Assume the United States is a large consumer of steel that is able to influence the world price. Its demand and supply schedules are respectively denoted by DU.S. and SU.S. in Figure 4.2. The overall (United States plus world) supply schedule of steel is denoted by SU.S.+W.
Figure 4.2. Import Tariff Levied by a "Large" Country ?
-Suppose that the production of $500,000 worth of steel in the United States requires $100,000 worth of iron ore.The U.S.nominal tariff rates are 15 percent for steel and 5 percent for iron ore.Given this information, the effective rate of protection for the U.S.steel industry is approximately
A) 6 percent.
B) 12.5 percent.
C) 18 percent.
D) 17.5 percent.

Question

Assume the United States is a large consumer of steel that is able to influence the world price. Its demand and supply schedules are respectively denoted by DU.S. and SU.S. in Figure 4.2. The overall (United States plus world) supply schedule of steel is denoted by SU.S.+W.
Figure 4.2. Import Tariff Levied by a "Large" Country  ?
-Suppose that the production of $500,000 worth of steel in the United States requires $100,000 worth of iron ore.The U.S.nominal tariff rates are 15 percent for steel and 5 percent for iron ore.Given this information, the effective rate of protection for the U.S.steel industry is approximately
A) 6 percent. 
B) 12.5 percent. 
C) 18 percent. 
D) 17.5 percent.

Quizplus · Accepted Answer

The effective rate of protection (ERP) is calculated by considering both the nominal tariff on the final product and the tariffs on the inputs. The formula for ERP is: $$ERP = \frac{(V_{a} + T_{f}) - (V_{d} + T_{i})}{V_{a}} \times 100\%$$ where $V_{a}$ is the value added by the domestic industry (in this case, $400,000 = $500,000 - $100,000), $T_{f}$ is the tariff on the final product ($75,000 = 15\% of $500,000), $V_{d}$ is the domestic cost of inputs before tariffs ($100,000), and $T_{i}$ is the tariff on inputs ($5,000 = 5\% of $100,000). Plugging these values into the formula gives: $$ERP = \frac{($400,000 + $75,000) - ($100,000 + $5,000)}{$400,000} \times 100\% = \frac{$470,000 - $105,000}{$400,000} \times 100\% = \frac{$365,000}{$400,000} \times 100\% = 91.25\%$$ However, the correct calculation should focus on the additional protection the domestic industry receives due to the tariff structure, which is not directly calculated by the above formula. The correct approach is: $$ERP = \frac{Nominal Tariff on Final Product - (Tariff on Input \times \frac{Input Value}{Final Product Value})}{1 - (\frac{Input Value}{Final Product Value})} \times 100\%$$ $$ERP = \frac{15\% - (5\% \times \frac{$100,000}{$500,000})}{1 - (\frac{$100,000}{$500,000})} = \frac{15\% - 1\%}{1 - 0.2} = \frac{14\%}{0.8} = 17.5\%$$ This calculation shows the additional protection given to the steel industry over and above the protection that would be implied by the input costs alone, taking into account the tariffs on both the final product and the inputs.

Assume the United States Is a Large Consumer of Steel