Graphical models

Different authors describe the economic system as graphical models.

Economics of Lipsey et al

The book “Economics” by Lipsey m. Al. (1) (My issue is the Tenth edition 1993) is used in university education in economics, 20-credit course. It has a figure titled “The Circular flow of expenditure and Income”. This is reproduced below:

Figure 6.2: first “The Circular Flow elaborated”. Lipsey FIGURE 3-2.

The book comes from the US. There is a different view than in Sweden on how the economy should work. The figure describes the main features of a pure market economy. The main players are the households and domestic producers. On the right side of the figure are for goods and services. Therefore, imports have been placed so that it looks as if households are responsible for the import. As far as I know, private imports is negligible compared with the companies’ imports. The author brings together domestic product (Total payments) to a flow in the system. National income (total income generated) gather for another flow. The figure does not distinguish between corporate and household taxes. According to the American ideology, the public sector’s influence to be minimal. That is perhaps why the author did not show public sector production. One gets the impression that the public sector only buys goods (“National Defense, commission of Justice, the building of schools and roads”) for the tax money. Households receive their Social Security through personal savings. These savings are invested in companies (shares). Firms lacking in the figure touch with the financial system, even though they probably save and borrow more than households.

In a footnote reserves the author points out that he, for simplicity ruled: “(i) the public confidence household incomes directly through transfer payments, unemployment insurance and social insurance, (ii) a portion of money that companies use for investment comes, not from the financial system but from their own profits they reinvest instead of paying dividends. “

According to a source in the US Congress that distributed the federal budget expenditure in 1997 as follows:

Social Security, Welfare, other mandatory $ 837 billion
Interest on the debt $ 248 billion
Defense discretionary $ 266 billion
Non defense discretionary $ 280 billion
Total $ 1,631 billion

Over half of federal spending goes to the welfare system. This means that the flows mentioned in the footnote, after all, should be included in the figure. (I have not seen if the later editions of “Economics” has new characters). According to the same source as constituted defense spending about half of the federal budget in 1962. So it has been a shift from the purchase of goods to transfers during the past 35 years. The Länder budget accounts for about half of the federal budget, acc. Chapter 22 “Taxation and Public Expenditure” in “Economics”.

6.3 Our economy by Klas Eklund

Klas Eklund’s book “Our economy ‘(2) was recommended bredvidläsningsbok when I read the 20-credit course. It has several different economic cycles with different levels of detail, here reproduced the image that is most comparable to Lispey’s image and the model “Economic cycles S2”.

Figure 6.3: first “Foreign trade in the economic cycle”, Figure 8.1 in Klas Eklund’s book.

This picture is very similar Lipsey’s view. Foreign trade is placed in the same way, households are responsible for the import. The goods market has an important place in the system. The public sector buys goods from the market and pays transfers to households. It had been quite simple to even bring public sector wage payments (factor payments with the character’s terminology), and thus make clear that the public sector contributes to the production of society. With this addition, the flow of domestic product to have to be divided in two places in the figure.

Klas Eklund has also a figure with the capital market which I will reproduce later when I demonstrated how I included this in my models.

To better depict the Swedish economy, we must accept that the production takes place in several different sectors (private and public) and that there is a commodity market for households (consumer goods) and another for firms (producer goods, exports and imports).

6.4 Output, Inflation and Growth by DC Rowan

The English book “Output, Inflation and Growth ‘by DC Rowan (3) has a rather complicated figure. Here also gather all production in a box. The figure is not with foreign trade.

Figure 6.4: first “The Circular Flow of Income, Output and Expenditure.” Figure 3.iii, Output Inflation and Growth.

The author’s goal is also to place domestic product in a single place in the system, between the companies and the market. The question is whether the public sector should be included among the companies, which in the figure represents the entire domestic product? National income consists of wages, rents and profits. It represents total household income used for consumption and saving. The savings are used for investments in companies. Consumption and investment are together the nation’s spending. The production of goods and services used partly for household consumption and partly to business investment. The small circles are the destination of production performance. Household consumption expenditure constitute payment for consumer goods. Similarly corresponds household wage income (wages) their work in production (included in factor services).

The author uses different types of arrows for payment flows and flows of goods and services. However, it is difficult to see the difference in the reproduced chart. It becomes clearer picture about 6.4: 1 is split into two characters, one for cash and one for real flows. Cash flows are expressed in units of currency / unit time (eg, dollars / year) and the balance of payments can be set up for each sector. Real flows belonging to the real economy and is expressed in units of work or goods / services / unit time (eg .. man-years / year or tons / year or units / year).

Many economists prefer to express real flows in monetary units / unit time with the price conversion factor. When you then must deal with inflation in the system, you get problems because the device for the real flows constantly changing.

Figure 6.4: 2nd Cash flows from photo 6.4 1.
Figure 6.4: 3rd real flows from the image 6.4 1.

6.5 Economic Theory by Robert W Grubbström

A recent book (4), “Economic Theory” by Robert W Grubbström, Professor of Production Economics at Linköping University, describes the mathematical methods needed to analyze the economic cycle.There is a separate chapter on the flow chart. The following cycle is found in the book’s introduction (the book’s mathematical definitions are excluded from the figure):

Figure 6.5: 1, Robert W Grubbström: Economic Theory, Figure 1.4

The book limits itself to treat consumers, producers and markets. “Services” means, among other things, the work of the labor force. “Goods” means goods and intangible goods (services) that producers deliver. The public sector is not included with the motivation: “Some economic action units do not fit in any simple way in the reported classification. … By far the most important type of such units are the government agencies, municipalities, counties and the state. “Nor abroad shall be included. The author uses different notation for payment flows and real flows. It would in this case be easier to understand diagram of two figures are used.

Figure 6.5: 2, Cash flows from Figure 6.5 1. Figure 6.5: 3, Real feeds from 6.5: first

The book contains the rest of the entire mathematical apparatus needed to analyze markets, supply and demand.

6.6 References

  1. Richard G. Lipsey et al: Economics, Tenth Edition, Harper Collins College Publishers, New York 1993.
  2. Klas Eklund: Our economy: an introduction to the national economy, Time Stockholm in 1993, Raben Prism 1997.
  3. DC Rowan: Output, Inflation and Growth, An Introduction to Macro-Economics, Macmillan, 1968, the 1969th
  4. Robert W. Grubbström: Economic Theory, Academica Adacta AB 1997.