Positive economics, Normative economics, Distinguish between positive and normative economics

 There are different views regarding the scope of economics such as positive, normative etc. It is very important to know the difference between positive and normative economics. Some differences of the two views are appended below.

Positive economics

The study of economics based on objective analysis. Most economists today focus on positive economic analysis, which uses what is and what has been occurring in an economy as the basis for any statements about the future. Positive economics stands in contrast to normative economics, which uses value judgments.

For example, a positive economic statement would be: "Increasing the interest rate will encourage people to save." This is considered a positive economic statement because it does not contain value judgments and its accuracy can be tested.

 

Normative economics

A perspective on economics that incorporates subjectivity within its analyses. It is the study or presentation of "what ought to be" rather than what actually is. Normative economics deals heavily in value judgments and theoretical scenarios. It is the opposite of positive economics. Normative statements are often heard in the media because they tend to represent a theory or opinion rather than objective analysis. Normative economics is a valuable way to establish goals and generate new ideas, but it should not be used as a basis for policy decisions.

An example of a normative economic statement would be, "We should cut taxes in half to increase disposable income levels"

There are different views regarding the scope of economics such as positive, normative etc. It is very important to know the difference between positive and normative economics. Some differences of the two views are appended below.

Positive economics	Normative economics
Positive economics is concerned with explaining what it is? That is it describes theories and laws to explain observed economic phenomena.	Normative economics is concerned with what should be or what ought to be the things.
According to J.N. Keynes, “A positive science may be defined as a body of systematized knowledge concerning what it is.”	According to J.N. Keynes, “Normative science is a body of systematized knowledge relating to criteria of what ought to be and concerned with the ideal as distinguished from the actual.”
Positive economics are broadly concerned with explaining the determination of relative prices and the allocation of resources between different commodities.	Normative economics is concerned with describing what should be the things, what price for a product should be fixed, what wages rate should be paid etc.
Positive economics states that monopolist will fix a price, which will equate marginal cost with marginal revenue.	The normative economics states the value judgments. It meant the conception of the people about what is good or bad.
The laws of positive economics are derives from set of axioms or propositions.	The normative economics is concerned with welfare propositions.

What are the branches of economics

 In modern economics the subject matter of economics has been divided into two parts. The two branches are microeconomics and macroeconomics. These terms were first introduced by Ragnar Frisch and have now been adopted by the economist all the world over.

Microeconomics deals with specific economic units and a detailed consideration of these individual units. At this level of analysis, the economist figuratively puts an economic unit under the microscope to observe details of its operation. It talks in terms of an individual firm, or household, and concentrate upon such magnitudes as the output or price of a specific product, the workers employed by a single firm etc. Microeconomics is useful in achieving a worm’s-eye view of some very specific component of our economic system.

Macroeconomics deals either with the economy as a whole or with the basic subdivisions or aggregates such as government, household and business sectors which make up the economy. It is concerned with obtaining a general outline of the structure of the economy and the relationships among the major aggregates. It speaks of such magnitudes as total output, total level of employment, total income, aggregate expenditures, the general level of price and so forth. Macroeconomics gives a bird’s-eye view of the economy.

 

What are the solutions to the economic problems? (Isms, market systems)

 There are different ways that a society can answer the basic questions. By the three kinds of economics we can get the solution of the problems. These are briefly discussed below.

Market economy: A market economy is one in which individuals and private firms make the major decisions about production and consumption. A system of process of markets of profits and losses, of incentives and rewards determines what, how and whom. In United States most economic questions are solved by this market economy. The extreme case of a market economy in which government keeps it hands off economic decisions is called a laissez-faire economy.

Command economy: A command economy is one is which the government makes all important decisions about production and distribution. It is operated in China. In short in a command economy, the government answers the major economic questions through its ownership of resources and its power to enforce decisions.

Mixed economy: In a mixed economy there exist both the market and command economy. A mixed economy is widely known as one, which has both private and public sector. The private has the features of free enterprise of market economy and public sector has the features of command or socialist economy.

The economic system depends on the environment and acceptability. As a developing country mixed economy is the unique solution for Bangladesh.

What are the basic problems of economics

 The scarcity of resources gives rise to various economic problems which have to be solved by economic system if it is to fulfill its purpose. The basic problems are:

a) What to produce?                  b) How to produce?

c) For whom to produce?           d) What provision should be made for economic growth?

