Permanent Income Hypothesis

Permanent Income Hypothesis - nts the changes of GDP...

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ents the changes of GDP components consumption and investment over time. Investment’s change from year to year is fairly drastic, proving the Professo The Permanent-Income Hypothesis Friedman’s theory holds that income is divided by wage earners into permanent and transitory income. Income essentially fluctuates and, while uncertain, wage-earners naturally attempt to figure out what their income will be in the future. Since wage-earners prefer smooth consumption, Friedman argues that consumption patterns rely on the portion workers spend of their more certain permanent income and use borrowing and saving to counteract the uncertainty of transitory income. Defining Terms - Y p = permanent income While income can fluctuate, Friedman’s theory argues there is a permanent and immutable component of income. Such permanent income exists because of worker skill and it is Friedman’s belief that in the long term, workers will be justly and consistently compensated for their skill. Y P is also viewed as expected long-term income. Essentially, while income may periodically go up or down, over the long
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This note was uploaded on 04/18/2011 for the course ECON 302 taught by Professor Staff during the Fall '08 term at UVA.

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Permanent Income Hypothesis - nts the changes of GDP...

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