Permanent income hypothesis (PIH) focuses on permanent income for consumption decisions
Permanent income hypothesis
Permanent income hypothesis (PIH) focuses on permanent income for consumption decisions
The permanent income hypothesis posits that individuals base their consumption on expected long-term income rather than temporary fluctuations. This contrasts with traditional Keynesian views that emphasize immediate income changes affecting consumption patterns.
Example
If a person receives a permanent salary increase, they will likely increase their consumption gradually over time, reflecting their new permanent income level.
Remember this
Understanding this helps explain why consumption doesn't always spike with temporary income gains, highlighting the importance of long-term income expectations in economic behavior.
Text adapted from Wikipedia, licensed under CC BY-SA 4.0.
Related concepts
Mental accounting
Mental accounting influences spending and saving decisions
Economics
Keynesian economics emphasizes aggregate demand as a driver of employment
Paradox of thrift
Paradox of thrift: individual saving decreases aggregate demand and gross output
Quantity theory of money
MV = PY equation
Economic growth
How does more money, people, and machines affect a country's wealth?
Endowment effect
People value owned items more than unowned ones
Educational content, not financial advice.
Swipe through 100 ML concepts daily
Open Pocket Polymath