Modeis Economic Aids

Modeis Economic Aids

ModeIs, Economic, aids to understanding the working of the economy. Fisher made a model of the price system using a large water tank and floats; A. W. Phillips invented a machine which pumps red water through a network of transparent pipes and valves to ate the flow of national income. But economic models are usually tica1 constructions: the bulk of economic theory consists of modeIs which, if well devised, identify the influences to be taken into at in the real world and the kind of results to be expected from each of them.

Economists have resorted to model-building because they at unable to conduct controlled experiments. They must therefore isolate from real situations the variable influences and relationship which are believed to be the main determinants of particular results Having chosen the parts, interconnections and prime movers of model, they analyse the way in which it works and the changes which additional or different parts and interconnections would make. If model reproduces important features of real life it provides a guide to understanding and a basis for predictions.

Models may incorporate individual economic units such as households and firms, often grouped into individual markets and industries and the relationships between them. These are caned micro-economic models. They help to explain such matters as the determination o prices and outputs of particular commodities and payments for individual factors of production. Macro-economic models have been extensively developed from the construction of total organizational income accounts by the late Sir Arthur Bewley, by Colin Clark an the late Lord Stamp, and from the theoretical work of Keynes and the Swedish economists. These ignore detail and build up systems o broad aggregates, such as total consumption, total investment, national income and changes in the general level of prices. Macroeconomic models are used in an effort to explain and predict the performance of the economy as a whole, e.g. changes in the level of national income, the level of employment and inflation. The British Treasury uses a macro-economic model in constructing the annual budget to estimate its likely effects on the performance of the economy. Planning bodies use macro-economic models when working out the implications of alternative rates of growth.

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