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‘ world p b89053160933a Miscellaneous Notes on Trade IV. Tariffs: Small Country (Can’t arrec Deﬁnition of Tariff:
Tax on imported goods. Pd = PW + t Speciﬁc !
Pd = PW (1+1) Ad Valorem 8 (domestic) World Price
+taﬁfl World Price 0 (domestic) What happens going from free trade to tariff? Domeszic Consumers lose : -(a+b+c+d)
Domestic Producers gain : +a
Govemment Rev. ‘ +c Net Loss = b+d = dead weight loss Where do those losses come from?
1.) Triangle b The tariff encourages US producers to produce Stuff that is more costly for them to produce than to
be supplied by foreign exporters. 2.) Triangle d 'I‘he_tariff forces US consumers to cut back their purchases when there were prooucers out there
Willing to sell to them at a lower price. (Think about a smuggling.) V. Estimating Tariff Costs Numbers Estimated: Consumer Loss: (a+b+c+d)
Consumer Loss/job saved
Producer Gain: (a)
Deadweight Loss: b+d ._ \'._- VIII. Measuring Tariff Levels: Effective Rate of Protection
How high are the barriers to trade in certain indusuies?
How much is that induSU'y helped by trade policy? Not always that obvious. What happens when an input has a tariff imposed. but not the good itself? “Lug” Effective Rate of protection = One way of trying to adest . _ , ' . :
Measures the percentage change in value added for a good before and after pmtccrion. -
Value Added = Selling price - Cost of inputs
Example: Portable computer Uses one part - Computer screen Price = 100. cost of screen = 50 Value added (before tariff) = 100 - 50 = 50 What are the Effective rate of protection (ERP) and nominal rate 'of proteCtion (NRP) of a 10% (ad
valorem) tariff on computers? P computers after tariff=100(1+l.l)= llO
NR? = 10% Easy ‘ Effective Rate of Protection:
Percentage change of value added = Value added after = 110-50 = 60
Value added before = 100-50 = 50 ERP = (60-50)/50 = 20%
ERP is higher than NRP
What about a tariff on screens only (the input)? 10% Screenwriff
Value added aftertariff=100 - 50(1.10) = 100 — 55 = 45 ERP = (45-50)/50 = -10% The ERP is negative. This reﬂects the fact that uttin a tariff th '
help that industry. but it will hurt others, compu‘lers. g on e input good. screens. may ...
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- Spring '07