A Report from a meeting on the 4see model - Essay Example

?(Insert of unit here) (Insert here) (Insert of college here) A Report from a meeting on the 4see model Sponsoring Organization: Foresight Innovation and Incubation Group, Arup Venue: Stanley Hotel Date: 12th April, 2013 Time: 8:00 am Introduction The meeting Opening Simon Roberts Associate Director of the Foresight, Innovation and Incubation Group, Arup, started by welcoming the participants to the meeting of engineering and economics professionals together with some of the Arup representatives present. The Director said that the meeting’s objective was to look keenly into the 4see model. The model was to simulate a view of the economy into a computational model so as to generate a business-as-usual scenario in the future. Mr. Roberts told members present at the meeting that he would narrow down to using ten distinct types of economic flows and separate accounts which are maintained for each of the ten flow variables. The model would use both deterministic approach for inputs of a process with respect to output and corrective approach. It would be calibrated using historical time-series data He further added that the deterministic approach and corrective approach enable many of the economic, energy and jobs variables to be endogenous, thus reducing exogenous variables to a small number. The meeting would also focus on how to complete a business-as-usual (BAU) scenario and use it to show that rising emissions due to economic growth are offset by gains in efficiency of energy use (Roberts). Barney Foran, Director Institute of Land, Water and Society at Charles Sturt University started by introducing computational models. He defined the computational model as a model that requires extensive computation to study the behavior of a complex system Wikimedia Foundation). The 4see being a model, he explained that it was an explanatory and exploratory computational model of a national macro economy. It is explanatory in that the abstractions used to explain the trajectory of the macro economy in a new way that generates unexpected insights. It is intended to be exploratory in that policymakers, academics and others can use it to explore the likely effects on the macro economy (and various statistical measures such as GDP and GHG emissions) of suites of policy choices (scenarios). Representatives present • Simon Roberts-Director Foresight Innovation and Incubation Group, Arup. • Nigel Goddard a Director in School of Informatics at the University of Edinburgh • Colin Axon - A Senior Researcher at School of Engineering and Design in Brunel University, Uxbridge, • Barney Foran - Institute of Land Water and Society, Charles Strut University • Benjamin Warr-Director of Environmental Services and Senior Environmental Scientist, GeoQuest Ltd, Modeling paradigm Mr. Goddard took the attendees through the modeling paradigm of the 4see model. He informed members that it differs from other macroeconomic modeling methods. It expresses constraints between components of the macro economy as equations which describe how they affect each other, and then uses iterative time-stepped simulation to evolve the model of the system forward in time. A key principle in 4see modeling is handling of distinctly different classes of flows. The full 4see- GB model of the UK economy includes ten distinct flows which are distinguished by having differing characteristics and being non-substitutable to each other in the short term. (Roberts) Modeling principles Mr. Goddard further went on to explain that the approach to creating the model follows a simple principle: that supply follows demand but is constrained in the short term by physical infrastructure or the inputs needed for output. There were concerns on the deterministic approach and corrective approach. Mr. Goddard went on to say that deterministic approach controls the need for inputs. Where as reconciliation between demands on the right and supply of the distinct separate flows is by the corrective approach. Finally, most of the final demand in the model is set exogenously. (Roberts) The set of distinct, separate flows Mr. Colin then took to explaining the model of the UK economy to the members present. It includes ten distinct flows which were distinguished by him as being non-substitutable and for which separate accounts are maintained within the model. For each flow, the 4see model would use the corrective approach, along with the deterministic approach and historical trending, to determine future flow. Other mechanisms like expert forecasting could also be used in this task, but none were used in the current model. Mr. Colin further informed that as it had been earlier stated by Mr. Goddard, the model is demand-led. Supply met this demand as constrained by the existing infrastructure and the systemic linkages which were modeled through the deterministic and corrective approaches. Some of the demand-driving variables that were exogenous are: ? Transport ? Population ? Demand for manufacturing ? Exports of services ? Services for households and government ? Investment in dwellings ? Components of balance of payments(Roberts) Gross fixed capital formation (GFCF) Gross fixed capital formation is measured using the total value of a producer’s acquisitions, fewer disposals, of fixed assets during the accounting period plus certain additions to the value of non- produced assets (such as subsoil assets or major improvements in the quantity, quality or productivity of land)(Roberts). This is realized by the productive activity of institutional units (Statistics Directorate). Members agreed that GFCF is itself one part of final demand as it had components from final supply of manufacturing, construction and services. It was explained that the historical trending approach is used to determine how any change in GFCF impacts demand (at purchasers’ prices) for manufacturing, services and construction. As the demand for GFCF increased the shortfall increased demand for manufacturing, construction and services according to the proportions by which they made up GFCF. Thus, it was important to account for FCF in each industry and dwellings because this information fed back into further demand for some industries (Roberts). Building the model a 4see model identified fixed asset variables, which had much longer life than a single period, as capital stocks. Flows of these stocks corresponded to consumption and formation of fixed capital. For these, they used the system dynamics modeling paradigm, which had been used to model a wide variety of both simpler and more complicated systems, from ecologies to business operations (Roberts). The fundamental components of a system dynamics model were: 1. Stocks of entities in the system – in this case, for example, long-life manufacturing capital; 2. Flows that affect the stocks (goods, construction and services into manufacturing capital) . 3. Equations that link the level of stocks to the flow rates The 4see model also identified process flows. The variables of major interest, such as flows of goods and services, were not modeled as stocks and flows in the system dynamics sense, but were assumed to be consumed in the same time-period in which they were produced - there is no modeling of inventory. In system dynamics terms, they we considered being auxiliary variables. The identified fixed capital stocks in the economy with the system dynamics stock concept. This was a reflection of the categorical difference in 4seemodels between fixed capital stocks and other types of stocks such as inventories.(Roberts) Discussion It was agreed that 4see is intended as an explanatory and exploratory computational model. Some of the ways brought forward to demonstrate this included: 1. We presented a macro-economic modeling framework based on deterministic and corrective approaches that enabled us to reproduce the historical data with a small number of exogenous parameters. 2. The model was grounded in standard national macroeconomic data that conformed to international conventions of data-holding and duration. (Wilmott Paul) 3. We demonstrated that breaking down national GDP statistics into a small number of non-substitutable flows corresponding to physically distinct entities could give us some insight into historical data and enable us create further projections into the future. 4. We had demonstrated that the explicit recognition in the model of the key role and long-term significance of capital stocks in the evolution of the macro-economy. 5. We had shown that some trends over the historical 21-year period were surprisingly smooth or stable, lending justification to using historical trends in selected instances to be used as the basis for future projections. (Colin) 6. We had described the 4see-GB model of the UK economy and its implementation in some detail, with other country models under construction. 7. We had developed a BAU scenario and discussed among the attendees on how it can be used to explore many key variables including non-economic ones such as GHG emissions. 8. We had shown how policymakers, think tanks, corporate planners, civic groups, and those advising them can use the model and scenarios to explore the effects of policy choices through adjustments to projected trends or corrective mechanisms (Roberts). Works Cited Colin, Clark. Mathematical bioeconomics. New York: Mc Graw Hill Publisher, 1990. Roberts, Simon. The 4see model: a robust, data-driven approach to macroeconomics. London, 29 December 2012. Statistics Directorate. Goss Fixed Capital Formation – SNA. 25th September 2001. 16 April 2013 . Wikimedia Foundation. Computational model. 28th February 2013. 16th April 2013 . Wilmott Paul, Jeff Dewynne, Sam Howinson. Option pricing: Mathematical models and computation. Oxford: Oxford Financial Press, 1993. Read More