Economics: Economic Analysis of a DASELINE SCENARIO

                    Economic Analysis

Initial baseline scenario:

Given:

• Money supply (m) = 250
• Velocity (v) = 5
• Time preference (TP) = 9

Let's start with the TP ratio of 9:1 and calculate the percentage of the smaller part (psp factor):

• Total parts = 9 + 1 = 10
• Percentage of smaller part = (1/10) * 100 = 10%

So, the psp factor = 10% = 0.10

Next, calculate aggregate demand (D):

• D = m × v = 250 × 5 = 1250

Aggregate sales revenue (SR) = D = 1250

Calculate aggregate net consumption (NC) using psp factor:

• NC = psp × SR = 0.10 × 1250 = 125

Calculate aggregate savings (sav) using TP:

• TP = sav / NC → sav = TP × NC = 9 × 125 = 1125

Aggregate savings (sav) = aggregate investment (inv):

• inv = sav = 1125

Calculate aggregate productive expenditure (PE):

• PE = inv = 1125

Calculate aggregate net consumption (NC) using SR and PE:

• NC = SR - PE = 1250 - 1125 = 125 (checks out with previous NC)

Aggregate cost (c) = PE = 1125

Calculate aggregate profit (prof):

• prof = SR - c = 1250 - 1125 = 125

Calculate aggregate capital accumulation (K):

• K = SR + PE = 1250 + 1125 = 2375

Calculate rate of profit (RProf):

• RProf = prof / K = 125 / 2375 ≈ 0.0526 or 5.26%

Interest rate (IR) = RProf = 5.26%

Degree of capitalism (DegCap):

• DegCap = PE / SR = 1125 / 1250 = 0.9 or 90%

Summary of results so far:

• psp factor (smaller part %): 10%
• Aggregate demand (D): 1250
• Aggregate sales revenue (SR): 1250
• Aggregate net consumption (NC): 125
• Aggregate savings/investment (sav/inv): 1125
• Aggregate productive expenditure (PE): 1125
• Aggregate cost (c): 1125
• Aggregate profit (prof): 125
• Aggregate capital accumulation (K): 2375
• Rate of profit (RProf): 5.26%
• Interest rate (IR): 5.26%
• Degree of capitalism (DegCap): 90%

Questions:

• Does prof = NC? (Is 125 = 125?) → Yes
• Does (prof/SR)(SR/K) = RProf?
  Calculate: (prof/SR) × (SR/K) = (125/1250) × (1250/2375) = 0.1 × 0.5263 = 0.0526 or 5.26% → Yes

Given the ratio of aggregate demand for capital goods to aggregate demand for business labor is Dk/DLb = 1.25, we need to calculate DLb and Dk.

Recall:

• Aggregate productive expenditure PE = DLb + Dk = 1125 (from previous step)
• Dk/DLb = 1.25

Let DLb = x
Then Dk = 1.25 × x
Sum: x + 1.25x = 1125
2.25x = 1125
x = 1125 / 2.25 = 500

So:

• Aggregate demand for business labor (DLb) = 500
• Aggregate demand for capital goods (Dk) = 1.25 × 500 = 625

Summary of these results:

• DLb = 500
• Dk = 625

Let's calculate:

Aggregate demand for consumer goods (Dc):

• Dc = D - Dk = 1250 - 625 = 625

Aggregate demand for consumer labor (DLc):

• DLc = psp factor × Dc = 0.10 × 625 = 62.5

Aggregate consumption expenditure (CE):

• CE = Dc + DLc = 625 + 62.5 = 687.5

Summary:

• Aggregate demand for consumer goods (Dc): 625
• Aggregate demand for consumer labor (DLc): 62.5
• Aggregate consumption expenditure (CE): 687.5

Calculations for labor and wages:

Aggregate demand for labor (DL):

• DL = DLb + DLc = 500 + 62.5 = 562.5

Aggregate wages for business labor (Wb):

• Wb = DLb = 500

Aggregate wages for consumer labor (Wc):

• Wc = DLc = 62.5

Aggregate wages (W):

