Suppose there is no tariff on imported inputs and the ratio of the value of imported inputs the value of the final product is 0.5 If the nominal tariff rate on the final product is 10 percent, the effective tariff rate equals ?
Correct answer: D. 20 percent
- A. 5 percent
- B. 10 percent
- C. 15 percent
- D. 20 percent
Explanation
Effective protection equals the tariff on final output divided by the share of domestic value added: 10% ÷ (1 − 0.5) = 20%. Because imported inputs are untaxed, the tariff raises domestic value added proportionately more than the nominal rate.
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