Question

ECON4850/5850 Class Exercise - Effective Rate of Protection Suppose that desks sell for $500 in free trade Suppose desks are made out of wood, and that the wood needed to produce 1 desk costs $250 1. Suppose initially there is a 20% tariff on desks, calculate the NRP Use NRP = (Pp' - P FTP FT 2. Suppose there are 20% tariffs on both desks and wood, calculate ERP Use ERP =(VAD' - VA")/VADFT where VA - price of good - price of inputs 3. Suppose instead free trade in wood, but a 20% tariff on desks, calculate ERP 4. Suppose instead free trade in desks, but a 20% tariff on wood, calculate ERP

Answer 1

1) Nominal rate of protection = (Price with tariff – free trade price)/free trade price = (500*1.2 – 500)/500 = 20%.

2) ERP = (Value added with tariff – value added without tariff)/value added without tariff

= (500*1.2 – 250*1.2 – (500 – 250))/(500 – 250)

= 20%

3) ERP = (Value added with tariff – value added without tariff)/value added without tariff

= (500 – 250*1.2 – (500 – 250))/(500 – 250)

= -20%

4) ERP = (Value added with tariff – value added without tariff)/value added without tariff

= (500*1.2 – 250 – (500 – 250))/(500 – 250)

= 40%