Tariffs
• In real world, each country maintain
extensive tariff structures with different
level for different products.
• Some products enjoy large protection,
whereas others have little or no protection.
• How to come up with a measure of overall
tariff protection for a country?
Average tariff calculation
• This calculation involves dividing a
country’s tariff revenue for a given period
by some measure of trade for that country
– Measure of trade: Total imports or total
dutiable imports
Effective Rate of Protection
• The amount of protection provided to the
individual products by the tariff structure of a
country
• Example: It takes 5yards of textiles to produce a
man’s suit. Labor and capital charges are $50 per
suit (domestic value added) and textile is available
from both domestic and foreign suppliers at a
price of $20 per yard.
• Government imposes a tariff of 20 percent on all
imported suits
Nominal and Effective Rates of
Production
• Nominal rate of protection (NRP) = t/P
• Effective rate of protection (ERP) =
(Vi – V)/V
• Where t=the tariff on the final product
P=Price of final product
V= Domestic value added under free trade
Vi = Domestic value added under tariff
NRP vs. ERP
NRP: It represents the amount by which domestic
producers can raise the price of their output and
still compete with foreign production
ERP: It represents the amount by which domestic
value added can raised relative to the free trade
value added levels
In our example, the tariff allowed payment to
factor of production to be raised by a total of 60
percent
Effective Rate of Protection
• What would happen to ERP if government
would impose a second tariff of 10 percent
on textile imports?
Effective Rate of Protection
World Tariff World Tariff Value NRP( ERP
Price on price on added suits (suits)
Suits Suits textiles textiles
150 0 100 0 50 0 0
150 20 100 0 80 20 60
150 20 100 10 70 20 40
150 20 100 20 60 20 20
150 20 100 30 50 20 0
150 20 100 40 40 20 -20
150 20 100 50 30 20 -40
Effective Rate of Protection
• It is an important and useful concept
– It helps to explain the structure of protection in
many countries
– Measures of ERP also tells us something about
the allocation of domestic resources
– ERP is a valuable measures for politicians and
especially for trade negotiators
• It would affect income received by domestic factors
of production
Summary
• Tariffs are taxes imposed either on imports or
exports
• The effects of tariffs are: 1)the increase of a price
of imported good and 2) the protection of
domestic producers
• Tariffs lower the standard of living in a country
relative to free trade
• In the case of large country, tariffs can increase
country’s standard of living