General
- Economics S5 SB File Uploaded 28/01/22, 14:53
- S5: Economics TG File Uploaded 11/08/22, 23:04
Unit 4: CONSUMPTION, SAVING, INVESTMENT AND MULTIPLIERS
Key unit competence:
Learners will be able to evaluate the impact of consumption, saving, and investment on national income.
My goals
By the end of this unit, I will be able to:
Distinguish between consumption, savings and investment and identify the factors that determine them.
Distinguish between average propensity to consume (APC) and average propensity to save APS, and marginal propensity to consume MPC and marginal propensity to save MPS.
Explain the limitations and the ways of improving investment levels in Rwanda.
Explain various types of multipliers and their effect on the national income.
Distinguish between the multiplier and accelerator principles.
Discuss the factors determining consumption,savings and investment levels.
Calculate and illustrate the consumption function.
Calculate APC, APS, MPC and MPS and explain how they influence national income levels.
Analyse the effect of multipliers on the national income.
Examine the limiting factors to the investment multiplier in Rwanda.
Compute and interpret different multipliers and adjust their consumption,savings and investment behaviours to increase the national income levels.
Show concern for promoting the investment multiplier in Rwanda.
4.1 Consumption theory
4.1.1 Meaning
Consumption in economic terms means using up of economic resources so that they are not available in the future. From the individual point of view, consumption refers to the expenditure on the purchase of goods for final use by the consumer.
Activity 1
Mr Rwanyamugabo of Ntunga Village in Rwamagana District uses 4kgs of sugar, 8kgs of meat, 25kgs of rice, 40 units of power, and 5 sacks of charcoal per month. While Ms Mukakabanda of the same village uses 6kgs of sugar, 4kgs of meat, 30kgs of rice and 50 units of power in a month.Using the case study above, respond to the following questions:
1. What economic term can you give the act of using those commodities by Mr Rwanyamugabo and Ms Mukakabanda?
2. What do you think are the factors that affect their consumption levels?
3. What effect does Mr Rwanyamugabo’s act of using 5 sacks of charcoal have on our environment?
4. What advice would you give to Mr Rwanyamugabo on the issue of using the 5 sacks of charcoal?
4.1.2 Consumption function
Consumption function is the relationship between current consumption and all the factors that influence consumer spending. Using the functional notation, we can express the consumption function as C= F (yd., w, cr, r, dg, ex, ygf) where;
C- Consumer spending,
yd. - personal disposable income,
w- Wealth, Cr- availability of credit,
r- Interest rates,
dg- stock of durable consumer goods,
ex- expectations
ygf- income distribution.
Consumption depends on many factors, thus, a change in any of these factors changes total consumption expenditure. However, it should be noted that consumption largely depends on income. Thus, consumption function can as well be defined as the relationship between the level of consumption and national income, i.e. C = C0+ bYd, where.
C is consumption and the dependent variable C0 is the consumption at zero income or autonomous consumption.
b is the marginal propensity to consume (MPC).
Yd. is the disposable income which is an independent variable.
When a household’s income is zero, it will still consume some minimal amount (via begging, borrowing, or drawing down savings). This level of consumption expenditure is autonomous because it persists even when there is no income. The higher a household’s income, the more it will want to consume. This part of consumption which depends upon income is induced. It varies with disposable income.
From Figure 1 above, as income rises, Marginal Propensity to Consume (MPC) declines (MPC is the proportion of additional income consumed). Rich individuals have a low MPC. This means that as their income increases, they consume a small proportion of the additional income. A straight-line consumption curve implies that as income rises, MPC is constant. It means that as income increases, one consumes a constant amount of the additional income. Nevertheless, this is not realistic.
4.1.3 Factors influencing the level of consumption
Consumption in any economy is generally determined by the many factors which include, among others, the following:
General Price level: The higher the price, the lower the demand and consumption; and the lower the price the higher the demand and consumption.
Liquidity preference: The higher the liquidity preference than investing money, the higher the consumption; and the lower the liquidity preference, the lower the consumption.
Disposable income: The higher the disposable income, the higher the consumption; and the lower the disposable income the lower the consumption.
Population size: The bigger the population size the higher the consumption; and the smaller the population the lower the consumption.
Nature of income distribution: When income is fairly distributed among the people, consumption will be higher than when income is in the hands of the few.
Availability of goods and services: When goods and services are available, consumption will be higher than when goods are not in plenty.
Degree of speculation: When people expect prices to go down in the future, consumption will be low at present but if prices are expected to be high in the future, consumption will be high at present.
