Task 1: Signing Trade Agreements through Zero Sum Modelling

India and China are the two largest economies in the world. However, multi-dimensional

disputes put the India and China onto the brink of trade war for some selected sector. To

solve this difficult conundrum, each side seeks to profoundly change the adversary's strategic

calculus at little cost and with little risk. Refer to below short case study and respond to listed

questions using the core concept of Game theory to determine and analyses the expected

outcome.

Suppose Indian Exporters are considering entering the Chinese market which is dominated

by its principal rival, say Chinese local Producers. Clearly, Indian decision to enter or not will

be judged on the potential profitability of such a move. If Chinese Government reacts

aggressively by increasing the existing Tariff rate, then an entry by Indian Exporters will result

to a loss of $ 4 billion for Indian's exporters and a loss of $3 billion for Chinese Producers.

Or if India Government applies the same tariff policy for Chinese exporter, pay off will be the

same as mentioned above.

On the other hand, Chinese Government accommodates (Low Tariff rate) Indian's exporter's

entry, then both India and Chinese producers (with same strategy) will be making profits of $

6 billion each, respectively. Finally, if both governments follow Higher Tariff Strategies to enter

the market at all, then both will be making additional $ 1.5 billion each respectively.

Required:

a) What would you do as the Government official if you were to make a decision for Indian

Exporters or local market?

b) What would you do as the Government official if you were to make a decision for

Chinese Exporter or local market?

c) Construct and discuss the zero-sum outcome of the all possible strategies?

Task 2: Part A:

David Ricardo, in 1817, established the idea of comparative advantage by using a compelling

and simple numerical example, which can be found in his book "On the Principles of Political

Economy and Taxation". He describes the theory of comparative advantage, the theory that

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free trade between two or more countries could be mutually beneficial, even if one country

has absolute advantage over the other countries in every aspect of the production.

Required:

explain the gains from application of Comparative Advantage Theory

amongst countries. Also, explain does the doctrine of comparative advantage apply to real

world? Or, is it so oversimplified that it fails to explain international trade in the real world?

Lastly, Economist Russell Roberts once wrote, "Self-sufficiency is the road to poverty."

Discuss how the principle of specialization and trade based on comparative advantage

supports this claim.

Part B:

Germany and UK are two countries producing peanuts and mirrors. Both of them have

40 hours of labor. The following table shows the number of hours of labor needed to

produce one pound of peanuts or one mirror.

Labor hours needed to produce one

pound of Chocolates Peanuts

Germany 25 22

UK 11 9

Required:

a. Which country has comparative advantage in which sector?

b. Is there any chance of specialization for any of these countries? If yes, discuss.

c. Discuss the baseline for making economic decisions using comparative Advantage

Theory.