ShmoopTube

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And finance Allah shmoop What is permanent income Oh win

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the lottery tap into a trust fund inherit the throne

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of some obscure but enormously wealthy country achieved tenure at

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some prestigious university Or maybe just get elected to the

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U S Senate Those situations cover one concept of a

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permanent income income that will be coming in forever no

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matter what you do In economics though the concept is

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more particular It's used to explain consumer spending patterns called

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the permanent income hypothesis The model assumes that a person

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will spend money according to what they think they're long

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term Average income will be In other words people get

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an idea in their head about how much they're likely

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to make going forward like off into the way distant

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future And that expectation then drives their spending activity So

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you're an economist we know dare to dream But you're

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not just a run of the mill On the one

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hand and on the other hand type of economists you're

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a very confident economist Brash brazen impertinence You just graduated

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last in your class from Jacksonville Online Economic Technical Institute

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and Culinary Academy I'll steal You are one hundred percent

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without a doubt Definitely convinced you're one day going to

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win that million dollar Nobel Prize in economics You're positive

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you're gonna win that dough someday Yeah So by permanent

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income theory you count that number in your permanent income

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Well you're twenty three now fresh out of Jackie Con

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tech and cool average life spans about seventy nine years

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That gives you about fifty six years to go divide

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a million bucks by fifty six And that's Ah seventeen

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grand dish extra that you Khun spend each year Well

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you'll have to borrow the money for now at least

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until you get a call from Sweden Another example You

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work in a factory that makes leashes and collars They're

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for pet ducks You make fifty grand a year Is

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a quality control inspector in the RND department You spend

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your days out back by the scientifically designed man made

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lake leading ducks along with the experimental leashes You assume

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you'll keep this basic salary for the foreseeable future Well

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under the permanent income hypothesis is you've assumed a permanent

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income is fifty grand You'll spend up to that level

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but not beyond that level Now you get some weird

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news You're eccentric Uncle decides he wants to give away

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his worldly belongings and move to a Buddhist commune in

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Mongolia Your share Five grand Okay so this particular year

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you brought in fifty five thousand right You've got your

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usual fifty grand for your job the ducklings factory and

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an additional one time bonus amount of five grand from

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your uncle Well someone supporting the permanent income hypothesis would

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expect you to save the five grand from your uncle

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You know the five thousand dollars a one time bonus

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Your uncle has moved to the Buddhist com unit Doesn't

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have any more money to give away You don't have

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any other sickly or weird uncles Point is the five

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grand gift is not likely to repeat your perception of

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your long term permanent income has not changed You still

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expect to earn fifty grand a year long term So

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you socked away the five grand you know for a

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rainy day Okay well then next year comes along and

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you get a promotion You're now head of the duck

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collar quality control department Your salary rises to eighty five

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thousand dollars and your expectations rise as well You assume

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you'll be head of the department or better forever least

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for the foreseeable future You don't say the additional thirty

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five grand in salary You're happy to spend it You

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trade in your Yaris that thing or Prius Maybe for

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a Cadillac and you skipped the five dollar wine rack

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for stuff in the twenty dollar I'll your new assumed

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permanent income has changed Now you perceive eighty five thousand

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dollars as your permanent income or income level so you

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spend it accordingly Then you buy a diamond collar for

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your own pet duck Yeah maybe a little extravagant even

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for an eighty five thousand dollars a year employee But

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well you did get to use your employee discount so 00:03:50.93 --> [endTime] you know it's a bargain

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