Average propensity to save definition
APS is defined as the percentage of income which is saved rather than spent
What is the average propensity to save?
The average propensity to save (APS) refers to the amount of money saved by households as a portion of their total income. The measure depends on the level of income, with low-income households usually having lower APS.
Economies with higher APS can easily overcome an economic downturn – characterised by low-income levels and potential unemployment – because households have savings.
Conversely, economies with low APS are generally considered to have lower unemployment, because households and individuals have higher spending levels. They increase the demand for goods and services, which consequently increases business activities. High consumption supports economic growth and investment.
Average propensity to save explained
As the average propensity to save identifies the portion of income which is not spent, it is calculated by dividing the total savings by total income. The value obtained for APS cannot be higher than 1 because it is a portion of the income earned. Also, it cannot be equal to 1 because households will always use a portion of their income to buy at least the most basic, essential goods and services.
APS = Total savings / Total income
The average propensity to save indicates the amount of money available in the economy for financing business activities. Households are economic entities with surplus levels of funds, while businesses are entities in need of funds. A high average propensity to consume increases the level of capital available in the economy. Financial intermediaries allocate this capital to businesses and other entities in the form of loans or investments.
APS is used as an indicator when analysing the composition of the economy as well as its future economic outlook. Economies with low APS could be faced with an elderly population, a financially irresponsible population, or a population focused on consumption. Each of these possibilities has different effects on economic stability and development.
Factors affecting the average propensity to save
Demographic factors include the age group of households and individuals in the economy. A younger population with saving habits increases the savings level. They save a portion of their income for retirement.
On the other hand, an elderly population has passed its peak income generation and wealth accumulation periods. Consequently, the elderly population will start “dissaving” – using the money saved to maintain a certain level of consumption.
Inflation decreases the value of money, and it also increases the cost of living. Higher inflation can stimulate increased spending today because prices will be higher tomorrow. Households are not stimulated to save today, because their money will buy fewer goods and services tomorrow.
Higher interest rates increase APS because households and individuals save in order to make a higher income. In general, periods with rising interest rates can be characterised with higher APS, while periods with low interest rates have lower APS. Nevertheless, this should not be taken for granted because other economic forces can also affect the willingness to save.