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What Are Economic Assumptions?

Economic assumptions are guesses based on current information and trends.
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  • Written By: Alex Newth
  • Edited By: Angela B.
  • Last Modified Date: 16 September 2014
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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.

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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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