Making Statements about the State of the Economy
How do you measure the health of the economy? In this lesson, students will assess the health of the economy. They will provide an initial assessment of the economy, explore and analyze key economic indicators, and then create their own economic indices that measure aspects of the economy not captured within the key economic indicators.Download lesson as PDF
Part 1: Economic Effects
(35 - 45 minutes)
- Probe for students' sense of the health of the economy. [Access] Give them choices of:
- Healthy and fit
- A little sick but generally healthy
- So-so -- some parts of the economy need help
- Mostly unhealthy
- Extremely unhealthy
- Ask for the basis of their views. [Access/Analyze] Students are likely to base their assessment of the economy on what they've seen, read, and/or heard. After hearing from students, guide them toward assessing the strength of their evidence. Is it anecdotal? Is it observational? Is it local? Does the economy seem any better or worse locally than it does elsewhere? Students may recognize that one's perception of the overall health of the economy may be strongly influenced by personal experience - therefore, there are likely to be differing views on the health of the economy.
- Show Teen on the Street Interviews. [Access] The question posed to teens is: What local businesses have you seen affected negatively by the recession? Does the variety of answers mirror the variety of student responses in Steps 1 and 2? View All Videos
- Speculate on a large auto factory closing. [Analyze] As a class, discuss a scenario in which a large auto factory that employed more than 1,000 people closed. Spend a brief time exploring what the "ripple effects" might be on that community and what the community members' perception of the economy might be.
- Read the "Ripple Effect" case study. [Access] The case study features nine different people, each of whom has been affected negatively by the closure of an auto plant. It begins with the view from one of the laid-off workers from the plant, moving to people whose jobs are less and less directly connected to the auto plant. The case study is likely to connect the closure to jobs and to overall effects that students probably did not mention in Step 4 -- i.e., it should expand their thinking/views on the ripple effects. Have students share and reflect on ways in which the case study enhanced their understanding of a ripple effect.
- Add "ripples" to the case study. [Analyze] Have students (as a class, in groups, individually) create a visual that shows the auto plant closure in the middle and the ripple effects that emanate from it. It should include at least some of the examples from the case study, but they should also include additional jobs that they think would be affected, including one job that's not in the local area of the auto plant. Spend some time exploring what some of the additional ripples might be. Likely effects outside of the local market include: auto dealerships, trucking companies that transport autos to dealers, stockholders in the company. If students struggle to come up with examples, that is fine -- it still sets up the next step.
- Speculate on the ripple effect of a downturn in the housing market. [Analyze] So, the ripple effect is not simply local. Ask students to come up with examples of industries and/or jobs that they think have been affected by the fact that the pace at which houses (and office space) are constructed has slowed considerably.
- Play this audio story about a Montana lumber company. [Access] Companies that supply lumber may have come up. This story from National Public Radio's Economic Training Project, provided by Public Radio Exchange, helps illustrate the economic impact of the housing market's downturn on a company in Montana, a sparsely populated state that supplies lumber well beyond its local area. Its owner is hoping that his self-funding and some federal stimulus money will help the company ride out the recession until the housing market improves.
- Repeat Step 1. [Analyze] To close this section of the lesson and set up the next, ask students to once again assess the health of the economy. Have their views changed at all? If so, how/why were they influenced by these stories and examples? Prompt students to consider the anecdotal nature of these stories -- that the perspectives of the people featured in the stories certainly paint a bleak portrait of the health of the economy. Can one story like this be used to make a judgment about the health of the overall economy? What additional indicators should we look at to determine the health of the economy in general?
Part 2: Economic Indices
(60 - 80 minutes)
- As a class, explore ways to get a broader sense of the economy's health. [Access/Analyze] Students are likely to come up with the stock market, employment/unemployment statistics, debt levels, savings rates, housing/foreclosure statistics, and wages/earnings. They may also come up with a measure that may not exist as they define it.
- Display (or hand out) the Economic Indicators cards. [Access] As a class, briefly speculate on what information the various indices provide, as well as why that information is useful.
