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Money and credit - Ivanov V.M.

1.3. Economic models as the main toolkit of theoretical economics

The main tool of theoretical economics, as you know, are economic models.

Economic modeling within the boundaries of theoretical economics helps to understand how the economy as a whole or its fragments function. There are explanatory models, which are based on a way to display reality, and decision-making models.

The purpose of economic modeling is to understand how the economy functions and what can happen if one or another change occurs in a certain part of it, and, therefore, to predict options for the consequences of these changes.

How accurate are economic models? All of them are evaluated in two ways, because they can carry accurate and inaccurate information, be erroneous and correct. Each model is somewhat erroneous, because it is much simpler than real life, and each model can be considered correct if it manages to reflect the real interaction of phenomena.

Macroeconomic models are divided into three groups:

• equilibrium models;

• models of imbalance;

• structural models.

The main feature of equilibrium models is the assumption that the economy consists of interconnected markets that are supposedly in natural equilibrium. The latter means that in all markets demand meets supply, and prices, that is, the mechanism ensuring this compliance, are constantly fluctuating.

In equilibrium models, the moments of equilibrium disturbance models are also used to a certain extent, since interest arises when equilibrium is disturbed. Models of imbalance describe the process of stabilizing equilibrium, when the economy consists of interconnected markets, and equilibrium is not a natural sign. Prices may not correspond to supply and demand.

Structural models are based on the idea that imbalance in some markets plays a significant role for the economy as a whole. Unlike equilibrium models, which suggest its updating due to price changes, structural models are based on the fact that equilibrium is achieved through the redistribution of income. Such a redistribution significantly affects the level of savings and investments of various social groups.