Consumption, Saving, Investment and Multiplier
Senior 5 · Economics
Consumption, Saving, Investment and Multiplier
Lesson 1 of 4
40 min
NISR's accounts show that in 2025 Rwanda's gross national disposable income, the income available to residents after payments to and from abroad, was Frw 23,973 billion. Households and the government together spent Frw 18,578 billion of it on consumption, and the remaining Frw 5,395 billion was saved. In 2024 the figures had been Frw 20,496 billion of income and Frw 15,959 billion of consumption. So out of each extra franc of income between the two years, about 75 centimes went on consumption. That fraction, and what decides it, is the subject of this lesson. It drives the size of the multiplier in Lesson 4.
Definition
Consumption: spending by households on goods and services for their own use, such as food, clothing, transport and school fees.
Consumption function: the relationship between consumption and disposable income, usually written , where is autonomous consumption and is the marginal propensity to consume.
Autonomous consumption (): consumption that takes place even at zero income, financed from past savings, borrowing or help from others. Induced consumption (): the part of consumption that depends on income.
Definition
Average propensity to consume (APC): the fraction of total income spent on consumption, .
Marginal propensity to consume (MPC): the fraction of an extra unit of income spent on consumption, . It is the slope of the consumption function.
Keynes argued that "men are disposed, as a rule and on the average, to increase their consumption as their income increases, but not by as much as the increase in their income". Three things follow:
| Disposable income Y (Frw thousand) | Consumption C = 200 + 0.75Y | APC = C ÷ Y | MPC = ΔC ÷ ΔY |
|---|---|---|---|
| 0 | 200 | – | – |
| 400 | 500 | 1.25 | 0.75 |
| 800 | 800 | 1.00 | 0.75 |
| 1,200 | 1,100 | 0.92 | 0.75 |
| 1,600 | 1,400 | 0.875 | 0.75 |
| 2,000 | 1,700 | 0.85 | 0.75 |
The break-even point is where the consumption function crosses the 45° line: , so nothing is saved. Here , giving . Because the line starts above the origin, APC is always greater than MPC on a straight-line consumption function, and APC falls towards MPC as income rises.
Worked example 1: reading the propensities
A household's disposable income rises from Frw 300,000 to Frw 360,000 a month, and its consumption rises from Frw 270,000 to Frw 312,000 (illustrative).
The household spends 70% of its extra income. Its APC falls because it spends a smaller share of the new, higher income than of the old one.
Worked example 2: Rwanda's propensities from the national accounts
NISR's figures (Frw billion, current prices): gross national disposable income 20,496 in 2024 and 23,973 in 2025; total final consumption (households, non-profit institutions and government) 15,959 and 18,578.
Interpret with care. These are national totals at current prices, so part of each change is inflation; they include government consumption; and one year's change is a rough guide only. Still, the pattern fits Keynes: the MPC is below 1 and below the APC.
Income is the main influence and causes a movement along the consumption function. Other influences shift the whole function.
| Factor | Effect on consumption |
|---|---|
| Distribution of income | Poorer households spend almost all extra income (high MPC); richer ones save more. A shift of income towards the poor raises total consumption. |
| Wealth | Households with more land, livestock, savings or property consume more at each income level. |
| Interest rates and credit | Cheap, easy credit (mobile loans, SACCO loans) raises spending on durable goods; high interest rates encourage saving instead. |
| Expectations | Expecting higher future income, or higher prices soon, raises spending now; fear of job loss lowers it. |
| Taxation | Higher income tax or VAT lowers disposable income and so consumption. |
| Size and age of households | More dependants mean more spending on necessities and less saving. |
| Social customs and the demonstration effect | Weddings, dowry, funerals and other ceremonies, and copying the spending of richer neighbours, raise consumption. |
| Advertising and the availability of goods | New products and persuasive advertising encourage spending. |
| Social protection | Pensions and health insurance reduce the need for precautionary saving. |
Warning
APC and MPC are not the same thing. APC uses totals (C ÷ Y); MPC uses changes (ΔC ÷ ΔY). A common exam error is to divide one year's consumption by one year's income and call it the MPC. Also remember that APC can exceed 1 (dissaving), but MPC normally lies between 0 and 1.
Important
Discuss. In a village, a poor farming household and a well-off trader each receive an extra Frw 10,000. Who is likely to have the higher MPC? What would this mean for total spending in the village if the government taxed the trader and gave the money to the farmer?
Khan Academy, "Consumption function basics" (about 7 minutes). Watch how autonomous consumption and the MPC form the line C = a + bY, the same form as the consumption function in this lesson.
Practice
Sources and credits
Written by Ganzaa: the text, both diagrams, the tables, the worked examples and the practice items. The consumption function and the household figures are illustrative.
