Flashcards in Stream III - The Hicksian Concept of Income Deck (20):
What is Hicks' definition of the central concept of an individual's income?
The maximum value which he can consume during a week and still expect to be as well at the end of the week as he was at the beginning
How does Hicks' definition of income change for an entire firm?
It becomes the amount a firm can consume in a year and still expect to be as well at the end of the year as it was at the beginning
What is the ability to consume for a firm?
The dividend the company could pay
What is the figure that Hicks says is relevant to decisions?
Income ex ante:
Yt0->1 = D1t0 + V1t0 - V0t0
What are Version A and Version B of income ex post?
- Version A: The difference between forecast cash flows and actual cash flows
- Version B: The difference between original forecast cash flows and revised forecast flows
What is the formula for Version A income ex post?
Yt0->1 = D1t1 + V1t1 - V0t0
Actual cash flow for the period, plus capital accumulation including windfalls
What is the formula for Version B income ex post?
yt0->1 = D1t1 + V1t1 - V0t1
Actual cash flow for the period, plus capital accumulation minus windfalls
Which version of income ex post do we use if we want it to equal rV0t1? Why?
Version B because it excludes windfalls
Which of the number 1 incomes is regarded as not subjective? Why can it be argued to be subjective on the other hand?
Ex post Version A.
It can be argued to be subjective because V1t1 includes expected future cash flows discounted back to the current time.
Why can't ex post be used for decision making?
Because of the general principle of "bygones are bygones". It can have no relevance on current decision making.
What could give rise to windfall gains and losses?
Changes in interest rates
What is Hicks' number 2 income and why does it exist?
The maximum amount the individual can spend this week and still expect to be able to spend the same amount in each ensuing week.
This exists when interest rates change.
What is Hicks' number 2 income for a company?
The maximum dividend the company can pay in a period and still be able to pay the same dividend in all future periods.
What is Hicks number 1 income
Income No. 1 is the maximum amount which can be spent during a period if there is to be an expectation of maintaining intact the capital value of prospective receipts (in money terms)
What is the equation for Number 2 ex ante: a special case? (This special case is when cash flows are not regular perpetuities and there are expected changes in the interest rate.
V0t0 = Y/(1+r0t0) + ((Y/(1+r1t0))/(1+r0t0)
What is Hicks' income number 2 ex post version A?
The maximum amount an individual can consume in a period and still expect to be able to consume the originally foreseen number 2 ex ante income in all periods
What is Hicks' income number 2 ex post version B?
The maximum amount an individual can consume in a period and still expect to be able to consume the same amount in all future periods
What is Hicks' Income Number 3
The maximum amount of money which the individual can spend this week and still be able to spend the same amount in real terms in each ensuing week
What is Hicks' Income Number 4
Basically just number 1 but adjusted for real terms