Question

1) Mexico uses $200 worth of imported parts and $100 worth of imported wood to produce a TV set whose world price is $600 a. What is the value added of the Mexican TV industry ? l Suppose that Mexico imposes a 20% ad valoreim tariff on imports of TV. What happens to the value added of Mexico's TV industry ? What is the effective rate of protection ? Suppose that in addition to the tariff on imports of TV sets, Mexico imposes tariff of 8% and 14% on imports of parts and wood, respectively. Calculate the new effective rate of protection. b. C.

Answer 1

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a. Protectionism is the economic policy to restrict trade through tariff, quotas and other regulations that burden foreign ers; not domestic producers. A tariff is a tax on import that will increase domestic production and decrease domestic con- sumption. Tariff causes consumer to switch to relatively cheaper domestic goods or to drop-out of the market. Tariff also encourages domestic producers to increase their output because demand switches from foreign to domestic goods. At the world price any good can be consumed and foreign supply curve is horizontal at the world price level. There are two types of protection: effective rate of protection and the nominal rate of protection. The nominal rate of protection is the rate that levied on the particular product. The effective rate of protection is takes into account the nominal rate of protection and any tariff on intermediate inputs. The effective rate of protection is given as (VA*-VA) VA Here VA is the value added of the good under free trade which is the price of the good minus the cost of intermediate goods used to produce it. VA* is the value added of a good after taking into account all tariffs, both on final good and intermediate inputs Suppose that in the M TV sets are built using both domestic and foreign parts. Let the price of the TV is $600 and this requires S300 of imported parts ($200 part and $100 wood). Then the domestic value added of the M made TV is price of the good - price of foregn input - S600- S300 = S300 mestic value added is S30 Suppose that in the M TVs are built using both domestic and foreign parts. Let the price of the TV is S600 and this requires $300 of imported parts. If 20% tariff is levied on the TV of the same quality, then the price of the TV increases by the amount of tariff that is the price becomes after taruf price S600+0.2x S600 S720 Then the domestic value added of the M made TV is price of the good - price of foregn input S720-S300 $420 he domestic value added changes to $42

Then the free trade value added (VA) is $300 and post-tariff value added (VA*) is $420. Then the effective rate of protection is given as (VA*-VA) S420-$300 $300 40% hen effective rate of protection is 40% C. Suppose that in the M TVs are built using both domestic and foreign parts. Let the price of the TV is S600 and this requires $300 of imported parts. Then the domestic value added of the M made TV is price of the good - price of foregn input $600- $300 = $300 If 20% tariff is levied on the TVs of the same quality, then the price of the TV increases by the amount of tariff that is the price becomes after tari price $600 + 0.2x $600 = $720 If 8% tariff is levied on the imported parts, then the price of the imported parts increases by the amount of tariff that is the price becomes after tari price $200 + 0.08 × $200 S216 If 14% tariff is levied on the imported wood, then the price of the imported wood increases by the amount of tariff that is the price becomes after tariff price $100+0.14x$100 -S114 The total imported input price after tariff is now S330 Then the domestic value added of the M made TV is

price of the good - price of foregn input $720-$330 $390 Then the free trade value added (VA) is $300 and post-tariff value added (VA*) is $390. Then the effective rate of protection is given as (VA*-VA) VA $390-$300 S300 -30% en effective rate of protection on M manufactured TV is 30