Abstract
The goal of this study is to utilise the Evaluation of Capital Creation Options (ECCO) methodology to estimate the potential growth of the United States economic system in terms of the economic system's ability to extract natural resources and process them into capital, consumer goods and services. Its goal is to provide a tool for evaluating an economic system's path to Sustainable Development.
Acknowledgements
Declaration
I declare that this thesis was composed by myself, that the work contained herein is my own except where explicitly stated otherwise in the text, and that this work has not been submitted for any other degree or professional qualification except as specified.
(Antonios Logothetis)
Table of Contents
Introduction 1
Model Overview and Data Gathering 14
Simulation Results and Evaluation 27
Conclusions and Future Work 28
Bibliography 29
Figures
Figure 1 Work and Decision 2
Figure 2 Economic growth model 5
Figure 3 ECCO basic elements 7
Figure 4 A simple Carrying Capacity model 8
Figure 5 4see model forms of physical assets 14
Figure 6 Energy Consumption by Sector 22
Introduction
It is highly acceptable these days that the way economies develop is unsustainable (Senn & Fratesi, 2009). Neoclassical economics finds it difficult to cope with the issue of sustainability on a finite planet. Thus, new methodologies have to be developed and utilised in order to offer sufficient reliability to the policy and decision makers. The problem lies to the fact that an inappropriate numeraire is used, and not to the invalidity of the theory of economic growth (Slesser, 1992). Money can be created by the banks without necessarily reflecting an increase in the production of real wealth, so it can undermine the ability of one to forecast the real rate of growth. Evaluation of Capital Creation Options (ECCO) determines the physical basis of this problem, if an action is not physically feasible, it cannot be economically possible (Slesser & King, 1988).
Domar (1946) and Harrod (1939) created the modern theory of economic growth which states that net investment spending increases income and at the same time it expands potential output for the future. Those early economic growth models suggested that the capitalist growth process is unstable and marked by crises (England, 2000). Sollow (1956) accepts the model developed by Domar and Harrod with the exception of their assumption of fixed proportions. This means that production takes place under fixed proportions. Sollow suggests that there is room for substituting labour with capital. The main weakness of these theories is that they defy the natural foundation of production. In order for production to take place labour, capital, energy and land must be combined, thus these theories are incomplete. Later, modern growth theorists suggested that biophysical limits to growth exist (Stiglitz, 1974).
ECCO instead of using monetary terms, like traditional economics, it uses thermodynamic laws to construct a model of the biophysical economy. This is called the natural capital theory of growth. In natural capital theory growth industrial output is considered to be the result of work and decisions. Work is measured in energy. Energy is consumed by the machines used during the production and transportation of goods. Decisions are made from employees.
Industrial Output (Q/y)
Work (W/y) Decision (D/y)
Figure 1 Work and Decision
Background
In order to provide a better comprehension of ECCO we will refer to its basics characteristics.
ECCO's purpose is not to forecast economic trends, but to provide an estimation of the potential of a system regarding the effects of human policies, technologies and environmental objectives. In order to have a working economy physical capital and energy are necessary. Land has an important role in the economy due to the fact that there are natural processes of solar energy which are land dependent, for example crop production. Human capital is also important because it provides the decisions needed, thus population growth is an important factor in the outcome.
Economic development is based on the depletion of natural resources. This kind of development cannot continue indefinitely and ECCO provides a method for quantifying alternative solutions. The exploitation of natural resources cannot continue indefinitely. In their effort to sustain their material standard of living people have reached environmental limits and caused environmental disasters, nevertheless they have become increasingly aware of the consequences of their actions.
ECCO has its origins in the United Nations request (Slesser, 1992) to find a way to quantify the trade-offs between population growth and standard of living that faced many developing countries and to provide guidelines to what is called sustainable development. Sustainability is influenced by rates and achieved by (Slesser, 1992):
Matching the rate at which negative entropy is used with its available rate of supply and
Matching growth of the economy with the sustainability of the natural environment.
Negative entropy (or Negentropy) is the amount of entropy a system exports in order to keep its own entropy low (Wkipedia, 2010). It measures the complexity of physical structures, such as machines and buildings, in which amount of energy are invested.
