Macro Accounting and General Equilibrium

Kimagure Nshi
kimagure.nshi@gmail.com

February 20, 2017

(Original: January 24, 2017)

Abstract
This paper develops an accounting oriented general equilibrium
model that represents macro statistical systems by aggregating journal
entries of micro accounting. The aim of the model is integrating mi-
croeconomics and macroeconomics by the different way from modern
macroeconomics. From a reverse thinking of classical general equilib-
rium models, the model explores how should preference and expecta-
tion of market participants be if the market is always in the equilib-
rium. An important feature of the model is the rule of symmetry, that
is, economic activities of economic entities implies that other economic
entities who takes just the opposite economic activities always exist.
In other words, the rule requires the existence of economic entities have
just the opposite preference and expectation like a mirror copy. The
paper discusses aspects of the economy by using this simple rule.
The most close literature related to this paper is Exploring General
Equilibrium (1995) of Fischer Black. The accounting oriented general
equilibrium model attempt to construct Black’s full general equilibrium
model and extend his consideration.
CONTENTS 1

Contents
1 Introduction 2

2 Macro Accounting 5
2.1 Quadruple Entry Bookkeeping . . . . . . . . . . . . . . . . . 5
2.2 Value Added Cost Accounting . . . . . . . . . . . . . . . . . . 6
2.3 The Structure of Accounts . . . . . . . . . . . . . . . . . . . . 8
2.4 General Price Level and Inflation . . . . . . . . . . . . . . . . 9

3 General Equilibrium 11
3.1 Symmetry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.2 Efficiency and Stability . . . . . . . . . . . . . . . . . . . . . 14
3.3 Economic Policy . . . . . . . . . . . . . . . . . . . . . . . . . 16

4 Time 21
4.1 Value of Time . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.2 Capital and Time . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.3 Money and Investment . . . . . . . . . . . . . . . . . . . . . . 24

5 Business Cycle 28
5.1 Sector Rotation and Roundabout Production . . . . . . . . . 28
5.2 Innovation and Taste Changing . . . . . . . . . . . . . . . . . 32
5.3 Lifespan and Generation . . . . . . . . . . . . . . . . . . . . . 35

6 Conclusion 39

Bibliography 41

A The Accounting Model 43

A.1 Notations and Notation Method . . . . . . . . . . . . . . . . 43
A.2 Micro Accounting Model . . . . . . . . . . . . . . . . . . . . . 47
A.3 Macro Accounting Model . . . . . . . . . . . . . . . . . . . . 56
1 Introduction
In enterprise financial statements, economic activities of firms are recorded
by double entry bookkeeping. Double entry bookkeeping is also able to
record economic activities of all other economic entities such as households,
governments and nonprofit organizations. As a result, all transactions have
to be recorded by two economic entities from macroeconomic view. There-
fore, each transaction is recorded by two journals and four accounts in macro
statistical systems. The accounting principle implies that the economic ac-
tivities of economic entities implies that other economic entities who takes
just the opposite economic activities always exist. Sometimes, economic
models seem to be inconsistent with the accounting principle. Even if
economic models consistent with the accounting principle, counterparts of
trades are frequently given as exogenous variables without consideration of
incentive.
Especially, financial market should be modeled so that one’s financial
claims are another one’s financial obligations and one’s investment return
have to be delivered by other economic entities. However, many financial
market models ignores who delivers return on investment and why they
deliveries return on investment. From the accounting principle of macro
statistical systems, all of financial market’s aggregated values with netting
identically equals zero in models of the closed economy. In other words,
anyone’s profit has to be generated from another one’s loss or burden in
macro accounting.
For constructing an economic model consistent with the accounting prin-
ciple, the paper develops a macro accounting model by aggregating micro
accounting journal entries. Macro statistical systems consist of National In-
come and Product Accounts (NIPA), National Balance Sheets, Input Output
Table and Flow of Funds Accounts (EC et al. (2009)). In addition, Balance
of Payment and International Investment Positions provides information on
international trades and international assets and liabilities (IMF (2009)).
The macro accounting model attempt to represent these macro statistical
systems as aggregated micro accounting journal entries. Of course, macro
statistical systems are not calculated by such the way. However, this ap-
proach is useful for theoretical economic modeling because of consistent with
the accounting principle.
From a reverse thinking of the classical general equilibrium model, if the
rule of symmetric recording can regard as the consequence of the general
equilibrium, then each side of economic entities has to have just the op-
posite preference and expectation like a mirror copy. In other words, the
market in the general equilibrium can not help separating preference and
expectation of economic agents. As a result, any economic policies can not
help generating people feel favor and disfavor with the policies respectively.
The trade off between efficiency and stability and the difficulty of economic
1 Introduction 3

forecast by tactical behaviors will be also led by the rule of symmetry.

Another aim of the paper is a consideration for the value of time. The
value of goods arrives at return on physical capital, including natural re-
sources and labor force, i.e. return on human capital, by tracing back to
their origins. In other words, large parts of endowments in microeconomics
can be considered as return on physical capital and human capital. How-
ever, return on investment is not generated without the passage of time. In
this sense, return, i.e. the value of endowments in microeconomics, can be
also considered as the value of time. Hence, if the uncertainty of equilibrium
exits, the uncertainty of the value of time is the most important factor of
fluctuations.
Obviously, the value of time depends on the subjectivity of economic
entities. Therefore, if time preference of economic entities is stable, then
the value of time does not almost fluctuate. Conversely, if time preference
of economic entities changes drastically, then equilibrium points also change
drastically like crashes of financial market and great depression. Time pref-
erence of economic entities can be observed as the level of interest rate and
the level of interest rate is not stable at all historical. From this viewpoint,
there are some factors making time preference of economic entities unstable.
What are the factors making time preference of economic entities un-
stable? Of course, there exist multiple reasons, however finiteness and un-
certainty of life spans of economic entities can be considered as the most
important reason. If economic entities are able to know own life spans, then
they can make decisions rationally and makes time preference stable like
Ramsey problem. On the contrary, if they are not able to know own life
spans correctly, then it is difficult to make decisions stably for them because
of their death happens only once in a very long time. The uncertainty of
life spans generates biased time preference of economic entities and biased
time preference can be considered as a cause of economic boom and bust.
Thus, finiteness and uncertainty of life spans of economic entities are
important factors for macroeconomic phenomena and business cycles. Es-
pecially, financial market can be considered as the market for time rather
than the market for risk. From this viewpoint, this paper discusses about
money, interest rates, price level and other macroeconomic phenomena.
Thirdly, causes of business cycles such as Kitchin cycles, Juglar cycles
and Kondratiev cycles are described by using developed general equilibrium
model and the consideration for the value of time. In this paper, causes
of business cycles ask to the nature of human beings. Business cycles are
explained by time scope of decision making, the cycle of tasting change and
the cycle of the generations. At first, Kitchin cycle is explained by time
scope of decision making and roundabout production, including time to
build (cf. Kydland and Prescott (1982)). In addition, an interesting feature
of business cycles by sector rotation in durable goods markets (cf. Black
(1982)) is introduced.
1 Introduction 4

Secondly, Juglar cycles and Kuznet cycles are discussed by tasting

change. The paper assumes the general people lost interest in the thing
in 7 years. In other words, the taste changes occur every 7 years and rise
and fall in innovative sectors can be considered as a cause of Juglar cycles.
In addition, innovation assumes to penetrate in the order in which inno-
vators, advanced people and mass. As a result, each class is lost interest
innovation in 7 years in the order. Kuznets cycles can be seen the cycle of
interest in innovation in each class. Furthermore, the reason why the life
span of business is about 30 years is discussed from the viewpoint.
Finally, the paper suggests a hypothesis of a cause of Kondratiev cy-
cles. This paper defines Kondratiev cycles are cycles of interest rate and
claims a cause of the cycles is that the general people’s utility functions
and time preference depends on their historical experiences. In other words,
the general people’s utility functions and time preference are different by
each generation and their utility functions and time preference does cycli-
cal behavior with periods of average human life spans excluding education
periods.
The outline of the hypothesis is as the following. The hypothesis as-
sume each person to have each time preference that forms in their young
period. Furthermore, formed time preference are assumed to keeps on until
to die even if time preference is biased. In addition, trend of interest rate
assume to generate biased time preference, in other words, high interest rate
environments tends to generate shortsighted people (i.e. High interest rate
people) and low interest rate environments tend to generate longsighted peo-
ple (i.e. Low interest rate people). If the above assumptions are accepted,
then level of interest rate does cyclical behaviors with periods of average
human life spans excluding education periods can be proved. Section 5 ex-
plains why the assumptions are supported and why the assumptions leads
cyclical behaviors of interest rate in detail.
The most close literature related to this paper is Black (1995). The
problem of consistency with general equilibrium theory in macroeconomic
models is suggested by Black (1995). Actually, the accounting oriented gen-
eral equilibrium model attempt to construct Black’s full general equilibrium
model and extend his consideration.
The structure of the paper is as the follow. Section 2 defines notations
and explains accounts of the model. Section 3 discusses implications of the
macro accounting model in the general equilibrium framework. Section 4
considers the value of time and its macroeconomic implications. The section
discusses about money, interest rates, price level and other macro economic
phenomena. Section 5 discusses the causes of business cycles. The final
section describes conclusions.
2.1 Quadruple Entry Bookkeeping 5

2 Macro Accounting
2.1 Quadruple Entry Bookkeeping
Economic activities of firms are recorded by double entry bookkeeping in
enterprise financial statements. As same as business accounting, economic
activities of other economic entities in the macro economy can be recorded
by double entry bookkeeping in macro statistical systems. From a macroeco-
nomic viewpoint, a transaction is recorded by two economic entities, there-
fore a transaction is recorded by entering into four accounts in macro sta-
tistical systems. The journal entry method is called quadruple entry book-
keeping. The following denotes an outline of quadruple entry bookkeeping
and a model of journal entries.
First, double entry bookkeeping record economic activities by the follow-
ing rules. When journals are entered into the accounts, the same amount
enters into debit and credit respectively at the same time (the equivalence
principle of debit and credit). All economic activities can be recorded by
the following rules, even if transactions no matter how are complex.

Entry Rules of Accounts in Double Entry Bookkeeping

Increased Assets (Flow)
Decreased Liabilities (Flow)
Expense and Decreased Capital (Flow)
Opening Balances of Assets (Stock)
Closing Balances of Liabilities (Stock)
Closing Balances of Capital (Stock)
Decreased Assets (Flow)
Increased Liabilities (Flow)
Profit and Increased Capital (Flow)
Closing Balances of Assets (Stock)
Opening Balances of Liabilities (Stock)
Opening Balances of Capital (Stock)

For example, if a household purchase some foods by cash, the purchase

transaction amount is entered into debit of foods account and credit of cash
account respectively. Let ć be quantity of purchased foods, ṕc be price of
foods, and ḿ(= ṕc ·ć) be the purchase transaction amount. Then, the journal
entry for the transaction of the household is as the follow.

Foods ṕc · ć Cash ḿ

For the sake of a simplification, let debit||credit denotes a journal entry.

Above example can be denoted by ṕc · ć||ḿ. Moreover, in order to omit
notations of prices, let define ⟨ć| |ḿ⟩ ≡ ṕc · ć||ḿ. In the following, ⟨x| de-
notes debit transaction amount and |x⟩ denotes credit transaction amount
of journal entries. Here, x denotes quantities of goods. The example can be
also regarded as a firm sells foods by cash. Let c̃ be the quantity of foods
and m̃ be sale proceeds from viewpoint of the firm. Then, journal entry of
the firm can be denoted by ⟨m̃| |c̃⟩.
In macro statistical systems, all transaction of economic entities have to
be aggregated, therefore each transaction is recorded by two journals and
four accounts. The transaction in macro statistical systems is recorded by
quadruple entry bookkeeping as the follows.
2.2 Value Added Cost Accounting 6

The household: ⟨ć| |ḿ⟩

The firm: ⟨m̃| |c̃⟩

Furthermore, the transaction can be also represented by exchanging

credit of accounts of the household and the firm as the following.

Goods (Real) side: ⟨ć| |c̃⟩

Monetary side: ⟨m̃| |ḿ⟩

The journal entry method is called horizontal double entry bookkeeping

and double entry bookkeeping in the usual sense is called vertical double
entry bookkeeping. Thus, quadruple entry bookkeeping can be regarded as
the journal entry method integrating horizontal and vertical double entry
bookkeeping. The rules of quadruple entry bookkeeping have important
roles in the accounting oriented general equilibrium model. The notation
method for the accounting model is defined in detail in appendix.

2.2 Value Added Cost Accounting

Major differences between micro business accounting and macro account-
ing are valuation, time of recording, and classification (Gorter and
Shrestha(2004), EC et al. (2009)). In business accounting, historical cost
basis is used for evaluating the value of assets frequently. On the other
hand, almost all assets and transactions are evaluated by mark to market
basis in order to be consistent with the equivalence principle of debit and
credit and to detect influence of inflation in macro accounting. Similarly,
depreciation of fixed assets is measured based on mark to market basis in
macro statistical systems.
In micro business accounting and macro accounting, time of recording
is based on accrual basis. However, micro business accounting recognizes
sales and profit lately from macro accounting by the principle of conser-
vatism. In general, profit from transactions is recognized at the time of
sales in micro business accounting. On the contrary, value added in macro
accounting should be recognized at the time of production in order to detect
the influence of inflation.
For example, let consider a company manufactures some durable goods
from various materials. Let x̃1 , x̃2 , · · · , x̃n be quantities of materials, includ-
ing manufacturing labor time, d˜ be a quantities of producing durable goods,
and m̃ be sale proceeds for the firm. In the micro business accounting,
journals of this firm are as the follows.
2.2 Value Added Cost Accounting 7

[At Time of Production]

Inventory ˜ · d˜
p̃( d) Material 1 p̃x˜1 · x˜1
Material 2 p̃x˜2 · x˜2
···
Material n p̃x˜n · x˜n

[At Time of Sales]

Cash m̃ Sales m̃
Sales Cost ˜ · d˜
p̃( d) Inventory ˜ · d˜
p̃( d)

Sales m̃ Sales Cost ˜ · d˜

p̃( d)
Profit s̃

Here, s̃ = m̃ − p̃( d) ˜ · d.
˜ The first one of above journals can be denoted
˜ ˜ denotes
as ⟨d| |x̃1 , x̃2 , · · · , x̃n ⟩ by notation of 2.1. Furthermore, let ⟨m̃| s̃ |d⟩
the second one of the above journals. That is, if journals generate residuals,
then residuals are denoted as |x| between bra and ket.
On the other hand, journals of above example in macro accounting as
the follows.
[At Production]

Inventory ˜ · d˜
p̃( d) Material 1 p̃x˜1 · x˜1
Material 2 p̃x˜2 · x˜2
···
Material n p̃x˜n · x˜n
Value Added s̃

[At Sales]

Cash m̃ Inventory ˜ · d˜
p̃( d)

Above journals can be also denoted by ⟨d|˜ s̃ |x̃1 , x̃2 , · · · , x̃n ⟩ and ⟨m̃| |d⟩.
˜
Thus, production activities are recorded by mark to market basis cost ac-
counting and exchange trades without frictions, i.e. transaction fees, do not
generate value added in macro accounting. In addition, despite of taking
account of the allocation of resources in microeconomics, the allocation of
resources does not influence for value added in macro accounting. Because
frictionless trades do not generate value added even if economic welfares
are improved. Production activities are recorded by not quadruple entry
bookkeeping, but double entry bookkeeping.
Sometimes, the value added by processing and manufacturing is ignored
by the assumption of perfect competition in microeconomics. However, the
value added by processing and manufacturing can be regarded as a large
part of the source of profit, i.e. value added by firms. Hence, the value
2.3 The Structure of Accounts 8

added by processing and manufacturing should not ignore in macroeconomic

modeling.

2.3 The Structure of Accounts

Macro statistical systems consist of National Income and Product Accounts
(NIPA), National Balance Sheets, Input Output Table and Flow of Funds
Accounts (EC et al. (2009)). In addition, Balance of Payment and Inter-
national Investment Positions provides information on international trades
and international assets and liabilities (IMF (2009)).
For constructing these statements from micro accounting journal entries,
all of the journal entries for economic entities sorts the follow accounts, the
money account, the foreign money account, the value account, the change
of stock and the revaluation account, and balance sheet. The money ac-
count records money flow of domestic trades and the foreign money account
records money flow of international trades. In other words, journal entries
of monetary side in horizontal double entry bookkeeping are sorted in these
accounts. On the other hand, the value account record journal entries of
real side in horizontal double entry bookkeeping. The change of stock and
revaluation account represents the change of assets and liabilities and their
holding gains (or losses), i.e. gains from revaluation. The balance sheet
represents the status of stocks for economic entities. In these accounts, the
value account is the core account of macro statistical systems. Credit of
the value account means the generation of value and debit of value account
means the consumption of value, therefore residual of value account means
the change of the values of stocks, i.e. the change of capital, in the macro
economy.
For example, journal entries of a typical household are sorted as the
follow. Let ý be labor incomes, ý F be labor incomes from jobs at foreign
country, ć be purchased consumption goods, ćF be imported consumption
goods from foreign country, á be purchased and sold assets such as durable
goods and financial instruments, ´l be change of liabilities such as loans, ḿ
be money flows, and capital letters be stock of each variable. Then, the
account of the household can be denoted as the follows.
The Money Account
Labor Income |ý⟩ Consumption Goods ⟨ć|
Net Increased Liabilities |ĺ⟩ Net Purchased Assets ⟨á|
Net Money Flow |ḿ|

The Foreign Money Account

Labor Income |ý F ⟩ Consumption Goods ⟨ćF |
Net Foreign Money Flow |ḿF |
2.4 General Price Level and Inflation 9

The Value Account

Consumption Goods |ć⟩ Labor Income ⟨ý|
Consumption Goods |ćF ⟩ Net Holding Gain ⟨π́|
Saving |Ś| Labor Incomes ⟨ý F |
Net Holding Gain ⟨π́ F |

The Change of Stock and Revaluation Account

Net Money Flow |ḿ⟩ Net Increased Liabilities ⟨ĺ|
Net Foreign Money Flow |ḿF ⟩ Saving |Ś|
Net Holding Gain |π́⟩
Net Purchased Assets |á⟩

The Balance Sheet

Money |Ḿ ⟩ Liabilities ⟨Ĺ|
Foreign Money |Ḿ F ⟩ Net Wealth |Ḱ|
Assets |Á⟩

For convenience, let |y⟩ x ⟨z| define x account that includes journal entries
of ⟨x| |y⟩ and ⟨z| |x⟩. Appendix shows the full specification of the account-
ing model with various economic entities such as households, firms, central
banks, governments, and other institutions. Furthermore, macro statisti-
cal systems are described by aggregating micro accounting journal entries.
However, the detail of the accounting model is not required for the following
discussions. Therefore, readers should to refer the appendix on demand.

