As a whole, economic models are used to simulate or graphically show the workings of the economy to better understand it. The need for economic modeling made itself most evident in the Great Depression, during which, the inflation and unemployment rates skyrocketed and many ended up living in the streets, while the lines in the soup kitchens grew. Ever since, economists begun and expanded macroeconomics with effective uses of economic models. One of their most important uses is discovering meaningful patterns within the economy to help prevent another tragedy like the Great Depression.

The Analysis of Questions

It gives economists the ability to better analyze questions such as:

• How much can our economy produce of each product? (production possibilities frontier)
  
  
• Will trade with that country be beneficial for us? (comparative advantage)
  
  
• How does the economy manage to provide jobs for a growing population? (circular-flow diagram)
  
  
• How much will we have to give up to produce this product? (production possibilities frontier)
  
  
• How much will we gain if we trade with this country? (comparative advantage)
  
  
• What will happen if the majority of the population decides to save rather than spend? (circular-flow diagram)
  

Positive and Normative Economics

Economic models also contribute to positive and normative economics.

• Positive Economics: an economic analysis that has definite answers about how the economy actually works. With the help of economic models, it can make forecasts, which are simple predictions of the future.

• Normative Economics: an economic analysis that makes prescriptions about how the economy should work. With the help of economic models, economists can see the consequences of certain factors that affect these models. This helps them make prescriptions about what to do in real life.

Economic Models | Production Possiblities Frontier | Comparative Advantage | Circular Flow Diagram | Uses of Economic Models