Lecture 1: Economic Modelling and Prediction PDF

Topic: Economic Modelling and Predictio Lecture 1: Introduction Dr. Abdelmoneim Ahmed  Course Objectives the end of this course You will be able to: Determined the relations between economic variables. Clarified the problems of definition variables....

Topic: Economic Modelling and Predictio Lecture 1: Introduction Dr. Abdelmoneim Ahmed  Course Objectives the end of this course You will be able to: Determined the relations between economic variables. Clarified the problems of definition variables. Determined the causality in economic relations. Defined Equations and parameters. Know the types of equations and principles of modelling. kinetic models in the economy, Introduction Economic theory gives a good reference for developing large-scale macroeconomic models. Key areas in the model is the input- output structure, the wage formation and the determination of the demand of inputs. When forecasting is based on an annual model, up to date information on the development in several variables on higher frequency Introduction An economic model is a simplified version of reality that allows us to observe, understand, and make predictions. A good model is simple enough to be understood while complex enough to capture key information. Sometimes economists use the term theory instead of model. And use models as the primary tool Economics models Economic models can be represented using words or using mathematics. All of the important concepts in this course can be explained without math. But math is a tool that can be used to explore economic concepts in very helpful ways. The use of algebra is a specific way that economics express and explore economic models. Where graphs require you to “eyeball” a model, algebra can give you more Economic models …are simplified versions of more complex realities with irrelevant details stripped away …are used to:  show relationships between variables.  explain the economy’s behavior.  devise policies to improve economic performance. Economics models Economic models offer a way to get a complete view or picture of an economic situation and understand how economic factors fit together. A good model to start with in economics is the circular flow diagram. Univariate and Multivariate variables models Univariate analysis can be considered as the easiest form of data analysis where we only analyze only one variable from the entire dataset. Since we deal with only one variable, we do not have to worry about causes or relationships. The main purpose of univariate analysis is to describe the data and find patterns that exist within it. Univariate Analysis Statistical Univariate technique analysis Sincetechnique we deal with onlyGraphical one variable, we do not have to worrytechnique about causes or relationships. The main purpose of univariate analysis is to describe the data and find patterns that exist within it. Univariate Analysis - Graphical method Graph of Univariate is reflect the trend of economics variable. The Charts are shows the relation between economics variable and time. If the time is change the variable will change up or down it depends. Univariate Analysis - Graphical method Macroeconomics variables: Gross Domestic Product (GDP). GDP per capita. National Income. Personal Income. Inflation. Exchange rate. Money Supply. Graphical method examples (Sudan) GDP (Current) 120000000000 100000000000 80000000000 60000000000 40000000000 20000000000 0 60 963 966 969 972 975 978 981 984 987 990 993 996 999 002 005 008 011 014 017 020 023 19 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 GDP = the value of final goods and services currently produced within a country over a period of time. Graphical method examples (Sudan) Inflation 400 350 300 250 200 150 100 50 0 6 0 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11 14 17 20 23 19 -50 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 Inflation, , is the rate of change of prices: where Pt is today’s price and Pt-1 is last period’s price U.S. real GDP per capita (2009 dollars) ITALY real GDP per capita (2010 Euro) U.S. Inflation Rate  Tasso Inflazione, Italia - 1955-2015 Fonte: ISTAT U.S. unemployment rate (% of labor force) Types of Models A mathematical model is central to most computational scientific research. Other terms often used in connection with mathematical modeling are  Computer modeling  Computer simulation  Computational mathematics  Scientific Computation. How do we incorporate mathematical modeling / computational science in the scientific method? Mathematical Modeling Problem-Solving Steps Identify problem area Develop Conduct background computational research algorithm State project goal Perform test Define relationships calculations Interpret results Develop mathematical model Communicate results Mathematical model in Economics The production side of the economy transforms inputs (labor, capital) into output (GDP)  Inputs referred to as factors of production  Payments to these factors are referred to as factor payments The relationship between inputs and outputs is defined by the production function Y  f ( N , K )(1) where Y = output, N = labor, K = capital  “Output is a function of labor and capital,” where the functional form can be defined in various ways. Mathematical model in Economics Total demand for domestic output is made up of four components: 1. Consumption spending by households (C) 2. Investment spending by firms (I) 3. Government spending (G) 4. Foreign demand for our net exports (NX) The fundamental national income accounting identity is Y C  I  G  NX (2)  Mathematical model in Economics Assume national income equals GDP, and thus use terms income and output interchangeably Begin with a simple economy: closed economy with no public sector, output expressed as Y  C + I (3) Only two twings can do with income: consume and save, national income expressed as (where S is private saving) Y  C + S (4) Combine (4) and (5): C + I  Y  C + S (5) Rearrange (6) I  Y – C  S (6) Or: investiment = savings  Important issues in macroeconomics Macroeconomics—the study of the economy as a whole— addresses many topical issues, such as: What causes recessions? What is “government stimulus,” and why might it help? How can problems in the housing market spread to the rest of the economy? What is the government budget deficit? How does it affect workers, consumers, businesses, and taxpayers? Important issues in macroeconomics Part 2 Macroeconomics—the study of the economy as a whole— addresses many topical issues, such as: Why does the cost of living keep rising? Why are so many countries poor? What policies might help them grow out of poverty? What is the trade deficit? How does it affect a country’s well- being? Example of a model: Supply and demand for new cars Shows how various events affect the price and quantity of cars Assumes the market is competitive: each buyer and seller is too small to affect the market price Variables Qd = quantity of cars that buyers demand Qs = quantity of cars that producers supply P = price of new cars Y = aggregate income Ps = price of steel (an input) The use of multiple models No single model can address all the issues we care about. For example, our supply–demand model of the car market… can tell us how a fall in aggregate income affects price and quantity of cars cannot tell us why aggregate income falls The use of multiple models We will learn different models for studying different issues (e.g., unemployment, inflation, long-run growth). For each new model, you should keep track of: its assumptions which variables are endogenous and which are exogenous the questions it can help us understand and those it cannot