EC 340 Lecture Notes - Lecture 7: Non-Cooperative Game Theory, Nash Equilibrium, World Trade Organization
Document Summary
When countries seek to reduce trade barriers between themselves, they enter into an international trade agreement. Under the most favored nation principle of the wto, the lower tariffs agreed to in multilateral negotiations must be extended equally to all members. Wto is an example of a multilateral trade agreement. There are also smaller regional trade agreements, involving several countries, often located near each other. To demonstrate the logic of multilateral trade agreements, we will assume there are two big countries. Important feature of mtas: no member country is left out of the agreement. Prisoner a gets life imprisonment, b goes free. Prisoner b gets life imprisonment, a goes free. The payoff matrix: we stated in chapter 5 that large countries may benefit from imposing tarffs on imports, but we did not consider strategic interactions between multiple large countries. Now we are looking at 2 big countries (home and foreign); 2 industries (import and exporting).
