In economics, the absolute income hypothesis concerns how a consumer divides their disposable income between consumption and saving.[1] It is part of the theory of consumption proposed by economist John Maynard Keynes. The hypothesis was subject to further research in the 1960s and 70s, most notably by American economist James Tobin (1918–2002).[2]
Keynes' General Theory in 1936 identified the relationship between income and consumption as a key macroeconomic relationship. Keynes asserted that real consumption (i.e. adjusted for inflation) is a function of real disposable income, which is total income net of taxes. As income rises, the theory asserts that 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] Keynes' consumption function has come to be known as 'absolute income hypothesis' or 'absolute income theory'. His statement of the relationship between income and consumption was based on psychological law.
absolute, income, hypothesis, this, article, multiple, issues, please, help, improve, discuss, these, issues, talk, page, learn, when, remove, these, template, messages, this, article, includes, list, general, references, lacks, sufficient, corresponding, inli. This article has multiple issues Please help improve it or discuss these issues on the talk page Learn how and when to remove these template messages This article includes a list of general references but it lacks sufficient corresponding inline citations Please help to improve this article by introducing more precise citations July 2016 Learn how and when to remove this template message This article needs additional citations for verification Please help improve this article by adding citations to reliable sources Unsourced material may be challenged and removed Find sources Absolute income hypothesis news newspapers books scholar JSTOR July 2016 Learn how and when to remove this template message Learn how and when to remove this template message In economics the absolute income hypothesis concerns how a consumer divides their disposable income between consumption and saving 1 It is part of the theory of consumption proposed by economist John Maynard Keynes The hypothesis was subject to further research in the 1960s and 70s most notably by American economist James Tobin 1918 2002 2 Contents 1 Background 2 Model 3 See also 4 Notes 5 ReferencesBackground editKeynes General Theory in 1936 identified the relationship between income and consumption as a key macroeconomic relationship Keynes asserted that real consumption i e adjusted for inflation is a function of real disposable income which is total income net of taxes As income rises the theory asserts that 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 Keynes consumption function has come to be known as absolute income hypothesis or absolute income theory His statement of the relationship between income and consumption was based on psychological law Model editThe model is Ct a lYt displaystyle C t alpha lambda Y t nbsp where Ct displaystyle C t nbsp is consumption at time t a displaystyle alpha nbsp is autonomous consumption a constant l displaystyle lambda nbsp is the marginal propensity to consume 0 lt l lt 1 displaystyle 0 lt lambda lt 1 nbsp Yt displaystyle Y t nbsp is disposable income at time t See also editConsumption functionNotes edit R L Thomas 1985 Introductory econometrics theory and applications London Longman p 160 ISBN 058229634X OCLC 10348689 a b absolute income hypothesis Archived 2019 04 21 at the Wayback Machine wisdomsupreme com Retrieved 2019 03 01 Kuznets S 1946 National Income A Summary of Findings New York National Bureaus of Economic Research References editKeynes John M The General Theory of Employment Interest and Money London Macmillan 1936 nbsp This article related to macroeconomics is a stub You can help Wikipedia by expanding it vte Retrieved from https en wikipedia org w index php title Absolute income hypothesis amp oldid 1193839367, wikipedia, wiki, book, books, library,
