permanent income

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The component of lifetime income that is anticipated and planned by a consumer. It is determined by a consumer's physical and human capital, as both of these affect the consumer's ability to earn income during his or her lifetime. Any part of income that is not anticipated and/or planned is transitory income. The permanent income hypothesis suggests that consumption constitutes a constant proportion of permanent income (the process of ‘consumption smoothing’), and that transitory changes in income do not affect long-run spending behaviour.

Subjects: Economics.

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