Tag: economic analysis

Categories
Higher Education

ROI on degrees

As we head towards $100,000 university degrees, the investment decision becomes increasingly critical.  No longer is an undergraduate degree simply three or four years in a person’s life.  Large debts are going to be attached.  So will the expected increase in lifetime earnings offset this?

It is hard to say because there are a lot of factors at play.  However doing an economics degree still looks like a good return on investment for school leavers:

http://thenewdaily.com.au/money/2015/04/15/uni-degrees-best-roi/

Categories
Economics

A Crash Course in Economic Principles

There are many different approaches to understanding economics. Here is one that sets out three broad fields:

  • How people make decisions
  • How the economy works as a whole
  • How people interact

Read for yourself about ten economic principles that support this and save yourself years of study. A lot of applied economics addresses the issues below.

How People Make Decisions 

  1. People Face Tradeoffs. To get one thing, you have to give up something else. Making decisions requires trading off one goal against another.
  2. The Cost of Something is What You Give Up to Get It.  Decision-makers have to consider both the obvious and implicit costs of their actions.
  3. Rational People Think at the Margin. A rational decision-maker takes action if and only if the marginal benefit of the action exceeds the marginal cost.
  4. People Respond to Incentives. Behavior changes when costs or benefits change.

How the Economy as a Whole Works

  1. Trade Can Make Everyone Better Off. Trade allows each person to specialize in the activities he or she does best. By trading with others, people can buy a greater variety of goods or services.
  2. Markets Are Usually a Good Way to Organize Economic Activity. Households and firms that interact in market economies act as if they are guided by an “invisible hand” that leads the market to allocate resources efficiently. The opposite of this is economic activity that is organized by a central planner within the government.
  3. Governments Can Sometimes Improve Market Outcomes. When a market fails to allocate resources efficiently, the government can change the outcome through public policy. Examples are regulations against monopolies and pollution.

How People Interact

  1. A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services. Countries whose workers produce a large quantity of goods and services per unit of time enjoy a high standard of living. Similarly, as a nation’s productivity grows, so does its average income.
  2. Prices Rise When the Government Prints Too Much Money. When a government creates large quantities of the nation’s money, the value of the money falls. As a result, prices increase, requiring more of the same money to buy goods and services.
  3. Society Faces a Short-Run Tradeoff Between Inflation and Unemployment. Reducing inflation often causes a temporary rise in unemployment. This tradeoff is crucial for understanding the short-run effects of changes in taxes, government spending and monetary policy.

Source: Mankiw, Principles of Economics, 2e

Categories
Cost Benefit Analysis

Cheat Sheet for Reviewing a Cost Benefit Analysis Report

Suppose you are given a cost benefit analysis.  Without an economics degree, how do you know it has been properly completed?

Economic CBAs are a decision support tool used to determine the net benefit to an economy of a proposed course of action, a policy or a project.  A ‘do something’ case is typically compared to a ‘business as usual’ case to identify incremental changes in benefits and costs, explicitly recognising that not doing a project has implications as well.  Costs and benefits occur in different time periods and values are brought to the present to enable comparison of net economic benefits.

If you are wading through one of these reports here is a cheat sheet with questions you can ask the analyst to pierce the veil of certainty these reports often convey.  It is based on longstanding advice the Commonwealth Government has given its own agencies when confronted with this kind of economic analysis.

Ask the following questions:

  1. What questions does the study attempt to answer?
  2. What alternative strategies are considered?
    1. Do you have any comments on the way the choices could have been set out?
    2. Are there other choices that could/should have been considered at the same time?
  3. Are you happy with the cost estimates made?
    1. Are the methods of evaluation satisfactory?
    2. Are any relevant costs omitted?
  4. Is the study based on reliable evidence?
    1. What further information would you require?
    2. Is such information available and, if so, where and from whom?
  5. Are you happy with the methods of benefit measurement employed in the study?
    1. If not, what method or approach would you propose?
    2. If yes, are you content with the values derived?
  6. Does the study allow for:
    1. Uncertainty (or errors) in the expected costs and benefits?
    2. The differential timing of costs and benefits?
  7. Finally, assuming you were advising the decision makers, what would be your recommendation?

Any analyst should have no problems or hesitancy answering these.  If they do, the report probably needs more work.

Categories
Infrastructure

Better Infrastructure Planning

Better infrastructure planning avoids presuming a solution.

Often we get locked into assumptions about the nature of the problem, its causes and desirable solutions. Wise infrastructure planners step back – examine what caused the problem, what caused the causes, and what caused those causes. This reveals possibilities very different from what end users envisage, but meet the true need most effectively.

A proper needs analysis is critical. If overlooked, huge value is often lost – for society, for the economy and for business.

Categories
Climate Change

Climate Change Adaptation in the Pacific

Climate change is recognised as a serious risk to economic infrastructure.

In Australia a wide range of work has been underway. A lot of research is coordinated through the National Climate Change Adaptation Research Facility (http://www.nccarf.edu.au/). This is part of focus at the national level on climate change adaptation (http://http://www.climatechange.gov.au/climate-change/adapting-climate-change).

Lytton Advisory is currently working on climate change adaptation issues in the Pacific.