Autonomous Expenditure - Macroeconomics | Macro Economics - B Com PDF Download

Autonomous Expenditure (AE)

• This is a part of the Keynesian model.

• Autonomous expenditure (AE) or autonomous investment (AI) as it is also known, is independent of the level of disposable income

• Whatever the level of the disposable income, AE or AI is the investment that will be done in the economy.

• Though AE or AI do not depend on income, they do depend on the interest rate.

• As the interest rate goes up, AI or AE goes down and vice versa.

• It is conceptually similar to autonomous consumption, which is the part of consumption, independent of our income.

• Again just like our consumption has two components, so does AE or AI.

We know by the aggregate expenditure model:

• Y = C+I+G+ (X-M), or

• Aggregate expenditure= C+I+G+ (X-M)

• This aggregate expenditure also has two components.

• We have autonomous expenditure (AE) that is the part of C+I+G+ (X-M), not dependent on income.

• Then we have induced expenditure that is the part of C+I+G+ (X-M) which is dependent on changes in income.

• Autonomous expenditure is an expenditure which is independent of the level of income.

• It is part of the simple Keynesian income-expenditure model.

• Autonomous expenditure is independent of income, but it does determine the level of income.

• This is so because changes in the level of autonomous expenditure lead to changes in income in the future.

• This contrasts with the concept of induced expenditure, which is dependent on the level of income.

• Autonomous expenditures are those components of the economy's aggregate expenditure which are independent of the economy's level of income.

• Autonomous expenditure is automatic, necessary and indispensable.

• It includes things like government expenditure, exports, our basic living expenses etc.

• These are things we cannot do without.

• These expenditures have to be borne irrespective of the real income of the economy. In a simple Keynesian model:

• AE = A +bY

• where AE=aggregate expenditure

• A= autonomous expenditure and here A= C+I+G+ (X-M)

• B= marginal propensity to consume (MPC)

• Y= real national income