Question

What would be the effective rate of protection on bicycles in China if China places a 50 percent tariff on bicycles, which have a world price of Php200,and no tariff on bike components, which together have a world price of Php100?

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Answer 1

Solution:

First, calculate the value-added before tariffs and after tariffs:

Value-added (VA) = World price of output – Cost of inputs (components)

Value added without tariff:

Bicycle world price = Php200

Component world price = Php100

Value added = 200 – 100 = Php100

Value-added with tariff:

Bicycle world price = $200 + (200\times50\%) = 200+100 = Php300$

Component world price = Php100

Value added = 300 – 100 = Php200

Effective rate of protection of bicycles (g) =$\frac{(VA \;after\; tariffs - VA\; added\; before\; tariffs) }{VA \;added \;before\; tariffs} \times 100$

g = $\frac{(200 - 100) }{100} \times 100 = 100\%$

The effective rate of protection of bicycles = 100%