How to Calculate Marginal Propensity to Save (MPS) with Examples
The marginal propensity to save (MPS) is a vital concept in economics that tells us what part of extra income people choose to save instead of spend. Understanding MPS helps students in board exams, entrance tests, and in daily business scenarios. It also explains important links between savings, consumption, and the economy’s multiplier effect.
| Concept | Explanation | Example |
|---|---|---|
| Marginal Propensity to Save (MPS) | Portion of extra income saved | If you get ₹1,000 more and save ₹200, MPS = 0.2 |
| Marginal Propensity to Consume (MPC) | Portion of extra income spent | If you spend ₹800 of that ₹1,000, MPC = 0.8 |
Marginal Propensity to Save: Meaning and Definition
Marginal propensity to save (MPS) refers to the ratio of change in savings to the change in income. It shows how much of any additional income will be set aside instead of being used for consumption. The concept is central in understanding saving habits and economic stability.
Formula and Calculation of Marginal Propensity to Save (MPS)
The formula used to calculate the marginal propensity to save is simple. It is often tested directly in school exams and competitive entrance tests as well.
- MPS = Change in Savings (ΔS) ÷ Change in Income (ΔY)
- Here, ΔS means how much savings increase, and ΔY means how much income increases.
This formula helps Commerce students link individual savings to broader economic activity, as seen in National Income chapters.
Stepwise Calculation Example
- Suppose your income rises from ₹10,000 to ₹12,000 (ΔY = ₹2,000).
- Your savings go up from ₹1,000 to ₹1,400 (ΔS = ₹400).
- MPS = ₹400 ÷ ₹2,000 = 0.2
So, for every extra rupee earned, ₹0.20 is saved.
Marginal Propensity to Save: Numerical Example
Numerical questions on MPS appear frequently in board exams and entrance tests. Solving these step by step builds confidence for students.
- If a family’s income increases from ₹30,000 to ₹35,000 (ΔY = ₹5,000), and their savings increase from ₹2,000 to ₹3,500 (ΔS = ₹1,500):
- MPS = ΔS ÷ ΔY = ₹1,500 ÷ ₹5,000 = 0.3
This means for every extra rupee earned, ₹0.30 is saved while the rest is spent.
Relationship Between MPS and MPC
Marginal propensity to save (MPS) and marginal propensity to consume (MPC) are closely related – together, they always add up to 1. This direct link is essential for Class 12 Commerce and competitive exams. Students can revise quickly using a difference table:
| Basis | MPS | MPC |
|---|---|---|
| Meaning | Extra income saved | Extra income spent |
| Formula | ΔS/ΔY | ΔC/ΔY |
| Numerical Value | 0 to 1 | 0 to 1 |
| Relation | MPS + MPC = 1 | MPC + MPS = 1 |
Sometimes, students confuse the two, but remembering that what is not spent (MPC) is saved (MPS) helps avoid mistakes.
Marginal Propensity to Save Diagram
A savings curve graph helps visual learners understand how MPS works. In a basic diagram, income is on the x-axis, and total savings on the y-axis. The slope of the savings line (when income increases) represents MPS. You can draw two parallel lines – one for the consumption function (starting from the y-axis) and one for the savings function (starting from zero).
- When the slope is steeper, MPS is higher.
- Both MPS and MPC can be shown as complementary parts of every rupee increase.
Tip: Diagrams like this are ideal for revision and may be required in longer answer economic questions.
Role of Marginal Propensity to Save in the Multiplier Effect
The marginal propensity to save is central to the Keynesian multiplier effect. The multiplier shows how much total income changes when there is extra spending in the economy. The formula for the multiplier is:
- Multiplier = 1 / (1 - MPC) OR = 1 / MPS
A low MPS means people spend more, making the multiplier larger. A high MPS means more savings, making the multiplier smaller. This is a common question in Keynesian Theory of Employment chapters and case studies.
Real-World Application: MPS by Country and Policy
MPS varies across countries and income groups. For instance, developed countries with higher incomes usually have a higher marginal propensity to save than developing countries. Policymakers use MPS data to predict the impact of tax cuts or government spending.
- Low-income groups may have an MPS close to 0.1–0.2.
- High-income groups may have an MPS of 0.4–0.6.
