pickel.pdf economic education report by christie pickel i. local report: mtsu's center for economic education we deliver the programs from the fall of 1998 to the fall of 1999 mtsu's center held nine workshops for approximately 200 k-12 educators. these workshops have included instructional use of the virtual economics cd, participation in the stock market game, grant writing, personal finance and other programs designed for k12 students. plans for the next year include an intensive focus on gifted children and teachers of gifted children who have an interest in direct interaction with the center in the design and implementation of teen related research projects and programs. we're into instructional technology for k-12 educators with respect to new applications of instructional technology in economic education, more than 200 virtual economics cd's have been placed in local schools, the internet version of the stock market game has been greatly expanded, with 157 new teams being added in rutherford county alone. the center has also developed two satellite programs which were telecast into six local school systems in middle tennessee. one, conducted by ms. christie pickel, demonstrated new cd and internet resources for k12 economic educators. the second, conducted by richard hannah, demonstrated internet resources and reviewed labor market developments related to career choices for high school graduates. the center has been highlighted in several pubic access (channel 9) cable tv programs, especially inside academia, which reaches 40,000 to 50,000 households in middle tennessee. finally, we have a very good start on building an electronic network for k-12 teachers that eliminates snail mail cost and delays. please contact us by email if you would like to be added to our workshop distribution list and other economic education announcements. email christie pickel at: cpickell@bellsouth.net, or richard hannah at: rlhannah@frank.mtsu.edu. we're into scholarships ... and we need your help last year the center participated in raising over $25,000 for the billy balch scholarship. currently, we have a fund raising drive underway for the bobby corcoran scholarship. bobby has run the stock market game in tennessee for nearly two decades and is now phasing into retirement. thousands of students have benefited from his selfless dedication over the years, and we invite you to help us ensure that students can continue their education here at mtsu. if you'd like to contribute, a check can be made to the bobby corcoran scholarship and mailed to c/o richard hannah, mtsu department of economics and finance, box 27, murfreesboro, tennessee 37132. if you would like to discuss alternative giving arrangements, please call richard hannah at 615-8982228, or email to rlhannah@frank.mtsu.edu. ii. state report: a state council in tennessee? tennessee is one of only two states without a statewide council for economic education. although there are three centers for economic education (at ut-martin, ut-chattanooga, and mtsu), the geographic dispersion and differences in missions do not easily lend themselves to state-wide coordination of activities, especially fund raising for more intensive programming and a more effective method of articulating the needs for economic education in tennessee. there have been some recent discussions with the national council on economic education to assess the possibility for a state council. success in such an undertaking will require significant commitments of resources from business, foundations, and educational institutions in tennessee. however, if we 77 are to have a systematic program of economic education, this is the best alternative for statewide initiatives. from the perspective of coordinating with and drawing upon expertise at the national level, the timing is right for this initiative. iii. national report: the campaign for economic literacy you may recall reading the april 18, 1999 parade magazine newspaper insert with the cover titled, "what we don't know about money will hurt us." this issue reported the results of a national test on basic economics. the bottom line was, "it reveals an appalling lack of knowledge among adults and teens." this publication spawned widespread concern about the poor quality of economic education in the united states, resulting in two significant nation-wide initiatives. one is the proposed excellence in economic education act of 1999, which would provide funds for new instructional materials, teacher training, assisting school districts that are incorporating economics into their curricula, evaluating impacts, and strengthening and expanding the economic education network to all states. in support of his introduction of this legislation, u.s. senator daniel k. akaka (hawaii) highlighted some of parade's reported results, such as: • half of adults and two-thirds of high school students failed a basics economics test. • students and adults alike lack a basic understanding about the concepts of money, inflation and scarcity of resources. • only 54 percent of adults and 23 percent of students know that a budget deficit occurs when the federal government’s expenditures exceed its revenues for that year. • yet, 96 percent of respondents believe basic economics should be taught in high school. are these the statistics that indicate america's prosperity in the 2lst century? the national council on economic education doesn't think so and has launched a major initiative to bolster economic education, the campaign for economic literacy. this was a major part of the theme of the national council's and the national association of economic educators' annual meeting in boise, idaho in october of 1999. we can expect to hear a great deal more about these initiatives. 78 1 journal for economic educators, 13(1), 2013 1 unintended consequences of trade distortions and price controls: a national tragedy provides a teaching moment by s. christoffersen, ph.d. 1 abstract the tragedy at valley forge during george washington’s military encampment in the winter of 1777-1778 provides a vivid lesson in economics. trade disruptions and price controls mistaken policies of the nascent republic, consistent with the political philosophy of the times were contributing factors to death of nearly two thousand soldiers camped at valley forge. in this paper, we employ a fundamental supply and demand analysis, and then we illustrate a price ceiling and subsequent shortage. the glitter of british entertainments in philadelphian society and the harshness of the continental soldiers’ meager existence twenty miles away provide a sharp contrast and sparks the imagination for any student of economics. keywords: economic history, revolutionary war, trade distortions, shortages, valley forge jel classification: introduction following is a story of price controls and trade disruption that will inspire interest in economics and early american history. we document the economic philosophy in britain which carries over to the british american colonies as the basis of their early trade policies, as well as price controls meant to contain inflation. we further illustrate the supply and demand dynamics that inevitably lead to the tragic consequences at the winter encampment at valley forge. economic philosophy in british america mercantilism dominated english economic thought on trade from at least as far back as the medieval acts of the great king alfred, through to parliamentary laws in the 1600’s, the navigation acts between 1651 and 1673, and continued to dominate during the revolutionary war period. 2 this trade philosophy recommends limiting imports while promoting exports, based on the feudal system of the 1500’s and is currently described as economic nationalism. while export promotion was intended to secure economic benefits for england from her colonies, it also unintentionally advantaged the british american colony. the navigation acts 1 associate professor of economics, school of business administration, kanbar college, philadelphia university, school house lane and henry ave, philadelphia, pa 19144 christoffersens@philau.edu 2 mccusker and menard, p. 46 mailto:christoffersens@philau.edu 2 journal for economic educators, 13(1), 2013 2 created a closed trading system in which all members of the empire had access to trade (a custom union) while the dutch and other nations were closed out. “protected and encouraged by the navigation acts, the colonists moved quickly to seize the chances open to them” as they were no longer restricted to roles such as commission agents for the british. 3 the colonists became active exporters of raw materials as “all citizens of the empire had clearly absorbed the spirit of mercantilism”. 4 in addition to export promotion, mercantilist philosophy includes “import prevention”, 5 thus it is not surprising that trade barriers in america date back to before america existed as an independent country, including barriers to trade in textiles. 6 "in the years after 1750, the men who would lead the colonists into declaring their independence... became increasingly captivated by a vision of an american empire... that would protect american commerce,... (and) develop american industry". 7 benjamin franklin was among those who promoted this vision, thus an early advocate of protectionism, according to gerald stourzh 8 . at the very onset of the revolutionary era, george washington called for boycotts of british textiles. when the royal governor dissolved the virginia assembly in 1765, “george washington, patrick henry, thomas jefferson and other assemblymen hied to a tavern where they agreed to boycott british goods”. 9 in 1769, washington led the non-importation association and several years later he chaired the virginia committee that adopted the fairfax resolution calling for an intensified boycott of british goods. 10 (simple) economic analysis the non-importation agreement of late 1774 was followed by further prohibitions on trade with britain, leading to “acute shortages”. 11 the impact of limiting imports of textiles is clearly identified by supply and demand analysis: if we limit british textiles, there are fewer suppliers (s 3 mccusker and menard, p. 47 4 mccusker & menard, p. 47 5 charles m andrews, 159-259 6 christoffersen, p.78 history of trade barriers in the textile industry 7 mccustard and menard, p. 357 8 gerald stourzh 9 “the spirits of independence” p. 14 10 shleier, 2006 11 mccusker & menard p. 361 3 journal for economic educators, 13(1), 2013 3 to s’), and inevitably there will be upward pressure on prices (p0 to p1) and less quantity (q0 to q1) available in the marketplace. the pressure on prices is further exacerbated by various preparations for the war, specifically, provisioning the troops. 12 the demand for textiles increases due to the need for uniforms and protective outerwear for soldiers, especially those fighting in the northern colonies. thus, in addition to the inward shift of supply (s to s’), there is an expansion of demand (d to d’), both exerting upward pressure on prices (p0 to p2). while the market forces led to sharp increases in prices, there were political forces at work that would soon exacerbate the problem. “in late 1774 and 1775, congress tried to stop all trade by employing the weapons of boycott and embargo.” 13 the war years “witnessed the beginnings of a national policy; a great increase in government intervention in economic affairs.” 14 the acute shortages, accompanied by higher prices, were burdensome, and in an attempt to alleviate the burden of price increases, the nascent republic called for price controls on various products, including textiles. 15 the association of 1774, calling for cessation of trade with britain, also called for price ceilings, “merchants were urged to keep their prices at the level that prevailed over the previous 12 months” or risk being cut off from business with fellow citizens. 16 “the more important attempts to control prices were carried out at the state and local levels”, with statewide controls coordinated at regional conferences (providence, r.i., 1776; york, pa, 1777; springfield, mass, 1777; new haven, ct., 1778; hartfield ct 1779; philadelphia pa 1780). 17 to the extent that the legislation kept prices below the market equilibrium, the shortages due to import barriers were exacerbated (quantity demanded exceeds quantity supplied at p3; shortage = qd – qs). 12 mccusker & menard, p. 361 13 mccusker & menard p. 361. 14 mccusker & menard, p.360. 15 schuettinger & eamonn, p. 41. 16 rockoff, p. 29. 17 baldwin, p 37-38. 4 journal for economic educators, 13(1), 2013 4 the disastrous winter at valley forge can in large part by attributed to these wellintentioned but misdirected laws. on june 4, 1778, the continental congress, finally ended the ill-fated price controls with the following resolution: “whereas…it hath been found by experience that limitation upon the prices of commodities are not only ineffectual for the purposes proposed, but likewise productive of very evil consequences…resolved, that it be recommended to the several states to repeal or suspend all laws or resolutions within the said states respectively limiting, regulating or restraining the price of any article, manufacture or commodity”. 18 impact of misguided policy contrast the social scene in philadelphia with washington's nearby winter encampment at valley forge: the british army is encamped in philadelphia, “the gayest of all colonial cities,” 19 attending society balls and being entertained by philadelphia’s elite. twenty miles away, washington's army has walked as far as the winter weather permits and is now encamped at valley forge, a wooded area whose slight rise allows a view across the fields in order to observe any advance of the british forces (one that never came). the "ragtag" continental army forages the countryside for food and cuts down trees to build and heat log cabins. the "growth of a self-conscious, powerful colonial elite" and the active "involvement of the 'lower orders' in the revolutionary movement" are documented by egnal and ernst (1972). 20 given these disparate social classes, we might ask who had the ability to purchase the limited supply of textiles: the elite in philadelphia (who incidentally live near the port), or the rural mother (who desperately wants to sew protective clothing for her son in the militia)? lower prices might have helped the farmwife to afford the material but it would never reach her. british officers and philadelphian society had proximate access to the goods and certainly the ability to bribe or otherwise influence purveyors to supply their need for ever-new garments. the result: nearly two thousand people die during the winter encampment, a large number from disease resulting from exposure; “shortages of clothing did cause severe hardship for a number of 18 schuettinger & eamonn, p. 41 19 brown, p.755, 757 20 egnal & ernst, p. 9-10 5 journal for economic educators, 13(1), 2013 5 men” 21 . this national tragedy is commemorated today by the national park at valley forge, pennsylvania. conclusion bright lights, fancy dinners and the british military elite dancing with society mavens, all decked out in their fine uniforms and elegant dresses sparks the imagination. a mere twenty miles away, men foraged in the snow with rags on their feet and scant clothing to protect them from the elements. the contrast of brilliant society balls just a horseback ride from thousands of desperate men perishing in a snow-covered valley forge is tragic. these deaths were the dire consequences of mercantilism and political interference with supply and demand. this brief economic history will peak students’ interest in a mythic tragedy set during stirring historical times, and it may educate citizens who vote and policy makers regarding the unintended consequences of trade disruption and price controls. references: anonymous. 2012. “the spirits of independence” the wilson quarterly 36,2: 14. andrews, charles m. 1918. “the boston merchants and the non-importation movement”, col. soc. mass., pubs.,xix:trans. 1916-1917, 159-259. baldwin, simeon e. 1882. “the new haven convention of 1778.” new haven colony historical society papers 3: 33-62. brown, h. g. 1952. “cost of production, price control and subsidies: an economic nightmare” american economic review 42, 126-34. brown, william garrott. 1905. “a continental congressman: oliver ellsworth, 1777-1783”, the american historical review, vol. 10, no.4 pp. 751-761 and oxford university press christoffersen, susan. 2002. “the textile industry: does r&d deliver success?” competitiveness review, vol. 12, no. 2, pp-77-95. egnal, marc and joseph a. ernst. 1972. "an economic interpretation of the american revolution," wmq, 3rd ser., xxix, 3-32. mccusker, john and russell menard. 1985. “the economy of british america, 1607-1789, the institute of early american history and culture, the university of north carolina press, chapel hill and london. national park service, valley forge, www.nps.gov/vafo, accessed 11 october 2012. schleier, curt. 2006. (feb 21). “president george washington; founding father: his sense of duty, honor set the standard for our nation”. investor’s business daily, pp. 03. rockoff, hugh. 1984. “drastic measures: a history of wage and price controls in the united states”, cambridge university press (new york) schuettinger, roberts l. and eamonn f. butler. 1979. forty centuries of wage and price controls (washington, d.c.: heritage foundation. stourzh, gerald. 1954. “benjamin franklin and american foreign policy” (chicago) 21 www.nps.gov/vafo http://www.nps.gov/vafo http://www.nps.gov/vafo analysis of u.s. foreign aid determinants 48 journal for economic educators, 9(1), summer 2009 undergraduate research analysis of u. s. foreign aid determinants for 20031 joshua m. hill and christopher c. klein 2 many countries throughout the world face the problem of providing the basic benefits of government to their citizens. there are many factors that could lead to this major problem including: corruption within the government, poor tax system, badly devised budgets, or the low income of the citizens does not provide enough revenue for the government to operate efficiently. there are several ways that more developed nations set out to help these countries. the united states is the largest provider of foreign aid in the world with roughly $16.3 million contributed in 2003 (oecd). although aid is given for the purpose of developmental assistance, the process often becomes politicized. this has been observed most recently in an incident in kyrgyzstan. the kyrgyzstani government chose to evict a key u.s. military base due to political pressure from russia. russia offered the kyrgyz a $2 billion loan and $150 million in aid, roughly forty times more than the current u.s. level of aid (harding). how does the u.s. determine its foreign aid distribution? surprisingly, little literature exists on this question. atwood, et al (2008), radelet (2003), and lancaster (2000), for example, argue for improvements in, or reform of, foreign aid policies. among recent research, only travis and zahariadis (2002) econometrically analyze actual aid data, but emphasize u.s. political factors rather than the economic characteristics of aid recipients other than gdp. in considering the determinants of foreign aid, the welfare of the country receiving aid is an obvious first choice since data can be collected on gross domestic product (gdp) or gross national income from various sources. we hypothesized that that aid may be distributed based on countries’ needs. in other words, countries could be prioritized with the most needy receiving the most amount of aid. this could present a problem if every aid donor used the same system, however, as the poorest country could end up monopolizing the aid. more than just need is likely at stake. other indicators may not be measured in dollars but are good measures of the overall welfare and level of economic development of a country. after looking for data that would be applicable, other indicators of development were located: as co2 emissions as a measure of industrialization; percent of children receiving a measles immunization shortly after birth as a measure of the medical system; percent of the country’s land used for agriculture; and the percent of population that are regular internet users. the amount of u.s. exports and imports by country could also affect aid. 1 this research was undertaken in partial fulfillment of the requirements for econ 4570 econometrics and forecasting at middle tennessee state university during the spring semester of 2009. dr. klein taught the class and acted as mentor. the authors thank an anonymous referee for helpful comments. 2 joshua m. hill is now a graduate student in economics at middle tennessee state university; christopher c. klein is associate professor, economics and finance department, middle tennessee state university, cklein@mtsu.edu. mailto:cklein@mtsu.edu� 49 journal for economic educators, 9(1), summer 2009 figure 1: map of u.s. oda inflows and outflows for 2003. visualized using many eyes, ibm® source: oecd dac statistical database table i: variable definitions, means, and standard deviations year 2003 ($ = 2008 u.s. dollar) variables mean sd description aid $100904489.8 $222346805.6 total oda per country in 2003 gdppc $1509.940405 $1691.1718 gross domestic product per capita iu 444552.1219 1684929.429 internet users per 100 people co2 95530650.23 451440437.9 tons of carbon dioxide emissions per person immu 78.94897959 17.70454683 immunization, measles(% of children ages 12-23 months) pop 44455212.19 168492942.9 population of country agri 288018.9242 675556.2138 number of square kilometers of agriculture land imp $5330864014 $24728003703 total dollar value of u.s. imports from country ex $2379354666 $12193062737 total dollar value of u.s. exports to country 50 journal for economic educators, 9(1), summer 2009 the aid statistic selected for this study is the outflow of official development assistance, or oda, in the year 2003. the data were collected from the oecd’s developmental assistance committee’s aid statistics database. oda is defined as monetary based aid provided by an official government agency. this aid need not be completely concessional, but must have a twenty-five percent grant element. this allows countries to pay back part of the aid once their economies become more developed. oda does not include food aid, medical aid, or any aid from private firms or individuals. it also does not take into account the economic effects of outside government activity such as an overseas military base that creates jobs for the receiving country. for the welfare and development statistics, we relied mainly on the world bank’s world development indicators online database. data on gdp, population, internet usage, immunization statistics, agricultural statistics, and co2 emissions were collected. trade data are from the u.s. census bureau’s foreign trade division. in order to create a correct analysis of the data, the dollar amounts are expressed in real terms and not in nominal amounts from different years. most of the data were in 2008 dollars. the trade data grew at a rate of 3.25% per year from 2003 dollars. gdp was divided by population to receive a more accurate measure of the welfare of the country by using gdp per capita. in total, data were collected for ninety-seven countries. after collecting the data, a regression model was set up with oda as the dependent variable and the rest of the data as independent variables. this regression produced results that were not statistically significant. all of the regression results are summarized in table ii. all statistical procedures were conducted in excel. collinearity among the explanatory variables was evaluated by calculating the correlation coefficient for each pair of variables. only imp and ex were correlated at better than 0.5, with only ex surviving in the final regression. a log-linear form was then utilized to see if the results were any different than the normal form (see table ii). this regression is more significant than the original and also included many statistically significant independent variables. the coefficients represented percent changes in the dependent variable given the percent change in the independent variable. the glesjer test (gujarati, 2006, 404) revealed that heteroscedasticity existed in the gdppc variable. to correct for this all of the variables were divided by the square root of gdppc. the new regression yielded a much higher r-squared, more significant f, and more significant t-statistics for the independent variables. the best regression was restricted to four of the most significant variables (gdppc, iu, immu, ex) to yield a better fit (table ii). the f statistic associated with restricting the regression was 0.88223 with 4 and 88 degrees of freedom. this f statistic was not significant at the 10% level, meaning that there was no significant change in the unrestricted versus the restricted regression. therefore, the restricted regression is preferred. the restricted regression yielded the following equation of the determinants of u.s. foreign aid in 2003: lnaid= 5.374 – 1.982lngdppc + .380lniu +1.233lnimmu + 0.358lnex the coefficient for gdppc was, as expected, negative. this means that as gdppc increased the total amount of aid decreased. the coefficient for ex was positive, as expected, since many countries had “aid-for-trade” treaties. this means that the more a country imported from the u.s. the more aid they received. this raised several questions with respect to the equity 51 journal for economic educators, 9(1), summer 2009 table ii: determinants of u.s. foreign aid 2003 (t statistic in parentheses) explanatory variables normal form log-linear form unrestricted corrected log-linear restricted gdppc -14607.8 (-0.95895) -0.938724538*** (-1.85264) -1.981835268* (-3.79139) iu 1.48e+15 (0.048989) 0.406792861 (1.461137) 0.380482757** (2.39915) co2 -0.453761854 (-1.1098) -0.069754451 (-1.20874) immu 192596.1773 (0.13558) 1.400088877*** (1.782164) 1.232890996*** (1.867589) pop -1.47918e+13 (-0.04899) agri 33.04979135 (0.428311) 0.154365982 (1.088042) imp 0.004638742 (0.589193) -0.078833545 (-0.69279) ex -0.005221558 (-0.48526) 0.383763465** (2.407399) 0.358268863* (2.768429) adj-r2 -0.026169505 0.448442551 0.704239928 f 0.69078671 10.75657317* 58.14685619* n 98 97 97 *significant at 1% **significant at 5% ***significant at 10% 52 journal for economic educators, 9(1), summer 2009 of u.s. foreign aid since the poorest countries may not be able to import expensive american products. the coefficients of iu and immu were unexpectedly positive. we thought it made more sense to give aid to countries with poor healthcare systems and that are not technologically advanced, rather than to those with good healthcare and more technology. this is not what we found. a possible explanation is that this effect is due to a trend of aid over time. if a country received aid in the past, that aid may be used to improve healthcare and information infrastructure. aid may be offered to those countries in the future since they utilized it well. this would account for the positive coefficients associated with these variables. this model does not account for the entire variation in aid from country to country. for future research, it may be beneficial to investigate other possible independent variables. to study the amount of aid given to countries in the past and how it may affect current and future aid would be interesting. another area of interest may be to study the effectiveness of aid to receiving countries and how that may affect future aid. another possible determinant of aid that was not examined is the diplomatic status of the countries that received aid. if this could be quantified, then it may give insight into how the u.s. uses aid as a political tool. it would also be good to include nonmonetary aid such as food/medical aid to create a clearer picture of total aid the u.s. gives to other countries. the “aid-for-trade” programs also merit future research since they seem to be export subsidies in disguise. countries may choose to import american products only because they receive the aid which in essence reduces the price of the u.s. imports. is the u.s. using aid as a means to bolster its exporting business? all of these would be useful in future analysis of u.s. and global foreign aid to see how other countries use or abuse their foreign aid. references atwood, j. bryan, m. peter mcpherson and andrew natsios. 2008. “arrested development: making foreign aid a more effective tool.” foreign affairs, 87(6), 123-32. gujarati, damodar n. 2006. essentials of econometrics. 3rd ed., boston: mcgraw-hill/irwin. harding, luke. 2009. "kyrgyzstan to close key u.s. military airbase." guardian.co.uk. <http://www.guardian.co.uk/world/2009/feb/04/kyrgyzstan-us-base-afghanistan>. accessed 4 february 2009. lancaster, carol. 2000. “redesigning foreign aid.” foreign affairs, 79(5), 74-88. radelet, steven. 2003. “bush and foreign aid.” foreign affairs, 82(5), 104-17. travis, rick and nikolas zahariadis. 2002. “a multiple streams model of u.s. foreign aid policy.” policy studies journal, 30(4), 495-514. data sources foreign trade division, u.s. census bureau. foreign trade statistics. 09 april 2009. 30 march 2009 <http://www.census.gov/foreign-trade/balance/index.html>. oecd. query wizard for international development statistics. 2008. 11 march 2009 <http://stats.oecd.org/qwids/>. world bank. quick query: selected from world development indicators. 2007. 11 march 2009 <http://ddpext.worldbank.org/ext/ddpqq/member.do?method=getmembers&userid=1&queryid=1 35>. references 38 journal for economic educators, 12(1), 2012 nominal and real income in a real dollar store sheldon h. stein 1 abstract in this paper, the distinction between nominal and real income is highlighted by positing the existence of an imaginary “real dollar store.” in this store, all items are sold at a price of one dollar in the base year and the price of each is indexed to the cost of living. hence, such concepts as “real income” and “real rate of interest” can be illustrated in physical terms in a way that lacks the ambiguity that comes with the term “dollar of the base year.” jel classification codes: a21,a22 key words: real income, price level, real interest rate introduction one of the most important things for beginning students to learn and understand in the principles of macroeconomics course is the difference between nominal income and real income. nominal income, or money income, is the measure of income that is most familiar to lay persons – the one that is measured in terms of money. real income is that measure of income that is based on the quantity of goods and services that can be purchased with money income. the measurement of real income, however, is one that is fraught with difficulty. if one were to make a list of all of the goods and services that people purchase and boil it down into a single number as a measure real income, the aggregation process would involve adding apples and oranges, which we are taught in kindergarten is improper. we would have to employ what economists call “real dollars,” even though, as kenneth boulding said in his presidential address to the american economic association in 1968, a real dollar is a “strictly imaginary” one. and yet to measure real income, which is the most familiar metric of the state of a society’s aggregate wellbeing and economic development, we are forced to use “real dollars.” the most familiar way that economists measure real income is with market baskets. in measuring real income using the consumer price index, for example, a fixed market basket is used. the problem with measuring real income in this way is that when the student computes real income in terms of “dollars of the base year” by dividing nominal income by the cpi, they have no intuitive feel for what the “correct answer” in terms of base year dollars really means. we introduce another way of measuring real income, one that is associated with an imaginary institution called the “real dollar store,” below. in a real dollar store, each physical unit of an item costs one dollar in the base year. in every other year, the price of each item is $1*(1+i) t where i is the rate of inflation and t is the number of years since the base year. hence, if we divide nominal income by the price of each item in the real dollar store, we obtain actual physical quantities of something that is familiar to the student, not some hypothetical or imaginary dollar amount. 1 department of economics, cleveland state university, s.stein@csuohio.edu. 39 journal for economic educators, 12(1), 2012 in order to compare this approach with the traditional way of measuring real income in macroeconomics textbooks, we normalize the value of a laspeyres fixed market basket to $100 in the base year. in using an index like the cpi to generate real income in the traditional way, the computation of the cpi is not only simplified, but division by the cpi provides a measure of income called “basket income.” if we then multiply the number of baskets that we can buy with nominal income in any given period by $100, we obtain the standard measure of real income in terms of “dollars of the base year.“ this measure of real income is then compared to the measure obtained from the real dollar store. the real dollar store the first way to approach the concept of real income is to begin with someone whose annual nominal income is, say, $30,000 in the base year. this economic agent can purchase 30,000 physical items in the real dollar store where each item costs $1. since actual dollar stores sell a wide variety of items from pencils to screw drivers to legal pads to cans of food, it is easy for a student to imagine this. we now present the students with the following problems. 1. suppose that our economic agent gets a 6% raise. assume that the inflation rate is zero. a) what is the new nominal income? b) what is the new real income? answer: nominal income rises to $30,000*1.06 = $31,800. all prices are still $1.00 and, since the inflation rate is assumed to be zero, the agent can purchase $31,800/$1.00 = 31,800 physical items. hence, the new real income is 31,800 physical items. real income rises by 6%. 2. suppose that our economic agent gets a 6% raise with the inflation rate being 6%. what is real income now? answer: the nominal salary is still $31,800 as a result of the 6% raise, but the 6% inflation results in each item in the real dollar store having a price of $1.06. real income, as measured by the number of items that can be purchased, is $31,800/$1.06= 30,000 items, the same as before. thus, there is no change in real income. the agent’s standard of living is unchanged. the percentage change in real income is 6% 6% or 0%. the raise is simply a cost of living raise. thus, the percentage change in real income is equal to the percentage increase in income minus the rate of inflation. 3. now suppose that our economic agent gets a 6% raise and that the inflation rate is 8%. what is real income? answer: the nominal salary is still $31,800 as a result of the 6% raise, but every item in the store has a price of $1.08. the total number of items that can be purchased is $31,800/ $1.08 = 29,444 items. thus, even though the agent is receiving a larger paycheck in terms of dollars, the amount that can be purchased has fallen from 30,000 items to 29,444, or a 2% drop. again, the percentage change in real income is 6% 8% or -2%. the 6% raise in nominal 40 journal for economic educators, 12(1), 2012 income represents a 2% reduction in real income, because the rate of inflation is greater than the rise in nominal income. nominal versus real rates of interest the difference between nominal rates of interest and real rates of interest is also easy to imagine in the real dollar store. . suppose that the nominal rate of interest is 6% and that the rate of inflation is also 6%. assume that the agent has $100 in the base year. if one saves the $100 in the base year for a period of one year, then in the year following, the saver will receive principle plus interest equal to $106. the real reward for savings is equal to zero percent since in both the base year and the year following, the saver can only purchase $100/$1.00 or $106/$1.06 or 100 items. 4. what is the real rate of interest if the nominal rate is 6% and the inflation rate is 2%? answer: if the rate of inflation is 2%, then each item in the real dollar store will cost $1.02. thus the principle plus interest of $106 will enable the saver to purchase $106/$1.02 or approximately 104 items. since the saver could have purchased 100 items in the base year, the real reward is not six real items but four real items. the real rate of interest is 4% 5.finally, what is the real rate of interest if the nominal rate of interest is 6% while the rate of inflation is 8%. answer: now, the saver is obviously a loser in real terms. the $106 dollars in the following year only buys $106/$1.08 or approximately 98 items. since the saver could have purchased 100 items in the base year, there is no incentive for the agent to save. the real rate of interest is 6%-8% or -2%. one advantage of the real dollar store example is that it discourages the tendency of students to engage in a subtraction exercise whenever they confront a real rate of interest and an inflation rate. when told that a lender demands a real rate of interest of 3% when the inflation rate is 2%, many students, even the best of them, often choose 1% as the nominal rate of interest. this paradigm forces them to think rather than to answer real interest rate questions on automatic pilot. basket income: the standard approach the standard approach to the consumer price index involves computing the value of a fixed market basket in a base year and dividing the value of the items in that basket in any given period by the value of the basket in the base year. that ratio is then multiplied by 100 to construct the cpi. in the fifth edition of o’sullivan, sheffrin, and perez’s macroeconomics principles text, for example, it is assumed that a fixed basket costs $200 in the base year of 1992. if that very same basket costs $250 in 2004, then the cpi is ($200/$200)*100= 100.0 in 1992 and ($250/$200)*100= 125.0 in 2004. the text then presents an example that asks how much nominal income is needed in 2004 to have the same standard of living as would have been provided by $300 in 1992. the answer is given as $300*(125/100) = $375. (alternatively, 41 journal for economic educators, 12(1), 2012 ($375/125)*100 = $300). in my 35 years of teaching experience, i have found that examples of this type rarely result in student knowledge that persists beyond the final exam. here is another way to present the standard approach to the computations of the cpi and real income using the cpi. consider an economy in which the standard market basket purchased by consumers contains 50 pounds of chicken to eat and 25 togas to wear. assume that in the base year the price of chicken is $1 a pound and the price of togas is $2 per toga. ask the students what the price of the basket is and they should answer $100. in a sample of principles of macro texts, the value of the basket in the base year is usually anything but $100. of course, in reality the cpi market basket will not have a value of $100 in the base year and in that sense what follows is not “realistic.” there are, however, some pedagogical benefits from normalizing the basket to have a $100 value. the class is then asked how many of these baskets a consumer can buy in the base year if they have $200 of nominal income. the reply is a quick “2 baskets.” i then tell them that in the year following the base year, the price of chicken rises to $1.05 per pound, the price of togas rises from $2 to $2.02, and the consumer’s income rises from $200 per week to $206 per week. i then ask them how many baskets the consumer can purchase. the answer again is again two baskets because the standard market basket now costs $103. at this point, i tell them that the consumer price index is 100.0 in the base year and 103.0 in the year following the base year. these are the values that one obtains from following the standard textbook approach to computing the cpi. the cpi is thus the dollar value of the standard basket over time. finally, i tell them that in the following year nominal income rises to $213, the price of chicken rises to $1.08, and the price of togas rises to $2.10. once again, i ask them how many baskets of 50 pounds of chicken and 25 togas the consumer can purchase with the $213 of money income now that the standard market basket costs $106.50. the answer again is a quick “2 baskets.” students pick this example up very quickly. i then tell my students that if one consults data on real income, one never sees real income reported as “basket income.” instead, nominal income is divided by the cpi with the decimal point moved two places to the left. hence, one evaluates for each example $200/1.00, $2.06/1.03, and 213/1.065, all of which are $200 dollars in the base year. there are always some puzzled looks when presented with this information. to be sure, the number is the same whether we measure real income with basket income or the standard approach to cpi computation . i then ask them how much 2 baskets cost in the base year? their reply is $200. at this point, the student understands that dividing nominal income by a price index with the decimal point moved over two places to the left in any given year is a measure of real income in terms of dollars of the base year. of course, there is not much difference between the “basket income” approach and the real dollar store approach to teaching real income. one can think of a real dollar store selling baskets costing $100 with each basket containing 100 items that each cost $1 in the base year. or, one can think of an item in a real dollar store as a basket of one item. nevertheless, most students, unlike trained economists, do not think in terms of market baskets. almost everyone, except people whose sense of pride prevents them from entering such a store due to concerns about being seen in one, has personal experience with making an actual purchase in such an establishment. whether one thinks of baskets, or items in a dollar store each of which costs the same amount, real income is income in terms of commodities purchased rather than dollars, however defined. 42 journal for economic educators, 12(1), 2012 conclusion are real dollar stores hypothetical? perhaps not. of late, stores like dollar general and five below have been selling their wares for more than one dollar. but at dollar tree, nearly all items cost $1 and at the 99 cents only store, nearly all items sell for ninety-nine cents. while there are no actual “real dollar stores” where all prices are exactly indexed to the cost of living, i have found that such a store is a useful teaching device to introduce students to the distinction between real and nominal variables. for those who insist on using the traditional approach to computing the cpi and real cpi income, students are very sympathetic to the version of the traditional approach demonstrated here. references boulding, kenneth e. (1969). “economics as a moral science,” american economic review, vol. 59, no. 1 (1969), 1-12. o’sullivan, arthur, sheffrin, steven, and perez, stephen (2008). macroeconomics: principles, applications, and tools, pearson/prentice-hall, new jersey. a new empirical study of the relationship between money supply and stock prices 54 journal for economic educators, 8(2), fall 2008 can money supply predict stock prices? sara alatiqi and shokoofeh fazel 1 abstract a positive causal relation from money supply to stock prices is frequently hypothesized by some financial media and financial analysts. the basis of this assertion is an assumed negative causal relation from money supply to interest rates, and a negative causal relation from interest rates to stock prices. in this paper, we argue against a stable causal relation from money supply to stock prices. an empirical analysis, based on cointegration and granger causality tests, supports our argument. introduction the relationship between money supply and stock prices has been examined in many studies. beryl sprinkel (1964) compared the turning points in a stock price index with the turning points in the growth rate of money. he concluded that a bear stock market was predicted 15 months after each peak in monetary growth, and that a bull market was predicted two months after each monetary trough was reached. homa and jaffe (1971) estimated the relationship between the supply of money and an index of common stock prices, seeking a forecasting tool in the implementation of investment strategies. their findings indicated that the price of any common stock is determined by three variables: the level and growth rate of dividends, the risk-free rate of interest, and the risk premium. the risk-free rate of interest being a function of money supply, they concluded that the average level of stock prices is positively related to the money supply. hamburger and kochin (1972) started with the standard valuation model and added current price level and the corporate bond rate to capture the direct and indirect impacts of money supply on the stock market. they concluded that changes in monetary growth could have a number of different effects on the stock market. pesando (1974) found empirical and theoretical problems in the models used by hamburger-kochin and homa-jaffe. he concluded that the inability of these models to generate accurate forecasts of stock prices was evidence against a structural and stable relationship between money supply and common stock prices. gupta (1974) adopted a probabilistic approach to predict the turning points in stock prices within a predetermined time period. using monthly data over a 23-year period, and a turning point observed in the money supply, he found that that 59% of the peaks in the stock market could be accurately predicted. kraft and kraft (1977) used time series analysis and found no causal relationship from money supply to stock prices. pearce and roley (1985) examined the effects of money supply news on stock prices, finding a negative relationship between unanticipated increases in the money supply and stock prices. 1 sara alatiqi, financial analyst, american university of kuwait; shokoofeh fazel, ph.d., associate professor of economics/finance, montana state university-billings. 55 journal for economic educators, 8(2), fall 2008 money supply and interest rates the hypothesized causal relation from money supply to stock prices is often derived in two steps: an assumed negative causal relation from money supply to interest rates, followed by an assumed negative causal relation from interest rates to stock prices. accordingly, the absence of a causal relation from money supply to stock prices may be partly due to uncertainty over whether interest rates will fall (rise) as a result of an increase (decrease) in the money supply. the negative causal relation from money supply to interest rates is often based on the short-term liquidity effect. according to the liquidity effect, an increase in the supply of money creates an excess supply of money at existing income, interest rate, and price levels. money demand is a decreasing function of nominal interest rates, because the interest rate is the opportunity cost of holding cash. an increase in the supply of money must cause interest rates to decrease in order to keep the money market in equilibrium. in technical terms, assuming no shift in the money demand curve, a rightward shift in the money supply curve will cause a downward movement along the money demand curve, causing the equilibrium interest rate to decline. if at the same time that money supply shifts to the right, money demand curve also shifts to the right, however, the new equilibrium interest rate may be the same or higher than the old equilibrium rate. money demand may shift to the right as the result of a higher price level or higher real output. for example, if the economy experiences stagflation, rising prices may cause households to increase their demand for money. this causes a rightward shift in the money demand curve. in such a scenario, an expansionary monetary policy may result in an increase or no change in interest rates. another reason that interest rates may not react negatively to changes in the money supply stems from the real output and price effects. as the result of expansionary monetary policy, real output and the price level may rise, causing a rightward shift in money demand, and leading to higher interest rates. a positive relation between money supply and interest rates is also implied in the fisher equation. according to the fisher equation, the nominal interest rate equals the real interest rate plus the expected rate of inflation. since the public expects expansionary monetary policy to be inflationary, increases in the money supply may cause expected inflation and, therefore, and increase in nominal interest rates. in short, as the money supply increases, interest rates might not decrease. interest rates and stock prices even if we ignore the possible lack of a causal relation from money supply to interest rates, we are faced with the uncertainty of a negative causal relation from interest rates to stock prices. this assumed negative relationship is partly based on the view that a decrease in interest rates leads to lower borrowing costs for firms, higher future profits, and thus higher stock prices. it is also argued that lower interest rates prompt investors to move money from the bond market to the equity market. nevertheless, future profits may not change, if interest rates decline at the same time that demand for firms’ products, and thus their sales, decline. in this case, stock prices may not change and, depending on the effects of lower interest rates and lower sales on profit, stock prices could even decline. a decline in interest rates may occur simultaneously with an increase in the cost of some major inputs, such as oil. in this case, total cost may not decrease, and profits and stock prices may not increase. 56 journal for economic educators, 8(2), fall 2008 further, a decline in interest rates may lead to expectations of even further declines. this may prompt some investors to stay in the bond market, since they might see an opportunity to make profit at lower risk. moreover, those investors who were not investing in the bond market may switch from stocks to bonds, because of the inverse relationship between interest rates and bond prices. while interest rates are the most important determinant of bond prices, stock prices depend on many other factors. in short, when the money supply increases, interest rates may not fall, and if interest rates decline, stock prices may not increase. these uncertainties may result in no reliable negative causal relation from money supply to stock prices. methodology and test results we used monthly data from 1965-2005 to empirically analyze the relationship between money supply and stock prices. seasonally adjusted m1 data were used to measure money supply; s&p 500 index data were used to measure stock prices. the interest rate was measured by both the three month treasury bill rate (sr) and the average treasury bond rate (lr). our empirical analysis includes three tests; the augmented dickey-fuller test, the engle-granger cointegration test, and the granger causality test. augmented dickey-fuller test the first step in performing the cointegration test is to test for the presence of a unit root in the individual series. we employ the augmented dickey-fuller test (1979)for this purpose. table 1 displays the results of the augmented dickey-fuller tests. in each case, a log polynomial in first differences of each variable was taken out six periods to render the residuals approximate white noise. the ljung-box "q" statistic was used to test the hypothesis that all of the autocorrelations are zero. for all the variables examined, absolute values of calculated tstatistics were lower than the mackinnon critical values. consequently, the null hypothesis of difference-stationary could not be rejected at any standard significance level. although this does not prove there are unit roots in each of the variables, the consequences of specifying spurious deterministic trends convinced us that defining the variables as the first differences in the logs was the prudent way to proceed. table 1: augmented dickey-fuller (adf) unit root tests, 1965-2005 variable adf coefficient t-stat s&p500 .0041 1.4278 sr -.0210 -1.4363 lr -.0111 -1.3272 m1 .0048 1.6546 mackinnon critical values (491 observations): 1% -3.46 5% -2.87 10% -2.57 57 journal for economic educators, 8(2), fall 2008 engle-granger cointegration test the concept of correlation in a growing economy is that of a common stochastic trend or cointegration. many economic time series are not stationary. if, however, the first difference of a series is stationary, the original series is said to be integrated of order one. as described in engle and granger (1987), two or more variables are said to be cointegrated, if individually each is non-stationary (has one or more unit roots), but there exists a linear combination of the variables that is stationary. to investigate the cointegration properties of stock prices, money supply, and interest rate, we first test for cointegration between stock prices and money supply. next, we test for cointegration between stock prices, interest rate and money supply. table 2 reports the results of the engle-granger test for cointegration between stock prices and money supply. table 3 displays the results of the test for all three variables. in both tests, absolute values of calculated t-statistics were below the conventional mackinnon critical values. that is, there is no evidence of cointegration or common stochastic trends among money supply, interest rate, and stock prices. this contradicts the view that money supply and stock prices hold a stable long-run relationship. the cointegration results further confirm that money supply does not have any long-run explanatory power in predicting movements in stock prices, and provide support for the view presented in this paper. table 2: cointegration test between stock prices and money supply, 1965-2005 variables coefficient t-stat s&p500, m1 -.0419 -2.23 mackinnon critical values (491 observations): 1% -4.3468 5% -3.7717 10% -3.4730 table 3: cointegration test between stock prices, interest rates, and money supply, 1965-2005 variables coefficient t-stat sp500, sr, m1 -.0714 -3.1269 sp500, lr, m1 -.0678 -3.5076 mackinnon critical values (491 observations): 1% -4.3468 5% -3.7717 10% -3.4730 58 journal for economic educators, 8(2), fall 2008 granger causality test in performing the granger causality tests, the hypothesized dependent variable is regressed on its lagged values. the lag length in the regression equation must be selected in such a way that the resulting residuals are white noise, eliminating any first order serial correlations. next, the lagged values of the hypothesized independent variable are added to the right side of the regression equation and the new regression is executed. using an f test, the resulting sums of squared residuals from the two regression equations are compared. a relatively large difference between the two sums of squared residuals (a large f) would provide evidence that the hypothesized independent variable granger causes the dependent variable. the granger causality test results are shown in table 4. the small f statistic of the granger causality test (0.0814), lower than the critical f value at the 5% confidence level (3.66), supports the view that there is no causal relation from money supply to stock prices. table 4: granger causality test, 1965-2005 null hypothesis: f-stat probability m1 does not cause s&p s&ptock prices 0.0814 0.970 s&p does not cause m1 4.1834 0.006 lag:3 our test results conform well to our logical explanations presented earlier that money supply does not have any explanatory power in predicting changes in stock prices. conclusion a change in the money supply is frequently assumed to positively affect stock prices. this positive causal relation is often based on an hypothesized inverse causal relation from money supply to interest rates and an hypothesized inverse causal relation from interest rates to stock prices. in this paper, we argue against the existence of these relationships. we show that the lack of a stable negative causal relation from money supply to interest rates, and from interest rates to stock prices, results in no significant long-term causal relation from money supply to stock prices. using the engle-granger cointegration test and the granger causality test, we find empirical support for our view. references dicky, d. a. and fuller, w. a. 1979. “distribution of the estimators for autoregressive time series with a unit root.” journal of the american statistical association, 74(336): 427431. engle, r.f. and c.w.j. granger. 1987. “cointegration and error correction: representation, estimation, and testing.” econometrica, 55: 251-276. gupta, manak c. 1974. “money supply and stock prices: a probabilistic approach”, journal of financial and quantitative analysis, 9(1): 57-68. hamburger michael j. and levis a. kochin. 1971. “money and stock prices: the channels of influences.” the journal of finance, 27(2): 231-249. 59 journal for economic educators, 8(2), fall 2008 homa, kenneth e. and dwight m. jaffee. 1971. “the supply of money and common stock prices.” the journal of finance, 26(5): 1045-1066. kraft, john and arthur kraft. 1976. “determinants of common stock prices: a time series analysis.” the journal of finance, 32(2): 417-425. pearce, douglas k. and v. vance roley. 1985. “stock prices and economic news.” the journal of business, 58(1): 49-67. pesando, james e. 1974. “the supply of money and common stock prices: further observations on the econometric evidence.” the journal of finance, 29(3): 909-921. sprinkel, beryl. 