Game Theory

Question 1

What is a Nash equilibrium?

Answer 1

• mutual best response
• no-one will unilaterally deviate

Question 2

Is free trade a Nash equilibrium

Answer 2

No it’s not
Free trade is Pareto Efficient - zero sum game
-> someone is worse off in Nash equilibrium than free trade
Both countries prefer free trade to Nash Equilibrium

Question 3

tariff equal to infinity

Answer 3

pushes you back to infinity

Question 4

How is winning trade wars possible?

Answer 4

Side payments

Question 5

For a threat to be successful, it must be what 2 things?

Answer 5

1. Credible
2. Effective

Question 6

What are different trade agreements?

Answer 6

General Agreements on Tariffs and Trade (1947)
European Economic Community (1957)
MERCOSUR (1991)
European Union (1993)
World Trade Organization (1995)
Now: RTA - Regional Trade Agreement
NAFTA
Asian
Ireland + UK - Windsor Agreement

Question 7

1st Level of agreements - Depth of Agreements

Answer 7

Free Trade Area: “no” protection between members

Question 8

2nd Level of agreements - Depth of Agreements

Answer 8

Customs Union: FTA + common external policies
- get rid of cross-border shopping, If UK tariffs differ from EU, UK are out of customs union

Question 9

3rd level of agreements - Depth of Agreements

Answer 9

Common Market: CU + free factor flows
- still some barriers but lower - e.g., no people with criminal convictions

Question 10

4th level of agreements - Depth of Agreements

Answer 10

Economic Union: CM + common internal policies
- sovereignty (you give up the ability to decide things for you) versus efficiency (we gain efficiency - get rid of DWL)