Inflation and Globalization

Globalization refers to a kind of force that has defined the final part of the last century and continues to put forth a strong influence on the globe’s economic and political affairs today.  It refers to the increased aggregation of social, political and economic practices across international borders. Its economic impacts have been more felt than the social and political effects. This has seen the opening up of boundaries and increased ease in trade between countries, regions and continents. Globalization is inevitable, and people welcome it since there have been enormous economic gains that has improved their standards of living. For instance, countries like China and India among others are being more and more integrated as the outsourcing centers in the world for industries such as paperclip production, emails production, and software development. China, for instance, is about to overcome the U.S.A. as a superpower in a revolution owed to globalization.

Globalization and inflation have been issues of concern that are said to be changing at an unusually high rate.There is the mounting evidence that inflation course has been changing and its effects will be felt in the recent future. All around the globe it has gone down and stabilized. This drop in inflation rate is welcome news, especially after consideration that there was the recent economic recession in the world. The only sensitivity measure for inflation trends phenomenon in the economy is monetary policy that has been much more effective. However, there are other methods that have tried to explain the inflation rate and its development.

On trade issues, we can explore how China is exporting inflation globally. Indeed, China is exporting inflation through the prices of products it exports to the world economy. Due to the Chinese macroeconomic conditions, we have experienced a ride at awakening the global financial crisis that happened in between the years 2008 and 2009. The major cause of inflation rate in China is increasing rate of external demand and growth of gross domestic product (GDP). The external demand is estimated to have risen from 6.1 per cent in the year 2006 to 10.6 in the year 2008, and the GDP growth started to rise up from 7.9 per cent to 10.7 per cent between the same years. Due to inflation being the major concern in China, the Chinese government and financial planners have adopted tightening measures, such as hikes in interest rates of borrowing, increased reserve requirement, and direct control of bank lending.

The Relationship between Inflation and Globalization

Globalization affects China in a decidedly different way depending on the country’s level of economy. For instance, there are high incomes in China that have already shifted out of manufacturing company benefit from lower prices as importers of cheaper products. On the other hand, low-income countries are faced with stiff competition hence high inflation rates. The inflationary trend may impact on globalization. This can be explained by the use of basic laws of economics that suggest that inflation is long-term and stay put unchanged if monetary policy keeps its course. For instance, prices of commodities like metals and energy behave the same way.

Globally, there is a greater demand for Chinese products; not only from the developed countries with good standards of living that have demand for such goods The effects of non consumer welfare and services and sectors are actually more devastating for the overall levels of prices of products. For instance, in China there is exporting inflation to the other segments of the global economy. The perspective of globalization on the inflation process can be looked at from two points of view.

The Interaction of Actualand MonetaryFactors

When prices go higher, there is a wide agreement that in the long run inflation process is a monetary situation. Initially, prices can be considered independent if they are real prices. On the other hand, the collective price levels are pinned down by the vectors of nominal quantities. In a more fundamental sense, it implies that monetary policy, eventually, determines inflation, and depends on the direct or indirect rate at which the economy expands. The interaction of real and monetary factors can be taken to mean that growth in the real economy does not exceptionally determines the inflation rate. Whether productivity growth is high or low, workforce should be competitive and the global economy integration are not pertinent considerations. By implication, economic globalization and real prices must not be expected to have a material on the route of inflation. According to Lane, inflation rate for the monetary authorities deliberately objects to be dependent of the real structure of the economy. For instance, more flexible workforce markets and nominal wages may push down the cost of deflation and give a chance to the authorities to aim for more traditional inflation rates. Similarly, more competitive goods and services in the markets may reduce the incentives for monetary policies as the means of keeping output above its equilibrium level. This has been noted as a possible subtle way in which globalization forces have led to global disinflation. Unexpected, positive distribution development related with globalization may have made it easier for central banks. Across currency areas, exchange rates may fail to reflect inflation situations. In a stable condition, differences in desired inflation rates are defined by those central banks setting policy in various areas, such as China. As a result, this will translate into distinction in the rates of exchange across them. Real factors may have crash over horizons over which inflation is less convenient for a given inflation objective. At the one end of the spectrum, a high degree of trade and possibly financial integration can lead a country to come to a decision to tie its exchange rate to a larger currency. The absence of capital controls and impediments to arbitrage trade permit its local inflation. Any difference in inflation drifts would be mainly determined by the difference in the composition of production and productivity leaning. Alongside this background, the hypothesis that greater economic integration, that is globalization, can lead to a lower inflation environment that has been there over the past decade. The potential move in the drivers of the inflation process shifts away from country towards global factors. This has been the case in China over the last few years, elevating it to become a superpower. The association decline in inflation results from both conscious decisions of policy makers to accommodate it. However, an in-depth analysis is needed to distinguish between these two possibilities and leave it for a prospect research. The relative role of globalization is better understood in settings of two alternative and modeling approaches. One of these approaches is much closer to customary way of manipulating inflation. It is heavily focused on the country-specific factors towards global factors. It is also crucial to stress at the two approaches that do not differ in their fundamental views of the inflation process and hence the function of exchange rates within that process. The processes vary in a way that is treated in the psychoanalysis. Furthermore, as discussed above, we can admit that wealthier frameworks can have extremes setup. Eventually, they are helpful in establishing some basic ideas. 

