International Economics
International Economics
16th Edition
ISBN: 9781305887633
Author: Robert Carbaugh
Publisher: Cengage Learning
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Chapter 4, Problem 1SQ
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Explain the specific tariff, ad valorem tariff, and compound tariff.

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Explanation of Solution

Specific tariff: The amount of money paid per physical unit of imported product is known as the specific tariff. This tax considers goods such as wheat, rice, fertilizers, cement, sugar, cloth, and so on.

Advantage:

  1. 1) Easy to understand.
  2. 2) Effective in reducing demand.
  3. 3) Equally increases the price of goods and makes a bigger effect in the reduction of overall demand.

Disadvantage:

  1. 1) Tax is more regressive, that is low income and higher income groups have the same tax burden. 
  2. 2) Decline in the level of protection in the inflation period.

Ad valorem tax: The fixed percentage of money levied as duty on the commodity that goes under trade based on its values is known as the Ad valorem tax.

Advantage:

  1. 1) Easy to implement
  2. 2) Tariff increases with the same rate due to the proportionality.
  3. 3) Increase with increasing inflation will reduce the demand of consumer in the inflation situation.

Disadvantage:

  1. 1) Incentive to use a false invoice.

Compound tariff: A blend of specific and ad valorem tax is known as the compound tax.

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