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.

The ideas of model building

• Entire economy• Different layers

for different kinds of flows

Payments

Real flows:work, products etc.

Economic Circular Flows

The payments are connected to thereal flows by pricerelations. Dashed lines.

Economic Circular Flows

Economic Circular FlowsThe ECF program main window.

Menu with dropdownsubmenues

Building components

Time scroll bar

Model drawing area

Info and message area

Economic Circular FlowsBuilding components

Economic Agent, eg public sector, households or private sector. Bank.Hub for incoming and outgoing flows. Summation point.Splitter. Splits a flow into different parts.Process. Converts flows to other flows, eg work to products.Production capital.Source or sink.Endpoint that connects a flow with another flow.Account for accumulating assets and liabilities. Flow Generator. Flows depending on a signal (see below).

Flow, eg, payment, work, products, etc.Signal. Determines the flow in a flow generator.Function that calculates a signal from another.Explanatory text.Button to delete a symbol.

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

Economic Circular FlowsSample models

Model S1, The same as in the introduction.

Economic Circular FlowsProduction process with investments

Note: This is an example of an open model with real flows.

Economic Circular FlowsI 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 1 Part 2

The Households has an internalstructure with delays.Wages are spent with one period´s delay.

Part 3 Bank connectionParts 4-5 Data is added

Economic Circular FlowsThe following slides show consequenttime steps with a simple closedeconomy containing a bank(system).

At the beginning there is no money incirculation. The process is started by borrowing the necessary money.

The process continues with a high taxratio policy with hiring more publicemployees. A low tax regime followswith a smaller public sector and finallyalso a smaller private sector.

Economic Circular FlowsThe model has prescribed and calculated parameters.

Prescribed variables are indicated by orange color.Wages in public sector.Wages in private sector.Tax ratio.Other prescribed conditons are:Flow balance, FB , of public sector, private sector and Tax ratio splitter.Price relations, P : Wage levels and price of goods and services.

Calculated variables are indicated by blue color.Public loans.Private loans.Taxes.Total income of households.Private consumption.Cost of services and price of products .

Economic Circular Flows

The Model B1 startswith no money in thesystem.

Economic Circular Flows

Money is added to the system.

Wages are payed buthave not yet been usedfor taxes or private consumtion.

Public and privatesectors borrow in orderto cover for budget deficit.

Time 2001

Economic Circular Flows

Tax ratio too low.

Public sector borrows10 GKr in order to cover for budget deficit.

Private sector has 10 GKrsurplus which is saved,part of loans is payed back, -10 GKr.

Time 2002

Economic Circular Flows

Tax ratio adjusted to public costs.

Marginal loans andsavings.

Time 2003, 2004

Economic Circular Flows

Less taxes, 880 GKr.Tax ratio loweredfrom 0.45 to 0.40.

Public budget deficit. Increased private spending.

Public loans.Private sector surplus and savings.

Time 2005

Economic Circular Flows

Public spending reduced.from 1000 GKr to900 GKr/year.

Less public borrowingbecause taxes and privateconsumtion are basedthe previous year.

Time 2006

Economic Circular Flows

Lower public spending.Public balance.

Time 2007

Economic Circular Flows

Still less public spending.Public budget surplus. Increased private spending.

Private surplus and savings.

Time 2008

Economic Circular Flows

Less public spending.Public budget surplus.

Time 2009

Economic Circular Flows

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.

Time 2010

Economic Circular Flows

Public surplus prescribedin order to pay back public loans.

Time 2011

Economic Circular Flows

Public taxes are now760 GKr and publicspending 700 GKr/year.

There is a public surplus and loans arepayed back.

Private consumtion has gone down and theprivate sector has to borrow.

Time 2012

Economic Circular Flows

Private sector laying off people.

Time 2013

Economic Circular Flows

Private sector still has losses.

The GDP is now 1800 GKr/year.We have entered a recession.

Note that the totalloans are 1800 GKr= the money supplyneeded for the yearlyGDP.

Time 2014

Economic Circular FlowsWe have now studied the payments layer of the Model B1 with one possible scenario. The consequences of differenttax 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 …

Economic Circular FlowsNow 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 bothhas an internal structure, productionprocesses with given productitivities= 1 pmy/wmy.

Economic Circular FlowsTime 2005 Time 2014

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.

Economic Circular FlowsWork (Mwmy) and products (Mpmy)

wmy = workedman-years

pmy = productman-years =the productionfrom 1 wmyat produtivity =1 pmy/wmy.

Highter productivitygives more products.Productivity = 1.2would give 20% moreproducts for the samework.

Public sector work and services

Private sector work and goods and services

Economic Circular Flows

Private consumtion

GKr/year

Price of products

kKr/pmyThe price of productscan be calculated frommoney spent andproduction volume.

Economic Circular FlowsThe balance sheet of the bank is calculated from customer´s accounts.

The bank´s income statement isempty because no interests werepayed or recieved.

Economic Circular FlowsModel 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.

Economic Circular FlowsThe ECF program is far from complete. •Many features must be improved. •This version has errors that must be corrected.•I would like to add more drawing possibilities. Several curves on the same graph and cross-plot (xy plot)

The program is the work of a single person. It can be seen as a prototypefor 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.

Economic Circular Flows

Lars Olert, graduated in Engineering Physics, 1969, has also studied economicsat university level. Mail: lars.olert(at)vidingsjo.se. Websites: wp.ecf-teori.se, old.ecf-teori.se/english.htm