Newb Questions about basic economic equations
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Hello,
I just recently started getting into Godley and Steve Keen work. As well as using Minsky modeling program. However i have a hard time understanding all the variables that there is in the system and how are they related to one another. Yes, Godley has a part of them explained, but others not. And yes, there are incredibly basic, but as a newbie in finance and economic modeling i would like to find the whole list of them explained through either examples and/or equations.
For example as simple as: Y (OutPut) / Labour productivity = Employment
Employment / Population = Employment Rate
Capiltal/Capital output ration (accelerator) = Y (Output)
Etc. I am not even sure about the last one, just copied to make a better example. Hopefully you get the idea. What i need is purely basic functions which start from scratch and builds up making it more complex.
Hopefully my problem is understandable. Looking forward to any suggestions.
No simple answer because the names of the variables aren't set in stone.
Basically you have to get a feel for the relationships and the equations
expressing them. Try working thorough Godley and Lavoie's book
http://dl4a.org/uploads/pdf/Monetary+Economics+-+Lavoie+Godley.pdf.
--
Regards
Graham Hodgson
Phone: 0207 253 3235
Office Address: http://bit.ly/rs6iQo
Please take three minutes to find out why there's so much debt and what we
can do about it: http://www.positivemoney.org.uk/
On 8 April 2015 at 14:41, Laurynas laurynask@users.sf.net wrote:
Thanks for answer! I've already started reading it, but its really clumpy. And the problem is that i DO understand the flows, but when it comes to some basic knowledge about economics for example accelerator effect on capital or other basic underlying silent knowledge - i get lost.
For example, can anyone actually help me decipher some of Godley - Goodwin simulations?
Whats P in this model? Does it go for Inflation? If it is, do we make it a constant or a variable? If a variable, how can we construct it from the ground?
Ig - is it gross investment?
Whats delta? Is it some kind of constant that deprecation happens in capital?
I think my biggest misunderstanding is with capital stock or K (is that what it stand for?). How does it differ from capital?
I understand that these might be basic questions or even dumb questions, but i just see that there is a lot of silent knowledge in the basics of model and i really want to understand the underlying structure as well. Any help will be appreciated.
P.s. I think if Steve Keen is really determined to create his school, i really wished there was a basic cheat sheet for all the equations and assumptions which user should already know.
Have you worked through the demo videos at
http://www.debtdeflation.com/blogs/2013/08/14/15-easy-minsky-pieces/
--
Regards
Graham Hodgson
Phone: 0207 253 3235
Office Address: http://bit.ly/rs6iQo
Please take three minutes to find out why there's so much debt and what we
can do about it: http://www.positivemoney.org.uk/
On 14 April 2015 at 11:48, Laurynas laurynask@users.sf.net wrote:
Thanks. It does explain most of the parts. However i do still have some questions.
For future generations i attached some Steve Keen works. They helped me a lot.
Just so it be in some topic if somebody would stumble on them.
I have a suggestion for Steve. I don't know how much its useful to him, but i think it would be helpful for people who try to understand it. Along with Misnky modeling program you have to attach more of your work or more explanations. I am not talking books, where one has to stack up everything from the beginning, explain the critics point of view etc etc and get >600 pages book. I am saying 30-50 pages simple summary of all equations and so on.
For more information follow Steve Keen on Youtube.
He just uploaded a very good video in which pushes the information quality to the limit. Highly recommended stuff.
Can someone explain me this equation? I just cannot get my head around it.
\pi_{fn} * Y = I_d
Profit function * Output = Investment demand
I understand that in "profit growth times" investors want to invest more into capital. We choose the equilibrium/threshold from which point there will be a demand for more investment. Investment demand > profit = Debt.
However i just cannot understand why profit function multiplied by output is investment demand. Please help. Thanks
The left hand side generates the nominal value for profits and the model
assumes that profits are intended to be spent on investment
(revenue-earning assets) not on consumption.
--
Regards
Graham Hodgson
Phone: 0207 253 3235
Office Address: http://bit.ly/rs6iQo
Please take three minutes to find out why there's so much debt and what we
can do about it: http://www.positivemoney.org.uk/
On 30 April 2015 at 13:49, Laurynas laurynask@users.sf.net wrote:
I understand the concept of that. Once the profit rate is higher than equilibrium investors want to invest more. If Investment demand > profits then we have debt. But what i don't understand is the derivation to that. I attach word document with the exact formulas i am lost.
