What are the differences between financial and economic analysis? – Associated Programme on Flood Management (2024)

FAQs

What are the differences between financial and economic analysis? – Associated Programme on Flood Management? ›

An economic analysis requires consideration of additional costs and benefits. While the financial analysis exclusively considers the costs and benefits related to the market aspects of the project, the analysis from an economic point of view defines benefits as an increase in social well-being.

The financial analysis is used to document a reasonable expected return on investment to prospective investors. The economic analysis is used to document that the project is a net benefit to society as a whole – this is especially interesting in relation to public investments.

Cost-benefit analysis (CBA) is used for appraising the net economic impact of a project proposal (e.g. barramundi farm) based on a comparison of the economic benefits and costs. CBA is akin to a financial analysis, except the focus is on all costs and benefits for society as a whole rather than an individual company.

Both estimate the net-benefits of a project investment based on the difference between the with-project and the without-project situations. However, the financial analyses of the project compare benefits and costs to the enterprise, while the economic analyses compare the benefits and costs to the whole economy.

While finance in a lot of ways can be defined by the direct use and management of money, economics considers both material and non-material resources and how the scarcity of resources can impact local or global markets, goods and services, and human behaviour.

Key takeaways: Finance is the area of economics that studies how individuals and businesses acquire and manage money, while economics focuses on the movement and trade of goods and services.

Finance and Economics are related, but not identical disciplines. Economics studies local or global markets, human behaviour, goods and services, etc. Finance focuses on financial systems and everything related: banks, loans, investments, savings, etc. Both disciplines open the doors to well-paid and in-demand jobs.

As a general social science, the focus of economics is more on the big picture, or general questions about human behavior around the allocation of real resources. The focus of finance is more on the techniques and tools of managing money.

An economic analysis requires consideration of additional costs and benefits. While the financial analysis exclusively considers the costs and benefits related to the market aspects of the project, the analysis from an economic point of view defines benefits as an increase in social well-being.

Answer and Explanation:

Finance is related to managing money for the companies, while economics is related to the framing of monetary policies and exchange rates. Finance deals with accountancy, management, and business, while economics deals with the production and distribution of goods and services.

What is the difference between economic and financial model? ›

Financial analysis is also conducted for business cases, where the objective is to assess the financial viability of a proposed project. Economic modelling is a broader form of analysis because it evaluates the costs and benefits of a project from a societal perspective.

The key difference between financial analysis and financial analytics is that one does not need a deep understanding of mathematics or statistics in financial analysis. On the other hand, in finance, you do need a background knowledge of mathematics/statistics.

Economic and financial analysis plays a key role in all stages of a company's life cycle. From the initial planning of a new venture to the management and expansion of already established businesses, this practice provides a solid foundation for well-informed decision making.

While economics focuses broadly on a government's approach to money, spending, and resources, the finance field concentrates on how individual people and companies manage money.

Financial efficiency is defined as how well the dollars invested in each alternative produce revenues to the agency. Economic efficiency is defined as how well the dollars invested in each alternative produce benefits to society. Present Net Value (PNV) is used as an indicator of financial and economic efficiency.

Economic Investment. Many people use both terms interchangeably, but they are in fact different. Whereas financial investments are bought with the intent of making money, economic investments are purchased to improve the productivity of a company and ultimately raise its profit margins and stock value.

An economic analysis requires consideration of additional costs and benefits. While the financial analysis exclusively considers the costs and benefits related to the market aspects of the project, the analysis from an economic point of view defines benefits as an increase in social well-being.

Economic analysis essentially entails the evaluation of costs and benefits. It starts by ranking projects based on economic viability to aid better allocation of resources. It aims at analyzing the welfare impact of a project.

There are two types of economic study or economic analysis: Deductive Method and Inductive Method. Here, we take a look at these methods and also present an overview of the process of making the hypothesis.