What is an Economic Analysis?

Definition: An economic analysis is a process followed by experts to understand how key economic factors affect the functioning of an organization, industry, region or any other particular population group, with the purpose of making wiser decisions for the future. It is a broader term that can mean simple and concise or sophisticated and complex identification, study and projection of economic variables.

What Does Economic Analysis Mean?

In business, economic analysis allows to incorporate elements from the economic environment such as inflation, interest rates, exchange rates and GDP growth into the corporate planning. Every organization is an open system that impact and is impacted by the external context. This means that a proper assessment of economic variables facilitates the identification of opportunities and threats that could affect the company’s performance.

Organizations tend to carry out corporate planning processes every one or two years and often define two or three possible economic scenarios for short and medium terms. Then they evaluate how each scenario would affect company decisions and achievement of goals. Economic analysis is also made when evaluating specific projects in order to consider economic and financial feasibility.

Example

Kleyton Industries harvest wheat in large quantities and produces a narrow range or wheat-based products. It exports most of the production to low and middle-income countries. A new Board of Directors consider that a more complete process of strategic planning should be made to be adequately prepared for uncontrollable variables affecting the world’s economy. They decided to conduct an economic analysis with the help of an expert consultant as a first step to develop a corporate planning.

The analysis included scenarios of forecasted growth in the target countries and key domestic economic variables. As a result, the company elaborated plans according to each scenario and was able to make some wise decisions with the purpose of diminishing its market risk exposure.