Classify each of the following statements as a positive or normative and explain
1. society faces short run trade offs between inflation and unemployment.
2. a reduction in the rate of growth of money will reduce the rate of inflation.
3. the bank of Ghana should reduce the rate of growth of money.
4. Society ought to require welfare recipients to look for jobs.
5. Lower tax rates encourage more workers and more savings.
Before we can classify these statements as “positive” or “normative”, we must have a clear understanding of these two terms as they apply to economic thought and theory. A positive statement in economics is one that straightaway says what is, as very well explained by “mvcdc” above, where he notes that, “In economics, when we say positive statement, we mean statements … that simply state facts.”
With a positive statement, one does not try to advance an opinion or a solution or a strategy that must or should be implemented. A positive statement just reports facts and offers no further discourse on what should be done. It is akin to an objective news story that relates facts and no more.
On the flip side, a normative statement is a more action oriented statement because it offers opinions and solutions, based on the opinions and biases of the author of the statement. It seeks more than a general statement of facts. It states policies, procedure, or processes that the person making the statement believes should be put into practice to achieve a desired end – an end that he or she, or a group wishes to see come to fruition. Hence, a normative statement is more aggressive, with an agenda.
With these definitions in mind each of the following statements would be classified thus;
1. Society faces short run trade-off between inflation and unemployment. (Positive statement).
This statement is positive because it does not offer an action to be taken. It is stating facts on the relationship between inflation and unemployment.
2. A reduction in the rate of growth of money will reduce the rate of inflation. (Positive Statement).
I believe, as respectively opposed to the opinion above by “mvcdc”, that this is also a positive statement. This is accepted economic theory. This statement is not trying to offer a solution based on a pre-determined agenda. It is simply stating economic theory.
An increase in money growth increases aggregate demand and brings about an increase in inflation. (The Effects of Money Growth on Inflation and Interest Rates across Spectral Frequency Bands -Mark A. Thoma Journal of Money, Credit and Banking, Vol. 26, No. 2. (May, 1994), pp. 218-231).
Therefore, the converse is true - that a decrease in money growth decreases aggregate demand and brings about a decrease in inflation.
3. The bank of Ghana should reduce the rate of growth of money. (Normative statement)
The author of this particular statement is offering an opinion and a policy that he or she believes the bank of Ghana should undertake. This statement is not just a statement of fact, it goes beyond that.
4. Society ought to require welfare recipient to look for jobs. (Normative statement)
Again, this is offering an opinion of an action that the author of the statement believes should be taken. Therefore, a normative statement.
5. Lower tax rates encourage more workers and more savings. (Positive statement)
Here, again, a statement of widely accepted economic theory is being made. The author of the statement is not offering an opinion, or stating an action that should be taken. He or she is simply stating what the prevailing economic thought on this subject is.
In economics, when we say positive statement, we mean statements that are objective, and that simply state facts. Positive economics simply describes and explain economic events - or simply states what is happening. On the other hand, normative statements are those that suggest certain actions towards a certain end. Normative economics deals with providing value judgements regarding economic events. In other words, positive statements answers questions of the form What is... while normative statements pertain to those that respond to What ought to be....
Hence, for each of the sentences:
1. Positive because it simply explains what the society is facing.
2. Normative because it suggests an action - to reduce rate of growth of money - to reduce inflation rate.
3. Normative because it suggests the bank to reduce rate of growth of money.
4. Normative because it forwards the need for job-seeking.
5. Positive because it simply explains the relationship between tax rate and workers and savings.
Notice that positive statements are only concerned with reality, or the current situation. On the other hand, normative statements usually relate to actions to change what is happening.