1964. money and stock prices. homewood, illinois: richard irwin, inc. microsoft word jeespr05d.doc journal for economic educators • volume 5 • number 2 • spring 2005 1 consumers’ expectations and consumption expenditure shokoofeh fazel * abstract some studies have examined the impact of consumers’ expectations on consumption expenditure. however, none of these studies concludes a clear positive relationship between these variables. it has been argued that consumers’ expectations about the economy’s future should have an impact on consumers’ decisions about how much to consume and how much to save. while consumers’ expectations seem to be a strong predictor for future consumption expenditure, there are potential statistical problems with the use of current available estimates of consumers’ expectations. in this paper, we hypothesize that, due to these statistical problems, consumers’ expectations measured by currently available estimates such as the index of consumer sentiment do not have explanatory power to predict future levels of consumption expenditure. we present empirical evidence that, while disposable income is a good predictor for consumption expenditure, the index of consumer sentiment is not a reliable predictor for future levels of consumption. our empirical analysis is based on a multiple regression model in which the dependent variable is consumption expenditure and the independent variables include disposable income and consumers’ sentiment. data for consumption expenditure and disposable income are obtained from the bureau of economic analysis: national economic accounts at www.bea.doc.gov, and the data for consumers’ sentiment index were obtained from www.econstats.com. we use monthly time series data for all three variables over the 1990-2003 period. introduction in light of declines in aggregate demand over the 2001-2004 period in the u.s. economy, and given the fact that consumption expenditure counts for more than 60 percent of aggregate demand, it seems imperative to take a new look at factors that have influence on consumption expenditure. correct identification of such factors can help predict future slowdowns in consumption and aggregate demand. for many years the impacts of variables such as current disposable income, past peak income, interest rates, and consumers’ expectations on consumption have been debated and empirically examined in the macroeconomic literature. although scholars have studied the subject extensively, prediction of levels of consumption expenditure remains an unresolved issue. the focus of this paper is on the explanatory power of current available measures of consumers’ expectations to predict future levels of consumption. our hypothesis is that due to statistical bias current estimates such as the index of consumer sentiment are not reliable tools for prediction of consumption expenditure. we present empirical evidence that, while disposable income is a good predictor for consumption, the index of consumer sentiment does not have explanatory power to predict future levels of consumption expenditure. background according to keynes (1936), current consumption expenditure is very closely related to current disposable income—both for an individual and for an economy. empirical evidence both * shokoofeh fazel, montana state university – billings, sfazel@msubillings.edu. journal for economic educators • volume 5 • number 2 • spring 2005 2 in cross-sectional and time series data has been widely used to explore keynes’ theory. the results were mixed and led to a variety of innovations in consumption theory. friedman (1957) introduced permanent income hypothesis (pih). according to the pih, consumption by households is the outcome of an intertemporal decision-making process. friedman argued that consumption had two components, a permanent planned component based on habits, budget planning, and current needs and a transitory capricious component based on whim, chance occurrence, and random phenomena. while the pih alludes to a flexible concept of permanent income, including possibly lifetime income, it makes no explicit allowance for demographic factors. the structure of population, number of new couples, percentage of retired couples, and so on, is not static. these kinds of factors may change and induce changes in consumption that would be unanticipated by the pih. duesenberry (1967) introduced the relative income hypothesis. he postulated that consumption depends on current income and past peak income. if income exceeds the previous peak level of income, no downward adjustment in living standards is necessary, and consumption will adjust to income according to one set of relations. if, however, income falls below previous peak income, then consumption will react more gradually to changes in income. a different approach to consumption was undertaken by modigliani and ando (1963). their theory of consumption titled “life cycle hypothesis” distinguishes between two types of wealth, net worth of one’s stock of assets and the present value of one’s expected labor income stream. according to this theory, consumption at any time depends both on the flow of expected labor income and on the stock of net worth or wealth. the impact of interest rates on consumption expenditure has also been studied extensively in the macroeconomic literature. almost all empirical studies on the subject have found no significant relationship between interest rates and consumption expenditure (lusardi 1990; wilcox 1990; elmendorf 1996). the absence of a significant relationship between interest rates and consumption may be due to two simultaneous effects that interest rates have on consumption. while an increase in interest rates (an increase in cost of financing) may induce a reduction in consumption of durable goods and services, it could also raise future incomes from each dollar saved in the current period and thus increase current consumption. consequently, the direction and magnitude of the effect of interest rate on consumption expenditure remains ambiguous. some relatively recent studies have examined the impact of consumers’ expectations on consumption. an empirical study by bram and ludvigson (1998) suggests that, when interest rate and equity price changes are included in forecasting models, the index of consumer sentiment (ics) is no longer a significant predictor of consumption expenditures. however, according to this study, the conference board’s consumer confidence index (cci) significantly improves the explanatory power of the forecasting models. bram and ludvigson conclude that the cci and the ics do not provide the same forecasting information. yash and martin (2003) use empirical analysis controlling for the possible influences of expected changes in income and interest rates on consumer spending. they find that consumer sentiment may predict future household spending because it foreshadows current economic conditions. they conclude that consumer sentiment is useful as a barometer of the near-term outlook for spending. garrett, hernandez-murillo, and owyang (2003) test the ability of consumer sentiment to predict retail spending at the state level. they conclude that the practical value of sentiment indices to forecast consumer spending at the state level is, at best, limited. there are other studies in the literature that investigate the impact of consumers’ expectations on consumption expenditure (souleles 2001; carroll, fuhrer, and wilcox 1994). none of these studies concludes a clear positive relationship between these variables. it has been argued that consumers’ expectations about the economy’s future should have an impact on consumers’ decisions about how much to consume and how much to save. when consumers have good expectations about the future, they may consume more and save less than when they are journal for economic educators • volume 5 • number 2 • spring 2005 3 pessimistic about it. therefore, what consumers are thinking about the future state of the economy could be a useful factor in explaining future changes in levels of consumption. while consumers’ expectations seem to be a strong predictor for future consumption expenditure, there are potential statistical problems with the use of estimates for consumers’ expectations. in the next section, we present explanations for these problems and hypothesize that consumers’ expectations measured by current available estimates such as index of consumer sentiment do not have explanatory power to predict future levels of consumption expenditure. we present empirical evidence that, while disposable income is a good predictor for consumption expenditure, consumers’ expectations do not have explanatory power to predict future levels of consumption. empirical analysis while consumers’ expectations seem to be a logical predictor for future consumption expenditure, there are potential statistical problems with the use of estimates for consumers’ expectations. first, when estimates like the consumers’ expectations index or the index of consumers’ sentiment are used, there is no assurance that the resulting forecast errors average out over a certain time period. consumers who are surveyed may overestimate or underestimate the level of business activity, future inflation rates, and other key macroeconomic variables in such a way that could lead to biased predictions. second, forecasts may be inefficient, in that people’s forecast errors can be correlated with their demographic characteristics and/or aggregate shocks do not hit all people uniformly. as a result of these problems, we believe that available estimates for consumers’ expectations should not have any strong explanatory power to predict future consumption expenditure. in this paper, we provide an empirical examination of the impact of disposable income and consumers’ expectations on consumption expenditure. we hypothesize that the relationship between survey-based estimates for consumers’ expectations and future consumption expenditure should be insignificant. two of the best known tools of measuring consumers’ expectations are the consumer confidence index published by the conference board and the index of consumer sentiment published by the survey research center at the university of michigan. in this paper, we use the index of consumer sentiment to measure consumers’ expectations. this index is based on the responses of several hundred households to questions about their current and expected future financial situation and their expectations about the state of the economy in the next one to five years. the index is measured relative to a value of 100 for 1966, with higher values corresponding to greater consumer optimism. we use a multiple regression model in which the dependent variable is consumption expenditure and the independent variables include disposable income and consumers’ sentiment. data for consumption expenditure and disposable income were obtained from the bureau of economic analysis: national economic accounts at www.bea.doc.gov, and the data for consumers’ sentiment index were obtained from www.econstats.com. we use monthly time series data for all three variables over the 1990-2003 period to test for the impact of disposable income and consumers’ expectations on consumption expenditure. to perform our empirical analysis, we estimate the following multiple regression model: ct = a + b1 dit +b2 cst-1+ ut (1) where ct = level of consumption expenditure at time t b1 = marginal propensity to consume dit = level of disposable income at time t journal for economic educators • volume 5 • number 2 • spring 2005 4 a = intercept b2 = slope of current consumption with respect to lagged consumers’ sentiment cst-1= lagged consumers’ sentiment ut = error term at time t table 1 presents the estimates for the slope coefficients, b1 and b2, over the entire sample period as well as the two sub-periods of 1990-1996 and 1996-2003. slope coefficients related to disposable income (marginal propensity to consume) are significant at the 5 percent confidence level for all periods. these results confirm the traditional keynesian hypothesis that current disposable income is the major factor determinant of current consumption expenditure. however, slope coefficients related to the lagged consumers’ sentiment are insignificant. these results conform well to our hypothesis that consumers’ sentiment has no explanatory power with respect to consumption expenditure. while less biased measures of consumers’ expectations may be powerful tools of predicting future consumptions, it appears that statistical bias related to the use of a survey-based index of consumer sentiment makes this measure an inefficient tool for consumption forecasts. table 1. ct = a + b1 dit +b2 cst-1+ ut period b1 b2 n dw r 2 1990.12003.7 .51 (3.62) 1.18 (.30) 163 2.04 .96 1990.1-1996.9 .31 (4.32) .98 (.25) 81 1.97 .97 1996.10-2003.7 .62 (3.40) 1.27 (.53) 82 2.01 .96 concluding remarks the objective of this study was to examine the relationship between consumers’ expectations as measured by the index of consumer sentiment and future consumption expenditure. the major hypothesis of this study was that the index of consumer sentiment would not have the explanatory power to predict future consumption. our logic for this hypothesis was based on the statistical bias related to the use of this index as a proxy for consumers’ expectations. we used a multiple regression model in which the dependent variable was consumption expenditure and the independent variables include disposable income and the index of consumers’ sentiment. we found empirical support for our hypothesis. according to our test results, while disposable income is a good predictor for consumption expenditure, the index of consumer sentiment does not have explanatory power to predict future levels of consumption. the major implication of our empirical results is that to obtain more reliable forecasts for consumption, more research on developing other unbiased measures for consumers’ expectations is necessary. journal for economic educators • volume 5 • number 2 • spring 2005 5 references ando, a., and frank modigliani. 1963. “the life cycle hypothesis of saving: aggregate implications and tests” american economic review. bram, j., and s. ludigson. 1998)\. “does consumer confidence forecast household expenditure? a sentiment index horse race.” federal reserve economic policy review 4(2): 59-79. carroll, christopher d., jeffrey c. fuhrer, and david w. wilcox (1994). “does consumer sentiment forecast household spending? if so, why?” american economic review 84(5): 1397-1408. duesenberry, james s. 1967. “income, saving and the theory of consumer behavior.” oxford: oxford university press. elmendorf, douglas w. 1996. “the effects of interest-rate changes on household savings and consumption: a survey.” federal reserve board. friedman, milton. 1957. “a theory of the consumption function.” nber, princeton: princeton university press. garrett, thomas a., ruben hernandez-murillo, and michael t. owyang. 2003. “does consumer sentiment predict regional consumption?” federal reserve bank of st. louis. working paper. keynes, john maynard. 1932. “the general theory of employment, interest and money.” new york: harcourt, brace, & world, inc. lusardi, annamaria. 1990. “durable goods and varying real interest rates.” princeton university discussion paper no. 63. souleles, nicholas s. 2001. “consumer sentiment: its rationality and usefulness in forecasting expenditure-evidence from the michigan micro data.” nber working paper no. 8410. wilcox, james a. 1990. “nominal interest rate effects on real consumer expenditure.” business economics 25. www.bea.doc.gov www.econstats.com wykoff, frank c. 1976. “macroeconomics, theory, evidence, and policy.” new jersey: prenticehall. yash, p. mehra, and elliott w. martin. 2003. “why does consumer sentiment predict household spending?” federal reserve bank of richmond economic quarterly 89(4): 51-67. a pedagogical note on modeling the economic benefit of emissions abatement vs 1 | journal for economic educators, 12(1), 2012 1 a pedagogical note on modeling the economic benefit of emissions abatement vs. the economic harm from emissions christopher s. decker 1 abstract the number of undergraduate-level textbooks on environmental economics has increased in recent years, but the textbook treatment of optimal emissions (abatement) varies markedly from textbook to textbook. in particular, there is no consensus as to whether to model the economic “bad” (i.e. emissions) or the economic “good” (abatement). this inconsistency can lead to some needless confusion for students introduced to environmental economics for the first time, particularly those students outside of the formal economics major, such as students of business administration and public policy. as a means of mitigating this confusion, i propose a simple example that instructors can use in lecture, test question, or student assignment format, that illustrates the duality between modeling emissions and abatement. key words: environmental policy, optimal abatement, optimal emissions, duality, social welfare jel classifications: a22, a23, q50 introduction there has been a noticeable increase in the number of undergraduate-level textbooks on the subject of environmental economics in recent years. most textbooks are structured in standard fashion starting with a review of efficient markets leading into a discussion of market failures; common property resources, externalities, and public goods, with emphasis placed on the latter two. shortly thereafter, most textbooks then launch into a discussion of either optimal emissions or optimal abatement levels with a corresponding discussion of the various policy designs that economists have developed over the years. the textbook treatment of optimal emissions (abatement) varies markedly from textbook to textbook, particularly for those texts aimed at the undergraduate level. in particular, there is no consensus as to whether to model the economic “bad” (i.e. emissions) or the economic “good” (abatement). field and field (2009) tend to model emissions while callan and thomas (2010) model abatement. many textbooks, such as tietenberg (2003), kalstad (2011), perman, ma, mcgilvray, and common (2003), and hanley, shogren, and white (2007), will in some places model emissions and in other places model abatement (or pollution control). perman, ma, mcgilvray, and common (2003), for instance, will model emissions when discussing the welfare implications of an optimal emission tax and subsidy (p. 220) and model abatement when modeling tradable permit markets with firms facing different abatement cost functions (p. 226). this inconsistency in presentation does not suggest any serious or inherent flaw in any of these textbooks. after all, minimizing the social harm caused by emissions is the economic dual 1 professor of economics, department of economics, college of business administration, university of nebraska at omaha, omaha, ne 68182. email: christopherdecker@unomaha.edu. 2 | journal for economic educators, 12(1), 2012 2 of maximizing the net social benefits derived from abatement. 2 it is true that the relative merits of each approach, i.e. modeling the economic “good” or the economic “bad”, can be debated. 3 however, this inconsistency between and within textbooks can lead to some needless confusion for those students being introduced to environmental economics. as a means of mitigating this confusion, i propose below a simple example that instructors can use, either in lecture, as a test question, or as a student assignment, that illustrates the duality. this note, then, follows in the tradition of some recent literature, such as corrigan (2011), main (2010), kahane (2002), heyes (2000), and yates (1998) that offer instructors of environmental economics courses illustrative examples and in-class experiments to improve delivery of course topics. the remainder of this paper is organized as follows. in the next section, i present a model illustrating the duality between the optimal abatement level and optimal emissions level. the model is kept deliberately simple and straightforward so as to be accessible to the often broad audience of students studying environmental economics: upper-level undergraduate and beginning graduate students of economics, students studying business administration, students studying law and public policy, etc. after that, i review the basic welfare implications of the two different modeling approaches and offer a short conclusion. a simple example modeling the economic “good” consider a firm that emits as a by-product of production carbon dioxide (c02) thus degrading the air quality in a nearby neighborhood. carbon dioxide reductions are possible but only at a cost. let [0,1]a be the percentage of carbon pollution created but abated at cost a(a). let the cost function be defined as 2 ( ) 2a a a . this will generate a linear marginal abatement cost function commonly published in environmental economics textbooks and familiar to most students. for context, allow costs (as well as the benefits defined below) to be measured in thousands of dollars. assume that the per-person benefits of abatement increase with the percent of c02 abated but at a diminishing rate. to reflect this, define the benefit function as 2 ( ) .5b a a a . like the abatement cost function, this will generate a linear marginal benefit schedule common in most texts. notice also that 2 2 / 0, / 0db da d b da , indicating that benefits increase with abatement but at a decreasing rate. further, assume that c02 abated can be treated as a pure public good (i.e. cleaner air is non-excludable and non-rival), so that total affected population benefits are simply ( )nb a , where n is the number of affected individuals. let n = 12. the social welfare (sw) maximization problem is thus: max ( ) ( ) a sw nb a a a . (1) 2 indeed, some authors (though certainly not all) have acknowledged this duality. see, e.g. perman, ma, mcgilvray, and common (2003, p. 218). 3 on the one hand, it may make more sense to model the economic “bad”, given the environmental economics field’s focus on pollution as an externality. however, given that optimal emissions (abatement) discussions usually occur on the heels of a review of public goods where the economic “good” is generally modeled, and that many environmental goods, such as clean air, are often held up as examples of public goods, it may make more pedagogical sense to model abatement. at the end of the day, it’s probably best left to the individual instructor to decide which method is best and under what circumstances modeling, say, abatement, is preferable to, say, emissions. 3 | journal for economic educators, 12(1), 2012 3 incorporating our specific functional forms, we have: 2 2 max 12( 0.5 ) 2 a sw a a a . (2) the first order condition is where the marginal benefit of abatement (mb(a)) equals the marginal cost of abatement (mac(a)). mathematically, from (2), this condition is: 12(1 ) 4 ,a a (3) where mb(a) = 12(1-a) and mac(a) = 4a. note that ( ) / 0dmb a da , reflecting that the benefits of additional abatement diminish, and that ( ) / 0dmac a da , demonstrating that marginal abatement costs increase with increased abatement efforts. the resulting optimal level of abatement is * 3/ 4a . thus, the optimal amount of c02 abated is seventy-five percent. this result is depicted in figure 1 below. this figure is standard, indicating the optimal level of abatement at 3/4 with a marginal cost of abatement of $1.125 thousand. figure 1. a $ 1 $12 3/4 $1.125 x y z w mb mac modeling the economic “bad” to set this problem up, recognize that emissions, are those pollutant releases that are not abated, or 1a e , where [0,1]e is the percentage of carbon emitted (i.e. the percent not abated). secondly, environmental damages are understood as the opposite of abatement benefits. define the damages function as ( ) ( )d e b a . finally, the abatement cost function with emissions as the argument is '( ) ( )a e a a . unlike the economic “good” case, the goal here is to minimize social costs (sc); i.e. the costs (damages plus abatement costs) associated with emissions: min ( ) '( ) e sc nd e a e . (4) 4 | journal for economic educators, 12(1), 2012 4 again, introducing our specific functions yields: 2 2 min 12(1 0.5(1 ) ) 2(1 ) e sc e e e . (5) the first order condition here is where the marginal damages from emissions (md(e)) equals the marginal cost of abating emissions (mac’(e)). mathematically, from (5), this condition is: 12 4(1 ),e e (6) where md(e) = 12e and mac’(e) = 4(1-e). the resulting optimal level of emissions is * 1/ 4e . just to highlight the duality, note that a* = 1e* = 3/4. figure 2, common in most textbooks, illustrates this equilibrium and essentially represents a mirror image of figure 1. consistent with expectation, the model demonstrates that ( ) / 0dmd e de , illustrating that marginal damages increase with increased pollution. also with this model, '( ) / 0dmac e de , indicating that marginal abatement costs fall as emissions increase. this reflects the notion that less effort is being directed towards abatement. while this result makes intuitive sense, it is plausible, indeed likely, that students may have some initial difficulty due to the “unusual” feature that the marginal abatement cost function is downward-sloping. 4 once students are exposed to the duality via an example like the one presented here, the situation becomes clear. figure 2. e $ 1 $12 1/4 $1.125 x’ y’z’ w’ mac’ md welfare analysis to solidify the duality, it is valuable to include the exercise of comparing the welfare implications of both approaches. this is done below. welfare analysis and the economic “good” typically, welfare analysis embodies both a calculation of the net social benefits to pollution control and/or a calculation of the total costs associated with pollution control. for optimal net social benefits of pollution control when modeling the economic “good” (sw(a*)), 4 indeed, this may be a reason to favor modeling the economic “good” over the economic “bad”. 5 | journal for economic educators, 12(1), 2012 5 we see from figure 1 that this is quantifiably equivalent to the areas w+x. this is mathematically represented as: 3/ 4 0 ( *) 12(1 ) 4sw a a a da , (7) which when evaluated is: 3/ 4 2 2 2 2 0 ( *) 12( 0.5 ) 2 12(3 / 4 0.5(3 / 4) ) 2(3 / 4) $4.5sw a a a a . (8) with respect to optimal social cost (sc(a*)), from figure 1 we see that this is quantifiably equivalent to areas y+z, or: ( *) 0.5(3 / 4)1.125 0.5(2 / 4)1.125 0.5(1.125) $0.5625sc a . (9) welfare analysis and the economic “bad” for the economic “bad” optimal net social benefits of pollution control (sw(e*)), we read figure 2 from the right-hand-side axis. here, the benefits are the avoided damages (area w’+ x’+ y’) minus cost of abatement (y’). this is represented mathematically as: 1 1/ 4 ( *) 12 4(1 )sw e e e de , (10) which when evaluated is: 1 2 2 2 2 1/ 4 ( *) 6 2(1 ) 6 6(1/ 4) 2(3 / 4) $4.5sw e e e . (11) from figure 2, we see that optimal social cost (sc(e*)) is quantifiably equivalent to areas y’+ z’, or: ( *) 0.5(1/ 4)1.125 0.5(3 / 4)1.125 0.5(1.125) $0.5625sc a . (12) again, the duality is apparent. to highlight this condition graphically, it is beneficial to point out that w+x from figure 1 equals w’+ x’ from figure 2. likewise, y+z from figure 1 is equivalent to y’+ z’ from figure 2. conclusion textbook treatment of optimal emissions (abatement) varies markedly from textbook to textbook. in particular, there is no consensus as to whether to model the economic “bad” (i.e. emissions) or the economic “good” (abatement). this inconsistency can lead to needless confusion for students introduced to environmental economics for the first time, particularly those outside of the formal economics major, such as students of business administration, law 6 | journal for economic educators, 12(1), 2012 6 and public policy. to mitigate this confusion, i propose a simple example that instructors can use to quickly illustrate the duality between modeling the emissions and modeling the abatement. as models in environmental economics become more and more complex, and as these models filter into textbooks, consistency of presentation becomes increasingly difficult. it may be desirable from a learning perspective to model emissions when presenting, say, a cap-andtrade model and to model abatement when modeling, say, a deposit-refund system. indeed, no textbook author should feel compelled to force consistency in model presentation at the expense of pedagogical clarity. diversity in presentation may ultimately be a good thing, but avoiding unnecessary student confusion is desirable as well. a unifying example that encapsulates the duality associated with modeling the economic “good” and the economic “bad” can allow students to focus less on notational inconsistency and more on conceptual understanding. references callan, scott j., and janet m. thomas. 2010. environmental economics & management. 5 th edition. mason, oh: south-western: cengage learning. corrigan, jay r. 2011. “the pollution game: a classroom game demonstrating the relative effectiveness of emissions taxes and tradable permits.” journal of economic education, 42(1): 70-78. field, barry g. and martha k field. 2009. environmental economics: an introduction. 5 th edition. new york, ny: mcgraw-hill/irwin. hanley, nick, jason e. shogren and ben white. 2007. environmental economics in theory and practice. 2 nd edition. london, uk: palgrave macmillan. heyes, anthony. 2000. “a proposal for the greening of textbook macro: ‘is-lm-ee’.” ecological economics, 32: 1-7. kalstad, charles d. 2011. environmental economics. oxford, uk: oxford university press. kahane. leo h. 2002. “rice, salmon, or sushi? political competition for supply of a regulated input.” the american economist, 46(1): 22-28. main, robert s. 2010. “simple pigovian taxes vs. emission fees to control negative externalities: a pedagogical note.” the american economist, 55(2): 104-110. perman, roger, yue ma, james mcgilvray and michael common. 2003. natural resource and environmental economics. 3 rd edition. new york, ny: pearson addison-wesley. tietenberg, tom. 2003. environmental and natural resource economics. 6 th edition. new york, ny: pearson addison-wesley. yates, andrew j. 1998. “the equal marginal value principle: a graphical analysis with environmental applications.” journal of economic education, 29(1): 23-31. 18 |journal for economic educators, 19(1), 2019 economics, objectivity, and science: useful classroom discussions matthew t. clements1 abstract this paper describes classroom discussions that will help students understand the sense in which economics may be regarded as a science and the role of subjectivity in analyzing economic questions. key words: subjectivity, objectivity, science, controversy jel classification: a11, a13, a22 introduction when we teach undergraduates, we naturally focus on the economic way of thinking as an analytical framework, guiding students in using a set of principles to understand economic phenomena. however, there is also a set of meta-principles at play that often do not receive enough attention. how economic principles are used (and misused) outside the classroom, how they inform debates, and how students can confidently take their own stand in these debates are arguably as important as the principles themselves. an economics class presents an excellent opportunity to instruct students more generally in thinking carefully and expressing ideas. while it is typical for an introductory textbook to discuss the types of controversies involving economics that arise in the public sphere, this discussion tends to be cursory and often gives the impression (or even states directly) that there is a sharp dichotomy between subjective and objective issues, that there are value-laden applications of economics but that the scientific conclusions of economics are not open to debate. even if a textbook, or an instructor, does not intend to leave that impression, it is useful to discuss pointedly what it means for economics to be regarded as a science and whether and to what extent the conclusions of economics can be considered objective. what is debatable? “is everything in economics debatable?” a student in a principles class put this question to me some years ago. unable to answer either yes or no without a great deal of qualification, i developed a discussion focusing on what it means for a topic to be “debatable.” one component of this discussion is what we consider to be objective truth. objective is often defined as free from the influence of personal feelings or values: e.g., one would like a jury to render an objective verdict, based only on the facts of the case. in a philosophical sense, objective refers to a reality that is independent of any one person’s perception of it: an objective truth belongs to the object of thought rather than to the person having the thought. one might then say that objective conclusions are those that are derived logically from objective truths. on the other hand, a logical or mathematical argument always 1 associate professor of economics, department of finance and economics, st. edward’s university, 3001 s. congress ave., austin tx 78704 19 |journal for economic educators, 19(1), 2019 relies on some set of axioms upon which different people may or may not agree, and furthermore there is no way to prove that any given perception of reality is trustworthy, or common to all of those perceiving it. we are then left with the notion that objective truths may exist, but we can have no certainty about anything beyond cogito ergo sum. and so there is arguably no true objectivity in any human endeavor; but if we can agree on observed reality and the rules of logic, we can come close enough that it isn’t worth quibbling about. (even so, i usually avoid the word objective in class, preferring alternatives like concrete. for example, market value is concrete, whereas any other notion of value is likely to be quite subjective.) even if objectivity is a reasonable goal to strive for, it will never be attainable in anything other than a strictly mathematical or logical argument. if we take the mathematical workings of an economic model to be indisputable, there is still the question of whether the model adequately represents a real-world situation, and what the implications of the model tell us about that realworld situation. there can be disagreement about this at a number of levels, and the nature of disagreement may be difficult to assess given the possibility that values can intrude into a logical process. then the important question, and the one worthy of attention in class, becomes to what extent disagreement is reasonable. to illustrate this point, i ask students: is it reasonable to deny that the holocaust actually occurred? does the fact that there is not unanimous agreement mean that it is debatable? (one advantage of this question is that it gets their attention, but if one wishes to use a less emotionally fraught example, whether the moon landing was real can serve the same purpose.) most students’ instinctive reaction will be no, but they may not be able to articulate a justification for this instinct. i then ask them to imagine how an academic historian might react to a holocaust denier. would the historian simply disagree, or “agree to disagree”? more likely, the historian would question the argument underlying the holocaust denier’s claim. the historian could criticize the denier’s refusal to accept certain evidence, or the reasons for doing so (which may or may not have been stated openly), or the denier’s acceptance of dubious evidence, or perhaps the denier’s refusal to respond to criticism directly. acceptance of the holocaust as historical fact is not only a majority view, but is also supported by historians using rigorous and compelling arguments, and these historians respond to holocaust denial in a reasonable and responsible way that holocaust deniers tend not to reciprocate.2 holocaust denial is, arguably, so difficult to support, so easy to criticize, that it does not deserve equal status with other historical views, or that one need not even take it seriously (and one can go on to criticize the feelings of injustice that arise as a reaction to this view). one cannot prove any historical fact in the same sense as proving that two plus two equals four, but acknowledging the impossibility of such proof is not the same as considering the question to be debatable in the sense that reasonable disagreement can exist. a less extreme example illustrates the point further. i briefly describe to students the austrian school of thought, including that it is outside the mainstream of the economics profession. i note also that, in my experience, mainstream economists may have different attitudes toward non-mainstream ideas: one might view such ideas as topics for thoughtful debate, while another might dismiss them out of hand. to take a specific example, one economist might put austrian monetary theory in the same category as holocaust denial, in the sense of being untenable and beneath serious consideration. another economist might disagree with austrian monetary theory but still take it seriously. how do we decide whether disagreement is 2 some useful references that delve into denial of the holocaust or of the moon landing more concretely are lipstadt (1994), evans (1999), and frazier (2009). 20 |journal for economic educators, 19(1), 2019 reasonable? there is simply no objective way to answer that question. it is up to the individual to decide, recognizing that the presence of any kind of disagreement does not imply that any opinion or argument is as good as any other, or that every opinion or argument is valid. this is a crucial component of the critical thinking we hope to inculcate in undergraduates. i would say that, outside of a class in mathematics or logic, it is a mistake to try to appeal to objective truth. i never go so far as to claim that the holocaust actually is historical fact, just that the opposing view is very hard to defend. there is much we can teach students about making and evaluating arguments, but to what extent different opinions are reasonable will generally be a subjective issue. navigating that subjectivity is a burden that any intellectually responsible person must bear.3 what is science? a more focused question that is related to the above issues is whether or to what extent economics can be considered a science. this question can generate responses and follow-up questions that make for a fruitful discussion. i start the discussion by putting the question directly to students: is economics a science? typically there will be both yes and no responses from students, and i find it useful to probe the latter first. common justifications for denying that economics is a science are that it is somehow different from the natural sciences or that the complexity of social phenomena precludes any kind of precise analysis. it often takes some back-and-forth to get students to articulate these objections, which i see as a beneficial exercise in itself. the comparison and contrast with the natural sciences is a key component of the discussion and a good point to consider next: how is economics different from physics? how is it the same? the most obvious answer to the first question is that physics deals with physical rather than social phenomena; but some students will likely argue that the results obtained in physics are more reliable and less open to interpretation than those in economics. again, nudging students into articulating this is part of the exercise. for the latter question, some students will want to say that economics and physics are not the same in any respect. this is a good time to come back to those students who originally supported the idea that economics is a science. sometimes a student will cut straight to the use of the scientific method as the decisive criterion, or there may be mention of the components of the method: gathering of evidence through observation or experimentation as well as a process for interpreting the evidence. this provides an answer to the fundamental question, which until this point i will have avoided confronting directly: what is science? i note here that this would have been an appropriate question to address first, but that one often sees claims that economics is not a science without any consideration of how we define the term. 3 more discussion of whether and to what extent objectivity is achievable in economic arguments and their application can be found in myrdal (1969), putnam and walsh (2011), and clements (2019). 21 |journal for economic educators, 19(1), 2019 now, if we can agree that the scientific method—the formulation and testing of hypotheses—can be applied both to physics and to economics, there is room for debate over what constitutes a test of a hypothesis, whether it necessarily involves gathering observable data or whether a theoretical argument can suffice. also, we are left with the idea that economics somehow lacks the precision of physics and that this bears upon how much confidence we can have in the conclusions of economic analysis. it is important to acknowledge that the social sciences generally consider highly complex, nuanced phenomena, and that a greater degree of simplification is involved in reducing those phenomena to tractable models as compared to the natural sciences. this can be a basis for criticism of any given economic argument. this brings me to an alternative view of science for students to consider (which does not preclude use of the scientific method): that science is a system of rhetoric, a method of persuasion with its own style and norms.4 the view of science as a tool for persuasion dovetails with the idea of subjectivity. whether or not one tries to make a claim of objective truth, the bottom line is often whether someone is convinced—which brings us back to the idea of making and evaluating arguments, and the possibility that one finds an argument simply unconvincing, or completely untenable. this, finally, brings me to the point that we need not consider whether economics is a science to be a yes-or-no question. we can consider the scientific approach to economic questions as one possibility (in contrast to an historical approach, for example) with its own strengths and weaknesses. it is difficult to argue that there is absolutely no insight to be gained by considering economic questions in a scientific manner; but certainly there are pitfalls in doing so, and there may be questions for which the scientific method is not well suited. (here i refer back to students’ claims that economics is not a science, which could be classified as potential problems with the scientific approach to economics.) alternative approaches may have different strengths and weaknesses, and one approach may be better than another with regard to a specific question. framing the question as whether economics, by definition, is or is not a science precludes discussion of a much better set of questions: what does it mean to take a scientific approach to economic questions? what value is to be had by doing that? what problems may arise through this approach? what alternative approaches may also be valuable? when people argue over whether economics is a science, often they are really arguing about the strengths and weaknesses of economics as a science, and in what ways scientific economic arguments are or are not compelling. these are useful issues to come back to throughout the semester. what is economics? with all of this discussion of what is not a necessary part of economic reasoning, there can be some confusion over what economics fundamentally is. students may respond that it has something to do with trade, or money, or supply and demand, and all of these have in common the one element that is essential to economics and defines it as a field: scarcity. economic agents must decide how to allocate scarce resources, and these decisions have aggregate effects. i like to use students’ allocation of their own time as an example, notable in that it involves scarcity but no market or trade of any kind. economics does not by its very nature involve any specific methodologies, just as it does not demand the adoption of any particular beliefs or assumptions. in teaching the mainstream, 4 as explored in kuhn (1996) and gross (1990). 22 |journal for economic educators, 19(1), 2019 scientific approach to economics (as i do), we need not claim that one must always do it this way, or that one can’t do it any other way. to do so would be as misleading as an economics instructor using historical methodology and claiming that no other way, including the scientific, is valid. if we’re talking about scarcity, we’re doing economics. as we work through the methodology, i frequently repeat box’s (1976) comment, “all models are wrong, but some are useful.” models are never themselves true but may help us to get at some underlying truth. the important questions are how useful a model is given its limitations, and how much it contributes to understanding a particular question. all of that is debatable, and something students must decide for themselves, while recognizing how fraught those decisions can be. we can teach them the mechanics of a model in an essentially objective sense, and to be thoughtful and thorough in making and evaluating arguments. but where they go with that is up to them. references box, g. e. p. 1976. “science and statistics.” journal of the american statistical association, 71: 791–799. clements, matthew t. 2019. “subjectivity in economics.” american review of political economy, 13(2). evans, richard j. 1999. in defense of history. new york: norton. frazier, kendrick (ed). 2009. science under siege: defending science, exposing pseudoscience. amherst, ny: prometheus books. gross, alan g. 1990. the rhetoric of science. cambridge, ma: harvard university press. kuhn, t. 1996. the structure of scientific revolutions. 3rd edition. chicago and london: university of chicago press. lipstadt, deborah. 1994. denying the holocaust: the growing assault on truth and memory. new york: penguin. myrdal, g. 1969. objectivity in social research. london: duckworth & co. putnam, h., and v. walsh (eds). 2011. the end of value-free economics. oxford: routledge. a note on the definition and graphical representation of unemployment 1 journal for economic educators, 8(2), fall 2008 presenting unemployment in principles classes: micro and macro perspectives j. j. arias 1 abstract the interpretation of unemployment can differ, depending on whether it is presented in a micro or macro context. instead of glossing over these different perspectives, instructors can expound on them as a means to reinforce basic graphical analysis, to introduce or review the distinction between stocks and flows, and to discuss policy issues related to unemployment, the measurement of unemployment and the labor market. key words: unemployment, labor market, minimum wage, stocks and flows jel classification: a22 introduction unemployment is an important topic in both macroeconomic and microeconomic principles courses. in macroeconomics, the unemployment rate is a major headline variable, and one of the most politically sensitive macro variables. in microeconomics, the concept of unemployment is usually presented as a specific type of market surplus. there is often an inconsistency, perhaps subtle, in the presentation of unemployment in these two different contexts. as i show below, this inconsistency relates to the difference between stock and flow variables, as well as the way the government measures unemployment. although instructors of an economics principles class at the high school or college level may choose to gloss over these differences in the presentation of unemployment, they may alternatively choose to expound on them as a means to reinforce basic graphical analysis, to introduce or review the distinction between stock and flow variables, and to discuss policy issues related to unemployment, the measurement of unemployment, and the dynamics of the labor market. in macroeconomics, the focus is on the government‘s official definition of the unemployment rate. therefore, in the macro context both the labor force and the level of unemployment are measured in terms of people who are in those respective categories at a point in time. consequently, the unemployment rate, which is simply the percentage of the labor force that is unemployed, is a stock. however, the typical labor market graph in price theory is usually a depiction of the flow of labor, where the quantity of labor on the horizontal axis can be measured in work-hours. the quantity of labor, then, can change along two margins: (1) the number of people employed and (2) the flow of hours per person. there is another important difference between the two contexts. in microeconomics, unemployment is typically presented as a surplus of labor, but in the macro-economy unemployment may or may not be associated with a surplus of labor. that is, there is frictional unemployment which is due to the process of matching workers with jobs. the labor market clears, but it takes time for agents to find the right match. while the macro definition of 1 associate professor of economics, department of economics & finance, georgia college & state university, campus box 014, milledgeville, ga 31061 2 journal for economic educators, 8(2), fall 2008 unemployment is a stock, there is a flow variable corresponding to this stock. this flow is the transition from one labor market category to another (e.g. from employed to unemployed) during a given interval of time. in addition to frictional unemployment, there may be factors leading to a surplus of workers for a particular region, sector or—in some models—for the aggregate labor market. binding minimum wage laws the first inconsistency comes to the fore when analyzing the effect of binding minimum wage laws in the labor market. suppose a textbook or an instructor presents a graph of the labor market when there is a binding minimum wage law, similar to the one in the figure 1. notice that in this graph the surplus of labor, (l s -l d ) is labeled as ―unemployment.‖ however, unless one makes certain assumption about how to define a unit of labor, this concept of unemployment is not the same as that used in the macro definition of the unemployment rate. rather, the surplus of labor shown in the labor market graph is a broader concept that includes involuntary, part-time employment. that is, the surplus of labor in the graph could represent a situation where everyone who wants a job at w m does indeed find a job, but firms hire some of those workers for fewer hours per week than they are willing to supply. in which case, there is no unemployment according to the macro or government definition of unemployment, but there is a surplus of labor according to the flow concept of labor services. 2 figure 1 2 while there is no unemployment according to the macro definition, the economy is operating below the ‗full-employment‘ level of output. this under-employment outcome can also be demonstrated in the standard workleisure model when hours worked are set by the employer (mcconnell, brue and macpherson 2009, p. 36). unemployment d s l (quantity of labor) w (wage) l* l s l d w m 3 journal for economic educators, 8(2), fall 2008 a way to reconcile these different concepts of unemployment is to convert the level of employment from a flow to a stock. just as one can analyze the loanable funds market through stocks or flows, one can use a similar approach with the labor market. if the quantity of labor is defined as total hours per unit-of-time, one can simply assume that hours per unit-of-time is constant across individuals, and then divide by that constant. the labor demand curve becomes the quantity of workers demanded by firms at each wage rate, and the labor supply curve becomes the quantity of workers supplied by households at each wage rate. for example, if the quantity of labor is 2,000 hours per week, and we assume that everyone works 40 hours per week; then dividing the flow of 2,000 hours/week by 40 hours/week yields a stock of 50 workers. at this point, an instructor may want to point out that a uniform work-week is a simplifying assumption which, of course, does not hold in reality. now it is straightforward to relate the graph of unemployment to the definition of the unemployment rate. at a given wage, above the market-clearing wage, l d represents the number of people employed, l s represents the labor force, and the difference, (l s -l d ) represents the number of people unemployed. the unemployed workers come from two sources: job losses and additional workers in the labor force. job losses are reflected in movement along the labor demand curve, where (l*-l d ) is the number of workers who have lost their jobs. additional workers are reflected in movement along the labor supply curve, where (l s -l*) is the number of new workers who have decided to enter the labor force. in this way a discussion of the unemployment created by a binding minimum wage law provides a nexus of both micro and macro perspectives: micro because the analysis involves the surplus created in a single market by a binding price floor; macro because unemployment is interpreted as the number of people who want to supply their labor, but cannot find employment. accordingly, many textbooks interpret the supply and demand of labor in a way that is consistent with the macro definition of unemployment. for example, frank and bernanke (2007, p. 606) graph minimum wage-induced unemployment (their figure 21.8), and describe the quantity of labor supplied as ―the number of people who want to work at the minimum wage,‖ and the quantity of labor demanded as ―the number of people that employers are willing to hire.‖ in a similar graph, colander (2004, p. 116) labels the horizontal axis as the ―quantity of workers,‖ and within the text he describes the surplus labor as ―an excess supply of workers.‖ hubbard and o‘brian (2008, p. 109) also use ―number of workers per year‖ to measure the quantity of labor when graphing minimum wage induced unemployment. mankiw (2007, pp. 122, 443) labels surplus labor as ―labor surplus (unemployment)‖ and as ―surplus of labor = unemployment‖ when discussing minimum wage laws. taylor (2009, pp. 85, 585) graphs surplus labor in figure 2 of chapter 4 and in figure 8 of chapter 20. in the former, quantity supplied and quantity demanded are labeled, respectively, as the ―number of workers who want to work‖ and the ―number of workers that firms are willing to hire,‖ while in the latter, the quantity demanded is labeled as, ―…firms hire this many workers.‖ unemployment due to job search the coverage of unemployment in macroeconomic textbooks typically includes a variety of causes and types of unemployment. increasingly, principles texts are emphasizing frictional unemployment and the basic concepts of the job-search model. i believe this is a positive development. although formal labor-market search models are not appropriate for most high school and college students at the principles level, the economic intuition behind the model is very accessible. when describing the three states of the labor market: employed, (involuntarily) 4 journal for economic educators, 8(2), fall 2008 unemployed and not in the labor force, i often give an example of a student who transitions from one state to another. a brief summary follows below. consider a full-time student, rebecca, who is deciding whether or not to work. at first wages are too low, given her preferences, abilities and alternatives, so she chooses not to work. this puts her outside of the labor force. now suppose that wages increase, and she now decides to look for a job so she can work ten hours a week. her decision to start looking for work transfers her into the labor force. she seeks a job for a month before becoming employed. she is unemployed during the month she is searching, and then finally transitions from unemployed to employed when she accepts a job offer. an additional scenario adds the possibility of underor over-employment. this may be especially relevant to students since these outcomes may occur more frequently in low-skill, lowexperience labor markets. in this case, rebecca desires to work ten hours a week as previously stated, but she has trouble finding a job with those work hours. suppose her first job offer involves an eight-hour work week. given her preferences, she rejects the offer. she subsequently accepts a job with a fifteen-hour work week. although she is better off than not working, she is now over-employed. since job-search unemployment can be easily put into the context of a story, it is an effective way to explain the population categories used by the bureau of labor statistics, and to show the dynamic nature of the labor market. although simple diagrams showing the flow from one category to another are found in intermediate texts such as mankiw (2007, p. 161) and abel, bernanke and croushore (2008, p. 96), such diagrams (see figure 2) are helpful additions to a macro principles lecture on unemployment. figure 2 many students are unaware of the ‗churning‘ that occurs in the labor market which is masked by the statistics on net job creation or destruction. although the magnitude of net job creation or loss as reported monthly by the bls is usually in the tens of thousands, the flow of employed to unemployed and vice versa is of a much larger magnitude. typically two to three million jobs are created each quarter; likewise for jobs lost. i think it is important for students to realize that when they read a headline that a particular firm has laid-off, say 80,000 workers; this is largely irrelevant from a macro perspective. the job-search story is also a useful context to demonstrate the meaning of reservation wage, and the accept/reject decision of job-seekers when they receive a job offer. again, i believe the intuition behind these ideas is quite accessible to principles-level students. employed unemployed 5 journal for economic educators, 8(2), fall 2008 policy applications although many principles textbooks convert labor from a flow to a stock when graphing the unemployment caused by minimum wage laws, they do not call attention to this conversion, or elaborate on how this differs from the usual interpretation of supply and demand curves. nevertheless, for a number of reasons, it is beneficial for students if the instructor goes through this conversion process explicitly. in addition to reconciling the different concepts of unemployment, it provides a concrete example of the important distinction between stocks and flows. further, it provides a springboard for a discussion on how governments measure unemployment. for example, two common criticisms of the official measurement of unemployment in the united states are that it misclassifies discouraged workers as not in the labor force, and that it fails to account for those who are involuntarily, part-time employed. conceptually, a surplus of the flow of labor would include the unemployment created by the presence of both discouraged workers and the involuntarily, part-time employed. a surplus of the stock of labor, however, cannot by definition include the unemployment created by the involuntarily, part-time employed. in contrast, the presence of discouraged workers is exclusively a measurement problem due to the way the bureau of labor statistics classifies, or misclassifies, survey respondents. students should realize that when interpreting labor as a stock, quantity supplied can be interpreted as the number of people who are willing to work at that wage, regardless of their job-search effort. finally, there are policy implications related to the two margins along which the quantity of labor can change. for instance, in discussing the adverse effect of a minimum wage law, politicians sometimes admit that the quantity of labor demanded – and hence employment – will decrease, but they obfuscate with a statement like, ―i think most people are willing to work fewer hours in exchange for a higher wage.‖ this is misleading, because the firms decide how to decrease employment. firms can do this by reducing the number of workers, by reducing the flow-hours per person, or a combination of both. needless to say, they often rely heavily on reducing the number of workers. an instructor could also discuss the average work week and how it differs among countries or within a country through time and how this may impact employment or productivity. certain labor laws that are associated with ‗euro sclerosis‘ can affect the quantity of labor on both margins: unemployment insurance and constrictive laws on firing reduce the number of people employed; mandatory vacations and legal limits on the length of the work week reduce the flow of hours per person. instructors could also touch on the potential relationship between the number of employees and the average worker‘s hours per week. for example, in the recent past there has been a binding constraint in both france and germany in the form of a thirty-five hour work week. supporters of this policy in government and labor unions may have fallen prey to the mistaken belief that there is a fixed sum of work-hours that firms desire, so that forcing a reduction of the work week will automatically lead to a higher level of employment. these differences in the average work week also arise in comparing per capita output across countries. the higher output per capita of the u.s. relative to the e.u. can be separated into three components: the productivity of labor, the employment rate, and working hours per employee. an interesting question is the extent to which differences in the average work week are due to restrictive labor policies as opposed to different preferences (munchau 2006). these and other issues cannot be addressed without explicit reference to the distinction and probable interplay between the two margins of labor. 6 journal for economic educators, 8(2), fall 2008 a discussion of unemployment insurance benefits provides another application in the jobsearch framework. as unemployment insurance benefits increase, the reservation wage for jobseekers increases, leading to more unemployment. this is consistent with basic supply and demand analysis in the aggregate labor market: a higher reservation wage decreases the supply of labor, leading to less employment and a higher market-clearing wage. this is also a good point to facilitate a discussion on the pros and cons of unemployment insurance. such a discussion should include the normative/positive distinction, the proper role of government, and the usefulness of the unemployment rate as a measure of social welfare. 3 conclusion a lecture of the type discussed above would fit most naturally within a section devoted to the labor market. with the exception of unemployment in macroeconomics, labor markets are often given short shrift in principles classes. however, labor market issues are increasingly topical and relevant. increases in income disparity due to changes in technology and the returns to education, the effect of international flows of capital from globalization, and the effects of immigration are a few examples of important issues which are accessible to principles students through basic graphical analysis of the labor market. explaining the difference between the macro and micro interpretations of unemployment provides an opportunity for instructors to reinforce the distinction between stocks and flows and the graphical interpretation of demand and supply, as well as introducing policy analysis. consequently, a lecture on the distinction between the two perspectives becomes more than a technical exercise; it becomes a way to introduce important issues related to employment, labor laws and the labor market. references abel, andrew, and ben bernanke, and dean croushore. 2008. macroeconomics. 6 th edition. boston: pearson addison wesley. frank, robert, and ben bernanke. 2007. principles of economics. 3 rd edition. new york: mcgraw-hill. colander, david c. 2004. economics. 5 th edition. new york: mcgraw-hill. hubbard, r. glenn, and anthony patrick o‘brian. 2008. macroeconomics. 2 nd edition. upper saddle river, nj: pearson prentice hall. munchau, wolfgang. 2006. ―more work and less play is best policy for europe.‖ financial times, august 28, london edition. mankiw, n. gregory. 2007. essentials of economics. 4 th edition. mason, oh: thomson southwestern. mankiw, n. gregory. 2007. macroeconomics. 6 th edition. new york: worth. mcconnell, campbell r., stanley l. brue and david a. macpherson. 2009. contemporary labor economics. 8 th edition. new york: mcgraw-hill. taylor, john, and akila weerapana. 2009. economics. 6th edition. boston: houghton mifflin. 3 in addition to the measurement problems, one could argue that a higher unemployment rate may be associated with more leisure and better job-worker matches. 39 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 1 ( 1 ) , s u m m e r 2 0 1 1 consumption-saving investigation: united states jamie emerson 1 abstract this paper uses historical data from the united states to investigate the simple keynesian consumption-income relationship. when structural breaks are taken into account, the theory of the simple keynesian consumption function performs quite well in describing what is seen in the us data. students and instructors of macroeconomic theory should be interested in these results, which demonstrate that the simple keynesian consumption function does indeed perform quite well as a first approximation of the consumption-income relationship. key words: consumption function, keynesian, cointegration, structural change jel classifications: e12, e21, a22 introduction when teaching the simple keynesian model in undergraduate macroeconomics, most of us show our students the simple keynesian consumption function and explain students that keynes believed that the level of real consumption expenditure was a stable function of real disposable income. further, we explain that while keynes did not deny that other variables affect consumption, he believed that income was the dominant factor determining consumption. thus, as a first approximation, we ignore other influences and investigate the keynesian consumption-disposable income relationship: c = a + b yd, with a > 0 and 0 < b < 1. in this keynesian consumption function, the intercept term (along with the error term) can be thought of as the effect on consumption of variables other than disposable income (variables not explicitly included in the model). thus, the intercept term is expected to be positive. the keynesian assumption on the slope coefficient is that an increase in disposable income will lead to an increase in consumption, but this increase in consumption will be less than the increase in disposable income. hence, the slope (marginal propensity to consume) is expected to be positive but less than one. once we have the simple keynesian consumption function the simple saving function is implicitly determined: s = –a + (1 – b) yd. this paper investigates the simple keynesian consumption function and the implicitly determined saving-income relationship. does this consumption function describe what we see using historical data or is this model too simple to explain what we see in the real world data? one potential problem of such a simple model is the possibility of omitted variable bias. as keynes himself agreed, variables other than income certainly affect consumption. but, since we all teach this simple keynesian consumption function and use it to find the marginal propensity to consume, the marginal propensity to save, equilibrium in the simple keynesian model, etc., then this simple consumption function should at least be a reasonable first approximation of the relationship between consumption and disposable income. otherwise, why should we expect our students to agree with any of the textbook policy implications of the keynesian model? 1 assistant professor of economics, department of economics and finance, perdue school of business, salisbury university, salisbury, md, 21801 40 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 1 ( 1 ) , s u m m e r 2 0 1 1 therefore, the purpose of this article is to investigate whether the simple keynesian consumption function gives anywhere close to reasonable results when using real world data for the united states. using historical us data for personal consumption expenditures and disposable income, a simple keynesian consumption function is estimated and the reasonableness of the results is evaluated. data the data used in this paper are obtained from the national income and product accounts tables, us department of commerce: bureau of economic analysis. consumption is real personal consumption expenditures (billions of chained 2005 dollars). income is real disposable personal income (billions of chained 2005 dollars). this study considers annual data for both of these series starting in 1929 and ending in 2009. figure 1: consumption and income 1929 – 2009 (note that both axes are measured in billions of chained 2005 dollars) estimation results to begin, a graphical representation of the relationship between consumption and disposable income from 1929 to 2009 is presented in figure 1. this graph suggests that there is a linear relationship between consumption and disposable income. the relationship between consumption and disposable income is estimated using ols. (1) consumption = –83.70 + 0.93 income p-values: (0.0001) (<0.0001) adj. r 2 = 0.9984 0 2,000 4,000 6,000 8,000 10,000 0 2,000 4,000 6,000 8,000 10,000 12,000 income c o n s u m p t io n 41 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 1 ( 1 ) , s u m m e r 2 0 1 1 at first glance, the simple keynesian consumption function does not appear to perform well at all, using the us data. the intercept, which keynes assumed to be positive, is negative and highly significant, while the marginal propensity to consume is positive but less than one, as expected. omitted variables may be causing this unreasonable result for the intercept term, but there is another possible explanation that should be investigated before scrapping the simple keynesian consumption function. since this analysis uses time series data to estimate the relationship between consumption and income, it is imperative that the relationship remain stable over time in order for the results to be useful. therefore, before continuing we should test for structural change(s) in the consumption-income relationship. in other words, we will test whether the marginal propensity to consume (slope coefficient) and the intercept remain stable over time or if the slope and/or intercept are different during different time periods. andrews (1993) and andrews and ploberger (1994) proposed tests for one or more unknown structural breakpoints in the parameters of the equation. the basic idea behind these tests is to compute a test statistic, say, w(τ), for each possible breakpoint τ (where there are k possible breakpoints), then calculate a function of these tests statistics to use as the test for structural change. the test statistics proposed by andrews (1993) and andrews and ploberger (1994) are max w(τ), mean w(τ), and exp w(τ), where , , and . the distribution of these test statistics is nonstandard. hansen (1997) provided approximate asymptotic p-values for these tests. however, the distribution of these statistics becomes degenerate as τ1 approaches the beginning of the sample or τ2 approaches the end of the sample. to compensate for this behavior, the general practice is to exclude some observations from the beginning and end of the sample. this “trimming” is commonly 15% (exclude the first and last 15% of the observations). we begin by dropping the data corresponding to us involvement in world war ii from the analysis. these wartime observations for 1942 – 1945 are excluded, because this sub-sample period contains only four observations, which leaves only two degrees of freedom once the coefficients are estimated. 