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Trade deficit and living standard

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Trade deficit and living standard

by kelly20_00 » Sun Jan 31, 2010 4:44 pm
Question:
Neither a rising standard of living nor balanced trade, by itself, establishes a country's ability to compete in the international marketplace. Both are required simultaneously since standards of living can rise because of growing trade deficits and trade can be balanced by means of a decline in a country's stand of living.

If the facts stated in the passage above are true, a proper test of a country's ability to be competitive is its ability to ____.

A) balance its trade while its standard of living rises.
B) balance its trade while its standard of living falls.
C) increase treade deficits while its standard of living rises.
D) decrease trade deficits while its standard of living falls.
E) keep its standard of living constant while trade deficits rise.

Answer is A.

My quesiton are:

1) I don't understand the underline sentence of the question. Why standards of living will rise when trade deficit increases? And why country's standard of living will decline when trade is balanced?

2) Why the answer is A?

Many many thanks!
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by Lance123 » Sun Jan 31, 2010 5:34 pm
kelly20_00 wrote:Question:
Neither a rising standard of living nor balanced trade, by itself, establishes a country's ability to compete in the international marketplace. Both are required simultaneously since standards of living can rise because of growing trade deficits and trade can be balanced by means of a decline in a country's stand of living.

If the facts stated in the passage above are true, a proper test of a country's ability to be competitive is its ability to ____.

A) balance its trade while its standard of living rises.
B) balance its trade while its standard of living falls.
C) increase treade deficits while its standard of living rises.
D) decrease trade deficits while its standard of living falls.
E) keep its standard of living constant while trade deficits rise.

Answer is A.

My quesiton are:

1) I don't understand the underline sentence of the question. Why standards of living will rise when trade deficit increases? And why country's standard of living will decline when trade is balanced?

2) Why the answer is A?

Many many thanks!
Remember the main point of the excerpt is related to A country's ability to compete internationally.

Standard of living determined by many different factors including consumption. A country can be importing most of its goods and services and not exporting anything close to that. Thus Standard of living rises but the company isn't exporting much in relation to its imports (trade deficit) and hence cannot compete on the international market.

This is actually happening to my home country. We are an oil rich nation, and we have failed to diversify over the years and depend greatly on oil exports only. We don't produce much of anything else and rely on importation to satisfy or product needs. We have a huge trade deficit but the government has said that Standard of living has improved.
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by kelly20_00 » Sun Jan 31, 2010 8:18 pm
Lance123,

Thanks for your explanation, but I have a question from another point of view.

Am I right to say that, when there is a trade deficit in a country, unemployment rate of the country will be increased (especially for the low-skilled labour who can't find a job in manufacturing industry). If this relationship is ture, unemployed people may find it harder to buy any goods no matter the goods are from import or export. In this situation, how can we say that the living standard of the general citizens increase?


Thanks!
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by vijay_venky » Sun Jan 31, 2010 9:43 pm
First of all, trade deficit signifies the difference between exports and imports.
Suppose the food production of a country is self-sufficient and majority of the population lives on agriculture for their living,

1. then people are not unemployed
2. country needs a lot of imports and could export only a little (because of self-sufficiency).

So this could be an example of a country where the trade deficit is large, but still standard of living of people could be rising.

Hope this helps
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by sars72 » Sun Jan 31, 2010 9:46 pm
kelly20_00 wrote:Lance123,

Thanks for your explanation, but I have a question from another point of view.

Am I right to say that, when there is a trade deficit in a country, unemployment rate of the country will be increased (especially for the low-skilled labour who can't find a job in manufacturing industry). If this relationship is ture, unemployed people may find it harder to buy any goods no matter the goods are from import or export. In this situation, how can we say that the living standard of the general citizens increase?


Thanks!
this is exactly what u shouldn't do in GMAT CR - bring ideas or facts that have not been mentioned in the premise. Stick to what's given and don't let emotional or moral judgement cloud your reasoning.
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by kelly20_00 » Mon Feb 01, 2010 9:38 am
Thank you all!
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