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. Consumption Function

    The consumption function is a mathematical formula laid out by ...
  5. Portfolio Income

    Income from investments, dividends, interest, royalties and capital ...
  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. Investing

    What Has Been Groupon’s Growth Strategy?

    Groupon established a strategy with efforts to become a broader force in the e-commerce world and to expand more strongly into international markets.
  7. Economics

    The Impact Of Ending The US Embargo On Cuba

    Many argue that ending the US embargo on Cuba will not only make US consumers happy, but also help the US economy and bring more freedoms to Cuba.
  8. Budgeting

    How Your Government's Budgetary Decisions Impact the Public Sector

    Issues facing the public sector are not unlike some issues facing America’s oldest and largest companies, but with larger and broader impacts.
  9. Economics

    Afraid Of A New Financial Crisis?

    It may be time for the U.S. to adopt a model for financial companies that better deters risky financial behavior.
  10. Budgeting

    Ready To Save Money While Eating Healthy?

    These six cheap and nutritious foods are a perfect way to deal with rising grocery prices while staying healthy.

You May Also Like

Hot Definitions
  1. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  2. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  3. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  4. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  5. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  6. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
Trading Center