Some spending changes with income; some changes for other reasons.
Autonomous expenditure is independent of the current level of national income within the model, although it can change when confidence, interest rates, policy or other external determinants change. Induced expenditure varies in response to national income. Consumption may have both components. Exports can be autonomous with respect to domestic income while still depending on foreign income. An initial autonomous change starts the multiplier process; later income-driven spending is induced. This distinction concerns the assumed relationship with current income, not whether the spending is voluntary, important or permanent.
- Autonomous
- Autonomous expenditure does not depend on current national income in the model. It can still change for another reason, such as greater confidence.
- Induced
- Induced expenditure changes because income changes. A household buying more after earning more is an example of this link.
- Consumption function
- C = a + bY is a rule relating consumption C to income Y. The constant a is autonomous consumption; b is the extra consumption for each extra income unit, so bY is the income-induced part.
Apply the idea
Domestic versus foreign income
Exports may be autonomous relative to domestic Y but depend on foreign income.
Initial and later changes
The initial autonomous injection and subsequent induced expenditure are distinct; do not count either twice.
Worked example: More income and greater confidence
A two-sector model includes households and firms, with no government or foreign sector. Use C = 20 + 0.6Y, where Y is income in this model's units rather than the earlier graph's output index. At Y = 100, C = 80. Compare a rise in Y to 110 with a confidence change raising the constant, or intercept, from 20 to 25.
- When income rises from 100 to 110 with the function unchanged, consumption rises by 0.6 x 10 = 6. This is induced consumption.
- The confidence change raises consumption by 5 at every income level: it is an autonomous consumption increase in this model.
- At Y = 110 after both changes, C = 25 + 0.6 x 110 = 91. Relative to the initial 80, the increase contains 6 induced and 5 autonomous units.
- The term autonomous does not mean fixed forever. It means independent of current Y for the stated relationship.
Watch out for this
Autonomous consumption is the part that changes when national income changes.
That is induced consumption. Autonomous consumption is the income-independent component within the model.
Check your understanding
In C = 20 + 0.6Y, an income rise of 10 with the function unchanged raises consumption by how much?
- 20.
- 6.
- 26.