2.4 General Price Level and Inflation

There are two quotations for macro accounting variables, i.e. nominal value
and real value. Nominal value is the value of variables measured by the value
of the numéraire of each time period. Real value is the value of variables
deflated by Deflators such as the CPI (Consumer Price Index) and PPI
(Producer Price Index).
CPI is seen as the most important price index. CPI is used for adjusting
public pension benefit, determining the coupon rate for inflation bond and
inflation derivatives, and target of policy making such as inflation targeting
and so on (ILO et al. (2004)). The most important use of the CPI is to
measure the change of quality of life (QoL) of the country by comparing real
values of macro statistical systems. Therefore, the purpose of the estima-
tion of CPI is not always equal to the measurement of the value of money.
Actually, the basket for measuring CPI restricts the domain of goods to
consumer goods. For the comparison of economic status between different
time periods, real values are useful for analysis rather than nominal values,
because of the detecting the influence of inflation.
However, the estimation procedure of price index highly depends on
human judgment and econometric estimation. The basket for price index is
2.4 General Price Level and Inflation 10

arbitrary choice and the value of quality improvement have to estimate by

econometric methods such as hedonic regression. In addition, interest rate
can be also used for the comparison of the value of money between different
time periods. Let Pt denotes the purchasing power of the money (in the
abstract sense) at time t, it,t+1 be inflation rate from time t to time t + 1,
Mt be the value of money at time t, and rt,t+1 be nominal interest rate from
time t to time t + 1. Then,
Pt+1
1 + it,t+1 =
Pt
Mt
1 + rt,t+1 =
Mt+1
can be obtain. If the purchasing power of the money regards in the same
lights as the value of money, i.e. Mt = c · Pt−1 , then it,t+1 = rt,t+1 have to
hold. In other words, real interest rate have to be 0.
Thus, inflation rate and real value are not important for theoretical dis-
cussion, even if they are important indicators for practical use. Actual price
indexes are calculated for restricted baskets and they include human judg-
ment and estimation noise. In addition, interest rate provide the information
for comparing the value of money between different time periods more di-
rectly. In the following discussion, inflation rates and interest rates identify
as the same and assuming real interest rates equal 0.
3 General Equilibrium 11

3 General Equilibrium
3.1 Symmetry
3.1.1 Preference and Expectation
The rule of quadruple entry bookkeeping is that a transaction has to be
recorded symmetrically by two economic entities. The most important im-
plication of the rule is that the economic activities of economic entities
implies that other economic entities who takes just the opposite economic
activities always exist. In other words, the rule requires the existence of
economic entities have just the opposite preferences and expectations like a
mirror copy.
In addition, the rule can be also interpreted as that to obtain some goods
implies to leave another one. In other words, exchange trades cannot affect
to the specified market without influence to other market. The rising value
of any goods implies the falling value of other goods relatively. Obviously,
the information on market prices does not provide the information for the
value of goods in the absolute sense. The values in the absolute sense cannot
be observed in the market. For the sake of the convenience, economics and
accounting introduce the concept of numéraire. The values of all goods are
measured by exchange rates with numéraire.
However, the value of numéraire is not constant through the time cycles.
If the prices of all goods excluding the numéraire are raised, that cannot
be distinguished whether the increasing value of goods in the world or the
decreasing value of the numéraire. Thus, the value in the absolute sense in
the world can never be observed. All values in the macro statistical systems
are only in the relative sense. The growth rate of GDP is regarded as the
growth rate of economic activities, actually the growth rate of economic
activities in absolute sense cannot be observed.
Instead of the growth rate of GDP, the growth rate of production quanti-
ties may be used as the measure of economic activities. However, the direct
comparison of production quantities has the problem that the composition
of production quantities is not constant. The composition of production
quantities depends on the taste of economic entities and the tasting will be
changing shortly, therefore the production quantities will be increasing and
decreasing. Hence, the decreasing of production quantities does not always
mean the decline of economic activities. Eventually, production quantities
cannot be used as the measure in the absolute sense of economic entities.
Thus, there is no means to measure the growth rate of economic activities
objectively. In other words, the measures disclosed in public that shows how
degree of the growth rate of the economy are not the facts but the opinions.
In truth, how degree the economy grew objectively can never be known.
Furthermore, the symmetry rule gives a skeptic to representative agent
models. In the model, economic entities who are only demanding or only
supplying should not exist. Preference and expectation of economic enti-
3.1 Symmetry 12

ties have to be diversified. If the agent in the economy is a singleton, then

the expectation of the agent has to have rational expectation for consis-
tency with general equilibrium. However, if multiple agents with diversified
and symmetric preference and expectation exist, then the expectation of
the each agent does not require the rationality for consistency with general
equilibrium.
From above discussion, the paper assumes the symmetric preference and
expectation of economic entities instead of rational expectation. In the
following, some aspects of the economy are discussed by using the rule.

3.1.2 Money Is Made From Real Goods

As the illustration of section 2.1, the rule of symmetry for the flow and
stock between money and goods has to hold. Therefore, the flow and stock
of money have to be equal, these are just the opposite in the accounting
sense, the flow and stock of goods. Hence, the value of money in the world
has to be identically equal the value of goods, i.e. capital, in the world.
In the model, the definition of money is the financial debt without the
specified debtors. That is, the most distinguishing feature of money from
other financial debts in the model is the anonymity of the debtor. All of fi-
nancial transactions have the counter parties and fiat money can be regarded
as the debt of governments or central banks. All of these transactions should
be netted out by the symmetry rule. Hence, the definition of money in here
does not include any financial transactions and fiat money.
From the viewpoint, any financial transactions and issuing fiat money
do not have the effect to the general price level directly. Let X be the stock
of goods, M be the stock of money in the model, P (≡ M X ) be the general
price level, F be the stock of financial assets and liabilities including fiat
money (these are not regarded as money in the model). Then, the relation

P ·X +F ≡M +F

has to hold. Therefore, any transactions and operations changing F , espe-

cially monetary policy, does not give the effect to the general price level and
the stock of goods directly.
The balance sheet of national account in closed economy can be also
denoted as
⟨X + F | ≡ |K + F ⟩
where |K⟩ be the value of capital. Hence, M ≡ |K⟩ can be obtained. From
the above discussion, controlling the quantity of money is tautological equal
controlling the value of capital. If the quantity of money is able to be
controlled, then the change of the value of capital, i.e. investing and saving,
is also able to be controlled. However, the means of controlling the quantity
of money does not exist but controlling the value of capital.
In addition, the money in the exchange equation of Irving Fisher should
be regarded as the same definition of the model. Let x denote the flow of
3.1 Symmetry 13

goods, p be the price of the flow of the goods, v is the velocity of money,
then the equation is
p · x ≡ v · M.
P · X ≡ M , therefore,
p·x
v≡ .
P ·X
In other words, the velocity of money has to equal the velocity of goods
measured by money. Therefore, the quantity of money in the equation has
not to include any financial transactions and fiat money. Thus, the exchange
equation of Irving Fisher does not and should not have any implications for
monetary policy.
Obviously, the money m, M in the accounting model have to be distin-
guished from all of actual financial instruments including fiat money. Both
of them are the substitutions for each other about the value standard. How-
ever, the debtor be specified or not is the most important distinguish feature
of the money in the accounting model. All of debt with specified debtors
should be netted out by the quantity of the money in the accounting model.
Finally, the property of fiat money, i.e. zero interest rate, is regarded as
the problematic property in classical macroeconomics. However, the prop-
erty does not matter for economic policy and business cycles. Because fiat
money can be replaced easily by other financial instruments such as bank
deposit if the property is problematic (Black (1970)). Actually, fiat money
does not occupy a major part of the portfolios of economic entities in the
current.

3.1.3 Human Capital and Physical Capital

The value of physical capital can be interpreted as the present value of the
stream of their return, i.e. the change of the value of physical capital, minus
their depreciation in the future. Therefore, let Kt be the value of physical
capital at time t, πt be the return on physical capital in time period [t − 1, t],
δt be the depreciation on physical capital in time period [t − 1, t], r be the
discount yield of physical capital. Then,
∞
∑ πt − δt
Kt =
j=t+1
(1 + r)j−t

can be obtained. In addition, investment it in time period [t − 1, t] can be

regarded as newly added physical capital plus the return on physical capital.
As same as physical capital, the value of human capital can be seen as the
present value of the stream of the output from human resource, i.e. income,
minus the input to human resource, that is the consumption. Therefore, let
Ht be the value of human capital at time t, yt be the output in time period
[t − 1, t], ct be the consumption in time period [t − 1, t]. Then,
∞
∑ yt − c t
Ht =
j=t+1
(1 + r)j−t
3.2 Efficiency and Stability 14

can be obtained.
From the view of macro accounting, the identity yt − ct ≡ it − δt has to
hold. Therefore, the stream for physical capital and the stream for human
capital have to be the same. In other words, the value of physical capital
and the value of human capital have to be equal if the discount rates are the
same, and these have a symmetric relation. That is, the value out of macro
accounting is the input to human capital (consumption) and the value in of
macro accounting is the output of human capital (income). Thus, human
capital and physical capital cannot input independently from each other to
the production function.
Eventually, the value of human capital cannot grow independently of the
value of physical capital. Hence, the economic growth that has the form of
human capital biased technical change and physical capital biased technical
change is never happened. All of economic growth has to take the form
of neutral technical change (Black (1995)). The viewpoint will provide a
critique to Solow’s model, that is a representative model in economic growth
theory, and modern economic growth models.

3.2 Efficiency and Stability

3.2.1 Grand Old Maid
If the dynamics of the economy can be formulated by mathematics, then
almost all of economic phenomena may be able to forecast the future and
explain the cause of the phenomena. That is maybe the dream of economists.
However, the dream will never come true and it looks the castle in the air.
The rule of symmetry is just like the rule of Old Maid that is the famous
trump game. The rule leads the existence of massively noisy information,
and the unpredictability of the dynamics of the market.
Trading in the financial market is compared to other games or gambles
in sometimes. Liar’s Poker of Lewis(1989) is the one of the famous figures.
Liar’s Poker is the game that uses serial digits of U.S dollar bill and the
players guess the summed number of specific numbers of serial digits of
dollar bills holding all participants of the game. The key factors of the game
are odds calculation and psychological technique such as fake and bluff, and
later one seem to be more important.
Similarly, trading in financial markets is also compared Old Maid. The
rules of market mechanism, including non-financial market such as con-
sumption goods and production goods and labor market, like the rules of
Old Maid rather than Liar’s Poker. Obviously, Old Maid does not depend
on odds calculation almost all. The result of the game depends on the sen-
timent of the players. In other words, the dynamics of the market highly
depends on the sentiment of the participants.
The fake information swirls around not only about financial markets, but
also about economic policy and industrial trend in usual. Many business
people and politicians who are seen to be excellent, uses the psychological
3.2 Efficiency and Stability 15

techniques like fake and bluff for obtaining and keeping power, profit and
position. Many of suspicious information and knowledge about the market
and the organizations spreads in order to make the entities in opposite side
to do irrational decision making.
Economists and politicians who would like to take credit for their policies
have the incentive to create economic theory that justifies their policies.
Despite the causal and effect between economic phenomena and economic
policies is not sure, they creates statistical models and provides statistical
evidences so that their claims justify. Many of economic data and enterprise
financial statements have the properties of opinions rather than facts. In
order to measure these data, the reasonable assumptions are required. Even
if the data are fully objective, economic situations depend on various factors
and there are many candidates for interpretations of the data. In order to
evaluate the claims objectively, the backgrounds of the claims should to be
known even if the theory is suggested by experts in the field.

3.2.2 Pendulum
Symmetric expectation does not always imply that mismatch of the expec-
tation between the entities each other exist. Perfectly matched expectations
of the entities are also included in symmetric expectation. Under such the
situation, the dynamics of the economy depends on external shocks like the
representative agent model with rational expectation.
The benefit of the market mechanism is the benefit of the exchange
of goods and services between diversified preference and ability. Matched
preference and expectation reduce the benefit of the exchange trade in the
market and market liquidity. On the other hand, diversified preference and
expectation makes the equilibrium price and quantity to be unstable, be-
cause the market will become more competitive under the situation. Thus,
there is the trade off relation between the benefit of market mechanism and
the stability of the equilibrium.
The multiple agent model with symmetric expectation does not require
the existence of external shocks in order to generate the dynamics of the
economy. Diversified expectation leads the market with high return and high
volatility. In addition, such the situation promotes new real investment and
destruction of deteriorated capital because the current state of the economy
does not provide satisfaction to many of economic entities and that leads
diversified preference.
However, the situation does not keep on forever. Because, high volatility
and uncertainty makes discomfort to many of economic entities. Sometimes,
the crashes of real and financial market lead to the end of these periods.
From this point in time, economic entities looks for stability by sacrificing
the efficiency. The diversity of preference and expectation is lost and that
makes the market to be low return and low volatility. Under the situation,
new real investment stagnates and many of economic entities keen to tolerate
the situation with already having resources.
3.3 Economic Policy 16

Of course, the situation does not also keep on forever. The inefficiency
makes discomfort to many of economic entities. Sometimes, the situation
generates inflation to the economy because of the deficit of goods and services
and deteriorated capital. Inflation and the deficit of goods increase the
return and the volatility of the real and financial investment.
Thus, the cause of low volatility market environment is the past of high
volatility market environment and vice versa. The cyclical volatility dynam-
ics can be regarded as the natural consequence of the general equilibrium.
The cycles should not and will not to be stopped because the cyclical dy-
namics of the market are the consequence of pursuing efficiency. The steady
state is not a natural state for the general equilibrium.

3.3 Economic Policy

3.3.1 Economic Welfare
From the first fundamental theorem of welfare economics, the allocation of
general equilibrium is Pareto optimal. That is, anyone’s utility cannot be
better off without other one’s utility worse off. Therefore, any economic
policies can not obtain objective justification.
On the other hand, some failures of the market, such as economic exter-
nalities, publicities, economies of scale, information inefficiency and so on,
may make the resource allocation to be not Pareto optimal even if general
equilibrium conditions hold. Sometimes, the failures are figured by examples
in game theory, such as the prisoner’s dilemma and tragedy of the commons.
These factors are used for the basis of economic policies in sometimes.
However, regardless of economic externalities, publicities, economies of
scale and so on, the allocation of general equilibrium can be Pareto optimal
from the symmetry rule. Because the interest of the one side has to be
opposite the interest of the other side. The situations like the prisoner’s
dilemma make the competitive allocation to be not Pareto optimal, however,
such the situations will be vanished by the increasing number of players.
In addition, surplus analysis does not consistent with the general equi-
librium model. From the symmetry rule, the improvement of surplus on
the one market implies the worse off of other market. Any shift of demand
and supply curve does not change total surplus of the whole market if gen-
eral equilibrium conditions hold. Surplus analysis, i.e. partial equilibrium
analysis, should not use for economic policy evaluation.
Of course, Pareto optimality is not the only one criterion of the economic
welfare measurement. However, another criterion, i.e. equity criterion, can
not help depend on the individual values of the members of the society.
In other words, making economic policies and economic policy evaluation
cannot be independent from the individual interest of the members of society.
Eventually, economic policy evaluation does not belong to the domain of
science, but the domain of the art.
3.3 Economic Policy 17

3.3.2 Fiscal Policy

From the symmetry rule, economic activities of governments can be seen
to have the symmetric relation with residual of economic activities of pri-
vate sectors after netting. Therefore, economic activities of governments are
mirror copies of residual of economic activities of private sectors. If govern-
ments left freedom of economic activities to market, then economic activities
of governments are following economic activities of private sectors.
Of course, the effect of opposite direction can be considered, and the
approach is called the active fiscal policy. The aim of active fiscal policy
is the changing of economic activities of private sectors by the changing of
economic activities of public sectors. If the active fiscal policy is effective
and feasible, then the government may be able to control to be stable the
state of the economy.
However, the cost of active fiscal policy is very huge and almost all of
governments does not have such the size. Because economic activities of
government are the opposite of the residual of economic activities of private
sectors, therefore, the size of economic activities of governments has to be
larger than a half in the nation in order to control fully the economic ac-
tivities of private sectors. If governments have such the size, then market
mechanism will not work and the economy will be out of the general equi-
librium. The fiscal policy of government can not help being passive if the
market is always in the general equilibrium.
On the other hand, the passive fiscal policy does not imply the small
government. If the rest of economic activities of private sectors expand, then
the size of public sectors also cannot help expand if the passive fiscal policy
is adopted. Therefore, the size of government depends on the economic
activities of private sectors under the passive fiscal policy. In this sense, too
small government prevents the functions of the market as same as too big
government.
Eventually, if the economy is assumed to be in continual general equilib-
rium, then governments cannot assume to have not the size for controlling
fully the economy. From this viewpoint, the fiscal policy of governments
can be regarded as the consequence of business cycles, therefore, the fiscal
policy should be regarded as non important factor for business cycles under
this assumption.
Sometimes, the cause of business cycles asks to government economic
policy and the history of business cycle is explained to be generated by
governments on purpose. One possibility is that governments generates
boom and bust in order to take balance of power between private sectors and
public sectors. The viewpoint will be politics of business cycles. However, it
seem to be difficult to keep on the policies in the long term and the reason
why of taking balance of power between private sectors and public sectors
cyclically is not sure. Because, it is hard to read the cards on the table by
irregular adjustment rather than cyclical adjustment. The political effects
to business cycles cannot be rejected theoretically, however, the aspect is
3.3 Economic Policy 18

out of the scope of this paper.

