What is Marginal Propensity To Save ?

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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.

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 each additional dollar of income that is saved rather than consumed.

Origin

The concept of Marginal Propensity to Save originates from John Maynard Keynes' macroeconomic theory, first introduced in his 1930s work, 'The General Theory of Employment, Interest, and Money.' Keynes' theory highlighted the importance of consumption and saving in economic activity, with MPS being a key component.

Categories and Features

The Marginal Propensity to Save can be represented by a saving line: plotting changes in savings on the vertical y-axis and changes in income on the horizontal x-axis, forming a sloped line. The value of MPS ranges between 0 and 1, where 0 indicates all additional income is spent, and 1 indicates all additional income is saved. The level of MPS reflects consumer saving habits and the influence of the economic environment.

Case Studies

During the 2008 financial crisis, the MPS in the United States significantly increased as consumers, uncertain about the economic outlook, chose to save more for future uncertainties. Another example is Japan, where during its prolonged economic stagnation, households exhibited a high saving rate, reflecting a high MPS, which posed challenges to economic recovery.

Common Issues

Investors often misunderstand the relationship between MPS and consumption propensity, assuming that a high saving rate is always beneficial for economic growth. However, an excessively high MPS can lead to insufficient consumption, hindering economic growth. Understanding the dynamic changes in MPS is crucial for formulating effective economic policies.

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