Use a consistent income measure and avoid double counting.
A marginal propensity relates a change in spending or withdrawal to a change in income. MPC concerns consumption, MPS saving, MPT tax and MPM imports. Specify the income measure and which consumption is counted before combining these ratios. In a simple two-sector model without taxes or imports, MPC + MPS = 1. In an open-economy example where every share uses the same extra national income, saving, net tax and imports together determine the share not respent on domestic output. Imports can already be part of total consumption, so do not add imports again as if they were a separate use on top of that total.
- Extra spending from extra income
- A marginal propensity is a share of an income change. Here MPC means marginal propensity to consume: extra consumption divided by extra income. This macroeconomic use of MPC differs from marginal private cost.
- Other marginal shares
- MPS is the marginal propensity to save, MPT to tax and MPM to import. They measure the extra saving, net tax or imports per extra income unit. Divide by the same income measure before combining them.
- Domestic respending
- Part of the extra income is saved, paid in net tax or spent on imports. The remainder buys domestic output in this simple allocation. Imports may already be inside total consumption, so do not add them twice.
Apply the idea
Consumption overlap
Total C can include imports. Separate domestic and imported consumption before adding or subtracting shares.
Disposable income
Disposable income is income after net taxes. In this example, the extra $100 leaves $90 disposable income. Dividing extra consumption by $90 gives a different ratio from dividing by $100; do not mix those denominators in one formula.
Not an average share
C/Y is an average propensity. MPC is the additional consumption divided by additional income; they need not equal one another.
| Use | Extra amount | Share of extra national income |
|---|---|---|
| Domestic consumption | 60 | 0.6 |
| Imported consumption | 10 | 0.1 |
| Saving | 20 | 0.2 |
| Net taxes | 10 | 0.1 |
| Total allocation | 100 | 1.0 |
Worked example: Allocate an extra $100 without counting imports twice
For each extra $100 of national income, households pay $10 extra net tax, save $20 and spend $70 on consumption: $60 domestically produced and $10 imported. All marginal shares here use the same $100 income denominator.
- Total MPC is 70/100 = 0.7. MPS is 20/100 = 0.2; MPT and MPM are each 10/100 = 0.1. Consumption $70, saving $20 and net tax $10 together use all $100.
- The $10 imports are inside the $70 consumption. Adding C + S + T + M would count them twice.
- Marginal withdrawals from domestic respending are 0.2 + 0.1 + 0.1 = 0.4. The domestic respending share is 0.6.
- A consumption propensity defined relative to disposable income would have a different denominator. Do not insert it into this national-income share calculation without adjustment.
Watch out for this
If total MPC is 0.7 and MPM is 0.1, imports must be added on top of total consumption when allocating income.
Imports may already be included in C. Here domestic consumption is 0.6 of extra income and imported consumption is 0.1, together giving total MPC 0.7.
Check your understanding
In the stated $100 allocation, what share is respent on domestic consumption?
- 0.7.
- 0.9.
- 0.6.