Developed by James Duesenberry

James Duesenberry

James Stemble Duesenberry 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 Consumer Behavior...

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

Consumption (economics)

Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt. Generally, consumption is defined in part by comparison to production. But the precise definition can vary because different schools of economists define production quite differently...

 and saving is dictated more by his income in relation to others than by abstract standard of living

Standard of living

Standard of living is generally measured by standards such as real income per person and poverty rate. Other measures such as access and quality of health care, income growth inequality and educational standards are also used. Examples are access to certain goods , or measures of health such as...

. So an individual is less concerned with absolute level of consumption than by relative levels. The percentage of income consumed by an individual depends on his percentile position within the income distribution.

Secondly it hypothesises that the present consumption is not influenced merely by present levels of absolute and relative income, but also by levels of consumption attained in 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.