Economists coined the term vertical specialization in 2001 to describe

Question

Economists coined the term vertical specialization in 2001 to describe a country's use of imported intermediate parts or services as inputs in producing goods the country later exports—a common occurrence today in global trade. Traditionally, although exports were deducted from imports in calculating gross domestic product (GDP), policymakers did not have data specifically addressing the import content of exports. Today, new trade statistics are being developed to remedy this. These statistics show the national value-added content of exports after all imported input goods and business services have been subtracted.

The case of Sweden is illustrative. A 2010 report from the Swedish National Board of Trade examines data about manufacturing and services inputs and outputs for the Swedish economy in 1995 and 2005 and finds that the conventional gross trade figures inflate the value of exports in relation to GDP. The report finds that 33.5 percent of the total value of Swedish exports consisted of imported goods and services used as inputs. Consequently, when official statistics claim that the 2005 export share of Swedish GDP was 49 percent, this exaggerates the contribution of exports to the Swedish economy. The real contribution is the value added in the exports. It is therefore more accurate to say that approximately one-third of Swedish GDP is generated by foreign demand, not half. Thus, Sweden is considerably less dependent on exports than commonly believed.

"Made in Sweden" can thus seem an anachronism. It is, however, not equally anachronistic for all sectors. National aggregates hide huge sectoral differences in import content, ranging from sectors with very little import content to sectors where almost all production consists of imports. Generally, production of services requires fewer inputs than production of goods; consequently services are also less dependent on imported inputs. A 2011 study finds that the vertical specialization of manufacturing sectors ranges from 15 percent (electricity, gas, and water) to 90 percent (petroleum), whereas for services the range is from around 8 percent (finance and insurance) to around 30 percent (transport and storage). This shows that, as a proportion of total exports, export of services contributes more to Sweden's economy than the gross trade data imply.   1  1. Which of the following is a claim made in the passage about exports from Sweden in 1995 and 2005?

(A) The traditional gross trade figures are based on incorrect calculations of the total value of the products exported.
(B) The most frequently used gross trade figures do not accurately report the total value of exported products and services.
(C) The gross trade figures traditionally provided tend to misrepresent what contribution domestic production makes to exports.
(D) Imports that are used as inputs in products that are domestically produced are not recorded as imports in the most commonly used gross trade figures.
(E) The inflation-adjusted value of products exported would show them to be a larger proportion of GDP than is indicated by the gross trade figures that are normally used.

2 
 2. The passage states in the final paragraph that a 2011 study found that the vertical specialization of the Swedish finance and insurance sector is about 8 percent. From this and the other information in the passage, it can most reasonably be inferred that

(A) about 8 percent of the the total output in the sector was produced in Sweden
(B) a country other than Sweden produced about 92 percent of the total output in the sector
(C) some goods or services produced outside of Sweden comprised about 8 percent of the value of the total output of the sector
(D) the finance and insurance sector is not as important a component of the Swedish economy as the electricity, gas, and water sector
(E) the finance and insurance sector accounts for about 8 percent of the total Swedish domestic product

3 
 3. A claim made in the passage is that

(A) economists had traditionally been unaware of the extent to which imported inputs contributed to the manufacture of exported goods
(B) production of services, unlike production of goods, was very unlikely to require imported inputs
(C) export figures that subtract the value of imported inputs tend to exaggerate the economic contribution of exports to Sweden's economy
(D) trade statistics were being developed to report the portion of exports' value directly attributable to production in the exporting country
(E) official trade figures for gross exports had underreported the quantity of services exported by Sweden

4 
 4. Which of the following situations is most analogous to the problematic situation identified in the passage concerning traditional reporting of trade statistics?

(A) A researcher presents, as part of a job application, a list of his publications but does not distinguish between those that he authored alone and those of which he was merely the primary author.
(B) A taxpayer omits from her income declaration the profits that she made from the rental of a property and that are deemed taxable under tax law.
(C) In accounting for a firm's cost of manufacturing inputs, the firm's accountant distinguishes between materials that are the result of recycling and those that are not.
(D) In calculating the quantity of fuel needed to put a space vehicle into Earth orbit, an engineering student neglects to factor in the changing weight of the loaded vehicle as it expends fuel in its ascent.
(E) In reporting patients' exposure to radiation by the application of a new medical-imaging technology, a clinical study reports only the radiation produced by the procedure and omits always-present background radiation.

