Principles of Macroeconomics

Posted: October 17th, 2013

Principles of Macroeconomics

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Principles of Macroeconomics

Marginal propensity to consume (MPC) refers to the additional consumption, which results from additional income. Marginal propensity to save (MPS) is the additional saving realized from additional income. It is the additional saving that is realized when a person earns extra income. Both MPC and MPC result from additional disposable income realized by the consumer (Sexton, 2010). MPC and MPS are inversely related. The higher the MPC, the lower the MPS. An individual who decides to spend the extra income realized will not have enough to save. On the other hand, individuals who decide to save the extra income will not have enough money to spend. Some of the factors that determine how people consume or save money include the amount of income that a person has, expected future income, future prices, taxation, availability of the products, and the size of the household debt. The GDP measures the total value of the final goods and services that are produced in a country within a specified period. The more the consumer spends the higher the GDP. The GDP decreases when the MPS increases, because less money is spent. An increase in consumer spending will have a multiplied effect on the GDP, meaning that GDP increases at a higher rate than the initial spending does (Delaney et al., 2011).

References:

Delaney, R. P., Delaney, R. P., & Whittington, R. O. (2011). Wiley CPA exam review 2012, business environment and concepts. Hoboken, NJ: John Wiley & Sons

Sexton, L. R. (2010). Exploring macroeconomics. New York, NY: Cengage Learning