What to produce: The problem ‘what to produce’ is the problem of choice between commodities. Scarcity of resources does not permit production of all goods and service that people would like to consume. Besides, all the goods and service are not equally valued in terms of their utility by the consumers. This is why the problem of choice between the commodities arises. Production possibility curve helps to analyze the problem.

How to produce: This means what combination of resources society decides to produce goods. Economy aims at using the available resources in the most efficient method. Isoquant curve helps to take the decision.

For whom to produce: This implies how the national product is to be distributed among the members of the society. Economic problem solutions depend on distribution process.

What provision should be made for economic growth: Both an individual and a society would not like to use all its scarce resources for current consumption only. This is because if all resources are used for producing consumer goods only and no provision in terms of allocating some resources for investment, that is, for production of capital goods is made, the future resources or productive capacity would not increase.

What are the goals of economics

 A number of economic goals or value judgments are accepted in the society. These goals may be briefly listed as follows.

a) Economic growth: The production of more and better goods and services, or more simply stated a higher standard of living, is desired.

b) Full employment: Suitable jobs should be available for willing and able to work.

c). Economic efficiency: All want maximum benefits at minimum, cost form the limited productive resources available.

d) Price level stability: Sizable upswings or downswings in the general price level, that is, inflation and deflation, should be avoided.

e) Economic freedom: Business executives, workers, and consumers should enjoy a high degree of freedom in their economic activities.

f) An equitable distribution of income: No group of citizens should face stark poverty while others enjoy extreme luxury.

g) Economic security: Provision should be made for those who are chronically ill, disabled, handicapped, laid off, aged, or otherwise unable to earn minimal levels of income.

h) Balance of trade: Economists seek a reasonable balance in international trade and financial transactions.

What is economics

 Economics is a social science. The word ‘Economics’ came from the Greek word ‘Oikonomioa’ which refers the ‘household management’. Many economists defined economics in different ways. Some definitions are given below.

Adam Smith defined, “Economics is a science which enquires the nature and causes of wealth of nations.”

L. Robins defined, “Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.”

According to Paul A. Samuelson, “Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people.”

Thus, we can conclude that, Economics is the science concerned with the problem of using or administering scarce resources to attain the greatest or maximum fulfilment of society’s unlimited wants.

What are the facts that provide the foundation of economics?

 Economics is the science concerned with the problem of using or administering scarce resources to attain the greatest or maximum fulfilment of society’s unlimited wants.

Two fundamental facts provide a foundation for the field of economics. These are shortly discussed below.

Unlimited wants: Society’s material wants are unlimited and insatiable. Material wants include the desires of consumers to obtain and use various goods and services which provide utility such as automobiles, sweaters, pizzas, legal advice and the like. It also includes those which businesses and units of government seek to satisfy such as machinery, communications systems, hospitals and the like.

Material wants cannot be satisfied completely. Over a short period of time, wants for a particular product can be satisfied. But, over a period of time wants multiply. When some of those are fulfilled, new wants are added. Overall objective of all economic activity is the attempt to satisfy these diverse material wants.

Scarce Resources: Economic resources are limited or scarce. Economic resource means all natural, human and manufactured resources that go into the production of goods and services. Economists broadly classify such resources as either (1) property resources— land or raw materials and capital; or (2) human resources— labour and entrepreneurial ability.

Gresham's law

 Gresham's law is an economic principle that states: "When a government overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation."   It is commonly stated as: "Bad money drives out good".

This law applies specifically when there are two forms of commodity money in circulation which are required by legal-tender laws to be accepted as having similar face values for economic transactions. The artificially overvalued money tends to drive an artificially undervalued money out of circulation and is a consequence of price control. 

 In economics, Gresham's law is a monetary principle stating that "bad money drives out good". For example, if there are two forms of commodity money in circulation, which are accepted by law as having similar face value, the more valuable commodity will disappear from circulation.

The law was named in 1858 by Henry Dunning Macleod, after Sir Thomas Gresham (1519–1579), who was an English financier during the Tudor dynasty.Gresham’s law, observation in economics that “bad money drives out good.” More exactly, if coins containing metal of different value have the same value as legal tender, the coins composed of the cheaper metal will be used for payment, while those made of more expensive metal will be hoarded or exported and thus tend to disappear from circulation. Sir Thomas Gresham, financial agent of Queen Elizabeth I, was not the first to recognize this monetary principle, but his elucidation of it in 1558 prompted the economist H.D. Macleod to suggest the term Gresham’s law in the 19th century.