Achieving sustainable development is a multi-vector social, economical and environmental problem. In our days economic growth is largely based on the depletion of natural resources. On the other hand, ECCO methodology is trying to quantify alternative solutions in an understandable way so that the alternative solution can be evaluated. The root of the problem is the way people exploit the world's natural resources. In their effort to achieve higher standard of living people have overexploited the environment causing instability. This has caused the climate change with non linear effects such as drought and flooding. Furthermore, severe biodiversity loss is observed globally. Present day lifestyle and model of development are unsustainable.
Natural capital is what we call environment. It is comprised by the elements of the biosphere and their quality and quantity. It is the stock of natural ecosystems that produces a flow of goods or services into the future, a flow that can be indefinitely sustainable subject to changes in the solar flow which is its driving force. Natural Capital Accounting takes the physical resource base as point of departure to evaluate the possibilities of an economic system to sustain or extend its activities (Slesser, 1992).
Energy is a stock more important than all others, due to the fact that it can be exploited only once. This type of energy is non-renewable, examples are oil and gas. On the other side, there are minerals such as steel and iron that can be reused. Furthermore, there is energy coming from renewable sources. Examples of such energy are wind and solar energy most of which derive from the sun originally.
Economic growth, development and environment are notions closely related. Until recently, economic growth to some extent meant the partial destruction of the local environment. Pollution, harvesting forests and abuse of water resources are some examples. According to the economic theory, production and consumption processes are the base of welfare. In order to supply further growth, we should not used all capital created for consumption. We should also use part of it for investment. This issue is mostly social and moral. This happens in order to create progress capital known as human made capital. By using human made capital, man increases gradually his efficiency and effectiveness of human labour.
Technological innovation can also lead forward in more efficient methods of production resulting in lower capital/resource ratio. Also, it can lead to the substitution of non-renewable with renewable resources which are environmentally friendly in most cases, if not all.
Natural Capital Accounting (or Resource Accounting) serves as the base of ECCO. In natural capital accounting, one measures the physical effort necessary to complete an economic activity rather than its cost. In economics, money is seen as the primary means which people use to express value, on the contrary in natural capital accounting the cost of completing an economic process is measured in terms of the physical effort it requires. The difference between a natural capital accounting analysis and an economic analysis is that of numeraire. Slesser et al (1988) showed that this effort is equal with the energy required to create all inputs of the process plus the energy consumed during the process.
Figure 2 Economic growth model
In order to reach physical resources one should use energy, knowledge and capital, although the energy requirements may be high. Physical resources may be scarce in nature but with the exception of few never run out. Unlike them work is used only once and cannot be renewed. Furthermore, labour is slowly replaced by energy as a source of work and increasingly is becoming a decision making entity. This change causes the economy to be even more fuel, thus energy, dependent and researchers have shown that technological progress cannot aid humanity in reducing its dependency anymore as many technologies have reached their limits (Chapman & Roberts, 1983). As it was shown (Slesser & King, 1988) all inputs of the production process can be mapped into labour and energy which were irretrievably dissipated. There are two main reasons for which labour is important. The first is that labour is people and people make decisions and developing countries need an increasing proportion of educated people. The second is that people consume the goods produced in industry fulfilling economy's main goal which is to provide goods for improving people's standard of living (Slesser & King, 1988).
Natural Capital Accounting utilises the discipline of Energy Analysis to implement its promises. Energy Analysis is a process for evaluating activities in energy terms (IFIAS, 1974). As stated before, work can be used only once. When an economic process is completed, energy is irreversibly converted from a low entropy form to a higher entropy form and that is the reason why the word "embodied" accompanies goods and/or services. As a result goods produced include a previously dissipated amount of energy which can be calculated. From the description above it should be clear that energy does not circulate in a system as money do, on the contrary as a rate of supply it drives the economy (Slesser & King, 1988).
Energy Analysis provides a way of measuring an economy's sustainability. In order for an economy to be sustainable the rate of net energy supply to the economy must be more or less constant. This means that part of the energy fed into the system must be used to extract new energy. Having as granted that energy in ground becomes scarcer in time then the energy requirements for extracting new energy increases. This leads to the conclusion that if one seeks economic sustainability then it must be made sure that the rate of energy flow into the economy is enough to extract the resources needed to sustain the material standard of living of the people living in the economy.
