Friedman's Permanent Income Hypothesis
After the Second World War, it was noticed that a model in which current consumption was just a function of current income clearly too simplistic. It could not explain the fact that the long-run average propensity to consume seemed to be roughly constant despite the marginal propensity to consume being much lower. Friedman's Permanent Income Hypothesis are one of the models which seeks to explain this apparent contradiction.
According to the Permanent Income Hypothesis, permanent consumption, CP, is proportional to permanent income, YP. Permanent income is a subjective notion of likely medium-run future income. Permanent consumption is a similar notion of consumption.
Actual consumption, C, and actual income, Y, consist of these permanent components plus unanticipated transitory components, CT and YT, respectively.
CPt =β2YPt
Ct = CPt + CTt
Yt = YPt + YTt
Read more about this topic: Intertemporal Choice
Famous quotes containing the words friedman, permanent, income and/or hypothesis:
“Corporate America will likely be motivated to support child care when it can be shown to have positive effects on that which management is concerned about—recruitment, retention and productivity. Indeed, employers relate to child care as a way to provide growth fostering environments for young managers.”
—Dana E. Friedman (20th century)
“There is no permanent class of hired laborers amongst us. Twenty five years ago, I was a hired laborer. The hired laborer of yesterday, labors on his own account today; and will hire others to labor for him tomorrow. Advancement—improvement in condition—is the order of things in a society of equals.”
—Abraham Lincoln (1809–1865)
“Strictly speaking, every citizen above a certain level of income is guilty of some offense.”
—Max Frisch (1911–1991)
“The hypothesis I wish to advance is that ... the language of morality is in ... grave disorder.... What we possess, if this is true, are the fragments of a conceptual scheme, parts of which now lack those contexts from which their significance derived. We possess indeed simulacra of morality, we continue to use many of the key expressions. But we have—very largely if not entirely—lost our comprehension, both theoretical and practical, of morality.”
—Alasdair Chalmers MacIntyre (b. 1929)