relationship between income and consumption pdf

Relationship Between Income And Consumption Pdf

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Propensity to consume is also called consumption function. In the Keynesian theory, we are concerned not with the consumption of an individual consumer but with the sum total of consumption spending by all the individuals. Aggregate consumption depends on consumption function or propensity to consume.

Income, consumption and wealth inequality in Spain

The consumption function is a relationship between current disposable income and current consumption. It is intended as a simple description of household behavior that captures the idea of consumption smoothing. We typically suppose the consumption function is upward-sloping but has a slope less than one. So as disposable income increases, consumption also increases but not as much. More specifically, we frequently assume that consumption is related to disposable income through the following relationship:.

A consumption function of this form implies that individuals divide additional income between consumption and saving. Figure In symbols, we write the consumption function as a relationship between consumption C and disposable income Y d :.

Here a represents autonomous consumption and b is the marginal propensity to consume. We assume three things about a and b :. The second assumption means that the marginal propensity to consume is positive. By the third assumption, the marginal propensity to consume is less that one.

What happens to the remainder of the increase in disposable income? Since consumption plus saving is equal to disposable income, the increase in disposable income not consumed is saved. More generally, this link between consumption and saving S means that our model of consumption implies a model of saving as well.

We can also graph the savings function. The savings function has a negative intercept because when income is zero, the household will dissave. The savings function has a positive slope because the marginal propensity to save is positive. Economists also often look at the average propensity to consume APC , which measures how much income goes to consumption on average. It is calculated as follows:.

When disposable income increases, consumption also increases but by a smaller amount. This means that when disposable income increases, people consume a smaller fraction of their income: the average propensity to consume decreases.

An increase in disposable income reduces the first term, which also reduces the APC. Previous Section. Table of Contents. Next Section. We assume autonomous consumption is positive. Households consume something even if their income is zero.

If a household has accumulated a lot of wealth in the past or if a household expects its future income to be larger, autonomous consumption will be larger. It captures both the past and the future. We assume that the marginal propensity to consume is positive. The marginal propensity to consume captures the present; it tells us how changes in current income lead to changes in current consumption.

Consumption increases as current income increases, and the larger the marginal propensity to consume, the more sensitive current spending is to current disposable income. The smaller the marginal propensity to consume, the stronger is the consumption-smoothing effect. We also assume that the marginal propensity to consume is less than one. This says that not all additional income is consumed. When a household receives more income, it consumes some and saves some.

Permanent income hypothesis

Consumption function , in economics , the relationship between consumer spending and the various factors determining it. At the household or family level, these factors may include income, wealth, expectations about the level and riskiness of future income or wealth, interest rates, age, education, and family size. The characteristics of consumption functions are important for many questions in both macroeconomics and microeconomics. In macroeconomic models the consumption function tracks total aggregate consumption expenditures; for simplicity it is assumed to depend on a basic subset of the factors economists believe are important at the household level. Analysis of consumption expenditure is important for understanding short-term business cycle fluctuations and for examining long-run issues such as the level of interest rates and the size of the capital stock the amount of buildings, machinery, and other reproducible assets useful in producing goods and services. In principle, the consumption function provides answers to both short-run and long-run questions. In the long run, since income that is not consumed is saved, the responsiveness of households to any tax policy such as those meant to spur aggregate saving and increase the capital stock will depend on the structure of the consumption function and particularly what it says about how saving responds to interest rates.


In this direction, Keynes (;, p. ) suggested that individuals tend to increase consumption as their income increases, but to a lesser extent. This fundamental psychological law states that as the level of income increases, the difference between income and consumption increases as well.


Income Effect vs. Substitution Effect: What's the Difference?

The consumption function is a relationship between current disposable income and current consumption. It is intended as a simple description of household behavior that captures the idea of consumption smoothing. We typically suppose the consumption function is upward-sloping but has a slope less than one. So as disposable income increases, consumption also increases but not as much. More specifically, we frequently assume that consumption is related to disposable income through the following relationship:.

The relationship between income and expenditure is often called a consumption schedule.

Consumption function

This study examined the household and government consumption with income separately both in short and long run. The data is collected from the WDI from to of spain. In contrast ,the expenditures of government and consumption is more than that of its income in long run and vice versa.

Full references including those not matched with items on IDEAS Most related items These are the items that most often cite the same works as this one and are cited by the same works as this one. Phillips, Sena Durguner, Mian, A. Scott R. Farrokhnia,

This study analyses the relationship between energy consumption and economic growth for countries during the period of , classified into four groups regarding to the World Bank income ranking. The main motivation of this study is to analyze whether the causal relationship differs between different income groups of countries. The results of the study indicate that the causal relationship between energy use and economic growth differs depending on which income group country belongs to. We conclude that the feedback hypothesis is supported for upper-middle income group in the long run and high-income group, while conservation hypothesis is supported for upper-middle income group in the short run and lower-middle income group in the long run. Finally, neutrality hypothesis is supported for low and lower middle-income groups in the short run. Keywords: Energy consumption, economic growth, panel unit root, ARDL boundary approach, panel causality.


Panel unit-root tests which are robust to cross section correlation indicate the sta- tionarity of the topics between consumption, income and wealth. This paper.


This paper analyses the level of inequality in Spain and how it evolved over the course of the past crisis and the early stages of the current recovery. To this end, it first introduces the various dimensions of wage, income, consumption and wealth inequality, and studies how they have developed. The analysis shows less wage dispersion in Spain than in other comparable economies, even after the crisis years, while the surge in unemployment during the period resulted in a high level of inequality in per capita income. The level of inequality in Spain is more moderate when total gross household income is analysed, decreasing during the crisis as a result of pensions developing more favourably than other sources of income, in conjunction with young people delaying setting up home. Inequality in per capita consumption rose during the crisis, particularly as a result of a decrease in expenditure on consumer durables by low-income households.

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    1 million, the consumption increases by Rs. million. The potential of consumption was higher in higher income households. Findings are in line with the Keynes economic theory [1], which suggests that the income variable has positive effect on household consumption.

    12.05.2021 at 20:04 Reply

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