Marginal propensity to save is used in Keynesian macroeconomics to quantify the relationship between changes in income and changes in savings. The marginal propensity to save is determined by calculating the change in savings and the change in household income.
Calculating the Marginal Propensity to Save
The marginal propensity to save is calculated by dividing the change in savings by the change in income. The marginal propensity to save determines how much of each extra dollar of income is used for saving instead of being spent for consumption of goods and services.
If income changes by $1, then saving changes by the value of the marginal propensity to save. The Marginal propensity to save is actually a measure of the slope of the savings line, which is created by plotting the change in income on the horizontal x axis and change in savings on the vertical y axis. The slope of the savings line is depicted by the change in saving and the change in income, or change in y axis divided by the change in the x axis. The value of the marginal propensity to save always varies between 0 and 1.
For example, assume an engineer has a $100,000 change in income from the previous year due to a pay raise and bonus. The engineer decides she wants to spend $50,000 of her income on a new car and save the remaining $50,000. Her resulting marginal propensity to save is 0.5, which is calculated by dividing the $50,000 change in savings by the $100,000 change in income. Therefore, for each additional $1 of income, her savings account increases by 50 cents.