Macro Economics For downloading this contact- bikashkumar.bk100@gmail.com Prepared by Students of University of Rajshahi Rabbi Mehedi Sadia Rafia Tuhin

1. Static, Dynamic and
Comparative Static
Economics
• The term static, comparative static and dynamic is
frequently appearing in economic analysis. It is the
fundamental discipline that economist must have in
advance before writing or reading any paper in this
field.

2. Static Economics
The word static originated from the field of physics. It is
used to denote some kind of movement in which speed
is constantly maintained. Alike, static economics mean
the studies focusing only on particular period of time.
In economics, the concept of static refers to a situation
where there is a movement. But this movement is
continuous, certain, regular and constant. Static
economics does not deal with the unexpected changes. It
studies only the expected economic activities. There are
no windfall changes or fluctuations in economic
activities. According to Prof. Harrod, “An economy in
which rates of output are constant is called static.”

3. Example of Static Economics
Static economics mean the studies focusing only on
particular period of time. It is similar to taking a
photo when you press the button for a shot then the
photo is just at a particular point of time. In
economics most paper is a static analysis, for
instance, we say the market is in equilibrium when
demand and supply equate one another, which is
graphically represent by the intersection point of
demand and supply curve. This is a static analysis
since we just only see the picture at a point of time.

4. Definition: Static Economics
• Prof. Schumpeter defined static analysis as “a
method of dealing with economic phenomena that
tries to establish relations between elements of
economic system, prices and quantities of
commodity, all of which refer to the same point of
time.”
• According to Prof. Stigler, “The stationary state is an
economy in which the tastes, resources and
technology do not change through time.”

5. Explanation
The meaning of static economic analysis can be
explained with the help of Fig. 1.2

6. Features of Static Economics
Prof. Clark has pointed out the features of a static
economics.
They are:
• (i) No change in the population and its composition.
• (ii) No change in the quantity of capital.
• (iii) No change in the techniques of production.

7. • (iv) No change in the working and organisation of
industrial units.
• (v) No change in the habits, tastes and fashions of
the people i.e. the wants of people remain the
same.

8. Scope and Importance of Static
Economics
• 1. It is the simple and easy method of economic analysis.
It is easier to understand and economical in thought.
• 2. It is the basis of the principle of free trade. The
principle of free trade which was favoured by classical
economists like Adam Smith is an integral part of static
economics.
• 3. Robbins’ definition is also the subject matter of static
economics. Robbins defined economics as a science
which studies human behaviour as a relationship
between ends and scarce means which have alternative
uses. This definition is a part of static economics.

9. • 4. Static economics give knowledge of the conditions of
equilibrium. It tells that price is determined where demand for
the supply of goods is equal. Similarly, income is in equilibrium
where planned investment and planned savings are equal.
• 5. It is the basis of dynamic analysis. Prof. Hicks has pointed
out that static economics occupies an important role because
it gives a lot of information for the proper understanding of
dynamic economics. We can understand the path of
equilibrium only after studying the conditions of equilibrium.
• 6. Keynes’ theory is also static in nature. It shows only a once-
over change of variables like consumption function, multiplier,
liquidity preference, etc. The effect of once-over change of
economic valuables is studied in static economics.

10. Limitations of Static Economic
Analysis
Static economic analysis has its drawbacks too.
They are given below:
• 1. Constancy of Variables:
• Prof. Clark and Stigler have assumed many economic variables
as constant. They are population, quantity of capital, natural
resources, techniques of production, habits and fashions, etc.
We know that these economic factors change in reality. So
static economic analysis is far from reality.
• 2. Unrealistic Assumptions:
• Static analysis is based on unreal assumptions like perfect
competition, perfect mobility, perfect knowledge, full
employment, etc. These assumptions are far from the real
world. That is why Prof. Hicks said, “Stationary state in the end
is nothing but an evasion.”

11. • 3. It ignores Time Element:
•
• Another shortcoming of the static analysis is that it
studies a timeless economy. But in reality, many changes
occur with the passage of time. Therefore, it gives a
narrow explanation of economic problems.
• 4. It does not Explain the Path of Equilibrium:
•
• Static analysis explains only the final state of equilibrium.
And comparative statics compares only the two final
equilibrium states. It does not show how this new
equilibrium has been reached.

12. Dynamic Economics
The word ‘dynamics’ means causing to move. In
economics, the term ‘dynamics’ refers to the study of
economic change. It aims to trace and study the
behavior of variables through time, and determine
whether these variables tend to move towards
equilibrium.
We have know that there is movement in statics also
but this movement is certain, regular and expected.
While dynamics refers to that movement which is
uncertain, unexpected and irregular.

13. Definition of Dynamic Economics
According to Prof. Harrod, “Dynamic economics is
the study of an economy in which rates of output are
changing.”
According to Prof. Hicks, “Economic dynamics refers
to that part of economic theory in which all
quantities must be dated.”
From Prof. Hicks’s definition, we come to know that
time element occupies great importance in dynamic
economics.

14. Example of Dynamic Economics
In dynamic we focus on the change of time and how
the equilibrium change with time. It is the same as
watching the movie you can see how the image
animate and move. Dynamic analysis allows us to see
the path of variable how the variable change with
time. It help us to see whether the equilibrium will
reach or not.

15. Therefore, an aero plane flying in the sky is in a
dynamic state only if its direction, height and speed
are uncertain.
The concept of dynamics is nearer to reality. In
dynamic economics we study the economic variables
like consumption function, income and investment in
a dynamic state.

