Chapter 21, Problem 1QE

To determine

Model and changes from reality.

Explanation of Solution

Economy is an actual world, which includes the individuals and set of many laws and regulations that determines the relations between the individuals. The testing of any economic theory in the actual world is very difficult because of the wide diversity in the economy. This is handled through the introduction of the economic models.

The economic model is a theoretical construct with a set of variables and set of relationships between the variables. This theoretical construct represents the abstract of the economy. Since the model is only an abstract, it would not show all the characteristics and details of the real economy whereas it highlights the features that are important to the economy.

The best example for the model is the globe. It shows the main highlights about the continents and the design and scalar size of the seas and oceans but is not as perfect representation of the original. Another example includes the roadmaps and model of human organs.

Economics Concept Introduction

Economic model: Economic model is an abstract of the reality, which explains the economy through a set of theoretical construct of set of variables and set of relations between the variables.