Incorporate The Concepts Of Game Theory With International T ✓ Solved

Incorporate The Concepts Of Game Theory With International Trade And T

Incorporate the concepts of game theory with international trade and tariffs. Set up two payoff matrices. Set up the first payoff matrix such that the outcome will be harmful to both countries. Set up the second payoff matrix such that the outcome will be beneficial to the United States. Evaluate the two matrices using current actions by each country to see which matrix is most likely correct. Discuss with your classmates whether or not the ensuing trade war will produce successful outcomes.

ANSWER THE ABOVE QUESTION AND THEN REPLY TO MY CLASSMATE’S RESPONSE TO THE ABOVE QUESTIONS AND EXPLAIN WHY YOU AGREE? (A MINIMUM OF 150 WORDS)

Sample Paper For Above instruction

Introduction

Game theory provides a strategic framework for understanding the decision-making processes of countries engaged in international trade. It helps predict outcomes based on the choices of rational actors, such as whether to impose tariffs, engage in free trade, or opt for protectionist measures. This paper sets out to analyze how game theory applies to international trade, specifically focusing on scenarios involving tariffs, with the aim of evaluating the potential consequences of trade wars.

Developing Payoff Matrices

Harmful Outcome to Both Countries

The first payoff matrix models a situation where both countries—say, the United States and China—decide to impose tariffs or engage in protectionist measures that harm both economies. For simplicity, the payoff matrix is as follows:

In this matrix, both countries imposing tariffs leads to a negative payoff for both, reflecting economic harm such as reduced trade volumes and increased costs. The Nash equilibrium here occurs when both countries choose tariffs, resulting in mutual loss (−50,−50).

Beneficial Outcome to the United States

The second payoff matrix incorporates a strategic move where the United States adopts tariffs, but the outcomes are such that both countries benefit, especially the US. An example matrix could be:

In this matrix, the payoffs reflect the US implementing tariffs while China chooses whether to retaliate or not. The optimal outcome for the US occurs when it imposes tariffs and China does not retaliate, leading to a payoff of 30 for the US and 10 for China. The matrix suggests that strategic tariff policies can be beneficial for the US, especially if other countries do not retaliate.

Analysis of Matrices and Current Actions

Using current actions, such as the US imposing tariffs on Chinese imports, and China's response, these matrices suggest that a harmful trade war is more likely unless both parties coordinate to favor mutual benefits. The first matrix aligns with the recent escalation of tariffs and trade tensions, leading to mutual losses and economic uncertainty. The second matrix, indicating possible benefits if retaliation is avoided, seems less consistent with recent US-China trade policies, which are characterized by retaliatory tariffs.

Therefore, the matrix most aligned with current actions is the first, indicating a likely harmful outcome unless diplomatic negotiations lead to a cooperative equilibrium.

Discussion on Trade War Outcomes

The effectiveness of a trade war in producing successful outcomes is highly debated. On one hand, tariffs aim to protect domestic industries and can pressure trade partners to negotiate favorable terms. On the other hand, trade wars typically lead to increased costs for consumers, supply chain disruptions, and geopolitical tensions that hinder global economic growth. Historical evidence, such as the Smoot-Hawley Tariff of the 1930s, suggests that trade wars tend to reduce overall welfare. In modern contexts, while some industries may temporarily benefit, the broader economic consequences usually prove damaging.

Therefore, unless carefully managed through multilateral agreements and strategic diplomacy, trade wars are unlikely to produce sustainable or successful economic outcomes.

References

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