Suppose that the nominal tariff rate on finished computers is 12 percent and that the weighted average of the nominal tariff rates on the inputs used in producing computers is 18 percent. Thus the effective rate of protection for the computer industry must
Options:
| a. be less than 12 percent, and can be negative b. be less than 12 percent, but must be greater than zero c. equal 6 percent d. exceed 30 percent |
The Correct Answer Is:
a. be less than 12 percent, and can be negative
Correct Answer Explanation: a. be less than 12 percent, and can be negative
The correct answer is (a) the effective rate of protection for the computer industry must be less than 12 percent, and it can be negative. The effective rate of protection (ERP) measures the overall impact of tariffs on a particular industry by considering not only the tariff on the final product but also the tariffs on its inputs.
In this case, the nominal tariff rate on finished computers is 12 percent. This means that when a computer is imported, a 12 percent tariff is imposed on its value. However, the effective rate of protection takes into account the tariffs on inputs used in producing computers as well.
If the weighted average of the nominal tariff rates on these inputs is 18 percent, it implies that the cost of producing computers is subject to an 18 percent increase due to tariffs on the inputs.
The effective rate of protection is calculated as the difference between the value-added tariff (the difference between the final product tariff and the weighted average input tariff) and the nominal tariff on the final product.
In this case, the value-added tariff is 18 percent (weighted average input tariff) – 12 percent (nominal tariff on the final product), which equals 6 percent. Since this value is positive, it indicates a positive effective rate of protection.
Therefore, the effective rate of protection for the computer industry is less than the nominal tariff rate on the finished product, which is 12 percent.
Now, let’s discuss why the other answer choices are not correct:
b. “be less than 12 percent, but must be greater than zero”:
The effective rate of protection (ERP) considers both the nominal tariff on the final product and the weighted average of nominal tariffs on inputs. While it is true that the nominal tariff on finished computers is 12 percent, the ERP is not bound to be strictly greater than zero.
It can indeed be negative, especially when the weighted average of the input tariffs significantly surpasses the tariff on the final product.
In this scenario, with an 18 percent weighted average tariff on inputs and a 12 percent nominal tariff on finished computers, the ERP is indeed positive (6 percent), but it could potentially be negative if the input tariffs substantially outweighed the tariff on the final product.
c. “equal 6 percent”:
This choice incorrectly identifies the effective rate of protection as 6 percent. The 6 percent figure, derived from the difference between the weighted average of input tariffs (18 percent) and the nominal tariff on the final product (12 percent), represents the value-added tariff.
However, the effective rate of protection is the disparity between the value-added tariff and the nominal tariff on the final product. Therefore, the ERP cannot be conclusively determined solely as 6 percent it depends on the relationship between this value-added tariff and the final product’s nominal tariff.
d. “exceed 30 percent”:
This answer choice overestimates the potential effective rate of protection. There is no explicit or implied information in the scenario to support an ERP that exceeds 30 percent. Given the nominal tariff rate on finished computers (12 percent) and the weighted average of input tariffs (18 percent), the resultant value-added tariff is calculated as 6 percent.
The ERP, as discussed, is contingent on this value-added tariff and the nominal tariff on the final product. Hence, an ERP exceeding 30 percent is highly improbable based on the provided tariff information.
In summary, these alternative choices fail to accurately capture the flexibility of the effective rate of protection, which can indeed be negative and is determined by the disparity between the value-added tariff and the nominal tariff on the final product, as influenced by the tariffs on both inputs and the finished product.
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