MODULE 1-(1) Positive and Normative economics

Positive Economics
Positive Economics is the branch of economics that studies the economy as it actually
exists.
It is based on facts, real data, and cause-and-effect relationships.
It explains economic events without giving personal opinions or value judgements.
The main aim of positive economics is to understand how the economy works and to
make predictions about future economic activities based on present facts.
Because it is based on facts and evidence, positive economics is considered objective
and scientific.

Example:
If the price of petrol increases, the demand for petrol will decrease.

Normative Economics
Normative Economics is the branch of economics that studies the economy from the
point of view of what should be done.
It is based on opinions, values, and judgements rather than only facts.
Normative economics suggests policies and solutions to improve economic conditions.
It is concerned with what ought to happen in the economy and what decisions will be
best for society.
Since it includes personal beliefs and value judgements, normative economics is
subjective in nature.

Example:
The government should reduce petrol prices to improve the standard of living of poor
people.

Difference between Positive and Normative Economics

Parameters Positive Economics Normative Economics

Meaning A part of economics grounded on A part of economics grounded on values,

information and certainty is positive perspectives, and discernment is normative
economics. economics.

Nature Illustrative Dictatorial

Outlook Objective Subjective

Deals with What actually is? What has to be?

Testing (Trial) Statements can be tested Statements cannot be tested

Economic Evidently elucidates the economic Provides a solution for the economic concerns,
problems concerns and issues based on the value.

MODULE 1-(5) PCI, GVA, GREEN GDP

Per Capita Income (PCI): This measures the average income earned per person in a
given area (city, region, country) in a specified year. It is a key indicator of the standard
of living.
PCI = TOTAL NATIONAL INCOME divided by TOTAL NATIONAL POPULATION

Gross Value Added (GVA): This is a measure of the total value of goods and services
produced in an area, industry, or sector of an economy. It shows the contribution of
each sector (agriculture, industry, services) to the GDP.

GROSS VALUE ADDED = VALUE OF OUTPUT - VALUE OF INPUT

VALUE OF OUTPUT - VALUE OF INPUT

Farmer 400 - 0 400

Miller 700 - 400 300

Baker 1000 - 700 300

Total 2100 1100 1000

1000- MONETARY VALUE GVA

Green GDP: This is an experimental attempt to measure a country's economic growth

while accounting for the environmental consequences, such as resource depletion,
environmental degradation, and pollution costs. It attempts to provide a more
sustainable economic indicator.
GREEN GDP = GDP - EC - SC
EC- Environmental cost
SC- Social cost

MODULE 1-(6)
What is a Business Cycle?
A business cycle is a cycle of fluctuations in the Gross Domestic Product (GDP) around
its long-term natural growth rate. It explains the expansion and contraction in economic
activity that an economy experiences over time.

A business cycle is completed when it goes through a single boom and a single
contraction in sequence. The time period to complete this sequence is called the length
of the business cycle.

A boom is characterized by a period of rapid economic growth, whereas a period of

relatively stagnated economic growth is a recession. These are measured in terms of
the growth of the real GDP, which is inflation-adjusted.

Stages of the Business Cycle

In the diagram above, the straight line in the middle is the steady growth line. The
business cycle moves about the line. Below is a more detailed description of each
stage in the business cycle:

1. Expansion or Peak
The first stage in the business cycle is expansion. In this stage, there is an increase in
positive economic indicators such as employment, income, output, wages, profits,
demand, and supply of goods and services. Debtors are generally paying their debts on
time, the velocity of the money supply is high, and investment is high. This process
continues as long as economic conditions are favorable for expansion.

2. Peak
The economy then reaches a saturation point, or peak, which is the second stage of the
business cycle. The maximum limit of growth is attained. The economic indicators do
not grow further and are at their highest. Prices are at their peak. This stage marks the
reversal point in the trend of economic growth. Consumers tend to restructure their
budgets at this point.

3. Recession
The recession is the stage that follows the peak phase. The demand for goods and
services starts declining rapidly and steadily in this phase. Producers do not notice the
decrease in demand instantly and go on producing, which creates a situation of excess
supply in the market. Prices tend to fall. All positive economic indicators such as
income, output, wages, etc., consequently start to fall.

4. Depression
There is a commensurate rise in unemployment. The growth in the economy continues
to decline, and as this falls below the steady growth line, the stage is called a
depression.

5. Trough
In the depression stage, the economy’s growth rate becomes negative. There is further
decline until the prices of factors, as well as the demand and supply of goods and
services, contract to reach their lowest point. The economy eventually reaches the
trough. It is the negative saturation point for an economy. There is
extensive depletion of national income and expenditure.

6. Recovery
After the trough, the economy moves to the stage of recovery. In this phase, there is a
turnaround in the economy, and it begins to recover from the negative growth rate.
Demand starts to pick up due to low prices and, consequently, supply begins to
increase. The population develops a positive attitude towards investment and
employment and production starts increasing.

Employment begins to rise and, due to accumulated cash balances with the bankers,
lending also shows positive signals. In this phase, depreciated capital is replaced,
leading to new investments in the production process. Recovery continues until the
economy returns to steady growth levels.

This completes one full business cycle of boom and contraction. The extreme points are
the peak and the trough.