Question

To what extent and what ways can models of an economic systems enhance our understanding of real-world economic systems?

Answer 1

There are many tools that help people perform a task or an activity in everyday life easier; map is used for telling the direction and helping people choose the right way; microwave is an important kitchen tool in the modern life-style that reduces time to warm and to cook food; or electronic mail is an important information technological innovation that allow people to keep in contact with the people who live far away from them. In the same way, biologists use human body models as their tools to explain how internal organs work; engineers build models to see how the system works; also, economists use models as their tools to help them in dealing with problems or historical data in the economy. Economics is one branch of social sciences that is concerned with money flows, trade activities, and industrial systems in the society. Economists use the scientific approach for developing economic theories. Considering the way to test a theory, in economics it is not easy as it is in the scientific world; scientists can make an experiment under the controlled environment or the given conditions to test their theories. How do economists make a real experiment in economic system which is concerned with the real society? In this case they need specific tools, i.e. models and historical data, to fulfill their approach.

From Chinese proverb “A picture is worth a thousand words”, it is true that a picture can express idea better than words or equations. Graphics help economists in many specific purposes: some shows the relationship of observed data; some shows how the economic process runs; some shows the trend from historical data. Graphs and flow charts play the main role in this purpose of using models. There are some examples from the previous part: the production possibilities frontier shows the relationship between the available factors of production and the available production technology; the circular-flow diagram shows how dollars flow through market among households and firms; and the famous supplyand-demand diagram shows the relationship of demand and supply curves in the same frame. These types of models help them see the picture of the process, know how data relate to each others, and clarify the idea about the problem. These types of models will be used as a combination with mathematical models and applied in the other purposes.

Economists carry a set of theories in their heads like a carpenter carries around a toolkit. When they see an economic issue or problem, they go through the theories they know to see if they can find one that fits. Then they use the theory to derive insights about the issue or problem. In economics, theories are expressed as diagrams, graphs, or even as mathematical equations. Economists do not figure out the answer to the problem first and then draw the graph to illustrate. Rather, they use the graph of the theory to help them figure out the answer. Although at the introductory level, you can sometimes figure out the right answer without applying a model, if you keep studying economics, before too long you will run into issues and problems that you will need to graph to solve. Both micro and macroeconomics are explained in terms of theories and models. The most well-known theories are probably those of supply and demand, but you will learn a number of others.

Models are used widely in economic reports and researches. Importance of models in economics is not only tools for economists, but also how they use these tools; how to choose the right one. They separated econometrics as a branch of economics for further studies about models. From these discussions it can be concluded that models are very important in econ