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Economic Modelling

  • P. Arestis
  • G. Hadjimatheou
Chapter

Abstract

Economic modelling encompasses a multitude of related activities; it includes the specification, estimation and validation of single-and multiple-equation models for policy analysis and forecasting. A model in this context is broadly defined as a system of interdependent quantitative relations. Various types of relationships are considered: behavioural, which constitute attempts to describe certain aspects of economic agents’ behaviour; technical, an example of which is a production function; and identities. The following simple, stochastic and dynamic, macroeconomic model can be used to illustrate this and to introduce some standard terminology:
$$Y = C + \bar G + X - M$$
(1.1)
$$Y = A{K^a}{\bar L^{1 - a}}{u_1}$$
(1.2)
$$C = {m_0} + {m_1}{y^d} - 1 + {u_2}$$
(1.3)
$$I = {b_0} + {b_1}\Delta Y + {b_2}\bar r + {u_3}$$
(1.4)
$${Y^d} = Y - \bar T$$
(1.5)
$$M = {c_0} + {c_1}{Y_{ - 1}} + {u_4}$$
(1.6)
$$K = {K_{ - 1}} + I$$
(1.7)
where Y = income or output, C = consumption, I = investment, G = government expenditure, X = exports, M = imports, K = fixed productive capital, L = labour, Yd = disposable income, T = tax revenue, AY = Y − Y−1, r = interest rate, and ui = disturbance term.

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Copyright information

© P. Arestis and G. Hadjimatheou 1982

Authors and Affiliations

  • P. Arestis
  • G. Hadjimatheou

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