Recursive Competitive Equilibrium - Explained
What is the Recursive Competitive Equilibrium?
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What is the Recursive Competitive Equilibrium (RCE)?
The recursive competitive equilibrium (RCE) is said to be an equilibrium concept. An equilibrium concept in the sense that, when external economic influences are absent, and economic forces like supply and demand are equal; there would not be any change in the equilibrium values of the economic variables. In the standard text perfect equilibrium for example, the point at which the quantity supply equals the quantity demanded is said to be the point at which equilibrium has occurred. The Recursive Competitive Equilibrium assists economists and analysts to investigate economics issues such as monetary and fiscal policies, and unsteadiness in business cycles.
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Understanding Recursive Competitive Equilibrium (RCE)
The recursive competitive equilibrium which is characterized by time-invariant equilibrium decision rules which brings about actions as a function of a finite number of variables. This equilibrium concept assumes that all the variables are current and past information present in the economy are known. The decision rules of the recursive competitive equilibrium include various types of functions, such as pricing and value. In this equilibrium concept, instead of the variables, objects are the functions. This can be ascertained by examining the effect of the functions, prices, value and period allocation policies on the information available in the economy, which are the variables. The current state of the economy can be analyzed by economic agents who are equipped with the knowledge of these variables.
RCE and Macroeconomics
The recursive competitive equilibrium is a branch of macroeconomics which is the study of the broader economy. The economy is said to be in equilibrium when there is a balance between economic forces. It can also be referred to as the equality of supply and demand. It assists economists to find the cause of short-term unsteadiness in business cycles and long-term economic growth. Macroeconomics is a branch of economics that covers a wide range of economic trends and indicators like national income, unemployment rates and the Gross Domestic Product (GDP). It also examines the relationship that exists between various economic factors like inflation, trade, consumption, and income.
The assumption made by the recursive competitive equilibrium is that, while a given number of firms producing just two goods ( a capital good and a consumable good) with inputs and labor acquired at competitive prices; and maximizing their profit at each period, consumers are kings as they make all consumption decisions. The wages paid to consumers are used for the acquisition of goods from the firms, and this process repeats itself again without the retention of assets and technology by the firms. In the process of attaining desired growth, there is an assumption of a static environment which doesn't change over time by the recursive competitive equilibrium. This is the main reason for the recursive representation.
- Self Interest
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- Diminishing Marginal Utility
- Sunk Costs
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