Outside money specifically refers to Government money. It is issued by public institutions. Inside money refers to Institutions outside the government realm relating to lending activities. The construction of a monetary economy makes some simplifying assumptions. It postulates that private money does not exist; purely for illustration purposes. Model SIM tests the affects of changing exogenous variables affect the endogenous variables.
Model SIM makes the following assumptions about the economy;
Closed economy.
No imports or exports.
Producers of services have no cost of production & no equipment. Production only carried out by labour.
Inventories do not exist.
No banks, firms or profits.
Government issues money which is legal tender. Used for exchange of good and services in the economy.
Government fixes price of labour per hours.
Unlimited supply of labour.
Demand led economy.
The Model SIM balance sheet has one item, money (H). Household (+) and government (-). Producers do not hold cash. Inflows (+) and outflows (-) cancel each other, therefore summing to zero. Wages are sole source of income for household; can be used for 1) taxes (T) 2) consumer services(C) 3) financial assets (∆ H)
Total production (Y) is expressed as Y== C+G=WB (sum of all expenditure)
There are a number of equations that underpin model SIM. They look to explain how both supply and demand react. Equations are offered to explain how price increases causes a decrease in demand. Firms have an excess of stock to meet demand that may arise. Keynesian approach assumes that supply reacts instantly to demand and completes the order instantly. It is also assumed that Investment must be exactly equal to saving.
The pitfalls of the traditional view of the multiplier effect are outlined. It deals with how flows were considered but not the reaction to stocks from these flows. It is a short run phenomenon and cannot be considered to exist in the long run.
The steady state assumes that flows and stocks are in a continuous rate of change. Either in stationary state, recession or growth the variables remain constant. Model SIM assumes the stationary state. It assumes that consumption must be the same as the available disposable income. The consumption function is adjusted tobe interpreted as a wealth accumulation function.
The model SIM uses the assumption that consumers have perfect foresight regarding their income. It assumes that households make some estimate on their income. Demand is added to the equation as households decide at the beginning of a period how much money they desire to have at the end of the period.
∆Hd = Hd – Hh-1 = YDe - Cd
If realised income is greater than that expected then household will hold the difference in larger cash money balances. The amount of cash held will be similar to that planned but will be modified by an error in their expectations. The difference between desired and realised holdings of money is equal to the expected and realised disposable income. Over time people change their consumption decisions due to unexpected changes in their wealth stock. The fact that expected income is used by the equation rather than realised income means that the system is recursive. If income is continually higher than expected then wealth will in turn be higher than expected causing consumption to grow.
Current income is established by the amount of money that was held in the previous period thus giving credence to Keynes’s argument that money is the link between each period and the next.
A rise in the tendency to consume from current income causes an initial rise in national income due to an increase in consumption expenditure. This will be cancelled out by a decline in accumulated money balances and therefore reduce consumption expenditure out of wealth.
It is sometimes assumed that the process of economic adjustments inevitably lead to an equilibrium. Stability analysis tests whether equilibrium can be attained.
As the SIM model is so simple it is possible to provide a more conventional graphical representation requiring four quadrants fully closed.
Sunday, March 18, 2007
Week 5 Homework: Problem Set 4 Problem 2
The assignment was to explain/justify the lines within the SIM Behavioral Transactions Matrix:
Consumption Line: Households have a need or want (demand) for products and services within the economy. Consumers are willing to purchase these products using their own income (-Cd) if someone is willing to produce them. Producers fulfil the role of producing what is demanded from Households, and in return generate income (+Cs) from engaging in this activity.
Government Line: Governments and Producers have a similar relationship to that of Households and Producers. The government demands and spends its income on products and services for it's own purposes and public works (-Gd). In turn, producers supply these items as a means for generating their own income (+Gs).
Output Line: Output in the matrix is neither an income nor expenditure. Hence, its single “appearance” does not violate the macro-equilibrium concept. Its existence represents the income/expenditure (assuming income = expenditure) within the economy. Income = output = consumption from households + Government expenditure.
Factor Income Line: This line represents the influence of labour in the economy. Households provide their labour to production firms in order to earn an income (+W.Ns). They must earn this income in order to purchase the goods and services they demand. From a production firm's perspective, labour is required in order for them to produce goods and services which earn them income. The act of hiring this labour force is an expenditure to the production firm (-W.Ns).
Taxes Line: Governments must earn an income in order to provide public goods and services. To “earn” this income, the Government will collect tax income from households which benefit from these services (+Td). Households are taxed in various ways such as on income earned for their labour, which is viewed as an expenditure (-Ts).