No economic activity can be completed unless energy is dissipated, so it would make sense if someone wanted to model an economic system in terms of energy. Some argue that people do not account for energy requirements when taking decision but money. Even if this true Roberts (1982) showed that embodied energy in goods and their monetary value is close. Natural capital accounting does not offer short term economic forecasting; on the contrary it offers a solution for quantifying long term progress while taking into account present policies. On the other side, economic analysis seems to be more suitable for short term forecasting, but becomes imprecise when it is used for long term predictions.
Natural capital accounting analyses development in the opposite way economic planning does (Slesser & King, 1988). Instead of setting up a set of "wants" and working towards achieving them, one should examine a systems boundary. Thus this would look like: resources-> technology-> feasible output -> capital -> resources. Carrying capacity gives the number of people that share a system and can be supported by it in a given moment at a sustainable basis, while taking into account its resources as well social, economical and environmental policies. Resource accounting can tell us if investment meets supply needs and output meets investment needs. To achieve sustainability all economic sectors must develop in harmony. In 1983 UNESCO developed a carrying capacity approach to identify the policies needed for a country to achieve sustainability, which means to be self sufficient to food and energy. A critical factor in achieving sustainability is population growth. From this UNESCO initiative, ECCO was born. Initially, it was called Enhancement of Carrying Capacity Options, but it was later changed to Evaluation of Capital Creation Options. In general, it is a feedback model using the system dynamics paradigm with the whole economy represented by a chain of cause and effect. When an event occurs (cause) then another second event (effect) happens as a result of the first. Moreover, policies are inserted into the model, for example a minimum percent of gross fixed capital investment. Thus, a modeller's task is to (Slesser, 1987):
Construct the structure of the economy, identify feedbacks loops that exist in reality.
Quantify the relationship between cause and effect in energy terms.
Figure 3 ECCO basic elements
In the following figure there are two feedback loops with all stocks and flows measured in energy terms. The arrows indicate which entities are affected by other entities. The figure represents the way industrial growth works. It becomes clear that when the industry output increases, the energy demand also grows. Also, when energy demand grows then there is greater demand for energy capital. This in turn means that les capital will be invested in other sectors.
Figure 4 A simple Carrying Capacity model
Energy
Economies used to be driven by solar energy, people, animals, water-wheels, windmills, sails etc. This changed during the centuries first with coal then with oil and lately with nuclear power. In present day all economies are rapidly transforming, human labour and animal use is replaced with efficient machines so energy has an increasingly more important role. Due to the combination of energy and physical capital, human labour is becoming less important and is limited to decision making. The demand for higher material standard of living in developing countries has dramatically increased energy demand. Moreover, population growth has increased the needs for food output per hectare. It becomes clear that the economy cannot expand without the use of additional energy (Slesser, 1987). To get additional energy, more energy has to be expended. This is called energy requirement for energy (ERE), higher quality energy has higher ERE. The gross energy requirement is the sum of net capital energy and the energy required for energy extraction plus the embodied energy in extraction equipment. Energy planning is a difficult process used to forge long term policies on local, national or global energy system. In this process both money and energy are used as numeraire. Energy planning has an important role in setting regulations in the energy sector, it takes into account energy related investment and the same time seeks the least expensive solutions. According to the present methodology each different solution is independently assessed. Energy planning provides only short term guidelines mostly because of the concept of elasticity, which is the non predictable energy demand by consumers. Furthermore, there are three factors the rule the assessment of economic to energy systems, which are system lifetime, capital cost and future fuel prices. Energy planning handles growth with a systems approach. Also energy is the driving force of the economy. The knowledge of energy requirement of energy alone is inadequate to model an entire economy. Relationships between capital and output have to be defined and also the influence of technology must be known. The advantage of an energy model over an economic model is that it requires less short term details, it is more accurate and has long term application (Slesser, 1987).
