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Keynes' Absolute Income Hypothesis and Kuznets Paradox

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  • Alimi, R. Santos

Abstract

The study investigates how consumption expenditure is determined by income according to Keynes’ Absolute Income Hypothesis (AIH) for the case of Nigeria and thus presents a consumption function for Nigeria for the period 1970 to 2011, estimating total household consumption expenditure against total income. The AIH model was tested by ordinary least squares over the period using data obtained from the World Bank national accounts data and Ivan Kushnir’s Research Center. We described and tested two important theoretical predictions of the Keynesian AIH model; first, that the marginal propensity to consume (MPC) is constant and, second, that the average propensity to consume (APC) declines as income increases. Using Nigeria economic data, we estimated parameter MPC and APC both for short run and long run time series. The results shows that MPC conform with Keynes earlier proposition that MPC is less than one, however it is not stable and the value of the autonomous consumption is negative in the long run. We found also that the APC did not vary systematically with income as conjectured by Keynes that it declines as income increases. As a result, the income elasticity of consumption does not follow Keynes prediction. The absolute income hypothesis fits well for Nigeria data in the short run. In the long run, with the elasticity of consumption of about 1 or above 1, evidently there are other important determinants of consumption other than income.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 49310.

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Date of creation: 26 Aug 2013
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Handle: RePEc:pra:mprapa:49310

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Keywords: Consumption function; Average Propensity to Consume; Marginal Propensity to Consume;

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  1. Francisco Alvarez-Cuadrado & Ngo Van Long, 2008. "The Relative Income Hypothesis," CIRANO Working Papers 2008s-18, CIRANO.
  2. David Bunting, 2001. "Keynes' Law and Its Critics," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 24(1), pages 149-163, October.
  3. Mauro Baranzini, 2005. "Modigliani's life-cycle theory of savings fifty years later," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 58(233-234), pages 109-172.
  4. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
  5. Mauro Baranzini, 2005. "Modigliani's life-cycle theory of savings fifty years later," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 58(233-234), pages 109-172.
  6. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  7. Denis Kwiatkowski & Peter C.B. Phillips & Peter Schmidt, 1991. "Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure Are We That Economic Time Series Have a Unit Root?," Cowles Foundation Discussion Papers 979, Cowles Foundation for Research in Economics, Yale University.
  8. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, December.
  9. Granger, Clive W J, 1986. "Developments in the Study of Cointegrated Economic Variables," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 213-28, August.
  10. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  11. Thomas, J J, 1989. "The Early Econometric History of the Consumption Function," Oxford Economic Papers, Oxford University Press, vol. 41(1), pages 131-49, January.
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