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What Is the Marginal Propensity to Save?
Marginal propensity to save (MPS) is used by economists to quantify the relationship between changes in income and changes in savings. It refers to the proportion of an increase in disposable income that a household saves rather than uses for consuming goods and services.
Key Takeaways
- Marginal propensity to save (MPS) is an economic measure of how savings change, given a change in disposable income.
- It is calculated by dividing the change in savings by the change in disposable income.
- A larger MPS indicates that small changes in disposable income lead to large changes in savings, while a small MPS indicates that large income changes lead to small savings changes.
Understanding Marginal Propensity to Save
The marginal propensity to save is the portion of each extra dollar of a household’s income that’s saved. The MPS indicates what the overall household sector does with extra income—specifically, the percent of extra income that is saved.
As saving and consumption complement each other, the MPS reflects key aspects of a household’s saving and consumption habits. The MPS reflects leakage, the portion of disposable income that’s not put back into the economy through purchases of goods and services. The higher the changes in disposable income for an individual, the higher the MPS, as the ability to satisfy needs increases with income.
Disposable income is the amount of income left over after paying bills and other recurring expenses, income that is not intended to be used for living expenses. Disposable income can increase for various reasons, such as a pay raise without an increase in expenses or paying off a car loan, mortgage, or credit card.
In other words, each additional dollar is less likely to be spent as an individual becomes wealthier. Studying MPS helps economists determine how wage growth might influence savings.
MPS is expressed as a percentage. For example, if the marginal propensity to save is 10%, it means that out of each additional dollar not used for expenses, $0.10 is saved.
How Marginal Propensity to Save Is Calculated
MPS is most often used in Keynesian economic theory. It is calculated simply by dividing the change in savings observed given a change in income:
MPS = ΔS/ΔY
Where:
- Δ represents change
- ΔS is the change in savings
- ΔY is the change in income
If income changes by a dollar, then saving changes by the value of the marginal propensity to save. The marginal propensity to save is actually a measure of the slope of the savings line when graphed. The graph is created by plotting the change in income on the horizontal x-axis and the change in savings on the vertical y-axis. The slope of the savings line is depicted by the change in savings and the change in income, or a change in the y-axis, divided by the change in the x-axis.
So, if consumers saved $0.20 for every $1 increase in income, the MPC would be 0.20 (0.20 / $1). The value of the marginal propensity to save always varies between zero and one, where zero indicates that changes in income had no effect on savings whatsoever.
Example
Assume an engineer has a $100,000 change in income from the previous year due to a pay raise and bonus. The engineer decides that they want to spend $50,000 of the increase in income on a new car and save the remaining $50,000. The resulting marginal propensity to save is 0.5, which is calculated by dividing the $50,000 change in savings by the $100,000 change in income.
Therefore, for each additional $1 of income, the engineer’s savings account increases by $0.50.
What Is MPC and MPS?
Marginal propensity to save (MPS) is a measurement of a consumer’s increase in savings relative to a change in income. Marginal propensity to consume (MPC) is the opposite of MPS, a measurement of an increase in spending in proportion to an increase in income.
How do You Calculate MPC to Save?
Marginal propensity to consume (MPC) is a measurement of a consumer’s increase in consumption regarding an increase in disposable income.
What Is Meant by Marginal Propensity to Save?
Marginal propensity to save is the measured proportion of savings following an increase in income.
The Bottom Line
Marginal propensity to save is a measurement of a worker’s proportional increase in savings following an increase in income. It is a metric generally used by economists to describe and quantify consumer saving tendencies.