- Have groups dig deeper into the indices, with each group taking a different index to research. [Access/Analyze] They should find (or create) visual representations for the index that they research.
- Present their index to the rest of the class. [Act] What is it? What does it measure? How often is it calculated? Who tabulates/calculates the numbers? How does a recent index compare with others at various points? What are any limitations of the index? (What does it NOT measure?) Finally, what is the value of the index -- i.e., how can we use its information to help us? How can its numbers in earlier indices illustrate what was going on at the time (i.e., how can we learn from the past), and how can that understanding of the past help us better forecast the future?
- Share the story of unlikely indicators. [Access] To extend students' understanding of how and why to measure the health of the economy, have them consider some unofficial indices, like the Wall Street shoe repair shop profiled in this video from WNYC.
Part 3: Homegrown Indices
(Homework + 30 minutes)
- Create local indices. [Act] Have students interview peers, family members, and community members about the economy. Students should ask their interviewees to comment on ways that they can tell that the economy is changing. Moreover, students should ask if these personal economic "indices" indicate that the economy is getting better, is getting worse, or is remaining about the same.
- Present a new economic indicator. [Act] Using inspiration and ideas from their interviews, students should present a new economic indicator. Consider having students represent their indices graphically and, when possible, show what the current state of the economy is according to their specific index.
- Compare with other alternate economic indicators. [Analyze] Have students compare their economic indicators with alternate economic indicators such as those used by the U.S. Census or those used in the USA Today Economic Outlook Index.
To demonstrate mastery of the learning objectives, students should be able to:
- Articulate the purpose and the value of economic indicators for assessing the health of the economy.
- Present and defend logical analysis of the specific economic indicator they research.
- Develop an economic index (even if it is more localized and subjective) that provides a measure of the health of the economy.
- Work together with group members.
- Ask students to predict how they would answer the question asked in Step 1 in six months, one year, and five years. Moreover, ask which economic indicator(s) will best illustrate if their predicted answer is correct.
- Compile all of the new economic indices into one collection (online and/or physical collection), calling it something like Statements about the State of the Economy.
- Invite an economist and/or a policymaker to attend the presentations on the additional economic indices.
- Compare the leading indicators in this lesson with alternate economic indicators such as those used by the U.S. Census or those used in the USA Today Economic Outlook Index.
Activity Sheet 1 - Key Economic Indicator Cards
Download Activity Sheet 1 as PDF
Instant Expert: Economic Indicators Edition
The most important measure of economic activity in a country is its Gross Domestic Product (GDP). The GDP represents the monetary value of all the finished goods and services produced within a country's borders in a specific time period (including all of private and public consumption, government outlays, investments and exports) minus imports. It is the crossing point of three sides of the economy (expenditure, output, and income) and is calculated by the Bureau of Economic Analysis.
Economists and policymakers use many measures to forecast the direction of the GDP and to analyze the current state of the economy and project the likely future based on trends. These are called Economic Indicators.
While there are dozens of indicators and many sources for this information, this lesson focuses on the 10 factors that make up the Conference Board Index of Leading Indicators. The Conference Board is an independent membership organization that publishes information and analysis, makes economics-based forecasts, and assesses trends. Their Index of Leading Indicators incorporates data from 10 economic releases that traditionally have peaked or bottomed ahead of the business cycle. Each of the 10 components is averaged and a standardization factor is applied to equalize volatility. Below is a list of definitions for each indicator as well as information about how each affects the overall economy.
- Average weekly hours (manufacturing) -- This report reflects the working hours of existing manufacturing employees. Adjustments are usually made in advance of new hires or layoffs, which is why it is a leading indicator for changes in unemployment. Decreases foretell declines in future manufacturing output and possible declines in the GDP.
- Average weekly jobless claims for unemployment insurance -- The Census Bureau reverses the value of this component from a positive to a negative because a positive reading indicates a loss in jobs. Higher first-time claims for unemployment insurance are associated with falling employment and subsequently sagging GDP.
