Question:
Suppose that in the absence of any tariff, a domestic manufacturer using Rs. 15 000 worth of imported inputs manufactures and sells bicycles for Rs. 25 000 per unit. The government imposes a 20% tariff on bicycles, an imported bicycles would now sell for Rs. 30 000 per unit. What would be the effective rate of protection for domestically manufactured bicycles under this situation?
(1) 20%
(2) 25%
(3) 40%
(4) 45%
(5) 50%
Correct Answer:
(5)
Answer Explanation:
Effective Rate of Protection (ERP) = (Value Added with tariff – Value Added without tariff) / Value Added without tariff. Without tariff: Value Added = 25,000 – 15,000 = 10,000. With 20% nominal tariff, the final price rises to 30,000. New Value Added = 30,000 – 15,000 = 15,000. ERP = (15,000 – 10,000) / 10,000 = 50%.
Topic: International Trade Year: 2022
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