Question

Briefly explain the following:

(iv) Nominal rate of protection versus effective rate of protection

(v) Overlapping demand theory of trade

Answer 1

iv) nominal rate of protection versus effective rate of protection

The nominal rate of protection is the amount of tariff that is imposed on the commodity when it enters the country. It is smaller as compared to effective rate of tariff. It was assumed that hogher the value of tariff, higher the protection and smaller the tariff value, less the protection. The effective rate of tariff , on the oether hand establishes the relationship between the domestic value added and tariff charged. It is calculated on the basis of the domestic value added in the economy. It helps in maintaining a consistency between physical input and output co-efficients.

v) Overlapping demand theory of trade

The theory of overlapping demand of trade was given by Linder. The theory suggests that international trade of manufactured goods will be stronger between the countries with similar per capita income. The theory is in contrast with usual supply based theory and shifts the concentration to demand side from the supply side. This is also known by the name of demand similarirty hypotheses.