Permanent Income Hypothesis

Discipline: Economics

Developed by American economist Milton Friedman (1912-1992), in its simplest form, permanent income hypothesis states that the choices consumers make regarding their consumption patterns are determined not by current income but by their longer-term income expectations.

Measured income and measured consumption contain a permanent (anticipated and planned) element and a transitory (windfall/unexpected) element. Friedman concluded that the individual will consume a constant proportion of his/her permanent income; and that low income earners have a higher propensity to consume; and high income earners have a higher transitory element to their income and a lower than average propensity to consume.

Also see: absolute income hypothesis, life-cycle hypothesis, relative income hypothesis

Source:
M Friedman, 'A Theory of the Consumption Function', National Bureau of Economic Research (Princeton, N.J., 1957)

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