effective rate of protection

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Rate of Effective Protection

The added value to a domestically produced good or service resulting from a tariff that keeps out (or makes more expensive) foreign goods and services. That is, because the tariff make foreign goods and services more expensive than they otherwise would be, domestic goods and services are not forced to cut their own prices, which adds value and results in higher profits.

effective rate of protection

the real amount of PROTECTION accorded to domestic suppliers of a final product when a TARIFF is applied to a competing imported final product (see IMPORTS), but either no tariff, or a lower rate of tariff, is applied on FACTOR INPUTS that are imported to produce that product. For example, assume that initially the same domestic final product and imported final product are both priced at £100. Assume, further, that the price of the domestic product is made up of 50% value added by domestic inputs and 50% by imported raw materials. If an ad valorem tariff of 10% is now applied to the imported final product, its price will increase to £110. If no tariff is applied to imported raw materials, however, then the import price of these will remain at £50. This allows domestic VALUE ADDED (and prices) to increase by up to £10, with the domestic final product still remaining fully competitive with the imported final product. The effective rate of protection accorded to domestic suppliers is thus 20% (that is, £10 additional value added/£50 existing value added). See NOMINAL RATE OF PROTECTION.
References in periodicals archive ?
Trade protection measured by nominal import tariff as well as effective rate of protection (ERP) was brought down substantially in the 1990s.
The standard measure of the effective rate of protection for a product group or industry is the percentage change in value added per unit of output resulting from assistance to the output(s) and the inputs of the product group or industry.
It is a reasonable assumption--though subject to many qualifications--that the cost of protection is greater, firstly the greater is the average effective rate of protection of protected industries or activities relative to low- or zero-protected activities (notably export industries or activities), and secondly the greater is the variation of effective rates within the protected sector.

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