Analysis of Trade Models and Tariff Impacts on InternationalEconomics1.Suppose the free trade market price of a car is $20,000. It contains $10,000 worth ofsteel. The importing country imposes 25% tariff on car imports.a. Calculate theeffective rate of protection if there is no duty on steel imports.Answer–ERP = (VAt-VAf) / VAf = (VAt / VAf)-1where:ERP = Effective rate of protectionVAt = VA with tariffVAf = VA with free tradeVAf = [Selling price with free trade]-[Costs of intermediate goods with free trade]= $20,000-$10,000= $10,000VAt = [Selling price with tariff]-[Costs of intermediate goods with tariff][Selling price with tariff]= $20,000 + ($20,000 * 0.25)= $25,000Since there is no duty onsteel imports, thereforeVat = $25,000-10,000 = $15,000ERP = (15,000/10,000)-1 = 0.5= 50%b. Calculate the effective rate of protection if the importing country imposes a 20%tariff on steel imports.Answer–Cost of intermediate goods with tariff =10,000+(0.2*10,000) = 12,000New Vat = $25,000-$12,000 = $13,000ERP = (13,000/10,000)-1 = 30%c. Suppose it also takes $4000 worth of copper (besides $10,000 worth of steel) toPreview Mode
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