Government policy of taxation: If the government overtaxes the people, they will be left with little income, hence low consumption.But when there are low taxes, income and consumption will be high.
Availability of credit facilities: Consumption will be high if there are credit and hire purchase facilities, but it will be low when these cannot be accessed.
- Marginal propensity to consume (MPC). The higher the MPC, the higher the consumption; and the lower the MPC, the lower the consumption.
4.1.4 Average propensity to consume (APC)
Activity 2
Higiro, a house helper in Nyamiyonga sector, Nyagatare District, used to earn 10,000 FRW per month from which he used 3,000 FRW for consumption and the remaining for saving. After one year, his earnings increased to 15,000 FRW per month. He decided to increase his consumption to 5000 FRW.Individually, using the case study above, work out and explain the following in your exercise books:
1. The fraction of income that is put to use.
2. Fraction of change in income that is put to use.
3. Suggest measures that can be put to increase Higiro’s fraction of income put to use.
4. What lesson have you learnt from Higiro’s behaviour?
Average Propensity to Consume (APC): This refers to the ratio of total consumption to the level of disposable income.
APC=C/Y.
The average propensity to consume declines as income increases. This is because as income increases, more is saved than consumed.
Marginal propensity to consume (MPC): This refers to the fraction of an individual’s additional income that is spent on consumption.
MPC= ∆C/∆Y
As the income rises, MPC falls. Rich people tend to consume a smaller proportion than the poor people. Normally, MPC is less than 1. It can be equal to one only when all the additional income is consumed.
4.1.5 Measures to raise the APC and MPC
Advertisement and propaganda which help to make the consumers familiar with the use of the products and attracts them to consume more;
Development of infrastructure for example, from producing centres to different parts of the country which encourages and enlarges markets for the product and this reduces prices due to reduced costs of transport, thus encouraging consumption;
Urbanisation which increases people’s consumption because of changes in conditions that attracts them to new articles and because of demonstration effect;• Increased wages leading to increased incomes which leads to increased purchasing power;
Increased government expenditure such as giving unemployment benefits/allowances, old age pension, etc. which help reduce uncertainties;
Offering cheap and easy credit facilities, thus as people are availed with loans, thus leading to increased consumption;
Income redistribution policies, i.e. this tends to increase consumption among the poor for example subsidising them through taxing the rich highly; and
Ensuring peace and security in all parts of the country to ensure efficient earning of income to encourage consumption.
4.2 Savings
4.2.1 Meaning
Savings refers to the proportion of disposable income which is kept for future use. The total income of an individual is a summation of his or her consumption and the savings. What remains after consumption of the goods and services that is kept for future use is what is known as savings. It takes forms of personal savings, cooperative savings, and compulsory savings such as RSSB, mituelle, among others.
Activity 3
Whatever we do with money, we need to manage it well. A planned programme of financial education can help give learners as young peoplethe confidence, skills and knowledge they need to manage their money, now and in the future.
On average, most learners receive pocket money and grants; own some resources at home; purchase items; open bank accounts etc. Thus the need for young people to be in control of their money needs to be stronger through availing the young with knowledge of the saving culture; how to manage money; becoming critical consumers; as well as managing risks and emotions associated with money. From the statement above:
1. What message is portrayed from the statement above?
2. Share with the whole class how you can manage your money once earned.
3. What factors may determine your saving levels in case you decided to?
4.2.2 Savings function
Savings function shows the relationship between the level of saving and disposable income. S=F(Y). Savings depend on the level of income whereby if the income increases, also the savings increase, other factors remaining constant. This is more so with the rich individuals as compared to the poor individuals.
Figure 2 above shows the savings curve. As income rises, marginal propensity to save (MPS) increases. Rich individuals have a high MPS. This means that as their incomes increase, they save a bigger proportion of their additional income.
4.2.3 Factors influencing the level of savings
Level of income: The higher the level of income, the higher the savings; and the lower the level of incomes, the lower the savings.
General price level: The higher the general price level, the lower the savings; and the lower the price level, the higher the saving.
Level of interest rates offered by banks: The higher the interest rate offered by banks on deposits, the higher the savings; and the lower the rates, the lower the savings.
Level of development of financial institutions: If many financial institutions are set up, savings will be higher than when financial institutions are undeveloped.
Political situation: Political stability encourages production, capital accumulation and savings but political instability discourages savings.
Marginal propensity to save (MPS): The higher the MPS, the higher the savings; and the lower the MPS, the lower the savings.
