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Home » Determinants of the Level of National Income and Employment » Concept of Propensity to Save/Saving Function

 

Concept of Propensity to Save/Saving Function:

 

Definition:

 

The propensity to save schedule which for the sake of brevity is called the propensity to save or saving function shows relation between saving and disposable income at varying levels of income S = F(Y).

 

The propensity to save schedule comes from subtracting consumption from income at each level of income. Since saving represents the difference between the 45o guideline and the consumption function, it may be positive or negative. The propensity to save schedule can easily be derived from the propensity to consume schedule, in our example given earlier, (Click here to read full example), the propensity to consume, is as follows:

 

Income ($ in billion) 50 100 140 200 300
Expenditure ($ in billion) 50 70 100 140 200

 

The propensity to save schedule can easily be derived by subtracting the amount of consumption from the corresponding amount of income. The saving schedule thus is as follows:

 

Income ($ in billion) 50 100 140 200 300
Save ($ in billion) 0 30 40 60 100

 

Concepts of Propensity to Save:

 

There are two concepts of propensity to save:

 

(1) Average Propensity to Save (APS).

 

(2) Marginal Propensity to Save (MPS).

 

(1) Average Propensity to Save (APS):

 

Definition:

 

Average propensity to save is the percentage of income saved at a given level of income (APS).

 

The average propensity to save at any point can be found by dividing saving by income.

 

For instance, If the disposable income is $100 billion and expenditure $80 billion on consumption goods, then the saving win be equal to $20 billion. The average propensity at save will be = 0.2. The average propensity to save can also be found by subtracting average propensity to consume from 1. In the above example, the average propensity to consume is:

 

80/1000 = 0.8

 

So the average propensity save will be 1 - 8 = 2

 

(2) Marginal Propensity to Save (MPS):

 

Definition:

 

Marginal propensity to save is the ratio of change in saving to change in income. The MPS measures the change in saving generated by a change in income.

 

Formula:

 

MPS = Change in Saving

            Change in Income

 

MPS = ΔS

           ΔY

 

It is also found out by subtracting marginal propensity to consume from 1. Thus:

 

MPS = 1 - MPC

 

Schedule For APS and MPS:

($ in billion)

Disposable Income   (Y)

Consumption Expenditure (C) Net Saving (S) Average Propensity to Save                 (1 (1 - PC = PS) Marginal Propensity to Save                     (1 - MPC = MPS)
A 1000 1100 $100 1 -1 = 1 1 - 9 = 0.1
B 2000 2000 $000 1 - 1 = 0 1 - 6 = 0.4
C 3000 2600 $400 1 - 0.86 = 0.14 1 - 5 = 0.5
D 4000 3100 $900 1 - 0.77 = 0.23 1 - 3 = 0.7
E 5000 3400 $1600 1 - 0.68 = 0.32 1 - 2 = 0.8
F 6000 3600 $2400 1 - 0.6 = 0.4 1 - 1 = 0.9
G 7000 3700 $3300 1 - 0.53 = 0.47  

                                                

It is quite clear from the above saving schedule that as the income increases, the average propensity to save and marginal propensity to save also increases and as income decreases, the average propensity to save and the marginal propensity to save also decreases.

 

Diagram:

 

 

In figure (30.4) disposable income is measured along the X axis and saving along the Y axis. At point A, the consumption expenditure $1,100 billion against the disposable income of  $1,000 billion. The expenditure is more than the disposable income. There is dis-saving of  $100 billion. The excess expenditure of $100 billion is met either out of accumulated saving or by borrowing. When income increases to $2,000 billion, the expenditure also increases to $2,000 billion.

 

At point B, consumption is exactly equal to expenditure. B is the break even point where C =Y. From B onward up to G point, saving goes or increasing with the increase in disposable income. AG thus is the saving curve which has risen with the rise in income.

 

It may here be noted saving as used by Keynes in consumption function is "real saving" and ‘income is "real disposable income". The saving function like the consumption function remain stable in the short period.

Relevant Articles:

» Psychological Law of Consumption
» Propensity to Consume
» Determinants of the Consumption Function
» Concept of Saving
» Concept of Propensity to Save/Saving Function
» Concept of Investment
» Concept of Marginal Efficiency of Capital (MEC)
» Factors on Which Marginal Efficiency of Capital Depends
» Concept of Employment and Full Employment
» Full Employment
 

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