Trading Economics

Trade News Center

The Use of Math in Economic


Economics is the study of the utilization of resources, their distribution, and allocation. Mathematics represents the study of numbers which can help solve problems by using number and logic. Maths is very accurate, and quantity, size, and other features can be described with 100% precision. The mathematical link to logic makes possible to solve very complex problems which otherwise would not be so easy.

Mathematics is an important part of economics and its analyses of the global economy, market, etc. Economists use mathematical models to make projections about future economic events, as well as of what would happen if an action would be implemented and how it would affect an economy. The economic end-calculations usually take the form of a graph, formula or index.

Calculus, linear algebra, and geometry are all useful mathematical concepts for economic analyses. Representation of the data is yet another thing and has to be done accurately since it can easily happen to misinterpret them because of their complexity and relationships in isolation.

Maths in Economy

Economics is a broad term and field including different factors like work, property, money, investments, taxes, and it represents the decision of people how to utilize their assets. Economics has multiple definitions but according to De Rooy (1995) it comes down to people, and their choices they make at different levels may it be at the company, individual or government level. It can be reduced to the utilization of resources, and if they are limited, the economic term that applies there is scarcity. Resources do not have to refer to money automatically, but hey can also include goods and services exchanged between people.

According to another economic expert, Gottheil, resources have limits, but people’s desires have not, so he identifies three major issues in his economic study:

- The scarcity issue whereby people want more than their limited resources can offer

- The issue with decisions of how to allocate resources to make goods and offer services

- The issue with the process of distributing end products and services to others.

Economic knowledge is closely connected to how one distributes the goods and services, and if done right it shows to what extent an individual actually understands the broad field of economics.

The Science of Maths

Maths is the study of the size, quantity, and shape expressed through symbols and numbers. The symbols and numbers represent accurate results. Maths represents the solution to complex concepts by being able to decipher and discover what is behind a concept and how it will affect us. Theory testing is also conveyed through maths, and it shows us whether a theory is true or false. Maths is the solution to many compound problems since it takes into account all influencing factors and displays the result in numbers.

Maths and Its Correlation to Economics

Maths is the study that deals with quantity, and it is able to display precise measurement of an economic concept and how it affects resources. Economic scenarios and projections, as well as analyses, are all using maths as a means to obtain necessary results. The general form used is modeling and it reveals potential future actions of what might happen if a certain action is undertaken. In that way, experts know what move will result in positive developments and which move should be avoided. Modeling refers to the simulation of real events and actions, and all projections are made on the basis of mathematical calculations. Modeling is referred to as the process of solving real-life problems with the science of maths in the simplest terms.

Modeling is a process, and hence, it is divided into developmental stages, which are:

1. Model construction is the first step and refers to understanding the core of the problem. The model should be constructed as to offer valid answers upon which action can be taken in real life in order to optimize the results.

2. Interpretation of the economic model is also crucial if it is going to be transferred or used on real-life examples. The information obtained through modeling needs to be understood correctly in order to be able to solve a problem in real life.

Focusing on solving a problem that is present in real life requires repetition of the above steps until sufficient information is obtained from the model. According to Gottheil, mathematical modeling helps in identifying the causes that lay behind the effects of a certain action. According to some economic experts, economic modeling rests on the principles of linear algebra, differential equations, and calculus.

Micro vs. Macro Economics

It has been already stated that economics is a broad field and roughly speaking, it is divided into microeconomics and macroeconomics. Microeconomics is more concerned with the decisions and choices of individual persons, whereas macroeconomics studies economy in general at a more comprehensive level. To deal with both, different models are being applied in both disciplines. Supply and demand are one of the foundations of economic analyses, and it all starts from there. In macroeconomics, to get an overview of the supply and demand percentage, economic factors like GDP, inflation, employment rate, and prices are examined. Thereby, the analysts can tell to what extent and how a governmental decision or policy affected the economy of an entire country. The economy cannot be regarded as isolated since it is interrelated with other economic factors, like when a country deals with inflation, prices will increase which will affect the supply and demand chain. Economic measures take the form of mathematical variables during analyses, and in that way, they can be traced back and identified.

Practical Application

Individuals tend to stay away from calculations of economic factors and usually do not want to be involved. Still, all individuals should at least try to understand some of the concepts in order to be able to predict events such recessions and inflations by only observing how the economy changes. Economic literate people have the advantage of predicting such events based on the living conditions.

Mathematics and economics are two different disciplines that are very closely related, and maths can be used to display and describe any economic concept which is the basis for a functioning economy.