Modeling
The economy of a nation-state is deeply intertwined with rights and obligations. In countries before the nation-state, there wasn’t even a concept of citizens. Naturally, there wasn’t even the idea of doing something for the citizens. The obligations and rights of citizens only exist because of the nation-state, so even when talking about education or public investment, it was either the benevolence of the monarch or for military purposes.
If a nation-state cannot support its citizens, they will either explode outward or collapse inward. In either case, the state disintegrates, and the citizens disperse. Thus, the world overflows with numerous refugees.
Today’s Japanese people take the existence of the state for granted, believing that the state will protect and support them. However, in the past, Jews lost their state and wandered the world as persecuted people. In modern times, many ethnic groups have lost their countries, becoming refugees, with families scattered and suffering immense hardships. A country that no one tries to protect cannot be protected.
We must not forget that much of today’s economy exists because of the nation-state. At its core are the rights and obligations of citizens, and the way these are structured fundamentally changes the way we think about the economy.
The economy of a nation-state is built on the structure and system of the nation-state.
To examine the economy of a nation-state, it must be modeled. How to approach the basic idea of modeling? First, why is it necessary to model the economy? It is because we need to clarify the health of the economy. The primary purpose of modeling the economy is to monitor whether the current liberal economy, driven by the circulation and function of “money,” is flowing smoothly and functioning normally without distortions, biases, or stagnation.
Why is it necessary to first construct a model that can provide an overview? It is to understand the ideal state of the economy. By measuring the deviation from the ideal state, we can make adjustments.
Is the economy functioning healthily or not? If it is not functioning healthily, we need to determine how to address it. For that, it is necessary to clarify where the problems are and where their impacts appear, both overall and individually.
Unnatural flows of funds become hotbeds of crime.
To measure the circulation of “money” and monitor whether it is functioning normally.
What we want to know is the health of the economy.
Before constructing a model, it is necessary to clarify the nature of the model we are trying to build.
The model we aim to construct is not the type that gives a definitive answer when numbers are input. Its purpose is to provide reference answers based on the user’s objectives and assumptions, not to give test answers. In other words, the mission of the model is to provide the answers that the user desires based on their needs.
With this in mind, while designing the user interface, we should not give users excessive expectations. Rather, we need to adopt a design philosophy similar to that of video games.
Design the base field, platform, set the rules, stages, characters, items, scores, and goals. Allow arbitrary initial conditions to be input, and set uncertain, random events and phenomena. Then, rank the results and learn through various trials and errors.
Ultimately, the results should be summarized in a control panel like a dashboard.
Instead of consolidating everything into one model, create one model that provides an overview and, as needed or for specific purposes, create separate individual models. First, create a capital circulation model to check for distortions, biases, or stagnation in the flow of funds, and whether there are any unnecessary flows. At this stage, it is essential to verify the facts as much as possible.
The foundational information includes the capital circulation table, national economic accounts, balance of payments, consumer price index, electricity consumption, tax statistics, and corporate statistics.
Next, check for problems or abnormalities in the function and movement of “money” (prices, interest rates, exchange rates, speculation, etc.). Then, check the movement of goods (production, inventory, distribution, sales, consumption, etc.).
A recent example is the movement of rice prices. Recently, rice prices have soared, and the cause is the problem. The rise in rice prices is believed to be due to competition among collection agents. Therefore, the government is trying to counteract this by releasing reserve rice.
Calculate the impact of each country’s economic policies on the economy.
Predict the trends of the world economy, this country, and the domestic economic situation. Based on that, construct individual models for specific purposes such as exchange rate forecasts, sales forecasts, price forecasts, and stock price forecasts.
Aim to ultimately create a dashboard for the user interface. Arrange the individual results so that the correlations are clear.
To create a model, first, identify the items and elements that make up the model according to the purpose. Clarify the nature of the items and elements.
The important aspects of items and elements are position, movement, and relationships.
Clarify how each element that constitutes the economy affects the flow of “money.” To do this, position each element within the whole, clarify where and how it affects the flow, and how it influences other elements and creates relationships. By formulating this into equations, we can predict the movement of the economy or use it as a reference for the measures we should take next.
