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(Saving Function):

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.

Following are the two main concepts of propensity to save or (saving function):

(1) Average Propensity to Save (APS).

(2) Marginal Propensity to Save (MPS).

(1) Average Propensity to Save (APS):

Definition:

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

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

Calculation with Example:

For example, if the disposable income is $100 billion and expenditure $80 billion on consumption goods, then the saving will 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 – 0.8 = 0.2

(2) Marginal Propensity to Save (MPS):

Definition:

Marginal propensity to save (MPS) 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:

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

MPS = 1 – MPC

Schedule:

Schedule for APS and MPS:

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.