Economic modeling: definition of the concept, classification and types, description of methods

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:40

Economic modeling is an extremely important component of many processes in this scientific field, which allows you to analyze, predict and influence certain processes or phenomena occurring in the course of economic movement. In this article, this topic will be discussed in as much detail as possible.

Definition

Mathematical modeling of socio-economic processes is a repetition (in other words, a recreation) of certain objects or phenomena directly related to the economy, on a reduced scale (that is, controlled by the one who builds this model, artificially created and maintained conditions). Most often, this method of reproducing, analyzing and solving any emerging economic problems is used precisely with the help of mathematical techniques, formulas, dependencies, etc.

The general functions of economic modeling are to analyze the economic system as a whole and its individualprocesses and phenomena in particular, forecasting any events, possible thanks to mathematical calculations, as well as drawing up and maintaining various plans for managing and influencing the economy, its components and derivative tasks. More details about these functions will be written under the corresponding headings of the article.

Typically, the end product of economic modeling (ie the model itself) has fundamental support, consisting of real information derived from statistical and empirical studies. Based on the model obtained, one can predict certain processes or phenomena with high accuracy, as well as evaluate any factors related to economic theory.

Economics

An important feature of any model is the fact that it can be used to identify the main properties of the object or phenomenon being studied in the process of modeling, which means that specific patterns inherent in this object or phenomenon can also be determined. For example, if a certain product had a decline in its price, with a high degree of probability, an economist can determine that representatives of any of the categories of citizens corresponding to consumers of this product will purchase it much more often in the future. This, in turn, is a clear reflection of the essence of the law of demand.

A real person in economic theory is replaced by his “improved”, more rational copy – an economic subject that is guided bysolely by reason, excluding any feeling, and making every decision on the basis of the conclusions of carefully verified reasoning and comparisons, the elements of which are benefits, losses, utility and other concepts involved in this process. Such actors get to their intended goals with the least cost or with the greatest results, if they must act within certain restrictions.

The goal of the manufacturer in this system is to achieve the maximum possible profit in his case or some other indicators necessary for success. The consumer must find the manufacturer or product that will provide maximum utility and best meet consumer needs.

Complex processes from the field of economics are most often simplified through the use of such a method as partial analysis, the essence of which is to accept most of the factors affecting the object of study as unchanged and constant, while those factors whose influence on the object research needs to be determined, subject to change. The result derived from a partial analysis becomes the first step in the implementation of a more complex, general analysis, in which absolutely all factors are taken into account during the study. Economic analysis also plays a very important role in modeling methods.

Requirements for models

In mathematical modeling of economic processes, it is extremely important that the model results correspond to a certain list of requirements that looks likeas follows:

• Performance.
• Reality of all results, as well as specially made errors.
• Possibility for further forecasting.

• Ability to get all the information you need.
• Ability to validate the resulting model.

And also some others.

Scientists-economists did not agree on one common conclusion as to which criteria from this list are the most important. Someone relies on the possibility of forecasting, someone - on the acceptable realistic amount of errors (for example, to find an explanation for economic events that have already taken place). The majority, however, recognizes that economic and mathematical modeling is designed to solve specific applied problems, and if the model fulfills them, it does not matter if it meets other criteria less important than the main ones.

Stages of creating a model

Any theoretical model goes through similar stages, and economic modeling models are no exception. These stages in chronological order are as follows:

1. Selection of variables necessary for further work and successful compilation of the model.
2. Determination of permissible errors, the use of which facilitates the structure of the model and research activities based on it.
3. Developing one, and in some cases several, explanations of interrelated and mutually exclusive processes andhypothesis factors.
4. Conclusion based on research specific findings.

Classes of economic models

The basics of economic modeling can be conditionally divided into two large classes, each of which is necessary for detailed consideration. These classes represent ideal and material modeling.