When gamified, the characters are assumed to be households, finances, businesses, financial institutions, and overseas entities.
Another approach is the I Ching analysis method, which uses a tree structure to classify actions into yin and yang, positive and negative, and plus and minus, preparing sixty-four hexagrams and further dividing them into six stages for analysis.
The important thing in analysis is the premise.
The model’s purpose changes according to the user’s requirements, so the initial premise and the user’s purpose become important. Without clarifying the premise, the effectiveness of the analysis cannot be expected. It is the user, that is, the person, who sets the premise.
The economy is people. The relationship between goods and money arises from people. Goods have a yang function, and money has a yin function. Goods and money exert their effects through inflow and outflow.
Identify the nature of the data and numbers that make up the elements of the items.
Models are usually composed of multiple equations, simultaneous equations, or matrices. Since models are typically composed of multiple equations, it is necessary to decompose the numbers collected as data and formulate them into equations.
The equations used to measure the economy are fundamentally linear.
In equations, the nature of the numbers is important.
Also, since the circulation movement of “money” and life are based on the movement of celestial bodies, equations need to be devised based on rotational motion, periodic motion, waves, and time series analysis.
When analyzing economic value, it is difficult to determine whether it is nominal value or real value. The value of money is nominal value. Real value is a number based on the actual substance of things or people.
Numbers representing “money” and numbers representing things have different characteristics. Numbers representing things form a more definitive basis. “Money” represents relative value, an abstract value. Things form the base.
The basic numbers include population composition, production volume, and inventory volume. The basic numbers are fundamentally based on real value.
The numbers that make up equations include constants and variables. Equations consist of constants and variables.
Equations consist of dependent variables, independent variables, coefficients, and constants.
Also, the key to constructing equations is what to set as the objective variable and explanatory variable. The objective variable is the variable that constitutes the objective and represents the result. When the purpose is prediction, it refers to the value or data to be predicted, corresponding to the dependent variable. The explanatory variable is the variable that explains the result, the causal variable, corresponding to the independent variable.
Both objective variables and explanatory variables are not predetermined and can be set arbitrarily according to the purpose and conditions. In short, they are selected according to the purpose. For example, when predicting exchange rates, set the exchange rate value as the objective function and set items related to exchange rate fluctuations, such as interest rates and balance of payments, as explanatory variables. When predicting crude oil prices, set the crude oil price as the objective function and assume explanatory functions based on the results of correlation analysis.
Also, what is a fixed value and what is an uncertain value? What to set as a fixed value and what to set as an uncertain value is not always given or self-evident. Sometimes it is set arbitrarily as an assumption.
This point needs attention. For the purpose of analysis or the convenience of calculation processing, sometimes values are arbitrarily assumed as fixed values.
Numbers have differences in immediacy, measurability, and manageability. Information has freshness and quickly becomes obsolete. Also, information transmission takes time, and preliminary figures sometimes have value.
Indicators include leading indicators and lagging indicators. Leading indicators are indicators that appear ahead of the result. They signify signs or omens. They are used to achieve goals. Or they serve as reference indicators for making predictions or plans. They are also indicators that cause lagging indicators. They can be indicators that predict the economy. Coincident indicators are indicators that appear almost in line with economic movements. Lagging indicators are indicators that appear after the result. They are indicators that confirm the result. They are also indicators that appear as a result afterward. They are indicators that definitively determine economic movements. They are phenomena that occur with a time lag.
In dieting, for example, calories burned are leading indicators, and weight is a lagging indicator.
Leading economic indicators include:
- ISM Manufacturing Index (PMI)
- Initial Unemployment Claims
- Housing Starts
- Consumer Confidence Index
- New Residential Construction Floor Area and Number
- Tokyo Stock Exchange Index (year-on-year)
- Real Machinery Orders (excluding ships and electric power for private demand)
- Money Supply
- Interest Rate Spread
- University of Michigan Consumer Sentiment Index
- Housing Permits
- New Unemployment Claims
- Delivery Delay Index
Examples of coincident indicators:
- Effective Job Openings-to-Applicants Ratio (excluding new graduates)
- Operating Profit (all industries)
- Overtime Hours Index (manufacturing)
- Industrial Production Shipment Index
- Commercial Sales (retail)
- Large-scale Electricity Consumption
Examples of lagging indicators:
- Unemployment Rate
- Consumer Price Index (CPI)
- Corporate Earnings
- Industrial Production Index
- Lending Rates
Also, whether it is manageable or controllable is an important factor in management accounting. It is an important factor in expense budgets. Expenses that can be determined by policy, such as entertainment expenses, are manageable costs, while expenses that occur in conjunction with products, such as raw materials, are difficult to manage directly.
