The correct answer is (b) a percentage of the price of the product. Ad valorem tariffs are a type of import tax that is assessed as a percentage of the value or price of the imported product. This means that the amount of the tariff is calculated based on the product’s declared or assessed value, typically as a percentage of that value.

Let’s explore why this answer is correct and then explain why the other options are not accurate descriptions of ad valorem tariffs.

b. A percentage of the price of the product:

Ad valorem tariffs are calculated as a percentage of the price of the imported product. For example, if a country imposes a 10% ad valorem tariff on the import of a certain item with a declared value of $100, the tariff amount would be $10, calculated as 10% of the product’s value.

This type of tariff is directly tied to the product’s price, making it proportional to the product’s value. It is one of the most common forms of tariffs used in international trade and is often employed to protect domestic industries and generate revenue for the government.

Now, let’s examine why the other options are not correct descriptions of ad valorem tariffs:

a. Fixed amounts of money per unit traded:

This option describes a specific tariff, also known as a specific duty or specific tariff. Unlike ad valorem tariffs, specific tariffs are calculated as fixed amounts of money per unit of the imported product (e.g., $2 per kilogram of steel).

They are not based on the product’s value, making them different from ad valorem tariffs. Specific tariffs can lead to varying effective tariff rates based on the value of the product, while ad valorem tariffs are consistently calculated as a percentage of the product’s value.

c. A percentage of the quantity of imports:

This option is not an accurate description of ad valorem tariffs. Such a tariff system would be more aligned with quantity-based tariffs, which are not commonly used in international trade.

Quantity-based tariffs are calculated based on the quantity or volume of the imported goods, rather than their value. Ad valorem tariffs, in contrast, are directly tied to the value or price of the product and do not consider the quantity of imports.

d. All of the above:

This option is not correct because ad valorem tariffs are specifically defined as tariffs calculated as a percentage of the price of the product, as explained earlier. Ad valorem tariffs do not encompass fixed amounts of money per unit traded or a percentage of the quantity of imports. Therefore, the correct answer is (b), which accurately describes the calculation method of ad valorem tariffs.

In summary, ad valorem tariffs are a type of import tax calculated as a percentage of the price or value of the imported product. This makes them directly proportional to the product’s value and distinguishes them from specific tariffs, quantity-based tariffs, or other tariff systems.

It’s essential to understand the specific characteristics of ad valorem tariffs when dealing with international trade and tariff policies.