What is average propensity to consume (APC)?
– APC is the share of income that is spent rather than saved. Mathematically: APC = Consumption ÷ Income.
– Consumption here means total spending on goods and services. Income generally means disposable income (income after taxes), which gives a more realistic measure of what people can actually spend or save.
Why APC matters (brief)
– A higher APC implies more of income is being spent, which tends to boost demand, production, and employment in the short run.
– A lower APC means a larger share of income is being saved, which can reduce current demand but may support future investment.
– Economists use APC to compare spending behavior across groups (low-, middle-, or high-income households) and over time.
Key definitions (first use)
– Disposable income: income available to households after taxes.
– Average propensity to save (APS): the share of income that is saved; APS = Savings ÷ Income. APC + APS = 1.
– Marginal propensity to consume (MPC): the change in consumption divided by the change in income; MPC = ΔConsumption ÷ ΔIncome.
How to calculate APC — step-by-step
1. Select the entity and time period (individual, household, income class, or whole country; e.g., one year).
2. Use disposable income for the chosen period (income after taxes and transfers).
3. Measure total consumption (total spending on goods and services) for the same period.
4. Compute APC = Consumption ÷ Disposable income.
5. Optional: compute APS = 1 − APC (or Savings ÷ Disposable income).
6. If evaluating responsiveness to income changes, compute MPC = ΔConsumption ÷ ΔIncome.
Short checklist before you compute
– [ ] Have you chosen a consistent entity and time frame?
– [ ] Are you using disposable (after-tax) income?
– [ ] Are consumption and income measured in the same units and period?
– [ ] Are one-off items (large transfers, tax rebates) accounted for or flagged?
– [ ] Are you comparing like with like (e.g., country to country or same country over time)?
Worked numeric example
Scenario A (levels)
– Disposable income = $500 billion
– Total savings = $300 billion
– Then consumption = Income − Savings = $500b − $300b = $200 billion
– APS = Savings ÷ Income = $300b ÷ $500b = 0.60 (60%)
– APC = Consumption ÷ Income = $200b ÷ $500b = 0.40 (40%)
Scenario B (changes to compute MPC)
– New disposable income = $700 billion
– New consumption = $375 billion
– New APC = $375b ÷ $700b ≈ 0.5357 (≈53.57%)
– Change in consumption = $375b − $200b = $175 billion
– Change in income = $700b − $500b = $200 billion
– MPC = ΔConsumption ÷ ΔIncome = $175b ÷ $200b = 0.875 (87.5%)
Interpretation: of each additional dollar of income in this interval, about $0.875 was spent.
Practical notes and special considerations
– Data source matters: national accounts measure consumption and income differently from household surveys. Use consistent sources for comparisons.
– Use disposable income whenever possible; pre-tax income overstates what people can actually spend.
– Short-run spikes or drops in APC can reflect temporary transfers (stimulus checks), credit usage, or emergency spending.
– Low-income households tend to have higher APC (they must spend more of their income on necessities). High-income households usually save a larger share.
– APC is bounded between 0 and 1 when expressed as a fraction (0% to 100% when expressed as a percent).
– Comparing APC across countries requires attention to differences in social transfers, taxes, and service coverage.
Where to find reliable data
– National statistical agencies or central banks (for country-level income, consumption, savings).
– Bureau of Economic Analysis (U.S.) for personal saving rates and other household aggregates.
– Reputable economic education sites for definitions and examples.
Selected sources
– Investopedia — Average Propensity to Consume (APC): https://www.investopedia.com/terms/a/average-propensity-to-consume.asp
– U.S. Bureau of Economic Analysis — Personal Saving Rate (data and releases): https://www.bea.gov/data/income-saving/personal-saving-rate
– Corporate Finance Institute — Average Propensity to Consume (APC): https://corporatefinanceinstitute.com/resources/economics/average-propensity-to-consume-apc/
– Corporate Finance Institute — Marginal Propensity to Consume (MPC): https://corporatefinanceinstitute.com/resources/economics/marginal-propensity-to-consume-mpc/
Educational disclaimer
This explainer is for educational purposes only. It does not constitute financial, investment, or tax advice. Always consult a qualified professional for decisions tailored to your personal circumstances.