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Absolute income hypothesis

From Wikipedia, the free encyclopedia

In economics, the absolute income hypothesis concerns how a consumer divides his disposable income between consumption and saving.[1] It is part of the theory of consumption proposed by economist John Maynard Keynes. The hypothesis was refined extensively during the 1960s and 1970s, notably by American economist James Tobin (1918–2002).[2]

Background

Keynes' General Theory in 1936 identified the relationship between income and consumption as a key macroeconomic relationship. Keynes asserted that real consumption (ie adjusted for inflation) is a function of real disposable income, which is total income net of taxes. As income rises, the theory asserts, consumption will also rise but not necessarily at the same rate.[2] When applied to a cross section of a population, rich people are expected to consume a lower proportion of their income than poor people.

The marginal propensity to consume is present in Keynes' consumption theory and determines by what amount consumption will change in response to a change in income.

While this theory has success modeling consumption in the short term, attempts to apply this model over a longer time frame have proven less successful. This has led to the absolute income hypothesis falling out of favor as the consumption model of choice for economists.[3]

Model

The model is

where:

See also

Notes

  1. ^ R. L., Thomas (1985). Introductory econometrics, theory and applications. London: Longman. p. 160. ISBN 058229634X. OCLC 10348689.
  2. ^ a b "absolute income hypothesis Archived 2019-04-21 at the Wayback Machine", wisdomsupreme.com. Retrieved 2019-03-01
  3. ^ Kuznets, S. (1946) National Income: A Summary of Findings, New York: National Bureaus of Economic Research.

References

  • Keynes, John M. The General Theory of Employment, Interest and Money. London: Macmillan, 1936.
This page was last edited on 8 May 2021, at 22:41
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