Positive versus Normative
•statements of what “is” or “was” or “will be”
•right and wrong
•increase in min wage leads to higher youth unemployment
•taxing carbon emissions reduces carbon emissions
•statements of what “should be”
•no right or wrong
•based on “positive” evidence
•we should increase the minimum wage
•we should tax carbon emissions
Disagreements in Economics
•can be based on the positive
•is this the right model to analyze the phenomenon/question being studied?
•does the empirical analysis really test the positive proposition
•but also on the normative
•differences in value judgements over the relative importance of various (possibly competing)
•economics is a social science
•as such it adheres to the scientific method
•theories are proposed, tested, and modified or discarded as indicated – continual process.
•given the complexity of the economy, economists use models to describe theories
•Empirical models – built to analysis data.
•Endogenous variables – values that are determined within model.
•Exogenous variables – values that affect the model, but are not effected by the model.
Testing Economic theories
•test a theory by comparing its predictions with evidence from the real world
•empirical observations – econometrics
•must be careful to make the distinction between causation and correlation
•NFC wins the Super Bowl, stock prices rise the next year.