Sustainable Development
There are two opinions given for what it is to be 'sustained' in sustainable development. The first states that the utility of future generation is to be sustained and not to decline. In this way, it is ensured that the standard of living of future generations will be as well as this of the present generation. The second opinion states that physical throughput should be sustained. This means that the entropic physical flow from natural resources to the economy and back to nature should not decline (Daly, 2006). In this way it is ensured that natural capital will be accessible to the future generations. The difference in these two concepts is that although utility is a standard concept in economics, throughput is not. Due to this fact the utility concept has proven more popular, but this is not always the case. Some scientists prefer the throughput definition because of certain advantages over utility. Utility is not something that can be measured. Future generations may inherit knowledge and things but still these may not make them happy. On the other side, throughput measures the capacity to generate an entropic throughput from and back to nature. The things created in an economy like structures and vehicles are called 'dissipative structures' because they are maintained against the forces of entropy by a throughput from the environment (Daly, 2006). This ongoing metabolic flow is what we live and produce, the human economy. It is obvious that physical laws constraint economics. Being sustainable does not mean forever, but longevity. It is a fact that most resources are not renewable so our economy cannot continue indefinitely. Rather the essence of sustainability is reliability and longevity.
Development traditionally is defined as the growth of gross domestic product (GDP). Some suggest that it could be defined as more utility per unit of throughput and growth defined as more throughput (Daly, 2006). A further condition to development is that growth will go to poor but this is often regarded as class warfare which might pose a threat to further development of the GDP. Additionally, any change towards to public goods from private goods is often regarded as interference to the free market. Currently, free trade, free capital mobility and export led economy, global integration is thought to be the solution to further growth.
Related Work
In the past, there have been some attempts to model national economies using the ECCO approach as well as a global economy model. The national economies which have been modelled in the past are:
UK
Australia
Netherlands
Scotland, separately from the rest of the United Kingdom
Europe, with 15 European Union members
China
The ECCO model developed for Australia, called OzECCO (Foran, Crance, Poldy, Phipp, & Slesser, 1998), describes the function of the Australian physical economy in terms of energy flows that enable growth. It also describes the sectors where the energy becomes embodied to infrastructure and productive capital where goods and services are produced. The main parts of this study were to analyse and model the physical world of the Australian economy, to describe the model and calibrate the real data to the model. Furthermore, eight different policy scenarios were tested for the Australian physical economy and the results were quantified and presented.
The creator of the ECCO model for the Netherlands economy (Noorman, 1995) utilises Natural Capital Accounting. Using energy as the physical numeraire, he designs the physical perspective on sustainable development. The purpose of the model is to investigate the long term physical aspects of the Dutch economy and which future policies should be adopted to move the economy towards sustainable development. The study tries to answer whether it is possible to construct an ECCO model which can explore the long term physical consequences of different policies given the inadequacies of present approaches. Also, it tries to quantify the stocks of embodied energy and the flows of both embodied energy and direct energy flows within the Dutch economy. Finally, it explores under pre-conditions, the possible policies that could lead to a transition towards a sustainable society.
The Chinese ECCO model (Hao, 1996/8) was created to help the Chinese economy to move towards sustainable land management. Although China is huge geographically, its even greater population makes the country relatively short of land resources with land per capita far less than the world's average. The issue that derives from this situation is a conflict between land supply and demand. The enormous growth of the Chinese economy the past two decades has created great demand from sectors like construction, agriculture and transportation. Also due to the lack of legal regulations for the control of land use, there has been great loss of arable land. The low price of land in China makes easy for enterprises and government agencies to occupy much more land than they need to. ChinaECCO integrates biophysical and socio-economic analyses. In total it includes 30 sub-models, some of which are land use, population, industry and agriculture. The model's initial year is 1990 and simulation is done for 40 years.
GlobECCO (Slesser & King, 1995) is the ECCO world model which was created in 1985 and had the world divided into two categories depending on the per capita GDP. The first category was the Developed World with per capita GDP exceeding $1750 and the rest of the world was named Developing Countries. Each region is supposed to be a homogeneous economy with its natural resources such as land area, industrial and capital stock energy and mineral resources. The model was used to calculate the state of the economy in year 1985 including the total output manufactured goods, food and non-food crops, waste production, imports and exports. For each of those the consumption of the existing food consumption, births and death rates was determined. These were related to a Material Standard of Living. Additionally, the investment from the Developed to the Developing world and the trade between the two was studied. The data gathered were used to create the simulation model which consisted of a set of finite equations with feedbacks. The purpose of the model was not to forecast but to determine the potential of the economy taking into account the strategic policies.
