Autonomous expenditure refers to spending that unaffected by the level of income. It will exist, even when income is zero. Some basic needs, such as food and drinks, fall into this category. Meanwhile, in macroeconomics, examples of autonomous expenditure are government spending, certain types of investment spending, and exports. Also known as autonomous spending.
What is the difference between autonomous expenditure and induced expenditure
Economists classify aggregate expenditure into two broad categories: induced expenditure and autonomous expenditure. Induced expenditure fluctuates with changes in aggregate income, as indicated by changes in real GDP. When real GDP rises, induced spending will also increase. Vice versa, the value will decrease when real GDP falls.
Conversely, autonomous spending does not depend on real GDP fluctuations. The value is constant, even if real GDP is zero. In a curve, the value represents the intercept of a linear aggregate expenditure curve.
In a graph, where the y-axis represents total expenditure, and the x-axis represents total production, the aggregate expenditure curve is a linear line with a positive slope. Mathematically, we can write the linear line with the following equation:
AE = c + bY
Where AE is an aggregate expenditure, c is an autonomous expenditure, b is the slope, Y is national income (real GDP).
In macroeconomics, aggregate expenditure represents total expenditure by four economic sectors: household, government, business, and external. Not all expenditure from the four sectors is the induced expenditure.
For example, government spending, unlike tax revenue, does not link to economic growth. Instead, it depends on government discretion.
Likewise, with exports, the fluctuations do not depend on the domestic economy but the economic growth of global and trading partners. Therefore, government expenditures and export are autonomous expenditures.
Some business investments also fall into autonomous expenditure. In deciding whether to build in a new factory or order new capital goods, businesses usually look ahead on the interest rate and return on investment rather than economic growth.
Although not correlated with aggregate output, autonomous expenditure can change over time. Many factors determine its level, including government fiscal policy, global economic growth, interest rates, wealth, trade policy, consumer confidence, and currency exchange rates. Changes to these factors will affect autonomous expenditure and shift the aggregate expenditure line.