What are the differences between financial and economic analysis?

Financial and economic analyses have similar features. 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 financial analysis uses market prices to check the balance of investment and the sustainability of project, economic analysis uses economic price that is converted from the market price by excluding tax, profit, subsidy, etc. to measure the legitimacy of using national resources to certain project. Financial and economic analyses also differ in their treatment of external effects (benefits and costs), such as favorable effects on health.

For more information, please refer to “Economic Aspects of Integrated Flood Management“, Session 2.3.