Critical reasoning question

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Critical reasoning question

by kashefian » Thu Nov 04, 2010 11:46 pm
Which of the following best completes the passage?

Critics of Country A's trade policy with Country Z contend that Country A's low tariffs are responsible for its large trade deficit with Country Z. Government officials, however, argue that there is a trade deficit with Country Z because low labor costs in Country Z allow its companies to manufacture goods cheaply. The officials also claim that economic competition from Country Z is responsible for better prices for Country A's consumers. Therefore, they say, the most logical way to lower the trade deficit without hurting Country A's consumers is to _________.

(A) raise the tariffs on goods imported from Country Z
(B) encourage businesses in Country A to reduce their labor costs
(C) increase taxes on all goods not manufactured in Country A
(D) improve the products manufactured by Country A's companies
and market them heavily in Country A
(E) subsidize all of Country A's companies that manage to
maintain their prices at the level of the goods produced by
Country Z

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by sanabk » Fri Nov 05, 2010 6:47 am

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by kashefian » Fri Nov 05, 2010 8:19 am
I was in doubt whether to select B or E. I've selected B and as a matter of fact the answer is B (by the reference) but i'm still not totally sure why E is wrong?

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by Jon@Knewton » Fri Nov 05, 2010 10:57 am
I like this one a lot! CR questions that combine political and economic topics try to trick you into using outside information and ideas. Most prospective business school students have heard a few news stories about trade deficits and subsidies. However, if you use your own personal ideas about trade to pick an answer choice, you will frequently be led in the wrong direction.

Remember, the goal in the last sentence is to "lower the trade deficit without hurting Country A's consumers. In the prior sentence, "officials" claim that economic competition is aiding Country A's consumers. Therefore any solution for the trade deficit problem must preserve economic competition and help Country A's consumers.

We can therefore rule out answer choices A and C immediately as both would hurt country A's consumers. Increasing taxes or tariffs would necessarily lead to higher prices on consumer products. Answer choice D sounds like a lovely idea, but it is too weak to address the real problem. We are assuming that the trade deficit is a consequence of Country Z producing cheap products. Improving the quality of country A's products might help a little bit, but it will not solve the more fundamental problem of consumers wanting to purchase cheap products.

This leaves us with choices B and E. Choice E is a very typical solution to trade imbalances. In fact, many governments do subsidize domestic industries to maintain a competitive advantage. However we have to use only the information provided in the paragraph to determine the best answer. Look at answer choice E again closely and consider what it is really suggesting.

Why would subsidizing the companies that already produce goods at Country Z level prices help reduce the trade deficit? If their prices are already competitive, then they are likely already selling well within country A. Subsidizing them might help them sell more, and perhaps improve the trade deficit slightly. However this would not solve the real problem - the companies that cannot maintain their prices at Country Z levels. Those companies are still being undercut by cheaper goods from Country Z. The trade deficit will likely persist so long as this is the case. If this answer choice suggested subsidizing these less competitive companies, then it would be viable.

Answer choice B is the only one that can be derived from the passage. According to the passage, economic competition is good for consumers, and Country Z is selling its products well because it has low manufacturing costs. Therefore, country A can increase its competitiveness and reduce the trade deficit by encouraging its businesses to lower their labor costs.
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