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General equilibrium theory is a central point of contention and influence between the neoclassical school and other schools of economic thought, and different schools have varied views on general equilibrium theory. Some, such as the Keynesian and Post-Keynesian schools, strongly reject general equilibrium theory as "misleading" and "useless".
Notes and Problems in Applied General Equilibrium Economics, North Holland; Dixon, Peter (2006). Evidence-based Trade Policy Decision Making in Australia and the Development of Computable General Equilibrium Modelling, CoPS/IMPACT Working Paper Number G-163; Dixon, Peter and Dale W. Jorgenson, ed. (2013).
Dynamic stochastic general equilibrium modeling (abbreviated as DSGE, or DGE, or sometimes SDGE) is a macroeconomic method which is often employed by monetary and fiscal authorities for policy analysis, explaining historical time-series data, as well as future forecasting purposes. [1]
In other words, Sonnenschein–Mantel–Debreu raises questions about the degree to which general equilibrium theory can produce testable predictions about aggregate market variables. [ 21 ] [ 22 ] For this reason, Andreu Mas-Colell referred to the theorem as the “Anything Goes Theorem” in his graduate-level microeconomics textbook. [ 22 ]
Walras's law is a consequence of finite budgets. If a consumer spends more on good A then they must spend and therefore demand less of good B, reducing B's price. The sum of the values of excess demands across all markets must equal zero, whether or not the economy is in a general equilibrium.
The classical general equilibrium model aims to describe the economy by aggregating the behavior of individuals and firms. [1] Note that the classical general equilibrium model is unrelated to classical economics, and was instead developed within neoclassical economics beginning in the late 19th century.
The theory shows how a general equilibrium is reached through the interaction between demand and supply in an economy consisting of multiple markets operating simultaneously. The Lausanne School is also largely credited with the foundation of welfare economics, through which Pareto sought to measure the welfare of an economy. [24]
See Financial economics § Arbitrage-free pricing and equilibrium. Relatedly, both approaches are consistent [ 9 ] [ 2 ] with what is called the Arrow–Debreu theory . Here models can be derived as a function of " state prices " - contracts that pay one unit of a numeraire (a currency or a commodity) if a particular state occurs at a ...