Page
  1. 1
    1
  2. 2
    2
  3. 3
    3

Why do economists use models, and to what extent is it important that these models are realistic?

Extracts from this essay...

Introduction

Why do economists use models, and to what extent is it important that these models are realistic? One of the main reasons as to why we construct models is because we wish to know why something is as it is. We use these models all the time to decide how to act, not only in economics but also in real life. For example because we know that fire burns we tend not to put our hands in a flame. In economics however these models are used obviously for economic understanding and to act upon the findings. In economics there are two types of models a positive model and a normative model. A positive model deals with facts and figures, which can be proven whereas when using normative models you tend to find that they deal with the way things ought to be. The main type of model for solving problems and looking at the economy are the positive models. The basic use of an economic model is to help economists to understand and predict a large number of economic problems such as unemployment and inflation.

Middle

Models are very valuable resources to economists because not only do they portray a problem they also manipulate the recipients mind into a certain way of thinking. This mode of thought helps the economist not only in that particular example, but also in every problem they are faced with. This is because economists don't have to learn every single model ever made in order to become a good scholar, but it is helpful to have the skill of interpreting the majority of models that they come across. A single model helps to do this because if you can interpret one model you can usually cope with other examples. Although models can display problems in an understandable way they are not extremely realistic because they tend to concentrate on a specific area of a problem and then distort that point to make it more understandable. This means, in most cases, that in order to find out about the whole problem economists sometimes need to use a number of different models in order to solve one issue.

Conclusion

> Models can be used to portray the workings of a market or an economy. In this case the fact that the predictions of the model are unrealistic is not particularly important because the detail may be realistic, in the model, but it may not be able to foretell the future. > If the model is normative then obviously the realism is trivial due to the fact that is depicting what ought to be happening. > Models that are very simple may still be useful because the assumptions raised by it may be powerful but simple conclusions. Good models, which are of the up most importance to economists, contain relevant insights into the problem even if this means that they have to modify what actually occurs in the real world, this gives a more in depth understanding of the issue at hand. Also the best models are usually the simplest due to the fact that they are easy to construe. Economics essay on the use of models

The above preview is unformatted text

Found what you're looking for?

  • Start learning 29% faster today
  • Over 150,000 essays available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Over 180,000 student essays
  • Every subject and level covered
  • Thousands of essays marked by teachers

Related GCSE Economy & Economics

  1. Overview of Intercontinental Hotels Group

    Moreover, in a hotel, all kinds of services such as restaurants, bar, business center, conference room, and internet access are available for all customers, unlike in condominium. Leisure customers might want to own timeshare, yet they might not desire to go to the same place for their holiday.

  2. Option Pricing Models

    Heston and Nandi (2000) developed an analytical formula to price European options when the dynamic of the conditional variance is given by a specific GARCH process. In contrast, Duan, Gauthier and Simonato (1999) developed and analytical approximation for the European option price under GARCH.

  • Over 180,000 essays
    written by students
  • Annotated by
    experienced teachers
  • Ideas and feedback to write
    your own great essays

Marked by a teacher

This essay has been marked by one of our great teachers. You can read the full teachers notes when you download the essay.

Peer reviewed

This essay has been reviewed by one of our specialist student essay reviewing squad. Read the full review on the essay page.

Peer reviewed

This essay has been reviewed by one of our specialist student essay reviewing squad. Read the full review under the essay preview on this page.