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Demand Pull Inflation and Cost Push Inflation | Money

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The upcoming discussion will update you about the difference between demand pull inflation and cost push inflation.

Inflation may be of either demand-pull or cost-push type. Demand-pull inflation occurs when too much of spending (consumption expenditure + investment expenditure + government expenditure, i.e., C+I+G) on the limited supply of goods that can be produced at full employment pulls up prices and ultimately wages, too.

In such situation the prices rise due to higher demand caused by larger spending for the limited amount of goods available during the full employ­ment period. The higher demand and the larger spending do not normally bring about a rise in prices so long there are unemployed resources for the production and supply of goods can be increased to match the increased demand and spending.

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But once the economy reaches the stage of full-em­ployment, any further increase in desired expenditures for goods and services would cause the prices to rise as their supplies cannot be increased at all. Such a demand-induced price rise would ultimately bring about an increase in wages, too.

Cost-push inflation, on the other hand, develops when the upward thrust on prices comes from the increase in the cost of productive services, such as, an increase in the cost of imported or indigenous raw materials, of labour services, etc.

This kind of inflation occurs, for many economic groups in society have the power to force up wages and prices. A typical case of cost-push inflation is when the wages of the labourers are increased by the pressure of trade unions more than the increase in the productivity of labour. This kind of inflation may develop even though there is unemploy­ment in the economy.

Previously it was thought that cost-push inflation is basically wage-push one. But the modern writers like Samuelson and others have shown that the cost-push is the combination of price-push and wage- push. At first prices rise, and these higher prices force the trade unions to demand higher wages, which ultimately give rise to cost-push inflation, now described by Samuelson as sellers’ inflation.

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The effects of these two categories of inflation are, however, different. As demand-pull inflation occurs during full employment, it cannot stimulate aggregate output; as a result the real value of GNP of a country remains constant although higher prices increase its money value.

But, as cost-push inflation may occur even during unemployment, it may stimulate the total output of the country. But is very difficult to identify the effects of these two types separately as the distinction between these two types of inflation is “largely a spurious one.”

In most modern economics both the types operate simultaneously. For this reason, Samuelson remarks, “a theory that com­bines wage-push with demand-pull may be the most realistic one to explain recent economic history”.

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