The world price of automobiles is $10,000. A U.S. auto producer uses only imported components to...

The world price of automobiles is $10,000. A U.S. auto producer uses only imported components to build autos. Those imported components cost $6,000. There is a tariff on imported components of 10% and a tariff on automobiles of 20%. How does the ERP compare to the nominal rate of protection (NRP)?

Expert Solution

ANSWER:

Value added with free trade = word price of automobiles - price of imported components = $10,000 - $6,000 = $4,000

world price of automobiles under protection = price of automobiles - price of automobiles * tariff on automobiles = $10,000 - $10,000 * 20% = $10,000 - $2,000 = $8,000

price of imported components under protection = Price of imported components - price of imported components * tariff on imported components = $6,000 - $6,000 * 10% = $6,000 - $600 = $5,400

Value added under protection = world price of automobiles under protection - price of imported components under protection = $8,000 - $5,400 = $2,600

ERP = (Value added with free added - Value added under protection) / value added with free trade = ($4,000 - $2,600) / $4,000 = $1,400 / $4,000 = 0.35 or 35%

so the ERP is 35%

The nominal rate of protection is 20% and so the difference between ERP and NRP IS 15% (35% - 20%)

Rahul Sunny answered 7 months ago

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