In the following, you can learn how to calculate MPS by its simple marginal propensity to save formula and get familiar with its importance in economics.
What is the marginal propensity to save (MPS)?
In short, the marginal propensity to save (MPS) is the amount by which household
savings change when disposable income increases by one dollar.
From the concept of MPC, we know that consumers normally spend only a part of an additional dollar of disposable income, that is, the MPC is a number between 0 and 1. The additional disposable income that consumers don't spend is saved. Therefore, the marginal propensity to save (MPS) is the fraction of that additional dollar of disposable income that is saved.
How to calculate MPS? - The marginal propensity to save formula
From the above relations, we can derive the following two marginal propensity to save formulae:
MPS = 1 − MPC
MPC = Δs / Δyd
MPS- marginal propensity to save;
MPC- marginal propensity to consume;
Δs- increase in household savings; and
Δyd- increase in disposable income.
Using the MPS calculator, you can compute the marginal propensity to save if you provide the increases in disposable income and household savings.
For example, if you know that an average family saves $300 when its income increase by $1,000, the
300/1000 = 0.3.
Since there is a direct relationship between the marginal propensity to consume and the marginal propensity to save, you can deduct the value for MPS from the MPC. For example, if the MPC is 0.6, the
1 - 0.6 = 0.4.
Macroeconomic implication of the marginal propensity to save
While savings, in general, are welcomed by a household, the economy as a whole might suffer when a considerable part of the population within the economy increases their savings. We call this phenomenon the paradox of thrift, often referred to as the fallacy of composition. Putting this paradox in our context, when MPS increases in the economy, the MPC must decrease, leading to a lower gross output, which will, in turn, reduce total savings as households then receive less income which could have been saved.
Lately, the paradox of thrift has been related to the debt-deflation theory of economic crisis, proposed as a possible way to explain the economic slump during the Great Recession. In this form, because of high indebtedness, households attempt to repay the loan by increasing savings, referred to as a deleveraging process. When a considerable part of the economy involved in such practice, consumption and investment shrink, unemployment rate increases, and, because of lower aggregate demand, the general price level declines. Because of deflationary pressure, the real interest rate increases, which further increases the real debt burden and triggers more loan repayments. This feedback loop can push the economy into a vicious cycle.