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Economists use the phrase trade deficit to describe a condition when t

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New post Updated on: 12 Mar 2019, 06:44
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New Project RC Butler 2019 - Practice 2 RC Passages Everyday
Passage # 80, Date : 12-MAR-2019
This post is a part of New Project RC Butler 2019. Click here for Details


Economists use the phrase trade deficit to describe a condition when the dollar value of an economy's imports exceed the dollar value of an economy's exports. Some political analysts believe that trade deficits are a sign of weakness in an economy. They opine that trade deficits cause an economy to lose jobs and drain the wealth of a nation. A closer analysis, however, reveals that trade deficits might not be a cause of economic weakness.

One misconception is that trade deficits cause an increase in unemployment. The problem with this analysis is that it confuses the loss of certain jobs with a decrease in the total number of jobs. For example, when two nations drop their barriers to trade, certain industries in one country might incur losses in the new more competitive market, resulting in a job loss. But each nation will move more efficiently towards production in areas of comparative advantage, while the consumers of each nation will be in a position to purchase goods at the most competitive prices. While it is beneficial for a nation or region to have comparative advantages in profitable sectors of the economy, efforts to offset the lack of comparative advantage by protecting an economy will only lead to inefficiently high subsidies, whether from a government or in the form of higher prices paid by consumers.

Another misconception surrounding trade deficits is that they drain the wealth of a nation. However, just because money flows from an economy doesn't mean that the economy becomes weaker. Trade deficits are offset by capital account surpluses. The current account measures the various flows of goods across countries while the capital account refers to a country's assets. Countries that have current account surpluses will have capital account deficits, and vice versa. This capital account surplus means that more assets in the form of cash, property, and other assets are flowing into the home country. Having greater assets means that the country has more money to invest in business, which in turn raises productivity.
1. The author's main point is that

a) although trade deficits entail current account deficits, the countervailing capital account surplus creates substantial economic benefits
b) every nation should aim to incur large trade deficits because, contrary to common opinion, these deficits actually improve the economy
c) the strength of a nation's economy depends on the size of its trade deficits with other nations whose high subsidies create inflated prices for their consumers
d) the claim that a trade deficit creates an unhealthy economy relies on two common misconceptions about a trade deficit's effects on jobs and a nation's wealth
e) because global economic systems are so complex, misconceptions about employment rate, a nation's wealth, and especially trade deficits are common



2. Which of the following, if true, would strengthen the author's conclusion that greater assets mean higher productivity?

a) The assets that a country builds up when the economy is healthy are likely to be invested abroad.
b) The more assets a country has, the more its citizens can save to purchase homes.
c) Each current account surplus is offset by an equal capital account deficit, and vice versa.
d) When assets flow into a capital account, they are owned by private enterprise.
e) A country's assets are typically invested in domestic businesses.



3. The misunderstanding addressed in the second sentence of paragraph 2 is most similar to which one of the following situations?

a) Investors in a company sell its stock when sales of a certain product dip, even though the company's quarterly profits rose.
b) A babysitter decides to work for a family with three children instead of a family with two children, even though the pay is same.
c) A movie-goer avoids seeing a film that received only one poor review, although it was from a prominent critic, and instead sees a film that got many bad reviews.
d) To ensure the kitchen will be able to handle orders, a restaurant decreases the prices of its appetizers after it began serving food to guests sitting at the bar.
e) In spite of a construction company's new policy of shorter breaks for its workers, productivity drops.



4. According to the passage, which of the following is true of trade deficits?

a) Trade deficits are exclusive to the United States and other developed countries.
b) Trade deficits occur when a country has a capital account surplus and a current account deficit.
c) Trade deficits can lead to budget deficits.
d) Countries should work to prevent trade deficits.
e) Political analysts and economists are in agreement about the consequences of a trade deficit.




