Question

What is normative economics? What is an example of normative decision, include the positive analysis and how that helps form normative decision.

Answer 1

Ans:

Normative analysis are 'opinion' based and prescriptive in nature. This analysis can't be tested true or false because they are 'opinion' based or value based.

The knowledge of positive economics can be useful in normative economics in the sense that normative economics is concerned with how economic problems should be solved while positive economics is concerned with identification of economic problems. Thus, knowledge of positive economics helps in identification of economic problem which then helps the normative economics in designing a policy framework with respect to desirable things that should be undertaken and undesirable things that should be avoided is solving the identified economic problem.

Example-

i) In India, unemployment rate has increased by 50℅ in the past three years.

This is an example of positive analysis as it is a fact and can be tested true or false.

ii) The National minimum wage should be increased as a method of reducing poverty.

Note that this example is prescriptive in nature and opinion based and cant be verified true or false. Therefore it's an example of normative analysis.