System Dynamics Models of the Economy

I received funding to hire a contractor for two years to help me build a System Dynamics model to estimate the impact of Defence expenditure on the Canadian economy.  In the first year of the project, we examined the literature for existing System Dynamics models that could be used for macroeconomic modelling.

We found three.  The first was Threshold 21 built by the Millennium Institute.  The second one was a model developed by Nathan Forrester (Jay Forrester’s son) for the Natural Resources Canada in 1972.  The third was a model developed by Nathan Forrester for his PhD dissertation.

The Threshold 21 model had hundreds of equations and thousands of variables.  It had a sub-model for Defence spending and a timeline for GDP.  However, when we looked more closely, we found the model for Defence spending was simply a time series of Defence expenditure that was input to the model.  Therefore, there was no analysis being conducted by the model.  It was simply a situation where the Defence expenditure time series was input to the model and added to the GDP curve.  This was not satisfactory.

The Natural Resources Canada model developed by Nathan Forrester was an excellent example of how to build a System Dynamics model.  Nathan thanked his father Jay, the inventor of System Dynamics, for his help in building the model.  The model had five sectors of the economy but did not have sectors for Defence or government in general.

The third model was a classical macroeconomic model that might be useful to the Department of Finance.  It attempted to model monetary and fiscal policy to stabilize the economy but would not be useful to the Defence expenditure issue.

After the first year of study, we chose to continue the work by concentrating on the model of the Canadian economy built by Nathan Forrester for Natural Resources Canada.  We planned to add two new sectors to the model: for Government expenditure excluding Defence; and for Defence expenditure.