How to Calculate Multipliers With MPC

••• utah778/iStock/GettyImages

In economics, the concepts of ​marginal propensity to consume​ (MPC) and ​marginal propensity to save​ (MPS) describe consumer behavior with respect to their income. MPC is the ratio of the change in the amount a person spends to the change in that person's overall income, whereas MPS is the same ratio with savings as the metric of interest. Because people either spend or do not spend (that is, save) whatever income they earn, the sum of MPC and MPS is always equal to 1.

TL;DR (Too Long; Didn't Read)

A higher MPC results in a higher multiplier and thus a greater increase in GDP. In short, more spending results in more national income.

The Investment Multiplier

This relationship gives rise to something called the ​investment multiplier​. This is predicated on the idea of a positive-feedback loop, wherein an increase in average consumer spending ultimately leads to an increase in national income greater than the initial amount spent at a given MPC. The relationship is:

\text{ multiplier}=\frac{1}{1-MPC}

This relationship can be used to calculate how much a nation's gross domestic product (GDP) will increase over time at a given MPC, assuming all other GDP factors remain constant.

For example, assume a nation's GDP is $250 million and its MPC is 0.80. What will the new GDP be if total spending rises by $10 million?

Step 1: Calculate the Multiplier

In this case,


Step 2: Calculate the Increase in Spending

Since the initial increase in spending is $10 million and the multiplier is 5, this is simply:

(5)(\$10\text{ million})=\$50\text{ million}

Step 3: Add the Increase to the Initial GDP

Since the initial GDP of this nation is given as $250 million, the answer is:

\$250\text{ million} + \$50\text{ million} = \$300\text{ million}

Related Articles

How to Calculate Average Revenue
How to Calculate Cost Increase by a Percent
How to Calculate Price Per Share of Common Stock
How to Calculate Daily Compounding Interest
How to Calculate Rate of Decrease
How to Figure the Percentage of Change
How to Calculate Percent of Return
How to Calculate Percentage Decrease on a Calculator
How to Calculate Percentage Reduction
How to Calculate Yearly Averages
Good News! The New House Bill Would Boost Funding for...
How to Calculate 20% Off
Russian Famine of 1891
Ways to Persuade People to Save Energy
How to Calculate a 20 Percent Markup
How is Calculus Used in Economics?
How to Calculate Running Average
How to Add Percentage to a Price
How to Calculate Percentage of Increase
How to Make a Difference With Global Warming

Dont Go!

We Have More Great Sciencing Articles!