Category: 

What Is the Average Propensity to save?

Article Details
  • Written By: Ray Hawk
  • Edited By: E. E. Hubbard
  • Last Modified Date: 31 October 2016
  • Copyright Protected:
    2003-2016
    Conjecture Corporation
  • Print this Article
Free Widgets for your Site/Blog
Snake charmers get snakes to “dance” because of the movement of their flute-like instruments, not their music.  more...

December 4 ,  1945 :  The United States Senate approved of US participation in the United Nations.  more...

The Average Propensity to Save (APS) is an economic calculation for nations or individual households of either how much disposable income is saved on a regular basis or how much of the total income is saved. The principle is based on economics theories established by John Maynard Keynes, a noted British economist of the early 20th century whose theories, as of 2011, are still widely used by nations and businesses. As income increases, the percentage of the average propensity to save also tends to increase, and, as income decreases, the APS also falls. The reason for this given by Keynes was that the amount of income directly determined savings rates, while many other economists believe that average propensity to save is instead most directly affected by interest rates in a country, and the rising or falling cost of goods and services.

Ad

In developing nations with limited consumer markets and low incomes in general, the average propensity to save tends to be high. The most notable example of this is China, where the savings rate is extremely high both on a national and household level, with the country saving nearly 50% of its gross domestic product (GDP) income in the first decade of the 21st century. Most modern industrialized nations have very low average propensity to save rates by household, however, with rates as of 2011 in the US being 3.6%, in the UK 5.4%, and 3.2% in Japan. Several reasons affect such a savings percentage, including the demographics of a population, rates of inflation, and unemployment levels. Nations that are modern day states yet still have comparatively very high average propensity to save rates, include Spain with a rate of 17%, Belgium at 13.1%, and France at 15.2%.

A closely related concept to average propensity to save is Marginal Propensity to Save (MPS), which targets increasing income levels. As an individual's or nation's income increases, the marginal propensity to save also increases as a percentage of the whole. This is a another key modifier in economics theories promoted by Keynes, and is a ratio that shows the change in savings percentages as the change in income percentages grows. China is the most notable example of a high MPS rate, where it exceeded 60% growth during the first decade of the 21st century.

The flip side to savings rates are two other fundamental concepts used in Keynesian economics, which are the Average Propensity to Consume (APC) and the Marginal Propensity to Consume (MPC). If a household's average propensity to save from disposable income is 5.4% as in the UK, then the average UK household has a APC of 94.6% for its disposable income. MPC is equally the reverse of MPS and is a ratio based on the change in consumption levels as the change in disposable income takes place. Consumption rates are typically high in modern, industrialized nations because of the proliferation of goods and services available, and the consumer base to societies that fuels job growth. As incomes increase, there is less of a need to spend on more goods and services, so consumption rates typically drop as a percentage of the whole.

Ad

You might also Like

Recommended

Discuss this Article

Post your comments

Post Anonymously

Login

username
password
forgot password?

Register

username
password
confirm
email