Average propensity to consume (APC) is the percentage of household income spent on goods and services in a given period, while the inverse is the average propensity to save (APS). High APC levels benefit the economy, but saving wisely leads to long-term financial success.
The term “average propensity to consume” describes the percentage of household income spent on purchasing services and goods in a specified period of time. This amount is the inverse of the average propensity to save, and the two totals when added together will sum to one. To determine an individual’s or family’s average propensity to consume (also known as APC), the sum of money applied to consumption during a prohibited period of time must be divided by the total income earned during that same period of time. High APC levels across society are better for the economy as a whole even though they detract from the savings of individuals within society.
Every person who earns money has to make daily decisions about how much of that money to spend and how much to save. These individual decisions have an effect on the economy as a whole, which depends on strong levels of spending for your health. Therefore, the average propensity to consume can be used as an important indicator for economic health, as well as a specific look at the spending habits of individual households.
As an example of how the average propensity to consume is calculated, imagine that a household earns $10,000 US dollars (USD), after taxes, in a single month. That family proceeds to take $7,000 USD and spend it on food, clothing, entertainment, and the like for the entire month. In this case, the APC would be consumption of $7,000 USD divided by income of $10,000 USD, producing a ratio of .7. This means that the company spent 70 percent of its profit in that particular month.
Conversely, the inverse of the average propensity to consume is the average propensity to save, or APS. Using the example above, savings of $3,000 USD would be divided by income of $10,000 USD, producing an APS of 0.3. As the example shows, adding the APC of 0.7 and the APC of 0.3 gives a sum of one.
Economists keep a close eye on the average propensity to consume across the economy, as APC levels are often directly proportional to the strength of an economy as a whole. People who spend more of their earnings means more revenue for companies, which can afford to produce more goods and hire more people. Still, on an individual level, people who care about saving money wisely will generally have better long-term financial success than those who spend indiscriminately.
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