Sustainable Europe (Bockermann, Bernd, Omann, & Spangenberg, 2004) (SuE) is the ECCO model constructed to simulate the European Economy. The model includes the first fifteen European countries (EU-15) and incorporates not only the flows by traditional input-output tables, but also the material flows between the natural environment and the economy (Bockermann et al., 2004). That means that the materials that are extracted are transformed and fed back to the environment by economic activities. The model uses the data provided by the System of National Accounts (SNA) which disaggregates the economy into 58 sectors, and restructures them in order to fit the models sector structure. The model focuses on the input side of the material flows and calculates the environmental effect caused by the EU economic activity by determining the total material input into the EU-15. In conclusion, the model provides useful results of physical and economic nature. SuE calculates values for energy and material consumption starting from externally defined carrying capacity assessments, which are quantified in input terms and help to identify which policies are ideal to reach them.
Motivation, Project Aims and Contributions
ECCO models can be used to identify suitable policies to reach sustainable development of the economy. They are not suitable for economic forecasting. The motivation of such a research is to define the impact of human activity in the environment which was the main resource humanity had throughout its evolution and quantify alternative ways towards sustainable development. For the purpose of our study, we use Vensim simulation package. We utilize the model developed by Simon Roberts and data gathered mainly from the United States Bureau of Economic Analysis to explore the potential carrying capacity if the US economy and identify potential weaknesses. Furthermore, it is our intention to provide an evaluation of potential further enhancements of ECCO models in order to further improve the context providing detailed national models.
Thesis Outline
The thesis has been divided into 4 chapters. The sequence of the chapters is organized as follows:
Chapter 1 make a detailed analysis of the background of ECCO models and the underlying theories.
Chapter 2 describes the process of data gathering, provides an explanation of the economic and energy notions of the data, while a deeper look at the ECCO model and its sectors is taken.
Chapter 3 focuses on providing a detailed presentation of the simulation and the scenarios along with the produced results.
Chapter 4 contains a summary of our simulation results, a thorough discussion and conclusion and finally suggests where future work should be focused.
Model Overview and Data Gathering
Introduction
In this chapter we present the two main components of the implementation: the statistical data gathering from various statistical agencies and the ECCO model which was created by David Crane and Simon Roberts and it was converted to 4see model using Vensim by Simon Roberts.
Model Overview
The 4see model aggregates a whole economy into sectors depending on their products and examines how these sectors interact with each other. In 4see all products are quantified in monetary terms, but that does not mean that they can arbitrarily replace each other. If the manufacturing sector demands more energy, then energy it is and not another good with the same monetary value. If the transport sector has to reduce its dependence on energy, then it should receive investment in the form of goods which will enable it to be more energy efficient. The model utilises system dynamics to simulate the sectors interactions and to investigate the effect of investments.
Energy
Manufacturing
Agriculture
Dwellings
Transport
Service Sector
Figure 5 4see model forms of physical assets
Data Gathering
The 4see model relies on statistics from national agencies to operate, thus it is structured the way the statistical agencies provide their data. In brief, the data used n the 4see model is:
Supply and Use Tables
Gross Domestic Product
Energy consumption per sector
Water consumption per sector
Capital Stocks
Balance of Payments
Jobs per sector
While explaining the data gathering process, we will provide definitions of the relevant statistical data and point out their importance to the model. As mentioned before the main source of data was the US Bureau of Economic Analysis (BEA). BEA provides the estimation of National Income and Product Accounts (NIPA) for the US economy. NIPA provides a view of the composition of the American production and the distribution of the income (BEA, U.S Bureau of Economic Analysis). NIPA originates from the efforts of the authorities to get an overview of the American economy in order to cope with the Great Depression. Over the years many modifications and improvements were incorporated to NIPA. In order to ease international economic comparisons and help countries build their own economic accounting systems the System of National Accounts (SNA 1993) was developed by the international community. NIPA contains seven accounts which are the following:
Domestic Income and Product Account
Private Enterprise Income Account
Personal Income and Outlay Account
Government Receipts and Expenditures Account
Foreign Transactions Current Account
Domestic Capital Account
Foreign Transaction Capital Account
Input-Output Accounts
The input-output accounts are used to measure the overall size of the economy, the distribution of wealth and the current economic activity. There are two main tables the make and the use table. Each table contains information for one year. These tables present the distinct production of each industry and how this production relates to other industries. They can show the relative size of an industry within an economy and their income.
