A Small Quiz on
Trade Wars
(last update: May 12, 1999)
Section A: True, False, or Uncertain?
- When two economies are in a trade war using optimal
tariffs, a Nash equilibrium must involve some trade.
- When two economies are in a trade war using optimal
quotas, the Nash equilibrium must involve some trade.
- When two economies are in a trade war, with one country
using an optimal tariff while the other country using an optimal quota, the Nash
equilibrium must involve some trade.
- A trade war is usually compared with prisoners' dilemma
in the sense that both countries will be worse off in a trade war than under free trade.
- In a trade war between two countries, the smaller country
must lose.
- In a trade war between two countries, the larger country
must lose.
- In a trade war between two identical countries, both must
lose.
- Starting from a Nash equilibrium in a trade war with tariffs only, a
simultaneous reduction in the tariff rates by the same percentage by all countries will
benefit all countries.
- Starting from a Nash equilibrium in a trade war with quotas only, a
simultaneous doubling of the quotas by all countries will benefit all countries.
Section B: Explain the following statements.
- Consider a Johnson framework with two governments
choosing their optimal tariffs on competitive industries. Argue that if both offer curves
are concave and continuous, a Nash equilibrium with some trade always exists.
- Consider a Johnson framework with two governments
choosing their optimal tariffs on competitive industries. Show that if the foreign offer
curver is not concave downward (toward its import axis), then the home country's tariff
reaction curve may not be continuous and a Nash equilibrium with trade may not exist.
- In a trade war with tariffs, specific tariffs are not equivalent to ad
valorem tariffs. Explain.
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