eBusiness Weekly
Blessing Nyatanga
Marginal Propensity to Save
The marginal propensity to save (MPS) is the portion of each extra dollar of a household’s income that is saved. The MPS indicates what the overall household sector does with extra income specifically, the percent of extra income that is saved.
As saving is a complement of consumption, the MPS reflects key aspects of a household’s activity and its consumption habits. It is expressed as a percentage.
For example, if the marginal propensity to save is 10 percent, it means that out of each additional dollar earned, 10 cents is saved.
The marginal propensity to save is calculated by dividing the change in savings by the change in income. For example, if consumers saved 20 cents for every $1 increase in income, the MPS would be 20 percent.
The MPS reflects the savings amount or leakage of income from the economy. Leakage is the portion of income that’s not put back into the economy through purchases of goods and services.
The higher the income for an individual, the higher the MPS as the ability to satisfy needs increases with income. 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. The marginal propensity to save represents the share of additional disposable income used for saving. Therefore, a change in savings brought on by a change in disposable income is the MPS.
It demonstrates how much a person is willing to set aside when they obtain more money. The higher the income, the higher their MPS will be.
Thus “saving function” or “propensity to save” displays how much money households save when their income is at a certain level for a certain amount of time.
It displays the various savings rates at various income levels in an economy. Propensities to save are of two types: Average Propensity to Save (APS) and Marginal Propensity to Save (MPS).
The MPS calculates how much money is made or lost in the economy. Leakage is the term used to describe the portion of income not spent on purchasing goods and services to reinvest in the economy.
A person’s ability to meet their needs increases along with their income, creating a larger MPS. In other words, a person’s likelihood of spending an additional dollar decreases as their wealth increases.
MPS is a significant factor in determining the multiplier impact. Any change in the market value of commodities produced inside a nation’s boundaries that results from a change in an independent variable, like an increase in government spending, is dealt with by the multiplier effect .
Any modification to government spending will raise disposable income, which will increase consumption.
Marginal Propensity to Consume
The marginal propensity to consume (MPC) is the flip side of MPS. MPC helps to quantify the relationship between income and consumption. MPC is the portion of each extra dollar of a household’s income that is consumed or spent. For example, if the marginal propensity to consume is 45 percent, out of each additional dollar earned, 45 cents is spent.
Economic theory tends to support that as income increases, so too does spending and consumption. MPC measures that relationship to determine how much spending increases for each dollar of additional income.
MPC is important because it varies at different income levels and is the lowest for higher-income households.
The marginal propensity to consume is calculated by dividing the change in spending by the change in income. For example, if consumers spent 80 cents for every $1 increase in income, the MPC would be 80 percent.
The MPC percentage can also be used by economists to determine how much of each $1 in tax rebates will be spent. In doing so, they can adjust the total size of the rebate program to achieve the desired spending per household.
The MPC is also vital to the study of Keynesian economics, which is the result of economist John Maynard Keynes . Keynesian economics was developed during the 1930s in an attempt to understand the Great Depression.
Keynes advocated for increased government expenditures and lower taxes to stimulate demand and pull the global economy out of the depression. The extent to which stimulus adds to economic growth is called the Keynesian multiplier.
The MPC, like the MPS, affects the multiplier process and affects the magnitude of expenditures and tax multipliers.
Ultimately, both MPS and MPC are used to discuss how a household utilises its surplus income, whether that income is saved or spent. Consumer behaviour concerning saving or spending has a very significant impact on the economy as a whole.
In economics, so-called “marginal” values are used to measure how quantities such as price and cost change from their current values.
In general, marginal values are important for economic forecasting and policy design precisely because they better reflect how conditions are likely to change in the future, rather than providing a snap-shot description of the present, as a total or average value might do.
Marginal values typically change depending on the level of the underlying variable.
For example, a low-income family has a lower ability to save money than a high-income family; and the MPS of the former will correspondingly be lower (and the MPC will necessarily be higher).
The marginal propensities can thus be used to differentiate subgroups within the economy, which again allows for better understanding of economic conditions and consumer behaviour.
MPS can be used to understand how government spending and investment may influence saving and what the economic impact of the spending and investment might be.
Uses of the MPS and MPC
i. Tax rebates are sometimes used to encourage economic growth by boosting consumer spending. The MPC can be used to measure the degree to which cutting taxes (thereby increasing take-home income) will contribute to increasing consumption, which can help target and size the rebate.
ii. The MPC plays a role in Keynesian economic modelling, in which government spending and taxation is used to stimulate the economy.
iii. The MPS can be used to measure “leakage”, which refers to money being saved rather than spent and recirculated in the economy.
Blessing Nyatanga holds a Bachelor’s Degree in Banking and Investment Management from NUST.0784909184/[email protected]
