Nominal Tariffs vs. Effective Rates of Protection (15 marks) Suppose the free trade price of a domestic product that faces foreign competition is $10,000 and contains 25% imported components.
Assuming this is a small country, consider the following situations:
a) A 10% tariff is placed on the (final) product but not on the imported components;
(i) What is the products price after the imposition of the tariff?
(ii) What is the domestic value added before and after the imposition of the tariff?
(iii) Calculate the effective rate of protection.
b) In addition to the 10% tariff on the (final) product, suppose there is now a 5% tariff imposed on the imported components.
(i) What is the products price after the imposition of both tariffs?
(ii) What is the domestic value added after the imposition of both tariffs?
(iii) Calculate the effective rate of protection.