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The Average, Marginal Propensities To Save

 Average Propensities, Marginal Propensity to Save

The APS is the ratio of saving to earnings. It is found by dividing saving by income, or APS = S / Y. It tells us about the proportion of each income level that people will save i.e. they will not spend on consumption. For instance in Table 1 at an income level of $ 360 millions, the consumption expenditure is $ 340 millions and the savings are $20 millions.

The APS is 0.06 which means that people save 6 percent of their income, as shown is column (5) of the Table. It is noted that as income enhances the average propensity to consume APC decreases from 0.944 to 0.916. But APS increases from 0.06 to 0.08 as represented pictorially, the APS is any point on the S curve. In diagram 2, point S1, measures the APS of the S curve which is S1Y1 / OY1.

The Marginal Propensity to Save

The MPS is the ratio of the change in saving to the change in income. It can also be defined as the rate of change in APS as income changes. It can be found by dividing a change in saving by a change in income, i.e. Δ S / ΔY. For instance, in Table 1 when income increases from $360 millions to $ 480 millions, savings increase from $ 20 millions to $ 40 millions so that Δ Y = $ 60 ($480 - $360) millions and Δ S = $ 20 millions ($40 – 20) and the MPS = 20 / 120 = 0.17 for the reason that Δ S / Δ Y = 20 / 120 which is invariable.

Pictorially, the MPS is measured by the gradient or slope of the S curve at a point or over a small range. This is represented in the diagram below, by AB / BC where AB is the change in saving Δ S and BC is the change in earning Δ Y.

Thus APS and MPS are two different concepts. The APS relates total saving to total income. Conversely, the MPS relates a change in saving to a change in earning.

Illustration 42

If the value of the marginal propensity to consume, b, is 0.70, then what would be the marginal propensity to save?

Solution

The marginal propensity to save

                        =          1 – 0.70           =          0.30.

This implies that of every dollar of earnings. Therefore, 30 % is saved which means 30 cents of every dollar is saved.

Illustration 43

If the consumption function is C = 80 + 0.65 Y, then what is the saving function?

Solution

 Since, S          =          Y – C

            S          =          Y – (80 + 0.65Y

            S          =          Y – 80 – 0.65Y

            S          =          - 80 + 0.35 Y

The Paradox of Thrift

  1. Thrift means to save or to cut down unnecessary expenses. A hike in thrift tends to higher saving and wealth.
  1. It is also regarded as public virtue for the reason that if people consume little, then higher resources can be put to manufacturing principle goods which tends to augment in earnings, productivity and employment.
  1. As per Keynes, “thrift is a public vice if the increase in the propensity to save is unaccompanied by increase in the propensity to invest, i.e. self-governing investment.”
  1. Presume that people become thrift oriented and choices to save higher out of a given level of earnings, given the propensity to invest.
  1. This will tend to lower equilibrium level of revenue. Thus Paradox of thrift leads to the conclusion that saving is a private virtue and a public vice.
  1. So saving is a virtue for a person or family for the reason that it leads to augment in saving and wealth but it is a vice for the entire society for the reason that it tends to reductions in earnings, productivity and employment.

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