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Exam 13: The Instruments of Trade Policy

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Question 1

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(a) Suppose that a country has a nominal tariff rate of 10 percent on good A and imports $1,000 of good A, has a nominal rate of 5 percent on good B and imports $1,400 of good B, and has a nominal tariff rate of 15 percent on good C and imports $600 of good C.These are the only three goods in existence. Calculate the country's unweighted-average nominal tariff rate and its weighted-average nominal tariff rate. Explain in economic terms the relationship you have found between the two rates. (b) Suppose that, for a country, the free trade price of good X is $1,000 and the free trade prices of the only two inputs (both of which are imported) to the production process of good X are $400 for good W and $200 for good Y. Assume that one unit each of good W and good Y is necessary for the production of one unit of good X. Suppose now that the country, which is a "small" country, introduces a tariff structure that imposes a 20 percent nominal tariff on good X, an 8 percent tariff on good W, and a 6% tariff on good Y. Calculate the Effective Rate of Protection (ERP), or "effective tariff rate," that this tariff structure provides to the domestic producers of good X. Explain the economic meaning of your result. For what purpose might the ERP of an industry be more useful to an economist than the nominal tariff rate on imports of the industry's product?

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(a) To calculate the unweighted-average ...

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Question 2

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Suppose that the nominal tariff rate on final good X is 7 percent and that the weighted average of the nominal tariff rates on the inputs used in producing good X is 10 percent. In this situation, the effective rate of protection (ERP) for final good industry X

A) will be greater than 10 percent.
B) will be less than 10 percent but must be greater than 7 percent.
C) will be less than 7 percent but must be greater than 0 percent.
D) can be negative.

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Question 3

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Given the following information for industry X in country A, and assuming that input Y is imported, that one unit of Y is required for each unit of X, and that country A is a "small" country: $\begin{array}{lcc}&\text { free trade price }&\text {nominal tariff rate }\\\text { final product X } & \$200 & 25 \% \\\text { input Y (only input to X) } & \$ 100 & 15 \%\end{array}$ The effective rate of protection (ERP) for industry X is __________ percent. However, if The nominal tariff rate on input Y is eliminated (i.e., the 15% rate become 0%) , the ERP For industry X would become __________ percent.

Other things equal, which one of the following will cause an increase in the effective rate of protection (ERP) in the automobile industry?

Given the following information for industry X in country A, and assuming that input Y Is imported, that one unit of Y is required for each one unit of X, and that country A is a "small" country: $\begin{array}{lcc}&\text { free trade price }&\text {nominal tariff rate }\\\text { final product X } & \$ 120 & 10 \% \\\text { input Y (only input to X) } & \$ 80 & 15 \%\end{array}$ The "effective tariff rate" or "Effective Rate of Protection (ERP) " for industry X in Country A is __________ percent.

Suppose that a country has a nominal tariff rate of 10 percent on good A and imports $100,000 of good A, has a nominal rate of 5 percent on good B and imports $120,000 of good B, has a nominal rate of 12 percent on good C and imports $80,000 worth of good C, and has a prohibitive tariff rate of 50 percent on good D. These are the only four goods in existence. Calculate the country's unweighted-average nominal rate and its weighted-average nominal rate. Explain in economic terms the relationship you have found between the unweighted- and weighted-average rates.

Suppose that a country's nominal tariff rate on imports of good X is 20% and that the country's nominal tariff rate on good A [a raw material and the only input (an imported input) used in making good X] is 5%. In this situation, the Effective Rate of Protection (ERP or "effective tariff rate") for the country's domestic X industry will be __________, and this type of escalated tariff structure __________ the type of tariff structures that high-income, developed countries actually have in place on goods imported from low-income, developing countries.

The United States now gives China permanent most-favored-nation (MFN) treatment [or Normal trade relations (NTR) ]. This means that the tariff schedules applicable to U.S. Imports from China

Which one of the following is NOT an example of making a trade instrument more Restrictive against imports, other things equal?

If offshore assembly provisions were extended to include more goods, what would this do to the actual level of protection provided by a country's nominal tariff schedule? Explain. If the extension of the provisions is made to final goods but not to intermediate goods, what would this do to the effective rate of protection (ERP) for the country provided by its tariff schedule? Explain.

In general, a country's unweighted-average nominal tariff rate tends to be __________ than the country's weighted-average nominal tariff rate. The difference between the two would be __________ if the goods with the highest tariffs became imported relatively more heavily.

Suppose that the nominal tariff rate on final good X is 10 percent and that the weighted average of the nominal tariff rates on the inputs used in producing good X is 6 percent. In this situation, the effective rate of protection (ERP) for final good industry X

Given the following information for industry X in country A, and assuming that input Y Is imported, that one unit of Y is required for each unit of X, and that country A is a "small" country: $\begin{array}{lcc}&\text { free trade price }&\text {nominal tariff rate }\\\text { final product X } & \$ 100 & 20 \% \\\text { input Y (only input to X) } & \$ 80 & 15 \%\end{array}$ The effective rate of protection (ERP) , or "effective tariff rate," for industry X is __________ percent. However, if the nominal tariff rate on input Y is eliminated (i) e., the 15% rate becomes 0%) , the ERP for industry X would become __________ percent.

Industries with the highest level of nominal tariff rates on their competing imports do not necessarily receive the greatest incentive to expand domestic production. Explain why this is so and how you might go about arriving at a more revealing measure of tariff-based incentives for expanding production.

Suppose that a country's "unweighted-average (nominal) tariff rate" (call it "t_U") and "weighted-average (nominal) tariff rate" (call it "t_W") are calculated both with and without the inclusion of prohibitive tariffs, and that the country does in fact have some prohibitive tariffs. In this situation, the t_U that includes the prohibitive tariffs __________ the same as the t_U that excludes the prohibitive tariffs, and the t_W that includes the prohibitive tariffs __________ the same as the t_W that excludes the prohibitive tariffs.

Given the following information for industry X in country A, and assuming that at least some of input Y is imported, that one unit of Y is required for each unit of X, and that country A is a "small" country: $\begin{array}{lcc}&\text { free trade price }&\text {nominal tariff rate }\\\text { final product X } & \$ 100 & 19 \% \\\text { input Y (only input to X) } & \$ 70 & 10 \%\end{array}$ The effective rate of protection (ERP) for industry X is __________ percent.

Which of the following is NOT an example of a nontariff barrier to the free flow of goods and services in accordance with comparative advantage?

The use of the most-favored-nation (MFN) principle [or normal trade relations (NTR) ] is an attempt to attain __________ toward competing suppliers of imports to a country. Hence, the arrangement whereby developed countries permit duty-free entry on some goods coming from developing countries but levy tariffs on the same goods if coming from other developed countries is __________ the MFN [or NTR] principle.

The 2012 U.S. MFN/normal trade relations tariff on men's knitted wool blazers was 38.6¢ per kilogram of weight plus 10 percent of the value of the blazer. This is an example of __________.

An import quota specifies the __________ amount of a good that can be imported into a country; a step to becoming more protectionist would involve __________ in the quota.