Economics plays an important role in a country’s progress and development. And not only about a country, but economy is also important even on an individual level.
There are two kinds of economies, one dealing with the present and other taking the future predictions in consideration. These are named as Positive Economics and Normative Economics. Scroll this blog to learn about both economies. We will also read about the advantages and disadvantages of both economies.
What is Economics?
Before jumping to the difference between positive economics and normative economics. First let us revise the meaning of economics.
Economics is defined as a branch of social science that deals with the production, consumption, and distribution of goods and services. It is especially related to efficiency in production and exchanges. Economics uses models and assumptions to understand the global economy and create incentives.
Different economists have defined economics in different words. Here are some famous definitions of the word economics.
The father of economics, Adam Smith defined economics as an inquiry into the nature and the causes of the wealth of the nations.
Alfred Marshall defined economics as the study of mankind in the ordinary business of life.
Lionel Robbins defined economics as the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.
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Types of Economics
Economics and its related studies are classified into two major subtypes.
As the name shows, microeconomics deals with the economy at micro or individual level. Microeconomics is the type of economics that deals with the study, how individual consumers and firms make decisions.
These decision making units can be a single person, a household, an organization, or a government agency. In simple language, microeconomics deals with single factors and effects of individual decisions.
For example, microeconomics will assist how a company will maximize its production and capacity.
As the name suggests, macroeconomics studies the economy of a broad system. Macroeconomics is concerned with large-scale production factors or general economic factors. It studies the conduct and performance of the economy as a whole.
Macroeconomics doesn’t take individual decisions into consideration. It emphases on the combined changes in the economy such as interest rates, unemployment, and growth rate.
For example, macroeconomics will consider the contribution of Gross Domestic Product and Gross National product. The economics studies are important to analyze the economic growth of the nation and its status with the other countries. It is important for the overall development and progress of the nation.
(Suggested Read : Macro Economics vs Micro Economics)
What are the two branches of economics?
Modern economics has two standard branches :
Positive economics talks about various economic phenomena. It refers to objective analysis in the study of economics. It deals with the present economy, like whatever presently happening in the country is a part of positive economics.
Positive economics relies on the facts and factual data. There are no assumptions made in positive economics. Positive economics can be tested and backed up by data. It is concerned with describing and explaining an economic process.
It deals with the facts and behavioral relationships of cause and effects. It also includes the development and testing of economic theories. It prohibits judgements on economic value.
In simple language, positive economics is defined as ‘what is’ economics. The investigation process of what is actually happening in a given economy.
Positive Economics Examples
Following are the examples of positive economics:
- How the growth of the money supply influences inflation, without including the suggested policies.
- To study the factors influencing the increase in government spending will reduce the unemployment rate.
Advantages of Positive Economics
Here are the major merits of positive economics:
- Positive economics is based on objective data.
- Positive economics doesn’t include opinions and value judgements.
- Positive economics assures a guarantee to back up any claim made.
- Positive economics allows us to use historical data to regulate the relationship between interest rates and consumer behavior.
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- The no space to value and judgments in positive economics, allows the policy makers to frame required measures to tackle any economic conditions.
- Positive economics assists in moving the economy in a certain direction.
Disadvantages of Positive Economics
Following are the demerits or limitations of positive economics:
- There are no fool-proof solutions or conclusions.
- The policies framed by keeping positive economics in mind doesn’t affect everyone in the same manner.
- Certain decisions of positive economics are based on emotions more than logic.
- Positive economics is not a good decision when it comes to big purchases.
- Positive economics is not an exact science or logic.
- Positive economics doesn’t have a one-size-fits-all approach.
- Single decision of positive economics has a different impact on everyone. For consideration, raising rates may be important for slow growth and is a boon for lenders. But at the same time, it is no less than a curse to borrowers.
(Reference blog - Classical vs neoclassical economics)
Normative economics as the name suggests reflects the normative or ideologically prescriptive judgements towards economy. It includes economic development, investment projects, statements, and scenarios.
Normative economics concerns more on value judgements and statements. It doesn’t rely on cause-and-effect statements. Normative economics suggests the ideological judgements about the results that can occur in economic activity if public policies are made.
In normal language, normative economics can be defined as ‘what should’ or ‘what ought to be’ of economics. It determines what should happen or what ought to be. Normative economics suggests the conclusions and solutions.
Normative Economics Examples
Given below are the major examples of normative economics.
- The government strives for economic growth of the nation.
- Behavioral economics is also an example of normative economics.
- Cutting of taxes into halves to increase disposable incomes.
Advantages of Normative Economics
The merits of normative economics are as follows:
- Normative economics is important in establishing and generating new ideas.
- Normative economics is better in dealing with big purchases.
- Normative economics can suggest policies to influence economic decisions.
- Normative economics expresses ideological judgements.
- Normative economics reflects the what if phase of economic policies.
Disadvantages of Normative Economics
The disadvantages of normative economics are given below:
- Normative economics cannot be verified.
- Normative economics suffers from the problem of non-replicability.
- It is impossible to create a stable market in case of normative economics.
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What is the difference between Positive Economics and Normative Economics?
Key differences between positive economics and normative economics
Positive economics is a contradiction to normative economics in its process and properties. The list of differences between the two branches of economies is given below:
Positive economics is a measurable perspective and normative economics is a precautional perspective.
Positive economics deals with the present economy, while normative economics considers the future of the economy.
Positive economics defines what is of the economy, while normative economics defines what ought to be of the economy.
Positive economics is based on objective data, while normative economics is based on facts and logic.
Positive economics can be verified, while normative economics can’t be verified and detected.
Positive economics doesn’t give a solution at the end, while normative economics can give solutions and conclusions at the end.
Normative economics is based on subjective data, while positive economics considers objective data.
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A way forward
Both positive economics and normative economics are essential in judging the economy. They both are important to perform different duties in the national economy.
Usually, the benefits of an economy depend on person to person and from function to function. Both economies have their own pros and cons and people should consider them before applications.