The nominal tariff rate signifies the total increase in domestic productive activities compared to what would occur under free-trade conditions. True False
The correct answer and explanation is:
The correct answer is False.
The nominal tariff rate refers to the tariff that is stated or advertised on the surface, without taking into account any other factors like exemptions, rebates, or changes in other trade policies. It is the rate applied to the value of goods being imported, but it does not provide a direct measure of the overall impact of the tariff on domestic production or trade.
The increase in domestic productive activities, which is what the question is referring to, depends on more than just the nominal tariff rate. Instead, it is determined by the effective tariff rate, which takes into account how tariffs affect the prices of both imported goods and domestically produced goods. The nominal tariff rate might only be one element in a broader set of policies influencing domestic production.
A nominal tariff may lead to an increase in the price of imported goods, which could make domestic products more competitive. However, the actual increase in domestic production also depends on other factors like elasticity of demand, the availability of alternatives, and the responsiveness of domestic producers. In addition, other policies such as subsidies, quotas, or trade agreements can affect the overall economic impact, making the nominal tariff rate alone insufficient for calculating the actual boost to domestic productive activities.
In short, while tariffs may encourage domestic production by raising the price of imports, the nominal tariff rate itself does not directly measure the total increase in domestic production compared to free trade. A full analysis would need to consider the effective tariff rate and how various trade policies interact with one another to influence production.