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Modeling of economic dynamics 1. Motivated examples 1.1 Deposit growth model. 1.2 Samuelson’s model. 1.3 Neo-classical model of economic growth. 1.4 Keynesian model.

2. Difference equations 2.1 Fixed or balance point, example. 2.2 Stable and unstable balance point, example. 2.3 Linear difference systems, example. 2.4 Non-linear difference systems, example. 2.5 Difference equations with delay, example. 2.6 Difference equations with delay and time series.

3. Differential equations 3.1 Equilibrium or balance point, example. 3.2 Stable and unstable balance point, example. 3.3 Linear systems of differential equations, example. 3.4 Non-linear systems of differential equations, example.

4 Chaos in economic systems 4.1 Hyperbolic balance point, example. 4.1 Stable and unstable manifolds, example. 4.2 Homoclinic orbit as a cause of chaos, example.

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4.3 Indestructibility of chaos, example.

5 Computer modeling of economic dynamics 5.1 Symbolic image of dynamical system. 5.2 Construction of symbolic image, example. 5.3 Balance points and periodic orbits on symbolic image, example. 5.4 Matrix of transition and global dynamics, example. 5.5 Attractors and their construction, example. 5.6 Localization of recurrent orbits, example. 5.7 Stochastic Markov chains, example. 5.8 Balance method for stationary distribution. 6 Discussion and propositions. Тhe lectures can be understood by anyone who has basic knowledge of calculus and linear algebra.

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**1. Motivated examples 1.1 Deposit growth model.
**

Suppose that we deposit amount X0 in a savings account at an annual the interest rate of r. Denote Xn amount at the end of n-th year. At the end of the next year the saving consists of

Xn+1-Xn=rXn.

From this it follows the recurrence relation

Xn+1=(1+r)Xn.

We obtain difference equation. Suppose that interest rate r does not depend on time. Let us check that solution has the form

Xn=X0(1+r)n .

Substitution this expression in left and right parts of the difference equation gives correct equality. Let us consider a continuous case. Denote X(t) amount of deposit at time t. The saving at the time consists of

(

)

()

()

where a can be treated as the interest rate. We have

( If

)

()

()

tends to zero we obtain equality

( )

( )

that contains derivative, i.e. we get differential equation to the deposit. Suppose that interest rate does not depend on time. Substituting the expression

4

in left and right parts of the differential equation we can verify that the given function is solution of the equation. If the time unit is one year then between coefficient a and interest rate r there is the following connection

(

)

.

**If coefficient a depends on time t, the solution has the form
**

∫ ( )

.

1.2 Samuelson’s model.

Let us briefly recall the business cycle model of Samuelson (1939). National income at time t Yt may be written as the sum of three components: consumption Ct, induced private investment It, and government expenditure Gt. Therefore,

Yt=Ct+It+Gt

The agents consume a constant fraction of their past income

Ct =aYt-1

where 0<a<1 stands for the marginal propensity to consume. Induced private investment is proportional to changes in consumption and thus also to changes in national income

It =b(Ct-Ct-1)=ab(Yt-1-Yt-2)

As is well known, ab >0 denotes the relation between the capital stock and output. Since government expenditure is constant G national income may be rewritten as

Yt=G+a(b+1)Yt-1-abYt-2

The recurrence relation in the income variable is a second-order linear difference equation.

**1.3 Neo-classical model of economic growth.
**

Neo-classical model (Swan, 1956) and (Solow, 1956) is based on the following assumptions. (i) Labor (L) grows at a constant rate n i.e.

/L=n

5 (ii)

All saving S = sY are invested in capital (K) by the equality

**(s, δ are constant positive fractions)
**

(iii) Production takes place under constant returns conditions:

Y = F(K, L) = LF(K/L, 1) = Lf(k) where k = K/L, F is a production function. As an example we consider the Cobb-Douglas production function

Y=Kα L1-α , (0 < α < 1).

We have

( )

(

where δ+n=λ.

)

( )

( )

These lead to the fundamental dynamic equation

( )

where f(k) is increasing concave differentiable function f" < 0 < f' For the case of the Cobb-Douglas production function

Y=Kα L1-α,

Y/L= Kα L-α=k α=f(k)

and the fundamental growth equation is

Difference equations 2. x2. D=C+I+G Consumption is an increasing function (assumed linear) of income. xn+1 is future state of the system and xn is present state of the system. A difference equation expresses the change of economic state as a function of the current state. ( ) ( ) ( ) This is a typical first order linear differential equation of the form 2.1 Fixed or balance point. i. The dynamic model is. Orbit or trajectory with initial point x0 is a sequence of points O(x0 )={…. for a constant positive k.6 1. Consider a macro economic model in which velocity of income (Y) rises in response to excess demand (D — Y). x0. x-1. with investment (I) and government expenditure (G) both given. ( ) For a simple closed economy. 0<c<1. The system of difference equations can be expressed in the vector form x(t + 1) = f(x(t)) or d xn+1=f(xn ) where x ϵ R describes the state of economic system.. t (or n) is descrete time. demand is consumption (C) plus I plus G. x1. …} . C = c0 + cY where c0>0.e.4 Keynesian model (1936). example.

While demand D(t) is a function of current price p(t). Balance point x* is determined as solution of the equation x*=f(x*). The fixed point is called equilibrium or balance point. γ are constants and p(t) is price in time t. The fixed point of the equation gives price P* such that is not change in time p(t)=p(t-1)=P* P*=aP*+b From this it follows P*=b/(1-a). It describes a state of economic system that doesn’t change in time. A simple illustration of an orbit is a fixed point {xn =x0 }. p(t-1). Consider the supply S(t) and demand function D(t) for a commodity ( ) ( ) ( ( ) ) where α. supply D(t) is a function of price prevailing on the market at some previous period.7 that satisfy the system of difference equations xn+1=f(xn ). δ. Example (The Cobweb Cycle). β. If D(t)=S(t) then ( ) ( ) ( ) ( ) where . .

