What is Friedman s permanent income hypothesis

The permanent income hypothesis states that people's spending behavior depends primarily on permanent income, rather than accidental income.

The "temporary income", c = yp, and the permanent income hypothesis explains the "mystery of average consumption", which has the policy implication that only policy changes that do not have an expectation to affect future income can affect consumption.

For society as a whole, permanent income can be seen as a weighted average of current and past measured income.

This weighted average is adjusted upwards by a stable long-term trend, and its weights will decline over time.

The Permanent Income Hypothesis (PIH) is also known as Friedman's Permanent Income Hypothesis, the Constant Income Consumption Function, the Persistent Income Hypothesis Consumption Function Model, and the Persistent Income Hypothesis Model The Permanent Income Hypothesis was put forward by the famous American economist Friedman. He believes that household consumption does not depend on the absolute level of current income, nor on the relationship between current income and the previous highest income, but on the lasting income of residents. The theory of lasting income divides residents' income into permanent income and temporary income, and lasting income refers to the income that can be obtained over a long period of time, which is a kind of long-term average expected income, which is generally expressed by the average income of the past few years.

Temporary income refers to income obtained in a short period of time, which is a temporary and accidental income, which may be positive (such as unexpected bonuses) or negative (such as theft, etc.). Friedman argues that only a lasting income can affect people's consumption.

Permanent income in Friedman's theory of money demand refers to the average of past, present, and future incomes, i.e., the average of long-term incomes. This concept is used because Friedman believed that what affects people's demand for money is the amount of money that an individual can hold in terms of the amount of his total wealth.

Friedman's research shows that although the demand for money is a function of a variety of complex variables, because the determinant variables are constrained by factors such as the level of social productivity and institutions, there will be no major changes in the long run, especially the factor of permanent income with a high degree of stability plays a dominant role in the demand for money.

Permanent income, on the other hand, is one of the basic requirements for the existence of money, and if it does not exist, this theory cannot be explained.

American economist Friedman believes that the quantity theory of money is not a theory about output, money income, or price level, but a theory of money demand, that is, a theory of what factors determine money demand.

(Persistence, i.e., the measure of wealth) is the permanent income in Friedman's theory of money demand.

Why use this concept?

Theoretically, it is the discounted value of all expected future income, and simply put, the average expected value of long-term income. FYI.

Friedman's theory of enduring income holds that a consumer's consumption spending is determined not by his current income, but by his enduring income.

The so-called long-term income refers to the long-term income that consumers can expect, that is, the stable income flow that can be maintained over a long period of time. This theory divides people's income into temporary income and persistent income, and considers consumption to be a stable function of lasting income.

In other words, in order to maximize the effect, rational consumers make consumption decisions based not on the temporary income of the current period, but on the level of income that can be maintained in the long run, that is, the level of lasting income.

The hypothesis of eternal income

The theory of the consumption function of permanent income was put forward by the famous American economist Friedman. The theory holds that a consumer's consumption spending is determined not by his current income, but by his permanent income. In other words, in order to maximize the effect, rational consumers make consumption decisions not based on temporary income in the current period, but on the level of income that can be maintained in the long run, that is, the level of lasting income.

The basic idea is that household consumption is largely determined by the expectation of long-term absences (i.e., permanent income). The hypothesis is that only permanent income can affect people's consumption, that is, consumption is a stable function of permanent income.

Long-term income can be understood as the expected average long-term income. According to Friedman, the sum of the four assets in the explanatory variables of money demand: money, bonds, ** and non-human wealth is the total amount of wealth held by people, and its value can be roughly represented by permanent income.

It is positively correlated with the demand for money. Emphasizing the important influence of permanent income on the hidden demand of money is a characteristic of Friedman's theory of money demand.

The Persistent Income Hypothesis (Permanent

income

Hypothesis, abbreviated as PIH).

It is also known as Friedman's permanent income hypothesis, constant income consumption function, persistent income hypothetical consumption function model, persistent income hypothesis model, etc.

The Persistent Income Hypothesis (Permanent

income

hypothesis) was developed by a famous American economist.

Friedman. Raised.

He believes that household consumption does not depend on the absolute level of current income, nor does it depend on the relationship between current income and the previous highest income, but on the lasting income of residents. The theory of durable income will.

Residents' income is divided into long-term and temporary income, and the lasting income refers to the income that can be obtained over a long period of time, which is a kind of long-term average expected income, which is generally expressed by the average income of the past few years.

Temporary income refers to income obtained in a short period of time, which is a temporary and accidental income in the state, which may be positive (such as unexpected).

bonuses, which can also be negative (e.g. stolen, etc.).

Not. Reedman argues that only a lasting income can affect people's consumption.