In Keynesian economic theory, the Marginal Propensity to Save (MPS) refers to the proportion of an increase in income that a consumer saves rather than spends on goods and services. Put simply, MPS determines the fraction of each additional dollar of income that is saved instead of spent. It is a crucial component of Keynesian macroeconomic theory and is calculated as the change in savings divided by the change in income.
MPS = Change in Saving ÷ Change in Income
MPS can be visually represented by a savings line: a sloped line created by plotting the change in savings on the vertical y-axis and the change in income on the horizontal x-axis.
Key Takeaways
- Marginal Propensity to Save (MPS) is the proportion of an increase in income that gets saved instead of spent on consumption.
- MPS varies by income level and is typically higher at higher incomes.
- MPS helps determine the Keynesian multiplier, which describes the effect of increased investment or government spending as an economic stimulus.
Enhanced Example of Marginal Propensity to Save (MPS)
Imagine receiving a $1,000 bonus in your paycheck. You now have $1,000 more in income than before. If you decide to spend $700 on new furniture and save the remaining $300, your marginal propensity to save is 0.3 ($300 change in saving divided by $1,000 change in income).
Understanding Marginal Propensity to Save (MPS)
Given data on household income and household saving, economists can calculate households’ MPS by income level. This calculation is vital as MPS is not constant and varies by income level. Typically, higher-income households exhibit a higher MPS because as wealth increases, the ability to satisfy needs and wants also increase; thus, additional dollars are more likely going towards saving rather than spending. However, this can fluctuate depending on changes in saving and consumption habits with an increase in pay.
With a higher salary, covering household expenses becomes easier, providing more leeway to save. A higher salary may also lead to spending on higher-end goods, such as luxury vehicles or a more expensive home.
If economists know the MPS, they can determine the influence of increased government spending or investment spending on savings using the expenditures multiplier formula:
1/MPS
The expenditures multiplier reveals how changes in MPS influence the economy. The smaller the MPS, the larger the multiplier and the more significant the economic impact will be from government spending or investment.
The marginal propensity to consume (MPC) complements the MPS, adding up to one, signifying total income allocation (spending + saving).
Marginal Propensity to Consume (MPC)
On the flip side of MPS is the Marginal Propensity to Consume (MPC), which indicates the proportion of an income change that a household uses for consumption.
MPC = Change in Spending ÷ Change in Income
Continuing from our example, if you spent $700 from your $1,000 bonus, your MPC would be 0.7 ($700 divided by $1,000). When summed with MPS, this equals one, showing the complementarity between MPC and MPS.
Frequently Asked Questions about MPS
What does Marginal Propensity to Save (MPS) describe?
Marginal Propensity to Save (MPS) refers to the proportion of a raise in income that a person saves rather than spends.
What is Marginal Propensity to Consume (MPC)?
Marginal Propensity to Consume (MPC) is the proportion of an income raise that a person spends rather than saves. It complements MPS, and their sum equals one.
What is the purpose of determining MPS?
MPS is used to understand how government spending and investment affect savings and overall economic impact.
The Bottom Line
Marginal Propensity to Save (MPS) is an economic metric that determines how much of a raise a person would save. MPS varies at different income levels and is crucial for economists to hypothesize the impact of individual incomes on the broader economy.
Related Terms: Marginal Propensity to Consume, Keynesian Multiplier, Macroeconomics, Household Income, Economist.
References
- Encyclopœdia Britannica, Britannica Money. “Propensity to Save”.
- Encyclopœdia Britannica. “Multiplier: Finance”.
- Encyclopœdia Britannica, Britannica Money. “Propensity to Consume”.