• W = Wb + Wc = 500 + 62.5 = 562.5

Now calculate:

• GNR1 = SR + W = 1250 + 562.5 = 1812.5
• GNR2 = CE + PE = 687.5 + 1125 = 1812.5

Compare: Does GNR1 = GNR2?
Yes, 1812.5 = 1812.5

Calculate value added (VA):

• VA = prof + W = 125 + 562.5 = 687.5

National income (Yn):

• Yn = VA = 687.5

Degree of exploitation:

• prof / W = 125 / 562.5 = 0.2222 (about 22.22%)

Calculate profit2:

• profit2 = CE - W = 687.5 - 562.5 = 125

Check if profit2 equals prof and NC:

• profit2 = 125, prof = 125 → Yes
• profit2 = 125, NC = 125 → Yes

Check if (NC + W) = CE:

• NC + W = 125 + 562.5 = 687.5, CE = 687.5 → Yes

Degree of inequality1:

• W / NC = 562.5 / 125 = 4.5

Degree of inequality2:

• W / CE = 562.5 / 687.5 ≈ 0.8182 (81.82%)

Capital intensiveness1:

• K / SR = 2375 / 1250 = 1.9

Capital intensiveness2:

• K / CE = 2375 / 687.5 ≈ 3.4545

Capital output ratio:

• K / Yn = 2375 / 687.5 ≈ 3.4545

Capital turnover rate:

• SR / K = 1250 / 2375 ≈ 0.5263

Summary of these values:

• Aggregate demand for labor (DL): 562.5
• Aggregate wages business labor (Wb): 500
• Aggregate wages consumer labor (Wc): 62.5
• Aggregate wages (W): 562.5
• GNR1: 1812.5
• GNR2: 1812.5
• Value added (VA): 687.5
• National income (Yn): 687.5
• Degree of exploitation: 22.22%
• profit2: 125
• Does profit2 = prof? Yes
• Does profit2 = NC? Yes
• Does (NC + W) = CE? Yes
• Degree of inequality1: 4.5
• Degree of inequality2: 81.82%
• Capital intensiveness1: 1.9
• Capital intensiveness2: 3.4545
• Capital output ratio: 3.4545
• Capital turnover rate: 0.5263

Aggregate productive expenditure = aggregate production (PE = prod = 1125)

Recall:

• Dk/Dc = ratio of aggregate production of capital goods to aggregate production of consumer goods = production factor (pf)
• prodk = aggregate production of capital goods
• prodc = aggregate production of consumer goods
• prodk + prodc = prod
• prodk = prod - prodc

Calculate prodc:

• prodc = prod / (1 + pf)

Since pf = Dk/Dc, we need to calculate that first.

We know:

• Dk = 625 (from previous)
• Dc = 625 (from previous)

So,

• pf = Dk / Dc = 625 / 625 = 1

Thus,

• prodc = prod / (1 + pf) = 1125 / (1 + 1) = 1125 / 2 = 562.5

Calculate prodk:

• prodk = prod - prodc = 1125 - 562.5 = 562.5

Calculate aggregate supply of consumer goods (Sc):

• Sc = 2 × prodc = 2 × 562.5 = 1125

Calculate aggregate supply of capital goods (Sk):

• Sk = 2 × prodk = 2 × 562.5 = 1125

Calculate aggregate supply (S):

• S = Sk + Sc = 1125 + 1125 = 2250

Summary of latest values:

• Aggregate production (prod): 1125
• Production factor (pf): 1
• Aggregate production of consumer goods (prodc): 562.5
• Aggregate production of capital goods (prodk): 562.5
• Aggregate supply of consumer goods (Sc): 1125
• Aggregate supply of capital goods (Sk): 1125
• Aggregate supply (S): 2250

Calculations:

Average price level (P):

• P = D / S = 1250 / 2250 ≈ 0.5556

Real demand (Dr):

• Dr = D / P = 1250 / 0.5556 = 2250 (approximately)

Says law check:

• Does real demand = aggregate supply? Dr = 2250, S = 2250 → Yes, Says law holds.

