Economic Circular Flows, ECF

1. Economic Circular Flows, ECF - a method of building macro economic models and analyzing the results of political and economic decisions. The ECF method is based on an interactive computer program and a set of symbols for economic agents and connections (nodes). The nodes are connected by payment flows or real flows.

2. Economic Circular Flows The ideas of model building • Entire economy • Different layersfor different kinds of flows Payments Real flows:work, products etc.

3. Economic Circular Flows The payments are connected to thereal flows by pricerelations. Dashed lines.

4. Economic Circular Flows The ECF program main window. Menu with dropdown submenues Building components Time scroll bar Model drawing area Info and message area

5. Economic Circular Flows Building components Button to return to normal arrow cursor. The cursor is used to point to (click on) components, move or resize them.

6. Economic Circular Flows Sample models Model S1, The same as in the introduction.

7. Economic Circular Flows Production process with investments Note: This is an example of an open model with real flows.

8. Economic Circular Flows I have made a series of videos that show how the interactive process for building a model works. You find the videos here. There are five videos. Each one shows one part of the process. Part 3 Bank connection Parts 4-5 Data is added Part 1 Part 2 The Households has an internal structure with delays. Wages are spent with one period´s delay.

9. Economic Circular Flows The following slides show consequent time steps with a simple closed economy containing a bank(system). At the beginning there is no money in circulation. The process is started by borrowing the necessary money. The process continues with a high tax ratio policy with hiring more public employees. A low tax regime follows with a smaller public sector and finally also a smaller private sector.

10. Economic Circular Flows The model has prescribed and calculated parameters. Prescribedvariablesareindicated by orange color. Wages in public sector. Wages in private sector. Tax ratio. Otherprescribedconditonsare: Flowbalance, FB , of public sector, private sector and Tax ratio splitter. Price relations, P : Wagelevelsand priceofgoods and services. Calculatedvariablesareindicated by blue color. Public loans. Private loans. Taxes. Total incomeofhouseholds. Private consumption. Costofservices and priceofproducts.

11. Economic Circular Flows The Model B1 starts with no money in the system.

12. Economic Circular Flows Time 2001 Money is added to the system. Wages are payed but have not yet been used for taxes or private consumtion. Public and private sectors borrow in order to cover for budget deficit.

13. Economic Circular Flows Time 2002 Tax ratio too low. Public sector borrows 10 GKr in order to cover for budget deficit. Private sector has 10 GKr surplus which is saved, part of loans is payed back, -10 GKr.

14. Economic Circular Flows Time 2003, 2004 Tax ratio adjusted to public costs. Marginal loans and savings.

15. Economic Circular Flows Time 2005 Less taxes, 880 GKr. Tax ratio lowered from 0.45 to 0.40. Public budget deficit. Increased private spending. Public loans. Private sector surplus and savings.

16. Economic Circular Flows Time 2006 Public spending reduced. from 1000 GKr to 900 GKr/year. Less public borrowing because taxes and private consumtion are based the previous year.

17. Economic Circular Flows Time 2007 Lower public spending. Public balance.

18. Economic Circular Flows Time 2008 Still less public spending. Public budget surplus. Increased private spending. Private surplus and savings.

19. Economic Circular Flows Time 2009 Less public spending. Public budget surplus.

20. Economic Circular Flows Time 2010 Budget balance. No loans, no saving. GDP is now 2000 GKr. It was 2200 GKr/year. Tax ratio is now 0.40. It was 0.45.

21. Economic Circular Flows Time 2011 Public surplus prescribed in order to pay back public loans.

22. Economic Circular Flows Time 2012 Public taxes are now 760 GKr and public spending 700 GKr/year. There is a public surplus and loans are payed back. Private consumtion has gone down and the private sector has to borrow.

23. Economic Circular Flows Time 2013 Private sector laying off people.

24. Economic Circular Flows Time 2014 Private sector still has losses. The GDP is now 1800 GKr/year. We have entered a recession. Note that the total loans are 1800 GKr = the money supply needed for the yearly GDP.

25. Economic Circular Flows We have now studied the payments layer of the Model B1 with one possible scenario. The consequences of different tax ratios and total wage payments have been calculated. • The simulation raises new questions. What would happen if: • the private sector had hired more people during good times instead of saving the money. • interest payments were added. • the public sector could not borrow money. • the private sector exports or imports goods. • There are certainly more questions …

26. Economic Circular Flows Now we will study the real flows of work and goods and services. Only two points in time will be shown. The wage levels are 400 kKr/year in public sector and 500 kKr/year in private sector. Time 2005 The public and private sectors both has an internal structure, production processes with given productitivities = 1 pmy/wmy.

27. Economic Circular Flows Time 2014 Time 2005 Public sector: Total wages 1000 GKr/year. Work done 2.5 million man-years. Private sector: Total wages 1200 GKr/year. Work done 2.4 million man-years. Public sector: Total wages 700 GKr/year. Work done 1.75 million man-years. Private sector: Total wages 1000 GKr/year. Work done 2.2 million man-years.

28. Economic Circular Flows Work (Mwmy) and products (Mpmy) wmy = worked man-years pmy = product man-years = the production from 1 wmy at produtivity = 1 pmy/wmy. Highter productivity gives more products. Productivity = 1.2 would give 20% more products for the same work. Public sector work and services Private sector work and goods and services

29. Economic Circular Flows GKr/year Private consumtion kKr/pmy The price of products can be calculated from money spent and production volume. Price of products

30. Economic Circular Flows The balance sheet of the bank is calculated from customer´s accounts. The bank´s income statement is empty because no interests were payed or recieved.

31. Economic Circular Flows Model B1 showed a very simple system but many conclusions can be drawn. It is possible to build more detailed models as shown in the figures below.

32. Economic Circular Flows • The ECF program is far from complete. • Manyfeatures must be improved. • Thisversion has errorsthat must be corrected. • I would like toaddmoredrawingpossibilities. Severalcurves on the same graph and cross-plot (xyplot) • The program is the work of a single person. It can be seen as a prototype • for a much more advanced program. I invite anybody who is interested to • contribute or to take ideas for other projects. • I have been inspired by drawing programs and simulation programs, e.g. • Simulink. http://se.mathworks.com/products/simulink/. • I have chosen not to use the commercially available programs because: • They may cost a lot. Simulink is not affordable for private persons. • They do not have the special building blocks (components) suited for the ECF type of models. • They are based on signals and not on flows. • They don´t have units for currency and real flows. • They are not adapted for multi-layer models.

33. Economic Circular Flows Thankyou for watching Lars Olert, graduated in Engineering Physics, 1969, has also studied economics at university level. Mail: lars.olert(at)vidingsjo.se. Websites: wp.ecf-teori.se, old.ecf-teori.se/english.htm