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, although they are often simplified in order for the economists to obtain a greater understanding of the problem or situation. Models help economists because they can explain a very complex problem in a very straightforward way. Models are used in everyday life, not just in economics.
For example road maps of Britain are simplified models because they only show the main roads and give a rough shape of a city, whereas in A-Z’s of a particular city, the maps show every road even the really small insignificant ones. Looking at models like this show us how models can be used to help the understanding of a situation because of someone was wishing to travel from Sheffield to London, they probably wouldn’t use A-Z’s of every area they went through, but instead they would use a road map, which only depicted the main roads. In economics terms this means that if an economist was generally looking at a problem he would use a model to get the basic idea of what the situation is and to highlight the main points of this problem.
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. Most people would expect that if a model were wore realistic then it would be of greater use to economists. This is not usually the case because in the real world most of the problems economist face are very ambiguous in that the real economy is not a straightforward system.
Although models don’t need to be entirely accurate they still rely on the fact that there is some element of certainty within them. If models were entirely fictional they would be of little use to economists, apart from portraying the perception, of that issue, by the models author.
To summarise, the use and accuracy of models, here is a list of some of their main functions: –
; Models may be used to predict the future. In this case it is unimportant if they are completely realistic because the value of the models should be judged in terms of its capability to foresee the future.
; Models may be used to analyse certain groups of individuals. This type of model is generalising the group of individuals so if one certain individual acts differently from the way stated by the model, it doesn’t mean that the model is inaccurate because individuals will tend to behave in contrasting ways to the group.
> 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.