Positive and Normative Economics

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Introduction

Economic principles can be used or obtained in two different forms. In one form, the past and present conditions can be taken as a reference while in another future prediction can be used as the base. Depending on such types of assumptions, economics is divided into two types, namely:

  • Positive Economics
  • Normative Economics.

What is Positive Economics?

Positive economics is sometimes referred to as ‘what is’ economics. It deals with the knowledge of what is happening and what has happened to describe what should the base of the economy should look like. Positive economics is the process of investigating of future of an economy depending on past and present resources.

In other words, positive economics is an objective type of economics that is not based on value judgments. It uses whatever data is available at hand and describes future situations depending on the present data. Positive economics data can be tested for accuracy and the information used in such economics is backed up by valuable data.

Positive economics does not provide instructions or advice. It is just the representation of facts. Therefore, positive economics can be tested for accuracy, and facts from positive economics can be used along with normative economics to derive policy goals or objectives.

Positive economics’ pillars are based on fact-based behavioral finance. It also deals with economic relationships and reason and effect theories to develop economic presentations. As behavioral economics follows a principle that people will make judgments depending on the facts they have at their hands, positive economics can be considered the base of the foundation on which a broader economic structure is formed.

Advantage: The advantages of positive economics include the fact that the choices of positive economics are based on true data. Therefore, they can be used for real purposes rather than in making decisions in fancy. As there is no value judgment in positive economics, it is a better alternative to formulate measures that will work. Using positive economics, individuals can make better economic decisions as the facts of positive economics are based on facts.

Disadvantage: Disadvantages of positive economics include the fact that people often decide based on emotions rather than depending on data. So, positive economics is often overlooked. Moreover, having a present or past fact does not mean that future facts will be similar. So, positive economics cannot be 100% accurate in measuring economic outcomes.

What is Normative Economics?

Instead of deciding facts that represent ‘what is’ certain forms of economics rely on ‘what ought to be’ to determine the economic perspectives. Such economic principles that are based on value judgments toward economic development, statements, financial perspectives, and scenarios are known as normative economics.

Normative economics is not fact-based or steered by cause-and-effect principles. It is based on ideological principles that express the condition of the economy when public policy changes are made. Unlike positive economics, normative economics cannot be tested for accuracy.

As is obvious, normative economics is related to the study of what should happen rather than what is happening now. Therefore, it prescribes solutions for ideological economic situations. Normative economic principles cannot be verified and hence, normative economics can be considered to be the economics of ideologies rather than facts.

Normative economics asks individuals what should be or what should be the norm. Therefore, normative economics is an opinion-based analysis. While positive economics can prove its facts and claims, normative economics is just related to ideas whose claims can just be understood but cannot be verified.

Advantage: The advantages of normative analysis include the freedom to make choices. As normative economics is based on ideas, it is not necessary for economists to be 100% accurate in their judgments.

Disadvantage: The same stated above can be considered a disadvantage in some situations too. Disadvantages include too many variations from real situations and unrealistic considerations that cannot be applied to real lives.

Differences between Positive and Normative economics

Positive and normative economics are two branches of economics that deal with different aspects of the economy considered.

Positive EconomicsNormative Economics

Positive economics describes different economic phenomena.

Normative economics deals with the desirability of the results of economic activities.

Positive economics just relies on past and present data to determine future situations. It has nothing to do with fairness or the well-being of individuals and societies.

On the other hand, normative economics deals with fairness and the value of economic principles.

For example, while positive economics can suggest that the inflation of the economy may rise 1% over the next quarter.

Normative economics would revolve around the suggestion that the rate should be halved for the betterment of the economy.

Positive economics is based on facts that can either be approved or disapproved.

The branch of normative economics can therefore be termed as ideological and non-fact-based.

Positive economics uses facts and data and tries to find behavioral assessments to depend upon in order to formulate assumptions.

Normative economics makes assumptions and lets economists fulfil the assumption in a due period of time.

Therefore, in these ways mentioned above, we can say that positive economics is more practical than normative economics which is more ideological in nature.

Importance of Positive and Normative types of economics

Although positive and normative economics address economic assumptions differently, they can act together to create an ideal economic situation for the members of the economy.

  • Normative economics can assume the results and positive economics can check whether the facts and data could be used to obtain the desired outcome in a due course of time.

  • Positive economics is unavoidable for the measurement of various economic factors. It is widely used for the verification and testing of economic principles. On the other hand, normative economics is used to assume the ideal outcomes for the economies and it shows the path to follow for an ideal economic situation.

  • The combined use of positive and normative economics is considered ideal for the formation of public policies. As positive economics offers the best information and normative economics gives the ideal solutions, a mix of the two is considered ideal for formulating the best public policies.

  • Positive economics offers the exact fact that can be used as a milestone for reaching the values proposed by normative economics. Although normative economics is subjective, its principles can act as the torchbearers and can motivate economists to strive for a better economic situation.

Conclusion

Both positive and normative economics has their own merits and demerits and they can be used in different aspects to get better results. Some may argue that positive economics is better than normative economics as it deals with facts, but sometimes dealing with ideas is also important.

In a nutshell, using positive and normative economics to their full potential can lead an economy to obtain the highest value in the long run.

FAQs

Q1. Which of the economies, positive and normative, is based on past and present facts?

Ans. Positive economics is based on past and present facts. It deals with subjects that rely on data that are obtained from real-world situations.

Q2. What is the main difference between positive and normative economics?

Ans. The main difference between positive and normative economics is that positive economics relies on objective data, while normative economics deals with subjective principles.

raja
Updated on 13-Oct-2022 11:19:47

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