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Economic documentation


The most recent and complete economic model documentation is available on Pardee's website. Although the text in this interactive system is, for some IFs models, often significantly out of date, you may still find the basic description useful to you.

The economics model of IFs forecasting system draws on two general modeling traditions. The first is the dynamic growth model of classical economics. Within IFs the growth rates of labor force, capital stock, and multifactor productivity largely determine the overall size of production and therefore of the economy. The second tradition is the general equilibrium model of neo-classical economics. IFs contains a six-sector (agriculture, raw materials, energy, manufactures, services, and ICT) equilibrium-seeking representation of domestic supply, domestic demand, and trade. Further, the goods and services market representation is embedded in a larger social accounting matrix structure that introduces the behavior of household, firm, and government agent classes and the financial flows they determine. 

Goods and Services Market


Goods and Services
Organizing Structure
Endogenously driven production function represented within a dynamic general equilibrium-seeking model
Capital, labor, accumulated technology
Production, consumption, trade, investment
Key Aggregate  Relationships 
(illustrative, not comprehensive)
Production function with endogenous technological change; price movements equilibrate markets over time
Key Agent-Class Behavior  Relationships
(illustrative, not comprehensive)
Households and work/leisure, consumption, and female participation patterns;
Firms and investment;
Government decisions on revenues and on both direct expenditures and transfer payments

Households, firms, and the government interact via markets in goods and services. There are obvious stock and flow components of markets that are desirable and infrequently changed in model representation. Perhaps the most important key aggregate relationship is the production function. Although the firm is an implicit agent-class in that function, the relationships of production even to capital and labor inputs, much less to the variety of technological and social and human capital elements that enter a specification of endogenous productivity change (Solow 1957; Romer 1994), involve multiple agent-classes. In the representation of the market now in IFs there are also many key agent-class relationships as suggested by the table.


Financial Flows / Social Accounting


Organizing Structure
Market plus socio-political transfers in Social Accounting Matrix (SAM)
Government, firm, household assets/debts
Savings, consumption, FDI, foreign Aid, IFI credits/grants, government expenditures (military, health, education, other) and transfers (pensions and social transfers)
Key Aggregate  Relationships 
(illustrative, not comprehensive)
Exchange rate, movements with net asset/current account level; interest rate movements with savings and investment
Key Agent-Class Behavior  Relationships
(illustrative, not comprehensive)
Household savings/consumption;
Firm investment/profit returns and FDI decisions;
Government revenue, expenditure/transfer payments;
IFI credits and grants

Households, firms, and the government interact in markets, but more broadly also via financial flows, including those related to the market (like foreign direct investment), but extending also to those that have a socio-political basis (like government to household transfers). A key structural representation is the Social Accounting Matrix (SAM).

The structural system portrayed by SAMs is well represented by stocks, flows, and key relationships. Although the traditional SAM matrix itself is a flow matrix, IFs has introduced a parallel stock matrix that captures the accumulation of assets and liabilities across various agent-classes. The dynamic elements that determine the flows within the SAM involve key relationships, such as that which constrains government spending or forces increased revenue raising when government indebtedness rises. Many of these, as indicated in the table, represent agent-class behavior.

The model can represent the behavior of households with respect to use of time for employment and leisure, the use of income for consumption and savings, and the specifics of consumption decisions across possible goods and services. And it represents the behavior of governments with respect to search for income and targeting of transfers and expenditures, in interaction with other agents including households, firms, and international financial institutions (IFIs).

IFs thus represents equilibrating markets (domestically and globally) in goods and services and in financial flows. It does not yet include labor market equilibration. <header><hgroup>

Dominant Relations: Economics

</hgroup></header> In any long-term economic model the supply side has particular importance. In IFs, gross domestic product (GDP) is a function of multifactor productivity (MFP), capital stocks (KS), and labor inputs (LABS), all specified for each of six sectors. This approach is sometimes called a Solowian Cobb-Douglas specification, but IFs helps the user get inside the multifactor productivity term, rather than leaving it as a totally exogenous residual.

The following key dynamics are directly related to the dominant relations:

  • Multifactor productivity is a function partly of exogenous specification of an annual growth rate in it for the systemic technology leader, base rates of relative technological advance in other countries determined via an inverted U-shaped function that assumes convergence with the leader, and of an exogenously specified additive factor for control of specific regions or countries.
  • Multifactor productivity is, however, largely an endogenous function of variables determined in other models of the IFs system representing the extent of human, social, physical, and knowledge capital; their influence on production involves coefficients that the user can control.
  • Capital stock is a function of investment and depreciation rates. Endogenously determined investment can be influenced exogenously by a multiplier and the lifetime of capital can be changed.
  • Labor supply is determined from population of appropriate age in the population model (see its dominant relations and dynamics) and endogenous labor force participation rates, influenced exogenously by the growth of female participation.

The larger economic model provides also representation of and some control over sector-specific consumption patterns; trade including protectionism levels and terms of trade; taxation levels; economic freedom levels; and financial dynamics around foreign aid, borrowing, and external debt.