Marginal propensity to save

Also called: MPS · Topic: Aggregate Demand, Income Determination and the Multiplier · NCERT: Class 12, Ch 4 "Determination of Income and Employment"

Meaning

Marginal propensity to save (MPS) is the change in saving for each unit change in income. It tells us what share of an extra rupee of income a household saves.

• Formula: MPS = ΔS/ΔY = s = 1 − c (Δ means "change in", S is saving, Y is income, and c is the marginal propensity to consume, or MPC).
• So MPC + MPS = 1.

MPS matters because it decides how much of each round of new income "leaks out" of spending. A smaller MPS means more of the income gets spent again. So the investment multiplier = 1/MPS is bigger.

Explanation

How MPS comes from the consumption function

• Saving (S) is the part of income that is not consumed: S = Y − C.
• Keynes's consumption function is C = C̄ + cY:
• C̄ = autonomous consumption, the minimum spending that happens even at zero income.

• c = MPC, the part of each extra rupee that is spent.

• Put this into S = Y − C and you get the saving function: S = −C̄ + (1 − c)Y.

• The intercept is −C̄. At zero income, saving is negative. This is dissaving (using up past savings or borrowing).

• The slope is s = 1 − c. This slope is the MPS.

• Derivation: s = Δ(Y − C)/ΔY = ΔY/ΔY − ΔC/ΔY = 1 − c.

• Why MPC + MPS = 1:
• Each extra rupee of income is either spent or saved.
• The simple model has no third use.

Worked example: Imagenia

• C = 100 + 0.8Y, so S = −100 + 0.2Y.
• Income rises from ₹1,000 to ₹1,100:
• S at Y = 1,000 → −100 + 200 = ₹100
• S at Y = 1,100 → −100 + 220 = ₹120

• MPS = ΔS/ΔY = 20/100 = 0.2 ✔

• Check: MPC 0.8 + MPS 0.2 = 1.

• Break-even income (where saving = 0): −100 + 0.2Y = 0 → Y = ₹500.
• Below ₹500, saving is negative. Households dissave.

• Above ₹500, saving is positive.

• Multiplier = 1/MPS = 1/0.2 = 5. So ₹100 of new investment finally raises income by ₹500.

Range and behaviour of MPS

• Range: 0 ≤ MPS ≤ 1. It is the mirror image of MPC, and NCERT includes both end points.
• MPS = 0 → the whole extra income is consumed (MPC = 1).
• MPS = 1 → the whole extra income is saved (MPC = 0).

• Usual case: 0 < MPS < 1.

• MPS can never be negative. This is true even at low income, where total saving (and so APS) is negative.

• On a straight-line saving function, MPS stays constant (0.2 in Imagenia) at every income level. But APS keeps changing:

Y	S	APS (S/Y)	MPS
250	−50	−0.20	0.2
500	0	0	0.2
1,000	100	0.10	0.2
2,000	300	0.15	0.2

What makes MPS higher or lower

• Income level of the household:
• Poorer households have a higher MPC, so a lower MPS.

• Example: poor household MPC 0.9 → MPS 0.1. Rich household MPC 0.5 → MPS 0.5.

• Fear and crisis:

• C̄ and c are not fixed for ever.

• Lockdowns and fear can push people to spend less and save more, so the whole consumption function shifts down.

• Taxes work through disposable income:

• Disposable income (Yd) is the income households have in hand after taxes and transfers: Yd = Y − T (+ transfers).
• In Imagenia, a ₹100 tax cuts consumption by ₹80 (MPC × ΔT) and cuts saving by ₹20 (MPS × ΔT).

In India

• MPS is not published as a single official number. It is a theoretical ratio. What India measures is the level and pattern of saving.
• Who measures it:
• MoSPI (Ministry of Statistics and Programme Implementation) estimates saving in the national accounts.
• Its National Accounts Statistics – 2025 (released 16 May 2025) gives consumption and saving estimates for households, the corporate sector and government. It follows the UN System of National Accounts (SNA), with base year 2011-12 [7].

• The RBI publishes estimates of household financial savings [2][3].

