Question

Explain why economics used model to explain?

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.[1] 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..

n economic model is essentially a simplified framework for describing the workings of the economy. It exerts the discipline of forcing the modeller to formally articulate assumptions and tease out relationships behind those assumptions. Models are used for two main purposes: simulating (e.g. how would the world change relative to some counterfactual if we assume a change in this or that variable) and forecasting (e.g. what the world might look like in 2030). Economic models are great tools for simulations – given what we know about the behavioural workings of the economy, and taking these mostly as given, how might the economy respond to, say, an energy price spike? But models are much less effective at providing forecasts precisely not least because when making forecasts, very little can be taken as given. The further out the forecast, the larger the structural uncertainties making model projections at best illustrative, especially when trying to forecast the impact of non-marginal impulses such as climate change impacts or the transformation of the global energy system.

Economic models are simplified descriptions of reality used by economists to help them understand real life economies. An economic model includes several economic variables and describes the nature of the logical relationships between these variables.

Economic models include variables and require that assumptions be made. A variable is just the value of an economic quantity, such as the rate of interest or the price of a good. The assumptions often involve holding some variables constant and only allowing one or two variables of interest to change. The relationships between the variables can be expressed graphically, mathematically or verbally.

Economic models in current use do not pretend to be theories of everything economic; any such pretensions would immediately be thwarted by computational infeasibility and the incompleteness or lack of theories for various types of economic behavior. Therefore, conclusions drawn from models will be approximate representations of economic facts. However, properly constructed models can remove extraneous information and isolate useful approximations of key relationships. In this way more can be understood about the relationships in question than by trying to understand the entire economic process.

The details of model construction vary with type of model and its application, but a generic process can be identified. Generally any modelling process has two steps: generating a model, then checking the model for accuracy (sometimes called diagnostics). The diagnostic step is important because a model is only useful to the extent that it accurately mirrors the relationships that it purports to describe. Creating and diagnosing a model is frequently an iterative process in which the model is modified (and hopefully improved) with each iteration of diagnosis and respecification. Once a satisfactory model is found, it should be double checked by applying it to a different data set.