Excess liquidity

 Excess liquidity is the liquidity that banks hold in excess of the aggregate needs arising from minimum reserve requirements and autonomous factors amount.

 Excess liquidity is defined as deposits at the deposit facility net of the recourse to the marginal lending facility, plus current account holdings in excess of those contributing to the minimum reserve requirements.

In normal times, when the interbank market functions properly, banks would channel liquidity to each other across the system and excess liquidity would have little or no reason to exist, because the cost opportunity of holding it would be just too high.

Producer Surplus

 Producer surplus is an economic measure of the difference between the amount that a producer of a good receives and the minimum amount that he or she would be willing to accept for the good. The difference, or surplus amount, is the benefit that the producer receives for selling the good in the market.

Consumer surplus/buyer’s surplus

 Consumer surplus, also known as buyer’s surplus, is the economic measure of a customer’s excess benefit. It is calculated by analyzing the difference between the consumer’s willingness to pay for a product and the actual price they pay, also known as the equilibrium price. A surplus occurs when the consumer’s willingness to pay for a product is greater than its market price.  

Basel II

 Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision.

 Basel II, initially published in June 2004, was intended to amend international standards that controlled how much capital banks need to hold to guard against the financial and operational risks banks face. These rules sought to ensure that the greater the risk to which a bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and economic stability. Basel II attempted to accomplish this by establishing risk and capital management requirements to ensure that a bank has adequate capital for the risk the bank exposes itself to through its lending, investment and trading activities. One focus was to maintain sufficient consistency of regulations so to limit competitive inequality amongst internationally active banks.

Basel II uses a "three pillars" concept – (1) minimum capital requirements (addressing risk), (2) supervisory review and (3) market discipline.

Objective

The final version aims at:

1. Ensuring that capital allocation is more risk sensitive;
2. Enhance disclosure requirements which would allow market participants to assess the capital adequacy of an institution;
3. Ensuring that credit risk, operational risk and market risk are quantified based on data and formal techniques;
4. Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage.

While the final accord has at large addressed the regulatory arbitrage issue, there are still areas where regulatory capital requirements will diverge from the economic capital

 The Basel I accord dealt with only parts of each of these pillars. For example: with respect to the first Basel II pillar, only one risk, credit risk, was dealt with in a simple manner while market risk was an afterthought; operational risk was not dealt with at all.

 Minimum capital requirements: The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk, operational risk, and market risk.

 Supervisory review: This is a regulatory response to the first pillar, giving regulators better 'tools' over those previously available. It also provides a framework for dealing with systemic risk, pension risk, concentration risk, strategic risk, reputational risk, liquidity risk and legal risk, which the accord combines under the title of residual risk. Banks can review their risk management system.

 The Market Discipline: This pillar aims to complement the minimum capital requirements and supervisory review process by developing a set of disclosure requirements which will allow the market participants to gauge the capital adequacy of an institution.

 Basel III, The third installment of the Basel Accords,was developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–08. Basel III is intended to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage.

The Vicious Cycle of Poverty

 This is a phenomenon used often by economic scientists. It simply means poverty begets poverty. It is a concept that illustrates how poverty causes poverty and traps people in poverty unless an external intervention is applied to break the cycle.

Lets look at this scenario with a family in absolute poverty.

A very poor family with children have very little to eat, and have and access to health facilities. As a result, the children are malnourished and unhealthy and have many health complications. They are therefore unable to go to school (even if there is a school in the next village). They grow up with no education or skill and cannot do any economic activity. Their parent die from preventable diseases as a result of lack of health facilities, and their fate is in their hands. As the children turn adults, they find wives who are just on the same level of poverty as them, and they have their own children. They hand over this condition to their children, who will also grow up in similar conditions.

It takes an intervention from governments, charity organizations or family members who are better off to step in and provide some kind of assistance (health, feeding, shelter and basic education) to get the youth to do some kind of economic activity to bring in some income. Without that, this cycle will continue for generations and it’s a trap that is extremely difficult to get out of.

Floating Exchange Rate

A floating exchange rate or fluctuating exchange rate is a type of exchange-rate regime in which a currency's value is allowed to fluctuate in response to market mechanisms of the foreign-exchange market. A currency that uses a floating exchange rate is known as a floating currency. A floating currency is contrasted with a fixed currency.In a fixed exchange rate system, the government (or the central bank acting on the government's behalf) intervenes in the currency market so that the exchange rate stays close to an exchange rate target. When Britain joined the European Exchange Rate Mechanism in October 1990, we fixed sterling against other European currencies. The pound, for example, was permitted to vary against the German Mark by only 6% either side of a central target of DM2.95. Britain left the ERM in September 1992 when the pound came under sustained selling pressure, and the authorities could no longer justify very high interest rates to maintain the pound's value when the domestic economy was already suffering from a deep recession.

