General equilibrium analysis on arms exports to developing countries in conflict

In this paper a conflict game between the two developing countries is constructed. It is assumed that weapons are imported at the fixed world price, pM, and the consequence of the decline of pM is examined, which happened when the former Soviet Union collapsed. In Section 2, specifying the utility and production functions in general equilibrium (GE) model by Cobb-Douglass type, we actually derive the reaction functions of GE conflict game. In Section 3, we examine the effect of the decline of pM on the “existence” of solution to the game, its “stability”, and finally on the utility levels of two countries in the “stability” case. By simulation we show that as pM falls, the number of “non-existence” cases increases, the percentage of “instability” cases among “existence” cases rises, and finally as pM falls, the percentage of “rising utility levels of two countries” cases among “stability” cases falls. In Section 4, assuming that the above countries have domestic military industries, we derive the reaction functions in this conflict game.