Lesson 6 Activity: The Balance of Trade Always Balances

 Activity:  Balance of Trade Among States

Download Balance of Trade Activity: Teacher Guide, Handouts, Visuals (.doc file)

Concepts

Balance of payments	Export	Trade deficit
Capital account	Import	Trade surplus
Current account

Content Standards

Standard 5:  Students will understand that:  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.

• A nation pays for its imports with its exports.

Lesson Overview

In this paper-and-pencil exercise, students track the flow of trade among 3 states in the U.S., learning that the flow of goods and services into and out of any single state is always accompanied by a balancing flow of money and financial assets. As students record and tally the simple transactions, they must distinguish between current account and capital account flows. In the process they rediscover that the balance of trade always balances. This realization prepares them to objectively describe what is meant by a trade deficit, helping to prepare them for current events discussions that consider the questions of “What’s good?” and “What’s bad?” about a deficit or surplus in our balance of payments accounts.

Materials

• Copies of 4-page student handout (See attached download file above for all materials masters.)
• Overhead transparencies
• All handouts, visuals and teacher guide are included in the download file linked above.

Time

One-half to  one class period

Procedures

1. Ensure that students have the background knowledge about trade as an economic phenomenon.  The balance of payments activity is designed for students who already understand the basic concepts of trade – scarcity, voluntary exchange, specialization, interdependence, and comparative advantage.  In demonstrating the balance-of-payments process with trade among states, the purpose of the activity is to create a useful analogy for discussing and analyzing trade among nations.  Teachers are encouraged to expand on the activity by having students read and discuss current events issues around the balance of payments.
2. Allow students to work in pairs so that they may discuss the tasks and assist each other.  (Optional – allow students to work individually.)
3. Distribute the student handout on State Trade.  Display the overhead transparency and explain the task.  (All handouts, charts, and visuals are included in the download file linked above.)
4. Allow time for students to complete the work and to discuss their conclusions with their partners.
5. Conduct a large group discussion of the handout questions, or ask various groups to propose their answers for group consideration and reactions.
6. Monitor the discussion to be sure that students understand why it is true that “the balance of trade always balances.
7. Close the debriefing by focusing on the similarities of state trade and trade among nations.  (Teacher guide included in download file linked above.)
   • What do you notice about the sum of the current account total and capital account total for each state?  Do you think this is always the case?  Why?
   • A deficit exists if a state imports more than it exports.  A surplus occurs if a state exports more than it imports.  Decide whether each state has a deficit or surplus in each of its trading accounts.
   • In plain words, what does it mean to have a current account deficit?  A current account surplus?  Is one better than the other?  Explain.
   • Was trade “balanced” between each pair of states?  _________  Can you tell which state came out the best (gained the most) in this example? Explain.
   • Total the value of ALL the goods exchanged in this example:  $______________
   • Total ALL the money spent in this example:                              $______________
   • Was trade “balanced” among all 3 states?  _________
   • What would happen to the analysis of the trades if we were looking at the countries of Japan, Saudi Arabia and the United States?
   • Would the total flows of goods and money into a country always balance the total flows of goods and money out of the country? _______________________