Answer to Question #242106 in Macroeconomics for Leeza

Question

Does the absolute income hypothesis exist in Sri Lanka? Explain your answer based on the households consumption behaviour in Sri Lanka in general.

Answer 1

The absolute income hypothesis does not exist in Sri Lanka. This is because consumers spend most of their income on consumption and and only a negligible amount is saved or there is no saving at all.

This is illustrated by the households consumption expenditure between 1970 and 2019. It is seen that consumption expenditure has increased from 2,137 million US dollars in 1970 to 58,216 million US dollars in 2019. This implies a 7.56% growth in consumption expenditure annually. This is a high rate of growth in consumption implying that there exists very little savings.