What Is the Marginal Propensity to Save (MPS)?
In Keynesian economic theory, the marginal propensity to save (MPS) refers to the proportion of an aggregate raise in income that a consumer saves rather than spends on the consumption of goods and services. Put differently, the marginal propensity to save is the proportion of each added dollar of income that is saved rather than spent. MPS is a component of Keynesian macroeconomic theory and is calculated as the change in savings divided by the change in income, or as the complement of the marginal propensity to consume (MPC).
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.
- Marginal propensity to save is the proportion of an increase in income that gets saved instead of spent on consumption.
- MPS varies by income level. MPS is typically higher at higher incomes.
- MPS helps determine the Keynesian multiplier, which describes the effect of increased investment or government spending as an economic stimulus.
Marginal Propensity To Save
Understanding the Marginal Propensity to Save (MPS)
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
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.
The marginal propensity to save is generally assumed to be higher for wealthier individuals than it is for poorer individuals.
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. However, the possibility remains that a consumer might alter savings and consumption habits with an increase in pay.
Naturally, with an increase in salary comes the ability to cover household expenses more easily, allowing for more leeway to save. With a higher salary also comes access to goods and services that require greater expenditures. This may include the procurement of higher-end or luxury vehicles or relocation to a new, pricier residence.
If economists know what consumers' MPS is, they can determine how increases in government spending or investment spending will influence saving. MPS is used to calculate the expenditures multiplier using the formula: 1/MPS. The expenditures multiplier tells us how changes in consumers’ marginal propensity to save influences the rest of the economy. The smaller the MPS, the larger the multiplier and the more economic impact a change in government spending or investment will have.