Economic analysis is a key tool for understanding the complexities of market dynamics and making informed decisions. Through descriptive, diagnostic, predictive and prescriptive analysis, economists and government agencies use a variety of methodologies and tools to examine current and future trends and factors that influence market health.
Economic Analysis Basic Tools
An economic analysis typically begins by identifying the costs and benefits of a particular decision or action in a specified region. Depending on the purpose of the study, this region may be a neighborhood, city block, statistical area, state, country, continent or even the world. The analyst then attempts to isolate the specific variables that drive these relationships by controlling for other predictive factors.
A key to this process is the time horizon or period that the study covers. For example, an economic impact study that measures a cost or benefit up to one month after the impact of a bioterrorist attack would likely fail to capture the full consequences, as some diseases and injuries have long-term effects. At the same time, attempting to measure the impact of a potential event 300 years into the future would be nearly impossible to perform.
Another critical component of economic analysis is the practice of discounting. This involves recognizing that opportunity costs (the value of the next best alternative that you must forego when making a choice) and inflation make a dollar in the future worth less than a dollar today. This is why analysts often use a discount rate to adjust future costs and rewards back to present day values.
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