Macroeconomic Models

... an introduction

© 2020 Gary R. Evans. This slide set by Gary R. Evans is licensed under a Creative Commons

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Read Chapter 1 – “Economic Models”:https://www.palmislandtraders.com/econ53/chap1.pdf

before watching this video ... this is just a

supplemental reminder of that content.

Classes of economic models

• Visual Models

• Mathematical Models

• Empirical Models

• Simulation Models

Example of a visual model:The Elementary Supply and Demand Model with

Inflationary Expectations

Demand1

Supply1

Quantity

Price

Q1

P1

Example of a math model:

The Elementary Supply and Demand Model with

Inflationary Expectations

( )

( )

( )

( )( )

( )

(5)

1

2

3

4

0

0

0 0

S a bP

D c dP eIE

S D Q

Pc eIE a

b d

Q a bP

Example of an empirical model:

... take the math model and estimate the coefficient values

statistically

( )

( )

( )

1

2

3 0

S a bP

D c dP eIE

S D Q

Example of a simulation model:

A comparative statics model ...

Demand1

Supply1

Quantity

Price

Q1

P1

P2

Q2

..due to an increase in

inflationary expectationsa

b

A dynamic model ...

( )

( )

( ) ( )

1

2

3

1

1 2

Y C I

C a bY

I v Y Y

t t t

t t

t t t

The multiplier/accelerator interaction model ...

Variables that effect supply and demand

Factors that Effect Demand Factors that Effect Supply

1. Price (-) 1. Price (+)

2. Income (+) 2. Labor costs (-)

3. Wealth (+) 3. Resource costs (-)

4. Population (+) 4. Advertising costs (-)

5. Advertising (+)

6. Substitute prices (+) (+) Shift curve right

7. Inflationary Expectations (+) (-) Shift curve left

The math equivalent ...

( ) ( , , , , , , , )

( ) ( , , , , )

( )

1

2

3

0 0

0 0

D f P I W N A S E X

S g P L R A Y

D S

whereD

Wand

S

L

The tendency toward equilibrium ...

D

S

Quantity

Price

10

$400

8

(sold)

14

(produced)

$600 ab

Inventory buildup

c

Know the following also

(from the assigned reading) ...

• Expectations-enhanced models

– Adaptive expectations

– Rational expectations

• The primary limitations of models

• The model as an “image” of economic activity

• The examples