Reading Comprehension
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Common Information

Economists have long recognized a persistent and unfounded belief among the population which has come to be known as the anti-foreign bias. As a result of this bias, most people systematically underestimate the economic benefits of interactions with foreign nations. Some psychologists believe that this bias is rooted in a natural distrust of the "other," while others believe that a form of folk wisdom, seemingly in accord with common sense but nonetheless incorrect, explains the bias. This wisdom asserts that in any transaction there is a winner and a loser and any foreign nation that wants to engage in trade must be doing so because it seeks its own advantage. But nothing could be further from truth.

No less an authority than Adam Smith, one of the fathers of the modern free market system, spoke glowingly of foreign trade in his influential treatise Wealth of Nations. "What is prudence in the conduct of every private family, can scarce be folly in a great kingdom," said Smith. His point is simple. A baker trades his bread to the cobbler for shoes and both men benefit from the trade because of the value of specialization. The same principle works for nations. Even more startling, a basic economic theorem, the Law of Comparative Advantage, states that mutually beneficial trade is possible even if one nation is less productive than the other.

Suppose a citizen of Country X can produce either 10 computers or five bushels of wheat and a citizen of Country Y can produce either three computers or two bushels of wheat. If one citizen from Country X switches from producing wheat to computers and three citizens from Country Y switch from producing computers to wheat, there is a net gain of one computer and one bushel of wheat.

Q.

Common Information Question: 1/4

The passage is primarily concerned with which of the following?

 A.

Arguing for an increase in trade with foreign nations.

 B.

Providing a historical context for a long-standing belief.

 C.

Demonstrating the fallacy of a particular way of thinking.

 D.

Illustrating an economic principle through an example.

 E.

Describing Adam Smith’s contributions to the theory of trade.

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Solution:
Option(C) is correct

This is a main idea question. An active reading of the passage reveals the following major points:

(1) Economists have long recognized a persistent and unfounded belief among the population which has come to be known as the anti-foreign bias.

(2) No less an authority than Adam Smith, one of the fathers of the modern free market system, spoke glowingly of foreign trade in his influential treatise Wealth of Nations.

(3) Even more startling, a basic economic theorem, the Law of Comparative Advantage, states that mutually beneficial trade is possible even if one nation is less productive than the other.

With these key points, the author shows that foreign trade can be a mutually beneficial exchange despite the belief of the population. The passage is not arguing for an increase in trade, so choice A is out.

The historical context— Adam Smith—refutes the belief of the population, so eliminate choice B.

Choice D is too narrow. The reason the author illustrates the economic principle is to show the fallacy of the belief.

Choice E is also too narrow because it only focuses on Adam Smith.


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