This study unit looks into the meaning of macro statics, macro dynamics and
comparative statics analysis. However, economic statics is the study of relations
between economic variables at a point of time, whereas economic dynamics
explains the relationship of economic variables through time.
In addition to the analysis of macro statics and macro dynamics, comparative
statics also explain a particular phenomenon that stand between time variant and time invariant as discussed hereafter.
At the end of this unit, students should be able to
Understand the definitions and meaning of macro statics.
Understand the definitions and meaning of macro dynamics.
Understand the definitions and meaning of comparative statics.
Distinguish between the three concepts of macro statics, macro dynamics
and comparative statics.
Macro Statics
The word 'statics' is derived from the Greek word statike which means bringing
to a standstill. In physics, it means a state of rest where there is no movement. In
economics, it implies a state characterised by movement at a particular income without any change. It is a state, according to Clark (1998), where five kinds of changes are conspicuous by their absence. The size of population, the supply of capital, methods of production, forms of business organisation and wants of thepeople remain constant, but the economy continues to work at steady pace. "It is to this active but unchanging process", he writes ―that the expression static economics should be applied.‖ Static economy is thus a timeless economy where no changes occur and it is necessarily in equilibrium. Indices are adjusted instantaneously; current demand, output and prices of goods and services. As pointed out by Prof. Samuelson (1978): ―Economic statics concerns itself with
the simultaneous and instantaneous or timeless determination of economic
variables by mutually interdependent relations.‖ There is neither past nor future
in the static state. Hence, there is no element of uncertainty in it. Prof. Kuznets
(1967), therefore, believes that ―static economics deals with relations and
processes on the assumption of uniformity and persistence of either the absolute or relative economic quantities involved‖.
Macro-statics explains the static equilibrium position of the economy. This is best explained by Professor Kurihara in these words, ―If the object is to show a
‗still picture‘ of the economy as a whole, the macro-static method is the
appropriate technique. For this technique is one of investigating the relations
between macro-variables in the final position of equilibrium without reference to the process of adjustment implicit in that final position.‖ Such a final position of equilibrium may be shown by the equation.
Y = C +I
where Y is the total income, C is the total consumption expenditure and I, the
total investment expenditure. It simply shows a timeless identity equation
without any adjusting mechanism. This macro-static model is illustrated in
Figure 1.3.1. According to this static Keynesian model, the level of aggregate
supply function and the aggregate demand function, in the figure, 450
line represents the aggregate supply function and income line, the aggregate demand function, 450 line and C+I curve intersect at point E, the point of effective
demand which determines OY level of national income
Thus, economic statics refers to a timeless economy. It neither develops nor
decays. It is like a snapshot photo from a ‗still camera which would be the same
whether the previous and subsequent positions the economy were subject to
change or not.
Self Assessment Exercises
i. Discuss the macro statics concept in relation to time.
ii. With the aid of a suitable diagram, clearly analyse macro statics concept.
Macro Dynamics
Economic dynamics, on the other hand, is the study of change, of acceleration or
deceleration. It is the analysis of the process of change which continues through time. An economy may change through time in two ways: (a) without changing its pattern, and (b) by changing its pattern. Economic dynamics relates to the latter type of change. If there is a change in population capital, techniques of production, forms of business organization and tastes of the people any one or all of them, the economy will assume a different pattern, and the economic system will changes its direction.
In the above diagram, given initial values of the economy, it would have
proceeded along the path AB, but suddenly at A the indices change the pattern,
and the direction of the equilibrium changes towards C. Again, it would have
proceeds to D but at C the pattern and direction is changed to E. Thus, economic dynamics studies the path from one equilibrium position to another: from A to C and from C to E. Economic dynamics is, therefore, concerned with time-lags,
rates of change, and past and expected values of the variables. In a dynamic
economy data changes and the economic system takes time to adjust itself
accordingly. According Kurihara, ―Macro dynamics treats discrete movements or
rates of change of macro-variables enable one to see a ‗motion-picture‘ of the
functioning of the economy as a progressive whole.
The macro-dynamic model is explained in terms of the Keynesian process of
income propagation where consumption is a function of the income of the preceding period, i.e Ct f (Yt I) and investment is a function of time and of constant autonomous investment I,i.e., I f (I) . In Figure 1.3.2; C + I is the
aggregate demand function and 45
0 line is the aggregate supply function. If we begin in period t0 where with an equilibrium level of income OY0, investment is increased by I , then in period t income rises by the amount of the increased investment (from t0 to t). The increased investment is shown by the new
aggregate demand function C I I . But in period t, consumption lags behind,
and is still equal to the income at E0. In period t+I, consumption rises and along
with the new investment, it increases income still higher to OY1. This process of
income propagation will continue till the aggregate demand function C I I
intersects the aggregate supply function 450 line at En in the nth period, and the
new equilibrium level is determined at OYn. The curved steps t0 to En show the
macro-dynamic equilibrium path.
