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

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New post Updated on: 26 Sep 2019, 23:50
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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

Originally posted by globaldesi on 26 Jan 2019, 03:02.
Last edited by SajjadAhmad on 26 Sep 2019, 23:50, edited 3 times in total.
Updated - Complete topic (691).
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Re: Economists use the phrase trade deficit to describe a condition when t  [#permalink]

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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]

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New post 14 Apr 2019, 04:24
All correct in 7 mins 15 seconds including 3 mins 30 seconds to read
Para 1- trade deficit- a sign of weakness?
Para 2- misconception 1- trade deficits cause an increase in unemployment
Para 3- misconception 2- drain the wealth of a nation

1. The author's main point is that
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- Correct

2. Which of the following, if true, would strengthen the author's conclusion that greater assets mean higher productivity?
e) A country's assets are typically invested in domestic businesses.- Correct

Having greater assets means that the country has more money to invest in business, which in turn raises productivity.

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.- Correct

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.

4. According to the passage, which of the following is true of trade deficits?
b) Trade deficits occur when a country has a capital account surplus and a current account deficit.- Correct

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.
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New post 20 Apr 2019, 06:56
2
Official Answers:

1.
The author's main goal is to explain and correct misconceptions about national trade deficits. The two main misconceptions are that trade deficits increase unemployment and drain a nation's wealth. (D) expresses this same thought and is the correct answer.

Choice (A) focuses too narrowly on a detail in the third paragraph and is therefore incorrect. Although the author does touch on some possible benefits of trade deficits, choice (B) is incorrect because the author's goal is not to encourage nations' economic advisors to create trade deficits. Rather, the aim is show how the two common misconceptions are based on a faulty understanding of trade deficits' effects. Choice (C) is also a distortion because it focuses on the benefits of trade deficits (instead of explaining misconceptions), and (C) also ties the reasoning to a detail in the second paragraph. The correct answer to a Global question should not hinge on any single detail. Lastly, choice (E) is out of scope as its topic is global economic systems, not misconceptions about trade deficits as stated in the passage.

2.
The phrase greater assets leads us directly to paragraph three. The author says that greater assets leads to greater productivity. We need to find an answer choice that makes this conclusion more likely to be true which leads us to choice (E). If a country is investing more in its domestic businesses they are more likely to be productive.

Choice (A) is a 180 from the passage. (B) and (D) are outside of the scope of the passage. Answer (C) may be true, but doesn't strengthen the conclusion.

3.
The second sentence of paragraph 2 states: “The problem with this analysis is that it confuses the loss of certain jobs with a decrease in the total number of jobs.” The misunderstanding here is over the parts and the whole. While trade deficits might cause a decrease in a specific type of job, they do not decrease the number of jobs overall, which means that there is an increase of other jobs. For example, a trade deficit might cause a nation to lose a large number of textile manufacturing jobs but at the same time create smaller increases in a variety of textile-related jobs, such as designers, sales, advertising, and technological development of textile machinery.

Choice (A) is correct because the situation is the same type of confusion: parts versus the whole. The investors sell their stock in the company because they mistakenly believe the dip in sales of one product is a signal of decreased value; however, the company's overall profits rose because it sold other products.

Choice (B) is incorrect because the discrepancy is over the rate of pay. On the surface, the baby sitter's decision to work the family with three children instead of the family with two children is confusing because you would expect the babysitter to be paid more for watching more children. (C) is the opposite. The movie-goer gives more weight to the "big picture" of the film's critical reception and less weight to a single bad review. In choice (D), the restaurant should increase the prices of its appetizers to encourage people to order fewer appetizers, if it worried that the kitchen will not be able to handle all of the orders. The situation presents a confusion over supply and demand, which is not analogous to the situation in the passage. Choice (E) is also incorrect because it is a misunderstanding of time versus work completed, another conflict of rate. The construction company mistakenly believed that more time working would increase productivity, but it did not consider the rate of work, which apparently dropped when workers had shorter breaks.

4.
The phrase "according to the passage" is a direct give-away this is a Detail question. This question paragraph three and the understanding of the current account and capital account. Answer choice (B) is just another way to state the definition of a trade deficit.

Answers (A), (D), and (E) are outside of the scope of the argument. Answer choice (C) is a 180 from the passage.
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