Globalization

Globalization is simply restriction free movement of capital, labor and goods across a country's physical limits. Neoclassical (Solow) model of growth considers three ways in which globalization can help increase the financial condition of the poor countries by giving them job work. Globalization leads to inflows of money to the poor country and thus raises the wages of the people which in turn gives them better health benefits, safety and increase standard of living. Higher wages help the people migrate to wealthier countries where incomes are even higher and thirdly it gives them purchasing power for their desired goods. All this makes the salaries of low skilled workers shoot up.

Differences in the income between two nations are because of the Capital to labor ratio as the richer countries have more money per person. Globalization leads to money inflows to poorer countries and it also makes people migrate to richer countries in search of better jobs. It increases the Capital to labor ratio in poor countries and decrease in richer countries. These inflows continue till the capital-labor ratio equals outs in both the countries. In the Solow model theory of factor endowment, free movement of factors makes the poor country richer and reduces the poverty gap between rich and poor countries. This poverty gap between the two countries leads to two things. Firstly, it raises the wages in poor countries and secondly, it leads to migration of unskilled workers to richer countries which not only raises that persons wages but also the people who don't migrate.

The affect of globalization on inequality and poverty can be seen by the Neo classical model of factor endowment. However, productivity differences show a different picture. In the poor countries there are low physical and capital returns to the workers in terms of their working conditions compared with rich countries. Workers work more rapidly in difficult conditions