Marginal propensity to save is used in Keynesian macroeconomics to quantify the relationship between changes in income and changes in savings. It refers to the proportion of a raise in pay that a consumer saves rather than uses for consuming goods and services.
How Marginal Propensity to Save Is Calculated
The marginal propensity to save is calculated by dividing the change in savings by the change in income.
If income changes by a dollar, then saving changes by the value of the marginal propensity to save. The marginal propensity to save is actually a measure of the slope of the savings line, which is created by plotting the change in income on the horizontal x-axis and change in savings on the vertical y-axis. The slope of the savings line is depicted by the change in saving and the change in income, or a change in the y axis, divided by the change in the x axis.
The value of the marginal propensity to save always varies between zero and one.
For example, assume an engineer has a $100,000 change in income from the previous year due to a pay raise and bonus. The engineer decides that he or she wants to spend $50,000 of the increase in income on a new car and save the remaining $50,000. The resulting marginal propensity to save is 0.5, which is calculated by dividing the $50,000 change in savings by the $100,000 change in income. Therefore, for each additional $1 of income, the engineer's savings account increases by 50 cents.