OK, I see the problem. He hasn't explained the function at all in his pdf,
just stated it as a linear alternative to an earlier function. What it
boils down to is investment demand = output * (return on capital - 0.005) *
4.5 where 4.5 and 0.005 are scaling coefficients which have been derived
empirically. He may be hoping to endogenise the coefficients eventually,
but I agree that it is unhelpful to have implied through the use of the
same root symbol that the 4.5 figure will have the same dimensional
composition as return on capital.
--
Regards
Graham Hodgson
Phone: 0207 253 3235
Office Address: http://bit.ly/rs6iQo
Please take three minutes to find out why there's so much debt and what we
can do about it: http://www.positivemoney.org.uk/
On 7 May 2015 at 21:35, Laurynas laurynask@users.sf.net wrote:
aaaaa..... now its clear :) Thank you!
Adding some already built up models.
2
Graham,
As you are the only one who replies to me here, i have a question/ponder. The topic is "money creation in modern economy". The Bank of England wrote a wonderful piece on this one. You have read i am sure.
Just tell me if i am correct on this one.
Quote from that piece: "For example, suppose an individual bank lowers the rate it
charges on its loans, and that attracts a household to take out a mortgage to buy a house. The moment the mortgage loan is made, the household’s account is credited with new deposits. And once they purchase the house, they pass their new deposits on to the house seller. This situation is shown in the first row of Figure 2. The buyer is left with a new asset in the form of a house and a new liability in the form of a new loan. The seller is left with money in the form of bank deposits instead of a house. It is more likely than not that the seller’s account will be with a different bank to the buyer’s. So when
the transaction takes place, the new deposits will be transferred to the seller’s bank, as shown in the second row of Figure 2. The buyer’s bank would then have fewer deposits
than assets. In the first instance, the buyer’s bank settles with the seller’s bank by transferring reserves. But that would leave the buyer’s bank with fewer reserves and more loans relative to its deposits than before. This is likely to be problematic for the bank since it would increase the risk that it would not be able to meet all of its likely outflows. And, in practice, banks make many such loans every day. So if a given bank financed all of its new loans in this way, it would soon run out of reserves."
Let's call House Buyer's bank - X; House Seller's bank - Y;
In this case, if bank X continued on creating new loans/new money, and it would always be going to Y, X would soon run out of money as it would always have net negative flow. However if they both create new loans/new money and the net stays zero (for the purpose of the argument X goes to Y and Y created money goes to X) then they can create a huge pile of money. Is this correct? As an aggregate, banking sector's money stock is positive in this situation.
Hi Laurynas,
Yes. As Keynes put it in Treatise on Money "It is evident that there is no
limit to the amount of bank money which the banks can safely create provided
they move forward in step."
Even if they don't, since the reserves held by banks at the central bank
form a closed pool (disregarding government for the time being*), any
shortage by one bank will indicate a surplus somewhere else, so the short
bank can in principle always make good its deficit by borrowing from a bank
in surplus. It is the function of the money market to put banks with
surplus reserves in touch with banks with a shortfall.
However, as Northern Rock found in 2007, banks which lend too aggressively
and rely on the money market to supply liquidity as required, using their
own securitised loans as collateral, can find that other banks take a dim
view and stop lending.
*Payments to government drain the banks' poolof reserves so special
measures have to be taken to restore liquidity in the banking system. In
the US, the Treasury deposits surplus receipts in accounts it holds at
several thousand country banks, which in turn lend these through the Fed
Funds market to the New York banks. In the UK, the Treasury's Debt
Management Office lends all surplus receipts directly into the money market
overnight.
--
Regards
Graham Hodgson
Phone: 0207 253 3235
Office Address: http://bit.ly/rs6iQo
Please take three minutes to find out why there's so much debt and what we
can do about it: http://www.positivemoney.org.uk/
On 26 May 2015 at 14:52, Laurynas laurynask@users.sf.net wrote:
As it becomes usual - a great response! Thanks :)