Health and Wealth in a Dynamic General Equilibrium Theory

Abstract

This paper deals with dynamic interdependence between wealth and health in a dynamic general equilibrium theory. The economy is composed of any number of groups of people.  It consists of three economic sectors - capital good, consumer good, and health sectors. We describe the economic structure and production technologies on the basis of Walrasian general equilibrium theory and neoclassical growth theory. Zhang’s utility function is applied to describe behavior of households. In our approach wealth and income inequalities between households are caused by heterogeneity in households’ preferences and differences in characteristics of health and human accumulation. Markets are perfectly competitive. Wealth accumulation is through saving and change in health stock is through health caring and consuming goods and services. We first build the dynamic general equilibrium model and then we provide a computational procedure so that we can easily follow movement of the economic system with specified parameter values and proper initial conditions. We simulate the heterogeneous-household model with three types of households. We identify the existence of a locally stable equilibrium point for the given parameters. We plot the motion of the economy and carry out comparative dynamic analysis with regard to changes in some parameters.