Performance Management · Specific performance analysis issues in not-for-profit organisations and the public sector

Value for Money: Economy, Efficiency and Effectiveness Explained

Updated 11 October 2026 · Fact-checked

Value for money (VFM) means getting the best result from the resources used. It is judged with the three Es. Economy is spending less on inputs. Efficiency is getting more output per input. Effectiveness is achieving the organisation's objectives. Calculate each as a ratio or cost, then compare with a target, a past period or a similar body.

Understand Value for Money: Economy, Efficiency and Effectiveness

Not-for-profit (NFP) and public sector bodies cannot judge themselves by profit. A hospital, school or charity exists to deliver a service. So you need other ways to ask: are we using money well? That question is value for money.

VFM is judged with the three Es. Think of a chain: inputs (money, staff, materials) are turned into outputs (patients treated, lessons taught, meals served). Outputs then lead to outcomes (people healthier, pupils educated, hunger reduced).

Economy looks at inputs. Are we buying the resources at the lowest cost for the required quality? Efficiency links inputs to outputs. Are we getting the most output for the inputs used, or using the fewest inputs for a given output? Effectiveness links outputs to the objectives. Did the service achieve what it was meant to achieve?

The three can conflict. A school can buy very cheap books (economical) but pupils may learn less (ineffective). A clinic can see many patients quickly (efficient) but give poor care (ineffective). Good VFM needs a balance of all three.

Some texts add a fourth E, equity, meaning fair access to the service. Mention it only as an extra point. The core of the exam is the three Es.

A key difficulty is measurement. Outputs are easy to count. Outcomes are hard to measure, take time to appear, and may have many causes. Targets are often vague or conflicting.

Key rules to remember

Economy: Economy = actual cost of inputs compared with budgeted or expected cost of the same quality inputs (e.g. cost per hour of nurse time, cost per kg of food); Spending less is only economical if quality is held constant. It is about the price paid for inputs.
Efficiency: Efficiency = outputs ÷ inputs (e.g. patients treated per nurse hour), or inputs ÷ outputs (e.g. cost per patient treated); Compare with a target, a prior period or a similar body. Higher outputs per input, or lower input per output, is better.
Effectiveness: Effectiveness = actual outcome or output achieved compared with the objective or target (e.g. pupils reaching pass grade ÷ pupils entered); Needs a clear objective. Judge against the objective, not against cost.
Chain of resources: Inputs → Outputs → Outcomes; Economy relates to inputs. Efficiency links inputs and outputs. Effectiveness links outputs or outcomes to objectives.
Value for money: VFM = economy + efficiency + effectiveness together; Each E alone can mislead. Assess all three.

How to solve Value for Money: Economy, Efficiency and Effectiveness questions

Use this method for both calculation and discussion questions on the three Es.

1Identify the organisation and its objectives. Write down what it is trying to achieve.
2List the inputs (costs, staff hours, materials), the outputs (units of service delivered) and the outcomes (the real result for the users).
3Decide which E each figure tests. Input cost or price points to economy. Output per input points to efficiency. Result against objective points to effectiveness.
4Calculate each measure with units shown, such as cost per patient or pass rate in %.
5Compare each measure with a benchmark: target, previous year, budget or a similar organisation. A figure alone means nothing.
6Interpret the result in words. Say whether it is good or poor and explain the likely cause.
7Note the links and conflicts between the Es, such as cheap inputs hurting quality.
8Add limits if asked: hard-to-measure outcomes, lack of comparable bodies, and quality not captured by the numbers.

Quickest way: Three-question test

When to use it: Use in Section A or B objective questions where you must label a measure or pick the E affected.

Ask: is this about the price or cost of what is put in? If yes, it is economy.
Ask: is this output compared with input, such as per hour, per ₹ or per staff member? If yes, it is efficiency.
Ask: is this about reaching the aim, such as pass rate, waiting target met or lives improved? If yes, it is effectiveness.
If the question asks for a calculation, compute the ratio and compare with the benchmark given before reading the options.

Common mistakes in Value for Money: Economy, Efficiency and Effectiveness

Treating economy as simply spending less.
Students link economy with cost cutting.
Fix: Economy means the lowest cost for the required quality. Cheaper inputs of lower quality are not true economy.
Mixing up efficiency and effectiveness.
Both sound like 'doing well'.
Fix: Efficiency is output per input (doing things right). Effectiveness is achieving objectives (doing the right things).
Calculating a ratio but not comparing it with anything.
Students stop once the arithmetic is done.
Fix: Always compare with a target, budget, last year or another body, then state whether VFM is good or poor.
Judging effectiveness by outputs only.
Outputs are easier to count than outcomes.
Fix: Ask whether the objective was met. Ten thousand leaflets given out is an output. Fewer people smoking is the outcome.
Analysing each E in isolation.
The question seems to ask for three separate points.
Fix: Comment on how they interact. Economy gains may reduce effectiveness, and efficiency gains may reduce quality.
Ignoring the unit of the ratio.
Rushing under time pressure.
Fix: Write the unit beside every answer, for example ₹ per patient or patients per nurse. It shows which E you are testing.

