Normative and Positive Analysis

While we are being conversant with how Opens in new window economists build economic models Opens in new window and use them to answer questions, we need to bear in mind the distinction between positive analysis and normative analysis.

Positive analysis is concerned with what is, and involves value-free statements that can be checked by using the facts.

For example, the statement that ‘a reduction in taxation rates will lead to an increase in spending by individuals’ is a positive statement and can be confirmed or negated by factual data.

Normative analysis is concerned with what ought to be, and involves making value judgments, which cannot be tested.

For example, ‘individuals should receive reductions in taxation as they are able to decide how to spend money to maximize their satisfaction better than the government’ is a normative statement as it cannot be tested.

Economics Opens in new window is about positive analysis, which measures the costs and benefits of different course of action.

We can use the minimum wage laws in Australia to compare positive and normative analysis. In 2012 it was illegal for an employer to hire an adult worker at a wage of less than $15.96 per hour.

Without the minimum wage law some firms and some workers would voluntarily agree to a lower wage.

Because of the minimum wage, some workers have difficulty finding jobs and some firms end up paying more for labor than they otherwise would have.

A positive analysis of the federal minimum wage uses an economic model Opens in new window to estimate how many workers have lost their jobs because of the minimum wage, its impact on the costs and profits of businesses and the gains to workers receiving the minimum wage.

After economists complete this positive analysis, the decision as to whether the minimum wage law is a good idea or a bad idea is a normative one and depends on how people assess the trade-offs involved.

The assessment by an individual would depend, in part, on that person’s values and political views. The positive analysis provided by an economist would play a role in the decision but can’t by itself decide the issue one way or the other.

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