difference between demand pull inflation and cost push inflation pdf

Difference between demand pull inflation and cost push inflation pdf

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What is the difference between cost-push and demand pull inflation? How they can be tackled?

Demand-pull inflation

6 Causes of Demand-Pull Inflation

Demand-Pull Inflation

Demand-pull inflation is asserted to arise when aggregate demand in an economy outpaces aggregate supply. It involves inflation rising as real gross domestic product rises and unemployment falls, as the economy moves along the Phillips curve. This is commonly described as " too much money chasing too few goods. This would not be expected to happen, unless the economy is already at a full employment level.

What is the difference between cost-push and demand pull inflation? How they can be tackled?

Latest version View entry history. Phillips curve models were initially amended by natural rate models and by models that appended rational expectations and flexible wages and prices to natural rate models. It is now recognized that the response of inflation and unemployment to shifts in aggregate demand itself depends on the inflation environment, and moderate inflation is the desired environment. Stabilization policy continues to distinguish between supply shocks affecting prices and the effects of aggregate demand. In the Keynesian model, there is a well-defined level of potential GDP corresponding to full employment levels of employment and unemployment. Nominal wages are downwardly rigid, so that below full employment aggregate supply increases with prices while aggregate demand decreases. With a positive gap — that is, in the operating region below full employment — an expansion of aggregate demand mainly raises employment and output and only moderately raises prices.

Inflation is classified into cost push inflation and demand pull inflation in terms of its origin. If inflation is demand pull, it will be caused by high demand or income with the people. On the other hand, if inflation is cost-push, it will be caused by rise in the price of inputs used in the production of commodities. Cost push inflation is caused by rise in the prices of inputs like power, labour, raw materials etc. Price rise of inputs in the form of increased raw material cost, electricity charges or wage rate including a rise in profit margin made by the producer results in increased cost and ultimately to increased price of the product. An important example for cost push inflation is the rising price of coal which immediately may cause price rise in industries which use coal. Price rise of key inputs like crude oil products may trigger price spiralling effect on other goods and services.

Demand-pull inflation

Inflation is classified into cost push inflation and demand pull inflation in terms of its origin. If inflation is demand pull, it will be caused by high demand or income with the people. On the other hand, if inflation is cost-push, it will be caused by rise in the price of inputs used in the production of commodities. Cost push inflation is caused by rise in the prices of inputs like power, labour, raw materials etc. Price rise of inputs in the form of increased raw material cost, electricity charges or wage rate including a rise in profit margin made by the producer results in increased cost and ultimately to increased price of the product. An important example for cost push inflation is the rising price of coal which immediately may cause price rise in industries which use coal.

6 Causes of Demand-Pull Inflation

This is a great question! Inflation rates and speculation about future inflation are mentioned so often in the media that it's important to know some basics about inflation. What is inflation? Inflation is defined as a rise in the general price level.

It starts with an increase in consumer demand. Sellers meet such an increase with more supply. But when additional supply is unavailable, sellers raise their prices. That results in demand-pull inflation. It is the most common cause of inflation.

What are some of the factors that contribute to a rise in inflation?

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Demand-Pull Inflation

This represents a situation where the basic factor at work is the increase in aggregate demand for output either from the government or the entrepreneurs or the households. The result is that the pressure of demand is such that it cannot be met by the currently available supply of output. If, for example, in a situation of full employment, the government expenditure or private investment goes up, this is bound to generate inflationary pressures in the economy. Keynes explained that inflation arises when there occurs an inflationary gap in the economy which comes to exist when aggregate demand exceeds aggregate supply at full employment level of output. Basically, inflation is caused by a situation whereby the pressure of aggregate demand for goods and services exceeds the available supply of output both being counted at the prices ruling at the beginning of a period. In such a situation, the rise in price level is the natural consequence. Now, this imbalance between aggregate demand and supply may be the result of more than one force at work.

Definition: Cost push inflation is inflation caused by an increase in prices of inputs like labour, raw material, etc. The increased price of the factors of production leads to a decreased supply of these goods. While the demand remains constant, the prices of commodities increase causing a rise in the overall price level. This is in essence cost push inflation.

Key Differences Between Demand-Pull and Cost-Push Inflation

Inflation refers to the rate at which the overall prices of goods and services rises resulting in the decrease in the purchasing power of the common man, which can be measured through Consumer Price Index. Modern analysis of inflation revealed that it is mainly caused either by demand side or supply side or both the factors. Demand side factors result in demand-pull inflation while supply side factors lead to cost-push inflation. The demand-pull inflation is when the aggregate demand is more than the aggregate supply in an economy, whereas cost push inflation is when the aggregate demand is same and the fall in aggregate supply due to external factors will result in increased price level. This article explains clearly the significant difference between demand-pull and cost-push inflation. Basis for Comparison Demand-Pull Inflation Cost-Push Inflation Meaning When the aggregate demand increases at a faster rate than aggregate supply, it is known as demand-pull inflation. When there is an increase in the price of inputs, resulting in decrease in the supply of outputs, is is known as cost-push inflation.

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