-In a less than fully employed economy, demand side inflation raises price level but at the same time output as well as employment level also rises. On the other hand, in supply side inflation, price level rises but employment and output falls due to decrease in supply.Thus, supply side inflation has two costs: fall in purchasing power and rise in unemployment. Thus, supply side inflation is more painful for the economy.
2 comments:
this situation called as stagflation.
Sir:
Well said! Such thinking as yours is rare and, like rare money, is of very great value.
I hold that the cost problem need not be sudden, unexpected, temporary, or severe, as supply shocks are always said to be. The cost problem could arise from the gradual, persistent growth of a cost such as the cost of finance.
The continuing rise of cost pressure resulting from this gradual but persistent growth would contribute to low but persistent supply-side inflation. This would lead to a persistent decline in economic growth such as the "advanced" world has now seen for four decades or more.
No one seems to notice that demand-side and supply-side inflation have opposite effects on economic growth. No one but you. Thank you!
Post a Comment