Marginal propensity to save: definition, formula. Cash income of the population

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:44

Everyone accumulates something. As a rule, today it is money. In the people it is called "to save for a rainy day." We can keep cash at home under the mattress, or we can deposit it in the bank. In any case, if the salary allows, I don’t want to spend some part of it. In theory, this is called the "marginal propensity to save." For the first time it was studied in his works by J. M. Keynes. Let's try to figure out how this indicator will help us today in a crisis.

Psychological addiction

Let's digress a bit from theory and reflect on why a person is prone to savings. In order to be able to accumulate something, two conditions must be met: the first - all primary needs are satisfied, the second - the amount of income allows you to save a certain amount.

Such concepts as consumption and saving are very related. They do not mean the same thing, but when studying the propensity to accumulate, you need to understand that they are very closely dependent on each other.friend.

Even at the beginning of the 20th century, at the dawn of economic theory, it became necessary to study the relationship between consumption and savings. Keynes was, of course, the first person to take up this task. His theory is called the "Basic Psychological Law". And this is what it says.

Firstly, people's savings depend on income. A certain percentage, say 5% of income, a person is able to save for the future. If income grows, this percentage will change insignificantly. It would seem a paradox. But this is where human psychology comes into play. The more we receive, the more we spend. And there is no more money left for savings. And if the growth of consumption grows in proportion to income, then the growth of savings will creep very, very slowly.

Proof

There is a very simple proof that consumption rises as income rises. Take, for example, a family with an income of 6,000 rubles. They save 2% of the amount, and the rest of the money goes to various expenses. What can you afford with this money? Pay utility bills, buy a minimum set of groceries and probably everything.

Family income starts to grow. Already the total contribution is 10,000 rubles. Now you can buy more meat, go to the movies one day and afford to buy a new dress. But the amount set aside for savings will still remain the same. Because, first of all, a person will satisfy his needs, and only then will he think about the amount of savings.

Factors influencing changes in consumption and savings

The increase or decrease in consumption and savings depends not only on the growth of wages. In the economic environment, there are many other indicators that in one way or another will change consumer ability. Marginal propensity to save also depends on these factors.

Inflation. The increase in inflation is usually much higher than the indexation of salaries. As a rule, prices rise monthly, while family incomes rise at most once a year. Therefore, the consumer has to spend a large amount on purchases, while there is no money left for savings.
Increase in taxes. An increase in deductions leads to a proportional decrease in any expenses, including the propensity to save.
Price increase. This factor will significantly affect those households with low income. Those who earn high salaries will save as much.
Increase in social insurance fees. This is a very interesting factor. Most often, the propensity to save occurs when a person feels insecure from the state. Money is needed in case of illness, sudden death, etc. If the insurance fund provides all this, then the need for separate savings will disappear. Therefore, with an increase in social contributions, the propensity to save falls.
Growth of offers on the market. This is purely a marketing factor. Usually, there is a rush for medicines during periods of sharp outbreaks of epidemics, pandemics, etc. With an increase in consumptionsavings are declining.
Income growth. As already discussed, with an increase in the amount of funds, consumption and saving tend to increase.

Theory

In the economic environment, it is customary to understand savings as a certain amount of money set aside from income for the future and not consumed at the moment. The propensity to save can be medium or marginal.

The average propensity to save shows what percentage of the total amount a person is ready to save for the future, and is displayed as a formula:

APS=S / Y where S is the savings portion and Y is the total income.

Marginal propensity to save (formula) shows changes in the savings part and in the amount of income. In other words, this indicator can tell how the desire of people to keep or not their earned money will change if the amount of total income changes:

MPS=δS / δY.

As savings increase, expenses decrease. The economic significance of this indicator at the country level means a desire to save money, which means there is an opportunity to invest it in real production. And this is an investment, which, in turn, affects the overall welfare of the country.

Propensity to save chart

The value of the marginal propensity to save, as we have already found out, strongly depends on consumption. The graph shows the actual dependence of one indicator on another. Consider the picture.

Y-axis acceptedcalculate the amount of income, and on the abscissa - the amount of savings. If, in theory, everyone spent an amount equal to income, then the relationship would be a perfect straight line at an angle of 45 °. This line represents the straight line AB. But that doesn't happen in real life.

The straight line showing the propensity to save is indicated by the blue line in the figure, and it always deviates downward. The point of intersection O is the point of zero savings. It means that the household spends all the income received on its own needs. Below this intersection, debt arises, and above, savings. As you can see, the higher the income, the greater the marginal propensity to save.

Dependence of savings on age

In the course of our lives, we earn money unevenly. In one period of life they are not enough, in another there are surpluses. This trend can also be shown graphically.

Let income be on the vertical axis, and age on the horizontal axis. The curve shows that personal savings increase with age, while they are almost non-existent in youth. And it really is.

While a person is studying and is at the stage of searching for his profession, his income is small. He spends most of it on education or personal needs. Getting older and starting a family, he again begins to increase expenses, but, as a rule, by this time a stable income is already established and it becomes necessary to save at least a small amount for large purchases (car, house, children's education). Your highest salarya person receives in adulthood, and then he begins to think about a pension and save some of his money. It is during this period that the marginal propensity to save reaches its maximum, and then declines again.

What else affects savings

There are certain non-income factors that also have a significant impact on a person's ability to save money for the future.

The first factor is expectation. If a crisis situation is observed in the country, and a person expects that prices will soon rise and fees for services will increase, then he will stock up now, if possible, at lower prices. Fear of empty shelves and huge expenses make people spend all their money here and now. But in the opposite situation, when prices are expected to fall in the future, or at least their level remains unchanged, a person will save more than spend.

The second factor is consumer debt. We live in a world of loans. And now there is such a tendency that all the savings of the population simply turn into a payment for a product or service in future periods. The level of average salaries is not enough to put something aside for a major purchase. You can save up for a car for 10 years, or you can take it on credit and then pay for it for 10 years. Thus, our desire and ability to save something turn into the most powerful tool of the economy - credit.

Propensity to save in macroeconomics

The concept of savings is very important not onlyfor individual households, but also for the country as a whole. The marginal propensity to save shows whether the people within the state can ensure development and production growth. It would seem that a simple indicator can?

In fact, the higher its value, the more free money individuals and legal entities have in their hands, which means that they act as potential investors. Investments are monetary investments in the sphere of production, and at the same time the most powerful tool for influencing the development of the country. The more money is invested in innovation, technological innovations, etc., the higher the economic growth rates.

Conclusion

The propensity to save is one of the most important economic indicators that can be studied not only at the level of individual households, but also across the country as a whole. The higher this indicator, the better people live.