PUTTING THE TEA IN TEACHING

PUTTING THE TEA IN TEACHING:

THEORY, EVIDENCE, ANALYSIS ASSIGNMENTS FOR MACRO PRINCIPLES

Phil Holleran

Radford University

P.O. Box 6952

Radford, VA 24142

ABSTRACT

Students may conclude from their introductory courses that Economics is a purely theoretical exercise. They develop little knowledge of or appreciation for the connection between economic theory and empirical evidence. This paper describes a series of assignments in which students perform simple tests of some of the theories they encounter in the Macro Principles course. The paper describes the characteristics of these Theory, Evidence, Analysis assignments in general and presents examples of three such assignments. The paper reports informal evaluation of these assignments and discusses the benefits and costs of the assignments.

An old joke has it that an economist is someone who looks at the way the world really works and asks, “Yes, but will it work in theory?” Despite the inclusion in almost every introductory textbook of a section on economic models, hypothesis testing, and the scientific method, many students emerge from their Principles courses persuaded that the old joke tells the truth.

Students may complete their introductory courses convinced that Economics is a purely theoretical exercise. They develop little knowledge of or appreciation for the connection between economic theory and empirical evidence. They may gain the impression that economic theories are dreamt up out of the blue by some “academic scribbler.” They see truth in the old joke, and believe that Economics is more about theory than about reality.

Students often express the belief that something may be “good in theory, but not in practice.” They fail to appreciate that a theory that is not good “in practice,” i.e., does not explain reality, is not in fact a “good theory.” A theory is accepted only after it has been shown to be consistent with the evidence. One way to further students’ appreciation for the connection between theory and reality (or evidence) is to have students evaluate macroeconomic theory themselves, by confronting theory with evidence to see how well the theory explains the reality. As Kennedy (2000, p. 81) argues, the macroeconomics course “is greatly strengthened by showing that its contents have empirical relevance.”

Several Economics instructors have developed and described exercises to enhance students’ understanding of the empirical relevance of Economics. Abdalla (1993) describes a project in an International Economics course in which students locate and report data on domestic and international economic conditions for an individual country and evaluate its economic performance. Wight (1999) describes an assignment for an Economic Development course in which students retrieve World Bank data on social and economic development indicators for a country, graph the data, and explain whether development occurred in that country. Neither of these projects, however, includes the testing of any theories, nor is either designed for a Principles course.

Santos and Lavin (2004, p. 149) propose “an empirical macroeconomic research curriculum” in which students evaluate macroeconomic theory, using both extant data and analyses of other economists, on the basis of how well these theories explain the data.” They describe empirical assignments for a money and banking course. For example, students test the monetary transmission mechanism by plotting the federal funds rate and changes in business inventories and then comparing the evidence to the process described by Taylor (1995).

Santos and Lavin report the results of a test for the impact of these assignments on deep learning. The results do not unequivocally support the contention that the assignments enhanced deep learning. Santos and Lavin attribute this failure to the lack of a pre- and post-test to assess individual student development and to the use of just two such assignments during the semester.

While Santos and Levin do present an assignment that allows students to conduct a test of a theory, their assignment is not designed for a Principles course.

In this paper, I describe a series of Theory, Evidence, and Analysis (TEA) assignments for the Macro Principles course. Each TEA assignment is at the level of rigor appropriate for the Principles course, yet each is sufficiently brief that I have been able to assign five TEAs in a 15-week semester, consonant with Santos and Lavin’s (2004, p. 155) suggestion that more-frequent empirical assignments would have a “relatively more discernable” impact on student learning.

The TEA assignments address at least two of the six proficiencies advocated by Hansen (1986, 2001), namely, “access existing knowledge” and “understand and interpret numerical data found in published tables such as those in the annual Economic Report of the President.” These assignments also implement Petr’s (1998) “data manipulation and interpretation” dimension of active learning. The TEA assignments implement Petr’s suggestion that “a somewhat more sophisticated use of data interpretation as a learning activity is to request students to affirm or refute an argument or position through the use of a table, or chart, or graph” (198, p. 235).

