ABSTRACT
A dynamic system can be described by changes in the state of its components. The variables of concern, which are observable, are represented as dynamic functions of these components, which are unobservable. The unobserved components, also called state variables, transit from one state to another or evolve according to certain rules which are not easy or straightforward to be applied to the observed variables themselves. This kind of dynamic modelling of systems is called the state space method. It explains the behaviour of externally observed variables by examining the internal, dynamic and systematic properties of the unobserved components. Therefore, this modelling strategy, if applied properly, may reveal the nature and cause of dynamic movement of variables in an effective and fundamental way.