Existing stock of capital: The bigger the stock, the more the output and savings; and the smaller the capital stock, the lower the savings
MPC: The higher the MPC, the lower the saving, and the lower the MPC, the higher the savings.
Spending habits: The higher the spending habits, the lower the savings; and the lower the spending habits, the higher the savings.
4.2.4 Average propensity to save (APS)
Activity 4
Gahongayire, a student at G.S Musha 2015, received 50,000 FRW as a prize for performing well in S.3 national exams by her school administrators. She decided to buy some items and kept 10,000 FRW. After a week, her uncle Mr. Musonera having got amused by her performance, as an appreciation over her success, gave her some money and her income increased to 70,000 FRW. She decided to buy other wants and kept some more money thus increased her savings to 12,000 FRW.From this case study above, individually work out the following:
1. The fraction of Gahongayires’ income that is saved.
2. The fraction of her additional income that is saved.
3. What advice would you give to Gahongayire over managing her money?
4. How do you relate her APC and MPC?
Facts
Average propensity to save (APS) refers to the ratio of saving to the level of disposable income. The APS increases as the income of the individual increases.
Average propensity to save = APS = S/Y
4.2.5 Marginal propensity to save (MPS)
This refers to the fraction of an individual’s additional income that is spent on savings.
Marginal propensity to save = MPS= ∆S/∆Y
Relationship between MPC and MPS
MPC+ MPS=1
Y= C+S∆
Y= ∆C+∆S
∆Y/∆Y= ∆C/∆Y+∆S /∆Y
1=MPC+MPS
4.3 Investment theory
4.3.1 Meaning
Investment can be defined as the expenditure on capital goods with an aim of increasing production. There are mainly two classes of investments:
1. Fixed income investment: This involves investments in assets such as bonds, fixed deposits and preference shares, among others.
2. Variable income investments: This involves investments such as business ownership or property ownership. It should be noted also that expenditure on education and health is recognised as an investment in human capital.
Activity 5
Visit areas near your school. Through research, find out the following:
1. What are the different ways in which people can invest?
2. What factors determine investment levels in any given area?
3. Discuss the limitations to investment levels in Rwanda.
4. In your view, as students of economics, suggest measures that can be put in place to increase investment levels in Rwanda.
4.3.2 Factors that influence the level of investment in an economy
- General Price level: The higher the price, the higher the level of investments by the investors so as to enjoy the profits; and the lower the price, the lower the investment.
- Liquidity preference: The higher the liquidity preference than investing money, the lower the investment; and the lower the liquidity preference, the higher the investment.
- Disposable income: The higher the disposable income, the higher the level of investment; and the lower the income, the lower the investment.
- Level of demand: The higher the demand, the higher the level of investment; and the lower the demand for the goods and services, the lower the investment.
- Degree of speculation: When investors expect a boom, there will be high rates of investment than when they expect a slump or depression.
- Government policy of taxation and subsidisation: If the government overtaxes the investors, investments will be low but if the government subsidises people, investments will be high.
- Availability of credit facilities: Investment will be high if there are credit facilities accessed by people in form of loans but it will be low if these facilities are scarce.
- Political situation: Peace and stability encourages investment while insecurity discourages investment.
- Presence of capital: The presence of adequate capital resources increases the rate of investment and if capital is not enough, the rate of investment will be low.
- Level of entrepreneurs: Once the level of entrepreneurs is high, investments will be high; and once it is low, investment will be low.
4.3.3 Limitations of investment in Rwanda
Limited markets due to low incomes of the people and this limits the investors from putting up mega structures in terms of investments.
Underdeveloped infrastructure in some areas especially in rural areas limits the movement of potential investors, goods and services from areas of production to the markets.
Unfavourable investment climate in form of high taxes charged by the government to investors discourages them from investing. However, the trend changes where investors are given tax holidays depending on their capacities.
Limited capital: There is still a problem of limited capital whereby the local people do not have the necessary capital to invest. This leads to domination of foreign investors who carry and capital outflow through profit repatriation.
Political insecurity in some areas especially those surrounding Burundi and Congo:The instabilities in those countries cause panic in the Rwandan areas adjacent to those areas. Hence the investors fear to invest in such areas.
High population growth rate leads to increase in the dependence ratio among the families, leaving little disposable income for savings and investment.
High level of liquidity preference: Many people prefer to hold their money in cash or near cash form because of different motives such as precautionary and speculation, among others. This limits their capacity to invest.
