System Dynamics Applications

Business Cycle Dynamics

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The ‘multiplier-accelerator’ model of business cycles is based on the original 1939 paper by economist Paul Samuelson on the interaction between two mechanisms operating in the business sector.  The ‘accelerator’ is based, in part at least, upon exogenous input and has the effect of driving the creation of income.  The ‘multiplier’ responds to a combination of exogenous policies designed to create capital through investment of income.  The model demonstrates how endogenous linear feedback creates non-linear dynamics.  It is a partial explanation of what underpins the dynamics of business cycles.  In Jørgen Randers 1980 book, ‘Elements of the System Dynamics Method’, Gilbert Low (Randers, 1980: 76-94) explains how a system dynamics model can be most valuable in providing insights into the behaviour of business cycles.  Specifically, the model demonstrates that these cycles are highly sensitive to small changes in selected inputs such as a private investor’s ability to react to changes in government’s level of investment in the business sector.

The construction of the ‘multiplier-accelerator’ model is described at .

A Powersim™ Studio representation of the ‘multiplier-accelerator’ model is at .