BASIC METHODS OF ECONOMIC ANALYSIS

 What are the basic methods of analysis used by Economists?

Briefly and convincely discuss each of them.

ANSWER:

Economics like every other sciences, employs two essential methods in its investigations and formulation of law and principles. The two methods includes:

1.Deductive method

2. Inductive method

DEDUCTIVE METHOD 

  Deductive method is a method of economic analysis that involves the use of logical reasoning to arrive at a conclusion using formal data and assumptions. This method provides us with generalizations and hypotheses.We have valid economic laws if the hypotheses are tested and verified with relevance to facts.

A complete form of deductive method consist of three stages, viz

1. Observation

2. Deductive reasoning

3. Instance and testing by means of further observation.

INDUCTIVE METHOD

  The inductive method is sometimes similar to the deductive method. The only thing that differentiates them is that induction uses econometric packages i.e E-views and STATA to run experiment. This method proceeds from a practical angle to problem of science to reduce the gulf between theory and practice. Induction is done by two form, viz, experimentation and statistical form. Here facts are first collected, arranged and conclusions are then drawn. Then these general conclusions are further verified with reference to actual facts.

  The inductive method is generally associated with the statistical form of induction because statistical approach has a higher field in economic investigations than the method of experiment. The statistical induction is indispensable for the formulation of economic policy. Malthus and Engel used the statistical induction to present the Theory of Population and Law of Consumption respectively.