X* is said to be stable if for any ε>0 there exists δ>0 such that if the |x0-X* |<δ than |xn-X* |<ε for any n>0. Suppose that we found a balance state X* in economic system. Consider a teeter for children or a pendulum on a rigid suspension There are two equilibriums: lower equilibrium and upper equilibrium. A fixed point X* is called asymptotically stable if X* is stable and there exists δ0 such that if |x0-X*|< δ0 then xn tends to X* if n-->∞.8 2. More formally. will stay close to X* at all future time. example. xn+1=f(xn ). but from the point x0 closest to it? Definition An equilibrium point X* is stable if every solution that starts at a point x0 close to it. What happens if we start a dynamic process not from the balance X*. It is clear that lower equilibrium is stable and upper equilibrium is unstable. Example Consider very simple linear difference equation xn+1= a xn .2 Stable and unstable balance point.

If |a|>1 then |xn| ∞ as n∞. This means that the fixed point X*=0 is unstable. b=(γ-α)/ β. The equation has a fixed price P*=b/(1-a). Let us find conditions for stability of the fixed point P*. Sn=γ+δpn-1 From these suppositions we obtain the difference equation for price pn=apn-1+b. Introduce new variable x=p . where a=δ/β. Example (continuation of the Cobweb Cycle).b/(1-a) that is difference between p and the fixed point P*. It is not hard to establish that solution of the equation has the form xn=x0an. If |a|=1 then |xn|=|x0| for any n. We study the case when the supply Sn and demand function Dn for a commodity satisfy equalities Dn =α+βpn. If |a|<1 then xn0 as n∞ .9 The fixed point is X*=0. This means that the fixed point X*=0 is stable. This means that the fixed point X*=0 is asymptotically stable. Then from p= b/(1-a) +x and the equation . but it is not asymptotically stable.

A value λ and vector v to be an eigenvalue and eigenvector of the matrix A if are said Av=λv or (A-λE)v=0. 2. 1) The fixed point x=0 is asymptotically stable if and only if module of each eigenvalue of the matrix A | λ |<1. The equation has solution v it is necessary det(A-λE)=0. We obtain the difference equation xn+1=a xn where a= δ/β >0. example. Let us consider a linear system of difference equations xn+1=Axn. 2) The fixed point x=0 is stable if module of each eigenvalue of the matrix A . Stability theorem. where E is the identity matrix. if a>1 (or δ>β ) the fixed price is unstable. If a<1 (or δ<β) then xn0 and the fixed price P*=b/(1-a) is asymptotically stable.3 Linear difference systems. Eigenvalues are determined from this equation.10 pn+1=apn+b it follows equality b/(1-a) +xn+1=a(b/(1-a) +xn ) +b. Let us consider a square matrix A of size nxn.

trA λ + detA=0 √( ) . The value trA=a+d is called trace of matrix A and ad-cb=detA is determinant of A. so eigenvalues is solution of quadratic equation λ2 . 3) The fixed point x=0 is unstable if and only if there exists an eigenvalue λ of the matrix A such that | λ |>1.11 | λ |≤1. If Δ=0 then real eigenvalue λ =trA/2. √ =β. Two-dimension matrix A=( ). The value Δ=(trA)2-4detA denotes discriminant. . If Δ<0 there exists two complex eigenvalues λ12=trA/2 ± √ where √ =α±βi. trA/2= α. det(A-λE) = (a-λ)(d-λ)-cb = λ2-(a+d) λ+ad-cb. √ . (A-λE)=( ). If Δ>0 there exists two different real eigenvalues λ1 and λ2.

3. If discriminant Δ<0 then |λ1|=| λ2| and since |detA|= |λ1|| λ2|. b<1. and 0<a<1<b. 2. Construct matrix with complex eigenvalues. Find a matrix A such that the difference system xn+1=Axn. yn+1= bxn.12 Module of complex number z= α+βi is |z|=√ . Tasks 1. is unstable (stable). Investigate dynamics of system xn+1=-a xn. Investigate dynamics of 2-dimensional system with complex eigenvalues. the condition |detA|<1 guarantees asymptotic stability. 4. . 0<a.

. . Recall that Samuelson’s model of national income is a second-order linear difference equation ( ) . Example. . . . . Samuelson’s model (continuation). are real number. are real number.13 a) b) c) d) e) f) are real number. α±βi are complex number. α±βi are complex number. are real number.

2. So yn-1 is named delay. Suppose that x=x* is a fixed (or balace) point.4 Non-linear difference systems. 0<ab<1 implies stability of the fixed point. The matrix of the linear system has the form ( ( ) ) ( ) Furthermore. The equation has a unique balance (fixed) point y*=G/(1-a) that does not change in time. f(x) is smooth mapping. example. the conditions for stability are determined by eigenvalues of A. ( ) √( ( )) The condition 0<a<1. where x Rd. If x lies close to x* we can rewrite the mapping f(x) in the form f(x)= f(x*)+D(x-x*)+r(x). The system has fixed point (G/(1-a).14 Where yn+1 is the income in the future period. To study stability of the balance point we rewrite the equation as system without delay { From the first equation it follows If it is substituted in the second equation. yn is the income in the current period and yn-1 is the income the previous period of production. we get the Samuelson’s model. where D is matrix and r(x) is a small remaider. . G/(1-a)). x*=f(x*). Let us consider general system of difference equations x(n+1)=f(x(n)). The condition a(b+1)2<4b generates negative discriminant and the complex eigenvalues that implies cyclical motion around the fixed point.