Material modeling (otherwise it is called physical or subject) is that modeling, during which an object existing in reality is compared with its copy in a reduced or enlarged version. Such economic modeling allows the transfer of properties from the prototype of the model to its object according to the principle of similarity (as a rule, all this happens in the laboratory). An example can be any layouts, physical models, etc.

Ideal modeling is based not on the physical analogy of the prototype of the model with the model itself, but on an analogy drawn at the mental level in the ideal form, that is, without any errors. It is most often used in real research on economic phenomena, since natural experiments always limit the possibilities of the scientists conducting them, while ideal models can be built at much lower costs.

Types of ideal modeling

Ideal modeling, in turn, is also divided into several subspecies: intuitive, sign and imitation. Since the latter is a synthesis of the first two, we will consider them in more detail:

Intuitive modeling is the basis for modeling socio-economic processes, which is based on the thoughts of the one who builds it. In other words, this is a figurative model that is applicable where the cognitive knowledge base is not extensive enough or is at the stage of its initial development

An example of what can be studied through intuitive modeling is a science such as physics - despite the colossal theoretical base of this science and the concretization of knowledge and theories about it and its derivatives, it still has many areas in which which a person cannot see without using his own imagination, which, coupled with objective knowledge of reality, can push the researcher to any conclusion. If we talk about the economy, then for a very long period of time, intuitive modeling was, in principle, the one and only available option for carrying out analytical work with accompanying calculations as part of the research by scientists of processes related directly to the economy and the laws and rules of its formation, movement and development. Any person making any decision in the field of economics, one way or another, is based on a model built earlier by himself or by another, more competent person, in relation to the specific situation that he needs to solve.

However, in the field of serious economic transactions, the use of this method, which involves relying on a person’s personal experience, usually leads to errors, because the subject of the economy may not be objective enough orat least not as objective as a subject making certain decisions on the basis of symbolic modeling. Intuitive models also fundamentally prevented the economy as a science from developing unhindered in the course of its historical growth, for the simple reason that different researchers-economists can perceive the same model of this type in completely different ways, and hence the conclusions they draw on it. basis will vary.

Sign modeling is the basis of socio-economic modeling, which involves the use of models based on the exact sciences, and in particular mathematics

It was the mathematical approach that allowed the economy to create a base of specific methods and methods for constructing models as close as possible to the present state of affairs, and also taught economists how to use it to draw correct conclusions from these methods. However, the prevalence of iconic models in the work of professionals, including in the modeling of socio-economic systems, does not in the least detract from the usefulness and significance of their intuitive “colleagues”, who are no less important in their specific areas.

Groups of elements in models

Any model of the economic process or phenomenon that is being studied by people involved in this on a professional basis, as well as by any enthusiasts and amateurs interested in this science and solving its applied problems, contains elements that, in turn, are subdivided into two grade groupsfame of their parameters.

1. If by the time of building an economic model all its parameters and any mathematical calculations and dependencies are already known, then these parameters are called exogenous variables. A group of these elements is formed after a thorough observation of the object of study and study by scientists, as a result of which they put forward a number of specific hypotheses about its properties and other indicators that can be considered in the model of this object.
2. If by the time of building an economic model all its parameters and any mathematical calculations and dependencies are not yet known, then these parameters are called endogenous variables. This group is already based on the analytical work carried out on a specific model in order to solve related issues.

If exogenous variables are changed in any way, influencing them in one way or another, then it will be possible to discover certain properties that are inherent in endogenous variables, which, in fact, are the direct object of economic research.

Types of economic models

There are two types of economic activity modeling products discussed in this article. The type to which a particular model belongs is determined by the essence of the object of study, in which modeling was involved as a way to solve the problem. According to economic modeling methods, these two types look like this:

1. Optimization. Models based on this type are responsible forthe actual description of the motives in the behavior of certain economic agents (this term refers to the subject of the economy and relations within the framework of this scientific and social sector, which is directly involved in the processes of production and further distribution of material goods), which achieve the tasks assigned to them under certain conditions that are before them, and deterrents.
2. Equilibrium. Models of this type present to the specialist who built them the final result of a complex of mutual actions and a list of relations between economic entities, after which conditions are developed in which all their economic actions will be compatible and will not interfere with each other.

