THE PAKISTAN DEVELOPMENT REVIEW
On Two Formulae for Calculating the Effective Rate of Protection (Notes & Comments)
In the literature on effective tariff protection, two formulae have been used, more or less equivalently. One defines effective protection as the percentage difference , between value added at domestic prices and value added at world prices. The other defines it as the percentage difference in value added per unit of output at the two sets of prices. The first definition has been used by Balassa (1965) Bhagwati and Desai (1970) and Lewis and Guisinger (1968), whereas the second definition seems to have been used by Basevi (1966), Corden (1966) and Leith (1967 and 1968). There is some ambiguity in the works of the last three authors as to the meaning of value added per unit of output at domestic prices. Part of the confusion arises because none of these authors explicitly defines this concept. Leith (1967) implicitly defines this as value added at domestic prices divided by the value of output at domestic prices [5, foot-note 14, p, 60, equation (A-5 and A-6) p.70]. Basevi (1966) implicitly used this definition at one place [2, p. 140] but at another he implicitly defines value added per unit of output at domestic prices as value added at domestic prices divided by the value of output at world prices. [2,p. 148]. The last definition also seems to have been used by Corden (1966).