New Variables

To the previous model (A Simple Economy: Version 1) we have added two variables: fractional consumption rate table and consumption rate growth.

The fractional consumption rate table, which insight maker refers to is a converter, feeds values into the fractional consumption rate variable. The table below shows the values entered for the periods listed:

	fractional consumption rate
period	decimal	%
years 0 - 5	(1)	100%
years 6 - 25	(0.9)	90%
years 26 - 50	(1.05)	105%

 

I have added the consumption rate growth variable to gather information from the consumption rate in order to calculate and display its rate of growth.

We will describe the effects of these variables in the simulation.

Simulation

When you click the Run Simulation button the simulation panel will open and map out the results of the calculations based on the assumptions of the model. No need exists to run more than one simulation, since you do not have the capability of changing any of the variables. I will describe the contents of the various simulation tabs below.

Savings, Production & Consumption

The values for the fractional consumption rate discussed above lead to some very interesting results in Savings, production rate, and consumption rate:

Consumption Rate

For the first five years the consumption rate remains level. (It equals 100% of the production rate during that period.)

Because of the change in the fractional consumption rate in year six, a precipitous decline in consumption occurs in that year. In the succeeding years, from six through 20, consumption rises to a level that exceeds the consumption rate beginning of the model.

When the fractional consumption rate rises from 90% of production rate to 105% of production rate between years 25 and 26, the chart reflects a significant jump in the consumption rate. The consumption rate begins to decline after that initial jump and continues to decline to the end of the simulation in year 50.

Production Rate

For the first five years the production rate remains the same. (It equals 100% of the consumption rate during that period.)

After the reduction of the consumption rate the production rate begins to rise. This occurs because of the effect of the fractional production improvement and the increased Savings, which I will discuss below.

When the fractional consumption rate shifts from 90% of the production rate to 105% of the production rate, the production rate begins a decline that lasts through the balance of the simulation.

Savings

The quantity of Savings, as reflected on the left-hand scale, results from the flows of the production rate less the consumption rate. It stays level during the period in which the consumption rate equals the production rate, rises during the period in which consumption rate equals less than the production rate, and falls during the period in which the consumption rate exceeds the production rate.

Fractional Consumption Rate

The chart in the first simulation tab—Fractional Consumption Rate—plots the values for the fractional consumption rate over the 50 year period of the simulation.

For the first five years fractional consumption rate equals 100% of production. For the next 20 years the fractional consumption rate drops to 90% of production. The fractional consumption rate rises to and stays at 105% of production for the last 25 years. (The small transitions from one fractional consumption rate to another result from the fact that the model calculates values quarterly.)

Consumption Rate of Growth

The third tab shows the consumption rate growth, which the model calculates for your information. This output has no feedback into the model.

When the consumption rate equals the production rate this growth rate equals zero.

When the consumption rate drops to 90% of the production rate this growth rate, after the brief decline in consumption, amounts to roughly 0.4% per annum.

When the consumption rate rises to 105% of the production rate, this growth rate, after the brief jump in consumption, drops to a negative value of roughly -0.2% per annum.

This particular chart shows how the growth rate of consumption actually increases with a lower consumption rate, and decreases with a higher consumption rate.

Conclusion

In this model I have inserted sudden changes in the fractional consumption rate in order to demonstrate graphically the dramatic influence this has on production and consumption in an economy.

The model demonstrates how, when people reduce their rate of consumption relative to the rate of production, the rate of consumption rises significantly over the long-term. It also demonstrates how increased rates of consumption have only a brief positive impact on the rate of consumption, followed by steady declines in rates of consumption.

This demonstration helps to point out the the logical error of artificially stimulating consumption. Contrary to popular opinion, when consumption gets stimulated by any means, it creates a long-term drag on long-term consumption (as seen in the last 25 years of the simulation.)

I have shifted the fractional rate of consumption from a relatively low rate to an unrealistic high rate in order to show the effects that these changes have. In reality, the fractional rate of consumption shifts over longer periods of time in smaller increments, and seldom exceeds the production rate. In reality, an increase in the fractional consumption rate from one positive level to another will not turn the production and consumption rates negative, but it will affect them negatively.

Generalized dis-saving (consumption rate in excess of production rate) might seem rather unlikely, but we have had dis-saving in segments of the economy—with devastating effect.