4/15/2006

Effects of inflation from globalization

In advanced economies, inflation has dropped by as much as 1/2 a percent in non-oil import prices, as stated in the article How has globalization effected inflation on the New Economist web site. The article refers to global excess capacity leading to lower prices, in turn resulting in possible deflation. The article also refers to monetary policy of industrial countries making the effects of globalization only temporary, because of single digit inflation targets by economic leaders. As in most cases globalization benefits market competition and stabilizes price fluctuation.

6 comments:

Dr. Tufte said...

Yup.

Hasn't good old Dr. Tufte been telling you since your principles classes to lighten up and enjoy growth and globalization?

alex said...

How many countries are there which do not import oil?
Moreover oil is a necessary commodity, and its price rise contributes significantly to inflation.

Dr. Tufte said...

Oil is excluded - not because it is unimportant - but because its price is volatile, and because not all countries are sensitiive to it.

For example, Japan has to import 100% of its oil, but the U.K. is self-sufficient.

alex said...

Isnt that just a few countries might be self sufficient regarding oil?

In India, the WPI which is sued for measuring inflation is undervalued. I belive that increasing housing rates, increases in costs of services ought to be included. Moreover, the share of services to GDP is more than 50%.

Dr. Tufte said...

Agreed.

But ... most countries aren't self-sufficient in very many goods.

For example, the U.S. clearly isn't self-sufficient in a basic resource that is much more important to us than oil: labor. That's why we import a great deal of both highly skilled and unskilled labor.

But, the public has a fixation on oil. So, we focus on it more.

In the context of the WPI, we remove oil because of the combination of its volatility and importance. If it was merely important but stable - like employee compensation - we'd leave it in there.

alex said...

Employee compensation: stable -So true. :)