Models

A description of economic relationships in mathematical or graphical form, designed to allow hypotheses to be tested. Inevitably, models have to simplify the incredibly complex nature of relationships in the real world. Although models can add clarity and mathematical rigour to statements about the economy, some are criticised for their unrealistic assumptions (such as perfect information and rational expectations). And a fondness for complex mathematical equations has led economists to be accused of “physics envy”; trying to create precise rules in a social science.