• Who saves in India: shares of gross savings in 2022-23 [4][5]:

• Households: 60.9%, the largest saver
• Non-financial corporations: 37.3%
• Financial corporations: 9.3%

• General government: (−) 7.5%. The government dissaved, meaning it spent more on current needs than its current income.

• Longer view (2006-07, % of GDP at current market prices) [8]:

• Household financial saving: 11.8%
• Saving in physical assets (houses, gold and similar): 12.5%

• Total household saving: 23.8%

• The other side of saving is consumption:

• Private final consumption expenditure (PFCE) is the national-accounts measure of household consumption. It was 60.9% of GDP in 2022-23 [4][5].

• PFCE was estimated to grow 7.6% in 2024-25, up from 5.6% in 2023-24 [6].

• COVID-19 and "forced saving":

• Household financial savings spiked in Q1 of 2020-21. This went against the usual seasonal pattern.
• The likely reason: during the lockdown, people could not spend on non-essentials [3].
• The rate then eased to 8.2% of GDP in Q3 of 2020-21, the second quarter in a row of decline [2].
• Lesson: the share of income people save can jump in a crisis. It is not a fixed constant.

Don't confuse with

• Average propensity to save (APS = S/Y): APS is saving per unit of total income. MPS is saving per unit of extra income. APS can be negative at low income (−0.20 at Y = 250 in Imagenia), but MPS can never be negative.
• Marginal propensity to consume (MPC = ΔC/ΔY): MPC is the share of extra income that is spent. MPS is the share that is saved. MPC + MPS = 1. A higher MPC means a lower MPS and a bigger multiplier.
• APC + APS = 1 vs MPC + MPS = 1: both are true, but they are different identities. The first uses totals (C/Y + S/Y). The second uses changes (ΔC/ΔY + ΔS/ΔY). Both follow from Y = C + S.
• Household share in gross savings (60.9% in 2022-23) [4][5]: this is the household sector's share of the country's total saving. It is not a propensity and says nothing about how saving responds to a change in income.

Prelims Hooks

• MPS = ΔS/ΔY = 1 − MPC. It is the slope of the saving function S = −C̄ + (1 − c)Y. The saving function's intercept (−C̄) is negative.
• Range: 0 ≤ MPS ≤ 1 (NCERT includes both 0 and 1). Trap: APS can be negative, but MPS cannot.
• Investment multiplier = 1/(1 − MPC) = 1/MPS. If MPS = 0.2, the multiplier = 5. A lower MPS gives a bigger multiplier.
• Imagenia (C = 100 + 0.8Y): MPS = 0.2. ₹100 more income → ₹20 more saving. Break-even income = ₹500.
• On a straight-line saving function, MPS is constant, but APS rises as income rises (0 → 0.10 → 0.15).
• Households = 60.9% of India's gross savings in 2022-23. General government = (−) 7.5% [4][5].

Mains Points

• Paradox of thrift and the multiplier:
• In a slowdown, if everyone raises their MPS, less of each rupee is spent again.
• The multiplier (1/MPS) falls → aggregate demand falls → income falls → total saving may not rise at all. This is Keynes's paradox of thrift.

• But households give 60.9% of India's gross savings (2022-23), and this pool funds investment [4][5]. So policy must balance growth-led consumption with enough saving.

• Targeted transfers vs tax cuts for the rich:

• The poor have a low MPS (for example 0.1), so they spend ₹900 of a ₹1,000 transfer.
• The rich have a higher MPS (for example 0.5), so they spend only ₹500.

• A tax cut raises consumption by only MPC × ΔT, because part of it is saved. So in a slump, cash transfers to the poor and direct government spending give more demand per rupee. This is useful for GS-III answers on the quality of fiscal stimulus.

• Crisis saving and counter-cyclical policy:

• The forced saving spike of 2020-21 [2][3] shows that fear and lockdowns can push saving up and spending down.
• When private consumption falls this way, counter-cyclical fiscal policy (the government spending more in bad times) can fill the gap in demand.

Related concepts

• Consumption function
• Autonomous consumption
• Induced consumption
• Marginal propensity to consume
• Average propensity to consume
• Average propensity to save
• Savings

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