DSGE models do not necessarily have to be complicated but they do need to cover the whole of the macro-economy or social system. When they don't manage to do this, what is being represented is incorrect. So before using a model the question we need to ask is what is vital for the model to contain? I think this question can be asked in a number of ways and that one way of looking at it is to ask about the number of different kinds of transactions that exist in our social system, and between which agents they must pass. Note that by using the word "kinds" it does not mean different products, firms, sizes of families, amount of wealth holders, cultures, etc. "Kinds" refers to the different functional activities of the various agents.
My answer to this question is shown below in the diagram which is taken from my new book "Consequential Macroeconomics". Actually the answer to this problem, as presented in this way, is not so hard as a beginner might think, and as Professor Einstein claimed: "the best scientific theories should be as simple as possible without being over-simplified". This way we can see what is happening as well as model the situation properly.
DSGE models do not necessarily have to be complicated but they do need to cover the whole of the macro-economy or social system. When they don't manage to do this, what is being represented is incorrect. So before using a model the question we need to ask is what is vital for the model to contain? I think this question can be asked in a number of ways and that one way of looking at it is to ask about the number of different kinds of transactions that exist in our social system, and between which agents they must pass. Note that by using the word "kinds" it does not mean different products, firms, sizes of families, amount of wealth holders, cultures, etc. "Kinds" refers to the different functional activities of the various agents.
My answer to this question is shown below in the diagram which is taken from my new book "Consequential Macroeconomics". Actually the answer to this problem, as presented in this way, is not so hard as a beginner might think, and as Professor Einstein claimed: "the best scientific theories should be as simple as possible without being over-simplified". This way we can see what is happening as well as model the situation properly.