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Evaluating Model Design Choices
An economist is developing two separate models concerning the market for wheat.
- Model 1 aims to forecast the price of wheat for the next quarter. In this model, the average seasonal rainfall is treated as an exogenous variable, with its value taken from external meteorological forecasts.
- Model 2 aims to predict how global climate shifts will affect wheat prices over the next 50 years. In this model, long-term precipitation patterns are determined within the model as a function of rising global temperatures.
Critique the decision to treat 'average rainfall' as an exogenous variable in Model 1 but as an internally-determined variable in Model 2. Justify why this difference in approach is appropriate, considering the distinct goals and time horizons of each model.
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Introduction to Microeconomics Course
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Evaluating Model Design Choices