What is Economic Methodology?

Economic methodology is scientific in nature. It include following steps.

  1. Observation of facts
  2. Development of cause and effect relationship (Hypothesis)
  3. Testing of hypothesis against real world observation
  4. Acceptance, rejection or modification of hypothesis

As favorable results accumulated, hypothesis turns into theory. A theory that is widely accepted become principle or law. Model uses many laws or principles.

A Fact develops theories and modifies them in view of changing circumstances.

What is Macro Economics?

It analyzes economy and its sub division, relationship or aggregates (Government, business sector and house hold sector).

An aggregate is a collection of units that can be treated as one.

So macro economics discusses at aggregate level for example total output, total income, and total profit. For example analysis of beach, not rocks, sands or pebbles etc.

What is Micro Economics?

It analyzes individual unit for example income of a house, workers employed by a firm.

So microeconomics analyzes rocks, pebbles and not the beach.

Micro economics and Macro economics are not independent of one another for example the education of individuals and how labor markets operate determines total unemployment in an economy.

Both micro economics and macro economics uses positive economics and normative economics.

Positive Economics

  • Describes facts and hypothesis.
  • It deals with theory development and testing
  • It avoids value judgments
  • It describes “what is”

Normative Economics

  • It also describes facts and hypothesis
  • And also deals with theory development and hypothesis testing
  • And it describes" what should be”

For example saving rate in Pakistan is only 15% which is very low as compared with its neighboring countries so the saving rate should be increased.


business economics

January 26, 2019