Positive economics is the scientific or objective study of the allocation of resources. It deals with objective or scientific explanations of the economy. There is no personal opinion involved. It is capable of refutation.
For instance, an increase in government spending on health care leads to a higher GDP.
In contrary, normative economics is the study and presentation of policy prescriptions involving value judgments about the way in which scarce resources are allocated. It involves personal opinion and it is bias. Normative economics attempts to describe what ought to be. A normative statement is one that contains a value judgment. A normative economics sets a standard by which reality can be judged.
For instance, what might be the right level of health spending so that national welfare is maximized?.
One important criterion by which a positive economics may be judged is the extent to which it accurately explains reality.
Reality exists in three different time periods: the past, the present and the future. Positive economics is able to explain what happened in the past, explain what is happening today and predict what will happy in the future. For example, today we can understand a rise in oil price in the past was due to a restriction in the supply of oil by OPEC. From this study of causes and effects (positive economics) by gathering data or performing controlled experiments, we can predict with confidence that Ceteris Paribus, A quota imposed on petrol will cause the price of petrol to increase.
On the other hand, there are a number of economic models that are claimed to be good predictors but are not based on realistic assumptions i.e. based on normative economics. In the real world there are no industries that conform to the assumptions of either perfect competition or pure monopoly yet these theories are widely discussed. One justification is that although the assumptions are unrealistic, the models provide very powerful and clear predictions about the extremes of behavior of firms.
