Economic analysis is the process of evaluating costs and benefits to make sound business decisions. CFOs often conduct this type of analysis to help determine whether a company should expand or try new things. However, some CFOs may be unsure of the basics of economic analysis or how to apply it to their role. This article helps define economic analysis and provides a guide to conducting it.
The first step in economic analysis is selecting a research question. It is important to select a question that has enough research and data available to support the conclusions you want to draw. It is also important to consider a time horizon that is appropriate for the study. For example, a study that attempts to measure the cost of an event 300 years in the future will likely be extremely costly and difficult to perform.
In economic analysis, a key concept is opportunity cost. Opportunity cost is the value of a choice that must be forgone in order to take another action. This is a key component of the economic analysis process and can be used to evaluate many different factors. In order to ensure that your analysis is as fair and accurate as possible, it is important to use the phrase ceteris paribus (Latin for “all else being equal”).
A crucial part of economic analysis is understanding the limitations of the data available. It is important to identify potential errors and biases in the data. The more you can identify these issues, the more accurate your analysis will be. Finally, it is important to have a good grasp of statistical concepts and methods. This will allow you to interpret and present the results of your economic analysis clearly.