| Definition |
Simplified theoretical frameworks to explain economic phenomena and predict outcomes. |
The actual economic environment where production, consumption, and trade occur. |
| Purpose |
To analyze, understand, and forecast economic behavior using assumptions. |
Reflects complex, dynamic interactions influenced by real factors and events. |
| Assumptions |
Often rely on simplifying assumptions like perfect competition, rational actors. |
Contains imperfections, irrational behavior, external shocks, and regulations. |
| Complexity |
Less complex for clarity and focus. |
Highly complex and multifaceted. |
| Usefulness |
Helpful in teaching, policy formulation, and theoretical insights. |
Critical for real decision-making, business, and government policies. |
| Flexibility |
Can be adjusted by changing assumptions or parameters. |
Continuously changing and influenced by unpredictable factors. |
| Data Dependence |
Based on selected data and variables. |
Uses actual economic data, often more comprehensive. |
| Predictability |
Provides forecasts with some level of certainty. |
Outcomes may differ due to unforeseen events and complexities. |
| Examples |
Supply and demand curves, Keynesian models, IS-LM model. |
Actual markets, employment levels, inflation rates, economic growth. |
economic models vs real-world economy