What is normative economics? – InvestBro

In the study of economics, there are normative conditions and positive economics. Although both are branches of economics and aim to provide appropriate policy advice to policymakers, they are not. But both of these are different.

in the following article The author explains what normative economics is and how it differs from positive economics. Let’s see:

Understanding Normative Economics

Normative economics is an economic view that considers how things work. macroeconomics and micro Should run due to its normative nature. This view is therefore somewhat untestable.

This view dates back to before the 1930s from the old social welfare theory (economic welfare). This theory uses the Pareto principle. (the principle that a person who wants to maximize satisfaction must sacrifice some of his preferences) and the principle of compensation to form economic opinions on the impact of policies undertaken by governments to improve the welfare of the people.

In a macro context, an example from this point of view is “If the government wants to achieve increase in GDP increases by 6%, then they have to run programs a, b, and c.” For the context of microeconomics, an example is, “Theoretically, if there is an x% increase in the price of normal goods without being followed by an increase in income, so demand should decrease y%”

According to Amartya Sen, one of the Nobel laureate economists. Normative economics is divided into two parts: normative economics or fundamental norms. and normative economics. In the first category, statements about economic conditions have no basis or theory. while in the second type This understanding of the approach is built on a prevailing understanding of economic theory. These theories are then used as a base for formulating assumptions or ideals for analyzing the country’s economic conditions and formulating public policies and strategies.

In the foregoing statements on the effects of increases in prices for regular goods, for example, such normative economic statements cannot appear if the person making these statements does not understand what is normal goods. And how will price changes affect demand for normal products?

Difference Between Normative Economics and Positive Economics

Simply put, if normative economics is “ideal” then positive economics is “ideal”. “What happens on the field” and if the first approach is theoretical and subjective in nature. The second approach is the data-based and objective approach.

To create policies that are relevant and have a direct impact on both government and private goals. Researchers must combine these two approaches. In general, economic researchers use normative economics as their basic assumptions and use positive methods to obtain research results. The combination of these two approaches yields solutions and strategies for the current economic climate.

For example, a 10% increase in the price of rice is usually followed by a 6% increase in demand for corn, since the relationship between these two commodities is substituting. The demand for corn is increasing in any way. Then to answer the question “Why Rising Rice Prices Are Not Followed by Increased Demand for Corn” Researchers made positive findings by collecting data in the field.

with such a mechanism It is therefore not surprising that studying economics on campuses In Indonesia and around the world, students are required to have recognized mathematical and statistical competence. Because economics is not just a theory that must be understood and remembered. it is also about collecting and analyzing data to formulate appropriate solutions and policies.

Why is normative economics necessary to understand?

Although this is subjective and difficult to prove. But this economic approach needs to be understood. Because this methodology provides the assumptions and theoretical basis needed to formulate appropriate economic policies and strategies.

Take, for example, the relationship between rice prices and corn demand above. From here, the normative side is the substitutional relationship between the two. while on the positive side are the findings of economists’ research. If from the results of this study it can be concluded that people nowadays have a better quality of life until they do not switch from rice to corn even though the price of rice increases, the government can implement appropriate policies to control the market.

Examples of application of normative economics

public policy

1. Having a tax discount should be able to increase people’s disposable income. to increase purchasing power
2. Opening the market should be able to increase people’s purchasing power as banks can provide loans at lower interest rates.
3. Labor intensive infrastructure development projects should be able to increase people’s fighting power during epidemic times. Including accelerating the distribution of goods between cities and provinces.

company

1. have employee shareholding program (ESOP) is likely to increase employee loyalty to the company.
2. An increase in staff salaries based on the regional minimum wage (UMR) should be enough for workers’ organizations to no longer hold demonstrations.
3. A sales policy based on HARBOLNAS should be able to increase sales of the company’s products.

individual

Normative economics can also be used at the level of individual decision-making, for example:

1. If I can exceed my KPIs, I should get a raise.
2. I prefer bonds over stocks when the economy is uncertain.
3. in an uncertain economic climate Should I choose to continue working at my current company?