How to Make an Economic Analysis

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Economic analysis has quantitative and qualitative elements.
Economic analysis has quantitative and qualitative elements. (Image: Jupiterimages/BananaStock/Getty Images)

Economic analysis requires consideration of a set of possible alternatives or courses of action, a frank assessment of the consequences and expected benefits of each course, and a thorough comparison that facilitates decision making. Businesses conduct analyses to assess the economic feasibility of a new venture, such as a new product or planned expansion. Governments and other organizations conduct analyses to weigh the costs and benefits of particular activities, policies and programs. Economic analyses vary in complexity, depending on the purpose of the analysis, the data collected and the analytical methods used.

Identify the relevant issue, problem or need that your economic analysis will address. Then outline two or more proposed courses for action intended to respond to the identified need. For example, an analysis by a local government or economic development organization may focus on the need to create new jobs in a city or region with rising unemployment. The analysis may consider a set of proposed infrastructure projects designed to attract new business and support the expansion of existing firms.

Provide a context for your analysis by collecting data that outline the larger economic picture. Possible data sources include, but are not limited to, local and state government organizations, chambers of commerce and the U.S. Census Bureau. Examples of contextual data include population and demographics, market characteristics, unemployment rates, per capita income, major employers and key economic sectors. The purpose of the contextual data is to provide a snapshot of the community on which the analysis is focused, as well as its economic and industrial climate.

Estimate the costs and benefits associated with each proposed alternative for addressing the identified problem or need. Express costs and benefits in measurable, numeric terms as much as possible. For example, estimate the number of jobs or the dollar amount of new business investment associated with a given infrastructure project or economic development initiative. In addition, identify any non-economic barriers associated with proposed alternatives. These include government restrictions and environmental concerns.

Compare the costs and benefits of each proposed course of action. The alternative or alternatives that should be pursued are those in which the benefits outweigh the associated costs. Disregard any actions in which the estimated costs exceed the benefits.

Recommend the course of action that delivers the greatest benefit at the lowest cost, based on the results of your analysis.

Tips & Warnings

  • Consider time frames when weighing costs and benefits, and recommending courses of actions. Some alternatives may have limited short-run effects, but beneficial long-term impacts, or vice versa.

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