3.3.3 Monetary Policy

Fiat money and bank reserve, that is liabilities of central banks, are most
close substitution of money in the abstract sense. Actually, the value of a
unit of fiat money equals the value of a unit of money in accounting at point
in time. For that reason, in order to change the value of a unit of money
in accounting, i.e. to change inflation rate, governments and central banks
attempt to change the volume of fiat money and bank reserve in sometimes.
That is monetary policy.
From the equation
P · X + F ≡ M + F,
obviously all of monetary policy influence only the value of F , therefore
monetary policy does not have the effect to change the general price level
P and output X directly. Give the another expression, typical monetary
policy, that is exchanging bank reserve and other money market instruments
(short term loan, repo, bank bill and so on), can be recorded by the rule of
quadruple entry bookkeeping,

Bank: ⟨m̂i | |m̂j ⟩

Central Bank: ⟨m̌j | |m̌i ⟩

here, mi , mj denotes quantity of one of money market instruments in-

cluding bank reserve respectively. Hence, the transaction does not change
any macro accounting variable with netting. Of course, the policy may have
the indirect effect to the general price level and output. However, mone-
tary policy does not seem to have clear transmission mechanism, and the
policy execute in order to change the expectation of market participants in
sometimes.
From the viewpoint, monetary policy does not have the impact into
business cycles and monetary policy also can be seen as the consequence of
the business cycles as same as fiscal policy. In general, central banks have
to run monetary policy for smooth operations of money market. Therefore,
central banks do not determine the policy independently from the market
movement.
Finally, the claim that the cause of hyper inflation is lawless printing
money and monetary policy, is seen as the evidence of the relation between
monetary policy and inflation rate in sometimes. However, inflation rate can
regard in the same lights as interest rate from the discussion in section 2.4.
Therefore, hyper inflation can be seen as massive myopic economic actions of
the general people. The most probable reason of massive myopic economic
actions is massive deficit of living goods such as foods, i.e. standing in
the fear of their life. High interest rate requires a high growth rate of the
money. The lawless printing money and monetary policy can be regarded
as the consequence of hyper inflation.
3.3 Economic Policy 19

3.3.4 Noise
From above discussions, traditional monetary policy and non-traditional
monetary policy, such as quantitative easing, that is, to purchase financial
assets for affecting to financial asset prices and macro statistical data by
central banks and governments, does not have influences to real aspects of
the macro economy and general price level. However, many people think
monetary policy have large effects to the macro economy and sometimes
these seem to have large influences to the state of the macro economy. Why
the phenomena happens?
Black (1986) claims that the cause of the phenomena is the effect of irra-
tional behaviors of market participants surpasses the effect of their rational
behaviors. He calls the effect is Noise. From the rule of symmetry, market
participants cannot predict real and financial market behaviors correctly,
i.e. they does not always make decisions rationally, and the same actions
and similar situations lead to quite different outcomes on some occasions.
The effect of noise can be compared to psychological effect in poker games
such as Texas Hold’em. In general, rational odds in poker can be estimated
by probabilistic calculation. Hence, if all participants of the games make
decision by only rational probabilistic calculation, then win or lose of the
games are left to only luck. However, many of the participants of the game
uses psychological techniques such as bluff in order to increase the rate of
winning by inducing irrational decision making of other participants. Some-
times, bluff affects to win or lose the games rather than rational probabilistic
calculation. In other words, the effect of noise are the effect of information
for inducing irrational decision making and the effect of irrational behaviors,
and sometimes the effect of noise can surpass the effect of rational decision
making.
Economic policy relies on irrational behaviors of market participants are
just like bluff in poker. Sometimes, monetary policy seems to have large
influences to the state of the macro economy even if the policy relies on
irrational behaviors of market participants. However, these actions lead to
different outcomes situation by situation. From the theoretical point of view,
monetary policy, regardless of traditional or non-traditional, does not affect
to general price level and outputs if market participants are not confused
by the noise. Of course, studies of economic policy relying on noise may be
useful, because sometimes the policy may have large influences to the state
of the macro economy. However, efforts and attempts to control noise are
apt to come to nothing in many cases. These studies should belong to the
domain of the art of policy makers rather than the domain of social science.
4 Time 20

4 Time
4.1 Value of Time
In classical general equilibrium theory, prices and quantities of consumption,
production and exchange trade in general equilibrium are led from utility
functions, production functions and endowments of resources. If economic
situations highly depend on the supply side, then production functions are
important and productivity shocks have large impacts to the business cycles
of the macro economy. Conversely, if economic situations highly depend
on the demand side, utility functions are important and taste changing has
large impacts to the business cycles of the macro economy. Therefore, utility
functions and production functions are important for the study of economics.
However, if utility functions and production functions assume to be in-
variant on the passage of time, will business fluctuations vanish? Obviously,
in order to make the state of the economy be stable, endowments have to be
stable. If endowments fluctuates, then equilibrium point will fluctuate even
if utility functions and production functions are stable.
In general, endowments in general equilibrium theory are regarded as
the resources and the wealth for economic agents and these are given as
exogenous variables beyond any doubt. However, if dynamic macroeconomic
models are considered, endowments should be endogenous variables and the
major parts of endowments should be regarded as the return on physical
capital, including land and natural resources, and human capital, i.e. labor
force. The return on capital is not generated without the passage of time.
In other words, any value does not generate without the passage of time.
Therefore, the value of endowments can be regarded as the value of time. If
the definition is accepted, the question about what is the value identically
equal to the question about what is time.
What is the value of time? Almost all of the natural phenomena occurs
regardless of the will of the people, however, almost all of economic phenom-
ena cannot be occurred without the will of anyone. Therefore, the value of
time should be considered as the thing that depends on the will and the
subjectivity of economic agents. As long as the matter of the subjectivity of
human beings, the assumption that the value of time provides to the world
in the stable, should not be justified.
Hence, if the uncertainty of the economy exists, then there exists the
uncertainty of time preference of the general people. The return and the
risk of investment, that are important factors for business cycles, comes
from the time preference of the general people and the uncertainty of these.
In the following, what are the factors to form the time preference of the
general people and why time preference cannot be stable are considered.
4.2 Capital and Time 21

4.2 Capital and Time

4.2.1 Physical Capital and Economic Useful Life
Before time preference of the general people consider, what is the time for
physical capital should to be considered. In general, the value of investment
to physical capital can be denoted as
∞
∑ πt − δt
Kt = .
j=t+1
(1 + r)j−t

Physical capital can use finite horizon, i.e. it has economic useful life. In
addition, if existing physical capital assumed to be already invested in the
past, then depreciation does not associated with spending the value. Under
the equilibrium condition, the return on capital can be approximated as
πt ≈ δt , hence, the value of existing physical capital can be denoted as

∑
t+T
δt ∑
t+T
πt
K̂t = j−t
≈ .
j=t+1
(1 + r) j=t+1
(1 + r)j−t

Here, T be the economic useful life of the physical capital.

The physical capital will generate the value in time interval [t, t + T ].
Regardless straight line method or declining balance method, the value of
time for the physical capital should be measured by depreciation δt . Of
course, objective depreciation cannot be observed, how to decline the value
of physical capital be the only assumption. Therefore, revenue πt can be
used for the proxy of depreciation.
If revenues are projected to be constant through the economic useful
life, then the straight line method should be adopted as the depreciation
method for the physical capital. If revenues are projected to be declined
constant ratio through the economic useful life, then the declining balance
method should be adopted. Eventually, the value of physical capital should
be measured by its future revenues πt . In other words, the risk of the physical
capital is the risk of its future revenues.
Another risk for physical capital is the economic useful life shrinks by
rapid obsolescence. The risk can be also regarded as the risk of future
revenues by the physical capital. However, the damage by obsolescence lost
almost all of the value of physical capital, the risk is different from the
volatility of future revenues. In other words, the risk of obsolescence is the
risk of changing economic useful life T → T ′ (< T ). That is close to sudden
death for human capital. In general, economic useful life of physical capital
is short, longest in 10 years, excluding building and public infrastructure.
Hence, the phenomena can be seen to have not large impact to the macro
economy compared to human capital.
4.2 Capital and Time 22

4.2.2 Human Capital and Lifespan

Applying the same analogy with physical capital to human capital, there are
two risks for the value of human capital. That is, there are the uncertainty
of the revenue yt , i.e. the risk on the value of time, and the uncertainty
of the life spans. Unlike physical capital, the two risks for human capital
should to be distinguish strictly each other. Because the death for human
beings make lost not only their economic value but also other all value of
them. In general, the general people have the thing that is more important
than economic values. As a result, the economical decision making about
lifespan tend to be more irrational than other economical decision making.
The average life span of human beings can be estimated by statistical
methodology. Therefore, almost all of agents knows the average of the rest of
the own lifetime. If the agents know correct own lifetime and they make the
decision rationally, then the interest rate of them will be stable and market
interest rate will converge to the average of mortality rate. However, it seems
to be not actually like that. The dynamics of interest rates was not stable
historically and the level of interest rate diverse from the level of average
mortality rate in sometimes.
The level of interest rate and inflation rate can be regarded as the same
light, therefore, the cause of the difference between the level of interest rate
and the average mortality rate is able to be regarded as the surplus or the
deficit of goods. In other words, the level of interest rate is influenced by
not only the average mortality rate, but also whether the economy is good
or bad. Therefore, the level of interest rate is influenced by two aspects,
that is the financial aspect (time preference) and the real aspect (the status
of the macro economy).
However, if time preference assume to be stable and agents assume to be
cool, then the level of interest should converge to average mortality rate even
if the status of the macro economy is uncertain. In fact, the level of interest
rates are not stable at all historically, therefore the assumption, i.e. the
stability of time preference, is wrong. The consideration that the instability
of time preference is the cause of the instability of the macro economy, is
more reasonable.
Why the time preference of economic entities is unstable? Of course,
there exist multiple reasons, however finiteness and uncertainty of life spans
of economic entities can be considered as the most important reason. Be-
cause of their death happens only once in a very long time, it is difficult to
make decisions stably for them. Uncertainty of life spans generates biased
attitudes to time of economic entities and biased attitudes to time can be
considered as a cause of economic boom and bust.
Thus, finiteness and uncertainty of life spans of economic entities are
important factors for macroeconomic phenomena and business cycles. Es-
pecially, financial market can be considered as market of time rather than
markets of risk. From the viewpoint, The risk in financial markets can be
regarded the risk of time, i.e. the risk of life spans of human beings. In other
4.3 Money and Investment 23

words, the existence of the death can be regarded as the fundamental source
of economic risk by tracing back to the origin. Eventually, the uncertainty
of the macro economy never vanishes in as far as people will die one day in
the future.

4.3 Money and Investment

4.3.1 The Source of Investment Return And Risk
From the rule of symmetry, one’s financial claims are another one’s financial
obligations and one’s investment return on financial instruments, including
equity stock, have to be delivered by other economic entities. Therefore, if
return and risk for one investor (lender) denotes as

dP1 (t) = r1 (t, P1 )dt + σ1 (t, P1 )dW,

then, investee (borrower) return and risk can denote as

−dP1 (t) = −r1 (t, P1 )dt − σ1 (t, P1 )dW.

If r1 (t, P1 ) is positive, the investor’s expected return is positive and the

investee’s expected return is negative. However, the degree of risk is the
same with the investor and the investee. Hence, if assuming the rationality
of both of them, the source of return cannot be explained by risk premium,
i.e. the difference of preference on the degree of risk.
Of course, the investee may invest other instruments and the purpose of
the trade is financing and hedging. If the investment target of the investee
denotes
dP2 (t) = r2 (t, P2 )dt + σ2 (t, P2 )dW,
then, the investee’s return can be denoted as

dP2 (t) − dP1 (t) = (r2 (t, P2 ) − r1 (t, P1 ))dt + σ12 (t, P )dW
√
σ12 (t, P ) = σ12 (t, P1 ) + σ22 (t, P2 ) − 2ρσ1 (t, P1 )σ2 (t, P2 ).
If r2 (t, P2 ) − r1 (t, P1 ) is positive, then the investee’s decision making is ra-
tional. However, if the asset P2 is a financial instrument, the counterpart
of investing have to exist. Obviously, the same operation has to repeat for
assuming the counterpart’s rationality. Finally, the operation keeps on un-
til arriving real investing. Thus, the total return and risk of investment in
the world are independent from the prices and the quantities of financial
instruments such as money market instruments, fixed income and equities.
Financial instruments change the allocation of investment return and risk,
but financial instruments do not influence to the total value of return and
risk on investment in the world directly.
From the above consideration, the source of return and risk on invest-
ment has to be the return and risk of real investing. The return and risk of
4.3 Money and Investment 24

real investing can be regarded as the return on physical capital and human
capital. From the discussion of the previous section, return have to equal
the discount rate plus the depreciation rate under the perfect competitive
market assumption. In other words, net expected return on investment,
excluding risk premium have to be discounted rate. The viewpoint is the
same with consumption CAPM. Of course, the perfect competitive market
assumption is an unrealistic assumption. However, positive expected return
under non perfect competitive market assumption is only superficial rate,
because the return is generated by reducing anyone’s utility compared to
perfect competitive market assumption. Such the return does not always
exist.
Finally, the source of return and risk of investment should ask discount
rate, i.e. the property of human beings that is discounting the future com-
pare with the current. In other words, the source of investment return is
the value of time for the general people, and the source of investment risk
is the risk of time for the general people.

4.3.2 The Trick of 2%

What is the preferable level of interest rates, inflation rates and economic
growth rates for the general people? Sometimes, many people seem to feel
2%. The rate is close to the average mortality rate of humans, excluding
the youths who depends on their parents about economic activities. In the
following, the hypothesis that the natural rate of interest rate is 2% and the
rate is the average mortality rate is discussed.
One of the important risks for investors, but almost all be ignored, is the
mortality risk of investors. No living investors cannot gain return on invest-
ment. Therefore, investors should require an additional return to investment
about self mortality risk. If the average life span is 75 years old and average
old of living households is 40 years, then current living households reduce a
half after 35 years. That means exp(−λ ∗ 35) = 0.5, hence λ is nearly equal
2%.
Obviously, the mortality risk of investors is out of the scope of modern
finance theory. If the risk is handled in modern finance theory, the risk
should be considered in the context of market incompleteness. In addition,
risk free rate assumes to be given exogenously and the assumption is key
concept for arbitrage pricing theory including derivative pricing theory. Es-
pecially, the existence of risk neutral probability is relying on the assumption
of exogenous risk free rate.
However, the mortality risk of investors does not vanish no matter how
financial technologies and insurance products progress, therefore, risk free
rate in the true sense never exist. The risk free rate should be regarded as
the price of the mortality risk of investors. In other words, investors bet not
only the risk on investment target, but also their own mortality risk and if
the risk free rate in the true sense, excluding the mortality risk of investors,
exist, then the rate has to be 0.
4.3 Money and Investment 25

From the viewpoint, discount factor can be also regarded as an average

survival probability of investors. The expectation of survival probability will
converge to natural survival probability in long time horizon. Therefore,
the form of yield curve tends to be contango (upward sloping) if the level
is lower than 2 - 3%, and the form tends to be backwardation (downward
sloping) if the level is higher than 2 - 3%. In addition, there are few financial
instruments that have the maturity longer than the average life spans of
human beings. Thus, the properties of financial market are linked to human
life spans.

4.3.3 Money
In economics, money is defined as any item and verifiable record having
the functions of a medium of exchange, a unit of account and a store of
value. Obviously, there are many candidates of money because almost all of
financial debts and many of physical goods having the functions of a medium
of exchange and a store of value, furthermore, what is a unit of account is
the matter of the social decision.
For example, Black(1970) demonstrates bank deposit can replace the
function of fiat money and other financial debts, Hicks(1989) shows cigarette
was used as money, i.e. cigarette had the functions of a medium of exchange,
a unit of account and a store of value, in some prison. In addition, discount
issued or interest bearing financial debts (e.g. treasury bills) are recognized
as money in sometimes.
However, for any item that are recognized as money, even if US dollar,
there are places and times cannot use it. Money as abstract concept should
to have the function of a medium of exchange against to anyone and anytime,
and actual monetary instruments should to be regarded as substitutions of
the abstract money.
Hence, the holder of the abstract money has to be able to claim to
anyone to fulfill the obligation. In other words, the debtor of the abstract
money has to be anonymous and anonymous have not to have any properties.
Therefore, the concept of abstract money can be defined as the liability of
anonymous. The most distinguished feature of money from other financial
instruments can be seen as anonymity of the debtor.
The anonymous as economic concept have to fulfill the obligations in
anytime. That is, anonymous as economic concept has to suppose as the
person who lives forever. From above discussions, the interest rate of the
person who lives forever have to be 0. Hence, interest rate of the abstract
money has to be 0.

4.3.4 Equity Premium Puzzle

The equity premium puzzle, that is, the consistency problem between as-
set pricing models (e.g. Consumption CAPM) in Arrow-Debrue paradigm
and observed equity risk premium, is posed by Mehra and Prescott (1985)
4.3 Money and Investment 26

and they conclude the puzzle cannot resolve Arrow-Debrue paradigm and
the puzzle should to be resolved by non Arrow-Debrue paradigm. On the
other hand, there are some critiques to their conclusion such as ignoring
extreme events (Rietz (1988), too restricted utility function (Black (1995))
and selection bias including survivorship bias (Brown, Goetzmann and Ross
(1995)).
From above discussion, the return on investment comes from the value
of time of investee. Therefore, equity premium comes from not only the
difference of risk, but also the difference of the value of time between firms
and other economic entities, i.e. banks and governments. Time preference
of typical managers of firms and entrepreneurs is more microscopic than
other economic entities. Because the edge of the business is easily lost by
the passage of time, therefore, almost all of the firms is destined to run by
hand to mouth management until to bankrupt. In other words, much of
the profit of a business is destined to throw into the darkness of the future
in order to continue the business. Therefore, entrepreneurs expect to gain
more higher return from their business and they are willing to pay higher
interest rate for funding even if other economic entities do not feel.
The economic activities of commercial banks can be seen as another
example of the diversity of time preference. The reason why commercial
banks collect deposits from households and lend to firms is the difference
of time preference between households and firms. In general, interest rates,
i.e. the value of time, for households, is lower than interest rates for firms.
Therefore, commercial banks can gain profits from spreads of interest rates
between households and firms by collecting deposits and lending to firms.
Do commercial banks collect deposits and lend to firms if the interest rates of
firms are lower than the interest rates of households? In such the situation,
commercial banks will collect deposits from firms and lend to households
and take profits from their spread of interest rates.
The majority of equity investors are entrepreneurs and firms, on the other
hand the majority of fixed income investors are banks, insurance companies
and pension funds which are agents of the general households. If investors
have to invest full and there are only two investment assets, bonds and
equities, then buying equities imply selling bonds and buying bonds imply
selling equities. In addition, in order to sell equities or bonds, the economic
entities that would like to buy the assets, have to exist. Therefore, the utility
function of equity investors and the utility function of bond investors have
to be not so much the same as just the opposite. Aggregation or averaging of
opposite properties does not have consistent properties. The diversification
of time preference and risk preference will make to fail the estimation of the
model. From the viewpoint, equity premium puzzle can be seen as the limit
of the assumption of representative agent.
5 Business Cycle 27

5 Business Cycle
All of economic phenomena are generated by the will of anyone. If the mar-
ket is always in the equilibrium, the will of anyone can not help generating
the opposite will of other ones. That is, the cause of all of economic phe-
nomena can be never known by the rule of symmetry. In other words, the
cause of business cycles can be never understood.
However, there may be some tendencies because of the matter of human
doings. In the following, some hypotheses for business cycles are suggested
without evidences. These hypotheses ask the cause of business cycles to the
nature of the human being, The key assumptions are the time periods for
time scope of decision making, tasting change and human life span. If the
hypotheses formulates by mathematics, these may belong to business cycle
theory of generalized and complex utility function (Black(1995)).
In classics, periods of business cycles are classified to Kitchin cycles (3-5
years), Juglar cycles (7-10 years) and Kondratiev cycles (50-60 years) (cf.
Schumpeter (1939)). In addition, Kuznets cycles (20-25 years) is added to
these in sometimes. Various hypotheses for the cause of these were con-
sidered by many economists. Typical one is to ask the cause to the cycles
of investment, i.e. inventory investing (Kitchin), capital investing (Juglar),
investment in construction (Kuznets) and technological innovation (Kon-
dratiev). However, business cycles can be regarded as the same lights as the
cycle of investment, therefore, the claim is only the form of tautology and
nothing to say the cause of business cycles.
As the illustration in section 3, sometimes the cause of business cycles
asks to economic policies or failures and shocks of the politics. However,
incentive for generating business cycles is not sure and periodical shocks of
the politics are unrealistic. It may be valid for consideration that economic
policies do not have a large impact to business cycles.
In general equilibrium theory, prices, quantities and other macroeco-
nomic factors should to be determined by demand and supply of the general
people. The decision making of organizations, firms and governments, is
also determined by the general people as workers and managements. There-
fore, the cause of business cycles should to be asked to the nature of human
beings and properties of market mechanism.

