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Newb Questions about basic economic equations

Laurynas
2015-04-08
2015-05-28
  • Laurynas

    Laurynas - 2015-04-08

    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.

     
    • Graham Hodgson

      Graham Hodgson - 2015-04-08

      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:

      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.

      Newb Questions about basic economic equations
      https://sourceforge.net/p/minsky/discussion/general/thread/cf22c8b7/?limit=25#6a3a


      Sent from sourceforge.net because you indicated interest in
      https://sourceforge.net/p/minsky/discussion/general/

      To unsubscribe from further messages, please visit
      https://sourceforge.net/auth/subscriptions/

       
  • Laurynas

    Laurynas - 2015-04-14

    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?

     
  • Laurynas

    Laurynas - 2015-04-14

    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.

     
    • Graham Hodgson

      Graham Hodgson - 2015-04-14

      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:

      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.

      Attachment: GodleyGoodwinSimInt01B.mky (104.8 kB; application/minsky)

      Newb Questions about basic economic equations
      https://sourceforge.net/p/minsky/discussion/general/thread/cf22c8b7/?limit=25#bd7e


      Sent from sourceforge.net because you indicated interest in
      https://sourceforge.net/p/minsky/discussion/general/

      To unsubscribe from further messages, please visit
      https://sourceforge.net/auth/subscriptions/

       
  • Laurynas

    Laurynas - 2015-04-16

    Thanks. It does explain most of the parts. However i do still have some questions.

     
  • Laurynas

    Laurynas - 2015-04-23

    For future generations i attached some Steve Keen works. They helped me a lot.

     
  • Laurynas

    Laurynas - 2015-04-23

    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.

     
  • Laurynas

    Laurynas - 2015-04-29

    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.

     
  • Laurynas

    Laurynas - 2015-04-30

    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

     
    • Graham Hodgson

      Graham Hodgson - 2015-05-05

      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:

      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


      Newb Questions about basic economic equations
      https://sourceforge.net/p/minsky/discussion/general/thread/cf22c8b7/?limit=25#ef95


      Sent from sourceforge.net because you indicated interest in
      https://sourceforge.net/p/minsky/discussion/general/

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      • Laurynas

        Laurynas - 2015-05-07

        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.

         
        • Graham Hodgson

          Graham Hodgson - 2015-05-07

          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:

          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.


          Newb Questions about basic economic equations
          https://sourceforge.net/p/minsky/discussion/general/thread/cf22c8b7/?limit=25#ef95/b2fc/3718


          Sent from sourceforge.net because you indicated interest in
          https://sourceforge.net/p/minsky/discussion/general/

          To unsubscribe from further messages, please visit
          https://sourceforge.net/auth/subscriptions/

           
          • Laurynas

            Laurynas - 2015-05-08

            aaaaa..... now its clear :) Thank you!

             
  • Laurynas

    Laurynas - 2015-05-04

    Adding some already built up models.

     
  • Laurynas

    Laurynas - 2015-05-04

    2

     
  • Laurynas

    Laurynas - 2015-05-26

    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.

     
    • Graham Hodgson

      Graham Hodgson - 2015-05-26

      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:

      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.

      Attachment: Money creation in the modern economy 2014 BoE.pdf (114.1 kB;
      application/pdf)


      Newb Questions about basic economic equations
      https://sourceforge.net/p/minsky/discussion/general/thread/cf22c8b7/?limit=25#db6a


      Sent from sourceforge.net because you indicated interest in
      https://sourceforge.net/p/minsky/discussion/general/

      To unsubscribe from further messages, please visit
      https://sourceforge.net/auth/subscriptions/

       
      • Laurynas

        Laurynas - 2015-05-28

        As it becomes usual - a great response! Thanks :)

         

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