Limited entrepreneural skills needed for inventing and innovating. Still the levels are low, meaning that there are no new things that may come on the market. The manpower needed to carry out the inventions is still low, hence leaving the levels of investments low.
Competition from outside countries that bring in their goods on the local market at a low price compared to the one at which home made goods are sold: This diverts people’s attention to buy cheap imported goods, leaving the local goods without market.
4.3.4 Ways of improving investments in Rwanda
Expanding the market through integration and signing treaties with other countries: This will help to solve the problem of lack of market for the home-made products and furthermore, it will bring in more foreign exchange
Developing more feeder roads in addition to the ones that already exist: These will help to link the rural inaccessible areas to the main roads and will ease the movement of goods and services, hence attracting more investors to those respective areas.
Availing a conducive investment climate: This is through reducing the rates of taxes that the beginner firms can pay. This has further been helped by the government setting up investment zones in the areas of Kabuga.
Availing capital: This can be through the commercial banks giving loans and credit at low rates of interests to attract the potential borrowers; furthermore, requesting for lower collateral security when seeking loans. This will attract many people to get soft loans that can be used for setting up investments.
Strengthening security in areas near countries with instabilities: This can be through working hand in hand with the respective governments or more deployments of security personnel in those areas. It will create confidence in the local people and the investors,hence increase capital and investments in those respective areas
Controlling the rate of population growth through a maximum number of children per family: This will reduce the rate of dependence in the families and it will leave the people with enough incomes that can be used for savings and investments in the long-run. Still, it will reduce the government expenditure on social services, leaving it with enough to invest in government-owned parastatals.
Encouraging people to reduce the rate of liquidity and carry out savings: This could be through increase in the interest rates offered on savings. In the long-run it will lead to capital accumulation which can further lead to investments.
Improving entrepreneur skills needed for inventing and innovating. This can be through on-job training and through seminars and workshops. Furthermore, the government has embarked on competence based form of education which helps learners to carry out research and critically think. This form will help students develop their own ideas, leading to constant innovation and inventions.
Competition can be reduced through economic integration and specialisation where countries within the same region produce different goods and sell to others. Furthermore, it can be reduced through producing good quality output through research. The government can also carry out protection to shield domestic industries from competition.
- Subsidisation policy by the government can help to reduce the problem of inadequate capital. At the same time, the goods produced will be sold at a lower price since the cost of production is also low; meaning that they may be sold at a price lower than the foreign goods, hence increasing their demand.
4.4 Multiplier
4.4.1 Meaning
Assuming that the economy is not in conditions of full employment, any increase in investment will not only have an initial effect upon output and income of the same amount, but will also have additional subsequent effects upon output and income. The final increase in income will be larger than the initial increase in investment expenditure. This is the process of the multiplier. Multiplier, therefore, refers to the number of times initial change in expenditure multiplies itself to give a final change in income. The multiplier can be shown as: Multiplier (M) = ∆Y/∆E.
The size of the multiplier is determined by the proportion of extra income going on extra consumption, i.e. MPC. The higher the MPC, the higher the multiplier. The multiplier process reflects the fact that extra spending becomes extra incomes, which in turn becomes partly extra spending. The MPC determines the increase in national income. The formula for determining the actual size of the multiplier is:
Activity 6
One of the reasons why changes in the amount of capital investments are of much significance in an economy is because any sudden change in the level of investment will have a magnified effect on total spending.
Any expenditure will always have a change in the total incomes. Thus, an initial change in investment has great effect on the final change in total spending in the economy.From the statement above, identify and explain the following.
1. What do we call the process through which investment expenditure brings about change in national income?
2. Identify any other forms of expenditures that may bring about a change in national income.
3. What do you think are the limitations to investment multiplier in Rwanda?
Example 1
Given that MPC = 0.4, calculate the multiplier magnitude.
Solution;
Example 2
If the initial increase in capital investment was 20 million FRW and this brought a final increase in total expenditure of 100 million FRW, the multiplier would be:
Multiplier (M) = ∆Y/∆E
100 million/20 million = 5
Note: It is important to point out that no increase in expenditure of any type (investment, consumption, government or exports) will increase the national output and income if the economy is already at full employment. For an economy already at full capacity, where no further increase in output can take place, any further increase in spending can only raise price so that although national income would rise in “money” terms, there would be no increase in “real” terms. Thus, in examining the effect of increased investment on national income, we must make it clear that there must be unemployed resources for national income to rise (excess capacity).
