Chapter 8 Theory of Consumption Saving 友学经济学院
Chapter 8 Theory of Consumption & Saving 01 0 10 20 30 40 90 91 92 93 94 95 96 97 98 99 00
Topics to be Discussed o8.1 Keynesian consumption function o8. A simple two-period model o8.3 Consumption theory after Keynes Permanent-income Hypothesis Life-style Hypothesis o8.4 Real interest decision-making between consumption and saving 友学经济学院
Topics to be Discussed 8.1 Keynesian consumption function 8.2 A simple two-period model 8.3 Consumption theory after Keynes ❖ Permanent–income Hypothesis ❖ Life-style Hypothesis 8.4 Real interest & decision-making between consumption and saving
8.1 Keynesian Consumption Function household consumption is mainly decided by its disposable income Yd Consumption increases slower than income (0<b<1) C= a+by 友学经济学院
8.1 Keynesian Consumption Function ❖household consumption is mainly decided by its disposable income Yd;; ❖Consumption increases slower than income （0<b<1） C = a +bYd
8.1 Keynesian Consumption Function o Deficiency of Keynesian theory Only consider the influence of present income . Ignore the influence of household wealth to present consumption 友学经济学院
8.1 Keynesian Consumption Function Deficiency of Keynesian theory ❖ Only consider the influence of present income ❖ Ignore the influence of household wealth to present consumption
8.2 A Simple Two-period Model ⊙TWo- period model Consider present future Fix the foundation of permanent-income Hypothesis and Life-style Hypothesis 友学经济学院
8.2 A Simple Two-period Model Two-period model ❖ Consider present & future ❖ Fix the foundation of Permanent–income Hypothesis and Life-style Hypothesis
8.2 A Simple Two-period Model o Assumption of the model Life is made up of two periods: the youth and the aged Income is made up of two parts: wealth wages, with no positive wealth at the beginning and the end o Optimal objects Given the present income future income, decide the consumption of the present and the future to maximize their intercourse inter temporal utility 友学经济学院
8.2 A Simple Two-period Model Assumption of the model ❖ Life is made up of two periods：the youth and the aged ❖ Income is made up of two parts ：wealth & wages，with no positive wealth at the beginning and the end Optimal objects： ❖ Given the present income & future income, decide the consumption of the present and the future to maximize their intercourse intertemporal utility
8.2 A Simple Two-period Model o inter-temporal constraint 2=01+ 1+r) (1+r) C1 C2 is respectively the first-period the second-period consumption; Q1, Q2 is respectively the periods wages o inter-temporal utility function U(C1, C2)( convex) 友学经济学院
8.2 A Simple Two-period Model inter-temporal constraint C1、C2 is respectively the first-period & the second-period consumption；Q1、Q2 is respectively the periods’ wages inter-temporal utility function U（C1，C2）（convex） （1 r） Q Q 1 r C C 2 1 2 1 + = + + + ( )
8.2 A Simple Two-period Model o Debit consumption o Save for future consumption period2 period Q2 E A B C2 C2 Q2 Q1 C1 period 1 C1 Q1 riot 友学经济学院
8.2 A Simple Two-period Model Debit consumption Save for future consumption period2 period1 Q2 Q1 C1 C2 Q2 C1 Q1 C2 period1 period2 E A B E
8.3 Consumption Theory After Keynes o Permanent Income Hypothesis .Milton Friedman, 1957, a theory of consumption function》 ☆ Permanent income w Observe household average income in a long run. In a two period model, permanent income is a weighted average for present income future income +=0,+ (1+r Q °(1+r) (+r) (2+ (1+r) 友学经济学院
8.3 Consumption Theory After Keynes Permanent Income Hypothesis ❖ Milton Friedman，1957，《a theory of consumption function》 ❖ Permanent income Observe household average income in a long run. In a twoperiod model, permanent income is a weighted average for present income & future income. （1 r） Q Q 1 r Y Y 2 1 p p + = + + + ( ) + + + + = （1 r） Q Q 2 r 1 r Y 2 p 1 ( ) ( )
8.3 Consumption Theory After Keynes . Significance of permanent income Income variable is relatively steady Permanent or long -term income will make the individua adjust his consumption behavior &o Deficiency of permanent income hypothesis Decide whether income change belongs to permanent phenomena by adaptable anticipation 友学经济学院
8.3 Consumption Theory After Keynes ❖ Significance of permanent income Income variable is relatively steady Permanent or long-term income will make the individual adjust his consumption behavior ❖ Deficiency of permanent income hypothesis Decide whether income change belongs to permanent phenomena by adaptable anticipation