Assignment Week 3

Behavioural Transactions Matrix

Figure 1

As a precursor to the following two questions it is important to note that the behavioral matrix (figure 1) adheres to the fundamental principle of accounting. That is, all columns and rows concerning assets and liabilities must naturally sum to zero.



Q1.1 Why must the Vertical Columns sum to zero?

"The vertical columns must necessarily sum to zero, because the change in the amount of money held must always be equal to the difference between households' receipts and payments." (Godley & Lavoie, 2007, p.62)

In other words, reading column one vertically it is possible to deduce that households primary source of funds are through wages (WB). Alternatively, in this model there are only three possible outflows: consumption, taxes and saving (∆H). Therefore, in light of the introductory statement all vertical columns sum to zero.

Q1.2 Why must the Horizontal Rows sum to zero?

In the opening chapter of Godley & Lavoie (2007, p.6) the authors state that “everything comes from somewhere and everything goes somewhere”. Therefore, in horizontal row one the production sector generates funds from the supply of products or services while alternatively this represents a net outflow for households.

References
Godley, W., and M. Lavoie (2007) Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth, Palgrave Macmillan.



Q. 2

1. Consumption

According to the Consumption function:
Every period, households consumption is formed by from the flow of the disposable income (which depends on the wage received minus the taxes paid, ) plus of the opening stock of money formed by the wealth accumulated from previous periods.
This money is assumed to be completely expended on goods produced in an equal quantity, so the sum of the roe is zero.

2. Government Expenditures

In this model Gd is an exogenous variable, set by the autonomous decision of government, once the government has determined its own expenditure, it equals the amount of money received by the producers, leading the total sum of zero.

3. Output

Since Y is not a transaction between two sectors, it only appears once, and represents the total amount of goods an services produced in that period.

4. Factor Income

This represents labour in the economy. As with any firms (the production column) employ the workers (the household column, as workers are expected to come from households). The firms require labour to produce goods and services which will earn them income while households supply labour to earn income to purchase the goods and services they demand. Wages are paid, in some monetary form, by the firms to the households as compensation for this provision of labour. The wage bill is denoted by the wage rate (W) times employment (N). The cost of this labour to the firms is represented as –W.Nd (negative as it is an outflow funds). The income earned (wages) by the households is denoted by +W.Ns (positive as it is an inflow of funds). Both are exactly offset which is why the row will sum to zero. The s and d represent supply and demand.

5. Taxes

To provide for public services Governments must earn an income. This income is gained through income taxing the households who will directly or indirectly benefit from these services. The income tax received is denoted by +Td (positive as it is an inflow to the Government). The income tax paid by the Households is denoted by –Td (negative as it is an outflow from the households).

6. Change in Money Stock

This describes the changes in stocks of financial assets and liabilities from period to period (Godley and Lavoie 2007, p.60). The Government prints money and in this model all transactions occur in government money. Money (H) is an asset to a household but a liability to the Government as it constitutes debt. In this model the Government is the only issuer of financial assets so households must purchase from the Government to acquire these. This occurs when households use their surplus disposable income to purchase these instruments. This is denoted by –ΔHh (change in H or high-powered money, h for households held). Although stocks of cash are assets to households, the change here is negative as by the model households cannot issue cash/financial instruments nor derive any inflow (source) of funding. Thus the minus signifies an outflow (use) of funds. Conversely the corresponding inflow (+ΔHs) appears in the Government column, again positive as it is a source of funding. It also represents the difference between the Governments receipts and expenditure.

References
Godley, W., and M. Lavoie (2007) Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth, Palgrave Macmillan. Chapter 3.