Fluctuations in the exchange rate can provide an automatic adjustment for countries with a large balance of payments deficit. If an economy has a large deficit, there is a net outflow of currency from the country. This puts downward pressure on the exchange rate and if a depreciation occurs, the relative price of exports in overseas markets falls (making exports more competitive) whilst the relative price of imports in the home markets goes up (making imports appear more expensive).

This should help reduce the overall deficit in the balance of trade provided that the price elasticity of demand for exports and the price elasticity of demand for imports is sufficiently high. A second key advantage of floating exchange rates is that it gives the government / monetary authorities flexibility in determining interest rates. This is because interest rates do not have to be set to keep the value of the exchange rate within pre-determined bands. For example when the UK came out of the Exchange Rate Mechanism in September 1992, this allowed a sharp cut in interest rates which helped to drag the economy out of a prolonged recession.

Fixed Exchange Rate

 A fixed exchange rate is a country's exchange rate regime under which the government or central bank ties the official exchange rate to another country's currency (or the price of gold). The purpose of a fixed exchange rate system is to maintain a country's currency value within a very narrow band. Also known as pegged exchange rate.

 Fixed rates provide greater certainty for exporters and importers. This also helps the government maintain low inflation, which in the long run should keep interest rates down and stimulate increased trade and investment.

Terms of Trade - TOT

 Terms of trade (TOT) is the value of a country's exports relative to that of its imports. It is calculated by dividing the value of exports by the value of imports, then multiplying the result by 100. If a country's terms of trade (TOT) is less than 100%, there is more capital going out (to buy imports) than there is coming in. A result greater than 100% means the country is accumulating capital (more money is coming in from exports).

Using the terms of trade to determine the health of a country's economy can draw the wrong conclusions. It is important to know why exports increase relative to imports, especially since the terms of trade are directly impacted by changes in export and import prices. Terms of trade measurement is often recorded in an index for economic monitoring.

 For example, if, over a given period, the index of export prices rises by 10% and the index of import prices rises by 5%, the terms of trade are:

110  x 100 / 105 = 104.8

This means that the terms of trade have improved by 4.8%.

When the terms of trade rise above 100 they are said to be improving and when they fall below 100 they are said to be worsening.

Currency Depreciation

 Currency depreciation is a decrease in the level of a currency in a floating exchange rate system due to market forces. Currency depreciation can occur due to any number of reasons – economic fundamentals, interest rate differentials, political instability, risk aversion among investors and so on. Countries with weak economic fundamentals such as chronic current account deficits and high rates of inflation generally have depreciating currencies. Currency depreciation, if orderly and gradual, improves a nation’s export competitiveness and may improve its trade deficit over time. But abrupt and sizeable currency depreciation may scare foreign investors who fear the currency may fall further, and lead to them pulling portfolio investments out of the country, putting further downward pressure on the currency. Easy monetary policy and high inflation are two of the main causes of currency depreciation. In a low interest-rate environment, hundreds of billions of dollars chase the highest yield. Expected interest rate differentials can trigger a bout of currency depreciation.

In the 12 months ending January 2014, for example, the Canadian dollar depreciated by 10% against the U.S. dollar. This was because economists and analysts expected the Bank of Canada to relax its monetary policy in 2014, at the same time the Federal Reserve was preparing to scale back its bond purchases, which was seen as a precursor to tighter monetary policy.

Inflation can also cause currency depreciation. This is because the higher input costs for export products made in a high-inflation nation will make its exports uncompetitive in global markets, which will widen the trade deficit and cause the currency to depreciate.

Sudden bouts of currency depreciation, especially in emerging markets, inevitably raise the fear of “contagion,” whereby many of these currencies get afflicted by similar investor concerns. There have been a number of such episodes, among the most notable being the Asian crisis of 1997 that was triggered by the devaluation of the Thai baht. In the summer of 2013, the currencies of nations such as India and Indonesia traded sharply lower on concern that the Federal Reserve was poised to wind down its massive bond purchases.

