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- Keynes' absolute income hypothesis states that consumption increases as income rises but at a decreasing rate, with more savings. However, aggregate savings did not rise with aggregate income over time. - Duesenberry's relative income hypothesis argues that consumption is based on one's income relative to others rather than absolute levels. People make financial decisions based on their position within the overall income distribution. - Absolute income looks solely at total earnings without context, while relative income considers one's earnings compared to others in society or at a given point in time. Research shows relative income may impact happiness and well-being more than absolute income alone.

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107 views3 pages

New Microsoft Word Document

- Keynes' absolute income hypothesis states that consumption increases as income rises but at a decreasing rate, with more savings. However, aggregate savings did not rise with aggregate income over time. - Duesenberry's relative income hypothesis argues that consumption is based on one's income relative to others rather than absolute levels. People make financial decisions based on their position within the overall income distribution. - Absolute income looks solely at total earnings without context, while relative income considers one's earnings compared to others in society or at a given point in time. Research shows relative income may impact happiness and well-being more than absolute income alone.

Uploaded by

Akash Goyal
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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Absolute income hypothesis

Keynes' General Theory in 1936 identified the relationship between income and consumption as a key macroeconomic relationship. Keynes asserted that real consumption is a function of real disposable income, total income net of taxes. As income rises, the theory asserts, consumption will also rise but not necessarily at the same rate.When applied to a cross section of a population, rich people are expected to consume a lower proportion of their income than poor people Marginal propensity to consume is present in Keynes' consumption theory and determines by what amount consumption will change in response to a change in income. While this theory has success modeling consumption in the short term, attempts to apply this model over a longer time frame have proven less successful. This has led to the absolute income hypothesis falling out of favor as the consumption model of choice for economists

Relative income hypothesis


Developed by James Duesenberry, the relative income hypothesis states that individuals attitude to consumption and saving is dictated more by his income in relation to others than by abstract standard of living. So an individual is less concerned with absolute level of consumption than by relative levels. The percentage of income consumed by an individual depends on his percentile position within the income distribution. Secondly it hypothesises that the present consumption is not influenced merely by present levels of absolute and relative income, but also by levels of consumption attained in previous period. It is difficult for a family to reduce a level of consumption once attained. The aggregate ratio of consumption to income is assumed to depend on the level of present income relative to past peak income.

What Is the Difference Between Relative Income & Absolute Income?


Original post by Tom Gresham of Demand Media The difference between relative income and absolute income centers on the issue of context. Relative income measures your income in relation to other members of society, weighing it against the standards of the day. Absolute income, meanwhile, does not take into consideration those other factors, but simply reflects the total amount of earnings you've received in a given period. Absolute Income

Economist John Maynard Keynes created a theory of consumption based on people's absolute income. According to Keynes, consumers would spend a smaller percentage of their income as their absolute income grew larger, simultaneously increasing their savings rate. Data supported the theory, but when aggregate income grew there was not a similar growth in the aggregate savings rate. Still, standard economics asserts that individuals view their income and financial position in absolute terms. Relative Income James Duesenberry introduced the relative income hypothesis, which demonstrats that people make decisions, including savings and consuming, based not on on absolute income but on relative income. Duesenberry argued that consumers view their own position in relation to others, and behave accordingly. For instance, a consumer will consider his income as it relates to others before making purchase decisions. Income and Well-Being Many economists argue that absolute income is the best measurement of an individual's wellbeing. However, research indicates that measures of happiness have remained the same when the population's absolute income grows at a similar rate. But the wealthy population shows higher levels of happiness than the poorer population. This evidence suggests that relative income is critical to our happiness and well-being. Absolute income has been linked to increased social tolerance, a cleaner environment and better health. Contemporary Income Growth Absolute income and relative income have diverged considerably in their measurements of income growth in the U.S. since the 1970s. Absolute income has grown at a much higher rate than median family earnings in the U.S., owing to increased income inequality in the country. This means that the portion of the population not in the highest earnings brackets has seen its relative income decrease even as its absolute income climbs.

What is the difference between relative and absolute income? What are additional incomes and what is the big picture?
Work is the process of exchange of skill, time and effort for the money. This is very well clear for everybody who trades the work for the money. Every person can have different levels of knowledge, education, experience, personal traits, energy and enthusiasm for the work.

According to these inputs comes the expected output the money that represents the compensation for the done job. But there is the question about who earns more or who has a better-paid job? Is that the person that earns more? Or is that the person who works less? These questions cannot be understood unless we evaluate their relation. In first place comes the level of income as a measure how well paid the job is. This is called absolute income. If Mary monthly earns $2.600 and Jane earns $3.000, it is obvious that Jane earns more and has a better paid job. Jane's Absolute income is higher than Mary's. But if the Mary works 40 hours per week and Jane is working 50 hours per week, it appear that Mary is earning more per hour. Mary is earning $16,5 while Jane is earning $15. This means that Mary's Relative income is higher than Jane's It is important to distinguish Absolute and Relative income when valuating two different jobs. Still, this is not the end of the story. A fee of 50$ for one hour of work can represent high relative income. But if the monthly number of such engagements is low, than high relative income with low engagements cannot give satisfying overall salary. Further more while comparing relative and absolute income, it is necessary to evaluate other benefits: company's mobile phone or a car, bonus, stocks, vacation days and other extras. Evaluation a whole package from all aspects can show a real picture how well are we paid. This evaluation can give us input information for understanding the employment conditions. Having in mind all these aspects you can answer to two important questions: Am I paid enough for work I do? Am I working too much for money I earn?

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