In macroeconomic theory, the marginal propensity to consume is defined as the proportion of the aggregate change in pay that a person spends on consumer goods. It is calculated by dividing the change of consumption by the change of income. The equation looks like this:
Change in consumption / change...
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In macroeconomic theory, the marginal propensity to consume is defined as the proportion of the aggregate change in pay that a person spends on consumer goods. It is calculated by dividing the change of consumption by the change of income. The equation looks like this:
Change in consumption / change in income = marginal propensity to consume
1.) If the change in consumption is from 7 to 6, delta C is 1.
If the change in income is from 5 to 3, delta Y is 2.
Delta C / Delta Y = ½.
The marginal propensity to consume is therefore 0.5.
Disposable personal income (DPI) is defined as the amount of income households have available after income taxes have been removed. It is the amount of cash households have to spend on consumer goods. Savings is calculated by subtracting the amount of DPI from the amount of goods consumed (C).
2.) Thus, if the DPI is 10, but the consumption is 12, this means that a household is spending more than it receives in income.
DPI – C = S; 10 – 12 = -2.
This means that this particular household has negative 2 units of savings available to them, placing it in a negative income range.