4.4.2 Types of multiplier
Multipliers can be classified according to the form of sectors that spend. These sectors are: government, firms, and foreign sector. The types of multipliers are seen below.
Government multiplier: It refers to the number of times initial government expenditure multiplies itself to give a final change in income, i.e. M = ∆Y/∆E
Investment multiplier: It refers to the number of times initial investment expenditure multiplies itself to give a final change in income. M = ∆Y/∆I or 1/MPS or 1/1-MPC
Consumption multiplier: It refers to the number of times initial change in consumption expenditure multiplies itself to give a final change in income. M = ∆Y/∆C
Export multiplier: It refers to the number of times a given change in export earnings multiplies itself to give a final change in income.M = ∆Y/∆X
Employment multiplier: It refers to the number of times a given change in employment multiplies itself to give a final change in income. M = ∆Y/∆Employment
Tax multiplier: It refers to the number of times a given change in tax expenditure multiplies itself to give a final level of income. M= ∆Y/∆Tax expenditure
Income multiplier: this is the number of times a change in total expenditure multiplies itself to give a final change in income.This explains the process by which a change in total expenditure (E=C+I+G+X-M) leads to a change in income.
4.4.3 Calculations
Activity 7
Work out and interpret the following calculations:
1. Given that MPS is 0.2, find the MPC and determine the magnitudeof the multiplier. Interpret your answer.
2. Given that the marginal propensity to consume is 0.75, calculate the size of multiplier. Interpret your answer.
3. Given that the current level of GDP is 300million FRW. The increase in national investment expenditure is 50 million FRW and the marginal propensity to save is 0.2. Calculate the final level of income.
Example 1
Given that as a result of increase in investment expenditure from 20 million FRW to 60 million FRW, national income increased from 3000 million FRW to 7000 million FRW. What is the investment multiplier?
Solution
Investment multiplier =∆Y/∆I
∆Y = 7000million FRW-3000million FRW = 4000million FRW
∆I = 60 million FRW-20 million FRW = 40 million FRW
Thus; I.M = 4000million/40 million = 100
This means that the initial investment expenditure has multiplied itself 100 times to give a final change in national income.
Note: Multiplier has no units; it is simply a number of times.
Example 2
Given that the final change in investment from 3 million FRW to 8 million FRW led to an increase in income from 200 million FRW to 400 million FRW, calculate the investment multiplier.
Solution
Investment multiplier = ∆Y/∆I
∆Y = 400million-200 million = 200 million FRW
∆I = 8 million- 3 million = 5million FRWThus,
I.M = 200 million/5million FRW = 4
Therefore, the investment multiplier = 4.
This means that the initial investment expenditure of 3million FRW has multiplied itself 3 times to bring about a final change in income of 400 million FRW.
Exercise
1. Given that government expenditure in an economy is increased by 100 million, where the MPC is 0.8. Find the final change in national income.
2. Given that MPS is 0.2, find the MPC and determine the magnitude of the multiplier.
3. Given MPC is 70%, find MPS.4.
(i) Calculate the magnitude of the multiplier where MPC is 40%.
(ii) Given that the multiplier in an economy is 2 and the final level of income is 100 million. Find the MPS and change in expenditure.
4.4.4 Factors limiting the operation of the investment multiplier in Rwanda
Activity 8
Explain the factors that hinder the operation of investment multiplier in Rwanda.
Facts
Of all the multipliers, the investment multiplier is said to have a bigger impact on the level of a country’s national income. The investment multiplier in Rwanda has been limited by several factors among which include the following:
Limited markets due to low incomes of the people and this limits the investors from putting up mega structures in terms of investments.
Underdeveloped infrastructure in some areas especially in rural areas limits the movement of potential investors, goods and services from areas of production to the markets.
Unfavourable investment climate in form of high taxes charged by the governments to investors discourage them from investing. However, the trend changes where investors are given tax holidays depending on their capacities.
Limited capital: There is still a problem of limited capital whereby the local people do not have the necessary capital to invest. This leads to domination of foreign investors who carry out capital outflow through profit repatriation.
Political insecurity in some areas especially those surrounding Burundi and Congo. The instabilities in those countries cause panic in the Rwandan areas adjacent to those areas. Hence the investors fear to invest in such areas.
High population growth rate leads to increase in the dependence ratio among the families leaving little disposable income for savings, and investment.
High level of liquidity preference. Many people prefer to hold their money in cash or near cash form because of different motives such as precautionary, speculation among others. This limits their capacity to invest.
