What are the difference between positive and normative economies?

The distinction between positive economics and normative economics may seem simple, but it is not always easy to differentiate between the two. Positive economics is objective and fact based, while normative economics is subjective and value based. Positive economic statements must be able to be tested and proved or disproved. Normative economic statements are opinion based, so they cannot be proved or disproved. In fact, many widely-accepted statements that people hold as fact are actually value based.

For example, the statement, "government should provide basic healthcare to all citizens" is a normative economic statement. There is no way to prove whether government "should" provide healthcare; this statement is based on opinions about the role of government in individuals' lives, the importance of healthcare, and who should pay for it.

The statement, "government-provided healthcare increases public expenditures" is a positive economic statement, as it can be proved or disproved by examining healthcare spending data in countries like Canada and Britain, where the government provides healthcare.

Disagreements over public policies typically revolve around normative economic statements, and the disagreements persist because neither side can prove that it is correct or that its opponent is incorrect. A clear understanding of the difference between positive and normative economics should lead to better policy making if policies are made based on facts (positive economics), not opinions (normative economics). Nonetheless, numerous policies on issues ranging from international trade to welfare are at least partially based on normative economics.

6. Decribe the link between value and labou

What is the 'Labor Theory Of Value '

The labor theory of value was an early attempt by economists to explain why goods were exchanged for certain prices on the market. It suggested the value of a commodity could be measured objectively by the average number of labor hours necessary to produce it. The best-known advocates of the labor theory were Adam Smith, David Ricardo and Karl Marx.

BREAKING DOWN 'Labor Theory Of Value '

Exchange values were a serious puzzle for early economic thinkers. If a horse cart traded for 20 ounces of gold but a pair of shoes only traded for 2 ounces, what made the horse cart 10 times as valuable as the shoes? The answer, according to the labor theory, is the horse cart took 10 times as much average labor to produce as the shoes.

Advocates of the labor theory believed that if two goods are exchanged for the same price, they must therefore have the same value. Value was determined by inputs, chiefly labor. The theory could not explain, among other things, profits, losses and land values.

Describe the disadvantages of market economy

1. Distorted investment priorities, as wealth gets directed into what will earn the largest profit and not into what most people really need (so public health, public education, and even dikes for periodically swollen rivers receive little attention);

2. Worsening exploitation of workers, since the harder, faster, and longer people work—just as the less they get paid—the more profit is earned by their employer (with this incentive and driven by the competition, employers are forever finding new ways to intensify exploitation);

3. Overproduction of goods, since workers as a class are never paid enough to buy back, in their role as consumers, the ever growing amount of goods that they produce (in the era of automation, computerization and robotization, the gap between what workers produce—and can produce—and what their low wage allows them to consume has increased enormously);

4. Unused industrial capacity (the mountain of unsold goods has resulted in a large percentage of machinery of all kinds lying idle, while many pressing needs—but needs that the people who have them can't pay for—go unmet);

5. Growing unemployment (machines and raw materials are available, but using them to satisfy the needs of the people who don't have the money to pay for what could be made would not make profits for those who own the machines and raw materials—and in a market economy profits are what matters);

6. Growing social and economic inequality (the rich get richer and everyone else gets poorer, many absolutely and the rest in relation to the rapidly growing wealth of the rich);

7. With such a gap between the rich and the poor, egalitarian social relations become impossible (people with a lot of money begin to think of themselves as a better kind of human being and to view the poor with contempt, while the poor feel a mixture of hatred, envy and queasy respect for the rich);

8. Those with the most money also begin to exercise a disproportional political influence, which they use to help themselves make still more money;

9. Increase in corruption in all sectors of society, which further increases the power of those with a lot of money and puts those without the money to bribe officials at a severe disadvantage;

10. Increase in all kinds of economic crimes, with people trying to acquire money illegally when legal means are not available (and sometimes even when they are);

11. Reduced social benefits and welfare (since such benefits are financed at least in part by taxes, extended benefits generally means reduced profits for the rich; furthermore, any social safety net makes workers less fearful of losing their jobs and consequently less willing to do anything to keep them);