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Marginal Propensity to Consume and the Marginal Propensity to Save

Marginal Propensity to Save (MPS) refers to change in amount of savings in response to the change in level of income. Marginal Propensity to Save {MPS} can be calculated from two perspectives. One will be based on an increase in the income while the other will be based on a decrease in the income. From a psychological perspective, changes in the income of a person will definitely affect their savings (McEachern 198). An increase in income of a person will result to increased savings by the same person. A decrease in income will result to less amount of money available for saving.

The level of savings is important, as it demonstrates development. Individuals will not be able to invest unless they are able to save from their earnings. Savings will only be relevant to a consumer if his or her basic needs are already satisfied. As such, increase in income will indirectly affect investments as the saved money can be put into investment. Less amount of money available for saving will result in the person saving less money. The reduction of the disposable amount of money to save will also imply that the consumer will also have to cut down on investments. This will definitely affect the calculation of Growth Domestic Product (GDP). The MPS is dependant on the income factor.

Marginal Propensity to Consume {MPC} refers to the change in the level of consumption in response to change in the amount income. Marginal propensity can be calculated from two perspectives. One will be based on an increase in the income of the consumer and the other on the decrease in the income of the consumer (McEachern 112). Increase in the income of a consumer will mean that the consumer has more money at his or her disposal for consumption. This will lead to the consumer consuming more of product/products. A decrease in the income of a consumer will mean that the consumer has less money to spend at his or her disposal. This will force the consumer to cut down on the consumption. Indeed, consumption is one of the elements that are used in the calculation of the Gross Domestic Product (GDP).

GDP is made up of consumption, investment, government expenditure, and net exports. This makes Marginal Propensity to Consume {MPC} and the Marginal Propensity to Save {MPS} key contributors of the Gross Domestic Product {GDP}. For consumption to be obtained there is need for incorporation of the MPC to find the real consumption due to the change in the level of income. Investments’ figures can only be obtained when savings have been calculated. This is because without the savings there would be no investments. The government is keen on getting the MPC and MPS figures to calculate and find the GDP. The government is therefore interested in getting information on income generating opportunities and jobs to ensure that there is a positive trend in MPC and MPS (McEachern 45).

From a completely rounded perspective, MPC and MPS are related. Consumption is only but the other side of saving. The current income hypothesis holds that consumption in one period is a function of income in that same period. Calculation of MPC and MPS after the tax disposable income will sum up to one. This means that: MPC + MPS = 1.An average expenditure curve will indicate the total expenditures that are planned at each GDP level. In the average expenditure model, this curve is used in the determination of equilibrium real GDP (at specific prices}. Multiplier effect is created when there is change in the autonomous aggregate expenditure. This will result in positive change in equilibrium real GDP. For the case of a simplified economy, lets say the MPC, which is the multiplier is 1(1-MPC). This is because summation of MPC AND MPS IS 1, multiplier in this model will also be 1/MPS (McEachern 167).

Works Cited

McEachern, William. Econ Macro 2. Mason, OH: South-Western Cengage Learning, 2010. Print.