Changes in Money Stock Line: It is assumed that over time, households will accumulate excess stocks of money, as their income may exceed the demand for goods and services (this can also be considered savings). If households have an excess amount of money, they can use it to purchase financial assets (-Chg Hh). It is assumed in the simplified transactions matrix that the sole-supplier of these financial assets is the Government. By issuing these assets, the Government can raise income to fund their public works.
Week 5 In-Class Work
Briefly, here are out notes for Problem 4 Pt 1 which was done in class last Monday:
Recorder of the day: Barry
Presenter of the day: Rory
Workers: Tom, John, Rob, Hugh
1.1
The amount of any given expenditures has to balance with incomes/inflows. Put simply, there must be “macro-balance” in each sector.
1.2
For every component in the table there must be an opposite component. There must be an equivalent or a sum of equivalent components. This is because we need to equalise supply and demand and find equilibrium.
Why?
We are aiming to achieve the steady state economy (Pg.63). All consumption required is demanded. Everything taxed is also “returned” with public goods. Using notation from our table:
Cs = Cd Ns-> Nd
Gs = Gd
Ts = Td
Which refer to the following topics in Chapter 3:
Investment function
Consumption Function (3.5, 3.7)
Taxation (3.11)
Tuesday, March 6, 2007
Chapter 7
Chapter 7
This chapter focuses on the meaning of the terms “saving” and “investment” and their relation to one another, in particular to when there is an excess of saving over investment. The excess here is said to be similar to that of an un-designed increment in the stock of unsold goods. Mr. Hawtrey does not agree, regarding the daily decisions of entrepreneurs concerning their scale of output as being varied from the scale of the previous day by reference to changes in their stock of unsold goods.
“Normal Profit” of entrepreneurs also declines with an excess of savings over investment. Furthermore, a continually increasing excess of savings shows a decline in actual profits.
An entrepreneur fixes the volume of employment to maximise present and prospective profits. The volume of employment is determined by the estimates of effective demand made by the entrepreneurs, an expected increase of investment relative to saving being a criterion of an increase in effective demand.
With Mr. D. H. Robertson’s definition of “today’s income”, saving can exceed investment by the excess of yesterday’s income over today’s income. Therefore if current expectations were always determined by yesterday’s realised results, today’s effective demand would be equal to yesterday’s income.
“Forced Saving” is then highlighted here. This has no definite relation to the difference between investment and saving. “Forced Saving” results from, and is measured by, changes in the quantity of money or bank-credit. A change in the volume of output and employment will cause a change in income which in turn redistributes income between borrowers and lenders. A change in aggregate income measured in money creates a change in the amount saved. These are not “forced savings”. A highly contrived definition of “forced savings”, resulting from a meaning for “savings” in a state of full employment, may be: “Forced saving is the excess of actual saving over what would be saved if there were full employment in a position of long-period equilibrium”.
Jeremy Bentham looked at the consequences of an increase in money in circumstances of full employment and pointed out that real income cannot be increased, and, consequently, additional investment involves forced frugality “at the expense of national comfort and national justice”.
No-one can save without acquiring an asset and no-one can acquire an asset which he did not previously possess, unless either an asset of equal value is newly produced or someone else parts with an asset of that value which he previously had. Therefore, the loss of wealth must be due to his consumption exceeding his income. The aggregate saving must be equal to the amount of the current new investment.
Bank credit that allows for the addition to current investment, will increase income and at a rate which will normally exceed the rate of increased investment. This brings an increase in real income. Money corresponding to the bank credit can be held rather than holding some other form of wealth. Bank credit has tendencies which may affect the distribution of real income between groups. This is avoidable only by passing up any course of action capable of improving employment.
The affect of consumption on the incomes of others make it impossible for all individuals to save any given sums simultaneously. The community as a whole cannot save less than the amount of current investment, as this will raise incomes to a level at which the sums at which individuals choose to save add up to a figure exactly equal to the amount of investment. Incomes and prices change until the aggregate of the amounts of money which individuals choose to hold at the new level of incomes and prices thus brought about has come to equality with the amount of money created by the banking system
This chapter focuses on the meaning of the terms “saving” and “investment” and their relation to one another, in particular to when there is an excess of saving over investment. The excess here is said to be similar to that of an un-designed increment in the stock of unsold goods. Mr. Hawtrey does not agree, regarding the daily decisions of entrepreneurs concerning their scale of output as being varied from the scale of the previous day by reference to changes in their stock of unsold goods.
