How to Calculate MPC in Macroeconomics
The marginal propensity to consume (MPC) is the name given in macroeconomics to the study of people’s consumption rates when there is a shift in income. If nothing else changed and people were offered a raise in pay, the MPC measures what proportion of this raise people spend on the consumption of goods and services as opposed to saving this money.
In this OneHowTo article we will explain How To Calculate MPC In Macroeconomics with a practical example and the use of this tool in daily life.
Marginal propensity to consume (MPC) equation
The marginal propensity to consume (MPC) is calculated by dividing the change in consumption by the change in income.
The formula is change in consumption (ΔC) / change in income (ΔY).
To do so you have to calculate first the change in both consumption and income. For the change in consumption, perform total/current consumption minus normal consumption. For the change in income, perform total/current income minus normal consumption.
To help you learn this formula let’s look at an example. If you are rewarded by your boss for completing a difficult project with a 200 euros bonus on your paycheck this month, it means that you have 200 euros more of income than last month.
Now, if you decide to spend 50 euros of this marginal increase on a nice dinner to celebrate, this means that your marginal propensity to consume (MPC) would be 0.25 (50 euros divided by 200 euros). Your marginal propensity to save (MPS) would be 0.75 (150 euro divided by 200 euros).
If you decided to save all your money your MPC would be 0. Your MPS would be 1.
Use and Importance
Proponents of Keynes macroeconomic theory, argue that an increase in income as a result of an increase in production will raise people’s consumption levels. The more that people are paid the more that they tend to consume. This is shown by a rising curve on a graph. It works in a cycle given that this raise in consumption will fuel more production and more income.
Economists use MPC to track consumption rates based on household income. Given the varying income levels across countries, experts use this tool to measure how wealth impacts the level of expenditure in comparison to the savings of many families.
You can learn more on Economic subjects in OneHowTo, such as the Differences between Microeconomics and Macroeconomics.
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