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Economics as a compartmental system: a simple macroeconomic example

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Abstract

The application in economics of methods and tools originally thought for other disciplines is not new. In this paper, we show how the compartmental approach, typical of Biology, Medicine, Chemistry, etc., can be used as a tool to represent the heterogeneity of the agents and introduce it into the dynamic models. We also show that in some cases, the subdivision of the agents into compartments can be useful for the government in order to obtain some results more efficiently. In this paper, the compartmental approach is applied to a macroeconomic model characterized by firms that may go bankruptcy whenever they are unable to repay their debts. Firms are grouped by size, and the consequences of these assumptions are analyzed, especially those regarding the policy implications.

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Notes

  1. Recently the Lotka–Volterra equations have also been applied to explain dynamics in industrial clusters (Bischi and Tramontana 2010; Fortis and Maggioni 2002).

  2. It must be noted that Amos Tversky did not receive the Nobel Prize in 2002 together with D. Kanheman and V. Smith only because he was already dead.

  3. See Weibull (1995) for a survey.

  4. In (3) and (4), we have omitted the time indicators because the expected values do not depend on the period t.

  5. In their experiment, they moved from a situation in which the compartments are characterized by the same number of firms. Large firms become much more numerous than small firms as a consequence of the shock.

  6. This is one of the main results obtained by Bischi et al. (1998).

  7. We could endogenize this effect by letting the firms realize that they have power on the market price when they are just a few, permitting them to collude.

  8. Note that the market situation after the application of the fiscal discount is very similar in the two cases, so the relevant differences in the fiscal revenues are those concerning the periods in which the measures are applied.

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Acknowledgments

This research has been supported by the EU 7th “Monetary, Fiscal and Structural Policies with Heterogeneous Agents (POLHIA)” grant no. 225408.

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  1. Dipartimento di Economia, Università Politecnica delle Marche, Piazzale Martelli 8, 60121, Ancona, Italy

    Fabio Tramontana

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  1. Fabio Tramontana
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Correspondence to Fabio Tramontana.

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Tramontana, F. Economics as a compartmental system: a simple macroeconomic example. Int Rev Econ 57, 347–360 (2010). https://doi.org/10.1007/s12232-010-0106-5

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