Economic models are simplified versions of reality. One purpose of economic models is to make economic ideas sufficiently explicit and concrete so individuals, firms, or the government can use them to make decisions. Economists use economic models to answer questions.
What is economic model building?
Today model building in economics has a specific set of agreed upon methods, tools, and objectives. The model builder states the research question, establishes the basic mathematical methods and equations, and then either presents the equilibrium or proves its existence.
Why do economists use models to study the economy?
Economists also build models to study “what-if” scenarios, such as the impact on the overall economy of introducing a value-added tax. Despite their diversity, empirical economic models have features in common. Each will allow for inputs, or exogenous variables, which do not need to be explained by the model.
How are economists able to build empirical models?
How economists build empirical models Despite their diversity, empirical economic models have features in common. Each will allow for inputs, or exogenous variables, which do not need to be explained by the model. These include policy variables, such as government spending and tax rates, or nonpolicy variables, like the weather.
What are the different types of economic models?
Different economists will make different judgments about what is needed to explain their interpretations of reality. There are two broad classes of economic models—theoretical and empirical.
How are economic models used to study structural issues?
Other models are designed to focus on structural issues, such as the impact of trade reforms on long-term production levels, ignoring short-term oscillations. Economists also build models to study “what-if” scenarios, such as the impact on the overall economy of introducing a value-added tax.
