Written: Miles Van Tassel. 11/24/11.

Copyrighted material PREFACE: A one line of the economy in control loop format is presented here. This one line eliminates terms that not measured such as supply and demand and replaces them with economic terms that can be measured, such as the value of a dollar and profit margin. A one line is a simplification of the economy and can not fully represent the economy. The one line demonstrates how major components relate to each other. Finding proper gains for a variety of economic topics will stimulate discussions on what affects the economy and how. This is one of the goals of pictorially modeling the economy using a PID format. INTRODUCTION: Economic theory is normally expressed with algebraic representations and graphs showing the relationship between two or three variables. How these relationships change over time can be difficult to show. Control loops use time as an independent variable and all outputs are dependent on an error signal and time. Some inputs are controllable and can be changed in an attempt to accomplish a desired result. Showing how an output can be controlled is one of the advantages of control loop format. To read the a one line, remember a few simple rules: Outputs are always on the right. Inputs are on the left, top and bottom. When dividing the divisor is draw to the bottom. An output can supply inputs to more than one block. Negative signs drawn next to an input negates the value. Summing junctions must have the same units.

Demand

+ -

Price

Supply INPUTS SUMMING JUNCTION PID BLOCK OUTPUT

Above is a classic supply and demand curve in control loop format. Supply and demand must have the same units for the summing junction. This summing junctions is using the value of supply and the value of demand. The result is an error signal. The error signal hovers near zero, sometimes negative for high supply and sometimes positive for high demand. A higher demand than supply creates a positive error signal. The output price will rise or fall with the error signal. It will also ramp up or down with time or integrated with time. The output changes in a relationship with the gains assigned to the PID block. The, P, or price PID takes the error signal and gives an immediate proportional change. Prices rise. Consider integral gain, I. The

PID block allows prices to climb over an integrated time until supply or demand balance; then the error signal goes back to zero where prices then remain unchanged. Sometimes prices go up because the price is rising. The PID block allows prices to change in this way using derivative gain or D. These three gains give the PID block its name. Not shown above are the links between supply and demand. Later we will see how inflation occurs and how supply and demand curves are represented, as well as what moves the supply and demand curves. To do this, a clear understanding of control loops is needed. A control loop can show more variables and show oscillations over time. Control loops can be expressed in mathematical terms. The majority of the mathematics are omitted. The topology is emphasized for a clear understanding of how economic variables relate to each other. PID loops show how things changes in relationship to time and how systems can become cyclical. The rules for understanding PID blocks are as follows: A PID block has three major components for which it is named, Proportional, Integral and Derivative gains. A Proportional Integral Derivative or PID block has an input error signal. When the input to the PID block remains at zero the output of the PID block remains unchanged at its current value. PID loops have a wide range of additional variables in other disciplines. They are not used here. When needed some PID loops will show an output limiting value. The first gain is algebraic. Proportional gain abbreviated Kp represents Kp*(Input). Kp is normally a constant but can be a variable. It represents a multiplication relationship between the input and output. It is simple multiplication. It is the multiplication of the error signal times Kp. The second value is used in calculus. Integral gain, Ki, is represented by Ki*(Time)*(Input). If you were to graph the input, or error signal, it would be the area under the line. Time would be on the X axis. When the error signal goes negative the output decreases as more negative area is accumulated. The output will go negative when there is more total negative area then positive area. Its value is time dependent. It value represents the area under the line. The third value is used in calculus. Derivative gain abbreviated Kd is represented by Kd*(Slope). Time would be on the X axis. When the slope of the error signal increases the output would increase. On a graph it would be the slope of the input, or error signal. PID loops always have an input that is preceded by a summing junction. The inputs to the summing junctions have at least one value is positive and at least one value that is negative. The units need to be identical. When the output of summing junction is zero, the PID block has an unchanging output value. A stable or unchanging PID block has an input near zero. TOPOGRAPHY Determining how many PID loops to draw and how they connect to each other is best described as the topography of the system. Some but not all of the concepts used to draw the economic system are shown below. An increasing cash value creates additional demand. An increasing profit creates additional supply. A shortage of inventories will cause the existing inventory to become more valuable.

