Chapter 2 - Krugman_CH02_020-040 12:45 PM Page 20 chapter 2...

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Economic Models: Trade-offs and Trade TUNNEL VISION What you will learn in this chapter: Why models —simplified repre- sentations of reality—play a cru- cial role in economics Three simple but important mod- els: the production possibility frontier, comparative advan- tage, and the circular-flow diagram The difference between positive economics, which tries to describe the economy and pre- dict its behavior, and normative economics, which tries to pre- scribe economic policy When economists agree and why they sometimes disagree 20 N 1901 W ILBUR AND O RVILLE W RIGHT built something that would change the world. No, not the airplane— their successful flight at Kitty Hawk would come two years later. What made the Wright brothers true visionaries was their wind tunnel, an apparatus that let them experiment with many different designs for wings and con- trol surfaces. These experiments gave them the knowledge that would make heavier-than-air flight possible. A miniature air- plane sitting motion- less in a wind tunnel isn’t the same thing as an actual aircraft in flight. But it is a very useful model of a flying plane—a sim- plified representation of the real thing that can be used to answer crucial questions, such as how much lift a given wing shape will generate at a given airspeed. Needless to say, testing an airplane design in a wind tunnel is cheaper and safer than building a full-scale version and Landov Photos >> I chapter 2 hoping it will fly. More generally, models play a crucial role in almost all scientific research—economics very much included. In fact, you could say that economic theory consists mainly of a collection of models, a series of simplified representa- tions of economic reality that allow us to understand a variety of economic issues. In this chapter, we will look at three eco- nomic models that are crucially important in their own right and also illustrate why such models are so useful. We’ll conclude with a look at how economists actually use models in their work. Clearly, the Wright brothers believed in their model. Krugman_CH02_020-040 8/30/04 12:45 PM Page 20
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Models in Economics: Some Important Examples A model is any simplified representation of reality that is used to better understand real-life situations. But how do we create a simplified representation of an economic situation? One possibility—an economist’s equivalent of a wind tunnel—is to find or create a real but simplified economy. For example, economists interested in the economic role of money have studied the system of exchange that developed in World War II prison camps, in which cigarettes became a universally accepted form of payment even among prisoners who didn’t smoke. Another possibility is to simulate the workings of the economy on a computer. For example, when changes in tax law are proposed, government officials use tax models large computer programs—to assess how the proposed changes would affect different types of people.
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Chapter 2 - Krugman_CH02_020-040 12:45 PM Page 20 chapter 2...

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