Business, Legal & Accounting Glossary
Life-cycle hypothesis analyzes the consumption pattern of individuals. Irving Fisher, Roy Harrod, Franco Modigliani, and Alberto Ando developed Life-cycle hypothesis. Different from Keynesian consumption function, Life-cycle hypothesis, suggests that individuals desire and try to maintain a constant standard of living throughout their lifetime. Since after a certain age, individuals may retire from active work, they have to ensure enough funds to sustain their standard of living beyond retirement age. This is usually done by earning income from accumulated assets.
According to Life-cycle hypothesis, an individual’s consumption pattern is dependent on two goals. Individuals want to enjoy a higher standard of living. They also prefer a constant standard of living. This second goal implies that they would not want unsustainable, drastic changes in their standard of living. For instance, a person who has enjoyed considerable luxury will certainly not prefer to live in poverty.
In economics, consumption relates to the utilization of goods and services, either common and traditional or personal and unique. Household consumption expenditure is used as a measurement for the consumption of goods and services.
Keynesian consumption function also called the absolute income hypothesis, is based on an assumption that consumption patterns are dependent on current income. It does not take into account potential future income that an individual may earn or expects to earn.
Standard of living refers to the quantity and quality of products (goods and services) that individuals in a specified population can avail. Real income per person and poverty rate are some standards used to measure Life-cycle hypothesis.
Asset refers to all kinds of tangible and intangible property. Examples of tangible assets include property, plant, furniture, and equipment. Examples of intangible assets include stocks, trademarks, patent, and goodwill.
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Definitions for Life-Cycle Hypothesis are sourced/syndicated and enhanced from:
This glossary post was last updated: 29th March, 2020 | 0 Views.