Model - Details

Using the Virtual Economy, you can experiment with sophisticated computer models which are very similar to those the Chancellor and his advisors use to prepare the Budget and to keep the economy on track. The Virtual Economy uses two different models - a microeconomic and a macroeconomic model - although we've designed them so that they work together:

• The Macroeconomic Model

  The macroeconomic model shows the effects of policy changes on economy-wide variables such as total unemployment, the price level or Government borrowing. This model is designed to give very similar results to the Treasury's own model, but to be much faster and easier to use. It was developed by Keith Church of the ESRC Macroeconomic Modelling Bureau.

• The Microeconomic Tax Benefit Model

  The microeconomic model is designed to show the effects of your changes on individual households. The program used here is a version of the IFS Tax and Benefit Model, developed at the Institute for Fiscal Studies. The Treasury have an model called IGOTM (InterGOvernmental Tax Model), which gives almost identical results.

These pages have some general details of the history of the model, the current construction of the model and then some pages setting out the ways in which the model reacts to income tax cuts. Most of the contents of these pages were prepared by the ESRC Macroeconomic Modelling Bureau. There is also some information about the variables that can be changed in the Virtual Economy model, some details about budget constraints and descriptions of the families used in the Virtual Economy. This information was prepared by the IFS. Follow the links below or the page numbers at the foot of each page to access the details:

• Page 1: The Virtual Economy model
• Page 2: Using the model - a health warning
• Page 3: The base forecast and model solution
• Page 4: PC Ready Reckoner - downloadable software
• Page 5: Inflation targeting - technical details
• Page 6: History of the Treasury Model
• Page 7: The economics of the Treasury Model
• Page 8: Model properties - tax and the supply-side
• Page 9: Help - information about the model variables
• Page 10: Budget constraints
• Page 11: Descriptions of the families
• Page 12: A cautionary note on the use of small samples of families
• Page 13: The tax benefit model

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