Every field requires a systematic approach for a better understanding of the subject and general processing. Economists regard economic analysis as one such methodical strategy that assists them in making the best use of limited resources. It entails evaluating or investigating subjects or concerns from the standpoint of an economist. This article is a general overview of Economic analysis where we discuss the following in detail:
What is Economic analysis?
The Process of Economic analysis.
Types of Economic analysis.
Importance of Economic analysis.
Economic analysis vs. Financial analysis
What is Economic Analysis?
The study of economic systems is known as economic analysis. It could also be an investigation into a manufacturing process or an industry. The goal of the analysis is to identify how well the economy or a component of it is performing. Thus, the monetary appraisal of alternatives for achieving a specific goal is known as economic analysis.
Let us look at a real-life example of economic analysis, a decision-maker may explore new construction, renovation of an existing facility, or leasing another building to meet the need for additional office space. The assessment is based on a cost-benefit analysis of discounted costs and benefits over a set period of time. The ratio of total benefits to total costs (benefit-cost ratio) or, equivalently, the total net benefits, can be used to describe alternatives (net present value).
Most of the U.S, federal agencies have actively integrated economic analysis into their decision-making process and have given solutions to many issues ranging from environmental regulation to building designs. Building owners employ economic analysis to decide which building option is the most economically efficient or cost-effective.
The Economic Analysis (ECO) major will provide you with a solid foundation for working as a specialist, advisor, or manager in a variety of industries and organizations, particularly for occupations that require high levels of insight and analytical competence.
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The Economic Analysis Process
Given below is a diagram that shows the steps to estimate the economic consequence of a decision, as listed in Ruegg’s and Marshall’s Building Economics- theory and practice.
Steps to follow economic analysis
Let us discuss the steps in detail:
First, we have to define the problem and determine the objective of the problem. Then, we have to determine feasible options for achieving the goal, taking into account any limits.
It is very important to recognize if the economic analysis is actually necessary for the problem, and if so, what is the level of effort required. Then, we have to select one or more methods of economic analysis.
If the data to be used with the economic method are unclear, we have to choose a strategy that compensates for uncertainty and/or risk. We need to gather information and make the assumptions that the economic analysis method(s) and risk analysis approaches require.
Calculate an economic performance indicator.
Finally, we compare the economic repercussions of different options and make a decision, taking into account any non-quantifiable effects and the decision maker's risk attitude.
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What are the different types of Economic Analysis?
Different types of economic analysis differ not only by methodologies but also in terms of aims. The different types of economic analysis are given below:
This examines two programs to see which is the most cost-effective—that is, which can produce the most impact for the least amount of money.
Cost-benefit Analysis and Social Return on Investment (SROI):
Both try to determine whether the intervention's outcomes are worth the money and resources spent on it. It can be done retrospectively to assess actual outcomes or prospectively to estimate the worth of desired outcomes. Both methods of economic analysis assign a monetary value to the program's outcomes and compare it to the program's cost. Some of the methodology they employ to assess monetary values differs.
Why is Economic Analysis important?
Economic analysis is very important as it allows organizations and their donors to compare the impact of social intervention to the cost of implementing it. These comparisons aid in determining the most effective resource allocation.
Economic analysis is a type of assessment that helps answer the question "is it worth it?" in addition to the question "does it work?" that other impact evaluations address. Economic analysis has been more prominent in the impact measurement practices of charities and donors in recent years, as the sector has been under increasing pressure to give estimates of what value is created for every pound invested.
But, economic analysis isn't necessarily the most persuasive piece of evidence for demonstrating a charity's impact. Because it relies on solid outcomes data and a strong evidence basis, charities may not have the essential pieces in place to perform good economic analysis and may find it hard.
Economic analysis must be reliable; otherwise, it will be simple to identify flaws in calculations. If the economic analysis is done incorrectly, it might lead to erroneous charity resource allocation decisions.
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How to determine whether the economic evaluation is right for the organization?
While the decision to do an economic analysis is influenced by a variety of circumstances, the following questions can assist one in making an informed decision. If we do not know the answers to any of the questions, we should not consider economic analysis as an option in the first place.
1. Is there a good reason for doing an economic evaluation?
One should have a determined question that they want to investigate ( For example: Does my program provide value for money?) and they should also have a definite reason for asking this question. One must consider the consequences and if doing the process is worth their time or resources.
2. Are there good outcomes?
While the decision to undertake an economic analysis depends on many factors, considering the following questions will help to guide you. If your answer is ‘no’ to any of the questions, then the economic analysis is probably not appropriate.
3. Do you have a compelling cause to do an economic analysis?
You should have a specific question in mind (for example, does my program give excellent value for money?) and a compelling rationale for asking it. Consider what you'll do with the outcomes and whether the time and effort required are worthwhile.
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4. Do you have solid data for outcomes? Do you have statistics to compare your outcomes to what would have happened if your program or intervention didn't exist (the counterfactual)?
Although data from a 'control' group that has not undergone an intervention is preferable, there may be other options, such as collecting data from individuals on your service's waiting list or comparing it to national figures. Without a counterfactual, economic analysis will only give an indication of prospective economic effect rather than actual impact on the economy and will rely on possibly biased assumptions.
5. Do you have the time and resources to do a thorough economic analysis?
Whether you do it yourself or hire someone else to do it, you'll need time and money to do it right. Do not undervalue the rigor that goes into doing economic research. This can lead to sloppy economic analysis and jeopardize your evidence's trustworthiness.
6. Is it possible to communicate or translate the results you want to attain into monetary values in a meaningful way?
To answer this, think about the difference you can create as a consequence of your efforts. Some outcomes, such as educational attainment, physical health, or employment, are very straightforward to assign monetary values to. Improved confidence, well-being, and self-esteem, for example, are considerably more difficult to quantify financially. Although these results are significant, an economic examination may not be the ideal method for determining their worth.
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Economic Analysis vs Financial Analysis
Financial and economic assessments share many of the same characteristics. Based on the difference between the with-project and without-project scenarios, both estimate the net benefits of a project investment.
The basic difference between them is:
The real worth of a project for society as a whole is the subject of economic analysis. It encompasses all members of society and assesses the good and negative effects of the project. Furthermore, the economic analysis would take into account the costs and benefits of products and services that are not offered on the market and so have no market price.
Between financial and economic analysis, there are two additional major differences:
To determine the validity of utilizing national resources for particular projects, economic analysis utilizes economic prices that are converted from market pricing by eliminating tax, profit, subsidy, and other factors. (Source)
External impacts (benefits and costs), such as positive health consequences, are also treated differently in financial and economic studies. Externalities are valued in economic analysis in order to represent the real cost and value to society. The addition of externalities poses challenging problems about how to identify and assess them in monetary terms.
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In this context, cost-benefit analysis is supposed to be a type of economic analysis, highlighting the integrated perspective of the IFM method. It should be highlighted, however, that economic and financial analyses are complimentary.
A project must be financially sustainable in order to be commercially viable. There will be insufficient cash to run, maintain, and replace assets if a project is not financially viable. It has been claimed that financial viability should not be an issue because a project may be supported by government subsidies if it is financially sensible.