Question

2. Consider economic models:

a. Briefly explain how a map is a model.

b. Give an example of how a particular model can be appropriate in one context but inappropriate in another.

c. Identify the two attributes of a “good” economic model, and briefly explain the fundamental tradeoff between them.

d. Briefly explain why a model must accept as exogenous at least some features of the setting being modelled.

Answer 1

Answer 2)

(a) Just like a map, an economic model is an oversimplified portrayal of reality planned by economic researchers. These models can be hypothetical or observational relying on the target of the examination. Another significant likeness among maps and models is that they are exceptionally particular. They feature just the most fundamental parts and what we have to know. The best models are comparable they are miserly so as to be as productive as could be expected under the circumstances and don't confuse the structure by including every single detail.

(b) A model can't be utilized in a one glove fits in all sort of circumstances. We manufacture models to address explicit inquiries. No single model can clarify all the dynamic powers of economic hypothesis. Models and their hidden suppositions should be painstakingly contemplated and perceived, all together for the model to be as exact as could be expected under the circumstances.
For instance, the New Keynesian model was intended to clarify the developments in GDP when there were moderate price stuns. It was reliable with temporary price rigidities and advancing conduct of operators. It tended to inquiries of steadiness for macroeconomic strategy makers. Nonetheless, when an enormous monetary stun hit the economy, the New Keynesian model neglected to manage policymakers or clarify what had occurred. An alternate model, for example, the IS-LM model took over more importance in such a situation.

(c) Two characteristics of any great model are as follows:
(i) Parsimony
(ii) Explanatory force or goodness-of-fit

An amazing fit to the information (i.e., high graphic ampleness) is generally accomplished by exceptionally mind boggling and ground-breaking models for example we face a compromise between model proficiency and its informative power. Closefisted models are alluring because of their straightforwardness and dependence on just scarcely any suppositions which builds their effectiveness. Then again, the illustrative intensity of the model increments with more mind boggling models that convey the threat of over-fitting the information. Parsimony and Goodness-of-fit should be adjusted cautiously in any great model.

(d) In the event that all highlights of the model are endogenous, at that point we can't estimate the model. At any rate, a couple of factors in the model must be exogenous to have the option to run an appropriate regression. Else we will experience the issue of endogeneity and get one-sided and conflicting outcomes.