- Manufacturers' new orders for consumer goods/materials -- This reflects new orders by leading manufacturers for their goods and materials. Increases in new orders for consumer goods and materials usually mean positive changes in actual production. Decreases in the number of orders received by manufacturers indicate reduced future production and a decline in the GDP.
- Vendor performance -- This component measures the time it takes to deliver orders to industrial companies. An increase in delivery time can indicate rising demand for manufacturing supplies. Ironically, better on-time delivery indicates slackening business demand and potentially falling GDP.
- Manufacturers' new orders for non-defense capital goods -- This measure is the counterpart of new orders for consumer goods/materials (#3). Increases in orders usually mean positive changes in actual production and perhaps rising demand. A drop in orders for capital equipment and other investment goods implies reduced future aggregate demand and thus lower GDP.
- Building permits for new private housing units -- Building permits mean future construction, and construction moves ahead of other types of production, making this a leading indicator. A decrease in the number of building permits issued for new homes implies future declines in investment and a potential falling GDP.
- The Standard & Poor's 500 Stock Index -- This Index reflects the Stock Prices of the 500 largest companies in the U.S. Changes in stock prices reflect investors' expectations for the future of the economy and interest rates. Declines in stock prices are often reflections of expected declines in corporate sales and profits. Also, lower stock prices diminish consumer wealth, leading to possible cutbacks in consumer spending. Lower stock prices also make it attractive for firms to issue new shares of stock as a way of raising investment funds. Declines in stock prices can bring forth declines in the GDP.
- Money supply (M2) -- This indicator measures demand deposits, traveler's checks, savings deposits, currency, money market accounts and small-denomination time deposits. Decreases in the nation's money supply are associated with falling GDP.
- Interest rate spread -- This is often referred to as the yield curve and implies the expected direction of short-, medium- and long-term interest rates. Changes in the yield curve have been the most accurate predictors of downturns in the economic cycle. Increases in short-term nominal interest rates typically reflect monetary policies designed to slow the economy. These monetary policies have less effect on long-term interest rates, which are typically higher. A smaller difference between short- and long-term interest rates suggests restrictive monetary policies and a potential decline in the GDP.
- Index of consumer expectations -- This is the only component of the leading indicators that is based solely on expectations. Consumer expectations can indicate future consumer spending or tightening. Less favorable attitudes about future economic conditions foreshadow lower consumption spending and potential future declines in the GDP.
To view all terms from every lesson, visit the main Glossary section.
Consumer Price Index: A price index that measures the cost of a fixed basket of consumer goods and services and compares the cost of this basket in one time period with its cost in an earlier, base period. The changes in the CPI are used to measure inflation.
Employment Rate: The percentage of the working-age population who are currently employed; for example in 2005 (the latest year of available data), the U.S. employment rate was 71.5% according to the Organization of Economic Cooperation and Development.
Gross Domestic Product (GDP): A standard measure for a country's overall economic performance; GDP calculates the total market value of all goods and services produced within a country during a specified period.
Lagging Indicators: Among economic indicators that calculate economic performance, lagging indicators look at past performance, such as profits (measured after all revenue and expenses have been accounted for).
Stock Market: The term used to refer to all of the public markets (stock exchanges) throughout the world where company stocks are bought and sold.
- Assess the health of the economy based on their experiences/observations/perceptions.
- Evaluate some of the objective measures of the economy (i.e., key economic indicators).
- Compile and present information on one economic index.
- Create a new economic index that helps measure the health of at least one aspect of the economy, even if it's a localized measure.
- 120 - 150 minutes, plus time outside of class
- Computers with access to the Internet
- Activity Sheet 1
- Software or materials for students to develop visual representations of economic indices
- Economic indicators
- Decision making
- Economic analysis
The procedure outlined in this lesson plan addresses the following standards from the Council for Economic Education:
- Standard 7 : Markets - Price and Quantity Determination
- Standard 18 : Macroeconomy-Income/Employment, Prices
- Standard 19 : Unemployment and Inflation