Key Takeaways
- Fraction of extra income saved, not spent.
- MPS plus MPC always equals one.
- Higher MPS means lower economic multiplier.
- Influenced by risk aversion and time preference.
What is Marginal Propensity to Save (MPS)?
Marginal Propensity to Save (MPS) is the fraction of each additional dollar of income that you choose to save rather than spend. It is a key concept in macroeconomics that helps explain consumer saving behavior in response to changes in income.
MPS complements the marginal propensity to consume (MPC), with the two always summing to one, reflecting how additional income is allocated between saving and spending.
Key Characteristics
Understanding the core traits of MPS helps clarify its impact on economic dynamics:
- Ratio of savings to income: MPS measures how much of an incremental increase in income is saved rather than spent.
- Relationship with MPC: MPS and MPC sum to 1, indicating all additional income is either saved or consumed.
- Influence on economic multiplier: A higher MPS reduces the multiplier effect by diverting funds away from consumption.
- Varies by individual and economy: Factors like risk tolerance and time preference affect personal and national MPS levels.
- Links to liquidity preferences: Changes in M1 money supply can mirror shifts in saving behaviors reflected in MPS.
How It Works
MPS is calculated by dividing the change in savings by the change in income, indicating the proportion of new income allocated to saving. For example, if your take-home pay increases by $1,000 and you save $300 of it, your MPS is 0.3.
This saving behavior influences the overall economy since higher MPS means less immediate spending, which dampens demand and reduces the effectiveness of fiscal stimuli. Conversely, a lower MPS suggests more spending, accelerating economic activity through consumption cycles.
Examples and Use Cases
Real-world examples illustrate how MPS affects both individual finances and broader markets:
- Airlines: Companies like Delta may experience consumer spending changes as travelers adjust savings rates in response to economic shifts.
- Dividend investors: Investors focusing on best dividend stocks might consider how their MPS impacts their ability to reinvest earnings versus spending dividends.
- Index fund investors: Those using low-cost index funds may adjust contributions based on changes in disposable income and saving tendencies.
Important Considerations
Be aware that MPS varies across different income levels, economic conditions, and personal preferences, affecting how changes in income translate into saving. High MPS can signal cautious consumer behavior, which may slow economic growth during downturns.
When evaluating your financial plans or analyzing market trends, consider how MPS interacts with consumption patterns and investment decisions, including those related to companies like Delta or sectors influenced by shifts in savings rates.
Final Words
Marginal Propensity to Save (MPS) reveals how much of your extra income goes into savings rather than spending, directly impacting your financial growth. To leverage this, calculate your own MPS by tracking changes in your savings as your income changes and adjust your budget accordingly.
Frequently Asked Questions
Marginal Propensity to Save (MPS) is the fraction of additional income that consumers choose to save rather than spend. It shows how much of each extra dollar earned is saved, helping to understand saving behavior at both individual and economy-wide levels.
MPS is calculated by dividing the change in savings by the change in income. For example, if you save £350 from a £1,000 pay raise, your MPS is 0.35 (£350 ÷ £1,000).
MPS measures the percentage of additional income saved, while APS looks at the percentage of total income saved. So, MPS focuses on how much of extra earnings are saved, whereas APS considers overall savings relative to total income.
Individual MPS varies due to factors like risk aversion, where more cautious people save more to prepare for emergencies. Time preferences and behavioral patterns also influence whether someone prefers spending now or saving for the future.
MPS impacts the multiplier effect in economics. A higher MPS means more income is saved and less is spent, leading to a smaller multiplier and slower economic growth. Conversely, a lower MPS increases spending and stimulates more economic activity.
MPS and Marginal Propensity to Consume (MPC) always add up to 1. If you save 35 cents of each extra dollar (MPS = 0.35), you spend 65 cents (MPC = 0.65), since all additional income must be either spent or saved.
Yes, MPS can change based on economic conditions and personal circumstances. For example, during uncertain times, people may increase their savings rate, raising their MPS, while in stable times they might spend more, lowering their MPS.
