This action might not be possible to undo. Are you sure you want to continue?
From Wikipedia, the free encyclopedia
Jump to: navigation, search This economic theory related article is a stub. You can help Wikipedia by expanding it. The Absolute Income Hypothesis is theory of consumption proposed by English economist John Maynard Keynes (1883–1946), and has been refined extensively during the 1960s and 1970s, notably by American economist James Tobin (1918–2002).
• • • •
1 Background 2 Model 3 Notes 4 References
The theory examines the relationship between income and consumption, and asserts that the consumption level of a household depends on its absolute level (current level) of income. As income rises, the theory asserts, consumption will also rise but not necessarily at the same rate. 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.
Ct = λYt
Ct is consumption at time t.
1949. Unsourced material may be challenged and removed. J. the free encyclopedia Jump to: navigation. The percentage of income consumed by an individual depends on his percentile position within the income distribution. but also by levels of consumption attained in previous period. Relative income hypothesis From Wikipedia. The aggregate ratio of consumption to income is assumed to depend on the level of present income relative to past peak income. S. Please help improve this article by adding citations to reliable sources.• • λ is the Marginal propensity to consume (0 < λ < 1) Yt is income at time t. Cambridge: Harvard University Press. Secondly it hypothesises that the present consumption is not influenced merely by present levels of absolute and relative income. Income. . (March 2008) Developed by James Duesenberry. search This article does not cite any references or sources. It is difficult for a family to reduce a level of consumption once attained. the relative income hypothesis states that individual’s attitude to consumption and saving is dictated more by his income in relation to others than by abstract standard of living. So an individual is less concerned with absolute level of consumption than by relative levels.  References Dusenberry. Saving and the Theory of Consumer Behaviors.