positive-and-normative-economics

What’s The Difference Between Positive and Normative Economics?

Positive economics is concerned with describing and explaining economic phenomena; it is based on facts and empirical evidence. Normative economics, on the other hand, is concerned with making judgments about what “should be” done. It contains value judgments and recommendations about how the economy should be.

Understanding positive and normative economics

When most people think of economics, they tend to think of money and numbers. However, economics is the study of human behavior and how it relates to the production and distribution of goods and services.

There are two main branches of economics: positive and normative. In this article, we will discuss the differences between these two branches so that you can get a better understanding of what each one entails.

What is Positive Economics?

Positive economics is focused on describing, quantifying, and explaining economic systems and their behavior.

Positive economics analyzes present data, facts, and figures to explain why the economy behaves in a certain way.

In simple words, positive economics is all about describing “what is” happening in the economy.

What is Normative Economics?

Unlike positive economics, normative economics does not rely on facts and figures. Instead, it is based on opinions, values, and beliefs.

Normative economics is used to make recommendations about what policies should be implemented to improve the economy.

For example, a normative economist may argue that the government should increase taxes on the wealthy to reduce income inequality.

In general, normative economics is all about making recommendations about what “should be” done in the economy.

Positive vs Normative Economics: Key Differences

Now that you know the basics of positive and normative economics, let’s take a closer look at the key differences between these two branches.

  1. Positive economics is mainly based on facts and empirical evidence, while normative economics is based on opinions, values, and beliefs.
  2. Positive economics describes and explains economic phenomena, while normative economics focuses on making judgments about what should be done.
  3. Positive economics is concerned with “what is” happening in the economy, while normative economics is concerned with what “should be” happening in the economy.
  4. Positive economics explores the relationships between variables, while normative economics involves making value judgments.
  5. The theories of positive economics can be tested and either proven or disproven with scientific methods, whereas this cannot be done with normative economic statements.
  6. Unlike normative economics, which provides remedies for economic issues based on value judgment, positive economics plainly defines economic issues.
  7. Positive economics is more objective than normative economics, which is subjective. This is because positive economics is based on facts, while normative economics involves value judgments.

Conclusion

  • Positive and normative economics are the two main branches of economics. As you can see, there is a big difference between positive and normative economics.
  • Understanding the difference between these two branches is the first step for anyone who wants to study or work in economics.
  • Keep in mind that positive economics is associated with “what is” happening in the economy. In contrast, normative economics is associated with what “should be” happening, and you will remember these terms with ease.

Connected Business Concepts

Double-Entry

double-entry-accounting
Double-entry accounting is the foundation of modern financial accounting. It’s based on the accounting equation, where assets equal liabilities plus equity. That is the fundamental unit to build financial statements (balance sheet, income statement, and cash flow statement). The basic concept of double-entry is that a single transaction, to be recorded, will hit two accounts.

Balance Sheet

balance-sheet
The purpose of the balance sheet is to report how the resources to run the operations of the business were acquired. The Balance Sheet helps to assess the financial risk of a business and the simplest way to describe it is given by the accounting equation (assets = liability + equity).

Income Statement

income-statement
The income statement, together with the balance sheet and the cash flow statement is among the key financial statements to understand how companies perform at fundamental level. The income statement shows the revenues and costs for a period and whether the company runs at profit or loss (also called P&L statement).

Cash Flow Statement

cash-flow-statement
The cash flow statement is the third main financial statement, together with income statement and the balance sheet. It helps to assess the liquidity of an organization by showing the cash balances coming from operations, investing and financing. The cash flow statement can be prepared with two separate methods: direct or indirect.

Capital Structure

capital-structure
The capital structure shows how an organization financed its operations. Following the balance sheet structure, usually, assets of an organization can be built either by using equity or liability. Equity usually comprises endowment from shareholders and profit reserves. Where instead, liabilities can comprise either current (short-term debt) or non-current (long-term obligations).

Capital Expenditure

capital-expenditure
Capital expenditure or capital expense represents the money spent toward things that can be classified as fixed asset, with a longer term value. As such they will be recorded under non-current assets, on the balance sheet, and they will be amortized over the years. The reduced value on the balance sheet is expensed through the profit and loss.

Financial Statements

financial-statements
Financial statements help companies assess several aspects of the business, from profitability (income statement) to how assets are sourced (balance sheet), and cash inflows and outflows (cash flow statement). Financial statements are also mandatory to companies for tax purposes. They are also used by managers to assess the performance of the business.

Read next:

How To Read A Balance Sheet Like An Expert

Other business resources:

Scroll to Top
FourWeekMBA