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Economic theories are constructed using models and data.  Models can be described as frameworks which organise how economists think about a problem.  Models create a simplified and easier to manage reality with which to test theories.  Data is the facts with which the model interacts, therefore the data needs to be relevant.

Data can be;

1. Time series – which shows how a variable has changed over time.  This is usually graphically represented.
2. Cross sectional – shows a fixed point in time how a variable differs between groups or individuals.

Data is represented as;

1. Index numbers – this allows the comparison of data without using units and showing any change relative to a base number.  Indexes can also be expressed as averages.
2. Nominal or real variables – nominal values show the price of things, whereas real values show the price of things taking into account the factors which may influence the price.  For instance, a nominal value may have increased, but a real value would show the increase was due to rising labour costs and there was not an increase at all.

Economic models use empirical research to examine the realtionship of interest. 

Therefore economists;

1. Construct a theory
2. Develop a model to test the theory
3. Test the theory with data