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Does global competition lead to inflation?

By Luke Kim
web posted November 5, 2018

For decades, economists have been attempting to predict how and when the United States economy will grow. Some economists believe that the U.S. economy is nearing “its maximum sustainable level of employment and capacity utilization” and thus, will only see slow growth, while others believe that the economy’s speed limits on growth may be an “obsolete” idea. The optimism expressed in the latter opinion is known as the new economy view, sometimes referred to as the new paradigm. The new economy view claims that growing international trade has qualitatively changed the rate of U.S. economic growth.Paul Krugman argues in his article “How Fast Can the U.S. Economy Grow?” that “globalization has not changed in any important way the rules about how fast the U.S. economy can grow.” I disagree with Krugman’s argument due to the fact that globalization has reduced the risk of inflation in the United States.

Global competition has forced U.S. companies to lower their prices in order to stay competitive. With markets booming all around the world, rival countries from Europe and Asia are increasing their supplies, hoping to make profit on other countries’ markets. The United States sees these moves as a threat, thus lowering their prices in order to remain competitive. Krugman writes how international trade seems to be “somewhat novel in the United States,” especially since “the share of exports and imports in U.S. GDP remains well below levels that have been commonplace elsewhere for many decades.” However these facts do not represent a ignorance that disregards the importance of foreign trade; rather, these facts merely show that U.S. companies are lowering their prices in order to ensure market share in the U.S. economy.

If global markets from Asia or Europe happened to gain a significant market share of the U.S. economy, U.S. companies would not have enough profit; thus, they would start to go out of business. The loss of U.S. jobs would be a detriment to the U.S. economy.

By companies ensuring that prices are low enough, they are able to remain competitive and still have the ability to make a profit. Once these jobs are secured, the road for economic growth becomes one that is possible.

For decades, economists have been attempting to predict how and when the United States economy will grow. Some economists believe that the U.S. economy is nearing “its maximum sustainable level of employment and capacity utilization” and thus, will only see slow growth, while others believe that the economy’s speed limits on growth may be an “obsolete” idea. The optimism expressed in the latter opinion is known as the new economy view, sometimes referred to as the new paradigm. The new economy view claims that expanding demand will not lead to inflation due the impact of global competition. Krugman responds to this in his article “How Fast Can the U.S. Economy Grow?” saying that this goes without question; however, global competition mainly occurs in the goods-produced sector. ESR

Luke Kim is a high school student studying AP Macroeconomics. © 2018 Luke Kim.

 

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