A shortage of sales will cause the existing savings to have more value. An increase in market driven spending will cause the existing inventory to become more valuable. An increase in market driven production will cause the existing savings to have less value. Market Cash Value is the output of the supply loop. Market Cash Value is the input of the demand loop. Market profit is the output of the demand loop. Market profit is the input of the supply loop. The perception of a falling dollar creates spending. The perception of a rising dollar decreases spending. The perception that your last dollar is worth more the your first dollar is represented.

SUPPLY AND DEMAND CURVE Shown below is A representation of how prices change, in the short term, with supply and demand as the inputs to the, P or Price, PID loop. This PID represents how fast a supply and demand curve shift to the right or left. Notice the supply input is negative and stable prices occur when the input to the, P or Price, PID input is zero due to the nature of the integral gain function. Notice the graph and PID loop on the left are identical to the graph on the right; but, now measurable input are used to represent supply and demand. Demand Supply

+ Price

Price

Spending Production

+ Price

Price

Demand Supply SHIFTING SUPPLY & DEMAND

Spending Production SHIFTING SPENDING & PRODUCTION

Price can respond faster than spending and production. These factors used to describe this will be shown to be Market Profit Margin and Market Unit Cash Value. Market unit cash value is how many dollars it would take to buy the same amount of goods. Market Profit Margin is the profit margin set by the market to produce a good or service. Market Profit Margin has an inverse relation with cost. Price has an inverse relation with Market Profit margin. This double negative implies cost and price rise and fall together.

EXAMINING THE DEMAND CURVE: Demand is the act of exchanging cash for goods. The market value of cash is found by comparing sales

and production. This produces an error signal called Sales Change. Sales Change is modified by the PID called MCV, Market Cash Value. The output of the PID is divided by M3 to yield Market Unit Cash Value. The PID loop below is the first step in a two step process to find the first component of a demand curve. The first component is called the market unit cash value. Inflation and other factors affect the value of cash. On a macro economics scale, this is accounted for by dividing by M3, the total amount of cash in the economy.
Market Unit Cash Value

Sales

+ -

MCV
Sales Change M3

Production

Market Unit Cash Value

Sales Production

Demand is affected when the market value of cash exceeds the perceived value of cash. For example: if you are flush with cash the value of your first dollar is less than your perceived value of your last dollar. Shown below is the relationship between cash values and spending. This gives the demand curve its upward slope. The ADC, Aggregate Demand Curve, PID takes an upward line and makes it upward sloping using the integration function.

Market Unit Cash Value Sales

Spending

+ -

MCV
Sales Change M3

/
Perceived Unit Cash Value

+ -

ADC

Production

Market Unit Cash Value

Spending

Sales Production

Market Unit Cash Value Perceived Unit Cash Value

EXAMINING THE SUPPLY CURVE: The classical supply curve slopes in the opposite direction of the demand curve. In PID control format all curves are drawn up and to the right. Shown below are equivalent graphs. The PID circuits will use the curve that slopes up and to the right.

Production

Desired Profit Margin + 1 Market Profit Margin +1

Production

Market Profit Margin +1 Desired Profit Margin + 1

Classical Supply Curve

Supply Curve used in Control Loops

Supply is the act of exchanging goods for cash. The market value of goods is found by comparing spending and inventory. This produces an error signal called Spending Change. Spending Change is modified by the PID called MIV, Market Inventory Value. The output of the PID is divided by Cost to yield Market Unit Inventory Value. The PID loop below is the first step in a two step process to find the first component of the supply curve, the market profit margin plus one. Other factors affect the profit margin such as the cost of production. On a macro economics scale, this is accounted for by dividing by production costs.

Market Profit Margin +1

Spending -

+ -

MIV

Inventories

Spending Change Costs

Market Profit Margin +1

Spending

Inventories

Supply is affected when the market profit margin exceeds the desired profit margin. For example: If you are trying to grab more market share, you would lower your desired profit margin to sell at a better price. Another method is to lower your cost which would boost the market profit margin. Shown below is the relationship between profit margin and production. This gives the supply curve its equivalent upward slope. The ASC, Aggregate Supply Curve, PID takes an upwared line and makes it upward sloping using the integration function.

