Microeconomics Questions Please help?

Question

I am having a hard time with my economics class.

1)Evaluate the following statement: "It is easier to build an economic model that accurately reflects events that have already occured then to build an economic model to forecast future events." Do you think that this is true or not? Why? What does this imply about the difficulties of building good economic models?

2) Economists who work for the government are often called on to make policy recommendations. Why do you think it is important for the public to be able to differentiate normative statements from positive statements in these recommendations?

Answer 1

1) Past events are easier to predict because you can create a model that shows the outcome.  Such as, "since the auto maker decreased production, but did not properly estimate the power of its advertising, its had a shortage and lost out on revenue.  However, it increased production to match its demand and thus played an important role in creating a new market equilibrium."  

With this information, you can plot out the actual numbers on a graph to show the demand curve and production curve.  You can also use another graph to show the demand curve as it corresponds to the use of advertising over a period of time.

You could even converge these two graphs on top of one another.

2)Positive statements state whether or not something is true or false.  "Elephants come from South America" is a positive statement.   It isn't true, but that isn't the point.  It is simply making a statement about reality.

On the other hand, Normative statements state an opinion about something in the world.  Such as, "We should stop using elephants in our circuses because they need to go back to South America."  

The tricky part is when you get into statements that can seem like both.  Such as, "That man is telling lies."  It sounds like an Normative statement because it is making a judgment about a person, however, it really is a positive statement.  To be a normative statement, it needs to make a suggestion.  Such as, "We should lock that man up because he tells lies."  or "We should not lock up that man because he is not telling a lie."

It is important to understand these things because the public may end up in an undesirable position such as being in a war under false pretenses.  "Iraq has weapons of mass destruction." (Positive statement).  "We should go to war with Iraq because they have weapons of mass destruction." (Normative.)