Permanent Income

Published Jan 10, 2023

Definition of Permanent Income

Permanent income is an economic concept that describes the amount of money an individual or household expects to receive in the long run. That means it is the amount of money that is expected to remain constant, even if there are fluctuations in income over shorter periods of time.

Example

To illustrate this concept, let’s look at the example of John, a young professional. John has a steady job and earns a salary of $50,000 per year. In addition to that, he also receives a bonus of $5,000 every year. Thus, his total income is $55,000 per year.

However, John’s income is not necessarily permanent. That means if he loses his job or his employer decides to cut his bonus, his income will decrease. However, John does not expect to lose his job anytime soon. In that case, his permanent income would be $50,000 per year since that is the amount of money he expects to receive over a long period of time.

Note that although John expects this to be his permanent income, changes can still occur and his actual income might be different in the long run.

Why Permanent Income Matters

Permanent income is an important concept in economics because it helps to explain how people make decisions about their spending and saving. If people expect their income to remain constant over a long period of time, they are more likely to spend a large part of their income instead of saving and investing it for the future.

On the other hand, if they expect their income to decrease in the future, they are more likely to save their money now. Thus, being familiar with the concept of permanent income can help economists to better understand how people make decisions about their finances.