“Normal Profit” of entrepreneurs also declines with an excess of savings over investment. Furthermore, a continually increasing excess of savings shows a decline in actual profits.
An entrepreneur fixes the volume of employment to maximise present and prospective profits. The volume of employment is determined by the estimates of effective demand made by the entrepreneurs, an expected increase of investment relative to saving being a criterion of an increase in effective demand.
With Mr. D. H. Robertson’s definition of “today’s income”, saving can exceed investment by the excess of yesterday’s income over today’s income. Therefore if current expectations were always determined by yesterday’s realised results, today’s effective demand would be equal to yesterday’s income.
“Forced Saving” is then highlighted here. This has no definite relation to the difference between investment and saving. “Forced Saving” results from, and is measured by, changes in the quantity of money or bank-credit. A change in the volume of output and employment will cause a change in income which in turn redistributes income between borrowers and lenders. A change in aggregate income measured in money creates a change in the amount saved. These are not “forced savings”. A highly contrived definition of “forced savings”, resulting from a meaning for “savings” in a state of full employment, may be: “Forced saving is the excess of actual saving over what would be saved if there were full employment in a position of long-period equilibrium”.
Jeremy Bentham looked at the consequences of an increase in money in circumstances of full employment and pointed out that real income cannot be increased, and, consequently, additional investment involves forced frugality “at the expense of national comfort and national justice”.
No-one can save without acquiring an asset and no-one can acquire an asset which he did not previously possess, unless either an asset of equal value is newly produced or someone else parts with an asset of that value which he previously had. Therefore, the loss of wealth must be due to his consumption exceeding his income. The aggregate saving must be equal to the amount of the current new investment.
Bank credit that allows for the addition to current investment, will increase income and at a rate which will normally exceed the rate of increased investment. This brings an increase in real income. Money corresponding to the bank credit can be held rather than holding some other form of wealth. Bank credit has tendencies which may affect the distribution of real income between groups. This is avoidable only by passing up any course of action capable of improving employment.
The affect of consumption on the incomes of others make it impossible for all individuals to save any given sums simultaneously. The community as a whole cannot save less than the amount of current investment, as this will raise incomes to a level at which the sums at which individuals choose to save add up to a figure exactly equal to the amount of investment. Incomes and prices change until the aggregate of the amounts of money which individuals choose to hold at the new level of incomes and prices thus brought about has come to equality with the amount of money created by the banking system
Monday, March 5, 2007
Chapter 6 Summary
Chapter 6
Income
Keynes defines income and the factors which determine income. These determinants include sale of output, purchase of output, capital equipment (inventory, working capital, goods in production).
This lead Keynes to the equation of
A+G-A1
Where A is equal to sale of finished output to consumers etc.
G is equal to the working capital,
And A1 equals the cost of the inputs.
Keynes states that in order to define income a deduction must occur. This deduction is for the cost of having and maintaining capital equipment. This deduction is for the income that is not attributable to the present period, but from having a value inherited from previous periods. Keynes has come up with 2 methods for calculating the deduction; these 2 methods are based on production and the other on consumption. This figure can be either connected to voluntary activities or involuntary conditions.
In the deduction method dealing with production, Keynes refers to this as a voluntary activity. He argues that the value of G at the end of the period is determined by the maintenance and possible improvement that was done during the year; however there may be a decrease due to over use. He therefore comes up with the equation
(G’ – B’) – (G – A1)
Where B’ is the value of the maintenance, improvements during the year. G’ the value at the end of the period. (G – A1) is the value of the sacrifice to produce A. this is called the User Cost and is referred to U. The amount paid out for services of production is called the Factor cost. The User Cost + Factor Cost = Prime Cost of Output production.
In defining the deduction for consumption or as Keynes refers to as the involuntary conditions. These include changes in market values, obsolescence, time decay, and catastrophe. These may be unavoidable but they are not necessarily unexpected. These costs he describes as supplementary costs. These costs affect everyone. Keynes defines income like Marshall, as the excess value of finished output sold in the period over the prime cost.
Saving & Investment
Keynes states that savings is an agreed definition. This is the excess of income over expenditure on consumption. Any doubts must be on expenditure or consumption. This must mean the value of goods to consumers during that period, this leads to the problem of defining a consumer, such as consumer – purchaser or investor - purchaser. Keynes comes up with the equation A1 – U, for savings. For net saving for excess net income equals A1 – U – V.
This leads on to the definition of current investment. Keynes states that this is equal to the definition of savings. This is due to the current addition to the value of the capital equipment.
