An Introduction to Economic Dynamics

An Introduction to Economic Dynamics

An Introduction to Economic Dynamics

An Introduction to Economic Dynamics

Synopsis

This is an examples-driven treatment of introductory economic dynamics for students with a basic familiarity of spreadsheets. Shone approaches the subject with the belief that true understanding of a subject can only be achieved by students themselves setting out a problem and manipulating it experimentally. Although all economics students now have access to spreadsheets, they are often used for little more than graphing economic data. This book encourages students to go several stages further and set up and investigate simple dynamic models. A web-site for students and instructors is included that contains an additional 100 questions for students and 100 for instructors.

Excerpt

This is a short book. It aims to get across the essential elements of dynamics that are used in modern treatments of the subject. More significantly, it aims to do this through the means of examples. Some of these examples are purely algebraic. But many others consider economic models: both microeconomic and macroeconomic. Macroeconomics is replete with dynamic models – some simple and others quite complex. But this is not true of microeconomics. Microeconomics is still very largely static, with the exception of the cobweb model. In this book we have considered the dynamics of demand and supply and the dynamics of the firm. In terms of the firm we deal only with advertising, diffusion models and the dynamic theory of oligopoly. The macroeconomic models we consider follow the traditional development of the subject matter. The Keynesian fixed-price model is considered first, followed by the IS-LM model. But we also consider the Dornbusch model of the open economy. This model in particular allows us to show how rational expectations enter model construction. It also illustrates the concept of a saddle-point solution to a dynamic model. Other topics of importance are also dealt with such as inflation and unemployment and the fiscal criteria of the Maastricht Treaty. The final chapter (chapter 10) provides an introduction to modern ideas of bifurcation and chaos.

Every student now has access to a spreadsheet. In many colleges and universities, students are trained in the use of the spreadsheet. Often, however, this is for setting out economic data and graphing it. Occasionally a regression equation is undertaken. Rarely is a simple dynamic model set up and investigated. This is what this book is about. I have deliberately set a constraint on the material covered that it must be capable of being investigated on a spreadsheet and that no additional technical software needs to be invoked. This is not as limiting as it may first appear. It may be thought that this restricts our investigation only to discrete models. This is not in fact true. By utilising Euler's approximation, we can investigate quite readily continuous dynamic models. In this book we shall invoke Euler's approximation frequently.

There is a second reason for limiting myself to spreadsheets. Economics, like many subjects, can be more fully appreciated by setting out a problem and manipulating it experimentally. Experimentation is at the heart of this book. But such experimentation is based only on the reader setting up the model themselves on their computer. I have found that students like setting models up from scratch. When they get things wrong they must check their model specification relative to the theory. So they read the theory with a more focused . . .

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