Models (Emperical/Theory)
“All models are wrong, but some are useful.”
- George Box
Models are used in many fields from economics, to statistics, linguistics, and biology. Here is how to break down your curriculum systematically so that you can study for them more easily. If you can’t figure out what goes into a given section, you’re missing something important for the exam!
Statistical/Emperical Models
“Empirical models aim to [test or] verify the qualitative predictions of theoretical models and convert these predictions to precise, numerical outcomes.”
Important Vocabulary
Report - A static object without predictive power.
Function - An object with processing power that sits inside a model.
Model - A complex object that:
- Takes an input
- Produces an output
Equation - A mathematical representation of a function.
Algorithm - A set of steps passed into a model.
Economic Models
Models in economics have a specific structure, so it’s important to focus on storing the information in your brain this way so that you can use them in the right cases on an exam, or in research!
As opposed to an empirical model, “an economic model is a simplified description of reality, designed to yield hypotheses about economic behavior that can be tested. An important feature of an economic model is that it is necessarily subjective in design because there are no objective measures of economic outcomes.”
All economic models, with perhaps the exception of behavioural economics models, go something like this:
- The assumptions made
- The conditions
- Endogenous variables
- Exogenous variables
- Optimization function
- An optimality condition
- Constraints that we subject our optimization function to (e.x. : budget constraint)
- Shocks when one of the endogenous variables are changed (e.x.: What happens to GDP in this model when birth rates increase, thus increasing population?).
Sometimes:
- Graphs
- Stylized facts to motivate the conception of the model.
- When to use this model, compared to other models covered in the course.