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Positive and Normative Economics

1. Economists agree that an economy cannot grow without savings. This means forgoing current consumption, saving, and investing in capital goods. Using the production possibility frontier curve, explain the tradeoff between current consumption and savings and how this impacts economic growth. If think of savings and consumption as two products, then resources must be allocated to maximize production in order to have economic growth.

In a production possibility frontier, an economy is said to be efficient only if it can produce more of one product by producing less of another product. Back to consumption and saving, consumption is good whenever saving is reduced. Also saving is good when consumption is reduced. Both these instances will fully utilize the resources according to PPF. To have an economic growth certain factors must be introduced to PPF like technological advances, better resource quality and increase in resources.

If these factors are obtained, then production of goods will increase and the PPF will shift rightward. The rightward shift of the PPF is known as the economic growth (Kaplan, 2002). 2. One of the early economic “laws” was called Say’s Law that stated that—supply creates its own demand. Using the circular flow chart, explain what this means

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and how an expanding population results in economic growth. Say’s law can be illustrated using a simple flow chart. People own the resources which they sell to firms.

Firms pay the resources and it generates income for the households. The amount of income would be equal to the production cost. Another example is that, consider first two factors, good and labor. Labor are simply said the individuals or the people themselves. If a unit of good is produce by using a unit of labor then as the unit of labor increases the units of good also increases. The result is the supply. And the income generated by the labor is used to buy the goods they produced. So if population increases, labor also increases and it will result to higher supply.

Higher supply means higher income. Then there is economic growth (Atri, 1999). 3. To what extent do you think normative economic analysis, as opposed to positive economic analysis, determines our nation’s economic public policy decisions made by government? Why? Is that “good” or “bad”? Why? Normative economic analysis is focused only on what should be and ought to be. Normative economic statements are not testable and are impossible to prove to be false. Normative economic seems to suggest something out of the positive economic analysis.

Normative economic analysis can extend to a certain degree to determine our nation’s economic public policy decisions but it will not go over the limit. In order to have a normative analysis, one must have also the positive analysis. Normative analysis is made side by side with positive analysis. If one’s positive analysis is no good, then the normative analysis will not be good also. It is good because normative analysis is like an opinion based on facts (positive analysis) which should be taken seriously but not if it goes over the limit (Moraine Park Technical College [MPTC], 2009).

Resources Atri, S. (1999). Aggregate Expenditures Model. Retrieved April 1, 2009 from http://www. oswego. edu/~atri/lac/lec9sp99. htm Kaplan, J. (2002). Unit 1: Production Possibility Frontier. April 1, 2009 from http://www. colorado. edu/Economics/courses/econ2020/section1/section1-main. html Moraine Park Technical College (MPTC). (2009). Learning Plan 1: Positive and Normative Economics. Retrieved April 1, 2009 from http://mptceconomics. org/data/Learning_Plan_1_norm_post. pdf

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