# Using economic theory to predict outcomes: Applying stylized facts from the literature to the Solow Model

This material is replicated on a number of sites as part of the SERC Pedagogic Service Project

## Summary

Undergraduate research is not something that should be reserved for the last year of a student's experience. It needs to be intentionally woven into the fabric of coursework to build knowledge and skills for the capstone experience. This example asks students to manipulate a theoretical model to predict outcomes. I focus on theory because at Wooster, our assessment data has found that students have lower levels of competence building theoretical models. Students develop a set of "stylized facts" from a literature search. Then they use some of those stylized facts to manipulate the model to predict an outcome. In this example, I show how to use the Solow model to evaluate the benefits and costs of remittances and brain drain. The answers are ambiguous and depend on the stylized facts that the student finds. This pedagogical example can be replicated using classic papers in other areas of inquiry.

## Learning Goals

Students will learn:

1. How theory allows researchers to focus on a small set of variables of concern.
2. How to derive a set of stylized facts from empirical research.
3. How to take a set of stylized facts and use those to predict outcomes within a theoretical model (in this case Solow (1957)).

## Context for Use

This example is used in an intermediate macroeconomics class. Students have already been exposed to the Solow model and a series of in-class exercises or problems that give them familiarity with manipulating the model before the assignment. I have found that this activity works best as a problem set research question. I have used this pedagogical example with other models and in other intermediate or higher-level classes.

## Description and Teaching Materials

I assign this question in an intermediate macro class as a problem set question. Students are asked the following question:

"Migrants from developing countries sent back \$206.3 billion in 2006 to their families, according to the World Bank, nearly seven times the level of remittances in 1990. Many of these migrants are skilled. As such the migrant-sending country, often a developing country, experiences brain drain. Do migrant remittances compensate a developing country for brain drain? Write an essay that illustrates the theoretical effects of remittances on the economic growth of a developing country." I give out more guidelines and suggestions to students to help them along. Download the assignment. (Acrobat (PDF) 105kB Mar26 12)

## Teaching Notes and Tips

Preparation for this assignment is important because students can get overwhelmed. Students in my intermediate macroeconomics class have rarely been exposed to a question that asks them to manipulate a mathematical theoretical model to make predictions using stylized facts. For many students, this is also the first time they have been asked to read and use economic research. I prefer to hint that students combine both contextual news articles from the media like Financial Times and the Economist with economic research. News articles give students who find mathematics difficult or have reduced prior exposure to economic research an entry point for the topic. Here are some additional important pointers:

1. Before assigning a question with a theoretical model like Solow's, I make sure the model is covered in class. You can also point students to a straightforward textbook exposition of the model. Sometimes I also design an in-class collaborative group exercise to give students practice with model manipulation.

2. I ensure there is at least one full office hour open to answer questions.

3. I go over the rubric in class.

4. After grading the paper, I discuss their findings in class. This debriefing or reflection session is important to build and development important critical thinking skills.

## Assessment

The grading rubric can be found in the assignment file. (Acrobat (PDF) 105kB Mar26 12) I often spend half a class period after the assignment is returned to have a discussion.

## References and Resources

EconLit
Journal of Economic Literature
Financial Times
Mankiw, Intermediate Macroeconomics 7th Edition