Article 3: Economic Models

A model is merely a theoretical construct or analytical framework composed of a set of assumptions from which conclusions are derived. The first step is to abstract from the complex real world: the model builder must select the variables and relationships among them that seem most pertinent to the problem he attempts to analyze. This step produces the economic model, which contains a set of assumptions regarding the relevant variables and the relationships among them. The second steop is to apply logical deductions to the model and derive a theoretical or logical conclusion(s). The third step is to test the conclusion(s) against real world phenomena. If the conclusion(s) does not agree with the observed empirical data, a new model with more plausible assumptions is formulated. A new conclusion(s) is derived, and so on.