Question

What is the difference between normative analysis and positive analysis? Is economics concerned mainly with normative analysis or positive analysis? Briefly explain.

Short answer

Normative analysis entails value judgements, discussing what 'should' be, while positive analysis is data-driven, discussing what 'is'. Economics, while using elements of both, is mostly concerned with positive analysis, as it involves factual assessments that allow much room for objectivity.

Step-by-step solution

Definitions

Normative Analysis discusses statements that belong to the realm of opinion, belief or values. It focuses on what 'ought' to be or what 'should' be. On the other hand, Positive Analysis involves statements and theories that can be tested, either by examining the available evidence or by creating experiments to test the validity of the hypotheses. It describes what 'is', and relies on verifiable empirical data.

Differential Traits

While normative assertions are value judgements and subjective by nature, positive assertions are factual and objective in nature.

Role in Economics

Economics encompasses elements of both positive and normative analysis. However, it is often laid emphasis that economists should primarily utilize positive analysis since it deals with factual and data-driven assessments, leaving values and norms for policymakers and society to determine.

Key concepts

Economics Analysis

Economics analysis can be divided into two main parts: normative and positive analysis. These two elements are pivotal in understanding how economists approach various topics.

**Positive Economics** is all about factual statements. It answers questions like "What is happening?" and "What are the results of specific actions or policies?" For instance, if a government increases taxes, positive economics will look at measurable outcomes such as tax revenues, spending habits, and investment patterns. This type of analysis is supported by empirical data, making it testable and verifiable.

**Normative Economics**, in contrast, deals with value-laden statements. It answers questions like "What should happen?" or "How should policies be designed?" Normative analysis involves opinions and ethical judgments. For example, deciding whether higher taxes are "good" or "bad" involves views on fairness and equity, which fall under normative economics.

In practice, economics uses both analyses. While positive economics provides the factual groundwork, normative economics helps in decision-making and shaping policies.

Objective vs Subjective

A key distinction in economic analysis is between objective and subjective insights, much tied to positive and normative analysis.

**Objective Analysis** corresponds to the realm of positive economics. It is rooted in empirical evidence and factual information. Objective analyses do not waver based on personal beliefs or opinions; they are consistent and universal. This type of analysis helps in deriving conclusions from solid data. For instance, measuring inflation rates or employment statistics is objective.

**Subjective Analysis**, on the other hand, is synonymous with normative economics. Subjective analyses are influenced by individual perspectives, cultural beliefs, or societal values. They vary depending on who is analyzing the issues since they incorporate personal and moral judgments. When economists say "The government ought to control fuel prices for fairness," they are giving a subjective opinion based on their values.

Understanding these differences helps in appreciating how economics can be both a science and an art, blending measurable facts with ethical considerations.

Empirical Evidence in Economics

Empirical evidence plays a critical role in positive economic analysis. It provides the data and facts needed to substantiate theories and make objective economic assertions.

**What is Empirical Evidence?** Empirical evidence is information acquired by observation or experimentation. It is the cornerstone of positive economics because it enables economists to verify and validate hypotheses objectively. For instance, collecting data from economic studies allows economists to understand trends like GDP growth or unemployment rates.

**Role in Economic Analysis**: Empirical evidence is crucial because it offers a tangible basis for making conclusions. By relying on data rather than assumptions, economists can formulate accurate predictions and policies. This evidence-based approach separates positive analysis from normative analysis, which includes speculative or opinion-based assertions.

Data collection methods such as surveys, experiments, and observational studies help gather necessary empirical evidence. For example, when evaluating the impact of fiscal policy, economists use data from past policy implementations to predict potential outcomes.

• It helps test theories and validate models.
• Offers unbiased insights and results.
• Forms the basis for creating evidence-driven policies.

Ultimately, empirical evidence allows economics to be a robust, scientific discipline that continually adjusts and aligns according to the real-world data.