This approach has three connected key features. First, quantity of surplus demand and slack that decide inflation is wholly country-specific. Inflation in China is thoroughly influenced by excess demand in that country. Secondly, to a degree that a wage channel is officially included either directly or indirectly, the channel is merely a function of the corresponding country’s specific economic phenomenon. For example, this can refer to the productivity growth in that particular country. Thirdly, international influences are fully captured through exchange rates effects that are both demand and supply in the country and imports.

The above approaches predict assumptions and approximations. To start with, goods and services are differentiated in terms of the country where production takes place. The chief distinction is between domestic and foreign goods, especially in imperfect substitutes. For a given distribution, this assists to justify an obvious and unmistakable mapping between country-specific demand pressures and domestic inflation despite the global phenomenon for the products in question.

In addition, the approach assumes limited alternate between domestic and foreign workforce inputs. For a particular domestic demand for products, it happens to justify not considering foreign influences on domestic distribution condition. For a fixed capital stock, the most common way of rationalising this is to take for granted that workforce is immobile across the border; though, it may be highly mobile within the borders. In the end, the labor force flows could alleviate any bottleneck within that country, but cannot happen internationally. Above horizons to which the capital stock is not fixed, the approach makes similar hypothesis for this factor of production. As a result, for example, the relocation of production facilities cannot alternate for the relocation of labor.

The Globe-Centric Approach

The globe-centric approach commences from opposite premises. First, the approach sees fit to produce in different nations as well as close substitutes. Additionally, the approach assumes that labor features and capital mobility are the factors that are closely related globally. Certainly, the chances of moving capital and know how close borders assist to strengthen the greater substitute goods produced in different areas. The idea has several modeling inferences that are the mirror image of the products of the country-centric approach. The global approach implies that mapping between country-specific excess demand and the prices inflation that are not fully validated. It is global excess demand for the consumable goods in question that is applicable. For a given product, this would make meaning infer excess demand conditions from those in particular countries. Again, low inflation could be actually counterbalanced by high demand in another limited distributor. The only difference is that mobility of labor can assist relieve price pressures, regardless of the borders. In the limit, with country-specific it is irrelevant, but with imperfect substitute across the country. A global-centric approach would point to aggregate the excess demand by products rather than by country’s economic performances.

Generally, country-specific approach explains inflation in bottom-up fashion; play down global and international factors. By dissimilarity, the globe-centric factors, with domestic ones, are viewed as providing an incomplete image of the inflation process and take many influences on country-specific developments as endogenous.

Confrontation of the Approaches with Real World.

The country-specific approach has served in explaining and thinking about the determinants of the inflation. All in all, however, the process of economic globalization would be expected to increase the relevance of the aspects emphasized in the globe-centric perspective. Borders are noteworthy because they obviously matter differently for a different kind of products. Substitution between similar productions across the country may be much higher than for production within the countries. The key distinction was initially applied to the study of inflation in an approach to reference small countries. This is viewed as the inability to influence the prices of the tradable products internationally. Under foreign prices, fixed exchange rate and perfect capital mobility could determine prices that are tradable through the purchasing power. The overall inflation, therefore, would be moved in line with differential output growth, given ideal labor mobility within the country. Local excess demand pressures would only be relevant in the nontaxable prices through the purchasing power. The overall inflation, therefore, could be determined residually by denying the relevant prices between the two sectors. By contrast, it would be global excess demand pressure that would be relevant if modeled for tradable sectors..

