Definition
The Marginal Propensity to Save (MPS) is the fraction of any change in disposable income that households are likely to save rather than spend on the consumption of goods and services. It is calculated as:
\[ \text{MPS} = 1 - \text{MPC} \]
Here, MPC represents the Marginal Propensity to Consume, which indicates the proportion of additional income that is devoted to consumption. Hence, if 90 cents of an additional dollar are consumed, the remaining must be saved, making MPS equal to 0.10.
Examples
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Example 1: Assume a household receives an additional $1,000 in income. If they save $200 of this amount, their MPS would be: \[ \text{MPS} = \frac{200}{1000} = 0.20 \]
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Example 2: If a household consumes $850 of an additional $1,000 in income, their MPC is 0.85. Thus, their MPS would be: \[ \text{MPS} = 1 - 0.85 = 0.15 \]
Frequently Asked Questions
What does a high MPS indicate?
A high MPS indicates that households are saving a larger portion of their additional income, which can mean more funds are available for investment, potentially fostering economic growth.
How does MPS relate to economic growth?
When MPS is high, it suggests that more of the additional income is being saved, leading to more funds available for investments, which can drive economic growth.
Can MPS be negative?
Typically, MPS cannot be negative since it is derived from disposable income, and households cannot save negative amounts of additional income. However, if households are dis-saving (spending their savings), the practical interpretation still shows positive consumption but could technically affect how savings are perceived.
How is MPS used in policy-making?
Economists and policymakers use MPS to predict the saving behavior of households in response to changes in income. This behavior is critical for designing fiscal policies aimed at stimulating or cooling down the economy.
What is the relationship between MPS and MPC?
MPS and MPC are complementary. They always sum up to 1 as any marginal increase in income is either consumed (MPC) or saved (MPS).
Related Terms
- Marginal Propensity to Consume (MPC): The fraction of additional income that is spent on consumption of goods and services.
- Total Savings Rate: The proportion of total income that is saved, not limited to additional income.
- Disposable Income: The amount of income left after taxes and necessary expenses, available for saving and spending.
- Investment: The allocation of saved funds to generate further income or capital gains, contributing to economic growth.
Online Resources
- Investopedia – Marginal Propensity to Save (MPS)
- Wikipedia – Marginal Propensity to Save
- Khan Academy – Aggregate Demand and Aggregate Supply
Suggested Books for Further Studies
- “Principles of Economics” by N. Gregory Mankiw
- “Macroeconomics” by Paul Krugman and Robin Wells
- “Macroeconomic Theory and Policy” by William H. Branson
- “The General Theory of Employment, Interest, and Money” by John Maynard Keynes
- “Macroeconomics” by Olivier Blanchard
Fundamentals of Marginal Propensity to Save (MPS): Economics Basics Quiz
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