sum game as one in which it's a situation in which the existence of a winner means that there is also a loser, right? So, if you watched football over the weekend, football is a zero-sum game, right? So, someone walked off the field the winner. And if, in fact, there was a winner, there was also a loser. All right, so you should have a piece of paper in front of you that asks you to list your preferences. And what I'd like you to do is list your candy preferences from among these four. So, your No. 1 choice, your top preference from one of these four, your second favorite, your third favorite, and your least favorite. So I'm going to ask you to commit, OK? You have to commit. Given the choice of four kinds of chocolate bars, rank your favorites, from first to least. At a recent Dialogue with the Fed event about trade, Wolla led the audience in this activity. Step 2: Receive a candy bar, and then quantify your satisfaction. Transcript: Receive a candy bar It's your lucky day because you are going to receive candy. We have some volunteers that are going to come around and randomly give you a candy bar. And it may not be the one that you prefer the most. Don't be mean to our distributors. Don't eat it-- don't eat it yet. Yeah, OK. Yes. It's important-- two things that are important at this point. That you not eat the candy bar, OK? And that you're not-- that you not trade it yet. All right. Does anyone not have a candy bar? All right. So then what I'd like you to do is fill out on your paper-this is Step 1. Just fill in the blanks. "I got a..." whatever you got. So Mr. Goodbar or a Hershey's or a Crackle. "And it is my (blank) choice." So first, second, or third choice. Based on that commitment you made right up at the top. All right. Everyone ready? OK. We're going to quantify your satisfaction. So we're in economics, we're all about numbers. Measuring things and then comparing things and so on. And so if you got your first choice, that means you have like four satisfaction points. Second choice is three, and so on. So if you got your first choice on the draw, please raise your hand really high and keep them high so we can count them. Thirty. Thirty? All right. Second choice: How many people got their second choice? How many did you have? Thirty-one. Thirty-one. All right. Third choice. How many people got their third choice? Twenty. Twenty. All right. And how many of you on the draw got your least favorite, or your last choice? Twenty-three. Twenty-three? OK. Oh, let's-- all right. So in the-- we'll call it the initial endowment. Our random distribution of candy bars shows a satisfaction of 276. Hand out the four kinds of chocolate at random. Once everyone involved has a piece of candy, don’t eat it! Have participants rate their satisfaction with what they received. Follow this grid to quantify “satisfaction points” and tally the total points. # of People Multiply # of People by Received their 1st choice x4= Received their 2nd choice x3= Received their 3rd choice x2= Received their 4th choice x1= Satisfaction Points TOTAL HERE During the event shown in the video, the initial distribution of candy bars at random yielded a total 276 satisfaction points from the audience. Step 3: Prefer something else? Trade with your immediate neighbors. Transcript: Prefer something else? This is about trade. But I'm going to let you trade with your elbow buddies. This is like elementary school, right? Your elbow buddies are the people on either side. So you can only trade-- or you can trade, but you can only trade with the people on your borders, on either side. All right? So go ahead and trade. You don't have to trade. You don't have to trade. But you can trade. All right, so how many people now have their first choice? If you still have your first choice, right, from the first round, or if all of a sudden now you have your first choice. So we should have more people in first choice, right? So raise your hand. Thirty-nine. All right, second choice. Raise them high. Keep them high so we get them counted. All this is dependent on reliable data, right? Twenty-one. Twenty-one. OK. All right, how many people have their third choice? Third choice. Raise them high. Twentyseven. What is it? Twenty-seven. OK, and how many people have their last choice? Twelve. All right, so that says 285. Sorry for scribbling. So satisfaction went from 276 to 285. Let participants trade only with people in their immediate vicinity, or “borders.” It’s important to note that people don’t have to trade if they don’t feel it will increase their satisfaction. Wolla notes in his Page One Economics essay that in order for trade to occur, parties must feel it’s worth their time and effort. Buyers and sellers will only pursue trade if they feel they’ll end up better off. Once immediate trading is done, re-tally total satisfaction points. In the video, points increased to 285. Step 4: Still prefer something else? Trade globally. Transcript: Still Prefer something else? We're going to open to global trade for this last round, all right? So you can trade with anyone in the room, OK? You can get up. You can walk around. You can trade. We have some very active traders. All right, so once you have your trades, once you've completed your trades, find your seat. You can fill out your last statement. All right, so go ahead and fill out your last statement there with your choice and we're going to recount. OK, so in the first round-- we've got some active trades going on here. So in the first round, just randomly, we had thirty people who had their first choice. After the first round of trading, we increased that to thirty-nine. So let's see how many people now have their first choice. Please raise your hand. Wow, look at that. Look at that. [INAUDIBLE] How many'd you have? Fifty-four. Fifty-four. OK. How many people had their second choice? Twenty-five. OK. Third choice? Eight. OK. And last choice? Three. Three. All right, so our satisfaction, or your satisfaction as a group, went from 276 to 285 to 314. So what happened to overall satisfaction in this auditorium? It did increase. OK, did the items change at all? No. We were working with the same number of candy bars and the same actual candy bars, the types of candy bars throughout all the rounds. So summarize, or come to a conclusion. Why do you think satisfaction increased in this auditorium? The trade was beneficial. OK, right, because the trade was beneficial. In fact, one of the things I emphasize with students is that if those trades didn't increase your satisfaction, would you pursue them? No. No. OK, so by definition, you pursue trade because it benefits you in some way. The benefit outweighs the cost. And so we would say, by definition, that satisfaction will increase if you're given this opportunity and you have good information. And so my initial question was, is trade a zero-sum game? And the answer that you provided is, no. All right, so that's my role. Thank you very much for playing. Finally, let people trade with whomever they want in the room. Re-tally total satisfaction points. In the video, overall satisfaction increased to 314, and more people had their first choice of chocolate bar than at the outset. This outcome shows that for trade to occur, it must make both parties better off. Wolla says this is a positive-sum game, not a zero-sum game, because both sides gained. Teaching the Fundamentals of Trade In real life, trade and the globalization of industry is complex. As Wolla writes in his essay: “The costs and benefits of trade extend beyond the actual buyer and seller in the transaction. And, once third parties are included, it is clear that trade can create winners and losers.” Winners can include consumers, who have access to a larger variety of goods and services, and sellers, who can export their goods or services across the whole world. Losers may include certain sellers (and by extension, their employees) that cannot compete in a global marketplace and must innovate/adapt or risk going out of business. Nevertheless, Wolla explains, economists find that after taking both winners and losers into account, trade has net benefits for society. In other words, the benefits outweigh the costs. In addition to the winners above, other positive effects of trade include access to additional physical capital and thus increased productivity, which drives economic growth and a rising standard of living. It also increases export opportunities that can elevate developing economies and mitigate poverty. The important part is for people to think about the economic principles that motivate trade, and to form their own educated opinions. “When I do the candy exercise, I witness people having an epiphany, especially with students who are more likely to think of trade strictly in terms of winners and losers,” Wolla says. Additional Resources Dialogue with the Fed: The Economics of Trade Page One Economics: Does International Trade Create Winners and Losers? Open Vault: Tariffs, Jobs and the U.S. Trade Deficit ABOUT THE AUTHOR Christine Smith Christine Smith is a manager with the St. Louis Fed’s communications team.