Resources | Subject Notes | Economics
This section details the calculation of the average propensity to save (APS) and the marginal propensity to save (MPS), crucial concepts in understanding macroeconomic dynamics and the circular flow of income.
The circular flow model illustrates how money and resources move between households and firms in an economy. It consists of two main sectors: households and firms. Households own the factors of production (land, labour, capital, and entrepreneurship) and provide them to firms. Firms, in turn, pay households for these factors and produce goods and services for them.
The average propensity to save (APS) represents the proportion of disposable income that households save. It is calculated as:
Formula:
$$APS = \frac{Total \, Savings}{Total \, Income}$$Where:
For example, if a household earns £500 and saves £50, the APS is £50 / £500 = 0.1 or 10%.
The marginal propensity to save (MPS) represents the proportion of an additional unit of income that is saved. It is calculated as:
Formula:
$$MPS = \frac{\text{Change in Savings}}{\text{Change in Income}}$$The MPS is always between 0 and 1. A higher MPS indicates that a larger proportion of an increase in income is saved.
For example, if a household saves an additional £10 when their income increases by £100, the MPS is £10 / £100 = 0.1 or 10%.
The APS and MPS are related because the MPS is the slope of the saving curve. The saving curve shows the relationship between income and the amount saved. The APS is the y-intercept of this saving curve.
The MPS is a key determinant of the multiplier effect in macroeconomics.
To calculate APS and MPS, we need data on household income and savings. This data can be obtained from national accounts or household surveys.
Example Calculation:
Consider the following data for a particular year:
| Income (Millions of £) | Savings (Millions of £) |
|---|---|
| 100 | 20 |
| 200 | 40 |
| 300 | 60 |
| 400 | 80 |
Calculating APS:
Total Savings = 20 + 40 + 60 + 80 = 200
Total Income = 100 + 200 + 300 + 400 = 1000
APS = 200 / 1000 = 0.2 or 20%
Calculating MPS:
Change in Income (from £100 to £200) = £100, Change in Savings = £20
MPS = 20 / 100 = 0.2 or 20%
Similarly, for the change from £200 to £300, Change in Income = £100, Change in Savings = £20, MPS = 20/100 = 0.2
Therefore, the MPS is 0.2.
Understanding APS and MPS is crucial for policymakers as they influence aggregate demand and economic growth. A higher MPS suggests that an increase in income will lead to a larger increase in consumption, boosting overall economic activity. Conversely, a lower MPS implies that a smaller proportion of an income increase will be saved, leading to a smaller impact on aggregate demand.