Normative Economics – Definition

Cite this article as:"Normative Economics – Definition," in The Business Professor, updated September 26, 2019, last accessed October 23, 2020, https://thebusinessprofessor.com/lesson/normative-economics-definition/.

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Normative Economics Definition

Normative economics is a type of economics that makes perceptions and judgement for the economic growth, investment-based projects, statements, and conditions. It is different positive economics that depends on the analysis of the given data. However, normative economics is more about making ‘value judgements’, and ‘what if’ analysis instead of data based on causal relationships.

Normative economics creates ideological judgements about the impact of changes made in the public policies on the economic activity of a nation.

A Little More on What is Normative Economics

The main objective of normative economics is to ascertain the preference of individuals about several economic programs, scenarios, and conditions with a question ‘what should happen’ or ‘what ought to be’. Hence, such statements represent a perception or a view about what seems to be preferable. For instance, an objective to increase the economic growth by x% or decrease inflation by y% comes under normative economics.

Behavioral economics is considered as normative assuming that people use cognitive psychology for taking preferred decisions considering their choices and preferences.

While positive economics tell about the current economic situations and growth of a nation, normative economics works with a view to find solutions to issues. The statements revolving around normative economics make recommendations for making changes in the economic policies and to persuade the economic-decision making process.

It is not possible to either verify or test normative economic statements.

Real world examples of normative economic statements

The normative economic statement would be something like this: For enhancing the levels of disposable income, we should focus on reducing taxes to half. On the other hand, a positive economic observation would be: According to the last year’s statistics, huge reduction in tax rates would benefit lots of taxpayers, but considering the government budget, we cannot prefer reducing taxes for now. The above example talks about normative economics based on the assumption of increasing disposable income levels of people.

Normative statements are not meant to be tested or verified for facts, or actual cause and effect relationship. Example, ladies should receive more educational loans than men, laborers should be given more portion of capital profits, or working class should not incur any medical expenses. Usually, one can identify normative economic statements with the words ‘should’ and ‘ought’.

Key points to remember

  1. Normative economics talks about the prospective happenings that should take place in the future.
  2. Positive economics tells about the existing economic programs, scenarios, and cases, while normative economics represents solutions for problems.
  3. With the slightest changes made in the public policy, normative economics talks about how it would affect the economic activity.
  4. Behavioral economics can be considered to be normative in nature.

The difference between normative economics and positive economics

Normative economics is helpful in creating exclusive ideas and opinions from different viewpoints. However, decisions involving crucial economic policies are not merely influenced by such perspectives. Such information lacks facts and figures, and causal relationships.

Positive economics statements can be divided into measurable and distinguished facts that are capable of being proved and inspected. That’s why economist researchers and analysts use positive economics for arriving at any economic decision. As positive economics can be measured and observed, economists, government officials, and business organizations use it in economic decision-making process that has an impact on the specific policies guided by facts and figures.

However, business owners and policymakers also consider observing the desirable element which makes normative economics a significant component when it comes to making decisions on crucial economic situations. Positive and normative economics when combined together result in several solutions based on perspectives, showing the way a person or the whole society represent specific economic projects. Such opinions hold a huge importance for policymakers and country’s leaders.

References for “Normative Economics

https://www.investopedia.com › Investing › Financial Analysis

https://en.wikipedia.org/wiki/Normative_economics

https://www.wallstreetmojo.com › Learn Economics › Macroeconomics Basics

https://www.wallstreetmojo.com › Learn Economics › Macroeconomics Basics

https://www.higherrockeducation.org/glossary-of-terms/normative-economics

www.businessdictionary.com/definition/normative-economics.html

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