Munich Personal RePEc Archive

Theories of Consumption

Drakopoulos, Stavros A. (2021): Theories of Consumption. Published in: An introduction to Macroeconomics edited by L-P. Rochon and S. Rosi published in 2021, Edward Elgar Publishing Ltd (April 2021): pp. 233-267.

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This chapter explains the role of consumption expenditures in modern economies and their significance for the determination of the level of output and employment in an economy. It starts with a presentation of the theory of intertemporal choice that forms the basis of mainstream consumption functions. Next, it discusses Keynes’s approach to consumption, and particularly his criticism of the standard model of consumer behaviour, his emphasis on the role of consumption for the level of employment, and his analysis of aggregate consumption patterns. It also describes the main mainstream theories of consumption, which are the life cycle income hypothesis, the permanent income hypothesis and the random walk theory of consumption. Finally, the chapter explores the heterodox approaches to consumption, focusing mainly on the relative income hypothesis. Additionally, it shows the consequences of consumption theories for the effectiveness of economic policies towards unemployment and economic downturns.

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