 

Index Number

 An index is a statistical measure of changes in a representative group of individual data points. These data may be derived from any number of sources, including company performance, prices, productivity, and employment. Economic indices track economic health from different perspectives. It is anumberindicatingchange in magnitude, as of price,wage,employment, or productionshifts,relative to themagnitude at a specifiedpointusuallytaken as 100.

 The primary role of index numbers is to simplify otherwise complicated comparisons. It is especially useful when comparing currencies that have lots of different nominal values. Some countries even use index numbers to modify public policy, such as adjusting government benefits for inflation.

Fiscal Policy

 Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. It is the sister strategy to monetary policy through which a central bank influences a nation's money supply. These two policies are used in various combinations to direct a country's economic goals.

 Governments can influence macroeconomic productivity levels by increasing or decreasing tax levels and public spending. This influence, in turn, curbs inflation (generally considered to be healthy when between 2-3%), increases employment and maintains a healthy value of money. Fiscal policy is very important to the economy.

In economics and political science, fiscal policy is used by the government revenue collection (mainly taxes) and expenditure (spending) to influence the economy.^[1] According to Keynesian economics, when the government changes the levels of taxation and government spending, it influences aggregate demand and the level of economic activity. Fiscal policy can be used to stabilize the economy over the course of the business cycle.^[2]

The two main instruments of fiscal policy are changes in the level and composition of taxation and government spending in various sectors. These changes can affect the following macroeconomic variables, amongst others, in an economy:

• Aggregate demand and the level of economic activity;
• Savings and Investment in the economy
• The distribution of income

The three main stances of fiscal policy are:

• neutral fiscal policy is usually undertaken when an economy is in equilibrium. Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity.
• Expansionary fiscal policy involves government spending exceeding tax revenue, and is usually undertaken during recessions.
• Contractionary fiscal policy occurs when government spending is lower than tax revenue, and is usually undertaken to pay down government debt.

Governments use fiscal policy to influence the level of aggregate demand in the economy, in an effort to achieve economic objectives of price stability, full employment, and economic growth. Keynesian economics suggests that increasing government spending and decreasing tax rates are the best ways to stimulate aggregate demand, and decreasing spending & increasing taxes after the economic boom begins. Keynesians argue this method be used in times of recession or low economic activity as an essential tool for building the framework for strong economic growth and working towards full employment. In theory, the resulting deficits would be paid for by an expanded economy during the boom that would follow; this was the reasoning behind the New Deal.

Governments can use a budget surplus to do two things: to slow the pace of strong economic growth, and to stabilize prices when inflation is too high. Keynesian theory posits that removing spending from the economy will reduce levels of aggregate demand and contract the economy, thus stabilizing prices.

But economists still debate the effectiveness of fiscal stimulus. The argument mostly centers on crowding out: whether government borrowing leads to higher interest rates that may offset the stimulative impact of spending. When the government runs a budget deficit, funds will need to come from public borrowing (the issue of government bonds), overseas borrowing, or monetizing the debt. When governments fund a deficit with the issuing of government bonds, interest rates can increase across the market, because government borrowing creates higher demand for credit in the financial markets. This causes a lower aggregate demand for goods and services, contrary to the objective of a fiscal stimulus. Neoclassical economists generally emphasize crowding out while Keynesians argue that fiscal policy can still be effective especially in a liquidity trap where, they argue, crowding out is minimal. ^[3]

Some classical and neoclassical economists argue that crowding out completely negates any fiscal stimulus; this is known as the Treasury View^{[citation needed]}, which Keynesian economics rejects. The Treasury View refers to the theoretical positions of classical economists in the British Treasury, who opposed Keynes' call in the 1930s for fiscal stimulus. The same general argument has been repeated by some neoclassical economists up to the present.

Asian Clearing Union (ACU)

 Asian Clearing Union (ACU) is a payment arrangement whereby the participants settle payments for intra-regional transactions among the participating central banks on a net multilateral basis. The main objectives of the clearing union are to facilitate payments among member countries for eligible transactions, thereby economizing on the use of foreign exchange reserves and transfer costs, as well as promoting trade and banking relations among the participating countries.  

The Central Banks and the Monetary Authorities of Bangladesh, Bhutan, India, Iran, Maldives, Myanmar, Nepal, Pakistan and Sri Lanka are currently the members of the ACU.

 The Asian Clearing Union (ACU) was established with its headquarters at Tehran, Iran, on December 9, 1974 at the initiative of the United Nations Economic and Social Commission for Asia and Pacific (ESCAP), for promoting regional co-operation.