2 this gives two sample periods to initially consider: 1929 – 1941 and 1946 – 2009. we do not test for structural breaks in the sub-sample period 1929 – 1941 since this sub-sample consists of the years of the great depression leading up to the beginning of us involvement in world war ii. (2) sub-sample period 1929 – 1941: consumption = 160.72 + 0.73 income p-values: (<0.0001) (<0.0001) adj. r 2 = 0.9785 2 the analysis and tests for structural change were also carried out on the entire data set and the results were nearly identical. 42 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 1 ( 1 ) , s u m m e r 2 0 1 1 (3) sub-sample period 1946 – 2009: consumption = –121.97 + 0.93 income p-values: (0.0174) (<0.0001) adj. r 2 = 0.9983 table 1: tests for unknown structural breaks in equation (3) test statistic p-value max w (1986) 65.55 <0.0001 exp w 30.06 0.0001 mean w 40.40 0.1664 notes: the max and exp statistics reject the null hypothesis of no structural change in either the slope or the intercept, but the mean statistic fails to reject the null hypothesis. the maximum statistic occurred in 1986, and that is the most likely breakpoint location. test sample is 1956 – 1999. we now use the tests for unknown structural breakpoints described above to investigate the stability, or lack thereof, of the simple keynesian consumption function. we begin by testing equation (3) for structural breaks in either the slope coefficient or the intercept (note that this is a joint test, which is testing the joint hypothesis that both the slope and the intercept are stable). with 15% trimming this gives a test sample from 1956 to 1999. the test statistics and the corresponding p-values are reported in table 1. for equation (3), the max and exp statistics reject (at the 5% significance level) the null hypothesis of no structural change but the mean statistic does not reject the null hypothesis (at the 5% significance level). the most likely breakpoint is identified by the maximum statistic which occurred in 1986. thus, we proceed by estimating separate equations for the two sample periods identified: 1946 – 1985 and 1986 – 2009. (4) sub-sample period 1946 – 1985: consumption = 80.92 + 0.86 income p-values: (<0.0001) (<0.0001) adj. r 2 = 0.9993 (5) sub-sample period 1986 – 2009: consumption = – 434.49 + 0.98 income p-values: (0.0001) (<0.0001) adj. r 2 = 0.9968 we now repeat the process of testing for structural changes in these two sub-sample periods (equations (4) and (5)). the test statistics and the corresponding p-values are reported in table 2. for the sub-sample period 1946 – 1985, each of the test statistics fails to reject the null hypothesis of no structural change. for equation (5), the max and exp statistics reject (at the 5% significance level) the null hypothesis of no structural change but the mean statistic does not reject the null hypothesis (at the 5% significance level). the most likely breakpoint occurred in 2005. 43 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 1 ( 1 ) , s u m m e r 2 0 1 1 table 2: tests for unknown structural breaks in equations (4) and (5) test statistic p-value sample period 1946 – 1985 max w (1946) 1.67 0.9996 exp w 0.19 1.0 mean w 0.34 1.0 sample period 1986 – 2009 max w (2005) 16.69 0.0021 exp w 6.58 0.0020 mean w 3.20 0.15 notes: none of the test statistics reject the null hypothesis of no structural change in either the slope or the intercept for the sample period 1946 – 1985. test sample is 1952 – 1979. for the sample period 1986 – 2009, the max and exp statistics reject the null hypothesis of no structural change but the mean statistic fails to reject the null hypothesis. the maximum statistic occurred in 2005. test sample is 1990 – 2005. since two of the test statistics suggest the possibility of a structural break, we will also investigate the sub-sample period 1986 – 2004. the sub-sample period 2005 – 2009 is dropped from further analysis, as it does not contain enough observations for meaningful inference (after estimating the intercept and slope coefficient, only three degrees of freedom remain). (6) sub-sample period 1986 – 2004: consumption = –545.60 + 0.99 income p-values: (0.0000) (0.0000) adj. r 2 = 0.9989 table 3: tests for unknown structural breaks in equation (6) test statistic p-value sample period 1986 – 2004 max w 4.54 0.6346 exp w 0.69 0.7199 mean w 0.80 0.8473 notes: for the sample period 1986 – 2004, the test sample is 1989 – 2001. for this sub-sample period 1986 – 2004, each of the test statistics fails to reject the null hypothesis of no structural change. the tests for structural change (and the corresponding pvalues) for this sub-sample periods are presented in table 3. discussion in summary, three sub-sample periods have been identified in the investigation of the keynesian simple consumption-income relationship. the estimation results for each of these sub-sample periods are compiled in table 4. 44 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 1 ( 1 ) , s u m m e r 2 0 1 1 table 4: sub-sample estimation results intercept marginal propensity to consume adjusted r 2 1929 – 1941 160.72 (0.0000) 0.73 (0.0000) 0.9785 1946 – 1985 80.92 (0.0000) 0.86 (0.0000) 0.9993 1986 – 2004 –545.60 (0.0000) 0.99 (0.0000) 0.9989 notes: one-sided p-values are reported. marginal propensity to consume (mpc) is the coefficient on disposable income. the first sub-sample period considered is 1929 – 1941, consisting of the great depression leading up to the beginning of us involvement in world war ii. the marginal propensity to consume (mpc) is estimated as 0.73 (corresponding marginal propensity to save (mps) of 0.27) and the intercept is positive. both of these estimated coefficients are statistically significant and fall within the ranges expected by keynes. the results for this sub-sample period provide support for the simple keynesian consumption function. we continue by considering the sub-sample period 1946 – 1985. the structural break can be thought of as the culmination of many events in the late 1970s and early 1980s. the us economy was coming out of a period of stagflation in the 1970s. in addition, many important events and changes in tax legislation occurred during president reagan’s two terms in office. some of these events include the tax reform act of 1986, the gramm-rudman-hollings balanced budget act, the iran-contra scandal, the space shuttle challenger accident, and the recession of the early 1980s. the estimated mpc during this period is 0.86 (corresponding mps of 0.14) and the intercept is positive. further, both of these coefficients are statistically significant and fall within the ranges expected by keynes. thus, the results for this sub-sample period also provide support for the simple keynesian consumption function. the final sub-sample period is 1986 – 2004. the structural break identified in 2005 can be thought of as the culmination of many events in the early 2000s. some of these important events include the recession of the early 2000s, hurricane katrina, and the subprime financial crisis and the subsequent recession. the estimated mpc is 0.99 (corresponding mps of 0.01) and the intercept is negative. both of these coefficients are statistically significant. the value of 0.99 for the marginal propensity to consume is within the range expected by keynes, but is very high. this mpc suggests that during this period, 99% of additional disposable income was consumed. while this is much higher than the mpc for previous sample periods, the high value of the mpc for the late 1980s, 1990s, and beginning of the new millennium coincides with the often heard complaint of the period that americans, in general, consume too much of their income and do not save. the negative value for the intercept is unexpected and difficult to explain in terms of the simple keynesian consumption-income relationship. perhaps this can also be attributed, at least in part, to americans’ consumption of almost all additions to disposable income during this period. it will be interesting to come back to this question several years from now once more data are available to investigate the period 2005 and beyond. ideally, the methodology used here can 45 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 1 ( 1 ) , s u m m e r 2 0 1 1 be used to investigate the potential structural change(s) in the consumption-income relationship corresponding to the “great recession”. in summary, the marginal propensity to consume in the united states has consistently increased from the great depression through the end of the century. during in the late 1980s and 1990s, the us marginal propensity to consume was as high as 99%. conclusions the results provide at least some support for the simple keynesian consumption function. when structural changes in the parameters are taken into account, the resulting estimates of the consumption function fit reasonably well with keynes’s assumptions of a positive intercept and a positive marginal propensity to consume that is less than one. using historical data from the united states, the simple keynesian consumption function does indeed seem to be a reasonable first approximation ignoring other factors that could affect consumption. for sub-sample periods considered through 1985, the simple keynesian consumption function appears to perform quite well. for the most recent sample period beginning in 1986, the value of 0.99 for the marginal propensity to consume is within the range expected by keynes, but is very high. while this is much higher than the mpc for previous sample periods, the high value of the mpc for the late 1980s, 1990s, and beginning of the new millennium coincides with the often heard complaint of the period that americans, in general, consume too much of their income and do not save. the negative value for the intercept post-1986, however, is unexpected and difficult to explain in terms of the simple keynesian consumption-income relationship. perhaps this can also be attributed, at least in part, to the fact that americans consumed almost all additions to disposable income during this period. another possibility is that the negative intercept is due to the u.s. economy becoming much more complex in recent decades such that the simple keynesian consumption function cannot be used to describe the relationship between consumption and income any longer. of course, it is certainly possible that the simple keynesian consumption function will perform well again in future decades. it will be interesting to return to this investigation in the decades to come. in conclusion, this study suggests that the simple keynesian consumption function presented in most intermediate and principles macroeconomic courses and textbooks, is not only relevant for the development of the simple keynesian models, but is also relevant in explaining the consumption-income relationship observed in the united states since the great depression. this should be of interest to both students and instructors of macroeconomics. 46 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 1 ( 1 ) , s u m m e r 2 0 1 1 references andrews, d.w.k. 1993. “tests for parameter instability and structural change with unknown change point.” econometrica, 61(4): 821-856. andrews, d.w.k. and ploberger w. 1994. “optimal tests when a nuisance parameter is present only under the alternative.” econometrica, 62(6): 1383-1414. froyen, r.t. 2009. macroeconomics: theories and policies, ninth edition. new jersey: pearson prentice hall. hansen, b.e. 1997. “approximate asymptotic p values for structural-change tests.” journal of business and economic statistics, 15(1): 60-67. alternative forms of payment and incentives in the labor market: a classroom experiment 14 journal for economic educators, 10(1), summer 2010 worker payments and incentives: a classroom experiment1 linda s. ghent2 abstract this classroom experiment demonstrates the effects of time-based pay and output-based pay on worker behavior and productivity. students will discover that workers paid a piece rate per unit produced will have incentives to work harder, but will sacrifice quality for increased quantity of output. in addition, workers will self-sort into jobs with different payment systems based on expected productivity and effort. last, while labor costs per unit at firms offering output-based pay are generally lower than those at other firms, students will understand some of the reasons why this method of payment may not be widely used across occupations and industries. the paper concludes with several suggestions for extending the experiment to expand its illustrative value in a variety of economics courses. key words: incentives, wages, productivity jel classification: a22, j33 introduction one of the most important economic concepts students must learn is an understanding of how individuals respond to incentives. this is a classroom experiment designed to demonstrate how alternative systems of labor payment alter worker behavior. students (production workers) are offered an opportunity to be paid based on output or based on the amount of time they spend at work. while i typically use this experiment in labor economics courses, it could be used in any principles of microeconomics or intermediate microeconomics course when discussing the role of incentives in determining behavior. the experiment is based on the commonly used “widget” experiment that is generally performed in microeconomics courses to demonstrate the diminishing marginal returns of labor (neral, 1993).3 this new experiment provides each worker with a stapler and a stack of paper so that each worker has his or her own work station. thus, the amount produced in each period is no longer limited by diminishing returns and is solely dependent on the worker’s ability and effort. to demonstrate the effects of incentives on effort, the workers can elect to work for two different firms offering alternative payment schemes: a piece rate or a straight hourly wage. lazear (1998) suggests that these alternative payment systems can be used to induce workers to selfsort, thus revealing their expected productivity levels to the firms. in addition, workers who are in the widget experiment, workers are added to a production line with one stapler. the product produced is a paper that is folded and stapled. as students are added to the production process, the stapler becomes a bottleneck and the marginal product of labor rapidly falls. 1 the author would like to thank sean mulholland and two anonymous referees for their helpful comments. 2 professor and chair, department of economics, eastern illinois university, charleston, il 61920 3 examples of similar experiments can be found in bergstrom and miller (1997), hazlett (1999), and mason (2001). 15 journal for economic educators, 10(1), summer 2010 paid based on output have an incentive to put forth more effort than those paid a straight wage per hour. last, when worker pay depends on output, the quality of the good produced may suffer. all three of these predictions can be demonstrated using this experiment. in addition, this experiment can be extended in several ways to introduce the concepts of capital investment, risk, uncertainty, and mobility limitations. the experiment in more detail each student was provided a stapler and a stack of paper (i used strips of paper that were 8.5 inches × approximately 3 inches). production of widgets occurred for an allotted time period in each round (30 seconds). to produce a widget, the student must fold the paper into thirds and then staple each end. at the start of each production period, students were told that there were two firms offering them employment: one paying workers a fixed wage per time period and one paying workers a fixed amount per unit of output produced. the initial salary was $0.50 per 30second period and the piece rate was $0.07 per unit produced. after these rates were announced, each student individually selected the firm for which he or she wished to work.4 a trial run was performed so that students could gauge their productivity levels and choose the firm for which they wanted to work. the experiment was then repeated with different wage or piece rates. students were given the opportunity to change employers at the beginning of each period. at the end of the period, output was counted and workers were paid. for workers who chose time-based pay, their wages were simply equal to the specified rate regardless of output. for workers who chose output-based pay, their wages were equal to the piece rate specified multiplied by the number of widgets produced. only widgets that were fully completed were counted. 5 in the second round, the hourly wage was reduced to $0.40 while the piece rate remained the same. students were allowed to move to a different employer if they wished. at the end of the round, output was again counted. the comparative productivity in each firm determined the subsequent relative wage and piece rates; if average production was lower in the time-based firm, the wage rate paid by that firm was lowered in the next round so that the firm could continue to compete with the firm paying the piece rate. 6 at the end of the second round, an announcement was made that the managers of both firms were instituting a quality control policy. this required that all widgets be folded neatly (with edges lining up) with both staples parallel to the papers’ edges. any widget that did not meet this specification was discarded and, in the case of the workers who were paid on an output basis, was not included in the calculation of pay. after the announcement, students opted for the employer of their choice and the round began. afterward, output was examined and then counted. the experiment was followed by a discussion about the results and its application to several concepts discussed in the course. the experiment and discussion took approximately 20 minutes to complete. 4 i used cash to pay the students. therefore, it is important to keep the promised wage and piece rates small and the time period short to limit the cost of the experiment. an alternative system would be to pay students with extra credit points or to use this as a graded assignment with the students’ scores relative to their earnings. 5 if no students opt for either of the two firms, adjustments in the two wages should be made so that there are two groups and comparisons can be drawn. 6 the experiment can be repeated for as many rounds as the instructor chooses. 16 journal for economic educators, 10(1), summer 2010 expectations if we assume that students are interested in maximizing their earnings, we can make several predictions regarding their behavior during this experiment. first, students will self-sort into jobs due to the different incentives inherent in these two payment schemes. this choice will be based on the student’s knowledge of his or her ability to produce widgets along with the amount of effort he or she is willing to provide. second, the average productivity of the workers paid on a time basis will be lower than that of the workers receiving piece rates, prompting wage reductions in later rounds. when the time-based wage is reduced, some of the workers who had previously chosen to be paid a straight wage will move to the employer offering a piece rate. this will in general be those workers who are the most productive, leaving those least productive at the firm offering time-based pay. the average production per worker at this firm will be even lower than it was in the previous round, resulting in an additional reduction in wage. last, without any quality control restrictions, the quality of the widgets produced will vary between the two firms. the workers who are being paid a piece rate will focus on the quantity of output, and will produce widgets that are in general inferior (e.g., uneven folds, crooked staples) to those produced by workers who are paid on a time basis. results this experiment was performed in two sections of 10 and 14 students in an upperdivision labor economics elective course.7 the first round was then played. average productivity fell in the firm paying a timebased wage between the trial round and the first round. these workers no longer had any incentive to put forth great effort. they already had played the trial round to gauge their productivities. in addition, three workers who did not feel productive enough to continue being paid on an output-basis joined this firm, possibly pushing productivity down further. at the same time, average productivity in the firm offering output-based pay rose. table 1 shows the combined results for each round. before the trial period, 17 students opted for time-based pay, while the remaining seven chose to be paid per widget produced. after gaining some information on their own productivity, four workers switched employers. three students who had initially chosen to be paid based on output switched to time-based pay, while another moved in the opposite direction. at the start of the second round, the firm paying workers on a time basis reduced the wage it offered to $0.40 because its costs per widget were too high to compete with other widget producers. students were then given another chance to switch employers. four workers moved from this firm to the other that paid on an output basis. at the end of the second round of 30 seconds, output was again counted. average product fell again. this likely means that the workers who left this firm after the first round were among the more productive workers employed there. while labor cost per widget did decline slightly (6.25 percent) between rounds 1 and 2, it did not decline as much as the wage rate (20 percent). a quality control policy was instituted at the start of the third round. after this announcement, two workers moved from output-based pay to time-based pay. as a result of the 7 this experiment is ideal for small class sizes. however, it could also be used in larger classes if a sample of 10-12 students is chosen to demonstrate the effects of these two payment schemes. alternatively, teams of two workers could be created as a production unit. instructors may wish to alter the payments offered to workers or the time in each round to keep the cost of the experiment low. 17 journal for economic educators, 10(1), summer 2010 quality controls, average productivity fell at both firms while labor costs per widget rose. none of the seven workers receiving output-based pay earned as much as he or she could have under a straight wage. table 1: experiment results rate of pay # workers total output average product (st. error) labor cost per widget trial rounda time-based pay $0.50 per period 17 78 4.59 (0.23) $0.11 output-based pay $0.07 per unit 7 52 7.43 (0.30) $0.07 1st round time-based pay $0.50 per period 19 61 3.21 (0.15) $0.16 output-based pay $0.07 per unit 5 41 8.20 (0.37) $0.07 2nd round time-based pay $0.40 per period 15 41 2.73 (0.18) $0.15 output-based pay $0.07 per unit 9 68 7.56 (0.29) $0.07 3rd round (quality standard) time-based pay $0.40 per period 17 27 1.59 (0.12) $0.25 output-based pay $0.07 per unit 7 43 6.14 (0.26) $0.07 aworkers were not paid during the trial round. discussion questions at the end of the experiment, i used the remaining class time to discuss the results. this discussion centered around the questions listed below (along with the general conclusions drawn by the students in italics). i also followed up the experiment by including a short-answer essay question concerning the incentives of these two alternative forms of worker pay on the midterm exam. 1. how did you decide for which employer you wished to work? most students suggested that they predicted how many widgets they could produce in the time period allowed and then chose the employer for which their earnings would be greatest. one student, however, was honest enough to indicate that he chose time-based pay because he “didn’t want to work that hard.” 18 journal for economic educators, 10(1), summer 2010 2. for those of you who switched employers, why did you decide that one payment system was better than the other? did this decision benefit you? students said that the driving determination of switching employers was to maximize earnings. after the trial period, those who found that they were less productive than expected moved to time-based employment, while one found she was more productive than expected and moved to output-based pay. workers with borderline productivity levels (between 6 and 8 widgets) all moved to output-based pay once the fixed wage per period dropped. each student was happy about his or her move, except those who felt it necessary to move back to time-based pay once the quality control standards were instituted. 3. if these were two competing firms, what would you expect to happen over time? why? the majority of students understood immediately that the firm paying the workers on a time basis would have trouble competing with the firm paying its workers a piece rate. output per worker was higher and labor cost per widget were much lower at the firm offering outputbased pay. however, a couple of students pointed out that this result is dependent on the importance of the quality of the good produced. firms paying a piece rate generally end up with lower quality widgets unless standards are created. such standards lower the productivity of the workers. 4. why did quality differ across the two firms? students who were paid a piece rate responded that they only cared about the quantity of widgets produced per period, not the quality. 5. what was the effect of the quality control standards? which firm’s workers were affected more? the quality standards reduced worker productivity at both firms, but affected those paid on an output basis more. the workers who continued to choose being paid a piece rate all expressed regrets concerning that choice once quality standards were instituted. 6. if paying a piece rate works so well at increasing worker productivity, why don’t more firms do this? at first, student responses seemed to focus solely on the issue of quality. however, after talking about piece rates in general, they noticed that this scheme can only work when an employee’s production output can be measured. this led to a discussion of the difficulties involved in this type of measurement for most occupations. conclusions and suggested extensions this is an experiment that allows students to understand a variety of concepts that are important in economics: incentives, self-sorting, and productivity. when this experiment was performed in a labor economics elective course, students gained a better understanding of how alternative payment systems can (1) influence the amount of effort an individual is willing to put forth, (2) determine which types of workers may apply at particular firms, and (3) affect the quality of the product produced. there are a couple of issues that instructors should consider if they choose to use this experiment in their own courses. first, because every student needs his or her own stapler, it can 19 journal for economic educators, 10(1), summer 2010 be time consuming to gather the necessary supplies.8 second, a form of incentive must be provided. if the instructor wants to use a cash payment to simulate real life, it can get costly. however, limiting the number of student participants, rounds, and time period in each round can keep the cost relatively small.9 there are numerous ways in which this experiment could be extended. one possibility would be to account for the costs of monitoring worker output (in the case of output-based pay or quality control). this could be demonstrated with the instructor taking an exaggerated amount of time to count or check the quality of the widgets produced. the instructor could also hire and pay a student to count the output for the workers earning output-based pay. this allows students to see an additional reason why paying piece rates may not be superior to paying a straight wage: it is costly to measure and examine worker output. course points could be used in place of cash. for example, the total compensation earned by the student could determine his or her score on an in-class homework assignment. or, extra credit points could be assigned to the worker with the highest compensation through all of the rounds. another option is to provide one student the use of an electric stapler. this student could simply be chosen at random, but it would be more interesting to allow students to bid for the use of the electric stapler each period (with the winner paying the bid price out of wages for that period). this extends the analysis to include the effects of capital improvements on worker productivity and earnings. alternatively, one or two of the staplers could be “booby-trapped” – by only having a small number of staples inside. staplers could then be passed out to students on a random basis ultimately leading to a discussion of the risk to a worker of accepting output-based pay; sometimes, output is not fully determined by the worker’s effort and can be affected by forces beyond the worker’s control. the instructor may also want to institute a minimum level of output for time-based workers. in the real world, workers are expected to meet certain productivity levels, and may be let go if these expectations are not met. this will also change the incentives involved in the choice of employer for the students. those preferring time-based pay because they wanted more leisure may reverse this decision once this minimum effort level is announced. last, rather than reducing time-based wages due to low productivity, students with the worst record of productivity could be terminated. mobility difficulties (such as some wait time between jobs) might also be used to make the experiment more realistic. regardless of the approach taken, this experiment allows students to see first hand the role of incentives in the work place. this means that the experiment can be relevant for any microeconomics course (principles or intermediate) or a labor economics course. in addition, students will come away with more familiarity of possible options they may face later in the labor market, from jobs that pay straight commission to those that pay an hourly or annual salary. at the very least, they will be more prepared to anticipate the reasons why employers may differ in the ways in which they pay employees and the effects of these payment schemes on worker outcomes. 8 i simply borrowed staplers from many of my colleagues. an alternative may be to use paper clips in lieu of staples; instructors may find it to be easier to bring a box of paper clips to class rather than 10 to 12 staplers. 9 the cost of the entire experiment was between $10 and $11 each time it was performed. 20 journal for economic educators, 10(1), summer 2010 references bergstrom, theodore and john h. miller. 1997. experiments with economic principles. new york: mcgraw-hill. hazlett, denise. 1999. economic experiments in the classroom. reading, ma: addison wesley longman. lazear, edward p. 1998. personnel economics for managers. new york: john wiley & sons, inc. mason, paul m. 2001. “a production and cost experiment for use in the principles of microeconomics.” classroom expernomics 10(fall): 13-20. neral, john. 1993. widget production in the classroom. classroom expernomics, 2(spring): 7-8. 1 introduction 25 | journal for economic educators, 11(1) summer 2011 four budget deficit theories in one model jens peter siebel 1 athanassios pitsoulis 2 abstract the analysis of many budget deficit theories is too demanding for undergraduate students. this paper illustrates governments’ incentives to create budget deficits by means of a simple graphical model. it integrates four budget deficit theories: the theory of the state as leviathan, two different strategic deficit theories, and the theory of tax competition. these theories are embedded into an illustrative example of political competition between a conservative party and a liberal party. the main pedagogical benefits of the model are its intuitive setup and its waiver of demanding analysis. keywords: budget deficit, public debt, teaching, macroeconomics instruction jel codes: h11, h63, h71 introduction the phenomenon of chronic, excessive budget deficits and hence rapidly growing public debt is one of the most urgent economic problems in western democracies. although there is a common sense that deficits have to be reduced, governments keep on leaving deficits. this hypocritical behavior has incited many explanations and interpretations in both the empirical and theoretical literature. yet, popular political economy and public choice textbooks, such as persson and tabellini (2000), do not present those explanations in an integrated framework. instead, they focus on several special motifs of deficit creation one at a time. moreover, most budget deficit explanations rely on complex models of intertemporal optimization. these models are mathematically demanding, especially for undergraduate students. as a result, many lecturers teach the basic principles of budget deficits and public debt to graduate students only. as an alternative approach, this article proposes a simple graphical model combining four of the most important political-economic explanations of budget deficits. the intuitive setup enables the lecturer to familiarize undergraduate students with the deficit problem. the model is suitable for blackboard and transparency presentation as well as powerpoint presentation. before dealing with the model, students should have acquired basic microeconomic knowledge (indifference curves, transformation curves, budgetary restrictions, deriving curves in a diagram etc.). the model focuses on the following budget deficit theories: the first is the theory of the government as a ‘leviathan’ in the sense of brennan and buchanan (1980): a government tries to extract an extra rent from its citizens by raising tax revenues and budget deficits in excess of what it needs to finance the provision of public goods. both the second and third theories belong to the family of strategic deficit theories. they can be distinguished according to the social 1 lecturer of economics and business administration, international college, university of applied sciences kaiserslautern, schoenstrasse 9, 67659 kaiserslautern, germany. 2 assistant professor of microeconomics, institute of economics and business administration, faculty of engineering, brandenburg university of technology, konrad-wachsmann-allee 1, 03046 cottbus, germany. 26 | journal for economic educators, 11(1) summer 2011 groups at which the strategy is targeted. on the one hand, a government can target voters in order to secure electoral victory (the second theory), either in the next election (e. g. lizzeri (1999)) or the election after the next (e. g. lockwood et al. (1996)). on the other hand, a government can use strategic deficits in order to constrain the spending decisions of possible successors (e.g. tabellini and alesina (1990) or persson and svensson (1989), third theory). the latter authors present the appealing idea of a “stubborn” conservative government (persson and svensson 1989, p. 338) that leaves high deficits in order to constrain the liberal successor’s public spending and apply this theory to the fiscal policy of the reagan administration in the us. finally, the fourth theory holds that tax competition prevents governments from raising taxes excessively, as this could lead to capital flight, diminishing the overall welfare of an economy (alesina and tabellini, (1990)). we have used the model successfully in macroeconomics lectures at the undergraduate level. anecdotal evidence suggests that the intuitive way of approaching the deficit topic is attractive to students and reduces antipathy against economic modeling. the model the core of the model is a four-quadrants diagram (see figures 3 and 4). in the following subsections we will derive the components of the four quadrants step by step. first step: the welfare functions (south-eastern and north-western quadrant) there are two parties, a conservative (right-wing) party and a liberal (left-wing) party, representing capitalists and workers, respectively. capital is internationally mobile and labor is immobile. , 0 0 i c cc x x c t with x and x (1) is the welfare function of workers, with i t being the tax rate on labor income and c being the degree of social security. the capitalists’ welfare function is , 0 0 m i ii y y i t with y and y . (2) here m t represents the tax rate on mobile capital revenues, whereas i is the amount of capital-specific infrastructure. figure 1 shows that i t and m t work as shift parameters for the functions. these welfare functions will appear in the south-eastern and the north-western quadrant of figures 3 and 4. figure 1: welfare functions of workers and capitalists 27 | journal for economic educators, 11(1) summer 2011 the government decides on the tax rates on capital revenues and labor incomes. there are increasing deadweight losses of taxation, i. e. a rise in the tax rate on a production factor causes a disproportionately increasing reduction of factor-specific marginal welfare. this reflects distortionary tax-collection like progressive labor and capital income taxes 3 . as the government faces international tax competition, it can increase its own capital revenue taxes only up to a threshold value m t . if the government exceeds this threshold value, a complete capital flight from the domestic country occurs. conservatives, by ideology, favor capital, liberals, by ideology, favor labor. any government prefers to lower taxes for its ideologically favored production factor, i. e. a conservative uses an increasing budget to cut down capital taxes whereas a liberal one cuts down income taxes. second step: the budget constraint (south-western quadrant) the government can finance social security and infrastructure either by tax revenues or by borrowing abroad. it starts with a balanced budget and a debt stock of zero at the beginning of the first period. at the end of the second period the budget has to be rebalanced, i. e. further deficit-spending and ponzi games are impossible. most us states and canadian provinces have such strict intertemporal balanced budget rules on sub-national level 4 . denote the first period budget balance with b . if 0b , there is a first period deficit and the government has to borrow that amount on the international capital market. 0b denotes a first period surplus, the government lends to foreign countries 5 . to simplify things, the international interest rate shall be equal to zero; in order to prevent the problem of ricardian equivalence, private savings are assumed to be absent or not to be influenced by the government’s tax and deficit decisions 6 . third step: the voters (north-eastern quadrant) the linear-homogenous popularity function , 0, 0, 0 0 x y xx yy u u x y with u u u and u (3) describes the government’s popularity among voters. the model covers two periods and there is an election at the end of each period, with the voters’ preferences being time-consistent. these preferences are mapped as iso-popularity curves in the north-eastern quadrant of figures 3 and 4. due to the properties of the popularity function, they are negatively sloped and convex. in line with the well known political business cycle model of hibbs (1977), voters are backward looking, rewarding or punishing the government’s behavior in the last period. if the government provides an x-y-allocation below the re-election ensuring iso-popularity curve, it will loose the next election. the north-eastern quadrant shows the re-election ensuring iso-popularity curves for two different cases: a) voters prefer workers’ 3 one might object that capital taxes are usually proportional. in this case, one can alternatively assume that proportional capital taxation causes over-proportional marginal disutility. 4 currently all us states except vermont face some kind of balanced budget requirement. in canada, six of ten provinces have anti-deficit laws. even in provinces with less stringent laws, expenditures must not exceed revenues over a period of several years. on an international level, the european stability and growth pact prohibits the members from running deficits in excess of three per cent of current gdp. other examples are budgetary obligations to international organizations and donor countries like those in the washington consensus. recently, switzerland and germany have established constitutional deficit-brakes. 5 we abstain from analyzing this case, as this occurs infrequently. 6 this is a nice example of how ad hoc assumptions help to straighten out awkward theoretical problems. 28 | journal for economic educators, 11(1) summer 2011 welfare over capitalists’ welfare (iso-popularity curve lw u ) or b) voters prefer capitalists’ welfare over workers’ welfare (iso-popularity curve rw u ) 7 . throughout the following, the model will follow case a), as this case is in accordance with empirical evidence in western democracies. research shows that labor income is widely spread across the population, whereas capital income concentrates on a relatively small group of voters. as a result, many of these countries have higher tax rates on capital than on labor (daveri and tabellini, 1997) 8 . the government each government pursues a combined strategy of re-election and ideology. in line with the literature on strategic deficits, the government either tries to influence voters’ behavior or the succeeding government’s behavior. in line with the leviathan-literature, the government does not use up the whole budget for social security and infrastructure and extracts the difference as additional rent. in line with the tax competition literature, the government has to take care about the fact that the country is constantly threatened by capital flight. figure 2 gives a short overview of the governments’ actions in both periods. figure 2: time-structure of the model throughout the following, we focus on the case of a conservative first period government, as this is more illustrative. the conservative party holds office leaving a balanced budget in the reference case the first period budget is balanced 0b . the budget restriction in the south-western quadrant of figure 3 displays all feasible combinations of c and i. this determines the level of popularity the government can reach through the provision of social security and infrastructure. if the government fails in achieving re-election, it wants to ensure that it wins the second-period election at least. suppose that the conservative government chooses the tax rates 1 1 , m i t t . the northeastern quadrant shows the consequences of this choice: under a balanced budget the policy 7 a good example is a popularity function of the cobb-douglas-type: 1 ,u x y x y with 0.5, 1 in case a) and 0, 0.5 in case b). as this function is linear-homogenous, all re-election ensuring allocations must have the same distance from the origin. 8 see also the textbook of persson and tabellini (2000, p. 305) for a brief survey. 29 | journal for economic educators, 11(1) summer 2011 1 1 , m i t t yields the transformation curve ab in x-y-space. if the transformation curve reaches the iso-popularity curve, the government will win the election, otherwise not. figure 3 shows a case where the fiscal policy set 1 1 , , 0 m i t t b does not ensure re-election 9 . figure 4 displays the possible actions of a liberal successor if the conservative government fails in ensuring re-election. if the conservative government leaves behind a balanced budget, the liberal successor can raise capital income taxes and its worker-friendly policy will be 0 , m i t t . then the transformation curve gh in figure 4 would be high enough to ensure the liberal successor’s re-election, as the iso-popularity curve lw u is intersected 10 . to leave a balanced budget is thus an unfavorable policy for the conservative government. figure 3: behavior of the conservative government in the first period 9 of course, the conservative government would be re-elected if the relevant iso-popularity curve was rw u . 10 note that in this case the government cannot extract a private rent from the budget. thus the leviathan strategy is ruled out for the liberal second-period government which inherited a balanced budget. 30 | journal for economic educators, 11(1) summer 2011 leaving a deficit if the conservative government borrows on international capital markets (i. e. 0b ), the budget constraint in the south-western quadrant of figure 3 shifts to the left. now the government is able to provide any amount of social security and infrastructure at a lower tax rate. alternatively, it can provide a higher amount of social security and infrastructure at the same tax rate. assume that the government lowers taxes on capital, setting a fiscal policy 0 1 ( , ), 0 m i t t b . the capitalists’ welfare curve in the north-western quadrant of figure 3 shifts upwards to 0 , m y i t . this changes the transformation curve in the north-eastern quadrant to cd. according to the leviathan-theory, the government will spend only a part of its budget for social security and infrastructure and keep the remainder as a rent that “represents pure profits from governing” (sinn 1992, p. 183). in this case we get the transformation curve ef in figure 3. however, even the debt-financed higher-spending on x cannot prevent the conservative government from being voted out of office. waiving of the private rent would not help either. but nonetheless the government chooses the fiscal policy set 0 1 , , 0 m i t t b . the reason is that the government anticipates the policy of the liberal successor (figure 4). as further deficit-spending is ruled out, the liberal government must serve public debt. in figure 4 the budget constraint shifts to the right by the amount borrowed abroad. normally, a liberal government would prefer to raise capital tax rates in excess of m t in order to serve public debt and keep taxes on labor income at the level 0i t . but the threat of capital flight works as an additional constraint here. capitalists would respond to a higher capital tax rate by moving their assets abroad. this cannot happen without a reduction of labor welfare, and, as a consequence, overall domestic popularity. the liberal government cannot raise the capital tax rate beyond m t . the only way to serve public debt is to demand higher taxes 1i t on labor, initializing a tax policy set 1,m it t with transformation curve ij. but in this case the liberal government lacks the popularity to ensure re-election, which means that the conservative party will regain power at the end of the second period. hence, by choosing the strategic fiscal policy 0 1 , , 0 m i t t b in the first period the conservative government acts according to the deficit theories outlined in the introduction: 1) it extracts an additional rent for itself in the sense of brennan and buchanan (1980) (see figure 2). 2) it ensures re-election, not immediately but at least at the end of the second period – a strategy that follows the ideas of lockwood et al. (1996). 3) it commits the liberal successor to a less liberal policy. hence, it is “stubborn” in the sense of persson and svensson (1989, p. 338). 4) it uses international tax competition as a tool to put pressure on the successor similar to the model of alesina and tabellini (1990). 31 | journal for economic educators, 11(1) summer 2011 figure 4: behavior of the liberal government in the second period alternatively, assume that 1,m it t would ensure the liberal successor’s re-election (in this case ij would touch lw u ). should the conservative party abstain from leaving a deficit then? the answer is ‘no’. although the re-election incentive is irrelevant now, the incentive to extract an extra rent still exists. furthermore, the deficit constrains the liberal successor to a policy that is more in the conservative government’s interest. conclusions this paper brings mathematically sophisticated budget deficit theories down to undergraduate level. a simple graphical model allows the lecturer to illustrate up to four major political-economic theories of budget deficits in a unified framework. although the paper lacks some budget deficit theories e. g. the “war of attrition” (alesina and drazen, 1991, p. 1170) in a coalition government or the common pool problem in a federal country (velasco, 2000) it helps to make students aware of the deficit problem. it also demonstrates the explanatory power of intuitive, non-mathematical approaches without derivation of a general equilibrium. references alesina, a., a. drazen. 1991. “why are stabilizations delayed?” american economic review, 81: 1170–1188. 32 | journal for economic educators, 11(1) summer 2011 alesina, a., g. tabellini. 1989. “external debt, capital flight and political risk.” journal of international economics, 27: 199-220. brennan, g., j. buchanan. 1980. the power to tax: analytical foundations of a fiscal constitution. cambridge: cambridge university press. daveri, f., g. tabellini. 1997. “unemployment, growth and taxation in industrial countries.” working paper, innocenzo gasparini institute for economic research, milan. hibbs, d. 1977. “political parties and macroeconomic policy.” american political science review, 71: 1467-1478. lockwood, b., a. philippopoulos and a. snell. 1996. “fiscal policy, public debt stabilization and politics: theory and uk evidence.” economic journal, 106: 889-911. lizzeri, a. 1999. “budget deficits and redistributive politics.” review of economic studies, 66: 606-628. persson, t., l. svensson. 1989. “why a stubborn conservative would run a deficit: policy with time-inconsistent preferences.” quarterly journal of economics, 104: 325-345. persson, t., g. tabellini. 2000. political economics. explaining public policy. cambridge: the mit press. sinn, s. 1992. “the taming of leviathan: competition among governments.” constitutional political economy, 3(2): 177-196. tabellini, g., a. alesina. 1990. “voting on the budget deficit.” american economic review, 80: 37-49. velasco, a. 2000. “debts and deficits with fragmented fiscal policymaking.” journal of public economics, 76: 105–125. 53 | journal for economic educators, 12(1), 2012 situational economics r. a. parsons 1 abstract this paper argues that the various theories of economics have the potential to add value when they are applied to the appropriate situation, yet educational institutions each seem overly committed to only a single theory. the resulting intense debates between economists are destructive and should be replaced with attempts to combine multiple theories in situations where they are most appropriate. an econometric example demonstrates that combining the valuable information and relationships in different theories can improve overall understanding. consequently, economics education should teach a broad range of theories, identifying the specific situations in which the assumptions of each theory, or combination, best apply. key words: macroeconomic debates, schools of thought, economic assumptions jel classification: b41, a22 introduction an individual studying higher level economic theory will likely be impressed with the beauty and elegance of the proofs, with the mathematical underpinnings, and with the strength and quantity of rational argument. but, is this the light or the shadow? while the depth of the work and the quality of thought clearly are capable of contributing much to understanding the human social experience, there is often an unnoticed elephant in the middle of the room. when one expert’s adamant opinion cannot be reconciled with another’s, to the point that they won’t even talk to each other, is this a search for truth or simply practitioners committed to cults of dogma that focus their eyesight inward. keynes said of marxism that it was, "not only scientifically erroneous but without interest or application for the modern world" (hardcastle 1973). marx was also full of disparagement as he called the marginalism of his time "vulgar" economics. does today’s economist have to pick between exclusive clubs? nature of the problem while everyone with a casual exposure to economics understands the variety of economic views and has heard the constant jokes about economic disagreements, the problem extends far beyond jokes. is this a surface rebellion, as teenagers who must express views different than their parents to show their independence and get attention, or is it a fundamental irreconcilable difference like a religious difference? milton friedman suggested that the reports of the disagreement are overblown. he explained that most of the disagreement is over policy not economic theory (friedman 1968) and is famous for saying that “we are all keynesians now.” even if this were true during the 1960s, it is not true today. david prychitko (1998) explains, “the disagreements have grown stronger, the debates more grand. economists no longer argue simply over the slopes of the curves….the entire equilibrium-based model is open to serious reexamination and criticism.” james tobin, a keynesian economist, won the nobel memorial prize in economic science in 1981 and robert lucas, a proponent of rational expectations, won 1 dr. parsons is on the economics and finance faculty at the gore school of business, westminster college, 1840 s. 1300 e. salt lake city, utah 84105. 54 | journal for economic educators, 12(1), 2012 the same prize in 1995. arjo klamer (1983) tells us that “james tobin and robert lucas taken alone are both reasonable men, but they cannot talk reasonably with each other.” consequences of the problem there are three reasons to argue and disagree: one may think the other person is in the wrong; one may think that one’s own position is right; or both. as simple as this sounds, it leads to two different results. the first is to tear down your opponents’ argument and the second is to build and expand your own. a casual review of the literature shows a large amount of focus on tearing down rather than building up. this author’s recent review of the top five ranked economic journals found almost 20% of the articles attacked a theory. are more convinced of the fallacies of our antagonist than in the benefits of our own theories? in the world of theory, just as in the physical world, it is easier to break and destroy than to create and build. a good example of tearing down rather than building and finding common ground is the cambridge capital controversy. the controversy was primarily a theoretical and mathematical debate over the role of capital during the 1960s. the debate arose between paul samuelson and robert solow of cambridge, massachusetts in the u.s., and joan robinson and piero sraffa of cambridge university in the u.k. after years of arguments and attacks, there was agreement that robinson and sraffa had undermined the critical neoclassical assumptions (burmeister 2000). they had shown that the neoclassical assumptions about capital were circular and too restrictive for the modern world. these same unrealistic assumptions, however, are required for many economic models and this prevented the robinson and sraffa camp from developing effective alternatives. after all the attacks, the general mainstream theory went on as if nothing had happened. today, the ideas of the solow capital based growth model are still the centerpiece of most modern growth models. bliss (2005) summarizes: ...what one might call the existential aspect of capital theory has not attracted much interest in the past 25 years. a small band of ‘true believers’ has kept up the assault on capital theory orthodoxy until today… if one asks the question: what new idea has come out of anglo-italian thinking in the past 20 years?, one creates an embarrassing social situation. this is because it is not clear that anything new has come out of the old, bitter debates. meanwhile mainstream theorizing has taken different directions. interest has shifted from general equilibrium style (high-dimension) models to simple, mainly one-good models...can the old concerns about capital be taken out, dusted down and addressed to contemporary models? if that could be done, one would hope that its contribution could be more constructive than the mutually assured destruction approach that marred some of the 1960s debates. ….it reflects badly on economists and their keenness of intellect that this was not always obvious to everyone. this example demonstrates the lack of results from all the effort spent attacking opposing theories. if the same efforts were directed toward supporting theories and finding common ground, the result could lead to improved new theories. this would reflect better on economists. a new analogy the world is a large, complex place that is always changing. in an attempt at a joke, a college essay question that was a little too difficult was sarcastically stated as: “explain the 55 | journal for economic educators, 12(1), 2012 universe; use the back of the page if necessary.” economic questions that model actual occurrences in the world do not model the whole. while ockham’s razor reminds us there is logic in eliminating any unnecessary assumptions, it also produces a model fit only for a specific situation. blinder and baumol’s (2009) popular principles book explains the difference between the stylized abstract of economic models and the real world in terms of a map. this is actually a good analogy because a map is fit for a purpose. a political map does not layout geography. a topographical map may not show roads, etc. the map is a simplified representation of only part of the real world. it is easy to criticize a map by simply pointing out what it does not show; a political map does not show hills and valleys, for example. economic theories are similarly easy to criticize in a world filled with billions of individual people, thousands of cultures, religions, institutions, endowments, etc. what exactly are we demanding from our economic models? economists can fall into the trap of touching what is within arms reach rather than standing back and seeing the whole. in the parable of the blind men and the elephant, each of the blind men describes a different part of the elephant and each vehemently disagrees with the others on the proper description of an elephant. is not this the best parallel with today’s economic schools of thought? which school of thought is correct? many can be, but each for its own appropriate situation. some will complain that saying many are correct is weak an evasion or avoidance that unless we at least say who is most right we are not communicating anything meaningful. which of the blind men is most right about the elephant? it all depends on what we are talking about: the elephant’s side, leg or trunk! situational economics economists have been following the principle "if the only tool you have is a hammer, everything seems to be a nail." if we only use one theory we tend to use it for all analyses. it would be better if the theory used actually fit the specific and historical context. the agent decisions made by tribal members in primitive settings are quite different from the agent decisions made by stock traders on today’s exchange. there is a time and place, a culture, a set of incentives, a set of institutions and power relationships that give rise to each of the theories and are properly represented by it. no reasonable person will deny that under normal situations as the price of an item increases we will buy less of it. this is an appropriate application of neoclassical theory. no one would deny the dominating role of institutions in a financial crisis, hence the need for institutionalist models. the role of class struggle is helpful in studying many political economic battles, especially in developing economies, hence a use for marxist thought. and while marx’s analysis may be a more appropriate description for 19 th century england than for a modern social democracy, there are still times when historical determinism and class struggle are the best tools of analysis. here is an example. we live in the midst of major unemployment issues in the western economies. what is the cause and what is the solution? classical economists explain the problem as "wages are too high." marxist economists remind us of the producer's desire for a "reserve army of labor" to drive down wages (this can be related to immigration issues). institutionalists will talk about unemployment stemming from licensing restrictions, and the impact of government and union rules. while one theory may be "most" correct on average, ignoring the other theories likely leads to missing important parts of the problem. 56 | journal for economic educators, 12(1), 2012 finding value in alternative approaches there is a way to illustrate that there is value in alternative theories. this comes from the forecasting technique of combining forecasts. this technique consists of creating a forecast using the previous forecast's results as independent inputs into a new regression. this is not an averaging or weighting of the forecasts, but instead pulls the significant knowledge implicitly included in each individual forecast and uses it to build a combined forecast. given a selection of forecasts, the very best forecast can often be improved upon by combining it with a forecast that is less accurate. for example, a good regression based on a time series might miss some of the value that is included in a forecast based on a causal relationship. even though one forecast may be less accurate than another, the knowledge embedded in the less accurate forecast can be harvested to improve the overall regression. any time a particular forecast is ignored because it is not the “best” forecast, it is likely that valuable independent information contained in the discarded forecast has been lost. the information lost may be of two types (wilson and keating, 2009, 403): 1. some of the variables included in the discarded forecast may not be included in the “best” forecast. 2. the discarded forecast may make use of a type of relationship ignored by the “best” forecast. to relate this approach to our discussion of alternative economic theories we simply obtain a variety of forecasts and see if the combination of forecasts is better than the best individual forecast. a very simple test can be constructed from real gdp forecasts available on the congressional budget office website. this collection of forecasts shows the average growth for the next two years. the first forecast in this series is from the administration, and is prepared by the council of economic advisors, the treasury department and the office of management and budget. the second forecast is from the congressional budget office (cbo) and the third is an average of 20 blue chip private business economists. this data are shown in table 1. the time period begins with the earliest blue chip forecast available and ends just before 9-11-2001 and the following wars. a common way of measuring forecast accuracy is to use mean absolute percentage error and a common way of recognizing a goodness of fit is r 2 (wilson and keating, 2009, 35). using these techniques, the forecasts are shown to have different levels of accuracy, as shown in table 2. it appears that the blue chip forecast and the congressional budget office were more accurate than the administration forecast during this period of time. it could be argued that the administration forecast approach was biased due to politics and, therefore, should be ignored. however, there may be valuable information in the administration forecast that the others did not pick up. can information in the “worst” forecast improve on the “best”? 