c



 


The text "Economics" (2nd Edition) by Parkin and Bade gives the following explanation for cost -push inflation:
"Inflation can result from a decrease in aggregate supply. The two main sources of decrease in aggregate supply are
!p ¦n increase in wage rates
!p ¦n increase in the prices of raw materials
These sources of a decrease in aggregate supply operate by increasing costs, and the resulting inflation is called ` 



Other things remaining the same, the higher the cost of production, the smaller is the amount produced. ¦t a given price
level, rising wage rates or r ising prices of raw materials such as oil lead firms to decrease the quantity of labor employed and
to cut production." (pg. 865)

¦ggregate supply is the "the total value of the goods and services produced in a country" or simply factor 2, "The supply of
goods". The supply of goods can be influenced by factors other than an increase in the price of inputs (say a natural disaste r),
so not all factor 2 inflation is cost -push inflation.

Of course, the next question would be "What caused the price of inputs to rise?". ¦ny combinations of the four factors could
cause that, but the two most likely are factor 2 (Raw materials such as oil have become more scarce), or factor 4 (The
demand for raw materials and labor have risen).

c

c 
 


Parkin and Bade give the following explanation for demand -pull inflation:
"The inflation resulting from an increase in aggregate demand is called   
. Such an inflation may arise
from any individual factor that increases aggregate demand, but the main ones that generate Y
Y
increases in aggregate
demand are
1.p Increases in the money supply
2.p Increases in government purchases
3.p Increases in the price level in the rest of the world
"(pg. 862)
Inflation caused by an increase in aggregate demand, is inflation caused by factor 4 (¦n increase in the demand for goods).
The three most likely causes of an increase in aggregate demand will also tend to in crease inflation:
1.p `     This is simply factor 1 inflation.
2.p `     `  The increased demand for goods by the government causes factor 4 inflation.
3.p `    `     
   Suppose you are living in the United States. If the price of gum
rises in Canada, we should expect to see less ¦mericans buy gum from Canadians and more Canadians purchase the
cheaper gum from ¦merican sources. From the ¦merican perspective the demand for gum has risen causing a price
rise in gum; a factor 4 inflation.


 

Cost-push inflation and demand-pull inflation can be explained using our four inflation factors. Cost -push inflation is
inflation caused by rising prices of inputs that causes fa ctor 2 (The supply of goods goes down) inflation. Demand -pull
inflation is factor 4 inflation (The demand for goods goes up) which can have many causes.

`
` 
ppp



p p
p p
p p
p
pp  pp pp

  p 
p

p

p
pp  pp

p 
pp pp  pp
p

p
p p 
pp

 p
p   p 
p

p

p
pp

pp

p
 
pp
 p
p 
p


pp p
 p
 p
p   p
p

!p 


 p
p
 p p
 p p p

 p
p
 p
p
"
p p 
p 
p


 
`
`
p
c
 pp p
 p p pp
 pp p
p 
p p p pp  p p
 p ppp  
 p p p ppp pp p p p pp pp  p
 p ppp p
 pp
 pp p p p p pp
   ppp
 p
p p  p

p  p p
 p p
 p
p p 
p pp
 p p p p
p

pp p


p p p 
p p p p pp 

 p
p p  p  pp
 p p

 p p pp p p
p p p  p p p pp p
 p
 p
pp
p
pp p pp
p p p p p ppppp p
p p
 p p   p p p  ppp 
 p
 pp  p

  p

p
p

p

p
 p
  p

p
  
p

p
 p p
 p  p

p
 pp p  p  p p p p!"pppp

pp
 p p 
p 
pp
 p
ppp pp#p pp p ppp$%p p p
p p! pp p&%%'pp
pp

p
÷
p p
 ppp pp  p
p
p
p
pp p p p
 ppp
ppp p  pp pp p
p
 p pp  pp p p pp ppp pp
p p pp p p
pppp p  pp÷ 
 p p
p p
pppp

 p pp!"p
pppp

 p pp
p
p p
#pp pp
 p pppp pp  pp  p p pppp
 pp p
p$p p p
pp pp
pp p
p÷p
ppp ppp  p ppp pp p
p p
 p pp % p p   pp  pp ppp  pp
ppp
ppppppp &p
pppp p
 pppp ppp
pp
pp p  pp pp p
p 'pp
pppp p  p
p
p
pp