RC: Many people believe that because wages are lower...

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I have a question regarding the below question from an official GMAT practice exam. Can someone tell me why choice D is correct?

PASSAGE:

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.

QUESTION:

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.

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by abhasjha » Tue Dec 02, 2014 10:28 am
Dear Melaine ,

Read these two lines:

(1)However, in a developing country's economy as a whole, productivity improvements in goods traded internationally are likely to cause an increase in wages.

(2) 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

what happens when movement of capital is restricted ? The currency in developing country will remain undervalued .so this gives you the second part of answer D which says "without significantly increasing the value of its currency"..

Now refer to the passage where it says - " Advanced technology is being transferred ever more speedily across borders"

(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)

Now you can easily understand why the option D is correct which says -" A country's productivity could increase without significantly increasing the value of its currency"

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by me_1234 » Tue Dec 02, 2014 6:00 pm
Thank you for the feedback, but I'm still not sold on why answers B, C, or E don't work? Seems like D is a big enough inference that one of these three could work. Can you please help to further explain?

Sincerely

Melanie

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by abhasjha » Wed Dec 03, 2014 11:59 pm
If capital movement is restricted (as mentioned in the question) .... firms in developing coutries would be able to keep their wages low

( refering to the lines " 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.)

Productivity in developing countries will continue to get enhanced due to transfer of technology and the question has put no restriction on transfer of technology .

Now when the productivity increases and wages remain low in devloping countries then devloped countries will never be able to compete more effectively for jobs with devloping countries .

Option B is telling us just the opposite - " Developed countries could compete more effectively for jobs with developing countries."

so option B is ruled out .

Similarly when the movement of capital restricted this helps in keeping the average wage lower
and option C tells Just the opposite - " A country's average wages could increase without significantly increasing the sophistication of its technology or the value of its currency"

so option C is ruled out .

The passage goes on to say - "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 when capital flow is restricted then wages will remain low as currency will be undervalued .Agian this is what some firms are doing as mentioned in the passage .

option E tells just the opposite - " Workers could obtain higher wages by increasing their productivity."

so option E is ruled out .

Even if a single word in a option choice is wrong or exagerration of what is mentioned in passage then that answer choice is wrong . This trick is oftenly used by the creators of the test as they know that test takers are rushing against the time and if they keep their eyes off an accident is likely to happen .

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by me_1234 » Thu Dec 04, 2014 6:14 pm
Thank you, that was really helpful!