Now we turn to the method of economic dynamics which has become very popular in contemporary economics. Economic dynamics is a more realistic method of analyzing the behaviour of the economy or certain economic variables through time. The definition of economic dynamics has been a controversial question and it has been interpreted in various different ways. We shall try to explain the standard definitions of economic dynamics.
Frisch’s time period analysis
The course thorough time of a system economic variable can be explained in two ways. One is the method of economic statics described above in which the relations between the relevant variables in a given system refer to the same point or period of time. On the other hand, if the analysis candies the relationship between relevant variables whose values belong to different points of time is known as dynamic analysis or economic dynamics. The relations between certain variables the values of which refer to the different points or different periods of time are known as dynamic relationships. Thus, Professor Schumpeter says, we call a relation dynamic if it connects economic quantities that refer to defend points of time. Thus if he quantity of a commodity that is offeree at a point of time (i) is considered as dependent upon the price that prevailed at the point of time (t – 1) this is a dynamic relit on in a word economic dynamics is the analysis of dynamic relationships.
We thus see that in economic dynamics we duly recognizes the element of time in the adjustment of the given variables to each to her and accordingly analyse the relationships between given variables relating to different points of time professor ranger Frisch who is one of the pioneers in the use of the technique of dynamic analysis in economics defines economic dynamics as follows a system is dynamical if its dehaviour over item is determined by functional equation in which variables at different points of time are involved in an essential way in dynamic analysis, he further elaborates we comfier not only a set of magnitudes in a given point of time and study the interrelations between them but we consider the magnitudes of certain variables in different points of time and we introduce certain equations which embrace at the same time several fo those magnitudes belonging to different instants. This is the essential characteristic of a dynamic theory only by a theory of this type we can explain how one situation grows out of the foregoing.
Many examples of dynamic relationships from both micro and macroeconomic fields can be given if one assumes that the supply (S) for goods in the market in the given time (t) depends upon the price that prevails in the preceding period (that is t – 1) the relationship between supply and price is said to be dynamic. This dynamic functional relation can be written as:
St = ƒ (P t – 1)
Where Si stands for the supply of a good offered in a given period t and P t-1 for the price in the preceding period. Likewise if we grant that the quantity demanded (D) of a good in a period t is a function of the expected price in the succeeding period (t + 1), the relation between demand and price will be said to be dynamic and the analysis fo such relation would be called dynamic theory or economic dynamics.
Similarly examples of dynamic relationship can be given from the macro filed. If it is assumed that the consumption of the economy in a given period depends upon the income in the preceding period (t -1) we shall be conceiving a dynamic relation. This can be written as:
Ct = ƒ (Y t-1)
When macroeconomic theory (theory of income employment and growth) is treated dynamically, that is when macroeconomic dynamic relationships are analysed the theory is known as it is essential to understand that in modem theory statics and dynamics refer to a particular mode of treatment or type of analysis of the phenomena observed while the adjective stationary and changing describe the actual economic phenomena. A static or dynamic theory is a particular kind of explanation on of economic phenomena and indeed stationary and changing phenomena can be submitted either to a static or to a dynamic analysis.