How to Calculate the Marginal Propensity to Save

Share It

Marginal propensity to save equals the change in savings divided by change in disposable income. It represents how much of every extra dollar a consumer will save rather than spend.

Significance of Marginal Propensity to Save

Understanding the average marginal propensity to consume and save helps economists and financial regulators predict what consumers will do if they receive extra income. If Congress is considering approving a new tax credit to stimulate the economy, it's helpful to know how much of the tax credit consumers will spend rather than save. For example, the National Bureau of Economic Research estimated that the average marginal propensity to consume for the 2008 economic stimulus tax rebates was only one third, which means that the marginal propensity to save was around two thirds, or 67 percent. Because marginal propensity to save was so high, the Bureau didn't think that the tax credits provided a substantial economic benefit.

According to EconomicsHelp.org, the marginal propensity to save is higher for consumers at high income levels than it is for consumers at low income levels. Individuals are also more likely to save if the income increase is temporary - like a bonus or a tax break - rather than a permanent increase in income. In addition, consumers are more likely to save when they don't have confidence in the economy.

Calculate Marginal Propensity to Save

If you know the change in national savings, you can calculate marginal propensity to save directly by following these steps:

1. Determine change in savings levels. To do this, determine savings levels before disposable income changed and subtract it from savings levels after disposable income changed. For example, if the rate of national savings was \$10 million a year before a tax credit and \$13 million a year after the tax credit, change in savings was \$3 million.
2. Determine change in disposable income.  To calculate this, subtract old disposable income from new disposable income. For example, if the national disposable income was \$30 million before the tax credit and \$35 million after the tax credit, the change in income is \$5 million.
3. Divide change in consumption by change in disposable income to find marginal propensity to consume. In this example, marginal propensity to consume is \$3 million divided by \$5 million, or 0.6. That means, for every extra dollar the tax credit provided, consumers saved 60 cents of it and spent 40 cents of it.

Alternative Calculation

If you don't know the change in the national rate of savings, you can calculate marginal propensity to save by calculating marginal propensity to spend first. To use the alternative calculation, follow these steps:

1. Determine the change in consumption. To do this, find consumption before disposable income changed and subtract it from consumption levels after disposable income changed. For example, if national spending was \$10 million a year before a tax credit and \$12 million a year after the tax credit, change in consumption was \$2 million.
2. Determine change in disposable income.  To calculate this, subtract old disposable income from new disposable income. For example, if the national disposable income was \$30 million before the tax credit and \$35 million after the tax credit, the change in income is \$5 million.
3. Divide change in consumption by change in disposable income to find marginal propensity to consume. In this example, marginal propensity to consume is \$2 million divided by \$5 million, or 0.4.
4. Subtract marginal propensity to consume from 1 to find marginal propensity to save. In this example, marginal propensity to save is 1 minus 0.4, or 0.6.