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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.

Suggested Citation

  • Alimi, R. Santos, 2013. "Keynes' Absolute Income Hypothesis and Kuznets Paradox," MPRA Paper 49310, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:49310
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    File URL: https://mpra.ub.uni-muenchen.de/49310/1/MPRA_paper_49310.pdf
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    References listed on IDEAS

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    Cited by:

    1. repec:eco:journ1:2017-04-85 is not listed on IDEAS
    2. R. Santos Alimi, 2015. "Estimating Consumption Function under Permanent Income Hypothesis: A Comparison between Nigeria and South Africa," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 5(11), pages 285-298, November.

    More about this item

    Keywords

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

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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