Consumption Pattern of Tamilnadu with Reference to Permanent Income Hypothesis
CONSUMPTION PATTERN IN TAMILNADU A.KASIRAJAN(Asst.Prof)
WITH REFERANCE TO PERMANENT INCOME Department of Economics
HYPOTHESIS R.K.M.VivekanandaCollege, Mylapore,Chennai600004.
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Introduction The central idea of the permanent income hypothesis, proposed by Milton Friedman in 1957, is that people base consumption on what they consider their “normal income”. In doing this, they attempts to maintain a fairly constants standard of living even thought their incomes may vary considerably from month to month or from year to year. As a result, increase and decrease in income that people see as temporary have little effect on their consumption spending. Friedman asserts that consumption is determined by long term expected income rather than current level of income. It is this long-term expected income which is called by Friedman as permanent income on the basis of which people make their consumption plans. To make this point clear, Friedman gives an example which is worth quoting.
“An individual who is paid or receives income only once a week, say on Friday, he would not concentrate his consumption on one day with zero consumption on all other days of the week. He argues than an individual would prefer a smooth consumption flow per day rather than plenty of consumption today and little consumption tomorrow. Thus consumption in one day is not determined by income received on that particular day. Instead, it is determined by average daily income received for a period. Thus, according to him, people plan their consumption on the basis of expected average income over a long period which Friedman calls permanent income”[1].
It may be noted that permanent income or expected long-term average income is a long run
WITH REFERANCE TO PERMANENT INCOME Department of Economics
HYPOTHESIS R.K.M.VivekanandaCollege, Mylapore,Chennai600004.
_______________________________________________________________________________
Introduction The central idea of the permanent income hypothesis, proposed by Milton Friedman in 1957, is that people base consumption on what they consider their “normal income”. In doing this, they attempts to maintain a fairly constants standard of living even thought their incomes may vary considerably from month to month or from year to year. As a result, increase and decrease in income that people see as temporary have little effect on their consumption spending. Friedman asserts that consumption is determined by long term expected income rather than current level of income. It is this long-term expected income which is called by Friedman as permanent income on the basis of which people make their consumption plans. To make this point clear, Friedman gives an example which is worth quoting.
“An individual who is paid or receives income only once a week, say on Friday, he would not concentrate his consumption on one day with zero consumption on all other days of the week. He argues than an individual would prefer a smooth consumption flow per day rather than plenty of consumption today and little consumption tomorrow. Thus consumption in one day is not determined by income received on that particular day. Instead, it is determined by average daily income received for a period. Thus, according to him, people plan their consumption on the basis of expected average income over a long period which Friedman calls permanent income”[1].
It may be noted that permanent income or expected long-term average income is a long run
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