Suppose that the tariff on imported steel is 40 percent, the tariff on imported iron ore is 20 percent, and 30 percent of the cost of producing a ton of steel consists of the iron ore it contains.The effective rate of protection of steel is approximately 49 percent.

Question

Quizplus · Accepted Answer

The effective rate of protection (ERP) on steel is calculated as follows:

ERP = (tariff on steel + (percentage of imported inputs in the production of steel × tariff on those inputs)) ÷ (1 − percentage of imported inputs in the production of steel)

In this case:

ERP = (0.4 + (0.3 × 0.2)) ÷ (1 − 0.3)
    = 0.52 ÷ 0.7
    = 0.7429 or 74.29%

Therefore, the statement that the ERP on steel is approximately 49% is false.

Suppose That the Tariff on Imported Steel Is 40 Percent