Macroeconomics For Dummies®, uk edition Published by: John Wiley & Sons, Ltd

Thinking Like an Economist:


Learning to Love Modelling

Economists look like normal people, walk like normal people and (usually) talk like normal people. You can pass one in the street or sit opposite one on the train and be none the wiser. But they have one secret: they often think very differently to non-economists.

In this section we discuss what makes economics a distinctive way of thinking about the world. Central to this approach is the use of models (attractive though all economists undoubtedly are, we’re talking economic models here rather than the catwalk variety!). Although it may not be the only way of thinking about the world, we hope to convince you that ‘thinking like an economist’ has its advantages!

Modelling to understand the world

Many economic questions and problems are complex: for example, trying to work out the best way of reducing unemployment or analysing the likely impact of boosting government spending on the economy or even understanding how geopolitical events in the Middle East will impact global economic growth. These issues are so complex in fact that economists believe that trying to think about these problems head-on in all their complexity is almost bound to fail.

Instead, economists create models. An economic model is a simplified representation of the real world. A good model is one that focuses on the particular variables of interest while moving irrelevant (or less relevant) details to one side.

An example of a model is a street map. A good street map includes useful details such as roads along with their names; it probably also indicates a number of places of interest and perhaps train stations. You don’t expect the map to tell you where every tree is on your route or the location of each and every traffic light. In fact, you’d be positively annoyed if it did, because it would clutter up the map and make it much less useful.

The same idea applies with economic models: cut the irrelevant stuff in order

to focus on the things that matter. We use many different models in this book to help you understand different aspects of the economy.

Sometimes economists are criticised for making too many assumptions about people or the economy in their models – they’re told that their models are too simple and that the real world is more complex. That may be true, but economists prefer to have a simple model they can fully understand rather than a complicated one that they can’t make head or tail of. Moreover, when they understand the simple model, they can slowly complicate it to see what happens. In macroeconomics, as in life, you need to learn to walk before you can run.