Theory, Evidence, and Analysis assignments for a Macro Principles course must meet several criteria. Most obviously, they must be relevant to the basic principles covered in the course. In my Macro Principles course, I include five TEAs, covering 1) economic systems and national income; 2) the trade-off between inflation and unemployment; 3) budget deficits and interest rates; 4) economic conditions and Federal Reserve monetary policy; and 5) trade deficits and economic growth. (The complete assignments for the current semester can be viewed at www.radford.edu/~pholleran)¹

A second criterion is that the data needed to complete the assignments must be published and readily available at a zero (money) price. These TEA assignments use data published in the Central Intelligence Agency World Factbook, the Heritage Foundation Index of Economic Freedom, the Economic Report of the President, and minutes of Federal Open Market Committee meetings. All of these sources are freely available online.

Third, the assignments involve one dependent and one independent variable. Though this criterion can be challenging to satisfy in Macroeconomics, it is important not to overwhelm students with situations in which many variables may be changing at once. The evidence in each assignment should allow relatively straightforward analysis and relatively straightforward interpretation of results. This requirement gives rise to the fourth criterion: if the evidence is not consistent with the theoretical prediction, possible explanations for the inconsistency should lie within the students’ ability to grasp. For example, time series graphs of the U.S. budget deficit and interest rates generally move together in a way consistent with theory; students can explain inconsistencies by referring to lags and/or borrowing from abroad.

It is also important to note that the assignments do not require that students have knowledge of Statistics (much less Econometrics). The evidence should be amenable to analysis by simple comparison of means or by “eyeball” comparisons of graphical trends.

Completion of each TEA assignment follows the same general procedure. The assignment presents students with a topic, often in the form of a news report accompanied by an opinion. For example, a TEA on budget deficits and interest rates could begin with a news report of the most recent size of the government’s budget deficit, with an assertion by a politician that budget deficits will be harmful to economic growth. Students must first articulate the theoretical relationship between the two variables of interest. This statement of theory is based on class discussion and textbook reading. I have found it useful, especially in the first two or three assignments, to suggest to students a specific form in which that theoretical relationship might be stated. For example, it can be helpful to suggest to students that they can state the theory by filling in the blanks in the statement “economic theory predicts that increases in the budget deficit will cause interest rates to ______ because ______.” These prompts increase the likelihood that students will get started on the right track.

In the second step of the assignment, students use the links provided within each assignment to retrieve information on the variables of interest and to create tabular or graphical presentations of the evidence. Giving students the option of one or more ways of measuring a particular variable can make this something more than a mechanical process. For example, a TEA assignment on economic systems and national income could ask students to retrieve information on GDP and on GDP per capita, and then to choose which measure of national income is more appropriate for the comparison; likewise, an assignment examining the relationship between budget deficits and interest rates could give students the choice of measuring budget deficits in nominal terms or as a percentage of GDP. Students must then defend their choice of measurement.²

In the third step of the assignment, students analyze the evidence, describing the apparent actual relationship between the two variables. I suggest to students that they look for periods when the independent variable is, say, falling and then describe what is happening to the dependent variable over that period (I do not actually use the terms “dependent variable and “independent variable”). The analysis continues with students determining whether the evidence is consistent with the theoretical prediction. If it is consistent, then students explain why the predicted relationship holds (this is again directly from class discussion and textbook reading). If the evidence is not consistent with the theoretical prediction, students must offer an explanation for the inconsistency. Such an explanation might involve a violation of the ceteris paribus assumption, or it might involve measurement error (such as the failure to account for lags).

The series of TEA assignments includes a variety of types of evidence and presentation of that evidence. The first assignment, examining the relationship between economic systems and national income, uses cross-sectional evidence; students present the evidence in tabular form, calculate means, and compare ranges. Three TEA assignments (on inflation vs. unemployment; on budget deficits and interest rates; and on trade deficits and economic growth) use time-series evidence for the U.S.; students present the evidence in line graphs, and “eyeball” the evidence for trends.³ One assignment uses narrative evidence from Federal Open Market Committee minutes; students use the written evidence to determine the relationship between the FOMC’s assessment of macro conditions and the decision to raise or lower interest rates.⁴

Many Macro Principles courses discuss economic systems early on in the course. A first, fairly simple TEA assignment is to have students test the theory that market economies will have higher national incomes than command or mixed economies, other things being equal. (The complete assignment is shown in the Appendix.) The Heritage Foundation Index of Economic Freedom identifies those countries with the purest market economies (“free,” in The Heritage Foundation’s terminology) and the purest command (“repressed”) economies; in addition, students select some countries from the middle range to represent mixed economies.⁵ The Central Intelligence Agency World Factbook reports GDP and GDP per capita for each country.