57 | journal for economic educators, 12(1), 2012 year actual admin cbo blue chip 1982-1983 1.2 2.7 2.1 2.0 1983-1984 5.7 2.6 3.4 3.5 1984-1985 5.4 4.7 4.7 4.3 1985-1986 3.5 3.9 3.3 3.2 1986-1987 3.2 3.7 3.1 3.0 1987-1988 3.7 3.3 2.9 2.8 1988-1989 3.9 3.0 2.4 2.1 1989-1990 2.8 3.2 2.5 2.2 1990-1991 0.8 2.8 2.0 1.9 1991-1992 1.5 1.4 1.6 1.2 1992-1993 3.1 2.2 2.6 2.3 1993-1994 3.5 2.9 2.9 3.0 1994-1995 3.3 2.9 2.8 2.8 1995-1996 3.1 2.6 2.4 2.6 1996-1997 4.1 2.2 1.9 2.1 1997-1998 4.4 2.1 2.1 2.2 1998-1999 4.6 2.2 2.3 2.4 1999-2000 4.5 2.2 2.0 2.3 table 1: real gnp two year average growth mape r 2 administration 47.3% 5.1% cbo 41.2% 28.6% blue chip 36.3% 42.2% table 2: forecast accuracy the blue chip and the cbo forecasts are actually quite similar and using a standard two sample mean comparison test there is only a 20% chance that they are not the same (by comparison there is an 80% chance that the blue chip forecast is statistically different from the administration forecast.) a correlation matrix shows that the blue chip and cbo forecasts have a 95% correlation. given the similarity and correlation between the blue chip and cbo forecast, parsimony would recommend using only one of them. in an initial combined regression, the blue chip forecast comes up with significant coefficients and the cbo forecast does not. for these reasons the combined forecast will be prepared using the blue chip forecast and not the cbo forecast. a regression run using the blue chip and administration forecasts as independent variables against the dependent variable of actual values provides the results shown in table 3. 58 | journal for economic educators, 12(1), 2012 r squared 61.3% f stat (2, 15) 11.87 f probability .001 independent variable coefficient t statistic t probability intercept 1.078 1.27 .222 administration -1.181 2.72 .016 blue chip 2.236 4.67 .000 table 3: combined regression results this regression’s r squared, shows us that the equation explains 61% of the change in the dependent variable versus average. it shows an f statistic with a probability of only .001 that the equation is not significant. and the coefficients on both the independent variables (forecasts) are also significant at a 95% level. this regression provides a good fit and significant values, but does it make for a more accurate forecast? mape r 2 combined 29.9% 61.3% administration 47.3% 5.1% blue chip 36.3% 42.2% table 4: combined forecast accuracy versus individual forecast table 4 shows that the combined forecast improved both mape and r 2 over even the best individual forecast. i would interpret this by saying that even though one could argue the theories and approaches used by the blue chip economist were “better” than those of the administration, still the administration forecast had information to add to the overall outlook that was not included in the blue chip approach. to obtain the "best" understanding possible, multiple theories should be reviewed and included if the situation warrants. this is no different than saying neoclassical theory perhaps explains best the movement of prices in commodity markets, but additional understanding of the price movement can be obtained by recognizing the value of institutional thought relative to these same markets. the way forward the question should not be asked if a classical or keynesian view is correct. we should instead ask in what situations and for what purpose should a classical model be used, and when will keynesian tools be most helpful, or how can marxian thought be applied to our current analysis and in what situations should it be avoided. just like the elephant uses his trunk, legs and side for different tasks, so are the different economic theories most relevant depending on the situation. each theory can be of value and each should be applied depending on the situation. the way forward for an economist is to place effort, discussion and research around broadening and combining views rather than focusing on narrow and deeper theoretical development. this must begin in the graduate schools and in the pedagogy. but in fact the opposite has happened. sutter and pjesky (2007) pointed out that graduate schools have become 59 | journal for economic educators, 12(1), 2012 narrower and more technical in focus. a fundamental epiphany of sorts must take place in many of our leading thinkers. first they must acknowledge that the various theories are based on differing sets of facts not just personal interpretations. second, they must acknowledge that the theories are not simply self-serving, but honest attempts to interpret the world around us. with this internal change we can approach the problem more broadly. first teach the major theories. over time some theories will not perform as well and will be set aside. this is a natural occurrence and happens routinely within economics. malthus predicted the living standard would deteriorate to a sustenance level and starvation, but this prediction is no longer accepted. also fixed exchange rates gave way to flexible exchange rates, both in theory and in practice. second begin every analysis with an examination of the situation to determine which theories’ assumptions best apply. are we looking at a competitive market? are there social traditions and rules that may dominate? third instead of appending and adjusting pet theories, shift to a theory which has assumptions more consistent with the situation. a good example of this is the efficiency wage theory. because neoclassical wage theory cannot explain long-term unemployment and different wages paid for the same job, appendages such as "efficiency wage theory" have been added to explain the observed facts. because there are many other theories in the institutional and marxist camps that have no trouble explaining this observed reality, would it not be cleaner to rely on these alternate theories (if the assumptions appropriately apply) rather than create addons? references blinder, a.s. and baumol, w.j. 2009. microeconomics principles and policies. mason, oh: south-western cengage learning. bliss, c. 2005. introduction to the theory of capital: a personal overview. in capital theory vol 1, by a. cohen and g.c. hardcourt. uk: cheltenham. burmeister, e. 2000. the capital theory controversy critical essays on piero sraffa's legacy, economics, cambridge university press. friedman, m. 1968. dollars and deficits: living with america's economic problems. englewood cliffs, nj: prentice-hall. hardcastle, edgar. 2007. marxian economics in the modern world. 1973. marxist.org <www.marxists.org/archive/hardcastle/modernworld.htm>. accessed sept 20, 2011. klamer, a. 1983. conversations with economist: new classical economist and opponents speak out on the current controversy in macroeconomcs. totawa nj: rowman and allanheld. sutter d, and pjesky r. 2007. where would adam smith publish today? scholarly comments, academic economics 4 (2): 230–240. prychitko, d.l. 1998. why economist disagree. albany: state university of new york press. wilson j., and keating, b. 2009. business forecasting. new york: mcgraw-hill irwin. 33 journal for economic educators, 10(1), summer 2010 a quick argument for active learning: the effectiveness of one-minute papers kristin stowe1 abstract while lecture is the dominant means of delivering content in an economics class, the use of active learning techniques is slowly growing. this article focuses on the effectiveness of in-class writing. consistent with prior research, this study finds that writing improves student performance on exams. advances over prior research are offered in the particular usage of oneminute papers and in the availability of student data from the university’s registrar. in particular, the use of one-minute papers is found to have a significant positive impact on student grades in a principles of macroeconomics course. other key variables include a student’s attendance and prior academic record. key words: active learning, pedagogy, student performance, writing jel classification: a22 introduction faculty members at many business schools are working to revise curriculum and update their pedagogy. the energy to do so may come from a directive of the senior administration of the institution, or from accrediting agencies, or from the faculty member’s own sense that students are not learning as much as they should. regardless of the motivation, professors face uncertainty that raises a litany of questions: why do i have to change? this has worked before, why isn’t it working now? where do i go from here? economics faculty are among those whose major is losing ground. siegfried (2009) provides information on the major. from 1991 to 2008, the number of economics degrees awarded grew by 19.5 percent while the total number of undergraduate degrees awarded grew by 41 percent. the percentage of economics degrees earned by women rose from 30.6 percent to 31.2 percent in a period in which the share of all undergraduate degrees earned by women rose from 53.9 percent to 58.5 percent. this decline in economics market share is due in part to a failure to attract more female students. changing the balance of class time from lecture to active learning may help recruit and retain students who learn in different styles. in lecture, the instructor is active and the student passive. pedagogical techniques to engage the student, and hopefully improve learning outcomes, shift the focus from the instructor to the learner. the student is given the opportunity to engage the material as it is being presented. watts and becker (2008) find that the use of alternative teaching methods has been slowly growing. in economics principles classes, instructors lecture during 83 percent of class time. there is more use of cooperative learning, classroom experiments, and classroom discussions between students than in prior years. in 1995, the median time spent on these activities was zero; in 2005, time spent on each averaged 6 percent. 1 assistant professor of economics, school of business, wingate university, wingate, nc 28174. 34 journal for economic educators, 10(1), summer 2010 trading some lecture time for active learning can have value if people learn in a variety of ways. lage and treglia (1998) provide a review of studies indicating that females and males have different learning styles. studies have found women tend to learn through experiences; men through conceptualization. active learning is most effective for students who tend to take in information through experiences while lecture can be effective for people who learn through conceptualization. review of the literature on writing in economics courses numerous studies have covered factors that impact student performance in an economics course. many of the factors are based on the individual student: aptitude, time spent studying, absences, choice of major, etc. other factors include entering gpa, cumulative hours, transfer status, gender, age, race and personality.2 while the aforementioned studies focus on student characteristics, factors controlled by the instructor do impact student performance. as far back as 1974, anderson noted that the way in which concepts are organized can impact student retention of the material. miller and westmoreland (1998) find mixed results as to the effect of selective homework grading on test performance. sewell (2004) found that the policy of dropping a lowest test grade during the semester leads to lower performance on comprehensive final exams. recently, elzinga and melaugh’s (2009) study of 35,000 principles of economics students at the university of virginia found that math sat scores and gender (males score higher) are significant grade predictors. in addition, fourth year students outperformed students with less college experience; athletes and virginia residents earned lower grades than non-athletes and out-of-state students. the professor’s use of writing in a course may influence student learning. the use of writing may have two goals. some professors want students to learn to write; others want students to write to learn. in an economics curriculum, both are important. outside of academe, employers prefer that college graduates be able to communicate effectively. as one example, the national commission on writing collected cost data from 64 large corporations affiliated with the business roundtable. according to the 2004 report, firms may spend as much as $3.1 billion annually to remediate their employees' writing deficiencies. faculty may use writing outside of class to build both writing and economic skills. this need not be a formal research paper, although such papers do have value. instructors may use student journals and reflection papers as informal writing assignments (brewer and jozefowicz 2006). greenlaw (2003) taught principles of macroeconomics as a writing intensive course in which students wrote eight to ten short papers. compared to a section taught with the traditional lecture approach, writing improved student’s attitude toward the subject and led to higher scores on exams at the end of the course. dynan and cate (2005) find that writing assignments during the course lead to higher grades on student exams, which can help an institution demonstrate student learning for aacsb or other accrediting agencies. they later find that writing assignments help with lower order exam questions, such as those on knowledge and comprehension, but not necessarily with assessments of the higher order skills of analysis, synthesis and evaluation. dynan and cate (2009) suggest that adding structure to writing assignments boosts student learning. 2 studies include borg and stranahan (2003), anderson, benjamin and fuss (1994), borg, mason and shapiro (1989), and siegfried and strand (1977). 35 journal for economic educators, 10(1), summer 2010 in a minute paper, students are asked one or two simple questions at either the beginning or end of class. minute papers focus on writing to learn, not learning to write. many professors avoid writing assignments because of the time required to assess the work, but keeping the question(s) short and succinct lessens the instructor’s burden of grading. pre-class papers may ask questions such as “what do you know about . . . ?” to assess prior understanding of the day’s concept. post-class papers could include questions such as “what was most confusing about class today?” students can also be shown a chart or table with data, then asked to provide a written interpretation. other prompts could ask students to state the advantages and disadvantages of a theory discussed in class. one minute papers have been used in settings as varied as chemistry courses (harwood 1996), art history courses (steele 1995) and multicultural seminars (ludwig 1995). almer, jones and moeckel (1998) found that accounting students who wrote one-minute papers scored better on subsequent essay quizzes but not on multiple-choice quizzes. students whose oneminute papers were graded did not score better than those non-graded. grading was done by an outside instructor; questions were not used in the class. chizmar and ostrosky (1998) conducted a study in which the economics instructor began class with review of questions from the prior meeting’s one-minute papers. the control groups did not write papers and did not hear a review at beginning of class. students in class that wrote one-minute papers scored higher on the tuce (test of understanding of college economics) at the end of the semester. despite these studies, self-assessment activities such as one-minute papers are given an average of 0 percent of time in principles classes (watts and becker 2008). methodology this study was conducted in spring 2009 at a small, private university in the southeastern u.s. three sections of principles of macroeconomics were taught by same instructor on the same days (mwf). no other sections were offered at the university. two sections were the control group; students did no writing except on quizzes and exams. the third section comprised the experimental group; students took the same quizzes and exams plus they wrote a one-minute essay at end of each class. two questions were asked: 1. what did you learn in class today? 2. what was the most confusing thing in class today? each one-minute paper was read by the instructor. if a student wrote a question, it was answered in writing. otherwise, the instructor did not comment. papers were returned to all students one to three days later. the research question is whether writing influenced students’ final grades. unlike prior studies, the minute papers were not graded. a second difference is that student comments were not discussed in a subsequent class. third, the study differs from prior research because of the data on student background. other studies of business students relied on self-reported data. here, the university’s registrar provided data which prior literature has found to have an impact on student grades: cumulative gpa, cumulative credit hours earned, grade in prior course, sat math and sat verbal scores. other variables include gender, status as a student-athlete, and absences. table 1 provides descriptive statistics. all of the students in the course fell into the traditional age range of 18 to 22 years old. 53 percent of the students were males and 47 percent females. 52 percent of the students were ncaa division ii athletes and 48 percent were not 36 journal for economic educators, 10(1), summer 2010 athletes. there were no statistically significant differences in the descriptive statistics among the sections except for cumulative credit hours. students in the control group had completed an average of 60 hours; students in the writing section an average of 46. table 1: descriptive statistics variable mean standard deviation minimum maximum final average 78.1 12.2 33.3 94.5 sat verbal 498.8 78.1 360 700 sat math 523.7 77.7 370 710 cumulative credit hours earned 56.2 27.6 13 133 cumulative gpa 2.9 0.7 1.5 4 gpa for principles of microeconomics 2.7 0.9 1 4 number of absences 4.3 4.8 0 23 regression analysis ols regression was used to determine the predictive power of the variables. the most significant factor in predicting a student’s final average in principles of macroeconomics was, not surprisingly, the student’s prior academic performance. as table 2 shows, absences detract from a student’s grade.3 a student’s cumulative gpa and grade in principles of microeconomics were not included in the same regressions because of the connection between the two. sat verbal and cumulative hours earned were included in the first two regressions because of their standing in prior studies, but dropped from the third and fourth regressions when they were not significant with this data set. regressions including the student’s status as an athlete, not reported here, showed the variable to be insignificant. all students in the control classes are grouped into one section for purposes of the analysis; students in the class which did the one-minute papers comprise the second section. females had a higher average than males. consistent with elzinga and melaugh (2009), the sat math score was more significant than verbal. a key finding is that students in the section that wrote the one-minute papers scored higher than students who did not write. in the fourth regression, the ‘section’ variable was significant at the 11 percent level. responding to written questions at the end of each class added approximately 4 to 5 points to a student's final average. 3 the attendance policy for the course was that students who missed more than 50 percent of the classes would automatically fail. other than that, attendance did not directly factor into grade calculations. 37 journal for economic educators, 10(1), summer 2010 table 2: regression analysis dependent variable = final average in principles of macroeconomics ols ols ols ols variables 1 2 3 4 (constant) 40.556 *** 50.275 *** 43.731 *** 54.726 *** (8.10) (9.18) (7.63) (7.85) section of course 4.554 ** 5.934 * 4.103 * 3.711 (2.13) (1.90) (2.07) (2.26) sat verbal 0.008 0.012 (0.02) (0.02) sat math 0.023 0.011 0.024 * 0.014 (0.02) (0.02) (0.01) (0.02) cumulative credit hours earned 0.041 0.037 (0.04) (0.05) cumulative gpa 7.278 *** 7.945 *** (2.01) (1.96) gpa for principles of microeconomics 5.934 *** 6.52 *** (1.90) (1.79) number of absences -1.153 *** -1.074 *** -1.098 *** -1.007 *** (0.24) (0.28) (0.24) (0.27) gender 3.551 2.712 3.905 * 2.535 (2.23) (2.59) (2.19) (2.54) adjusted r2 0.775 0.751 0.777 0.757 n=54. standard errors in parenthesis. *** significant at 1 percent. ** significant at 5 percent. * significant at 10 percent. correlation the regressions highlight four factors as key in predicting a student's grade in principles of macroeconomics: section (with or without one-minute papers), number of absences, gender and prior academic record. while the regression analysis helps explain the differences in students' macroeconomics grades, there may be underlying relationships among the variables. for example, the section effect may be due not to writing, but to another relationship, perhaps a concentration of absenteeism in one class. students were grouped by gender and section: males in regular section (group 0), males in writing sections (group 1), females in regular section (group 2), females in writing section (group 3). spss was used to calculate the correlation between final average in macroeconomics and group, controlling for number of absences and cumulative gpa. as reported in table 3, the relationship between group and final average is significant at a level of 3 percent. the positive correlation indicates that students' final average rises from group 0 (males in control section) to group 3 (females in writing section). 38 journal for economic educators, 10(1), summer 2010 table 3: correlation between final average and group control variables final average group (gender/section) number of absences & cumulative gpa final average correlation 1.0 0.307 significance (2 tailed) 0.030 group correlation 0.307 1.0 significance (2 tailed) 0.030 note: df = 48 conclusions active learning exercises may make courses more interesting for students and improve learning outcomes. writing is one type of active learning. unfortunately, many writing assignments come with a high time cost for the professor. one minute writing can increase students’ learning with a relatively low cost to the professor. this study provides evidence that small amounts of writing do make a difference, even one-minute papers without a grade and without a subsequent in-class review of topics by the professor. the writing activity asks students to stop, focus their thoughts and pinpoint their questions before leaving class. female students may benefit more than males, adjusting for other factors. further research on one-minute papers could be done with larger numbers of students, with variations on the grading of papers and with differences in the amount of review the instructor conducts in class. in general, one-minute papers could be used by faculty who want a low-cost way to make classes more interactive. interactive classes could be one way to address the decline in the economics major outlined in siegfried (2009). references almer, elizabeth drieke, kumen jones and cindy l. moeckel. 1998. “the impact of oneminute papers on learning in an introductory accounting course” issues in accounting education, 13 (3): 485-497. anderson, g., d. benjamin, and m. fuss. 1994. “the determinants of success in university introductory economics courses.” journal of economic education, 25: 99119. anderson, wylie. 1974. "a comparison of preversus postorganizers upon retention of economic concepts." journal of economic literature, 6: 61-64. becker, william e. and michael watts. 2005. teaching economics to undergraduates: alternatives to chalk and talk. edward elgar. _______. 2001. "teaching economics to undergraduates." journal of economic literature, 35: 1347-73. borg, mary o’malley and harriet stranahan. 2002. "the effect of gender and race on student performance in principles of economics: the importance of personality type." applied economics. 34: 589-598. 39 journal for economic educators, 10(1), summer 2010 borg, mary o., mason, paul m. and shapiro, stephen l. 1989. the case of effort variables in student performance. journal of economic education, 20 (3): 308-313. brewer, stephanie m. and james j. jozefowicz. 2006. "making economics principles personal: student journals and reflection papers." journal of economic education, 37: 202-216. chizmar, john f. and anthony l. ostrosky. 1998. “the one-minute paper: some empirical findings,” journal of economic education, (winter) 3-10. college board, the national commission on writing for america's families, schools, and colleges. (2004, september). "writing: a ticket to work ... or a ticket out: a survey of business leaders." new york: author. dynan, linda and tom cate. 2009. “the impact of writing assignments on student learning: should writing assignments be structured or unstructured?” international review of economics education, 8: 64-86. ________. 2005. “does writing matter? an empirical test in a college of business course meeting aacsb’s new international standard.” proceedings of the association for global business. elzinga, kenneth g. and daniel o. melaugh. 2009. "35,000 principles of economics students: some lessons learned." southern economic journal, 76 (1): 32-46. greenlaw, steven a. 2003. "using writing to enhance student learning in undergraduate economics." international review of economics education, 1: 61-70. harwood, w.s. 1996. "the one-minute paper." journal of chemical education. 73 (3): 229230. ludwig, jeanette. 1995. "the one-minute paper." liberal education. 81 (4). miller, ellen and geraldine westmoreland. 1998. "student response to selective grading in college economics courses. " journal of economic education, 29: 195-201. sewell, ellen. 2004. "grade dropping: an empirical analysis." journal of economic education, 35: 24-34. siegfried, john j. 2009. "trends in undergraduate economics degrees, 1991-2008." journal of economic education, (summer) 331-336. siegfried, john j. and s.h. strand. 1977. "sex and the economics student." review of economics and statistics, 59 (2): 247-249. steele, brian. 1995. "the one-minute paper." art journal, 54 (3): 88-90. watts, michael and william e. becker. 2008. "a little more than chalk and talk: results from a third national survey of teaching methods in undergraduate economics courses." journal of economic education, 39: 273-286. publication rates for male and female economics ph 27 journal for economic educators, 10(2), fall 2010 a gender comparison of economists’ publications e. bruce hutchinson, marc a. loizeaux, leila j. pratt, and stephanie smullen1 abstract an ordered p robit model is used to examine the i mpact of gender and the quality o f the phd g ranting in stitution o n the publication r ecord of m ale an d f emale economists who received t heir doctorate i n 1985. this analysis indicates th at men an d women have different publ ication pa tterns regardless of where t hey r eceived t heir p hd and t hat the quality of t he p hd granting institution has n o m easurable effect o n an individual’s publication record. key words: gender, ordered probit model, journal publications jel classification: j16 introduction numerous s tudies ( davis, h uston a nd patterson [ 2001], g oodwin a nd s auer [1995], h utchinson a nd z ivney [ 1995], a nd laband a nd p iette [ 1994]) e xamine t he journal-publication be havior of i ndividuals w ith a doctorate i n e conomics. a s ubcategory of this literature is a continuing professional interest in the comparative journalpublication r ecords of male an d f emale economists. b ased o n a 1 966 n ational s cience foundation s urvey, h ansen, w eisbrod a nd s trauss r eport t hat w omen e conomists ha ve “higher av erage j ob q uality” yet “lower research productivity ( 1978, p.73 7).” fish a nd gibbons whose research focused on journal publication between 1969 and 1986 conclude “…that me n s ignificantly out-publish w omen …w hether t he s amples [ are] r egarded a s matched pairs or as two independent samples (p. 97).” m cdowell and smith, using data from 1968 t o 1975 f or a n e qual num ber o f m ale a nd f emale e conomists f rom t op 20 institutions, c onclude t hat on a verage, w omen produced fewer publ ications e ven after adjusting for t he n umber of coauthors (1992, p. 75) . ginther and k ahn, r elying upon national s cience foundation da ta f or doc torates e arned f rom 1974 t hrough 2000, w rite that “notably, men publish more than women, pa rticularly in non-top-10 j ournals (2004, p. 199).” in a 2006 a rticle, m cdowell, s ingell a nd s tater, us ing data from the a merican economics a ssociation (aea) directories for t he years 1964, 1974, 1985, 1989, 1993, and 1997, conclude t hat by 1993 the conclusion of earlier studies that ma le e conomists 1 e. bruce hutchinson is professor of economics, department of economics, university of t ennessee at c hattanooga, chattanooga, t n 37403; marc a . loizeaux is manager, provider p erformance assessment a nalytics, bluecross b lueshield of t ennessee, chattanooga, t n 37402 ; leila j . p ratt is hart professor of e conomics, university o f tennessee at c hattanooga; a nd, stephanie s mullen, i s professor o f c omputer s cience, computer science, university of tennessee at chattanooga. 28 journal for economic educators, 10(2), fall 2010 were m ore l ikely t o publish m ore than t heir f emale c ounterparts ( p. 1 66-67) was no longer applicable. their analysis of post-1993 data indicates that males and females had substantively equal publication records. the present study uses statistical analysis to compare male and female publication records a djusted b y the quality of t he phd granting i nstitution. quality here is determined by school tier as established by the national research council. we, as other authors excepting mcdowell, singell and stater, find a continuing statistical difference in journal publ ication r ecords w hen w e simultaneously consider gender a nd the quality of the phd granting institution. data and results our data are drawn from the 1985 and 1986 listing o f "doctoral dissertations in political e conomy in american universities a nd c olleges" p ublished i n th e d ecember 1985 a nd 1986 e ditions of t he american economic review. th ese lists id entify individuals a nd t he year i n w hich t he phd is co nferred. our d ata s et includes a ll lis ted individuals w ho r eceived a phd in 1985. 2 the economic literature database (heck, 2001), w hich contains 2 50-plus j ournals, was u sed t o i dentify economics a nd r elated journal articles (hereafter “journal article”) published b y these individuals between 1985 and 1999. counted were articles and notes; omitted were comments, replies, discussions, and book r eviews, w hich is t he g eneral treatment followed in th e lite rature. if articles were co -authored, ev en i f both a uthors w ere f rom t he 1985 phd class, each was given credit f or on e publ ication. t he gender of an individual was de termined based on name and where necessary and possible by contacting the individual.3 the original data s et contained 720 i ndividuals; however, we were unable t o determine t he gender o f 50 individuals. thus our w orking da ta s et c ontains 670 individuals. o f these 115 or 17 .2% were f emales an d 5 55 were m ales. three-hundred and twenty-seven (48.8%) of these individuals published at least one journal article. a l arger p ercentage ( see t able 1) of women ( 58%) f ailed t o publ ish a t l east one article be tween 1985 and 1999 t han di d m en ( 50%). however a slightly l arger percentage of women (13%) than men (12%) published exactly one article. likewise the percentage of w omen (8%) w ho publ ished t hree a rticles du ring t his p eriod w as a lso somewhat l arger t han t he p ercentage o f m en (5%). however a s ubstantially l arger percentage o f m en ( 7%) t han w omen ( 3%) publ ished e xactly t wo a rticles a nd a n e ven higher pe rcentage o f m en ( 26%) t han w omen (18%) publ ished f our o r m ore a rticles during this period. 2 the lis ts in clude i ndividuals w ho e arn t he p hd f rom c anadian u niversities. t hese individuals are omitted from our sample because their phd is from a non-u.s. university and the tier rankings used include only u.s. universities. 3 many faculty and students with knowledge of foreign languages and cultures assisted in this d etermination. e -mails w ere a lso s ent in a n e ffort to d etermine th e g ender o f individual economists. 29 journal for economic educators, 10(2), fall 2010 table 1 number of publications by gender publications 0 1 2 3 4 + female 67 15 3 9 21 58% 13% 3% 8% 18% males 276 66 40 29 144 50% 12% 7% 5% 26% total 343 81 43 38 165 51% 12% 6% 6% 25% universities were p laced into school tiers a ccording t o the 1982 r anking of economics d epartments as reported i n t he a ppendices of t he 1995 n ational r esearch council upda te t o t he 19 82 a ssessment o f r esearch-doctorate pr ograms. essentially, w e used hansen’s first (highest o r be st) to f ifth (lowest) tier d esignations to g roup the schools.4 as can b e s een, 4 0% o f o ur s ample r eceived t heir p hd f rom a tier 1 o r tie r 2 institutions w hile 32% r eceived t heir de gree from a t ier 5 s chool. 14 % of t he m ales received t heir de grees f rom a t ier 1 s chool c ompared t o onl y 8% of t he f emales. in addition, a hi gher p ercentage of w omen t han m en g raduated f rom t ier 4 or t ier 5 institutions. table 2 shows this stratification. 4 schools in the various tiers are: tier 1: chicago, harvard, mit, princeton, stanford, yale tier 2: columbia, m ichigan, m innesota, n orthwestern, pennsylvania, r ochester, u cberkeley, ucla, uw-madison tier 3: brown, c al-tech, c arnegie-mellon, c ornell, d uke, illinois, j ohns h opkins, maryland, m ichigan s tate, n ew y ork university, n orth c arolina, uc-san d iego, virginia, virginia polytechnic institute, washington-seattle tier 4: boston u niversity, c laremont, f lorida, iowa, iowa s tate, m assachusetts, o hio state, pennsylvania state, pittsburgh, purdue, suny-stony brook, t exas a &m, texas-austin, uc-davis, uc -santa b arbara, u sc, v anderbilt, w ashington-st. louis tier 5: all other colleges and universities. 30 journal for economic educators, 10(2), fall 2010 table 2 gender by school tier tier 1 tier 2 tier 3 tier 4 tier 5 publications 1 2 3 4 5 females 9 28 16 21 41 8% 24% 14% 18% 36% males 76 156 90 62 171 14% 28% 16% 11% 31% total 85 184 106 83 212 13% 27% 16% 12% 32% table 3 s hows publishing r ecords s tratified b y gender a nd s chool t ier. giving consideration t o t he s ensitivity of pe rcentages ba sed on s mall num bers, no pa ttern differences ar e r eadily observed. an or dered probit m odel i s us ed t o determine th e impact of these variables on t he probability that an individual will publish 1, 2, 3 o r 4 or more articles between 1985 and 1999. in general, this model takes the form: y* = β’x + ε. y* is not observed but we do observe y = 0 if y* ≤ 0 y = 1 if 0 ≤ y* ≤ μ1 y = 2 if μ1 ≤ y* ≤ μ2 . . . y = j if μj-1 ≤ y* the µ’s are unknown parameters and are estimated with the β’s. the values of both these parameters d epend o n t he s et o f m easurable f actors, x, and the unobservable factors ε. the error term, ε, is assumed to be normally distributed across observations. it is standardized to a mean of zero and a variance of one. the resulting normal distribution gives us the following probabilities: prob (y = 0) = φ(-β’x), prob (y = 1) = φ(μ1 β’x) φ(-β’x), prob (y = 2) = φ(μ2β’x) φ(μ1 β’x), prob (y = 3) = φ(μ3β’x) φ(μ2 β’x), prob (y = 4) = 1 φ(μ3β’x). for all the probabilities to be positive: 0 ‹ µ1 ‹ µ2 ‹ µ3. 31 journal for economic educators, 10(2), fall 2010 table 3 number of publications by school tier and gender publications 0 1 2 3 4 + tier 1 females 4 2 1 1 1 44% 22% 11% 11% 11% males 34 10 10 3 19 45% 13% 13% 4% 25% tier 2 females 18 3 0 1 6 64% 11% 0% 4% 21% males 85 13 13 10 35 54% 8% 8% 6% 22% tier 3 females 6 2 1 1 6 38% 13% 6% 6% 38% males 47 11 6 5 21 52% 12% 7% 6% 23% tier 4 females 12 0 0 4 5 57% 0% 0% 19% 24% males 31 8 3 5 6 58% 15% 6% 9% 11% tier 5 females 27 8 1 2 3 66% 20% 2% 5% 7% males 79 24 8 6 54 46% 14% 5% 4% 32% the e xplanatory va riables or t he regressors, x, a re g ender which e quals 1 i f t he individual i s male, a nd a s et of dum my v ariables t hat de signate t he t ier of t he p hd granting institution. table 4 reports the results of the ordered probit. none of the school tier dummies are significant indicating that th e quality of the phd granting institution is unimportant in explaining an individual’s probability of publishing. h owever, gender is positive and s ignificant indicating t hat m ales ha ve a s ignificantly hi gher pr obability of publishing than females. 32 journal for economic educators, 10(2), fall 2010 table 4 ordered probit regression results variable coefficient std. error t-statistic constant -0.1858 0.1277 -1.455 gender 0.2313 0.1211 1.910 * tier 1 0.0310 0.1465 0.212 tier 2 -0.1349 0.1175 -1.149 tier 3 -0.0106 0.1371 -0.077 tier 4 -0.1367 0.1498 -0.913 µ1 0.3112 0.0326 9.546 ** µ2 0.4882 0.0402 12.144 ** µ3 0.6592 0.0464 14.195 ** * significant at the 5% level ** significant at the 10% level as usual in models with discrete dependent variables the marginal impacts of the x values on t he pr obabilities a re not e qual t o t he c oefficients. t o m easure t he marginal impact of a binary e xplanatory va riable, on e m ust compare the p robabilities th at r esult when the variable takes on its two values (0 or 1) with all other variables held constant at their means. t able 5 shows the marginal impact of each of the binary regressors (school tiers or gender) on the five publishing probabilities given all the other variables are held constant at t heir s ample m eans. for e xample, a ccording to th e estimated ma rginal impacts pr esented i n t able 5, m ales a re 9.20% more l ikely t o not publ ish t han f emales given t he s chool t iers a re he ld c onstant at t heir mean v alues. likewise a g raduate o f a tier 2 in stitution is 5 .40% less lik ely to not publ ish t han ot her i ndividuals given gender and the other three tier dummy variables are held constant at their mean values. the s mall d ifferences in ma le a nd f emale p ublication p robabilities in the f ive school t iers r einforce t he non -significance o f t he t ier d ummy v ariables. t he g ender dummy va riables however pr ovide some s urprising r esults. m en ar e about 9% more likely than women to not publish at all. w omen, on t he other hand, are about 8% more likely t han m en t o publ ish 4 or m ore a rticles o r to be “ super publ ishers”. in a ddition, women and men are almost equally likely to publish 1, 2, or 3 a rticles between 1985 a nd 1999. 33 journal for economic educators, 10(2), fall 2010 table 5 marginal impact of gender & school tier on publishing probabilities prob. y =0 prob. y =1 prob. y =2 prob. y =3 prob. y =4 gender =0 0.412 0.123 0.069 0.064 0.331 gender =1 0.504 0.122 0.065 0.058 0.252 difference 0.092 -0.001 -0.004 -0.006 -0.079 tier 1 = 0 0.486 0.122 0.066 0.060 0.266 tier 1 = 1 0.499 0.122 0.065 0.058 0.256 difference 0.013 0.000 -0.001 -0.002 -0.010 tier 2 = 0 0.503 0.122 0.065 0.058 0.253 tier 2 = 1 0.449 0.124 0.068 0.062 0.298 difference -0.054 0.002 0.003 0.004 0.045 tier 3 = 0 0.488 0.123 0.066 0.059 0.264 tier 3 = 1 0.484 0.123 0.066 0.059 0.264 difference -0.004 0.000 0.000 0.000 0.000 tier 4 = 0 0.488 0.123 0.066 0.059 0.264 tier 4 = 1 0.483 0.123 0.066 0.059 0.269 difference -0.005 0.000 0.000 0.000 0.005 conclusion this study used research records based on a search of the economic literature database citations to 250-plus economics and related journals to examine the impact of gender and school t ier on t he pr obability t hat a n i ndividual who r eceived t he p hd i n 1985 w ould publish zero, one, two, three or four or more articles between 1985 a nd 1999. we find that f or t his g roup, the tier ( general q uality) o f t he graduate institution from w hich they graduated doe s not i mpact t heir publ ishing pr obability. w e a lso f ind t hat m en ha ve a significantly different pu blication pa ttern t han women though t he difference is n arrow. in particularly we find that men in this cohort are more likely to not publish at all. on the other hand, we find that women are more likely to be “super publishers” publishing four or more articles between 1985 and 1999. references american economic association. 1985. eighty-second list of doctoral dissertations in political economy in american universities and colleges.” american economic review, december: 1225-46. 34 journal for economic educators, 10(2), fall 2010 american economic association. 1986. eighty-third list of doctoral dissertations in political economy in american universities and colleges. american economic review, december: 1238-57. broder, i e. 1993. “professional achievements and gender differences among academic economists.” economic inquiry 31 (1): 116-27. davis, j. c., j. h. huston and d. m. patterson. 2001. “the scholarly output of economists: a description of publishing patterns.” american economics journal 29 (3): 341-49. durell, alan, bruce sacerdote, and heidi williams. 2007. “is economics becoming gender neutral?” aeaweb: conference papers, <http://www.aeaweb.org/annual_mtg_papers/2007/0105_1430_1103.pdf, 2007> assa conference, chicago, illinois, january 5-7, 2007 enomoto, c. e. and s. n. ghosh. 1993. “a stratified approach to the ranking of economics journals.” studies in economic analysis 14 (2): 74-93. fish, m. and j. d. gibbons. 1989. 2004. “a comparison of the publications of female and male economists.” journal of economic education 20 (1): 93-105. ginther, d. k. and s. kahn. 2004. “women in economics: moving up or falling off the academic career ladder.” journal of economic perspectives 18 (3): 193-214. goodwin, t. h. and r. d. sauer. 1995. “life cycle productivity in academic research: evidence from cumulative publication histories of academic economists.” southern economic journal 61 (3): 728-43. hansen, w. l., b. a. weisbrod and r. p. strauss. 1978. “modeling the earnings and research productivity of academic economists.’ journal of political economy 86 (4): 729-41. heck, j. l. 2001. economic literature database. wayne, pa: jlh enterprises. hutchinson, e. b. and t. l. zivney. 1995. “the publication profile of economists.” journal of economic education 26 (1): 59-79. laband, d. n. and m. j. piette. 1994. “the relative impacts of economics journals: 1970-1990.” journal of economic literature 32 (2): 640-66. mason, p. j., j. w. steagall, and m. m. fabritius. 1997. “economics journal rankings by type of school: perceptions versus citations.” quarterly journal of business and economics 36 (1): mcdowell, j. m. and j. k. smith. 1992. “the effect of gender sorting on propensity to coauthor: implications for academic promotion.” economic inquiry 30 (1): 6882. mcdowell, j. m., l. d. singell, and m. stater. 2006. “two to tango? gender differences in the decisions to publish and coauthor.” economic inquiry 44 (1): 153-168. national research council 1995. continuity and change. washington, d. c.: national academy of sciences. social capital and happiness: the canadian case 97 | journal for economic educators, 14(1), summer 2014 97 income and substitution effects: graphical analysis for intermediate microeconomics ambrose leung 1 , maureen mcgregor 2 , and justin chesney 3 abstract the graphical analysis of the income and substitution effects is an important part of consumer theory that is commonly taught at the level of intermediate microeconomics. few textbooks, however, devote much discussion of these effects for perfect substitutes. the purpose of this paper is to fill that gap by producing a more complete graphical analysis of the subject matter and thereby enhance student learning. key words: consumer theory; income effect; substitution effect jel classification: a22, d11 introduction consumer theory is a topic that generally occupies a good part of a course on intermediate microeconomic theory. a standard textbook written for such a course typically devotes a significant portion of the content to the discussion of consumer theory, of which the decomposition of income and substitution effects due to changes in the price of a good is always an important part. while most textbooks discuss the hicksian decomposition of the income and substitution effects (hicks 1956) in detail for the cases of normal and inferior goods (and often giffen goods), few textbooks include the discussion of these effects for the cases when two goods are perfect complements or perfect substitutes. furthermore, the few textbooks that include these so called special cases of perfect complements and perfect substitutes scan through the materials briefly and often leave the readers confused, which is unfortunate because such special cases, when properly explained, can enhance the students’ overall understanding on the treatment of income and substitution effects. in the case of perfect substitutes, there appears to be no textbook currently available that presents a complete discussion of all the possible scenarios in relation to substitution and income effects. the main purpose of this paper is to provide a discussion of the graphical analysis on income and substitution effects for such unique cases as perfect substitutes and perfect 1 ambrose leung is the author for correspondence, associate professor of economics, department of policy studies, mount royal university, 4825 mount royal gate sw, calgary, alberta, canada, t3e 6k6, e-mail: acleung@mtroyal.ca, phone: (403)-440-8515, fax: (403)-440-6815. 2 maureen mcgregor is an associate professor of economics, department of policy studies, mount royal university, 4825 mount royal gate sw, calgary, alberta, canada, t3e 6k6, e-mail: mmcgregor@mtroyal.ca, phone: (403)440-5944, fax: (403)-440-6815. 3 justin chesney is a graduate student of economics, york university, 4700 keele street, toronto, ontario, canada, m3j 1p3, email: jjechesney@gmail.com. mailto:acleung@mtroyal.ca mailto:mmcgregor@mtroyal.ca 98 | journal for economic educators, 14(1), summer 2014 98 complements. this presentation is often missing from typical intermediate microeconomics textbooks. the present paper will begin with an overview of the substitution and income effects when preferences are assumed to be well-behaved, followed by the cases of perfect complements and perfect substitutes. income and substitution effects the basic premise in the economic theory of consumer behaviour is that a consumer maximizes utility by allocating a given budget among the consumption of different goods. this implies that the quantity consumed of a good will change if there is a change in the price of the good in most cases. 4 there are two main reasons, commonly described as substitution and income effects, for the change in quantity demanded of a good due to its price changes. consider a simple case when a consumer allocates a given budget to the purchase of two goods. first, a change in the price of a good causes a change in its price relative to the other good, and a rational consumer tends to purchase more of whichever of the two goods is now relatively cheaper and vice versa. this kind of substitution between two goods due to a change in the relative price while keeping the level of utility constant is called the substitution effect. graphically the substitution effect is represented by a rotation around a same indifference curve when the consumer adjusts for the new price ratio (slope of the budget line changes) to equal the marginal rate of substitution (slope of the indifference curve). the substitution effect constitutes a negatively sloped demand curve that is captured by the law of demand. second, a change in the price of a good causes a change in the consumer’s purchasing power or real income, such that real income increases as the price of a good decreases and vice versa. this is called the income effect. graphically the income effect can be shown by a parallel shift of the budget line to the final equilibrium consumption bundle based on the change in real income. hence, the combination of the substitution effect and the income effect sum to the total effect on changes in quantity demanded of a good in response to a price change of the good. a typical intermediate microeconomics textbook tends to discuss in detail the substitution and income effects for utility functions that are “well-behaved” (e.g., landsburg 2014; perloff 2012). 5 consider the case of a decrease in the price of good x (from px to px’) in figure 1, where the solid lines represent budget lines and the dashed lines represent indifference curves. the budget line rotates counterclockwise along the horizontal axis from b1 to b2 as a result of the price change of good x. the slope of the budget line changes to reflect the change in the relative price. the corresponding optimal consumption bundle changes from a to c, which represents the total effect of the price change. the total effect can be decomposed into the substitution and income effects as shown in figure 1. the substitution effect is determined by rotating budget line b1 to b’ (to reflect the new price ratio) along the indifference curve i1 4 the quantity consumed of a good will not change in response to a price change of the good if the good has a perfectly inelastic demand. 5 a standard treatment in intermediate microeconomics textbooks is that a well-behaved utility function follows four basic properties of preference orderings: 1) indifference curves are downward sloping, 2) higher indifference curves are preferred to lower ones ,i.e., non-satiation, 3) indifference curves cannot cross, and 4) indifference curves are bowed inward towards the origin, i.e., convex preferences. a common form used to represent well-behaved preference is the cobb-douglas utility function. 99 | journal for economic educators, 14(1), summer 2014 99 resulting in movement from a to b. the income effect is then shown by the parallel shift from budget line b’ to b2 (to reflect an increase of real income) resulting in movement from b to c. the standard textbook treatment to decompose the substitution and income effects is through an imaginary experiment by asking the following question: “what is the required amount of changes in the budget from b2 that is just enough for the consumer to restore the initial utility level i1, given the relative price is now defined by the slope of b2?” the question is typically answered graphically using figure 1 by performing a parallel shift of b2 to b’ to form a tangency with the original indifference curve i1 at bundle b. the decomposition of the substitution and income effects follow as described earlier. 6 figure 1: decrease in price of good x for well-behaved preference 6 good x is a normal good in figure 1 as quantity consumed of good x decreases when income decreases from b2 to b’. substitution and income effects move in the same direction for the case of normal goods. if point b is to the right of point c, then quantity consumed of good x increases as income decreases, and good x is an inferior good. substitution and income effects move in opposite directions in the case of inferior goods. a good is defined as a giffen good when the income effect is large enough to outweigh the substitution effect. consult an intermediate microeconomic textbook for details (e.g., perloff 2012). 100 | journal for economic educators, 14(1), summer 2014 100 although most textbooks also introduce the unique cases of perfect complements and perfect substitutes in terms of optimal consumption choice determination, very few include a decomposition of substitution and income effects for these cases. those that include such analysis are surprisingly incomplete, especially for the case of perfect substitutes (frank et al. 2013; varian 2009). in the following discussion, we will consider the cases where the price of a good changes from the original price. specifically, in the cases of perfect substitutes we begin with px < py and then decrease px, and increase px to still < py, then = py , and > py . perfect complements when a consumer uses two goods in fixed proportion, it is referred to as the case of perfect complements, such as skis (x) and bindings (y). suppose a consumer’s preference is to use one pair of skis with one pair of bindings, then the consumer’s utility function can be written as u(x, y) = min [x, y] 7 . consider the case for a decrease in the price of skis, as shown by a rotation of the budget line from b1 to b2 in figure 2. figure 2: decrease in price of good x when two goods are perfect complements 7 perfect substitutes and complements are not necessarily a one-to-one ratio. however, using the one-to-one substitution (and complement) ratios provides ease of presentation and avoids excessive wordiness. students are encouraged to work through examples of perfect complements and perfect substitutes for a different ratio. 101 | journal for economic educators, 14(1), summer 2014 101 there is no substitution effect in the case of perfect complements because the consumer’s preference dictates that the two goods be used together in a fixed proportion without the possibility of substituting one for the other even if the relative price of the two goods has changed. the income effect suggests that the consumer’s real income increases as she can now buy more skis with a decrease in its price. however, skis are not substitutes for bindings as the two types of ski equipment must be used together in fixed proportion, one to one ratio in this case. to decompose the total effect into the substitution and income effects, we initiate a parallel shift of b2 to b’ which is tangent to the original indifference curve i1. the substitution effect is represented graphically by a rotation of the budget line (a change in the relative price) around a same indifference curve (to keep the level of utility constant), hence from points a to b on figure 2. in the case of perfect complements points a and b are the same, which implies that there is no substitution effect. the income effect is represented on the graph by the movement from points b to c, indicating an increase in real income due to a decrease in price of skis. the presence of the income effect implies that changes in the price of any good affects real income and the wellbeing of the consumer. in the case of perfect complements, the total effect equals the income effect – there is no substitution effect. perfect substitutes when a consumer views two goods as perfect substitutes, the consumer will allocate the whole budget to the good that provides him with higher utility for the money spent. consider the case where a consumer is indifferent between good x and good y when given the same amount of each, that is, the consumer is always willing to forgo any given amount of good x for the same amount of good y received and vice versa. in this case the utility function of the consumer can be written as u(x, y) = x + y. graphically the indifference curves for the case of perfect substitutes are downward sloping straight lines as shown by the dashed line in figure 3. the indifference curves for the case of perfect substitutes have a constant slope because the rate of substitution is constant regardless of the amount of each good consumed. to maximize utility given the budget constraint, the consumer will buy only good x if the price of good x is lower than the price of good y and vice versa. 8 if the prices of the two goods happen to be the same, the consumer will be indifferent between buying any amount of good x and good y as long as the budget allocated for the two goods is exhausted. this implies that the optimal consumption choice in the case of perfect substitutes depends on the relative slope of the budget line to the slope of the indifference curve. given this unique preference structure, it turns out that there are different possible scenarios in terms of the substitution and income effects when the relative price changes. consider the case of which tea (good x) and coffee (good y) are one-for-one perfect substitutes for a consumer. suppose initially the price of tea is $1 per unit and the price of coffee is $1.50 per unit, and the consumer allocates a budget of $15 per time period for the consumption of the two goods. with the $15 budget, the consumer can afford 15 units of tea or 10 units of coffee. therefore the initial optimal consumption choice is to purchase 15 units of tea and no coffee to maximize utility at the level of 15 (u = x + y = 15 + 0 = 15). graphically as shown in figure 3, the initial budget line is b1 with indifference curve i1 at point a which is the initial optimal consumption bundle. this implies that the consumer will buy only tea (good x) when the slope of the budget line is flatter than that of the indifference curve. in the following cases, 8 this is again assuming a one-to-one ratio of substitution for ease of presentation. 102 | journal for economic educators, 14(1), summer 2014 102 changes in quantity demanded for the two goods as a result of a price change in tea (good x) will be analyzed using the substitution and income effects. figure 3: optimal consumption choice when two goods are perfect substitutes case 1: a decrease in the price of tea from $1.00 to $0.75. as the price of tea decreases, the consumer obviously will continue to buy more and only tea, so there is no substitution effect. as tea becomes cheaper and the consumer’s real income increases 9 , she is able to afford more tea and the consumer’s well-being increases with an increase in the level of utility, implying a positive income effect. graphically as shown in figure 4, a decrease in the price of tea rotates the budget line counterclockwise along the horizontal axis to b2. as a result the slope of the budget line continues to be flatter than that of the indifference curves. the final optimal choice bundle is c on indifference curve i2 as a result of the price change. to identify the substitution and income effects, we show a parallel shift of the new budget line b2 to b’ that is tangent to the indifference curve i1 at point b. as points a and b end up to be the same point, there is no substitution effect, as the consumer continues to buy only tea. the income effect as a result of the price decrease of tea is shown in figure 4 by the movement from points b to c. this shows that the consumer is better off with higher real income as well as a higher level of utility by reaching indifference curve i2. 9 in the two goods case for perfect substitutes, a higher real income necessarily increases consumer utility when both goods are normal. 103 | journal for economic educators, 14(1), summer 2014 103 figure 4: decrease in price of good x to px’ < py for perfect substitutes case 2: an increase in the price of tea from $1.00 to $1.25. as the price of tea increases to a level that is still cheaper than the price of coffee, the consumer will continue to buy only tea implying that there is no substitution effect; but there is an income effect as the consumer becomes worse off with less real income and fewer units of tea consumed. in this case as shown in figure 5, the budget line rotates clockwise along the horizontal axis to b2. note that the slope of the new budget line b2 is steeper than that of the original budget line b1, but the slope of the new budget line b2 continues to be flatter than that of the indifference curves. with the new budget line b2, the consumer maximizes utility at point c on i0. as we initiate a parallel shift of b2 to b’ to decompose the income and substitution effects, point b is found to be the same point as a, which is the graphical representation that there is no substitution effect. the income effect can be identified in figure 5 by the movement from points b to c, indicating a decrease in the consumer’s real income and consequently a decrease in utility. 104 | journal for economic educators, 14(1), summer 2014 104 figure 5: increase in price of good x to px’ < py for perfect substitutes case 3: an increase in the price of tea from $1.00 to $1.50. the increase in the price of tea rotates the budget line clockwise along the horizontal axis to b2 as shown in figure 6. this is a unique case where b2 has the same slope as the indifference curves. the consumer’s utility drops to a level represented by the indifference curve i0 which coincides with the budget line b2. the consumer is indifferent between all bundles along i0 = b2, and is obviously worse off as real income and utility both decrease which means there exists a negative income effect. the consumer’s optimal consumption choice after the price change, point c, can be located anywhere along i0 = b2. whether there is a substitution effect depends on the final optimal consumption bundle chosen by the consumer. when a parallel shift of b2 is initiated to tangent the original indifference curve i1, the imaginary budget line b’ coincides with indifference curve i1 such that point b can be located anywhere along i1 = b’. if it turns out a = b then there is no substitution effect, there exists a substitution effect otherwise. the income effect is represented in figure 6 by the movement from points b to c, indicating a decrease in both real income and utility for the consumer. with any additional increase in px (price of tea) such that px > py , consumption changes to all y (coffee) as will be shown next in case 4. 105 | journal for economic educators, 14(1), summer 2014 105 figure 6: increase in price of good x to px’ = py for perfect substitutes case 4: an increase in the price of tea from $1.00 to $2. in this case the price of tea has increased to be higher than the price of coffee. the budget line rotates clockwise along the horizontal axis to b2 which has a slope steeper than that of the indifference curves as shown in figure 7. as a result, the consumer switches from buying only tea to buying only coffee, that is, a substitution effect. ten units of coffee and no tea will be consumed at the new optimal consumption bundle c on indifference curve i0, which implies the existence of an income effect as the consumer’s income has decreased as well as the level of utility. formally in figure 7, the decomposition of the substitution and income effects is shown by a parallel shift of the new budget line b2 to b’ to locate point b which is tangent to the initial indifference curve i1. in figure 7, the substitution effect is shown by the movement from points a to b, that is, from buying only tea to buying only coffee. the income effect is represented by the movement from points b to c, indicating a decrease of both real income and the level of utility. 106 | journal for economic educators, 14(1), summer 2014 106 figure 7: increase in price of good x to px’ > py for perfect substitutes in short, the effect of a change in the price of a good when two goods are perfect substitutes can take the substitution effect from non-existence to a very large magnitude, depending on the slope of the budget line relative to that of the indifference curve. for instance, when the slope of the budget line is flatter than that of the indifference curve, the optimal consumption choice will always be buying good x only. when the relative price changes, a substitution effect occurs only if the slope of the budget line changes from flatter to steeper than the slope of the indifference curve for the perfect substitutes. recall our example of tea (x) and coffee (y) as perfect substitutes with a one-to-one ratio. initially the price of tea (px) is lower than the price of coffee (py), such that the consumer buys only tea. table 1 provides a summary of all the possible cases of substitution and income effects as a result of different possible changes in the relative price that change the slope of the budget line. whether the consumer continues to buy only tea or switch to buying coffee depends on the slope of the budget line 107 | journal for economic educators, 14(1), summer 2014 107 relative to that of the indifference curve. table 1: substitution and income effects when two goods are perfect substitutes initially px < py and buy x only substitution effect income effect final optimal consumption choice case 1: px decreases to px’ < py none yes buy x only case 2: px increases to px’ < py none yes buy x only case 3: px increases to px’ = py maybe yes buy any combination of x and y to exhaust budget case 4: px increases to px’ > py yes yes buy y only conclusion in this paper, we focus on the graphical decomposition of the substitution and income effects for perfect complements and perfect substitutes due to a price change in combination with a well-behaved utility function. no currently available textbook includes all the possibilities. this paper provides a valuable resource to supplement the standard but incomplete textbook treatment of the substitution and income effects, which should enhance student learning of these concepts. references frank, r., i. parker, and i. alger. 