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The Relationship Between Consumption and Income

Author

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  • Tai-Yuen HON

    (Hong Kong Shue Yan University, China.)

Abstract

Friedman (1957) states that permanent consumption is a function of permanent income in the long-run. Co-integration theory is first used to test whether a long-run equilibrium relation exists between the two variables. The existence of an error-correction form between two variables is necessary and sufficient for them to be cointegrated. We applied for an error-correction form to conform the linear long-run relationship between permanent income and permanent consumption under special conditions and the elasticity of permanent income in logarithms with respect to permanent consumption in logarithms is unity.

Suggested Citation

  • Tai-Yuen HON, 2016. "The Relationship Between Consumption and Income," Journal of Economics Library, EconSciences Journals, vol. 3(1), pages 94-99, March.
    • Handle: RePEc:cvv:journ5:v:3:y:2016:i:1:p:94-99
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    JEL classification:

    • C00 - Mathematical and Quantitative Methods - - General - - - General
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General

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