CLASSMATE’S POST

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. Bottom of Form

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

CLASSMATE’S POST

Game Theory involves strategy.  It is a theory where decision makers from one party’s actions will affect another party’s outcome.  There should be at least two rational parties involved.  Game theory is used to predict outcomes with international trade.  Some countries use tariffs, which create higher prices for the goods being imported.  Tariffs increase the prices of goods.  This protects the domestic manufacturers of countries because they are more willing to produce the goods domestically. Tariffs work best with countries who have a lot of imports.

Following are two examples of a payoff matrix.  The first is a payoff matrix regarding whether to fight or keep peace between two countries.  The second is a payoff matrix on whether to add tariffs or have free trade between two countries.

The first payoff matrix would be harmful to both countries.  The Nash equilibrium is for both countries to fight.  If the United States chooses to fight or have peace, China would choose to fight.  If China chooses to fight or have peace, the United States would choose to fight, according to the Nash equilibrium.

In the second payoff matrix, the Nash equilibrium is for both countries to add tariffs.  This decision would not create the highest trade payoff, but it would have the best outcome according to the Nash equilibrium.  If both countries were to choose no tariffs, both countries would win and it would be beneficial to both.

Trade wars ensue when one country, such as the United States, decides to implement a tariff on another country, such as China or places other restrictions on international trade. In this situation, both countries will lose because when both add a tariff, the payoff matrix goes from 100 to 75 for both. Trade wars can affect the economy by increasing prices of goods for consumers.  Although trade wars may increase domestic manufacturers, they can also be very damaging to the economy and create uncertainty.