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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 10% tariff is placed on the (final) product but not on the imported components;

i) What is the product's 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

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Retselisitsoe Pokothoane
Retselisitsoe PokothoaneLv10
28 Sep 2019
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Related questions

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.

Suppose Smart Phone Inc. makes and sells smartphones. To produce the phones, the company assembles a number of components that are produced abroad. Of the product's final value, 60 percent is attributed to domestic production while 40 percent is attributed to foreign production. Suppose the United States imposes a nominal tariff on smartphones of 20 percent.

a. If the United States imposes no tariff on the imported components of the smartphone, what is the effective rate of protection for Smart Phone Inc.?

b. Suppose the United States imposes a 10 percent tariff on the imported components? What is the new effective rate of protection?

c. Did the effective rate of protection change? Explain why it changed and what it means for Smart Phone Inc.

Trade Policy.

The demand for cars in Home is q = 30 – P and the supply of cars in Home is q = P. The demand for cars in Foreign is q = 10 – P and the supply of cars in Foreign is q = P.

a) Calculate the autarky equilibrium price and quantity in each country.

b) Who is the importer of cars and who is the exporter?

c) Write the import demand for Home and the export supply for Foreign.

d) Find the equilibrium world price under free trade. What is the amount of cars traded between the two countries?

e) Suppose the country that is the importer imposes a tariff of $2 per unit on car imports. Find the new equilibrium world price under the tariff. What is the amount of cars traded between the two countries now? Show this in a graph with the import demand for Home and the export supply for Foreign.

f) Look at figure 1 for Home and fill in the table below (with letters, no numbers) with the consumer surplus, producer surplus, government revenue and total surplus before and after the tariff.

g) Look at figure 2 for Foreign and fill in the table below ((with letters, no numbers) with the consumer surplus, producer surplus, government revenue and total surplus before and after the tariff.

h) Does Home experience a terms of trade gain or loss as a result of the tariff? Does Foreign experience a terms of trade gain or loss as a result of the tariff?

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