An economic model is a simplified, abstract, theoretical description used to represent and study either an entire real-world economic system or a more limited one, such as a sector, issue or company. Besides providing a simple description, it can be used to make forecasts, run simulations and even perform optimizations. In the latter case, economic or political decision-makers may use it to justify certain strategic positions within companies and certain broader economic decisions. It may even be used to justify the planning and allocation of resources.
Very general, complex models are developed by specialized bodies such as Insee in France and the Federal Planning Bureau in Belgium. Their tasks include compiling economic, social and environmental statistics, indices and indicators; conducting surveys of businesses and households; developing models for forecasts and projections; and assessing the socioeconomic effectiveness of existing or proposed policies. To do so, they must manage vast databases. Their work spans many fields: regional, national and international economics, the labor market, public finances, social protection and healthcare, demographics, transport, mobility and energy…
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Confronting reality ---------------------------
An economic law is generally represented by equations relating the economic variables being modeled; these equations describe theoretical economic behavior and involve variables likely to influence the variables of interest. Some equations in a model are merely identities—definitions of concepts or national accounting equations, for example—while others express a simple trend over time. The most interesting are functional relationships: they involve economic variables but also depend on parameters that must be estimated from observations, that is, historical data. They may describe technical relationships, such as a production function, or behavioral ones, such as the law of demand or a consumption function. When the model is used for decision-making, some variables—tax levels or key interest rates, for example—are not measured but are instead under the control of the political or economic decision-maker, who can then run a number of preliminary simulations.