Question

Imagine that the production of a $50,000 truck in Mexico requires $20,000 worth of steel. The Mexican nominal hariff rates for importing these goods are 20 percent for artomobiles and 5 percent fot steel. Given thas information, the effective rate of protection for the Canadian autornobide industry is approximately

A. 30 percent.
B. 6 percent.
C. 3 percent.
D. 35 percent

Answer 1

The effective rate of protection for the Mexican automobile industry is calculated by comparing the value added with and without tariffs. With a tariff of 20% on automobiles and 5% on steel inputs, the rate is found to be 30%, making the correct answer A. 30 percent.

Step-by-step explanation:

To calculate the effective rate of protection for the automobile industry, we have to consider the tariff rates for the final product and for its inputs. In this case, the truck has a tariff of 20% and the steel input has a tariff of 5%. The value added by the Mexican production process (cost of the truck minus the cost of imported steel) is $50,000 - $20,000 = $30,000. The tariff on the truck increases the price by 20%, or $10,000, making the protected truck's price $60,000 domestically. Similarly, the tariff on steel increases the input cost by 5%, or $1,000, leading to an input cost of $21,000. The effective protection rate is the percentage increase in the value added due to the tariff structure:

Effective Protection Rate = (Protected Value Added - Unprotected Value Added) / Unprotected Value Added

Protected Value Added = $60,000 - $21,000 = $39,000

Unprotected Value Added = $50,000 - $20,000 = $30,000

Effective Protection Rate = ($39,000 - $30,000) / $30,000 = $9,000 / $30,000 = 0.3 or 30%

Based on this calculation, the correct answer is A. 30 percent.