- Economies with strong savings culture (like Japan) display higher MPS.
Understanding these trends helps governments design effective fiscal policies. Students can see examples of these in Methods of Measuring National Income.
Summary Table: Marginal Propensity to Save Overview
| Concept | Definition | Formula | Usual Value Range | Relation to MPC |
|---|---|---|---|---|
| Marginal Propensity to Save (MPS) | Part of extra income saved | ΔS ÷ ΔY | 0 to 1 | MPS + MPC = 1 |
For more practice, see Sandeep Garg Macroeconomics: Class 12 Solutions Chapter 9 for solved numericals and revisions. Explore related concepts in Circular Flow of Income and Consumption Function for full exam preparation at Vedantu.
In summary, marginal propensity to save explains how much extra income is saved instead of spent. It is easy to calculate, connected to MPC, and vital for understanding national income, business cycles, and economic policy. Mastering MPS helps students succeed in exams and understand real-world economic changes.
FAQs on Marginal Propensity to Save (MPS) Explained for Commerce Students
1. What is MPS in simple words?
Marginal Propensity to Save (MPS) is the fraction of an additional dollar of income that is saved rather than spent on consumption. It shows how much of an increase in income a person or economy saves.
2. How to calculate marginal propensity to save?
The MPS is calculated using the formula: MPS = ΔS / ΔY, where ΔS is the change in savings and ΔY is the change in income. For example, if a ₹1,000 income increase leads to a ₹200 savings increase, MPS = 0.2 (200/1000).
3. What will be its marginal propensity to save?
The marginal propensity to save (MPS) depends on the change in savings and income. To determine MPS, you need data on these two variables. For example, if income increases by ₹500 and savings increase by ₹100, then MPS = 100/500 = 0.2.
4. What is MPS vs MPC?
MPS (Marginal Propensity to Save) is the proportion of additional income saved, while MPC (Marginal Propensity to Consume) is the proportion spent. They are complements; MPS + MPC = 1. Understanding this relationship is crucial for analyzing Keynesian economics and the multiplier effect.
5. How is MPS calculated with a formula?
The formula for MPS is: MPS = ΔS / ΔY, where ΔS represents the change in savings and ΔY represents the change in disposable income. This formula helps calculate the proportion of additional income saved.
6. What is the relationship between MPS and MPC?
MPS and MPC (Marginal Propensity to Consume) are inversely related and always add up to 1. If MPS is high, MPC will be low, and vice-versa. This reflects how additional income is divided between saving and consumption.
7. Why is marginal propensity to save important in economics?
MPS is vital for understanding macroeconomic behaviour. It helps determine the multiplier effect, impacting government fiscal policies and economic growth. A higher MPS implies lower consumption and thus a smaller multiplier effect.
8. Can MPS ever be negative or greater than 1?
Theoretically, MPS can be negative if a rise in income leads to a decrease in savings (perhaps due to increased borrowing). It cannot be greater than 1, as it represents a proportion of income saved; it is always between 0 and 1.
9. How does MPS vary across different countries or income groups?
MPS varies across countries and income groups. Developed nations tend to have higher MPS compared to developing nations due to differences in income levels, saving habits, and economic policies. MPS by country data can be found in economic surveys and government reports.
10. What role does MPS play in the government’s fiscal policy planning?
MPS is crucial in fiscal policy as it influences the effectiveness of government spending. A higher MPS reduces the multiplier effect of government spending, meaning that fiscal stimulus might be less potent in boosting economic activity.
11. How can households benefit from understanding their own MPS?
Understanding personal MPS helps in financial planning and achieving financial goals. By tracking the proportion of income saved, households can adjust their saving and spending habits to build wealth and achieve financial security.
12. What are the differences between marginal and average propensity to save?
Marginal Propensity to Save (MPS) focuses on the change in savings due to a change in income, while Average Propensity to Save (APS) is the total savings as a proportion of total income. MPS reflects the incremental saving, whereas APS represents the overall savings ratio.
13. Does MPS always remain constant as income rises?
No, MPS isn't always constant. It can vary as income levels change. At lower income levels, MPS might be lower because individuals prioritize basic needs, while at higher levels, it can be higher as they can save more after meeting necessities. This reflects changes in consumption habits and spending patterns.
