Positive Economics

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What is the positive economy?

Positive economics uses objective analysis in the study of economics. Most economists look at what has happened and is happening now in a given economy to form their forecast base for the future. This investigative process is a positive economy. Conversely, a normative economic study will base future forecasts on value judgments.

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Positive and normative economy

Explanation of the positive economy

The cornerstone of positive economic practice is to examine factual finance or economic relationships and cause and effect interaction to develop economic theories. Behavioral economics follows a premise based on the psychology that people will make rational financial choices based on the information they find around them.

Many will qualify this study as “what” is economics because of its use of factual thinking. Normative economics is therefore called “what should have been” or “what should be”.

Key points to remember

  • Findings from positive economic analyzes can be tested and supported by data.
  • Statements based on the normative economy include value judgments.
  • The positive economy and the normative economy can work hand in hand when formulating policies.

Test positive economic theories

The conclusions drawn from positive economic analyzes can be verified and supported by data. For example, predicting that more people will save if interest rates rise would be based on a positive economy, as past behavior may support it. The analysis is objective in nature, contrary to normative statements and theories, which are subjective. Most of the information provided by the news media is a combination of positive and normative economic statements or assumptions.

Positive economic theory does not provide advice or instruction. For example, he can describe how the government can affect inflation by printing more money, and he can back this up with facts and an analysis of the behavioral relationships between inflation and money supply growth. However, it does not tell you how to properly apply and follow specific policies regarding inflation and printing money.

When considered together, the positive economy and the normative economy provide a clear understanding of public policies. These two theories cover both actual and actual facts and statements combined with opinion-based analysis. Therefore, when making political decisions, it is best to understand the positive economic context of behavioral finance and the causes of the events when you include normative value judgments about why things happen the way they do. .

Real example of positive economy

Fight for 15 is a national movement to lobby for a minimum wage of $ 15 over what would be considered a normative economy. A position on a minimum wage of $ 15 is a value judgment. Those who participate in the Fight for 15 campaign argue that a minimum wage of $ 15 would be good, while opponents argue that it would be harmful.

Historically, there has been much research on the impact of minimum wage increases, but there are no definitive findings that offer broad and general conclusions on whether higher minimum wages are good or not. bad. However, there are specific details of specific studies that could be considered as examples of positive economics.

Seattle ordinance

In 2020, Seattle passed a local ordinance to gradually raise the minimum wage for city workers. All workers will earn at least $ 15 an hour by 2021 or sooner, depending on the specific details of the job. Since then, two major studies have been devoted to the impact of the law.

The Californian study

A study by researchers at the University of California at Berkeley focused specifically on restaurant workers, while another study by researchers at the University of Washington looked at unemployment figures.

Californian researchers found that for every 10% increase in the Seattle minimum wage, employees of fast food restaurants saw their wages increase by 2.3%. This specific data is an example of a positive economy, but the researchers’ conclusion that the higher minimum wage was successful is not a positive economy because the objective of the study was not broad enough or sufficiently exhaustive to make such a conclusion.

Washington study

Washington researchers have concluded that raising the minimum wage has not been successful, but neither is this an example of a positive economy. However, some of the specific data they collected would be an example of a positive economy. For example, they found that when the minimum wage increased, the number of low-paid workers fell by 1% and the hours for those who were still employed also fell slightly. Although this specific data represents a positive economy, the researchers’ conclusion may still be questioned because other factors not addressed in the study, such as a potential increase in better-paid jobs, may have had an impact on data.

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