2013. microeconomics & behaviour. 5 th edition. toronto, ontario: mcgraw-hill ryerson. hicks, j. 1956. a revision of demand theory. oxford: clarendon press. landsburg, s. e. 2014. price theory & applications. 9 th edition. mason, ohio: south-western cengage learning. perloff, j. m. 2012. microeconomics. 6 th edition. upper saddle river, new jersey: pearson. varian, h. r. 2009. intermediate microeconomics: the modern approach. 8 th edition. new york: norton. 29 journal for economic educators, 13(1), 2013 using rfid technology to track attendance mehmet f. dicle 1 and john levendis 2 abstract the relationship between class attendance and academic performance continues to be of interest. the most common methods of tracking attendance, however, have their shortcomings and biases. we provide researchers with a method to collect unbiased and reliable attendance data. late arrivals and early departures can also be recorded with ease, allowing researchers to evaluate these behaviors as well. our method is intended to collect valuable attendance data at a minimal cost of time or money: setup takes 10-20 seconds per student initially, with no time lost subsequently, and the monetary cost is less than 29¢ for each student. an excel-based version is discussed. software code is provided, open-source, for instructors to implement. key words: electronic attendance, rfid, education jel classification: a2 introduction research on the relationship between attendance and academic performance requires data. traditional methods of data collection include roll calling, circulating a sign sheet, assigning specific seats to students, and clicker systems. calling roll is time consuming and may not be optimal for larger classes. circulating a sign sheet is open to bias since friends may sign for each other. assigning specific seats may not be pleasing to the students. finally, clickers are expensive and multiple clickers can be carried by students. every researcher comes across intriguing questions in their lifetime that cannot be answered due to lack of data. we suggest that the question of attendance-performance is an area that could advance with more reliable data. our contribution to the existing literature may not answer a specific question or test a hypothesis. we provide a foundation for more research on the attendance/ performance question via a reliable and extended data collection method. that is, we answer a need rather than answer a question. in this study, we provide a radio frequency identification (rfid) based electronic attendance system to solve the data collection problem. the system is implemented with a $20 rfid reader, 29¢ rfid key fob for each student and an excel macro. the system does not require institution-wide support and can be implemented at the instructors’ own initiative. this voluntary system can also track late arrivals and early departures: valuable data that are not easily available with traditional attendance tracking methods. there is also a second benefit, perhaps appealing to a wider audience, of the suggested electronic attendance system: tracking attendance in large, or even medium sized, classes can be very costly in terms of effort and class time. thus, many professors choose to forgo taking roll. it is important, however, to follow students’ attendance. in fact, the ability to automatically notify 1 assistant professor of finance, loyola university new orleans. mfdicle@loyno.edu. 2 associate professor of economics, and the dr. john v. connor professor of finance and economics, loyola university new orleans. jlevendi@loyno.edu. 30 journal for economic educators, 13(1), 2013 students of their attendance habits could contribute to their presence in class. there are other reasons to keep records of attendance. for instance, many universities require it for athletic participation. furthermore, us federal law requires that instructors take attendance in order to verify that students are not fraudulently using student-loans. northern arizona university (nau) has implemented an eighty five thousand dollar electronic attendance system to improve student attendance and retention rates (kraker, 2010). ryman (2010) reports that the nau system uses sensitive readers that do not require the ids to be removed from students’ wallets. this feature creates tension with the student body for fear of invasion of privacy. the concern is the potential surveillance of students’ every movement through readers placed around campus. thus far, unlike nau, we have never had a complaint about our electronic attendance system. instead, our university’s student run newspaper published an article about this “beneficial” technology with a “fruitful future”, commending the implementation of the new system. (the citation is suppressed to ensure anonymity during the review process). in this study, we initially provide a brief literature review about the benefits of classroom attendance. the system is explained in detail within the subsequent section. this is followed by the results of a student questionnaire. concluding remarks are provided with the final section. the survey questionnaire is provided as part of the appendix, as are some comments from other professors who helped pilot our attendance system. literature review the correlation between attendance and performance seems now to be beyond dispute. 3 the question of causation is still being investigated. one possibility is that when students attend class, they learn more, and therefore earn higher grades. another possibility is that good students tend to get better grades, but that they also tend to come to class. that is, the relevant variable is the students’ unobserved characteristic--their seriousness of purpose, for example. as it is an unobserved confounding variable, its impact becomes reflected in the regression parameters of the variables with which it is correlated. most recent studies attempt to control for student unobservables. some, such as romer (1993), do so by including variables that are correlated with student attitudes. others, such as davedoss and foltz (1996), estimate a two-stage iv model. still others estimate panel models (ex. rodgers, 2001; stanca, 2006). one of the best-structured studies of attendance/performance is by marburger (2001). he considers that it is unlikely that smartness varies with the type of economics question that students answer correctly. marburger kept track of each lecture topic for each day. he then checked to see whether students were more likely to miss questions related to that topic when they missed that particular lecture. even after controlling for additional student fixed-effects, he found that this was, indeed the case: attending lecture makes one more familiar with the material, and therefore more likely to correctly answer questions about that material. marburger (2006) builds on his earlier (2001) study to examine the effect of mandating attendance. marburger (2006) finds that students are more likely to answer questions related to material that was discussed on days they attended. marburger finds that sections that have mandatory attendance policies, and those that do not, have similar attendance rates at first, but 3 see, for example, bratti and staffolani (2002); chan et al. (1997); davedoss and foltz (1996); durden and ellis (1995); moore (2003); moore et al. (2003); rodgers (2001); romer (1993); schmidt (1983); stanca (2006) all of who find that there is a statistically significant relationship between attendance and grades. 31 journal for economic educators, 13(1), 2013 these rates tend to diverge dramatically as the semester progresses. the implication is that the policy increases attendance, and that attendance increases performance. attendance is also an important issue for on-line lectures, especially for those that involve multi-campus teaching. with the advancements in technology, the experiment described by freeman (1998) for multi-campus video conferencing is now common. the attendance tracking of the 330 students in freeman (1998) experiment would have been costly using traditional methods. our suggested system, however, simplifies the process and enables off-site attendance tracking. overview the consensus among scholars is that attendance is positively correlated with higher grades, and that there may be a causal connection running from attendance to performance. we developed an automated attendance tracking system using rfid technology. it is, in effect, a magnetic barcode. the rfid tags that we use are little chips, approximately the size of a us quarter, which fit onto a keychain. the rfid scanner is about the size of a deck of playing cards. each student is given the option of participating in the system. if they do not wish to participate, or if they forget their rfid one day, they have the option of signing in on a sheet of paper. at the beginning of the semester, each student chooses an rfid tag. the instructor then registers each tag’s 10-digit id code with the student’s name. once this is done, each time the student taps his rfid tag onto the reader, the reader emits a “beep” and sends the 10-digit code to a database which records the id-code and the precise date and time that the person beeped in. this is stored as text, which is exportable to any statistical software. once there, the data can easily be sorted by name, id, date, or time. thus, we can easily see how many times a student has “beeped in” during the semester, generate a list of all the students who “beeped in” on a particular date or create a list of students who habitually arrive late or depart early. how the attendance system works hardware the necessary hardware for this system is inexpensive and easily obtainable on-line. (we have used ebay, as well as several other vendors.) we use a usb 125khz rfid proximity reader. the reader connects via usb to any computer, and is the size of a deck of playing cards. the tags we used were 125khz rfid proximity id keyfobs (tokens or key tags). these fit nicely on a keychain and are the size of a quarter. in general, the weaker the signal, the closer the tags must be to the reader for the tags to be “read.” the weakness of the signal ensures that students are not tracked around campus, and thereby increases their willingness to participate. you can currently buy the tags for as little as 29¢ and the reader for less than $20. the 125khz system was chosen because it is easily obtainable, relatively cheap, and relatively weak. this means that students must approach the podium, where the scanner is located, to beep in. in this way, it is more obvious to the professor if a student tries to beep in twice (once themselves and once for a friend). moreover, the fact that it is a relatively weak signal means that students need not worry that all their movements are being tracked across campus. (as mentioned earlier, northern arizona university tried implementing a high powered rfid system with multiple scanners that could track students throughout campus. this was a very controversial program which generated a lot of resentment among the student body.) since 32 journal for economic educators, 13(1), 2013 our goal is simply to keep track of attendance in our particular classes, a weak 125khz system is strong enough for our purposes, but not so strong that it invades students’ privacy software the suggested electronic attendance system is based on a set of excel macros. it is important to note that the rfid reader we are suggesting reads the rfid keyfobs as keyboard entries. therefore, whenever the keyfob is within the proximity of the rfid reader, 10-digit code (and return character at the end) on the keyfob is sent to the computer as if it is a keyboard entry. this means that the instructors can take rfid attendance on a simple text editor, such as windows notepad. however, there would be no date or time stamp. the provided excel macros are a simple way to read the keyfobs via the rfid reader and provide a date and time stamp for each attendance entry. the excel macros are provided as a suggestion and instructors can write their code using any programming language. the excel macro-spreadsheet can be obtained from the authors. 4 registering students when the instructor first opens the excel file, they see something like figure 1, but without any names or rfid numbers in the “students” worksheet. the instructor then has to register each student to an rfid number. simply enter the student’s name in column a, and the id-number in column b. rather than typing the number, the instructor can simply place the cursor in the appropriate cell in column b and then scan the rfid tag. scanning is accomplished by placing the rfid tag within an inch of the reader. the rfid reader will automatically enter the 10-digit rfid number into the cell. registration takes approximately 10-20 seconds per student. if, in the course of the semester, a student loses or breaks their rfid tag, the instructor can simply replace the old number with the new one in the “students” worksheet. figure 1: screen shot of taking attendance. 4 the url is suppressed to ensure anonymity during the review process. 33 journal for economic educators, 13(1), 2013 tracking attendance in order to take attendance, simply click on the “take attendance” button, and the “attendance” dialogue box pops up. (the cursor is automatically inserted into the window, but be sure not to click the mouse outside this window when taking attendance.) once the cursor is positioned in the “attendance” dialogue box, the process is automatic. the student only needs to “beep in” at the beginning of every class session for their attendance to be tracked. when a student “beeps in”, the date and time of the beep, as well as the student’s name are recorded on the second worksheet in excel, the worksheet entitled “attendance record.” on that worksheet, you will see something like figure 2, a list showing the students’ name, rfid numbers, and the times they scanned their rfid tags. given that these attendance data are already in excel, it is easy to sort by date to get a list of students who attended on a particular day, or to sort by name, to see which classes a particular student attended. what prevents a student from scanning in their friends? the system reads only one rfid tag every three seconds. if you wanted to scan yourself and your friend in, there would be a long awkward pause in front of the podium as you waited three seconds for the scanner to reset. unlike if you were signing two names on a sheet, you’d be pretty conspicuous. figure 2: screen shot of attendance records. performance given the digital nature of the attendance system, it is easy to correlate student attendance with their grades. in table 1 we provide the results of a linear regression of each student’s final class grade on the percent of classes attended. to be clear, attendance, itself, was never graded; it was simply monitored. 34 journal for economic educators, 13(1), 2013 table 1: student attendance and grades grade (on a 4.0 scale) attendance pct 0.72*** (0.000) fall 2011 -0.57*** (0.000) fall 2012 0.28** (0.016) constant 2.42*** (0.000) observations 377 r-squared 0.137 p-values are in parentheses. * significant at 10%; ** significant at 5%; *** significant at 1% the dependent variable is the student’s grade, calculated on a 4.0 scale. attendance is measured continuously from 0 to 1. questionnaires we asked students in several sections to complete a questionnaire on the rfid system. (see appendix for a copy of the questionnaire.) of the 234 students enrolled, 172 students were present on the last day of class and responded to the questionnaire. of those 172 students, 159 (92%) were rfid users. (see table 2.) of the rfid users, when asked why they chose to use one, the most common response was some version of “because it was easy.” in fact, the word “easy” showed up in 47% of the responses. table 2: did you use the rfid system? response frequency percent no 13 7.56 yes 159 92.44 total 172 100.00 students were then asked whether they liked the rfid system. (see table 3) the allowable answers were “no,” “low,” “neutral,” “ok,” and “yes.” the results were heavily skewed toward the positive responses “ok” and “yes.” in fact, only one student answered “no” or “low.” when asked “why”, again the most common response was that it was “easy.” thirty-two percent of rfid users’ answers included the word “easy.” 35 journal for economic educators, 13(1), 2013 table 3: did you like the rfid system? response frequency percent no 1 0.63 low 0 0.00 neutral 10 6.29 ok 19 11.95 yes 129 81.13 total 159 100.00 we then asked the students whether the rfid system encouraged them to change their attendance habits. allowable answers were: “no,” “not much,” “somewhat,” and “yes.” (see table 4.) one-third of students indicated that the electronic attendance system changed their attendance. table 4: did your attendance habits change because of the rfid system? response frequency percent no 85 53.80 not much 23 14.56 somewhat 34 21.52 yes 16 10.13 total 158 100.00 finally, we asked whether students would suggest adopting the rfid system in other courses? allowable answers were “no,” and “yes.” (see table 5.) one hundred and fifty-five of the 159 students (97.5%) indicated that they would suggest using this technology in other classes. in fact, of the thirteen students who chose not to use the rfid system, only two said they would not recommend the system; two were neutral; and nine indicated that they would suggest the rfid system to other classes. in followup discussions with some of the students who chose not to participate, the consensus was that it seemed invasive, with one student likening it to a “lo jack.” this was not the common opinion of the majority of the class, however. table 5: would you suggest the rfid system? response frequency percent no 4 2.52 yes 155 97.48 total 159 100.00 it is our belief that merely taking roll encourages attendance, which in turn can boost learning. this is clearly fodder for future research—research made easier with our electronic tracking system. 36 journal for economic educators, 13(1), 2013 concluding remarks the technology that we use is called radio frequency identification, or rfid. it is similar in concept to a barcode. each student is given an rfid tag, which is the size of a quarter and fits easily on a keychain. each rfid tag has a magnetic signature which corresponds to a 10-digit id number. when the tag is placed within one inch of an rfid scanner, the scanner “reads” the number, beeps, and makes note of the 10-digit number, and the time and date when it was scanned. this is not gps. it doesn’t track a student’s movement around campus. it only makes a note of the instant that the tag was voluntarily placed within one inch of the reader. registering an rfid tag to a student takes between ten to twenty seconds per student. after this, the system runs itself and takes no class time at all. the number of students who opt out has been very low, so we don’t have to keep track of many signatures, names, and attendance sheets. the rfid technology has some advantages and disadvantages relative to the increasingly popular “clicker” technology. it is not unusual for instructors to require the expensive clickers, while using them only for attendance. the rfid tags we use retail for approximately 29¢. on the other hand, these tags are not interactive: they can’t answer multiple choice questions. they do one thing, but they do it well and without controversy: they are simply for attendance management. most importantly, the rfid attendance system provides reliable and unbiased attendance data which includes time of arrival or time of departure. this is important for future research on the attendance/performance relationship. references bratti, m., staffolani, s., 2002. student time allocation and educational production functions. hew 0207001. econwpa. chan, k.c., shum, c., wright., d.j., 1997. class attendance and student performance in principles of finance. financial practice and education 7, 58-65. davedoss, s., foltz, j., 1996. evaluation and factors influencing student class attendance and performance. american journal of agricultural economics, 78, 499-507. durden, g.c., ellis, l.v., 1995. the effects of attendance on student learning in principles of economics. american economic review (proceedings) 83, 343-346. freeman, m., 1998. video conferencing: a solution to the multi-campus large classes problem? british journal of educational technology 29, 197-210. kraker, d., 2010. university attendance scanners make some uneasy. http://www.npr.org/templates/story/ story.php?storyid=129482104. marburger, d. r., 2001. absenteeism and undergraduate exam performance. journal of economic education 32, 99-109. marburger, d. r., 2006. does mandatory attendance improve student performance? journal of economic education 37, 148-155. moore, r., 2003. helping students succeed in introductory biology classes: does improving student’s attendance also improve their grades? bioscene 29, 17-25. moore, r., jensen, m., hatch, j., duranczyk, i., staats, s., koch, l., 2003. showing up: the importance of class attendance for academic success in introductory science courses. the american biology teacher 65, 325-329. rodgers, j.r., 2001. a panel-data study of the effect of student attendance on university performance. australian journal of education 45, 284-295. http://www.npr.org/templates/story/ 37 journal for economic educators, 13(1), 2013 romer, d., 1993. do students go to class? should they? journal of economic perspectives 7, 167-174. ryman, a., 2010. skipping class? nau high-tech system will know. http://www.azcentral.com/news/articles/2010/ 04/27/20100427nau-studentattendance.html. schmidt, r.m., 1983. who maximizes what? a study in student time allocation. american economic review 73, 23-28. stanca, l., 2006. the effects of attendance on academic performance: panel data evidence for introductory microeconomics. journal of economic education 37, 251-266. appendix: questionnaire this survey is about the rfid electronic attendance system developed by drs. xxxx and yyyyy. your response will be used in an academic research article to present and to discuss the system. did you prefer to have an rfid tag? no yes why or why not? did you like the electronic attendance system? no low neutral ok yes why or why not? did your attendance habits change because of the electronic attendance system? no not much somewhat yes why or why not? would you suggest adopting the electronic attendance system in other courses? no yes why or why not? appedix: comments from peers in the course of development, our electronic attendance system was used by some of our peers. they generously agreed to provide comments regarding their experiences with the system. “the system is inexpensive, easy to implement, and makes use of a technology that many businesses including wal-mart are trying to introduce in their operations. we feel that you have done an excellent piece of work in bringing this technology to fruition.” (kamal hingorani, ph.d., alabama state university) “i use the system to take attendance for all my classes. students are issued rfid cards for a fee of $1.00, fully refundable upon returning the card at the end of the semester or upon dropping the course. students appear to like the system and i think attendance has been great, mostly due to the system. timed check-in allows for coding such as on-time, tardy, very tardy, and absent. there have been no complaints from students. the system forces me to get to class about 10 minutes http://www.azcentral.com/news/articles/2010/ 38 journal for economic educators, 13(1), 2013 early for the 5-minute set-up and to facilitate check-in before actual class time. it is practical, time-saving, and it allows me to provide uncontested attendance data to administrators when necessary. thank you for thinking about it and for sharing your knowledge.” (kwesi aggrey, ph.d., north carolina central university) “enhances accountability and frees the professor for more meaningful betweenclass and beginning-of-class interactions. i was surprised but my (non-business, this semester) students overwhelmingly embraced the novelty of the rfid cards.” (william w. jennings, us air force academy) presenting profit maximization with graphical analysis 34 journal for economic educators, 11(2), fall 2011 a primer on profit maximization robert carbaugh 1 and tyler prante 2 abstract although textbooks in intermediate microeconomics and managerial economics discuss the firstorder condition for profit maximization (marginal revenue equals marginal cost) for pure competition and monopoly, they tend to ignore the second-order condition (marginal cost cuts marginal revenue from below). mathematical economics textbooks also tend to provide only tangential treatment of the necessary and sufficient conditions for profit maximization. this paper fills the void in the textbook literature by combining mathematical and graphical analysis to more fully explain the profit maximizing hypothesis under a variety of market structures and cost conditions. it is intended to be a useful primer for all students taking intermediate level courses in microeconomics, managerial economics, and mathematical economics. it also will be helpful for students in master’s and ph.d. programs in economics and in mba programs. moreover, the paper provides instructors with an effective supplement when explaining the profit-maximization concept to students. 3 key words: profit maximization, microeconomics jel classification: a2, d2 introduction for about a century, the assumption that a firm maximizes profit (total revenue minus total cost) has been at the forefront of neoclassical economic theory. this assumption is the guiding principle underlying every firm’s production. an important aspect of this assumption is that firms maximize profit by setting output where marginal cost (mc) equals marginal revenue (mr). this equality holds regardless of the market structure under study—that is, perfect competition, monopoly, monopolistic competition, or oligopoly. while the implications of profit maximization are different for different market structures, the process of maximizing profit is essentially the same. the problem for the firm is to determine where to locate output, given costs and the demand for the product to be sold. in the simplest version of the theory of the firm, it is assumed that a firm’s ownermanager attempts to maximize the firm’s short-run profits (current profits and profits in the near future). more sophisticated models of profit maximization replace the goal of maximizing short-run profits with the goal of maximizing long-run profits, which reflect the 1 professor and co-chair, department of economics, central washington university 2 assistant professor, department of economics, los angeles valley college 3 we wish to thank professors john olienyk, darwin wassink, gerald gunn, tim dittmer, koushik ghosh and an anonymous reviewer for comments and suggestions. 35 journal for economic educators, 11(2), fall 2011 present value of the firm’s expected profits. in these models, the mr = mc concept plays an important role in analyzing the behavior of firms. nevertheless, the profit-maximization assumption has been criticized on the grounds that managers often aim to attain merely “satisfactory” profits for the stockholders of the firm rather than maximum profits. moreover, managers may pursue goals other than profit maximization, including sales maximization, personal welfare, and social welfare, all of which tend to reduce profit. in spite of these challenges, the mr = mc model of profit maximization is the dominant model used by the economics profession to explain firm behavior. profit maximization is emphasized in all microeconomics courses, from principles classes to graduate courses. principles textbooks (e.g., mankiw, 2009; krugman and wells, 2009; hubbard and o’brien, 2007) provide an introduction to the topic by using graphical analysis showing that a firm’s total profit is maximized at the output where mr is equal to mc. because principles texts are intended to fulfill the needs of beginning students (as they should), they address this topic only by considering the first-order condition for profit maximization, mr = mc. this leaves the second-order condition for profit maximization to be explained by more advanced texts; that is, when mr = mc, profit is maximized if mc cuts mr from below. when surveying intermediate microeconomics texts, however, we found that they generally do not shed much light on the second-order condition. of the eight leading intermediate microeconomics texts that we surveyed, all use graphical analysis to illustrate the first-order condition for profit maximization for the market models of perfect competition and monopoly, as seen in tables 1 and 2. one text (besanko and braeutigam, 2005) uses graphical analysis to portray the second-order condition for perfect competition, but not for monopoly. another text (eaton, eaton and allen, 2009) uses graphical analysis to tangentially discuss the second-order condition for perfect competition and monopoly; in a footnote, it also uses calculus to identify the second-order condition for monopoly. its treatment of this topic is limited to the case where marginal cost is rising at the profit-maximizing output. but what if mc is decreasing? a possible example of decreasing mc arises in the current weak economies of the united states and other countries. given excess capacity, as firms such as ford motor co. expand production, the benefits of mass production kick in and mc may decline. as output increases, mc may fall below mr, but the firm will maximize profit by increasing output until rising mc eventually meets mr. we also surveyed leading undergraduate mathematical economics texts to determine the extent to which they discuss the necessary and sufficient conditions for profit maximization. initially we thought that these texts would present these conditions in a comprehensive manner so as to make the topic obvious to students; therefore, why should we write this paper? however, we found coverage of this topic to be tangential. all of the texts that we reviewed (dadkhah 2007, sydsaeter and hammond 2006, dowling 2001, silberberg and suen 2001, and simon and blume 1994) use calculus to illustrate the general nature of firstand second-order conditions, which can be applied to a variety of topics. but these texts do not apply in a student friendly manner these conditions to profit maximization for pure competition and monopoly. moreover, not all students taking economics courses will take a course in mathematical economics dealing with firstand second-order conditions. simply put, there is a void in the treatment of the necessary and sufficient conditions for profit maximization that exists not only in intermediate microeconomics textbooks, but also in those for mathematical economics and managerial economics. 36 journal for economic educators, 11(2), fall 2011 table 1: illustrating the necessary and sufficient conditions for profit maximization for perfect competition in intermediate microeconomics textbooks ________________________________________________________________________ method of illustration first-order condition second-order condition textbook graph calculus graph calculus 1) bernheim & whinston yes no no no 2) besanko & braeutigam yes no yes no 3) browning & zupan yes no no no 4) eaton, eaton & allen yes no yes yes 5) nicholson & snyder yes no no no 6) perloff yes no no no 7) pindyck & rubinfield yes no no no 8) varian yes no no no ________________________________________________________________________ we maintain that additional coverage devoted to profit maximization is useful for economics students. why? profit maximization provides the simplest and most straight forward application of firstand second-order conditions. students can easily relate to a firm that produces one product and how the firm goes about finding the output level that maximizes total profit. other applications of necessary and sufficient conditions are even more complex, such as utility maximization, which involves two goods, and cost minimization involving two inputs, labor and capital. these topics are covered in advanced undergraduate courses and graduate courses in microeconomics. given the inadequate pedagogical treatment of profit maximization in current intermediate microeconomics texts and mathematical economics texts, we feel that a more comprehensive approach to the topic is warranted. if students grasp the implications of the simplest case of firstand second-order conditions found in profit maximization, they will have a greater ability to grasp these conditions found in more complex cases at the graduate level. our many years of teaching experience have led us to conclude that students tend to understand concepts better when they are presented in verbal, graphical (visual), and mathematical terms. this also applies to profit maximization. the purpose of our paper is to provide students and instructors a primer on profit maximization. our analysis begins by using calculus to derive the firstand second-order conditions. we then use graphs to illustrate these concepts visually, as applied to perfect competition and monopoly. 37 journal for economic educators, 11(2), fall 2011 table 2: illustrating the necessary and sufficient conditions for profit maximization for monopoly in intermediate microeconomics textbooks ________________________________________________________________________ method of illustration first-order condition second-order condition textbook graph calculus graph calculus 1) bernheim & whinston yes no yes no 2) besanko & braeutigam yes no no no 3) browning & zupan yes no no no 4) eaton, eaton & allen yes no yes yes 5) nicholson & snyder yes no no no 6) perloff yes no no no 7) pindyck & rubinfield yes no no no 8) varian yes no no no ________________________________________________________________________ it is hoped that the pedagogical presentation of this paper will lead to a more complete understanding of the profit-maximization hypothesis by student readers of all backgrounds and abilities. simply put, any economic model that simplifies from the real world should be as tight and complete as possible. our paper meets this objective by addressing profit maximization for a variety of market structures and under conditions of increasing mc and decreasing mc. our paper is intended to serve as a supplement for a course in intermediate microeconomics, managerial economics, or mathematical economics. it will be useful for those students who realize that profit is not necessarily maximized when mr = mc, and who could benefit from an article that systematically lays out the implications of this theory for alternative market structures. it also will be useful for students who are in master’s and ph.d. programs in economics as well as in mba programs. finally, it will serve as a helpful supplement for faculty who wish to elaborate on the profit-maximization concept in their classrooms. profit maximization: mathematical exposition consider the derivation of a firm’s profit maximizing conditions. the maximization of net revenue (total revenue minus total cost) requires that the first-and second-order conditions be fulfilled. to show this mathematically, first write the net revenue function as: (1) ),()()( qcqrq where q is quantity, )(qr is the total revenue function, and )(qc is the total cost function. for an extremum of this function, the first derivative of the function is set equal to zero. this 38 journal for economic educators, 11(2), fall 2011 suggests that the first-order condition is met--that marginal revenue equals marginal cost. this is shown below as: (2) 0 )()( q qc q qr q , which implies, (3) )()( qmcqmr . that is, when marginal revenue and marginal cost are equal, the firm has either maximized or minimized total profit. using this reasoning, microeconomic texts suggest that profit is maximized when marginal revenue equals marginal cost. of course, for the extremum in (2) to be a maximum (that is, profit maximization or loss minimization), the second-order condition requires that the second derivative of the net revenue function have a negative value. this is shown as: (4) 0 )()( q qmc q qmr , or, adding q qmc )( to both sides of the inequality, (5) q qmc q qmr )()( . the net revenue function is at a maximum when the slope of the marginal cost curve, q qmc )( , exceeds that of the marginal revenue curve, q qmr )( . although calculus can be used to explain the first and second order conditions for profit maximization, students often have difficulty in visualizing this method of presentation. their comprehension often improves when principles are illustrated in verbal and visual (graphical) terms to which the rest of this paper is devoted. profit maximization in perfect competition it can also be shown graphically that the first-order condition of marginal revenue equals marginal cost is a necessary, but not sufficient, condition for profit maximization. this is presented here for the special case of perfect competition. because a perfectly competitive firm’s demand schedule is perfectly elastic, its marginal revenue function is modeled as a horizontal line. fulfillment of the general rule that the slope of the marginal cost curve exceeds that of the marginal revenue curve necessarily requires that the marginal cost curve have a positive slope at its point of intersection with the horizontal (zero slope) marginal revenue curve. shown in figure 1, marginal revenue equals marginal cost at both q1 and q2. 4 given favorable demand conditions, a competitive firm in the short run will find its total revenue exceeding total cost at its best output level. its profit is maximized at output level q1, where the first-and second-order conditions are fulfilled. 4 throughout this paper “linear” demand conditions are assumed for the perfect-and imperfect-competition models analyzed. an exception will be made in the last case discussed, where nonlinear demand conditions will be assumed. 39 journal for economic educators, 11(2), fall 2011 the minimization of net revenue (loss maximization) is not economically relevant given the assumptions of rational seller behavior. nevertheless, it can easily be shown given the framework developed here. the two sufficient conditions for net revenue minimization are: (1) the first-order condition: marginal revenue equals marginal cost; and (2) the second-order condition: the slope of marginal revenue curve exceeds that of the marginal cost curve at their point of intersection. in perfect competition, the second-order condition necessarily implies that the marginal cost curve is decreasing (negative slope) at its point of intersection with the horizontal (zero slope) marginal revenue curve. in figure 1, net revenue minimization occurs at figure 1: perfect competition – profit maximization, loss minimization at output level q2, where the first-and second-order conditions are met. 5 5 the rationale of the second-order condition suggests the following. by increasing output beyond q1 more is added to total cost than to total revenue, since marginal cost exceeds marginal revenue. net revenue thus decreases. similarly, by decreasing output below q1 more is subtracted from total revenue. 40 journal for economic educators, 11(2), fall 2011 now suppose a competitive firm faces worsening short-run demand conditions. although the firm’s total revenue falls short of total cost at its best output level, net revenue will be maximized at that output level at which loss is minimized that is, where net revenue assumes its smallest negative value. in figure 2, this occurs at output level q1, where the first and second order conditions are met. figure 2: perfect competition – loss minimization profit maximization in imperfect competition concerning the conditions for net revenue maximization, the perfect competition model implies that the second-order condition requires marginal cost to be increasing when it intersects marginal revenue. this is just a special case of the general rule that the slope of the marginal cost curve must be greater than that of the marginal revenue curve at their point of intersection. the market structure of imperfect competition illustrates this general case. 41 journal for economic educators, 11(2), fall 2011 as treated in microeconomic textbooks, the basic approach generally used to illustrate an imperfectly competitive firm’s net revenue maximizing behavior is illustrated in figure 3. profit is maximized at output level q1. not only is the first-order marginal revenue equals marginal cost condition met, but so also is the second condition that the slope of the marginal cost curve exceeds that of the marginal revenue curve. this is because in the neighborhood of output level q1 marginal revenue has a negative slope, while the slope of marginal cost is positive. figure 3: imperfect competition – profit maximization, loss maximization given adverse demand conditions, an imperfectly competitive firm may find its total cost exceeding total revenue at its best output level. provided that total revenue is sufficient to cover total variable costs, the firm’s best short-run output would be that level at which its loss is minimized (net revenue maximized). figure 4 illustrates this case. at the firm’s best output, both the first-and second-order conditions are met: (1) marginal revenue equals marginal cost; (2) the slope of the marginal cost curve is greater than that of the marginal revenue curve. although total revenue falls short of total cost at this output, net revenue is still maximized. this is because total loss is minimized--total revenue falls short of total cost by the least amount. unlike the competitive firm case, profit maximization for an imperfectly competitive firm does not always require marginal cost to have positive slope when it intersects marginal revenue. because an imperfectly competitive firm’s demand schedule is downward-sloping, its marginal revenue curve is negatively sloped. for imperfect competition, it is possible that the 42 journal for economic educators, 11(2), fall 2011 figure 4: imperfect competition – loss minimization second-order condition is fulfilled when both the marginal revenue and marginal cost curves are negatively sloped. in the neighborhood of output level q1 in figure 5, the total cost and total revenue curves both increase at decreasing rates: both the marginal revenue and marginal cost curves are negatively sloped. at output levels immediately below q1, total revenue increases at a rate greater than total cost increases: marginal revenue exceeds marginal cost. a profit-maximizing firm benefits by expanding output until the differential is eliminated. at output levels immediately greater than q1, the total revenue curve increases at a rate less than that of the total cost curve. marginal cost now exceeds marginal revenue. the firm finds it advantageous to curtail its output until marginal revenue equals marginal cost. net revenue is thus maximized at output q1 where the first-and second-order conditions are met. as in the competitive firm case, the fulfillment of the first-order condition does not necessarily guarantee net revenue maximization under imperfect competition. should the slope of the marginal revenue curve be greater than that of the marginal cost curve at their point of intersection, the net revenue function would be minimized. the firm’s loss would be maximized. this is illustrated in figure 3 at output q2. given the assumption of net revenue maximization, however, a rational entrepreneur would not choose this extremum. 43 journal for economic educators, 11(2), fall 2011 figure 5: imperfect competition – profit maximization profit maximization: no-solution case the previous analysis involving net revenue maximization or minimization has been based on linear demand conditions facing a firm. this necessarily occurs under perfect competition and has been assumed to be the case under imperfect competition. however, under imperfect competition a linear demand schedule need not be assumed. and given this possibility, the first-order condition may not be achieved. a no-solution is therefore possible. consider the case of a demand schedule taking the form of a rectangular hyperbola. the nature of a rectangular hyperbola demand curve suggests that all of the rectangular areas associated with corresponding price and quantity levels are equal. the total revenue schedule is thus constant and is horizontal with respect to the quantity axis. the marginal revenue curve therefore coincides with the quantity axis since the slope of the total revenue schedule is zero at all output levels. figure 6 illustrates this point. facing a rectangular hyperbola demand schedule, a rational entrepreneur attempting to maximize net revenue would try to produce at that output level at which the firstand secondorder conditions are met. in this case there is no unique net revenue-maximizing output level. this is because no output level exists where the first-order condition of marginal revenue equals marginal cost is met. inspection of figure 6 reveals that at output levels greater than q1 the firm incurs a loss, while at output levels less than q1 the firm makes a profit. given a constant total revenue schedule, the firm would maximize net revenue by producing at that output where total cost is minimized. this occurs at output level zero. but at output level zero, total revenue also equals zero. therefore, the best output is the smallest positive output possible. 44 journal for economic educators, 11(2), fall 2011 given continuous rather than discreet cost curves, there exists no smallest positive level of output. thus, there exists no optimal level of output where the first-order condition is satisfied--a no-solution case occurs. although this no-solution case may be of little empirical relevance, it is intended to demonstrate that the conditions sufficient for net revenue maximization may not always be fulfilled. figure 6: imperfect competition – no solution case concluding remarks several years ago, our intermediate economics students were asked the following question: “if a firm operates at the output where mr = mc, will its total profit necessarily be maximized?” recalling what they learned in their microeconomics principles course, most of the students immediately responded with a yes. one student, however, recalled from his calculus course, that if mr = mc, profit could be maximized or minimized. why the confusion? this article reflects the view that the profit maximization hypothesis is not sufficiently illustrated in intermediate textbooks in microeconomics, mathematical economics, and managerial economics. therefore, we prepared a primer on profit maximization, combining verbal, graphical, and mathematical analysis to illustrate a topic that is “religiously” taught in college classrooms. by portraying the firstand second-order conditions for profit maximization, under conditions of increasing and decreasing marginal cost, and under perfect 45 journal for economic educators, 11(2), fall 2011 competition and imperfect competition, this article attempts to provide a comprehensive approach that clarifies this important concept. this analysis is intended for the use of all students taking intermediate courses in microeconomics, mathematical economics, and managerial economics. for those students in graduate programs in economics and mba programs, it serves as a helpful overview of economic optimization. for instructors who wish to elaborate on the profit maximization hypothesis beyond what is covered in textbooks, this article serves as a useful supplement. references bernheim, douglas and michael whinston, 2008. microeconomics. mcgraw-hill/irwin. besanko, david and ronald braeutigam. 2005. microeconomics. john wiley and sons, inc. browning, edgar and mark zupan. 2009. microeconomics: theory and applications. john wiley and sons, inc. case, karl and ray fair. 2007. principles of microeconomics. pearson/prentice hall. dadkhah, kamran.2007. foundations of mathematical and computational economics. thomson/southwestern. dowling, edward. 2001. introduction to mathematical economics. schaum’s outlines/ mcgraw-hill. eaton, curtis, diane eaton, and douglas allen. 2005. microeconomics. theory with applications. pearson/ prentice hall. krugman, paul and robin wells. 2009. economics. worth publishers. mankiw, gregory. 2009. principles of microeconomics. southwestern/ cengage learning. nicholson, walter and christopher snyder. 2007. intermediate microeconomics and its applications. thomson/ south-western. perloff, jeffery. 2009. microeconomics. pearson/addison wesley. pindyck, robert and daniel rubinfeld. 2009. microeconomics. pearson/prentice hall. silberberg, eugene and wing suen. 2001. the structure of economics: a mathematical analysis. mcgraw-hill/irwin. simon, carl and lawrence blume. 1994. mathematics for economists. w. w. norton & company. sydsaeter, knut and peter hammond.2006. essential mathematics for economic analysis. prentice hall/financial times. 32 journal for economic educators, 9(1), summer 2009 the effect of scrambling test questions on student performance in a small class setting della l. sue1 abstract a technique used by instructors is to prepare several versions of the same exam in which the multiple-choice questions appear in a different order in each version. this makes it difficult for a student to obtain answers from another student while keeping the level of difficulty of the exam constant across students since every version contains the same questions. if the order in which questions are arranged in an exam has an effect on a student’s performance on the exam, then changing the sequence order may bias student performance. previous statistical analyses of data collected from economics courses provide mixed results on whether scrambling the content order biases a student’s test score. in this paper, i investigate the effect of scrambling test questions on student performance in principles of macroeconomics courses and principles of microeconomics courses that are characterized by small class size. key words: pedagogy, testing, and student performance jel classification: a22 introduction in an effort to reduce the benefits of cheating on an exam, a technique used by instructors is to prepare multiple versions of the same exam in which the multiple-choice questions appear in a different order in each test version. this makes it difficult for a student to obtain correct answers from another student while keeping the level of difficulty of the exam constant across all students since every version contains the same questions. many computerized test banks offer question scrambling as a standard feature. this makes it easy for the instructor to prepare multiple versions of the same test questions and its standard availability highlights the popularity of the technique. an assumption of this technique is that the level of difficulty of an exam is determined by the level of difficulty of the questions being asked in the exam and not the order in which the questions are asked. however, does content order affect a student’s performance on an exam? in particular, if the content sequence of the questions on an exam is in the same order in which the material was covered in the course, then a student might perform better on the exam as a result of order association. this would suggest that content order matters and a randomly scrambled version of the same test could result in weaker student performance on the test. to what extent does the order in which questions are arranged in an exam affect a student’s performance? if there is an effect, then the degree of difficulty of the exam might not be constant across all students, even though the different versions of the exam contain the same questions. although the intention of the instructor is to be fair to all 1 assistant professor of economics, department of economics, accounting & finance, school of management, marist college, 3399 north road, poughkeepsie, ny 12601-1387 33 journal for economic educators, 9(1), summer 2009 students by reducing the benefits to cheating, scrambling the order of the questions might instead unfairly put some students to a grade disadvantage. this paper empirically explores this issue with data collected from two introductory one-semester undergraduate courses, which were principles of macroeconomics and principles of microeconomics. literature review the question of student performance being affected by the content order of multiple-choice questions in an exam has been previously explored. the earliest studies were applied to social sciences other than economics, such as psychology and geography. although the number of studies is not voluminous, i am limiting this literature review to studies that pertain to economics courses so as not to confound the issue with differences between disciplines. taub and bell (1975) conducted one of the earliest studies that addressed the issue at hand. using results from an undergraduate principles of economics class, they performed a regression analysis in which the sum of scores on previous exams and a dummy variable for an exam form in which the questions were randomly arranged were regressed on the final exam score. their results indicated that the effect of the exam form on the exam score was statistically significant and that the students who took the form in which the questions were randomly arranged scored lower than their classmates whose exam contained the same questions arranged in content order. however, two subsequent studies lead to opposite results. gohmann and spector (1989) found that scrambling questions did not adversely affect student performance in a principles of macroeconomics class. they suggest including a measure of student intelligence, such as grade point average or sat score, as an additional factor that might influence student performance but were precluded from doing so by the unavailability of the data. the study by bresnock, graves, and white (1989) similarly concluded that question order had no effect on test performance. however, using data from undergraduate principles of economics classes, their analysis also considered the effect of the distribution of the responses within a multiple-choice question and they found that altering the response pattern of answers could affect the degree of test difficulty as measured by the test scores. this suggests that if an instructor wants to offer different forms of an exam to minimize the benefits of student cheating without altering the difficulty of the exam, the instructor should scramble the test questions but not scramble the choices within each question. carlson and ostrosky (1992) offer a contrasting suggestion in creating variations in an exam. their study was based on data collected from a principles of microeconomics class. they look beyond the effect of question order on the mean (average) test score and address the possibility that question order affects the distribution of exam scores. while they found that scrambling the order of the questions could result in a lower test score, they recommend that the order of the responses within a multiple-choice question be scrambled instead of scrambling the questions as a method of reducing the benefits from cheating. in a more recent study, doerner and calhoun (2009) found that the content order of the questions had a statistically significant effect on the exam score. both sequentially ordered questions and reverse sequentially-ordered questions resulted in a higher grade, 34 journal for economic educators, 9(1), summer 2009 on average, with the former ordering of questions having a larger impact. the data was collected from three courses. two courses were introductory macroeconomics and the third course was introductory microeconomics. sue (2006) found that scrambling the content order of multiple-choice questions did not affect a student’s grade. the conclusion was that offering different versions of an exam, in which each version contains the same questions, to reduce the gain from cheating does not bias student performance on the exam. data used in the analysis was from a one-semester intermediate microeconomics course. an intermediate-level course was chosen because it was felt that students in this course were more uniformly interested in economics than are students in a principles course. all of the students had previously taken a principles of microeconomics course, most had taken a principles of macroeconomics course, and some students had taken an economics elective course. a few had previously taken an intermediate macroeconomics course. thus, in summary, empirical examinations of the effect of scrambling the content order of multiple-choice questions on a student’s performance on the exam indicate mixed results. all of the courses used in these studies were reported to have been large lecture classes. there were 88 students in the study by taub and bell (1975), approximately 300 students in the class used by bresnock, graves, and white (1989), 191 students in the analysis by gohmann and spector (1989), and 400 students in the section used by carlson and ostrosky (1992). in the study by doerner and calhoun, all three courses had a large class format, with a maximum enrollment of 450 students each. in the analysis by sue (2006), data was gathered from an intermediate level microeconomics course in which it was presumed that there is more uniformity in the students’ interest in the subject but the class size was small (28 students at the beginning of the course) in comparison with the studies conducted with principles-level courses. the focus of the analysis in this paper is to test the effect of scrambling the content order of multiple-choice questions on a student’s performance on the exam at the principles-level of course material within a small class setting. the relevance of class size is expressed in a footnote by bresnock, graves, and white (1989): “the law of large numbers makes it unlikely that our results imply that one group of test takers is more able than the other. this might not be true for smaller classes, however” (page 244). one of the salient features of smaller class size is stronger interpersonal communication between the students and the instructor as well as between students. this has the potential to weaken an advantage of recalling information if the questions on an exam appear in the same content order as the material was covered in class. empirical methodology the principal inquiry is whether scrambling the content order of questions in a multiple-choice test introduces a bias in student performance on the test, consequently affecting the test grade. the relationship can be expressed as grade = f (content order of questions) the effect of the content order on the grade can be estimated with the following linear relationship yij = β0 + β1 xij + εij 35 journal for economic educators, 9(1), summer 2009 where yij is the test grade for individual i on test j and xij represents the content order of questions. xij is a binary variable that indicates whether the multiple-choice questions are presented in the same order in which the material was covered in the course or whether the order of the questions was presented in a scrambled sequence. β1 measures the effect of scrambling the order on the test grade. if content order matters and a student benefits from order association when the questions are presented in the same order in which the material was covered in the course, then the expectation is that β1 < 0 and the bias from scrambling can be estimated by the magnitude of the coefficient. the data data was collected in two one-semester undergraduate courses. the semester in which the data was collected for the principles of macroeconomics course was the spring 2006 semester. in the three class sections of the course that were sampled, the initial enrollment at the beginning of the semester was 24 students, 30 students, and 27 students, with a total enrollment of 81 students. in the following fall 2006 semester, data was collected for 87 students who were initially enrolled in 3 class sections of the principles of microeconomics course, with individual section enrollments of 29 students, 30 students, and 28 students. in each class section, the enrollment was between 25 and 30 students, which is smaller than the class sizes of the previous analyses included in the literature review. all of the course sections used in this analysis were taught by the same instructor. for each course, the course material was identical across all sections. both courses are required of all students who are majoring in economics, business, or accounting, as well as those who minor in economics. either course can also satisfy a distribution requirement in social sciences, as part of the liberal arts foundation of the college. as a result, although a large proportion of the students in the courses choose a major in economics, business, or accounting, there is a wide range of interests and other majors among the students. the implication is that students in this course are not uniformly interested in economics. most of the students take these courses early in their undergraduate studies, as either freshmen or sophomores. unlike upperclassmen who become academically experienced, many of the students in these courses are learning to navigate through courses at the college level. being novices, content order of course material could be an important aspect of a student’s ability to understand, analyze, and recall the material, thus affecting a student’s performance on an exam. as part of the course requirements, the students were given two exams during the semester and a final exam at the end of the course. for each exam and the final, two versions of the exam were used, each containing the same multiple-choice questions: one form contained questions in the same content order in which the material was covered during the semester and the other form contained the same questions in a randomly scrambled order that was generated by the test bank software provided by the textbook publisher. the exams were randomly distributed among the students at the beginning of the exam session. the distribution of exams by form (“version”) is given in table 1 for each course. panels a through c pertain to the principles of macroeconomics course and 36 journal for economic educators, 9(1), summer 2009 table 1. distribution of versions by exam and course principles of macroeconomics panel a exam2 exam1 (blank) version 0 version 1 total (blank) 3 2 3 8 version 0 4 21 15 40 version 1 1 15 17 33 total 8 38 35 81 panel b final exam1 version 0 version 1 total (blank) 8 8 version 0 23 17 40 version 1 11 22 33 total 42 39 81 panel c final exam2 version 0 version 1 total (blank) 5 3 8 version 0 21 17 38 version 1 16 19 35 total 42 39 81 principles of microeconomics panel d exam2 exam1 (blank) version 0 version 1 total (blank) 1 2 2 5 version 0 16 25 41 version 1 1 25 15 41 total 2 43 42 87 panel e final exam1 (blank) version 0 version 1 total (blank) 1 3 1 5 version 0 29 12 41 version 1 1 25 15 41 total 2 57 28 87 panel f final exam2 (blank) version 0 version 1 total (blank) 1 1 2 version 0 30 13 43 version 1 1 26 15 42 total 2 57 28 87 key: version 0-on the exam, the multiple-choice questions were presented in the same content order in which the material was presented in the course. version 1-on the exam, the multiple-choice questions were presented in a randomly scrambled order. blank-neither version of the exam was taken. 