Economists coined the term vertical specialization in 2001 to describe a country's use of imported intermediate parts or services as...
GMAT Reading Comprehension : (RC) Questions
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Economists coined the term vertical specialization in 2001 to describe a country's use of imported intermediate parts or services as inputs in producing goods the country later exports—a common occurrence today in global trade. Traditionally, although exports were deducted from imports in calculating gross domestic product (GDP), policymakers did not have data specifically addressing the import content of exports. Today, new trade statistics are being developed to remedy this. These statistics show the national value-added content of exports after all imported input goods and business services have been subtracted.
The case of Sweden is illustrative. A 2010 report from the Swedish National Board of Trade examines data about manufacturing and services inputs and outputs for the Swedish economy in 1995 and 2005 and finds that the conventional gross trade figures inflate the value of exports in relation to GDP. The report finds that 33.5 percent of the total value of Swedish exports consisted of imported goods and services used as inputs. Consequently, when official statistics claim that the 2005 export share of Swedish GDP was 49 percent, this exaggerates the contribution of exports to the Swedish economy. The real contribution is the value added in the exports. It is therefore more accurate to say that approximately one-third of Swedish GDP is generated by foreign demand, not half. Thus, Sweden is considerably less dependent on exports than commonly believed.
"Made in Sweden" can thus seem an anachronism. It is, however, not equally anachronistic for all sectors. National aggregates hide huge sectoral differences in import content, ranging from sectors with very little import content to sectors where almost all production consists of imports. Generally, production of services requires fewer inputs than production of goods; consequently services are also less dependent on imported inputs. A 2011 study finds that the vertical specialization of manufacturing sectors ranges from 15 percent (electricity, gas, and water) to 90 percent (petroleum), whereas for services the range is from around 8 percent (finance and insurance) to around 30 percent (transport and storage). This shows that, as a proportion of total exports, export of services contributes more to Sweden's economy than the gross trade data imply.
Ques. 1/4
Which of the following is a claim made in the passage about exports from Sweden in 1995 and 2005?
Solution
1. Passage Analysis:
Progressive Passage Analysis
| Text from Passage | Analysis |
|---|---|
| Economists coined the term vertical specialization in 2001 to describe a country's use of imported intermediate parts or services as inputs in producing goods the country later exports—a common occurrence today in global trade. | What it says: Countries import parts/services and use them to make products they then export. This happens a lot now. What it does: Introduces the key concept we'll be analyzing Source/Type: Factual definition from economists Connection to Previous Sentences: This is our starting point - no previous information to connect to What We Know So Far: There's a trade pattern called vertical specialization What We Don't Know Yet: Why this matters, what problems it creates, specific examples Visualization: Country A imports: car engines, electronics, steel ↓ Uses these to make: finished cars ↓ Exports: those finished cars Reading Strategy Insight: The author helpfully defines the key term upfront and tells us it's common - this suggests the passage will explain why this matters. |
| Traditionally, although exports were deducted from imports in calculating gross domestic product (GDP), policymakers did not have data specifically addressing the import content of exports. | What it says: In the past, when calculating GDP, we subtracted imports from exports, but we didn't track how much of our exports were actually made from imported parts. What it does: Explains the measurement problem that vertical specialization creates Source/Type: Factual description of traditional economic measurement Connection to Previous Sentences: This builds on sentence 1 by explaining WHY vertical specialization matters - it creates a measurement problem. If countries import parts to make exports, traditional GDP calculations might be misleading. Visualization: Traditional GDP calculation: Total Exports: $100 billion Total Imports: $80 billion Net contribution: $20 billion But we didn't know: How much of that $100 billion in exports was actually made from imported parts? Reading Strategy Insight: This sentence sets up a "problem-solution" structure. We now know there's a measurement issue that needs fixing. |
| Today, new trade statistics are being developed to remedy this. | What it says: Now we're creating better statistics to solve this measurement problem. What it does: Provides the solution to the problem introduced in sentence 2 Source/Type: Factual statement about current developments Connection to Previous Sentences: This directly solves the problem from sentence 2. The author is following a clear problem-solution pattern: vertical specialization exists (sentence 1) → old measurements couldn't handle it (sentence 2) → new measurements are being developed (sentence 3) What We Know So Far: Vertical specialization exists, old GDP calculations had flaws, new statistics are being developed What We Don't Know Yet: What these new statistics show, specific examples Reading Strategy Insight: Feel confident here - this is a classic problem-solution setup, not added complexity. |
| These statistics show the national value-added content of exports after all imported input goods and business services have been subtracted. | What it says: The new statistics calculate what exports are really worth to a country by subtracting all the imported parts that went into making them. What it does: Explains exactly what the new statistics measure Source/Type: Factual description of the new measurement method Connection to Previous Sentences: This elaborates on "new trade statistics" from sentence 3, giving us the specific method. This is NOT new information - it's explaining HOW the solution works. Visualization: Traditional view: Exports = $100 billion contribution to economy ↓ New statistics method: Total Export Value: $100 billion MINUS Imported inputs: $40 billion = TRUE national value-added: $60 billion Reading Strategy Insight: This is elaboration, not complication. The author is walking us through the solution step-by-step. |
| The case of Sweden is illustrative. | What it says: Sweden is a good example of this concept. What it does: Signals that we're about to get a concrete example Source/Type: Author's transition to example Connection to Previous Sentences: This transitions from the general concept (sentences 1-4) to a specific real-world example. The author is about to make the abstract concept concrete. Reading Strategy Insight: This is a relief signal! Examples make concepts easier to understand, not harder. Expect the next few sentences to illustrate what we've learned with real numbers. |
