Tuesday, 16 April 2013

The Marginal Propensity to Consume is generally high for most developing countries including Ghana, yet the size of the National Income is low

Propensity to consume, in economics the proportion of total income or of an increase in income that consumers tend to spend on goods and services rather than to save. The ratio of total consumption to total income is known as the average propensity to consume; an increase in consumption caused by an addition to income divided by that increase in income is known as the marginal propensity to consume. Because households divide their incomes between consumption expenditures and saving, the sum of the propensity to consume and the propensity to save will always equal one.
Ghana being classified as a developing country is due to, our level of poverty in the country. The question is that, why Ghana and the other developing countries have a high Marginal Propensity to Consume and yet the size of the National Income is low? This because Ghana and other developing countries are been classified as a lower income country and also goes a lot in line with low-income families of the nationals in the country. The average propensity to consume out of current income is usually thought to be higher for low-income families than for high-income families. Families in the lowest income bracket, for example, may be forced to dissave or go into debt merely to provide themselves with basic necessities, whereas these same necessities require a much smaller proportion of high incomes. The low-income family’s average propensity to consume may therefore be greater than one and the high-income family’s some fraction of one.
The nature of MPC in Ghana; The MPC is higher in the case of the poor than in the  case of the rich people and the greater proportion of Ghana’s population falls below the poverty line (Low-Income Families). The greater a person’s income, the more his basic human needs would have been met, and the greater his or her tendency to save in order to provide for future will be. The marginal propensity to save of the richer classes is greater than that of the poorer classes. If, at any time, it is desired to increase aggregate consumption, then the purchasing power should be transferred from the richer classes (with low propensity to consume) to the poorer classes (with a higher propensity to consume). Likewise, if it is desired to reduce community consumption, the purchasing power must be taken away from the poorer classes by taxing consumption. The marginal propensity to consume is higher in the case of poorer countries and lower in the case of richer country. The reason is same as stated above. In the case of rich country, most of the basic needs of the people have already been satisfied, and all the additional increments of income are saved, resulting in a higher marginal propensity to save but in a lower marginal propensity to consume. In a poor country, on the other hand, most of the basic needs of the people remain unsatisfied so that additional increments of income go to increase consumption, resulting in a higher marginal propensity to consume and a lower marginal propensity to save. This is the reason MPC is higher in the underdeveloped country like Ghana, and lower in developed countries such as the United States, the United Kingdom, and Germany.

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