- Life-cycle Income Hypothesis
Franco Modigliani, winner of Nobel Memorial Prize in Economicsin 1985, originated the Life-cycle Income Hypothesis base on Irving Fisher's model of inter-temporal choice. In Modigliani's Life-cycle Hypothesis, or LCH in abbreviation, builds on the assumption that individuals consumes its wealth and income over the lifetime. It assumes that inidividuals will seek to smooth out the total wealth and income over its lifetime, which gives rise to the equation where W = initial endowed wealth, R = Retirement Years, Y = Income and T = Number of years of the individual's lifespan.
Rewriting the equation or consumption function, . If every individual plans their consumption in such way, the aggregate consumption function of the economy, will take the form , where parameter a is the marginal propensity to consume out of accumulated wealth and b is the marginal propensity to consume out of income.
LCH solve the consumption puzzle proposed by Simon Kuznet, which observes that in the Long Run, the average propensity to consume (APC) of individual will be constant, as the consumption function of individuals will pass through the origin. This can be best illustrated in the diagram below:
The Short Run Consumption Function denoted by W0 represents the initial endowed wealth level of a particular individual. In the short run, an increase in his income will triger an increase of consumption level from C0 to C1. However, in the long run, the increase in his income from Y0 to Y1 will leads to an increase in his wealth level. Hence in the long run, this will induce an upward shift of the consumption function from W0 to W1, which implies an increase in consumption from C0 to C2 instead of C1. Connecting the coordinates C0Y0 and C2Y1, we will derive an upward sloping long run consumption function which passes through the origin. This sums up Franco Modigliani's Life-cycle Hypothesis, which explains the Kuznet's Consumption Puzzle of constant Average Propensity to Consume in the long run.
Wikimedia Foundation. 2010.
Look at other dictionaries:
Life cycle hypothesis — The Life Cycle Hypothesis (LCH) is an economic concept analysing individual consumption patterns. It was developed by the economists Irving Fisher, Roy Harrod, Alberto Ando and Franco Modigliani.Unlike the Keynesian consumption function, which… … Wikipedia
Life-Cycle Hypothesis (LCH) — The Life Cycle Hypothesis (LCH) is an economic theory that pertains to the spending and saving habits of people over the course of a lifetime. The concept was developed by Franco Modigliani and his student Richard Brumberg. LCH presumes that… … Investment dictionary
Permanent income hypothesis — The permanent income hypothesis (PIH) is a theory of consumption that was developed by the American economist Milton Friedman. In its simplest form, PIH states that the choices made by consumers regarding their consumption patterns are determined … Wikipedia
income tax — a tax levied on incomes, esp. an annual government tax on personal incomes. [1790 1800] * * * Levy imposed by public authority on the incomes of persons or corporations within its jurisdiction. In nations with an advanced system of private… … Universalium
Life and work of Ludwig van Beethoven — This is a detailed account of the life and work of Ludwig van Beethoven. For more on this composer, see the main article Ludwig van Beethoven for his family see Van Beethoven Family. Role of Musical Biography It is common for listeners to… … Wikipedia
Real Business Cycle Theory — (or RBC Theory) is a class of macroeconomic models in which business cycle fluctuations to a large extent can be accounted for by real (in contrast to nominal) shocks. (The four primary economic fluctuations are secular (trend), business cycle,… … Wikipedia
Business cycle — Economics … Wikipedia
business cycle — a recurrent fluctuation in the total business activity of a country. [1920 25] * * * Periodic fluctuation in the rate of economic activity, as measured by levels of employment, prices, and production. Economists have long debated why periods of… … Universalium
Simon Kuznets — Infobox Scientist name = Simon Kuznets image size = 180px birth date = birth date|1901|4|30|mf=y birth place = Pinsk death date = death date and age|1985|7|8|1901|4|30|mf=y death place = Cambridge, Massachusetts nationality = United States field … Wikipedia
Гипотеза жизненного цикла — LIFE CYCLE HYPOTHESIS Гипотеза о том, что текущее потребление зависит не только от текущего чистого дохода, но также связано с ожидаемым пожизненным доходом. Молодой человек, например, может позволить себе купить дом в кредит, поскольку его… … Словарь-справочник по экономике