to our graph representation
In this essay, we re-state the common IS-LM model in a neat graphical
representation, which offers a few advantages over the
traditional representation, which exploits the Cartesian space and
We rather use some very basic elements of graph theory (nodes and
This allows us to offer a representation of the variables and the linkages
between them in a more compact and straightforward way, especially
well-suited for students and people interested in a first but systematic
view on how the economy works.
To a creative economist, this representation offers the immediate
possibility of adding further variables and outlining new or
different linkages between variables.
This graph representation was developped by the author during the academic
years 1996-97 and 1997-98 when he taught Macroeconomics at the Cracow
University of Economics (Poland).
To author's knowledge, this graph version of IS-LM is an innovative
tool for research and teaching purposes, but if you have published
or seen a published paper on a similar subject please let the Economics
Web Institute know.
At the same time, we hope you shall appreciate this graph method and develop
you own models, basing on the easily modifiable version of the scheme,
whose download is available here for free.
Variables, as consumption or exports, are put in rectangular
frames. To reader's friendliness, variables are in full names, not
abbreviations or math symbols.
Links between variables are expressed through oriented arrows,
with changes in the first variable having an impact on the second.
A sign "+" means that the change in the first variable provokes
a change in the same direction for the second ("an increase give
rise to an increment", "higher ... give rise to higher ...").
By contrast, a sign "-" shows that the change in the second variable
will be in the opposite direction ("a fall in the employment will
A long chain is easy to develop:
An increase of the
first variable will eventually provokes a fall of the third, after producing
a rise in the second.