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Ashwani Panesar, Lovely Professional University Unit-9: Permanent Income and Life Cycle Hypothesis

UNIT-9: Permanent Income and Life Notes

Cycle Hypothesis

Contents
Objectives
Introduction
9.1 Permanent Income Hypothesis
9.2 Life Cycle Hypothesis
9.3 Summary
9.4 Keywords
9.5 Review Questions
9.6 Further Readings

Objectives

After studying this unit, students will be able to:
y Know the Permanent Income Hypothesis,
y Know the Life Cycle Hypothesis.

Introduction

Friedman defines permanent income like that, “Consumer-unit can consume such quantity of income
to keep his money safe (or understand that can consume). ” That income is major for any familial unit
that further depends on time-horizon and foresight. These all are included with in it like personal
qualities of non-human earners of family, qualities of economic activities of earners like their business,
place of economic activities etc.

9.1 Permanent Income Hypothesis

Friedman presented one more solution of direct opposition between the function of rational long period
and non-rational short period by the median of his permanent income Hypothesis. Friedman rejected
that opinion “current or measured income“ decided the consumption expenses and on that place he
assume that consumption and expenditure both have two parts—permanent and transitory, like
Y or Y = Y + Y ...(1)
m p t
C = C + C ...(2)
p t
Where p =permanent, t=transitory, Y= income and C=consumption.
Friedman defines permanent income like that, “Consumer-unit can consume such quantity of income
to keep his money safe (or understand that can consume).” That income is major for any familial unit
that further depends on time-horizon and foresight. These all are included with in it like personal
qualities of non-human earners of family, qualities of economic activities of earners like their business,
place of economic activities etc.

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