5. Hicks' Income Notes

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Hicksian Income Central Concept of Income (Value and Capital, 1946)

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Hicks - "the maximum value which he can consume during a week and still expect to be as well off at the end of the week as he was at the beginning" To be made operational, must be clear on what is meant by "well off" o This is where his approximations come in, each of which has a concept of 'capital' that needs to be maintained to maintain 'well-offness'

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Ex ante = calculations made at the beginning of the year in the light of knowledge and expectations at that time o This is the one relevant for decision making

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Ex post = calculations made at the end of the year in the light of knowledge and expectations at that time o Normally still very subjective since it is still based upon expectations of the future from time 1 onwards

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The concept of income is only fully determinable and objective where there are 'complete and perfect markets' (Beaver)

Hicks' Number 1 Measure of Income

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"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)" The level of welloffness is the NPV of future cash flows

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o The cash flow arising at time 1 + capital value at time 1 + capital value at time 0 o Capital value = PV of FCF from time x onwards o i.e. the realised cash flow for the period plus the change in capital value over the period

Number 1 ex ante

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Will always equal interest on the capital value at the start of the period

Number 1 ex post Version A and Version B

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The versions differ in their treatment of windfall gains and losses o i.e. those that arise from differences between expected interest rates and actual interest rates, or changes in expected interest rates when we no longer assume interest rates are constant

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Version A: o The actual cash flow for the period, plus capital accumulation including windfalls

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Version B: o The actual cash flow for the period, plus capital accumulation excluding windfalls

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