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.


Common Information Question: 2/4

The author most likely mentions the "baker" and the "cobbler" in order to:


provide a concrete illustration of an economic principle


discuss the types of goods available during Adam Smith’s time


evaluate an example used in Smith’s Wealth of Nations


show that all trade is based on specialization


give a real world example of the importance of foreign trade

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Option(A) is correct

This is a logical structure question. It asks how certain information fits into the larger framework of the passage. The author uses the examples after giving Smith’s quote and writing "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." Thus, the baker and the cobbler illustrate the point made by Smith.

Choice B does not reflect the purpose of the lines.

The purpose is not to evaluate Smith’s book, meaning choice C is incorrect.

Choice D uses extreme language and choice E is incorrect because the lines are not a "real world example of foreign trade."

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