tariffs - and a 5% tariff is placed on its inputs so that...

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tariffs A tariff is a tax on imports. The tariff raises the domestic price above the world price. Consumers are losers because they pay a higher price and buy less of the product. Since the domestic price rises, domestic firms increase output and see their profits rise. Effective Rate of Protection Tariffs also have an effect on industries that sell material inputs to the protected industry, and firms in the protected industry are affected by tariffs on their inputs. This complicates looking at who is being protected by a set of tariffs. The effective rate of protection is the percentage by which the entire set of a nation's trade barriers raises the industry's value added per unit of output. Suppose that under free trade, the input costs of a bicycle are $220 and the world price is $300. Value added equals $80. Suppose a 10% tariff is imposed on bicycle imports so the domestic bicycle price rises to $330
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Unformatted text preview: and a 5% tariff is placed on its inputs so that input costs rise to $231. Value added now equals $99. The effective rate of protection for the bicycle industry equals (99-80)/80 or 23.8%, not the 10% nominal tariff. This tells us that income rises by 23.8% in the bicycle industry. Indifference Curve Analysis of a Tariff A tariff distorts consumption so we end up on a lower indifference curve. Production of the import good rises and that of the export good falls. quotas A quota is a limit on the amount of imports. For example, the U.S. allows 1 million tons of sugar to be imported but no more than that. The tariff has the same effects on producers and consumers as a tariff. The domestic price rises above the world price. Other Barriers to Trade • regulatory barriers: health & safety standards; government procurement policies • export barriers: quotas & duties • exchange controls...
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This note was uploaded on 11/22/2011 for the course FIN FIN1100 taught by Professor Bradrifkin during the Fall '09 term at Broward College.

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