- Multiplier
- The multiplier is the ratio of the final change in real GDP to the initial change in spending that caused it.
- Marginal propensity to consume
- The marginal propensity to consume is the share of each extra pound of income that a person spends on consumption.
The three marginal propensities to withdraw
Can you name the three marginal propensities to withdraw?
Each is the share of an extra pound of income that leaks out of the flow of spending before the next round.
The marginal propensity to save, or MPS, is the share of each extra pound of income that a person saves rather than spends.
Can you think of an example?
A nurse's pay rises by £100 a month and she puts £10 more into savings. Her marginal propensity to save (MPS) is £10 ÷ £100 = 0.1.
The marginal propensity to tax, or MPT, is the share of each extra pound of income that is paid in tax.
Can you think of an example?
A worker earns an extra £100 and pays £20 of it in income tax and £8 in National Insurance. The MPT is £28 ÷ £100 = 0.28.
The marginal propensity to import, or MPM, is the share of each extra pound of income that is spent on goods and services made abroad.
Can you think of an example?
Out of an extra £100 of income, a household spends £15 more on imported clothes, wine and holidays abroad. Its MPM is £15 ÷ £100 = 0.15.