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    Difference between Demand Pull and Cost Push Inflation

    Inflation can be of two types, demand pull and cost push inflation. Learn about the difference between demand pull inflation and cost push inflation in this article.

    CommerceList of Commerce ArticlesDifference Between Demand Pull And Cost Push Inflation

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    Difference between Demand Pull and Cost Push Inflation

    Inflation is referred to as the situation when the price level of goods and services rise, which leads to decline in the purchasing power in the economy or in other words decreases the buying power of the money.

    There are two types of inflation which arise either based on the demand side or price of inputs in the economy. The demand side factors result in formation of demand pull inflation and the supply side factors result in cost push inflation.

    Demand pull inflation arises when the aggregate demand becomes more than the aggregate supply in the economy. Cost pull inflation occurs when aggregate demand remains the same but there is a decline in aggregate supply due to external factors that cause rise in price levels.

    Let us look at some of the points of difference between demand pull inflation and cost push inflation.

    Demand Pull InflationCost Push Inflation Definition

    Inflation that occurs due to increase in aggregate demand is referred to as demand pull inflation

    Inflation that results from decline in aggregate supply due to external factors is referred to as cost push inflation.

    Impact of aggregate demand

    Increased aggregate demand results in demand pull inflation

    In cost push inflation the aggregate demand remains the same.

    Caused by

    Rise in aggregate demand

    Rise in price of inputs like raw materials, labour, etc

    What it represents

    The beginning of price inflation

    The idea that inflation is difficult to stop, once it has started

    Causative Factors

    Monetary factors and real factors

    Caused by business groups of society who respond to rise in costs of the product

    Prevalence

    Demand pull inflation occurs in most economies of the world

    Cost push inflation is not that relevant in current times

    This article was all about the topic of Difference between Demand Pull and Cost Push Inflation, which is an important topic for Commerce students. For more such interesting articles, stay tuned to BYJU’S.

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    Difference Between Demand

    There are a few differences between demand-pull and cost-push inflation which are discussed in this article. Demand-pull inflation is arises when the aggregate demand increases at a faster rate than aggregate supply. Cost-Push Inflation is a result of an increase in the price of inputs due to shortage of cost of production, leading to decrease in the supply of outputs.

    Difference Between Demand-Pull and Cost-Push Inflation

    Last updated on August 26, 2017 by Surbhi S

    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.

    Content: Demand-Pull Inflation Vs Cost-Push Inflation

    Comparison Chart Definition Key Differences Conclusion

    Comparison Chart

    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.

    Represents How price inflation begins? Why inflation is so difficult to stop, once started?

    Caused by Monetary and real factors. Monopolistic groups of the society.

    Policy recommendations Monetary and fiscal measures Administrative control on price rise and income policy.

    Definition of Demand-Pull Inflation

    Demand Pull Inflation arises when the aggregate demand goes up rapidly than the aggregate supply in an economy. In simple terms, it is a type of inflation which occurs when aggregate demand for products and services outruns aggregate supply due to monetary factors and/or real factors.

    Demand-Pull Inflation due to monetary factors: One of the major cause of inflation is; increase in money supply than the increase in the level of output. The German inflation, in the year 1922-23 is the example of Demand-Pull Inflation caused by monetary expansion.Demand-Pull Inflation due to real factors: When the inflation is due to any one or more of the following reasons, it is said to be caused by real factors:

    The increase in government spending without the change in tax revenue.

    Fall in tax rates, with no change in government spending

    Increase in investments

    Decrease in savings Increase in exports Decrease in imports

    Out of these six factors, the first four factors, will result in the rise in the level of disposable income. The increase in aggregate income result in the increase in aggregate demand for goods and services, causing demand-pull inflation.

    Definition of Cost-Push Inflation

    Cost push inflation means the increase in the general price level caused by the rise in prices of the factors of production, due to the shortage of inputs i.e. labour, raw material, capital, etc. It results in the decrease in the supply of outputs which mainly use these inputs. So, the rise in prices of the goods emerges from the supply side.

