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What is Normative Economics?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 29 November 2016
  • Copyright Protected:
    2003-2016
    Conjecture Corporation
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Normative economics is an approach to analyzing economic events and factors in a manner that allows room for some degree or personal interpretation. This is in contrast to positive economics, where the rule of thumb is to focus on hard facts with little to no subjective opinion included in the presentation. Often, the format of normative statements regarding economic events is couched in verbiage that suggests possible future events resulting from current events, based on individual speculation and interpretation of the available data.

Essentially, normative economics involves assessing current data and making a determination of how things should progress in the future, in order for a desired outcome to emerge. The subjective statements do not have to assume that the status quo will be maintained in the future, but that by pursuing one or more specified courses of action, a economic situation that is very different from the current one will come to pass. Often, statements of this type provide specific directives that, if implemented, have at least a chance of leading to outcome desired.

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The process of normative economics would involve making a statement of something that the speaker believes should take place in the future. For example, if a politician refers to current data regarding consumer spending within a given nation, and makes a statement that the government should reduce taxes by a certain percentage in order to provide more disposable income to taxpayers, that statement is based on projections of what could happen, rather than what is happening. By contrast, a positive or objective statement would involve noting that while tax cuts might be helpful, current data indicates that government agencies would have to reduce expenses before a tax cut would become feasible. The difference is that one statement focuses on the possible outcome of making a change, while the other has to do with what must happen before a chance can be made.

It is not unusual for normative economics to play a role in many statements made through the media. While those statements are subjective and sometimes considered impractical, that does not necessary mean they are without basis. In order for a comment to be truly based in a normative economics approach, that comment must have a foundation in currently verifiable facts, and provide a projection that at least some degree of logic in terms of how that proposed event would impact the economy. From this perspective, normative economics statements provide a valuable service, in that they can form the basis for new ideas and approaches, and aid in the establishment of workable goals for the future.

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