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1 Importance of Models in Economics Introduction There are many tools that help people perform a task or an activity in everyday life easier; map is used for telling the direction and helping people choose the right way; microwave is an important kitchen tool in the modern life-style that reduces time to warm and to cook food; or electronic mail is an important information technological innovation that allow people to keep in contact with the people who live far away from them. In the same way, biologists use human body models as their tools to explain how internal organs work; engineers build models to see how the system works; also, economists use models as their tools to help them in dealing with problems or historical data in the economy. Economics is one branch of social sciences that is concerned with money flows, trade activities, and industrial systems in the society. Economists use the scientific approach for developing economic theories. Considering the way to test a theory, in economics it is not easy as it is in the scientific world; scientists can make an experiment under the controlled environment or the given conditions to test their theories. How do economists make a real experiment in economic system which is concerned with the real society? In this case they need specific tools, i.e.

Models and historical data, to fulfill their approach. What are models in economics? How do they differ from each other? Where and when do economists use them? And the most important question, why do they need models in economics? Answers to all these questions will give more understanding about the role and the importance of models in economics.

In the following parts these issues will be discussed in more detail 2 What is a Model? Firstly, it is better to start with the meaning of a model. In Oxford Advanced Learner s dictionary by Hornby (2000) there is one meaning of a model as the following paragraph: A model is a simple description of a system which used for explaining how something works or calculating what might happen, etc: a mathematical model for determining the safe level of pesticides in food, a realistic model of evolution This definition of a model shows the general way of thinking about it; a model can be used for many purposes such as an explanation of the system or a calculating process. Many economists have their own specific definitions of a model in economics. The following definitions are taken from some economic textbooks. Samuelson and Nordhaus (1998) gave the definition of a model as a formal framework for representing the basic features of a complex system by a few central relationships.