You have a complex problem. Where you have to combine several data to make a decision. A decision about your organization. Or about your country. You might be a businessman, a policy advisor or a minister. People depend on your decision to move forward. I will show you how an economic model can help you solve your problem.

Before you open your spreadsheet and start making calculations ask yourself these five questions?

1. What data do I need?

Find out exactly what data you need to solve your problem. What are the variables, as economists call them, that matter? By looking at all the data about your problem you start seeing the things that matter. For a policy advisor the data might be about tourist arrivals or cruise tourists. What were the patterns in the past and what are other data influencing these variables? You  might find out that the economic developments in the USA or in Europe (the gross domestic product) has great impact on the cruise tourists and tourist arrivals. If you are a businessman your data might be about the costs in the past, the revenues and their projections. Put all these data together, make some graphs to see the patterns before you start calculating anything.

2. What calculations do I need to make?

Once you have the relevant data, think about the calculations needed. The data you put together in the first step are raw data. Now you need to ask yourself what are the key variables I’m interested in? You can use these raw data to make other variables. In the case you are a policy adviser you might use the stay over tourists to calculate the occupancy rates in hotels of your country. Why? Because your goal is to understand why the occupancy rates are so low. If you are a businessman you might use the raw data to calculate the profits, calculate the pay back time of your investment or the break even point.  Make sure you have a list of all the calculations you need to make. It might also appear that you need more data to make your calculations. Then you need to gather more data.

3. What scenarios are possible?

You have your raw data. You have your calculations needed. Now you need to understand what scenarios are relevant. Here you look into the future. You try to make one to three stories about your business case. What are the possible ways your business can develop? I always try to have at least an optimistic scenario, and a conservative scenario. In the scenarios you try to simulate several combinations of your raw data. If you are a policy advisor you might ask yourself: what if cruise and stay over tourists in the Caribbean drop with 10% next year? What will be the effects on the economy, on income and direct taxes? On employment on my island? On the other hand you might look into a more positive scenario. What if we invest in a hotel and in a mega cruise pier and increase the amount of stay over and cruise tourists with 10%? A scenario in the middle, between the conservative and the positive one, might be: what if we do not do anything? What will be the effects on the balance of payments of our island, on the real sector or on the fiscal budget? If you are a businessman you might ask yourself: what if our sales continue decreasing like this and our costs keep this high next year? This might be the scenario in the middle. The “Do nothing” scenario. A conservative scenario might be: what if our competitors take 5% of our market? A positive scenario might be: what if we invest in this business case and we increase our revenues by 10%?

4. What is the story I need to tell?

You have your data, your calculations and your possible scenarios. Great! you already understand the issue at hand. I’m sure by now you already understand the problem and are looking at possible solutions.  And you even have not touched the spreadsheet yet. Now you want to think about the story you need to tell. Most of the time you need to influence other people, convince other people with the knowledge you just gained. You might need to convince other stake holders to take a decision to solve the problem. If you are a policy advisor you might need to convince your minister about how to take action. How to invest into a marketing plan to increase the amount of stay over tourists. If you are the minister, you might need to convince the cabinet to sponsor your economic development plan for the upcomming 5 years. If you are a businessman you might need to convince the bank to give you a loan or you might need to convince your partners to invest. How do you convince anyone? Well, try writing a story. People love stories.

Write a story about the data, the trends, the calculations and the scenarios. A story where you explain the problem.  Make it personal. Why does it matter? Your story could be a 100 pages document, called your strategy or economic development plan. Or it could be a 10 pages powerpoint presentation, called your business plan. Your story could be a 1 page summary to the minister, called a summary, or an economic briefing. Whatever the name, or the length of the story, try a story. By writing a story you start solving the problem. And people start understanding a solution.

5. How will I monitor this problem?

How will you monitor this problem? As you take actions to solve the problem you want to know if the actions lead to solutions. You want to know how the data changes when you take actions. If you are a policy advisor you want to know if the cruise and stayover tourists increase due to the economic development plan. And you want to know by how much. If you are the businessman you want to know if your new market plan or investment lead to more sales or a decrease in costs. By asking yourself how you want to monitor these key indicators you focus on which data you need to gather.

How does an economic model help you?

An economic model in a spreadsheet helps you to organize all relevant data you collect in step 1. Furthermore, in your model you have all the relevant calculations about your problem listed and organized. You know exactly how the calculations are done and what determines what. With an economic model you can make what-if simulations, mentioned in step 3. It helps you make all relevant simulations about the future of your island or organization. An economic model helps you understand and tell stories. You understand what is at stake, because you break complex problems into pieces everyone can understand. It helps you with building a concise story for your stakeholders. And finally, an economic model helps you monitor the variables once you take action to solve the problem. It gives you the key indicators and how they are changing.

If you want to know more about how economic models can help you to make economic policies in your country, support strategic decisions in your organization or you want to build an economic model, contact me.