Difficulty Level: 600

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Originally posted by globaldesi on 26 Jan 2019, 03:02.
Last edited by SajjadAhmad on 12 Mar 2019, 06:44, edited 2 times in total.
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New post 09 Mar 2019, 21:44
Can anybody explain why the answer to question no 3 is A?
I went with C, not because i thought that it was the right option but because that was the only choice left.Striked out all the remaining option including A.
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New post 12 Mar 2019, 07:31
+1 Kudos to posts containing answer explanations of all questions
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New post 12 Mar 2019, 08:55
1
1. The author's main point is that

a) although trade deficits entail current account deficits, the countervailing capital account surplus creates substantial economic benefits
b) every nation should aim to incur large trade deficits because, contrary to common opinion, these deficits actually improve the economy
c) the strength of a nation's economy depends on the size of its trade deficits with other nations whose high subsidies create inflated prices for their consumers
d) the claim that a trade deficit creates an unhealthy economy relies on two common misconceptions about a trade deficit's effects on jobs and a nation's wealth This clearly is the best answer choice as this para-phases the overall structure of the passage
e) because global economic systems are so complex, misconceptions about employment rate, a nation's wealth, and especially trade deficits are common

2. Which of the following, if true, would strengthen the author's conclusion that greater assets mean higher productivity?

a) The assets that a country builds up when the economy is healthy are likely to be invested abroad.
b) The more assets a country has, the more its citizens can save to purchase homes.
c) Each current account surplus is offset by an equal capital account deficit, and vice versa.
d) When assets flow into a capital account, they are owned by private enterprise.
e) A country's assets are typically invested in domestic businesses Having greater assets means that the country has more money to invest in business, which in turn raises productivity. The last line from the passage clearly validates the option.

3. The misunderstanding addressed in the second sentence of paragraph 2 is most similar to which one of the following situations?
The first misconception is the generalization of the outcome of a certain event as the outcome of the entire process.Only A does that.
a) Investors in a company sell its stock when sales of a certain product dip, even though the company's quarterly profits rose.
b) A babysitter decides to work for a family with three children instead of a family with two children, even though the pay is same.
c) A movie-goer avoids seeing a film that received only one poor review, although it was from a prominent critic, and instead sees a film that got many bad reviews.
d) To ensure the kitchen will be able to handle orders, a restaurant decreases the prices of its appetizers after it began serving food to guests sitting at the bar.
e) In spite of a construction company's new policy of shorter breaks for its workers, productivity drops.

4. According to the passage, which of the following is true of trade deficits?

a) Trade deficits are exclusive to the United States and other developed countries.
b) Trade deficits occur when a country has a capital account surplus and a current account deficit.
c) Trade deficits can lead to budget deficits.
d) Countries should work to prevent trade deficits.
e) Political analysts and economists are in agreement about the consequences of a trade deficit.
The third passage states that : capital account surplus<-->a current account deficit<-->more business investment capital .. Hence trade deficit actually doesn't drain the economy

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New post 13 Mar 2019, 03:32
can anyone please explain me answer of 3rd question !!!!
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New post 13 Mar 2019, 03:52
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Hello rajasbhandari

Quote:
The problem with this analysis is that it confuses the loss of certain jobs with a decrease in the total number of jobs.


The theme of 3rd question is that you cannot blame all the population by taking one or few persons as sample.

Option C says that

c) A movie-goer avoids seeing a film that received only one poor review, although it was from a prominent critic, and instead sees a film that got many bad reviews.

The stroked text make this option wrong it tells that particular person sees films with many reviews.

Hope it helps
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New post 15 Mar 2019, 23:50
Can any one please help me with Question 4? How can we interpret that option B is the answer
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New post 16 Mar 2019, 02:58
Read these lines from the passage

Quote:
Trade deficits are offset by capital account surpluses. The current account measures the various flows of goods across countries while the capital account refers to a country's assets. Countries that have current account surpluses will have capital account deficits, and vice versa.


This is basically an inference question and we have no straight text to prove it rather we need to interpret the related text and conclude what Must be true based on the text.

The above quoted text implies that if a country didn't have capital surpluses then they are spending it. As a country has capital deficit it means it is spending and its current account is in surplus so when it has current account in surplus it has no trade deficit.
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Re: Economists use the phrase trade deficit to describe a condition when t   [#permalink] 16 Mar 2019, 02:58
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