Question

4. The following information is relevant to an import-competing steel industry. i. Iron ore and coal are the only intermediate inputs in steel production, and both are either imported or are produced locally in competition with imports. ii. Production of 1 tonne of steel requires 4 tonnes of iron ore and 6 tonnes of coal. iii. The free trade price of steel is $600 per tonne, the free trade price of iron ore is $60 per tonne, and the free trade price of coal is $40 per tonne. iv. The country imposes a 30 per cent ad valorem tariff on imports of steel, while iron ore and coal imports face ad valorem tariffs of 30 per cent and 15 per cent respectively. (a) Calculate the effective rate of protection (ERP) for the steel industry. (b) What happens to the ERP for the steel industry if the tariff on iron ore is increased to 40 per cent and on coal is reduced to 10 per cent? (c) What happens to the ERP if the tariffs on iron ore and coal are both abolished but country increases tariff on steel imports to 50 per cent?

Answer 1

the effective rate of protection (ERP) is a measure of the total effect of the entire tariff structure on the value added per unit of output in each industry, when both intermediate and final goods are imported. This statistic is used by economists to measure the real amount of protection afforded to a particular industry by import duties, tariffs or other trade restrictions.

a)