Properties and Limitations of Economic Model

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Economic theory tends to the construction of a model that can describe the economic behavior of individual units and their interactions which create the economic system of the region, a country, or the world. A model is a simplified representation of the real circumstance of economic entities. The model includes the major features of the real situation that is to be represented by it. In this section, we will discuss on Properties and Limitations of the Economic Model.

A model implies abstraction from reality that is achieved by a set of meaningful and consistent assumptions, which aim at the simplification of the phenomenon or behavioral pattern that the model is designed to study. Abstraction is necessary as the real economic world is extremely complex and any attempt to study it in the true form would lead to an analysis of unmanaged dimensions.

Thus, models do not describe the true economic world by their nature they are constructed as abstractions from reality. However, abstraction does not have anything to do with unrealism it is a simplification of reality. It is the beginning of understanding the complexity of the real economic world.

Models can be constructed at a different level of aggregation, detail, and sophistication based on the purpose behind the construction of the model. Models are developed with two purposes as analysis of the behavior of economic units, with a set of assumptions and prediction or forecasting the effects of changes in some magnitudes in the economy. 

The goodness or usefulness of the model depends on its validity. The validity of a model can be judged based on several criteria like the prediction power of the model, consistency, the realism of its assumptions, and explanatory power of the model, its generality, and its simplicity. However, there is go general agreement among economists as to which criterion is most significant.

Properties of Economic Model*

The economic models should have the following requirements or properties;

  • The problem to be modeled should be narrow.
  • The concept to be used in the model must be clear and meaningful; having meaningful empirical content.
  • The assumptions on which the model is based must be stated clearly.
  • The assumptions must be logically consistent with each other so that valid conclusions could be drawn with the help of them.
  • They should not be contradictory and opposite by observation.
  • The model should be a systematically related set of questions addressed to the observed data.
  • The model must be confined initially to the formulation of sufficient conditions until new evidence proves them to be correct.
  • If the model is applied to areas outside the field of study, estimates of the excluded relationships must be added to make it complete.
  • For policy prescriptions and conclusions, the estimates of the known economic conditions in the social system and their modus operandi must be done.   
  • The model should be a simple and wider application to the real situations of life.

*The mentioned criteria are also related to the criteria of a good model and criteria for the choice of model.

Limitations of Economic Model

Economic Models have the following limitations;

  • Pure theoretical models do not provide full explanations or correct predictions of the phenomenon under the study.
  • Economic models are not comprehensive but partial
  • They tend to neglect those factors that prove difficult to quantify.
  • The use of econometrics in the model building has given rise to problems of identification and random disturbances.
  • The mathematical expression of the model may lack relevance and realism
  • When they are applied to real economic situations they are selective, abstract, and arbitrary. Thus a model is unrealistic since it leaves out many of the elements that operate in actual economics.
  • There are different ways (certain parameters may stay constant, number of strategic variables may be narrowed down by a single one, very dissimilar items may be analyzed in terms of a single category, and certain sequences may be isolated and analyzed without regard to their relationship to other sequences) in which errors enter into economic models as a result of assumption, which are not made explicit.

These are the major Properties and Limitations of the Economic Model. Choosing a particular model is based on the research objective, questions, and scope of research. The model must suit the context of the research and it should be able to respond to each research question and their hypotheses. Almost all of the economic models are based on a set of assumptions. The more assumptions suit the context, the more efficiently the model works if it is to choose wisely and would be able to provide credible results. If the assumptions are not robust in the economic problem or scenario, the choice of the model would more complex and difficult, and would not work correctly

However model in economics plays a significant role. The major use of the model is in theoretical economic analysis. Economic models are essential aids to clear thinking. Even if the model is unrealistic, it may have a theoretical value. The most justifiable claims for the use of economic models are they are curves for exercising rigidity of thoughts and energies in searching for interdependent relationships. Understanding the properties and limitations of the economic model will help us to identify a good model.

References

Koutsoyiannis, A.(1979). Modern Microeconomics. London: ELBS/Macmillan

Jhingan, M.L (2012). Advanced Economic Theory. New Delhi: Vrinda Publications (P) LTD.

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