Deductive and inductive methods are two broad approaches to study in economics. The deductive method starts with a general theory or hypothesis and uses data to test it, moving from general to specific. It aims to test theories through a process of selecting a problem, formulating assumptions, developing hypotheses through logical reasoning, and verifying hypotheses. The inductive method gathers data and observations to develop broader generalizations and theories through a process of observing particulars and reasoning to identify patterns, form tentative hypotheses, and develop general conclusions, moving from specific to general. Both approaches have merits and limitations, and most economic research uses elements of both inductive and deductive reasoning.

1. Deductive v/s Inductive Method
In Economics, we often refer to the two broad methods of study as the deductive and
inductive Methods.
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.”
The problem
Data
Observation
Generalization

2. 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.
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