16. Explanation
In dynamic economics we also study the path of
change or the movement towards equilibrium. This
path can be explained with the help of the diagram
given below which relates to price determination in a
market.

17. Dynamic Economics Analysis diagram 1.4

18. Features of Dynamic Economics
Recently the concept of dynamics has been applied
to the economy as a whole, Prof. Clark has pointed
out the following features of a dynamic economy:
• (i) In a dynamic economy, population grows;
• (ii) Quantity of capital grows;
• (iii) Modes of production improve;

19. • (iv) Industrial institutions undergo changes.
Inefficient organizations are replaced by efficient
organisations.
• (v) Habits of the people, fashions and customs
change, as wants of the people increase.
We can conclude by saying that dynamic economics
relates to a dynamic economy where uncertainty and
expectations play their part.

20. Scope and Importance of Dynamic
Economics
Dynamic economics is becoming more and more
popular since 1925. Though the principles advocated
by Clark and Aftalian were dynamic in nature yet
their main purpose was to explain the business
fluctuations. After 1925, dynamic economics became
popular not only in business fluctuations but also in
the determination of income and growth models.

21. The following points explain the scope and
importance of dynamic economics:
• 1. Study of Time Element
• 2. Trade Cycles
• 3. Basis of many Economic Theories
• 4. More Flexible Approach
• 5. Realistic Approach

22. Limitations of Dynamic Economics
Dynamic economics analysis has its shortcomings too. It is
difficult to understand.
Its main limitations are the following:
• 1. Complex Approach:
• Dynamic economics analysis is a complex approach for the
study of economic variables because it is based on time
element. To find solutions of various problems, we have to
make use of mathematics and economics which is beyond
the understanding of a common man.

23. • 2. Not Fully Developed:
• Many economists like Samuelson and Harrod, have
developed dynamic approach of economic analysis.
They have developed their theories through
dynamic analysis. But this mode of economic
analysis has not been fully developed. The reason is
that factors affecting economic variables change
very soon. Dynamic approach is not developing at
the speed at which economic factors change.

24. Difference between Static and
Dynamic Economics
• 1. Time Element:
In static economic analysis time element has nothing to
do. In static economics, all economic variables refer to
the same point of time. Static economy is also called a
timeless economy. Static economy, according to Hicks,
is one where we do not trouble about dating.On the
contrary, in dynamic economics, time clement occupies
an important role. Here all quantities must be dated.
Economic variables refer to the different points of time.

25. • 2. Process of Change:
• Another difference between static economics and
dynamic economics is that static analysis does not
show the path of change. It only tells about the
conditions of equilibrium. On the contrary, dynamic
economics analysis also shows the path of change.
Static economics is called a ‘still picture’ whereas
the dynamic economics is called a ‘movie’ of the
market.

26. • 3. Equilibrium:
• Static economics studies only a particular point of
equilibrium. But dynamic economics also studies
the process by which equilibrium is achieved. As a
result, there may be equilibrium or may be
disequilibrium. Therefore, static analysis is a study
of equilibrium only whereas dynamic analysis
studies both equilibrium and disequilibrium.

27. • 4.
• Study of Reality: Static analysis is far from reality
while dynamic analysis is nearer to reality. Static
analysis is based on the unrealistic assumptions of
perfect competition, perfect knowledge, etc. Here
all the important economic variables like fashions,
population, models of production, etc. are assumed
to be constant. On the contrary, dynamic analysis
takes these economic variables as changeable.

28. Comparative Static Economics
• Comparative static economics studies the comparison
of the old and new equilibrium position. It does not
study the path of change. In comparative static
economics, we take only the first equilibrium position
and the final one; we can compare them to find out the
changes
• Instead of examining steps by step the whole process of
transition from one stage of equilibrium to another. We
take only two “still” pictures and compare them. This
method analysis is called the comparative static
economic.

29. Example of Comparative Static
Economics
This method of analysis is called comparative statics.
For example, when the demand as well as the supply of
onions is 50 kg., price is BDT 1. per kg. Now suppose
the demand increases to 6 kg’s. while supply remains
the same. Price of onions increases to BDT. 2 per kg.
The study of the two equilibrium prices of onions is
called comparative static economics. According to Prof.
Lipsey, “Comparative statics involves a comparison of a
new equilibrium position with original equilibrium
position due to change in some economic variable.

30. Definition Of Comparative Static
Economics
According to Baumol: "The analysis that can be used
to show economic equilibrium before and after a
change in one or more variables without regarding of
the time required is known as comparative static
economics analysis .

31. Explanation
We can explain the meaning of comparative static
economics through Figure 1.3

32. Features of Comparative Static
Economics
• 1. It studies the comparison of the old and new
equilibrium position.
• 2. Here we only analyze the first equilibrium
position and the last one. Then we compare the
changes
• 3. It shows the change in one or more variables .
• 4. It focuses on the external force that makes the
equilibrium in the model to change.

33. Limitations of Comparative Static
Economics
• 1. Though it studies the comparison of the old and
new equilibrium positon. It doesn't study the path
of change.
• 2.It has potentially overly restrictive nature of the
assumptions conventionally used to justify
comparative statics procedures.

34. References
• 1.https://en.m.wikipedia.org/wiki/Comparative_sta
tics
• 2.http://www.economicsdiscussion.net/economics-
2
• 3.http://ghimirebinu.blogspot.com/2012/12/static-
and-dynamic-economics-and-their.html?m=1
• 4.https://savuth.wordpress.com/2007/12/29/static
-comparative-static-and-dynamic-studies-in-
economics/amp/