budget constraint

Quick Reference

The limit to expenditure. For any economic agent, whether an individual, a firm, or a government, expenditure must stay within limits set by the ability to finance it. The finance may come from income, from assets already held, or from borrowing; loans will be obtainable only if lenders believe that they are sufficiently likely to be repaid. The budget constraint thus says that the present discounted value of total present and future expenditure cannot exceed the present discounted value of present wealth plus future income. Spending can only exceed income plus present wealth to the extent that it is possible to borrow. See also hard budget constraint; intertemporal budget constraint; soft budget constraint.

Subjects: Economics.

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