Incorporate the concepts of game theory to international trade ✓ Solved

Incorporate the concepts of game theory to 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. From your perspective as a consumer, evaluate the two matrices using current actions by each country to see which most likely benefits domestic consumers. Your journal entry must be at least 200 words in length.

Paper For Above Instructions

Game theory is a strategic decision-making framework that has significant implications for international trade and tariffs. In the context of global trade, nations often face decisions that impact their economic well-being and that of their trading partners. By constructing payoff matrices, we can analyze both harmful and beneficial outcomes for the involved countries.

Payoff Matrix 1: Harmful Outcome

To illustrate a harmful outcome, consider a hypothetical scenario involving the United States and China, two significant players in global trade. The first payoff matrix could be structured around the decision whether or not to impose tariffs on each other's goods:

In this matrix:

• The outcome (-5, -5) indicates that if both countries impose tariffs, both suffer a significant negative effect.
• If the US imposes tariffs while China does not, it may avoid a harmful outcome (0, -10), but China would still face severe losses.
• If China imposes tariffs and the US does not, the US would face severe losses while China gains somewhat (consequently resulting in both countries still suffering losses).
• Lastly, if neither country imposes tariffs, they can mitigate losses (-1, -1), but let’s assume that this outcome is still partially harmful.

Payoff Matrix 2: Beneficial Outcome for the United States

For the second payoff matrix, let’s envision a scenario where the U.S. successfully negotiates trade agreements that favor its economy, reducing tariffs on critical exports:

Here, in this beneficial scenario for the US:

• If the US imposes tariffs while China does so, both countries may see a more favorable financial outcome, although the US might have a more significant upper hand (0, 10), with China in a weaker position.
• If the US does not impose tariffs while China does, America reaps rewards with a net benefit of 10 (10, 0).
• If there's no tariff strategy from either, the equilibrium remains positive for both countries (6, 6), ensuring cooperation and mutual interest.

Consumer Perspective Evaluation

As a consumer analyzing both matrices, the second matrix clearly shows how the United States could maximize the benefits for its domestic consumers by negotiating favorable trade conditions. For instance, if China keeps its tariffs low and the U.S. does the same, consumers in the U.S. will have more purchasing power and access to diverse products without high tariffs inflating prices.

In current events, we can see the application of these theories with growing discussions around tariffs between the U.S. and China, particularly concerning technology and agriculture. Observations indicate that recent negotiations often lean towards reducing tariffs to ensure consumer welfare in both nations.

Conclusion

In summary, game theory provides a structured approach to understand and predict the actions of countries in the realm of international trade. By evaluating the two payoff matrices, it is evident that constructive bilateral relationships benefit consumers by reducing tariffs and encouraging trade. A harmonious trade relationship leads to lower costs, improved product availability, and an overall enhanced consumer experience.

References

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