37 journal for economic educators, 9(1), summer 2009 panels d through f pertain to the principles of microeconomics course. each panel provides the distribution among students for each version between two of the three exams given in the course, as indicated, as well as the number of students who took a particular version of a specific exam. for example, in panel a, for the first exam in the principles of macroeconomics course, 40 students took a content-ordered exam (“version 0”) and 33 students took a content-scrambled exam (“version 1”). eight students took neither version (“blank”), generally because they missed the exam on the day it was administered and were given a makeup exam that contained different questions. for the second exam of the course, 38 students took a content-ordered version and 35 students took a contentscrambled exam. similarly, there were eight students who were administered a different exam for exam2. twenty-one students took the content-ordered version of both exam1 and exam2, 17 students had scrambled versions for both exam1 and exam 2, 15 students had a scrambled exam for exam1 but a content-ordered exam for exam2, and 15 students experienced the opposite combination for the two in-class exams. in the remaining panels of table 1, corresponding distributions are provided for the two other combinations of the exam pairs as well as for the other course. a chi-square test of the joint distribution in each panel implies that there is no statistically significant relationship at a 95% level of confidence in the distribution of students who took the content-ordered version and those who took the scrambled version between each pair of exam combinations except for panel d. however, for panel d, the chi-square test was not statistically significant at a 99% level of confidence. thus, the exam versions were randomly distributed among the students at the beginning of each exam and there does not appear to be any systematic grouping among versions between exams. the average score on the multiple-choice questions for each version for all three exams is presented in table 2. except for the second exam in the principles of macroeconomics course and the final exam in the principles of microeconomics course, the average score was lower for those who took the scrambled order version. however, a statistical test of the difference between two means for each exam implies that we cannot reject the null hypothesis that there is no difference between the average scores by version for all three exams in both courses. table 2. t-test of the difference between average grade by version of the exam principles of macroeconomics principles of microeconomics exam1 version 0 version 1 exam1 version 0 version 1 average grade 97.3750 93.4848 average grade 112.4390 110.7317 number of observations 40 33 number of observations 41 41 hypothesized difference 0 hypothesized difference 0 t stat 1.1242 t stat 0.4051 p (t<=t) two-tail 0.2647 p (t<=t) two-tail 0.6865 t critical two-tail 1.9939 t critical two-tail 1.9901 (continued) 38 journal for economic educators, 9(1), summer 2009 exam2 version 0 version 1 exam2 version 0 version 1 average grade 103.2895 106.2857 average grade 110.5814 106.3095 number of observations 38 35 number of observations 43 42 hypothesized difference 0 hypothesized difference 0 t stat -0.5837 t stat 1.0338 p (t<=t) two-tail 0.5612 p (t<=t) two-tail 0.3042 t critical two-tail 1.9939 t critical two-tail 1.9890 final version 0 version 1 final version 0 version 1 average grade 152.1429 148.8462 average grade 132.8947 133.0357 number of observations 42 39 number of observations 57 28 hypothesized difference 0 hypothesized difference 0 t stat 0.5435 t stat -0.0211 p (t<=t) two-tail 0.5883 p (t<=t) two-tail 0.9832 t critical two-tail 1.9905 t critical two-tail 1.9890 key: version 0-on the exam, the multiple-choice questions were presented in the same content order in which the material was presented in the course. version 1-on the exam, the multiple-choice questions were presented in a randomly scrambled order note: exam1 and exam2 each contained 30 multiple-choice questions, each of which was worth 5 points. the final exam contained 40 multiple-choice questions, each of which was worth 5 points. t-test assumes equal variances. to test whether the content order of multiple-choice questions affects a student’s performance on an exam, regression analysis was performed. the null hypothesis is that scrambling the content order of questions in a multiple-choice test does not affect student performance on the test. since there is no statistical difference between average scores by version for each of the three exams for both courses, the following specification can be estimated using the combined data across the three exams and both courses. grade = b0 + b1 version + b2 dcourse + b3 dexam1 + b4 dexam2 + b5 dcourseexam1 + b6 dcourseexam2 + b7 dcourseversion + b8 dexam1version + b9 dexam2version + b10 dcourseexam1version + b11 dcourseexam2version the dependent variable was the multiple-choice score (“grade”). a dummy variable (“version”), which represented the content version of the exam that was taken by the student, was created as an explanatory variable. this variable assumed a value of 1 if the content order of the multiple-choice questions was the scrambled version and a 0 if the content order followed the sequence in which the material was presented in class. in order to allow for structural variation between the exams and courses, dummy variables were added to the regression specification. dcourse had a value of 1 if the observation was from the principles of microeconomics course and a value of 0 if the observation was from the principles of macroeconomics course. observations from the first exam and the second exam had a value of 1 for dexam1 and dexam2, respectively, and a value of 0 otherwise. if both of those binary variables had a 0 value, 39 journal for economic educators, 9(1), summer 2009 the observation pertained to the final exam. the remaining binary variables are interaction terms between the course, exam, and content order version. the results of the regression are presented in table 3. the coefficients for version and all of the interaction terms with version are not statistically significant. on the other hand, the coefficients for the binary variables representing the course and exam are statistically significant. there are structural differences between the two courses and the three exams, but the null hypothesis that scrambling the content order of questions in a multiple-choice test does not affect student performance on the test is not rejected. table 3. ols regression results coefficients t stat intercept 152.1429 43.7548 version -3.2967 -0.6579 dcourse -19.2481 -4.2003 dexam1 -54.7679 -11.0008 dexam2 -48.8534 -9.6831 dcourseexam1 34.3121 5.0546 dcourseexam2 26.5400 3.9058 dcourseversion 3.4377 0.4760 dexam1version -0.5934 -0.0814 dexam2version 6.2929 0.8645 dcourseexam1version -1.2548 -0.1225 dcourseexam2version -10.7058 -1.0501 r square 0.4124 number of observations 479 educators presume that a student’s performance on an exam is an indicator of how well the student comprehends the material. a student’s comprehension of the material reflects, in part, the effort put forth by the student to learn the material, the student’s innate learning ability, random chance, and perhaps the content order of the questions on the exam. gohmann and spector (1989) discussed the inclusion of grade point average and sat scores as indicators of student intelligence. although the unavailability of this information precluded them from including it in their analysis, they speculated that their finding that content order has little effect on performance would not be changed with the inclusion of grade point average or sat scores. in sue (2006), the student’s grade point average was included in the analysis as a measure of ability. the results indicated a statistically significant correlation between grade point average and exam score, with no change in the finding that scrambling the order of multiple-choice questions does not adversely affect a student’s performance on an exam. in that study, the data was obtained from an intermediate microeconomics course. none of the students were freshmen so a grade point average was available for each student in the course. however, in the current analysis many of the students were first semester freshmen for which a grade point average was not yet available at the time of the course. alternatively, an analysis based on the final exam can be conducted in which the student’s performances on the first exam and second exam in the course are included in the regression as controls for the student’s ability and effort. 40 journal for economic educators, 9(1), summer 2009 grade = b0 + b1 version + b2 mc1 + b3 mc2 + b4 dcourse + b5 dcourseversion + b6 dcoursemc1 + b7 dcoursemc2 “mc1” is the exam score on the multiple-choice section of the first exam and “mc2” is the exam score on the multiple-choice section of the second exam.2 the results are presented in table 4. recall that the data pertains to the final exam for both courses. the coefficients on version and dcourseversion are not statistically significant, again inferring that scrambling the content order of the questions does not adversely affect student performance on the exam. the coefficients on previous exam scores are statistically significant, as is the coefficient on dcourse. the coefficient on dcourse is negative, implying that performance on the final exam in the principles of microeconomics course was weaker than in the principles of macroeconomics course, controlling for test version and performance on the first two exams. the coefficients on the interaction terms between course and performance on prior exams are not statistically significant. one explanation is that the negative effect of the course subject is cancelled by the positive effect of performance on prior exams. the assumption is that there is less variation in a student’s ability and effort between exams than there is between students. thus including a student’s performance on prior exams within the same course could control for innate characteristics of the student. the dummy variable for course and the corresponding interaction terms were included to allow for structural variation. table 4. ols regression of grade on version and prior exam grades coefficients t stat intercept 50.3550 2.9365 version -3.3355 -0.6904 mc1 0.6517 3.7617 mc2 0.3891 3.3881 dcourse -53.4003 -2.2130 dcourseversion 7.5193 1.0706 dcoursemc1 -0.0164 -0.0719 dcoursemc2 0.1994 0.9825 r square 0.4572 number of observations 165 conclusions this analysis addresses the question of whether the content order of multiplechoice questions affects student performance on an exam. based on the empirical results obtained in two one-semester undergraduate courses in principles of macroeconomics and principles of microeconomics, exam scores do not appear to be affected by the order in which the questions are presented in the exam. the results do not change when controls 2 in an alternative specification, “mc1” and “mc2” were replaced with “mcsum”, which is the sum of the exam scores on the multiple-choice sections of the first exam and the second exam. corresponding interaction terms were also included in the regression. the results, which were consistent with the results presented here, are available from the author on request. 41 journal for economic educators, 9(1), summer 2009 for student effort and ability are introduced into the analysis. this suggests that the technique of scrambling multiple-choice questions in order to reduce the benefits of student cheating during the exam can be done without risk of biasing student performance. the courses used in this study were conducted in a small class format, rather than in a large lecture style design that characterized the introductory level economics courses used in previous studies. the evidence suggests that any potential disadvantages from taking an exam in which the content order of the questions deviates from the order in which the material was taught is not apparent in a small class setting. references bresnock, anne e., philip e. graves, and nancy white. 1989. “multiple-choice testing: question and response position.” journal of economic education, summer. carlson, j. lon, and anthony l. ostrosky. 1992. “item sequence and student performance on multiple-choice exams: further evidence.” journal of economic education, summer. doerner, william m., and joseph p. calhoun. 2009. “the impact of the order of test questions in introductory economics” (working paper). economics educator: courses, cases & teaching, april 20, economics research network (ern), a division of social science research network (ssrn). gohmann, stephan f., and lee c. spector. 1989. “test scrambling and student performance.” journal of economic education, summer. sue, della lee. 2006.“the effect of test scrambling on student performance.” proceedings of the 2006 nbea annual conference, northeast business and economics association. taub, allan j., and edward b. bell. 1975. “a bias in scores on multiple-form exams.” journal of economic education, fall. abstract literature review empirical methodology the data conclusions references microsoft word jeefall06.doc journal for economics educators • volume 6 • number 2 • fall 2006 1 determinants of student achievement in principles of economics by cynthia mccarty, gene padgham, and doris bennett • abstract this paper seeks to identify factors that influence student learning in college macroeconomics and microeconomics courses. student and professor gender and personality type, college entrance exam scores, grade point average, class size, and whether the course was micro or macro were hypothesized as explanatory variables for student learning, which was measured by improvement on the test of understanding college economics iii (tuce). we found no statistically significant influence on student achievement from college entrance exam scores or class size. student gender, matching instructor and student gender, and gpa were significant explanatory factors for performance in principles of both microeconomics and macroeconomics. student improvement was significantly higher in macro than in micro. (jel-a22) introduction this paper seeks to analyze factors that influence student performance in college principles of macroeconomics and microeconomics courses. examining factors such as student performance, measured by the improvement on the test of understanding college economics iii (tuce iii), the personality types of the professor and student as determined by the keirsey temperament sorter, overall college grade point average, act score, gender of the student and the professor, and class size, we can draw some conclusions that will help economics instructors and advisors to better meet student needs. further, as professors of economics at a university where teaching is a top priority, we are especially concerned about the generally persistently relatively poor performance by women in principles of economics courses here and across the nation. having hypothesized that student performance is influenced by the previously listed factors, we evaluated our principles of macro and micro students at jacksonville state university (jsu) from spring semester 1997 through fall 2002. our five economics faculty members, three male and two female, participated in collecting data for a sample of 148 microeconomics students and 254 macroeconomics students. on the first day of class, the students took the tuce iii test. later in the semester they took the keirsey temperament sorter, and then during the final exam they took the tuce iii test again. we also recorded the students’ act scores (converting from sat scores as needed), gpa for college work completed prior to the economics course, gender, and class size, with enrollment under 40 designated as “small.” we provide a concise review of the literature on student achievement in principles of economics classes, highlighting research in which gender, personality, and class size have been factors influencing learning. we then provide a brief explanation of the different personality types and the tuce iii. next we describe the jsu data, our analysis, and the results. last we offer some possible explanations of our finding and propose some areas for future research. • cynthia mccarty, associate professor of economics, jacksonville state university, cmccarty@jsu.edu; gene padgham instructor of finance, jacksonville state university, gpadgham@jsu.edu; and doris bennett, professor of economics, jacksonville state university, dbennett@jsu.edu. journal for economics educators • volume 6 • number 2 • fall 2006 2 literature review research on improving the rather weak performance of students in college principles of economics has been extensive in recent years. in a paper advocating reform, becker (1997) noted that grades in economics classes are often lower than grades in other college departments. further, women have consistently performed worse than men. thus, a focal point for much of the research has been an attempt to explain the relatively low performance of women in the principles of economics courses, even after adjusting for math background, act, and gpa (anderson, benjamin and fuss 1994; ballard and johnson 2005; becker 1997; dynan and rouse 1997; greene 1997; ziegert 2000). borg and shapiro (1996) first noted that gender was not a significant factor in determining student performance once student personality type was introduced. using the myers-briggs type indicator to determine student and professor personality type and the course grade to determine the student’s mastery of the material, they found student gender to be insignificant. they also noted that matching student and professor personality types enhanced student performance. borg and shapiro (1996) and ziegert and sullivan (1999) concluded that certain broad personality types, introverts and thinkers, tend to perform better in economics courses. however, ziegert and sullivan (1999) disagreed that a student/professor personality match improved performance. although three of the four broad personality categories are distributed evenly between men and women, one is not: most women are “feelers,” sensitive, empathetic, and in search of harmony, while most men are “thinkers,” cool, analytical and logical (tieger and tieger 1998; ziegert 2000). given the gender-specific personality type, some argue that if matching personality types enhances learning, then women students would learn better from women professors (ballard and johnson 2005; dynan and rouse 1997; jensen and owen 2001). however, the reality is that economics remains a field dominated by men. in 2000 less than one-third of undergraduate degrees and doctorates in economics were awarded to women (ballard and johnson 2005), while in 1994 only 11 percent of female economics professors were tenured associates (dynan and rouse 1997). ballard and johnson (2005) found that women tend to have low expectations about their ability to succeed in principles of economics courses, with a major factor being women’s relatively low level of competency in math. several studies (ballard and johnson 2005; anderson et al. 1994; jensen and owen 2001) note the importance of math skills in determining student performance in economics. another area of concern in the economic education literature has been whether the traditionally large lecture classes for principles of economics provide a beneficial learning environment for the students. research by arias and walker (2004) found a significant negative relationship between class size and student performance. they did not find gender to be significant. in sum, most recent studies agree that gpa, math ability, college entrance exams (act or sat), and gender are the most important determinants of performance. males continue to maintain a grade “premium” (anderson et al. 1994) in principles of economics, while women have less confidence and lower expectations regarding their success in economics. personality types the keirsey temperament sorter is a 70-question multiple-choice questionnaire. although the keirsey test is both less complex and less expensive than the myers-briggs test, it also has a high degree of accuracy and is used interchangeably by many universities. the students’ answers determine what their preferences are on four scales: where the student likes to focus his/her attention (e or i); the way a student looks at things (s or n), the way a student likes to decide journal for economics educators • volume 6 • number 2 • fall 2006 3 things (t or f); and how the student deals with the outer world (j or p) (keirsey and bates 1984). the four areas of choice are described in more detail below (lawrence 1982): 1. e = extroversion. the person’s interest flows mainly to the outer world of actions, objects, and persons. or i = introversion. the person’s interest flows mainly to the inner world of concepts and ideas. 2. s = sensing. the person prefers to focus on the immediate, real, and practical. or n = intuition. the person prefers to focus on the possibilities, relationships, and meanings. 3. t = thinking. the person makes decisions objectively, impersonally, logically. or f = feeling. the person bases decisions primarily on values, subjectively. 4. j = judgment. the person prefers to live in a planned and orderly way, having things settled. or p = perception. the person prefers to live in a spontaneous, flexible way, preferring to keep options open. we measured student learning by giving all of our principles students the test of understanding in college economics, 3rd edition, (tuce iii) exam at the beginning and end of the semester and then calculating the difference. the tuce iii for microeconomics and the tuce iii for macroeconomics consist of 33 multiple-choice questions, written by a committee of respected economists. widely used as an assessment of principles of economics courses, roughly 70 percent of the questions are designed to assess student aptitude in applying economics to solving problems (saunders 1991). since 1968 becker (1997) has found that the only consistently significant variables to influence post-tuce scores are aptitude measures, such as the pre-test and the sat and act. departing from becker’s measure of student performance by using the tuce exam, borg and shapiro (1996), anderson et al. (1994), arias and walker (2004), ballard and johnson (2005), jensen and owen (2001), and ziegert and walker (1999) chose instead to use grades to measure performance in economics (although ziegert and walker also used the improvement on the tuce and post-tuce). they claimed that the tuce is no more objective than an individual professor’s own tests and that the tuce reflects the personality types of the professors who composed it. they also found that women earned better overall course grades while men scored significantly higher on the post-tuce exam. although their arguments have merit, our goal was to measure the level of improvement in the course, not just the final grade. in order to improve our teaching of economics, we believe that whether a student comes in weak or strong in economics on the first day of class, our success in teaching should be based on how much that student has improved by the end of the course. methodology the sample consists of observations on 148 students in principles of microeconomics and 254 students in principles of macroeconomics courses from spring 1997 through fall 2002. students in each section were given the tuce on the first day of class and then again on the day of the final exam. student learning in the course was measured as the difference between the tuce post-test and pre-test. five professors participated in the study, two women and three men. student achievement in economics, represented by improvement on the tuce (diff) was hypothesized to journal for economics educators • volume 6 • number 2 • fall 2006 4 be determined by student and professor gender, class size, student effort and aptitude, student and professor personality, the professor teaching the course, whether student gender and/or personality were the same, and whether the course was macro or micro. the variables are displayed and defined in table 1. table 1: definitions of the variables variable name definition diff improvement on the tuce, the difference between the pre-test and post-test scores, and the dependent variable sgen student gender, 1 if student is male, 0 if female pgen professor gender, 1 if male, 0 if female size class size, 1 if large (40 or more students), 0 if small (less than 40 students) act student’s score on the american college test gpa student’s grade point average macro 1 if the student was enrolled in macroeconomics, 0 if microeconomics per variables dummy variables representing the 16 personality types identified by the keirsey temperament sorter (estj, estp, etc.) or dummy variables representing the four personality dimensions; e versus i, s versus n, t versus f, or j versus p ssex matching professor and student gender, 1 if same gender, 0 if different gender sper matching professor and student personality type, 1 if same personality type, 0 if not pf dummy variables for the different professors, 1–5 macro interactions interactions between the course and personality types act score is a measure of the student’s ability. gpa is a measure of how much effort the student has put into his or her studies. size is small if the section had less than 40 students, the average class size in the sample. small class size, act, gpa, matching gender (ssex), and matching personality (sper) between student and teacher are hypothesized to have a positive effect on performance. the effect of personality (per) on performance was measured in one specification of the regression model using the four personality dimensions, i.e., introversion versus extroversion, sensing versus intuition, thinking versus feeling, and judgment versus perception. the 16 personality types formed from the four keirsey preference dimensions (estj, estp, isfj, etc.) were used in another specification of the model. student gender, personality, and the mean diff for each of the 16 personality types for the entire sample are shown in table 2. two of the professors, a man and a woman, were estj; another two, also a man and a woman, were esfj; and the fifth professor, a man, was istj. the mean and standard deviation diff for selected subsamples of selected independent variables are shown in table 3. when the sample was divided into micro and macro, the macro students’ improvement averaged 0.7 points higher than for those in micro. the mean diff for male students in the sample was only slightly higher (0.03 points) than that of the female students. the average improvement for students in small classes was also only slightly higher than for those in the larger sections. extroverted, intuitive, thinking, and perceiving students had slightly higher diffs than introverted, sensing, feeling, and judging students. journal for economics educators • volume 6 • number 2 • fall 2006 5 table 2: student gender and personality personality type men women total mean (standard deviation) diff estj 37 38 75 4.15 (2.55) estp 5 3 8 3.63 (1.41) esfj 31 50 81 4.30 (2.44) esfp 5 5 10 4.50 (2.72) entj 12 10 22 5.41 (2.61) entp 6 4 10 3.60 (2.22) enfj 10 16 26 5.65 (3.58) enfp 13 23 36 4.00 (2.53) istj 20 16 36 4.81 (3.45) istp 1 1 2 3.00 (2.24) isfj 16 38 54 3.81 (2.62) isfp 1 2 3 7.67 (2.09) intj 4 7 11 5.36 (3.17) intp 2 2 4 3.25 (2.22) infj 7 11 18 4.28 (3.16) infp 2 4 6 4.17 (4.07) totals 172 230 402 table 3: mean and standard deviation of diff for selected independent variables variable mean diff standard deviation number of observations macro 4.63 2.86 254 micro 3.96 2.58 148 male students 4.42 2.59 172 female students 4.39 2.91 230 small class 4.42 2.79 158 large class 4.36 2.78 244 extroversion (e) 4.40 2.64 268 introversion (i) 4.34 3.05 134 sensing(s) 4.24 2.66 269 intuitive(n) 4.66 2.99 133 thinking (t) 4.44 2.77 168 feeling (f) 4.34 2.79 234 judgment (j) 4.06 2.56 79 perception (p) 4.46 2.83 323 journal for economics educators • volume 6 • number 2 • fall 2006 6 regression results the empirical model used in ordinary least squares estimation was diff = f(sgen, gpa, act, pgen, size, per, ssex, sper, pf, macro interactions). in the first estimation, which appears in table 4, per, the personality variable, was represented for each student as one of the 16 personality types determined by the keirsey temperament sorter. personality type infp and the fifth professor, pf5, were the omitted dummy variables; the minitab software package automatically removed personalities intp, isfp, and istp and one of the professors, pf2, because they were “highly correlated with other x variables.” in the original estimate, gpa and the interaction variable for personality type enfj in the macroeconomics sections were positive and significant. however, the variance inflation factors indicated the presence of multicolinearity, so backward stepwise regression, with alpha of 0.15, was used to find the best regression, which is shown in the last three columns of table 4. table 4: regression results for 16 personality types original estimate stepwise estimate independent coefficient p-value vif coefficient p-value vif variable constant 1.259 0.396 1.395 0.046 sgen 0.502 0.205 2.1 0.559 0.132 1.9 pgen -0.301 0.598 2.4 size -0.173 0.621 1.6 act 0.036 0.363 1.8 gpa 0.615 0.025 1.8 0.824 0.001 1.1 macro 0.225 0.777 7.9 estj 0.077 0.952 13.7 estp 0.042 0.977 2.3 esfj 0.079 0.952 15.4 esfp 0.554 0.697 2.7 entj 0.683 0.669 7.3 entp -1.138 0.560 5.1 enfj -0.571 0.716 8.2 enfp -1.151 0.437 9.8 -1.617 0.075 3.8 istj 0.933 0.517 9.3 isfj -0.841 0.531 11.5 -0.773 0.056 1.1 intj 1.004 0.467 2.8 infj 0.150 0.907 3.9 pf1 -0.436 0.586 1.3 pf3 0.271 0.747 1.5 pf4 1.501 0.235 1.3 samesex 0.631 0.107 2.0 0.618 0.093 sameper 0.215 0.632 1.8 estj-mac -0.467 0.642 5.4 esfj-mac -0.074 0.941 6.0 entp-mac 0.598 0.768 3.9 enfj-mac 2.971 0.041 5.2 2.351 0.001 1.0 entj-mac 0.520 0.729 4.5 1.211 0.087 1.0 enfp-mac 1.434 0.270 5.8 1.976 0.054 3.7 istj-mac -0.664 0.594 5.0 isfj-mac 0.253 0.817 5.4 r 2 = 13.2% n = 402 r 2 = 10.4% n = 402 journal for economics educators • volume 6 • number 2 • fall 2006 7 in the stepwise estimate, gpa and matching gender for student and professor had significant, positive effects. students with personality types enfp and isfj had significantly lower diffs than other personality types. the interaction variables for personality types enfj, entj, and enfp were positive and significant, indicating that students with these personality attributes may learn more in macro than in micro. table 5: regression results for four personality dimensions original estimate stepwise estimate independent coefficient p-value vif coefficient p-value vif variable constant 0.477 0.659 0.686 0.354 sgen 0.552 0.149 2.0 0.679 0.066 1.8 pgen -0.486 0.398 2.5 size -0.126 0.711 1.5 act 0.018 0.641 1.7 gpa 0.663 0.013 1.8 0.76 0.001 1.1 macro 1.414 0.103 9.5 1.35 0.001 1.8 ei 0.436 0.648 11.0 sn 2.519 0.402 109.4 tf 0.423 0.378 3.1 jp 1.875 0.243 22.2 0.597 0.103 1.2 ssex 0.627 0.096 1.9 0.670 0.068 1.8 sper-ei -0.456 0.573 8.2 sper-sn -2.496 0.401 107.4 sper-tf 0.541 0.079 1.3 sper-jp -1.070 0.471 19.7 e-mac 0.340 0.591 5.3 s-mac -1.034 0.120 5.8 -1.157 0.002 1.9 t-mac -0.690 0.273 4.1 j-mac -0.345 0.658 8.3 pf1 -0.633 0.660 1.4 pf3 0.207 0.824 1.8 pf4 1.357 0.281 1.3 r 2 = 10.1% n = 402 r 2 = 7.7% n = 402 since seven of the 16 personality types had relatively few students, 10 or less, we also examined the influence of the four broader personality dimensions on student performance. these results in table 5 indicate a positive, significant influence on achievement from gpa and matching professor and student gender. students who were thinking, rather than feeling, scored significantly higher by 0.5 points. as with the specification with 16 personality types, multicolinearity was present, so backward stepwise regression, with alpha of 0.15, was used to find the best combination of independent variables, shown in the last three columns of table 5. in the restricted regression, student gender (sgen) was significant and positive, indicating that male students improved more than female students. gpa and matching student and professor gender (ssex) were significant and positive. macro was also significant and positive, signifying a higher level of achievement in macro than micro. students who were judging (planned and orderly) scored approximately 0.60 points higher than perceiving (spontaneous and flexible) students. the interaction variable for the sensing versus intuitive dimension was negative, which means that sensing students scored, on average, a point less in macro than the intuitive students. journal for economics educators • volume 6 • number 2 • fall 2006 8 conclusions and recommendations our results identify several factors that contribute to achievement in principles of both micro and macro. in both specifications of our model, the coefficient of gpa was positive and highly significant, while the coefficient of act scores was positive but not statistically significant. this result may indicate that, for our sample, effort is more important than ability in student learning in principles of economics. also in both specifications of the model, matching professor and student gender (ssex) was positive and significant. since there are more male professors in economics than female professors, this result may be helpful in explaining why male students, on average, outperform female students in economics. in the second specification of the model using the four personality dimensions, student gender (sgen) was positive and significant, indicating that male students improved more on the tuce, which is consistent with many other studies. in the second specification, students in macro outperformed those in micro, and judging students outperformed perceiving students. both specifications of the model found some difference in the type of student who performs well in macro versus micro. the macro interaction variables in both models predict that intuitive students outperform sensing students in macro. unlike most previous work, this research suggests that act scores and class size have no significant effect on learning. we recommend that college advisors consider this information when suggesting which course the students should take first (if there is no prerequisite) or, if only one economics course is required, which one is the best “fit” for the student. future research certainly one avenue of further study would be to repeat this study with a larger sample of students and professors. with only three personality types represented by our five faculty, we were limited in our ability to analyze the influence of matching student and professor personality types. in addition, other factors that affect student learning should be considered and analyzed. course type (lecture versus internet), math background, seating preferences, age of student, economics background, number of students who drop the course and their personalities, and student major are a few that might have significance. further, although we used the difference between the preand post-tuce tests to measure learning, future research should include other measures such as course grade average. one limitation of giving the post-tuce during the final exam was in motivating the students to do their best when many perceived no measurable benefit in performing well on it. (for example, some students with solid “a” averages tended to perform below expectations, given that a poor performance on the post-tuce could not lower their overall grade.) last, given our results that the personalities of those who excel in macro differ from those who excel in micro, the choice of which course to take first (or solely) is critical. future research should determine the number of schools where either macro or micro may be taken and where both must be taken, disregarding sequence. in these cases the advisory role is critical: an analysis of the factors the advisor considers before making a recommendation and the student’s performance would be meaningful. references anderson, gordon, dwayne benjamin, and melvyn fuss. 1994. “the determinants of success in university introductory economics courses.” journal of economic education 25(2):99–119. arias, j.j., and douglas walker. 2004. “additional evidence on the relationship between class size and student performance.” journal of economic education 4:311–329. journal for economics educators • volume 6 • number 2 • fall 2006 9 ballard, charles, and marianne johnson. 2006. “gender, expectations, and grades in introductory microeconomics at a u.s. university.” feminist economics 11:95–122. becker, william. 1997. “teaching economics to undergraduates.” journal of economic literature 35:1347–1373. borg, mary, and stephen shapiro. 1996. “personality type and student performance in principles of economics.” journal of economic education 27:3–25. bowerman, bruce l., and richard t. o’connell. 2007. busines statistics in practice. 4th ed. new york: mcgraw-hill. dynan, karen, and cecilia rouse. 1997. “the under-representation of women in economics: a study of undergraduate economics students.” journal of economic education 28:350–368. greene, b. 1997. “verbal abilities, gender, and the introductory economics course: a new look at an old assumption.” journal of economic education 28:13–30. jensen, elizabeth, and ann owen. 2001. “pedagogy, gender, and interest in economics.” journal of economic education 32:323–343. keirsey, d., and m. bates. 1984. please understand me: character and temperament types. 5th ed. del mar, calif.: prometheus nemesis. lawrence, g.d. 1982. people types and tiger stripes: a practical guide to learning styles. 2nd ed. gainesville, fl: center for applications of personality type. saunders, phillip. 1991. test of understanding in college economics. 3rd ed. national council on economic education, new york. tieger, barbara, and paul tieger. 1998. “what’s your personality type?” new woman (august):68–73. ziegert, andrea. 2000. “the role of personality temperament and student learning in principles of economics: further evidence.” journal of economic education 31:307–322. ziegert, andrea, and dennis sullivan. 1999. “does personality type explain the gender gap in economics?” in valuing us all: feminist pedagogy and economics, edited by april aerni and kimmarie mcgoldrick. ann arbor, university of michigan press, pp. 142–167. 14 journal for economic educators, 13(1), 2013 14 understanding cost and production using a cooperative learning technique in a microeconomics class prathibha v. joshi 1 abstract this article examines the cooperative learning technique of structured problem-solving that induces students to work together to understand cost-calculations in microeconomics. cooperative learning methods can help students better extract and interpret knowledge about economic issues and then display their command of that knowledge, thereby accomplishing some of hansen’s proficiencies. the article investigates the effectiveness of this technique by comparing exam results between students who engaged in cooperative learning and those who did not. i find that cooperative learning enhances academic outcomes and helps students retain their knowledge of the material. key words: cooperative learning, microeconomics jel classifications: a22 introduction this article investigates the efficacy of the cooperative learning technique called structured problem-solving to actively involve students in their own learning in a microeconomics course. this cooperative learning technique allows students to understand class materials better and encourages them to participate more fully in the course as a whole. it also leads students to exhibit the four key elements of effective learning: positive interdependence, individual accountability, equal participation, and simultaneous interaction. success is measured through exam results for students who participated in the exercise and those who failed to do so. students in a principles of microeconomics class at a small state college in middle georgia participated in this study. most of the students are business majors representing a mix of traditional and non-traditional students. the majority are traditional younger students coming to college right after high school. the class size is 25-30 students. the rest of this article proceeds as follows: section 2 discusses the various elements of cooperative learning. section 3 describes the specific elements of the structured problem solving method for the microeconomics course. section 4 reveals the results on student learning. section 5 offers conclusions and implications. the cooperative learning technique the structure of cooperative learning is the source of its effectiveness. unlike “group work” in general, cooperative learning is planned and constructed ahead of time. it is more complex than just placing students together in a group to discuss some issue or solve a problem 1 associate professor of economics, department of business and public service, gordon state college, 419 college drive, barnesville, ga, 30204; 678-359-5334; pjoshi@gordonstate.edu mailto:pjoshi@gordonstate.edu 15 journal for economic educators, 13(1), 2013 15 (johnson, johnson, and smith 1991). very specific rules are prepared in advance by the professor so that the students know what is expected of them, how they must accomplish their goals, and how they will be graded (millis and cottell 1998). in essence, the professor crafts an exercise that requires true cooperation among the students, thus allowing them to fully combine their efforts to produce an overall group result. such cooperation requires students to support one another as each member of the group tries to ensure that everyone else understands the assignment and contributes to the results (moore 1999; roger and johnson 1994). students are linked through their efforts on the assignment; each member shares in the work and the rewards of the group. students attain “positive interdependence,” the first key dimension of learning (kagan 1992, 4). students must continually communicate with each other to achieve the desired outcome (millis 2002). they no longer compete with each other but work together to attain a “common fate” in terms of grades (johnson, johnson, and smith 1991). the students engage in “cooperative” learning by helping one another; one student learns if others also learn (deutsch 1962). many instructors label group activities in class as cooperative learning even though the activities are not fully structured. in such cases, students seldom work cooperatively in that they do not truly interact with each other (roger and johnson 1994). these interactions are collaborative work rather than true cooperative learning (barkley, cross, and major 2005). the students may share their efforts, but rarely recognize their responsibility to ensure that they all understand the class material. often, only one or two members of the group do all of the work. cooperative learning, however, seeks to instill shared responsibility so that every student benefits from the work of the group. in accepting responsibility, the students attain “equal participation,” the second key dimension of learning (kagan 1994). no member is excluded from the group work for any reason; all students have the same opportunity to participate (smith 1996). no member is allowed to remain silent either, preventing free riders (roger and johnson 1994). cooperative learning activities embrace active learning in which students become full participants rather than a passive audience (kvam 2000). this leads to “simultaneous interactions,” the third key dimension of learning (kagan 1994). this occurs when the students engage in active give-and-take, sharing ideas with each other to attain a coherent result for the group (johnson, johnson, and smith 1991, 6). the students must connect the information received from the instructor or textbook to the actual work required. they see the class lessons in action rather than simply theoretical or abstract. since the students themselves put forth most of the effort to understand and apply the information, cooperative learning is “learner-centered” (fink 2003). for effective cooperative learning, researchers in the area suggest that students work in small groups (cooper and muerk 1990, 1; johnson, johnson, and smith 1991). in large groups, some students are easily overwhelmed by the number contributing to the assignment. small groups require all members to participate to some degree (occhipinti 2003); no one student can refuse to work, since such a refusal hampers the group’s ability to accomplish its work. the ideal group size is three to five. this allows the group to do the work if one member is absent but still puts considerable pressure on everyone to participate (millis 2002). small groups also allow for greater interaction that helps the group bond more fully. in a cooperative learning exercise, instructors supervise the students by walking around the classroom to ensure that the groups actually work on the assignment (johnson, johnson, and smith 1991). they also can help groups that are having difficulties by explaining particular 16 journal for economic educators, 13(1), 2013 16 concepts or providing hints. the instructors do not provide answers or lecture the students; they allow the students to do their own work while encouraging them with “positive reinforcement” (kagan 1992; kagan and kagan 1994). as they monitor the groups, instructors observe individual student participation. instructors use this information to evaluate the students’ group and individual work. cooperative learning allows for both “individual and group accountability,” the fourth key dimension of learning (johnson, johnson, and smith 1991, 6). the expectation is that the group will attain the desired result and that instructors will judge individuals by their contributions (kagan 1992). the group’s success depends on whether or not the group produces the desired result in the way required by the assignment. instructors judge individuals according to how well they understand the group’s result. individual accountability also may be tested by an exam, quiz, or further assignment in which students are held accountable for the work of their group. the benefits of cooperative learning are, first and foremost, that students learn the material in a more meaningful and longer-lasting fashion than they would through conventional methods such as lectures (johnson, johnson, and smith 1991; mckeachie 2002). secondly, students attain better grades. students tend to remember the material longer than usual (lord 2001) and understand other more intricate concepts introduced later in the course (johnson, johnson, and smith 1991). third, students learn to think by responding to situations in which they must contribute to their group’s work (millis 2002). the students develop a “higher level of reasoning” (roger and johnson 1994) and often gain a stronger ability to apply their knowledge to other issues and assignments. ideally, cooperative learning helps students become better learners with more improved study skills, more devotion to school, and a greater willingness to help others (slavin 1995). this article evaluates the effectiveness of cooperative learning in a microeconomics class according to how it enables students to attain hansen’s proficiencies. first, students should be able to “gain access to knowledge” (carlson, cohn, and ramsey 2002, 182). second, they must show “command of that existing knowledge” through summaries or analyses of issues (hansen 2001, 232). third, students ought to “display the ability to draw out the existing knowledge” by interpreting other sources of information dealing with the same issue (hansen 1986, 151). fourth, students then demonstrate that they can “use the knowledge to explore issues” (carlson, cohn, and ramsey 2002, 182), by applying that knowledge to other topics or issues. fifth, the students “create new knowledge” by presenting an original research paper or project (hansen 2001, 232). the cooperative learning exercise the exercise seeks to develop students’ skills at constructing cost structures, explaining key cost concepts, and interpreting data as they evaluate a firm’s decision-making process under specific cost conditions. students are expected to demonstrate three of hansen’s proficiencies: extract existing knowledge from a lecture and the textbook; show command of that knowledge while working on the exercise; and interpret and apply that knowledge by using cost calculations to explain and evaluate that firm’s decisions. the exercise is designed to help students become more effective problem solvers by becoming active learners. while many different techniques of cooperative learning are available, this exercise used the technique of structured problem-solving. students begin by working on the cost structure problem individually, then form pairs to check each other’s work, and then the pairs combine 17 journal for economic educators, 13(1), 2013 17 into groups of four to finish the problem. the groups must ensure that every member has the correct answers and understands those answers. in particular, each individual student solved problem 1a (see the appendix) individually. given information on tfc and tc, the students had to calculate the cost structures tvc, afc, avc, ac, and mc for each quantity level. after 20-25 minutes, each student then paired with the closest available student to compare answers and discuss their results. both students needed to have the same answer for 1a and subsequently solve 1b and 1c together. after another 5 minutes, this pair then combined with another pair in the classroom to form the group of four, which interpreted, evaluated, and derived the cost calculations for a firm’s decision making process as it solved problems 1d i, ii. group members also compared and discussed their answers. finally after 25 minutes, students in the group had to list all of their answers and give explanations for how they achieved their results. they then reported their solutions to the rest of the class. before the exercise began, students obtained clear instructions about the cost worksheet from the instructor. each student also received a calculator to assist them with the problemsolving on numbers 1a, 1b, and 1c. each group of four chose one of their members to act as the recorder and another to act as the summarizer. the classes did not have any rules on how students could choose their partners for the pairs or combine into the groups. as the instructor, i continually monitored the students at each step. i walked around the room to ensure that all students participated in the exercise and checked to make sure that they used the correct formulas for their calculations. if some of the students started to do the problems incorrectly or used unneeded formulas, i guided them back to the proper path by giving them encouragement or offering them hints. i did not tell them the answers even when directly asked to do so. if a group finished early, i asked them to graphically depict the cost curves, showing the relationships among the cost curves ac, avc, and mc, and to indicate the firm’s efficient point based on their results. once i turned on the lights of the elmo in the classroom, all groups were to finish their work quickly and remain quiet. i then called on groups to describe various parts of the problem and chose students at random to answer the specific questions from the problem. at the very end of class, i collected all of the worksheets so that i could grade them and hand them back at the next class period. a subsequent exam had the same problem as the cooperative learning exercise. the exercise had a strict structure that allowed the students to use their own effort to not only learn the material but also apply it. in doing so, it incorporated the four key dimensions of learning: positive interdependence, simultaneous interaction, individual accountability and group accountability. results although most of the students had little experience with such a cooperative learning exercise, they participated well in the activity. many groups attained the correct answers right away and could explain them fully to the class. i expected students who took part in the exercise to better retain and successfully apply what they had learned to later exams. to further evaluate these students, i looked at how well they solved the problem both in the cooperative learning exercise and on the next exam. see table 1. 18 journal for economic educators, 13(1), 2013 18 table 1: summary of results of students present for the co-operative learning exercise. variables s06 f06 s07 f07 s08 cl exercise grade 80% 100% 100% 100% 99.2% exam cl grade 76.47% 80.10% 75.42% 80.36% 77.60% no. of students 51 47 60 56 48 note 1: fall 2006 and spring 2008 had two sections of the principles of microeconomics. the rest of them had 3 sections of the principles of microeconomics. note 2: cl stands for cooperative learning table 1 indicates the average grade percentages of the students who came to class and participated in the cooperative learning exercise in the principles of microeconomics classes for the spring 2006, fall 2006, spring 2007, fall 2007, and spring 2008 semesters. students in every class section each semester could receive up to five points from the cooperative learning exercise as part of the regular course grading, with the exercise as a whole worth 5% of the overall course grade. to receive the entire five points, students needed to correctly answer the problem as individuals and in their groups, with the evaluations coming from observations of their work, correct reporting of results in class, and the graded worksheets they had turned in at the end of the exercise. on average, spring 2006 sections had an 80% success rate on the exercise, while students in subsequent semesters averaged a 100% success rate for the exercise, except for 99.2% in spring 2008. to discover how well these students retained their knowledge from the exercise and to test the effectiveness of the exercise, the same problem appeared on the next exam a few weeks later. table 1 reports the scores the students received on that exam question alone. the problem on the exam was worth up to 15 of the 100 points available in the spring 2006 class and 10 points for the rest of the semesters. students in each semester who had participated in the cooperative learning exercise scored an average of 76.47% in spring 2006, 80.10% in fall 2006, 75.42% in spring 2007, 80.36% in fall 2007, and 77.60% in spring 2008. i implemented the cooperative learning exercise for a few consecutive semesters to ensure consistent results. table 2: summary of results of students absent for the co-operative learning exercise. variables s06 f06 s07 f07 s08 cl exercise grade 0 0 0 0 0 exam cl grade 62.22% 44% 0 53.33% 50% no. of students 6 5 0 3 1 as a contrast, table 2 summarizes the exam results for those students who did not attend class on the day of the cooperative learning exercise, but attempted to answer the exercise problem on the exam. the results show that missing the exercise proved detrimental to their grades. these results suggest that participating in the cooperative learning exercise helped students to successfully learn the material and subsequently remember the content later in the semester. 19 journal for economic educators, 13(1), 2013 19 those students who did not come to class and therefore did not participate in the cooperative learning exercise act as a control group 2 for this study. this may create a selection problem, however. in particular, the students who missed the cooperative learning exercise might represent students who missed class regularly and consequently performed poorly on class exams and other assignments. lower scores by these students on the exam’s cooperative learning problem may not truly demonstrate the efficacy of the cooperative learning exercise. nevertheless, there are many reasons why students might miss a class and missing one class does not automatically mean that a student will perform poorly overall. to further examine the viability of the control group and the extent of any potential selection problem, table 3 shows the percent of students passing the overall course who were absent for the cooperative learning exercise compared to those who participated in the exercise. table 3: summary of results of students participating in the cooperative learning exercise who passed the overall course and those absent for the exercise who passed the overall course. variables s06 f06 s07 f07 s08 % of students passing the overall course 88.88% 93.87% 89.23 % 92.98% 97.82 % % of students absent for cl passing the overall course 80% 80% 0 33.33% 100% for spring 2006, fall 2006, and spring 2008, the differences in the percent of students passing the course between those absent and those present is not significant. fall 2007, however, had only three students who missed the cooperative learning exercise, only one of which passed the course successfully for a 33.33% rate. the small sample size contributes to this skewed result. table 4: t-test results of mean exam scores of students participating and not participating in the cooperative learning exercise. note 1: significance at 5% shown by **. note 2: ncl stands for not participating in cooperative learning 2 the control group was used only for one semester (spring 2007). the control group consisted of one class of 16 students who did not participate in cooperative learning but still did the exercise. the control group results showed an in-class exercise grade of 97.50% but an exam score of 43.12 %. variables cl ncl mean. 8.54 6.6 standard deviations. 2.89 4.18 no. of observations 262 15 t statistics 2.45 p-value 0.014** 20 journal for economic educators, 13(1), 2013 20 table 4 shows the results of the t-test conducted for the differences in mean exam scores of students who participated in the cooperative learning exercise and those who did not. the results indicate statistically significant differences between the two groups at the 0.05 level. a second concern involves the students’ prior exposure to the class material, which could account for the different scores on the cooperative learning problem on the exam. the suggestion is that those students present for the exercise might have done better on the exam by virtue of having seen the problem previously in the exercise. yet such prior exposure does not fully explain the results, particularly considering the substantial time lag between the exercise and the exam. furthermore, students who had not participated in the cooperative learning exercise and had not seen the problem in the class activity still could have been exposed to the formulas and examples in the textbook prior to the exam. certainly, the absent students did not have the same opportunity to develop their skills to solve the problem well and fully incorporate the information. this cooperative learning exercise required students to meet three of hansen’s proficiencies. first, the students needed knowledge about the problem gained beforehand through the lecture or the textbook. second, they demonstrated command over that knowledge simply by using the formulas correctly to produce the right answers. third, students showed that they could draw out the knowledge by applying it to a new problem that they had not encountered in the lecture or textbook. they were able to interpret the problem using their previous knowledge and to gain an additional understanding of cost structures based on this new example. conclusion cooperative learning is one of a vast repertoire of techniques teachers can use to enhance learning. it is also one of the most effective ways to ensure that students retain knowledge long after they have learned it. it can create what hansen called “true learning,” where students incorporate the information they receive into the knowledge they possess so that they can readily access it whenever they need to do so. it also encourages students to view themselves as part of a larger whole, the entire campus, rather than just as individual components because they have stronger and more meaningful interactions with other students. they can see how their learning is enhanced by the other students and how they themselves can aid those in need. in essence, cooperative learning can create a bond among the students through which they will work with one another to attain more academic and personal success. this study explored cooperative learning as it applied very specifically to an economics class, showing that a cooperative learning exercise led students to accomplish more in-depth and meaningful learning. this article suggests that educational institutions, both secondary and postsecondary, encourage their teachers to adopt more cooperative learning exercises in their own courses as a way to help students refine their ability to understand the course materials and develop better thinking skills that will benefit them long after they graduate. references barkley, elizabeth, and k. patricia cross, and claire howell major. 2005. collaborative learning techniques: a handbook for college faculty. san francisco, ca: jossey-bass. carlson, j. lon, raymond l. cohn and david d. ramsey. 2002. “implementing hansen’s proficiencies.” journal of economic education, 33(2): 180-191. cooper, j. and r. muerk. 1990. “student involvement in learning: cooperative learning and 21 journal for economic educators, 13(1), 2013 21 college instruction.” journal of excellence in college teaching, 1: 68-76. deutsch, m. 1962. “cooperation and trust: some theoretical notes.” in jones, m. r. (ed), nebraska symposium on motivation. lincoln, ne: university of nebraska press: 275319. fink, d. 2003. creating significant learning experiences: an integrated approach to designing college courses. san francisco, ca: jossey-bass. hansen, w. lee. 2001. “expected proficiencies for undergraduate economics majors.” journal of economic education, 32(2): 231-242. hansen, w. lee. 1986. “what knowledge is most worth knowing – for economics majors?” american economic review, 76(2): 149-152. johnson, david w., roger t. johnson, and mary beth stanne. 2000. cooperative learning methods: a meta-analysis. cooperaton.org. <http://www.co-operation.org/pages/clmethods.html>. accessed 10 june 2009. johnson, d.w., r. t. johnson, and k. a. smith. 1991. “cooperative learning: increasing college faculty instructional productivity.” ashe-eric higher education report no. 4. washington d.c.: the george washington university school of education and human development. kagan, s. 1992. cooperative learning. san juan capistrano, ca: resources for teachers, inc. kagan, s. 1994. cooperative learning. san clemente, ca: resources for teachers, inc. kagan, spencer and miguel kagan. 1994. “the structural approach: six keys to cooperative learning. in sharan, s. (ed), handbook of cooperative learning methods. westport, ct: greenwood press: 115-133. kvam, paul. 2000. “the effect of active learning methods on student retention in engineering statistics.” the american statistician, 136-140. lord, thomas. 2001. “101 reasons for using cooperative learning in biology teaching.” the american biology teacher, 63(1): 30-38. mckeachie, w. j. 2002. teaching tips: strategies, research, and theory for college and university teachers. boston: houghton mifflin company. millis, barbara. 2002. “enhancing learning – and more! – through cooperative learning.” idea center paper #38. millis, barbara and phillip cottell. 1998. cooperative learning for higher education faculty. phoenix, az: american council on education and greenwood press. moore, r. l. 1998. “teaching introductory economics with collaborative learning lab component.” journal of economic education, 29: 321-329. occhipinti, john. 2003. “active and accountable: teaching comparative politics using cooperative team learning.” ps: political science and politics, 36(1): 69-74. roger, t. and david w. johnson. 1994. “an overview of cooperative learning.” in thousand, j. and a. nevin (eds), creativity and collaborative learning. baltimore: brookes press: 31-44. slavin, robert. 1995. cooperative learning: theory, research, and practice. upper saddle river, nj: allyn & bacon smith, k.a. 1996. “cooperative learning: making ‘group work’ work.” in sutherland, t. e. and c. c. bonwell (eds), using active learning in college classes: a range of options for faculty. new directions for teaching and learning, no. 67. san francisco, ca: jossey-bass: 71-82. http://www.co-operation.org/pages/cl-methods.html http://www.co-operation.org/pages/cl-methods.html 22 journal for economic educators, 13(1), 2013 22 appendix cost exercise 3 : 50 minutes. 