Gross National Product (GNP):

• GNP = P × Sc = 0.5556 × 1125 ≈ 625

Purchasing power 1:

• Dr / Sc = 2250 / 1125 = 2

Purchasing power 2:

• S / D = 2250 / 1250 = 1.8

Buying power 1:

• Wb / P = 500 / 0.5556 ≈ 900

Buying power 2:

• W / P = 562.5 / 0.5556 ≈ 1012.5

Buying power 3:

• W / S = 562.5 / 2250 = 0.25

Summary:

• Average price level (P): 0.5556
• Real demand (Dr): 2250
• Says law holds? Yes
• Gross National Product (GNP): 625
• Purchasing power 1 (Dr/Sc): 2
• Purchasing power 2 (S/D): 1.8
• Buying power 1 (Wb/P): 900
• Buying power 2 (W/P): 1012.5
• Buying power 3 (W/S): 0.25

Given:

• Supply of labor (Sl) = 1000

Calculations:

Productivity of labor 1:

• S / Sl = 2250 / 1000 = 2.25

Productivity of labor 2:

• Sc / Sl = 1125 / 1000 = 1.125

Productivity of capital goods 1:

• S / Sk = 2250 / 1125 = 2

Productivity of capital goods 2:

• Sc / Sk = 1125 / 1125 = 1

Physical capital intensiveness:

• Sk / Sl = 1125 / 1000 = 1.125

Prosperity 1 (wealth1):

• S = 2250

Prosperity 2 (wealth2):

• Sc = 1125

Efficiency 1:

• (S / Sl) + (S / Sk) = 2.25 + 2 = 4.25

Efficiency 2:

• (Sc / Sl) + (Sc / Sk) = 1.125 + 1 = 2.125

Summary:

• Productivity of labor 1: 2.25
• Productivity of labor 2: 1.125
• Productivity of capital goods 1: 2
• Productivity of capital goods 2: 1
• Physical capital intensiveness: 1.125
• Prosperity 1 (wealth1): 2250
• Prosperity 2 (wealth2): 1125
• Efficiency 1: 4.25
• Efficiency 2: 2.125

Calculations for distribution factors and wage rates:

Given:

• DLb = 500 (aggregate demand for business labor)
• Dc = 625 (aggregate demand for consumer goods)
• Sl = 1000 (supply of labor)
• Sc = 1125 (aggregate supply of consumer goods)

Calculate:

Distribution factor 2:

• DLb / Dc = 500 / 625 = 0.8

Money wage rate 2:

• DLb / Sl = 500 / 1000 = 0.5

Real wage rate 2b:

• (money wage rate 2) / P = 0.5 / 0.5556 ≈ 0.9

Real wage rate 2a:

• (DLb / Dc) × (Sc / Sl) = 0.8 × (1125 / 1000) = 0.8 × 1.125 = 0.9

Check if real wage rate 2a equals real wage rate 2b:

• 0.9 = 0.9 → Yes

Now for distribution factor 1:

Calculate:

• DL = DLb + DLc = 500 + 62.5 = 562.5 (aggregate demand for labor)
• Distribution factor 1: DL / Dc = 562.5 / 625 = 0.9
• Money wage rate 1: DL / Sl = 562.5 / 1000 = 0.5625
• Real wage rate 1a: money wage rate 1 / P = 0.5625 / 0.5556 ≈ 1.0125
• Real wage rate 1b: (DL / Dc) × (Sc / Sl) = 0.9 × 1.125 = 1.0125

Check if real wage rate 1a equals real wage rate 1b:

• 1.0125 = 1.0125 → Yes

Summary:

• Distribution factor 2: 0.8
• Real wage rate 2a: 0.9
• Real wage rate 2b: 0.9 (equal)
• Distribution factor 1: 0.9
• Real wage rate 1a: 1.0125
• Real wage rate 1b: 1.0125 (equal)

All checks for equality are confirmed.

This baseline scenario is ready to be used to analyze any change in any single parameter or combination of parameters in a new scenario and compare and contrast the two scenarios.