Steps in Developing A Simple Model

In order for you to become comfortable with all the varied concepts involved in economics, system dynamics, and Insight Maker, I led you through four steps in the development of this model:

A Four Product Economy (Step 1)

The four product economy introduces the basic idea of the production rate and the consumption rate and the stock of Savings. It also suggests the impossibility of modeling a "real economy"—far too complex.

Transition — Abstraction vs. Aggregation (Step 2)

I explained how I avoided logical errors of aggregation by using higher levels of abstraction to make a theoretically consistent model.

A Compressed Model (Step 3)

Step 3 compresses a complex system containing multiple stocks and flows into a single model using a higher level unit of measure I call economic units.

Adding Variables & Feedback (Step 4)

I introduced a couple of auxiliary variables to feed information into the model.

Connecting Production & Consumption (Step 5)

In step 5 I made the connection between the production rate and the consumption rate by using a fractional consumption rate (a fraction of the production rate) to calculate the consumption rate. With this change the consumption rate amounts to a consistent fraction (or percent) of the production rate.

After these five steps, we now have a simple model of the fundamental elements of an economic system. This model depicts principles that apply to an economic system at any level of abstraction.

Conclusion

In the five steps of developing this systems model we have demonstrated for principles of the economic systems:

1. Production always precedes consumption
2. Consumption rates less than production rates result in accumulated savings, and consumption rates greater than production rates result in reductions in savings
3. Production rates generally influence consumption rates
4. Savings have a positive, reinforcing, influence on the production rate

These four systemic principles represent four fundamental principles found in economic systems of any size: e.g. an individual, an organization, a community, or a nation.

Caution: This model uses units of measure that represent a higher level of abstraction. As a result, some precision gets lost. The viewer should see this model is a representation of economic principles and theories, and not a representation of a real economic system.

 

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In the next group of models I will use different versions of this model to further demonstrate the relationship between various rates of consumption, levels of savings and long-term rates of both production and consumption.