FIRM: An organization that combines resources for the production and supply of goods and services. The firm is used by entrepreneurs to bring together otherwise unproductive resources. The key role played by a firm is the production of output using the economy's scarce resources. Firm's are the means through which society transforms less satisfying resources into more satisfying goods and services. If firms didn't do this deed, then something else would. And we would probably call those something elses firms.
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Expenditures on aggregate production by the four macroeconomic sectors that do not depend on income or production (especially national income or even gross domestic product). That is, changes in income do not generate changes in these expenditures. Each of the four aggregate expenditures--consumption, investment expenditures, government purchases, and net exports--have an autonomous component. Autonomous expenditures are affected by the ceteris paribus aggregate expenditures determinants and are measured by the intercept term of the aggregate expenditures line. The alternative to autonomous expenditures are induced expenditures, expenditures which do depend on income. Autonomous expenditures are expenditures by the four macroeconomic sectors (household, business, government, and foreign) that are unrelated to and unaffected by the level of income or production. Autonomous expenditures can be thought of as baseline or minimum levels of expenditures undertaken by the four sectors in the unlikely event that income falls to zero. Or they can be thought of as expenditures that are held constant when the aggregate expenditures line is constructed.
This is one of two classifications of aggregate expenditures. The other is induced expenditures, aggregate expenditures that are based on the level income or production. In other words, aggregate expenditures can be divided into: (1) a minimum or baseline amount of expenditures which, in theory, would be undertaken even if the economy had no income and (2) additional expenditures that result from the income available to the economy.
While autonomous expenditures are unaffected by income and are held constant for the construction of the aggregate expenditures line, they are not absolutely constant, they do change. Autonomous expenditures are affected by aggregate expenditures determinants, such as interest rates, consumer confidence, fiscal policy',500,400)">fiscal policy, and foreign currency exchange rates. Changes in these and other determinants cause changes in autonomous expenditures, which shift the aggregate expenditures line and disrupt whatever equilibrium might exist.
Autonomous and induced expenditures interact in a specific way when equilibrium is disrupted by the aggregate expenditures determinants. A change in the determinants causes a change in autonomous expenditures, which is reflected by a shift in the aggregate expenditures line. This change disrupts the existing equilibrium. Equilibrium is then restored by a change in induced expenditures, which is indicated as a movement along the aggregate expenditures line.
Four ExpendituresAll four of the aggregate expenditures have autonomous components--consumption expenditures, investment expenditures, government purchases, and net exports.
- Consumption Expenditures: These are expenditures by the household sector on everything from apple juice to zirconium earrings. While the household sector bases most expenditures on available income (induced consumption), it is likely to undertake a minimum level of expenditures should income fall to zero. These are autonomous consumption expenditures. They are affect by such things as interest rates, consumer confidence, and wealth.
- Investment Expenditures: These are expenditures by the business sector on productive capital goods. A modest amount of investment expenditures are induced by income, but the autonomous portion of investment tends to be more important. Autonomous investment are those expenditures on capital that depend on interest rates, technological innovations, and expectations. Changes in autonomous investment expenditures are a prime source of business-cycle instability.
- Government Purchases: These are expenditures by the government sector on the vast array of goods and services that it uses to perform its designated duties. Like investment, a modest amount of government purchases are induced by income, especially those undertaken by state and local governments. However, the bulk of government purchases are autonomous and depend on factors such as fiscal policy and politics. Autonomous government purchases are a business cycle stabilization tool.
- Net Exports: These are the difference between exports and imports and are the net expenditures on domestic production by the foreign sector. While imports, like consumption expenditures, have a significant induced component, some imports and all exports are autonomous. As such, net exports depend on non-income factors such as foreign currency exchange rates, global economic conditions, and foreign political activity.
Autonomous In An EquationOne way to illustrate autonomous expenditures is with an aggregate expenditures equation, such as the one presented here:where: AE is aggregate expenditures, Y is income (national or disposable), e is the intercept, and f is the slope.
The two key parameters that characterize the aggregate expenditures equation are slope and intercept. Autonomous expenditures are indicated by the intercept of the aggregate expenditures equation. Induced expenditures are indicated by the slope.
