How to calculate marginal propensity to consume

Written by steve wozniak
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The Marginal Propensity to Consume (MPC) is a calculation used by economists to express the amount of additional income that consumers are actually spending and funnelling back into the general economy. It is the inverse of the Marginal Propensity to Save.

Skill level:
Easy

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Instructions

  1. 1

    Determine the change in disposable income from one year to the next. For example, if disposable income among consumers for the previous year was £1.5 trillion, and in the current year is £1.8 trillion, then the change in disposable income is £0.3 trillion, or £260 billion.

  2. 2

    Determine the change in consumption from one year to the next. For example, if consumption in the household sector jumped from £1.2 trillion to £1.4 trillion, then the change for the year would be £0.2 trillion, or £195 billion.

  3. 3

    Divide the change in consumption by the change in disposable income. In the case of the figures mentioned earlier, we would have to divide £195 billion by £260 billion, giving us an MPC of 0.75.

  4. 4

    Check the figure against the Marginal Propensity to Save, if available. The sum of the MPC and MPS should always equal 1. For example, if the MPS is 0.25, then the MPC must be 0.75.

Tips and warnings

  • Some economists will differentiate between an MPC on temporary income and an MPC on permanent income. If an increase in income is more permanent, consumers will be more influenced to spend. Temporary income increases usually spur more saving.
  • The MPC can be more than 1 if too much money is borrowed to finance expenditures.

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