Since x*=f(x*). then or x(n+1)-x* D (x(n)-x*). where derivatives are calculated at x=x*. then the system near the fixed point x* is equivalent to the linear system y(n+1)=D y(n). . x* is a fixed point.0) has form ( ) The eigenvalues are solutions of equation det(D. Consider system of difference equations x(n+1)=f(x(n)).15 The matrix D is called Jacobi matrix and has the form ( ). Grobman-Hartman Theorem.E)=0. Example The map f has the form ( ) ( ( ( ) ) ) ( ( ( ) ) ) where a=1. 0) and Jacobi matrix at (0. Thus the system near fixed point is like as linear system. y(n+1) D y(n). or (1+a.35. The fixed point is (0. If matrix D has eigenvalues and . the system can be represented as x(n+1) x*+D (x(n)-x*) Put y=x-x*.)-a=0 2 -(2+a) +1=0.)(1.

16 Then . . Let us investigate this linear sysem.0) is equivalent to linear system xn+1=(1+a)xn+yn. Eigenvalues √( ) √ . y) has the form ( or )( ) ( ) (1+aax+(1Since det(D- )x+y=0 )y=0 E)=0. yn+1= axn + yn. By Grobman-Gartman Theorem xn+1=xn+yn+axn(1-xn). The system in coordinates v1 = (x. Eigenvector v1 is determined by equality Dv1= v1 or (D- E)v1=0. This implies that eigenvalues the discrete system and . . . yn+1= yn+axn(1-xn) near the fixed point (0.

v1=(1. Thus the It follows that vector v=tv1. Moreover vn=( )n v0=( )n v0. This means that linear system expands on L1 with coefficient . t 0 is an eigenvector for eigenvectors form straight line or linear subspace L1={ v=tv1. Please.17 the second equality follows from the first one. t } which is invariant to the linear mapping D: vDv. L1. xn+1=(1+a)xn+yn. =3. yn+1= axn + yn is rewrited in the form ( or If v0 ) ( )( ) vn+1=Dvn. then all vn L1 for any n. -1-a)=(1. This means that it’s enough to solve the first equation (1+aThere are many solution. 0. one of them is )x+y=0.66) From equality Dv1= v1 as well.019. that is if v L1 then Dv Linear system L1. check this.

The origin (0. s The linear system on L compresses with coefficient =0. Simillar.18 Because of this the linear line L1 is named unstable subspace and denote L . 2. .5 Difference equations with delay. yn+1 =yn+axn(1-xn)). all eigenvectors v2 (to eigenvalue called stable subspace. Consider difference equations of the form vn+1=f(vn.0) is equivalent to linear system ( ) ( )( ). then all vn L2 for any n and vn=( )n v0=( )n v0. V2=(1.019) An equilibrium point is called hyperbolic point if .vn-2. this nonlinear system near (0.331. example.vn-1. Moreover. -2.…).0) is hyperbolic balace point for the system of difference equations xn+1= xn+yn+axn(1-xn). -1-a)=(1. If v0 ) form linear subspace L which is s u L2.

Suppose that during n-th period sale consists of bvn+ cvn-1+ dvn-2 where b. vn-2. Consider our example and put xn+1=yn. vn-2. If vn<H. Let the product have a shelf life equal to three periods of production. Example. where a is positive adapt coefficient and H can be treated as maximum volume that can be sold in one period. vn-1.c. … . n is number of periods of production. We will determine the volume of production by formula vn+1=vnexp(a(H-vn)). Then formula of production take the form vn+1=vnexp(a(H-(bvn+ cvn-1+ dvn-2))).d>0 and b+c+d=1. . Any difference equation with delay can be presanted as system difference equations without delay.19 This means that future state vn+1 of economic system depends not only on present state vn but also on other previous states vn-1. We obtane an equation with delay. production decreases. production increases and if vn>H. Suppose that vn is volume of production. This means that market has fraction of products vn.

that gives dynamical system zn+1=F(zn). Detecting strange attractor in turbulence. From the first equation it follows xn=yn-1 =zn-2. 2.6 Difference equations with delay and time series.. From the second equation it follows yn=zn-1. -. 1981. . Math. Takens Theorem.. zn+1= znexp(a(H-(bzn+ cyn+ dxn))). ..v.89-94. and there is an observed value d vn =h(xn) Let us construct m-vectors (that is time series {vn}). . zn=(vn-m+1.) Lect.898 -. x lies in R . (Takens F.20 yn+1=zn.Berlin: Springer -. Notes in Let xn+1=Ф(xn) be a dynamical system. vn-m+2. vn) then (in typical case) as m>2d there exists mapping F:RmRm . Finaly we have zn+1= znexp(a(H-(bzn+ czn-1+ dzn-2))).

Let us consider a statistic data of production x0. We can rewrite the formular in the form ( Using the production data ) x0. y3. ….…. The time series of production. where parameters a and b will be determined by method of least of squares. The equation to parameters a and b takes the form . Our aim is to find parameters of function that gives an opportunity to prognose the production. yk putting yn=ln(xn/xn-1)=ln(xn)-ln(xn-1).21 The last equation is a difference equation with delay vn+1=fm (vn.vn-m+1). …. y2. We will determine the volume of production by formula vn+1=vnexp(a+bvn)). x3. x1. …. xk we construct other data y1. x3. Example. Theorem say that any time series in the described conditions can be presented as a difference equations with delay. xk. x2. x1. x2.vn-1.

