Methods of Economic Analysis

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Economic Analysis

Any economic analysis involves the formulation of laws and generalizations through two methods- deductive and inductive.

Methods of Economic Analysis

Deductive Method

This is also called a priori reasoning. We start from unchallenged elementary or rudimentary assumptions/ facts and then arrive at conclusions(build a hypothesis or theory) using logical analysis or our own analytical abilities. In this kind of reasoning, we go from general to specific. The stages in deductive reasoning are:

  • Observation of a task/ issue
  • Making the hypothesis
  • Testing the hypothesis using more observations, etc.

This reasoning gives us a hypothesis and if this hypothesis gets verified we get general economic principles or laws.

Advantages of Deductive Method

  • It is a simple method, doesn’t involve the use of any complex software analysis, etc. only simple deductive logic is required.
  • This method is important for economists as it focuses upon economic reasoning which is of paramount importance.

Disadvantages of Deductive Method

 

In this method of reasoning we start from assumptions, thus, if the assumptions happen to be logically flawed the whole process becomes faulty and would give wrong conclusions. Thus, the logical fallacy is a disadvantage of this method.

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Deductive And Inductive Methods

Inductive Method

This type of reasoning flows from facts to theory. First, we collect information and facts and then move towards providing evidence using economic theory and facts. This method formulates principles using the sub-methods- Observations, Experimentations, Statistical methods.

Data is collected about a particular economic theory and then conclusions are drawn. The stages in this method are:

  • Observation
  • Formulation of a hypothesis
  • Generalizing principles
  • Verifying against actual facts.

Advantages of Inductive Method

  • Since it is based on facts it is more realistic and reliable.
  • Using statistical methods and experimentations makes the process more scientific, thus, more acceptable universally rather than just depending on your own reasoning and logic.
  • Since the economic environment is dynamic and always changing, relying upon a more scientific method always helps reach logical conclusions.

Disadvantages of Inductive Method

  • If the data used is insufficient and faulty it would lead to faulty conclusions, making the hypothesis less reliable.
  • It is a time-consuming process and thus expensive as well.
  • The collection of all the data is not an easy job and varies from person to person. As to how they collect data.
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