Question

TeleGlobal is an American firm producing TV sets. TeleGlobal imports TV set components from Taiwan and assemb them domestically. Suppose that in the United States, a TV set sells for $500 and that 80% of the TV set's value comes from the value of the imported components. The United States imposes a 30% tariff on TV sets and a 10% tariff on the TV set's components. Assume that costs of producing components are the same in the United States a Taiwan. Based on the information provided, the effective rate of protection that TeleGlobal receives from the tariff is:__________.

a. -17.5%
b. 70.0%
c. 110.0%
d. 24.4%
e. 47.5%

Answer 1

c. 110.0%

Step-by-step explanation:

Effective Rate of Protection (ERP) = (t1 - at2) / (1 - a)

Where t1: Nominal tariff rate on imported final product = 30% = 0.3

t2: Nominal tariff rate on imported input = 10% = 0.1

a: (Value of imported input / Value of finished good) = 80% = 0.8

ERP = (t1 - at2) / (1 - a)

ERP = 0.3 - (0.8*0.1) / (1 - 0.8)

ERP = 0.3 - 0.08 / 0.2

ERP = 0.22 / 0.2

ERP = 1.1

ERP = 110%