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Comparing
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Macroeconomics as a Complicated Jigsaw Puzzle
Gary Galles,
Most principles students have a harder time with macroeconomics than with microeconomics for several reasons. First, it seems that the measurement problems that must be overcome (e.g., ambiguities or biases in measures of unemployment, the money supply, national income accounts and the various price indices) before one is a competent user of concepts are much greater in macroeconomics, and since few students are inherently interested in these problems, this can lead to glazed eyes unless students can be shown their importance. Second, macro only indirectly addresses the world a college freshman "lives in," while micro seems more obviously relevant; it is harder to draw on student experience in explaining the issues involved‑‑in making economics "come to life." Third, the model building required before a payoff is much more time‑consuming in macroeconomics. Finally, students perceive macro as less coherent than micro, perhaps because there is less consensus among macroeconomists.
Because of these difficulties, I have drawn an analogy between macro and a jigsaw puzzle that must be put together in a particular way. First, several large pieces must be constructed from smaller pieces. I.e., with each building block of a general model, say monetary analysis, there are problems of definition (How should we define money?), measurement, (How should we measure money?), memorization, (What tools are available to the Fed?), institutions, (How does the Fed operate?) and analytics (What effects, and how large, will a given policy have?). However, these larger pieces do not fit together. Connecting pieces must then be constructed to join the building blocks together. I.e., the building blocks of macroeconomics need to be integrated into a more coherent general picture, but they can't be integrated until the building blocks are each understood (e.g., monetary and fiscal policy must be integrated, and further integration must occur to get to aggregate real supply and demand analysis of the accelerationist model). Only then does a relatively coherent picture emerge from the puzzle, and even then we don't have the border pieces. I.e., the principles class does not teach all of macroeconomics, and macroeconomics is continuing to evolve, so that while we can construct most of the center part of the puzzle, we cannot put it all together. The real difficulty with the whole process is that while the teacher knows what the completed puzzle looks like, he can only describe it to the students‑‑they can't "see" the completed (as far as principles is concerned) picture until they have built it.
I use this analogy to give students an overview of the course structure: we build up the pieces first, with descriptions of why we are doing this to get where we are going, then we put the separate pieces together into a more coherent "whole": not all of macro, but enough to understand most of the issues that will affect students' lives. This analogy also highlights some difficulties in teaching macroeconomics. While you need to give students a sense of where they are going; you can't integrate the analysis until each piece is well understood. You have to continually let students know why they are learning what they are made to learn, because it often isn't obvious. You have to beware of going over students' heads by introducing complications before the basics are well grasped or putting the pieces together too fast. Entertaining and useful illustrations also seem harder to come by than in microeconomics.
Comparing Phases of a Business Cycle to a Newlyweds' Life Cycle
By Judy Kamm,
A couple announces their engagement. The engagement process begins the expansion of their life cycle. The goods and services the couple demands during the planning of their wedding and new home lead to further expansion. Until their wedding which is the peak of the first phase of their life cycle. After their wedding, the couple's consumption falls off, recession begins, because they have to pay the bills from the wedding and the new home purchases. Also, the couple may not consume as many new goods and services now that they are newly married. The next expansion of their life cycle begins when the couple has a baby. The goods and services the couple demands while planning for the baby leads to expansion. The birth of a baby is another peak in the life cycle. In summary, all individuals' various life cycles combined together constitute the business cycle. As an instructor one could further the phases of the life cycle.
Figure 5-1
Ralph T. Byrns
The macro goals presented in Chapter 1 of our texts lead naturally into questions about the meaning of unemployment, inflation, or economic growth. Ask your students to estimates quantitative targets for rates of unemployment and economic growth. This is also a good place to distinguish changes in relative prices from inflation. Many people erroneously believe that inflation exists whenever any price rises, but other prices (e.g., computers, TVs and stereos, gas and oil during 1983‑86) may be experiencing offsetting declines. Mention that the price level is a macro concern, while changes in relative prices are largely within the province of microeconomics.
Briefly suggest the possibility of tradeoffs between macro goals: (a) unemployment vs. inflation; (b) growth vs. high consumption now; (c) balancing the budget vs. boosting growth through tax cuts. The intent here is not to rigorously investigate, e.g., the existence or transience of a Phillips curve, but rather to suggest that tradeoffs between goals are pervasive.
Economic Predictions and Lottery Tickets
James A. Kurre, The
Students just beginning Economics are sometimes frustrated that in the social sciences our laws don't hold every single time. They may be used to the physical sciences where the law of gravity or Boyle's law tells you exactly what will happen every time. I point out that a law that doesn't work every single time can still be quite useful. A system of picking lottery tickets that was only right once a week would still be very handy to have! Our laws might not hold for every person in every situation, but they're right significantly more often than once a week.
