Marginal Propensity to Save (MPS)
Candlefocus EditorMPS is calculated by dividing the increase in saving (ΔS) by the increase in income (ΔY). In formula form, this equation is represented as ΔS/ΔY. The result of this equation is a percentage or decimal representation of the amount of an increase in income that is saved.
It is generally accepted that the MPS increases at higher levels of income due to the financial goals that high-income earners typically have. Individuals at lower incomes are more likely to consume additional income, while those at higher incomes are more likely to save the additional money. Those in the middle may fall to either side, depending on their current needs and resources.
The calculation of MPS is used in the Keynesian multiplier — the effect of increased investment or government spending as an economic stimulus. Specifically, it is used to estimate the total increase in income due to the additional spending. This can help businesses and governments anticipate how changes in spending will affect economic growth.
Overall, the concept of MPS is important to understanding how changes in income and spending affect the economy. It helps to clarify how both the individual and the macroeconomic level of the economy interact in response to changes in income and spending.