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An economic theory derives laws or generalizations through two methods:

(1) Deductive Method and (2) Inductive Method.

The deductive method is also named as analytical, abstract or prior method. The deductive method consists in deriving conclusions from general truths, takes few general principles and applies them draw conclusions.

For instance, if we accept the general proposition that man is entirely motivated by self-interest. In applying the deductive method of economic analysis, we proceed from general to particular.

Inductive method which also called empirical method was adopted by the "Historical School of Economists". It involves the process of reasoning from particular facts to general principle.

This method derives economic generalizations on the basis of (i) Experimentation (ii) Observations and (iii) Statistical methods.

In this method, data is collected about a certain economic phenomenon. These are systematically arranged and the general conclusions are drawn from them.

For example, we observe 200 persons in the market. We find that nearly 195 persons buy from the cheapest shops, Out of the 5 which remains, 4 persons buy local products even at higher rate just to patronize their own products, while the fifth is a fool. From this observation, we can easily draw conclusions that people like to buy from a cheaper shop unless they are guided by patriotism or they are devoid of commonsense.

 

Lately, as a consequence of the economic events, the way economics should work as a scientific method and as a social science has been challenged. Eichengreen addresses how Economics should aim to a more inductive analysis fashion.

There are a few points in the same spirit that should be taken into analysis. First, is ever more clear that mathematical models are useful to test facts observed in reality. It is indeed frustrating that there are thousands of tons of papers about economics written, and despite the latter, bubbles in financial markets exist and policy makers are doubtful of the effects of public spending and tax multipliers.

Second, it's true, economic theory has advanced considerably in microeconomics, game theory, even in macro theory, however it is rather slow the process of applying theory to economic policy. Naturally, the question rose: when will developments in theory will help policy makers?

In years to come is fairly likely that research in macro will have to address specific problems, which prove directly related to reality and not with theoretical problems, such as existence or uniqueness of equilibrium.

This in turn gives an advantage to the keynesian and new keynesian economics approaches, as opposed to the classical one, the former are far easier to contrast in reality.

The latter implies that all of us who are interested in macro will have to put a lot -more- effort to empirical and programing techniques, whether they come from econometrics or from calibration.

All of the latter shows that the deductive method, in which a chain of logical facts is sufficient in order to prove one hypothesis has been seriously challenged.

Theory based in the deductive method should be regarded as a first step in the analysis, yet, making decisions without the appropriate empirical -inductive- evidence should be avoided.

An illustrative example of the latter appears in the interview Catherine Mansell made to Arnold Harberger. Harberger emphasizes that every economic policy recommendation and economic theory assertion must come from sound contrast with reality.

It is true, econometrics sometimes looks like some black magic that would tell the researcher what he wants to hear. This approach of econometrics should be corrected too.

Economists as social science researcher must base any conclusion in observation, with the valuable help of formality provided by mathematics.

enough explaination by above both

its pretty easy in inductive method at first the result is unknown we move particular to genral,collect data for eg. law of demand we ask people if they buy the same quatity of goods if it will cost them higher... n in deductive method we move genral to particular the result is already in mind for eg. if u really like girl n want to marry her n u ask ur parents no matter what thwy say u would definately prefer that girl to be ur life partner.... i think now u r able to understand it.....