5.1 Sector Rotation and Roundabout Production

5.1.1 Time Scope of Decision Making
Time scopes of decision making are vary in case by case. Time scopes of
decision making of day traders may be less than 1 second, and time scopes
of decision making for purchasing a house and marrying may be a whole
lifetime. However, many of decision makings for the stage of one’s life and
medium term enterprise business planning have around 3 years time scope.
On the psychological, future in over 3 years is too far to forecast and imagine
5.1 Sector Rotation and Roundabout Production 28

for human beings. In the following, the time scope for decision making,
especially enterprise business planning, assumes to be 3 years.
Of course, 3 years time scope of decision making does not mean the
existence of business cycles with 3 year period immediately. If the results
of decision making diversifies between different economic entities or the de-
cision timing smooths to be constant in every time period, then such the
cycles are not generated even if the assumption is correct. For example, de-
cisions for taking courses after graduate schools diversifies and smooths to
be constant in every time period, therefore, there will be not notable cycles
with 3 year period.
However, there is a reason why the decision making for enterprise busi-
ness planning tend to synchronize between different organizations even if
their sectors are different. Because, managements of enterprise effort to
gather information for making good decisions, and gathered information
tends to be similar under a competitive market environment even if orga-
nizations are different. Almost all of enterprise managers makes decisions
from the information about the macroeconomic environment and trend in
the sector which of the enterprise belong to. As a result, decisions of al-
most all of enterprise managers tend to be similar and the timing of decision
making concentrates in narrow time periods.
In other words, competitive market environments leads the synchronized
decision making, and the synchronized decision making leads business cycles
with the time period that equals the time scope of decision making. In the
next subsection, the cycle of inventories and production is led from the
synchronized decision making.

Figure 1: The pattern of the inventory cycle

5.1 Sector Rotation and Roundabout Production 29

5.1.2 Roundabout Production and Inventory Investing

Kitchin cycles are featured as cycles of inventory investing. In general, the
reasons for holding inventories are business policy of firms, lead-time for pro-
duction and consumption, and constraints by the capacities of production
facilities. From the discussion in the previous subsection, business policy of
firms tends to be similar and unique business policy does not have the influ-
ence to business cycles in usual. Lead-time for production and consumption
is an important source of risk for firms, however, that cannot be regarded
as the cause of the cyclical behavior of inventories. If the cause of the cycle
assumes lead-time for production and consumption, then firms have to fail
periodically to forecast the demand of consumers. Therefore, the following
focus on constraints by the capacities of production facilities.
Kydland and Prescott (1982) examine the importance of time to built
for business cycles. In general, firms have to invest in means of productions
before starting their business. The process is called roundabout production.
Time to build is the one of the form of roundabout production. Typically,
firms decide capacities of production facilities from demand projection, and
the capacities cannot change easily once firms invest in the facilities. The
cost for changing the capacities of production facilities is called adjustment
cost. Therefore, firms are keen to adapt to uncertainty of market by ad-
justing the stock of inventories and utility rates of production facilities. The
pattern of adjusting the stock of inventories and production leads the cyclical
behavior of inventories.

Figure 2: The overlapped pattern of the inventory cycle

The typical cycle of production can be categorized introduction period,

expanding period, repatriation period and closing period. After accomplish-
ment of production facilities, firms start production and to pile up invento-
ries in introduction period. If demand projection is correct, then firms raise
up utility rate of production facilities and piles up inventories additionally in
5.1 Sector Rotation and Roundabout Production 30

expanding period. The latter half of the cycle, the firm is keen to repatriate
invested funds by selling out inventories and start to invest in next business
plans. During a closing period, firms reduce inventories and production step
by step and stop sales and production in final. In usual, the closing period in
the cycle overlaps the introduction period in the next cycle. Figure 1 shows
the pattern of the cycle. Figure 2 is the cycle in the case of overlapping the
closing period of the previous cycle and the introduction cycle.
Of course, there are cases that the economic useful life of production
facilities is longer than the time period of decision making. However, in many
cases, reinvestment to improve quality and capacities of production facilities
and renewal of productions are executed in every cycle of business planning
even if production facilities does not replace. Therefore, the cycles does not
depend on the economic useful life of production facilities. The effect of
business cycles of economic useful life is discussed in the next subsection.

5.1.3 Durable Goods and Sector Rotation

Black (1982) examines the mechanism of business cycles by sector rotation
in durable goods markets. He assumes moving resource, especially human
resource, from one sector to another sector is costly. Sometimes, the cost
takes the form of involuntary unemployment. However, it is vague why
demand and supply of durable goods is cyclically. If demand for durable
goods smooth to be constant in every time period, then fluctuations that he
claims will not be generated.
The possibilities for non constant demand and production for the sectors
are the synchronization of consumer taste and increasing return for produc-
tion. The former one is trivial, demand for durable goods should change in
every time period following to consumer taste changing. The later one has
a unique feature. If durable goods production functions have the properties
of increasing returns, then rotational production is more efficient than con-
stant production. Increasing return for production can be also regarded as
the benefit of specialization. In other words, more specialized markets are
more influenced by the effect of boom and burst.
Following figures shows a simple numerical example for sector rotation
by increase return. Assume consumer utility function depends on the stock
of durable goods, i.e. the stock of the durable goods represents the level of
consumer utility. In addition, production resources assume to be singleton
and generating 2 units every time period. Let good1 and good2 be two dif-
ferent durable goods which have 2 years economic useful life. Let production
functions for goods1 and goods2 be fi (1) = 1, fi (2) = 3, i = 1, 2 respectively.
Then, input production resources, quantity of production and stock for
each good when constant production and rotational production, have the
trajectory as the following figures. Obviously, rotational production is more
efficient rather than constant production. Thus, sector rotation is more
efficient way under increasing return production function.
5.2 Innovation and Taste Changing 31

Actually, numerous sectors exist in the market and each sector have in-
dividual product functions. The generalized formulation of above example
will be formulated by multiple variables non convex dynamic optimization
problem. Unfortunately, multiple variables non convex dynamic optimiza-
tion problem is NP complete problem. Therefore, the problem does not
have reasonable solution algorithm and solving approach can not help rely-
ing heuristic approach. However, the solution of the problem will be cyclic
and rotational with time periods which are around economic useful life of
durable goods. At the same time, the solution of the problem will take
chaotic behaviors. That can be seen as a reason why of the difficulties of
economic forecasting.

5.2 Innovation and Taste Changing

5.2.1 Rise and Fall of Luxury Goods and Innovation Sectors
Juglar cycles, i.e. the cycles having 7-10 years time periods, are typically
explained as the cycle of capital investment. Sometimes, the cycles are
explained as a result of external shocks and economic actions to correspond
to shocks in real business cycle theory. The weaknesses of these models
that is following the restriction of rational expectation hypothesis, are that
any business fluctuations are not generated without external shocks, and
the reason why such the shocks generates periodically is not clear. In the
5.2 Innovation and Taste Changing 32

following, the cause of the cycles is asked to the nature of the human being
and the reason why it is related rise and fall of luxury goods and innovation
sectors is discussed.
The analysis in the previous section is fit for living goods markets rather
than luxury goods markets. Because demand for these goods is implicitly
assumed to come back by the passage of time even if demand decrease tem-
porarily. However, demand for luxury goods and innovation sectors, i.e.
sectors are not always needed for living by the general people, never come
back once the interest of the general people is lost in many cases. In other
words, luxury goods and innovation sectors can be regarded as the sectors
that repeats creations and destructions.
Obviously, fluctuations of capital investment for luxury goods and inno-
vation sectors are more volatile, rather than fluctuations of capital invest-
ment in living goods sectors. Because, historical records cannot be used
to project the demand for luxury goods and innovation sectors, therefore,
how to decide the production capacities is more difficult than living goods
sectors. In addition, the possibility of vanishing the market is also higher
than living goods markets. Thus, fluctuations of capital investment can be
considered that are influenced by luxury goods and innovation sectors rather
than living goods sectors.
Finally, luxury goods and innovation sectors are highly influenced by
trend, i.e. taste of consumers. In other words, the cycles of these markets
can be analyzed by analyzing trends which are where coming from, how long
time periods has and how to declines. The mechanism how to start trends is
not sure and that will be various, however, the reason why the trend declines
are in the clear. The goods and services lost interest from consumers, i.e.
taste changing. The next subsection does reverse engineering the nature of
human beings for generating Juglar cycles by taste changing in luxury goods
and innovation sectors.

5.2.2 People Lost Interest In Innovations In 7 Years

From the same analogy of synchronized decision making, people that have
similar economic backgrounds such as wealth, income, education and so on,
tend to take the similar economic behaviors at the same time. In other
words, people with similar tasting consumes and invests in specified goods
and services intensively when they have curiosity. In opposite, they will stop
consuming and investing in the goods and services when they lost interest.
Therefore, luxury goods and innovation sectors fall when the taste of the
people who had led the sector changes.
If the tasting changes assume to be generated cyclically, how long the
period of the cycles is? The most powerful candidate is 7 years, the period
closes with the period of Juglar cycles. Sometimes, 7 years are treated as
the special period in religions, and the thought of Rudolf Steiner in the
area of education, it is based on thoughts in ancient Greece, is a famous
one. Of course, there are individual differences and the period of 7 years
5.2 Innovation and Taste Changing 33

precisely is not important. However, the property is able to be considered as

average properties of human beings. Especially, trend of economic activities
is contagious. Therefore, the thinking that is average properties of human
beings tend to surface in macroeconomic phenomena, would be reasonable.
Innovations does not spread at once, but penetrate to each class step by
step, because to be able to input resources are limited in emerging indus-
tries. Following the typical classification, the stages of industry growth can
be categorized seeds, growth, matured and decline. Main players, not only
consumption but also production, in each stage can be considered as innova-
tors, rich and advance people, masses, late starters and manias respectively.
If people in each class lost interest in 7 years and main players interchange
in the order, then the whole period of industry cycles is about 30 years, that
is said as the life span of business in myths.
As same as the discussion of decision making, the start and the end of
the cycles might overlap. From the symmetry rule, in order to emerge one
industry, another matured industry has to decline. Therefore, the seeds
period of one emerging industry and the decline periods of another matured
industry will overlap. As a result, the other cycles that have 3 times period
of Juglar cycles, i.e. 20 to 25 years, are generated. The cycles will affect to
business cycles by influencing to not only industry structure but also housing
investment and investment in construction (Kuznets cycles).

Figure 3: The pattern of industry growth

5.2.3 Leverage And Downturn

The nature of financial innovations such as, stocks (corporation), leveraged
loans, bonds, margin trading, derivatives, securitization and so on, is de-
veloping leverage. Investors are able to gain high returns from unattractive
investments in ordinary situations by using financial leverage. In general,
financial leverage is not cheap, that like option premium in financial deriva-
5.3 Lifespan and Generation 34

tives, and the sellers of financial leverage (typically investment banks) are
also able to gain much profit by brokerages and selling financial leverages
that are taking the form of financial instruments.
From the rule of symmetry, anyone’s return has to be delivered by an-
other one. Financial leverage seems to break the rule, because buyers and
sellers seem to take profits from financial leverage. However, there is some-
one who takes loss or burden after all, because increasing financial assets
implied increasing financial liabilities from macroeconomic view. In other
words, financial leverage converts revenues in the future into return in the
current. Therefore, high return in the current have to pay in compensation
by realizing high revenues in the future (typically, wage that is not worth
of work) or financial losses by falling asset prices. Therefore, firms have to
put workers in harsh conditions in order to keep on high return by financial
leverage. However, such the situation is not able to keep forever.
Hence, leverage that is built up during upturn periods have to unwind in
downturn periods accompanied by falling asset prices. Typically, the down-
turn periods overlap with the downturn periods of leading innovation sectors.
As a result, financial markets tend to experience periodically crashes and
recessions in every 7 to 10 years, even if the degree of the downturn in the
leading sectors is not on a big scale (Sometimes, such the amplifier mecha-
nisms are modeled in macroeconomics, e.g. Moore and Kiyotaki(1997)).
From the above discussion, boom and bust in financial market may seem
to be able to control by regulating financial leverage. However, financial
leverage is the most powerful tool for the have-nots to rise above. In addi-
tion, financial leverage provides incentive for investment in beneficial, but
too low return or too high risk investment opportunities. Excessive regula-
tions lead to fixation of wealth gap and lost the benefit of market mecha-
nism. After all, all of the economy cannot help accepting boom and bust in
financial market.

5.3 Lifespan and Generation

5.3.1 Preference and Experience
In classical general equilibrium, the utility function is defined as the function
respect to the stock and the flow, i.e. the change of the stock, of goods.
However, if the concept of time is introduced into the general equilibrium
model, utility function should not be defined as the function respect to only
the time series of the flow and the stock of goods. In the following, the
hypothesis for lifetime utility function that is the key assumption of the
hypothesis of the theoretical foundation of Kondratiev cycles is described.
Almost all of economic theory does not show how to the utility function
of the general people be formed. The utility function of the general people
is not given naturally, but that is formed and learned in the course of their
lifetime. In general, human being learns from other people living in the
same place and the same time, self experience, information and history. In
5.3 Lifespan and Generation 35

other words, economic decision making depends on not only the flow and
the stock of goods, but also communication, experience, information and
history. Each factor can be defined as the follow.

• Communication · · · The influence by utility function of entities who

takes communication. Let ui,t denotes utility function for entity i at
time t. Then,
ui,t = ui,t (uj,t (), uk,t (), · · ·)

• Experience · · · The influence by history of own experience. That can

be denoted by historical own utility functions. Let t0(i) denotes the
birth year of the entity. Then,

ui,t = ui,t (ui,t−1 (), ui,t−2 (), · · · , ui,t0(i) ())

• Information · · · The influence by information without communication

and self experience. Let ℑi,{t0(i)≤u≤t} denotes information for entity i.
Then,
ui,t = ui,t (ℑi,{t0(i)≤u≤t} )

• History · · · The influence by information about before birth things.

ui,t = ui,t (ℑi,{u<t0(i)} )

In other words, decision makings of economic entities are influenced from

other economic entities and the past of self experience and the society which
the economic entities belong to. The effect of communication and informa-
tion can be considered as the contagion of tasting and knowledge, that have
been already discussed in the previous subsection. In the following, the
hypothesis for the effect of experience and history is suggested.
The hypothesis consist of three claims. Two of three are for experience
and the last one is for history, These claims may be applied to general
economic behaviors. However, the discussion focus on time preference, i.e.
interest rate, in the subsection, because the objective of the subsection is
the cycles of interest rate. The first two claims for the experience are at the
next.

• Time preference for the general people is formed in the young period,
and time preference have formed once never change by the passage of
time even if the economic situations that deny the policy happen.

• Time preference for the general people is formed for avoiding the sit-
uation like bad experiences, typically financial losses, in the young
period. In other words, people who experience up trend and high in-
terest rate environment in young period tend to become myopic, i.e.
high interest rate people. In opposite, people who experience down
5.3 Lifespan and Generation 36

trend and low interest rate environment in young period tend to be-
come longsighted, i.e. low interest rate people. Because, up trend
interest rate environment makes thrifty to have losses by inflation and
down trend interest rate environment makes spendthrift to have losses
by deflation respectively.

The last one is crucial. Because, if economic behaviors of the general

people are influenced by history, then cyclical economic behaviors beyond
generations cannot be justified. Therefore, the last claim is as the next.

5.3.2 Market Never Learn From History

Many of people learns the history for not only the home country, but also
foreign countries in schools. Therefore, people may learn something not
the enumeration of historical events from history. However, the history of
economic phenomena tells nothing, because the cause and effect of economic
phenomena cannot distinguish objectively by the rule of symmetry. If lessons
and policies that are learned from economic histories are able to believe,
these are only personal ones and there always exists people who does not
believe that. In addition, no one can judge which side is correct or not. It
seems to be difficult to learn something from the history for not only fools
but also wises.
After all, the general people learn many from self experiences and com-
munications with people who close to. Many of information and history are
only used for reinforcing own sense of values. Therefore, the gap between
families for income, wealth, education and so on, and regional features tend
to be fixed. In other words, social inequalities are generated by the property
of human beings, rather than social systems and economic systems. Many
of upstarts may be lonely people and they does not think that people close
to them are friends and teachers. In the sense, wises may not learn from
self experiences.
As same as regional features, economical sense of values in the same gen-
eration tend to be similar. Because the same generation shares the similar
experimental background of economic situations. As a result, each gener-
ation tends to have bias time preference. One generation may be short-
sighted, another generation may be longsighted. Therefore, if shortsighted
generation passes away, then the interest rate will fall down. Conversely, if
longsighted generation passes away, then the interest rate will rise up. In
the next subsection, the hypothesis that the phenomena lead Kondratiev
cycles is claimed.

