The Marginal Propensity to Save

The Marginal Propensity to Save, or MPS, is the fraction of additional disposable income that people choose to save instead of spending.

It’s calculated by dividing the change in savings by the change in disposable income. MPS determines the slope of a linear savings function.

Consider Kevin. If his disposable income increases by $100, and he decides to save $20, his MPS is 0.2. That means Kevin saves 20 cents out of every extra dollar he earns.

MPS ranges from 0 to 1. A value of 1 means all extra income is saved, while zero means none is saved.

Now, here’s a key idea in macroeconomics: the Marginal Propensity to Consume plus the Marginal Propensity to Save always equals one.

When a person receives additional disposable income, they have only two choices for allocating some or all of it.

They can spend a portion of it, as determined by the MPC, or they can save a portion of it, as determined by the MPS.

This relationship helps economists predict how changes in income impact overall spending, saving, and economic growth.