ECONOMICS

Economic Models: Definition, Types, Uses & Examples

Economic Models Definition, Types, Uses & Examples

Economic models

Models are simplified representations of theories that show relationships between economic variables in order to explain economic phenomena.

Economic models often show the relationships between variables by means of functions, functions are a mathematical concept that shows the dependency between variables, an example is the model of supply and demand.

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 Uses of economic models

The usefulness of the models lies in the fact that they allow us to explain reality by representing it in a simple way and to see how the exogenous variables affect the endogenous ones, getting rid of irrelevant information. (1) Models can be very enlightening, but also misleading, therefore common sense should always be applied.

Variables of the economic models

The variables that make up the models are the exogenous and endogenous variables. (2)

  • Exogenous variables: They come from outside the model.
  • Endogenous variables: They come from within the model and are the result of it, they are the ones that the model explains.

Types of economic models

The study of macroeconomics is based on three models, each one has its applicability in a time frame and are named according to this, each one is defined below:

  • Very long-term economic model

The study of the behavior of the economy focuses on the theory of growth, that is, on improving the economy’s ability to produce goods and services.

It focuses on the historical accumulation of capital and technological advances. Capital reserves and the level of technology can be considered fixed and determine the productive capacity of the economy, which is called potential production. (3)

  • Long-term economic model

The supply of goods and services is equal to potential production, and prices and inflation depend on changes in demand. (4)

  • Short-term economic model

The fluctuations in demand determine the efficiency in the use of capacity, which implies the level of production and employment. In this model, prices are relatively fixed and production is variable, and this is where economic policies have greater applicability.

See also