ABSTRACT
An equilibrium approach to economic analysis would suggest that economic forces keep an economy close to equilibrium. The economy can be subject to shocks – the term often used to describe exogenous disequilibrating forces – after which the equilibrating nature of the economy returns the economy to equilibrium. Pushing equilibrium analysis to the extreme, one might assume the economy is always in equilibrium. The static concept of equilibrium can be extended to a dynamic equilibrium in which the economy remains on an equilibrium trajectory as it grows over time. This is how the theory of economic growth developed over the twentieth century.
