Marginal Propensity to Save (MPS): Proportion of Additional Income That Will Be Saved Rather Than Consumed

August 25, 2024 3 min read Economics Finance Marginal Propensity to Save MPS Savings Economic Indicators Investment

Marginal Propensity to Save (MPS) is the proportion of additional income that a consumer saves instead of spending on consumption. It is calculated as 1 minus the Marginal Propensity to Consume (MPC). MPS is an important indicator of an economy's potential for investment and growth.

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Marginal Propensity to Save (MPS) is a key economic metric representing the fraction of any additional income that a consumer elects to save rather than spend. It is a fundamental concept in Keynesian economics and is instrumental in understanding consumer behavior and its implications for economic growth.

Mathematically, Marginal Propensity to Save (MPS) is expressed as:

$$ MPS = 1 - MPC $$

where MPC stands for Marginal Propensity to Consume, which is the fraction of additional income that is spent on consumption.

Calculation Example

If a consumer’s Marginal Propensity to Consume (MPC) is 0.90, it implies that they spend 90 cents out of every extra dollar earned. Consequently, the Marginal Propensity to Save (MPS) will be:

$$ MPS = 1 - 0.90 = 0.10 $$

Economic Implications of MPS

Investment and Economic Growth

The percentage of income saved (MPS) provides essential funds for investments. Since savings are critical in expanding an economy’s productive capacity, a higher MPS could indicate a stronger potential for future economic growth.

Factors Influencing MPS

Income Levels

Higher income households may exhibit a higher MPS as their basic consumption needs are already met, allowing them to allocate a larger portion of additional income to savings.

Economic Conditions

During periods of economic uncertainty, individuals may choose to save more to protect against future financial instability, leading to a higher MPS.

Cultural attitudes towards saving and spending can significantly impact a society’s overall MPS.

Marginal Propensity to Consume (MPC): MPC denotes the fraction of additional income that is spent on consumption. It complements MPS, such that the sum of MPC and MPS is always 1.
Savings Rate: This represents the total amount of income saved by consumers, not just the additional income. It provides insight into overall economic stability and the propensity to invest.

FAQs

Q: How can MPS be used to predict economic trends?

A: MPS can be an indicator of how much additional income in an economy will be diverted to investments rather than immediate consumption. Higher MPS suggests more saving and potential for future investments.

Q: Can MPS be greater than 1?

A: No, by definition, MPS cannot exceed 1. It ranges between 0 and 1.

Q: Why is MPS important for policymakers?

A: Policymakers use MPS to understand saving behaviors to influence economic policies such as interest rates, taxation, and fiscal stimuli aiming to balance consumption and investment for sustainable economic growth.

Historical Context

The concept of MPS emerged from the works of the economist John Maynard Keynes, who emphasized the roles of saving and consumption in determining overall economic activity. His theories on income and saving behavior radically transformed economic policy discussions during the 20th century.

Summary

Marginal Propensity to Save (MPS) is a vital economic metric that helps in understanding the saving behavior of individuals out of their additional income. By evaluating MPS in conjunction with MPC, economists and policymakers can gauge economic trends, make informed decisions on fiscal policies, and promote sustainable economic growth by balancing consumption and investment opportunities.

References

Keynes, J. M. (1936). The General Theory of Employment, Interest, and Money.
Mankiw, N. G. (2020). Principles of Economics. Cengage Learning.
Samuelson, P. A., & Nordhaus, W. D. (2009). Economics. McGraw-Hill Education.

This comprehensive and structured definition of Marginal Propensity to Save (MPS) combines theoretical insights with practical examples to provide a thorough understanding of a fundamental economic concept.