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. Consumption Function

    The consumption function is a mathematical formula laid out by ...
  6. Autonomous Consumption

    The minimum level of consumption that would still exist even ...
Related Articles
  1. Budgeting

    Stop Keeping Up With The Joneses - They're Broke

    Conspicuous consumption could be robbing you of future wealth.
  2. Budgeting

    Managing Income During Retirement

    Learn some sensible strategies for making your hard-earned savings last for as long as you need them.
  3. Credit & Loans

    The Disposable Society: An Expensive Place To Live

    Resisting the trend toward consumption will boost your bottom line and bolster the environment.
  4. Markets

    Your Dividend Payout: Can You Count On It?

    We go over several telling factors that can help you answer this question and avoid losses.
  5. Budgeting

    Downshift To Simplify Your Life

    Learn how to ditch the rat race with voluntary simple living.
  6. Economics

    No Exit: What Could Happen If the Eurozone Breaks Up?

    There is no exit strategy for nations in the eurozone or the EU because most members acknowledge that they are far better off together than apart.
  7. Economics

    How do economies of scale work with globalization?

    Discover how globalization can lead to unprecedented economies of scale for firms across the world, leading to higher global efficiency and productivity.
  8. Fundamental Analysis

    What is arbitrage pricing theory?

    Find out what arbitrage pricing theory is and how it can theoretically be used by investors to generate risk-free profit opportunities.
  9. Trading Strategies

    How can retirees protect their wealth in a bear market?

    Look at some helpful hints about how to protect your retirement nest egg when the stock market is underperforming or the economy is in recession.
  10. Fundamental Analysis

    What is the difference between operating cash flow and net income?

    Learn how net income is an income statement for a certain period of time, while cash flow shows inflows and outflows based on conversion of sales into cash.

You May Also Like

Hot Definitions
  1. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  2. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  3. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  4. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  5. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  6. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
Trading Center