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Product Code: KEP-103

Everyone specializes to some degree in what he or she produces, and then trades with others to obtain many of the goods and services he or she consumes. Voluntary trade is a cooperative activity, and both parties in a trade expect to benefit. Thus, voluntary trade usually results in "win-win" situations, not winners and losers. Understanding the mutual gains from trade helps students understand how institutions that make trading easier improve social welfare.

Money is anything widely accepted as final payment for goods and services. Trade without money is called barter. Barter is costly and difficult because both parties must be willing to trade for the item the other person has.  When money replaces barter, this makes exchanges less costly and easier to do. As a result, more specialization can take place, with more people using money to buy most of the goods and services they want to consume. This leads to higher levels of production and consumption.

Students should understand that the real value of money is determined by the goods and services it can buy. Doubling the amount of money in an economy overnight would not, by itself, make people better off. This is because there would still be the same amount of goods and services produced and consumed - only at higher prices.

Ideas & Standards

Understanding
Conduct a barter activity. Have students bring items from home to trade with one another. Students should trade for the item they want most, making as many trades as they wish in a five-minute time period. Discuss why many students didn't get the item they wanted. Explain how money would make the trading much easier.

Draw a picture showing people trading. Write a paragraph entitled, "Why People Benefit From Trade." Make a bulletin board of the drawings.

Discuss ways that people use their money (income): taxes, spending for goods and services, saving, giving, etc. List specific examples.

Discuss the four basic characteristics of money: scarce, durable, portable, and divisible. Research different items that have been used for money, such as precious metals, tobacco, shells, paper, and beads. Evaluate how these "fit" the four characteristics.

Write these basic functions of money on the board: helps people to trade, measures the value of items, facilitates savings. Discuss and explain, giving examples of each.

Have students bring in money from different countries. Discuss how the money is similar and different from our money. Older students can investigate the exchange rates of different currencies.

Identify items in the classroom or from home that are made in other countries. List these countries and color them on a black-line map.

Research the major trading partners of the United States. Draw bar graphs illustrating the trading volume.

Related Lessons
Herschel's World of Economics DVD

  • Lesson 5: Trade and Money
  • Trade and Money

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