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Comparing Marginal Propensity to Consume: US Vs. World

The marginal propensity to consume, or the ratio of the change in aggregate consumption compared to the change in aggregate income is a component of Keynesian macroeconomic theory. In the United States, it tends to be higher than many other countries around the world. This also means Americans tend to save less than the citizens of other countries.

Marginal Propensity to Consume: US Vs. Rest of the World

Economists and statisticians often approximate the marginal propensity to consume in the United States at between 90 and 98 percent. This is different than the average propensity to consume, which is lower in the United States than many countries.

This high level of consumption, relative to new income, is a consistent phenomenon, at least since the low-interest rate policies of the 1990s, though consumption habits did dip during the great recession of 2007-2008. In fact, marginal propensity to consume figures actually undersell the spend-heavy habits of Americans because they ignore credit cards and home equity lines of credit.

It is often speculated that the marginal propensity to consume is higher for poorer individuals than wealthy individuals. This is because basic physical comforts, such as food, shelter, clothing and entertainment, make up a larger fraction of a poor person’s income. This tendency is not universal among people or countries. Some wealthy nations, such as Japan and Germany, have relatively low marginal propensities to consume. Likewise, many poor African and Asian countries have relatively high marginal propensities to consume.

The United States, however, is a unique case. Since the U.S. dollar is a de facto reserve currency for many central banks, Americans can essentially trade dollars for cheap foreign goods without ever having to produce an equivalent amount of goods in return. This means American savings rates can be artificially low.

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