permanent-income hypothesis

Definitions

Economics

  • noun the theory (proposed by Milton Friedman) that an individual’s spending is not based on real disposable income, but on his or her estimates of whether the current income is likely to continue into the future. People base their consumption on what they consider their normal income, and try to maintain a fairly constant standard of living even though their incomes may vary considerably from month to month or from year to year. As a result, increases and decreases in income which people see as temporary have little effect on their consumption spending. According to this theory, consumption depends on what people expect to earn over a considerable period of time; they save during periods of high income and stop saving during periods of low income. This theory took the place of the relative-income hypothesis.

Marketing

  • noun the theory that people spend according to the average income they expect to receive in their lifetime
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