ECON 432--CHAPTER 2
Tools 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.

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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 CONTINUED
2. Causation: when a change in one variable causes a change in
another variable. This requires the following three conditions
to hold:


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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 ANALYSIS
These 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 groups
outcomes given certain parameters.
 Treatment group:.

Control group:.
EXPERIMENTAL STUDIES: EXAMPLE
Example: My Dissertation: Efficiency and Equity Considerations in
Procurement Auctions compared bidding strategies of firms under
different preferential treatment structures. The Buy American
legislation allows bidding preferences to American firms and increased
preferences to minority-owned firms. Part of the dissertation uses
experimental techniques in the following way:


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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 STUDIES
Advantages:
 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
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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.