Trade Makes The World A Better Place

My high-school economics teacher, to which I am in a large part indebted as he spurred my creative interest in the subject, used a number of games to teach economic principals.



One of these games involved giving each student a bag of trinkets, paper, pencils, gum etc.



He then instructed each student to write down the value of what they believed the objects were worth. He also told them to quantify on a 1-to-10 scale how much they wanted the objects.



In the next step, students could trade their items. It was very informal, there were no auctions or formal trading routes, you just walked around seeing what everyone else had and struck up a deal if it interested you.



The last step was to have the students estimate how much their new possessions were worth and rate on a scale of 1-to-10 how they felt about their new items.



To every ones surprise, they now had more than they started with.



This was a powerful demonstration that people will trade only when it benefits them. Trade creates wealth.



I thought of this example as I stumbled upon an economics paper that seeks to estimate the impacts of increased trade in India. Here is the link.



The author looks at railroad construction in India and a very detailed dataset and comes to the following conclusions:



1. Railroads reduced trading costs in India.

2. Railroads increased trade flows.

3. Railroads reduced supply shocks, prices did not fluctuate as greatly as before.

4. Railroads increased real income

5. Railroads decreased income volatility

6. Railroads paid for themselves.



The author utilized some pretty clever tools in his paper to ensure accuracy. Since building a railroad is not a random process you had to tweak the process a bit, otherwise you will draw conclusions from a biased premise. To get around this, the author examined areas where railroads were actually built, and compared growth to areas where railroads were supposed to be built, but were not.

In this way, you are more accurately comparing apples to apples.

A good read.