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In economics, an economic model is typically a complex, often abstract, framework reflecting various economic processes through a collection of structural factors and a collection of quantitative and/or logical relationships between them. For example, in the study of international trade, an economic model can be formulated in a number of different ways, depending on the particular field of study. In the case of macro economics, the model may be expressed as a spatially independent economic theory that is used to make predictions about the behavior of markets. In the study of business cycles, the model may be expressed as a theory of business cycles that describes how changes in the rate of interest, credit availability, business cycle variables such as unemployment rates, inflation rates, and financial indicators are linked with changes in the production, employment, and spending of capital in order to produce changes in output, which in turn are interpreted as implications for changes in the economy.

Economists who adopt a methodological approach to economic models consider themselves rational economists because they use economic models to describe and analyze economic processes, data, and relationships more precisely than other types of economic thinkers (such as stylists and political scientists). Broadly, however, economic models are divided into two main types: descriptive and rational. Descriptive economic models are descriptive in the broadest sense, whilst rational economic models are precise and general in the sense that they attempt to predict the behaviour of economic variables as a result of prevailing circumstances. In other words, economic models offer a predictive detail regarding the observed characteristics of a given economic system.

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A descriptive economic model can be thought of as a map on the floor of a physical store or marketplace. The theoretical description of the store-room may not fully capture all the relevant facts regarding the goods and services available for sale within it. As a result, it may be necessary to interpret some of the more subtle economic relationships behind the descriptions. In this way, economics becomes an applied science of observation and interpretation rather than just a theory. The methods by which this can be done vary widely between disciplines of economics. Some of the most commonly used techniques include structural equation methods, mathematical models of demand and supply, economic equations involving trade cycles, or the determination of the parameters of a macroeconomic equation using micro-economic data.

Rational economic models, on the other hand, assume that the known facts about the real world are consistent with the desired assumption(s) of the model. These assumptions are typically made in order to ensure consistency with a particular model's predictive usefulness. Some of the commonly applied assumptions in rational economic models include the effects of competition, the impact of laws and taxation, and the effects of technology on the production process. These assumptions are designed to capture certain aspects of the real economy that are often ignored in other models. Some of these assumptions may prove useful in the future as more theories are refined with empirical evidence, but the assumption is not essentially part of the model's validity or utility.

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Economic models have been in use for over two centuries now, and it is still the subject of vigorous debate among economic thinkers. Many leading economic thinkers including John Taylor, Henry Simons, Milton Friedman, Ludwig von Mises, and others have all offered different interpretations of how the economic model operates. The current debate is related to the methodology of economic models and their evaluation. Critics argue that the economic models used by most economists do not accurately describe real-world economic behavior and that they fail to provide a foundation for policymaking. Many economists dispute the effectiveness of economic models as a scientific tool, because the models cannot provide a systematic framework from which to draw and evaluate empirical evidence.

Nevertheless, most economists still use the majority of the models they build on to provide a consistent framework from which to analyze and make economic decisions. While many critics have raised concerns about the predictive validity of these models, even those who are sympathetic to the field tend to agree that the benefits of models far outweigh any possible shortcomings. The use of the models to make economic decisions continues to be very powerful in decision making circles. The continued use of these models is likely to continue for many years to come.

Examples from economic model applications related to the - economic model

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