Question

1. Laptop computers are produced domestically and also imported. The price of laptop computers is $1000 and domestic producers use $600 of imported inputs per laptop computer produced at home.

a) What will be the price of laptop computers if a 20% tariff is imposed on imports of finished laptop computers? _____________

b) What will be the domestic value added after tariff? ________________

c) What will be the effective rate of protection? _______________________

d) What will be the cost of input if along with a 20% tariff on finished computers, a 20% tariff is also imposed on imported inputs? ___________________________

e) What will be the value added when along with a 20% tariff on the finished computer, a 20% tariff is also imposed on imported inputs? __________

f) Based on information in part d) and e), what will be the new effective rate of protection on laptop computers? ___________

Answer 1

(a)

Price = $1000

Tariff = 20% or 0.20

Amount of tariff = 1000 * 0.20 = 200

Price after tariff = $1000 + $200 = $1200

The price of laptop after tariff is $1,200

(b)

Domestic value added = Price after tariff - Cost of imported input = $1200 - $600 = $600

The domestic value added after tariff will be $600.

(c)

Value added before tariff = Price of laptop before tariff - Cost of imported input = $1000 - $600 = $400

Effective rate of protection = [(Value added after tariff - Value added before tariff)/Value added before tariff]

Effective rate of protection = [(600 - 400)/400] = 0.50 or 50%

The effective rate of protection is 50%.

(d)

Cost of imported input = $600

Tariff = 20% or 0.20

Amount of tariff = 0.20 * 600 = 120

Cost of input after tariff = 600 + 120 = $720

The cost of input after tariff is $720.

(e)

Calculate the value added when along with a 20% tariff on the finished computer, a 20% tariff is also imposed on imported inputs -

Value added = Price after tariff - Cost of input after tariff = $1,200 - $720 = $480

The value added when along with a 20% tariff on the finished computer, a 20% tariff is also imposed on imported inputs is $480.

(f)

Effective rate of protection = [(Value added after tariff - Value added before tariff)/Value added before tariff]

Effective rate of protection = [(480 - 400)/400] = 0.20 or 20%

The new effective rate of protection is 20%.