Chapter 1, Problem 17AA

To determine

Purpose of using real world data in building economic model.

Explanation of Solution

An economist starts with an idea about the way things work, then collects data for some time period and observe the workings of different variables. On the basis of his observation he formulates simplified models. If the model is helpful in representing reality, it is approved by economist otherwise a new model is developed.

For example: suppose an economist comes with an idea that there is a direct relationship between minimum wage and teenage unemployment rate (Direct relationship means as minimum wage rate increases teenage unemployment also rises and vice-versa). Now, the economist uses real world data and graphs the findings as shown below:

  

As can be seen from the upward sloping curve in the above graph there is a direct relationship between the teenage unemployment rate and the minimum wage rate. Real world data supports the model.

Economics Concept Introduction

Introduction:

An economic model is a simplified representation used by economist to predict the behavior of different variables. An economist uses real world data to test economic models and predict behavior of economic variables.