Differential Equations in Economics BIU（微分方程在经济学国际障碍）.pdf

Chapter 1 Differential Equations in Economics Applications of differential equations are now used in modeling motion and change in all areas of science. The theory of differential equations has become an essential tool of economic analysis particularly since computer has become commonly available. It would be difficult to comprehend the contemporary literature of economics if one does not understand basic concepts (such as bifurcations and chaos) and results of modem theory of differential equations. A differential equation expresses the rate of change of the current state as a function of the current state. A simple illustration of this type of dependence is changes of the Gross Domestic Product (GDP) over time. Consider state x of the GDP of the economy. The rate of change of the GDP is proportional to the current GDP x(t) = gx(t), where t stands for time and i ( t ) the derivative of the h c t i o n x with respect to t. The growth rate of the GDP is xlx. If the growth rate g is given at any time t, the GDP at t is given by solving the differential equation. The solution is x(t) = x(o)eg. The solution tells that the GDP decays (increases) exponentially in time when g is negative (positive). We can explicitly solve the above differential function when g is a constant. It is reasonable to consider that the growth rate is affected by many factors, such as the current state of the economic system, accumulated knowledge of the economy, international environment, and 2 Differentia/Equations, Bifurcations, and Chaos in Economics many other conditions. This means that the growth rate may take on a complicated form g(x, t). The economic growth is described by