The marginal propensity to import (MPM) is the fractional change in import expenditure that occurs with a change in disposable income (income after taxes and transfers). For example, if a household earns one extra dollar of disposable income, and the marginal propensity to import is 0.2, then the household will spend 20 cents of that dollar on imported goods and services.
Mathematically, the marginal propensity to import (MPM) function is expressed as the derivative of the import (I) function with respect to disposable income (Y).
The derivative of a function of a real variable measures the sensitivity to change of the function value with respect to a change in its argument. Derivatives are a fundamental tool of calculus. For example, the derivative of the position of a moving object with respect to time is the object's velocity: this measures how quickly the position of the object changes when time advances.
In other words, the marginal propensity to import is measured as the ratio of the change in imports to the change in income, thus giving us a figure between 0 and 1.
The UK government assumes that UK citizens have a high marginal propensity to import and thus will use a decrease in disposable income as a tool to control the current account on the balance of payments.
The marginal propensity to save (MPS) is the fraction of an increase in income that is not spent on an increase in consumption. That is, the marginal propensity to save is the proportion of each additional dollar of household income that is used for saving. It is the slope of the line plotting saving against income. For example, if a household earns one extra dollar, and the marginal propensity to save is 0.35, then of that dollar, the household will spend 65 cents and save 35 cents. Likewise, it is the fractional decrease in saving that results from a decrease in income.
In economics, the marginal propensity to consume (MPC) is a metric that quantifies induced consumption, the concept that the increase in personal consumer spending (consumption) occurs with an increase in disposable income. The proportion of disposable income which individuals spend on consumption is known as propensity to consume. MPC is the proportion of additional income that an individual consumes. For example, if a household earns one extra dollar of disposable income, and the marginal propensity to consume is 0.65, then of that dollar, the household will spend 65 cents and save 35 cents. Obviously, the household cannot spend more than the extra dollar.
In macroeconomics, a multiplier is a factor of proportionality that measures how much an endogenous variable changes in response to a change in some exogenous variable.
In economics, the Gini coefficient, sometimes called Gini index, or Gini ratio, is a measure of statistical dispersion intended to represent the income or wealth distribution of a nation's residents, and is the most commonly used measurement of inequality. It was developed by the Italian statistician and sociologist Corrado Gini and published in his 1912 paper Variability and Mutability.
Disposable income is total personal income minus personal current taxes. In national accounts definitions, personal income minus personal current taxes equals disposable personal income. Subtracting personal outlays yields personal savings, hence the income left after paying away all the taxes is referred to as disposable income.
In economics, the fiscal multiplier is the ratio of a change in national income to the change in government spending that causes it. More generally, the exogenous spending multiplier is the ratio of a change in national income to any autonomous change in spending that causes it. When this multiplier exceeds one, the enhanced effect on national income is called the multiplier effect. The mechanism that can give rise to a multiplier effect is that an initial incremental amount of spending can lead to increased income and hence increased consumption spending, increasing income further and hence further increasing consumption, etc., resulting in an overall increase in national income greater than the initial incremental amount of spending. In other words, an initial change in aggregate demand may cause a change in aggregate output that is a multiple of the initial change.
Intertemporal choice is the process by which people make decisions about what and how much to do at various points in time, when choices at one time influence the possibilities available at other points in time. These choices are influenced by the relative value people assign to two or more payoffs at different points in time. Most choices require decision-makers to trade off costs and benefits at different points in time. These decisions may be about saving, work effort, education, nutrition, exercise, health care and so forth.
The General Theory of Employment, Interest and Money of 1936 is the last and most important book by the English economist John Maynard Keynes. It created a profound shift in economic thought, giving macroeconomics a central place in economic theory and contributing much of its terminology – the "Keynesian Revolution". It had equally powerful consequences in economic policy, being interpreted as providing theoretical support for government spending in general, and for budgetary deficits, monetary intervention and counter-cyclical policies in particular. It is pervaded with an air of mistrust for the rationality of free-market decision making.
In macroeconomics, Aggregate Demand (AD) or Domestic Final Demand (DFD) is the total demand for final goods and services in an economy at a given time. It is often called effective demand, though at other times this term is distinguished. This is the demand for the gross domestic product of a country. It specifies the amounts of goods and services that will be purchased at all possible price levels.