The make table presents the commodities produced by each industry. Industries are presented in rows while commodities are presented in columns. Each entry represents the value of the commodities (in dollars) produced by the industry. The values of the diagonal cells represent the value of the production of the commodity of that specific industry which is the primary producer. The rest of the cells in each row represent the value of the production of secondary commodities. The values in columns show the value of the production of an industry. The rest of the cells in each column which are off diagonal show the secondary producer of the commodity. The total in each row of a make table is equal to the column of the use table. The total of each column represents the total production of commodities. Input-Output tables estimate gross output which includes intermediate products which are used by industries for production and final products.
The use table presents for a given year the use of commodities by each industry. It is different from the make table, the rows show the value of commodities, while columns show the final users that consume the commodities. The sum of a row is the gross output of the specific commodity. The sum of the column show the total quantity of commodities consume by the specific industry. There are also "value added" components which show the income created by the production, specifically these are for labour, government and capital. When gross value added is summed across all industries it equals the Gross Domestic Product.
Balance of Payments
A balance of payment sheet records all economic transactions taking place between a country and its residents and the rest of the world (BEA, 2010). The bureau of economic analysis names it as International Transaction Accounts and it is composed by:
The current account
The capital account
The financial account
The current account measures the net amount a country is spending or earning, depending if it is on deficit or surplus (Wikipedia, 2010). This includes transactions dealing with services, goods, income and unilateral current transfers. The current account is like an income statement. It is an aggregation over every transaction within the economy over a period of time.
Goods may be imported or exported, in both cases military goods value is excluded. Goods are imported when they are purchased by U.S residents from foreign residents. When the goods cross the U.S borders a transfer of ownership occurs, but the valuation of the good takes place at the port of exportation. The same apply for exports. Data for both imports and exports are organized according to the Harmonized System of commodity classification which is an international standard. In general, imports and exports of goods measure the transfer of ownership of goods, so the ITA does not show how industries use goods.
Services may be imported or exported and they are used to measure sales and transfer of service from U.S residents to resident of rest of the world and vice versa. All services are recorded at the time they are provided, if the service takes place over a period of time then it is recorded throughout the period. Both imports and exports of services are classified into seven categories (BEA, 2010):
Travel
Passenger fares
Other transportation services
U.S government
Royalties and license fees
Other private services
U.S government miscellaneous nonmilitary services
Transfers under U.S government military sales contracts (exports)
Direct defense expenditures (imports)
Income is composed by (BEA, 2010):
Income receipts of U.S owned assets and income payments from foreign owned assets in the U.S and,
Compensation receipts and payments of temporary employees.
The income earned from assets is divided into income from direct investment, other private investment income and on U.S government investment. Direct investment income measures the return on U.S investment out of the borders of the country and the return from foreign investment to the country. Other private investment income shows the income U.S residents got from U.S holdings on foreign equities, foreign bonds and also interest received on US bank and nonbanks claims on foreigners. Finally, U.S government income measures the income received by the U.S government. This includes interests gained by the U.S government from foreign citizens or organizations and also payments made by the U.S government in its liabilities.
The capital account measures changes occurring in the ownership of non produced non financial assets and changes in other capital transfers. Capital account has two components:
Capital transfers
Acquisitions and disposals of non produced non financial assets
The first shows the amount of transfers for insurance payments which are related to catastrophes and debts. Except from catastrophes and debts, migrants' transfers are part of capital transfers that is the value of assets that migrants' possess when they enter or leave the U.S. Also taxes of capital transfers are accounted in capital transfers. The second includes the transfers of rights for tangible and intangible objects.
The financial account measures the transactions relative with financial assets and liabilities and they are not included in the NIPA tables.
