Methodology of Economics

Deductive v/s Inductive Method

Link:-http://www.slideshare.net/ProfMKGhadoliya/inductative-deductive-methods

In Economics, we often refer to the two broad methods of study as the deductive method and inductive method.

Deductive Method:



Deductive Method aims at testing theories. It works Like this – general theory  -   and   develop hypothesis test hypothesis to verify the general theory. Thus it begins with a hypothesis. Sometimes this is informally called a "top-down" approach. It is associated with quantitative research. We might begin with thinking up a theory about our topic of interest. We then narrow that down into more specific hypotheses that we can test. We narrow down even further when we collect observations to address the hypotheses. This ultimately leads us to be able to test the hypotheses with specific data -- a confirmation (or not) of our original theories. Deduction Means reasoning or inference from the general to the particular or from the universal to the individual. Deduction involves four steps: (1) Selecting the problem. (2) The formulation of assumptions on the basis of which the problem is to be explored. (3) The formulation of hypothesis through the process of logical reasoning whereby inferences are drawn. (4) Verifying the hypothesis.

Merits of Deductive Method            Demerits of Deductive Method

Real                                                     Unrealistic Assumption

Simple                                                 Not Universally Applicable

Powerful                                             Incorrect Verification

Exact                                                   Abstract Method

Indispensable                                      Static Method

Universal

Deductive economics starts with a set of axioms about economies and how they work, and relies on these principles to explain individual cases or events. Supply and demand analysis, a staple in any introductory economics course, is an example of deductive reasoning because it involves a set of generally accepted principles about demand and supply. To summarize, deduction in economics starts with a generally accepted principle and proceeds to the specific

Inductive Method:

Induction “is the process of reasoning from a part to the whole, from particulars to generals or from the individual to the universal.”

 Major Points:-

The problem

Data

Observation

Generalization

  Inductive approach is concerned with generation of new theories. It works like this – Gather data- look and then develop theory. It is associated with qualitative research. It works the other way, moving from specific observations to broader generalizations and theories. Informally, we sometimes call this a "bottom up" approach In inductive reasoning, we begin with specific observations and measures, begin to detect patterns and regularities, formulate some tentative hypotheses that we can explore, and finally end up developing some general conclusions or theories.

Merits of Inductive Method             Demerits of Inductive Method

Realistic                                                          Mis-interpretation of Data

Future enquiry                                                 Uncertainty

Dynamic                                                          Lacks Concreteness

Statistical Method                                           Costly Method

Indispensable                                                  Difficult to Prove Hypothesis

Universal                                                         Controlled Experimentation not Possible

Inductive reasoning in economics does the reverse of deductive reasoning; namely, it begins with an individual problem or question and proceeds to form a general principle based on the evidence observed in the real world of economic activity. For example, an economist who asks if a government program of public works spending will stimulate a region's economy will proceed to research the issue, collect and analyse data, and based on conclusions, form a general theory about the economic impact of fiscal policies.

These two methods of study have a very different "feel" to them when you're conducting research. Inductive reasoning, by its very nature, is more open-ended and exploratory, especially at the beginning. Deductive reasoning is more specific in nature and is concerned with testing or confirming hypotheses. Even though a particular study may look like it's purely deductive most economic research involves both inductive and deductive reasoning processes at some time in the project.
Subject matter of Economics:
Economics studies five major divisions-
Consumption
Production
Exchange
distribution and Public finance.

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