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Economic Model

An economic modes is a simplified representation of a theory, lay or economic event.

The main elements of an economic model are:

  • Assumptions
    • Psicological
    • Estructural
    • Institutional
  • Variables
  • Parameters
  • Relations
  • Representations
    • Formulas
    • Graphical representations
    • Verbal representations
  • Conclusions

Predictive Capacity of an Economic Model

An economic model cannot predict the outcome of economic policies with 100% precision, since the economic (human and social) behavior is influenced by randomness and is unpredictable. But economic models can give hints about the direction of the behavior of economic variables and estimates about it's magnitude.

Cualitative deviations

Unrealistic assumption can lead to wrong conclusions. A model applied successfully in a country, may not be applied with success in another country with different parameters and social structures.

Quantitative deviations

Deviations from the outcome can be near zero in average or can be always positive or negative. Models with deviations near zero are preferred over models with average positive or negative deviations.

Models with lower volatility in its deviations are preferred over models with higher volatility

Examples of Economic Models


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