Gross Domestic Product
The GDP is defined as the economic output of a country. It is the total market value of all final goods, products and services created by labour and property (BEA, 2009). It can be measured in three different ways which may not deliver identical results because they do not use the same data sources.
The first method used to measure the GDP is by summing the total goods and services sold to final users. This method is also known as the expenditures approach because it sums all money spent by governments, people and businesses. Actually it sums personal consumption expenditures, gross private fixed investment, change in private inventory, net exports of goods and services, government consumption expenditures and gross investment. Personal consumption expenditures show the amount of money spent by persons to goods and services. Gross private fixed investment shows the changes occurred in the stock of fixed assets without accounting depreciation. Change in private inventories shows the alteration in the volume of inventories owned by private business. Net exports of goods and services are exports minus imports. Government consumption expenditures and gross investment includes expenditure of the general government which cover the creation of product and services for the public, in addition it includes gross investment which is spending by general government and private section. In conclusion, the GDP is equal with:
The second method used to measure the GDP is the cost of production of goods and services. This is called the Income approach, the purpose it is used for is to examine the purchasing power of households and the finances of businesses. According to this method the GDP is calculated by summing the compensation of employees, the taxes on production and imports, subsidies, net operating surplus and consumption of fixed capital.
The third method used to measure GDP is called "value added" because it measures the total value added to the economy by all industries. Value added is defined as the difference between gross output and its intermediate inputs. Gross output is used to measure production and inter-industrial relations whether the goods or services are for intermediate or final consumption. On the other side, GDP measures only products and services sold to final users, thus gross output is always much bigger than the GDP.
Capital Stocks
Capital stocks in the U.S economy represent the amount of money invested in fixed assets and consumer durable goods. BEA provides an estimation of the net stocks of fixed assets and consumer durables which is the value of assets after being depreciated. The depreciation is a process of decreasing the value of assets due to use or aging. Furthermore, BEA provides an estimation of investment flows associated with net stocks and depreciation (BEA, 2003). The methodology used to calculate stocks requires some assumptions are made due to data limitations, e.g. the stock is supposed to remain in the same sector/industry throughout its existence.
Two methods are utilised in order to compute net stocks. The first is called physical inventory method and it applies estimated prices to the number of physical units for each type of asset. The second is called perpetual inventory method in which data from past investment flows are gathered and combined to calculate the value of stock. Between these two methods the physical inventory method is more straightforward, but it is used only for autos because they are the only kind of asset for which there are sufficient data.
Investment is defined as the addition to the net stock and estimates are ensured to be consistent with the NIPA estimates of investment and Standard Industrial Classification (SIC). In order to make sure that the estimates are correct they must meet three requirements. The first is that each asset belongs to the industry that purchased it. The second is that every new investment, in asset, should be summed and that should equal with NIPA total investment. Finally, industries are classified on an establishment basis (BEA, 2003).
Depreciation is assumed to follow a pattern of geometrical declination of assets value over time. In any given year the depreciation is calculated by multiplying the constant dollar depreciation charge by one and subtracting the annual depreciation rate.
Energy Consumption
The model requires data for energy consumption for each economic sector, which were acquired from the U.S Energy Information Administration. The energy the economic sectors consume may have the form of coal, oil, gas, electricity or thermal energy. Of all these forms of energy, thermal energy is probably the most interesting to discuss since it is the only renewable source. Sun is the source of thermal energy, if we try to identify the sources of energy which provides us with solar power, wind power, hydropower, biomass and geothermal power we will conclude that it is sun and gravity. Data for energy consumption was available for all sectors (EIA, 2008). The only issue we had to cope with was that agriculture's energy consumption was embedded to the rest of the sectors. We used a report made by the University of Arkansas (Schnepf, 2004) and a presentation (Miranowski), which shows that agriculture takes about 1% of the annual energy use and made the assumption that does not deviates significantly per year.
Figure 6 Energy Consumption by Sector
Water Consumption
Water is used only by the agriculture sector. The only data (Hutson, Barber, Kenny, Linsey, & Lumia, 2004)we were able to find were published by the U.S Geological Survey which shows water use in all the sectors needed for the model. The only issue with this data is that they are available for every five years so there is a slight loss of accuracy.
