Economic Models
An economic model is a theoretical construct that represents economic processes by a set of variables and a set of logical and/or quantitative relationships between them. The economic model is a simplified framework designed to illustrate complex processes, often but not always using mathematical techniques. Economic models are used to analyze and explain economic phenomena, to test economic theories, and to make forecasts.
History of Economic Models
The use of economic models dates back to the 18th century, when economists such as Adam Smith and David Ricardo used simple models to explain the workings of the economy. Since then, economic models have become increasingly sophisticated, incorporating more variables and more complex relationships between them. In the 20th century, economists such as John Maynard Keynes and Milton Friedman used economic models to explain the effects of government policies on the economy. Today, economic models are used to analyze a wide range of economic phenomena, from the effects of monetary policy on inflation to the effects of trade liberalization on economic growth.
Comparison of Economic Models
| Model | Variables | Mathematical Techniques |
|---|---|---|
| Classical | Supply and Demand | Equilibrium Analysis |
| Keynesian | Aggregate Demand and Supply | Macroeconomic Equilibrium |
| Monetarist | Money Supply and Demand | Money Supply Curve |
| New Classical | Expectations and Supply and Demand | Rational Expectations |
Summary
Economic models are used to analyze and explain economic phenomena, to test economic theories, and to make forecasts. The use of economic models dates back to the 18th century, and since then, economic models have become increasingly sophisticated. Today, economic models are used to analyze a wide range of economic phenomena, from the effects of monetary policy on inflation to the effects of trade liberalization on economic growth. For more information about economic models, visit the websites of the International Monetary Fund, the World Bank, and the Organization for Economic Cooperation and Development.
See Also
- Supply and Demand
- Equilibrium Analysis
- Aggregate Demand and Supply
- Macroeconomic Equilibrium
- Money Supply and Demand
- Money Supply Curve
- Expectations and Supply and Demand
- Rational Expectations
- Monetary Policy
- Trade Liberalization
