Marginal Propensity to Save (MPS): Definition and Calculation

What Is Marginal Propensity to Save (MPS)?

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 = Change in Saving ÷ 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.

Example of Marginal Propensity to Save (MPS)

Suppose you receive a $500 bonus with your paycheck. You suddenly have $500 more in income than you did before. If you decide to spend $400 of this marginal increase on a new business suit and save the remaining $100, your marginal propensity to save is 0.2. This is calculated by dividing the $100 change in saving by the $500 change in income.

Understanding Marginal Propensity to Save (MPS)

Given data on household income and household savings, economists can calculate households’ MPS by income level. This calculation is important because MPS is not constant; it can vary by income level. Typically, the higher the income, the higher the MPS because as wealth increases, so does the ability to satisfy needs and wants; thus, each additional dollar is less likely to go toward additional spending. However, the possibility remains that a consumer might alter savings and consumption habits with an increase in pay.

Naturally, with an increase in salary comes the ability to cover household expenses more easily, allowing for more leeway to save. A higher salary also brings access to goods and services that require greater expenditures. This may include the procurement of higher-end or luxury vehicles or relocation to a new, pricier residence.

If economists know what consumers’ MPS is, they can determine how increases in government spending or investment spending will influence saving. MPS is used to calculate the expenditures multiplier using the following formula:

 1/MPS

The expenditures multiplier tells us how changes in consumers’ MPS influences the rest of the economy. The smaller the MPS, the larger the multiplier and the more economic impact that a change in government spending or investment will have. 

Marginal Propensity to Consume (MPC)

The other side of MPS is marginal propensity to consume (MPC), which shows how much a change in income affects purchasing levels.

 MPC = Change in Spending ÷ Change in Income

Using the above example, where you spent $400 of your $500 bonus, the MPC is 0.8. This is calculated by dividing $400 by $500.

If you add MPC and MPS, the result should always equal one, making MPC the complement to MPS.

The Bottom Line

Marginal propensity to save (MPS) is an economic theory that calculates how much of a raise a person would save. The number is different at different income levels and helps economists make theories about how individual incomes impact the broader economy.