There are measurable and immeasurable numbers. For example, it is difficult to measure the number of participants in political rallies. It is also difficult to measure equipment deterioration. In such cases, estimated values are used.
In any case, the ease of direct management or operation is an issue, and numbers that are difficult to handle directly are handled indirectly. Naturally, numbers that can be handled directly are more reliable and certain.
The function of the economy is the key to predicting economic fluctuations. The function of the economy appears in prices, income, corporate profits, employment, interest rates, exchange rates, domestic and foreign price differences, balance of payments, tax rates, land prices, stock prices, and deposits. In other words, the impact of prices, income, corporate profits, employment, interest rates, exchange rates, domestic and foreign price differences, balance of payments, tax rates, land prices, stock prices, and deposits on the economy is the function.
Substantial numbers in the economy appear according to the flow of economic procedures. That is, production volume, inventory volume, distribution volume, sales volume, and consumption volume. These appear in the process from production to consumption. By clarifying which stage forms the price, and examining the presence or absence of these movements and signs, we can identify abnormal movements and fraud.
First, is the data qualitative or quantitative? Much of the information does not come in as numerical data from the beginning but comes in as qualitative data. The first task of modeling is how to convert qualitative data into quantitative data.
Next, the reliability of the data becomes an issue. The reliability of the data is questioned first. The reliability of the data depends on the source of the information. In other words, the origin of the information.
The numbers we see are mostly processed in some way.
The most reliable data is primary data, but there are limits to collection. Inevitably, secondary data must be used. For example, television ratings. However, with the development of sensors, the use of primary data is also becoming possible.
A good example of this is big data. Parts that had to rely on sample surveys are becoming possible to conduct full surveys. This means that the importance of primary data is increasing, not just secondary data.
Also, in terms of reliability, raw data, like primary data, is highly reliable, but full surveys and processing are difficult, so estimated values are often used.
If AI could completely predict stock prices, the stock market would not function. However, there is no doubt that AI will play an important role in predicting stock prices. Because it is imperfect and relative, there is room for human consciousness to intervene and work.
The important thing in analysis is the assumptions.
Since the model’s purpose changes according to the user’s needs, the initial assumptions and the user’s purpose are important. Without clarifying the assumptions, the effectiveness of the analysis cannot be expected. Setting the assumptions is the user’s responsibility, that is, the person.
The analysis of I Ching, specifically, first clarifies the situation and preconditions as a hexagram. Then, it expresses the outline and the policy to be taken as the hexagram statement, and interprets the line statements according to the situation and conditions of the other party. This procedure is important. First, grasp the whole picture, then confirm the situation of the other party. Based on the position of the other party, formulate countermeasures.
For example, when expressing a financial statement as a hexagram. Create a table with seven rows and two columns. The first row is the item row, the first column is the debit side (Yang, operation, out), and the second column is the credit side (Yin, procurement, in). Second row, debit side, increase or decrease in total assets, credit side, increase or decrease in capital. Third row, debit side, increase or decrease in fixed assets, credit side, increase or decrease in fixed liabilities. Fourth row, debit side, increase or decrease in current assets, credit side, increase or decrease in current liabilities. Fifth row, debit side, increase or decrease in expenses, credit side, increase or decrease in revenue. Sixth row, debit side, increase or decrease in fixed costs (purchases), credit side, increase or decrease in gross profit. Seventh row, debit side, increase or decrease in variable costs, credit side, increase or decrease in operating profit.
Then, based on the increase or decrease compared to the previous period, use shades of blue to indicate an increase and shades of red to indicate a decrease. Then, read the hexagrams of the credit and debit sides. Also compare, read the changing lines, hidden hexagrams, etc., and predict the future.