> > Teaching Principles Students How to Assess the State of the Economy

# Teaching Principles Students How to Assess the State of the Economy

This material was originally developed as part of the Carleton College Teaching Activity Collection
through its collaboration with the SERC Pedagogic Service.

#### Summary

Principles students are asked to collect and analyze data on a few macro economic aggregates to give them a first taste of empirical work. Students must create data tables and charts using a spreadsheet, and draw conclusions based on three variables which may be telling somewhat different stories. Critical decisions include which measures of GDP Growth, inflation, and unemployment to choose, and how to weight them in reaching a conclusion about the overall state of the economy.

## Learning Goals

The objective of this assignment is for students to use data to develop a conclusion, and then turn their analysis into a written argument, supported by the data as evidence. The assignment is further complicated in that the data are usually somewhat contradictory.
• Students are able to find the requested data series from a reputable website.
• In locating the data, students are able to differentiate between nominal and real GDP.
• Students choose inflation data which is defined as the percent change in an appropriate price index (e.g. CPI or GDP deflator), not the price index itself.
• Students are able to display data in both tabular and graphical formats, appropriately formatted and labeled.
• Students are able to correctly and completely cite the sources of their data.
• Students are able to characterize a data sample in a reasonable way using mean, min and max values, or trends.
• Students are able to draw conclusions in the face of possibly ambiguous data (e.g. higher unemployment but lower inflation), and data are used explicitly to support the conclusion.

## Context for Use

This assignment is designed for a principles of macroeconomics course. While piloted in a moderate size course (n = 35), the assignment could be used for larger principles courses (with TA support), as well as for any upper level course to introduce students to the stylized facts of the field. The assignment is preceded by a class session where students are introduced to the major sources for U.S. macro data, including the Economic Report of the President, which is described as "containing all the data a student is likely to need in macro principles. It is also preceded by a session on the difference between nominal and real measurements, and why the difference matters.

## Description and Teaching Materials

The purpose of this example is to introduce students to empirical analysis and to some of the stylized facts in a field. This assignment serves to cap our discussion of national income accounting and the state of the economy. Students are asked to evaluate the claim by a senator that the decade of the 2000s was better than either the 1980s or the 1990s. In order to do this, students must collect data on three variables from the last several decades: real GDP growth, inflation rates, and unemployment rates. Students then present the data in tables and charts, and characterize the data for each variable in each decade. One can tell the students where to find the data online, or leave it up to them. One can also specify how to characterize the data (e.g. min, max, mean, increasing, decreasing) or leave it up to the students' discretion. Students must also provide complete citation information for the data sources. Finally, students must draw a conclusion about which decade showed the "best" economic performance, and more importantly to explain their reasoning. This assignment leads to a discussion of the results in class on the due date. The assignment handout is provided below.

Teaching materials needed include:
• Display hardware and software for presenting the results in class.
Assignment Handout (Microsoft Word 28kB Apr7 09)

## Teaching Notes and Tips

In reviewing this assignment, you'll want to discuss the difference between the CPI and the GDP Deflator and how they tell roughly the same story, though each is probably a better choice in a certain context. Similarly, you may want to compare different measures of the unemployment rate.

Common problems students run into:
• Differentiating between real and nominal GDP, even though we've spent several class sessions on this, including defining the two as current dollar and constant (or 2000) dollar GDP.
• Articulating the basis for their descriptions of the data. Did they compute mean values over the decade? Did they look at trends from one decade to the next?
• Students are reluctant to draw a conclusion when different data series are telling inconsistent stories. They want to assert "inflation was better during the 2000s, but unemployment was worse and therefore you can't tell which decade had better economic performance." This is consistent with the cognitive level of most first or second year students according to the Nelson-Perry taxonomy. The point I try to make is that judgment is required, but it's a tough sell for this age group. This is a good moment to introduce the Misery Index (or Misery Index augmented by the growth rate of the economy), though it begs the larger question of how to weight the different inputs in one's conclusion.

## Assessment

• Are the data sources authoritative?
• Are the data accurate? Do the tables/charts show the correct patterns in the data.
• Did the student characterize the data by decade in a reasonable way?
• Did the student draw conclusions in a reasonable way? Did they recognize the conflicting evidence between the different variables? Did they make an attempt to reconcile the conflicts or did they simply ignore them?

## References and Resources

There are many sources of US macro data online. A good one is the annual Economic Report of the President.