The method of least of squares is to find a and b that the expression ∑( ) takes the minimum value. We know the statistic data { (xi. yi) } and the parameters a and b are determined from the equations ∑( )( ) ∑( )( ) The first equation is transformed to ∑ ∑ ∑ ∑ ∑ ̅ where ∑ ̅ ̅ ∑ ̅ ∑ .22 y=a+bx.

1 Equilibrium or balance point. Differential equations 3. t is time. Balance point x* is determined as solution of the equation f(x*)=0.23 The second equation is transformed to ̅̅̅̅ ̅ ̅̅̅ where ̅ is arithmetical mean. Trajectory with initial point x0 is the curve T(x0 ) ( ) }. A simple illustration of trajectory is an equilibrium or balance point T(x0 )={x0} or X(x0. A differential equation expresses the derivative (velocity) of change of state as a function of the current state. We obtain formulas for a and b ̅̅̅̅ ̅̅̅ ̅ ̅̅̅̅ ̅̅̅ ̅̅ ̅ ̅̅ ̅ ̅ 3. The system of differential equations can be expressed in the vector form ( ( )) d or ( ) where x ϵ R describes the state of economic system.t) solution of the system of differential equations. Denote by X(x.t)=x0. Equilibrium or balance of economic system is a state that doesn’t change in time. example. with initial conditions X(x.0)=x. as . .

(Continuation of Solow model. because k=0 means that there is no production. The second balance is point of view. Example Consider very simple linear differential equation The balance point is x*=0. The first balance point k=0 is not interesting for us. example.24 Example. k= k*=(s/λ)1/(1-α) and is very important with practical 3. will stay close to x* at all future time.λk1-α )=0 k1-α=s/λ. It is not hard to establish that . Definition An equilibrium point x* is stable if every solution starting at a point x0 close to x*.t)-x* |<ε for any t>0.) The differential growth equation is . A balance point x* is called asymptotically stable if x* is stable and there exists δ0 such that if |x0-x*|< δ0 then X(x0.t) tends to x* if t∞. More formally. x* is said to be stable if for any ε>0 there exists δ>0 such that if the distance |x0-x* |<δ than |X(x0.2 Stable and unstable balance point. The equation has two equilibrium or balance points which are determined by the equation -λk+skα=0 k=0 or and kα(s.

det(A-λI) = (a-λ)(d-λ)-cb = λ2-(a+d) λ+ad-cb.3 Linear systems of differential equations. so eigenvalues is solution of quadratic equation λ2 .trA λ + detA=0 √( ) . where E is the identity matrix. at If a>0 then |xeat| ∞ as t∞.25 X(x. Let us consider a square matrix A of size nxn. This means that the fixed point x*=0 is stable. Two-dimension matrix A=( ). (A-λE)=( ). If a<0 then xe 0 as t∞ . If a=0 then xeat =x for any t . Eigenvalues λ of A are determined from the equation det(A-λE)=0. 3. but it is not asymptotically stable.t)=xeat is a solution of the equation. The value trA=a+d is trace of matrix A and ad-cb=detA is determinant of A. example. The value . This means that the fixed point x*=0 is unstable. This means that the fixed point x*=0 is asymptotically stable.

Example Let us consider linear . α=Re λ is called real part of λ and β =Im λ is called imaginary part of λ. trA/2= α. Stability theorem. If Δ>0 there exists two different real eigenvalues λ1 and λ2. 2) The balance point x=0 is stable if real part of each eigenvalue of the matrix A Re λ 0. Let us consider a linear system of differential equations 1) The balance point x=0 is asymptotically stable if and only if real part of each eigenvalue of the matrix A Re λ <0. 3) The balance point x=0 is unstable if and only if there exists an eigenvalue λ of the matrix A such that Re λ >0. . √ =β. If Δ=0 then real eigenvalue λ =trA/2.26 Δ=(trA)2-4detA is discriminant . If Δ<0 there exists two complex eigenvalues λ12=spA/2 ± where √ √ √ = α±βi.

Tasks 1.t))2=x2+y2.0)=y. Find a matrix A such that the system of differential equations x’=ax+by.y) and origin of coordinate (0. Y(x.y. Y(x. .t)=-xSin(t)+yCos(t). Check.y. This means that the trajectory lies on circle of radius r=√ Matrix ( has eigenvalues ) and center (0.t))2+(Y(x. is unstable (stable). Investigate dynamics of system x’=-a x. y’= bx.0)= x.t)=xCos(t)+ySin(t). 0<a and 0<b. .0). the balance point (0. 2. Re Since Re =0. y’=cx+dy. The value r2=x2+y2 is square of the distance between the point (x.y.y.0) is stable but not asymptotically stable.y. Construct the system of differential equations with complex eigenvalues. 3.0).y.27 Solution has the form X(x. =0. please! Let us calculate (X(x. X(x.

. Investigate dynamics of 2-dimensional system with complex eigenvalues. are real number. a) b) c) d) e) f) are real number. . ±βi are complex number (Re =0). α±βi are complex number. Re =α>0.( .28 4. ). . are real number. .( ). are real number.

If p = 0. q = det(A). eigenvalues are purely imaginary and trajectories enclose the fixed point in ellipses or circles. complex eigenvalues result in spiral trajectories. and d = disc(A).4 q = 0. 2 In the region of the (q. one eigenvalue is negative and the other is zero: the trajectories are stable lines. both eigenvalues have negative real parts (or are purely negative numbers). If p > 0. and q = 0. is the locus of points (p. and the fixed point is unstable. both eigenvalues have positive real parts (or are purely positive numbers). q) for which d = 0.4 q < 0. 2 . and the fixed point is stable. p) plain). The following diagram classifies the balance points of the linear system according to the values of p = trace(A). d = p .29 Classification of balance points for linear systems of differential equations. If p is not zero. Conversely. p . if p < 0 and q > 0 (the negative quadrant). If p > 0 and q > 0 (the positive quadrant of the (q. The parabola. and q = 0. If p < 0. one eigenvalue is positive and the other is zero: the trajectories are unstable lines. the eigenvalues 1 and 2 are complex numbers. Consequently. p) plain enclosed by the parabola.