    Moreover, cost-push inflation may also be caused by depletion of natural resources, monopoly and so on. There are three kinds of cost-push inflation:

    Wage-push inflation: When the monopolistic groups of the society like labour union exercise their monopoly power, to enhance their money wages above the competitive level, which cause an increase in the cost of production.Profit-push inflation: When the monopoly power is used by the firms operating in the monopolistic and oligopolistic market to increase their profit margin, leading to rise in the price of goods and services.Supply shock inflation: A type of inflation arising due to unexpected fall in the supply of necessary consumer goods or major industrial inputs.

    Key Differences Between Demand-Pull and Cost-Push Inflation

    The differences between dDemand-pull and cost-push inflation can be drawn clearly on the following grounds:

    Demand-pull inflation arises when the aggregate demand increases at a faster rate than aggregate supply. Cost-Push Inflation is a result of an increase in the price of inputs due to the shortage of cost of production, leading to decrease in the supply of outputs.

    Demand-pull inflation describes, how price inflation begins? On the other hand, cost-push inflation explains Why inflation is so difficult to stop, once started?

    The reason for demand-pull inflation is the increase in money supply, government spending and foreign exchange rates. Conversely, cost-push inflation is mainly caused by the monopolistic groups of the society.

    The policy recommendation on demand-pull inflation is associated with the monetary and fiscal measure which amounts to the high level of unemployment. Unlike, cost push inflation, where policy recommendation is related to administrative control on price rise and income policy, whose objective is to control inflation without increasing unemployment.

    Source : keydifferences.com

    Inflation and Stagflation Flashcards

    Start studying Inflation and Stagflation. Learn vocabulary, terms, and more with flashcards, games, and other study tools.

    Inflation and Stagflation

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    Which federal agency calculates the Consumer Price Index (CPI)?

    Click card to see definition 👆

    b. US Bureau of Labor Statistics

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    Stagflation occurs when high inflation combines with

    Click card to see definition 👆

    a. high unemployment and a low level of production.

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    1/17 Created by chelseabailey19

    Terms in this set (17)

    Which federal agency calculates the Consumer Price Index (CPI)?

    b. US Bureau of Labor Statistics

    Stagflation occurs when high inflation combines with

    a. high unemployment and a low level of production.

    The graph shows changes in the US economy between 1971 and 2001.

    According to the graph, 1971 to 1976 was a period of stagflation due to

    a. rising unemployment and inflation.

    Why is gasoline weighted more heavily than tomatoes in a calculation of the annual inflation rate in the United States?

    d. Americans spend more money on gasoline than tomatoes, on average.

    How does demand-pull inflation differ from cost-push inflation?

    a. Demand-pull inflation is driven by consumers, while cost-push inflation is driven by producers.

    Which scenario is an example of demand-pull inflation?

    a. Consumers have more money to buy cars, and the prices of cars and car accessories rise as a result.

    Consumers having more money to purchase computers will most likely result in

    b. an increase in prices for computers and computer accessories.

    Which is an effect of stagflation?

    b. The value of a country's currency drops.

    Typically, low inflation is a sign of

    a. a healthy economy because it results from a steady rise in demand.

    Which is the best definition of inflation?

    b. a gradual increase in the price of goods and services

    Typically, high inflation is a sign of

    c. a struggling economy because wages cannot keep up with the increase in prices.

    What is one consequence of stagflation?

    a.The economy drastically slows down as money loses its buying power.

    Demand-pull inflation happens when the demand for goods

    d. increases

    What are the signs of high inflation? Check all that apply.

    a. Production begins to fall.

    d. Interest rates increase.

    e. Purchasing power falls.

    f. Fewer fixed rate bank loans.

    The inflationary spiral explains the causes and effects of high inflation.

    The spiral usually begins with an increase in demand. What is the direct effect of this increase?

    a. Producers raise prices to continue to make a profit.

    Hyperinflation can occur when

    d. the government prints a ton of money in order to pay off its debt.

    Which scenario is an example of cost-push inflation?

    b. An increase in workers' wages raises the production cost of cars, and car prices rise as a result.

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