5.3.3 Business Cycles As Cycles of Life

Kondratiev cycles are called life cycles in sometimes (Murphy (2004), pp.195-
197). That is, people who have an average life span have an experience of
the peek and the bottom of business cycles only once and they have never
5.3 Lifespan and Generation 37

the experience again. In addition, the cycle is spanned by four stages and
each stage is compared by seasons in a year. In other words, spring is the
a up trend interest rate stage, summer is a high interest rate stage, autumn
is a down trend interest rate stage and winter is a low interest rate stage.
By the assumption of the hypothesis, people who are born in each season
tend to have a biased time preference. That is, people who are born in
spring and summer tend to be shortsighted and high interest rate people,
and people who are born in autumn and winter tend to be long-sighted and
low interest rate people. In addition, born in spring passes away in summer,
born in summer passes away in autumn, born in autumn passes away in
winter and born in winter passes away in spring respectively.
After all, low interest rate people pass away and high interest rate people
bear in the spring and summer. Conversely, high interest rate people pass
away and low interest rate people bear in autumn and winter. An equi-
librium of financial market changes according to changes of constitution of
market participants. That is all of the claim of the hypothesis.
These cycles will affects to not only economic behaviors, but also social
behaviors. Especially, in order to be a high interest rate environment, i.e.
inflation, demand for goods and services have to surpass these supply. How-
ever, it is difficult to imagine that such a situation can be realized under the
situation of decreasing population. Because once raised productivity cannot
be considered easy to fall. Therefore, each season in the cycle can be consid-
ered to have distinguishing features of social and political background from
each other. It seems to be not sure the cause and effect between economic
situations and social situations. However, the cause of both of them must
be the nature of human beings.
6 Conclusion 38

6 Conclusion
In this paper, some aspects of market mechanism, financial market and
business cycle are discussed from the viewpoint of the accounting oriented
general equilibrium model. The model is just the reverse thinking of classi-
cal economics, in other words, the approach analyzes how to preference and
expectation of market participants be if market is always in general equilib-
rium, instead of searching equilibrium from given utility functions, product
functions and endowments.
The approach will be similar to the economics of Fischer Black. His
approach supposes that market is in the continual equilibrium and fluctu-
ations of economic variables are regarded as the change of the equilibrium.
He does not think almost all of economic phenomena is the disequilibrium
or Walrasian tournament processes even if there exists crashes and great
depression. Almost all of his claims comes from the policy that the market
is always in the equilibrium.
If the market is in the equilibrium, then preference and expectation of
market participants can not help separating. As a result, he claims any
economic policy makes some people better off without making others worse
off. In addition, monetary policy is only takeover of economic actions of
other economic entities, typically commercial banks, by governments and
central banks. Therefore, he also claims monetary policy can affect neither
the real sector nor the price level.
He did not think to be able to explain his thinking in classical economic
models and modern economic models. In many cases, he used examples and
unsophisticated mathematical models, despite of the excellent formulation
in the field of finance, and he was not keen to provide statistical evidences
(Mehrling (2005)).
The cause of the impossibility of mathematical formulation of the ac-
counting oriented general equilibrium model is a contradiction. The pur-
pose of creating macroeconomic models is to know the cause and effect of
macroeconomic phenomena. However, if market assumes to be always in
general equilibrium, the cause and effect of macroeconomic phenomena can
be never known. In other words, in order to be able to understand the
cause and effect of macroeconomic phenomena, market have not to be in
general equilibrium. After all, the completed version of macroeconomics
with microeconomics foundations may have nothing to tell.
Classical economic model searches vectors (prices and quantities) from
giving functions, therefore the models can be solved with reasonable assump-
tions. On the other hand, the problem of the accounting oriented general
equilibrium model is just like constructing and estimating the mathematical
problem from its solution. In order to solve the problem, the function forms
have to be restricted so that parameters of functions are able to be estimated
from observable vectors. However, the approach makes the model to be too
specific and the model cannot help losing the generality and depending on
arbitrary assumptions.
6 Conclusion 39

In addition, many of statistical data do not provide information for con-

troversial economic questions such as demand vs. supply, real vs. money,
skill vs. technology and so on. From the rule of symmetry, many of macro
statistical data have to be the same, regardless of which one is the cause of
phenomena. Hence, many of macro statistical data do not contain informa-
tion for identifying the cause of phenomena. Statistical evidences should to
be regarded as not evidences but interpretation of data.
The accounting oriented general equilibrium model provides only the
simple principle, i.e. the rule of symmetry. If the market is always in
the equilibrium,the model requires the existence of economic entities have
just the opposite preference and expectation like a mirror copy. At the
same time, the model allows the existence of economic agents with various
preferences and expectations. More diversified expectation makes market
to be more unstable, more diversified preference makes market to be more
efficient by specialization. The viewpoint will be the same one with business
cycle theory of Black.
Finally, the paper provided the discussion about Kondratiev cycles.
There are some literatures that ask the cause of Kondratiev cycles to hu-
man life span and the generation gap (e.g. Kato(2006)). The idea is not the
unique. However, the idea that ask for the cause of Kondratiev cycles to
properties of market equilibrium will be unique and it is a main contribution
of this paper.
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Fund(IMF), Organization for Economic Co-operation and Develop-
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[10] International Monetary Fund(IMF). Balance of Payment and Interna-

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[11] John Moore and Nobuhiro Kiyotaki. Credit cycles. Journal of Political
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[12] Masashi Kato. Business Variation and Time - Cycles, Growth and Long
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[13] Finn E. Kydland and Edward C. Prescott. Time to build and aggregate
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[14] Michael Lewis. Liar’s Poker. W.W. Norton & Company, 1989.

[15] Rajnish Mehra and Edward C. Prescott. The equity premium:a puzzle.
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[16] Perry Mehrling. Fischer Black and The Revolutionary Idea of Finance.
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[18] Thomas A. Rietz. The equity risk premium a solution. Journal of

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[19] Joseph A. Schumpeter. Business Cycles. A Theoretical, Historical and

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[20] Stephen J. Brown, William Goetzmann and Stephen Ross. Survival.

Journal of Finance, July 1995.
A.1 Notations and Notation Method 42

A The Accounting Model

In general, basic principles of studies, regardless of natural science or social
science, should be simple. However, the simplicity of the principles does not
imply the simplicity of phenomena. Therefore, the concrete model is also
useful to understand the actual phenomena, even if the model is complicated.
In the appendix, in contrast to the body of the paper, economic activities
of each economic entity are denoted in detail with avoiding abstraction as
possible. At first, notation method and notations are defined. Second, micro
accounting models of each economic entity are described in detail. Finally,
the macro statistical system is denoted by aggregating journal entries of
micro accounting models.

A.1 Notations and Notation Method

(F) x( F)
Let xi,j,k,t (θ)
and pi,j,k,t (θ) be the general formulation of quantity and price
respectively. Here, x denotes the category of goods, i be the subscription of
countries, j be the subscription of entities, k be the subscription of goods,
t be the subscription of time periods, and θ be parameters of variables. If
F is attached, then these variables are quantities and prices of international
trades. As same as section 2.3, if x is a small letter, then the variable
denote a flow variable, and capital letters denote stock variables. In order
to identify the type of entities such as households, firms, governments and
so on, these variables are used with accents that are defined as the follows.

Table A-1 The Definition of Accents

Symbol Definition
x́ Households.
x̃ Non-financial corporations.
x̂ Financial corporations except central banks.
x̌ Central banks.
ˆ
x̂ Financial corporations include central banks.
ˆ = x̂ + x̌.
That is, x̂
⃗x Local and state governments.
x̄ Central governments and social security funds.
¯
x̄ General governments and social security funds.
¯ = x̄ + ⃗x.
That is, x̄
x̀ NPISHs(Non profit organizations such as schools, hospitals,
and churches etc.).
ẋ Rests of economic entities such as international institutions.
x Aggregated variables for all types of economic entities.
That is, x = x́ + x̃ + x̂ + x̌ + ⃗x + x̄ + x̀ + ẋ.
A.1 Notations and Notation Method 43

For example, ći,j,k,t denotes quantities of consumption goods and services

k for the household j lives in the country i in the time period (t − 1, t]. For
convenience, the summation of these variables is represented by omitting
subscription as the following examples.

Table A-2 The Summation of Variables

Symbol Value Definition
∑
xi,j,t k xi,j,k,t Aggregated quantities of goods in the category x for
∑
the economic entity j.
xi,k,t x Aggregated quantities of goods k in the country i.
∑j i,j,k,t
xi,t x Aggregated quantities of goods in the country i.
∑j i,j,t
xk,t x
∑i i,k,t
Aggregated quantities of goods k in the world.
xt i xi,t Aggregated quantities of goods in the world.

In section 2, some notations for denoting journal entries and accounts

are introduced. The whole notation method of journal entries and variables
of accounts is defined as the follow.

Table A-3 Notations of Accounting Variables

Symbol Definition
⟨x| Debit transaction amount. If multiple items are entered, then
the debit of journal entries have multiple elements.
|x⟩ Credit transaction amount.
⟨x⟩ Net debit transaction amount. That is, ⟨x⟩ = ⟨x| − |x⟩
⟨x| |y⟩ Journal entries. If journal entries generates residual, then the
residual is denoted as variables between bra and ket. For in-
stance, ⟨x1 , x2 , · · · , xm | z |y1 , y2 , · ·∑
· , yn ⟩ means ∑ residual enters
into the credit of z account if z = m p x · x − n py · y > 0
i=1 i i i=1 i i
and the debit of z account if z < 0.
⟨x|y⟩ Conditional sum of debit transaction amount of the x account
such that the credit of journal entries is the y account. From
the symmetry, the value also denotes conditional sum of credit
transaction amount of the y account such that the debit of
journal entries is the x account.
x |y⟩ Conditional sum of a quantity of debit of the x account such
that the credit of journal entries is the y account.
⟨x| y Conditional sum of a quantity of credit of the y account such
that the debit of journal entries is the x account.
|y⟩ x ⟨z| T-account for the x account that includes journal entries of
⟨x| |y⟩ and ⟨z| |x⟩.
A.1 Notations and Notation Method 44

Prices of goods can be defined as transaction amount divided by quan-

tities. Average prices of goods are different between debit and credit for
each economic entity. However, aggregated average prices of goods across
all economic entities have to be the same between debit and credit. Let
p⟨x| = ⟨x|m⟩
x|m⟩ be average prices for the debit and p
|x⟩ = ⟨m|x⟩ be average
⟨m|x
prices for the credit. Here, m be the money account. Prices of average
transaction amount for debit and credit can be denoted as px = ⟨x|m⟩+⟨m|x⟩
x|m⟩+⟨m|x .
As same as the summation of quantities, average prices of the summation for
goods, economic entities and countries denoted by omitting subscriptions.
From the same analogy of prices, effective foreign exchange rates are
defined as transaction amount divided by price denominated foreign cur-
rencies and quantities. Let p⟨x | = ⟨x |m⟩
F F

xF |m⟩ be prices denominated domestic

currencies for the debit and pF⟨x | = ⟨x |m ⟩
F F F

xF |mF ⟩ be prices denominated foreign

currencies for the debit. Then, effective exchange rates of goods x can be
denoted as ϵ⟨x | = p⟨x | /pF⟨x | . Let ϵi/j denote exchange rates of currency
F F F

j against to unit of currency i. As same as average prices, average exchange

rates of the summation for goods, economic entities and countries denoted
by omitting subscriptions.
Finally, let define symbols of goods categories, i.e. types of x, as the
follow.

Table A-4 Notations of Quantities

Symbol Definition
I, J, K Number of countries, economic entities and goods.
c( , C) Consumption goods. The model, assume that consumption goods
are consumed in the same fiscal period of production, i.e. C ≡ 0.
d, D Durable goods. Depreciation of durable goods are denoted by δ d .
x, X Intermediate products and materials for production. In input out-
put tables, subscription j of x denotes intermediate products cate-
gorized by sectors.
v, V Fixed assets such as building, production facilities and computer
softwares including intangible assets, etc. Depreciation of fixed
assets are denoted by δ v .
u, U Public infrastructures. Depreciation of public infrastructures are
denoted by δ u .
m, M Cash and money market instruments including deposits, credit
cards, current accounts, bank bills, etc. The notation denotes fi-
nancial instruments that are used in settlement for real trades, and
it does not denote financial instruments for investment, such as
money market funds, even if financial instruments that are catego-
rized in money market instruments in general.
e, E Equity shares including listed stocks.
A.1 Notations and Notation Method 45

b, B Fixed income securities such as government bonds, corporate

bonds, mortgage backed securities, etc. In addition, the notation
includes financial instruments for investment even if tenors of fi-
nancial instruments are short.
r, R Real capitals excluding fixed assets. In other words, lands and
natural resources.
l, L Loans such as mortgage loans, bank loans, syndication loans, etc.
o, O Insurances, derivatives and other financial instruments.
f, F Financial assets excluding money market instruments, i.e. f =
e + b + l + o.
w Working hours. Labor incomes can be calculated by pw · w.
g, G Social securities such as public insurances and pensions. Stock
variables means claims and liabilities for social securities.
κ Subsidies from governments.
τ (type) Taxes.Type of taxes enumerates as follows. Let τ r be income tax,
τ v be value added tax, τ i be inheritance tax, τ a be asset tax, τ m
be import tax, τ x be export tax and τ be total amounts of whole
taxes, that is, τ = τ r + τ v + τ i + τ a + τ m + τ x .
θ Gifts including inheritances and donations.
µx Property Income (and expenditure) of financial instruments and
return on real capital. For example, interest of loans and dividend
of equity shares are included. x represents type of assets. µ =
µm + µb + µl + µe + µr + µo .
λx Gain (or Loss) by trading, i.e. realized profit and loss by asset
prices movement.
πx Holding gain(or loss), i.e. unrealized profit and loss by asset prices
movement. In general, holding gain are defined as including realized
profit and loss in macro statistical systems. However, this paper
distinguishes realized profit and loss from holding gain.
S Saving, i.e. the change of the value of capital.
I Investing, i.e. the change of the value of real assets excluding de-
preciation of fixed assets. If international trades are ignored, then
investing equals saving minus depreciation of fixed assets.
K Capital (net wealth or net obligations), i.e. residual amount of
assets minus liabilities of balance sheets.
A.2 Micro Accounting Model 46

A.2 Micro Accounting Model

A.2.1 Households
Typical economic activities of households are working, consumption and
investment to real capitals such as lands and financial instruments. All
household economic activities can be described by bookkeeping, however, all
of economic activities are not always measured and captured. Houseworks
and household productions are obviously household’s economic activities
and generate value added. However, such activities are difficult to measure,
therefore the activities are ignored in macro accounting in general.
Households are identified with workers and consumers in sometimes,
however, all of capitalists also belong in this sector. In microeconomics, the
objectives of consumers and firms are distinguished and they are treated
as vis a vis economic entities in usual. However, all of firms are owned by
households as capitalists and governments by tracing back the origins of
their own structures. The decision makings of firms are decided by house-
holds as labors and households as capitalists. Thus, separation of decision
making between consumers and firms is not always justified, and these seem
to highly correlate in some rare situations such as great depressions. In
the following, journal entries of typical economic activities of households are
classified into the accounts in section 2.3 from accounting viewpoint.

The Money Account of Household (i, j)

Labor Incomes |ẃi,j,t ⟩ Consumption Goods ⟨ći,j,t |
Property Incomes |µ́i,j,t ⟩ Property Expenses ⟨µ́i,j,t |
Received Gifts |θ́i,j,t ⟩ Given Gifts ⟨θ́i,j,t |
Social Security Benefits |ǵi,j,t ⟩ Social Security Contributions ⟨ǵi,j,t |
(Net Purchased) Durable Goods ⟨d´i,j,t |
(Net Purchased) Foreign Money ⟨ḿFi,j,t |
(Net Purchased) Financial Assets ⟨f´i,j,t |
(Net Purchased) Real Estates ⟨ŕi,j,t |
Tax Payment ⟨τ́i,j,t |
Net Money Inflow(Residual) |ḿi,j,t |

The Foreign (Money) Account of Household (i, j)

F ⟩
|ẃi,j,t ⟨ćF
Labor Income Consumption Goods i,j,t |
Property Income |µ́F
i,j,t ⟩ Property Expense ⟨µ́F
i,j,t |
Received Gifts F ⟩
|θ́i,j,t Given Gifts F |
⟨θ́i,j,t
Social Security Benefits F ⟩
|ǵi,j,t Social Security Contributions F |
⟨ǵi,j,t
(Net Purchased) Foreign Money |ḿi,j,t ⟩ (Net Purchased) Durable Goods ⟨dF |
´
i,j,t
(Net Purchased) Financial Assets F |
⟨f´i,j,t
(Net Purchased) Real Estates F |
⟨ŕi,j,t
Tax Payment F |
⟨τ́i,j,t
Net Money Inflow(Residual) |ḿF
i,j,t |
A.2 Micro Accounting Model 47

The Value Account of Household (i, j)

Consumption Goods |ći,j,t ⟩ Labor Income ⟨ẃi,j,t |
Property Expense |µ́i,j,t ⟩ Property Income ⟨µ́i,j,t |
Given Gifts |θ́i,j,t ⟩ Received Gifts ⟨θ́i,j,t |
Social Security Contributions |ǵi,j,t ⟩ Social Security Benefits ⟨ǵi,j,t |
Tax |τ́i,j,t ⟩ Net Trading Gain ⟨λ́i,j,t |
Depreciation(Durable Goods) |δ́i,j,t
d ⟩ Net Holding Gain ⟨π́i,j,t |
Consumption Goods |ćF
i,j,t ⟩ Labor Income F |
⟨ẁi,j,t
Property Expense |µ́Fi,j,t ⟩ Property Income ⟨µ̀F
i,j,t |
Given Gifts F ⟩
|θ́i,j,t Received Gifts F |
⟨θ́i,j,t
Social Security Contributions F ⟩
|ǵi,j,t Social Security Benefits F |
⟨g̀i,j,t
F ⟩
|τ́i,j,t ⟨λ́F
Tax Net Trading Gain i,j,t |
F
Depreciation(Durable Goods) |δ́i,j,t ⟩
d Net Holding Gain F |
⟨π́i,j,t
Saving(Residual) |Śi,j,t |

The Stock/Revaluation Account (Change of Balance Sheet) of Household (i, j)

Net Money Inflow(= |ḿi,j,t |) |ḿi,j,t ⟩ Depreciation(Durable Goods) ⟨δ́i,j,t
d |
F
(Net Purchased) Durable Goods |d´i,j,t ⟩ Depreciation(Durable Goods) ⟨δ́i,j,t
d |
(Net Purchased) Financial Assets |f´i,j,t ⟩ Saving(Residual) |Śi,j,t |
(Net Purchased) Real Estates |ŕi,j,t ⟩
Net Trading Gain |λ́i,j,t ⟩
Net Holding Gain |π́i,j,t ⟩
Net Money Inflow |ḿFi,j,t ⟩
(Net Purchased) Durable Goods |d´F ⟩
i,j,t
(Net Purchased) Financial Assets F ⟩
|f´i,j,t
(Net Purchased) Real Estates F ⟩
|ŕi,j,t
Net Trading Gain |λ́F
i,j,t ⟩
Net Holding Gain F ⟩
|π́i,j,t

The Balance Sheet of Household (i, j)

Money Stock |Ḿi,j,t ⟩ Financial Liabilities ⟨F́i,j,t |
Durable Goods |D́i,j,t ⟩ Foreign Financial Liabilities ⟨ĹF
i,j,t |
Financial Asset |F́i,j,t ⟩ Net Wealth(Residual) |Ḱi,j,t |
Real Estate |Ŕi,j,t ⟩
Foreign Money Stock F ⟩
|Ḿi,j,t
Foreign Financial Asset F ⟩
|F́i,j,t
Foreign Real Estate F ⟩
|Ŕi,j,t

A.2.2 Non Financial Corporations and NPISHs

In business accounting, financial statements consist of cash flow statement,
profit and loss and balance sheet. Accounts of the model corresponds to
these statements by money (and foreign money) account, value account and
balance sheet respectively. Stock and revaluation account denotes change of
stock between fiscal period start and its end.
As the illustration of section 2.2, major differences between micro busi-
A.2 Micro Accounting Model 48

ness accounting and macro accounting are valuation and time of recording.
The model of the firm accounting can be seen as not only firm accounts in
macro accounting, but also the financial statements in micro business ac-
counting by changing valuation and time of recording. In addition, equity
shares are not identified as liabilities of firms in micro business accounting.
On the other hand, equity shares are financial liabilities of firms and equity
shares have to be evaluated by mark to market basis in macro accounting
in order to satisfy debit and credit equivalent.
Parts of nonprofit institutions (NPIs) can be treated like non-financial
corporations and NPIs that are controlled by governments are included in
general governments. NPIs that cannot be grouped into non-financial cor-
porations and general governments are called non-profit institutions serving
households (NPISHs). The distinguishing features of NPISHs are that in-
come and profit of organizations do not belong its owners and their products
are not traded by fair market prices in many cases. In addition, funds of
some of NPISHs are financed by subsidies from governments and donations.
However, NPISHs can be treated like non-financial corporations in the
model, because the aim of the model is not how to evaluate transactions
and belonging of economic profit. Therefore, economic activities of NPISHs
are represented as same as non-financial corporations, i.e. only accents of
variable changes from x̃ to x̀. The accounting model of non-financial corpo-
rations is as the following.

