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What Is The Relative Income Hypothesis?

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Relative Income Hypothesis was developed by Duesenberry. Duesenberry's analysis is based on two hypotheses. The first hypothesis is with respect to the consumption behaviour of an individual. It states that the consumption behaviours of individuals are interdependent. An individual is not so much concerned with his absolute level of consumption as he is with his consumption relative to the rest of the population. Thus the percentage of income consumed by an individual depends on his percentile position in the income distribution. The second hypothesis states that the present consumption is not influenced merely by present levels of absolute and relative income, but also by levels of consumption attained in previous period. He argues that consumption relations are irreversible over time. It is difficult for a family to reduce a level of consumption once attained. The aggregate ratio of consumption to income is assumed to depend on the level of present income relative to past peak income.

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