Market Profit Margin +1

Production

Spending -

+ -

MIV

/ -

ASC

Inventories

Spending Change Costs

Desired Profit Margin + 1

Market Profit Margin +1

Production

Spending

Market Profit Margin +1 Desired Profit Margin + 1

Inventories

The Supply and demand curves are inputs to each other This four part PID loop can be redrawn. Shown below in PID form are the supply and demand curves. Demand affects supply and supply affects demand. The output of a demand curve is goods and services because purchases are converted to goods or services. The output of a supply curve is cash because sales are converted to cash. The links between supply and demand are spending and production.

Spending

Market Cash Value Perceived Cash Value

+ -

ADC
Inventories

+ -

MIV
Spending Change Costs

Production

Market Profit Margin +1 Desired Profit Margin + 1

+ -

ASC
Sales

MCV
Sales Change M3

Market Cash Value Inventories are supply. Market inventory values are a supply function. Market Inventory Value or MIV represent the shape of the supply curve. The output of this block, after being divided by its per unit value, goes to the summing junction of the ASC PID input as Market Profit Margin +1. . Cash values are a demand function. Market Cash Value or MCV represent the shape of the demand

curve. The output of this block goes to the summing junction of the ADC PID input. Production and sales are not always equal. Production follows sales with a time delay. Notice the negative sign on the summing junction is on the opposite input. This shows that more production than sales will bring prices down, cash is worth more because less cash can buy the same goods. Lower sales mean people are holding on to their cash or cash is worth more than goods. When cash is worth more, then the MCV or Market Cash Value is rising. Below is I different interpretation of the Price PID. It takes into account that the value of inventories can change due to mass production or other factors, thus; price changes value. The inputs to the summing junction are MIV and MCV. It shows that as inventory become more valuable the price will rise. If cash values rise, prices will fall. The P PID takes into account the time it takes for prices to stabilize or the time it takes curves to shift to the left or right. This was a slow process when news did not travel so fast. For example: Should there be a shortage of wheat due to bad weather, the national Wheat MIV would be lower because there is less total wheat inventory. Because the national total cost would remain the same and inventory is less, Market profit margin would fall. National production would fall and prices would rise. Price does not change immediately. Only those who have the news that the total Wheat MIV has fallen will make purchases. This will also drive up the price of wheat. Others would not buy at the higher price, thus bringing national spending down until the Wheat MCV is equivalent to the MIV. Once the news of the production level of wheat is common knowledge the system stabilizes Tunning variables, Kp and Ki, should be chosen to represent the speed of the economy. By using MIV and MCV instead of spending and production price changes can occur at a pace that better represents the economy.

MIV

+ -

Price

MCV P = Price P,Kp = Product constant P, Ki = Product news cycle time P,Kd = Perception of added value

Lets take a second look at the supply and demand one line Below the one line are variables assigned to the tunning parameters of each PID. Some can change over time, such as the public's perception, and other will remain constant. Finding proper gains for a verity of economic topics will bring into discussion what affects the economy and how. This is the goal of the modeling the economy in one line

format. The values chosen in the example below are topics for discussion.

Spending

Market Cash Value Perceived Cash Value

+ -

ADC
Inventories

+ -

MIV
Spending Change Costs

Production

Market Profit Margin +1 Desired Profit Margin + 1

+ -

ASC
Sales

MCV
Sales Change M3

Market Cash Value

MIV = Market Inventory Value MIV,Kp = %Used capital MIV, Ki = New capital installation time MIV,Kd = Price added value ADC = Aggregate Demand Curve ADC, Kp = Public Perception of shortage ADC, Ki = Disposable Income ADC, LL = 0; Lower Limit

MCV = Market Cash Value MCV,Kp = %Used capital MCV, Ki = New capital installation time MCV,Kd = Price added value ASC = Aggregate Supply Curve ASC,Kp = Industry Perception of shortage ASC, Ki = Disposable Capital ASC, LL = 0; Lower Limit ASC, UL = Monopoly Political Consequences