The Money Account of Firm(i, j)

Sales(Consumption Goods) |c̃i,j,t ⟩ Cost(Intermediate Products) ⟨x̃i,j,t |
Sales(Durable Goods) |d˜i,j,t ⟩ Cost(Wages) ⟨w̃i,j,t |
Sales(Intermediate Products) |x̃i,j,t ⟩ Cost(Social Security) ⟨g̃i,j,t |
Sales(Fixed Asset) |ṽi,j,t ⟩ Property Expense ⟨µ̃i,j,t |
Sales(Public Infrastructures) |ũi,j,t ⟩ Given Gifts ⟨θ̃i,j,t |
Property Income |µ̃i,j,t ⟩ Tax Payment ⟨τ̃i,j,t |
Received Gifts |θ̃i,j,t ⟩ (Net Purchased) Fixed Assets ⟨ṽi,j,t |
Subsidies Revenues |κ̃i,j,t ⟩ (Net Purchased) Real Estates ⟨r̃i,j,t |
(Net Purchased) Foreign Money ⟨m̃Fi,j,t |
(Net Purchased) Financial Assets ⟨f˜i,j,t |
Net Money Inflow(Residual) |m̃i,j,t |

The Foreign (Money) Account of Firm(i, j)

Sales(Consumption Goods) |c̃F
i,j,t ⟩ Cost(Intermediate Products) ⟨x̃F
i,j,t |
Sales(Durable Goods) |d˜F ⟩
i,j,t Cost(Wages) F |
⟨w̃i,j,t
Sales(Intermediate Products) |x̃F
i,j,t ⟩ Cost(Social Security) F |
⟨g̃i,j,t
F ⟩
|ṽi,j,t ⟨µ̃F
Sales(Fixed Assets) Property Expense i,j,t |
Sales(Public Infrastructures) |ũF
i,j,t ⟩ Given Gifts F |
⟨θ̃i,j,t
Property Income |µ̃F
i,j,t ⟩ Tax Payment F |
⟨τ̃i,j,t
Received Gifts F ⟩
|θ̃i,j,t (Net Purchased) Fixed Assets F |
⟨ṽi,j,t
Subsidies Revenue |κ̃F
i,j,t ⟩ (Net Purchased) Real Estates F |
⟨r̃i,j,t
(Net Purchased) Foreign Money |m̃i,j,t ⟩ (Net Purchased) Financial Assets ⟨f F |
˜
i,j,t
Net Money Inflow(Residual) |m̃F
i,j,t |
A.2 Micro Accounting Model 49

The Value Account of Firm(i, j)

Cost(Intermediate Products) |x̃i,j,t ⟩ Sales(Consumption Goods) ⟨c̃i,j,t |
Cost(Wages) |g̃i,j,t ⟩ Sales(Durable Goods) ⟨d˜i,j,t |
Cost(Social Security) |g̃i,j,t ⟩ Sales(Intermediate Products) ⟨x̃i,j,t |
Depreciation(Fixed Assets) |δ̃i,j,t
v ⟩ Sales(Fixed Assets) ⟨ṽi,j,t |
Property Expense |µ̃i,j,t ⟩ Sales(Public Infrastructures) ⟨ũi,j,t |
Tax Payment |τ̃i,j,t ⟩ Property Income ⟨µ̃i,j,t |
Subsidies Revenues ⟨κ̃i,j,t |
Net Trading Gain ⟨λ̃i,j,t |
Net Holding Gain ⟨π̃i,j,t |
Import(Intermediate Products) |x̃F
i,j,t ⟩ Export(Consumption Goods) ⟨c̃F
i,j,t |
F
Depreciation(Fixed Assets) |δ̃i,j,t
v ⟩ Export(Durable Goods) ⟨dF |
˜
i,j,t
F ⟩
|w̃i,j,t ⟨x̃F
Cost(Wages) Export(Intermediate Products) i,j,t |
Cost(Social Security) F ⟩
|g̃i,j,t Export(Fixed Assets) F |
⟨ṽi,j,t
Property Expense |µ̃Fi,j,t ⟩ Export(Public Infrastructures) ⟨ũF
i,j,t |
F ⟩
|τ̃i,j,t ⟨µ̃F
Tax Payment Property Income i,j,t |
Saving(Residual) |S̃i,j,t | Subsidies Revenues ⟨κ̃F
i,j,t |
Net Trading Gain ⟨λ̃F
i,j,t |
Net Holding Gain F |
⟨π̃i,j,t

The Stock/Revaluation Account (Change of Balance Sheet) of Firm(i, j)

Net Money Inflow(= |m̃i,j,t |) |m̃i,j,t ⟩ Intermediate Products ⟨x̃i,j,t |
Intermediate Products |x̃i,j,t ⟩ Depreciation(Fixed Assets) ⟨δ̃i,j,t
v |
(Net Purchased) Fixed Assets |ṽi,j,t ⟩ Intermediate Products ⟨x̃F
i,j,t |
F
(Net Purchased) Financial Assets |f˜i,j,t ⟩ Depreciation(Fixed Assets) ⟨δ̃i,j,t
v |
(Net Purchased) Real Estates |r̃i,j,t ⟩ Saving(Residual) |S̃i,j,t |
Net Trading Gain |λ̃i,j,t ⟩
Net Holding Gain |π̃i,j,t ⟩
Net Money Inflow(= |m̃F
i,j,t |) |m̃Fi,j,t ⟩
Intermediate Products |x̃F
i,j,t ⟩
(Net Purchased) Fixed Assets F ⟩
|ṽi,j,t
(Net Purchased) Financial Assets |f F ⟩
˜
i,j,t
(Net Purchased) Real Estates F ⟩
|r̃i,j,t
Net Trading Gain |λ̃F
i,j,t ⟩
Net Holding Gain F ⟩
|π̃i,j,t

The Balance Sheet for Firm(i, j)

Money Stock |M̃i,j,t ⟩ Financial Liabilities ⟨F̃i,j,t |
Inventory(Intermediate) |X̃i,j,t ⟩ Foreign Financial Liabilities ⟨L̃F
i,j,t |
Fixed Asset |Ṽi,j,t ⟩ Net Wealth(Residual) |K̃i,j,t |
Financial Asset |F̃i,j,t ⟩
Real Estate |R̃i,j,t ⟩
Foreign Money Stock F ⟩
|M̃i,j,t
Fixed Asset F ⟩
|Ṽi,j,t
Foreign Financial Asset F ⟩
|F̃i,j,t
Foreign Real Estate F ⟩
|R̃i,j,t
A.2 Micro Accounting Model 50

A.2.3 Financial Corporations and Central Banks

A common feature of financial corporations such as commercial banks, in-
vestment banks and insurance companies, etc. is that their corporate profit
made from spread of property income and expense. For example, commer-
cial banks earn revenue from interest of lending loan and their funding cost
is interest on deposit. Securities companies and investment banks earn rev-
enue as transaction fee for various capital market services and sometimes
these transaction fees takes a form of bid-ask spread. Bid ask spread can
be seen as trading gains, hence the revenue also can be seen as spread of
property income and expense.
Economic activities of central banks are similar to commercial banks
and sometimes central banks are called ”bank of banks” or ”Lender of Last
Resort (LLR)”. Major part of the liabilities of central banks are bank notes
and current deposits from commercial banks i.e. bank reserve. The main ob-
jective of traditional monetary policy, such as inducing policy interest rates
and money market operations is controlling the balance of bank reserve. On
the other hands, a major part of assets of central banks are lending loan
to commercial banks and government bonds. In recent years, controlling
assets side of the balance sheet of central banks is also identified as mon-
etary policy and central banks announces purchase amount of government
bonds, mortgage backed securities and mutual funds such as exchange trade
funds (ETF) etc., as monetary policy. The non-traditional monetary policy
includes Quantitative Easing (QE).
In addition, the other objective of central banks is the smooth operation
of short term financial market, i.e. money market. In the usual market
environment, the main players of money market transactions are banks,
market makers and investors. Of course, central banks are major player
of money market in usual environment, however, central banks does not
actively interfere the activities in money market. On the other hands, in the
rare situations such as a financial crisis, money market transactions shrinks
drastically and then market participants can not execute treasury operations
smoothly. In such situations, central banks actively interfere as the money
market player vis a vis other market players for keeping liquidity of money
markets. The role of central banks is represented as providing liquidity.
Despite of the difference of economic activities and objective of central
banks from general financial corporations, journal entries of central banks
are almost same as general financial corporations. Therefore, economic ac-
tivities of central banks are represented like financial corporations, i.e only
accents of variable changes from x̂ to x̌. The journal entries of financial
corporations are classified into the accounts in section 2.3 as the follow.
A.2 Micro Accounting Model 51

The Money Account of Bank(i, j)

Property Income |µ̂i,j,t ⟩ Property Expense ⟨µ̂i,j,t |
Cost(Wages) ⟨ŵi,j,t |
Cost(Social Security) ⟨ĝi,j,t |
Tax Payment ⟨τ̂i,j,t |
(Net Purchased) Fixed Assets ⟨v̂i,j,t |
(Net Purchased) Real Estates ⟨r̂i,j,t |
(Net Purchased) Foreign Money ⟨m̂Fi,j,t |
(Net Purchased) Financial Assets ⟨fˆi,j,t |
Tax Payment ⟨τ̂i,j,t |
Net Money Inflow(Residual) |m̂i,j,t |

The Foreign (Money) Account of Bank(i, j)

Property Income |µ̂F
i,j,t ⟩ Property Expense ⟨µ̂F
i,j,t |
(Net Purchased) Foreign Money |m̂i,j,t ⟩ Cost(Wages) F |
⟨ŵi,j,t
Cost(Social Security) F |
⟨ĝi,j,t
Tax Payment F |
⟨τ̂i,j,t
(Net Purchased) Fixed Assets F |
⟨v̂i,j,t
(Net Purchased) Real Estates F |
⟨r̂i,j,t
(Net Purchased) Financial Assets ⟨f F |
ˆ
i,j,t
Tax Payment F |
⟨τ̂i,j,t
Net Money Inflow(Residual) |m̂F
i,j,t |

The Value Account of Bank(i, j)

Property Expense |µ̂i,j,t ⟩ Property Income ⟨µ̂i,j,t |
Depreciation(Fixed Assets) |δ̂i,j,t
v ⟩ Net Trading Gain ⟨λ̂i,j,t |
Cost(Wages) |ŵi,j,t ⟩ Net Holding Gain ⟨π̂i,j,t |
Cost(Social Security) |ĝi,j,t ⟩ Property Income ⟨µ̂F
i,j,t |
Tax Payment |τ̂i,j,t ⟩ Net Trading Gain ⟨λ̂F
i,j,t |
Property Expense |µ̂F
i,j,t ⟩ Net Holding Gain F |
⟨π̂i,j,t
F
Depreciation(Fixed Assets) |δ̂i,j,t
v ⟩
Cost(Wages) F ⟩
|ŵi,j,t
Cost(Social Security) F ⟩
|ĝi,j,t
Tax Payment F ⟩
|τ̂i,j,t
Saving(Residual) |Ŝi,j,t |
A.2 Micro Accounting Model 52

The Stock/Revaluation Account (Change of Balance Sheet) of Bank(i, j)

Net Money Inflow(= |m̂i,j,t |) |m̂i,j,t ⟩ Depreciation(Fixed Assets) ⟨δ̂i,j,t
v |
F
(Net Purchased) Fixed Assets |v̂i,j,t ⟩ Depreciation(Fixed Assets) ⟨δ̂i,j,t
v |
(Net Purchased) Financial Assets |fˆi,j,t ⟩ Saving(Residual) |Îi,j,t |
(Net Purchased) Real Estates |r̂i,j,t ⟩
Net Trading Gain |λ̂i,j,t ⟩
Net Holding Gain |π̂i,j,t ⟩
Net Money Inflow(= |m̂F
i,j,t |) |m̂Fi,j,t ⟩
(Net Purchased) Fixed Assets F ⟩
|v̂i,j,t
(Net Purchased) Financial Assets |f F ⟩
ˆ
i,j,t
(Net Purchased) Real Estates F ⟩
|r̂i,j,t
Net Trading Gain |λ̂F
i,j,t ⟩
Net Holding Gain F ⟩
|π̂i,j,t

The Balance Sheet for Bank(i, j)

Money Stock(Assets) |M̂i,j,t ⟩ Money Stock(Liabilities) ⟨M̂i,j,t |
Fixed Assets |V̂i,j,t ⟩ Financial Liabilities ⟨F̂i,j,t |
Financial Assets |F̂i,j,t ⟩ Foreign Money Stock(Liabilities) F |
⟨M̂i,j,t
Real Estates |R̂i,j,t ⟩ Foreign Financial Liabilities ⟨L̂F
i,j,t |
Foreign Money Stock(Assets) F ⟩
|M̂i,j,t Net Wealth(Residual) |K̂i,j,t |
Fixed Assets F ⟩
|V̂i,j,t
Foreign Financial Assets F ⟩
|F̂i,j,t
Foreign Real Estates F ⟩
|R̂i,j,t

A.2.4 Government and Social Security Fund

The economic activity of governments is the reallocation of resources and
incomes of households and firms by collecting taxes and providing public
goods and public services. Sometimes, tax policy and controlling public
investment are used for anti business cyclical policy, i.e. active fiscal policy.
Fiscal policy, especially public investment, provides the mandate invest-
ing and increase employments of target sectors. However, the policy will not
relax the pain of involuntary unemployment and that is not sure the policy
increase effective employments.
By the symmetry rule, governments can be seen as the counterpart of
netted economic activities of households and firms. For example, if house-
holds and firms increase holding financial assets, then governments decreases
holding financial assets or increase financial liabilities. The cause of the cu-
mulative debt problem is not sure which is the failure of fiscal policy or the
natural result of economic activities of private sectors.
The accounting model of governments is similar with firms, excluding tax
and social security. The social security fund and its liabilities should identify
as a financial asset and liability of governments. The difference of local
governments and central governments is the domain of governance. There
is not the major differences of economic activities. Therefore, economic
activities of local governments can be denoted like central governments, i.e.
A.2 Micro Accounting Model 53

only accents of variable changes from x̄ to ⃗x. Government’s money account

and balance sheet are as the follow.
The Money Account of Government(i)
Tax Revenue |τ̄i,t ⟩ Subsidy Payments ⟨κ̄i,t |
Social Security Expense |ḡi,t ⟩ Social Security Income ⟨ḡi,t |
Revenue(Public Service) |c̄i,t ⟩ Cost(Intermediate Products) ⟨x̄i,t |
Revenue(Public Service) |x̄i,t ⟩ Cost(Wages) ⟨w̄i,t |
Property Income |µ̄i,j,t ⟩ Property Expense ⟨µ̄i,j,t |
(Net Purchased) Fixed Assets ⟨v̄i,j,t |
Public Infrastructure ⟨ūi,j,t |
(Net Purchased) Real Estates ⟨r̄i,j,t |
(Net Purchased) Foreign Money ⟨m̄Fi,j,t |
(Net Purchased) Financial Assets ⟨f¯i,j,t |
Net Money Inflow(Residual) |m̄i,j,t |

The Foreign (Money) Account for Government(i)

F⟩
|τ̄i,t ⟨κ̄F
Tax Revenue Subsidies Payment i,t |
Social Security Expense F ⟩
|ḡi,t Social Security Income F |
⟨ḡi,t
F
|c̄i,t ⟩ ⟨x̄F
Revenue(Public Service) Cost(Intermediate Products) i,t |
Revenue(Public Service) |x̄F
i,t ⟩ Cost(Wages) F |
⟨w̄i,t
Property Income |µ̄Fi,t ⟩ Property Expense ⟨µ̄F
i,t |
(Net Purchased) Foreign Money |m̄i,t ⟩ (Net Purchased) Fixed Assets F |
⟨v̄i,t
Public Infrastructure ⟨ūF
i,t |
(Net Purchased) Real Estates F |
⟨r̄i,t
(Net Purchased) Financial Assets ⟨f¯F |
i,t
Net Money Inflow(Residual) |m̄F
i,t |

The Value Account of Government(i)

Subsidies Payment |κ̄i,t ⟩ Tax Revenue ⟨τ̄i,t |
Cost(Wages) |w̄i,t ⟩ Revenue(Public Service) ⟨c̄i,t |
Cost(Intermediate Products) |ḡi,t ⟩ Revenue(Public Service) ⟨x̄i,t |
Property Expense |µ̄i,t ⟩ Property Income ⟨µ̄i,t |
Depreciation(Fixed Assets) |δ̄i,t
v ⟩ Net Trading Gain ⟨λ̄i,t |
Depreciation
(Public Infrastructure) |ūi,t ⟩ Net Holding Gain ⟨π̄i,t |
Subsidies Payment |κ̄F
i,t ⟩ Tax Revenue F|
⟨τ̄i,t
F ⟩
|w̄i,t ⟨c̄F
Cost(Wages) Revenue(Public Service) i,t |
F
|ḡi,t ⟩ ⟨x̄F
Cost(Intermediate Products) Revenue(Public Service) i,t |
Property Expense |µ̄Fi,t ⟩ Property Income ⟨µ̄F
i,t |
vF ⟩
|δ̄i,t ⟨λ̄F
Depreciation(Fixed Assets) Net Trading Gain i,t |
Depreciation
(Public Infrastructure) |ūF
i,t ⟩ Net Holding Gain F |
⟨π̄i,t
Saving(Residual) |S̄i,t |
A.2 Micro Accounting Model 54

