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 McConnell:
“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 Analysis or Theory:
The main steps involved in constructing an economic analysis or theory 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.
Steps for Making an Economic Policy:
The main steps in economic policy formulation are as under:
(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.