How to Calculate MPC and MPS
MPC = change in consumption ÷ change in income; MPS = change in saving ÷ change in income. MPC + MPS always equals 1.
Formula
MPC = ΔC ÷ ΔY | MPS = ΔS ÷ ΔY | MPC + MPS = 1
Steps
- 1Find the change in income. ΔY — the extra disposable income households receive.
- 2Find the change in consumption. ΔC — how much of that extra income is spent. MPC = ΔC ÷ ΔY.
- 3Find the change in saving. ΔS = ΔY − ΔC, so MPS = ΔS ÷ ΔY. You can also just compute MPS = 1 − MPC.
- 4Check they sum to 1. Every extra dollar is either spent or saved, so MPC + MPS = 1 always.
Worked example
Income rises by $500 and consumption rises by $400: MPC = 400 ÷ 500 = 0.8 and MPS = 100 ÷ 500 = 0.2 (they sum to 1). That MPS gives a spending multiplier of 1 ÷ 0.2 = 5.
Frequently asked questions
Why do MPC and MPS have to add to 1?
Each extra dollar of disposable income can only go two places — consumption or saving — so the fractions spent and saved must sum to exactly 1.
How do MPC and MPS connect to the multipliers?
Spending multiplier = 1 ÷ MPS and tax multiplier = −MPC ÷ MPS. A higher MPC means more re-spending each round and therefore bigger multipliers.
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