Production, Capital Stock and Price Dynamics in a Simple Model of Closed Economy

The purpose of this paper is to study a price level dynamics in a simple four-equation model. A basis of this model is developed from dynamical Kaldorian model which could be noticed very frequently in works of non-linear economic dynamics. Our approach is traditional. The difference is observed in a choice of an investment function. The investment function depending on the difference of logarithm of production and logarithm of capital (logarithm of the productivity of capital) is in a form of the logistic function. These two equations create relatively closed sub-model generating both production and capital stock trajectories. Two other equations describe the price level dynamics as a consequence of money market disequilibrium and continuously adaptive expectation of inflation. Our investigation is firstly aimed to core model dynamics, i.e., a dynamics of the production and capital stock. Secondly is to analyze dynamics of the model as a whole, i.e., to the first part is superadded the price dynamics and expected inflation dynamics depending on both an adaptation parameter of the commodity market and a parameter of the expectation. Thirdly we compute Lyapunov exponents for a simple model of closed economy showing it’s a chaotic behaviour. Simulation studies are performed.