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Many people believe that because wages are lower in [#permalink]
22 Jun 2013, 23:50
Many people believe that because wages are lower in developing countries than in developed countries, competition from developing countries in goods traded internationally will soon eliminate large numbers of jobs in developed countries. Currently, developed countries' advanced technology results in higher productivity, which accounts for their higher wages. Advanced technology is being transferred ever more speedily across borders, but even with the latest technology, productivity and wages in developing countries will remain lower than in developed countries for many years because developed countries have better infrastructure and better-educated workers. When productivity in a developing country does catch up, experience suggests that wages there will rise. Some individual firms in developing countries have raised their productivity but kept their wages (which are influenced by average productivity in the country's economy) low. However, in a developing country's economy as a whole, productivity improvements in goods traded internationally are likely to cause an increase in wages. Furthermore, if 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. And although in the past a few countries have deliberately kept their currencies undervalued, that is now much harder to do in a world where capital moves more freely.
1. The passage suggests that if the movement of capital in the world were restricted, which of the following would be likely? A Advanced technology could move more quickly from developed countries to developing countries. B Developed countries could compete more effectively for jobs with developing countries. C A country's average wages could increase without significantly increasing the sophistication of its technology or the value of its currency. D A country's productivity could increase without significantly increasing the value of its currency. E Workers could obtain higher wages by increasing their productivity.
I'm finding it too difficult to infer the correct answer from the passage. Please give full explanation for the answer. thank you...
The passage states that when productivity goes up, it generally drives up wages. If wages are held down, then the value of the currency goes up. In the last sentence, the author states that the free movement of capital makes it hard for a country to deliberately keep its currency undervalued.
So let's say Country X increases its productivity and holds wages down. Normally this would increase the value of the currency. However, if capital does not move freely, Country X may also be able to hold down the value of its currency. We now have a case in which productivity increases without an increase in the value of the currency.
Dmitry Farber | Manhattan GMAT Instructor | New York