The functional relationship between saving and national income is known as Saving Function. It shows the savings of households during a given period of time at a given income level. In alternate terms, the savings function shows different savings levels at different income levels in an economy. Saving function is also known as Propensity to Save and is represented by S = f(Y). The two different types of Propensity to Save are Average Propensity to Save (APS) and Marginal Propensity to Save (MPS).
Average Propensity to Save (APS)
It is the ratio of saving to the corresponding income level. The formula to determine Average Propensity to Save (APS) is:
Average Propensity to Save can never be one or more than one; however, it can be zero. The point at which the APS is equal to zero is known as the break-even point. Also, the average propensity to save increases with the increase in income because the income proportion saved keeps on increasing.
Marginal Propensity to Save (MPS)
It is the ratio of the change in saving to the change in total income. The formula to determine Marginal Propensity to Save (MPS) is:
Marginal Propensity to Save varies between 0 and 1. If the whole additional income is saved then MPS will be equal to one, and if the whole additional income is consumed then MPS will be equal to zero.
Difference between Average Propensity to Save (APS) and Marginal Propensity to Save (MPS)
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