Page 81 - DECO402_Macro Economics

Macroeconomic Theory

Notes Because the measured and current income of consumer is Y, so it can be more or less in any duration
from its permanent income. This type of difference in measured income and permanent income are
because of transitory part (y ). According to the immediate profit and loss and cyclical change, transitory
t
income can be increases or decreases. If transitory income will be positive because of immediate profit,
then measured income will be increased. If due to theft (or because of loss) transitory income will be
negative, then fix income will be less then transitory income. Transitory income can be also zero and
in that situation measured income will be equals to the permanent income.

Self Assessment
Fill in the blanks:
1. Friedman rejected that opinion “current or measured income“ determines
……………………………..
2. According to the immediate profit and loss and cyclical change, transitory income can
be……………………………
Permanent consumption is the value of these services which planes consumption in any special
duration. Measured consumption is also divided in two parts: permanent consumption (C ) and
P
transitory consumption (C ). Measured consumption can be more, less or equals to the permanent
t
consumption that will depend on that thing is transitory consumption is positive, negative or zero.
The coefficient (k)of permanent consumption (C ) and permanent income is (y ).
P P
C = k Y P
P
And, k = f(r, w, u)
So, C = k(r, w, u) Y ...(3)
P P
Where k (coefficient), the function of rate of interest (r), total money and the ratio of assets or non-
assets from national income (w), and the consumption nature of consumer (u). So constant is k (= C /
P
Y ) that are free from permanent income. Thus k is the permanent and frontier nature of consumption
P
and APC = MPC.
Friedman analyzed that off-setting powers by which that conclusion find out. If interest rate (r) is
taken, then it is falling secularly from the decade of 1920 A.D. By it’s the value of k increases. But the
ratio of assets and non-assets income from national money are long period downfall. By it’s the value
of k decreases. The nature of consumption is affected by three reasons. First, the population of farms
(field) downfall fast by which the consumption increased with unbans. So the value of k increased.
Second, the structure of families reduced. So saving increased so the value of k reduced. Third, social
security arrangement increased by state government. So the necessity of more saving is finished. So
the nature of consumption increased so the value of k increased. The total effect of these portal powers
is that consumption increased by ratio of change in the stable income part.
So, According to Friedman, permanent income and consumption are proportionate related.

C = kY ...(4)
p
Where k is the proportionality coefficient, in which APC and MPC are contained and which depends
on above described factors. In other words, it is that proportion of permanent income, which is
consumed.
Now we take the permanent income, which Friedman considers on the time series basis that the
permanent income depends partly on current income and partly on previous period’s income. It can
be measured as:
Y = a Y + (1 – a) Y ...(5)
pt t t – 1

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