The marginal propensity to save (MPS) is the fraction of an increase in
income
Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. For ...
that is not spent and instead used for
saving
Saving is income not spent, or deferred consumption. Methods of saving include putting money aside in, for example, a deposit account, a pension account, an investment fund, or as cash. Saving also involves reducing expenditures, such as recur ...
. It is the slope of the line plotting saving against income. For example, if a household earns one extra dollar, and the marginal propensity to save is 0.35, then of that dollar, the household will spend 65 cents and save 35 cents. Likewise, it is the fractional decrease in saving that results from a decrease in income.
The MPS plays a central role in
Keynesian economics
Keynesian economics ( ; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomic theories and models of how aggregate demand (total spending in the economy) strongly influences economic output an ...
as it quantifies the saving-income relation, which is the flip side of the consumption-income relation, and according to
Keynes
John Maynard Keynes, 1st Baron Keynes, ( ; 5 June 1883 – 21 April 1946), was an English economist whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. Originally trained in m ...
it reflects the
fundamental psychological law. The marginal propensity to save is also a key variable in determining the value of the
multiplier.
Calculation
MPS can be calculated as the change in savings divided by the change in income.
:
Or mathematically, the marginal propensity to save (MPS) function is expressed as the derivative of the savings (S) function with respect to
disposable income
Disposable income is total personal income minus current income taxes. In national accounts definitions, personal income minus personal current taxes equals disposable personal income. Subtracting personal outlays (which includes the major c ...
(Y).
:
where, dS=Change in Savings and dY=Change in income.
Value
Also, marginal propensity to save is opposite of marginal propensity to consume.
Slope of saving line
Multiplier effect
Mathematical implication
The end result is a magnified, multiplied change in aggregate production initially triggered by the change in investment, but amplified by the change in consumption i.e. the initial investment multiplied by the consumption coefficient (Marginal Propensity to consume).
The MPS enters into the process because it indicates the division of extra income between consumption and saving. It determines how much saving is induced with each change in production and income, and thus how much consumption is induced. If the MPS is smaller, then the multiplier process is also greater as less saving is induced, but more consumption is induced, with each round of activity.
Thus, in this highly simplified model, total magnified change in production due to change in an autonomous variable by $1
=
Measuring the multiplier
See also
*
Marginal propensity to consume
In economics, the marginal propensity to consume (MPC) is a metric that quantifies induced consumption, the concept that the increase in personal consumer spending (consumption) occurs with an increase in disposable income (income after taxes and t ...
*
Marginal propensity to import
The marginal propensity to import (MPM) is the fractional change in import expenditure that occurs with a change in disposable income (income after taxes and transfers). For example, if a household earns one extra dollar of disposable income, an ...
*
Average propensity to consume Average propensity to consume (as well as the marginal propensity to consume) is a concept developed by John Maynard Keynes to analyze the consumption function, which is a formula where total consumption expenditures (C) of a household consist of au ...
*
Average propensity to save
In Keynesian economics, the average propensity to save (APS), also known as the savings ratio, is the proportion of income which is saved, usually expressed for household savings as a fraction of total household disposable income (taxed income). ...
*
Fundamental psychological law
Notes
External links
"Marginal propensity to save"Encyclopædia Britannica. Encyclopædia Britannica Online. Encyclopædia Britannica Inc., 2011. Web.
"Marginal Propensity to save" AmosWEB LLC, Economic WEB*pedia,2010-2011.
ccessed: November 8, 2011Web.
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Macroeconomics
Economics curves
Marginal concepts