Many people believe that because wages are lower in developing countri

Passage breakdown

In the first sentence, the author introduces a conventional view

• Because wages are lower in developing countries, jobs in developed countries will be eliminated by competition with these developing countries.

Then, the author explains why this conventional view may be mistaken

• First, the author establishes that higher productivity leads to higher wages.
• Then, he/she states that productivity will rise in developing countries, and therefore wages will rise.

For more on this process, check out this article and our live RC videos.

Explanations for individual questions

• Question 1
• Question 2
  
  • Part 1
  • Part 2
• Question 3
  
  • Part 1
  • Part 2

D

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

increased prod => higher wages or (lower wages and) appreciated currency (= dev'd country paying more for the goods)

currency undervalued => currency not appreciated == lower wages BUT AT HIGHER PRODUCTIVITY

D: A country's productivity could increase without significantly increasing the value of its currency

D
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.

The last sentence of the passage says that ..Currencies value kept at low BUT it is difficult in where capital moves freely..i.e. author unwilling to accept that currency values can be devalued easily.

Updated time: Time taken 5 mins.

2. The primary purpose of the passage is to
C. present information relevant in evaluating a commonly held belief
"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.
blah blah
When productivity in a developing country does catch up, experience suggests that wages there will rise.
"


3. The passage suggests that if the movement of capital in the world were restricted, which of the following would be likely?
D. A country's productivity could increase without significantly increasing the value of its currency.
"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."

Having tough time with Q1.
Regards.

To answer the 1st question, following lines must be digested
"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."

from the above lines, the following can be inferred
1) if P increases W increase
2) forcibly if you are not allowing W to increase, even after the P increased, it will cause CV( of producing country)to increase. which is a burden for the importer.
3) Now alternative to this is to keep CV low so that the importer is happy and Wages also can be increased
4) point 3. is not feasible because of the free flow of currency.
5) so, if the free flow is restricted, CV can be low, wages can be high and Production can be high. that is clearly mentioned in Option D

Hi E-gmat,

Q1. I have the below doubts:

Below is my understanding from the relevant section of the passage that:
1. Productivity increases in dev countries > Wages inc
2. If wages are not increased then the currency rate appreciates which is equivalent to increased wages
3. Because in a free flowing economy currency can't be undervalued
Conclusion: currency rate could increase leading to increase in wages.

I do not understand how productivity is increasing with the increase in wage. Do we have reverse relationship here as per point 1. Please explain.

Q2. The first para talks about the factors that causes differences between the developing and developed countries.
The second para shares a chain reaction of how productivity and wage are interdependent on each other and how they define the wages along with some independent factors about currency appreciation and its effect on wages
Main point: The argument talks about factors causing the difference in wages between developed and developing countries.
Can you please help me how the argument reaches the abstract main point. I am unable to figure out.

Hi Nishat,

Thanks for posting your doubt here.

Reply for Q1. Take a look the the following excerpt from the passage: 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.

The passage states that in developing countries, when productivity increases, then wages increase too. But many developing countries have deliberately kept the wages low. When this is done, then the value of the currency of that nation increases. But if the capital is allowed to move freely, then productivity could increase, but that would not lead to the increase in the value of the currency pf that nation. Hence, Choice D is the correct answer.

Reply for Q2. The opening sentence of the passage says: 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.

This is the point that the author elaborates upon. He goes on to say that technological advancements are catching up in developing nations that will lead to increase in productivity as well as wages. Hence, the developing countries will also have the same job opportunities as the developed nations. This is the reason why Choice C is the correct answer.

Hope this helps.
Thanks.
Shraddha

The passage starts with a claim and then it goes on to explain by providing details that the way it's thought it's not actually so. And that's the primary purpose of the passage. Now let's dive in to the options

2. The primary purpose of the passage is to
A. identify the origin of a common misconception --> There's no discussion of some origin or the root cause of anything. Chuck it out!
B. discuss the implications of a generally accepted principle --> There are no deductions or implications rather the passage explains details about a commonly held belief (evident from the first line : "many people believe that because wages..."). Chuck it out !
C. present information relevant in evaluating a commonly held belief --> Perfect ! This option shows that passage tries to evaluate a commonly held belief by presenting details/explanations. Answer
D. defend a controversial assertion against a variety of counterarguments --> There is no controversy discussed as such. Chuck it out !
E. explain under what circumstances a well-known phenomenon occurs --> A well known phenomenon ? Simply chuck it out !


