How to Calculate Marginal Propensity to Consume Based on Savings

by C. Taylor

Marginal Propensity to Consume (MPC) describes how much of any additional income you use for purchases, rather than placing in savings. It is a reflection of your spending behavior when offered money beyond your normally budgeted amount. As an example, you might be quite shrewd with your $800 per week paycheck and save half of it, but what if you were given a $200 bonus: Would you also save half of that extra income, or would you blow it?

1. Calculate the change in your income by subtracting your normal income from your current pay. In the example, if you received a $200 bonus on top of your normal salary, then the change in income would be $200.

2. Add how much of that money you actually spent, rather than placing it in savings. In the example, you might celebrate the extra cash with a $150 night on the town and deposit only $50 in savings.

3. Divide the amount you spent by the extra income to derive your MPC. In the example, $150 divided by $200 gives you a MPC of 0.75, or 75 percent. If your behavior is consistent, then you can expect to spend 75 percent of any additional income and save only 25 percent.

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