The deflationary gap and adjustment in the north

The more closely the constituent parts of an international economy are linked together through trade and financial flows, the greater will be the influence of global demand on economic performance. A chronic excess of global demand will make for persistent, perhaps accelerating, inflation and shortages of labour and primary commodities, just as a chronic demand deficiency will produce persistent, even mounting, unemployment and depressed prices for raw materials; the latter will also encourage conflicts among countries as they try to capture a larger market share for themselves. By the same token, instability in world demand will generate fluctuations in the level of activity in individual economies, as well as in key economic variables such as the rate of interest and exchange rates. It will also alter the distribution of income within and among nations and the size of the gap between industrialized countries and less developed ones.

Related Subject(s): International Trade and Finance
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