7/27/2019 Discuss the Extent to Which Globalisation Might Lower the General Price Level in an Economy

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Discuss the extent to which globalisation might lower the general price level in an economy

or

Discuss the extent to which globalisation might lower the rate of inflation in an economy

or

Discuss the extent to which globalisation can bring about a low rate of inflation in an economy

Introduction

-  idea that the lowering of general price level (if it is not temporary) refers to deflation-  otherwise a lower rate of inflation would refer to a reduction in the rise of the general price level

(4% inflation to 2% inflation rate)

-  a low rate of inflation (can use the indicator of below 4%)

-  note that the way the following answers are phrased would depend on WHAT question was posed

to the student

Body

Thesis:

1)  First concept that is best to discuss would be the link to CA – lower opportunity costs/low costs of 

productiona.  Increasing trade (as a result of globalisation as well as reduced protectionism)

i.  CHEAPER IMPORTS

1.  Reduce imported inflation

ii.  Remember to discuss why there are cheaper imports

1.  Not simply because of CA, but because of increased globalisation

a.  More access to various countries with different CA or different factor

resources

b.  Can link idea to trade creation as well!

b.  Note that this would cause an increase in AS (illustrated by rightward shift in AS)

2)  Next, can identify that uncompetitive countries could experience fall in GPL (as a result of fall in AD)

or a reduced increase in AD (causing a low rate of inflation or a lower rate of inflation)

a.  In this case, can argue that lack of competitiveness results in a demand substitution away

from domestic goods, causing a rise in M and a fall in C

b.  Can also characterise this issue with respect to FDI, where FDI inflow is reduced

i.  As well as FDI outflow (where domestic I falls as firms would prefer to invest in other

countries

ii.  Can link to outsourcing and offshoring as well

3)  Identify that globalisation leads to greater movements of labour. Hence some countries may

experience increases in labour supply, causing wages to fall

a.  Can discuss impact on wage push inflation or cost of production

4)  Finally, can link to either fall in GPL or lower/low rate of inflation in the LR

a.  FDI inflows result in the increase in the amount of capital in the economy, as well as the

increase in technology

b.  This can decrease price levels in the LR as a result of the increase in LRAS (rightward shift of 

the vertical portion of the AS curve)

c.  HOWEVER, must note that this is usually accompanied by a SR increase in AD due to the

increase in FDI, hence leading to the idea of SR inflation

Anti-thesis

1)  increases in X and FDI causing increase in AD and demand pull inflation

7/27/2019 Discuss the Extent to Which Globalisation Might Lower the General Price Level in an Economy

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a.  The thesis and anti-thesis should blend into each other because the thesis ended with SR

inflation which sparks off the first point that competitive economies experience increases in

FDI and X as a result of CA

2)  Highlight the increased openness of the economy

a.  Causing demand and supply shocks to impact domestic inflation

i.  Example of 2008 oil crisis

3)  Some countries experience brain drain

a.  Hence causing wages to rise instead leading to wage push inflation

b.  Students should also highlight which countries experience brain drain

4)