Numerical Methods in Economics
Economics is the most quantitative of the social sciences, which means a solid grounding in mathematics and statistics is necessary. Economists use a wide range of numerical methods to illustrate, explain and analyze economic phenomena. Applying numerical methods to economics is essential to understanding the complex models economists use in their research and analysis.
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Function
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Economists use numerical methods first to express an economic issue. A simple example is the expression of gross domestic product as the sum of consumer spending, business investment and government spending. Many economic models are much more complex, expressed in multivariate equations that require in-depth statistical analysis using specialized software. Economists then use analytical skills to interpret the results of the equation or statistical procedure in economic terms.
History
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The use of numerical methods in economics dates back to 17th-century Europe. Economists such as William Stanley Jevons pushed for more formal mathematical methods in the 19th century, arguing that economics must be mathematical because it deals with quantities.
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Types
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Numerical methods in economics include many skills drawn from basic mathematics, algebra, geometry, calculus and statistics.
Applications
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An understanding of division and percentages, for example, is necessary to understand the concept of elasticity in economics. Elasticity measures responsiveness of supply or demand to changes in price. Elasticity of demand measures the response in consumer demand to changes in price for a particular good, and is expressed as the percentage change in demand divided by the percentage change in price.
Understanding basic concepts of geometry, such as slopes and intercepts, is important for drawing and interpreting economic graphs, such as supply-and-demand graphs. These charts illustrate price as determined by supply and demand lines meeting at an equilibrium, or market-clearing, price.
Calculus Example
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Differential calculus calculates derivatives, or the change in variable "y" relative to a change in variable "x." Understanding calculus is key to understanding marginalism in economics. Marginal cost, for example, measures the change in cost relative to an increase in output.
Statistical Models
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To develop, solve and explain the complex mathematical models that economists use, it is important to understand basic and advanced statistics. Important statistical concepts for economists range from basic descriptive measures, such as means, to regression analysis. Regression, a favored analytical tool among economists, measures the change in a dependent variable, such as average wages or production levels, brought about by changes in one or more independent variables. Many journal articles published in peer-reviewed economics journals, such as "The American Economic Review," use regression and other statistical methods to analyze and explain economic phenomena.
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