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What Are the Different Methods of Economic Analysis?

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  • Written By: K.C. Bruning
  • Edited By: John Allen
  • Last Modified Date: 02 September 2016
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Two common overall methods of economic analysis are the deductive and inductive methods. More specific ways of conducting an analysis include fiscal impact analysis, cost-benefit analysis, cost-effectiveness analysis, and cost analysis. These methods are used to determine how to maximize resources for optimum benefit.

The deductive and inductive methods draw economic generalizations in dramatically different ways. Deductive analysis involves drawing a conclusion from the study of general facts and principles. Inductive analysis starts with specific facts and then uses them to expand to a study of general principle. Many analysts will use both of these methods together in order to compensate for the weaknesses found in each method.

Fiscal impact analysis is one of the most comprehensive methods of economic analysis, and it is used to determine if a new program or policy is worth the cost. This includes studying every known potential expenditure or financial benefit and determining what its impact would be from a governmental point of view.

Cost-benefit analysis is used for comparison. The method weighs the pros and cons of various programs and policies so that it can be decided which action provides the greatest value. In essence, the process attaches a dollar amount to a series of concepts.

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Another comparison tool is the cost-effectiveness analysis. This method explores different ways of using resources in order to find the most economical way to accomplish a goal. Similar to the cost-benefit method, the process puts a dollar amount on multiple options in order to enable comparison.

Cost analysis is the process of determining all expenses associated with a particular policy or program. While this is a simple goal, there are often several different kinds of analysis that must be performed in order to reach an accurate final estimate. This analysis is often performed before the other methods are used.

A thorough cost analysis will include an accounting of both direct and indirect costs, as well as an estimate of costs to be expected in the future, such as increasing salaries and expenses. When the analysis is for a new venture, then the one-time start-up costs would need to be considered as well. If there are any loans attached to the project or program, then the capital costs, which include any related fees or interest, will also be incorporated into the total amount.

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bluedolphin
Post 3

We usually talk about different economic analysis methods as an either or type of thing. It's true that some circumstances require a specific type of analysis. For example, a company that is trying to find the most affordable solution for a problem should be doing a cost-effectiveness analysis. Other times, a company will actually benefit from using several of these methods at the same time. The results of several analysis can help one make the most logical and beneficial decision.

donasmrs
Post 2

@SarahGen-- Cost-benefit analysis is very popular and also very useful. But it is usually done for large projects, often public service projects to see if the benefits of the project outweigh the costs. Hence, it's usually analyzed by financial analysts. There can be many factors involved and it's important to calculate accurately for an accurate solution.

Cost-benefit analysis could also be done on a smaller scale just to compare costs of producing a good versus the profit. When the analysis is for a large public project, things get more complicated because there are also social consequences that are more difficult to measure.

SarahGen
Post 1

Cost-benefit analysis appears to be one of the most popular methods of economic analysis. I'm applying for administrative jobs. Some companies require that I also do budgeting. And one employer even asked me about cost-benefit analysis and whether I know to do them.

I'm thinking about taking a financial course so that I can understand these methods better. I do know budget management and can do basic budget calculations and analysis. I think it won't take me long to learn cost-benefit analysis.

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