What Is The Consumption Ratchet?


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Sudipa Sarkar answered
It has been argued by Prof. Duesenberry that the consumption function is irreversible with respect to the fall in income. This means that the consumption function applicable to the rise in income will not be applicable to the fall in income. This is so because when the level of income raises people become accustomed to the consumption of certain articles and it becomes difficult to curtail the consumption of these goods as income falls. Thus suppose that for an individual when income increases by £100, consumption increases by £60. Now after certain period of time, if the income of the individual falls by £100, his consumption will not fall by £60, but by less than £60. This phenomenon is known as the 'consumption ratchet'.

The ratchet idea can also be explained as follows: During the long term growth of income, the consumption function shifts in the upward direction every few years. Such upward shifts usually occur during periods of relatively high income. Such shifts are irreversible and subsequent declines or increases of income are shared roughly equally between consumption and saving, until another shift occurs. Each shift 'takes off' from a platform provided by the previous one. This provides the source of ratchet data.

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