- The Deductive Method of Economic Analysis

The deductive method of economic analysis is also called the abstract, prior or analytical method. It consists of using general truths, deriving conclusions from them and by applying a few general principles, drawing conclusions.

- The Four Steps of the Deductive Method

Firstly, the perception of the problem to be investigated must be identified, which means that there must be a clear and precise idea of the problem that requires investigation.

Secondly, you need to define the terms clearly in the analysis. This also means that all assumptions must be just as precise.

Thirdly, using the assumptions, it is possible to deduce a hypothesis.

Fourthly, the hypothesis needs to be tested. Real world events should be verified by close observation of the real world and through statistical investigation.

- The Inductive Method of Economic Analysis

This is also called the empirical method and was adopted from the "Historical School of Economists." It uses a process of reasonings and generalizations from facts in order to establish a general principle.

- The Three Methods of Inductive Economic Analysis

Firstly, observations should be used to begin determining the facts.

Secondly, the hypothesis must be formed.

Following this, the third step is the generalization process. This shapes the general principle.

Fourthly and finally, the hypothesis is verified by using the principles evolved from the steps above.

Both methods have weaknesses when used alone. However, modern economic thought considers that they are not exclusive but complimentary, and so become equal partners rather than rivals. Alfred Marshall believed that deductive and inductive methods are both necessary for scientific thought in the same way as we need both feet for effective walking.

This means that both methods can be used as the situation requires.