KarishmaB · Accepted Answer

What does the passage tell us? It talks about  vertical specialization - a country's use of imported intermediate parts or services as inputs in producing goods the country later exports.
Say a car manufacturer in country A imports the wheels from a supplier outside A for $5k per car. Using these and all other inputs, he manufactures the car and exports it to other countries at a cost of say $25k per car. The traditional figures use this $25k as export value in GDP.
Now, new trade statistics are being developed to remedy this. Something that will take the $5k into consideration. The value added to the GDP by the car manufacturer domestically was actually $20k only. So this would be a more accurate figure to account for in GDP. 
(We will take these figures ot explain various options. )

Then the case of Sweden is taken to illustrate the point the author is making.

Question 1.

1. Which of the following is a claim made in the passage about exports from Sweden in 1995 and 2005?

(A) The traditional gross trade figures are based on incorrect calculations of the total value of the products exported.
(B) The most frequently used gross trade figures do not accurately report the total value of exported products and services.
(C) The gross trade figures traditionally provided tend to misrepresent what contribution domestic production makes to exports.
(D) Imports that are used as inputs in products that are domestically produced are not recorded as imports in the most commonly used gross trade figures.
(E) The inflation-adjusted value of products exported would show them to be a larger proportion of GDP than is indicated by the gross trade figures that are normally used.

(A) The traditional gross trade figures are based on incorrect calculations of the total value of the products exported.

The traditional figures do not calculate the total value of the products exported incorrectly (the car costs $25k only, no error there). The error lies in the value in relation to GDP (but the value added to GDP was only $20k). The error lies in the ignoring of the imports of $5k.

(B) The most frequently used gross trade figures do not accurately report the total value of exported products and services.

Again, the error does lie in the total value of exported products and services.

(C) The gross trade figures traditionally provided tend to misrepresent what contribution domestic production makes to exports.

Exactly. The traditionally provided figures misrepresented the domestic contribution. They said it was $25k. But actually it was $20k only.

(D) Imports that are used as inputs in products that are domestically produced are not recorded as imports in the most commonly used gross trade figures.

Not correct. We are given "Traditionally, although exports were deducted from imports in calculating gross domestic product (GDP).." so imports and exports were balanced off. What was ignored was the import content of exports.

(E) The inflation-adjusted value of products exported would show them to be a larger proportion of GDP than is indicated by the gross trade figures that are normally used.

No discussion on inflation-adjusted value of products.

Answer (C)

Question 2.

2. The passage states in the final paragraph that a 2011 study found that the vertical specialization of the Swedish finance and insurance sector is about 8 percent. From this and the other information in the passage, it can most reasonably be inferred that

(A) about 8 percent of the the total output in the sector was produced in Sweden
(B) a country other than Sweden produced about 92 percent of the total output in the sector
(C) some goods or services produced outside of Sweden comprised about 8 percent of the value of the total output of the sector
(D) the finance and insurance sector is not as important a component of the Swedish economy as the electricity, gas, and water sector
(E) the finance and insurance sector accounts for about 8 percent of the total Swedish domestic product

Given:
 A 2011 study finds that the vertical specialization ... for services the range is from around 8 percent (finance and insurance) to around 30 percent (transport and storage).

We are also given: vertical specialization ... to describe a country's use of imported intermediate parts or services as inputs in producing goods the country later exports

This means that 8% of the service value is imported by Sweden (it was produced outside Sweden) and 92% is domestically generated in Sweden.

Hence (C) is correct.
(C) some goods or services produced outside of Sweden comprised about 8 percent of the value of the total output of the sector

Answer (C)

Question 3.

3. A claim made in the passage is that

(A) economists had traditionally been unaware of the extent to which imported inputs contributed to the manufacture of exported goods
(B) production of services, unlike production of goods, was very unlikely to require imported inputs
(C) export figures that subtract the value of imported inputs tend to exaggerate the economic contribution of exports to Sweden's economy
(D) trade statistics were being developed to report the portion of exports' value directly attributable to production in the exporting country
(E) official trade figures for gross exports had underreported the quantity of services exported by Sweden

(A) economists had traditionally been unaware of the extent to which imported inputs contributed to the manufacture of exported goods

All we are given is this:
Traditionally, although exports were deducted from imports in calculating gross domestic product (GDP), policymakers did not have data specifically addressing the import content of exports. Today, new trade statistics are being developed to remedy this.

All we know is that they did not have the figures. We do not know whether economists were aware of the extent to which imported units contributed to the manufacture of exported goods (a large extent or a small extent). They just did not have the actual figures. They are taking steps to acquire the right figures now.

(B) production of services, unlike production of goods, was very unlikely to require imported inputs

No such claim made. We are given that generally, production of services requires fewer inputs than production of goods and hence fewer imported inputs. We are not given that they do not require imported units.

