Comparative Statics in the G&S Model

Comparative statics refers to any exercise in which one of the exogenous variables is changed and the effect of that change on the equilibrium value of the endogenous variable is shown. Below we will demonstrate two such exercises: an increase in government spending demand and an appreciation of the US dollar value. In each case we'll show the effect of the change on the equilibrium value of real GNP.

It is useful to think of a comparative statics exercise as a controlled economic experiment. In the sciences, one can test propositions by controlling the environment of a physical system in such a way that one can isolate the particular cause and effect relationship. Thus, to test whether a ball and a feather will fall at the same rate in a frictionless vacuum, experimenters could create a vacuum environment and measure the rate of descent of the ball versus the feather. In economic systems such experiments are virtually impossible because one can never eliminate all of the "frictions."

However, by creating mathematical economic systems, (i.e., an economic model), it becomes possible to conduct similar types of "experiments." A comparative statics exercise allows one to isolate how a change in one exogenous variable affects the value of the equilibrium variable while controlling for changes in other variables that might also affect the outcome.

International Finance Theory and Policy - Chapter 50-9: Last Updated on 1/20/05