APC Calculator

The average propensity to consume (APC) is the proportion of disposable income that a household spends on consumption rather than saving. It is calculated by dividing total consumption expenditure by total disposable income. This calculator allows you to calculate this ratio in reverse. Enter the known values for either consumption expenditure, income or APC and the tool will fill in the missing value.

Economists pay attention to the APC because it provides clues about how people respond to tax cuts, stimulus packages or changes in real wages. Households that spend nearly all of their income behave differently than those who save a quarter of their earnings.

What is the average consumption rate?

The APC is the ratio of consumption expenditure to disposable income. An APC of 0.85 means that 85 cents out of every dollar earned is spent on consumption and 15 cents is saved. It is usually expressed as a decimal between 0 and 1, but can exceed 1 if consumption spending exceeds income.

In most developed economies, the APC of households is often in the range of 0.80 to 0.95. For low-income households, the APC tends to be higher because a large portion of their income goes toward necessities and there is little room for savings.

How to use this calculator.

Enter total consumption and total disposable income to find the APC expressed as a decimal. If the APC is already known, and you want to determine either corresponding consumption or corresponding income, enter the known values and leave the remaining fields blank for automatic calculation of the missing value. Enabling "MPC" will compare the average with the marginal, while enabling "Consumption function" will predict spending based on autonomous consumption and MPC.

APC Formula:

The basic definition is consumption (C) divided by disposable income (Y).

If consumption is represented as the sum of autonomous consumption (c0) and the product of marginal propensity to consume (c1) and income, then the APC can be broken down into two parts.

This second formula allows us to make useful predictions. As income (Y) increases, the term c_0/Y becomes smaller, so that the APC gradually falls. People with high incomes tend to save a larger share of their income. The same relationship holds for savings.

The table below shows the individual symbols and their example values.

Example calculation:

Let's take Mark as an example. His spending is $52,000 and his disposable income is $80,000.

The proportion of consumption expenditure to income (APC) is $52,000 divided by $80,000 which equals 0.65

As 65 percent of the income is used for consumption and the rest is saved, the proportion of savings to income (APS) is 0.35.

Now let's look at Jerry. His autonomous spending is $12,000, his marginal propensity to consume is 0.55, and his disposable income is $75,000. Using the second formula, we can calculate that his average propensity to consume (APC) is equal to 12,000 divided by 75,000 plus 0.55, which is equal to 0.71. On average, Jerry spends a larger portion of his income on consumption than Mark does.

APC and average savings rate:

The sum of APC and APS is always 1. As disposable income is either spent or saved, if one value is known the other can be calculated by subtracting it from 1. The opposite of APC is the savings rate, which is found by dividing total savings by income. Usually this would be based on disposable income rather than total income.

APC and marginal propensity to consume.

The APC (average propensity to consume) is a measure of the state at any given point in time and is calculated by dividing total spending by total income. The MPC (marginal propensity to consume) is a measure of responsiveness, indicating what proportion of additional income will be spent on consumption. The APC shows where a household is at that moment, while the MPC indicates how households respond to pay rises or tax cuts. Graphically, the APC is the slope of a line drawn from the origin to any point on the consumption function, while the MPC is the slope of the consumption function itself.

Examples of the use of APC:

In personal finance management, the APC shows what percentage of income is spent each month. If an individual's APC consistently exceeds 0.95, this means that little to no savings are being made. In macroeconomics, total APC is one of the more direct indicators of consumer confidence. An increase in APC often indicates households beginning to spend money while a decrease usually foreshadows a recession.

The design of policy measures is also based on this concept. Tax rebates paid to households with a high APC are more likely to be spent, thus bringing money quickly into the economy. Tax rebates that go mainly to higher income households will often be used for savings or investment.

APC Tips:

Use disposable income instead of total income. Since taxes do not come into a household's account, including taxes will underestimate the APC. Track values over several quarters or years rather than focusing on just one number. A gradual increase usually indicates that spending is growing faster than income. Also distinguish between the APC and MPC. The former refers to the overall proportion of income already spent, while the latter represents the proportion of next dollar used for spending.