Documente Academic
Documente Profesional
Documente Cultură
Consumption and
Investment
2005
Economic Principles
Keyness absolute income
hypothesis
Duesenberrys relative income
hypothesis
Friedmans permanent income
hypothesis
2005
Economic Principles
Modiglianis life-cycle hypothesis
The marginal propensity to
consume
The marginal propensity to save
Autonomous investment
2005
What Determines
Consumption Spending?
Consumption-spending and
consumption-production decisions
are made simultaneously and
independently of each other.
2005
What Determines
Consumption Spending?
The result is that sometimes
consumers dont buy enough of
everything produced and other
times producers do not produce as
much as people want to consume.
2005
What Determines
Consumption Spending?
Consumption function
The relationship between consumption
and income. It is written as C = f(Y),
where C represents consumption and Y
represents income.
2005
What Determines
Consumption Spending?
The single most important factor
influencing a persons consumption
spending is his or her level of
disposable income. The greater the
disposable income, the greater the
consumption spending.
2005
What Determines
Consumption Spending?
A number of hypotheses have
been offered to explain how
changes in an individuals income,
and, taken collectively, changes in
national income affect individual
and national consumption.
2005
2005
2005
10
2005
11
12
2005
13
14
2005
15
EXHIBIT 1
2005
16
17
2005
18
2005
19
EXHIBIT 2
2005
20
2005
21
22
Duesenberrys Relative
Income Hypothesis
Relative income hypothesis
As national income increases,
consumption spending increases as well,
always by the same amount. That is, as
national income increases, MPC remains
constant.
2005
23
Duesenberrys Relative
Income Hypothesis
According to Duesenberry,
consumption spending is rooted in
status. High-income people not
only consume more than others,
but also set consumption
standards for everyone else.
2005
24
Duesenberrys Relative
Income Hypothesis
An individuals MPC, then,
remains the same, as long as the
individuals relative income
position remains unchanged.
2005
25
EXHIBIT 3
2005
26
27
28
Friedmans Permanent
Income Hypothesis
Permanent income hypothesis
A persons consumption spending is
related to his or her permanent income.
2005
29
Friedmans Permanent
Income Hypothesis
Permanent income
Permanent income is the regular income
a person expects to earn annually. It may
differ by some unexpected gain or loss
from the actual income earned.
2005
30
Friedmans Permanent
Income Hypothesis
Transitory income
The unexpected gain or loss of income
that a person experiences. It is the
difference between a persons regular and
actual income in any year.
2005
31
Friedmans Permanent
Income Hypothesis
According to Friedman, an
unexpected gain or loss in income
in one year does not influence an
individuals overall MPC from
year to year.
2005
32
Modiglianis Life-Cycle
Hypothesis
Life-cycle hypothesis
Typically, a persons MPC is relatively
high during young adulthood, decreases
during the middle-age years, and increases
when the person is near or in retirement.
2005
33
What Determines
Consumption Spending?
Autonomous consumption
Consumption spending that is
independent of the level of income.
2005
34
What Determines
Consumption Spending?
Some consumption spending is
simply unavoidable. While
individuals may spend less on
food, clothing, and shelter when
income falls, there are limits to
how much one can cut and still
survive.
2005
35
What Determines
Consumption Spending?
A change in national income
induces a change in consumption.
The change in consumption is
considered movement along the
consumption curve.
2005
36
What Determines
Consumption Spending?
The consumption curve can also
shift. Shifts in the consumption
curve are unrelated to national
income. There are several factors
that can shift the consumption
curve.
2005
37
What Determines
Consumption Spending?
1. Real asset and money holdings.
An increase or decrease in real assets or
money holdings causes the consumption
curve to shift. For example, a substantial
inheritance of money or property would
cause the curve to shift upward.
2005
38
What Determines
Consumption Spending?
2. Expectations of price changes.
An expectation of inflation could cause an
increase in the current level of consumption,
even though incomes are not expected to
change. The increase in consumption would
shift the curve upward.
2005
39
What Determines
Consumption Spending?
3. Credit and interest rates.
If credit is more easily available or if the
credit terms are made more attractive,
people are likely to increase their spending
on durable goods, even if their incomes
havent changed. The consumption curve
would shift upward.
2005
40
What Determines
Consumption Spending?
4. Taxation.
If government decided to increase the
income tax, people would end up with a
smaller pay check, even though their
salaries remained unchanged. This would
cause a decrease in consumption and a
downward shift in the consumption curve.
2005
41
EXHIBIT 4
2005
42
2005
43
44
2005
45
2005
46
47
2005
48
2005
49
2005
50
2005
51
2005
52
2005
53
2005
54
2005
55
2005
56
2005
57
58
2005
59
2005
60
What Determines
Investment?
The level of national income
doesnt play the decisive role in
determining investment that it
plays in determining consumption
spending.
2005
61
What Determines
Investment?
Autonomous investment
Investment that is independent of the level of income.
2005
62
EXHIBIT 6
2005
63
2005
64
What Determines
Investment?
Four factors determine the size of
the economys autonomous
investment.
2005
65
What Determines
Investment?
1. Technology level.
2005
66
What Determines
Investment?
2. Interest rate.
ent when they believe the rate of return generated by the investm
2005
67
What Determines
Investment?
2. Interest rate.
2005
68
EXHIBIT 7
2005
69
70
What Determines
Investment?
3. Expectations of future economic
growth.
2005
71
What Determines
Investment?
4. Rate of capacity utilization.
2005
72
What Determines
Investment?
4. Rate of capacity utilization.
2005
73
What Determines
Investment?
The level of investment spending in
the U.S. economy is volatile.
Sometimes the factors that effect
investment spending pull in
opposite directions. Other times,
they work in unison and lead to
impressive economic growth.
2005
74
EXHIBIT 8
Source: Economic Report of the President 1994 (Washington, D.C.: United States Government Printing Office, 1994), p. 270; and
U.S. Department of Commerce, Survey of Current Business 76 (January/February 1996), Table 2.
2005
75
2005
76