In economics, the consumption function describes a relationship between consumption and disposable income. The concept is believed to have been introduced into macroeconomics by John Maynard Keynes in 1936, who used it to develop the notion of a government spending multiplier.
In economics, a country's national saving is the sum of private and public saving. It equals a nation's income minus consumption and the government’s taxes levied.
In macroeconomics, automatic stabilizers are features of the structure of modern government budgets, particularly income taxes and welfare spending, that act to dampen fluctuations in real GDP.
Autonomous consumption is the consumption expenditure that occurs when income levels are zero. Such consumption is considered autonomous of income only when expenditure on these consumables does not vary with changes in income; generally, it may be required to fund necessities and debt obligations. If income levels are actually zero, this consumption counts as dissaving, because it is financed by borrowing or using up savings. Autonomous consumption contrasts with induced consumption, in that it does not systematically fluctuate with income, whereas induced consumption does. The two are related, for all households, through the consumption function:
Induced consumption is the portion of consumption that varies with disposable income. When a change in disposable income “induces” a change in consumption on goods and services, then that changed consumption is called “induced consumption”. In contrast, expenditures for autonomous consumption do not vary with income. For instance, expenditure on a consumable that is considered a normal good would be considered to be induced.
In economics, the life-cycle hypothesis (LCH) is a model that strives to explain the consumption patterns of individuals.
The permanent income hypothesis (PIH) is an economic theory attempting to describe how agents spread consumption over their lifetimes. First developed by Milton Friedman, it supposes that a person's consumption at a point in time is determined not just by their current income but also by their expected income in future years—their "permanent income". In its simplest form, the hypothesis states that changes in permanent income, rather than changes in temporary income, are what drive the changes in a consumer's consumption patterns. Its predictions of consumption smoothing, where people spread out transitory changes in income over time, depart from the traditional Keynesian emphasis on the marginal propensity to consume. It has had a profound effect on the study of consumer behavior, and provides an explanation for some of the failures of Keynesian demand management techniques.
The complex multiplier is the multiplier principle in Keynesian economics. The simplistic multiplier that is the reciprocal of the marginal propensity to save is a special case used for illustrative purposes only. The multiplier applies to any change in autonomous expenditure, in other words, an externally induced change in consumption, investment, government expenditure or net exports. Each of these operates to increase or reduce the equilibrium level of income in the economy.
John Maynard Keynes, in 1936, proposed the psychological law in his work: The General Theory of Employment, Interest and Money. The law basically captures and understands the essential spending behavior of the household sector. Keynes uses the term 'psychology' in his law but the law is just a basic observation of consumer behavior and consumption. It states the relationship between income and consumption pattern, such as the changes in the aggregate income of the economy and the expenditures on consumption by the household sector. The law is thus, a macro framework of the operation of the economy as it applies more to the aggregate economy than to the individuals. Therefore, in Keynesian macroeconomics, the fundamental psychological law underlying the consumption function states that marginal propensity to consume (MPC) and marginal propensity to save (MPS) are greater than zero (0) but less than one (1): MPC + MPS = 1; e.g., whenever national income rises by $1 part of this will be consumed and part of this will be saved
Consumption smoothing is the economic concept used to express the desire of people to have a stable path of consumption. People desire to translate their consumption from periods of high income to periods of low income to obtain more stability and predictability. There exists many states of the world, which means there are many possible outcomes that can occur throughout an individual's life. Therefore, to reduce the uncertainty that occurs, people choose to give up some consumption today to prevent against an adverse outcome in the future.
The Keynesian cross diagram is a formulation of the central ideas in Keynes' General Theory. It first appeared as a central component of macroeconomic theory as it was taught by Samuelson in his textbook, Economics: An Introductory Analysis. The Keynesian Cross plots aggregate income and planned total spending or aggregate expenditure.
In economics, the absolute income hypothesis concerns how a consumer divides his disposable income between consumption and saving. It is part of the theory of consumption proposed by English economist John Maynard Keynes (1883–1946). The hypothesis was refined extensively during the 1960s and 1970s, notably by American economist James Tobin (1918–2002).
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