Question

(b) Suppose that, for a country, the free trade price of good X is $1,000 and the free trade prices of the only two inputs (both of which are imported) to the production process of good X are $400 for good W and $200 for good Y. Assume that one unit each of good W and good Y is necessary for the production of one unit of good X. Suppose now that the country, which is a “small” country, introduces a tariff structure that imposes a 20 percent nominal tariff on good X, an 8 percent tariff on good W, and a 6% tariff on good Y. Calculate the Effective Rate of Protection (ERP), or “effective tariff rate,” that this tariff structure provides to the domestic producers of good X. Explain the economic meaning of your result. For what purpose might the ERP of an industry be more useful to an economist than the nominal tariff rate on imports of the industry’s product?

Answer 1