What Is Marginal Propensity to Save (MPS)?
In Keynesian economics theory, 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, MPS is the proportion of each added dollar of income that is saved rather than spent. MPS is a component of Keynesian macroeconomics theory and is calculated as the change in savings divided by the change in income.
MPS = 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 (MPS) is the proportion of an increase in income that gets saved instead of spent on consumption.
- MPS varies by income level and 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
Example of 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).
Understanding Marginal Propensity to Save (MPS)
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 can vary 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; thus, 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. A higher salary also brings 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 following formula:
The expenditures multiplier tells us how changes in consumers’ MPS influences the rest of the economy. The smaller the MPS, the larger the multiplier and the more economic impact that a change in government spending or investment will have.
The marginal propensity to consume (MPC) is the complement to MPS; added together, they should always equal one.
Marginal Propensity to Consume (MPC)
The other side of MPS is marginal propensity to consume (MPC), which shows how much a change in income affects purchasing levels.
MPC = Change in Spending ÷ Change in Income
Using the above example, where you spent $400 of your $500 bonus, the MPC is 0.8 ($400 divided by $500).
If you add MPC and MPS, the result should always equal one, making MPC the complement to MPS.
What does marginal propensity to save (MPS) describe?
Marginal propensity to save (MPS) refers to the amount of a raise in income that a person saves as opposed to spends.
What is marginal propensity to consume (MPC)?
Marginal propensity to consume (MPC) refers to the amount of a raise in income that a person spends as opposed to saves. This makes it the complement to MPS; added together, they should always equal one.
What is the purpose of determining MPS?
MPS can be used to understand how government spending and investment may influence saving and what the economic impact of the spending and investment might be.
The Bottom Line
Marginal propensity to save (MPS) is an economic theory that calculates how much of a raise a person would save. The number is different at different income levels and helps economists make theories about how individual incomes impact the broader economy.