Limitations of Static Analysis

In the discussion of static equilibrium in the market or in the national income, our primary-concern has been to find the equilibrium values of the endogenous variables in the model. A fundamental point that was ignored in such an analysis is the actual process of adjustments and readjustments of the variables ultimately leading to the equilibrium state (if it is at all attainable). We asked only about where we shall arrive but did not question when or what may happen along the way.

The static type of analysis fails, therefore, to take into account two problems of importance. One is that, since the adjustment process may take a long time to complete, an equilibrium state as determined within a particular frame of static analysis may have lost its relevance before it is even attained, if the exogenous forces in the model have undergone some changes in the meantime. This is the problem of shifts of the equilibrium state. The second is that, even if the adjustment process is allowed to run its course undisturbed, the equilibrium state envisaged in a static analysis may be altogether unattainable. This would be the case of a so-called unstable equilibrium, which is characterized by the fact that the adjustment process will drive the variables further away from, rather than progressively closer to, that equilibrium state. To disregard the adjustment process, therefore, is to assume away the problem of attainability of equilibrium.

The shifts of the equilibrium state {in response to exogenous changes) pertain to a type of analysis called comparative statics, and the question of attainability and stability of equilibrium falls within the realm of dynamic analysis. Each of these clearly serves to fill a significant gap in the static analysis, and it is thus imperative to inquire into those areas of analysis also. We shall leave the study of dynamic analysis to Part 5 of the book and shall next turn our attention to the problem of comparative statics.

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Responses

  • Robel
    What are the limitations of static analysis?
    3 years ago
  • aubrey
    What are the limitations of comparative static analysis ?
    2 years ago
  • Venita
    What the meaning and limitations of comparative static analysis?
    1 month ago

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