Marginal Propensity To Save
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 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)
Definition
In Keynesian economic theory, the Marginal Propensity to Save (MPS) refers to the proportion of additional income that a consumer saves rather than spends on goods and services. In other words, MPS is the fraction of an increase in income that is saved rather than consumed.
Origin
The concept of MPS originates from John Maynard Keynes' macroeconomic theory. Keynes introduced this concept in his 1936 book, 'The General Theory of Employment, Interest, and Money,' to explain how consumption and saving behaviors impact economic activity.
Categories and Characteristics
MPS can be categorized based on different income levels and economic conditions:
- MPS for High-Income Groups: Typically higher, as high-income individuals tend to save more after meeting their basic consumption needs.
- MPS for Low-Income Groups: Typically lower, as low-income individuals spend most of their income on basic necessities, leaving less for savings.
- MPS during Economic Booms: May be lower, as consumer confidence is high and more income is spent on consumption.
- MPS during Economic Recessions: May be higher, as consumers tend to save more to prepare for future uncertainties.
Specific Cases
Case 1: Suppose a person’s monthly income increases by $1000, and they choose to save $200 of it. Their Marginal Propensity to Save (MPS) would be 200/1000 = 0.2, or 20%.
Case 2: In an economy, the government implements a tax cut, increasing disposable income by $10 billion. If residents save $3 billion of this additional income, the economy’s Marginal Propensity to Save (MPS) would be 30/100 = 0.3, or 30%.
Common Questions
1. What is the difference between MPS and MPC?
MPS (Marginal Propensity to Save) and MPC (Marginal Propensity to Consume) are complementary, with MPS + MPC = 1. MPC represents the fraction of additional income spent on consumption.
2. Why is MPS important in economic analysis?
MPS helps economists understand the impact of saving behavior on economic growth, especially when formulating fiscal policies.