Grobman-Hartman Theorem.30 However. If x lies close to x* we can rewrite the mapping f(x) in the form f(x)= f(x*)+D(x-x*)+r(x). d f(x*)=0.4 Non-linear systems of differential equations. where derivatives are calculated at x=x*. where D is matrix and r(x) is a small remaider. 3. one eigenvalue is a positive number and the other is negative: trajectories follow the saddle point pattern. f(x) is smooth mapping. the system can be represented as ( Put y=x-x*. Let us consider general system of differential equations ( ) where x R . Consider a system of differential equations ( ) . The matrix D is Jacobi matrix and has the form ( ). Suppose that x=x* is an equilibrium (or balace) point. Since f(x*)=0. then ) Thus the system near fixed point is like as linear system. example. if q < 0.

example.31 x* is an equilibrium point.λ(1-α)<0. The equation has two equilibrium or balance points which are determined by the equation -λk+skα=0.) The differential growth equation is . The equation has solutions k=0 and 1/(1-α) k1-α=s/λ. This means that the balance k* is stable and any trajectory tends to k*.1 Hyperbolic balance point. The second balance is k= k*=(s/λ) and is very important. 4 Chaos in economic systems 4. . Its stability is determined by the derivative of the right side of the equation and as k=k*=(s/λ)1/(1-α) the value -λ+sαkα-1 = . If matrix D has eigenvalues . (Continuation of Solow model. Consider a system of difference equations x(n+1)=f(x(n)). then the system near the equlibrium point x* is equivalent to the linear system Example.

There exist stable L and unstable L lines (or s s u s u DL = L .32 where x lies in R . 0. u Ws and Wu are called stable and unstable manifolds. matrix D expands on L and D contracts on L . Algorithm for construction Wu: Let L is a small segment that intersects W then the iterates f (L) converge to the unstable manifolds W as n .1x-0.1y sin(x). i. DL = L . x*=f(x*). Suppose that a point x* is fixed point. 0) is a fixed point .e. Recall that the point is hyperbolic if the eigenvalues of the matrix ( satisfy inequality subspaces) such that ( )) s u 2 . u Theorem. Let x* is a hyperbolic fixed point of difference system x(n+1)=f(x(n)).7y+0.y)=( 1.5x2) (0. Example Consider the mapping n u s f(x. x R2 then the set of points Ws={x: fn (x) x* for n } is a curve that is tangent to stable subspace L and the set of points s Wu={x: f -n (x) x* for n } is a curve that is tangent to unstable subspace L .

The segment L starts at the point (0. 0.31. Example (Line3) Let us continue to study hyperbolic point of the mapping f(x.y)=(x+y+ax(1-x).03).3.35 Unstable manifold of this mapping has very complicate behavior Algorithm for construction Ws: Let L be a small segment that intersects W . y+ax(1-x)).31) and finishes at the point (-0.33 D=( 0. Iterations fn(L) have the form: ). a=1. u .

Y)=(X-Y. Y= f2(x.y)=(x+y+ax(1-x). Set -1 X =f1(x.y). Y= y+ax(1-x) y=Y. y+ax(1-x)). Then the mapping G(X. We get equalities x=g1(X.y)=(f1(x. X= x+y+ax(1-x).y)) Problem is to construct f .y)=(x+y+ax(1-x).ax(1-x)=Y-a(X-Y)(1-(X-Y)). . Y-a(X-Y)(1-(X-Y)) is inverse mapping to f(x. g2(X. y+ax(1-x)). We have X= x+Y x=X-Y.y).Y)=(g1(X. y=g2(X. -n s Conctrustion inverse mapping Let the mapping f has form f(x. f2(x. Y= y+ax(1-x). Thus the mapping G(X.34 The iterates f (L) converge to the unstable manifolds W as n . Solve this system wth respect to x and y.Y).Y).Y).y). Example Let f(x.Y)) is inverse to initial one.

2 Homoclinic orbit as a cause of chaos. Let x* is honoclinic poit or intersection point W and W . 2. Existence homoclinic point generates nontrivial dynamics near the orbit T. it starts and finishis at the hyperbolic point x*. This inresection is called transversal if angle between W and W greater than zero. Program Line2 s u s u . Orbit of the homoclinic poit T={x=fn(x0). Dynamics around a homoclinic orbit is very complicated. Homoclinic point Let x* is hyperbolic fixed point.35 It can be used to construction stable manifold W s 4. a poit x0 is called homoclinic if fn(x0) x* as n+ s and nu This means x0 lies in the intersection W and W . example. 1. 3. …} is called homoclinic orbit. hard to predict and has stochastic character. n=0. Such behavior is called CHAOS.

yn+1)=(f1(xn. f2(xn. Example Let us continue to study hyperbolic point of the mapping f(x. In particular. y+ax(1-x)). s u s u Smale Theorem S. This implies the existence of periodic orbits of any large period near homoclinic orbit. .35 We can get coordinates of the transversal homoclinic point by computer x = 0. periodic sequences correspond to periodic orbit of the same period.009848517670. Problem Let us investigate a system of differnce equations (xn+1. y = -0. a=1.y)=(x+y+ax(1-x). yn).y)=x+y+ax(1-x2).36 Let x0 is honoclinic poit or intersection point W and W .Smale showed that near to transversal homoclinic orbit there exists a collection of orbits which can be coded by all possible binary sequences. yn)) where f and f2 is the form f1(x.019195942408 Smale theorem guarantees existence of chaos in this case. This inresection is called transversal if angle between W and W greater than zero. f1(x.y)=y+ ax(1-x2).

