Question

15. ​If a Canadian manufacturing firm uses some imported inputs in the production process, the most accurate measure of the rate of protection is the a. ​specific tariff b. ​ad valorem tariff c. ​nominal tariff d. ​effective tariff

16. ​Assume that Mexico is a small country and it imposes a tariff on imported automobiles. As a result of the tariff a. ​the world price of automobiles falls b. ​the world price of autos remains constant c. ​the Mexican price of autos falls d. ​the Mexican price of autos remains constant

Answer 1

Ans 15) a - nominal tariff

The nominal tariff is the rate associated with duties imposed on goods that do not reflect price changes of the goods due to inflation, taxes, etc.

The effective tariff is the protective rate which is measured as the percentage increase in value added per unit in an economic activity which is made possible by the tariff structure relative to the situation in the absence of tariff but with the same exchange rate. It includes other impacts on nominal tariff such as inflation, taxes, etc.

Since the question does not mention the form of the tariff, i.e. whether it is applied as a percentage of the value or on fixed units, we cannot know if it is ad valorem or a specific tariff.

There are two basic ways in which tariffs may be levied: specific tariffs and ad valorem tariffs. A specific tariff is levied as a fixed charge per unit of imports. For example, if the US government levies a 21 cent specific tariff on every wristwatch imported and if 1000 watches are imported, the US government collects $210 in tariff revenue. In this case, $210 is collected whether the watch is a $40 Swatch or a $5000 Rolex. An ad valorem tariff is levied as a fixed percentage of the value of the commodity imported. The US currently levies a 2.5% ad valorem tariff on imported automobiles. Thus if $100,000 worth of autos are imported, the US government collects $2,500 in tariff revenue.

Ans 16) b - the world price of autos remain constant

Since Mexico is assumed to be a small country, the trade theory suggests that the country’s imports are a very small share of the world market—so small that even a complete elimination of imports would have an imperceptible effect on world demand for the product and thus would not affect the world price. Thus when a tariff is implemented by a small country, there is no effect on the world price.