William Youngblood and Nuri Mahmoud

Math Econ – Modeling Paper

April 10th, 2012

Developed by the Austrian school of Economic thought, malinvestment refers to investments of firms being poorly allocated due to what they think is artificially low cost of credit and an unsustainable increase in the money supply. This is often blamed on a central bank. By incorporating this concept of malinvestment into the national income model, we can observe and measure the affects on National income as well as its repercussions on our economy as well as foreign economies. Malinvestment is caused by an incorrect prediction of the future at the time of investment and result in capital losses.

We will use a Kenysenian-like model for national income and adjust the investment variable to incorporate both the initial investment and malinvestment. Our endogenous variables are those we can predict within the model after putting in the appropriate exogenous variables. Each segment will contribute towards Y, which is the National Income of a country represented in trillions of dollars. The main endogenous variables contributing to national income are Consumption (C), Investment (I), and Government spending (G). Consumption is marked by what individuals and companies will spend to operate after first taking taxes out. Therefore the equation will read [C = a + b (Y-T)]. Investment also plays a large roll in determining national income; in the standard equation investment is represented as Io or initial investment. Since we are incorporating malinvestment we will represent I as [ I = Io – Im ]. This will take the initial investments and reduce it by the amount of malinvestment. Since malinvestment can have very serious negative affects we may need to use a multiplier in this equation as well, to show the severity of the malinvestment. Taxes are also important and will