Question

Income of an economy increased from ₹40,000 crore to ₹1,00,000 crore. Savings of the economy increased from ₹4,000 crore to ₹20,000 crore.
(i) Calculate Average Propensity to Consume (APC) and Average Propensity to Save (APS) before and after the rise in income.
(ii) Draw appropriate conclusion regarding the behaviour of Average Propensity to Save (APS) as his income increases.

Hint:

As income increases, the tendency to consume decreases slightly, and the tendency to save increases, which is reflected in the rise of APS and the fall in APC.

Answer 1

Step 1: Formula for APC and APS.
The Average Propensity to Consume (APC) is calculated as: \[ \text{APC} = \frac{\text{Consumption}}{\text{Income}} \] The Average Propensity to Save (APS) is calculated as: \[ \text{APS} = \frac{\text{Savings}}{\text{Income}} \]
Step 2: Before the increase in income.
Before the increase in income, Income = ₹40,000 crore and Savings = ₹4,000 crore. Assuming that Consumption is the remaining income after Savings: \[ \text{Consumption} = 40,000 - 4,000 = 36,000 \, \text{crore} \] Now, calculate APC and APS before the increase in income: \[ \text{APC} = \frac{36,000}{40,000} = 0.9 \] \[ \text{APS} = \frac{4,000}{40,000} = 0.1 \]
Step 3: After the increase in income.
After the increase in income, Income = ₹1,00,000 crore and Savings = ₹20,000 crore. Assuming that Consumption is the remaining income after Savings: \[ \text{Consumption} = 1,00,000 - 20,000 = 80,000 \, \text{crore} \] Now, calculate APC and APS after the increase in income: \[ \text{APC} = \frac{80,000}{1,00,000} = 0.8 \] \[ \text{APS} = \frac{20,000}{1,00,000} = 0.2 \]
Step 4: Conclusion.
From the calculations, we observe that before the increase in income, the APC was 0.9 and the APS was 0.1. After the increase in income, the APC decreased to 0.8, and the APS increased to 0.2. This suggests that as the income of the economy increases, the Average Propensity to Save (APS) rises, while the Average Propensity to Consume (APC) falls. This is because, with higher income, people tend to save a larger proportion of their income.