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 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. Economics

    What’s Driving U.S. Stocks? Irony.

    A seesaw week for U.S. stocks ended on the upside last week, though the rally was more a function of slow growth rather than a booming economy.
  2. Stock Analysis

    A Trader's Look at the S&P 500

    Moving averages are sending an important signal, and it's probably not what you think.
  3. Savings

    Best (And Worst) Places To Change Money In Vegas

    Skip the booths at the airport and find an ATM when you want to exchange currency. Or try to use your credit card. Another good source: casinos!
  4. Credit & Loans

    The Tangled Web of Interest Rates, Mortgage Rates, And The Economy

    The article looks into the interwoven relationship between the economy, interest rates, and mortgage rates.
  5. Economics

    Why The Russian Economy Rises and Falls With Oil

    The Russian economy depends on profitable oil production to pay for the cost of government, prop up the ruble, and provide most of it exports revenue.
  6. Economics

    How Oil Prices Impact the U.S. Economy

    Now that the United States has increased oil production through shale oil and fracking, low oil prices can harm the U.S. oil industry and its workers.
  7. Investing

    Rethinking About Retirement Investing?

    There are plenty of reasons to rethink your retirement investing, wherever you fall on the spectrum between fatalistic acceptance and cheerful confidence.
  8. Savings

    How To Save On Currency Exchanges in NYC

    You will get the best exchange rate in New York, but it's good to arrive in the U.S. with some dollars in your pocket. Here are tips for tourists.
  9. Savings

    Best (And Worst) Ways To Change Money In Europe

    Which are the cheapest– and most costly – ways to exchange money when you're in Europe? See if you made the right choices on your last trip.
  10. Investing

    Want To Learn Financial Tips For Women?

    Although Men Are From Mars, Women Are From Venus was focused more on love than money, some of the analogy also works fairly well in the world of finance.

You May Also Like

Hot Definitions
  1. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  2. Asset Class

    A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same ...
  3. Fiat Money

    Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat ...
  4. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  5. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  6. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
Trading Center