In this section we will construct our first model of the economy. A model is a simplified representation of something. Macroeconomic models are simplified versions of the overall economy. A macroeconomic model will cover a certain number of systems of the economy and will include a description of how each one works. Because we are talking about market oriented economies, they will mostly focus on how people and institutions interact in the marketplace.
Economic models differ in a number of ways.
Some models cover more parts of the economy. Others cover the same sectors but go into them in more detail. While others choose to be less detailed, but are simpler and so easier to understand. Another reason that models differ is that they may reflect different assumptions about how the economy works. In this section we will look at a relatively simple model.