Lets look at an example, if there is a rumor that gasoline is going to run out, the perceive market value of gasoline goes up. The public tries to fill there tanks before the rumored supply runes out. Supply hasn't had time to respond. The speed in which the rumor grows affects the demand curve. The rumor is represented in the aggregate demand block by the value of the proportional gain. Once that the rumor subsides the value of gasoline will return to its original value. Should spending permanently increase, the MIV will rise until the production loop responds forcing the MIV spending change to zero. At this point the MIV will have a new and higher value. Should there be over production the MIV input will be negative until supply decreases or demand increases, both respond to the price or MIV. HOW THE PROFIT MARGIN LOOP IS DRAWN There are two types of profit margin. One is dictated by the market and the other is businesses desired profit margin. Any attempt to increase the desired profit will cause a response from the ASC PID; and, from the point of view of the market, the only way to increase the price is to increase demand or decrease supply. The only way a decreasing supply can be achieved, with a rising desired profit margin, is to draw the desired profit margin with a negative input on the summing junction. If the market profit margin goes up, such as in increase in demand, the one line shows the supplier will supply more. Looking at the desired profit, a business will typically not want the highest possible profit. A business will want to maximize its income. A business will competitively supply more at lower profit margins so long as income increases. This implies a business will have a low desired profit margin when it can not control the supply. Lets call businesses that can not control supply a market business. A market business will maximize their output to take advantage of the market profit margin. A market businesses desired profit margin is just above a value of zero. A monopolistic business that can control supply can maximize income by controlling the market profit margin by limiting supply. Limiting supply is shown as AS, UL = Monopoly Political Consequences. When this limit is hit, prices stop rising. This value can change, with the public or government opinion. Looking at a situation when cost rise, it is possible that a market profit margin will be less then the desired profit margin. Under these conditions the input to the ASC PID will be negative and the output will fall. This represents a falling supply. It is also possible that the market profit margin be less than zero. This would also cause the ASC PID to fall but now at a greater rate. Supply will be reduced until the demand side of the control loop pushes market profit margin to a value greater than zero.

An upward slopping ASC curve is typical of any supply loop. As cost that rise the curve will rise more slowly. This is represented after MIV portion of the supply loop. It shows that rising material cost will lower the market profit margin. A ONE LINE OF M3 Adding Money Removing Money

+ + + APSP APSI + +

MM Other Deposits Fed Buying Bonds Fed Selling Bonds I(dr) M3 = Money supply MM = Money Multiplier = 1/(RR+BH) RR = Reserve Requirement BH = Bank Holdings IB = Change in Incentive to borrow I(dr) = Interest, discount rate AL = All Loan values APSP = Amount Put in Stocks Public APSP,Kp = Libor rate* Public Margin APSP,Ki = APSI = Amount Put in Stocks Industry APSI,Kp = Libor rate* Industry Margin APSI,Ki = BWL = Banks Willingness to Loan BWL,Kp = 1 BWL, Ki = 1/delinquent rate M3 is the summation of the all the money in an economy. The one line above shows an end result of M3. The values chosen for the gains are an approximate values that best emulate the economy. M3 can be controlled because the inputs can be controlled.

+ -

X/Y AL

BWL

M3

A ONE LINE OF COST Material Demand

+ -

MC

Material Costs

Costs

Material Supply

Production Cost

Energy Demand

+ -

EC

Energy Cost

Energy Supply MC = Material Cost MC, Kp = Public Confidence or Employment MC, Ki = Disposable Income

Scavenge cost

EC = Energy Cost EC,Kp = Industry Confidence or Capital Usage EC, Ki = Disposable Capital

Costs is the summation of the all expenses in providing goods and services. The one line above shows an end result of costs. The values chosen for the gains are an approximate values that best emulate the economy. Costs can not be easily controlled because the inputs can not be easily controlled. The above graph should have demand and supply replaced with spending and production.

A ONE LINE OF PRODUCTION COST Sales Change

HI
Upper

Employment

LIM
Lower

+ 95

WA

Labor Costs

94

Energy Costs Other production costs PB = Purchase Balance TB = Trade Balance

Production Costs

WA = Wages WA,Kp = WA,Ki = 0 HI = Hiring HI,Kp = 1 HI,Ki = Industrial confidence HI,UpLim = 100 HI, LoLim = 0

Production Costs are the summation of the all expenses concerning production in providing goods and services. The one line above shows an end result of production costs. The values chosen for the gains are an approximate values that best emulate the economy. Productions Costs can not be easily controlled because the inputs can not be easily controlled. A TOOL FOR DISCUSSION People think in pictures and one lines put the economy in a pictorial format. It shape, design, topography, and gains are topics for discussion What is shown here has little room for modification, but what is not shown are good topics for discussion. This is one of the purposes of a one line. The affects of taxes, insurance, educational costs, new investment types, and other fascists of economic impact should be drawn, studied and debated.