Macroscale modeling linking energy and economics : tests of investment choices

Lai, Qiuying
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Natural resources, especially energy, play a significant role in human society, from economics to politics. A number of models has been built in the past to study the relationship between natural resources and macroeconomics. These include biophysical models for population and natural resource use, which omit many important economic factors, such as debt, wages and employment. On the other hand there are economic models of debt, employment, Gross Domestic Product and other such variables, but these omit considerations of energy and natural resources. The goal of this study is to further develp a model that links biophysical and economic fundamentals within a cohesive framework. Based on the “HANDY” biophysical model and the Goodwin economic model, a merged model has been developed to simulate the dynamics of an integrated system associating natural resources and economics. This merged model focuses on the relationship between energy consumption and macroeconomic structure. It has two industry sectors – resource extraction and goods production. Both sectors produce output that is consumed by households, and the goods sector also produces investment goods that are allocated to each sector. In order to better understand how the different investment strategies influence the physical flows of resources as well as economic growth, several simulations for investment by firms have been tested in this study. The simulations make predictions for population, natural resources, economic output, debt and other economic variables. They reveal the impact of concerning investment and show that our merged model provides the means to explore questions on this topic.