propensity to save

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Fig. 164 Propensity to save. The effect of an increase in the propensity to save on national income.

propensity to save

the proportion of NATIONAL INCOME that is saved by households (see SAVING). The average propensity to save (APS) is given by:

The marginal propensity to save (MPS) is the fraction of any change in income that is saved:

Alternatively, saving can be expressed as a proportion of DISPOSABLE INCOME.

In the simple CIRCULAR FLOW OF NATIONAL INCOME MODEL, all disposable income is either consumed or saved by households. It follows that the sum of the MARGINAL PROPENSITY TO CONSUME and the MPS add up to 1 (note that saving is defined as all disposable income that is not spent by consumers regardless of whether savings are placed in banks, hidden under the bed, or whatever).

A rise in the propensity to save decreases consumption expenditure for a given income level, for example, from OC to OC1 at income level Y in Fig. 164. This increases the savings withdrawal from the circular flow of national income, resulting in a decrease in aggregate demand and national income.