0) has form ( The eigenvalues are solutions of equation ) (1+a. y(n+1)= y(n)+ax(n)(1-x(n)2) near the fixed point (0.0) is equivalent to linear system x(n+1)=(1+a)x(n)+y(n). . √( ) √ . Let us investigate the linear sysem. The fixed point is (0. y(n+1)= a x(n) + y(n). This implies that eigenvalues the discrete system and . .)-a=0 or Then 2 -(2+a) +1=0.4.0) and Jacobi matrix at (0.)(1.37 where a=0. . Eigenvector v1 is determined by equality Dv1= ( v1 or (D- E)v1=0 ( ) )( ) (1+a)x+y=0 . By Grobman-Gartman Theorem x(n+1)=x(n)+y(n)+ax(n)(1-x(n)2).

v1=(1.017047586207 4.3 Indestructibility of chaos. 0. x = -0. Let a system have a hyperbolic fixed point x* and transversal homoclinic point X*. y = 0. Suppose that the system is perturbed by small perturbation. example. Example Let us consider a system of differnce equations generated by the mapping . Smale theorem guarantees existence of chaos in this case. the second equality follows from the first one.085871691404.46…) We can get coordinates of the transversal homoclinic point by computer Smale theorem guarantees existence of chaos in this case. If the perturbation is sufficiently small then the perturbed system has hyperbolic fixed point x** close to x* and transversal homoclinic point X** close X*.38 ax+(1Since )y=0 det(D- E)=0. one of them is )x+y=0. This means that it’s enough to solve the first equation (1+aThere are many solution. -1-a)=(1.

j. q. with the perturbed parameter a=0. f1(x. …} in unit of time. l. 5 Computer modeling of economic dynamics 5. The constructed graph G is called symbolic image of the dynamic system.y)=x+y+ax(1-x2).5. For each state i it is fixed admissible transition from i to some states {q. j.y)=y+ ax(1-x2).39 f1(x. … } and has edges {iq} corresponding to the fixed admissible passes.1 Symbolic image of dynamical system. Let an economic system have n states {i. . … }. q. Consider a directed graph G that has n vertices corresponding to the states {i.

2 Construction of symbolic image.2]x[-2.40 An infinite in both directions sequence {zk} of vertices is called an admissible path (or simply a path) if for each k the graph G contains the directed edge zk zk+1. The system is -periodic in t. the information obtained from the reports. mathematical calculations and models. A path {zk} is said to be p-periodic if zk=zk+p for each k. Example. So we have 16x 16=256 cells.25x0.25. The covering consists of the boxes M(i) of the size 0. Let us consider dynamical system generated by the forced Duffing system ( ) in the domain M=[-2. example. 5. Each cell is identified with the state of the system. . Construct a covering of the domain M.2]. An admissible path describes dynamics of the economic system. There are many methods for constructing a symbolic image. It may be expert estimates. In any case preliminary information is needed.

y.y. We can check by computer the inclusions f(x. M(214). ). M(229.t). Let us consider the described construction and take as example cell M(87).y)= (X(x.t)) be solution of the system and mapping f(x.Y(x. )) be the shift along the trajectories on the period T= . Let (X(x. . The placement of points may be systematic or random.y.) and M(230). The image of points f(m(i)) is an approximation of the image f(M(i)). (x.y.41 The numbering of the sells starts from the left-upper corner and finishes to the right-down corner. The image of the cell M(87) is shown in Figure The image f(M(87)) intersects the cells M(213).Y(x. see picture.y) and if the inclusions hold we fix the edge m(i)$ i j. Let m(i) be a finite set of points in M(i).y) M(j).

The investigation of the symbolic image permits to get valuable information about the global structure of economic system. hence. . Let d C={M(1).. Two vertices i and j are connected by the directed edge i j if there is admissible transition . f(x) M(j). 87229. the symbolic image.M(n)} be a finite covering of the domain M by closed cells. The graph G is called the symbolic image of f with respect to the covering C. In other words. It is easily to note that there is a correspondence between orbits of a system and the paths on G.. 87214. Let G be a directed graph with vertices {i} corresponding to cells {M(i)}. and 87230 in the graph G The same way we can construct each edge and. We will say that there exists (admissible) transition from i to j if the image f(M(i)) intersects the cell M(j) ( ( )) ⋂ The existence of the edge () guarantees the existence of a point x in the cell is a trace M(i) such that its image f(x) lies in M(j).42 So we have the edges 87213. By investigating the symbolic image we can analyze the evolution of a system.. Let us consider a discrete dynamical system generated by a system of difference equation xn+1=f(xn) where x lies in a domain M R . We can consider the symbolic image as a finite approximation of the mapping $f$. where x M(i). the edge of the matching x f(x).. We identify the cell M(i) with the state i. A symbolic image is a geometric tool to describe the quantization process. It would appear natural that this approximation describes dynamics more precise if the mesh of the covering is smaller.

How many difference periodic paths? . i2.43 5. ip} on the symbolic image G. i3. that implies existence transitions i1i2 i3 … ip i1 and periodic path {i1. Suppose the system has periodic regime i1. i3. Since the balance point does not change in time the point x* lies in the intersection ( ( )) That implies existence transition () ii. i2. 2) periodic paths. …. …. example. Task Find 1) balance states. Suppose the economic system has fixed (or balance) point x* that lies in M(i). ip.3 Balance points and periodic orbits on symbolic image.

