Economic Models, Economists' Toys

When an economist wants to study the economic behavior observed in the complex world around us, the first step is often to build an economic model. A model can focus an analysis by stripping down and simplifying real world events into a representation of the motivations of the key players in any economic story. Some amount of context and interesting detail must be left out as the economist distills a model rich enough to explain events credibly and realistically, but simple enough to put the spotlight on the essential actions in the story. When an economist succeeds in building a model, he or she now has a tool that can be manipulated. By playing with this “toy” representation of economic activity, the economist can learn more about the fundamentals behind an event and can study likely outcomes or possible solutions.

There are many kinds of economic models. The type of model that we will be studying is a Computable General Equilibrium (CGE) model. It is an “economywide” model because it describes the motivations and behavior of all producers and consumers in an economy and the linkages among them.