Grease currently fetches a price of $300 per ton. To make one ton of grease, $80 worth of crude oil and $50 worth of emulsified soap is required. If it is assumed that $60 of domestic input is required to produce one ton of grease, what is the effective rate of protection (ERP) for domestically produced grease if the following tariffs exist:
• 10% tariff on imported grease;
• 6% tariff on imported crude oil; and
• 5% tariff on imported emulsified soap.
Solution
| Effective Rate of Protection (ERP) | ||
| Domestic Value added after tarrif - Domestic value added in free trade / Domestic valueof input in free trade | ||
| Free trade price of Grease | $300 | |
| 10 % tarrif imposed | $30 | |
| 30 / 60 = 50% | ||
| Crude Oil Free trade price | 80 | |
| 6 % tarrif imposed | 4.8 | |
| 4.8/60 = 8 % | ||
| Emulsified Soap Free trade price | $50 | |
| 5 % tarrif imposed | $2.50 | |
| 2.5 / 60 = 4.17% | ||
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