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Definition of Cost-Push Inflation 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

An increase in wage rates An 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 cost-push inflation Other things remaining the same, the higher the cost of production, the smaller is the amount produced. At a given price level, rising wage rates or rising prices of raw materials such as oil lead firms to decrease the quantity of labor employed and to cut production." (pg. 865) Aggregate 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 disaster), 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?". Any 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).

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

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