1. suppose the total fixed cost (tfc) of an abc lawn mowing company is $2000.00 and the following schedule for total cost is given. a. write the cost formulas and calculate total variable cost (tvc), average fixed cost (afc), average variable cost (avc), average total cost (atc) and marginal cost (mc) for each quantity. b. what kind of cost does not depend on the quantity of output? c. what is the cost of producing an extra unit of output called? why is it important to know this cost? d. what is the efficient scale of the lawn mowing company? i. what condition must be satisfied for the lawn mowing company to be at its most efficient scale? ii. choose an output level that is either above or below the efficient scale you have identified in d. explain why this is not efficient. lawns mowed (q) tc tfc tvc atc afc avc mc 1 2500 2 2800 3 3000 4 3160 5 3340 6 3540 7 3780 8 4080 9 4410 10 4770 11 5190 12 5760 13 6630 14 7800 15 9800 3 a standard cost problem from a principles of microeconomics textbook. 7 journal for economic educators, 10(2), fall 2010 7 why does no-one teach undergraduate macroeconomics using the dynamic stochastic general equilibrium model? paul turner1 abstract this paper argues that the reason that the dsge model, which has proved so successful in convincing academic economists of its value, has made relatively few inroads into the undergraduate teaching sphere is that it fails to allow for the development of higher order educational objectives in students. the qualities which make it attractive to academics, such as the purity of its assumptions and its sound microeconomic basis, have little resonance with undergraduate students. instead, the qualities of the neo-keynesian model, such as its ability to incorporate ‘real-world’ institutional features and the ease with which it can be used to develop higher order skills and applications, prove much more attractive. key words: macroeconomics, dsge models, pedagogical approaches. jel classification: a22, e20 introduction since the award of the nobel prize for economics to finn kydland and edward prescott in 2004, for their work on dynamic macroeconomics, there has been no shortage of papers praising their work and recognising the impact that it has had on the economics profession. their 1982 econometrica paper, “time to build and aggregate fluctuations”, has been the focus of much of the attention. this paper proposed that aggregate fluctuations in economic activity could be adequately explained as the outcome of the decisions of individual agents operating in competitive markets in which prices were flexible and moved instantly to clear markets. this literature rapidly became known as real business cycle (rbc) theory because of its emphasis on productivity shocks as the driving force behind movements in the aggregate economy. more recently however, the preferred descriptor has become dynamic stochastic general equilibrium (dgse) theory. this has reflected the reintegration of a monetary sector into these models and, to a limited extent, the introduction of some degree of stickiness in wages and prices. the central role of the kydland and prescott paper is recognised in a recent survey paper by rebelo (2005) who states that “it is not surprising that a paper with so many new ideas has shaped the macroeconomics research agenda of the last two decades”. the sense that this is a seminal piece of work which continues to influence the direction of current research in macroeconomics is enhanced by a further statement from rebelo that “..the best way to celebrate rbc models is not to revel in their past, but to consider their future”. 1 reader in economics, department of economics, loughborough university, loughborough, le11 3tu, united kingdom. 8 journal for economic educators, 10(2), fall 2010 8 rebelo’s statements are indicative of the direction in which research in macroeconomics has gone since the early 1980s. it would not be too far from the truth to say that macroeconomics research which is not based on the analysis of optimising agents with rational expectations operating in competitive markets, is simply no longer taken seriously by mainstream macroeconomics researchers. this reflects a remarkable shift in paradigm for the discipline. even in the early 1980s the dominant paradigm was that of the neo-classical – keynesian synthesis (henceforward, the neo-keynesian model). innovations, such as the assumption of rational expectations, had left their mark, but there remained the idea that the behaviour of the macroeconomy could not be captured fully by the tools of microeconomics and that a separate macroeconomics discipline was necessary. despite the triumph of the dsge paradigm among academic economists, it has however, had surprisingly little impact among policy makers and in the teaching of economics. in a recent paper mankiw (2006) argues that “the sad truth is that the macroeconomic research of the past three decades has had only minor impact on the practical analysis of monetary or fiscal policy”. similarly, with reference to the teaching of economics, mankiw argues that “..the basic framework that modern students learn to make sense of the business cycle is one that would be familiar to an early generation of keynesians”. this argument is based on the treatment of macroeconomic issues in the textbooks used for undergraduate economics programmes, which remains, overwhelmingly neo-keynesian. the only exception to this treatment in mainstream textbooks is that of barro (1984)2 the purpose of this paper is to argue that the failure of the new classical approach (and even more so the dsge model) to achieve the same dominance in the teaching of macroeconomics as it has in macroeconomics research is no accident. essentially the argument of this paper is that dsge theory has little or nothing to offer undergraduate students or their instructors. the features that make it attractive to graduate students – its mathematical complexity and its consistency with the axioms of rationality and price flexibility – render it deeply unattractive to undergraduate students, who generally prefer models which are richer in policy implications and less reliant on extreme assumptions. in pedagogical terms the dsge is a sterile approach which can never rival the much criticised, but ultimately more fruitful, approach of the neo-keynesian model. , who attempts to provide a treatment of the dsge at a level suitable for undergraduates. however, mankiw goes on to argue that “..the new classical revolution in pedagogy that barro hoped to inspire never took off, and the barro text did not offer significant competition to the dominant textbooks of the time”. the plan of the paper is as follows. in the next section, i contrast the dsge model and the neo-keynesian model in pedagogical terms using bloom’s taxonomy of educational objectives. my argument is that the dsge is limited to the lower levels of the cognitive domain. a teaching strategy based on the dsge model necessarily emphasises knowledge and comprehension but leaves little or no room for application, analysis, synthesis and evaluation. in contrast, the neo-keynesian approach allows for the full range of cognitive functions to be considered. section three argues that, not only does the dsge model limit what can be taught in specific macroeconomics classes, it also fails to generate the valuable linkages into other subject areas such as econometrics, which are characteristic of the neo 2 more recently barro (2007) has produced a new textbook which embodies the dsge approach. in a review in the times higher educational supplement (march 2008), nicolas rau argues that “this is a book which will revolutionise the teaching of macroeconomics”. the cynic might argue that, since barro’s first attempt had nearly 25 years to do this and failed, the chances of the second attempt succeeding are rather less than certain. 9 journal for economic educators, 10(2), fall 2010 9 keynesian approach. the final section gives conclusions and some speculation about how undergraduate macroeconomics may evolve in the future. teaching macroeconomics with the dsge model bloom’s (1956) taxonomy of educational objectives provides a framework within which we can assess alternative pedagogical strategies in macroeconomics. bloom divides educational objectives into three domains: these are the affective, the psychomotor and the cognitive domains. the affective domain is concerned with emotions and values, the psychomotor domain is concerned with physical coordination and the manipulation of objects while the cognitive domain is concerned with the knowledge and understanding of a particular topic. most academic economists would naturally think of themselves as operating primarily in the cognitive domain though, as i will argue later, there are important parts of teaching economics that fall into the territory of the affective domain. within the cognitive domain there is a hierarchical set of skills which the teacher seeks to transmit to the student. these start with knowledge of the topic, then proceeds to comprehension and then finally, to a series of interrelated skills in which the student uses the knowledge he/she has acquired. these higher level skills include the ability to apply the knowledge to new situations, the ability to analyze and synthesize the knowledge in new ways and the ability to critically evaluate the topic under consideration. these skills are hierarchical in the sense that it is necessary to acquire the lower level skills before proceeding to the higher level skills. consider the ‘traditional’, or neo-keynesian, treatment of aggregate demand which, as mankiw has noted, still provides the underpinning for most intermediate level teaching in macroeconomics. in the simplest version of this model, with no government and no overseas trade, the goods market finds an equilibrium when planned savings and planned investment are equal. in developing this model, the instructor normally emphasises that savings and investment decisions are taken by separate groups of agents. decisions on savings are taken by households with income (and possibly the interest rate) acting as the main determinants. investment decisions are taken by firms who are influenced by the rate of interest and expectations of future profits, with current income having a relatively minor influence. the main equilibrating force is the income level with the interest rate playing a secondary role (in contrast with the classical model in which the interest rate equilibrates the market for loanable funds at the full employment level of income). the account of the goods market given above may appear excessively simple, or even just plain wrong, to the modern economic theorist. however, it emphasises an important feature of real world markets which is obscured by the dsge approach. because savings and investment decisions are taken by different groups of agents, there is an important coordination problem. the dgse model blurs the distinction between savings and investment by making it a simultaneous decision taken by a representative household. by giving firms an explicit role in the process, the neo-keynesian model marks an important step towards ‘realism’ in the underlying assumptions of the model. of course, as friedman (1953) has argued, realism is not, in itself, a pre-requisite for a model to be useful. in this case however, the separation of savings and investment decisions makes a radical difference to the behaviour of the model and is therefore a key assumption. the neo-keynesian model also enables the instructor to discuss the important aspects of the institutional structure of the economy with students as the macroeconomic framework is developed. this contrasts with the dsge model in which all the institutional structure is assumed away in favour of an intertemporal optimising procedure which gives rise to an euler equation. 10 journal for economic educators, 10(2), fall 2010 10 next, consider the way in which these two approaches can be used to develop higher order skills. the neo-keynesian approach can be extended quickly and easily to bring in complicating factors such as the government and the overseas sector. in fact, such extensions are commonly used as tutorial exercises which allow students to develop the higher order ‘application’ skill in bloom’s cognitive domain. such extensions are much more difficult with the dsge model in which both the objective function and the budget constraint must be modified in order for the model to be generalised. the role of the realism of the underlying assumptions of the models used in teaching deserves further comment. since friedman’s classic 1953 essay, it has been widely accepted that realism is not, in itself, a defining requirement for a good model. what is important is that a model be ‘fit for use’, in the sense that it generates useful predictions which conform to real world experience. as an example, friedman discusses the assumption of perfect competition in the market for cigarettes. the assumption of perfect competition arguably generates usable results when analysing the impact of a sales tax. thus, as a simplifying assumption it is useful, even though it is clearly unrealistic in the traditional sense. however, if the objective is to analyze the impact of wartime price controls, then the assumption of perfect competition generates misleading results and is therefore no longer a useful assumption. the fact that an unrealistic assumption may be useful in one context, but not in another, is one of the hardest things to communicate to undergraduate students. now, the assumptions of the dsge are clearly unrealistic but the question is whether or not this lack of realism matters. given friedman’s discussion, we can only judge this on the basis of the uses to which the models generated will be put. here the differences between a teaching model and a research model could not be more stark. for teaching, we wish to develop models which describe the operation of the macroeconomy and allow qualitative predictions to made. we also wish to present models which enable students to develop higher order skills such as application, analysis and synthesis. the neo-keynesian assumptions clearly satisfy these criteria but the dsge assumptions do not. in contrast, the objective of research models is to generate models with predictive power that satisfy a set of axioms which are consistent with the tacitly accepted rules of the profession. since the profession now seems to have accepted the new classical agenda that all models should be based on the assumptions of intertemporal maximisation by atomistic agents operating in competitive markets, it follows that dsge assumptions fit the criteria well but the neo-keynesian assumptions place these models immediately outside the pale. krugman (2000) has an interesting discussion of the use of simple (neo-keynesian) models in both an educational setting and by professional economists. his view is that the flexibility of the simple models more than compensates for the crudity of some of their assumptions and it is for this reason that they have survived. krugman’s view of models is as vehicles for ‘thought experiments’. the more complex the model, then the more difficult it becomes for it to act in such a way. his conclusion is that the ad-hoc neo-keynesian models will continue to survive until the dsge framework can generate working models which perform this function. it is interesting to note that krugman’s assessment of the value of simple models extends to their use by professional economists as well as in a purely educational setting. although the dsge may not have achieved the inroads into the teaching of undergraduate economics which its proponents would have hoped for, it is true that it is increasingly taught as a key part of postgraduate programmes, both at masters level and in 11 journal for economic educators, 10(2), fall 2010 11 those institutions which put on taught phd modules3. this reflects the dominance of the approach in the academic journals and the need to prepare graduate students with the skills necessary to publish in the journals which are important for their careers. however, even here it is possible to argue that the chief gains of the approach have not been in the development of higher order skills in the cognitive domain, but rather in terms of the affective domain. much of the time and energy devoted to the dsge in graduate programmes goes into the lower order cognitive skills of knowledge and understanding, along with a determined effort to convince graduate students that this is the only way to think seriously about macroeconomics. in order words, the teaching of the dsge model at graduate level is often focussed on the affective domain in that one of its primary objectives is to convince students that this is the only game in town4 there is an extended discussion of the targeting of the affective domain by advocates of the dsge approach in a recent book by colander (2007) that documents how this approach has become dominant in us graduate schools. elsewhere, colander (2008) argues that the dominance of the dsge model in academic circles lies more in its facility for generating papers which lend themselves to mechanical assessment through the peer review process, and which contribute to the career advancement of young economists, rather than in any genuine superiority of insight or empirical performance. he claims that the neokeynesian framework and the lse approach to econometrics (see next section) suffer in comparison with the dsge model in terms of the ‘replicator dynamics’ of the economics profession. this is similar to the reasons given by johnson (1971) for the success of the monetarist revolution of the 1970s who argued that one of the key elements in this success was the ability of the monetarist model to generate empirically testable hypotheses which could be investigated by graduate students as the basis of a phd thesis. . linkages with other areas of economics as someone who has taught intermediate econometrics for some years, i have reason to be grateful for the neo-keynesian model. simple relationships such as the consumption function, the accelerator model of investment and the demand for imports, provide useful examples for the instructor which can easily be investigated using national accounts data. the fact that the dsge model does not generate such examples so easily is not an argument against the validity of that model, however, it may help explain the reluctance of those responsible for the design of undergraduate economics programmes to abandon the neokeynesian alternative. the dsge model has certainly generated some interesting quantitative work. both the calibration of models and the methods used to solve complex non-linear models have 3 even at the graduate level, there remains a core of traditional macroeconomics which many instructors continue to teach as a vital part of the toolbox of techniques for economists. for example, paul krugman (2000) provides a spirited defence of traditional macroeconomics where he argues that “we need small, ad-hoc models as part of our intellectual tool-box”. similarly, blanchard and fisher (1989) include a chapter entitled ‘some useful models’ which covers much of this material but discretely relegates this to the latter part of their text. 4 lucas (1980) argued the following “one cannot find good, under-forty economists who identify their work as ‘keynesian’. indeed, people take offence if referred to as ‘keynesians’. at research seminars, people don’t take keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another”. this statement is indicative of a rhetorical tactic rather than a scientific argument. lucas is here seeking to embarrass into silence those who would take a contrary position to his own. in other words he is seeking to generate changes in the affective domain for his readers. by ridiculing even the thought that an alternative approach might be useful he is seeking to establish the dominant position of the new orthodoxy. 12 journal for economic educators, 10(2), fall 2010 12 proved exciting new areas for graduate students. one only has to see the collection of essays in marimon and scott (1999) to see how this approach is attractive to those working at the cutting edge of the discipline. however, these methods offer little to the teacher of intermediate econometrics. this reflects partly an explicit rejection of traditional econometric methods by practitioners in this field. the rejection of traditional econometric methods by the dsge research programme derives from its emphasis on the use of ‘deep’ parameters reflecting the tastes of agents and the production technologies available to industry. the implicit argument in much of the dsge literature is that the parameters estimated by traditional econometric methods are necessarily reduced form parameters which are inherently unstable as outlined by the lucas (1976) critique5 another remarkable feature of the dsge research programme has been the way in which is has effectively sidelined the serious scientific approach to applied econometrics developed by david hendry and various co-workers. since the early 1970s, the ‘lse school’, as it became known, pioneered the systematic investigation of econometric relationships using a combination of economic theory for the specification of long-run relationships and data driven short-run dynamics. the central idea is that economic theory is a useful guide to the determination of long-run equilibrium relationships, but that it tells us little about shortrun adjustment, which is driven by costs of adjustment, rule of thumb behaviour and a variety of other factors. equations estimated using a tightly defined economic theory are almost always misspecified. therefore the lse approach recommends estimating a general unrestricted model and then testing restricted versions against this to obtain a ‘parsimonious specification’. . given this instability, it is argued that there is little point in building models based on unstable foundations, and it is therefore better to construct models in which the ‘deep’ parameters are imposed on the basis of microeconomic studies of individual household or firm behaviour. while there is some logic to this argument, it is also inherently dangerous because it removes dsge from the set of testable models. if the parameters are imposed then the only option available to the investigator is to compare the performance of the model with real world data i.e. compare the real-world sample moments with those generated by the model. however, since other models are not considered, it is difficult to see how the dsge can be rejected, other than by the grossest of inconsistencies with real-world observations. while it is possible to imagine the dsge being rejected by such a process, i have yet to see this happen. instead, any deficiencies of the model are classified as ‘puzzles’ which can, in principle, be solved in a more complete model or else are patched-up by appropriate ad-hoc adjustments, such as the assumption of serially correlated technology shocks. of course, the lse approach is incompatible with the dsge research programme. firstly, and most importantly, the lse approach allows for the possibility that the economic theory underlying the model being estimated may be rejected by the data. whether one agrees fully with the lse approach or not, it has to be recognised that this is an essentially scientific methodology. in this approach economic theories generate tentative hypotheses which may, or may not, be consistent with the data. this is incompatible with the dsge research programme, in which theoretical relationships are treated as axioms rather than tentative hypotheses to be investigated. secondly, the lse approach concentrates on relationships 5 the empirical importance of the lucas critique is also open to debate. the breakdown of econometric relationships following the opec shock of the mid-1970s is often quoted as evidence of the critique in action. however, it is difficult to see any models, including dsge models, surviving a shock of this magnitude. in addition, ericsson and irons (1995) have found no practical evidence of parameter instability of the kind predicted by lucas. 13 journal for economic educators, 10(2), fall 2010 13 between observable empirical quantities rather than the latent variables which comprise the dsge model. finally, the lse approach emphasis the idea of ‘encompassing’ by which models are judged by their ability to explain the results of other models. since consideration of alternative models is not part of the dsge methodology, there is no basis for judging how well these models encompass alternative approaches which are ruled out on the basis of their underlying assumptions. the failure to engage with the lse approach produces a curious vacuum in dsge discussions of empirical methods. recent textbooks by dejong and dave (2007) and canova (2007) simply make no reference to the lse school6 what seems to have occurred is that there has not only been a division in theoretical approaches between the neo-keynesian and dsge schools, but there has also been a division in the empirical research methods they employ. this is dangerous because econometrics has traditionally played the role of a testing ground in which rival macroeconomic approaches can be compared on the basis of the data. this was certainly true of the monetarist-keynesian debates of the 1970s and those between the keynesian and the new classical school in the 1980s. if the dsge really is untestable using standard econometric techniques, then it is difficult to see how it can qualify as a scientific theory. this may help to explain its lack of appeal to teachers of economics who, by and large, are sensitive to accusations from students that their subject matter lacks scientific credibility. . conclusions this paper has argued that it is no surprise that the dsge model, which has proved so successful in convincing academic economists of its value, has made relatively few inroads into the teaching sphere. the qualities which make it attractive to academics, such as the purity of its assumptions and its sound microeconomic basis, have little resonance with undergraduate students. instead, the qualities of the neo-keynesian model, such as its ability to incorporate ‘real-world’ institutional features and the ease with which it can be used to develop higher order skills and applications, prove much more attractive. to some extent the neo-keynesians can justifiably say “we told you so”. for example, james tobin, writing in 1980, argues the following: “one view, prevalent among mathematical theorists of general equilibrium, is that traditional macroeconomic theory suffers from its lack of firm microeconomic foundations. the behavioural relations of macro models, it is said, are not rigorously derived from optimization by individual agents and from the clearing of markets in which optimizing agents participate. in short, macro models do not look like general equilibrium models. of course, it hard to make them look like general equilibrium models without emptying the macro models of the aggregative simplicity, institutional content, and definiteness of conclusion which are their raison d’etre.” tobin (1980) p. x. the optimist in me hopes that the neo-keynesian model will continue to dominate in the teaching sphere. this is because i feel that this model has significantly more to offer than the dsge models which continue to suffer from the same array of problems that tobin 6 i was surprised to find that neither of the two books (both in their own way, very interesting descriptions of dsge methodology) do not reference hendry in their bibliographies. the impact of hendry on macroeconometric research is self-evident to any uk student of the last 30 years and is also evidenced by reference to his work in essays by two recent nobel prize winners (engle (2004) and granger (2004). 14 journal for economic educators, 10(2), fall 2010 14 identifies above. however, the pessimist in me believes that the dsge model may still succeed in the long-run through a simple process of attrition. as the older generation of macroeconomists retires and new generations, who have followed graduate programmes in which dsge is the only macroeconomics on offer, take over, the programme will increasingly filter down into the undergraduate programme. if this happens then macroeconomics will rapidly lose any appeal it has to the mass of undergraduate students. in summary, this is a recipe for the marginalisation of the sub-discipline of macroeconomics within economics, and even the discipline of economics itself. ultimately the question is what do we want our students to get out of their study of macroeconomics? my own view is that, in the cognitive domain, we should equip our students with a flexible intellectual framework which will allow them to address a range of unfamiliar questions and issues. in the affective domain, we should encourage them to be sceptical but aware of the positive achievements of different schools of thought. the neokeynesian model satisfies these requirements while, at least to me, the dsge model fails on both counts. references barro, r. 1984. macroeconomics. new york: john wiley and sons. barro, r. 2007. macroeconomics: a modern approach. thomson learning, international edition. blanchard. o.j and fischer, s. 1989. lectures on macroeconomics. cambridge, massachussetts: mit press. bloom, b.s. (ed) .1956. taxonomy of educational objectives: the classification of educational goal. susan fauer company. canova, f. 2007. methods for applied macroeconomics research. princeton: princeton university press. colander, d. (2007) the making of an economist, redux, princeton: princeton university press. colander, d. (2009) “economists, incentives, judgment, and the european cvar approach to macroeconometrics”, economics, the open access, open assessment e-journal, vol. 3, april, pp. 1-21. dejong, d.n. and dave, c. 2007. structural macroeconometrics princeton: princeton university press. engle, r. 2004. “risk and volatility: econometric models and financial practice.” american economic review 94 (june): 405-420. friedman, m. 1953. “the methodology of positive economics.” in friedman, m. essays in positive economics. chicago: chicago university press. granger, c.w.j. 2004. “time series, cointegration and applications.” american economic review 94 (june): 421-425. ericsson, n.r. and irons, j.s. 1995. “the lucas critique in practice: theory without measurement.” in k.d. hoover (ed) macroeconomics: developments, tensions and prospects. dordecht: kluwer academic press. krugman, p. (2000), “how complicated does the model have to be?” oxford review of economic policy, 16(4), pp. 33-42. kydland, f.e and prescott, e.c. 1982. “time to build and aggregate fluctuations.” econometrica 50: 1345-1370. johnson, h.g. (1971) “the keynesian revolution and the monetarist counter-revolution”, american economic review, 61 (may), pp 9-22. 15 journal for economic educators, 10(2), fall 2010 15 lucas, r.e., jr. 1976. “econometric policy evaluation: a critique.” carnegie-rochester conference series on public policy. 1: 19-46. lucas, r.e. jr. 1980. “the death of keynesian economics.” issues and ideas. 18-19. mankiw, n. g. 2006. “the macroeconomist as scientist and engineer.” pluralist economics review. http://pluralisteconomicsreview.net/ marimon, r. and scott, a. 1999. computational methods for the study of dynamic economies. oxford: oxford university press. rebelo, s. 2005. “real business cycle models: past, present and future.” scandinavian journal of economics. 107: 217-238. tobin, j. 1980. asset accumulation and economic activity. oxford: basil blackwell. http://pluralisteconomicsreview.net/� introduction teaching macroeconomics with the dsge model linkages with other areas of economics as someone who has taught intermediate econometrics for some years, i have reason to be grateful for the neo-keynesian model. simple relationships such as the consumption function, the accelerator model of investment and the demand for imports, provid... conclusions references it is often difficult to convey complex or abstract statistical concepts and apply these concepts in a classroom environment 1 journal for economic educators, 9(1), summer 2009 demonstrating the central limit theorem in the classroom: an excel exercise1 hilde patron2, william j. smith3, and david boldt4 abstract the central limit theorem (clt) states that regardless of the underlying distribution, the distribution of the sample means approaches normality as the sample size increases. understanding the clt is central to other concepts presented in a business statistics class; however, the clt remains one of most misunderstood concepts in introductory statistics. this paper describes the steps for developing a microsoft excel spreadsheet that allows students to visualize the clt. in addition to introducing students to creative uses of spreadsheets, we show that student learning is enhanced by incorporating this pedagogical exercise in the classroom. key words: central limit theorem, spreadsheet applications, student learning jel classification: a22 introduction the central limit theorem (clt) is one of the most important concepts introduced in a business or economics statistics class and is the foundation for much of the decision-making tools used in the business world. the power of the clt is that it greatly reduces the information and effort required to make decisions. basically, the theorem says that even if the population distribution is not normally shaped, the sampling distribution, or the distribution of the sample means, will be approximately normal (brightman, 1986). the larger the sample size, the more normal the sampling distribution will become. for sample sizes larger than 30, the sampling distribution from almost any population will be normally shaped. furthermore, since convergence of the sampling distribution to a normal distribution does not depend on the size of the population from which the sample is drawn, larger samples are not required for larger populations to achieve normality. as pointed out by hardy (2002), other important results of the central limit theorem are: 1. the sample mean is itself a random variable with its own distribution. 2. the mean of the probability distribution of the sample mean is the same as the mean of the probability distribution from which the sample is drawn. 1 we would like to thank lee hoke, university of tampa, for his helpful suggestions on improving earlier versions of this paper. 2 assistant professor of economics, department of economics, university of west georgia, 1601 maple street, carrollton, ga 30118. 3 assistant professor of economics, department of economics, university of west georgia, 1601 maple street, carrollton, ga 30118. 4 professor of economics, department of economics, university of west georgia, 1601 maple street, carrollton, ga 30118. 2 journal for economic educators, 9(1), summer 2009 3. the sample mean is less variable than individual observations from the population from which the sample is drawn. 4. the standard deviation of the sample mean is equal to n s . without an understanding of the central limit theorem, it would be difficult for a researcher to persuade himself or herself that population statistics could be effectively derived from sample statistics, especially when the population is known to be non-normally distributed. a major obstacle to understanding the concepts surrounding the clt is that students typically are faced with a single sample and do not understand that the sample mean is itself a random variable. in this paper, we outline a set of steps to produce a very intuitive example of the clt using microsoft excel. there are examples of pedagogical tools that use spreadsheets or programming languages such as java or javascript to present the clt in a visual manner. our excel-based application improves on the currently available tools by simplifying the construction of the spreadsheet and by providing instructions that makes purpose-specific modification of the spreadsheet easy. a spreadsheet-based approach is an excellent way of demonstrating the clt as it reinforces as well as builds on the spreadsheet knowledge students have gained in previous courses. in addition, the construction of the spreadsheet could be used as part of the students’ assignment, whereas other web-based tools require substantial programming knowledge to duplicate, and thus are not practical for students to produce themselves for a classroom exercise. in the section that follows, we discuss a variety of web-based tools that provide useful demonstrations of the clt. subsequently, we outline a step-by-step procedure for building a clt demonstration model using an excel spreadsheet. after describing the model development, we then present results of an empirical examination of the effectiveness of this excel-based simulation of the clt on student learning. the final section of the paper summarizes the paper and provides insights into other possibilities for other excel-based tools that might be integrated into an introductory business or economics statistics course. using online sources to demonstrate the central limit theorem there are a variety of on-line sources that allow teachers and students to simulate an assortment of distributions and to visualize the effect of these different distributional assumptions in the context of the clt. however, almost without exception, on-line sources either build their clt demonstration applications using something other than a simple spreadsheet or may not provide the source code. furthermore, because these educational web applications are written in languages such as java™, javascript™, php or some other webbased programming language, their usefulness as a pedagogical tool is somewhat diminished in a business statistics course. it is typically far beyond the capacity of introductory statistics students to produce code that would replicate what can be found at these sites. furthermore, web-based applications require an internet connection to be effectively used in a classroom environment. a demonstration built in excel can be used with or without an internet connection. as long as the instructor or student has access to a computer with excel, they have access to all they require to build, modify and use their own clt demonstration tool. although web-based demonstration tools have their limitations, many provide a very sophisticated assortment of controls that allow the user to change distributions or parameters of a distribution with a mouse click. as an example, janro elonen (2002) has developed a java™ 3 journal for economic educators, 9(1), summer 2009 applet that produces a simulation of dice rolls (see figure 1). a number of other similar teaching tools are also accessible via the internet.5 figure 1 using excel to demonstrate the central limit theorem excel, as well as other spreadsheet programs, has the ability to produce random numbers under a variety of distributional assumptions. because the power of the clt is its ability to handle non-normal distributions our examples focus on these types of distributions. to simulate the clt there are four basic steps: first, we must simulate collecting a finite sample of size n from an infinite population (n). we do this by generating n random numbers. second, to generate a graph approximating the sampling distribution, we repeat the first step over multiple columns in the excel spreadsheet. third, once the multiple samples are generated, we calculate the sample mean of each sample. fourth, we produce a graph or histogram of the means (middleton, 2004). to demonstrate how this could be used in class, we will first consider a manufacturing example. in this example, suppose a wire manufacturing plant is producing 50 foot electrical extension cords. the actual lengths of extension cords are uniformly distributed and range between 49.5 feet and 50.5 feet. although the distribution of the entire population of extension cords manufactured by this plant is uniformly distributed, our example will demonstrate that the 5 users of elonen’s clt applet can modify various parameters of the distribution, such as the number of observations in the sample of rolls, the number of sides on the dice (i.e., the pdf), and the number of times the sampling is repeated (elonen, 2002). a similar on-line tool has been developed by charles stanton (2008), a professor of mathematics at california state university as san bernardino. his demonstration tool also uses dice as an example. the applet allows the user to choose among a pre-specified number of dice and number of rolls. as the user plays the applet over and over, the sampling distribution is built. there are several other examples of online tools (annis, 2008, rogers et al., 2001, scott et al., 2008, wachsmuth, 2003, and tsai and wardell, 2006). 4 journal for economic educators, 9(1), summer 2009 means of the samples generated will be approximately normally distributed. furthermore, by using excel, we can dynamically demonstrate to a class how repeating the sampling produces similarly shaped sampling distributions each time we draw a new set of random samples. appendix a provides the step-by-step instructions for developing the ms excel application. evaluation of the clt exercise tool in this section, we evaluate our teaching tool using the students’ performance on classroom exercises developed in earlier sections. we seek to answer three questions: 1. do students feel that experience with the simulation improves their understanding of the central limit theorem? 2. does interaction with the simulation really improve student understanding? 3. is active interaction with the simulation more or less effective than passive interaction? to answer these questions we first randomly assign classes to different treatment groups. because the treatment involves classroom instruction, it is infeasible to randomly assign individual students to groups, because individual students cannot be randomly excluded or included in lectures. the groups’ sizes were matched as closely as possible, however since the control and treatment groups were based on classes, we had to allow for slight differences in the number of students participating in each group. group 1: consists of 30 students who observed the instructor demonstrate the clt simulation. they were also present during the regular lecture about the clt. group 2: consists of 33 students who developed the simulation of the clt in excel by themselves based on the instructions in this article (no teacher demonstration). students in this group did not observe the instructor demonstration of the clt simulation and may not have attended the regular theory lecture on the clt. group 3: consists of 43 students who were not present during the lecture on the clt or the in-class demonstration of the excel simulation of the clt. also, these students did not develop the simulation of the clt in excel by themselves. even though student perception of the benefits from this exercise may or may not reflect changes in actual performance, determining a baseline for student perception is of potential importance for evaluating future improvements in this excel-based exercise, therefore we survey the students about their perceived benefits from this exercise. students who watched the simulation were asked a simple question: “did witnessing the simulation in microsoft excel by your professor improve your understanding of the clt?” of the respondents, 29 out of the 30 (96.67%) answered “yes.” students who developed the excel exercise themselves were also asked a similar question: “did completing the excel simulation help you better understand the implications of the central limit theorem?” of the respondents, 25 of the 33 students in this group (75.76%) answered “yes”. students in this group were also asked if the instructions to 5 journal for economic educators, 9(1), summer 2009 complete the file were easy to follow, and if they thought that the exercise was a good complement to the regular clt lecture. of the responses, 75.76% and 78.79%, respectively, were positive. it would appear that students feel more confident of their understanding of the clt after viewing or completing the simulation. although confidence is important when implementing new statistical concepts, confidence alone can be a dangerous thing. to answer the second question, i.e., whether the simulation actually improved student understanding, all three groups were required to take a quiz. the quiz was administered online through the campus edition of webct vista. out the 106 students registered in the class, 90 completed the quiz. the quiz consisted of several questions in addition to those focused on the clt. however, one of the questions focused distinctively on concepts developed in the clt exercises, and more specifically on the shape of the sampling distribution of the sample means as the sample size increases. we used the score on this response to measure both the student understanding of the clt and the benefits associated with the excel teaching tool we developed. if the student answered the question correctly, he/she scored a 1. otherwise that score was labeled 0. this variable is called a binomial response. our goal was to determine whether the students in group 1 performed significantly better than the other two groups. students in this group were identified with a dummy variable group 1, which equals 1 if the student was in group 1 and 0 otherwise. we also included in our models for control purposes the student’s actual grade point average (gpa). since this is a classroom-based environment, we cannot randomize treatments within a classroom, thus we estimate the model both with and without gpa to address the potential for unobserved ability or motivation-related factors. table 1 presents summary statistics of these variables for the common sample used in the estimations. table 1: descriptive statistics mean median max. min. st. dev. sum obs. binomial response (full sample) 0.72 1.00 1.00 0.00 0.45 65.00 90 for group 1 only 0.90 1.00 1.00 0.00 0.31 26.00 29 for group 2 only 0.65 1.00 1.00 0.00 0.49 20.00 31 for group 3 only 0.63 1.00 1.00 0.00 0.49 19.00 30 gpa (full sample) 2.89 2.85 4.00 1.97 0.49 259.89 90 for group 1 only 3.14 3.11 4.00 1.97 0.50 91.04 29 for group 2 only 2.84 2.81 3.60 2.12 0.45 88.00 31 for group 3 only 2.70 2.61 3.85 2.00 0.43 80.85 30 group 1 0.32 0.00 1.00 0.00 0.47 29.00 90 group 2 0.34 0.00 1.00 0.00 0.48 31.00 90 group 3 0.33 0.00 1.00 0.00 0.47 30.00 90 6 journal for economic educators, 9(1), summer 2009 an analysis of table 1 shows that the proportions of students in groups 1, 2 and 3 who answered the clt question correctly are approximately 90%, 65% and 63%, respectively. this is a first indication that students in group 1 performed better than students in the other two groups. in what follows we explore this possibility more formally. we first do hypotheses tests for differences in proportions. letting ( ) denote the proportion of students in group 1 (2) who answered the quiz question correctly we formulate the following null and alternative hypotheses: to test the hypothesis we calculate a z test, 1 2 1 2 (1 ) (1 )p p p p z n n π π π π π π − = − − + where pπ represents the proportion of students in both groups who answered the question correctly and ( ) denotes the number of students in group 1 (2). we do similar pair wise tests for difference of proportions between the three groups of students. results are summarized in the table below: table 2: z-test for difference of proportions in binomial responses (p-values in parenthesis) z test (p-value) group 1 and group 2 -2.30 (0.02) group 1 and group 3 -2.13 (0.03) group 2 and group 3 -0.10 (0.92) as table 2 shows, the proportion of students in group 1 who answered the clt question correctly is significantly different (higher) than the proportion of students from groups 2 and 3. that is, we clearly reject the null hypotheses that = or = 3π . however, we cannot reject the null hypothesis that the proportions of students in groups 2 and 3 who answered the clt question correctly are the same. this suggests that students in group 1 (students who were present when the instructor demonstrated the clt simulation) performed better than students who did the simulation themselves or who did not have any experience with the simulation, but that firsthand experience with the simulation without instructor guidance does not improve student performance. to determine the benefits of the simulation in terms of student learning, we first calculated simple correlation coefficients between the performance variable (binomial response) and the explanatory variables. as table 3 illustrates, there is a positive correlation between students in group 1 and the binomial response. furthermore, this relationship becomes stronger when we exclude from the sample the second group of students. this suggests to us that interaction with the excel exercise has a positive impact on student learning, especially 7 journal for economic educators, 9(1), summer 2009 so when the student witnesses the instructor doing the exercise, more so than when the student performs the simulation by himself/herself. this is similar to the findings of other studies of computer-based statistical demonstrations of the clt (hagtvedt et. al. 2007). table 3: correlation coefficients (p-values in parenthesis) binomial response full sample restricted sample (groups 1 & 3) restricted sample (groups 1 & 2) restricted sample (groups 2 & 3) group 1 0. 27 (0.01) 0.31 (0.02) 0.30 (0.02) na group 2 -0.12 (0.24) na -0.30 (0.02) 0.01 (0.93) group 3 -0.14 (0.19) -0.31 (0.02) na -0.01 (0.93) gpa 0.36 (0.00) 0.32 (0.01) 0.32 (0.01) 0.42 (0.00) even though the simple correlation suggest a positive relationship between watching the instructor do the excel simulation and learning, to measure this relationship appropriately we ran logit models. table 4 shows the results from the logit model. columns 1 and 2 show the estimated coefficients and marginal effects of the model estimated using all observations. columns 3 and 4 show the coefficients and marginal effects of a logit estimation using a restricted sample of 59 students. this restricted sample excludes students from group 2. columns 5 and 6 show the coefficients for the restricted sample for the 60 students in groups 1 and 2. the first column in table 4 shows that there is a positive and significance relationship between binomial response and students in group 1. the second column further shows that students who observe the instructor demonstrate the excel simulation have a 26 percent higher chance of answering the question correctly. for the restricted samples (columns 3 through 6), the coefficients of group 1 are still positive and significant. this seems to suggest that watching the instructor do the demonstration or doing the demonstration oneself has a similar positive impacts on student learning. 8 journal for economic educators, 9(1), summer 2009 table 4: logit models (p-values in parenthesis) dependent variable: binomial response full sample restricted sample (includes groups 1 & 3) restricted sample (includes groups 1 & 2) coef. marginal effect coef. marginal effect coef. marginal effect const. 0.57 (0.03) 0.11 (0.01) 0.55 (0.15) 0.09 (0.10) 0.60 (0.11) 0.10 (0.07) group 1 1.59 (0.02) 0.26 (0.00) 1.61 (0.02) 0.26 (0.01) 1.56 (0.03) 0.25 (0.01) log likelihood -49.53 -29.36 -29.81 lr statistic 7.30 5.94 5.58 actual 1s and 0s correctly predicted 72.22% 76.27% 76.67% number of observations 90 59 60 even though the results provide evidence that viewing the simulation increases learning, it is possible that those students who were present when the instructor demonstrated the clt were the same students who came to class regularly and who were highly motivated. to account for this motivation (as well as the student’s natural ability) we included the student’s incoming grade point average in the estimations. results are summarized in table 5. columns 1 and 2 show the estimates using the full sample of students. gpa has indeed a positive and significant effect on the probability that a student answers the question correctly. furthermore, by including gpa in the models, group 1 loses strength and significance. the marginal effect of group 1 on binomial response is now only 18 percent. since the variables group 1 and gpa are positively correlated (correlation coefficient =0.31, p-value=0.02), it is likely that including gpa underestimates the effect of group 1 on binomial response. results of the restricted model (columns 3 through 6) are similar to the full sample model. 9 journal for economic educators, 9(1), summer 2009 table 5: expanded logit models (p-values in parenthesis) dependent variable: binomial response full sample restricted sample (includes groups 1 & 3) restricted sample (includes groups 1 & 2) coef. marginal effect coef. marginal effect coef. marginal effect constant -4.20 (0.02) -0.73 (0.01) -2.96 (0.17) -0.46 (0.16) -3.42 (0.11) 0.52 (0.10) group 1 1.13 (0.11) 0.18 (0.06) 1.14 (0.14) 0.18 (0.12) 1.26 (0.09) 0.19 (0.07) gpa 1.75 (0.01) 0.31 (0.00) 1.32 (0.10) 0.20 (0.08) 1.43 (0.06) 0.22 (0.05) log likelihood -45.15 -27.89 -27.87 lr statistic 16.06 8.88 9.46 actual 1s and 0s correctly predicted 75.56% 76.27% 76.67% obs. 90 59 60 we conclude from the various models that in fact student performance increases with experience with the clt excel exercise. there is also some evidence that observing the instructor demonstration of the exercise increases the chances of a correct response. we also find that poorer students (those with a lower gpa) have more to gain from witnessing the presentation. figure 2 depicts the difference in the expected probability of correct responses by gpa. students with lower gpas experience a greater increase in the probability of a correct response if they observe the classroom demonstration than students with higher gpas. figure 2: impact on learning by student gpa 10 journal for economic educators, 9(1), summer 2009 conclusions the central limit theorem is a critical concept that business students should master because of its application in areas such as hypothesis testing, regression analysis, and in the business world in general (e.g., six sigma). this paper provides a set of instructions for developing a microsoft excel-based demonstration tool that can be used either in the classroom or in a student assignment. in either case, it can be used to provide insight into the innerworkings of this fundamental concept. furthermore, by focusing this exercise on excel, this pedagogical tool accomplishes two goals in many business statistics classes: 1. it demonstrates a statistical concept, and 2. it does so in a commonly used tool that most business school students are required to master in their degree programs. by using excel as the medium of instruction, students are able to learn this important concept, while practicing basic spreadsheet skills, and developing a familiarity with more advanced spreadsheet features like formulas and sampling. the benefit to the instructor is that this exercise accomplishes several pedagogical goals in a reasonably simple package, while remaining flexible enough to accommodate a variety of different real-world applications. our intent in the future is to set up excel modules to demonstrate other statistical concepts such as interval estimation as well as hypothesis testing and make these modules publicly available. in addition, we hope to further test the effect of this teaching tool on student performance. 11 journal for economic educators, 9(1), summer 2009 appendix a: step-by-step procedures for using excel to demonstrate the clt step 1: creating the random samples since the extension cord lengths are uniformly distributed, we need to first create a uniform random number between 49.5 and 50.5 feet. this is accomplished by using the rand function in excel. let us assume for now that we intend to calculate the means for 30 samples of size 10. in figure a1 below, the function =49.5+rand() is entered in cell b2 to generate a uniform random number between 49.5 and 50.5. (note that generating a uniform random number with a wider range can be accomplished by multiplying the rand() portion of the function by the desired range width. adding a number other than 49.5 will change the lower bound. the general function for any uniform distribution is =x+y*rand() where x is the choice of the lower bound of the distribution and y is the choice of the range of the distribution.) figure a1 step 2: copying the cell b2 is then copied down to cell b31, and the contents of these thirty cells are copied to the adjacent cells in column c through column k. each row from b2:k2 to b31:k31 represents thirty uniform random samples. step 3: calculate the sample means to calculate the sample means for each of the thirty samples, we simply enter the function =average (b2:k2) in cell l2, and then copy the function in l2 into all the cells down to l31. the result should look like figure a2 (sample 17-30 not shown). it should be noted that entering anything into an empty cell and pressing enter or pressing the f9 key will cause each of the samples to be re-calculated, creating thirty new samples each time. the previous section provides a very clear example of how the distribution of the sample means approximates a normal distribution, even though the underlying data generating process is uniformly distributed, not normally distributed. the following section provides some useful extensions to the exercise above to expand the discussion beyond the uniform distribution. 12 journal for economic educators, 9(1), summer 2009 figure a2 step 4: producing the histogram (graph) of the sample means although a histogram can be produced using a variety of methods, only one method is used here for simplicity. in excel, place your curser in cell m2, press shift and press the down arrow until cells m2 through m8 are selected (seven cells should be highlighted). then type the following: =frequency(l2:l31,{49.7, 49.8, 49.9, 50, 50.1, 50.2, 50.3}) after you have typed this function, hold down ctrl+shift and press enter. this calculates the frequency of the sample means in each of the bins defined in the function above, starting with 49.7 and going through 50.3. there are seven bins in this example (49.7 to 50.3) so, seven cells were required. type the bins used in your frequency function starting with the value 49.7 in cell n2 and going down next to each frequency calculation for use as labels. once the frequencies are calculated, and the bin labels are typed in, use the chart wizard to graph the histogram. the bin values are used as the labels for the x-axis. the results should look something like figure a3 below. to remove the space between the bars in the graph, right click on a bar in the graph and select format data series, then select the options tab, and set the gap width to “0.” to resample, press f9. 13 journal for economic educators, 9(1), summer 2009 figure a3 frequencies 0 2 4 6 8 10 12 49.7 49.8 49.9 50 50.1 50.2 50.3 the previous section provides a very clear example of how the distribution of the sample means approximates a normal distribution, even though the underlying data generating process is uniformly distributed, not normally distributed. the following section provides some useful extensions to the exercise above to expand the discussion beyond the uniform distribution. step 5 (optional): extensions of the clt lesson with other distributions excel has several options for different distributional assumptions. this could be very helpful in trying to simulate a specific process with a known population distribution, such as flipping a coin (bernoulli). the values of a bernoulli distributed random variable can take on two values, 0 and 1. the bernoulli distribution is useful in predicting discrete outcomes like success versus failure. to simulate a random draw from a bernoulli distribution with a 0.5 probability of success or failure uses the following formula in cell: =round((rand()),0) recall that, in excel, the rand function returns a uniform random number between 0 and 1. by using the round function and eliminating the decimal, a uniform random variable is converted to one that is bernoulli distributed, with a mean of 0.5 (a coin toss). a discrete distribution of any range could be simulated by adding the minimum value to and multiplying the rand() portion of the equation above by r-1, where r is the range. for example, the roll of a die, a discrete distribution that takes on integer values between 1 and 6 can be simulated by the following: =round(1+5*(rand()),0) step 6 (optional): using visual basic and buttons to simplify the process in addition to building a clt demonstration spreadsheet, there are simple methods for increasing the interactivity of the spreadsheet, thus making it easier to use and modify. buttons and scrollbar can be used to change parameters of a distribution or even to populate (re-populate) items in a spreadsheet. included in excel’s repertoire of tools is the control toolbox (figure a4). the control toolbox allows the user to quickly add control features such as buttons, and assign these buttons a specific task. to access the control toolbox, select view, toolbars, and 14 journal for economic educators, 9(1), summer 2009 select control toolbox. to add a button, right click on the button form on the control toolbar, then click and drag on the spreadsheet the size button desired. figure a4 once the button is created, specific commands can be assigned to it by double clicking on the button. below is code that can be used to fill in the region of cells from b2 to l31 with a bernoulli random variable with the click of the button. only the bolded portion is required, since the un-bolded code appears by default. private sub commandbutton1_click() range("$b$2:$l$31") = "=round((rand()),0)" range("$b$2:$l$31").select end sub figure a5 once the code has been added, close the code window and click on the design mode button (figure a5) to toggle out of design mode and to activate the button for use. these steps can be repeated for a variety of different distributions to allow the user to choose different distributions without having to go through the creation process outlined earlier. by using the same range of cells and different distributions, quick comparisons can be made between the properties of one distribution and another. 15 journal for economic educators, 9(1), summer 2009 references annis, c. "central limit theorem," 2008. accessed at http://www.statisticalengineering.com/central_limit_theorem.htm, accessed january 2008. brightman, h. j. 1986 statistics in plain english. cincinnati: south-western publishing co. elonen, jarno. 2002. "central limit theorem explained," finland, 2002, accessed at http://elonen.iki.fi/articles/centrallimit/index.en.html#demo, accessed august, 2007. hagtvedt, r., jones, g. t., and jones k. 2007. “pedagogical simulation of sampling distributions and the central limit theorem,” teaching statistics. 29.3, (august): pp 94-97. hardy, m. e. 2002. "repeated simulated sampling in excel as a tool for teaching statistics." journal of computing sciences in colleges. 