The Stock-Flow consistent (SFC) model technique is a method students and thinkers can use to build models by using consistent money flows and stocks. Accounting principals are followed by ensuring that all monetary trades are balanced with an exchange of product and monetary equivalent.
SFC models can be built to display the NIPA sectors and GDP, or they can be built to display other economic events. The focus here will be to build two progressively more detailed SFC models, thereby preparing the reader for the next step of understanding the yet more detailed models found in 'beginning' texts.
The Concepts Underlying SFC Models
The first concept we will identify is that a sector can both divest itself of money and buy a substitute product by interacting with another sector. Thus, we can have the Household sector buying food from the agriculture sector (here represented by "Firms"). The two simultaneous transactions are recorded in two sector columns on a single line. (See Figure 1a.) The line total (shown at far right) will be zero if the exchange was equal in both directions.
|Figure 1.* Two SFC models demonstrating technique and the flexibility of the SFC method|
Restated in a slightly different way, rows record the instantaneous exchange of product and money (usually of equal value) so that the value change from a macroeconomic perspective will be zero. The zero sum will be recorded in a separate value column at far right.
A plus value will always represent inventory of money. Negative values will carry dual representation. A negative sign indicates both that a monetary inventory has flowed away from this sector and that another counter-flow inventory of product/services, labor or some other exchangeable has been substituted. (As with all models, beware of exceptions to any of these 'rules'.)
In Figure 1, the actual products exchanged are identified using a 'a<>b' style of notation.
Vertical columns are intended to cover period of time so that additional rows detailing additional events can be recorded. The productive effort of labor (resulting in a sequenced replenishment of products for future sale) is a good example of an exchange taking time to develop but settled instantaneously. The time period is usually assumed to be one year.
Vertical columns, when used to represent sectors, need to sum to zero in an absolute monetary sense if we are to achieve accounting accuracy. Simply stated, when money flows away from a sector, it must be replaced. In Figure 1a, we replace money used to buy products with money earned from firms by selling labor. Column sums of zero (at the bottom) indicate that stability has been achieved.
Memo lines can be inserted to convey additional information. In Figure 1a, the total output of firms could would be indicated with the term "[Y]".
How to Model an Outrageous Event [an exercise]
Boy-oh-boy--are the SFC models flexible! Next we will consider an outrageous but possible event that can occur in any economy. We could have a counterfeiter at work. We will assume this guy prints green money good enough to fool at least some people (sales clerks). How would we enter his activity into our SFC model?
Here we will give the counterfeiter a line of his own. We could give him an entire column but here we will just call him a deviant consumer and consider how he might affect the stability of the otherwise stable system. In Figure 1b you see a SFC matrix displaying the author's description of how the event would go down:
"The culprit fooled the clerk with bad money, got a product and left the store. The money made it to the next level but not before the event was counted as an GDP output event. At the next money level, the fraud was discovered and reversed out of the Firms sector. The Household sector entry was also reversed but no decision was made on what might have been exchanged."By now, the reader has gained an inkling of the flexibility of this modeling system. As is always true of models, the model builder decides what the model is to say. Models don't give us answers--they only help us convey ideas that are better connected mechanically.
Now Read the Book!
If you are still reading, you should have gained an appreciation of the flexibility and power of SFC modeling. If you want more information, try the Wikipedia article "Stock-Flow consistent Model".
For university level information, try Wynne Godley and Marc Lavoie's co-authored "Monetary Economics". The authors develop and explain extensive macroeconomic SFC models ready for computer simulation.
Hopefully, with a little mechanical SFC background in mind, the reader has gained confidence to undertake further study using advanced texts. Perhaps the reader can also articulate and present his own views and visions more accurately. [Writing this post helped this author]
*The matrices found in Figure 1 originated in the Wikipedia article "Stock-Flow consistent Model".
(c) Roger Sparks 2019