Life cycle hypothesis

Life cycle hypothesis slideshare

Hence even if population is stationary, net aggregate saving tends to be positive. If the size of the cohorts born in successive years grows at the rate p then both population and the aggregate income grow at the rate p. This is because each successive cohort enjoys earning greater than the preceding cohorts, and thus a large level of consumption at each age—since, by assumption, the allocation of consumption over life remains unchanged in time. To see the implications of this theory for the form of the consumption function, we first look at a simplified example. Further, we assume that this person intends to consume the total amount of lifetime earnings plus current assets and plans no bequests. But empirical research tells us that these theories are not the last word. Finally, we assume that the interest paid on assets is zero; current saving results in dollar-for-dollar future consumption. Government means-tested benefits for old-age people may provide an incentive not to save because lower savings will lead to more social security payments. People may lack the self-control to reduce spending now and save more for future. Further, each household must hold such a vision with enough certainty that it would be worthwhile to use this vision as a basis for rational planning of consumption decisions. This discourages dissaving at the expected rate.

Harder to work and earn money, in old age. Explanation to the Theory of Consumption 2.

average propensity to consume life cycle hypothesis

Bookmark the permalink. Government means-tested benefits for old-age people may provide an incentive not to save because lower savings will lead to more social security payments.

life cycle hypothesis ppt

Does the Life-cycle theory happen in reality? If income is high during working life, there is a diminishing marginal utility of spending extra money at that particular time.

This is because each successive cohort enjoys earning greater than the preceding cohorts, and thus a large level of consumption at each age—since, by assumption, the allocation of consumption over life remains unchanged in time.

policy implications of life cycle hypothesis

To further analyse the implications of the life-cycle model, we start by considering the case of a stationary economy in which population and productivity are constant through time. This discourages dissaving at the expected rate.

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