The Use of Balance Method in Macroeconomic Economic Model
Introduction
Balance method entails the assumption of the application of similar mathematical operation on both sides of the equation as well as the equality of the parameters on both sides of the equal sign. In this method of macroeconomic design, few variables are used as the computation is sometimes cumbersome and hectic. The resulting equations can be linear or non-linear.
A macroeconomic model is a function deemed to portray the operation of the large a country or part of a country. The model majorly examines and analyses economic aspects such as aggregate demand, aggregate supply, interest rate, money supply, gross domestic product, the level of employment over a particular duration, and level of prices.
A wide range of Econometrics is mathematically designed to give theoretical principles or phenomena a simpler explanation which can be grasped at a glance. For instance, Aggregate Demand (AD) and Aggregate Supply (AS) model expressed in the form AD=AS, portray the equilibrium between the accumulative household's demand for commodities and the total supply by the firm within a country or region at large. In addition to comparing macroeconomic aspects, a model can also provide more clarification.
Basically, balance method has been used to design Econometrics such IS-LM model and the Keynesian macroeconomics model (Mundell'Fleming model) , and the neoclassical growth theory IS-LM model (Solow model). These models use few variables, though relatively fixed or static (applicable over a long duration) they examine ever-changing macroeconomic issues. The use of those balanced based models is discussed below.
Balance Method Designed Macroeconomic Models.
The models designed are usually, graphically illustrated with the parameters under examination intersecting to show a state of balance as well as expressed mathematically where equal sign is used too to indicate equality; Aggregate demand'aggregate supply commonly referred as AD-AS analysis and is used mainly to assess the economy using an aggregate demand curve and an aggregate supply curve. The curves are ploted with the price level on the vertical (x-axis) and real output on the horizontal axes. Notably, the key point is the intersection of those those curves (history of political economy 2002)
The IS-LM graph is in most cases used to evaluate the relationship between quantity of the production, or Gross Domestic Product of an economy. Also, this technique evaluates the nominal interest rates of the same economy taking into account that only two markets exists in the economy; that is output market and the money market. The point of intersection for the two markets is considered to be the point of equilibrium or balance. Similar to the equal sign when the theory is illustrated mathematically which too indicates balance of the two sides (Investopedia 2015)
Limitations of the balance method models
There are a number of endogenous and exogenous variables which affects any macroeconomic issue, hence the use of the few variables, though practical and application do not portray a wholly dependable picture.
Macroeconomic issues are dynamic characterized with current trends and emerging issues. Hence these models should also keep pace with the changing issues rather than remain static.
Conclusion
Macroeconomic models are usually applied in a number of principles or theories rather that the particular theories for which they have been postulated henceforth usage of very few parameters or variables to some extent make their application questionable. The panacea for the puzzle might be an improvement on the relevant designs to make them more current.
Bibliography
History Of Political Economy. Aggregate Demand 'Aggregate Supply Analysis: A History (2002) 34 (2) 321-363 DOI: 10.1215/00182702-34-2-321
INVESTOPEDIA. 'Islm model definition ' ( 2016).
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