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GMATPREP ChallengeQ -Many people believe that because wages

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Re: GMATPREP ChallengeQ -Many people believe that because wages [#permalink]

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New post 19 Oct 2017, 21:28
zaidq1 wrote:
GMATNinja
Sir,
could you please help me with the below doubts for question 3.

"Developed countries could compete more effectively for jobs with developing countries."

if capital movement is restricted in developing countries, the productivity will not be able to increase value of the currency and hence will lead to an increase in wages.
now, if the wages in developing countries are increased, the developed countries will become more effective in competing, as the one of the reason why developing countries were gaining jobs was because of low wages. so b can be a contender.

"Workers could obtain higher wages by increasing their productivity."

if currency is kept undervalued the productivity increase has to cause an increase in wages. so why is E wrong.

Quote:
if capital movement is restricted in developing countries, the productivity will not be able to increase value of the currency and hence will lead to an increase in wages.
This is not necessarily true. We are told that IF we have productivity improvements, we will likely see an increase in wages. That still leaves the possibility that we could have productivity improvements without an increase in wages. Now, if we go with the likely scenario where wages should increase BUT the wages are not allowed to rise, THEN the value of the country's currency will appreciate, unless the country manages to deliberately undervalue their currency. But deliberately undervaluing currency is hard to do because capital moves more freely.

So if capital were restricted and could NOT move freely, it would be hard for a country to deliberately undervalue its currency. This means that we could have productivity improvements WITHOUT an increase in wages and also WITHOUT an appreciate in the value of the country's currency, which is exactly what choice (D) says.

As for choice (B), just because we have productivity improvements and NO increase in the value of the currency does not mean that wages will increase. Theoretically, if wages were not allowed to rise and the movement of capital were restricted, we could have productivity improvements with neither an increase in wages nor an appreciation in the value of the currency.

Quote:
if currency is kept undervalued the productivity increase has to cause an increase in wages
This logic is not valid for the same reason, so choice (E) should also be eliminated.

Refer to the following portions further supporting choice (D):

  • "In a developing country's economy as a whole, productivity improvements in goods traded internationally are likely to cause an increase in wages." - Note that this does not say that wages will DEFINITELY increase with productivity improvements.
  • If the productivity improvements should cause wages to increase BUT "wages are not allowed to rise, the value of the country's currency will appreciate, which (from the developed countries' point of view) is the equivalent of increased wages in the developing country." - This portion refers to the LIKELY scenario in which wages should increase with productivity. If, in that case, wages are NOT allowed to rise, the value of the currency will appreciate.
  • Countries can try to deliberately undervalue their currency, but "that is now much harder to do in a world where capital moves more freely."

I hope that helps!
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Re: GMATPREP ChallengeQ -Many people believe that because wages   [#permalink] 19 Oct 2017, 21:28

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