Students present the evidence by creating a table listing the market economies and their GDP and GDP per capita; the mixed economies and their GDP and GDP per capita; and the command economies and their GDP and GDP per capita. Students analyze the evidence by comparing the mean GDP and GDP per capita for each group, and by comparing the range of GDP and GDP per capita values within each group (for example, how does the lowest GDP per capita in the market economy group compare to the highest GDP per capita in the command economy group?).

In this assignment, students must decide whether the appropriate measure of national income for testing the theory is GDP or GDP per capita. Students find that many command and mixed economies have higher GDP than the market economies. But when using GDP per capita as the measure of national income, the evidence strongly supports the theory: the group of market economies has a much higher GDP per capita, on average, than either the group of mixed economies or the group of command economies; no command economy has a higher GDP per capita than any of the market economies. At the same time, students are also able to observe that not all of the world’s richest countries (on a GDP per capita basis) are market economies, and not all of the world’s poorest countries are command economies.

These results allow a discussion of the ceteris paribus assumption in the theory: economic systems are not the only factor that accounts for international differences in GDP per capita. The result also allows for discussion of whether GDP per capita is the only, or even the best, measure of a country’s standard of living. Finally, since some students will conclude that GDP per capita is the more appropriate measure of national income because the GDP per capita evidence supports the theory more strongly than does the GDP evidence (rather than arguing that the per capita measure is better because it accounts for national differences in population), the assignment also introduces the notion of what it means for evidence to support a theory.

Most Macro principles textbooks and instructors introduce the concept of the crowding-out effect of government budget deficits. A TEA assignment allows students to empirically examine the relationship between government budget deficits and interest rates. Students retrieve data on budget deficits and interest rates from the Economic Report of the President to test the theory that government borrowing will drive up the price of borrowing.

Students present the evidence in a line graph, with a time series of budget deficits and another series of interest rates. (A measurement issue also presents itself here, an issue which I prefer to have students resolve for themselves: the Economic Report presents budget deficits both in nominal terms and as a percentage of GDP. I ask students to choose the appropriate measure and to defend their choice.) The students then “eyeball” the two series, to see if periods of increasing deficits are also periods of increasing interest rates. (I do not ask students to calculate a correlation coefficient, though occasionally students take it upon themselves to do so. More often, students loosely use the term “correlation” without understanding its precise statistical meaning.) Students analyze the data by identifying periods when the budget deficit was increasing, and determining what the interest rate was doing during those periods; students then identify periods when the budget deficit was decreasing and describe what the interest rate was doing during those periods.

In this example, the evidence does seem to support the theory. In the time series graph, periods when the budget deficit is increasing do generally coincide with periods of rising interest rates. During the period of decreasing deficits and surpluses in the 1990s, interest rates generally were falling. The analysis also allows for a discussion of the ceteris paribus assumption: budget deficits are not the only determinants of interest rates, so that we can discuss lags, foreign lending in the U.S., and the role of the Fed in interest rate determination.

It is important not to assume that students know how to produce these graphs. Messineo and DeOllos (2005) argue that instructors frequently assume that students’ use of email, text messaging, and other electronic communications translates into proficiency with data analysis applications. Messineo and DeOllos report survey evidence showing that students’ self-reported skill levels are much lower for data processing (24% of students in their sample considered themselves “skilled”) than for personal email use (88% considered themselves skilled) and word processing (85% considered themselves skilled). I ask students to create the graphs in Microsoft Excel, and I devote substantial class time to explaining how to do that. In addition, within the assignment itself I provide step-by-step directions for accessing the data and creating time series graphs. As Wight (1999) notes, “Well-written instructions substantially lower student time costs and frustration” – and, I might add, substantially reduce time spent grading and correcting incomprehensible graphs. As an added precaution, during discussion of the assignment I display for students what their finished graphs should look like.

