Calculation and interpretation of NRP and ERP.
Use the scenarios described below to answer this question.
Scenario 1: The free trade world price of a mobile phone is $50. All of the inputs used in making the mobile phone are imported. These imported inputs cost $19. A tariff of $6 is placed on mobile phones.
Scenario 2: Use all of the information in Scenario 1 AND now there is a tariff of $10 on imported inputs used to make mobile phones.
a. Calculate the NRP for scenario 1.
i. Interpret the value you calculated for the NRP. What does the value you calculated imply for the domestic producer of mobile phones?
b. Calculate the ERP for scenario 1.
i. Interpret the value you calculated for the ERP. (Hint: what does this value of ERP mean for domestic producers of the final good - mobile phones)?
c. Calculate the NRP for scenario 2.
d. Calculate the ERP for scenario 2.
i. Interpret the value you calculated for the ERP. (Hint: what does this value of ERP mean for domestic producers of the final good - mobile phones)?
ii. Illustrate what does this ERP value compute in part d imply for the tariff structure of mobile phones? Would you expect to see tariff escalation take place? Briefly explain.