 Relative income hypothesis

Developed by James Duesenberry, the relative income hypothesis states that an individual’s attitude to consumption and saving is dictated more by his income in relation to others than by abstract standard of living; the percentage of income consumed by an individual depends on his percentile position within the income distribution.Secondly, it hypothesizes that the present consumption is not influenced merely by present levels of absolute and relative income, but also by levels of consumption attained in a previous period.