Marginal Propensity to Save (MPS) – Definition and Calculation

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Calculating Marginal Propensity to Save

The Marginal Propensity to Save (MPS) is a crucial concept in economics that measures the change in savings resulting from a change in income. Calculating the MPS allows economists and policymakers to understand how individuals and households allocate their income between consumption and saving.

To calculate the Marginal Propensity to Save, you need to follow these steps:

  1. First, determine the change in savings and the change in income. This can be done by comparing two different income levels or by observing the changes in savings and income over a specific time period.
  2. Next, divide the change in savings by the change in income. This will give you the Marginal Propensity to Save ratio.
  3. Finally, express the Marginal Propensity to Save ratio as a decimal or a percentage.

Here is the formula for calculating the Marginal Propensity to Save:

MPS = Change in Savings / Change in Income

The Marginal Propensity to Save is an important indicator of household behavior and the overall economy. A higher MPS suggests that individuals and households are more likely to save a larger portion of their income, which can lead to lower levels of consumption and slower economic growth. On the other hand, a lower MPS indicates that individuals and households are more likely to spend a larger portion of their income, which can stimulate economic activity and boost growth.

By calculating the Marginal Propensity to Save, economists can gain insights into consumer behavior, savings patterns, and the potential impact of changes in income on the overall economy. This information is valuable for policymakers when designing fiscal and monetary policies to achieve desired economic outcomes.