Autonomous Expenditure

Updated on April 24, 2024
Article byMilan Jha
Edited bySusmita Pathak
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Autonomous Expenditure?

Autonomous expenditure refers to the aggregate expenses made by people in an economy that are not influenced by the level of income they have. In short, these expenditures include spending for necessary things without which survival becomes difficult.

What Is Autonomous Expenditure

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The spending, here, can occur at any level, whether government dues or an individual’s payments. This can also be considered a good sign for the economy because it is a general understanding that if the autonomous expenditure is high, the output is also high in that year.

Key Takeaways

  • Autonomous expenditures are non-discretionary spending by households, businesses, or the government that is not directly influenced by changes in income or economic conditions.
  • Autonomous expenditures often include essential expenses such as rent, mortgage payments, insurance premiums, and certain government spending programs like Social Security or healthcare. 
  • Autonomous expenditures are considered relatively stable and less sensitive to changes in economic conditions than discretionary expenditures.
  • Changes in autonomous expenditures can have a significant impact on aggregate demand and economic stability.

Autonomous Expenditure Explained

Autonomous expenditure is a compulsory expenditure bound to be made irrespective of an individual’s income. It doesn’t depend upon real income. It is a basic requirement that everyone should fulfill to live a peaceful life. Sometimes, expenditures become so necessary that the person required to meet the needs will have to take loans to carry that, and the interest cost is also associated with it.

This is somewhat of a fixed component because it doesn’t vary in any given situation. This will occur in case of recession, and there is no way to avoid the expenses in those peak hours.

The components that identify these expenditures as autonomous include the following:

  • Household consumption – The items that are used in a household, maximum of them are necessary purchases, which is required irrespective of one’s income level. In fact, there are certain things that one has to but even if they have no source of income. Such items include food, clothing, etc.
  • Investment spending – Investment into a business venture is inevitable. A businessperson has to invest in manufacturing or delivering goods and services when the demands are high in the market. They have to do so even if they have limited revenue generated or significant losses incurred.
  • Government spending – This kind of expenditure is yet another element of autonomous expenditure that cannot be ignored or avoided. The authorities have to spend on schemes, campaigns, etc. that are introduced for the betterment of an economy irrespective of their debt obligations and other financial burdens.
  • Net exports – Having significant net export figures is again a must. Export is necessary for an economy to ensure it undertakes foreign trade and enhances economic growth. The inclination of foreigners on domestic items ensures better revenue for the economy. Hence, net export figures must be significant.

Autonomous expenses are an internal factor and an external factor. Many trade policies and government taxes are levied so that the exporters or importers make extra efforts to hedge their losses in the market because other nations are also involved here. Therefore, to sum up, it is always advisable to check the income and the savings because these are the important factors in any economy.

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Factors

Many factors affect autonomous expenditure, such as:

#1 – Savings

The most important factor in autonomous expenditure is the savings an individual has. Since autonomous expenditure cannot be avoided, individuals should consider their savings. Furthermore, we should understand our capacity and strength in spending money wisely.

#2 – Borrowings

One very difficult situation arises when an individual takes loans to meet their basic needs. When the loans are returned, they add an interest cost, making it dearer for an individual. Therefore borrowing is also considered as one of the important factors that may affect autonomous expenditure.

#3 – Government Factors

The government also plays a very vital role in considering autonomous expenditure. The expenditure is made for the people to make our nation better in many respects, for example, road repairs, bridge construction, metro and train facilities, etc. This expenditure can be considered a waste for some people, but it is a necessity for most people, and therefore it is considered an autonomous expenditure.

#4 – Trade Policies

Not only internal but also some external factors are responsible for autonomous expenditure. For example, many countries have different trade policies and taxes. Moreover, to participate in nation-building, we have to deal with the foreign exchangeForeign ExchangeForeign exchange, or Forex, is trading one currency for values equivalent to another currency.read more to get more returns. Thus, the trade policy is one factor to consider while calculating autonomous expenditure.

Autonomous Expenditure factors

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Formula

The expression or equation that helps calculate autonomous expenditure is mentioned below:

AE = c + bY

where,

AE is the aggregate expenditure

c is the autonomous spending

Y is the real GDP or income

b is the marginal propensity to consume (MPS), which is the slope that represents the change in AE when Y changes.

How to Calculate?

The autonomous expenditure is calculated statistically. Then, the equation to find out the autonomous expenditure is solved using a graphical representation.

Autonomous Expenditure Graph

The graph here depicts a straight line that intersects the income and the expenditure. The line indicates that expenditure remains the same irrespective of income in all stages.

Examples

Let us consider the following examples to understand the concept:

Examples

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Example #1 – Government Expenditure

Government expenditure includes the taxes all have to pay to live a peaceful, uninterrupted life. There are several taxes that the government has levied, for example, minimum income tax, property tax, road taxes, water taxes, etc.

We all have to deal with it irrespective of our income or profits. Since the government is also making a huge effort to make our daily lives easy, money is required to make all such facilities that a nation should get, like metro or train facilities, public toilets, bridges, highways, expressways, etc., available to us. It, thus, comes under autonomous expenditure.

Example #2 – Basic Needs for a Living

The most important example of autonomous expenditure is the basic needs of all human beings, i.e., expenses made to get the food and shelter to live. All are working hard to eat well and live a good life, but these things are not easily achievable; an individual has to work very hard to achieve their family’s basic food, shelter, and education for their children. This type of expenditure is again autonomous since it occurs irrespective of income.

Autonomous Expenditure vs Induced Expenditure

Autonomous expenditure and induced expenditure are widely used terms when assessing the expenses of an economy. Let us quickly have a look at the differences between the two below:

  • Autonomous expenditure doesn’t have to depend upon the income level, whereas the induced expenditure varies with each drop or rise in income.
  • The induced expenditure can be avoided, but there is no scope to prevent the autonomous expenditure.
  • On a national level, autonomous expenditure doesn’t depend on the gross domestic production level of the country. In contrast, the induced expenditure depends on the nation’s GDP level.
  • Autonomous expenditure depends on an expense made for basic needs. In contrast, the induced expenditure is made for luxury, depending on income levels.

Frequently Asked Questions (FAQs)

1. How do autonomous expenditures affect the overall economy?

Autonomous expenditures play a crucial role in shaping aggregate demand in the economy. Since they are relatively stable and less influenced by income changes, they provide a baseline level of spending that helps sustain economic activity even during economic downturns.

2. Can autonomous expenditures change over time?

While autonomous expenditures are generally considered relatively stable, they can change over time due to changes in government policies, shifts in consumer behavior, or variations in business investment patterns. However, these changes tend to occur more gradually compared to discretionary expenditures.

3. How do autonomous expenditures interact with other components of aggregate demand?

Autonomous expenditures are one component of aggregate demand, along with consumption, investment, and net exports. Changes in autonomous expenditures can have multiplier effects on the overall economy. For example, an increase in government spending on essential programs can stimulate economic growth by creating additional income and demand for goods and services.

This has been a Guide to what is Autonomous Expenditure. We explain it with its formula, how to calculate it, examples, vs induced expenditure, and factors. You can learn more about from the following articles –