Economic Analysis and
Economic Policy:
Economics,
like other social sciences, has two aspects. One aspect is analytical and the
other is practical. Both these aspects are of great importance because economic
analysis is the basis for economic policy. These are, in fact, integral parts of
each other.
What is
Economic Analysis or Economic Theory?
Definition and Explanation:
Economic
analysis or economic theory is a body of economic principles built up as a
result of logical reasoning. We can call it a “base of tools” with which the
economists analyze economic problems. Economic theory derives principles from
facts which are systematically arranged and interpreted. In the words of Maconnell:
“The task of economic theory is to systematically arrange, interpret and
generalizes upon facts”.
Economic theory thus is a statement or a set of related statements about cause
and effect, action and reaction.
Steps for
Making an Economic Theory:
The main
steps involved in constructing theory of economics are as under:
(i)
Selecting the problem. The first step involved in the formulation of a
theory is the selection of problem which is related to the real world.
(ii)
Formulation of hypothesis. The second step is to formulate hypothesis of the
economic problem to be analyzed.
(iii) Predictions. The third step required in the construction of a theory is to
draw implications from the assumptions by way of logical reasoning.
(iv)
Testing of predictions. Finally, the predictions are tested by the process
of observation and statistical analysis of the data.
The
economic theory is extremely valuable in explaining economic phenomenon,
predicting economic events, judging performance of the economy and in
formulating economic policies.
What is an Economic Policy:
Definition and Explanation:
Economic
policy is an attempt to devise government actions and to design institutions
that might improve economic performance.
The
creation of specific policies for achieving economic goals of the society is not
simple and easy matter. The main steps in policy formulation are as under:
Steps for Making an Economic
Policy:
(i)
Clear statement of goals. There
should be clear statement of economic goals to be achieved.
(ii)
Effects of alternative policies. The
second step is to examine and consider the possible effects of alternative
policies designed to achieve the economic goal. For example, while
considering the merits and demerits of fiscal policy in the achievement of
desired level employment, the altering monetary policy must remain under
examination.
(iii)
Evaluation. The third step is to
evaluate the effectiveness of the policies. The process of evaluation should
be continuous. If any drawback is found in it at any stage, it should he
improved.
Goals of
Economic Policies:
There are
number of economic goals which economic policies are designed to achieve. These
goals are:
(i) Economic growth (ii) more jobs for persons willing and able to work (iii) maximum
benefits at minimum cost from the limited productive resources (iv) stability in
price level (v) high degree of freedom in economic activities (vi) fair
distribution of income (vii) provision of economic security to disabled,
handicapped, unemployed etc., (viii) reasonable favorable balance in balance of
payments.
The
economic goals to be achieved differ with the level of employment in the
country. For example, the developed countries can aim at achieving full
employment, proper distribution of income and price stability etc. The
developing countries, on the other hand, are mostly faced with the problems of
unemployment, unequal distribution of wealth, price instability etc. Each
country, therefore, must devise a system of priorities for its objectives.
If may,
here also be noted that an economic theory formed as a basis for policy measure
at one time is not applicable for all times to come. An economic theory which is
true today may be obsolete tomorrow.
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