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The permanent income hypothesis (PIH) is a theory of consumption
Consumption (economics)

Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt. Generally consumption is defined by opposition to Production theory basics....
 that was developed by the American economist
Economist

An economist is an expert in the social science of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy....
 Milton Friedman
Milton Friedman

Milton Friedman was an United States economist, statistician and public intellectual, and a recipient of the Nobel Memorial Prize in Economic Sciences....
. In its simplest form, the hypothesis states that the choices made by consumer
Consumer

Consumer is a broad label that refers to any individuals or household that use Good generated within the economic system. The concept of a consumer is used in different contexts, so that the usage and significance of the term may vary....
s regarding their consumption patterns are determined not by current
Present (time)

The present is the time that is perception directly, not as a recollection or a speculation. It is often considered as a hyperplane in space-time, often called now, but it may also be viewed as a duration ....
 income but by their longer-term income expectation
Expectation

In the case of uncertainty, expectation is what is considered the most likely to happen. An expectation, which is a belief that is centred on the future, may or may not be realistic....
s. The key conclusion of this theory is that transitory, short-term changes in income have little effect on consumer spending behavior.

Measured income
Income

Income, refers to consumption opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings received......
 and measured consumption contain a permanent (anticipated and planned) element and a transitory (windfall gain
Windfall gain

A windfall gain is any type of income that is unexpected.The etymology of the phrase is from colonial times. "The The Crown precluded the colonists from using any lumber one foot or wider except whereby act of God, such as a severe storm, a tree falling on one's own property....
/unexpected) element.






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The permanent income hypothesis (PIH) is a theory of consumption
Consumption (economics)

Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt. Generally consumption is defined by opposition to Production theory basics....
 that was developed by the American economist
Economist

An economist is an expert in the social science of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy....
 Milton Friedman
Milton Friedman

Milton Friedman was an United States economist, statistician and public intellectual, and a recipient of the Nobel Memorial Prize in Economic Sciences....
. In its simplest form, the hypothesis states that the choices made by consumer
Consumer

Consumer is a broad label that refers to any individuals or household that use Good generated within the economic system. The concept of a consumer is used in different contexts, so that the usage and significance of the term may vary....
s regarding their consumption patterns are determined not by current
Present (time)

The present is the time that is perception directly, not as a recollection or a speculation. It is often considered as a hyperplane in space-time, often called now, but it may also be viewed as a duration ....
 income but by their longer-term income expectation
Expectation

In the case of uncertainty, expectation is what is considered the most likely to happen. An expectation, which is a belief that is centred on the future, may or may not be realistic....
s. The key conclusion of this theory is that transitory, short-term changes in income have little effect on consumer spending behavior.

Measured income
Income

Income, refers to consumption opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings received......
 and measured consumption contain a permanent (anticipated and planned) element and a transitory (windfall gain
Windfall gain

A windfall gain is any type of income that is unexpected.The etymology of the phrase is from colonial times. "The The Crown precluded the colonists from using any lumber one foot or wider except whereby act of God, such as a severe storm, a tree falling on one's own property....
/unexpected) element. Friedman concluded that the individual will consume a constant proportion
Proportionality (mathematics)

In mathematics, two quantity are called proportional if they vary in such a way that one of the quantities is a constant multiple of the other, or equivalently if they have a constant ratio....
 of his/her permanent income
Income

Income, refers to consumption opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings received......
; and that low income earners have a higher propensity to consume; and high income earners have a higher transitory element to their income and a lower than average propensity to consume
Average Propensity to Consume

Average propensity to consume is the percentage of income spent. To find the percentage of income spent, one needs to divide Consumption by income, or...
.

In Friedman's permanent income hypothesis model, the key determinant of consumption is an individual's real wealth, not his current real disposable income. Permanent income is determined by a consumer's assets; both physical (shares, bonds, property) and human (education and experience). These influence the consumer's ability to earn income. The consumer can then make an estimation of anticipated lifetime income.

See also

  • Consumption function
    Consumption function

    In economics, the consumption function is a single mathematical function used to express consumer spending. It was developed by John Maynard Keynes and detailed most famously in his book The General Theory of Employment, Interest, and Money....
  • Life cycle hypothesis
    Life Cycle Hypothesis

    The Life Cycle Hypothesis is an economics concept analysing individual consumption patterns. It was developed by the economists Irving Fisher, Roy Harrod, Alberto Ando and Franco Modigliani....
  • Income#Meaning in economics and use in economic theory
    Income

    Income, refers to consumption opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings received......
  • Milton Friedman
    Milton Friedman

    Milton Friedman was an United States economist, statistician and public intellectual, and a recipient of the Nobel Memorial Prize in Economic Sciences....


External links

  • Robert Schenk, ""