TutorOn by Sanath Withanage

Question:

Domestic industry: imported inputs = Rs. 5000, final product = Rs. 10 000. Tariff on final = 25%, tariff on inputs = 20%. What is the rate of effective protection?
(1) -5%
(2) 15%
(3) 25%
(4) 30%
(5) 32.5%

Correct Answer:

(4)

Answer Explanation:

Value Added at world prices ($VA_w$) = 10,000 – 5,000 = 5,000. Value Added at domestic prices ($VA_d$) = Final price with tariff minus Input price with tariff. Final price = $10,000 times 1.25 = 12,500$. Input price = $5,000 times 1.20 = 6,000$. $VA_d = 12,500 – 6,000 = 6,500$. Effective Rate of Protection (ERP) = $(VA_d – VA_w) / VA_w = (6,500 – 5,000) / 5,000 = 1,500 / 5,000 = 0.30 = 30%$.

Topic: International Trade Year: 2024