Page 83 - DECO402_Macro Economics

Macroeconomic Theory

Notes and cut the long duration consumption function C on E . Therefore, consumer will consume Y E on
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1
1
L
constant income level OY .
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Friedman constant income principle is similar to cross sectional budgetary data. Long period data
shows the proportionate relation between income and consumption. But it is find out by the study
of the fluctuation related income by short period balance way that measure income and measure
consumption are non-proportionate related.

Did You Know? Permanent income and consumption are proportionate related.

Its Criticisms- Still there are some drawbacks in this principle-
1. Correlation between Temporary Income and Consumption: its assumption of Friedman is
unrealistic that in the temporary part of consumption and income are not related. The mean
of that assumption that when the measure income of family is increases or decreases, then
his consumption neither increase nor decrease, because accordingly he neither save nor
spends. But this thing is apposite to real consumer behaviour. If any person gets immediate
profit then he did not deposit full money in bank account but he spends partly on his current
saving. Therefore, if person lost his wallet, then he will not go to bank for money for fulfill
his need, but he will ignored or cut his present consumption.
2. APC of all Income Groups not Equal: The rule of Friedman says that APC is equals to poor
and rich families in long term. But this thing is against to the normal-behaviour of family. It is
realistic that low income family did not save more income as more income holder. It’s not only
one reason that their income is low but it is also that they will prefer to present consumption
expect to future consumption for fulfill their left need. So, the savings of low income is low
relatively to their income but the savings of more income families more relatively their income.
The saving level is different in normal income level and consumption also.
3. Use of Various Terms for Income and Consumption Confusing: Friedman use that words
in his principle ‘Permanent’, ‘Temporary’ and ‘measured’, it untangle that principle. the
perception of measured income one side improperly find by permanent and temporary
income and other side by permanent and temporary consumption improperly.
4. No Distinction between Human and Non-Human Wealth: The more deflect of permanent
income principle is that Friedman did not do distinction between Human and Non-Human
wealth and the experiential analysis of his principle, it is mix in one dictionary gets income
by both. Despite of these deflect, in the words of Michal Ivenz, “It can be appositely says
that certification is the supporter of this principle that by the replacement of Friedman the
research of consumption gets new way and new side.”

Self Assessment
Multiple Choice Questions:
3. If due to profit, temporary income is positive, then measured income increases by
……………… income.
(a) permanent (b) temerity
(c) cost (d) none of these
4. Temporary income can be-
(a) More (b) Zero
(c) Less (d) None of these

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