The bulk of saving falls in the induced category because people are prone to base saving on available income. However, some saving (actually negative saving) takes place independent of income. Autonomous saving generally surfaces primarily as a theoretical extreme, at least for the aggregate household sector--the amount of saving 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 saving on available income. However, should Pollyanna's income fall to zero (perhaps due to a temporary bout of unemployment), then her saving is bound to fall. In fact, it is likely to fall so much that it turns negative as Pollyanna's consumption exceeds income. That is, she probably finds it necessary to withdraw previously accumulated saving to meet her expenses. This is Pollyanna's autonomous saving.

Autonomous In An Equation

S

=

c

+

dY

The two key parameters that characterize the saving function are slope and intercept. Autonomous saving is indicated by the intercept of the saving function. Induced saving is indicated by the slope.

• An Autonomous Intercept: The intercept of the saving function (c) measures the amount of saving undertaken if income is zero. If income is zero, then saving is $c. The intercept is generally assumed and empirically documented to be negative (a < 0). It is conceptually identified as autonomous saving.


• An Induced Slope: The slope of the saving function (d) measures the change in saving resulting from a change in income. If income changes by $1, then saving changes by $d. 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 saving and the marginal propensity to save (MPS).

C

=

a

+

bY

Because income not spent is saved, the saving function can be specified as:

S

= -

a

+

(1-b)Y

Autonomous In A Line

Saving Line

The two primary characteristics of the saving function--slope and intercept--are also identified by the saving line.

• An Autonomous Intercept: The saving line intersects the vertical axis at a negative value of -$1 trillion. Click the [Intercept] button to highlight. Once again this intercept value is autonomous saving.


• An Induced Slope: The slope of the saving line presented here is positive, but less than one. In this case the slope is equal to 0.25. Click the [Slope] button to highlight. And once again this is induced saving and the marginal propensity to save (MPS).

Consumption Expenditures Determinants

These determinants, similar to those for other relations in the study of economics, while primarily specified as determinants of consumption expenditures also cause a change in the underlying saving-income relation. From a graphical perspective, these determinants cause the saving line to shift, which effectively means that the intercept of this line changes.

More generally, these determinants cause a change in autonomous saving. A decrease in interest rates, a boost in consumer confidence, or an increase in financial wealth, for example, all trigger an decrease in saving... even though income remains unchanged.

Other Autonomous Expenditures

• 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.