Calculating Economic Growth and Inflation from FRED

This activity is appropriate for macro principles students and they should know how to calculate the rate of inflation and economic growth. This exercise should take about 20 minutes in a single class meeting. There are no class size limitations.

Overview

Principles students often have difficulty connecting a concept, such as economic growth or inflation, with the actual macro variable used to calculate them. To address this point, this activity asks students to download a handful of macro variables from FRED and then calculate the rate of inflation and the rate of growth over the previous 12 months.

Expected Student Learning Outcomes

Students will be able to calculate the rate of inflation and economic growth and correctly select the appropriate variable to use in their calculation.

Information Given to Students

Calculating Growth and Inflation from FRED (Microsoft Word 2007 (.docx) 13kB Jul19 18)

 
A rapidly growing economy provides many more job opportunities for workers than a slowly growing one. For example, in the late 1990s the economy grew quite rapidly and there were many job opportunities for workers. However, in much of the 2010s, the economy grew at about half the rate of the late 1990s and opportunities were much more limited. It is very likely in the years to come we'll periods of both high and slow growth so it is important to be able to understand this topic for the world you'll be working and living in.

The rate of inflation is another important variable – if inflation is high, a worker would hope that their nominal salaries would be rising quickly to stay ahead of inflation. While the U.S. last had high rates of inflation in the 1970s to the early 1980s (at times during these years, prices were rising more than 10% annually), even low rate of inflation (which we have seen since the early 1990s) can affect people's purchasing power. Thus, we need to be familiar with measuring inflation.

In this exercise we'll calculate economic growth and the inflation rate for consumers as well as the inflation rate for the entire economy over the last 12 months. First, go to the FRED website (that is, https://fred.stlouisfed.org/ ) and download data for the last 12 months for the following variables. Note that the codes in parenthesis after each name is the one used by FRED; use them to be sure to that you've got the correct variables when you gather you data.
    nominal GDP (GDP)
    M1 money supply (M1SL)
    real GDP (GDPC1)
    the federal funds rate (FEDFUNDS)
    the GDP deflator (GDPDEF)
    the Consumer Price Index, or CPI (CPIAUCSL)

Which was largest over the last 12 months?
    A. the rate of economic growth
    B. the rate of inflation for the entire economy
    C. the rate of inflation for consumers

To prepare students for this exercise they should have been introduced to calculating inflation and growth.

One point to emphasize is that one must know what variables are needed to calculate the concepts of interest (inflation and growth). Also, do note that the answer may well vary by month, so the instructor will need to calculate it each time this exercise is done. To do as a team, it would be best for each individual member to answer the question first and then team members should compare their answers.

In a later quiz or exam, given a range of variables students should be able to calculate the rate of inflation and economic growth.

As in the handout for students FRED, https://fred.stlouisfed.org/ is used.