80.112.140.134 at 07:22, 2 January 2014

2014-01-02T07:22:07Z

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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).<ref>[http://www.wisdomsupreme.com/dictionary/absolute-income-hypothesis.php WisdomSupreme.com], Retrieved 2008-05-29</ref>

==Background==
Keynes' General Theory in 1936 identified the relationship between [[income]] and [[Consumption (economics)|consumption]] as a key macroeconomic relationship. Keynes asserted that real consumption is a function of real disposable income, total income net of taxes. As income rises, the theory asserts, consumption will also rise but not necessarily at the same rate.<ref>[http://www.wisdomsupreme.com/dictionary/absolute-income-hypothesis.php WisdomSupreme.com], Retrieved 2008-05-29</ref> When applied to a cross section of a population, rich people are expected to consume a lower proportion of their income than poor people

[[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.<ref>Kuznets, S. (1946) ''National Income: A Summary of Findings'', New York: National Bureaus of Economic Research.</ref>

==Model==
<math> C_{t} = \lambda Y_{t}</math>

Where: <br />
*<math> C_{t}</math> is consumption at time t.
*<math> \lambda </math> is the [[Marginal propensity to consume]] (<math> 0<\lambda<1</math>)
*<math> Y_{t}</math> is income at time t.

==Notes==
{{Reflist}}

==References==
* Keynes, John M. ''The General Theory of Employment, Interest and Money.'' London: Macmillan, 1936.

{{Consumption}}

[[Category:Macroeconomics]]

{{econ-theory-stub}}

Scherrer equation - Revision history

80.112.140.134 at 07:22, 2 January 2014