Question

Suppose that an automobile sells on the world market for $15000, and the parts that made it are worth $10000. Australian government now decides to increase the tariff rate on imported computers from 0% to 50% and to increase the tariff rate on imported semiconductor components from 0% to 20%. Assume that Australia is a small importing country and the semi-conductor components are the only inputs needed to produce computers.

a. What are the values added in the production of cars before and after the tariff changes imposed by Australian government? )

b. Please compute the nominal rate of protection (NRP) and the effective rate of protection (ERP)? In what case are these two rates the same?

Answer 1

a. Initially, price of cars = $15,000 whereas, price of parts = $10,000.

Value added in the production of cars = $15000-$10000 = $5000.

Now, with the tariff changes, new price of cars (increases by 50%) , i.e, $22,500 and new price of parts (increases by 20%), i.e, $12,000.

Then, the value added with the tariff changes = $22,500-$12,000 = $10,500

b. Nominal rate of protection (Tariff imposed on the import of a good) = 50%

Now, margin between the value added in both cases, i.e, $10,500-$5,000 = $5,500

Effective rate of protection = Margin/Value added without tariff * 100

or, Effective rate of protection = $5,500/$5,000 * 100

or, Effective rate of protection = 110%

Now, ERP will be equal to NRP if tariff rate on parts is equal to the tariff rate on cars.