| A 2010 report from the Swedish National Board of Trade examines data about manufacturing and services inputs and outputs for the Swedish economy in 1995 and 2005 and finds that the conventional gross trade figures inflate the value of exports in relation to GDP. | What it says: A Swedish government study looked at their economy and found that traditional trade measurements make exports look more important than they really are. What it does: Introduces the Swedish study and its main finding Source/Type: Research findings from Swedish National Board of Trade Connection to Previous Sentences: This provides the promised Swedish example. It confirms what sentences 2-4 told us: traditional measurements are misleading because they don't account for imported inputs. Visualization: What traditional statistics showed: Exports very important to Swedish economy What the 2010 study found: Traditional numbers were inflated Reality: Exports less important than they appeared Reading Strategy Insight: This is confirmation, not new information. The Swedish study proves the point made in sentences 2-4. |
| The report finds that 33.5 percent of the total value of Swedish exports consisted of imported goods and services used as inputs. | What it says: About one-third of everything Sweden exports was actually made from imported parts and services. What it does: Provides the specific data that supports the previous sentence's claim Source/Type: Specific research data from the Swedish study Connection to Previous Sentences: This gives us the concrete numbers behind the claim that "conventional gross trade figures inflate the value of exports." If 33.5% of exports are really imports, then traditional measurements are indeed misleading. Visualization: Swedish exports = $100 billion (traditional measure) But $33.5 billion of that was actually imported parts So true Swedish value-added = only $66.5 billion Reading Strategy Insight: Now we have concrete proof with real numbers. This makes the abstract concept from earlier very tangible. |
| Consequently, when official statistics claim that the 2005 export share of Swedish GDP was 49 percent, this exaggerates the contribution of exports to the Swedish economy. | What it says: Official numbers said exports were 49% of Sweden's economy, but this number is too high because it doesn't account for imported inputs. What it does: Shows the practical impact of the measurement problem using Sweden's actual GDP data Source/Type: Analysis of official Swedish economic data Connection to Previous Sentences: This applies the 33.5% finding from the previous sentence to Sweden's actual GDP statistics. It's showing us the real-world consequence of the measurement problem. Visualization: Official claim: Exports = 49% of Swedish GDP Problem: 33.5% of exports are really imported inputs Result: The 49% figure exaggerates export importance Reading Strategy Insight: This continues the same example with familiar numbers. We're seeing the same concept applied step-by-step. |
| The real contribution is the value added in the exports. It is therefore more accurate to say that approximately one-third of Swedish GDP is generated by foreign demand, not half. | What it says: The true contribution should only count the Swedish value-added. So exports are really about 33% of Sweden's economy, not 49%. What it does: Provides the corrected, more accurate measurement Source/Type: Author's analysis of the corrected data Connection to Previous Sentences: This gives us the final, corrected number. We went from 49% (traditional measure) to approximately 33% (corrected measure). This is the payoff of the new measurement method described in sentences 3-4. Visualization: Traditional measurement: Exports = 49% of GDP ↓ Apply new method ↓ Corrected measurement: Exports = ~33% of GDP Difference: 16 percentage points lower! Reading Strategy Insight: This is the conclusion of our Swedish example. We now have a complete before-and-after comparison with concrete numbers. |
| Thus, Sweden is considerably less dependent on exports than commonly believed. | What it says: Sweden doesn't rely on exports as much as people think. What it does: Summarizes the main takeaway from the Swedish example in simple language Source/Type: Author's conclusion Connection to Previous Sentences: This is pure restatement and simplification. The author is helping us by summarizing the complex Swedish data (33.5% imported inputs, 49% vs. 33% GDP contribution) into one simple conclusion. What We Know So Far: Vertical specialization exists, old measurements were flawed, new measurements correct this, Sweden is a prime example where exports were overvalued What We Don't Know Yet: Whether this applies to other countries, sectoral differences Reading Strategy Insight: Feel relieved here - this is simplification, not new complexity. The author is giving us the simple takeaway. |
Answer Choices Explained
A
The traditional gross trade figures are based on incorrect calculations of the total value of the products exported.
Why It's Wrong:
- The passage never suggests that gross trade figures incorrectly calculate total export values
- The problem identified is about interpretation and representation, not mathematical errors in calculating totals
- The 49% figure for Swedish GDP export share appears to be accurately calculated - the issue is what it represents
B
The most frequently used gross trade figures do not accurately report the total value of exported products and services.
Why It's Wrong:
- Similar to choice A, this focuses on accuracy of total values rather than representation of domestic contribution
- The passage doesn't question the reported total values of exports
- The issue is about what those accurate totals actually mean for understanding economic dependence
C
The gross trade figures traditionally provided tend to misrepresent what contribution domestic production makes to exports.
Why It's Right:
- This directly matches the passage's central claim about gross trade figures
- The passage states that traditional figures "inflate the value of exports in relation to GDP" because they don't account for imported inputs
- The core problem identified is that these figures misrepresent how much domestic production actually contributes to exports
D
Imports that are used as inputs in products that are domestically produced are not recorded as imports in the most commonly used gross trade figures.
Why It's Wrong:
- The passage doesn't suggest that imports used as inputs aren't recorded as imports
- The problem is about tracking which imports become part of exports, not about recording imports generally
- This misunderstands the measurement issue - it's about connecting import data to export data, not failing to record imports
E
The inflation-adjusted value of products exported would show them to be a larger proportion of GDP than is indicated by the gross trade figures that are normally used.
Why It's Wrong:
- This choice discusses inflation-adjusted values, but the passage doesn't mention inflation adjustment
- The passage actually argues that properly accounting for imported inputs would show exports to be a SMALLER proportion of GDP (33% vs 49%)
- This choice gets the direction of the correction backwards
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