The directed graph G is uniquely determined by its nxn (adjacency) matrix of transitions ( where ) . Clearly. if and only if there is the directed edge i j. example. . where ) () () ∑ and upper script 2 stands for an index (not for power).4 Matrix of transition and global dynamics.44 5. otherwise It should be remarked that if there is mapping f:MM we can consider the matrix of transitions independently of the symbolic image by putting if ( ( )) if ( ( )) Let ( be the square the transition matrix.

Task Determine recurrent and non-recurrent vertices. Two recurrent vertices i and j are called equivalent if there is a periodic path containing i and j. A vertex of the symbolic image is called recurrent if there is a periodic path passing through it. the set of recurrent vertices RV decomposes into classes {Hk} of equivalent recurrent vertices. According to the definition. In the similar way one can verify that the element of the power ( ) is the number of all admissible paths of length p from i to j. Find classes of equivalent recurrent vertices. So if and only if there exists the path i k j from i to j through k. In the graph theory the classes Hk are called a strongly connected components of the graph G. Then the sum ∑ is the number of all admissible paths of length 2 from i to j.45 if and only if and otherwise . The set of recurrent vertices is denoted by RV. .

5 Attractors and their construction. In the last case coincides with a single zero. Consider discrete dynamical system generated by system of difference equations xn+1=f(xn). Task Determined described renumbering for the graph considered above. 5.46 Proposition. The vertices of a symbolic image G can be renumbered so that the equivalent recurrent vertices are numbered with consecutive integers and the transition matrix has the form ( where the elements under the diagonal blocks are zeros. example. The described renumbering is not uniquely defined. ) each diagonal block corresponds to either a class of equivalent recurrent vertices Hk or a non-recurrent vertex. .

Under this numbering there is no admissible path from a class Hp to a class Hq if q<p: . each diagonal block corresponds to either a class of equivalent recurrent vertices Hk or a nonrecurrent vertex. The set ( ) ( ) is called the domain of attraction or the basin of A. In the last case coincides with zero. So invariant set is an union of orbits. This means that the orbit (or trajectory) of x has to be in S. Suppose that we construct a symbolic image by method described above and numbering of vertices is according to the Proposition. An invariant set A is called attractor if there exists a neighborhood U(A) of A such that iteration of closure ̅ lies in : ( ̅) ( ) and positive iterations ( ) tend to A: ⋂ ( ) Asymptotically stable balance point is an example of attractor.47 The set S is called invariant if from an inclusion it follows the inclusions and ( ) . Transition matrix has the form ( ) where the elements under the diagonal blocks are zeros.

We say that B is an attractor on G if one can get into the A. ( ) () Task. we have to move in the same class or to go down.48 As the numbering of rows of the transition matrix coincides with the numbering of the vertices. Find attractor of the symbolic image . Thus. as the following scheme shows. ( ) Hence we cannot get higher than Hk. each class Hk generates an attractor consisting of the vertices of numbers (indexes) more or equal to the numbers of the ones from Hk. but one cannot get out. Proposition Suppose G be symbolic image of the mapping f constructed by method described above and B is an attractor on G. Then the union of cells ⋃ is a neighborhood such that ( ̅) and ⋂ is an attractor of the mapping f. Consider a collection B of vertices of G. According to this Proposition we can determine attractors by symbolic image.

it has a dense orbit and a nontrivial fractal structure.49 Strange attractors.4 and b=0. a=-0. By this is meant that the attractor is chaotic. The Henon attractor has the form Ikeda Attractor.9.y)=(1-ax2+y. bx). b=0.. Henon's computation represents numerical evidence of the existence of a strange attractor for the case a=1. chaotic attractor of the form ) ) ( ).3.e. The Ikeda system of difference equations has the form ( ( where r=2. The system has a . i. Henon explored numerically the mapping f(x.9. There are many attractors with so nontrivial structure that they are called "strange attractors".

1.2).0). & f(-2. . f(2. Let us check that the sequence x1=(2.x2)=0.2).-2).1. example.0). (f(x2). x4=(0.0)=(0.1).-2). x3=(-2. x2=(0. Consider a system of difference equations xn+1=f(xn) where x lies in Rd.0)=(0. In fact.6 Localization of recurrent orbits.y)=(y. f(0. & (f(x3).05(1-x2)y-x). 0. For a given an infinite in both directions sequence is called an -orbit (a pseudo-trajectory or a pseudo-orbit) of f if for any k the distance ( ( Example ) ) On the plane R2 consider a map of the form f(x.50 5.x3)=0.x4)=0.-2)=(-2. & (f(x1). xk+4=xk forms a 4-periodic -orbit for any >0.-0.

there A chain recurrent set. It is known. A point x is called chain recurrent if x is -periodic for each exists a periodic -trajectory passing through x. It should be remarked that if a chain recurrent point is not periodic and then there exists as small as one likes perturbation of f for which this point is periodic. One may say that a chain recurrent point may become periodic under a small perturbation of the map f.1). We can consider the transition from the point (-2. Denote by P(d) the union of the cells M(i) for which the vertex i is recurrent. that the chain recurrent set Q is invariant.0) and from the point (2.-0.e. and contains periodic. .1.0. homoclinic. Recall that a vertex of the symbolic image is called recurrent if a periodic path passes through it.. 1.1) to the point (2.1. The set P(d) is a closed neighborhood of the chain recurrent set . is the set of all the chain recurrent points.. Let us consider a symbolic image G of the mapping f with respect to a covering C.51 f(0. Theorem. & (f(x4).1) to the point (-2.e.2)=(2. i.x1)=0. denoted Q.1. nonwandering and other singular trajectories. closed. So we have a 4-periodic -orbit for any >0. i. ( ) {⋃ () } where by d is the largest diameter of the cells M(i).0.0) as jumps or corrections of the value 0.

