Lecture No.4
Cost
Pull Inflation Causes And Remedies
Cost
push inflation is the concept first given in 1958 by Charles schultze.
Definition
of cost push inflation
Cost
push inflation is a situation when aggregate demand remaining the same but
aggregate supply reduced. Cost push inflation take place due to increase in the
cost of production while aggregate demand remain the same. The concept can be
explain with the help of Figure 4.1 below.
Figure 4.1
Explanation: in
the above Figure AS and AD intersect at point E0 to each other equilibrium
level of employment is determined as YE0 and price level 0P0. Now if AD remains
same but AS reduce in the economy.
AS
shift left upward at position A1B,AD CURVE
intersect at new Point E1 price will be increase as 0P0 to 0P1 and
Employment level reduce YE0 to YE1. If AS decrease again and AS become A2B
which cuts AD at point E2 price level increased from 0P1 to OP2 but employment
level reduced at YE2 which is below the level of full employment here we can see
that this increase in price due to reduction in AS and decrease in employment
level also due to decrease in ASI.
The
concept of cost push inflation as given in 1958 was a price dalimia. According
to this concept increase in the wage level was due to power of labor Unions (This concept was further explain in the situation of wage price
war (spiral)).
According
to the concept when labor union are strong enough and their demand for the
increase in wage is accepted at one time on other side owner of the firms
increase the price of their production in the same proportion due to this, real
purchasing power of the laborer remain the same or if the change in price level
is greater, than their real wages are reduced on next time. Laborer demand more
increase in their money Wage and if their demand is being accepted. Then is a
further increase level by the procedures such action and reaction chain
established it is called wage price war as shown Figure 4.2 below.
Figure 4.2
Explanation:
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In
this Figure at one time period wage level A and price level is A1.if labor
Union demand for increasing in their wages and their demand is accepted then wage
increase from A to B. Now procedure increase price level from A1 to B1. If increase in price level is greater
than increase in wage of the laborer then real wage level will be reduce. When prices
are increased by the procedure it will be price push inflation.
If inflation is the due to increase in wage it will be wage push
inflation. Now if laborer are powerful. They demand
for increase in their Wages and their demand is accepted wage will be increase
from B to C.
As
a result procedure will increased prices from B1 TO C1. If increase in price is
smaller, there will be increase in real purchasing power of labor
Now
we explain cost pull inflation with IS, LM approach:
Figure
4.3
Explanation:
In
the Figure, Three market in equilibrium at POINT E0, Employment is determined YF
and price level is determinal P1. When prices are increased from LM/P0 to LM/P1
real money supply is reduced, So LM curve shift left upward and new equilibrium
level of employment is also reduced from YF to YE1 and price level will be P2.
Causes
or Reason for Cost Pull Inflation:
There
can be different reasons which brings increase in cost of the production as a
resulting there will be cost push inflation. These reason can be of fallowing
types.
1. Wage Push Inflation (Due To Power Of Labor Unions)
If
labor union are powerful they can demand for increase in their wages so it will
be must for procedure to pay higher wage to laborers. In this way cost of
production will be increased and there will be wage push inflation.
2. Profit Push Inflation (Due To Power Of
Monopoly And Oligopoly):
If
procedure increased price due to in maximized their profits and their position
is very strong like as monopolist or oligopoly. This inflation is profit push
inflation.
3. Rising Of Price Of Imported Raw Materials
If
price of raw material in international market are increased. There will also be
increase in the production cost and due to this increase in cost of production.
There will be cost push Inflation.
4. Increase In Indirect Taxes (Commodities
Taxes):
If government
increase his indirect taxes. There will be an increase in production cost
because of this increase in taxes which government takes from procedures they
refers this increased to the commodity price and there will be cost push
inflation.
5. International Factor (Trade Barriers)
Sometime
government increase energy prices or increase in the price of capital goods due
to barriers on trade to the international financial institution there will be cost
pull inflation.
6. Political Factor
(Burden
of loan and investment, role of International financial institution):
When
International financial institution gives loan to any country. They make
barriers on the country to increase prices of some specific goods or services, so
this create cost-push inflation.
7. Structural Inflation (Exchange Rate Devaluation, Deterioration In
Terms Of Trade)
If
devaluation of currency is appeared then cost of production will increased due
to this devaluation so there will be cost push inflation. In other words if
imports of any country are more than export then price of goods will be
increased.
8. Administration Price Increase (When Price Are Increased By Some Authority
Specially Government)
If
government increased price of raw material or services by the government then cost
of production will also increased and there will be cost push inflation.
9. Sluggish Industrial Product:
When
production of some industrial is sluggish there will be cost push inflation or
in other words if production of different industries are increase or decrease
at different times period then these fluctuation creates inflation.
10.Holding And Black Marketing:
If
producer’s hold their production in stores are they buy all the goods from
market for the purpose of highest profit or another words they create shortage
in the country there will be inflation.
Author: Nasir Mehmood Ch مصنف: ناصرمحمود چوہدری
Email: Nasirmehmoodch97@gmail.com
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