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

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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. Economic models are usually based on real life situations,