The pool of 50 list positions is used to top up each party's number of MPs to that party's share. If a party does not win an electorate seat, it must get at least 5 per cent of the party vote to become entitled to list seats.
If a party gains more seats through winning electorate contests than it is entitled to according to its share of the party vote, it retains those seats and the size of Parliament simply expands to accommodate the "overhang".
Where is MMP used?
In New Zealand since 1996. The "home" of MMP is Germany where it has been used in federal and state elections since the 1950s.
The system - also known as Additional Member - is also used for elections to the Scottish parliament and the Welsh assembly.
What are the advantages of MMP?
The strongest argument for MMP is its fairness. Parties - big or small - get parliamentary representation according to their share of the vote as long as they beat the 5 per cent threshold or win an electorate seat.
It is rare for one party to have an absolute majority in Parliament. Parties therefore have to govern either in coalition with others or as minority governments relying on other parties' votes on confidence and Budget-related motions.
The system is therefore seen as moderating extreme policy positions that a governing party might wish to take, and acting as a brake on hasty decision-making.
Most major decisions will enjoy the backing of more than 50 per cent of Parliament.
Under First Past the Post - the simple majority system that MMP replaced - a single party could end up governing alone having won far less than 50 per cent of the vote.
Contrary to the predictions of its opponents, MMP has not produced unstable government in New Zealand.
In four out of the five MMP elections, it has been clear on election night which of the two major parties would be able to form the next government.
MMP has produced a Parliament which is much more diverse and representative than under FPP, with more women MPs and members from minority and ethnic groups.
Other pluses are that the electorate system maintains a direct line of accountability between voters and their local representatives, voters can split their votes between parties; and, the 5 per cent threshold means parties with extremist policies find it difficult to get a foothold in Parliament .
What are the disadvantages of MMP?
Opponents of MMP argue that it is unfair that small parties choose who governs through holding the balance of power.
Rather than electing a Government, voters have to wait for post-election negotiations during which parties may renege on campaign promises or agree to adopt policies which they oppose.
It is argued that the consensus achieved under MMP is just another word for compromise, and that the solution which is acceptable to the parties in a governing arrangement may not be the best solution for the country at large.
Critics of MMP say the power-sharing reduces major parties' willingness to tackle long-term problems in a decisive fashion, especially when the correct solutions will prove painful to voters.
Governments instead become consumed with short-term crisis management. An oft-heard complaint is that list MPs are accountable only to party bosses - not the voter.
There is also widespread public dissatisfaction that MPs who are voted out of Parliament by their electorates can "sneak" back into Parliament via the party list.
And there has also been growing concern about anomalies created by the rule which removes the necessity to get 5 per cent of the vote if a party wins an electorate seat.
Those latter two aspects of MMP are among items which will be addressed by an independent review of the system.
But that review will happen only if voters in next month's referendum opt to retain MMP.
The promise of a review follows Government acknowledgment that many people would like to retain MMP - but with some changes.
If there is a majority vote for change, there will be no review.
