Under free trade at international prices in a small country, each unit of output in the cloth-making industry has a price of $1. As a small country, it has no impact on world prices. The inputs into cloth-making are cotton yarn and “other fibers” which are also internationally traded items. A unit of cloth (the output) requires, at free-trade prices, 30 cents worth of cotton yarn and 30 cents worth of “other fibers” to produce. Under protection, suppose that a 25 percent ad valorem tariff is placed on cloth imports and a 1/6 tariff (16.7%) goes on cotton yarn imports.

 A. Work out the division of the free-trade unit value of cloth into payments for cotton yarn, payments for other fibers, and value added in cloth production if there is no protection. 

B. What is the price of the amount of cotton necessary to make a unit of cloth if the tariff on cotton is applied? 

C. What is the price of a unit of cloth if the tariff on cloth is applied? (This is the post-tariff unit value of the cloth). 

D. Work out the division of the post-tariff unit value of cloth into value added, payments for cotton, and payments for other fibers after applying all specified tariffs to the goods they apply to under protection. 

E. Calculate the effective rate of protection for the cloth industry with the tariffs applied as above

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A Work out the division of the freetrade unit value of cloth into payments for cotton yarn ... View the full answer