Demand pull and cost push inflation pdf

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demand pull and cost push inflation pdf

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P araguay evaded the bouts of hyperinflation that affected most countries in Latin America over the post-Second World War period, but, as inflation started to decline in neighboring countries, it remained afflicted with moderate inflation.

China's Inflation: Demand-Pull or Cost-Push?

Inflation means there is a sustained increase in the price level. The main causes of inflation are either excess aggregate demand AD economic growth too fast or cost push factors supply-side factors. If the economy is at or close to full employment, then an increase in aggregate demand AD leads to an increase in the price level PL. As firms reach full capacity, they respond by putting up prices leading to inflation. Also, near full employment with labour shortages, workers can get higher wages which increase their spending power. We tend to get demand-pull inflation if economic growth is above the long-run trend rate of growth.

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.

Definition: Cost-push inflation occurs when we experience rising prices due to higher costs of production and higher costs of raw materials. Cost-push inflation is determined by supply-side factors, such as higher wages and higher oil prices. Cost-push inflation is different to demand-pull inflation which occurs when aggregate demand grows faster than aggregate supply. Cost-push inflation can lead to lower economic growth and often causes a fall in living standards, though it often proves to be temporary. Short-run aggregate supply curve shifts to the left, causing a higher price level and lower real GDP. Cost-push inflation could be caused by a rise in oil prices or other raw materials. Imported inflation could occur after a depreciation in the exchange rate which increases the price of imported goods.

Cost-Push Inflation

Economics pp Cite as. In Chapter 9, Section 9. In addition we discussed the economic, social and political costs associated with inflation. You will recall that the main costs of inflation arise when inflation is imperfectly anticipated. The purpose of this chapter is to examine the debate over the causes of, and cures for, inflation.

Cost-push inflation is when supply costs rise or supply levels fall. Either will drive up prices as long as demand remains the same. Shortages or cost increases in labor , raw materials, and capital goods create cost-push inflation. These components of supply are also part of the four factors of production. Cost-push inflation can only occur when demand is relatively inelastic.


INFLATION: COST-PUSH AND DEMAND-PULL. By FRANKLYN D. HOLZMAN*. The primary purpose of this paper is to draw clearly, at the macro- economic.


Inflation: Causes and Cures

Definition: Cost-push inflation occurs when we experience rising prices due to higher costs of production and higher costs of raw materials. Cost-push inflation is determined by supply-side factors, such as higher wages and higher oil prices. Cost-push inflation is different to demand-pull inflation which occurs when aggregate demand grows faster than aggregate supply.

Cost-Push Inflation

Paraguay : Addressing the Stagnation and Instability Trap

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This paper focuses on the seminal contribution to the Phillips curve discussion by Samuelson and Solow in , which is usually considered as the first trade-off interpretation of the Phillips curve. It will be shown that Samuelson and Solow indeed offer a trade-off view but are very sceptical about the long-run stability of the curve. Hence, their approach to the trade-off between inflation and unemployment with emphasis on cost-push inflation is very different to that of Friedman, who only accepts demand-pull forces as a source of inflation.

As the access to this document is restricted, you may want to search for a different version of it. More about this item Keywords inflation ; demand factors ; labor cost ; and supply-side management ; All these keywords. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tpr:asiaec:vyip See general information about how to correct material in RePEc. For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ann Olson.


Friedman's criticism regarding the Phillips curve trade-off built. Retrospectives. Cost-Push and Demand-Pull Inflation: Milton Friedman and the “Cruel Dilemma”.


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