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Tuesday, February 14, 2006

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» IMF: How has globalisation affected inflation? from New Economist
A fascinating new IMF analysis of the impact of globalisation on inflation has just been published as Chapter 3 of the latest World Economic Outlook. This chapter, How Has Globalization Affected Inflation? (PDF), provides robust support for the global ... [Read More]

» What does globalisation mean for monetary policy? from New Economist
Globalisation poses many puzzles for the making of monetary policy, but until quyite recently few had given it much thought (aside from the effect of Chinese goods deflation). Just under a year ago though Dallas Fed president Richard Fisher gave a spee... [Read More]

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Lawrence Jay Kramer

"Does this mean that the concept of a global output gap could be more useful than the US output gap? Possibly – if we could measure it. "

And even if we can't. Concepts get their value from the material reality that they map, not from the technical feasibility. If we are going to the moon, we need to worry about conditions on the moon. If we can't measure them, then we can't measure them, but we can't use conditions on the Earth as a sort of Plan B.

I think the global output gap is a useful concept, if only because it undermines the importance of the domestic output gap. I agree, though, that measuring the global output gap is difficult, if not impossible. And the problem is exacerbated by two variables not often mentioned.

First, each country may face its own global output gap. The amount of additional supply that will be created to meet additional demand in the US is different from the same figure calculated for Zimbabwe. The US offers the kind of market that companies will add production to address. Other countries, not so much. Logistics, for example, can be seen as a limiting factor in the potential outputs. If one measures output at the point where the customer usually makes first contact, then the potential output of a place on one side of the river depends on the ease of getting things across the river. Some places have better bridges than others, so, for them, potential global output is larger than for places whose bridges only go to nowhere.

Second, economists need to "put the maps in motion." Given how quickly production can be created these days, maybe "potential output" needs to be reckoned using a dynamic model, in which a program that will create demand in 18 months looks at the production that can be added in 18 months by those aware that the demand is coming. How much faster does Mr. Moore say those computers will be in 18 months? How much more will the robots be able to do?

Those who suggest that the global output gap is closing may be correct in the strict sense that there are inflationary bottlenecks in certain inputs, energy most notably. But if those inputs are not major cost elements of a given output, the inflationary consequence of the shortage may not be significant to the developed countries that use those inputs. Of course, the consequences to places that use those inputs to survive can be dire, which is another way of saying that the "global output gap" means one thing to one country and something else to another.

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