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What Are Economic Assumptions?
Economic assumptions are estimates of how the market will be in several months or years, based on present conditions. They primarily are used by investors and businesses to make financial plans for the future, including deciding how much money will be needed for a project. As estimates, economic assumptions are subject to change, so most investors and businesses build their plans so they can make changes based on how the economic situation really is in the future. There are many factors that are assumed, but the three most common are inflation, productivity and average earnings. The main problem with these assumptions is that they are just guesses, and the real economic situation in the future may be completely different from the current assumptions.
Many investors and businesses plan for projects, and they need to know how much time and money will be required to complete these projects. To get an estimate, they use economic assumptions. For example, if it is assumed there will be negative inflation, then businesses will estimate that they need less money because the money will be stronger. By predicting the economic situation, investors and businesses can get an image of what they will require in the future to complete projects.
While economic assumptions strive to be accurate, they are really just guesses based on current information and trends. For this reason, most businesses and investors will make their plans fluid, so they can change rapidly. If negative inflation is expected but positive inflation occurs instead, then investors and businesses must be ready to change the amount of money they budget to finance projects. Without accounting for this possibility, investors and businesses may not be able to complete their projects, which may result in bad side effects such as lower profits or bankruptcy.
When economic assumptions are made, there are many factors that are examined. The three most common are inflation or the strength of money, how many items are manufactured and the average income of workers. Each factor has the potential to completely change how the economic system is doing, which is why they are examined very carefully.
Some economic experts have a problem with economic assumptions, because they cannot be entirely trusted. While assumptions strive to be accurate and are based on current information, the factors involved can change wildly with little or no warning. For example, if there are massive and unexpected strikes, then this hurts productivity and may impact inflation, and both may weaken a country or region. This leads some experts to believe that economic assumptions have no real-world application.
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![Economic assumptions are guesses based on current information and trends.]()
By: KenishirotieEconomic assumptions are guesses based on current information and trends. -
![Economic assumptions can be used to set production schedules in a manufacturing company.]()
By: pfpgroupEconomic assumptions can be used to set production schedules in a manufacturing company.
Discussion Comments
@SteamLouis-- I think analysts also try to overcome these issues by making different analyses based on different predictions. For example, they may prepare three different scenarios for how things may play out.
The advantage of this is that if it becomes apparent that one set of assumptions won't be working for the present situation, an alternative analysis is ready to go and can be put to use right away.
@SteamLouis-- I don't think it's that bad. It's true that the economy can be difficult to predict. But economists have the data from previous years and decades to compare to and analyze. They can find patters and cause and effect relationships between the various economic variables to make their assumptions. So I don't believe that economic assumptions are mostly inaccurate. Believe me, if that were the case, I think that the economy would be much worse than it is. After all, policymakers and businesses rely on these assumptions to make important economic decisions and policies.
I kind of feel bad for the analysts and forecasters who make these economic assumptions because it's very difficult to get them right. The economy is changing all the time and there are always unexpected events that suddenly change everything. So it's very, very difficult to get it right. They probably experience the backlash of their failed assumptions.
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