Relative income hypothesis

Updated: Aug 20, 2021

The theory that savings behaviour is affected by a person’s relative position in the income distribution. Thus at a given level of real income, a person may be a relatively poor member of a rich community, or a or a relatively rich member of a poor community. The member of the richer community is expected to consume more and save less, as ideas of what constitutes a socially acceptable minimum level of consumption are influenced by what is habitual to their friends and neighbours. This analysis also applies to comparisons between different countries or regions, or the same country at different times.

Reference: Oxford Press Dictonary of Economics, 5th edt.

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