The welfare loss of negative value-added

This brief paper applies the 'triangles' method of measurement of the cost of protection to an industry with negative value-added in international prices. The production loss cannot be estimated in this case by the normal procedure, which utilizes the effective protective rate: the latter is negative, when defined in the conventional way, and is thus useless for the purpose on hand. The production loss is separated into two components: the negative value-added itself - the foreign-exchange loss; and payments to domestic productive factors - the domestic resource loss. Despite the fact that the effective protective rate as such does not appear in the formula for the estimation of the production loss, this loss is presented as, among other things, a rising function of the output duties and of input coefficients and as a declining function of input duties - all the ingredients which make the effective rate of protection.