The Stock/Revaluation Account (Change of Balance Sheet) of Government(i)

Net Money Inflow(= |m̄i,j,t |) |m̄i,t ⟩ Intermediate Products ⟨x̄i,t |
Intermediate Products |x̄i,t ⟩ Depreciation
Public Infrastructure |ūi,t ⟩ (Public Infrastructure) ⟨δ̄i,t
u |

(Net Purchased) Fixed Assets |v̄i,t ⟩ Depreciation(Fixed Assets) ⟨δ̄i,t

v |

(Net Purchased) Financial Assets |f¯i,t ⟩ Social Security Expense ⟨ḡi,t |

(Net Purchased) Real Estates |r̄i,t ⟩ Intermediate Products ⟨x̄F
i,t |
Social Security Income |ḡi,t ⟩ Depreciation
F
Net Trading Gain |λ̄i,t ⟩ (Public Infrastructure) ⟨δ̄i,t
u |
F
Net Holding Gain |π̄i,t ⟩ Depreciation(Fixed Assets) ⟨δ̄i,t
v |

Net Money Inflow(= |m̄F

i,t |) |m̄Fi,t ⟩ Social Security Expense F |
⟨ḡi,t
Intermediate Products |x̄F
i,t ⟩ Saving(Residual) |S̄i,t |
Public Infrastructure |ūF
i,t ⟩
(Net Purchased) Fixed Assets F ⟩
|v̄i,t
(Net Purchased) Financial Assets F⟩
|f¯i,t
(Net Purchased) Real Estates F ⟩
|r̄i,t
Social Security Income F ⟩
|ḡi,t
Net Trading Gain |λ̄F
i,t ⟩
Net Holding Gain F ⟩
|π̄i,t

The Balance Sheet of Government(i)

Money Stock(Assets) |M̄i,t ⟩ Money Stock(Liabilities) ⟨M̄i,t |
Fixed Assets |V̄i,t ⟩ Financial Liabilities ⟨F̄i,t |
Public Infrastructure |Ūi,t ⟩ Social Security Liabilities ⟨Ḡi,t |
Financial Assets |F̄i,t ⟩ Foreign Financial Liabilities ⟨L̄F
i,t |
Social Security Funds |Ḡi,t ⟩ Social Security Liabilities ⟨ḠF
i,t |
Real Estates |R̄i,t ⟩ Net Wealth(Residual) |K̄i,t |
Foreign Money Stock F⟩
|M̄i,t
Foreign Financial Assets F⟩
|F̄i,t
Social Security Funds |ḠF
i,t ⟩
Foreign Real Estates F ⟩
|R̄i,t
A.3 Macro Accounting Model 55

A.3 Macro Accounting Model

A.3.1 National Income and Production Account
The accounts of macro accounting are consists of National Income and
Production Account (NIPA), National Balance Sheet, Input Output Ta-
ble, Flows of Fund Account. NIPA represents flows and changes of stock in
macro accounting and it can be denoted by aggregating income and expense
account, stock revaluation account and foreign money account in micro ac-
counting. This subsection shows that each account of NIPA can be described
by decomposing aggregated and sorted journal entries of micro accounting.

A.3.1.1 Aggregation
Aggregated value account, stock revaluation account and foreign money
account in micro accounting are as the following. All of the items exclud-
ing the change of stock variables hold the symmetric property, that is, the
transaction amount of the debit have to equal the transaction amount of the
credit.
Aggregated Value Account of Country(i)
Use(Intermediate Products) |xi,t ⟩ Intermediate Products ⟨xi,t |
Consumption Goods |ci,t ⟩ Consumption Goods ⟨ci,t |
Depreciation(Durable Goods) |δi,t
d ⟩ Durable Goods ⟨di,t |
Depreciation(Fixed Assets) |δi,t
v ⟩ Fixed Assets ⟨vi,t |
Depreciation(Public Infra) |δi,t
u ⟩ Public Infrastructure ⟨ui,t |
Import(Intermediate Products) |xF
i,t ⟩ Export(Intermediate Products) ⟨xF
i,t |
Import(Consumption Goods) |cF
i,t ⟩ Export(Consumption Goods) ⟨cF
i,t |
dF ⟩
|δi,t ⟨dF
Depreciation(Durable Goods) Export(Durable Goods) i,t |
Depreciation(Fixed Assets) vF ⟩
|δi,t Export(Fixed Assets) F |
⟨vi,t
uF ⟩
|δi,t ⟨uF
Depreciation(Public Infra) Export(Public Infra) i,t |
Wage F ⟩
|wi,t , wi,t Labor Income F |
⟨wi,t , wi,t
F
|µi,t , µi,t ⟩ ⟨µi,t , µF
Property Expense Property Income i,t |
Trading Loss |λi,t , λFi,t ⟩ Trading Gain ⟨λi,t , λF
i,t |
Holding Loss F ⟩
|πi,t , πi,t Holding Gain F |
⟨πi,t , πi,t
Tax Payments F
|τi,t , τi,t ⟩ Tax Revenues F|
⟨τi,t , τi,t
Social Security Contributions F ⟩
|gi,t , gi,t Social Security Benefits F |
⟨gi,t , gi,t
Subsidies Payment |κi,t , κFi,t ⟩ Subsidies Revenue ⟨κi,t , κF
i,t |
Given Gifts F ⟩
|θi,t , θi,t Received Gifts F |
⟨θi,t , θi,t
Saving(Residual) |Si,t |
A.3 Macro Accounting Model 56

Aggregated Stock/Revaluation Account for Country(i)

Money Inflow |mi,j,t ⟩ Money Outflow ⟨mi,j,t |
F
Durable Goods |di,t , dF i,t ⟩ Depreciation(Durable Goods) ⟨δi,t
d , δd |
i,t
Intermediate Products |xi,t , xF
i,t ⟩ Intermediate Products ⟨xi,t , xF
i,t |
F
Fixed Assets |vi,t , vF
i,t ⟩ Depreciation(Fixed Assets) ⟨δi,t
v , δv |
i,t
F
Public Infrastructure |ui,t , uF i,t ⟩ Depreciation(Public Infra) u , δu |
⟨δi,t i,t
Purchased Financial Assets |fi,t ⟩ Sold Financial Assets ⟨fi,t |
Purchased Real Estates |ri,t ⟩ Sold Real Estates ⟨ri,t |
Social Security Income |gi,t ⟩ Social Security Expense ⟨gi,t |
Trading Gain |λi,t ⟩ Trading Loss ⟨λi,t |
Holding Gain |πi,t ⟩ Holding Loss ⟨πi,t |
Net Foreign Money Inflow |mFi,t ⟩ Trading Loss ⟨λF
i,t |
(Net) Financial Assets F⟩
|fi,t Holding Loss F |
⟨πi,t
(Net) Real Estate F ⟩
|ri,t Saving(Residual) |Si,t |
Trading Gain |λF
i,t ⟩
Holding Gain F ⟩
|πi,t

Aggregated Foreign (Money) Account for Country(i)

Export(Consumption Goods) |cF
i,t ⟩ Import(Consumption Goods) ⟨cF
i,t |
Export(Durable Goods) |dF
i,t ⟩ Import(Durable Goods) ⟨dF
i,t |
Export(Intermediate Products) |xF
i,t ⟩ Import(Intermediate Products) ⟨xF
i,t |
Export(Fixed Assets) F ⟩
|vi,t Import(Fixed Assets) F |
⟨vi,t
Export(Public Infra) |uF
i,t ⟩ Import(Public Infra) ⟨uF
i,t |
Labor Income F ⟩
|wi,t Wages F |
⟨wi,t
F
|µi,t ⟩ ⟨µF
Property Income Property Expense i,t |
Tax Revenues F⟩
|τi,t Tax Payments F|
⟨τi,t
Social Security Income F
|gi,t ⟩ Social Security Expense F |
⟨gi,t
Subsidies Revenues |κF
i,t ⟩ Subsidies Payments ⟨κF
i,t |
Received Gifts F ⟩
|θi,t Given Gifts F |
⟨θi,t
(Net Purchased) Foreign Money |mi,t ⟩ (Net Purchased) Financial Assets F|
⟨fi,t
(Net Purchased) Real Estates F |
⟨ri,t
Net Money Inflow(Residual) |mF
i,t |

A.3.1.2 Sorting
In order to decompose into national accounts, aggregated value account
and stock revaluation account changes order and sorts as the follow.
A.3 Macro Accounting Model 57

Aggregated Value Account for country(i)

Use(Intermediate Products) |xi,t ⟩ Intermediate Products ⟨xi,t |
Consumption Goods ⟨ci,t |
Depreciation(Durable Goods) |δi,t
d ⟩ Durable Goods ⟨di,t |
Depreciation(Fixed Assets) |δi,t
v ⟩ Fixed Assets ⟨vi,t |
Depreciation(Public Infra) |δi,t
u ⟩ Public Infrastructure ⟨ui,t |
Import(Intermediate Products) |xF
i,t ⟩ Export(Intermediate Products) ⟨xF
i,t |
Import(Consumption Goods) |cF
i,t ⟩ Export(Consumption Goods) ⟨cF
i,t |
dF ⟩
|δi,t ⟨dF
Depreciation(Durable Goods) Export(Durable Goods) i,t |
F
Depreciation(Fixed Assets) |δi,t ⟩
v Export(Fixed Assets) F |
⟨vi,t
F
Depreciation(Public Infra) |δi,t ⟩
u Export(Public Infra) ⟨uF
i,t |

F ⟩
|wi,t , wi,t ⟨κi,t , κF
Wage Subsidies Revenue i,t |
v+m+x
Tax Payments |τi,t ⟩
v+m+xF
Tax Payments |τi,t ⟩

Property Expense |µi,t , µF

i,t ⟩ Property Income ⟨µi,t , µF
i,t |
Trading Loss |λi,t , λF
i,t ⟩ Trading Gain ⟨λi,t , λF
i,t |
Holding Loss F ⟩
|πi,t , πi,t Holding Gain F |
⟨πi,t , πi,t
Subsidies Payment F
|κi,t , κi,t ⟩ Labor Income F |
⟨wi,t , wi,t
v+m+x
Tax Revenues ⟨τi,t |
F
v+m+x
Tax Revenues ⟨τi,t |
r+v+i r+v+i
Tax Payments |τi,t ⟩ Tax Revenues ⟨τi,t |
r+v+iF r+v+i F
Tax Payments |τi,t ⟩ Tax Revenues ⟨τi,t |
Social Security Contributions F ⟩
|gi,t , gi,t Social Security Benefits F |
⟨gi,t , gi,t
Given Gifts F ⟩
|θi,t , θi,t Received Gifts F |
⟨θi,t , θi,t

Consumption Goods |ci,t ⟩

Saving(Residual) |Si,t |

Aggregated Stock/Revaluation Account of Country(i)

Saving |Si,t |
F
Durable Goods |di,t , dF i,t ⟩ Depreciation(Durable Goods) ⟨δi,t
d , δd |
i,t
Intermediate Products |xi,t , xF
i,t ⟩ Intermediate Products ⟨xi,t , xF
i,t |
F
Fixed Assets |vi,t , vF
i,t ⟩ Depreciation(Fixed Assets) ⟨δi,t
v , δv |
i,t
Public Infrastructure |ui,t , uF i,t ⟩ Depreciation(Public Infra) u , δ uF |
⟨δi,t i,t
Purchased Real Estates |ri,t ⟩ Sold Real Estates ⟨ri,t |
(Net) Real Estate F ⟩
|ri,t

Money Inflow |mi,j,t ⟩ Money Outflow ⟨mi,j,t |

Purchased Financial Assets |fi,t ⟩ Sold Financial Assets ⟨fi,t |
Social Security Income |gi,t ⟩ Social Security Expense ⟨gi,t |
Net Foreign Money Inflow |mFi,t ⟩
(Net) Financial Assets F⟩
|fi,t

Trading Gain |λi,t ⟩ Trading Loss ⟨λi,t |

Holding Gain |πi,t ⟩ Holding Loss ⟨πi,t |
Trading Gain |λF
i,t ⟩ Trading Loss ⟨λF
i,t |
Holding Gain F ⟩
|πi,t Holding Loss F |
⟨πi,t
A.3 Macro Accounting Model 58

A.3.1.3 Decompose into National Accounts

The accounts of NIPA as the follow. The rest of the world account
is corresponding to the foreign money account in micro accounting. The
notations for macroeconomic statistics denotes as the following table.

Table A-5 The Definition of Macro Accounting Statistics

Symbol Definition
Yi,t
G Gross Domestic Product(GDP) of country i in time period (t − 1, t].
Yi,t
N Net Domestic Product(NDP) of country i in time period (t − 1, t].
Yi,t
I Net Notional Income(NNI) of country i in time period (t − 1, t].
Yi,t
D Disposal Income of country i in time period (t − 1, t].
ROi,t Operating surplus and mixed income that is the residual of the gen-
eration of income account of country i in time period (t − 1, t].

The Production Account of Country(i)

Use(Intermediate Products) |xi,t ⟩ Intermediate Products ⟨xi,t |
Import(Intermediate Products) |xF
i,t ⟩ Consumption Goods ⟨ci,t |
Import(Consumption Goods) |cF
i,t ⟩ Durable Goods ⟨di,t |
Value Added(GDP) |Yi,t
G| Fixed Assets ⟨vi,t |
Public Infrastructure ⟨ui,t |
Export(Intermediate Products) ⟨xF
i,t |
Export(Consumption Goods) ⟨cF
i,t |
Export(Durable Goods) ⟨dF
i,t |
Export(Fixed Assets) F |
⟨vi,t
Export(Public Infrastructure) ⟨uF
i,t |
F
Depreciation(Durable Goods) |δi,t
d , δd ⟩
i,t Value Added(GDP,≡ |Yi,t
G |) ⟨Yi,t
G|

Depreciation(Fixed Assets) v , δ vF ⟩
|δi,t i,t
Depreciation(Public Infra) u , δ uF ⟩
|δi,t i,t
Value Added(NDP) |Yi,t
N|

The Generation of Income Account of Country(i)

Wage F ⟩
|wi,t , wi,t Value Added(NDP,≡ |Yi,t
N |) ⟨Yi,t
N|

Tax Payments v+m+x

|τi,t ⟩ Subsidies Revenue ⟨κi,t , κF
i,t |
v+m+xF
Tax Payments |τi,t ⟩
Operating Surplus(Residual) |Ri,t |
O

The Allocation of Primary Income Account of Country(i)

Subsidies Payment |κi,t , κF
i,t ⟩ i,t |)
Operating Surplus(≡ |RO i,t |
⟨RO
Property Expense |µi,t , µF
i,t ⟩ Labor Income F |
⟨wi,t , wi,t
Trading Loss |λi,t , λF
i,t ⟩ Tax Revenues v+m+x
⟨τi,t |
F
Holding Loss F ⟩
|πi,t , πi,t Tax Revenues v+m+x
⟨τi,t |
Net National Income |Yi,t
I | Property Income ⟨µi,t , µF
i,t |
Trading Gain ⟨λi,t , λF
i,t |
Holding Gain F |
⟨πi,t , πi,t
A.3 Macro Accounting Model 59

The Redistribution of Income Account of Country(i)

r+v+i
Tax Payments |τi,t ⟩ Net National Income(≡ ⟨Yi,t
I |

|Yi,t
I |)
F
r+v+i r+v+i
Tax Payments |τi,t ⟩ Tax Revenues ⟨τi,t |
F
Social Security Contributions F ⟩
|gi,t , gi,t Tax Revenues r+v+i
⟨τi,t |
Given Gifts F ⟩
|θi,t , θi,t Social Security Benefits F |
⟨gi,t , gi,t
Disposal Income(Residual) |Yi,t
D| Received Gifts F |
⟨θi,t , θi,t

The Use of Disposal Income Account of Country(i)

Consumption Goods |ci,t ⟩ Disposal Income(≡ |Yi,t
D |) ⟨Yi,t
D|

Saving(Residual) |Si,t |

The Capital Account of Country(i)

Durable Goods |di,t , dF i,t ⟩ Saving(≡ |Si,t |) |Si,t |
F
Intermediate Products |xi,t , xF
i,t ⟩ Depreciation(Durable Goods) ⟨δi,t
d , δd |
i,t
Fixed Assets |vi,t , v F i,t ⟩ Intermediate Products ⟨xi,t , xF
i,t |
F
Public Infrastructure |ui,t , uF i,t ⟩ Depreciation(Fixed Assets) ⟨δi,t
v , δv |
i,t
Purchased Real Estates |ri,t ⟩ Depreciation(Public Infra) u , δ uF |
⟨δi,t i,t
(Net) Real Estate F ⟩
|ri,t Sold Real Estates ⟨ri,t |
Net Lending(+)/
Net Borrowing(-)(Residual) |Li,t |

The Financial Account of Country(i)

Net Lending(+)/
Net Borrowing(-) ⟨Li,t |
Money Inflow |mi,j,t ⟩ Money Outflow ⟨mi,j,t |
Purchased Financial Assets |fi,t ⟩ Sold Financial Assets ⟨fi,t |
Social Security Income |gi,t ⟩ Social Security Expense ⟨gi,t |
Net Foreign Money Inflow |mFi,t ⟩
(Net) Financial Assets F⟩
|fi,t
Other Change in Assets |RV i,t |

The Other Change in Asset Account of Country(i)

Trading Gain |λi,t ⟩ Trading Loss ⟨λi,t |
Holding Gain |πi,t ⟩ Holding Loss ⟨πi,t |
Trading Gain |λF
i,t ⟩ Trading Loss ⟨λF
i,t |
Holding Gain F ⟩
|πi,t Holding Loss F |
⟨πi,t
Other Change in Assets |RV i,t |

The Rest of The World Account of Country(i)

Export(Consumption Goods) |cF
i,t ⟩ Import(Consumption Goods) ⟨cF
i,t |
Export(Durable Goods) |dF
i,t ⟩ Import(Durable Goods) ⟨dF
i,t |
Export(Intermediate Products) |xF
i,t ⟩ Import(Intermediate Products) ⟨xF
i,t |
Export(Fixed Assets) F ⟩
|vi,t Import(Fixed Assets) F |
⟨vi,t
A.3 Macro Accounting Model 60

Export(Public Infra) |uF

i,t ⟩ Import(Public Infra) ⟨uF
i,t |
Labor Income F ⟩
|wi,t Wages F |
⟨wi,t
Property Income |µF
i,t ⟩ Property Expense ⟨µF
i,t |
Tax Revenues F⟩
|τi,t Tax Payments F|
⟨τi,t
Social Security Income F
|gi,t ⟩ Social Security Expense F |
⟨gi,t
Subsidies Revenues |κF
i,t ⟩ Subsidies Payments ⟨κF
i,t |
Received Gifts F ⟩
|θi,t Given Gifts F |
⟨θi,t
Current Balance(Residual) |Bi,t |

Net Lending(+) / |LF i,t | Current Balance ⟨Bi,t |

Borrowing(-)
(Net Purchased) Real Estates F |
⟨ri,t

Net Purchased Foreign Money |mi,t ⟩ Net Lending(+) / ⟨LF i,t |

Borrowing(-)
(Net Purchased) Financial Assets F|
⟨fi,t
Net Money Inflow(Residual) |mF
i,t |

A.3.2 National Balance Sheet

National Balance Sheet represents the state of aggregated stock variables
of the country. From the symmetry rule, the value of asset and liability of
domestic financial transactions has to equal. Therefore, the net wealth of
the country has to equal the value of real capital and net financial asset to
foreign countries.

