POSITIVE AND NORMATIVE ECONOMICS

  

 Learning Contents:                                                            

·         Positive and Normative Statements

·         Positive and Normative Economics

·         Difference between Positive and Normative Economics

Introduction

Economists usually try to explain how the economy works and also concerned with how it should work. They are eager to research on various economic issues like finding the cause and effect of an economic issue. For e.g.  Why did unemployment increase in 2008 and 2009? They also make policy suggestions or recommendations. For e.g. what should the government do in response to an increase in unemployment? 

The first statement is an example of positive statement which is objective that is based on theories, facts, and evidence. It indicates the actual situation or scenario in an economy. We could ascertain from the first statement is the level of employment is normally based on the overall production in an economy (GDP), the increase in unemployment during that period was due to low GDP or called a great recession.

The second statement is an example of a normative statement that is subjective that reflects the value judgments or opinions on the part of economists. One recommendation could be adopting the monetary policy measures like cutting the interest rate to increase the demand in the economy. Another recommendation could be the effect of increased demand would generate the inflation in the economy. Which of these recommendations is right? It depends on subjective values or opinions.

Positive and Normative Statements

Positive statements- Positive statements are objective. They can be tested but no value judgments or opinions are given. The first claim i.e. unemployment was due to lower GDP over that time period could be tested on the basis of data available for unemployment and GDP. In simple words, someone claims it is raining outside. We can test this claim by checking, is rain actually there or not? So, positive statements can be tested, amended, or rejected for their validity. It can be tested, proven, or disproven. 

Normative statements- Normative statements carry judgments and are often subjective. It carries opinions. It indicates what should be? They are not to be tested further for its truthfulness as it represents the opinions or value judgments of the people. People are different in their opinions. One may like something other may be against of it. For e.g. one should help needy people. An economist whose values are attached to the poor people will have a positive opinion rather than those whose values are not attached to them. In simple words, A normative statement can be this ‘orange is better than mango’. Can we prove this? Answer is no. We cannot test this statement due to a person’s difference in their likings or preferences.

Positive and Normative Economics

Positive Economics- It seeks to answer these questions, ‘what is’, ‘what was’, ‘why it is’, and ‘what will be’. It suggests how the economic problems are actually solved. It indicates the real scenario or description of the economy. It deals with cause and effect relationships that can be tested or verified with actual data. For e.g. what is the trend of car prices in India? Why car prices stable despite an increase in demand for cars, what will be the demand for cars if prices go up? These are questions of positive nature.

For e.g.- A proposed tax cut in income tax- an economist wants to know the effect of a cut in income tax. He or she might want to know how a tax cut would affect the unemployment rate, economic growth, inflation, purchasing power, and so on.

Normative Economics- It seeks to answer the normative question ‘what should be’, ‘what ought to be’. It deals with idealistic situation how the economic problems should be solved. It involves value judgments which cannot be proven or disproven. It is based on ideals or ethics indicating what should be desirable in the interest of society. For e.g. production and sale of alcohol or drugs may be profitable for business. But, ‘Is production and sale of alcohol and cigarette are good for the society?’ Normative economics analyze an economic problem with respect to its social desirability. It analyzes the cost and benefits associated with the production of alcohol and cigarette and then further recommend appropriate measures. It is also called prescriptive economics as it suggests measures to correct the undesirable economic problems facing an economy.

    Difference between Positive and Normative Economics

S. No.	Positive Economics	Normative Economics
1.	It asks ‘what is’, ‘what was’ and ‘what will be’	It asks ‘what should be’, ‘what ought to be’
2.	It is based on facts and data.	It is based on opinions and judgments.
3.	It is based on the cause and effect of facts.	It is based on ethics or idealism.
4.	Value judgments are not given.	Value judgments are given.
5.	It deals with how the economic problems are solved.	It deals with how the economic problems should be solved.
6.	The statements may be true or false.	The statements can never be true or false as these include only opinions.
7.	It is descriptive in nature as it only describes the economic issue.	It is prescriptive in nature as it offers suggestions and solutions which positive economics do not.
8.	Positive analysis is independent of normative analysis.	Normative analysis is dependent on positive analysis.
9.	E.g. Effect of tax cut on purchasing power.	E.g. The government should provide free education to poor children.

Questions based on Positive and Normative and Statement.

Try it for self-assessment

Indicate whether each of the following statement is positive or normative.

1.      The inflation has been above 5% per year over the last five years.

2.      Government should take measures to curb inflation.

3.      The inflation should be kept as low as possible.

4.    "Since the price of oil is likely to rise in the future, we should develop more nuclear energy."

5.    “Poverty should be eliminated given the size of our economy; and that’s a fact.”

6.    If the government raises the tax on cigarette, this will lead to a fall in profits of the cigarette producing companies.

7.     A rise in average temperatures will increase the demand for sunscreen products.

8.    The government is right to introduce a ban on smoking in public places.

9.      Free education should be given to the poor.

 

Answers

1.      Positive statement as the actual rate of inflation can be calculated.

2.      Normative statement as it expresses an opinion or value judgment.

3.      Normative statement as it expresses an opinion or value judgment.

4.   Positive+ Normative. The first part of the statement is Positive and the second part is Normative.

5.      Normative statement as it expresses an opinion or value judgment.

6.      Positive statement as the actual fall in profits can be calculated.

7.   Positive statement as we can find the increased demand for sunscreen products due to the rise in temperature.(cause and effect)

8.      Normative statement as it expresses an opinion or value judgment.

9.      Normative statement as it expresses an opinion or value judgment.