System dynamics behaviour interpretation of macroeconomic models

Macroeconomics behaviour interpretation largely involves the use of comparative static models that rely on regression analysis for empirical verification. The purpose of this paper is to show that definite, pedagogical advantages are to be gained from using influence diagrams and causal loop simulations in macroeconomics behaviour interpretation. Moreover, it is hoped that for the future such methods will be adopted in economics analysis and education. This paper uses aspects of macroeconomics behaviour to show the power of System Dynamics in illustrating macroeconomics processes. Advantages of the systems approach are demonstrated, and we particularly emphasise this approach's ability to bridge the gap between understanding the structure and understanding the behaviour of economic systems. As a vehicle for illustrating these methods, this paper investigates a model of the labour market based on the Cobb-Douglas production function.