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effective protection


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effective protection

effective protection

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The effects of a tariff system on an industry's value added, taking account of tariffs on imported inputs as well as on output. Defining units of output and imported inputs so that their prices would be 1 under free trade, if the tariff on output is 100t percent and the tariffs on imported inputs are 100s percent, and a units of imported inputs are used per unit of output, with zero tariffs value added per unit of output is (1 − a). With tariffs value added per unit is

[(1+t)−a(1+s)].

The rate of effective protection e is then defined byso that

e = (tas)/(1 − a).

Effective protection is increased by higher tariffs on output, and decreased by higher tariffs on imported inputs.

Subjects: Economics.


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