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: Applying the Formulas.
APC = Consumption (C) / Income (Y)
APS = Savings (S) / Income (Y)
Note: C = Y - S.

Step 2: Calculations for the Initial State (Income = 40,000).
Savings (S1) = 4,000. So, Consumption (C1) = 40,000 - 4,000 = 36,000.
- APC1 = 36,000 / 40,000 = 0.9
- APS1 = 4,000 / 40,000 = 0.1

Step 3: Calculations for the Final State (Income = 1,00,000).
Savings (S2) = 20,000. So, Consumption (C2) = 1,00,000 - 20,000 = 80,000.
- APC2 = 80,000 / 1,00,000 = 0.8
- APS2 = 20,000 / 1,00,000 = 0.2

Step 4: Conclusion on APS behavior.
The data shows that as national income rose from 40,000 to 1,00,000, the APS increased from 0.1 to 0.2. This confirms that as income grows, the proportion of income saved tends to rise because the rate of consumption growth usually lags behind the rate of income growth.