What is economics about?

Economics is about how and why to spend resources in one way instead of another i.e., the rational allocation of resources. It involves establishing the assumptions under which it is possible to justify expenditure on production, service delivery, consumption or infrastructural investment.

The need to clarify assumptions underlying expenditure decisions applies regardless of whether a government official is preparing a national development plan or emergency rehabilitation and recovery programme, or a household head is deciding how much of his or her disposable income to allocate to food, rent or savings. The issue of allocating scarce resources between competing demands is a function of priorities, (as well as technical feasibility), and priorities will vary between individuals, government departments and political parties.

In order to allocate government-controlled public sector resources, alternatives and options have to be reviewed, and questions asked. For example:

· How much should be spent, on what, where and when? Another way of looking at this is to decide what not to spend money on, that is, which expenditure proposals can be ignored completely or deferred?

· Will the process of resource allocation be primarily through direct government expenditure or through the creation of an “enabling” policy environment intended to stimulate private sector consumption, production, savings and investment?

· Will changes in a country's institutional framework be required to permit the implementation of any proposed public sector investment or policy initiatives?

· Which balance of government revenue, concessional and commercial borrowing, grant assistance and relief aid will be most desirable and feasible for financing the public sector expenditures being proposed?

Q. What are the main questions asked through economic analysis?

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ANSWER

Which projects should be funded and which not? Will government funds be used directly or will enabling policy be sufficient without direct funding? What institutional arrangements are necessary to accomplish the policy objectives? What is the optimum balance of tax revenue, debt, and grants?