Petersburg Technical University. 5. example.5. Stochastic Markov chain is defined by a collection of states {i=1. The subsequent subdivisions cells are into 4 equal squares. A computer program realizing the algorithm described above has been implemented in St. According to Theorem these neighborhoods tend to the equilibrium point and the periodic orbit. 2.0) and a periodic orbit. Moiseev. which are 1x1 squares.5. The system has been studied numerically in the square M=[-3.7 Stochastic Markov chains.52 ( ) 2. … n} and probabilities Pij of transitions from the state i to the state j. 1991 by A. The picture presents the neighborhoods of the chain recurrent set. The matrix of the transition probabilities .5]. The initial covering consists of 49 cells.3. The chain recurrent set Q is limit of the sets P(d) as diameter d tends to 0 ( ) Example.3. Let us consider the Van-der-Pol system ( ) It is well known that the chain recurrent set of the Van der-Pol system consists of an equilibrium point (0.5]x[-3.

Task. all the outputs of the state are equivalent. Determine stochastic Markov chain on the given symbolic image.53 ( is a stochastic matrix if ) ∑ for each i. the sum of the probabilities of all outputs is equal to one. for each state. ) if the edge ij exists else By setting ∑ we get a stochastic matrix. However. Thus. the Markov chain can be viewed as a generalization of the . In this case. Stochastic Markov chain can be obtained from a symbolic image. The latter condition means that the probability of transition from state i to some state (possibly the same) is equal to 1. In addition. So stochastic Markov chain is a symbolic image with probability of transition over each directed edge i j. if some passages are more preferred that they should be more probability. Let ( be transition matrix of a symbolic image.

…. the system switches to a new state that has a distribution of the form ( ) After k units of time the system has a distribution ( ) We obtain a limit distribution when k tends to infinity.54 symbolic image. Stationary distribution is determined by the equation ( Example. …. The limit distribution is called stationary distribution and it is great importance for the practice. ∑ . P2. ) Consider symbolic image with two vertices and transition matrix of the form ( The corresponding stochastic matrix is ) ( ) The stationary distribution is ( ) . The matrix of the transition probabilities is ( ) During the unit of time. n}. 2. Pn) to states {1. Suppose we know that initial state of system is distributed with probability P0=(P1. Markov chains are used to study dynamics when we know state of economic system with some probability.

Let G be a directed graph.55 Please. A distribution {mij} on the edges {i j} is called flow on G if ∑ ∑ ∑ The last property may be treated as a Kirchhoff law: the flow incoming in the vertex i the flow outgoing from i ∑ . equals ∑ The second property is normalization. Show graph G of the symbolic image described above.8 Balance method for stationary distribution. Many economic problems are reduced to the study of flows in graphs. Task. 5. In the graph theory the described distribution is named a closed or invariant flow. check this. We define the probability of the vertex i as ∑ In this case we get ∑ ∑ ∑ Each flow {mij} on a graph G generates the stochastic Markov chain such that the states {i} are vertices .

Let G be a graph with n vertices. A matrix {mij} is a flow on G if the following conditions are satisfied: ∑ ∑ ∑ .56 and the transition probability ij is defined as The constructed stochastic matrix ( has a stationary distribution of the form ( ) ) It turns out that the inverse is true: for any stochastic matrix ( ) and its stationary distribution p=(pi) there exists a flow ( with the distribution on vertices ) It's enough to put It follows from above that the flow technology on graph is equivalent to the stochastic matrix method.

check the equality ) ) . Please. Sheleikhovsky solved such a task in the fifties of last century using the balance method. By repeating such balance in cycle he obtained the sequence of distributions which converges rapidly to the desired solution. Leningrad architect G. Consider the graph G For G a stochastic matrix and stationary distribution are constructed by the Sheleikhovsky method of balance. The original matrix has been the transition matrix of the symbolic image. Starting from an arbitrary distribution he recalculated the distribution sequentially such that only one equality be satisfied and other ones have escaped the attention. Example. The stochastic matrix and stationary distribution has the form ( ( Task.V.57 The task on computation of flow on graph may be considered as a specific transport task.

A. Theory of Complex Systems and Economic Dynamics. Detecting strange attractor in turbulence. Discrete Dynamical Systems.89-94. -v.58 Solow R. Vol. 1997. Sargent. JAPAN. P. An Introduction with Applications in Economics and Biology. DIFFERENTIAL EQUATIONS. Notes in Math. 1996. The Netherlands. Springer-Verlag. Wei-Bin Zhang. No. LAURENCE HARRIS. and Life Sciences.898 -. A.V. Takens F. Tu.. Amsterdam. 1994. 1981.G. 6. MALLIARIS. Bifurcations and Chaos in Economics ASIA PASIFIC UNIVERSITY. A. 65—94. Berlin • Heidelberg. Thomas J. 70. Contribution to the theory of economic growth // Quarterly Journal of Economics. MONETARY THEORY. BROCK . Steven Shreve. Psychology. Nonlinear Dynamics. April 2002. 1997 .Berlin: Springer -. Dynamic macroeconomic theory. 1956. 2006. Vol. United States of America Sixth printing. Dynamical Systems. Stochastic Calculus and Finance. WEI-BIN ZHANG. MCGRAW-HILL BOOK COMPANY. Lect. 1981. W. 2. STABILITY AND CHAOS IN DYNAMIC ECONOMICS . Pierre N.

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