Germany imports automobiles and other essential goods. A Toyota Camry car is manufactured from parts worth...

Germany imports automobiles and other essential goods. A Toyota Camry car is manufactured from parts worth $8000 and Germany imposed a tariff of 10% on all Toyota Camry imported into the country to protect German car manufacturers. If the price of a Toyota Camry in the international trade market is $12,000 then the effective rate of protect is more than the tariff rate. True or False? Explain.

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Question:

Answer

True

Effective Rate of Protection/Protect: The effective rate of protection computes the tariff rate as a proportion of the value added by an economic activity, so it measure of how a particular stage of production is affected by nominal tariffs in real means..

As per the question:

Nominal tariff rate = 10%

Toyota Camry car is manufactured from parts worth = $8000

Toyota Camry in the international trade market is $12,000.

Price after tariff = $12,000 + $12,000*10 = $12,000 + 1200 = $13200

Effective rate of protection = [(Value added with tariff/Value added without tariff) - 1] *100

Value added with tariff = 13200 -800 = $5200

Value added without tariff = 12000 - 8000= $4000

Effective rate of protection = [($5200/$4000) - 1] *100

= (1.3 -1)100 = 0.3 * 100 = 30%

Effective rate of protection = 30%

Nominal tariff rate is 10% and Effective rate of protection is equal to 30% so, effective rate of protect is more than the tariff rate.

Thank You

Rahul Sunny answered 1 year ago

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