ECON 432--CHAPTER 2Tools of Positive Analysis

WHAT IS POSITIVE ANALYSIS? Positive Economics or Positive Analysis: the study of

how the economy works with an objective representation of what has occurred, what is happening, or what is expected to happen.

Since the analysis is positive in nature with no value judgment the reader cannot discern the author’s viewpoint on the subject.

  Examples:

Description of economic statistics such as federal expenditures were $4.7 trillion in 2008

  Testing relationships between variables to determine

causation or correlation such as if cigarette taxes are increased by 25% what is the predicted impact on tax revenue?

  Efficiency considerations (lowest cost, maximum

value, etc) are positive in nature

BASIC TERMINOLOGY

1. Correlation:

Positive correlation

Example:

Negative correlation

Example:

TERMINOLOGY CONTINUED2. Causation: when a change in one variable causes a

change in another variable. This requires the following three conditions to hold:

Other explanations for any observed correlation must be eliminated. This means you need to rule out other variables that might be affecting Y before claiming that X is causing the change in Y.

 

3 TOOLS OF POSITIVE ANALYSISThese tools include (1) economic modeling; (2) experimental studies; and (3) observational studies or econometric analysis

USING ECONOMIC MODELS

Economists create economic models to examine hypothetical changes in public policy.

They help to frame the research question and isolate the set of variables that may influence the behavior of interest.

Ex: comparing various taxation options such as a lump sum tax, excise tax, or advalorem tax in terms of tax revenue generated and efficiency (minimal distortion of economic activity)

USING EXPERIMENTAL STUDIES

Experimental studies typically test a hypothesis by

comparing two different groups (a treatment group

and a control group) and determining if there are

significant differences between the two groupsoutcomes given certain parameters.

Treatment group:.

Control group:.

EXPERIMENTAL STUDIES: EXAMPLEExample: My Dissertation: Efficiency and Equity Considerations inProcurement Auctions compared bidding strategies of firms under different preferential treatment structures. The Buy Americanlegislation allows bidding preferences to American firms and increasedpreferences to minority-owned firms. Part of the dissertation usesexperimental techniques in the following way:

Control group: group bidding for contracts with no preferential treatment allowed.

  Treatment groups: groups that have differing levels of

preferential treatment and/or other factors such as the number of bidders, etc.

  Positive Analysis: compare the bidding behavior of 2

groups in which only one parameter has changed and look for statistically significant differences among behavior.

 

ADVANTAGES AND DISADVANTAGES OF EXPERIMENTAL METHODS

Advantage: There are any number of policies you can study by constructing proper experiments particularly in the absence of any historic data to do traditional econometric analysis.

Disadvantages: experiments require great precision. Conditions

must be as close to real world conditions as possible to get reliable results.

Experiments can be expensive and often require several parameters being altered simultaneously and therefore lots of treatment groups are necessary.

EXPERIMENTAL STUDIES CONTINUED

Some public policies cannot be addressed ethically through experimentation.

Ex:

Some public policies cannot be addressed legally through experimentation

Ex:

OBSERVATIONAL STUDIES--ECONOMETRICS Observational studies: statistical analysis of

economic data in order to estimate causal relationships. Basic regression techniques allow you to determine the relative statistical importance of different factors that may be affecting outcomes.

Example: My dissertation

Positive Analysis: using data from South Carolina Procurement Office use basic regression analysis to determine the relative importance of each factor on bidding behavior (number of bidders, type of preferential treatment, etc).

ADVANTAGES AND DISADVANTAGES OF OBSERVATIONAL STUDIESAdvantages: data is often available and in many cases less expensive than

conducting experimental sessions.

Several factors can simultaneously change and be accounted for in the statistical estimation

 Disadvantage: Results may be biased in cases where important variables are

omitted

Ex: labor supply analysis finds that people with high after-tax wages work more hours and people with low after-tax wages work less hours suggesting a positive correlation between after tax wages and work hours.

  However, what if some underlying factor, such as ambition,

plays a role? Those with greater ambition work harder and have higher wages; whereas those with less ambition work less and have lower wages. Ambition is difficult to measure.

THIS COURSE

We will use economic models to study the implications of various public policies (tax policies and social programs).

We will also use basic econometric techniques to examine the importance of different factors (economic and socioeconomic factors) in explaining demand for public programs.