- An Autonomous Intercept: The intercept of the aggregate expenditures equation (e) measures the amount of aggregate expenditures undertaken if income is zero. If income is zero, then aggregate expenditures are $e. The intercept is generally assumed and empirically documented to be positive (0 < e). It is conceptually identified as autonomous expenditures. It contains the sum of autonomous consumption, investment, government purchases, and net exports.
- An Induced Slope: The slope of the aggregate expenditures equation (f) measures the change in aggregate expenditures resulting from a change in income. If income changes by $1, then aggregate expenditures change by $f. This slope is generally assumed and empirically documented to be greater than zero, but less than one (0 < f < 1). It is conceptually identified as induced expenditures. It is the combination of the induce expenditures by the household, business, government, and foreign sectors.
Autonomous In A Line
Another common way to identify autonomous expenditures is with a standard aggregate expenditures line, such as the one presented in the exhibit to the right. The red line, labeled AE in the exhibit, is the positively-sloped aggregate expenditures line plotted from the equation: AE = 1 + 0.75Y. This line indicates that a minimum level of aggregate expenditures are undertaken by the four sectors even if income is zero.
|Aggregate Expenditures Line
The two primary characteristics of the aggregate expenditures line are, once again, slope and intercept. Slope indicates induced expenditures and intercept indicates autonomous expenditures.
- An Autonomous Intercept: The aggregate expenditures line intersects the vertical axis at a positive value of $1 trillion. Click the [Autonomous] button to highlight. Once again this intercept value is autonomous consumption.
- An Induced Slope: The slope of the aggregate expenditures line presented here is positive, but less than one. In this case the slope is equal to 0.75. Click the [Induced] button to highlight. And once again this is induced expenditures.
Aggregate Expenditures DeterminantsAutonomous expenditures might not depend on income, but they are affected by other factors, ceteris paribus factors that are held constant when the aggregate expenditures line is constructed. This ceteris paribus factors are aggregate expenditure determinants. Some of the more important ones are:
- Interest Rates: Higher interest rates discourage the borrowing used to finance some types of consumption and investment expenditures (such as factories and furniture) and they increase the return on income diverted into the financial markets. As such, consumption and investment decrease and saving increases. The end result is a decrease in autonomous expenditures. Lower interest rates work in the opposite manner.
- Physical Wealth: An increase in the existing stock of business capital goods and household durable goods means further purchases are not needed. This causes a decrease in consumption and investment, and thus a decrease in autonomous expenditures. A reduction in the stock of physical wealth has the opposite effect.
- Financial Wealth: An increase in the stock of financial assets available to the four sectors, such as stocks, bonds, and especially money, makes it possible to increase all four autonomous expenditures. Note that financial wealth (money) is not the same as income. Wealth is a stock and income is a flow. A reduction in financial wealth reduces the ability to make expenditures.
- Taxes: Government collects taxes to pay for government activities. Should government collect more taxes, then less income remains for consumption and investment expenditures. This, of course, assumes that government is not spending those taxes on government purchases. A reduction in taxes work in the opposite direction.
- Expectations: If the household and business sectors expect an improving economy then they are more likely to increase consumption and investment expenditures. The result is an increase in autonomous expenditures. Expectations of a declining economy are then likely to cause a reduction in both autonomous expenditures.
- Stabilization Policies: These are government policies, specifically fiscal policy, designed to stabilize the business cycle. The desire to counter instability caused by other expenditures is always a lurking in the minds of government policy makers. If aggregate expenditures decrease because of less spending from the household or business sectors, then the government sector is likely to spend more.
- Foreign Economic Conditions: If the foreign sector is expanding and prosperous, then exports increase and so too do net exports. This triggers an increase in autonomous expenditures. An economic downturn in the foreign sector causes a decrease in exports and thus net exports.
- Trade Policies: Virtually every nation of the world has policies designed to promote exports and restrict imports. Higher tariffs reduce imports and increase net exports, while lower tariffs increase imports and reduce net exports. In either event, autonomous expenditures change.
AUTONOMOUS EXPENDITURES, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: February 25, 2024].
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