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by Valentino Piana (1998-2001)



1. Introduction to our graph representation
2. The rules
3. The scheme
4. Reading the scheme: two examples
4.1. Export-led growth
4.2. Fiscal cuts
5. The advantages of this representation
Appendix 1. Justification for signs in relationships

Appendix 2. Introduction for absolute beginners


Freely modifiable MS Word version of the graph.

Data for all the variables in IS-LM model




Appendix 2. Introduction for absolute beginners

1. Understanding the economy as a whole

Our lives are extremely dependent on how well the economic system works and distributes its fruits to the member of the society. In an international perspective, the world economy is a complex structure linking nations and peoples in an ever-changing environment. How the economy works is a decisive question for understanding nations' physiology and pathology, first essential step to diagnosis and sanation.

Economic newspapers, official bodies' announcements, academic reflections describe processes, suggest interpretations, support policies and remedies. There you can find a burgeoning source of ideas in order to develop your own point of view.

Questions may be:

• how can growth be triggered when everything goes wrong?

• what will be the effects of rising prices?

• how will booming exports impact the households?

Well, in the newspapers you find a lot of suggested answers. But it is helpful to develop a coherent and tested framework to keep all relations together and as well as to learn the lessons from the past and from other nations' experience.

In this vein, economist have developed many schemes of the physiology of the national and international economy. One of the most basic schemes is the IS-LM model.

2. Introduction to a basic macroeconomic framework: the IS-LM model

The IS-LM model gather the most important variables of the economy and link them in a straightforward way. Among others, the model comprehends:

• household consumption;
• public expenditure;
• tax revenue;
• imports from abroad;
• exports to the international markets;
• the gross national product (GNP), basic measure of economic level of a nation;
• inflation;
• the interest rates banks requires for giving a loan to firms and households.

If you extensively read economic newspapers, you shall find a lot of common ideas.

Those variables are defined within the model and formally treated in formulas and relationships. Our version of the model, however, does not use math formulas, just intuitive ideas of "growth" and "fall" in variables values.

Basically, the model relate the variables to each other, to enquire what changes will be induces by an initial shock in one or more variables.

The use of the model allows you to see the far-reaching consequences of events and policies, basing on the relations proposed by the model. This gives you a hint for forecasting possible developments of economic climate. Conversely, a critical comparison with the real situation of your country in past and current values of variables will help you to judge the realism of the same model and its suggestions.

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