This can be seen through this
Income = value of Output = consumption + investment
Saving = Income – Consumption
Therefore Saving = Investment.
Income
Keynes defines income and the factors which determine income. These determinants include sale of output, purchase of output, capital equipment (inventory, working capital, goods in production).
This lead Keynes to the equation of
A+G-A1
Where A is equal to sale of finished output to consumers etc.
G is equal to the working capital,
And A1 equals the cost of the inputs.
Keynes states that in order to define income a deduction must occur. This deduction is for the cost of having and maintaining capital equipment. This deduction is for the income that is not attributable to the present period, but from having a value inherited from previous periods. Keynes has come up with 2 methods for calculating the deduction; these 2 methods are based on production and the other on consumption. This figure can be either connected to voluntary activities or involuntary conditions.
In the deduction method dealing with production, Keynes refers to this as a voluntary activity. He argues that the value of G at the end of the period is determined by the maintenance and possible improvement that was done during the year; however there may be a decrease due to over use. He therefore comes up with the equation
(G’ – B’) – (G – A1)
Where B’ is the value of the maintenance, improvements during the year. G’ the value at the end of the period. (G – A1) is the value of the sacrifice to produce A. this is called the User Cost and is referred to U. The amount paid out for services of production is called the Factor cost. The User Cost + Factor Cost = Prime Cost of Output production.
In defining the deduction for consumption or as Keynes refers to as the involuntary conditions. These include changes in market values, obsolescence, time decay, and catastrophe. These may be unavoidable but they are not necessarily unexpected. These costs he describes as supplementary costs. These costs affect everyone. Keynes defines income like Marshall, as the excess value of finished output sold in the period over the prime cost.
Saving & Investment
Keynes states that savings is an agreed definition. This is the excess of income over expenditure on consumption. Any doubts must be on expenditure or consumption. This must mean the value of goods to consumers during that period, this leads to the problem of defining a consumer, such as consumer – purchaser or investor - purchaser. Keynes comes up with the equation A1 – U, for savings. For net saving for excess net income equals A1 – U – V.
This leads on to the definition of current investment. Keynes states that this is equal to the definition of savings. This is due to the current addition to the value of the capital equipment.
This can be seen through this
Income = value of Output = consumption + investment
Saving = Income – Consumption
Therefore Saving = Investment.
Wk 4 Problems + New Team Member
Group 5. Tom Martin, Rob Ryan and Hugh O’Brien.
Recorder John O’Sullivan.
Wages – compensation for labor output. Income for individual and expenditure for business.
Consumption – the amount of goods and services used by the economy. Expenditure, income for the person providing goods and services.
Rent – the cost of the temporary use of an asset. Can be income if you own the asset and expenditure otherwise. A measure of extraction - Marx
Government Expenditure – the cost the government incurs to produce public goods and services. Expenditure.
Manufacturing output – tangible produce that is caused by combining the factors of production. Output.
Interest payments – cost that exceeds the principal amount of the loan, the cost of borrowing. Expenditure if the borrower, income if the recipient. Can be seen as output. A flow of funds.
Loans – savings leant to individuals and institutions as investment capital. Output for the lender.
Bank Deposit – funds deposited as savings by individuals and institutions. Income for banks.
Bonds – debt instrument issued by institutions and governments to raise investment capital.
Equities – shares of ownership issued by an institution.
Money Balance – how much money people and institutions hold at a given point in time.
Hugh is now in group 5 instead of being in group 6 alone.
Recorder John O’Sullivan.
Wages – compensation for labor output. Income for individual and expenditure for business.
Consumption – the amount of goods and services used by the economy. Expenditure, income for the person providing goods and services.
Rent – the cost of the temporary use of an asset. Can be income if you own the asset and expenditure otherwise. A measure of extraction - Marx
Government Expenditure – the cost the government incurs to produce public goods and services. Expenditure.
Manufacturing output – tangible produce that is caused by combining the factors of production. Output.
Interest payments – cost that exceeds the principal amount of the loan, the cost of borrowing. Expenditure if the borrower, income if the recipient. Can be seen as output. A flow of funds.
Loans – savings leant to individuals and institutions as investment capital. Output for the lender.
Bank Deposit – funds deposited as savings by individuals and institutions. Income for banks.
Bonds – debt instrument issued by institutions and governments to raise investment capital.
Equities – shares of ownership issued by an institution.
Money Balance – how much money people and institutions hold at a given point in time.
Hugh is now in group 5 instead of being in group 6 alone.
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