Types of Economic Analysis

There are three types of economic analysis. They are

1. Static Analysis

2. Comparative Static Analysis

3. Dynamic Analysis

1. Static Analysis

Static analysis studies a particular point of equilibrium. It does not show the path of change. It only tells us about the condition of equilibrium. In static economic analysis, time element has nothing to do. All economic variables are constant and refer to the same point of time. It is also known as Equilibrium Analysis.

Example of Static Analysis is the simple market model with one equilibrium point.

Useful mathematical tools for static analysis:

• Linear Models
• Matrix Algebra

2. Comparative Static Analysis

Comparative static analysis is the comparison of two different economic outcomes, before and after a change in some underlying parameter. It does not study the motion towards equilibrium nor the process of change itself. Comparative Statics completely disregard the process of adjustment of the variables and  merely compare the initial (pre-change) equilibrium state with the final (post-change)  equilibrium state.  Just like in the Static version, the new equilibrium is assumed to be  attainable as the old equilibrium.

Example of Comparative Static Analysis is a market model with comparison of  two or more equilibrium points.

Types of Comparative Static Analysis:

Let us understand the two types of comparative static analysis using the keynes' national income model equation.

Qualitative Analysis:

If we are interested in knowing whether an increase in investment  will increase or decrease the  equilibrium National Income , the analysis will be qualitative. (Direction of change) 

Quantitative Analysis:

If we are interested in knowing by how much has National Income  change resulting from a given  change in investment   (i.e., the size of the multiplier), the analysis will be quantitative (Magnitude  of change) 

By obtaining a quantitative answer, we can automatically tell the direction of change from its  algebraic sign. Hence, the quantitative analysis always embraces the qualitative analysis.

Useful mathematical tools for comparative static analysis:

• Derivative
• Differentials

3. Dynamic Analysis:

Dynamic economic analysis shows the path of change.  It studies the process by which equilibrium is achieved. (Both equilibrium & disequilibrium) It traces out the path of adjustment from one state of equilibrium to another. In dynamic analysis, time element occupies an important role and economic variables refer to the different point of time.

Useful mathematical tools for dynamic analysis:

• Integral Calculus-Indefinite & Definite Integrals.
• Differential Equations
• Difference Equations