Vendat File
The Vensim model loads its data from an Excel file named Vendat.xls. Vendat contains all data needed to run the simulation. All data are referenced to the original sources which have not been adulterated. Vendat has 10 different sheets which contain data from 1990 to 2008 each containing relevant data to an economic sector, these sectors are:
agri (Agriculture)
extr (Extractions)
util (Utilities)
man&c (Manufacturing & Construction)
serv (Services)
trans (Transportation)
dwlg (Dwellings)
BoP (Balance of Payments)
GDP (Gross Domestic Product)
Jobs
The real data acquired from BEA are from 1998 to 2008. Since the simulation's initial year is 1990 we had to extrapolate the data from 1990 to 1997. For example when we wanted to calculate the value for year i we used the following equation:. So starting from 1997 we produced the values to 1990. The data from the make and use tables originally were in inflated prices and arranged in sectors that BEA uses. These are:
Agriculture, forestry, fishing, and hunting
Mining
Utilities
Construction
Manufacturing
Wholesale trade
Retail trade
Transportation and warehousing
Information
Finance, insurance, real estate, rental, and leasing
Professional and business services
Educational services, health care, and social assistance
Arts, entertainment, recreation, accommodation, and food services
Other services, except government
Government
Scrap, used and second hand goods
Non comparable imports and rest-of-the-world adjustment
In order to make the data fit into the ECCO model we had to map these categories to the sectors that the model uses. The table below explains the mapping.
4see model
BEA categories
Agriculture
Agriculture, forestry, fishing, and hunting
Extraction
Mining
Utilities
Utilities
Manufacturing and Construction
Construction
Manufacturing
Services
Wholesale trade
Retail trade
Simon adds transportation to services
Transportation and warehousing
For example in capital stocks and SUTs
Information
Finance, insurance, real estate, rental, and leasing
Professional and business services
Educational services, health care, and social assistance
Arts, entertainment, recreation, accommodation, and food services
Other services, except government
Government
After combining rows and columns of the make and use tables in the categories described above, we deflated the tables to 1990 prices, using the implicit price deflator. So far the prices we had were from 1998 to 2008, so we extrapolated the prices to 1990 using the process described above. Except from the five standard sectors the model uses data that are not structured into industrial categories. These are:
Housh: households
M: imports
Ggov&n: General government expenditures and gross investment
Invest: Investment
Exports
Depr: Depreciation
The challenge is to define the proper sectors and associate the correct data to them. For example the agriculture sector requires data for the size of the capital stocks, consumption of water and energy, use of logistics (transportation) services, number of jobs created and economic productivity of assets (EPA). The most appropriate way to calculate the economic productivity of assets is from the GDP which is standardised across many different economies. The GDP is calculated in three different ways:
Income
Expenditure
Value Added
Assets value is measured in asset million dollars (AM$) and flows of products is measured in economic million dollars (EM$). There are coefficients to convert assets into other quantities. The coefficient of EPA is produced by Vensim and it divides the output of a sector to its assets size. The serv and man&c sectors work by producing a shortfall in demand, but when imports are added to the total then the shortfall is less. In order to convert this shortfall into the extra capital required we should divide with the EPA man&c. The question is how we should calculate the economic output, using the GVA or the Expenditure.
The expenditure derivation of the GDP estimates all products are consumed by households, general government, exports and gross fixed capital formation (investment). The problem with calculating EPA from expenditure is that the prices refer to the final supplier.
What the model needs to be more accurate is the gross value added for each sector, but the data is not available. There is a solution though. We utilise the intermediate consumption of two sectors, the man&c and serv to each other. Their ratio gives the direct value supply proportion (DVSP) which is calculated in the file int1_sut.xls. It calculated by subtracting the amount of man&c services consume from GDP+M (GDP plus imports) and dividing the result with GDP+M.
The model also uses data for capital stocks; they are used in agriculture, extractions, utilities, man&c, serv and dwellings sheets. There are three values required:
Capital stock
Capital formation
Capital depreciation
Initially, capital stocks/formation/depreciation categories are combined to those of 4see. Then they are converted to 1990 prices and finally placed into each separate Vendat sheet.
Simulation Results and Evaluation
Simulation Results
Evaluation
Conclusions and Future Work
Conclusions
Future Work