Limited entrepreneural skills needed for inventing and innovating: Still, the levels are low, meaning that there are no new things that may come on the market. The manpower needed to carry out the inventions is still low, hence leaving the levels of investment low.
4.4.5 Accelerator principle
Activity 9
From the knowledge of multiplier principle in activity 6, explain the following:
1. What is the relationship between consumption and the changes in national income?
2. The accelerator principle.
3. Work out and interpret the following:
(i) As a result of an increase in milk consumption in the country, from 80,000 to100,000 liters per week, investment in the diary sector increased by 200 million FRW. Given the price of milk as 300 FRW per litre, calculate the accelerator magnitude.
(ii) The consumption expenditure increased from 30 million to 70 million FRW, which resulted into an increase in investment from 500 million to 800 million FRW. Estimate the accelerator magnitude.
Facts
As investment leads to a change in income directly, change in consumption leads to a change in income indirectly by inducing investment which also leads to a change in income.
The accelerator principle is the number of times the original change in consumption multiplies itself to give a final change in investment.
For instance, if the consumption of beans increases from 15 kg to 22 kg and increase in investment moves from 100 FRW to 150 FRW, the accelerator principle would be:
Unit assessment
1. Analyse the factors that may determine the consumption rates in Rwanda.
2. (i) Why do you think there are low levels of savings in Rwanda?
(ii)What should the government of Rwanda do to encourage the saving culture in Rwanda?
3. The government has of late encouraged location of many industries in Masoro, what other measures have been put in place to improve investment rates in Rwanda?
4.5 Glossary
Accelerator: The number of times a given change in consumption multiplies itself to give a final change in investment. Accelerator = ∆I/∆C
Actual consumption:The consumption of the flow of services that are provided by the commodities that are purchased by households.
Actual investment: The amount of investment goods which are required in a given period of time including all the desired or undesired accumulated inventories.
Autonomous consumption: The consumption at zero income i.e consumption that is independent of the level of income and output.
Autonomous Investment: Investment that is independent of the level of income and output.
Average propensity to consume (APC): The ratio of consumption to the level of national income. APC = C/Y
Average propensity to save (APS): The ratio of saving to the level of national income. APC = S/Y
Consumption: The expenditure on the purchase of goods for final use by the consumer.
Desired investment: The quantity of investment goods acquired in a given time, including desired accumulated inventories, but excluding the undesired accumulated inventories.
Fixed investment: Investment in plants and equipment.
Forced savings: A situation in which prices have risen faster than income so that fixed income earners reduce their level of consumption. Or it is a situation where current consumption is sacrificed in greater proportion so as to favour another section of society/community (usually government).
Gross fixed investment: The amount of investment capital that is invested into the country minus depreciation.
Induced consumption: Part of consumption which depends upon income. It varies with disposable income.
Induced investment: Changes in investment brought about by changes in output and income.
Inventories: A stock of resources in form of raw materials, semi-finished and finished goods held by the firm at the end of any given business interval.
Investment: The process of devoting part of a person’s income to production of capital goods OR it refers to the process of creation of capital stock.
Investment demand function: A negative relationship between the quantity of investment per period and rate, holding other factors constant.
Marginal efficiency of investment: The relationship between desired investments and the rate of interest, assuming all other things equal.
Marginal propensity to consume (MPC): The fraction of an individual’s additional income that is spent on consumption. MPC = ∆C/∆Y
Marginal propensity to save (MPS): The fraction of an individual’s additional income that is spent on consumption. MPS = ∆S/∆Y
Multiplier: The number of times initial change in expenditure multiplies itself to give a final change in income. M = ∆Y/∆E
Savings: The proportion of income which is kept for future use. It takes forms of personal savings, co-operate savings, compulsory savings, among others.
Saving income: Incomes which households do not pass back to firms through consumption expenditure.
Savings gap: The difference between the amount of money resources required to attain increased investment and actual investment available
Unit summary
Consumption
• Meaning
• Consumption function
• Determining factors
• Average propensity to consume (APC)
• Measures to raise APC
• Marginal propensity to consume
Saving
• Meaning
• Determining factors
• Average propensity to save (APS)
• Marginal propensity to save (APS)Investment
• Meaning
• Determining factors
• Limitations of investment
• Ways of improving investment levels in Rwanda
Multiplier
• Meaning
• Types of multipliers
• Calculations and their interpretations
• Limitations of the investment multiplier in Rwanda
Accelerator
• Meaning
• Calculations