Towards a Dynamic Equilibrium-Seeking Model of a Closed Economy

Garry W. McDonald,Nicola J. McDonald

doi:10.3390/systems8040042

Abstract

Economics has long been concerned with the development of tools to help understand and describe the interactions among economic actors including the circular flow of economic resources. This paper expands our available toolkit of models, by describing a novel dynamic equilibrium-seeking model of a closed economy. The model retains many of the key features of state-of-the-art Computable General Equilibrium (CGE) models including economic interdependence, input substitution, nested production functions, and so on. A distinguishing feature of this model is that it adopts price-related balancing feedback loops that simulate the self-regulating behaviour of a dynamic economic system. Our modelling shows not only equilibrium states (as per conventional CGE models), but the transition path toward an often-changing equilibrium. This facilitates the investigation of out-of-equilibrium dynamics and behaviour adaptation typical of largescale disruption events.

Highlights

We often use models as a tool to analyse and visualise the change in systems
This paper expands our available toolkit of models, by describing a novel dynamic equilibrium-seeking model of a closed economy
We explicitly focus on the assessment of economic system consequences using whole-of-economy modelling

Summary

Introduction

We often use models as a tool to analyse and visualise the change in systems. They simplify complex systems, enabling us to better understand and explain structure and behaviour, often with the aim of informing decision making [1,2]. The ability of CGE models to incorporate price responses within production and consumption behaviours, and to trace the circular flow of income through economic systems, are features often identified as attractive for policy-oriented economic applications. When transition pathways or significant system changes are an important aspect of the application under enquiry, the structure of a CGE model is less suitable in providing useful insights

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