Economics Analysis and Economic Policy

 Economics being a social science has two aspects: the analytical and the practical. Both aspects are of great significance regarding having a perfect understanding of the nature of economic problems and seeking their appropriate solution. Both aspects are necessary for the completeness of each other. An analysis expresses a relationship between causes and effects whereas policy testifies the validity of derived conclusions. 

 

What is an economic policy?

 

Economic analysis which is frequently termed as economic theory, is a simplified logical way of expressing an economic event. It is a body of economic principles derived scientifically through investigation, observation, and collection of real-life facts. It is that basic tool with which economists can express the nature of economic problems and suggest their appropriate solutions. The task of an economic theory, in the words of Mc Connell, is to systematically arrange, interpret, and generalize upon facts. 

Economic analysis or theory seeks to break through complex phenomena into simpler sequences of causes and effects. When related to empirical evidence, the analysis clarifies relationships and helps economists predict what may happen next. 

For formulating an analysis or economic theory following steps are needed to be taken.

 

1. Selection of a Problem:

 

The very first step in formulating an economic analysis or a theory is the selection of an economic problem, which must be related to the real dynamic world. For example, the problem may be selected as finding the effect of an increase in petrol price on the demand for other necessities.

 

2. Formulation of hypothesis:

 

The second step is to formulate hypotheses of the selected economic problems to be analyzed. A hypothesis is a statement expressing the relationship between cause and effect. For example, when the price of a good rises, demand for its quantity declines.

3. Making necessary assumptions:

 

Assumptions are made to simplify the economic problem, concerning human economic behavior, to avoid the complexities that might arise due to the change in outside factors. 

 

4. Collection of relevant data:

 

The fourth step is to collect the relevant data and other facts concerning the problem of study.

 

5. Testing the validity of prediction:

 

The final step concerns the validity of the statement. The test of validity of a statement is judged through its power to predict. When the statement is tested and retested and found valid, its outcome is expressed in the form of a theory or analysis. 

 

What is an economic policy?

 

Economic policy refers to the course of action which is concerned with how the derived principles of economics can be put into practice or how the formulated economic theories can be made useful practically in an economy.

In a broad sense, an economic policy consists of such strategies and measures adopted by a government to manage the economy so that it can help to achieve its desired economic objectives.

 

A government is generally concerned with micro-level attainment of an efficient use of available scarce resources. 

 

Formulating effective economic policies for achieving specific goals is not an easy task. It requires well-thought-out steps to be taken in this regard. The main steps to be needed in policy formulation may be the following.

 

1.    Make a clear statement of goal:

 

Making a clear statement of goals is the basic step. For example, if the goal is to achieve full employment, it must be clearly stated what is meant by full employment.

 

2.           Possible effects of alternative policies:

 

This step requires a clear-cut understanding of the economic impact, benefits, costs, and political consequences of alternative policies.

 

3.           Evaluate the effectiveness of selective policies:

 

The third step is to evaluate the effectiveness of selective policies. This process of evaluation should be continued. If any defect is traced out in this process, at any stage it must be removed. 

 

Goals Of Economic Policies:

 

The main goals of economic policies may briefly be explained as under:

 

1.    Economic Growth:

 

This goal states that suitable jobs should be made available for everyone willing and able to work.

 

2.           Full employment:

 

This goal implies a higher standard of living through more production of better goods and services.

 

3.           Price level stability:

 

Fluctuations in the general price level are not there, that is the economy should not be under pressures of inflation and deflation.

 

4.           Economic security:

 

Adequate arrangements should be made for dependent members of the society.

 

5.           Just distribution of income:

 

This goal implies an equitable distribution of income. No section of the people should be allowed to face extreme poverty while the others enjoy luxurious life.

6.           Balance of payment:

 

A reasonable balance of payment in international trade and financial transactions must be sought out.

 

7.           Economic efficiency:

 

Economic efficiency should be maintained by way of getting the maximum benefits at the minimum cost from the available limited productive fields of economic activities.

 

8.           Economic freedom:

 

Every group of people whether they are businessmen workers or consumers, should enjoy the blessing of freedom in their respective fields of economic activities.