Developed by

James Duesenberry James Stemble Duesenberry (July 18, 1918 – October 5, 2009) was an American economist. He made a significant contribution to the Keynesian analysis of income and employment with his 1949 doctoral thesis ''Income, Saving and the Theory of Consu ...

, the relative income hypothesis states that an individual’s attitude to

consumption Consumption may refer to: *Resource consumption *Tuberculosis, an infectious disease, historically * Consumption (ecology), receipt of energy by consuming other organisms * Consumption (economics), the purchasing of newly produced goods for curren ...

and

saving Saving is income not spent, or deferred consumption. Methods of saving include putting money aside in, for example, a deposit account, a pension account, an investment fund, or as cash. Saving also involves reducing expenditures, such as recur ...

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 In economics, income distribution covers how a country's total GDP is distributed amongst its population. Economic theory and economic policy have long seen income and its distribution as a central concern. Unequal distribution of income causes ec ...

. 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. It is difficult for a family to reduce a level of consumption once attained. The aggregate ratio of consumption to income is assumed to depend on the level of present income relative to past peak income.

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