INSIDER TRADING: The buying and selling of corporate stock or other financial instruments based on knowledge that is not widely available to the general public. Insider trading is most often undertaken by corporate executives or directors using information that they have acquired by working "inside" the company. Insider trading is illegal because it gives an unfair advantage to those on the inside. The president of a pharmaceutical company might be inclined to sell stock in the company using advanced information that the government is about to decline the patent application for a new drug.
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Household consumption expenditures that do not depend on income or production (especially disposable income, national income, or even gross domestic product). That is, changes in income do not generate changes in consumption. Autonomous consumption is best thought of as a baseline or minimum level of consumption that the household sector undertakes in the unlikely event that income falls to zero. It is measured by the intercept term of the consumption function or the consumption line. The alternative to autonomous consumption is induced consumption, which does depend on income. Autonomous consumption is consumption expenditures by the household sector that are unrelated to and unaffected by the level of income or production. This is one of two basic classifications of consumption. The other is induced consumption, consumption expenditures that are based on the level income or production. In other words, household consumption can be divided into: (1) a minimum or baseline amount of expenditures which, in theory, would be undertaken even if the household sector had no income and (2) additional expenditures that result from the income available to the household sector.
The bulk of consumption expenditures fall in the induced category because people are prone to base their spending on available income. However, some spending takes place independent of income. Autonomous consumption generally surfaces primarily as a theoretical extreme, at least for the aggregate household sector--the amount of consumption expenditures undertaken in the unlikely event that household sector income is zero
However, it does have a pragmatic interpretation, especially for individuals. A typical consumer such as Pollyanna Pumpernickel is bound to base personal consumption spending on available income. However, should Pollyanna's income fall to zero (perhaps due to a temporary bout of unemployment), then her spending is bound to fall, but not completely to zero. Her spending is likely to continue as she purchases necessities such as food, living space, energy, etc. And because these expenditures cannot be financed with current income, she is likely to rely on savings (accumulations of past income) or loans (paid off with future income). This is Pollyanna's autonomous consumption.
Autonomous In An EquationOne way to illustrate autonomous consumption is with the consumption function, such as the equation presented here:where: C is consumption expenditures, Y is income (national or disposable), a is the intercept, and b is the slope.
The two key parameters that characterize the consumption function are slope and intercept. Autonomous consumption is indicated by the intercept of the consumption function. Induced consumption is indicated by the slope.
- An Autonomous Intercept: The intercept of the consumption function (a) measures the amount of consumption undertaken if income is zero. If income is zero, then consumption is $a. The intercept is generally assumed and empirically documented to be positive (0 < a). It is conceptually identified as autonomous consumption.
- An Induced Slope: The slope of the consumption function (b) measures the change in consumption resulting from a change in income. If income changes by $1, then consumption changes by $b. This slope is generally assumed and empirically documented to be greater than zero, but less than one (0 < b < 1). It is conceptually identified as induced consumption and the marginal propensity to consume (MPC).
Autonomous In A Line
Another common way to identify autonomous consumption is with a standard consumption line, such as the one presented in the exhibit to the right. This is reasonable because the consumption line is a graph of the consumption function. The red line, labeled C in the exhibit, is the positively-sloped consumption line for the equation: C = 1 + 0.75Y. This line indicates that a minimum level of consumption expenditures are undertaken by the household sector even if income is zero.
For reference, a black 45-degree line is also presented in this exhibit. Because the 45-degree line has a slope of one, it indicates that the induced slope of the consumption line is less than one.
The two primary characteristics of the consumption function--slope and intercept--are also identified by the consumption line.
- An Autonomous Intercept: The consumption line intersects the vertical axis at a positive value of $1 trillion. Click the [Intercept] button to highlight. Once again this intercept value is autonomous consumption.
- An Induced Slope: The slope of the consumption line presented here is positive, but less than one. In this case the slope is equal to 0.75. Click the [Slope] button to highlight. And once again this is induced consumption and the marginal propensity to consume (MPC).
Consumption Expenditures DeterminantsThis is a good place to make note of factors other than income that also affect consumption expenditures. While income is THE most important influence on consumption, interest rates, consumer confidence, and wealth are among other important influences--termed consumption expenditures determinants.
These determinants, similar to those for other relations in the study of economics, cause a change in the underlying consumption-income relation. From a graphical perspective, these determinants cause the consumption line to shift, which effectively means that the intercept of this line changes.
More generally, these determinants cause a change in autonomous consumption. A decrease in interest rates, a boost in consumer confidence, or an increase in financial wealth, for example, all trigger an increase in consumption expenditures... even though income remains unchanged.
Other Autonomous ExpendituresConsumption is one of four expenditures on aggregate production in the macroeconomy. The other three--investment expenditures, government purchases, and net exports--also have important autonomous components. In fact, the autonomous components of these other expenditures are often more important in Keynesian economics than autonomous consumption.
Autonomous and induced expenditures work together in the macroeconomy. Autonomous expenditures set in motion business-cycle instability; they trigger expansions and contractions of the macroeconomy. Induced expenditures (especially consumption) then magnify and accelerate these changes.
- Autonomous investment is key factor in the analysis of business-cycle instability. Business cycle ups and downs can often be traced back to autonomous changes in investment expenditures by the business sector. While these autonomous expenditures are unrelated to income, they are influenced by other factors, such as interest rates, technology, expectations, and wealth.
- Although some degree of government purchases are induced by income, the government sector is also inclined to change spending in response to factors other than income. Autonomous government purchases result from these other influences and are perhaps most important in the analysis of fiscal policy designed to correct business cycle ups and downs.
- Autonomous net exports, the difference between exports and imports, are based on global economic conditions, especially economic activity in other countries. These expenditures by the foreign sector also depend on such things as currency exchange rates, trade agreements, wars and conflicts, or global politics.
AUTONOMOUS CONSUMPTION, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: February 25, 2024].
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