Bienvenido Cortes,
Why has economic forecasting been likened to crystal ball gazing and evaluated as inferior to weather forecasting? In my business cycles and forecasting class, I address this question by assigning a special project. I provide each student a data set of 50 time-series economic variables (alternatively, the instructor can assign the students to gather the data themselves to familiarize them with basic government sources such as the U.S. Statistical Abstract and Survey of Current Business, and ask the student to select a particular variable he/she is interested in (only one student must be working on a specific variable). Using a statistical computer package such as MicroTSP, which I require in class, I instruct the students to do the following:
1. Based on the data of your variable under study, compute forecasts for 1, 2, and up to n periods ahead using the following forecasting methods:
a. naive models - average absolute change and average percentage growth rate
b. autoregressive model(s)
c. single moving average - absolute change and percentage change
d. exponential smoothing
e. trend model
f. causal regressive model - bivariate or multiple.
Explain each of the procedures as well as the results obtained. For the causal model, explain your choice of independent variable(s) and the causal relationship(s) presumed.
2. Provide time-series graphs of the actual and forecast values of your variable for the entire period and for each of the different forecast methods used.
3. Calculate the root mean squared error (RMSE) for the forecast series for the 1-, 2-, and up to n-period forecasts based on each of the different methods.
4. Which forecasting method do you think is best? Explain your answer.
This project underscores the difficulty of forecasting activity. It emphasizes the need for formulating adequate and sound economic hypotheses. In particular, causal modeling helps the students think logically about linkages or relationships. Finally, this project demonstrates that sometimes the simplest models or methods may be the best ones and that the accuracy of one's forecasts depends on one's assumptions and the stability of the hypothesized relationship.
Where Are
You at
Les Carson,
Figure 5‑2
Using the commonly incorporated monetized flow diagram above, an attention device to aid student conceptualization can be one of asking the students where they are while sitting in a college classroom relative to the macro‑system. This device works best if it is used prior to students leaving at the end of the class to eat lunch, go to work, band practice, football practice, etc. (Such a "tracing" of activity makes understanding the macroeconomic impacts easier.
For example, from public sector
(university) and human capital investment in himself, the student leaves campus
going to a part‑time job as a retail clerk in a local mall, thus being in
a product market. Later, or in an associated sequence, one can suggest that the
student might try to use a "float" by writing a check at
In summary, the exercise above connects in students' minds micro participant (economic man) to macro system and allows transference by a short response question with a changed situation on an exam.
Numbers in the Macroeconomic Circular Flow
J. Dennis Chasse,
Numbers in a circular flow diagram increase its explanatory power. I discovered this when I started using diagrams like this one to explain why planned saving must equal planned investment at equilibrium. I kept the numbers simple so the students could make comparisons in their heads. I used different situations: spending plans equal to national product; spending plans less than national product; and spending plans greater than national product. I left numbers out and had the students fill them in. I gave circular flow quizzes. I related it to their experience. As a result, they grasped, almost effortlessly, relations that they had previously found quite difficult. Since then, I have used the same technique in the larger circular flow with government and foreign trade. The insertion of simple numbers seems to multiply the pedagogical possibilities for the circular flow diagram.
Figure 5-3
Investment and the Interest Rate
Ki Hoon Kim,
Investment-demand curve is downsloping because rates of interest (along with the vertical axis) and the amount of investment (along the horizontal axis) are inversely related, just like the law of demand.
Whenever we encounter two variables which are inversely related, think of a seesaw. Place the I (investment) and i (the rate of interest) on a seesaw. If i goes up, I comes down, and vice versa.
Figure 5‑4
Philip E. Graves,
The following memory device has been useful to me in presenting the various factor payment categories.
W R i P (with a silent "W" as in "Wrangler"):
W = wages R = rents i = interest P = profit
I find this aids students considerably when studying elementary circular flow diagrams.
Business Cycles
Lessons from Edsels for Macroeconomics
Anthony K. Lima,
While most business students understand why they need to study micro, many have serious doubts about the relevance of macro for them. This example may not convince them of the value of the entire course, but generally quiets their more vigorous objections:
The Edsel was introduced by the Ford Motor Company in 1956, and was named after Henry Ford's younger brother, Edsel Ford. This was less than the ideal time to launch a new car model, because its maiden voyage sailed right into the teeth of the 1957‑58 recession. It was one of the more remarkable financial failures ever for new product introduction. The central point is that business planning is likely to fail unless the general macroeconomic environment is taken into account. Some knowledge of macroeconomics is necessary for the business person to successfully plan production or forecast demand.
This brief example can be extended in several directions. First, it can be used to point out the procyclical nature of the demands for consumer durables; that such demands generally fluctuate much more than the business cycle itself. This can lead to a discussion of the role of durability in determining the income elasticity of demand. A second direction which the discussion can take is the reason for the 1957‑58 recession. This will typically revolve around the issue of fiscal policy and the role of government in the economy. It may be possible, depending on the types of students you have, to introduce the simple multiplier concept at this point. It's a good example.
Depressions and Income Elasticities of Demand
Ralph T. Byrns
Discussions of the social consequences of recessions or depressions can lead into informal analysis of the income elasticities of demand (avoid this terminology unless most of your students have already taken principles of microeconomics) for such things as marriages, divorces, children, schooling, etc. Ask students for their impressions of why suicides, crime, physical and mental illness, and other maladies rise when economic activity falls, and why marriages, divorces, and birth rates tend to fall when the economy is in the doldrums. This discussion aids students who have little appreciation of the effects of the Great Depression.