Concept of positive and normative economics We have often heard statements about economic issues on the television and

written in newspapers and magazines. These statements can be divided into two main groups - positive and normative. POSITIVE STATEMENTS Positive statements are objective statements dealing with matters of fact or they question about how things actually are. Positive statements are made without obvious value-judgements and emotions. They may suggest an economic relationship that can be tested by recourse to the available evidence. Positive economics can be described as what is, what was, and what probably will be economics. Statements are based on economic theory rather than raw emotion. Often these statements will be expressed in the form of a hypothesis that can be analysed and evaluated. Examples:

A rise in interest rates will cause a rise in the exchange rate and an increase in the demand for imported products Lower taxes may stimulate an increase in the active labour supply A national minimum wage is likely to cause a contraction in the demand for low-skilled labour The UK economy now has lower unemployment than Germany The American stock market has boomed in recent years

NORMATIVE STATEMENTS Normative statements are subjective - based on opinion only - often without a basis in fact or theory. They are value-laden, emotional statements that focus on "what ought to be". It is important to be able to distinguish between these types of statements - particularly when heated arguments and debates are taking place. Most economists tend to adopt a positive approach. Examples:

The decision to grant independence for the Bank of England is unwise and should be reversed A national minimum wage is totally undesirable as it does not help the poor and causes higher unemployment and inflation The national minimum wage should be increased to 5 pond as a method of reducing poverty Protectionism is the only proper way to improve the living standards of workers whose jobs are threatened by cheap imports

OR more we can explain the concept of positive and normative economics as: Shaw's line echoes a popular view that economists seldom agree, but roughly 90 percent of all economists agree on about 90 percent of the basic concepts and broad models described in most standard economics textbooks, with only nit-picking differences about which 90 percent to accept. How can this reputation for discord be reconciled with the fact of widespread agreement? Part of the answer is that economists may differ sharply about how even widely accepted theory applies in a specific case. Economists' disputes about how to translate theory into policy get a lot of press, while broad areas of agreement tend to be ignored. Even if economists agree, politicians often reject their advice. For example, over 90 percent of economistsirrespective of their personal political leaningsfavor freer international trade, but tariff barriers are standard responses when imports threaten significant groups of voters' jobs. A similar consensus exists about most price controls, which include such things as minimum wage laws and the rent controls some cities enforcemost economists view price controls as inefficient. Apparent discord also arises when economists in government agree publicly (but disagree privately) with politicians who appoint them, even if economic logic supports policies the politicos won't enact. Pre-appointment writings of the two Chairmen of President' Bush's Council of Economic Advisors provide examples. Economists tend to agree most about positive economicswhich, ideally, generates ideas that are free of value judgments and which can be tested for accuracy.

positive economi cs:

Positive economics is relatively scientific (testable) and focuses on value-free descriptions of and predictions about economic relationships.

The statement A poor coffee harvest will raise coffee prices and people will drink more tea, is an example of a positive economic statement. But be wary. Positive statements may be either true or false. For example, the positive scientific statement that The moon is made of green cheese is clearly false. Disagreement is most common when value judgments are central to a problem.

normativ Normative economics deals with values and addresses e what should be rather than what is. economi cs:

Normative statements often contain the prescriptive words should or ought. For example, you might agree with the army of economists who think that government regulations should be reformed if specific policies are unarguably inefficient, but even this view is intrinsically normative. Positive and normative elements are often intertwined. For example, economists may differ sharply about the normative issue of whether government should ever execute murderers. The prediction that quicker, stiffer, and surer penalties deter crime is, however, a positive theory with which most economists would concur.

Normative issues often turn on questions of equity and provoke debate among economists and the public alike. Policy is inherently more normative than theory. For example, the statement, We should redistribute wealth from the rich to the poor, implies a value judgment that benefits to the poor would outweigh the harm done to the rich. There is little reason to suppose that an economist's value judgments are superior to those of other people, but economic reasoning can offer unique insights into the effectiveness of alternative policies in achieving specific normative goals. Few normative issues are settled by looking at evidence because value judgments involve faith and argument, not scientific proof. Disputes about positive economics can ultimately be settled by evidence, but even economists with shared values may disagree because some areas of positive economics remain unsettled for generations. For example, virtually everyone favors high employment and price-level stability, but economists may disagree about how to cure economic gyrations because of difficulty in finding the right evidence and then accurately interpreting it in changing circumstances.

Understanding economic reality is useful primarily because it helps us develop strategies to deal scarcity. All policies hinge on normative issues, but if economists design policies intended to achieve goals set by policy makers, then their quest can be positive in nature. For example, if minimizing unemployment is a goal, then developing policies to accomplish this goal involves positive economics. We can evaluate policies by how well they accomplish our goals, but positive economics cannot determine whether any goal is good or bad. The complex interactions of positive theory, empirical (observable) facts, normative

goals,

and

economic

policies

are

summarized

in

this

figure.