This approach has been applied, with varying extent of success, to the inflation process in small open economies. In addition, it strengthens the study of Balassa-Samuelson effect that explains long-term differential inflation rates across the tradable and non-tradable through different productivity growth in the two sectors. On the other hand, bordering is more beneficial for labor and so less for capital. Labor mobility across countries is vividly inhibited by cultural, legal and regulatory factors. The transfer of physical capital plus managerial and technological knowledge are also far more constrained across borders than within the countries.

Broad move has also gone hand in hand with the main long-term increase in the production potential of the global economy. Its output frontier has moved outwards. This is because the globalizations process has coexisted with the integration in the market systems. The coexistence has freed previously untapped resources. In particular, the effective increase in the work force directly or indirectly plugged into the global economic systems that have been massive.

Testing for the Impact of  Global Factors

This involves specific measures of global economic slack, control of foreign variety, and their influences such as import prices for oil. Oil prices globally are the main cause of inflation.


These methodologies are the three that influence globalization on empirical inflation models. Globalization may have changed the inflation dynamics and is effectively rendering the existence of irrelevant models. At the other extreme, globalizations may be viewed as a sequence of favorable supply that can be nailed on to the existing local or domestic Philips curve specification.

Effects of inflation on:

  1. Prices

Experimentally, inflation rates have dropped to historic low levels in the developed countries, while states in the developed world have witnessed this decline. General opinions have put together competition from emerging economies as a reason for dropped inflation. The goods that China exports in the economy tend to contribute to the global inflation as goods are simply cheap.

  1. Wages

Globalization has great impact on labor force, especially skill and unskilled work force. The ratios of both types of labors have decreased because much of the work force increased is unskilled. This results to the wages of unskilled labor to drop down, while profits rates on capital to rise up.. For instance, in China there are low wages relent to try to lower the inflation rate. This has proven as on the factor lowering the inflation rate.


Scholars have based their argument on China effects as the major cause of inflation globally. Also, evidence suggests that globalizations is causing a stabilizing effect on unskilled wages.. As a result, this leads to the growth of technology that is biased towards skills one possesses. We have seen that competition is the main cause of decrease in prices of tradable goods. Generally, low inflation rate in the Western countries would be because there is a better monetary policy and low-inflation trends. High assets prices are as a result of higher growth-volatility in the economy as people who invest increase the demand for investment that are expected to be less risky in future.

Globalization has caused inflation in slight ways, especially if the host of the factors is considered. In the long run, disinflation effect of globalizations is going to be nullified as imbalance created by trade. In the short run, the analysis has more complicated understanding. Prices of tradable products have dropped because of the China effect, while other prices such as energy, commodities, and services have increased in a way that all general prices could be mitigated.
Inflation has caused considerable uncertainty, and it gives out new costs in the economy. This leads to instability of the economy and redistributing income from lenders to borrowers thus discourages savings. The biggest problem with inflation is control because once it gets out of control, it is hard and expensive to bring it down. The economy needs to run below the capacity if inflation is under control.

From the research, inflation in China is viewed as risky if the economic reforms are not taken into consideration. For instance, in the year 1988, inflation rates were very high and led to a political instability in the same year. Also in the years 1994, 2004 and 2007, inflation showed to be risky, making the macroeconomic conditions unstable. Finally, global economy has started to recover focusing on Chinese products (the China effect) as the major cause.

Policies that are used to govern trade in China should be smoothened to ensure that China's economy stabilizes. With the increase rate of economic growth that China is recently enjoying, mainly attributed to is high population thus low cost of labor, there is a probability that any hitch in the country's economy can adversely affect the world economy. It is, therefore, paramount that China develops effective policies that will define the standards of their exported goods. Though there is a massive competition with other manufacturing countries, there is also the need to ensure that there are high quality goods that come from China. This way, it will still be profitable since there is a lot of cheap labor. The policies should strike a balance and profitability in order to ensure that there is the least probability that there will be inflation in the country. This process would not only involve the analysts of China alone, but also those from the rest countries of the Great eight (G8).

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