Intertemporal Equilibrium

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Definition: Intertemporal Equilibrium

Most of the models in Modern economic theory explicitly consider the fact that an economy evolves over time and hence the equilibrium in the economy cannot be viewed and analysed by looking at it from a single period of time i.e., on a static perspective. Intertemporal equilibrium is a concept in economics is one of such model which states that the equilibrium in an economy cannot be observed and analysed by just looking from the context of one point in time but rather should be analysed across many periods of time.

According to this theory, decision makers i.e., either households or corporations or governments are assumed to take decisions not just keeping in mind their requirements at that specific point in time but by considering and planning their impact of decisions over a long period of time. Thus Intertemporal equilibrium is a concept of equilibrium that is valid across long period of time.

Thus, household consumption and savings is assumed to be based on factors such as prices, wages, family requirements, utility and wealth accumulation over a period of time rather than just based on requirements at that single point in time. Similarly governments spending and tax structures depend on its need for funds for the purpose of well-being, utility, inflation etc. over a period of time rather than just its immediate requirements. Similar conclusion can be draw for corporations too by saying that firms choose their production, hiring and firing based on its strategy for a foreseeable time period into the future.



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