(C) export figures that subtract the value of imported inputs tend to exaggerate the economic contribution of exports to Sweden's economy

No. Export figures that subtract the value of imported inputs will give an accurate assessment of the economic contribution of exports to Sweden's economy

(D) trade statistics were being developed to report the portion of exports' value directly attributable to production in the exporting country

This is correct. The passage does claim this: Today, new trade statistics are being developed to remedy this.

(E) official trade figures for gross exports had underreported the quantity of services exported by Sweden
  
No such claim.

Answer (D)

Question 4.

4. Which of the following situations is most analogous to the problematic situation identified in the passage concerning traditional reporting of trade statistics?

(A) A researcher presents, as part of a job application, a list of his publications but does not distinguish between those that he authored alone and those of which he was merely the primary author.
(B) A taxpayer omits from her income declaration the profits that she made from the rental of a property and that are deemed taxable under tax law.
(C) In accounting for a firm's cost of manufacturing inputs, the firm's accountant distinguishes between materials that are the result of recycling and those that are not.
(D) In calculating the quantity of fuel needed to put a space vehicle into Earth orbit, an engineering student neglects to factor in the changing weight of the loaded vehicle as it expends fuel in its ascent.
(E) In reporting patients' exposure to radiation by the application of a new medical-imaging technology, a clinical study reports only the radiation produced by the procedure and omits always-present background radiation.

What is the problematic situation identified in the passage concerning traditional reporting of trade statistics?

In the export figures, the value of inputs from outside (imports) were ignored. The export value was presented as $25k as all being added by the domestic country.

(A) A researcher presents, as part of a job application, a list of his publications but does not distinguish between those that he authored alone and those of which he was merely the primary author.

Correct. The researcher cannot claim a publication to be his own if there were inputs from others. He can only claim the part that belonged to him. Just like Sweden can claim to have added value worth $20k only to GDP, not the entire $25k.

(B) A taxpayer omits from her income declaration the profits that she made from the rental of a property and that are deemed taxable under tax law.

This is hiding revenue. Nothing like our problem.

(C) In accounting for a firm's cost of manufacturing inputs, the firm's accountant distinguishes between materials that are the result of recycling and those that are not.

The accountant provides proper info here. We need to look for a case in which proper info was no provided.

(D) In calculating the quantity of fuel needed to put a space vehicle into Earth orbit, an engineering student neglects to factor in the changing weight of the loaded vehicle as it expends fuel in its ascent.

This discusses neglecting to take a factor into consideration. Not similar to the original problem.

(E) In reporting patients' exposure to radiation by the application of a new medical-imaging technology, a clinical study reports only the radiation produced by the procedure and omits always-present background radiation.

This is opposite to our problem. The report provides the radiation produced by the application only so it would be similar if only value added by the domestic country was reported i.e. only 20k.

Answer (A)

sayan640 · Answer

4. Which of the following situations is most analogous to the problematic situation identified in the passage concerning traditional reporting of trade statistics?

(A) A researcher presents, as part of a job application, a list of his publications but does not distinguish between those that he authored alone and those of which he was merely the primary author.
(B) A taxpayer omits from her income declaration the profits that she made from the rental of a property and that are deemed taxable under tax law.
(C) In accounting for a firm's cost of manufacturing inputs, the firm's accountant distinguishes between materials that are the result of recycling and those that are not.
(D) In calculating the quantity of fuel needed to put a space vehicle into Earth orbit, an engineering student neglects to factor in the changing weight of the loaded vehicle as it expends fuel in its ascent.
(E) In reporting patients' exposure to radiation by the application of a new medical-imaging technology, a clinical study reports only the radiation produced by the procedure and omits always-present background radiation.

For this question , focus on this part

Traditionally, although exports were deducted from imports in calculating gross domestic product (GDP), policymakers did not have data specifically addressing the import content of exports.

Option A says "A researcher presents, as part of a job application, a list of his publications but does not distinguish between those that he authored alone and those of which he was merely the primary author." The researcher too does not have the data so that he can distinguish between the publications he was merely the author for and the publications he authored alone.
Same way , from the export data , the good and services imported from the country outside and the items produced in this country itself cant be distinguished because there was no specific data regarding the the good and services imported from the country outside. 
A is the answer.

ozzaayy · Answer

Can someone share the reasoning behind Q 2 answer?

andrewxt111 · Answer

To answer Q2, we have to first see the exact definition for vertical specialization, which is found in the first sentence of the text:

Economists coined the term vertical specialization in 2001 to describe a country's use of imported intermediate parts or services as inputs in producing goods the country later exports—a common occurrence today in global trade.

