Permanent Income Hypothesis

AAA

DEFINITION of 'Permanent Income Hypothesis'

A theory of consumer spending which states that people will spend money at a level consistent with their expected long term average income. The level of expected long term income then becomes thought of as the level of "permanent" income that can be safely spent. A worker will save only if his or her current income is higher than the anticipated level of permanent income, in order to guard against future declines in income.

INVESTOPEDIA EXPLAINS 'Permanent Income Hypothesis'

The permanent income hypothesis was formulated by the Nobel Prize winning economist Milton Friedman in 1957. The hypothesis implies that changes in consumption behavior are not predictable, because they are based on individual expectations. This has broad implications concerning economic policy. Under this theory, even if economic policies are successful in increasing income in the economy, the policies may not kick off a multiplier effect from increased consumer spending. Rather, the theory predicts there will not be an uptick in consumer spending until workers reform expectations about their future incomes.

RELATED TERMS
  1. Income

    Money that an individual or business receives in exchange for ...
  2. Positional Goods

    Goods which act as a status symbols, signaling their owners' ...
  3. Consumption Smoothing

    The ways in which people try to optimize their lifetime standard ...
  4. Portfolio Income

    Income from investments, dividends, interest, royalties and capital ...
  5. Autonomous Consumption

    The minimum level of consumption that would still exist even ...
  6. Consumption Function

    The consumption function is a mathematical formula laid out by ...
Related Articles
  1. Stop Keeping Up With The Joneses - They're ...
    Budgeting

    Stop Keeping Up With The Joneses - They're ...

  2. Managing Income During Retirement
    Budgeting

    Managing Income During Retirement

  3. The Disposable Society: An Expensive ...
    Credit & Loans

    The Disposable Society: An Expensive ...

  4. Your Dividend Payout: Can You Count ...
    Markets

    Your Dividend Payout: Can You Count ...

Hot Definitions
  1. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  2. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  3. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  4. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  5. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  6. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
Trading Center