Methods Of Economic Analysis Pdf
It, therefore, follows that each and every assumption made by a theory may not be realistic. Facts come to mean something only as ascertained and organised in the frame of a theory. Secondly, through deductive logic useful economic theories can be derived without the tenuous and detailed collection and analysis of data which are required under the inductive method. The reliance by economists on uncontrolled experiences, however, does increase the number of observations required to verify the hypotheses or to establish the generalisations.
Methods of Economic Analysis - Inductive and Deductive
Economic laws under this method are not universal but valid only under certain conditions. Thirdly, in view of the limited scope for controlled experimentation in economics, the method of deduction is extremely useful method of constructing economic theories. Their inverse relationship between price and quantity demanded of a good is a well established generalization. But, it is worth mentioning that the number of observations has to be large if it can yield a valid economic generalisation.
Secondly, an economic phenomenon is the result of multiplicity of factors and causes acting and interacting upon each other. Now, the controversy which existed among the earlier economists as to whether deductive or inductive approach is more appropriate in developing economic theories and principles has been resolved. This led to the various theoretical explanations of the phenomenon observed in the empirical studies. This indicates the crucial importance of deductive logic for building up economic principles or theories. If the hypotheses are tested and verified with relevance to facts, we have valid economic laws.
In any scientific enquiry, the analyst or theorist must have a clear idea of the problem to be enquired into. Thus the principle of progressive taxation is derived from the law of diminishing utility through deductive reasoning. If predictions of theory are in agreement with the facts and actual behaviour of the economy, then a new reliable theory has been developed. The crucial assumptions are made on the basis of observations or introspection.
In applying the deductive method of economic analysis, we proceed from general to particular. Besides, the use of mathematical method makes the derivation of economic hypotheses more rigorous and exact. So, the next best alternative to experiment is deductive reasoning. Induction is done by two forms, viz. It is obvious that as compared with the deductive method, the inductive method is time-consuming and expensive.
An exploratory study of Hofstede's cross cultural dimesion. The statistical approach has a larger field in economic investigations than the method of experimentation. Then these general conclusions are further verified with reference to actual facts. As mentioned above, assumptions may be behavioural pertaining to the behaviour of the economic variables or they may be technological relating to the state of technology and the factor endowments. However, in spite of these difficulties, experimental method can be used in some fields.
This is because several forces act simultaneously on an economic phenomenon and it is not possible to eliminate some of these by means of a controlled experiment. Mill, Malthus, Marshall, Pigou, applied the deductive method in their economic investigations.
Teacher Evaluation Performance Standards and Indicators. This is because certain other forces such as a rise in aggregate investment demand operates which causes increase in both the price and quantity sold during a boom period. For instance, the Keynesian macroeconomic analysis is based upon the assumption of a depression-ridden capitalist economy with a lot of excess productive capacity.
Methods of Economic Analysis - Inductive and Deductive
The use of mathematics in economic analysis proves extremely useful where geometrical methods make the analysis more complicated to comprehend. The modern economists first derive economic hypotheses through the process of logical deduction and then empirically test them through statistical or econometric methods. The two methods have to be made use of or blended to achieve the required objective. These days in almost all branches of modern economics, trinosophia pdf mathematics as tool of analysis for deriving economic theories and generalisations is being increasingly used. In Deductive method of Economic Analysis we proceed from the general to the particular.
Appan Kandala Vasudevachary. In the absence of controlled experiments, for the verification of their theories economists have to rely on the direct observations of events in the real world.
Deductive & Inductive Methods of Economic Analysis
For example, we observe persons in the market. It still remains popular with modem economists as it has several merits. Without deduction, the inductive method would result in producing only a mass of unrelated and unconnected facts. The results, therefore, may differ even with the same problem. It is true that deductive method is simple and precise, underlying assumptions are valid.
Indeed, the two are complementary rather than competitive. If the predictions are found to be constant with facts, the hypothesis or theory stands proved and if the predictions of the theory are found to be inconsistent with facts, it stands rejected.
Economic hypotheses or theories must be developed logically before we can meaningfully use statistical analysis to test and verify them. The method gives a very high standard of precision in abstract economic reasoning. The deductive method consists in deriving conclusions from general truths, takes few general principles and applies them draw conclusions.
Likewise, it is assumed that investors try to minimise their risk and maximise the expected rate of their profits. Mere induction alone will not deliver goods unless it is supplemented by means of deductive reasoning.
One should not generalise on the basis of a very few observations. It is highly practical add realistic as it describes things as they are. Deductive method obviates the necessity of experimentation. It involves the process of reasoning from particular facts to general principle.
In the process of deriving economic generalizations, the analyst must have a clear and precise idea of the problem to be inquired into. The crucial factor in building up a valid theory is whether its predictions are corroborated by the facts in the world. In this method, economists proceed from a practical angle to problems of science to reduce the gulf between theory and practice. The deductive method is also called abstract, analytical and a priori method and represents an abstract approach to the derivation of economic generalisations and theories. This is the statistical method or what is now popularly called econometric method.
In regard to flaming and testing of economic generalisations, two related distinctions must be borne in mind. In this method detailed data are collected with regard to a certain economic phenomenon and effort is then made to arrive at certain generalisations which follow from the observations collected. Fourthly, the use of sophisticated mathematical methods in the deductive approach enables the economists to introduce accuracy and exactness in economic principles and theories. Empirical studies made through statistical or inductive method without a theoretical hypothesis to serve as a guide for the selection of data are quite useless.
Methods of Economic Analysis Deductive Method and Inductive Method
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