MODELS IN ECONOMIC ANALYSIS 4
Modelsin economic analysis
Modelsin economic analysis
Modelsplay significant roles in the economic analysis. Economists make useof models so as to study as well as portray situations (Asche et al.,2014). The focus of a model in economic analysis is gaining a betterunderstanding of how things work, observe patterns and also topredict stimuli’s results. Models also help in abstracting andsimplifying observed data. They also serve as a means of selectingdata on the basis of the paradigm of the econometric study.
Theassumptions, which tend to underlie in the design of economic modelsare very crucial. They usually create hypothetical benchmarks forbeing compared with the real world. In other words, they assist incomparing theoretical ideals and the real world. They also assist inbreaking an economic analysis into simpler and easily manageableparts. The real world is easily comprehended when it is subdivided.The assumptions underlying in an economic model tend to be overlysimplified if they manage subdividing the real world effectively inparts that are sensible and easily understandable (Chariet al.,2009). However, if the assumptions fail to compare real world andtheoretical ideals clearly, they are simply overly limiting.
Theassumptions underlying in a given economic model can also invalidatea model. The main objective of economic models is providing thesimplest analysis possible which will allow the readers to understandeasily the issue at hand. In simple terms, the economic modelsilluminate the connections in existence between ideas. The validityof the model is hence determined by how well the model simplifies theissue at hand and illuminates the connection existing between theideas encompassed in the issue addressed by an economic model(Fingleton et al., 2015). If the assumptions underlying the modelfail to reveal how ideas interconnect and complicate the model ratherbreaking it down, they simply invalidate that model. The main reasonas to why they invalidate the model is because it will not serve theideal purpose.
Asche,C.V., Hippler, S.E. & Eurich, D. T. (2014). Review of models usedin economic analyses of new oral treatments for type 2 diabetesmellitus. Journalof pharmacoeconomic, 32,15-27.
Chari,V. V., Patrick J. K., and Ellen R. M. (2009). New Keynesian models:Not yet useful for policy analysis. AmericanEconomic Journal: Macroeconomics, 1,242–66.
Fingleton,B., Abreu, M., Amaral, P. , Corrado, L., Fuerst, F., Garretsen, H., Igliori, D., Gallo, J. L., McCann, P., McCombie, J., Monastiriotis,V., Pryce, G. & Yu, J. (2015). Spatial Economic Analysis.Journalof the Regional Studies Association and the RSAI British and IrishSection, 2,127-136.