How is the life-cycle pattern of income related to the measurement of income at a point in time?

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gsenviro eNotes educator| Certified Educator

The life-cycle pattern of income and consumption is based on the Life-cycle hypothesis of Modigliani and Brunmberg, according to which an individual plans his saving and consumption over his lifetime or life-cycle. The idea is that an individual saves a portion of his income during his earning years and accumulates enough during his working life that lack of income during the retired years does not affect his standard of living. Since an individual can borrow or save, his current income does not define his consumption patterns. 

The income follows a typical trend with low income during initial working years (due to lack of experience), a gradual rise, a peak at around the age of 50 and then a sharp fall as one retires at 60 or 65 years of age. The measurement of income at a point in time will indicate which life-cycle stage the individual is at. For example, a 0 income (or nil income) indicates either a non-working age (too young to work) or retired; and the life-cycle pattern of income would be a flat (straight line corresponding to 0 income) line. Similarly, an increasing income indicates early life stages and will represent a rising trend in life-cycle patterns of income. The level of income at any given time will also dictate the level of savings a person does or can afford. 

The life-cycle pattern of income (and consumption) is dependent on the type of economy, developed vs. developing vs underdeveloped; level of education, etc. The patterns and magnitude of income/consumption may vary slightly, but the underlying concepts stay the same.

In conclusion, the measurement of income at a point in time will yield the trend of life-cycle income pattern and will indicate the stage of life the individual is at.