Federal Reserve decisions to raise and lower interest rates can be shrouded (often deliberately so) in mystery. This TEA assignment affords students the opportunity to test the theory that the Fed will reduce interest rates during periods of high unemployment and will increase interest rates to ward off (incipient) inflation.

Students use the most recently available minutes of the Federal Open Market Committee to determine which economic indicators the Fed relies on and the Fed’s assessment of economic conditions. Students then compare the action taken by the FOMC at that meeting to the predicted action, given the FOMC’s assessment of economic conditions. The minutes allow students to see the factors that the FOMC considers in its deliberations and to see the trade-offs that the FOMC considers.

Students often greet the announcement that this TEA will not involve the creation of any spreadsheets or graphs with relief. In fact, they often discover that reading the FOMC minutes is much more difficult than is plotting time series; students generally cite this as the most difficult of the TEA assignments to complete.

To assess the impact of these assignments, I administered a survey with the fifth TEA assignment during the Fall 2005 semester. (Students were told that failure to complete the survey would reduce their score on that assignment by 20 percent of the maximum possible score.) 94 completed surveys were returned (out of 113 total students), from 3 sections of the course. Of the 19 “missing” surveys, 6 were from students who did not complete the fifth assignment and 13 were from students who, for one reason or another, did not complete a survey. Presumably these 19 students did not constitute a random sample; thus the results reported here may be slightly biased in favor of the benefits of the TEA assignments.

The survey asked students to assess each of the TEA assignments on this question: “How much did each of these assignments strengthen your understanding of the economic theory involved?” Students were asked to use a scale of 1 (“not at all”) to 5 (“a lot”). The combined mean response for all five assignments was 4.1; mean scores for individual TEA assignments ranged from 3.9 to 4.3.

The assignment on the Fed’s monetary policy received the highest score, despite student complaints about the difficulty of reading through the FOMC minutes. The assignment on the effect of budget deficits on interest rates received the lowest score.

Students were also asked to identify which of the assignments they found “most helpful” and which they found “least helpful.” Each of the assignments was named by at least one student as “most helpful,” each was also named by at least one student as “least helpful.” The assignments on economic systems and national income and on the Fed’s monetary policy were cited most frequently as the “most helpful. ” The assignment on budget deficits and interest rates was cited the fewest times as “most helpful.” In terms of the “least helpful” assignment, most frequently cited was the TEA on trade deficits and GDP, while the TEA on economic systems and national income was cited by just one student as the “least helpful.”

Student comments included on the surveys further illustrate how TEA assignments aided student learning. One student described the assignments as being “as hands-on as you can get in an Economics class. They put real evidence behind the theories learned in class and helped to solidify the information in my head.” Another student said that the assignment “made the lectures more clear. I could relate them to something that happened in the real world.” One student even discovered that “sometimes the assignments were so memorable that you retained information accidentally.”

A particularly insightful comment came from a student who has difficulty with the first assignment, on economic systems and national income. This student reported that this assignment was the most useful one “because I did it wrong. It was more helpful to look at a country based on GDP per capita than on GDP alone and with the help of the TEA I found that out.”

Students reported that the TEA assignment on economic systems and national income helped them discover information about other countries that they didn’t know. As one put it, “I feel that I learned a lot about countries that I didn’t know before,” while another said, “I enjoyed researching the evidence and just learning about the many different countries.” And one student added, “I learned a lot about Excel.”

Students also were asked to identify the “worst thing” or the “thing that you would change” about the assignments. The most frequent response, given by exactly fifty percent of respondents, was “nothing.” Of those who did suggest changes, the most frequently recommended change was to make the assignments count for more points – some students felt that they effort they put into completing the assignments was not commensurate with the assignments’ weight in the overall course grade.⁶

Not all students were enamored of the assignments – witness the student who suggested “maybe find a good way to make it a little more interesting.” And one student lamented that the worst thing about the TEA assignments was that they were “due on Fridays so I couldn’t skip class.”

As a second way of assessing the impact of TEA assignments, I included a question about theory and evidence on the final exam. The question was: “Economic theory predicts that international trade will lead to higher national incomes. Carefully and completely describe how you could test the theoretical relationship between international trade and national income, including a description of the appropriate measure of national income.” The mean score earned on this question was 82%. The mean overall course percentage for the three sections was 78%.

