International trade with heterogeneous firms: An interactive classroom simulation

Abstract

In this article, the authors describe an interactive classroom simulation that helps students learn some of the most important ideas from models of international trade with heterogeneous firms. Students make entry/exit decisions for individual firms with different marginal costs of production. The simulation consists of five rounds, beginning with autarky and progressively liberalizing trade. In each round, students interactively determine each firm’s equilibrium entry/exit decision by responding in real time to how their individual firm’s profit is affected by the decisions of all of the other firms. Empirical evidence from a pre–post assessment of students who participated in the simulation in the fall of 2019 demonstrates a significant increase in student understanding of international trade with heterogeneous firms after participating in the simulation.

Keywords:

• Classroom simulation
• entry and exit
• heterogeneous firms
• international trade
• new new trade theory

JEL CODES:

• A22
• F12

Notes

1 https://ideas.repec.org/top/top.item.nbcites.html; accessed 23 July 2020.

2 https://www.economist.com/briefing/2008/12/30/international-bright-young-things; The four John Bates Clark Medal winners were Esther Duflo (2010), Amy Finkelstein (2012), Raj Chetty (2013), and Roland Fryer (2015). https://www.aeaweb.org/about-aea/honors-awards/bates-clark; Esther Duflo was a 2019 recipient of the Prize in Economic Sciences in Memory of Alfred Nobel; https://www.nobelprize.org/prizes/economic-sciences/2019/summary/

3 https://www.aeaweb.org/journals/jep/about-jep

4 https://www.aeaweb.org/conference/cont-ed

5 https://docs.google.com/spreadsheets/d/‌1UgiDqwFKBUBbQFLTak3LqYGnR1oOaxi8IgW818G5tzY/edit?usp=sharing

6 e.g., “Firm 1: Marginal Cost = 300,” “Firm 2: Marginal Cost = 600,” …, “Firm 10: Marginal Cost = 3000.”

7 See appendix C.

8 See cell C21 of the Master sheet (appendix C).

(300 + 600 + 900 + 1200 + 1500 + 1800 + 2100 + 2400)/8 = 1350

9 Because Firms 9 and 10 never find it profitable to enter either market in any round, it would be difficult to maintain student engagement if these firms were assigned to the same groups of students throughout the entire simulation. As students begin to appreciate the different experiences of the different firms in this simulation, they celebrate being assigned Firm 1 and bemoan being assigned Firm 10.

10 Our study was approved by the Furman University Institutional Review Board for the Protection of Human Participants.

11 See appendix B.

12 A review of students’ answers revealed widespread confusion between “heterogeneous firms” and “differentiated products.” While this wasn’t anticipated, it makes sense; students had just been learning about new trade theory and “differentiated products” (following Krugman 1979) in the previous class meeting. We’ll be more careful about emphasizing the difference between these two ideas in future courses!

13 And, therefore, before discussing figures 2 and 3 in the following class meeting.

14 A Shapiro-Wilk test of the distribution of the before–after differences in the number of correctly-answered assessment questions fails to reject the null hypothesis that these differences are normally distributed, z = 0.463, p = 0.322.

15 See Note 3 in Cheung (2005).