Define and give a well-explained example of a tariff.

Expert Solution

A tariff is a special kind of tax which is imposed by the government on goods and services imported from another country.

Tariff is levied by the government to make import less desirable versus domestic goods and services. Tariff works by increasing the price of product when import takes place. The increased price gives an advantage to the domestic product within the same market.

Tariff is imposed as a percentage of total cost of the product including freight and insurance.

Types of tariff:

Mainly there are two types of tariff:

Unit or Specific tariffs - when tariffs are levied as a fixed charge to the imported product, it is known as specific tariff. These tariffs are levied on per unit and cost a flat fee per import. For eg: $500 per ton of imported steel, $0.7 per live goat from China.
Ad Valorem tariffs - These tariffs are levied on value of item imported. These are generally in the form of percentage which is imposed on cost of product. for eg: US govt imposes 20% tariff to the value of automobiles imported.

Hence by referring to the above explanation and example we can conclude that,

Tariff plays a crucial role in nation's foreign trade policy. Their purpose is to generate revenue for the federal government and also aims to reduce trade deficit and pressure of foreign competition. It is one of the important pillars of importing country which allows the rapid development and industrialisation of that country.

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