To answer the below question we need to understand the lines where the same has been mentioned.
"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."


So basically it says in a freely moving capital, if productivity increases, then wages increases, and subsequently currency value will appreciate. THe question asks us what happens if the capital is not freely movable ? Simple the question of currency appreciation/ depreciation is out of the picture. Productivity could increase without the significant increase in currency value.

3. 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. --> advanced technology is not discussed in the context of restricting/freely flowing capital
B. Developed countries could compete more effectively for jobs with developing countries. --> same here, no mention of jobs.
C. A country's average wages could increase without significantly increasing the sophistication of its technology or the value of its currency. --> to some extent correct but then the term productivity is missing and also the sophistication of the technology is not discussed in the context of restricting /freely flowing capital.
D. A country's productivity could increase without significantly increasing the value of its currency. --> Bang on! This is what exactly we can deduce.
E. Workers could obtain higher wages by increasing their productivity. --> higher wages vs productivity exists even when currency appreciation is discussed.

Took 6 mins , 30 seconds , including 1 mins 40 seconds to read the passage
-The author is concerned with providing us information which will helps us evaluate whether a commonly held belief is true
-He also talks about how productivity and economy are inter related in developing and developed countries

1. "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 "
Answer D

2.
Option (A) – Incorrect – the author does not explicitly state that there is a misconception. He is merely seeking to provide information
Option (B)- Incorrect- The author is not discussing the implications but rather providing information
Option (C) – Correct – This is an exact purpose of the passage
Option (D)- Incorrect – No counter arguments are presented in the passage
Option (E)- Incorrect – The author is not claiming that a certain phenomenon occurs because of certain circumstances but rather providing information on evaluating that phenomenon

3.
"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."
The above suggests that if the movement of capital were restricted, the currencies would continue to be undervalued while at the same time ensuring that productivity is still increasing. Hence option(D) is the right answer.

Wanted an explanation for the question "The passage suggests that if the movement of cpital in the world were restricted, which of the following would be likely ?"

With regards to Q1, I am still not clear why D is right - where was the average productivity element deduced? Do request you to put out your understanding of ques/ method of identifying the inference of D. Thank you!

GMATNinja GMATNinjaTwo

GMATNinjaTwo

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.

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.

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!

The key to this question is in this chunk of the passage:

"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."

This tells us that wages are influenced by average productivity in a country's economy. So if one firm has raised its productivity but, on average, most other firms in the country have low productivity, wages might remain low even at the firm that has raised its productivity.

In other words, if one firm raises its productivity but the average productivity of the workers in the country has not risen, then that one firm could continue to pay low wages. This is exactly what choice (D) says.

I hope that helps!

5:11.
Got 2/3.

I couldn't understand the first answer.
"Some individual firms in developing countries have raised their productivity but kept their wages low".
This means that their productivity has increased.Right?

Yes, that's right. I hope our earlier post explaining why choice (D) is correct is helpful as well.

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


Now lets see fro the passage since the movement of capital in the capital is NOT restricted these days so it leads to wage rise.However if we dont allow the wages tp rise significantly then this will lead to appreaciation in currency which is equal to wage rise.(PPP understood-Purchase Power Parity)

Notice..The option doesnt say reducing value of cuurency or not increasing..It mentions the word SIGNIFICANTLY very smartly..and uses the word COULD.
So this definitely could be a possibility that if movement of capital is restricted it leads to somewhat increase in productivity and approaciation of currency.


I guess the catch is COULD and SIGNIFICANT words here which renders option D as a possibility.


E.Option E cannot not necessarily be true.This cannot be true untill and unless it is true for the aggregate of the country as a whole.The passage already cites
cases where few firms had increased productivity but it didn't lead to overall increase in wages.


Press Kudos if it helps !!