How do we measure the economy?

This activity can be used in Principles of Economics, Macroeconomic Principles, and Intermediate Macroeconomics courses. Simply adjust the difficulty level for your specific class and students. The exercise takes about 20 minutes and there are no class size limitations.

Overview

This exercise is a simple way to help student improve their data fluency and analysis skills. It introduces them to the "big 3" measures of the macroeconomy and helps students understand the importance of knowing how a variable is defined and measured. Additionally, students learn to use FRED, which has a large repository of economic data. Further, FRED has great user-friendly tools for creating graphs, which reduces the burden on both the instructor and student. This particular exercise looks at two different decades, asks the students to make a judgment, then asks them to make a prediction. Making a judgment and prediction are both higher-order cognitive processes that help knowledge retention.

Expected Student Learning Outcomes

Students will seek out key economic data on their own and learn how to properly analyze and interpret it. Therefore, students combine theory and empirical application to improve their conceptual understanding of the main 3 macroeconomic indicators.

Information Given to Students

Individual Work: Go to the FRED website and collect U.S. data for the real GDP growth rate, the civilian unemployment rate, and the Consumer Price Index (all urban consumers) inflation rate for one of the following decades (assigned by your instructor). Plot all three lines on the same graph, giving a different color to each one. (Hint: Check herefor help with creating graphs)
Team Work: Answer the following questions:
1. In which decade was the U.S. economy most healthy?
2. In which decade was the U.S. economy least healthy?
3. Based on your answers above, which statistic is most important for measuring an economy's health?
4. What do you notice about the relationship between the variables during each period? (Choose all that apply)
a. The inflation rate decreases when the unemployment rate increases.
b. When GDP growth is increasing, the unemployment rate decreases.
c. When the unemployment rate is high, GDP growth is low.
d. When GDP growth is high, inflation increases.
e. There is no connection between the three variables.
Follow-up for teams that finish early: What questions do these specific data bring to mind? What questions might you ask yourself when seeking out future data for these economic indicators? Write down at least two questions.

Measuring the Economy (Microsoft Word 2007 (.docx) 14kB Aug24 19)

This is a jigsaw activity, where each team member brings their own knowledge to the table and combines it with that of the group to solve a larger puzzle. Pick as many decades as you have team members. It's ok if not all groups have the same number of teammates; in fact, this can lead to more discussion because at least one team will have some information that other teams do not have. The primary point of the exercise is that these three measures are all important, but one is not necessarily more important that the other; indeed, their relative importance depends strongly on context. For example, if the economy has been doing very well, then a sharp decline in the growth rate might be more important that a 0.1 percentage point increase in the unemployment rate. For decades that you omit, you can ask follow-up questions such as: What do you think happened during the (omitted decade)? What do you think will happen during the coming decade (2020-2029)?

In a follow-up quiz or exam, ask students to discuss the pros and cons of a given change in these numbers. You could pick a different time period from what they analyzed in class, have them give a well-reasoned prediction about what will happen over the coming months and decades, or have them track and analyze these measures throughout the semester.

1. Your students most likely come into your class with a pre-conceived notion that the "stock market" is a comprehensive measure of the economy. This short podcast from NPR should diminish that notion and prepare them to understand what is important for measuring the economy instead:
2. St. Louis Federal Reserve: A good discussion from Kevin Kliesen about hard data vs. soft data and how they shape our view of the economy.
3. St. Louis Federal Reserve: FRED allows you to quickly find data in a convenient format and create a graph with their user-friendly tools. Most of the tools are self-explanatory, but FRED also offers a detailed FAQ (with screenshots) on how to edit graphs.
4. Here is an op-ed that describes how the stock market is not a measure of the economy and, further, that a decline in the stock market might coincide with some things that are good for some households. It shows that the economy cannot be simplified to a single number and everyone is affected differently by policy changes.