Normative Economics

Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What is Normative Economics?

Normative Economics is the opinions of economists who tell us what they think. It can be true for some and false for some. And these statements mentioned under normative economics aren’t verifiable and can not test them either.

Normative economics is just the twin division of positive economicsPositive EconomicsPositive Economics is a branch of modern economics that describes, explains, & clarifies several current economic facts with an objective approach. It prohibits value judgement & only revolves around the “what is” scenario. read more; because without normative economics, positive economics doesn’t cut it. Here’s how.

Key Takeaways

  • Normative economics involves economists expressing their subjective opinions and value judgments, which cannot be objectively confirmed or tested. It is distinct from positive economics, which deals with objective analysis.
  • Normative economic statements can influence policies that aim to increase purchasing power and stimulate economic growth in a country.
  • Normative economics is concerned with the exploration of what “should be” in the economy, offering policy recommendations and addressing ethical considerations. It helps guide decision-making processes by advocating for desired economic outcomes based on societal values and welfare considerations.

Let’s say that a country will decide on its financial policy. The authorities talked to the experts and asked them to send a report on the country’s current economic scenario. They follow suit. Then the authorities ask the experts/economists what the country should do in the current situation! The economists/experts take time and give their suggestions and recommendations. And the authorities agree with the suggestions offered by the economists, and that’s how the policy is made.

In the above scenario, you would see that there are two parts. The first part is all about “what is.” And then the next part is all about “what can be.” The first part is based on positive economics because there’s no judgment or opinions in the first part. However, the second part comprises a suggestions-based statement based on the value and understanding of fellow economists and their judgments.

If one part is missing from the above scenario, it would be impossible to create policies. We need both, even for a business.

If a business sees that its products are getting sold more in the upper market, it will try to push sales as much as possible.

The first part of the business is a purely informational, descriptive statement, meaning it is based on positive economics. The last part is completely value-based, for which the business starts to sell its products in the upper market, and it is based on normative economics.

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

Positive Economics vs Normative Economics Explained in Video

Examples of normative economics statements

Let’s understand this with real-life examples.

Normative Economics

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Normative Economics (wallstreetmojo.com)

Normative Economics Example#1

Positive Economics: The US Government should cut taxes for all countrymen.

If we stop here, it would be incomplete because, based on this, we can’t make a concrete policy. So, what do we need now? We need a statement under normative economics to support the statement under positive economics.

Normative Economics: This move will increase the purchasing power of all citizens, and they will be able to facilitate the country’s economic growth.

Normative Economics Example#2

Normative Economics: The economists of the UK mentioned that the UK would be a more capital intensiveCapital IntensiveCapital intensive refers to those industries or companies that require significant upfront capital investments in machinery, plant & equipment to produce goods or services in high volumes and maintain higher levels of profit margins and return on investments. Examples include oil & gas, automobiles, real estate, metals & mining.read morecountry if it would allow more foreign nationals to build their businesses.

But why do the economists of the UK mention the above statement? There is another statement before the economists said so. And it is a statement that will fall under positive economics.

Let’s look at the statement under positive economics.

Positive Economics: It is reported that the percentage of foreign businesses in the UK is quite lower than in the US.

As we mentioned in positive economics, it has become clear why economists of the UK have made such a statement.

Why combinations of positive and normative economics help policymakers?

Positive economics talks about factual statements and analyses. These statements either happened or are subject to verification. And normative economics, on the other hand, talks about what would be the next steps! Since one is portraying the fact and another is articulating what one should do in a given situation, the combinations of both of these help the policymakers and planners.

If we present one single statement, it doesn’t make sense. What would we do only with the fact if we know the fact? If we only present the judgment, are we making the judgment? Since positive economics helps economists look directly into the statisticsThe StatisticsStatistics is the science behind identifying, collecting, organizing and summarizing, analyzing, interpreting, and finally, presenting such data, either qualitative or quantitative, which helps make better and effective decisions with relevance.read more, they can test whether this is true for all situations. If yes, they give their recommendations. If not, they change their approach and offer different suggestions. In both of these cases, normative economics is applied.

For example, workers’ wages are $5 per hour. It is a statement of positive economics. If we now say that the workers’ wages should be more than $10 per hour, it would be a statement under normative economics. If we club both of these statements, it makes sense why we are combining the fact and the judgment on the fact.

Frequently Asked Questions (FAQs)

1. Why is normative economics important? 

Normative economics plays a vital role in guiding policy decisions and shaping societal values. It focuses on what ought to be, providing recommendations and judgments about desirable outcomes. By addressing equity, fairness, and social welfare issues, normative economics helps societies make informed choices to achieve their goals and improve overall well-being.

2. Why is it called normative economics? 

Normative economics derives its name from the term “normative,” which means relating to norms or standards. Unlike positive economics, which deals with objective analysis of economic phenomena, normative economics involves subjective value judgments and normative statements about economic outcomes based on societal preferences and ethical considerations.

3. What are the features of normative economics? 

The key features of normative economics include:
Subjectivity: Normative economics involves subjective opinions, preferences, and ethical judgments, making it value-laden.
Prescriptive nature: It provides recommendations and policy prescriptions to achieve certain desired economic outcomes.
Social welfare focus: Normative economics emphasizes improving overall societal well-being, often addressing issues of income distribution, social justice, and public policy.

This has been a guide to what is Normative Economics? We also discuss normative economics examples related to positive economics. You may also have read through these other articles on Economics –