Globalization and Inflation

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Nobel laureate and ex–head economist of the World Bank, Joseph Stiglitz, defines globalization as: "The closer integration of the countries of the world as a result of the lowering of communication and transportation costs and the elimination of man–made barriers”.


Globalization is unavoidable and the huge financial gain it has induced in standards of living of an average person is known by everyone. Nations like India, China and the flourishing nations of the Eastern Europe are being gradually incorporated as the outsourcing locations of the world for anything varying from paper–clip manufacture to software program. The Chinese commodities are a rage in the western economies because of its cheap price. Due to this, the workforce supply worldwide has increased from 1.5 billion to 3 billion. This in turn has a considerable impact on costs and earnings in developed markets, encouraging political and economic dispute over the effects of free commerce.

Data recommends that it is not globalization which is resulting in alleviating or reducing impact on unskilled income; rather, it is the technological advancement that is chiefly inclined towards expertise. This market rivalry results in reduction in costs of consumer commodities, but the usual low-inflation tendency is predominantly because of improved fiscal strategy in a low inflation friendly ambience.

Greater property costs are because of lower growth and economic instability as investors elevate their need for monetary infusions that are anticipated to be less dicey in the future years and not for the extra money generated by the impacts of globalization.

This proposes that globalization has a restricted role in negative tendencies while slightly contributing to the affirmative low inflation trends.


American economist and Nobel laureate, Milton Friedman, once observed that: “Inflation is always and everywhere a monetary phenomenon”. It has been witnessed that inflation, an elevation in the costs of products and services in an economy, is affected by the monetary supply governed by fiscal policy. High inflation results in great insecurity and generates new prices in the market, resulting in volatility and reallocating earnings from lenders to borrowers. This process thus deters savings. One of the major problems with high inflation is that once it elevates it is difficult to settle it down to the affordable rate.

To settle the inflation rate to an affordable price, the financial system needs to perform under capacity, and this should precede the fiscal and employment opportunities, sometimes which can turn costly. For instance, to settle down the inflation rate to convenient levels in the US, the Federal Reserve in the 1980’s forfeited around 20% of annual GDP, which valued around a trillion dollars.

From about 30% in the early 1990s to 4% today, global inflation has dipped consistently which is indisputably a contributing factor. According to some arguments, inflation dips due to the liberalization of workforce organizations. This argument to some extent does not hold true as inflation has deteriorated even in nations where these organizations have not been liberalized.

How inflation is related with globalization

Globalization influence different nations in different manners. High–income nations have progressed from generating advantages from the lower costs as importers of cheap commodities, whereas Latin American nations, especially Chile, Costa Rica and El Salvador, are directly jeopardized by the market rivalry in similar commodities like low price producers from China.

The impact is similar with earnings; it is those nations that have higher number of proficient workforce rather than amateurish labor, profit more from globalization than vice versa.

Data suggests that inflation has been low in the developed economy. During 1999-2004, the average inflation per year in the United States and United Kingdom has been 2.5% and 2.4% respectively. Inflation theories suggest that the cutthroat rivalry in the commodity and labor markets elevate because of business, cheaper consumer products and stabilization in wages. The market is thus left with surplus money which causes the inflation in capital assets such as real estate and equity markets.

Effects of inflation on prices

In the developed nations inflation rates have deteriorated to remarkably low levels while the developing economies are witnessing high rates in the past. General estimation suggests greater market rivalry from developing economies is one of the reasons for low inflation. On critical assessment one would discover that globalization actually have impact on relative costs and not on the absolute cost level.

The economists observe that while costs of certain commodities dip due to low-priced imports, the costs of other commodities and especially services can increase rapidly.

Costs of goods such as metals and energy perform in the similar manner because the demand for these commodities increases not only in developed world but also in flourishing markets which need raw materials for production. These secondary impacts of higher costs in non–consumer commodities sector are overpowering for the total level of costs of products and services.

However, the inflationary influence of globalization is doubtful. The general economic laws recommend that in the long term costs would remain stable if the fiscal strategy preserves its track. Considering these factors and outcomes, this notion stands intricate in short-run. The economic analysts observe that the lower inflation can easily overturn itself, if aspects such as rate of growth of flourishing economies are affected. They predict that these factors can act as a supply alarm and can result in high inflation rate.

In the progressively more combined global market, it seems that inflation is performing a great harmonizing function by administering the lower costs of consumer products with the higher costs in sectors like goods, equities, energy and services.

Corporate Globalization | Inflation Rate | Historical Inflation Rates | Bank of America

Last Updated on 5/18/2011