What Is the Average Propensity To Save?

The average propensity to save (APS) is a macroeconomic term that refers to the proportion of income that is saved rather than spent on current 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). APS is also related to the marginal propensity to save (MPS), which expresses the proportion of a change in income that is saved rather than consumed.

Key Takeaways

  • In macroeconomics, average propensity to save (APS) refers to the proportion of a population's income that is saved rather than spent on goods and services.
  • Also known as the savings rate, APS can express a society's overall preference for investing n the future over consuming in the present.
  • APS is driven by indvidual time preference and may be influenced by a mix of demographic and economic factors, such as the age distribution of the population, the rate of inflation, and current interest rates.
  • APS is calculated by dividing total savings by income level.

Understanding Average Propensity To Save

The APS is an important economic indicator for a population. From a personal finance perspective he 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. Economically, savings are intimately linked with the health of the economy, because they represent the choice to forgo current consumption in favor of future consumption, which frees up the real economic resources that are necessary to engage in productive investment and produce capital goods. The higher the APS of a society, the more the people in that society value investing in the future over consuming in the present. Investment in productive capital goods is the direct driver of sustainable economic growth.

Factors Influencing APS

Individual savings rates are driven mostly by individual time preference, so factors that influence individual time preference will tend to drive APS. A society's APS is the the average saving rate across all individuals, which will also depend on population level characteristics.

Factors that make individuals want to spend more now 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.

A population's ASP can be affected by demographic factors such as the distribution of people of various ages in the region. Most people's income and consumption vary over the course of their lives. Children and younger adults consume resources but have not yet matured to reach their productive capacity. Middle-aged people who are in the wealth accumulation phase of their life, should be saving their money for large purchases like houses and for retirement. Older people, once they pass through their most productive years usually begin spending down the savings they have accumulated, and will at some point begin to consume more than they produce.

A population with a low average propensity to save might have a large percentage of older people who are retired or past their most productive years, or a high percentage of children and young people who are not yet in the workforce or still building their productive capacity.

Calculating Average Propensity to Save

The formula to calculate APS is total savings divided by income level for which we want to determine APS. Usually, disposable (after-tax) income is used. 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.