Here it should be clarified that an economic entity is an economic entity engaged in the production or sale of any material values. This can be either a citizen carrying out work activities on an independent basis in the field of individual entrepreneurship, or an organization or enterprise, various funds, stock exchanges, associations, banks, etc.

There is also an important term that sounds like economic equilibrium. This term refers to the state of the economic environment in which no subject of economic relations is interested in changing anything in it or engaging in modeling economic development. This should not be regarded as if all participants in economic relations are completely satisfied with theireconomic results, just in this state, none of them is able to increase the level of their material well-being by influencing the volume of purchases or sales of certain goods or the structure of their distribution under a certain system of prices for them. The point of this equilibrium is located at the intersection of two curves, one of which is responsible for the demand indicator, and the other for supply.

Types of analysis in modeling

Methods of socio-economic modeling involve the use of two types of analysis. Let's analyze them for completeness of the discussed picture in more detail:

Positive analysis is a type of analysis that deals with the establishment of true chains, consisting of the causes of any economic process or phenomenon, as well as its consequences, without going into the assessment following these indicative statements

This analysis can provide answers to questions such as “What?”, “Why?”, “What will happen if?..” in the connotation of economic reasoning and the study of problematic issues and the situation in this area of scientific knowledge. The standard scheme of cause and effect (for example: “commit a crime - you will be punished”, “slept the alarm clock - you will be late for work”, etc.) is the most average and representative example of a statement that can lie at the root of a positive analysis of the basis of economic modeling.

Normative analysis is an analysis that contains, among other things, a certain recommendation array, presenting an assessment to the analystusefulness or, in other words, the desirability of any consequences arising from an economic process or phenomenon

This analysis aims to answer questions like: “What needs to be done in order to?..” Here, of course, one cannot do without the already mentioned recommendations that can explain the essence of this or that economic action in the perspective of its potential accomplishment or intention to accomplish it on the part of the subject of economic relations who used this analytical method.

According to the basics of economic modeling, positive and normative analyzes are closely and strongly connected, since the statements arising from normative calculations have the most direct direct impact on the subject of analysis carried out using a positive methodology, as well as on choice of this item. The initial results of a positive analysis can greatly facilitate the analyst's desired achievement of those intended goals that can be achieved in the course of this economic study. This is an important feature of the economic method of mathematical modeling.

Let's take an example. Let's take one specific statement, which goes like this: scientists from all over the world have called it a necessity to reduce the phenomenon of inflation in the economy. This is a typical example of a normative statement, especially considering that the goal it stands for can be achieved through various means and methods, which may include:

• Increasetax rates to reduce an acute financial deficit within the budget of a particular state in which this situation is being considered.
• Reducing all unnecessary or least necessary items of government spending on any material values to support the economy in the country.
• Freezing all currently available prices indicating the value of major economic commodities or other items of primary market importance.
• Restriction or other influence of this kind on the dollar or euro exchange rate in its correlative relation to the Russian ruble.

And so on. It is precisely a positive analysis that is responsible for choosing the best option from all the presented methods, because in this case each of them will necessarily be subject to passing through the chain of causes and effects, which will make it possible to find out what each of these positions can lead to in practice. “If we increase tax rates, then…”, “Freezing all prices for raw materials will lead to the fact that…” - this is how it will look in practice after “sifting” a certain problem through two sieves of different, but working in tandem, methods of conducting analysis. Modeling economic processes is an extremely multifaceted thing.