There are three types of costs to instructors of using TEA assignments. The largest cost is the time spent preparing the assignments. Preparation includes time spent detailing instructions for presenting the evidence in tabular or graphical form, as well as time spent finding appropriate data sources. These costs are largely one-time costs, although the data sources used in these assignments are revised annually (so that it is important to check that old links are still active).

Class time devoted to discussing the assignment a week or so before it is due is time well spent. My preference is to make sure that students know what each assignment involves, which requires walking through each step of the assignment in class. I even show students what the finished tables or graphs will look like, so that they are alerted to problems if the tables or graphs they produce don’t look like the ones displayed in class. Class time spent discussing the assignment can be used to reinforce the theory as well as to cover the mechanics of collecting and presenting the evidence. I also prefer to use substantial class time to reviewing the assignments once they have been completed and graded.

There is a substantial trade-off between class time discussing the assignment and time spent grading the assignment. Discussion of the assignment one week before it is due can head off many potential problems that would require greater grading time to address. I use a grading rubric with each assignment; on average, it takes five minutes to grade each individual paper.

Students reported on the survey a mean of 2.75 hours working on each assignment. Reported times ranged from about 1 hour to 8 hours (8 hours was reported by one student; eleven of the 94 responding students reported spending an average of more than 4 hours per assignment).

Theory, Evidence, Analysis assignments have proven to be an effective and relatively enjoyable way for students to engage in the empirical aspects of macro Principles. Though instructor costs are not insubstantial, they seem to be less than the benefits of enhanced student understanding of both economic theory and the process of “doing economics.” As one students reported, “I found these assignments to be the best projects for an economics class – they developed my understanding in a fantastic way.” Another noted that “it helps you to learn Econ in a different way than taking tests and quizzes.”

Perhaps most importantly, if not easily quantifiable, the TEA assignments can occasionally even get students excited about Economics. My evidence for this assertion is anecdotal rather than a set of data. I close with the example of a student who , upon completing the TEA on budget deficits and interest rates, could not wait for the next class meeting when we discussed the graded assignments. He sent me a long email describing the extra reading he had done online and how some evidence suggested there was a relationship between budget deficits and interest rates while other evidence suggested there was not. He even reported a long telephone conversation he had had with his mother about the assignment. He just could not wait – he wanted to know right away what the actual relationship was. He also suggested that perhaps TEA should stand for “There’s no Easy Answer.” Surely such interest in a humble Economics assignment must be a sign of something Good.

1. Since developing these assignments, I have become aware that the National Council on Economic Education has a similar series of exercises available on its website, <www.ncee.net>. My thanks to conference participant Janet Wolcutt for bringing this to my attention.

2. This does, however, introduce the question of how to treat, for purposes of grading, the work of students who choose the “wrong” measurement. For example, a student might choose to retrieve and analyze data on GDP when in fact an analysis based on GDP per capita is preferable. My solution has become to ask students to analyze the evidence using both measures and then to explain which one is better. In later assignments, I have taken to prescribing which measure to use and asking students to include in their analysis a discussion of why that particular measure is preferable.

3. I have had students create scatterplots as well as the time series graphs for several assignments, most notably the trade-off between inflation and unemployment. Students have much more difficulty interpreting the scatterplots than the line graphs, and I have essentially abandoned this requirement.

4. The complete assignments are available upon request from the author at <pholleran@radford.edu>. Assignments for the current semester are posted online as part of the course website at <www.radford.edu/~pholleran>.

6. Based upon this suggestion, I have raised the value of the TEA assignments from 25 points to 30 points each (in a grading system where a test is worth 100 points).

The objective of this TEA assignment is to investigate the relationship between economic systems and national incomes. You will achieve this objective by describing the theoretical relationship between economic systems and national incomes; presenting evidence about the actual relationship between economic systems and national incomes; and analyzing the evidence to determine whether or not it supports the theory.

1. State the Theory. (6 points) In one sentence, state the relationship between economic systems and national income that would be expected or predicted based on economic theory. That is, state which type of economic system is expected (based on economic theory) to lead to higher national income. Then in a second sentence, explain why we would expect that relationship between economic systems and national income.

