Methods of Economic Analysis
Last Updated : 01 Apr, 2024
Economic analysis is the process of assessment or examination of any particular topic or issue to understand how they are affecting the organization or system. This process of analysis comprises administering and operationalizing a comprehensive and holistic study of various processes such as production, consumption, consumer behavior, national income, employment, and others. It studies and estimates the topic in detail with all the aspects associated with the industry concerned.
Moreover, the main objective of economic analysis is to observe the findings like productivity, efficiency, and effectiveness of ongoing functions within an economy.
There are two prominent types of methods of economic study or analysis:
A) Deductive Method B) Inductive Method.
Deductive method :
- The Deductive Method is also known as the 'Analytical Method' or 'Abstract Method' or 'Priori Method’ or ‘Hypothetical Method’.
- In this method, the study starts by assuming factual information or rudimentary facts and then arriving at a concrete result or conclusion by following logical reasoning or analytical abilities. In this method, a theory is built on the basis of certain assumptions and experiments.
- Hence in a nutshell we can say that in this method we start our study from a general assumption and conclude our analysis with specific objects, which means we go from general to specific.
- Therefore, the common rule to remember in the case of deductive methods is to move from general inputs to a particular assumption and, eventually, constructive theories.
Stages involved in Deductive methodology :
Three stages or phases are recognized in the Deductive method :
1. Observation of the given topic
2. Making hypotheses using Logical reasoning
3. Experimentation of the hypothesis through more similar observations.
Ricardo, Senior, J S Mill, Malthus, Marshall, and Pigou used the Deductive method for their hypothesis.
Advantages of the Deductive method :
- Simple and convenient: This method is observation based and is fairly easy to practice.
- Avoids the necessity of experimentation: Experiments are essential and indispensable in subjects like physics, chemistry, etc unlike in the case of economics where the method works as an alternative to experiments.
Demerits of deductive reasoning :
- Based on assumptions: There is a higher chance of going inaccurate conclusions leading to invalid predictions.
- Unrealistic approach: The method works on the basis general to specific using imagination of including all under the same umbrella, hence real-life problems cannot be solved by imaginative or utopic solutions.
Inductive method :
- In this method, analysts or theorists advance from a practical outlook to a scientific problem in order to be more accurate in finding the most accurate solution using theoretical knowledge and practical applications.
- The Induction method is processed in two forms,
a) Statistics
b) Experimentation. - This method is basically observed with statistical forms of investigations. It involves a lot of facts including numbers, quantities, and formal terms.
Advantages of the inductive method :
- More pragmatic: It is a very practical and applicable method, and it is simply descriptive.
- More Accurate: It is subject to verification a number of times as it is based upon facts and statistics.
Laws and theories under the inductive method may not be universal but are condition specific.
Demerits of the inductive method :
- If in case the analysts or theorists do not possess a balanced and stable judgment, then this method is unhelpful as they will be extracting insufficient data.
- Unavailability of facts: since this method works upon the facts and their experimentation, it is often difficult to collect primary data and facts and their access for experiments.
- The Inductive method is an incomplete method alone. It can be used if combined with deductive methods or deductive reasoning.
Deductive method vs Inductive method :
| Basis | Deductive Method | Inductive Method |
| Origin | Used by those believing in classical theories | Used by those who believe in Neo-classical Theories |
| Technique | Abstract | Practical |
| Other names | Analytical, Prior, or Abstract Method | Historical, Empirical, or Posterior Method |
| Procedure | Facts are followed by Logical Reasoning | Practical Scenario to Scientific Techniques |
| Scope | Works under the Social Science Model | Works under the Science Model |
| Application | Universal | Situation Specific |
| Results | Confirmation of the Making of the Hypothesis | Generalized Results |
| Structure | Highly Structured Method | Less Structured |
Therefore, it was not wrong, when in the past, there was a debate and some differences among economists over the best method between the deductive method and the inductive method of economic analysis. But in the present scenario, economists feel that both induction and deduction are necessary for the most appropriate observation, just as the right and the left, both eyes are essential for appropriate sight.