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Inflation — Economics STD 10 — Question

ICSE BoardEnglish MediumSTD 10EconomicsInflation4 Marks
Question
Distinguish between demand pull inflation and cost push inflation.
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Answer

Causes of Demand Pull Inflation. Demand pull inflation is mainly caused by the following factors :
(i) Increase in Money Supply : The first major cause of demand pull inflation is increase in the supply of money which leads to increase in aggregate demand. Supply of money includes currency with the public and demand deposits at banks. This is money in spendable form. Demand deposits at banks can be withdrawn at any time and hence act as medium of exchange.
(ii) Increase in Disposable Income : When the disposable income of the people increases it raises their demand for goods and services leading to demand pull inflation.
(iii) Increase in Population : Increase in population is another major cause responsible for rise in prices. Increase in population means increased demand for consumer goods. It increases the aggregate demand for goods and services and puts pressure on the existing supply of goods and services.
(iv) Increase in Export Demand : Expansion in foreign demand as a result increase in exports will raise the incomes of poor people. This will push up demand for goods and services within the country.
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(v) High Rate of Investment : The heavy investments made by the government as well as private industrialists have resulted in continuous increase in the prices of capital goods and other items of production.
Causes of Cost Push Inflation. The cost push inflation is caused by the following factors:
(i) Rise in Wages : Rise in wages has been considered as the main determinant of cost push inflation. This is because in modern times, workers have organised themselves into strong trade unions which have succeeded in getting higher wages for their members.
(ii) Increase in the Price of Basic Materials : Cost push inflation is also caused by increase in the prices of some basic materials, such as steel, basic chemicals, oil, etc. Since, these materials are used directly or indirectly in almost all the industries, any increase in their prices affect the whole of the economy and the prices everywhere tend to increase.
(iii) Higher Taxes : Another important cause of cost push inflation is the imposition of higher taxes on commodities, like excise duties, sales tax etc. These taxes are largely passed over by the producers to the consumers by the amount of taxes.
(iv) Oil Price Hike and Global Inflation : Global inflation and hike in oil prices has resulted in higher impact of crude oil from abroad. It results in rise in prices of diesel, petrol and other petroleum products in India.
(v) Administrative Price : Administrative price refers to price fixed by government for essential goods. Price level in the country has also increased due to frequent hike in the administered prices like railway flights, port charges coal, steel, and goods produced by public sector industries.

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