Setting up Parameters - Obson/MicroSim-GUI GitHub Wiki

IMPORTANT: There have been significant changes (including the addition of conditional parameters) since this section was written and it is now out of date.

The Standard Model

The Standard Model is one in which the parameters are set up so that the model's behaviour is reasonably simple to understand, and which is sufficiently similar to real-world behaviour that it's easy to conjecture how changes to the model would relate to changes in the real world. Once we have set up a standard model we can vary the parameters to obtain and study the behaviour of other, non-standard models.

Note that all businesses in a model use exactly the same parameters, but this doesn't mean they will behave in exactly the same way. Random numbers are used at various decision points, and as time goes by the resulting differences will accumulate, so avoiding (I hope) the 'fallacy of composition'. See also the information on granularity.

Parameters

Parameters are set up by creating a new model or by selecting and existing model and clicking the Setup button. In either case the 'Parameter Wizard' appears. Simply set the parameters as required and click Done.

The reason why this dialog takes the form of a 'wizard' is that at a later stage I plan to allow 'conditional parameters'. These will (as the name implies) take effect when specified conditions apply (such as government expenditure exceeding a certain amount), and each set will have its own page in the wizard.

When creating a new model you can choose to import the parameters associated with any existing model, or the Standard Model. If you choose the Standard Model the parameters will default to those listed below.

Target Employment Rate

Default 95

This figure gives (as a percentage) the approximate proportion of the total population that will be employed (in the Standard Model). It is used to calculate the amount of direct government expenditure as

population x employment rate x standard unit wage x income tax rate

So if population is 1000, employment rate is 0.95 (or 95%), unit wage is 100, and income tax rate is 0.1 (or 10%), then government expenditure per period will be

1000 x 0.95 x 100 x 0.1 = 9500

not including unemployment benefit or 'unbudgeted' support for government owned businesses.

Propensity to Consume

Default 80

This is the proportion of a worker's funds (income + savings) he or she will spend each period. The rest is kept for a 'rainy day'.

Pre-tax Deductions

Default 0

In the real world the theory behind pre-tax deductions is that they provide premiums for National Insurance. In practice they do nothing of the sort and are merely an irritating complication — a sort of 'poll-tax' on employment. They appear to have no systematic effect on economic outcomes other than generally depressing activity. In the Standard Model we have the luxury of being able to leave them out altogether, so we do.

Income Tax

Default 10

Taxation is as essential a part of the fiscal network as is Government spending but it doesn't have to be high. For the purposes of study 10% is a good starting point.

Sales Tax

Default 0

The system works perfectly well without sales tax, providing income tax is non-zero, so we leave it out in the Standard Model.

Business Creation Rate

Default 0

This figure is the probability, expressed as a percentage, that a new business (or, depending on granularity, businesses) will come into being at the end of any given period. It is intended to simulate a situation where there is a growth in the number of businesses over a period of time. In most circumstances it's best left at zero (and the required number of businesses set up at the start) as the results can be quite hard to interpret. It's also highly unrealistic as it takes no account of the state of the market or how many businesses already exist. Use with caution, if at all!

Profit Distribution Rate

Default 100

After a business has paid its employees, it first decides whether it wishes, and can afford to expand, and how much this will cost in terms of wages and deductions. If it has any money left (profit) it then decides how much to distribute to its employees as bonuses, dividends, etc. This is determined by the percentage Profit distribution rate. This is (currently) distributed equally among employees as 'bonus', and anything left over remains 'in reserve'. On a balance sheet this would be shown as 'retained profits'.

For the sake of simplicity we want to ensure that in the Standard Model all the income a business receives (beyond what is needs to retain to cover expected commitments — i.e. future wages) is paid out again to its employees, so we set the profit distribution rate to 100%.

Investment Rate

Default 2

This is businesses' preferred expansion rate expressed as a percentage. The figure gives the proportion of funds available (after paying existing employees' wages) that will be reserved to pay new employees, and thus the number of new employees it will attempt to hire.

A surprisingly small percentage gives rise to a moderate rate of expansion over time, and experimentation shows a mere 2% to be a good starting point since it eliminates unemployment altogether. Too large a figure can result in unemployment as staff are taken on but may have to be fired soon after as the funds are not always sufficient to pay them. An alternative approach is to use a higher figure and borrow from the bank when there are insufficient funds to pay wages. (See Borrow if needed to pay wages below.)

Unemployment Benefit Rate

Default 60

This is (as a percentage) the proportion of the standard unit wage that is paid to workers who are unemployed. In the standard model it is immaterial because the model will run for 1000 iterations (the maximum allowed) with zero employment. However, as soon as any of the parameters are modified there is a possibility of unemployment so it makes sense to be prepared with a plausible figure here.

Central Bank Lending Rate

Default 1

This is the (percentage) rate at which the Central Bank lends to clearing banks. At present the figure is immaterial as we do not yet model this aspect of the operation, but I hope to add it soon.

Clearing Bank Lending Rate

Default 3

This is the (percentage) rate at which the clearing banks lend to businesses. If a business borrows to pay its employees, this is the rate of interest it will have to pay to the bank.

Borrow if needed to pay wages

Default Never

If a business finds itself with insufficient funds to pay its employees' wages it can ask a bank for credit. At present a bank will always provide a loan to a business (if asked) but I propose to introduce a degree of uncertainty into this process. Whether businesses will apply for loans depends on this setting, which can be 'never' (0%), 'rarely' (25%), 'sometimes' (50%), 'usually' (75%) or 'always' (100%). For the Standard Model this setting is immaterial as businesses always have sufficient funds to pay their employees'.