Worked examples

Example 1

A public hospital ward had these results. Budget: 4,000 patients treated using 20,000 nursing hours at ₹500 per hour. Actual: 4,200 patients treated using 21,000 nursing hours at ₹480 per hour. Assess economy and efficiency.

Show the solution

Economy: actual cost per nursing hour is ₹480 against budget ₹500. That is ₹20 lower, a 4% saving (20 ÷ 500), so the ward bought nursing time more cheaply.
Efficiency, budget: 4,000 ÷ 20,000 = 0.20 patients per hour, or 5 hours per patient.
Efficiency, actual: 4,200 ÷ 21,000 = 0.20 patients per hour, or 5 hours per patient.
Efficiency is unchanged against budget. The extra hours were matched by extra patients.
Cost per patient, budget: 5 hours × ₹500 = ₹2,500. Actual: 5 hours × ₹480 = ₹2,400. Cost per patient fell by ₹100, due entirely to the lower hourly cost.
Comment: effectiveness cannot be judged from these figures. We need outcomes such as recovery rates or readmissions, and a check that the cheaper nursing time did not reduce quality.

Answer: Economy is better (₹480 against ₹500 per hour). Efficiency is unchanged at 0.20 patients per nursing hour. Cost per patient fell from ₹2,500 to ₹2,400. Effectiveness needs outcome data.

Example 2

A charity aims to help long-term unemployed people into work. Last year it spent ₹60,00,000 and ran training for 1,200 people. 840 completed the course and 504 of those found jobs within six months. The target was a job for 50% of those who started. Explain each of the three Es using the data and comment on VFM.

Show the solution

Economy: total input cost is ₹60,00,000. No budget or price benchmark is given, so we cannot judge economy. We would compare the cost per trainer hour or per course with budget or similar charities.
Efficiency: cost per person trained = ₹60,00,000 ÷ 1,200 = ₹5,000. Cost per completion = ₹60,00,000 ÷ 840 = approximately ₹7,143.
Completion rate = 840 ÷ 1,200 = 70%, which also reflects how well outputs were produced from those who started.
Effectiveness: jobs found = 504. As a share of starters = 504 ÷ 1,200 = 42%, which is below the 50% target. As a share of completers = 504 ÷ 840 = 60%.
Cost per job = ₹60,00,000 ÷ 504 = approximately ₹11,905.
Comment: the charity missed its target of 50% of starters in jobs, so it was not fully effective. The 30% drop-out is a concern. Improving retention could raise effectiveness and lower cost per job. Job outcomes may also depend on the local economy, not just the charity.

Answer: Economy cannot be judged without a benchmark. Efficiency: ₹5,000 per person trained and about ₹7,143 per completion. Effectiveness: 42% of starters found jobs against a 50% target, so the objective was missed. Cost per job is about ₹11,905.

Exam tips

Always define each E in one line before calculating. It earns marks and keeps you clear.
In calculation questions, state the benchmark you compare with. If none is given, say what you would use.
Match the E to the data. If no objective or outcome data is given, say effectiveness cannot be assessed.
In written answers, give the conflict between the Es with a concrete example from the scenario.
For Section A, use the input, output and objective test. Read only the stem first to spot the clue word such as cost, per or target.

Practice questions from Specific performance analysis issues in not-for-profit organisations and the public sector

Value for Money: Economy, Efficiency and Effectiveness in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Value for Money: Economy, Efficiency and Effectiveness: frequently asked questions

What is the difference between economy, efficiency and effectiveness?

Economy is about the cost of inputs. Efficiency is about output per unit of input. Effectiveness is about whether the objectives were achieved. A simple memory aid is: spend well, work well, achieve the aim.

How do you calculate economy, efficiency and effectiveness in ACCA PM?

Economy compares the actual cost of inputs with a budget or benchmark. Efficiency is output divided by input, or cost per unit of output. Effectiveness compares the result with the target. Always show units and compare with a benchmark.

Can an organisation be efficient but not effective?

Yes. A ward may treat many patients per hour but get poor recovery results. It does things quickly but not in a way that meets its objective. This is why all three Es must be assessed together.

Why is value for money hard to measure in the public sector?

Objectives are often many, vague or in conflict. Outcomes are hard to quantify and take time to appear. There is also no profit measure and few direct comparators.