The Balance Sheet of Country(i)

Money Stock(Assets) |Mi,t ⟩ Money Stock(Liabilities) ⟨Mi,t |
Financial Assets |Fi,t ⟩ Financial Liabilities ⟨Fi,t |
Social Security Funds |Gi,t ⟩ Foreign Money Stock(Liabilities) F|
⟨Mi,t
Durable Goods |Di,t ⟩ Foreign Financial Liabilities F|
⟨Fi,t
Inventories(Intermediate) |Xi,t ⟩ Notional Wealth(Residual) |Ki,t |
Fixed Assets |Vi,t ⟩
Public Infrastructures |Ui,t ⟩
Real Estates |Ri,t ⟩
Foreign Money Stock(Asset) F⟩
|Mi,t
Foreign Financial Asset F⟩
|Fi,t
Foreign Real Estate F ⟩
|Ri,t
A.3 Macro Accounting Model 61

A.3.3 Balance of Payment and International Investment Position

A.3.3.1 Micro Accounting Aggregation
Balance of Payment and International Investment Position consists of
current account, capital account and financial account. The current account
describes the flow of goods, and the capital account and the financial account
describe the change of stock variables. The flow of goods and the change of
stock variables have the symmetric relation, therefore the balance of current
account and the balance of capital account plus financial account are equal.
The rest of the world account of NIPA describes international trades
from the monetary side. On the other hand, the current account of Balance
of Payment describes international trades from the real side. Hence, the
sides of debit and credit of both of them are just opposite.

Aggregated International Value Account for Country(i)

Import(Intermediate Products) |xF
i,t ⟩ Export(Intermediate Products) ⟨xF
i,t |
Import(Consumption Goods) |cF
i,t ⟩ Export(Consumption Goods) ⟨cF
i,t |
dF ⟩
|δi,t ⟨dF
Depreciation(Durable Goods) Export(Durable Goods) i,t |
Depreciation(Fixed Assets) vF ⟩
|δi,t Export(Fixed Assets) F |
⟨vi,t
uF ⟩
|δi,t ⟨uF
Depreciation(Public Infra) Export(Public Infra) i,t |
Wage F ⟩
|wi,t Labor Income F |
⟨wi,t
F
|µi,t ⟩ ⟨µF
Property Expense Property Income i,t |
Trading Loss |λF
i,t ⟩ Trading Gain ⟨λF
i,t |
Holding Loss F ⟩
|πi,t Holding Gain F |
⟨πi,t
Tax Payment F⟩
|τi,t Tax Revenue F|
⟨τi,t
Social Security Contributions F ⟩
|gi,t Social Security Benefits F |
⟨gi,t
Subsidies Payment |κF
i,t ⟩ Subsidies Revenue ⟨κF
i,t |
Given Gifts F ⟩
|θi,t Received Gifts F |
⟨θi,t
Current Account Balance |Bi,t |

Aggregated Stock/Revaluation Account for Country(i)

Foreign Money Inflow |mF
i,t ⟩ Foreign Money Outflow ⟨mF
i,t |
(Net Increased) Financial Assets F⟩
|fi,t (Net Increased) Financial Liabil- F|
⟨fi,t
ities
F
Durable Goods |dF i,t ⟩ Depreciation(Durable Goods) ⟨δi,t
d |

Intermediate Products |xF

i,t ⟩ Intermediate Products ⟨xF
i,t |
F
Fixed Assets |v F i,t ⟩ Depreciation(Fixed Assets) v |
⟨δi,t
|uF uF |
Public Infrastructure i,t ⟩ Depreciation(Public Infra) ⟨δi,t
Trading Gain |λF
i,t ⟩ Trading Loss ⟨λF
i,t |
Holding Gain F ⟩
|πi,t Holding Loss F |
⟨πi,t
(Net Purchased) Real Estates F ⟩
|ri,t Current Account Balance |Bi,t |
A.3 Macro Accounting Model 62

A.3.3.2 Decomposition
The above micro accounting accounts can be decomposed into the fol-
lowing macro accounting accounts.

The Current Account for Country(i)

Import(Intermediate Products) |xF
i,t ⟩ Export(Intermediate Products) ⟨xF
i,t |
Import(Consumption Goods) |cF
i,t ⟩ Export(Consumption Goods) ⟨cF
i,t |
dF ⟩
|δi,t ⟨dF
Depreciation(Durable Goods) Export(Durable Goods) i,t |
Depreciation(Fixed Assets) vF ⟩
|δi,t Export(Fixed Assets) F |
⟨vi,t
uF ⟩
|δi,t ⟨uF
Depreciation(Public Infra) Export(Public Infra) i,t |
Wage F ⟩
|wi,t Labor Income F |
⟨wi,t
F
|µi,t ⟩ ⟨µF
Property Expense Property Income i,t |
Trading Loss |λF
i,t ⟩ Trading Gain ⟨λF
i,t |
Holding Loss F ⟩
|πi,t Holding Gain F |
⟨πi,t
Tax Payment F⟩
|τi,t Tax Revenue F|
⟨τi,t
Social Security Contributions F ⟩
|gi,t Social Security Benefits F |
⟨gi,t
Subsidies Payment |κF
i,t ⟩ Subsidies Revenue ⟨κF
i,t |
Given Gifts F ⟩
|θi,t Received Gifts F |
⟨θi,t
Current Account Balance |Bi,t |

The Capital Account for Country(i)

F
Durable Goods |dF i,t ⟩ Depreciation(Durable Goods) ⟨δi,t
d |

Intermediate Products |xF

i,t ⟩ Intermediate Products ⟨xF
i,t |
F
Fixed Assets |v F i,t ⟩ Depreciation(Fixed Assets) ⟨δi,t
v |

|uF uF |
Public Infrastructure i,t ⟩ Depreciation(Public Infra) ⟨δi,t
(Net Purchased) Real Estates F ⟩
|ri,t Capital Account Balance |Ci,t |

Capital Account Balance |Ci,t ⟩ Current Account Balance ⟨Bi,t |

Net Lending(+)/
Net Borrowing(-)(Residual) |LF i,t |

The Financial Account for Country(i)

Net Lending(+)/
Net Borrowing(-) ⟨LF i,t |
Foreign Money Inflow |mFi,t ⟩ Foreign Money Outflow ⟨mF
i,t |
(Net Increased) Financial Assets F⟩
|fi,t (Net Increased) Financial Liabil- F|
⟨fi,t
ities
Trading Gain |λF
i,t ⟩ Trading Loss ⟨λF
i,t |
Holding Gain F ⟩
|πi,t Holding Loss F |
⟨πi,t
A.3 Macro Accounting Model 63

A.3.3.3 International Investment Position

International Investment Position (IIP) describes the stock of financial
assets and liabilities against to other countries. IIP denotes the stock at
the start and the end of the period and their change by transactions and
revaluation. The table of IIP can be denoted as the following. Here, E D
denotes direct investment, i.e. foreign equities owned and controlled by
domestic firms, and E −D denotes foreign equity position excluding direct
investing. OD denotes financial derivatives position, and O−D denotes other
investment excluding financial derivatives.

The International Investment Position for Country(i)

Items Beginning of Transactions Revaluation End of period
period IIP IIP
Assets
Direct investment ⟨Ei,t−1
DF | ⟨eDF
i,t | ⟨λeDF
i,t , πi,t |
eDF ⟨Ei,t
DF |
−DF
Portfolio investment ⟨Ei,t−1 |+ ⟨e−DF
i,t |+ ⟨λe−DF
i,t
e−DF
, πi,t |+ −DF
⟨Ei,t |+
F
⟨Bi,t−1 |+ ⟨bF | + ⟨λi,t , πi,t | +
bF bF F |+
⟨Bi,t
i,t
⟨LF
i,t−1 |
F |
⟨li,t ⟨λlF
i,t , πi,t |
lF ⟨LF
i,t |
Financial derivatives ⟨Oi,t−1
DF | ⟨oDF
i,t | ⟨λoDF
i,t , oDF |
πi,t ⟨Oi,t
DF |
−DF
Other investment ⟨Oi,t−1 | ⟨o−DF
i,t | ⟨λo−DF
i,t , o−DF
πi,t | −DF
⟨Oi,t |
Reserve assets F
⟨Mi,t−1 ⟩ ⟨mF ⟩ ⟨λmF , π mF ⟩ F⟩
⟨Mi,t
i,t i,t i,t

Total assets F
⟨Fi,t−1 |+ F |+
⟨fi,t ⟨λfi,tF , πi,t
fF
|+ F |+
⟨Fi,t
F
⟨Mi,t−1 ⟩ ⟨mF F⟩
i,t ⟩ ⟨λmF
i,t , πi,t ⟩ ⟨Mi,t
mF

Liabilities
Direct investment |Ei,t−1
DF ⟩ |eDF
i,t ⟩ |λeDF
i,t , πi,t ⟩
eDF |Ei,t
DF ⟩
−DF
Portfolio investment |Ei,t−1 ⟩+ |e−DF
i,t ⟩+ |λe−DF
i,t
e−DF
, πi,t ⟩+ −DF
|Ei,t ⟩+
F
|Bi,t−1 ⟩+ |bF ⟩ + |λi,t , πi,t ⟩ +
bF bF F ⟩+
|Bi,t
i,t
|LF
i,t−1 ⟩
F ⟩
|li,t |λlF
i,t , πi,t ⟩
lF |LF
i,t ⟩
Financial derivatives |Oi,t−1
DF ⟩ |oDF
i,t ⟩ |λi,t , πi,t
oDF oDF ⟩ |Oi,t
DF ⟩
−DF
Other investment |Oi,t−1 ⟩ |o−DF
i,t ⟩ o−DF
|λi,t o−DF
, πi,t ⟩ −DF
|Oi,t ⟩

Total liabilities F
|Fi,t−1 ⟩ F⟩
|fi,t |λfi,tF , πi,t
fF
⟩ F⟩
|Fi,t
Net IIP F
⟨Fi,t−1 ⟩+ F ⟩+
⟨fi,t ⟨λfi,tF , πi,t
fF
⟩+ F ⟩+
⟨Fi,t
F
⟨Mi,t−1 ⟩ ⟨mF F⟩
i,t ⟩ ⟨λmF , π mF ⟩ ⟨Mi,t
i,t i,t
A.3 Macro Accounting Model 64

A.3.4 Input Output Table and Flow of Funds Accounts

The input output table describes the flow of goods between industrial sec-
tors. The elements of the input output table can be denoted by the variables
in horizontal double entry bookkeeping. Therefore, the elements of the input
output table can be denoted like ⟨xi |xj ⟩ in the notation method.
The flow of funds accounts describes the change of financial assets and
liabilities each economic entity type. The elements of the table is the change
of stock, therefore it can be denoted the sum of the change of stock simply.
The Input Output Table of Country(i)

Output Intermediate Products Final Products Total

Input industry 1 industry 2 ··· industry J Consumption Durable Fixed Asset Public Infra Inventory Export Output

Industry 1 ⟨xi,1,t |xi,1,t ⟩ ⟨xi,2,t |xi,1,t ⟩ ··· ⟨xi,J,t |xi,1,t ⟩ ⟨ci,t |xi,1,t ⟩ ⟨di,t |xi,1,t ⟩ ⟨vi,t |xi,1,t ⟩ ⟨ui,t |xi,1,t ⟩ ⟨∆Xi,t |xi,1,t ⟩ ⟨xF |xi,1,t ⟩ Oi,1,t
i,t

Industry 2 ⟨xi,1,t |xi,2,t ⟩ ⟨xi,2,t |xi,2,t ⟩ ··· ⟨xi,J,t |xi,2,t ⟩ ⟨ci,t |xi,2,t ⟩ ⟨di,t |xi,2,t ⟩ ⟨vi,t |xi,2,t ⟩ ⟨ui,t |xi,2,t ⟩ ⟨∆Xi,t |xi,2,t ⟩ ⟨xF |xi,2,t ⟩ Oi,2,t
i,t

···

Industry J ⟨xi,1,t |xi,J,t ⟩ ⟨xi,2,t |xi,J,t ⟩ ··· ⟨xi,J,t |xi,J,t ⟩ ⟨ci,t |xi,J,t ⟩ ⟨di,t |xi,J,t ⟩ ⟨vi,t |xi,J,t ⟩ ⟨ui,t |xi,J,t ⟩ ⟨∆Xi,t |xi,J,t ⟩ ⟨xF |xi,J,t ⟩ Oi,J,t
i,t

Import ⟨xi,1,t |xF ⟩ ⟨xi,2,t |xF ⟩ ··· ⟨xi,J,t |xF ⟩ ⟨ci,t |xF ⟩ ⟨di,t |xF ⟩ ⟨vi,t |xF ⟩ ⟨ui,t |xF ⟩ ⟨∆Xi,t |xF ⟩ ⟨xF |xF ⟩ 0
i,t i,t i,t i,t i,t i,t i,t i,t i,t i,t

Total Use ⟨xi,1,t |xi,t ⟩ ⟨xi,2,t |xi,t ⟩ ··· ⟨xi,J,t |xi,t ⟩ ⟨ci,t |xi,t ⟩ ⟨di,t |xi,t ⟩ ⟨vi,t |xi,t ⟩ ⟨ui,t |xi,t ⟩ ⟨∆Xi,t |xi,t ⟩ ⟨xF |xi,t ⟩ Oi,t
i,t

Wage ⟨xi,1,t |wi,t ⟩ ⟨xi,2,t |wi,t ⟩ ··· ⟨xi,J,t |wi,t ⟩

A.3 Macro Accounting Model

Depreciation ⟨xi,1,t |δi,t ⟩ ⟨xi,2,t |δi,t ⟩ ··· ⟨xi,J,t |δi,t ⟩

v+m+x v+m+x v+m+x

Indirect Tax ⟨xi,1,t |τ ⟩ ⟨xi,2,t |τ ⟩ ··· ⟨xi,J,t |τ ⟩
i,t i,t i,t

-Subsidies − ⟨κi,t |xi,1,t ⟩ − ⟨κi,t |xi,2,t ⟩ ··· − ⟨κi,t |xi,J,t ⟩

Operating
Surplus ⟨xi,1,t |RO ⟩ ⟨xi,2,t |RO ⟩ ··· ⟨xi,J,t |RO ⟩
i,t i,t i,t

GDP |Y G | |Y G | ··· |Y G |
i,1 i,2 i,J

Total Output Oi,1 Oi,2 ··· Oi,J

65
The Flow of Funds Accounts of Country(i)

Non Financial Financial

Corporations Corporations Governments Households NPISH The Rest of World Total

Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities
ˆ ˆ ¯ ¯
Money ⟨∆M̃i,t | |∆M̃i,t ⟩ ⟨∆M̂ i,t | |∆M̂ i,t ⟩ ⟨∆M̄ i,t | |∆M̄ i,t ⟩ ⟨∆Ḿi,t | |∆Ḿi,t ⟩ ⟨∆M̀i,t | |∆M̀i,t ⟩ ⟨∆M F | |∆M F ⟩ ⟨∆Mi,t | |∆Mi,t ⟩
i,t i,t
ˆ ˆ ¯ ¯
Loans ⟨∆L̃i,t | |∆L̃i,t ⟩ ⟨∆L̂i,t | |∆L̂i,t ⟩ ⟨∆L̄ i,t | |∆L̄ i,t ⟩ ⟨∆Ĺi,t | |∆Ĺi,t ⟩ ⟨∆L̀i,t | |∆L̀i,t ⟩ ⟨∆LF | |∆LF ⟩ ⟨∆Li,t | |∆Li,t ⟩
i,t i,t
ˆ ˆ ¯ ¯
Fixed Incomes ⟨∆B̃i,t | |∆B̃i,t ⟩ ⟨∆B̂ i,t | |∆B̂ i,t ⟩ ⟨∆B̄ i,t | |∆B̄ i,t ⟩ ⟨∆B́i,t | |∆B́i,t ⟩ ⟨∆B̀i,t | |∆B̀i,t ⟩ ⟨∆B F | |∆B F ⟩ ⟨∆Bi,t | |∆Bi,t ⟩
i,t i,t
ˆ ˆ ¯ ¯
Equities ⟨∆Ẽi,t | |∆Ẽi,t ⟩ ⟨∆Ê i,t | |∆Ê i,t ⟩ ⟨∆Ē i,t | |∆Ē i,t ⟩ ⟨∆Éi,t | |∆Éi,t ⟩ ⟨∆Èi,t | |∆Èi,t ⟩ ⟨∆E F | |∆E F ⟩ ⟨∆Ei,t | |∆Ei,t ⟩
i,t i,t

Other Financial ˆ ˆ ¯ ¯
Instruments ⟨∆Õi,t | |∆Õi,t ⟩ ⟨∆Ô i,t | |∆Ô i,t ⟩ ⟨∆Ō i,t | |∆Ō i,t ⟩ ⟨∆Ói,t | |∆Ói,t ⟩ ⟨∆Òi,t | |∆Òi,t ⟩ ⟨∆O F | |∆O F ⟩ ⟨∆Oi,t | |∆Oi,t ⟩
i,t i,t
ˆ ˆ ¯ ¯
Total ⟨∆F̃i,t | |∆F̃i,t ⟩ ⟨∆F̂ i,t | |∆F̂ i,t ⟩ ⟨∆F̄ i,t | |∆F̄ i,t ⟩ ⟨∆F́i,t | |∆F́i,t ⟩ ⟨∆F̀i,t | |∆F̀i,t ⟩ ⟨∆F F | |∆F F ⟩ ⟨∆Fi,t | |∆Fi,t ⟩
i,t i,t
A.3 Macro Accounting Model
66