Thus, economic theory in no way deprives the subject of economic relations of any choice and does not limit his freedom of action regarding the commission of any economic actions, but rather gives impetus toto make this choice in a situation of greater awareness of a person and at least awareness of the full responsibility that he may incur if his actions or decisions turn out to be wrong, or, on the contrary, improve the situation in the market or in a certain segment of it.

Levels of economic processes

Any economic system (i.e., the aggregate list of all processes in the field of the economy that take place in a particular state or around the world on the basis of relations that have developed in a certain way between the participants in economic interaction, their property and the mechanism for the functioning of economic apparatuses and divisions) contains two levels of economic processes.

Production-technological level - it describes the capabilities of each of the studied systems of the economy in terms of the implementation of production activities

When building a model based on mathematical data and related to these very possibilities for the production of a certain system, it (the system) is usually divided into several separate, independent units that carry out production; these units are called elementary. Then each of these elementary units is analyzed and the specialist who is directly involved in the construction of this model describes their capabilities in terms of production and the possibilities for the movement of resources and final material products among themselves (through trade relations). The first opportunities should be presented in the form of a variety of productionfunctions, and the second - with the help of the so-called balance mathematical ratios.

Socio-economic level - it describes by what actions the possibilities for production arising from the production-technological level come to their realization

In this case of mathematical modeling of socio-economic processes, certain variable values \u200b\u200bmust be found that directly determine the general development of the economic process as a whole or in a particular case; the production possibilities of each of the systems set such constraints, within which one can find a large number of solutions to various economic problems. These variables are called controls or, in other words, control (influencing the studied factors) influences. The mechanism according to which the choice between different administrations will be made must be determined precisely at the socio-economic level of the processes taking place in the economy.

Thus, the creation of models of these two procedural levels is directly necessary if an economist needs to describe how the economic system itself functions. Modeling the socio-economic level, as a rule, takes place with much greater labor costs, because it is a rather complex and time-consuming process.

In the basics of economic modeling, however, there is a fairly extensive list of problematic phenomena that do not necessarily have to be described by modeling the secondconsidered level of economic processes. These phenomena are called normative, that is, they are precisely those controls that, in the course of further development of the model, lead the researcher to any positive results. The formulation of criteria, that is, direct descriptive definitions of what an economist can accept as a positive result, lies on the conscience of the specialist himself at the same stage of work.

Result

Summing up the results of the article, it can be noted that all products of activity on mathematical modeling of economic processes can be divided into two broad classes in one way or another. Here's what they look like:

1. The first class includes those models, the construction of which is due to the achievement of the goal of implementing the process of cognition of systems related to the economy (whether real systems or those that are entirely based on any hypothesis), their properties and other important factors.
2. The second class includes those models whose individual technical parameters may be subject to research evaluation based on data from real, already conducted economic experiments.

Representatives of models from both of these classes can be useful if you need to make any economic forecasts or when an economic problem situation needs someone to find a solution.

The second class is subdivided into three ordinal subclasses by a level below:

1. Organization (company) modelsare used as a basis for making any economic decisions at the level of manufacturing enterprises.
2. Economic models are used as a basis for making any economic decisions at the level of the central body responsible for economic production planning.
3. Economy models in a decentralized state are inherent in economic modeling methods that implement the ability to predict or manage economic processes and phenomena.

The problem of a methodological nature, which specialists most often face when trying to build any kind of economic model, is the problem of which mathematical equations are suitable in this case for describing the model itself. There are only two options: these can be differential equations, or there can be so-called finite-difference equations.

Thus, economic modeling is a complex multi-stage process that requires careful preparation on the part of special specialists responsible for these economic methods of solving or forecasting current problem situations in a given scientific field. This article examined the most basic key points that need to be clarified for a complete understanding of the methodological process of socio-economic modeling, as well as some other points that clarify this issue. We hope that you have found in this work all the answers that you were interested in and now you will be able to put into practice the solutions of anythere were economic tasks or just to be aware of this difficult topic. Once you have learned how to model economic processes, you can move on to more serious and complex topics.