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Autonomous consumption is defined as the expenditures that consumers must make even when they have no disposable income. These costs are regarded as autonomous or independent because they cannot be avoided independently of the restricted personal income.
Consumers' basic standards of life are guaranteed by Autonomous Consumption because it pays for necessities including rent, utilities, food, healthcare, and interest payments. Regardless of their salary or current financial situation, people must purchase these items and services.
Paying for these basics when a consumer is strapped for cash may require them to borrow money or draw upon savings that they had been putting up. When one spends more money than they have available to them, this is referred to as dissaving. Consumers may choose to spend their funds on luxuries like vacations or other discretionary costs while they are experiencing financial difficulties.
How is autonomous consumption calculated?
The aggregate Consumption function, which depicts the link between overall consumption and disposable income, includes autonomous consumption as one of its components. The aggregate consumption function can be expressed as:
C = a + bYd
where C is total consumption, a is autonomous consumption, 'b' is the marginal propensity to consume (MPC), and 'Yd' is disposable income.
The MPC gauges how much extra income individuals spend on consumption. Depending on the tastes and financial situation of the consumer, it goes from 0 to 1. Consumers who have higher MPCs are more likely to spend their additional money on consumption, whilst those who have lower MPCs are more likely to save.
The MPC is the gradient of the consumption function 'b'. It demonstrates how consumption is affected when disposable income fluctuates by one unit. You can figure it out by dividing the variation in consumption by the variation in disposable income.
What factors affect autonomous consumption?
Autonomous consumption can vary depending on several factors, such as:- Consumer preferences: Customers may have varying interests and preferences for products and services, which has an impact on their buying habits. For instance, depending on their income, some customers may place a higher value on health and education than others, spending more money on these products.
- Consumer expectations: Consumers' spending choices may be influenced by their various expectations for their future income, pricing, and economic situations. Consumers might spend more now while saving less, for instance, if they anticipate an increase in their income in the future. In contrast, people might spend less now and save more if they anticipate a decrease in their income or an increase in costs in the future.
- Consumer wealth: Different amounts of wealth, such as savings, assets, or liabilities, might affect a consumer's ability to spend money. Customers might spend more on autonomous consumption even if they have little income if they have more savings or assets than loans, for instance. Alternatively, even if individuals have large incomes, they might spend less on autonomous consumption if they have more debts than savings or assets.
- Government policies: Through its influence on people's income and pricing, government policies can alter what they spend their money on. By altering taxes and government spending, for instance, fiscal policy can have an impact on consumer spending. By altering the money supply and interest rates, monetary policy can have an impact on consumer spending.
Data on autonomous consumption
The average autonomous consumption as a percentage of GDP for high-income countries (HICs), upper-middle-income countries (UMICs), lower-middle-income countries (LMICs), and low-income countries (LICs) in 2019 was 18.9%, 16%, 13%, and 10.8%, respectively, according to data from the World Bank. This shows that across national boundaries, autonomous consumption tends to rise with income level.
Significant variances do exist within each income category, though. The autonomous consumption of HICs, for instance, ranged from 7.6% of GDP in Qatar to 28% of GDP in Greece. The autonomous consumption share of GDP in UMICs ranged from 8% in China to 24% in Brazil. The autonomous consumption share of GDP in LMICs varied from 6% in India to 22% in Morocco. Autonomous consumption was 4% of GDP in Afghanistan and 18% of GDP in Malawi among LICs.
These variations are a reflection of regional disparities in consumer choices, expectations, wealth, and political ideologies. They also demonstrate that there are other elements outside income level that affect consumer behavior and affect autonomous consumption.
