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Economic model

simplified representations of economic reality
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A economic model is a theoretical construct representing 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.

A diagram of the IS/LM model.
CONTENT : A - F , G - L , M - R , S - Z , See also , External links

Quotes

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Quotes are arranged alphabetically by author

A - F

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  • In many parts of the economy, stabilizing forces appear not to operate. Instead, positive feedback magnifies the effects of small economic shifts; the economic models that describe such effects differ vastly from the conventional ones. Diminishing returns imply a single equilibrium point for the economy, but positive feedback – increasing returns – makes for many possible equilibrium points. There is no guarantee that the particular economic outcome selected from among the many alternatives will be the “best” one.
    • W. Brian Arthur Increasing Returns and Path Dependence in the Economy, (1994); p. 1: Chapter 1. Positive feedback in economics
  • The so-called free market does not provide consumers with proper information, because the social and environmental costs of production are not part of the current economic models. ...an ecological tax reform would be strictly revenue neutral, shifting the tax burden from income taxes to "eco-taxes." …the taxes would be added to existing products, forms of energy, services, and materials, so that prices would better reflect true costs.
    • Fritjof Capra The Web of Life (1996) Epilogue: Ecological Literacy, p. 300
  • Unless the fundamental categories of economics such as ‘property’ were to be redefined in a radically personal way the liberal rationalist curse which had established economics as a scientific discipline cut off from human interests would proliferate. Economic models … have failed to incorporate any meaningful index of individual benefit other than the original utilitarian one, … the index of increasing income or an increasing flow of commodities.
    • John Carroll, Break-Out from the Crystal Palace (1974), p. 145
  • Unlike Hegel’s progress model of history, which moves by stages, each containing its own logic of growth and decline, the economic model develops as the simple function of one money-variable over time, with a long-term trend which increases monotonically.
    • John Carroll, Break-Out from the Crystal Palace (1974), p. 168
  • Real economic efficiency implies including all resources that affect sustainable human well-being in the allocation system, not just marketed goods and services. Our current market allocation system excludes most non-marketed natural and social capital assets and services that are critical contributors to human well-being. The current economic model ignores this and therefore does not achieve real economic efficiency. A new, sustainable ecological economic model would measure and include the contributions of natural and social capital and could better approximate real economic efficiency.
  • The long term solution to the financial crisis is to move beyond the ‘growth at all costs’ economic model to a model that recognizes the real costs and benefits of growth.
  • The construction of an economic model, or of any model or theory for that matter (or the writing of a novel, a short story, or a play) consists of snatching from the enormous and complex mass of facts called reality, a few simple, easily-managed key points which, when put together in some cunning way, become for certain purposes a substitute for reality itself.
    • Evsey Domar, Essays in the Theory of Economic Growth (1957)

G - L

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  • I view the work I've done related to statistics and economics as roughly speaking, how to do something without having to do everything. So economic models -- how any model by definition isn't right. When someone just says, 'Oh, your model is wrong.' That's not much of an insight. What you want to know is, is wrong in important ways or wrong in ways that are less relevant? And you want to know what does the data really say about the model?
  • Economics is a science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world. It is compelled to be this, because, unlike the typical natural science, the material to which it is applied is, in too many respects, not homogeneous through time. The object of a model is to segregate the semi-permanent or relatively constant factors from those which are transitory or fluctuating so as to develop a logical way of thinking about the latter, and of understanding the time sequences to which they give rise in particular cases.
    Good economists are scarce because the gift for using "vigilant observation" to choose good models, although it does not require a highly specialised intellectual technique, appears to be a very rare one.
  • Many of the stories economists tell take the form of models—for whatever else they are, economic models are stories about how the world works.
    • Paul Krugman and Robin Wells, Preface in Economics 3rd ed. (2013)

M - R

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  • Economists also use models to learn about the world, but instead of being made of plastic, they are most often composed of diagrams and equations. Like a biology teacher’s plastic model, economic models omit many details to allow us to see what is truly important. Just as the biology teacher’s model does not include all the body’s muscles and capillaries, an economist’s model does not include every feature of the economy.
    • N. Gregory Mankiw, Principle of Economics (6th ed., 2012), Ch. 2. Thinking Like an Economist
  • Haavelmo was the first to recognize the capacity of economic models to guide policies. This paper describes some of the barriers that Haavelmo’s ideas have had (and still have) to overcome, and lays out a logical framework that has evolved from Haavelmo’s insight and matured into a coherent and comprehensive account of the relationships between theory, data and policy questions. The mathematical tools that emerge from this framework now enable investigators to answer complex policy and counterfactual questions using simple routines, some by mere inspection of the model’s structure.
    • Judea Pearl, "Trygve Haavelmo and the emergence of causal calculus." University of California Los Angeles, Computer Science Department, CA. 2012.
  • The corporatist-economic model of society appears to be governing us. Economists, often in the pay of transnationals, are deciding, for us, what democracy is, and will be.
    • B. W. Powe Towards A Canada of Light (2006); Letter To Those In power, p. 83

S - Z

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  • Much of my work in this period was concerned with exploring the logic of economic models, but also with attempting to reconcile the models with every day observation.
  • The striking parallel between the economic models that are currently under discussion and some engineering systems suggests the hope that in some way the rapid progress in the development of the theory and practice of automatic control in the world of engineering may contribute to the solution of the economic problems.
    • Arnold Tustin (1953) The Mechanism of Economic Systems: An approach to the problem of economic stabilisation from the point of view of control system engineering. p. 1

See also

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