“Economic theory predicts that a ______ economic system will lead to higher national income than will a ______ economic system or a ______ economic system. This relationship is predicted because ________________________________________________.”

2. Present the Evidence. (4 points) To test whether the theory is correct, we must confront it with the evidence. Evidence consists of facts from the world around us. In this assignment, the facts that we need are 1) the type of economic system (market, command, or mixed) that is actually used in a sample of countries, and 2) the level of national income in each of those countries. We will then compare the levels of national income among countries with the different types of economic systems. We will record the information in a Microsoft Excel spreadsheet (alternatively, you can record the information in Microsoft Word by creating a table.)

b. Determine which countries are market economies, which are mixed, and which are command:

A good source for that information is the 2006 Index of Economic Freedom, published by The Heritage Foundation, a Washington, D.C. think tank. The 2006 Index of Economic Freedom is available at http://www.heritage.org – the link for the 2006 Index of Economic Freedom is about halfway down the page on the left. Click on the link, and then click on “Countries.” You will then see a list of countries ranked from the “most free” economies to the “most repressed” economies.

The countries that are ranked as “free” are considered to have the purest market economies in the world today (they’re the ones with an index score less than 2). Record the names of these countries in your spreadsheet under the “market” column.

The countries that are ranked as “repressed” are considered to have the purest command economies in the world today (they’re the ones with an index score of 4 or higher). Record the names of these countries in your spreadsheet under the “command” column. (The country with the purest command economy in the world should be at the bottom of your list.)

Now we need countries that have a mixed economic system. We will take the countries in the “middle” of the Index of Economic Freedom ranking as being those countries with mixed economies. Specifically, we will consider those countries whose Index of Economic Freedom score is above 2.90 and below 3.10 to be the “purest” mixed economies. Record the names of these countries in your spreadsheet under the “mixed” column.

A good source of information for national incomes is the World Factbook published by the U.S. Central Intelligence Agency. The CIA World Factbook is available at http://www.cia.gov -- click on The World Factbook (the link is under “Library and Reference” on the left-hand side of the page), and then select “world” from the country or location pull-down menu. Then click on “Economy” among the categories on the right-hand side of the page.

Scroll down the page to the GDP measure. Click on the chart icon (the one farthest to the right) for that measure. You will then see a ranking of GDP for all countries in the world, from highest to lowest. Use the GDP (purchasing power parity) measure of GDP.

Find the GDP for each of the countries in the “market” list, and enter it in the second column in your spreadsheet. Then find the GDP for each of the countries in the “mixed” list, and enter it in the fifth column in your spreadsheet. Then find the GDP for each of the countries in the “command” list, and enter it in the ninth column in your spreadsheet.

3. Analyze the evidence. Now we need to determine whether the evidence supports the theory or contradicts the theory, or if it is hard to say whether the evidence supports or contradicts the theory. That is, we want to determine whether the actual relationship between economic systems and national income is the one that would be expected based on economic theory.

a. (2 points) Compare the average GDP of the market economies with the average GDP of the mixed economies and with the average GDP of the command economies.

b. (2 points) Do any of the command economies or mixed economies have a higher GDP than any of the market economies?

c. (2 points) Compare the average GDP per capita of the market economies with the average GDP of the mixed economies and with the average GDP of the command economies.

d. (2 points) Do any of the command economies or mixed economies have a higher GDP per capita than any of the market economies?

e. (2 points) Are any of the world’s very richest countries not in the “market” list? Are any of the world’s very poorest countries not in the “command” list?

f. (5 points) Based on this analysis, does the evidence support the theory or does the evidence contradict the theory? In answering this question, be sure to carefully explain whether one of the measures of national income (GDP or GDP per capita) is better suited to testing the theory about economic systems and national income.

If the evidence does support the theory, then explain how it supports the theory and explain the reasoning of the theory – why does a country’s economic system have the effect it has on national income?

If the evidence does not support the theory, then explain whether that means that the theory is incorrect or whether the evidence produced here is not an appropriate test of the theory (for example, are there other factors besides the type of economic system that could affect national income?)

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ECON 105	Spring 2006
Holleran	Due Date: Thursday, February 2