Question

Suppose that you have been asked to analyze an economic model. Describe how you would structure your analysis?

Answer 1

In economics, a model is a theoretical construct representing economic processes by a set of variables and a set of logical and/or quantitative relationships between them. The economic model is a simplified, often mathematical, framework designed to illustrate complex processes. Frequently, economic models posit structural parameters. A model may have various exogenous variables, and those variables may change to create various responses by economic variables. Methodological uses of models include investigation, theorizing, and fitting theories to the world.

A diagram of the IS/LM model

The analysis for each element must be conducted separately and results combined to provide a qualitative measure of effectiveness because t the units of measurement are not consistent or directly comparable across all elements.

Step 1: Collect background data

Step 2: Describe the existing economic environment within the study area.

• Identify and describe existing businesses (name and location)

• Identify and describe existing business districts and industrial areas.

• Describe existing employment opportunities and wage rates.

• Describe the general economic characteristics of the region:

o City and/or county

o Relationship to the state economy

o Regional Planning agency statistics and projections

o Relationship to the transportation network

• Identify minority owned businesses, major minority employers and niche business serving minority or low-income markets.

Step 3: Describe the variables and their hypothesis testing. This will determine the effect of various variables and their relevance in the model.

Step 4: Relevance in real world

In other words, the process can also be determined in the following way:

The basic steps of the model-building process are: model selection model fitting, and model validation.