00:02
So here we're looking at the permanent income hypothesis and the relative income hypothesis.
00:11
So there are two economic theories and they seek to explain the consumption behaviour based on different factors.
00:30
So we can compare and contrast these hypotheses in the context of a modern developing country like kenya.
00:37
So for the permanent income hypothesis, it proposes that the individuals base their consumption decisions not just on the current income, but their expected average lifetime income, which is referred to as the permanent income.
00:52
And so in developing countries like kenya, where the income level can be volatile, the pih might still hold to some extent.
00:59
Households may try to maintain a steady level of consumption by borrowing during low income periods and saving during high income periods.
01:08
So strengths here, it reflects the idea of the optimisation and the rationale of consumer behaviour.
01:17
It aligns with the common practice of households in developing countries as well to save or borrow to maintain stable consumption levels.
01:26
However, weaknesses, it assumes that the consumers have perfect information about their future income and it does ignore behavioural aspects as well.
01:36
Moving on to the relative income hypothesis, it suggests that individuals consider their income in comparison to others in society who are making consumption decisions.
01:47
So it argues that people care not only about their absolute level of income, but also about the income relative to peers.
01:54
So income inequality in kenya, it can be really significant.
01:59
And so the rih may play a role in consumption behaviour as individuals compare their income to that of others around them...