Self Assessment Exercises
i. Discuss the macro dynamics concept in relation to time.
ii. With the aid of a suitable diagram, clearly analyse macro dynamics concept.
Comparative Statics
Comparative statics is a method of economic analysis which was first used by the German economist, F. Oppenheimer in 1916. Schumpeter described it as ―an
evolutionary process by a succession of static models.‖ In the words of
Schumpeter, ―whenever we deal with disturbances of a given state by trying to
indicate the static relations obtaining before a given disturbance impinged upon
the system and after it had time to work itself out. This method of procedure is
known as Comparative Statics. To be precise, comparative statics is the method of analysis in which different equilibrium situations are compared.
The distinction between static, comparative static and dynamic situation is explained with the help of the accompanying diagram.
A B
If the economy is working at situation A where it is producing at a constant rate
without any change in the variables, it is a static state which is functioning at a
point of time. When the economy moves from the equilibrium point A to point B
through time, it is economic dynamics which traces out the actual path of
movement of the economy dynamics which traces out the actual path of
movement of the economy between the two static equilibrium points.
Comparative statics, on the other hand, is related to once-over change from point
A to point B in which we do not study the forces behind the movement between
the two points. Thus comparative statics is not concerned with the transitional
period but ―involves the study of variations in equilibrium positions
corresponding to specified changes in underlying data.‖ The Keynesian
employment, income and output analysis is based on the theory of shifting
equilibrium wherein it compares different equilibrium levels of income.
According to Kurihara, Keynes made no attempt to show the process of
transition from one position of equilibrium to another. He simply used comparative statics analysis.
Figure 1.3.3 explains two different levels of income, OY2 at OT2 time and OY1 at
OT1 time. Independent of each other, both the income levels relate to economic
statics. But income at OY2 level is higher than at OY1 level. This is comparative
statics which compares two static levels of income as against dynamic
economics which traces out the path AB, showing increase in income.
Limitations to comparative statics
However, comparative statics has the following limitations.
1. Its scope is limited for it excludes many important economic problems.
There are the problems of economic fluctuations and growth which can
only be studied by the method of dynamic economics.
2. Comparative statics is unable to explain the process of change from one
position of equilibrium to another. It ―gives only a partial glimpse of the
movements, for we have only the two ‗still pictures‘ to compare, whereas
dynamics would give us a movie‖.
3. We are not sure when the new equilibrium will be established because this method neglects the transitional period. This makes comparative statics an
incomplete and unrealistic method of economic analysis.
Self Assessment Exercises
i. Discuss the comparative statics concept in relation to time.
ii. With the aid of a suitable diagram, clearly analyse comparative statics
concept.
Conclusion
No doubt economic dynamics is the antithesis of economic statics, yet the study of dynamic economics is a necessary adjunct to the hypothetical static analysis to enable economics formulate generalisation. The raison d’etre of all static investigations is the explanation of dynamic change. On the other hand, dynamic economics is made up of static situations. If economic dynamics is the running picture of the working of the economy, economic static relates to the ‗still‘, the stationary position of the economy. Thus, both economic dynamics and economic statics are essential for the study and solution of economic problems.
Summary
To sum up our discussion on macro statics, macro dynamics and comparative
statics thus: Economic statics is the study of relations between economic
variables at a point of time, whereas economic dynamics explains the
relationship of economic variables through time. In a static economy there is
movement but no change in economic phenomena while in dynamic economics,
the fundamental forces themselves change. The former studies movement around the point of equilibrium, but the latter traces the path from one point of
equilibrium, to the other, both backward and forward. On the other hand,
comparative statics studies and compares two statics equilibrium positions. If
savings at a point of time are S1 and at another moment time S2, this is once over
change which is comparative statics. But if a given rise in savings leads to
increase in investment, output, incomes and to a further rise in savings, this
sequence of interdependent events of continuous changes is dynamic in nature.
Marked Assignment
i. Discuss the macro dynamics concept in relation to time.
ii. With the aid of a suitable diagram, clearly analyse macro dynamics concept.
iii. Discuss macro dynamics and "timelessness"
iv. Clearly differentiate between macro statics and macro dynamics
v. Examine the relationship among macro dynamics, macro statics and
comparative statics.
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