At free-trade prices, a tennis racquet in country A, a small country, sells for $100 and contains $40 worth of aluminum inputs and $30 worth of plastic. In country A, the nominal tariff rates are 40% on tennis racquets, 20% on aluminum, and 10% on plastic. Based on this information, what is the effective rate of protection for the racquet industry in country A?
A)40%
B)63⅓%
C)10%
D)96⅔%

Question

Quizplus · Accepted Answer

The effective rate of protection measures the percentage increase in the value added by protected industries as a result of tariff protection. To calculate the effective rate of protection, we need to:

1. Calculate the protected value added for each input
- For aluminum: protected value added = $40 + (20% tariff x $40) = $48
- For plastic: protected value added = $30 + (10% tariff x $30) = $33

2. Calculate the protected value added for the final product
- The protected value added for the tennis racquet = $48 + $33 + $100 = $181

3. Calculate the effective rate of protection
- The effective rate of protection = (protected value added for final product - value added without protection) / value added without protection x 100%
- Without protection, the value added for the tennis racquet would be $70 ($40 for aluminum + $30 for plastic)
- The effective rate of protection = ($181 - $70) / $70 x 100% = 159%
- However, since the nominal tariff rate on the final product is 40%, we need to adjust the effective rate of protection to account for the fact that some of the protected value added is captured by the government as tariff revenue
- The effective rate of protection adjusted for the final product tariff = 159% x (1 - 40%) = 96⅔% (D)

At Free-Trade Prices, a Tennis Racquet in Country A, a Small