Reading Passage Question
Most people associate bartering with poor or undeveloped societies, or with small, infrequent, and informal exchanges made within economies that use traditional currency. But bartering has also played a role when once robust economies have faltered. During the Great Depression, for example, farmers directly traded crops and other services with one another, since what little money the farmers had was of negligible value. And after the fall of communism, inflation was so high that individuals and businesses in the former Soviet Union found it safer to trade goods and services directly. (Traditional currency was still used, but the street value of the currency stretched to fit the need of the purchased item: rubles used to buy staples such as food were considered to be of greater value than rubles used to buy luxury items such as fur coats.)
We are now seeing a growing movement of individuals and businesses that prefer to use bartering in a wide variety of transactions, including multi-million-dollar purchases. In New Zealand, a house and surrounding property, valued at 5.1 million United States dollars, was recently sold for 1.7 Barterdollars (BDs), a form of credit used by about 9,000 individuals and 50 businesses in four countries. Though the deal did not involve legal tender, it was not illegal, and a contract secured the sale through business property owned by the buyer. In this case, the seller will use most of the BDs to obtain plumbing and electrical work — for both office space and his new home — from the buyer, who owns a business that provides these services. The seller is under no obligation to use the BDs this way, however, and can spend them elsewhere or simply save them as credits for later use. There is, however, little incentive to save, because, as with most barter systems, the currency does not generate interest. This also applies to loans: several bartering organizations have set up facilities that lend currency in exchange for an agreement that stipulates that the borrower will "pay" it back with products and services over a set period of time, interest-free, though a transaction fee is charged.
Community-based non-profit bartering is generally not subject to taxation, but virtually all governments consider bartering by businesses identical to cash transactions, and taxes need to be paid accordingly. However, the nature of these transactions has made them harder for governments to track, especially as bartering on the Internet has become more popular. Determining the value of the terms of a barter can also be problematic. If A designs a website for B in exchange for barter credits, A should pay taxes on the value of the credits received, while B can consider the credits as a business expense. For tax purposes, A has an incentive to underestimate the value of the transaction and B has an incentive to overestimate. To minimize this sort of problem, some governments have set a standard, so that 1 credit in a non-governmental but nationally recognized barter system corresponds to a certain valuation of the official currency.
“Most people associate bartering with poor or undeveloped societies”- is a GMAT reading comprehension passage with answers. Candidates need a strong knowledge of English GMAT reading comprehension.
This GMAT Reading Comprehension consists of 4 comprehension questions. The GMAT Reading Comprehension questions are designed for the purpose of testing candidates’ abilities in understanding, analyzing, and applying information or concepts. Candidates can actively prepare with the help of GMAT Reading Comprehension Practice Questions.
Solution and Explanation
Question 1)
As per the author, which of the following is a big problem for governments?
(A) Taxation on barter transactions applies to non-profit organisations that provide services to communities as a whole.
(B) Different state governments don't always agree on which bartering systems to accept.
(C) A unique set of tax regulations that apply to online financial transactions.
(D) Bartering differs fundamentally from the established financial mode of exchange.
(E) A person selling a service in exchange for bartering credits is more likely to judge the value of the service to be higher than a person selling the same service in exchange for readily available traditional currency.
Answer: D
Explanation: As bartering on the Internet has grown in popularity, it has become more difficult for governments to monitor these transactions due to their nature. The value of the terms of barter can also be difficult to determine. As per the passage, if A designs a website for B in exchange for barter credits. A should pay taxes on the value of the credits received, while B can consider the credits as a business expense. For tax purposes, A has an incentive to underestimate the value of the transaction and B has an incentive to overestimate.
Question 2)
According to the author of the passage, bartering in the former Soviet Union (USSR) was
(A) When combined with an unusually flexible currency, it is problematic because it is difficult to determine the value of goods,
(B) primarily used by peasants in direct trade,
(C) used to buy both basic necessities and opulent items,
(D) subject to taxation with the same rigour as traditional transactions.
Answer: A
Explanation: Additionally, after communism was overthrown, inflation in the former Soviet Union (USSR) was so high that people and businesses concluded it was safer to conduct direct trade in goods and services. (Traditional money was still in use, but the street value of the money was stretched to fit the need of the purchased item: rubles spent on necessities like food were thought to be of better value than rubles spent on opulent items like fur coats.)
Question 3)
According to the author, a seller who receives Barterdollars (BDs) is
(A) When using interchange facilities that accept BDs, one can receive interest on the amount received,
(B) postpone paying taxes on the credits received until they are applied to the purchase of goods or services,
(C) apply the credits received to an unrelated transaction.
(D) can, in some countries, redeem the BDs for the traditional currency.
(E) is required to redeem the Barterdollars by purchasing the goods or services provided or offered by the buyer from whom the BDs were received.
Answer: C
Explanation: However, the seller is not required to use the BDs in this manner and is free to use them in other ways or simply save them as credits for future use. There is, however, little incentive to save, because, as with most barter systems, the currency does not generate interest. This also applies to loans.
Question 4)
The primary purpose of the passage is to
(A) object to how most governments now manage the issues associated with taxing barter transactions.
(B) explore contemporary, non-traditional bartering techniques and outline the potential consequences of their use.
(C) convince the reader that bartering transactions are just as valid as those involving traditional currency.
(D) cite some arguments in favour of and against the widespread usage of bartering
(E) demonstrate that unless the tax problems associated with bartering are handled, bartering will not become as well-known as other forms of financial transactions.
Answer: B
Explanation: The first paragraph gives the introduction of bartering and compares it with traditional money. Second paragraph shows a growing movement of individuals and businesses that prefer to use bartering in a wide variety of transactions, including multi-million-dollar purchases.
The last paragraph gives a brief of the government considering bartering identical to currency transactions. But it becomes a difficult task for the government to track such transactions. The passage discusses recent, non-traditional methods in which bartering is used, and presents some of the spreadings of this use. The main idea and structure of the passage matches option B.
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