Monday, October 5, 2009

Model of economy

So, how does the economy work. Well a simple diagram helps explain a lot. The complex nature of the economy comes from the dynamic nature of the feedbacks loops and the external shocks. Dynamic in that a change in one input or output can have downstream effects on the other institutions.

The best current econometrics models are Dynamic Stochastic General Equlibrium (DSGE) Models which are used in forecasting the US economy.

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