BA 506 Upper Iowa University Forecast Economic Phenomena Discussion

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DQ1
From the IMF publication readings, “Economic Models: Simulations of Reality” in part 1, define economic model. What makes a model good or useful? Why does a model fail? 
Please respond to the discussion question. Then respond to at least one peer’s post. All posts should be substantial – which means you are providing new information or insights. Substantial does NOT mean a lengthy post – in fact, posts should be concise and meaty for conversational purposes, not like a series of essays. Please include citations and references for information from outside sources, formatted in APA style.
DQ2
Select an economic trend from the Vistage report. What are your thoughts on the effect of this trend on the national economy? Find information from at least one outside source to provide new insights and information about the effect of this trend on the national economy.

R1
KAccording to Ouliaris, the economic model is described as, “ a simplified description of reality, designed to yield hypotheses about economic behavior that can be test- ed. An important feature of an economic model is that it is necessarily subjective in design because there are no objective measures of economic outcomes. Different economists will make different judgments about what is needed to explain their interpretations of reality” (Ouliaris, 2017).
Economic models are tools used to conduct research on but not limited to empirical economic patterns which are generally qualitative and are largely susceptible to variance due to the nature of the process. They are hypothetical constructs that encompass a set of theoretical economic procedures that rely on a set of analytical variables. According to Ouliaris, economic models are described further to, “generally consist of a set of mathematical equations that describe a theory of economic behavior” (Ouliaris, 2017).
Generally, a good economic model will give you factual & supportable implications in relation to the theory it is trying to prove. This is done through testing that includes but is not limited to qualitative measurements such as case-studies and lab-based experiments. Due to this reason, successful economic models are still somewhat subjective and can therefore be formally measured through concise and verifiable results.
There are many different reasons why an economic model would fail, some of those reasons include a lack of predictability and an inaccurate assessment of how an economy works. Economic models are also irreplicable and therefore it is difficult to predict changes in future economic behavior based on patterns and past outcomes. Some of the reasons, according to Ouliaris, have been due to, “Insufficient attention to the links between overall demand, wealth, and—in particular—excessive financial risk taking” (Ouliaris, 2017).
Reference
Ouliaris, S. (2021). Economic Models: Simulations of Reality. Economic Concepts Explained. Retrieved October 26, 2021, from https://www.imf.org/external/pubs/ft/fandd/basics/pdf/Economic-concepts-explained.pdf.

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Economic Models: Simulations of
Reality
Economists build simplified descriptions to enhance their understanding of how things work
Sam Ouliaris
THE MODERN ECONOMY is a complex machine. Its job is to allocate defined in the model (for example, an agent’s budget). They provide
limited resources and distribute the resulting output among a qualitative answers to specific questions—such as the implications
large number of agents—mainly individuals, firms, and govern- of asymmetric information (when one side to a transaction knows
ments—allowing for the possibility that each agent’s action can more than the other) or how best to handle market failures.
directly (or indirectly) affect other agents’ actions.
In contrast, empirical models aim to verify the qualitative
Adam Smith labeled the machine the “invisible hand.” In The predictions of theoretical models and convert these predictions
Wealth of Nations, published in 1776, Smith, widely considered to precise, numerical outcomes. For example, a theoretical model
the father of economics, emphasized the economy’s self-regulat- of an agent’s consumption behavior would generally suggest
ing nature—that agents independently seeking their own gain a positive relationship between expenditure and income. The
may produce the best overall result for society as well. Today’s empirical adaptation of the theoretical model would attempt
economists build models-road maps of reality, if you will—to to assign a numerical value to the average amount expenditure
enhance our understanding of the invisible hand.
increases when income increases.
As economies allocate goods and services, they emit measurable Economic models generally consist of a set of mathematical
signals that suggest there is order driving the complexity. For exam- equations that describe a theory of economic behavior. The aim
ple, the annual output of advanced economies oscillates around an of model builders is to include enough equations to provide useful
upward trend. There also seems to be a negative relationship between clues about how rational agents behave or how an economy works
inflation and the rate of unemployment in the short term. At the (see box). The structure of the equations reflects the model builder’s
other extreme, equity prices seem to be stubbornly unpredictable. attempt to simplify reality-for example, by assuming an infinite
Economists call such empirical regularities “stylized facts.” number of competitors and market participants with perfect
Given the complexity of the economy, each stylized fact is a foresight. Economic models can be quite simple in practice: the
pleasant surprise that invites a formal explanation. Learning more demand for apples, for example, is inversely related to price if all
about the process that generates these stylized facts should help other influences remain constant. The less expensive the apples,
economists and policymakers understand the inner workings
of the economy. They may then be able to use this knowledge A USEFUL MODEL
to nudge the economy toward a more desired outcome (for
The standard model of supply and demand taught in intro-
example, avoiding a global financial crisis).
ductory economics is a good example of a useful economic
model. Its basic purpose is to explain and analyze prices
Interpreting reality
and quantities traded in a competitive market. The model’s
An economic model is a simplified description of reality, designed equations determine the level of supply and demand as a
to yield hypotheses about economic behavior that can be test- function of price and other variables (for example, income).
ed. An important feature of an economic model is that it is The market-clearing price is determined by the requirement
necessarily subjective in design because there are no objective
that supply equal demand at that price. Demand is usually
measures of economic outcomes. Different economists will
set to decline and supply to increase with price, yielding a
make different judgments about what is needed to explain their
system that moves toward the market-clearing price—that is,
equilibrium-without intervention. The supply-demand model
interpretations of reality.
can explain changes, for example, in the global equilibrium
There are two broad classes of economic models—theoretical
price of gold. Did the gold price change because demand
and empirical. Theoretical models seek to derive verifiable implica-
changed or because of a one-time increase in supply, such as
tions about economic behavior under the assumption that agents an exceptional sale of central bank gold stockpiles?
maximize specific objectives subject to constraints that are well
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