Analysis of Trade Models and Tariff Impacts on International Economics

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