Posts tagged “fixed money supply”

Exogenous and endogenous variables
What does the modeller control and what does the model control?

In the previous monetary economics models we set up the scenario we wanted to model, with equations, some numbers for each of the parameters, and some starting ("initial") conditions. Once we set the models up we simply left them to run their course on the basis of the conditions we'd chosen. In this post we'll model a scenario where conditions change during the course of the model run. In doing so we'll draw a distinction between exogenous and endogenous variables.

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The Paradox of Thrift
Why saving isn't always a virtue

In the last model we simply watched money circulate around our economy. Because the same amount of money was spent in each time period, income was constant and there was nothing in the model to change this status quo. In this model, we'll allow our citizens an additional freedom. Instead of spending every pound they earn, they will have two options for how to use their income: they can save some part of it, and spend the rest.

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Spending, income and the circular flow of money
The simplest economic model conceivable

This is the first in what I hope to be a series of posts on modelling the economy. My intention is to explore economic modelling using a bit of theory, a bit of code, and some attempt to understand the results intuitively. I'll use the Python programming language to do this and describe and share all of the code. I was motivated to do this by reading Monetary Economics by Wynne Godley and Marc Lavoie, which describes increasingly complex models of the monetary economy in great detail. I am actually only about halfway through the book and decided to consolidate what I had learned so far. This post, and probably the next few, actually steps back from the starting point of Godley & Lavoie and describes a much simpler model in an attempt to isolate and identify some of the fundamental components and processes which contribute to the behaviour of the economy. This post shows that:

  • Income and money are separate concepts. Money is a stock, income is a flow (measured per unit of time)
  • Income is identically equal to spending, since these flows form two sides of every transaction
  • Total income over some time period is generated by a given stock of money circulating at a certain rate (termed the "velocity of money")
  • In an economy with a fixed money supply and wherein all income is spent, total income is constant over time
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