Deductive method is known by variety of its names like analytical, abstract or prior method. This method is also known as hypothetical method. This method is based on the process of model building where conclusions are derived from general principles. When economic analysis is conducted through deductive method, the economic analyst has to proceed from general to particular. For example there is a general principle that increase in the cost of inputs will lead to increase in the price of relevant output (product) and this general principle is known as Cost Push Inflation. Now if the theme of cost push inflation is adopted for a particular product like computers or cars, the process will be known as deductive method. Mostly the classical and neo-classical economists like Ricardo, Malthus, Senior, J.S.Mill, Cairnes, Marshall, and Pigou conducted their study of economic analysis on deductive method.
Steps Involved in Deductive Method
The following steps are taken into consideration while conducting analysis through deductive method;
- Identification of problem to be probed into
- Definition of technical terms
- Deducing hypothesis from the assumptions
- Testing of hypothesis
- It means that the nature of problem should be clear to the analyst.
- It means that the technical terms used during the analysis must clearly be defined.
- It means that accurate hypothesis may be concluded from assumptions.
- It means that the validity of hypothesis in practical may be tested by the use of statistical techniques.
Advantages of Deductive Method
It has the following merits
- This method is less time consuming and less expensive
- It is simple, precise and effective; there is no need for collection and elaborating statistical information
- It helps in deriving economic theories
- The use of statistical and mathematical techniques makes it more authentic and reliable
Demerits of Deductive Method
Following are the demerits of deductive method.
- It is restricted only to the derivation or economic theories.
- It is reliable only when assumptions
- It is not close to reality because of its abstract nature.
- It varies from time to time and place to place and hence not a universal one.