Suppose that the nominal tariff rate on final good X is 8 percent and that the weighted average of the nominal tariff rates on the inputs used in producing good X is 12 percent. In this situation, the effective rate of protection (ERP) for final good industry X
A) must be greater than 12 percent.
B) must be between 8 percent and 12 percent.
C) must be less than 8 percent and greater than zero percent.
D) must be less than 8 percent and can be negative.

Question

Quizplus · Accepted Answer

The formula for calculating the effective rate of protection is (1+τn)/(1-Σwi(1-τi)), where τn is the nominal tariff rate on the final good, Σwi(1-τi) is the weighted average of the nominal tariff rates on the inputs, and i represents each input. Plugging in the given values, we get (1+0.08)/(1-0.12) = 1.091, which means the effective rate of protection for final good X is 9.1%. Since this is less than the nominal tariff rate on X, the ERP is less than 8% and can even be negative. Therefore, choice D is the correct answer.

Suppose That the Nominal Tariff Rate on Final Good X