Dear all.There’s a question that’s been bothering me for a long time. I don’t understand where the resource constraint equation comes from. Is it the sum of the budget constraints of all departments. What if you add a banking sector. A lot of the literature directly writes the resource constraint equation, and I don’t understand how that comes about. I hope someone can answer my question.
I want to understand in detail how do we get the resource constraint equation
As the name says, the resource constraint is about the physical limitations of the economy. You can set it up by counting the available resources and their use. That’s why most of the literature writes it down correctly. But typically you can also derive it from the budget constraints and the first order conditions of the agents in the economy. After all, the budget constraints reflect the availability of resources and optimal behavior with non-satiation implies that all available resources will be used. It is not sufficient to sum up budget constraints, because endogenous objects like factor prices will appear that need to be substituted out. What happens in the presence of a banking sector cannot be generally answered. If the bank is a pure intermediary it will not exhaust any resources. But there are setups where monitoring wastes resources, which would show up in the resource constraint.
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Thank you very much for your answer. Your answer was very helpful to me.