The Basic Concepts of Linear Models

Abstract

What is a model? Generally a model is a representation of something else, which is a real phenomenon. The purpose of such a representation is to facilitate the study and understanding of the real phenomenon. The model may be easier to see, nearer by, or less dependent on time, relative to the real phenomenon. A shipbuilder may make a small-scale model of a ship he intends to build. In this case the real phenomenon does not as yet exist but many properties of the ship can be studied on the scale-model. In econometrics, the concept of a model has a more precise meaning. The model is a system of equations, representing a particular aspect of reality, or supposed reality. The representation of a not as yet existing structure is one of the useful applications of models, this is true both for the shipbuilder and for the econometrician. Computer simulation of the results of proposed changes in fiscal legislation or monetary policy may be helpful in deciding whether or not to introduce such changes. The concept of a model as a system of equations, representing a simulated reality, is valid for such varied applications as engineering, weather forecasting and outer- space navigation.