Rewording the sentence, it refers to the share of the output in a sector (from which goods or services are exported) that is attributed to imports. For example, if a German bank utilizes French software to streamline client communications, this would be part of this share.

So, we need to find which one of the points describes that 8 percent of the finance and insurance sector's output is attributed to imports.
A. states the opposite, eliminate.
B. same as A, worded differently, eliminate.
D. the text does not include any information of Sweden's economy broken down by sectors, nor inferences, eliminate.
E. again, no information about this is given or inferred, eliminate.

C. is the correct answer. Reasoning from text:

A 2011 study finds that the vertical specialization of manufacturing sectors ranges from 15 percent (electricity, gas, and water) to 90 percent (petroleum), whereas for services the range is from around 8 percent(finance and insurance)...

Pair this with our definition, and C is the only answer supported by the text, and the definition of vertical specialization, as it is given to us.

GMATNinja · Answer

Question 3 
A claim made in the passage is that...

It's not that economists were UNAWARE of this phenomenon. They talked about it (when they coined the term "vertical specialization", for example), but they "did not have data specifically addressing the import content of exports". So (A) is out.

The passage specifically tells us that the range of vertical specialization (use of imported inputs) for services is from around 8% to around 30%. So production of services is actually very LIKELY to require imported inputs, even if those imported inputs represent a small percentage of the final output. (B) is out.

It's the opposite: export figures that do NOT subtract the value of imported inputs would tend to exaggerate the value of the exports. Eliminate (C).

This is exactly what we're told at the end of the first paragraph: "Today, new trade statistics are being developed to remedy this. These statistics show the national value-added content of exports after all imported input goods and business services have been subtracted".

So (D) looks good!

The passage doesn't say anything about underreporting the QUANTITY of services exported by Sweden. The only issue was distinguishing between the final value of those services and the value added by Sweden (i.e. final value minus value of imported inputs).

(E) is out, and (D) is our winner.

Hoehenheim · Answer

KarishmaB 
 
I'd appreciate it if any of the experts can clear up this point for me. Although I got it right, my reason to eliminate (A) was solely because if in fact (A) is to be true, then I'd have to assume that all policymakers are economists. (D), however, fit my reasoning without any such assumptions.

My concern is this, the phrase "unware of the extent to which", to me, roughly translates to "did not know where in the range" does the quantity in question precisely lie. To not be aware of the extent to which the imported inputs contributed to the manufacture of exported goods, economists had to be aware that there was some %, say 10% or 20%, of imported intermediate goods contributed to the export of goods.

Now "policymakers did not have data specifically addressing the import content of exports" means that there was no data to precisely address the fraction of imports which were futrther processed and then exported.

So the crux of both the line in the passage, as well as option (A) are pretty synonymous to me, except for "policymakers" and "economists".

Am I correct in my reasoning or missing something?

KarishmaB · Answer

I am not sure I would make this distinction of policymakers vs economists.

For that matter, I would hold (A) till I get to (D) and then I know that (D) is better.

The issue with (A) is that to me it seems to say that economists were not aware to what a large extent imports are a part of exports and hence they did not include them in calculations. It is like saying that they did not know what a huge impact imports had on export value and that is why they did don't deduct the import value. They just ignored it. The data the author gives shows that import values were a large part of the export value. " 15 percent (electricity, gas, and water) to 90 percent (petroleum), whereas for services the range is from around 8 percent (finance and insurance) to around 30 percent (transport and storage)".

But the passage says that this adjustment was not made because the policymakers did not have these figures (so they couldn't even if they would have wanted to) and now the situation is being remedied.

VerbalBot · Answer

Automated notice from GMAT Club VerbalBot: 

A member just gave Kudos to this thread, showing it’s still useful. I’ve bumped it to the top so more people can benefit. Feel free to add your own questions or solutions.

 This post was generated automatically.

Economists coined the term vertical specialization in 2001 to describe

Prep Toolkit

Top 5 GMAT Debrief Videos

615 to 715 in 15 Days (Ria's Strategies)

More than Quant/Verbal Abilities: Speed vs. Accuracy

745 with Only Self-Prep and GMAT Club

From 555 to 765: 210-point Improvement

Perfect 805 Score Debrief by Julia

My Rewards

GMAT Reading Comprehension (RC) Questions

Economists coined the term vertical specialization in 2001 to describe

Prep Toolkit

615 to 715 in 15 Days (Ria's Strategies)

More than Quant/Verbal Abilities: Speed vs. Accuracy

745 with Only Self-Prep and GMAT Club

From 555 to 765: 210-point Improvement

Perfect 805 Score Debrief by Julia

My Rewards