What is 'Positive Economics'
Positive economics is the study of economics based on objective analysis. Most economists today focus on positive economic analysis, which uses what is and what has been occurring in an economy as the basis for any statement about the future. Positive economics stands in contrast to normative economics, which uses value judgments.
BREAKING DOWN 'Positive Economics'Unlike normative economics, positive economics focuses on causes and effects, behavioral relationships, and facts involved in the evolution and development of economic theories. Positive economics is often called the "what is" economics. On the other hand, normative economics is referred to as the "what should be" or "what out to be" economics.
An example of a positive economic statement would be: "Increasing the interest rate will encourage people to save." This is considered a positive economic statement because it does not contain value judgments and its accuracy can be tested. Most of the information provided by the media is a combination of positive and normative economic statements or theories. Because of this, investors should understand the difference between objective and subjective analysis.
Another example of a positive economic theory would be the way it describes how government impacts inflation by printing more money. In this example, positive economic theory plays a role in providing facts and behavioral relationships between inflation and money supply growth. However, it does not give any advice or instruction on how to properly follow the policies involved in inflation and money printing.
The Importance of Positive Economics
It is important to be aware of the differences between positive economics and normative economics, because the differences provide better policy making when tied with normative economics. Positive economics and normative economics working together provide a clear understanding on public policies because they highlight both factual statements and analysis based on opinions which drive market behavior. However, a clear understanding of positive economics leads to better decisions regarding economic policies since positive economic is not dependent on value judgement. Statements driven by positive economics can be defined and tested and thus provide a clear cause-and-effect streamline that can help individuals and economies make important decisions.
Positive statements provided by positive economics are objective. These statements can be clearly defined and tested, or rejected and amended, depending on the evidence available. Some examples of positive statements include: "Lowering the price of cigarettes has increased the demand for cigarettes among teenage consumers," "the rise of crude oil prices lessens the use of cars and increases the demand for bicycles," and "brewer profits will drop if the government taxes alcohol."