MacroeconomicsI_working_version (1)

Introduction into Macroeconomics 7
Abstractions – We must bear in minds that economic principles, or theories, are
simplifications (abstractions), which exclude irrelevant facts and circumstances. Such
models cannot to depict the full complexity of the real world. The very process of sorting
out and analysing facts involves simplification and removal of clutter.
Economic principles and theories present meaningful statements about economic
behaviour of the economy. Economic principles could be explained as tendencies of
average or typical consumers, workers, or firms. Accordingly economic principles are
generalisations associated with economic behaviour of individuals or with the economy as
a whole.
For example, when economists say that increase in personal income causes the rise in
consumer spending, it is obvious that some households may save all of an increase in their
incomes (and not to spend it). However, in general - on average, and for the entire
economy, spending rises when income increases.
Ceteris Paribus – “Other Things Equal” Assumption is used for creation of economic
generalisations. They are based on assumption that all other variables apart from those
under consideration remain unchanged (constant).
1.5. The Use of Economic Models
In economics we often use the simplified theories called models. Models examine the
relations among economic variables (often in mathematical terms). The real world is full of
complexity and the sense of models is to help us to omit the irrelevant details, remove
clutter and to focus on relevant economic connections and relations. The function of
models is to make things clear and understandable.
We use two kinds of variable in models: exogenous variables and endogenous variables.
Exogenous variables come from outside the model – they are the inputs into the model.
Endogenous variables come from inside the model – they are the output of the model. In
other words, exogenous variables are fixed at the moment they enter the model, whereas
endogenous variables are determined within the model. As Figure 1.3 shows, the purpose
of a model is to explain how the endogenous variables affect the endogenous variables.
Exogenous
variables
Model
Endogenous
variables