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by Valentino Piana (1998-2001)



1. Introduction to our graph representation
2. The rules
3. The scheme
4. Reading the scheme: two examples
4.1. Export-led growth
4.2. Fiscal cuts
5. The advantages of this representation
Appendix 1. Justification for signs in relationships

Appendix 2. Introduction for absolute beginners


If you have never heard of IS-LM model click here.

Freely modifiable MS Word version of the graph.

Data for all the variables in IS-LM model




1. Introduction to our graph representation

In this essay, we re-state the common IS-LM model in a neat graphical representation, which offers a few advantages over the traditional representation, which exploits the Cartesian space and analytical geometry.

We rather use some very basic elements of graph theory (nodes and arrows)

This allows us to offer a representation of the variables and the linkages between them in a more compact and straightforward way, especially well-suited for students and people interested in a first but systematic view on how the economy works.

To a creative economist, this representation offers the immediate possibility of adding further variables and outlining new or different linkages between variables.

This graph representation was developped by the author during the academic years 1996-97 and 1997-98 when he taught Macroeconomics at the Cracow University of Economics (Poland).

To author's knowledge, this graph version of IS-LM is an innovative tool for research and teaching purposes, but if you have published or seen a published paper on a similar subject please let the Economics Web Institute know.

At the same time, we hope you shall appreciate this graph method and develop you own models, basing on the easily modifiable version of the scheme, whose download is available here for free.

2. The rules

Variables, as consumption or exports, are put in rectangular frames. To reader's friendliness, variables are in full names, not abbreviations or math symbols.

Links between variables are expressed through oriented arrows, with changes in the first variable having an impact on the second.

A sign "+" means that the change in the first variable provokes a change in the same direction for the second ("an increase give rise to an increment", "higher ... give rise to higher ...").

By contrast, a sign "-" shows that the change in the second variable will be in the opposite direction ("a fall in the employment will increase unemployment").

A long chain is easy to develop:

An increase of the first variable will eventually provokes a fall of the third, after producing a rise in the second.

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