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Unformatted text preview: Multi-Year Dynamics McCarl and Spreen Chapter 8 Dynamic Concerns Arise: Dynamic binding financial constraints which change with time (e.g. cash flow) production situations in which decisions made in one period affect choices or outcomes in the next (e.g. crop rotations) a need to adjust over time to changing conditions exhaustible resources Dynamics Background Dynamics Length of total time period for the model and starting date must be specified The length of explicitly modeled sub­ periods must be determined Initial and final inventory conditions must be specified (important!) Activity life must be specified Discount rate must be specified Should dynamics be explicit? Should Dynamic situations may not require multiple time periods. In a steady state dynamic equilibrium model the same decision is assumed to be made over and over again and the model uses a “representative” single period. These models do not look at adjustment paths, and it is assumed that model parameters are constant across time. Dynamic Equilibrium Models Dynamic Dynamic equilibrium models are used when we are willing to assume: a) resource, technology, and price data are constant; b) a single long­run steady state solution is acceptable. Disequilibrium models are used when these assumptions do not hold. The Two Types of Errors Unnecessarily modeling explicit dynamics Unnecessarily modeling explicit dynamics when a steady­state model would suffice Improperly omitting them Examples Examples Crop rotations can often be modeled as steady­states wit...
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