CBSE Class 12 Macro Economics: Chapter 4 Income Determination NCERT Solutions

The Marginal Propensity to Consume (MPC) is defined as the proportion of an increase in income that is spent on consumption. It is calculated as the ratio of the change in consumption expenditure to the change in income.

Mathematically, $MPC\; =\; \backslash Delta\; C\; /\; \backslash Delta\; Y$, where $\backslash Delta\; C$ represents the change in consumption and $\backslash Delta\; Y$ represents the change in income.

The Marginal Propensity to Save (MPS) is defined as the proportion of an increase in income that is allocated to saving. It is calculated as the ratio of the change in saving to the change in income.

Mathematically, $MPS\; =\; \backslash Delta\; S\; /\; \backslash Delta\; Y$, where $\backslash Delta\; S$ represents the change in saving and $\backslash Delta\; Y$ represents the change in income.

Relationship between MPC and MPS:

Since any increase in income ($\backslash Delta\; Y$) can only be divided between an increase in consumption ($\backslash Delta\; C$) and an increase in saving ($\backslash Delta\; S$), we have the identity:

$\backslash Delta\; Y\; =\; \backslash Delta\; C\; +\; \backslash Delta\; S$

If we divide both sides of this equation by the change in income ($\backslash Delta\; Y$), we get:

$\backslash Delta\; Y\; /\; \backslash Delta\; Y\; =\; \backslash Delta\; C\; /\; \backslash Delta\; Y\; +\; \backslash Delta\; S\; /\; \backslash Delta\; Y$

This simplifies to:

$1\; =\; MPC\; +\; MPS$

This fundamental relationship shows that the sum of the marginal propensity to consume and the marginal propensity to save must always equal 1. This implies that if a certain proportion of additional income is consumed, the remaining proportion must be saved.

Example: Suppose national income increases from ₹200 crores to ₹250 crores, and consumption increases from ₹20 crores to ₹40 crores.

The change in income ($\backslash Delta\; Y$) is ₹250 crores - ₹200 crores = ₹50 crores.

The change in consumption ($\backslash Delta\; C$) is ₹40 crores - ₹20 crores = ₹20 crores.

The Marginal Propensity to Consume (MPC) is calculated as:

$MPC\; =\; \backslash Delta\; C\; /\; \backslash Delta\; Y\; =\; 20\; /\; 50\; =\; 0.4$

Using the relationship $MPC\; +\; MPS\; =\; 1$, we can find the Marginal Propensity to Save (MPS):

$MPS\; =\; 1\; -\; MPC\; =\; 1\; -\; 0.4\; =\; 0.6$

This means that for every additional rupee of income, 40 paise are consumed and 60 paise are saved.

The terms 'ex ante' and 'ex post' refer to planned versus actual outcomes in economics.

Ex ante investment refers to the planned or intended investment expenditure that firms and economic agents plan to undertake during a specific future period (e.g., a year). It represents the investment decisions made before the period begins, based on expectations about future economic conditions, profitability, and interest rates.

Ex post investment, on the other hand, refers to the actual or realized investment expenditure that has occurred during a specific period. It is the investment that has actually taken place, measured after the period has ended. Ex post investment includes both planned investment and any unplanned changes in inventories that may have occurred.

In essence, ex ante investment is a forward-looking concept based on intentions, while ex post investment is a backward-looking concept based on actual outcomes. The difference between ex ante and ex post investment often arises due to unforeseen events or discrepancies between planned and actual sales, leading to changes in inventory levels.