Definition
Positive Economics refers to economics based on objective analysis, focusing on cause and effect relationships and factual data. It describes what is, and how the economy functions. Conversely, Normative Economics is based on value judgments and subjective statements about what should be, or what ought to be done in an economy.
Key Takeaways
- Positive Economics deals with objective explanation and the testing and development of economic theories. It focuses on cause-and-effect relationships and draws conclusions based on facts and data without personal or societal values influencing the results.
- Normative Economics, on the other hand, incorporates value judgments about what the economy should be like or what particular policy actions should be recommended to achieve a desirable goal. It is subjective and perspective-oriented, making it debatable.
- The key distinction between the two is that while positive economics is fact-based and relies on verifiable data, normative economics is value-laden and relies on subjective judgement. While positive economics can be tested and proven, normative economics remains a matter of opinion.
Importance
The distinction between Positive Economics and Normative Economics is crucial as it separates objective analysis from subjective value judgments in the field of economics.
Positive Economics is based on measurable, verifiable facts, focused on ‘what is’ and ‘what has been’, aiming to describe economic behavior and predict economic phenomena.
On the other hand, Normative Economics deals with value judgments about ‘what ought to be or what should be’, proposing economic actions for policy making and judgements about economic fairness or the desirability of certain outcomes.
Making a clear distinction between the two helps to avoid policy debates based purely on personal preferences and aids in fostering discussions based on carefully analyzed and impartial economic data.
Explanation
Positive economics is primarily used for explaining and predicting economic behaviors. It is a branch of economics that focuses on the cause-and-effect relationships in economics, which use factual evidence to describe what is currently happening or what might happen in future. Positive economics is crucial in forecasting financial conditions which become necessary when framing economic policies.
It assists in understanding critical economic indicators, like how changes in interest rates impact employment or the correlation between inflation and economic growth. Also, businesses use the insights derived from positive economics to make strategic decisions such as pricing strategies and production levels. On the other hand, Normative economics is useful in defining what should be done to achieve certain economic objectives.
It is subjective by nature as it is based on judgments and opinions about what the economy should be like or what particular policy actions should be recommended to achieve a desirable goal. Normative economics helps in making value judgments and it goes beyond mere facts to incorporate ethical perspectives. It deals with fairness, ethics, and the ultimate goals that society should work towards.
Because of its ability to provide economic policies and recommendations, normative economics has a significant influence on political and policy decisions. In conclusion, while positive economics is descriptive and fact-based, normative economics is prescriptive and value-based.
Examples of Positive Economics vs Normative Economics
Minimum Wage: A positive economic statement regarding minimum wage might be, “Increasing the minimum wage will lead to higher unemployment rates among low-skilled workers,” since it is based on factual data that can be empirically tested. On the other hand, a normative economic perspective might state, “The government should increase the minimum wage so that low-skilled workers can have a living wage.”
Public Health Care: From a positive economics perspective, one might say, “Public healthcare provision results in higher taxes,” which can be factually tested and verified. However, a normative economics perspective might argue, “The government should provide healthcare to all of its citizens, regardless of the cost.”
Environmental Regulations: A positive economic statement might be, “Strict environmental regulations result in increased production costs for businesses,” which is a testable hypothesis. A normative statement, however, could be “The government should enforce strict environmental regulations to ensure the health and safety of its citizens, even if these regulations are costly to businesses.” This statement states a value judgment about what should happen, which can’t be empirically tested but reflects a moral stance.
FAQ: Positive Economics vs Normative Economics
What is Positive Economics?
Positive economics is the branch of economics that concerns the description and explanation of economic phenomena. It focuses on facts and cause-and-effect behavioral relationships and includes the development and testing of economics theories.
What is Normative Economics?
Normative economics is the branch of economics that expresses value or normative judgments about economic fairness or what the outcome of the economy or goals of public policy ought to be.
How does Positive Economics differ from Normative Economics?
Positive economics is objective and fact-based, while normative economics is subjective and value-based. Positive economic statements do not have to be correct, but they must be able to be tested and proved or disproved. Normative economic statements are opinion-based, so they cannot be proved or disproved.
Could you provide an example of Positive and Normative Economics?
An example of a positive economic statement is: “The unemployment rate in France is higher than in the United States.” An example of a normative economic statement is: “France should implement policy measures to decrease its unemployment rate.”
Can Positive and Normative Economics coexist?
Yes, both types of economics are often present in the economic forecasting. While positive economics can try to explain what factors have led to a certain economic outcome, normative economics often discusses whether that outcome is beneficial or detrimental and suggests corresponding policies.
Related Entrepreneurship Terms
- Empirical Statements
- Value Judgements
- Economic Policies
- Fact-based Analysis
- Predictive Modeling
Sources for More Information
- Investopedia: This is a comprehensive resource providing definitions of both terms with examples. They have an article directly comparing Positive and Normative Economics.
- Corporate Finance Institute: Their resources include educational content on a variety of finance and economics topics, including Positive Economics vs Normative Economics.
- Khan Academy: It’s a non-profit educational organization with many video-based courses. Their economics section includes material on the distinction between Positive and Normative Economics.
- Economics Help: This site provides articles and materials related to economics. They provide a side-by-side comparison of Positive and Normative Economics and they use clear language, great for beginners.
