What Is the Average Propensity To Save?
The average propensity to save (APS) is an economic term that refers to the proportion of income that is saved rather than spent on goods and services. Also known as the savings ratio, it is usually expressed as a percentage of total household disposable income (income minus taxes). The inverse of average propensity to save is the average propensity to consume (APC).
- In economics, average propensity to save (APS) refers to the proportion of income that is saved rather than spent on goods and services.
- APS is affected by a mix of demographic and economic factors, such as proportion of old people, rate of inflation, and current interest rates.
- APS is calculated by dividing total savings by income level.
Understanding Average Propensity To Save
The average propensity to save is an important economic indicator for a population. The current savings rate of a population can be linked to behaviors, such as saving for retirement, which affect the well-being of a population as it ages. A population's average propensity to save can be affected by demographic factors such as the proportion of older people in the region. Older people have already passed the wealth accumulation phase of their life and are more likely to consume than spend. Younger people who are in the wealth accumulation phase of their life, should be saving their money for large purchases like houses and for retirement.
A population with a low average propensity to save might have a large percentage of old people, or a high percentage of irresponsible young people. Other factors can also influence a population's average propensity to save, such as the rate of inflation and current interest rates. If inflation is high, prices are expected to rise in the future. People will spend their money now and make purchases in the present day that they may have otherwise delayed in order to get a better price. If they wait, prices may have risen.
Low interest rates will also encourage people to make purchases now, as they are not being incentivized to save due to the low interest rates being paid. Conversely, a low inflation/deflationary environment and high interest rate environment will encourage saving and delay of purchases.
As income levels change, the average propensity to save becomes an inexact tool to measure these changes. In such cases, the marginal propensity to save is used as a measure for calculating savings for an individual.
Calculating Average Propensity to Save
The formula to calculate APS is total savings divided by income level for which we want to determine APS. For example, if the income level is 100 and total savings for that level is 30, then APS is 30/100 or 0.3. APS can never be 1 or greater than 1. That said, APS can have a negative value, if income is zero and consumption has a positive value. For example, if income is 0 and consumption is 30, then the APS value will be -0.3.