A representation of an economic system, relationship or state, that takes any of a variety of forms. At its most informal, a model can be said to consist of a verbal description or analogy of some real-world phenomenon. Model-building usually consists of two main stages. The first stage, inspired by economic reasoning, is to develop the structure of the model - setting out what factors affect which variables. Often, this is as far as construction goes.
Models have a variety of uses.
First, they can illuminate and describe systems clearly by stripping them of all unnecessary complications. Second, computer models in particular are useful for simulation . A variable, such as unemployment , is defined in terms of the values of a set of other variables and, by simulating a change in these, the effect of different policies on unemployment can be estimated. Third, forecasts of the behaviour of variables can be made, based on past observations. Finally, the specification of models is a prerequisite to the testing of different theories.