Given the following information for industry X in country A, and assuming that input Y is imported, that one unit of Y is required for each unit of X, and that country A is a "small" country:
$\begin{array}{lcc}
&\text { free trade price }&\text {nominal tariff rate }\
\text { final product X } & \$200 & 25 \% \
\text { input Y (only input to X) } & \$ 100 & 15 \%
\end{array}$

The effective rate of protection (ERP) for industry X is __________ percent. However, if The nominal tariff rate on input Y is eliminated (i.e., the 15% rate become 0%), the ERP For industry X would become __________ percent.
A) 20; 25
B) 35; 50
C) 40; 50
D) 35; 25

Question

Given the following information for industry X in country A, and assuming that input Y is imported, that one unit of Y is required for each unit of X, and that country A is a "small" country:
$\begin{array}{lcc}
&\text { free trade price }&\text {nominal tariff rate }\
\text { final product X } & \$200 & 25 \% \
\text { input Y (only input to X) } & \$ 100 & 15 \%
\end{array}$

The effective rate of protection (ERP) for industry X is __________ percent. However, if The nominal tariff rate on input Y is eliminated (i.e., the 15% rate become 0%), the ERP For industry X would become __________ percent.
A) 20; 25
B) 35; 50
C) 40; 50
D) 35; 25

Quizplus · Accepted Answer

The effective rate of protection (ERP) for industry X can be calculated using the formula: ERP = (Px - Pm) / Pm where Px is the free trade price of the final product (X), and Pm is the domestic price of the final product after tariffs are applied. 
In this case, Px = $200 and Pm = $200 + ($200*25%) = $250. Therefore, ERP = ($200 - $250) / $250 = -20% (negative, indicating that the industry is actually hurt by the tariffs).
If the nominal tariff rate on input Y is eliminated, the domestic price of X would be $200 + ($100*0%) = $200. Therefore, ERP = ($200 - $200) / $200 = 0%. 
Eliminating the tariff on the input would increase the competitiveness of the industry and result in a lower effective rate of protection. Therefore, the correct answer is B (35% before tariff elimination and 50% after tariff elimination).

Given the Following Information for Industry X in Country A