Marginal Propensity to Save

AAA

DEFINITION of 'Marginal Propensity to Save'

The proportion of an aggregate raise in pay that a consumer spends on saving rather than on the consumption of goods and services. Marginal propensity to save is a component of Keynesian macroeconomic theory and is calculated as the change in savings divided by the change in income.

Marginal propensity to save

=

change in saving


change in income

MPS is depicted by a savings line: a sloped line created by plotting change in savings on the vertical y axis and change in income on the horizontal x axis.

 

INVESTOPEDIA EXPLAINS 'Marginal Propensity to Save'

Suppose you receive a $500 bonus with your paycheck. You suddenly have $500 more in income than you did before. If you decide to spend $400 of this marginal increase on a new business suit and save the remaining $100, your marginal propensity to save is 0.2 ($100 change in saving divided by $500 change in income). The other side of marginal propensity to save is marginal propensity to consume, which shows how much a change in income affects purchasing levels. Marginal propensity to consume + marginal propensity to save = 1. In this example where you spent $400 of your $500 bonus, marginal propensity to consume is 0.8 ($400 divided by $500). Adding MPS (0.2) to MPC (0.8) equals 1.

Given data on household income and household saving, economists can calculate households’ MPS by income level. This calculation is important because MPS is not constant; it varies by income level. Typically, the higher the income, the higher the MPS, because as wealth increases, so does the ability to satisfy needs and wants, and so each additional dollar is less likely to go toward additional spending. If economists know what consumers’ MPS is, they can determine how increases in production will influence saving.

MPS is also used to calculate the expenditures multiplier using the formula 1/MPS. The expenditures multiplier tells us how changes in consumers’ marginal propensity to save influence production. The smaller the MPS, the larger the multiplier.

RELATED TERMS
  1. Pension Risk Transfer

    When a defined benefit pension provider offloads some or all ...
  2. Foreign remittance

  3. Outcome Bias

    A decision based on the outcome of previous events without regard ...
  4. Predictive Analytics

    The use of statistics and modeling to determine future performance ...
  5. NY Empire State Index

    A seasonally adjusted index that tracks the results of the Empire ...
  6. Asian Century

    The dominant role that could be played by Asia in the 21st century, ...
RELATED FAQS
  1. What are the SEC regulations regarding a share premium account?

    Historically, because people in the United States have shown a higher propensity to consume, this is likely the more important ... Read Full Answer >>
  2. How do I negotiate a lower annual percentage rate (APR) with my credit card company?

    The main factors that drive the marginal propensity to consume (MPC) are the availability of credit, taxation levels and ... Read Full Answer >>
  3. Under what circumstances might a merchant turn toward using a banker's acceptance?

    According to Keynesian economic theory, several factors can lead to a change in the marginal propensity to consume, including ... Read Full Answer >>
  4. How does pork barrel spending hurt the economy?

    The marginal propensity to consume can be negative, or less than zero, if the income increase leads to reduced consumption ... Read Full Answer >>
  5. What effect does the income effect have on my business?

    The income effect may have positive or negative consequences on a small business, depending on many factors. The income effect ... Read Full Answer >>
  6. What factors cause shifts in aggregate demand?

    Aggregate demand, or AD, is defined as the total amount of goods and services consumers are willing to purchase in a given ... Read Full Answer >>
Related Articles
  1. Savings

    Is A Premium Checking Account Worth It?

    Premium checking accounts give you free checking and other perks in return for keeping a certain balance in the bank. Is that the best use of your money?
  2. Savings

    Top Premium Checking Accounts of 2015

    Which banks offer the best deals for premium checking accounts – and what do you have to do to qualify for one?
  3. Savings

    20 Ways To Pay Less At Costco

    There are plenty of little-known Costco shopping hacks that can save you big bucks at the register, and help you avoid the notorious spending hangover.
  4. Budgeting

    10 Worst And Best Vacation Cities In The U.S.

    The many costs of planning a vacation will put a stress on most people’s finances, but where you choose to go can be what really makes your travel budget.
  5. Retirement

    Tips for Boosting Your Retirement Income

    Here are some best practices on how to generate as much retirement income as possible.
  6. Forex

    The Pros & Cons Of A Strong Dollar

    As the U.S. economy has emerged from the Great Recession, the strength of the U.S. dollar has also improved.
  7. Retirement

    What New Grads Need To Do On Their First Job

    It's never too early to start saving aside something for retirement. But what purpose could a retirement account serve when someone just started working?
  8. Savings

    Understanding Savings Accounts

    A deposit account held at a bank or other financial institution that provides principal security and a modest interest rate.
  9. Economics

    Japan's Heavy Exposure to Rising Rates

    While Japan has seen falling interest rates for over two decades, quantitative easing could mean this is about change. Just how exposed is the country?
  10. Retirement

    10 Retirement Savings Myths That Won’t Go Away

    If you’re confused about the different retirement investment vehicles or don’t know how to save for retirement, it’s important that you do your research.

You May Also Like

Hot Definitions
  1. Mixed Economic System

    An economic system that features characteristics of both capitalism and socialism.
  2. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  3. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  4. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  5. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center