Marginal Propensity to Save

Loading the player...

What is the 'Marginal Propensity to Save'

The marginal propensity to save is 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.

 

BREAKING DOWN '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. Marginal Propensity To Invest

    The ratio of change in investment to change in income. The marginal ...
  2. National Savings Rate

    An estimate from the U.S. Commerce Department's Bureau of Economic ...
  3. Margin Debt

    1. The dollar value of securities purchased on margin within ...
  4. Profit Margin

    Profit margin is part of a category of profitability ratios calculated ...
  5. Marginal Profit

    Marginal profit is the profit earned by a firm or individual ...
  6. Savings

    According to Keynesian economics, the amount left over when the ...
Related Articles
  1. Economics

    Explaining Marginal Propensity to Consume

    The marginal propensity to consume is a measure of how much consumption changes when income changes.
  2. Economics

    Calculating the Consumption Function

    The consumption function shows the level of consumer spending as it relates to disposable income.
  3. Investing

    10 Ways to Effectively Save for the Future

    Savings is as crucial as ever, as we deal with life changes and our needs for the future. Here are some essential steps to get started, now.
  4. Retirement

    Retirement: What Percentage Of Salary To Save?

    There's new research on what percentage of salary you should save to ensure you end up with enough for a comfortable retirement. See how you measure up.
  5. Retirement

    Are You Saving Too Much?

    "Spend now! Don't worry about retirement," say some experts. Could they possibly be right?
  6. Options & Futures

    Margin Trading: Conclusion

    Here's the bottom line on margin trading: You are more likely to lose lots of money (or make lots of money) when you invest on margin. Now let's recap other key points in this tutorial: ...
  7. Budgeting

    5 Ways To Start Saving Today

    If you have no idea how to start saving your money, we list a few easy ways to start today.
  8. Your Clients

    How Much Millennials Need to Save for Retirement

    Millennials may not be worrying about retirement just yet, but they should be thinking about how much they'll need to save for retirement.
  9. Taxes

    Retirement Planning For 30-Somethings: Reducing Savings

    If you have accumulated savings, but find yourself highly in debt, it is possible that you are saving too much. Having a large nest egg can be attractive, but the associated benefits can be eroded ...
  10. Options & Futures

    Profiting From A Consumerless Recovery

    Recovering from an economic slump isn't the easiest thing to do, but here are a few potential methods of rebuilding.
RELATED FAQS
  1. How does the income of a person influence their marginal propensity to save?

    Discover how an individual's income can generally influence his marginal propensity to save and his marginal propensity to ... Read Answer >>
  2. How is marginal propensity to save calculated?

    Find out about marginal propensity to save, what the it indicates about a household and how to calculate a household's marginal ... Read Answer >>
  3. In what manner will a recession likely affect the marginal-propensity-to-save rate ...

    Learn why recessions are often accompanied by an increase in the marginal propensity to save and whether this is a concerning ... Read Answer >>
  4. How does pork barrel spending hurt the economy?

    Learn what factors affect the marginal propensity to consume, how the MPC can be negative and why it plays a key role in ... Read Answer >>
  5. Under what circumstances might a merchant turn toward using a banker's acceptance?

    Understand the significance of the marginal propensity to consume, and learn which factors can lead to a change in the marginal ... Read Answer >>
  6. How do you calculate the marginal propensity to consume?

    Learn about the theoretical mathematical calculation for marginal propensity to consume (MPC), which is the crucial variable ... Read Answer >>
Hot Definitions
  1. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  2. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  3. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  4. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  5. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
Trading Center