Positive vs. Normative Economics

Positive and Normative Economics is rightly known as the two arms of Economics. Positive economics deals with various economic phenomena, while normative economics focuses on what economics should be, this branch of economics talks about the value of the company’s fairness. In lucid language, positive economics answers the ‘what’ factor, whereas normative economics mandates the ‘should be’ or ‘ought to be’ section of economics.

Well, this was only a preface about the entire discussion. We will look forward to discussing ‘What is Positive and Normative Economics?’, we will take up the point of conflict between these two studies and also update ourselves with other knowledgeable facts on the same topic.

What is Positive Economics?

Positive economics is the stream of economics that has an objective approach, relied on facts. It concentrates on the description, quantification, and clarification of economic developments, prospects, and allied matters. This subdivision of economics relies on objective data analysis and relevant facts and figures. Therefore, it tries to establish a cause-and-effect relationship or behavioral relationship that can help determine as well as test the advancement of economic theories.

Here, the study of economics is more objective and focuses more on facts. Moreover, the statements are precise, descriptive, and measurable. Such reports can be quantified with respect to noticeable evidence and historical references.

A positive economics example is a statement, “Government-funded healthcare surges public expenditures.” This statement is based on facts and has a considerable value judgment involved in it. Therefore, its credibility can be proven or dis-proven via a study of the government’s involvement in healthcare.

What is Normative Economics?

Normative economics deals with prospective or theoretical situations. This division of economics has a more subjective approach. It focuses on the ideological, perspective-based, opinion-oriented statements towards economic activities. The aim here is to summarise the desirability quotient among individuals and quote factors like ‘what can happen’ or ‘what ought to be’.

Normative economics statements are subjective and rely heavily on values originating from an individual opinion. These statements are often very rigid and perceptive. Therefore, they are considered political or authoritarian.

A normative economics example is, “The government should make available fundamental healthcare to every citizen”. You can understand that this statement is based on personal perspective and satisfies the need for ‘should be’ or ‘ought to be’.

Difference Between Positive and Normative Economics

Positive and Normative Economics do have some underlying differences between them. We will analyze the differences between them in terms of meaning, perspective, function, area of study, testing, economical clarification. Now, let us delve into it right away. 

Meaning

Positive economics means more focus on data, facts, and figures rather than personal perspectives. The statements here are to the point and supported by relevant information. On the other hand, normative economics focuses more on personal perspectives and opinions rather than facts and figures. Here the statements are based on an individual’s point of view, and ample data is always available to support such claims. 

Perspective

The perspective of these two concepts is a significant point of difference between them. Positive economics is objective, whereas normative economics is subjective. The focus of positive economics is on presenting relevant and more focused statements backed by actual data.

Contrarily, normative economics focuses on presenting statements that may or may not be possible in the future. Moreover, in some cases, such statements do not have any credible data to back them up.

Function

Their functions can distinguish between positive and normative economics. Positive economics describes the cause and outcome of the relationship among variables. On the other hand, normative economics provides value judgment.

Area of Study

Positive economics is the study of ‘what is’; whereas normative economics describes ‘what should be’. One branch relies on a factual approach supported by data. Contrarily, normative economics relies more on personal opinions rather than actual data.

Testing

Every statement of positive economics can be tested scientifically and either proven or disregarded. However, normative economics statements cannot be tested scientifically. It entirely depends on the belief of an individual.

Economical Clarification

Positive economics provides a more scientific and calculated clarification on an economic issue. However, normative economics also provides such solutions but ones that are based on personal values.

Case in Points of Positive Economics – Examples 

• Monopolies have proved to be inefficient

• The desired rate of return on gambling stocks are higher compared to others

• The relationship between wealth and demand is inverse in the case of inferior goods

• House prices reduce once the interest rate on loans get higher

• Car scrappage schemes can result in a fall in the prices of second-hand cars

Case in Points of Normatics Economics – Examples

• The government should implement strict wealth tax laws to decrease the uneven distribution of wealth

• No individuals should be entitled to inheritances as it belongs to society

• Import duties should be increased on goods coming from nations with humble human rights record

• Investors ought to be more socially responsible and stop investing in vice stocks

• Developing countries should only accept democracy when their entire population is educated and liberated

What is the Importance of Positive and Normative Type Economics?

Even though normative economics is a subjective study, it acts as a base or a platform for out-of-the-box thinking. These concepts will provide a basic foundation for the innovative ideas that will ignite to reform an economy.

However, all the decisions cannot rely on them altogether. On the other hand, Positive economics is needed to provide an objective approach. Positive economics is focused on the facts and analyses of the effects of such decisions in society and thereby it helps by providing a statement that comprises the necessary information to make a sound economic decision.

Normative economics is thus useful in creating and generating newer ideas from another or different perspectives, also note it cannot be the only basis for making decisions on important economic issues, and here the positive economics come into action thus complementing each other.

So, Positive economic theory can help the economic policymakers to implement the normative value judgments. Like - it can describe how the government is in power to impact inflation by printing more money or restructuring the banking reforms, this economics can support that statement with strong facts and analysis with relationships between inflation and growth in the money supply of an economy.

A clear understanding of the difference between positive and normative economics is vital for commerce students. Apart from this, to learn more about other chapters of economics, students can visit the official website of Vedantu.