Economic analysis enables decision makers to understand the current state and future prospects of their economies, identify risks and opportunities, design effective strategies, and shape economic policies. It is conducted through descriptive, diagnostic, and predictive analysis.
Descriptive Analysis focuses on describing and summarizing economic data and trends, while Diagnostic Analysis identifies the underlying causes of economic phenomena or problems by exploring the relationships between variables. Predictive Analysis utilizes simulation and modeling techniques to forecast the potential outcomes and impacts of economic events or policy decisions.
Scenario Analysis combines multiple scenarios based on different economic assumptions to determine the likelihood of various economic outcomes and impacts. These analyses are used to test alternative courses of action and to inform policy decisions.
Economic Base Analysis examines which businesses bring money into a local economy from outside sources, as well as how dependent the local economy is on these industries. For example, a town that is heavily reliant on one large business will be vulnerable if the company does not do well.
Standard economic analysis begins with the assumption that decision makers assess alternatives using a measure of subjective desirability, commonly referred to as the expected utility function. However, a number of studies have shown that human choice behavior often violates the assumptions of this theory. Thus, while economic analysis can help inform the choices of governments and companies, it cannot prove that one choice is better than another. This is why it is important for regulatory bodies to include both cost-benefit and environmental impact analysis in their rule-setting processes.
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