What is the nominal tariff and the effective rate of protection if there is a 30% tariff on a file cabinet and a 40% tariff on the imported steel? The file cabinet costs $200, half of the price is due to manufacturing costs and half to imported steel.
Solution-
Nominal tariff is duties imposed on goods that do not reflect price changes of the goods due to inflation, taxes etc.
Effective rate of protection is given by the ratio of an increase in manufacturing price due to tariff by the original price of manufacturing before the tariff was imposed.
Effective rate of protection is 20 %.
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