WEALTH, DISPOSABLE INCOME AND CONSUMPTION - Economics

2 MEASURING WEALTH
In a competitive economy with perfect capital markets the representative
consumer’s wealth is the sum of his financial and physical assets net of liabilities
(non-human wealth) plus the expected discounted value of his current
and expected future after-tax labour income (human wealth). In an
open economy, non-human wealth will generally include both domestic
and foreign assets net of liabilities. Summing across consumers and dividing
by the population yields aggregate per capita real wealth. If we define
all aggregate variables in real per capita terms, real per capita wealth (W)
can be written as:
d
W t = At + Dt + ( Lt – T t)
+ Et i = 1 j = 1
⎛ 1 ⎞
⎜------------------- ⎟(
Lt
⎝1 + r + i–
Tt + i)
t + j⎠
5
(2.1)
where A is net domestic and foreign physical and financial assets, is
domestic holdings of government debt, L is labour income, T is taxes net of
transfers, r is the real interest (or discount) rate, and Et is the expectations
operator conditioned on information available at time t.
If we add the assumptions of intergenerational altruism and lump
sum taxes, wealth is characterized by the well-known Ricardian equivalence
proposition. For a given path for government expenditures and the
foreign debt, wealth is invariant to the timing of taxes and the size of the
government debt. Domestically held government debt nets out of wealth,
since rational consumers realize that the value of the government debt they
hold is offset by future tax liabilities. This can be demonstrated by combining
(2.1) with the government’s budget constraint. The government’s lifetime
budget constraint requires that the present value of taxes is sufficient
to pay for the present value of government expenditures plus any outstanding
government debt:
∞
∑
i
∏
D d