How Positive and Normative Economics Relates to the US Government Term Paper

  • Length: 5 pages
  • Subject: Economics
  • Type: Term Paper
  • Paper: #17995914

Excerpt from Term Paper :


The objective to the success of a specific science is the capability to identify and delineate opinions on 'what is' from 'what ought to happen'. This includes providing a demarcation between positive statements and normative statements. Positive statements deal with 'what is, was or what will be' but the normative statements deals with 'what ought to be' and are based on value judgments regarding what is good or what is bad. The positive conclusions could be considered as those which are extensively applicable throughout the whole world and they are testable whereas the normative instructions are not testable but constitute the basis for formulation of positive statements. Positive statements are for example, when we ask economists to inform us regarding how the price system operates, we are asking them to travel us along the road of positive economics. The following statement "if the price of petrol increases the demand for petrol falls" is a positive statement that could be either agreed or refuted. The normative economics on the other hand deals with the prescriptive statements, to illustrate, how the price system would function. Normative statements could generate positive hypothesis regarding the basis on which 'ought'-type conclusion depends on. It thus helps the policy decision makers to provide for the maximum well-being of all people. (The Tools of Economics Analysis) The positive analysis concentrates on becoming fully aware of the economic variables, unemployment, inflation, growth rates, interest rates etc. And the way they associate with one another. The normative theory contains the policy recommendations that the government activity in the economy is to be devised so as to maximize the national welfare. (The Demand Side: Keynesian Economics)

The U.S. trade policy exhibits three distinct modeling approaches: the normative approach that mostly associated with the goal of social welfare function, the positive approach associated with the basic postulates of the political economy and the transaction cost approach that is following a mid-way between the positive and normative approaches. The normative approach to the trade policy of the U.S. government emphasizes on the objective function that incorporates the issues of maximization of well being, optimization of resource allocation under the environment of perfect competition. The effective operation of such a system necessitates a type of government that itself functions perfectly and that is quite effective in handling the policies so as to accomplish the objectives of welfare maximization and efficiency objectives. (An Overview of the Modeling of the Choices and Consequences of U.S. Trade Policy)

However, in reality it is not necessary to examine in the normative modeling approach so as how a government is required to be organized and functioned to accomplish the conditions of first best world. On the theoretical framework at the minimum it is essential to assume that the government is fully aware of the economic indicators and functions so as to play the part of a beneficent dictator. However, what continues to be unclear in such circumstances is why governments will be originated initially and what should be the norms for guidance of their policy initiatives. The normative approach thus takes for granted the prevalence of perfect government and represents its part in policy making as an executing agency to implement the norms of normative approach for the benefit of the society. However, taking into account the prevailing structure of the U.S. government along the types and complexities of the concerned objectives it is apparent that an imaginary environment needs to be created so as to make the normative approach effective.

However, these are regarded as flexible approaches since the normative approach is unable to explain as to why the government has selected the trade policies that they do particularly, when such policy choices are so rapidly at variance with first-best optimal criteria. The political economy approach is considered quite effective since it improves the awareness of the factors that moulds the choice and designs the trade policies. The different positive models have universally accords more weight to some individual and interest groups than to others in finding out the policy priorities. The welfare objectives thus do not associate at all in the policy process or associated only along with the distributional objectives. The trade policy prioritizations are effected both in the Executive Branch and Congress particularly, while the probing authority of the ITC depended primarily on the facts and legal interpretations associated with U.S. trade laws as they were devised in other branches. As per the positive approach the private sector manufacturing interests along with the trade law actions of legal firms operating on their own are the impelling factors indicating the trade policy priorities that may be interdependent more especially, in the cases of large nations and trading blocks. (An Overview of the Modeling of the Choices and Consequences of U.S. Trade Policy)

Since the positive economic approach concentrates basically, on the effect of the goals of producers in restructuring policy priorities and electoral politics there exists some sort of specific objectives that does not sufficiently take into account. These incorporate differing public interests and advocacy organizations particularly those that are concerned with the trade polices and the circumstances, human rights and other non-economic, trade-related goals like improving of democratic political and social institutions. However, the main disadvantage of this approach is that it is not concerned with the merits and demerits of the substitute trade policies and it extends no guidance to the policy makers in selecting among the available policy substitutes. The Transaction Cost Approach signifies that society is consisted of innumerable agents reinforcing on behalf of innumerable principals and execution of numerous policies in real time basis. Unless a broad view is undertaken it is quite problematic to understand the alternative and consequences of trade policies. A combination of the normative and political economy approaches is therefore quite necessary.

A close look at the U.S. trade policy initiatives during the past half century ever since the conclusion of World War II, finds it worthwhile to consider such experiences within the transaction cost structure as involvement of the interplay between the forces of trade liberalization and protectionism / export subsidies as a radical process prevailing in real time. The close analysis and evaluation of the real consequences of the trade policy process strongly recommends on the balance that the U.S. economy has been subject to a distinguished liberalizing orientation and resulting all-round improvement in the economic well being, even when the variations in the income distribution are considered. The adherence process associated with the U.S. trade policies has been adequately strengthened so as to decline the transaction costs over time. However, we acknowledge that not everyone would grant such conclusion indicating particularly the frequent reliance on non-tariff protectionism in the last twenty years or more and the prolonged restrictions applicable to trade in agricultural products and apparel. (An Overview of the Modeling of the Choices and Consequences of U.S. Trade Policy)

However adoption of such principles the general direction of U.S. domestic and trade policies with regard to market oriented consequences and the reduction of U.S. And foreign trade impediments dominated the market. This has been strengthened by the prevalence of the General Agreement on Tariff and Trade that produced the necessary relevance and power for trade liberalization and non-discrimination with regard to the members of GATT and the regular multilateral trade negotiations. The U.S. dominance became the impetus for assisting in reducing tariff barriers for dealing with difficulties generated by the NTBs. This process has of course been far from perfect; however, the consequence has nevertheless been mostly advantageous to the major industrialized and developing nations associated with the global trading system. The continuation of the transition towards enhanced liberalization in the future is doubtful. However, it is apparent to be the rational working hypothesis that this will. This has been reinforced by the potentialities of a stronger agency represented by the WTO that has assured to be a more effective dispute settlement mechanism.

A further consideration is made to the significant part played by the international investment in the global economy. It has been established that the control of international capital movement among the major industrialized nations particularly have been remarkably declined the last five decades. This is marked by considerable lowering of interest differentials that can be considered as a symbol of enhanced efficacy in the functioning of international financial markets. Such markets have also represented many innovations by international financial institutions that have been indicated in variations in their organizational structure and enhanced in the types of international financial tools made available to the market associates. Moreover, the considerable enhancement in foreign direct investment and the associated trade resulted in by multinational corporations. As most of the FDI is continued by the operating MNCs among the group of major industrialized nations there have been sizable movements of FDI to the newly industrialized countries particularly in East and Southeast Asia and also in Latin America. More significantly, the FDI serves…

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