Question

Income of an economy increased from ₹ 40,000 to ₹ 1,00,000 crore. Savings of the economy increased from ₹ 4,000 crore to ₹ 20,000 crore.

1. Calculate Average Propensity to Consume (APC) and Average Propensity to Save (APS) before and after the rise in income.     [4]
2. Draw appropriate conclusion regarding the behaviour of Average Propensity to Save (APS) as his income increases.     [2]

Answer 1

APC = `"Consumption (C)"/"Income (Y)"`

APS = `"Savings (S)"/"Income (Y)"`

C = Y − S

Calculations for the Initial State (Income = 40,000).

Savings (S₁) = 4,000

Consumption (C₁) = 40,000 – 4,000

= 36,000

AP C₁ = `"36,000"/"40,000"` 

= 0.9

AP S₁ = `"4,000"/"40,000"`

= 0.1

Calculations for the Final State (Income = 1,00,000)

Savings (S₂) = 20,000

Consumption (C₂) = 1,00,000 – 20,000

= 80,000

AP C₂ = `"80,000"/"1,00,00,000"`

= 0.8

AP S₂ = `"20,000"/"1,00,000"`

= 0.2

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.