17.5, (april): pp. 167-74. middleton, m. r. 2004. data analysis using microsoft excel. belmont, ca: duxbury press. rogers, t., rogers, m., and rogers, s. r. 2001 "the central limit theorem – how to tame wild populations," retrieved from http://intuitor.com/statistics/centrallim.html, retrieved september 2007. scott, d., benway, j., lu, j., tang, z., shea, a., quinones, m., baggerly, k., austin, j., swartz, m., and swartz, r., 1998. " rice virtual lab in statistics," accessed at http://onlinestatbook.com/rvls.html, accessed september 2007. stanton, c. "the central limit theorem: java probability applets."accessed at http://www.math.csusb.edu/faculty/stanton/probstat/clt.html, accessed january 2008. tsai, w. and wardell, d. 2006 . an interactive excel vba example for teaching statistical concepts, informs transactions on education 7:1. accessed at http://ite.pubs.informs.org/vol7no1/tsaiwardell/ accessed january, 2008. wachsmuth, bert g. " 2003. "seton hall university math & computer science department thinklets." accessed at http://www.math.shu.edu/thinklets/math/statistics/clt/clt.html, accessed september 2007. http://ite.pubs.informs.org/vol7no1/tsaiwardell/� 28 journal for economic educators, 8(2), fall 2008 international trade theories within a unified framework john roufagalas and sumati srinivas 1 abstract a framework is developed which reduces to the three most popular models of international trade under different sets of assumptions. the key intuition is to focus on differences in per unit costs of production as determinants of trade patterns. this focus on per-unit costs clearly defines the links between between the ricardian, the hecksher-ohlin, and the economies of scale trade theories. examining the assumptions that are sufficient (but not necessary) for each case to hold provides a foundation which facilitates student understanding. students of international trade can see how these theories are inter-related, instead of viewing them in isolation as in the standard textbook expositions. introduction most undergraduate international economics textbooks present the major theories of trade in a somewhat disunited fashion. a typical textbook 2 exposition approaches international trade theory in the following manner. starting with a brief description and critique of the mercantilist doctrine of the seventeenth and eighteenth centuries, it discusses smith’s theory of absolute advantage and concludes that this theory has limited applicability. this sets the stage for the introduction of ricardo’s improvement on it in the form of comparative advantage. the trade theory section of the text generally starts with the presentation of the ricardian theory, followed by the hecksher-ohlin theory, and ending with the more modern economies of scale approach. it employs tools such as production possibilities frontiers, consumption possibilities frontiers, and community indifference curves to gain an insight into these theories. while such an exposition clearly has logic and value, it can leave the undergraduate student with the impression that each theory is a separate and distinct entity, existing independently of the others. a unified framework within which each trade theory can be derived as a special case would be a valuable complement to the conventional approach. such an innovation would help students to more easily recognize the links between the various theories. this is particularly useful in an area as challenging as trade theory can be for undergraduate students. in this note, we develop a framework which reduces to the three most popular models of international trade under different sets of assumptions, thus illustrating the links between these models. the key intuition behind our approach is our focus on differences in per unit costs of production as determinants of trade patterns. as we show in the following sections, this focus on per-unit costs allows us to clearly define the links between the ricardian, the hecksher-ohlin and the economies of scale trade theories. by highlighting and evaluating the assumptions that are sufficient (albeit not necessary) for each case to hold, we provide a foundation which will 1 author. john roufagalas is professor of economics at radford university, radford, virginia. sumati srinivas is assistant professor of economics at radford university, radford, virginia. 2 we surveyed half a dozen popular undergraduate textbooks in international economics. these are husted and melvin (2001), jepma, c.j., h. jager, e. kamphius (1996), kreinin (2001), krugman and obstfeld (2003), pugel (2004), and salvatore (2004). 29 journal for economic educators, 8(2), fall 2008 make it easier for students of international trade theories to see how these theories are interrelated, instead of viewing them in isolation as in the standard textbook expositions. the paper is organized as follows. in the first section, we develop the general theoretical framework upon which our analysis is based. in the following three sections, we delineate the assumptions needed to derive the predictions of each theory using our general framework. in the final section of our paper, we bring together the earlier sections by discussing our results. the general framework the starting point of our analysis is the assumption that production technology and market structure are such that the prices of traded goods are proportional to per unit costs. 3 consequently, a country will export a good when the relative average cost of producing that good is lower than that of its trading partner. this focus on per unit costs, which is associated with labor productivity, factor prices and economies of scale (as we show below) facilitates comparisons between the three trade theories we consider. suppose lp is average labor productivity, q is output, and l is employment. then output per worker or average productivity is given by: , l q lp or lplq . (1) next, suppose that ac represents average cost and tc represents total cost. average cost can then be written as: . q tc ac substituting for q from equation (1) yields: . 1 lpl tc lpl tc ac (2) equation (2) states that the average cost of producing a good varies directly with the total cost per worker and inversely with labor productivity. further, if we decompose total cost into its three component parts -fixed cost (fc), labor cost, wl (where w is the wage rate), and capital cost, ik (where i is the interest rate, and k is the amount of capital), we get the following equation: .ikwlfctc (3) substituting (3) in (2) yields: . 1 lpl ik w l fc ac (4) in other words, per unit cost depends upon the following variables: (a) the fixed cost per worker, which is a traditional measure of economies of scale. (b) the prices of the factors of production --the wage rate, w, and the interest rate, i. (c) the capital-labor ratio , l k and (d) labor productivity, lp. 3 such an assumption is consistent with (a) a perfectly competitive market structure, where the proportionality constant is one; (b) a monopolistically competitive market structure with consumer preferences of the constant elasticity of demand variety. we are grateful to an anonymous referee for this observation. 30 journal for economic educators, 8(2), fall 2008 following traditional analysis, we consider a two-good, two-country world; x and y being the two goods, 1 and 2 being the two countries. from equation (2), country 1’s relative cost per unit of good x is: . 1 . 1 1 1 x lp y lp yl tc xl tc yac xac (5a) similarly, the country 2’s relative cost per unit of good x is: . 2 2 2 2 x lp y lp yl tc xl tc yac xac (5b) trade flows are determined by relative costs per unit. if the relative cost per unit of good x in country 1 is less than the relative cost per unit of good x in country 2, i.e. if the expression in (5a) is smaller than that in (5b), then country 1 will benefit from specializing in and exporting good x. it follows that the inverse of (5b) is smaller than the inverse of (5a); consequently, country 2 will benefit from specializing in and exporting good y. substituting for total cost (tc) from equation (3) into equation (5a) and equation (5b) gives us the following expressions for the relative cost per unit x in countries 1 and 2, respectively. 1 1 11 1 1 11 1 1 xlp ylp yl k iw yl fc xl k iw xl fc yac xac (6a) and , 2 2 22 2 2 22 2 2 xlp ylp yl k iw yl fc xl k iw xl fc yac xac (6b) where 1 11 1 1 11 1 yl k iw yl fc xl k iw xl fc and 2 22 2 2 22 2 yl k iw yl fc xl k iw xl fc are relative cost per worker in countries 1 and 2, respectively. equations (6a) and (6b) give us a relationship between average costs, fixed costs, capitallabor ratios and the relative labor productivities that is fundamental to our analysis. in the following three sections, we will apply alternative assumptions to this relationship and 31 journal for economic educators, 8(2), fall 2008 demonstrate that it reduces to the ricardian theory, hecksher-ohlin, and economies of scale, respectively. the ricardian theory of trade almost two centuries after david ricardo’s 1817 classic the principles of political economy and taxation (where his principle of comparative advantage made a debut) was first published, the ricardian theory of trade is still regarded as an insightful and fundamental explanation of the patterns and gains from trade, and discussed at length in most international economics texts. in his book, ricardo attributed trade between countries to differences in relative labor productivities in the production of each good. in its simplest form, his theory states that if the relative labor productivity in producing good x relative to producing good y differs between countries 1 and 2, then both countries stand to gain from specializing in one of the goods and trading with each other, even if one country is more productive in absolute terms in both goods. for instance, if labor in country 1 is more efficient at producing good x relative to good y, then country 1 should specialize in and export good x. harberler 4 interpreted comparative advantage in terms of opportunity costs -a country with comparative advantage in good x produces good x at a lower opportunity cost than the other country. in a two-good, two-country world, this necessarily means that country 2 will have a comparative advantage in good y. if we assume that inputs are used in the same proportion in the production of each good, then labor productivity would be the only relevant determinant of comparative advantage. this is less restrictive than the classical assumption of the labor theory of value where labor is the only determinant of the price of a product. we show below that a country should specialize in the product in which it has the highest relative labor productivity. proposition 1: given the same relative cost per worker in both countries, each can gainfully trade with the other if it specializes in that good in which it has a higher relative labor productivity. proof: assume: (a) the relative cost per worker in each country equals k. (note that this condition, while sufficient to prove proposition 1, is not, however, necessary) (b) relative labor productivity in good x is higher in country 1 than in country 2. assumption (b) implies that 21 y lp x lp y lp x lp or that 2 . 1 x lp y lp x lp y lp we show in the appendix that under assumptions (a) and (b), . 21 yac xac yac xac in other words, given similar relative costs per worker, a higher relative labor productivity will lead to lower average costs. therefore, country 1 will benefit from specializing in good x, while country 2 should specialize in good y. 4 this was first introduced in english in a chapter in the translation of his original german textbook published in 1936 as theory of international trade. (w. hodge & company, london). 32 journal for economic educators, 8(2), fall 2008 let us explore further our key assumption that relative cost per worker is the same in both countries. this assumption implies the following condition: 1 11 1 1 11 1 yl k iw yl fc xl k iw xl fc = . 2 22 2 2 22 2 yl k iw yl fc xl k iw xl fc (8) below, we discuss some situations under which equation (8) may hold. case (i): labor is the only factor of production. an assumption standard in most textbook expositions of ricardo’s basic comparative advantage analysis, this implies that there are no fixed capital costs, reducing total cost to just labor costs. in other words, .wltc 5 substituting for total cost in (8) reduces each side of equation (8) to ‘1’ and thus the equality is satisfied. case (ii): production takes place under constant returns to scale technology and within each country the capital-labor ratio is the same for each good, even though this ratio may be different between the two countries. these two assumptions eliminate any fixed cost and imply that the capital-labor ratio in the production of both goods is the same. in other words, case (ii) involves the following conditions: (i) 0fc (ii) 11 yl k xl k . let this be equal to 1 l k . (iii) . 22 yl k xl k let this be equal to . 2 l k substituting conditions (i), (ii), and (iii) into (8) gives us ;1 2 12 2 12 1 11 1 11 l k iw l k iw l k iw l k iw the equality is thus satisfied. case (iii): production takes place under constant returns to scale; technology for each good is common across countries and the ratio of wages across countries equals the ratio of the costs of capital. as in case (ii), constant returns to scale implies that fc=0. 5 note that these labor costs may include a fixed number of labor hours required to start the production process. in this case, however, we can decompose the labor costs wl into ) 0 ( v llw , where 0 wl is the labor involved in setup and v wl is the variable labor cost. such decomposition will not alter the argument that is laid out in this section. 33 journal for economic educators, 8(2), fall 2008 common technology across countries implies the following: x l k x l k x l k 21 and . 21 y l k y l k y l k a further condition is the following: .1221 2 1 2 1 iwiw i i w w substituting the above three conditions in of (8) gives us: . 22 22 11 11 yl k iw xl k iw yl k iw xl k iw , which can be rewritten 6 as: ,0)2112()1221( x l k wiwi y l k iwiw since .1221 iwiw thus, the equality (8) is satisfied. let us examine the implications of each of the above three cases more closely. while the assumption that labor is the only factor of production appears extremely restrictive, it is consistent with the classical view of the labor theory of value. the assumption of constant returns to scale and similar technologies across goods is more general and less stringent than that of the labor theory of value, while the third case is plausible, particularly if the trading partners have similar relative factor endowments. figure 1 graphically illustrates proposition 1 by choosing sample values for the variables in equations 6(a) and 6(b). in this figure, we choose values for the capital-labor ratio and the factors of production such that the relative costs per worker in both countries are constant. we also set the relative labor productivity for good y in country 2 to an arbitrarily chosen value of 3.5. the graph in figure 1 then shows the effect of varying the relative labor productivity for good y in country 1 from a value of 0.5 to a value of 6.5 on the relationship between average costs 21 yac xac and yac xac as can be seen here, when the relative labor productivity in good 6 x l k yliwiw y l k xliwiw y l k x l k ii x l k ylwi y l k xliwylxlww y l k x l k ii x l k ylwi y l k xliwylxlww y l k ixlw x l k iylw y l k iylw x l k ixlw y l k iylw x l k ixlw y l k iylw x l k ixlw )1221()1221( 2112122121212121 11222211 22 22 11 11 34 journal for economic educators, 8(2), fall 2008 y is lower in country 1 (i.e., is less than 3.5), 21 yac xac yac xac , suggesting that country 1 would export good x, and this condition is reversed when the relative labor productivity in good y is higher in country 2 (i.e., greater than 3.5). (this graph obviously does not constitute a graphical proof of the proposition – an algebraic proof is supplied in the appendix. instead this graph, as well as figure 2 in the next section, is provided as a possible aid to textbook exposition of the proposition presented here.) figure 1 figure 1 : relative labor productivity and the ratio of average costs the hecksher-ohlin model a typical textbook analysis of the hechsher-ohlin theory of trade considers a two countrytwo-good-two-factor model. the hechsher-ohlin model rests on differences in relative factor endowments, which translate into different relative factor prices. the theory predicts that a relatively labor-abundant country can gainfully specialize in and export a labor-intensive product, while a relatively capital-abundant country should specialize in and export a capitalintensive product 7 . in contrast to ricardo’s comparative advantage theory, the hechsher-ohlin model assumes that technology of production for each good is the same in both countries. 7 as suggested by the leontief paradox, the role of factor endowments cannot be fully explained in a twofactor model of labor and capital, since it ignores the role of skilled vs. unskilled labor, and that of differing natural resource endowments. we are grateful to an anonymous referee for this observation. 35 journal for economic educators, 8(2), fall 2008 proposition 2: under the standard hecksher-ohlin assumptions of constant returns to scale, similar product technologies for both countries, and no differences in labor productivity across countries, each country will gain from specializing in that product that uses it’s relatively abundant factor more intensively. proof: proposition 2 involves the following assumptions: (i) constant returns to scale, which implies that fc = 0. (ii) similar product technologies for both countries, which implies that: 21 xl k xl k and . 21 yl k yl k (iii) similar relative labor productivities, which implies that: . 21 ylp xlp ylp xlp let us suppose that each of these equals . ylp xlp below we show using our general framework that it follows from (i), (ii) and (iii) that if good x is more labor intensive than good y, and country 1 is relatively better endowed with labor as demonstrated by lower relative wages, then country 1 should specialize in good x (and country 2 in good y). substituting (i), (ii) and (iii) in equations (6a) and (6b) and omitting several in-between steps, which are detailed in the appendix, gives us the following condition: if xl k yl k iwiw )1221( is negative, then 21 yac xac yac xac and country 1 specializes in and exports good x. this condition holds if and only if: 2 2 1 1 i w i w and xl k yl k . if we assume, as in most textbook treatments 8 , that wages and capital rents are endogenously determined by the capitallabor ratio, this implies that country 1 specializes in and exports good x if xl k yl k or 2 2 1 1 i w i w which is exactly what the hecksher-ohlin model predicts. in other words, if country 1 is relatively labor-abundant and thus has lower relative wages, it will gain from specializing and exporting that good which uses relatively more labor and less capital, namely, good x. 8 as noted in the standard textbook by salvatore, given similar tastes and demand preferences in both countries, there is no difference between defining relative factor abundance in physical terms as well as in terms of factor prices. (salvatore, 2004. page 121) 36 journal for economic educators, 8(2), fall 2008 figure 2 figure 2. wage-interest rate ratio and the ratio of average costs. figure 2 illustrates proposition 2 by plotting the ratio of relative average costs of good x against changes in the wage-interest rate ratio in country 1. the figure assumes that the wage-interest rate ratio in country 2 is fixed at 0.75, and other variables are assigned appropriate fixed values in accordance with our assumptions. as the graph shows, when the wage-interest ratio in country 1 is smaller than in country 2 (i.e., less than 0.75) and good x is labor intensive, the relative average cost of good x in country 1 is lower than country 2. conversely, when good x is capital-intensive, the reverse relationship holds. economies of scale theory in this section, we look at economies of scale with a focus on the reduction of fixed costs per worker as production is scaled up. this presentation of the economies of scale theory is only applicable to a discussion of internal economies of scale achieved in monopolistically competitive markets, and does not cover external economies of scale that result in inter-industry trade. we present it here, in addition to models of inter-industry trade such as the hecksher-olin and the ricardian theory, since the fact that our framework can model certain intra-industry trade patterns (such as trade between developed countries in differentiated versions of a product) should aid textbook expositions of international trade. 9 we define the variable cost per worker as: . l k iwvcw 9 we thank an anonymous referee for pointing out this distinction as applied to our model. 37 journal for economic educators, 8(2), fall 2008 the magnitude of the fixed cost per worker, l fc , represents economies of scale. 10 the lower the fixed cost per worker, the larger is the cost advantage for a producer stemming from the exploitation of the economies of scale. proposition 3: under assumptions of similar relative labor productivities across countries and identical variable costs per worker in both countries for the production of the same good, each country can gainfully trade with the other by exploiting economies of scale under monopolistically competitive conditions. proof: (i) the assumption of similar relative labor productivities implies the following condition: 21 xlp ylp xlp ylp (ii) the assumption of identical variable costs per worker across countries for the production of the same good implies the following: ; 21 x vcw x vcw . 21 y vcw y vcw we denote the former by x vcw and the latter by yvcw . variable costs are given by production technologies and factor endowments across countries. if good x is a differentiated product in which country 1 is monopolistically competitive, then country 1 can exploit increasing returns of scale in good x, i.e., : . 21 x l fc x l fc similarly, country 2 can exploit returns of scale in good y i.e., when . 12 y l fc y l fc under assumptions (i) and (ii), the relative cost per unit becomes: . 2 2 1 1 2 1 yvcw yl fc xvcw xl fc y vcw yl fc x vcw xl fc y ac x ac y ac x ac as shown in the appendix, this expression is less than 1 if and only if: 10 this does not take into consideration the impact of specialization as plant size increases. we thank an anonymous referee for pointing out this simplification. 38 journal for economic educators, 8(2), fall 2008 21 x l fc x l fc and 12 yl fc yl fc ,i.e., if both countries exploit economies of scale in their respective good. it is easy to see from proposition 3 that in the economies of scale framework, even if both countries face the same fixed costs in the production of differentiated products, each country can obtain a cost advantage by exploiting economies of scale and, as a result, both countries can gainfully trade in these products. attempting to explain trade flows under monopolistically competitive conditions by focusing on economies of scale only makes the implicit assumptions (i) and (ii) above, i.e. that both trading partners have the same relative labor productivities and similar variable costs per worker for each good. conclusion this paper illustrates how each of the three most popular trade theories can be linked together for purposes of instruction by means of a framework that focuses on average costs. it highlights the set of assumptions that is sufficient in order to obtain the important results of each theory. such an approach can aid authors of international economics textbooks in organizing the material they present in ways that highlight the connections between the various theories. additionally, it will help undergraduate students in better understanding how different sets of assumptions may lead to different theories. further, by explicitly specifying the sufficient conditions, it helps students evaluate competing theories not only on the merits of their predictions, but also on the reasonableness of their assumptions. references husted, s., and m. melvin.(2001) international economics, 5 th ed., addison wesley longman. jepma, c.j., h. jager, e. kamphius (1996) introduction to international economics, netherlands open university. kreinin, m.e. (2001) international economics. 9 th ed. south-western. krugman, p.r., and m. obstfeld.(2003) international economics, 6 th ed., addison-wesley. lucier, r.l.1992. survey of international trade/economics textbooks. journal of economic education 23 (spring):163-73. pugel, t.a. 2004.international economics, 12 th ed., mcgraw-hill. salvatore, d. 2004. international economics, 8 th ed., john wiley and sons. 39 journal for economic educators, 8(2), fall 2008 appendix a1. detail proof of proposition 1 (theory of comparative advantage) from section i, the assumption that relative cost per worker in both countries k implies the following: 11 11 11 11 yy xx l k iw l fc l k iw l fc = . 22 22 22 22 k yy xx l k iw l fc l k iw l fc (7) the assumption that relative labor productivity in good x is higher in country 1, while for good y relative labor productivity is higher in country 2 implies that . 21 x lp y lp x lp y lp (i) then: 2 1 yac xac yac xac 1 1 11 1 1 11 1 xlp ylp yl k iw yl fc xl k iw xl fc 2 2 22 2 2 22 2 ylp xlp xl k iw xl fc yl k iw yl fc . 2 1 2 1 . 1 xlp ylp xlp ylp ylp xlp kxlp ylp k the above expression is less than 1 because of condition (i). thus, 21 yac xac yac xac this proves proposition 1. a2. detailed proof of proposition 2 (the hecksher-ohlin model). since ,0fc and labor productivities are similar, the ratio of equations (6a) and (6b) reduces to the following: 40 journal for economic educators, 8(2), fall 2008 2 22 2 22 1 11 1 11 . 2 22 2 22 1 11 1 11 2 1 xl k iw yl k iw yl k iw xl k iw yl k iw xl k iw yl k iw xl k iw y ac x ac y ac x ac expanding this expression gives us: 2121 1212 21211221 21122121 xl k yl k ii xl k iw yl k iwww xl k yl k ii xl k iw yl k iwww . adding and subtracting xl k iw yl k iw 2112 from the numerator, the above expression becomes: . 21211221 2112211221122121 xl k yl k ii xl k iw yl k iwww xl k iw yl k iw xl k iw yl k iw xl k yl k ii xl k iw yl k iwww rearranging terms yields: , 21211221 2112122121122121 xl k yl k ii xl k iw yl k iwww xl k iw yl k iw xl k iw yl k iw xl k iw yl k iw xl k yl k iiww which can be rewritten: xl k yl k ii xl k iw yl k iwww xl k iw yl k iw xl k iw yl k iw 21211221 21121221 1 41 journal for economic educators, 8(2), fall 2008 = xl k yl k ii xl k iw yl k iwww xl k yl k iwiw 21211221 1221 1 . this implies that 1 2 1 y ac x ac y ac x ac xl k yl k ii xl k iw yl k iwww xl k yl k iwiw 21211221 1221 . the denominator of the right hand side of the above expression is positive. hence, the expression on the right hand side is negative if and only if: 1221 iwiw and xl k yl k are of opposite signs, i.e., if: xl k yl k , 1221 iwiw or . 2 2 1 1 i w i w this is just what the hecksher-ohlin model predicts, thus completing our proof. a3. detailed proof of proposition 3 (economies of scale theory of trade). , 2 2 1 1 2 2 2 2 1 1 1 1 2 1 y vcw yl fc x vcw xl fc y vcw yl fc x vcw xl fc y vcw yl fc x vcw xl fc y vcw yl fc x vcw xl fc y ac x ac y ac x ac since , 21 xvcwxvcwxvcw and . 21 yvcwyvcwyvcw the right hand side of above expression can be written as: 42 journal for economic educators, 8(2), fall 2008 . 2 2 1 1 x vcw xl fc y vcw yl fc y vcw yl fc x vcw xl fc yvcwxvcwyvcw xl fc xvcw yl fc xl fc yl fc yvcwxvcwxvcw yl fc yvcw xl fc yl fc xl fc 2121 2121 adding and subtracting yvcw xl fc xvcw yl fc xl fc yl fc 2121 from the numerator of the above expression, and rearranging yields: . 2121 12212121 1 yvcwxvcwyvcw xl fc xvcw yl fc xl fc yl fc xvcw yl fc yl fc yvcw x l fc x l fc x l fc y l fc y l fc x l fc thus, . 2121 12212121 1 2 1 yvcwxvcwyvcw xl fc xvcw yl fc xl fc yl fc xvcw yl fc yl fc yvcw x l fc x l fc x l fc y l fc y l fc x l fc y ac x ac y ac x ac the denominator of the right hand side of the above expression is positive. hence, the expression on the right hand side is negative if: 21 x l fc x l fc and 12 yl fc yl fc . this implies that country 1 has economies of scale in good x and country 2 has economies of scale in good y. this proves proposition 3. geetha rajaram 1 | journal for economic educators, 11(1), summer 2011 teaching econometrics using formative assessment geetha rajaram 1 abstract this article studies the effectiveness of formative assessment techniques for an econometrics course. a large scale project with extensive formative assessment was included in the course, incorporating both summative and formative assessment. the specific assignment is for students to learn all steps to turn raw data obtained from the interuniversity consortium for political and social research (icpsr) using the statistical software spss into a viable thesis that is worthy of undergraduate conference presentations and publications. learning gains from implementation of this project using extensive formative assessment are measured by changes in student course grades. key words: undergraduate economics education, teaching of economics jel classifications: a22 introduction for a course as challenging for students as econometrics, how do instructors know that students with varying math and analytical skill levels are learning the material before it is too late to affect their grade? instructors need continuous information on student learning to address the problem. there are two types of assessments that can provide useful information on how students’ are learning throughout an introductory econometrics course: summative and formative assessments. as defined by bloom, hastings and madaus (1971), summative evaluation is the “evaluation used at the end of a term, course or program for purposes of grading, certification, and evaluation of progress, or research on the effectiveness of a curriculum, course of study or educational plan”, for example homework, mid-terms, and final exams (p 155). formative evaluation was first used by scriven (1969) to describe an assessment form to improve curriculum. bloom, hastings, and madaus (1971) expanded the definition from purposes of curriculum improvement to include improvement in the “process of teaching and learning, and since formative evaluation takes place at the formation stage, every effort should be used to improve the process” (p 155). summative evaluation is the approach that is currently used by most econometrics instructors. becker and watts (1996) found that problem sets are used more extensively in econometrics courses than any other courses in economics. although problem sets and exams are helpful and essential, they may not give the instructor continuous information on student learning throughout the course. furthermore, as articulated by becker and greene (2001), problem sets and exams in econometrics are rarely based on actual data and events. actual data and events are 1 assistant professor of economics, department of business and economics, whittier college, 13406 philadelphia ave., whittier, ca 90608 2 | journal for economic educators, 11(1), summer 2011 helpful in teaching students the theoretical concepts in econometrics. moreover, with the availability and relatively easy accessibility of actual data and events, it is very possible to use real world examples instead of contrived ones. with the availability of such resources, designing a project that incorporates extensive formative assessment is feasible. formative assessment should include two fundamental characteristics: continuity and feedback. as eloquently articulated by walstad (2005), summative assessment helps instructors judge students “mastery of content,” and formative assessment is “continuous and can help shape instruction and learning throughout the course” (p 193). the purpose of the first element of formative assessment, continuity, is for instructors to identify early on what students are learning and modify their instruction to help students learn before it is too late. the results of the project discussed in this paper show that continuity in assessment throughout the project helped students develop a deeper understanding and learning of theoretical material. the second element defining formative assessments is feedback. in an article written by black and wiliam (1998), formative assessment was defined as “those activities undertaken by teachers and/or by their students, which provide information to be used as feedback to modify the teaching and learning activities in which they are engaged” (p 7). as further summarized by black and wiliam (1996) the goal of feedback mirrors the definition presented by ramaprasad (1983), where the purpose of feedback is stated to be to close the gap between the actual level and the referenced level of information and learning. the actual level is the learning level where a student is at, and the referenced level is where the student should be. in 2009, a large-scale project with extensive formative assessment was included in my upper-division econometrics course. in this project, both elements of continuity and feedback were included. the assignment was designed to incorporate summative as well as formative assessment. the specific assignment is for students to learn all the necessary steps to turn raw data obtained from the interuniversity consortium for political and social research (icpsr) using the statistical software spss into a viable thesis that is worthy of undergraduate conference presentations and publications. learning gains from implementation of this project using extensive formative assessment were measured by changes in student course grades. the motivation to alter the course in 2009 initially was based on my personal dissatisfaction with how the course seemed to be handled by students previous to 2009. students were not bridging the gap between theory and practical applications. the course evaluations from these earlier classes yielded some interesting results. students felt they were not fully engaged in the application of the concepts, thus making it difficult for them to understand the concepts. many felt the course was just too difficult. two-thirds of the students, who took the class in 2008, for example, felt they were not able to apply the concepts and properly learn the material. given the diversity of students’ mathematical and analytical skill levels in the course, overcoming this difficulty presented a very real challenge. teaching introductory econometrics the “traditional way” (mostly theoretically) to students with diverse levels of skills may not be the most effective method. the smaller class sizes at a liberal arts college gave me the opportunity to bridge the gap between theory and practical applications by implementing extensive use of formative assessment in addition to summative assessment in the course. this paper proceeds as follows: section ii briefly introduces the literature on the effectiveness of formative assessment. section iii discusses the stages of the econometric project and the formative assessment tools used. section iv presents the results with respect to course grades before and after the changes in the course. other benefits and costs to implementation of the project are summarized in section v, followed by concluding remarks. 3 | journal for economic educators, 11(1), summer 2011 effectiveness of formative assessment blaming students for lack of skill is a common explanation of poor student performance (wilson and scalise 2006). but as noted by wilson and scalise the problem can be summarized not entirely as a problem of “low ability” but also as a “lack of engaged students” (p 636). this project will show through formative assessment that students can become more engaged and raise their level of ability and understanding of the materials in the course. black and wiliam in a seminal article “inside the black box” (1998) were able to identify over twenty studies that show significant and substantial learning gains following the enhancement of formative assessment. the studies range from assessment of kindergarten to university students. many of the studies also concluded that the improved formative assessment helps low achievers more than other students. the learning gains were measured by an “effect size” in the range between 0.4 and 0.7. learning gains were typically measured by a meta-analysis procedure using the difference between an experimental and control group divided by the standard deviation of the control (glass, mcgraw, and smith 1981). this ratio is called the effect size. the effect size is a method of quantifying the comparison between a control and experimental group. an effect size of 0.4 translated into an average student who was a part of formative assessment classroom methods performing as well as the top third of students who did not participate (coe 2002). black and wiliam (2003) also conducted a study involving twenty-four teachers in six schools in england called the kmpfap project (king’s medway oxforshire formative assessment project) in mathematics and science. they showed quantitative evidence that formative assessment raised the standard of achievement on the national curriculum test and the general certificate in secondary education test with a point estimate of the mean effect size of 0.32. in addition to the work done in math and science classes by black and wiliam, a study from a principle of economics course shows similar results. applying feedback action as a form of formative assessment using applied exercises in a principles of economics course, faulk’s (2007) regression results show that formative assessment had a positive and significant effect on the difference between pre-test and post-test scores. faulk showed that minority students made the most improvement. however, his results also show that the formative assessment dummy in the regression was not a significant determinant of targeted assessment scores in supply-anddemand analysis, price controls, and monetary policy. he concludes that applied exercises and feedback as a formative assessment tool “may serve to motivate students to study more and thereby improve their general understanding of economics rather than lead to significant improvement in targeted topics” (p 13). faulk’s studies do show that formative assessment had a measurable success in raising overall student test scores. the project the project that was added to the introductory econometrics course in 2009 was designed as a mini-dissertation for students with the extensive use of formative assessment. during the course, students learn how to work with a large survey from beginning to end. they download and clean up data, recode and transform data, create descriptive statistics, run regressions, write a literature review, explain the data, theory, model and hypothesis, write an analysis explaining the regression output, and make policy proposals. simultaneously, students learn the standard topics in econometrics (with a reduced number of topics to accommodate a large-scale project), thus allowing for more depth but less breadth in the course. this type of change could be controversial on some levels. first, students are not taught all the topics in econometrics that are 4 | journal for economic educators, 11(1), summer 2011 usually covered in many traditional courses. second, given the loss of breadth in materials, some faculty may determine that students are not as prepared for graduate level study in econometrics based on this course. however, including a large-scale project allows students to thoroughly apply concepts, thus improving their abilities to perform better in their writing and analytical skills in graduate school. moreover, the project gives students who usually struggle with the material continuous feedback for them to improve their work. i briefly discuss a possible remedy for the loss of breadth in the course at the end of this paper. both formative and summative assessments are used throughout the project. the formative assessment of this project is achieved by requiring students to revisit their paper (project) in many stages. steps in implementing the project the course is taught during the fall semester. the first step begins before students depart for the summer. i meet with students who are registered for the fall course to show them how to log on to the interuniversity consortium for political and social research website (icpsr) and look for surveys. they are instructed how to download a survey using spss. this is done so that students have the summer months to look for a survey on a topic they are interested in pursuing. at the beginning of the course in september, each student meets with the professor for a formative assessment of step one. students are required to show the instructor two surveys, their first and second choice. the instructor meets with each student to go through the survey on the computer and talk to them about their interests. students who do not have their surveys are penalized with a loss of points. they are given a chance to turn in credible surveys within a week into the semester for points to be added back on. in step two, students “clean up their survey.” this process is taught to them through a project done jointly in class using a topic and survey the professor has chosen from icpsr. students are shown step-by-step how to recode data into binary variables, transform variables, assess missing observations, and other data-related functions. at the end of step two, students turn in the original survey and the “cleaned up” data from the survey. they also turn in a step-by-step log of how they transformed their survey from its original form to its current form. the instructor should be able to replicate the student’s data and end up with similar results. at this point students meet with the professor individually to assess all their work and are given both positive and critical feedback on their progress. more specifically, students who need to redo parts of step two will have the chance to turn in a second draft, reducing the possibility of data-related problems in the final version of the paper. the formative assessment in step two requires the professor to assign a grade on how well the student “cleaned up their survey” and the student to assign themselves a grade as well. students are told if the gap in the two grades is far apart, the student will be penalized through a loss of points. during the meeting with the instructor, students’ will reveal the grade they assigned to themselves, and the instructor will have the grade they assigned to the student written on their paper. the instructor shows the grade at that point. if the grades are more than half a grade apart, points will be deducted for that section of the draft. this form of assessment is repeated throughout the other steps of the project. in steps three, four, and five, students write (a) their theoretical analysis, econometric model, and literature review sections of their paper, (b) their descriptive statistics section, and (c) their regression results and policy analysis section. each section is turned in as a separate step so that students can be given extensive assessment of each section. 5 | journal for economic educators, 11(1), summer 2011 for formative assessment to be helpful, both positive and critical comments should be specific. for example, the comment is not just “excellent” as a positive comment, but “your definition and calculation of total cost of health care is excellent”, or “the human capital model should test for the diminishing marginal qualities of your experience variables, thus you should square that independent variable.” by the final draft students have been given extensive formative assessment that is continuous with frequent feedback. at each step, the instructor and students both grade their work, and students are penalized if there is more than half a grade gap between the two grades. if the grades are unsatisfactory, students are given the choice of turning in multiple drafts on each section. they finally turn in a completed draft a few days before the final exam. given the extensive formative assessment, students are no longer surprised at their grade in the project and in the course. results evidence on the effectiveness of formative assessment is presented by an analysis of the effect size measurement, analysis of descriptive statistics, and an analysis of ordinary least square regression of overall course grades. observations are from classes taught in 2007, 2008, and 2009. 2 every effort was made by the instructor to be consistent with the grading of students for all three years. homework, midterm, computer, and final exams were similar for all three years. analysis of effect size learning gains in educational research are typically measured by using a meta-analysis procedure called the effect size (es). a population es measure using the standardized means between two known populations is called the glass delta (glass, mcgraw and smith, 1981): this is the difference in means of the experimental group and control group divided by the standard deviation of the control group. effect sizes generally assume that both groups (control and experimental) are normally distributed and have equal variances. 3 the control group is comprised of students who took the course in 2007 and in 2008 whereas the experimental group is the group of students from 2009. the result in table 1 indicates the es of a comparison of the final course grade between the control and experimental group is 0.6. the finding in this study is evaluated by a two-tailed ttest of pair of independent group for mean differences resulting in a p-value of 0.08 with a corresponding confidence interval at the 90% confidence level of [0.2, 9.6]. the es is an equivalent measure to a z-score of a standard normal distribution. the es size can be interpreted as the percentile of the average experimental group student relative to the 2 one student was dropped, because he did not attend a single class and received a zero score on all assignments. data on students are actual data available to the instructor or obtained from the registrar’s office. 3 the levene’s test in this study shows that there are no differences between variances of the population. the graphical p-p plot and q-q plot show normality. in addition, the shapiro-wilk test, valid for sample sizes below 50, indicates a normal distribution. 6 | journal for economic educators, 11(1), summer 2011 average control group student. 4 effect sizes can be also interpreted as the percent of “nonoverlap” of experimental group scores to those of control group scores (cohen, 1988; p 21). an es of 0.6 suggests a non-overlap of 73% in the two distributions. table 1: mean and standard deviation of course grades mean std dev formative assessment dummy = 1 79.06 (n = 12) 6.77 formative assessment dummy = 0 74.23 (n = 25) 8.29 analysis of descriptive statistics the data represent three semesters of introductory econometrics course. years 2007 and 2008 represent the control group (dummy formative assessment = 0) and the year 2009 represents the experimental group (dummy formative assessment = 1). the mean characteristics of the pooled group, control, and experimental group are displayed in table 2. the average table 2: mean and standard deviation (s.d.) for pooled, control, and experimental group pooled control experimental mean s.d. mean s.d. mean s.d. formative assessment dummy 0.32 0.47 -------- final course grade* 75.8 8.06 74.23 8.29 79.06 6.77 race dummy (white = 1) 0.62 0.49 0.56 0.51 0.75 0.45 gender dummy (female = 1) 0.68 0.47 0.64 0.49 0.75 0.45 age 20.19 0.84 20.2 0.91 20.16 0.72 grade point average 3.27 0.38 3.31 0.38 3.17 0.38 economic major dummy 0.68 0.47 0.76 0.44 0.5 0.52 grade in microeconomics principles (a/a= 1)** 0.38 0.49 0.28 0.46 0.58 0.51 grade in macroeconomics principles (a/a= 1) 0.35 0.48 0.4 0.5 0.25 0.45 calculus 1 dummy 0.11 0.31 0.52 0.51 0.50 0.52 calculus 2 dummy 0.43 0.5 0.40 0.5 0.50 0.52 introduction to elementary statistics dummy 0.7 0.46 0.84 0.37 0.42 0.51 absence dummy*** 0.19 0.39 0.2 0.41 0.17 0.39 n = 37 25 12 *see appendix for grading plan. ** all courses listed are taken before econometrics. all students took both introductory economics. ***students who missed more than the two permissible absences. 4 further interpretation of effect sizes can be found in rosenthal and rubin (1982), glass, mcgraw and smith (1981), rosenthal (1984), coe (2002), cohen (1969), and cohen, kulik and kulik (1988). 7 | journal for economic educators, 11(1), summer 2011 course grade is 75.8% which is a c grade level. the average student is a 20-yearold white female, a junior with an average grade point average of 3.27, an economics major who did not get an a in her introductory courses, who took introductory statistics but not calculus, and did not miss more than two classes during the semester. both introductory economics courses are required for econometrics. about one third of the students got an a or ain the introductory economics courses. a comparison of the students between the two groups indicates, on average in both groups, students are of junior standing with a larger percentage of white and female students in the experimental group but lower percentages of economics majors (76% for the control group compared to 50% for the experimental group). with respect to prior coursework taken, a lower percentage of students from the control group got a’s in introductory microeconomics (28% compared to 58%), but fared better in introductory macroeconomics (40% compared to 25% a grades). about the same percentage of students took first semester calculus. twice as many students took introductory statistics in the control group compared to the experimental group, 84% versus 42%. higher percentages of students had taken calculus 2 in the experimental group compared to the control group (50% versus 40%). the average grade point average for the control group is only slightly higher than that of the experimental group, a difference of 0.14. as indicated previously, students from the experimental group on average scored 4.83 percentage points higher on their overall econometric course grade compared to control group students. a further review of the effectiveness of formative assessment measured by the differences in mean course grade between the control (without formative assessment) and experimental groups (with formative assessment) is presented in table 3. formative assessment was especially significant in raising course grades for nonwhites and females, a significant increase of 5.71 percentage points in overall grade for nonwhites, and 6.6 percentage points for females. for whites and males, the assessment had no significant effect in raising overall course grade. mean differences are significantly positive for students of all majors who took the econometrics course, especially for non-economics majors. course grades improved by 5.3 percentage points for economics majors and 8.8 percentage points for nonmajors, almost a full letter grade. the steeper the climb in terms of learning economic theoretical concepts, the more the student benefited from formative assessment. changing assessment techniques did not significantly affect students who do not show up to class, but was significantly effective for those who attended, 4.7 percentage points, approximately half a letter grade. this is not surprising. the more motivated a student is, the more likely to attend class, thus benefitting from the assessment. moreover, if a student misses class, he or she is not participating in the formative assessment process. analyzing the effectiveness of formative assessment for students based on their previous coursework does not follow a consistent pattern. formative assessment was significantly helpful for students who did not take introductory statistics, an increase of a substantial 10.38 percentage points, a full letter grade. yet, it was also helpful to those on the other end of math skills, students who took second semester calculus, approximately 5 percentage points, while not significant for students who took only the first semester calculus. this may suggest the continuous assessment and feedback helped students with the least and the most amount of math skills, more than those with middle-level math levels. 8 | journal for economic educators, 11(1), summer 2011 table 3: course grade descriptives and mean differences for control and experimental groups control experimental mean diff. p-value mean s. d. mean s. d. formative assessment 74.23 8.29 79.06 6.77 4.83 0.08 race 1 = white 0 = nonwhites 72.83 76.02 7.74 8.97 78.17 81.73 7.39 4.37 5.34 5.71 0.07 0.05 gender 1 = female gender 0 = male 72.36 77.58 8.54 7.05 79.01 79.20 7.85 2.40 6.65 1.62 0.03 0.45 economics major dummy = 1 economics major = 0 76.36 67.51 7.12 8.68 81.75 76.36 6.29 6.62 5.39 8.85 0.03 0.01 absence dummy = 1 = 0 65.50 76.42 7.44 7.07 68.65 81.14 3.67 5.07 3.15 4.72 0.18 0.04 (a/a= 1) (a/a= 0) grade in microeconomics principles dummy 79.31 72.26 5.74 8.49 82.70 73.93 5.31 5.28 3.39 1.67 0.09 0.53 (a/a= 1) (a/a= 0) grade in macroeconomics principles dummy 77.42 72.11 6.18 9.00 84.66 77.19 1.17 6.85 7.24 5.08 0.01 0.09 calculus 1 dummy = 1 calculus 1 = 0 75.55 72.81 8.82 7.79 80.84 77.27 5.78 7.73 5.29 4.46 0.15 0.08 calculus 2 dummy = 1 calculus 2 = 0 77.34 72.17 4.87 9.54 82.31 75.80 5.71 6.53 4.97 3.63 0.01 0.25 intro. to elementary = 1 statistics dummy = 0 74.77 71.43 8.71 5.54 75.21 81.81 7.08 5.42 0.44 10.38 0.80 0.00 n 25 12 * p-values conducted from t-test to compare means of two independent groups. numbers in bold are significant at the 0.05 significance level. regression analysis results from an ordinary least square regression are presented in table 4. characteristics such as gender, race, and a student’s class standing had no significant effect on the econometrics course grade. the coefficient for formative assessment is positive and highly significant, improving student course grades by approximately 7.7%, all else equal. this supports black and wiliam’s (1998) observation from a review of twenty-one studies that there were substantial learning gains following the enhancement of formative assessment. on the other hand, a regression model with the final exam grade as the dependent variable did not yield significant results for the formative assessment coefficient. this suggests that the assessment was helpful in raising overall performance (combination of homework, exams, paper and computer exam), but did not necessarily affect one particular exam. 9 | journal for economic educators, 11(1), summer 2011 table 4: regression results on course grades course grade variable coefficient p-value intercept 31.26 0.24 formative assessment dummy = 1 7.72 0.001*** race dummy (nonwhite = 1) -3.01 0.117 gender dummy (female = 1) -0.85 0.671 age -0.03 0.977 grade point average (gpa) 13.32 0.000*** economic major dummy=1 5.03 0.027** absence dummy = 1 -5.39 0.050** grade in principal microeconomics dummy (a/a= 1) -1.65 0.659 grade in principal macroeconomics dummy (a/a= 1) -1.64 0.526 calculus 1 dummy = 1 -2.59 0.352 calculus 2 dummy = 1 3.65 0.079* introduction to elementary statistics dummy = 1 -1.36 0.560 number of observations 37 r-sq 0.79 note:*** 0.01 significance level, ** 0.05 significant level, and * 0.10 significance level the regression results also show that a letter grade increase in gpa increases the econometrics course grade by more than a letter grade, approximately 13.32 percentage points. given that the average grades for most econometrics courses are in the low c range, the effect of a change in gpa on the econometrics grade is substantial. not surprisingly, student motivation measured by absences is an important determinant of course grade. students who missed more than two classes show a decrease in course grade of about 5.3 percentage points, dropping a student half a letter grade. previous introductory economics courses or lower level math courses had no significant effect on the econometrics course grade. 5 a student who took higher levels of calculus, however, realized an increase of more than 3 percentage points in overall course grade (p < 0.10). other benefits and costs of the project the most obvious benefit of formative assessment is the significant improvement in student course grades. in addition to improvement in course grades, students are also encouraged to send their papers to undergraduate conferences and publications. in the instructors judgment, six papers were worthy of conference presentations out of a class of twelve students in the fall of 2009. only one of twelve student papers in 2007 and three of thirteen papers in 2008 were judged as good enough for submission. in order to make a conference presentation possible, students are encouraged to take the course during their junior year, thus increasing the likelihood 5 a student receiving an overall course grade of a/awas the dummy variable one, and not introductory course taken since all students were required to take both introductory courses for econometrics. 10 | journal for economic educators, 11(1), summer 2011 of conference presentations and submissions for publication in their senior year. in the fall of 2010, four of seven junior-standing students who took the course in 2009 sent their papers to the southern california conference for undergraduate research (sccur). prior to 2009, only one student had presented at sccur. students are also encouraged to expand their econometrics papers into their senior project. two of the twelve students from 2007 and seven of the thirteen from 2008 choose to turn their econometrics paper into their thesis, whereas eleven out of the twelve in 2009 choose or intend to turn their econometric papers into their senior thesis. from faculty evaluations, some students have indicated they view the work as worthy of an eight-unit course (econometrics and senior project), instead of a four-unit course, in order to justify the demanding work required of them. in addition, students who do not show up to the periodic meetings could be denied expansion of their project into a senior project. this incentive is especially effective if the same instructor teaches both courses. the incentive to expand the econometrics project into a senior project course is a powerful motivator that allows for successful periodic monitoring and helps justify students’ work load. the costs associated with this project are the loss of breadth of material, the timeconstraint for the instructor, and structural problems with the implementation of such a largescale project. the implementation of a multi-step project with continuous feedback comes at a cost of loss of breadth in econometric topics. this problem can be remedied by expanding the curriculum to two semester courses in econometrics. the first semester would cover probability distribution, introduction to regression, classical two-variable regression model; properties of estimators; hypothesis testing, multiple regression, estimation, hypothesis testing, multicollinearity; specification error, heteroscedasticity, and dummy variables. the second semester would cover topics such as alternate functional forms, autocorrelation, qualitative choice and limited dependent variable models, simultaneous equations, and topics in time-series analysis and forecasting. this enables the instructor to include extensive formative assessment as well as to cover all relevant topics. a second possibility is to institute an applied econometrics course and a theoretical econometrics course, with the latter requiring more stringent mathematics. secondly, there are time constraints for the instructor. the implementing the projects and meeting with students after each stage is very time consuming. the benefit of student learning from this process outweighs the cost of time to faculty. in addition, specialization will diminish the marginal cost of implementation to the instructor over time. other than meeting with students individually, the project will require less time from the instructor each additional year the course is taught. moreover, if the same instructor teaches the senior project course in the following term, the work of advising students on a project for that course is significantly reduced. structurally, the project requires smaller class sizes, teaching the course in the fall term, a statistical computer program for student to access such as spss, and institutional membership in a data archive organization such as icpsr. other than smaller class sizes, most colleges can implement the other structural changes at a very reasonable cost. teaching the course in the fall allows the instructor to meet with the students at the end of the spring term. this in turn enables students to use the summer to look for surveys on topics that are of interest to them. smaller class sizes can be a challenge, although not necessarily a structural impediment for most liberal arts colleges. other colleges could restrict the course to juniors and seniors and only economics majors as a possible solution. 11 | journal for economic educators, 11(1), summer 2011 concluding remarks classroom experimentation with teaching the course with and without formative assessment will continue for the next several years. in addition to classroom experiments in econometrics, future research may result as student outcomes from formative assessment experiments in the introductory microeconomics course are collected. incorporating the project into the econometrics course yielded useful results. first, the instructor included extensive formative assessment throughout the course. second, students more fully engaged the material and raised their level of performance in the course. given these results, i argue that formative assessment was the principle means of raising student performance in my introductory econometrics course from 2007 and 2008 to 2009. the success of incorporating layers of formative assessment is evident in the improvement in overall course grade and the increased quality of papers written by students. the unmeasured benefit to this instructor is the ability to engage students throughout the semester. moreover, the ability of students with diverse math and analytical skill levels to master the theoretical concepts in econometrics and to apply them to real world situations has substantially reduced this instructor’s frustration in teaching econometrics. references becker, william, and watts, michael. 1996. “chalk and talk: a national survey of teaching undergraduate economics.” american economic review. 86(2): 448-54. becker, william and greene, william. 2001. “teaching statistics and econometrics to undergraduates”. the journal of economic perspective, 15(4): 169-182. black and wiliam 1996. “meanings and consequences: a basis for distinguishing formative and summative functions of assessment?” british educational research journal. 22(5): 537-548. black, paul and wiliam, dylan. 1998. “assessment and classroom learning,” assessment in education. 5(1): 7-74. black, paul and wiliam, dylan. 1998. “inside the black box: raising standards though classroom assessment.”phi-delta-kappa., 80(2): 139-148. black, paul and wiliam, dylan. 2003. “in praise of educational research: formative assessment,” british educational research journal. 29(5): 623-637. bloom, madaus, and hastings.1971. evaluation to improve learning. mcgraw-hill book company. coe, robert. 2002. paper from conference of british educational research association. university of exeter, england. september 12 – 14. cohen, j. 1969. “educational outcomes of tutoring: a meta-analysis of findings.”american educational research journal, 19: 237-248. cohen, j., kulik, j.a. and kulik, c.c. 1988. statistical power analysis for the behavioral sciences. hillsdale, hj: lawrence earlbaum associates. faulk, dagney. 2007. “formative and summative assessment in economics principles courses: are applied exercises effective? prepared for 2008 annual meeting of the american economic association, january 4-6, new orleans, la. glass, mcgraw and smith, 1981. meta-analysis in social research. sage publications inc. newbury park, ca, london, england, and new delhi. ramaprasad, a. 1983. “on the definition of feedback.” behavioral sciences, 28: 4-13. 12 | journal for economic educators, 11(1), summer 2011 rosenthal, robert and rubin d.b. 1982. “a simple, general purpose display of magnitude of experimental effect.” journal of educational psychology, 74: 66-169. rosenthal, robert. 1984. meta-analysis procedures for social research. sage publications, beverly hills, london, new delhi. scriven, m. 1967. the methodology of evaluation. in r. w.tyler, r. m. gagne, and m scriven (eds.), perspectives of curriculum evaluation. vol. i: 39-83. chicago, il: rand mcnally. walstad, william. 2005. teaching economics: more alternatives to chalk and talk. becker, william, coedited with michael watts and suzanne becker. cheltenham uk: edward elgar publishing, ltd, chapter 11. wilson, mark and scalise, kathleen. 2006. “assessment to improve learning in higher education: the bear assessment system.” higher education. 52(4): 635-663. yorke, mantz. (2003). “formative assessment in higher education: moves towards theory and the enhancement of pedagogic practice.” higher education. 45(4): 477-501. appendix grade requirements in 2007 and 2008 grade requirements in 2009 midterm exam 25% midterm exam 20% comprehensive final exam 35% comprehensive final exam 35% quizzes /homework 10% quizzes/homework 10% paper 25% paper 30% attendance 5% attendance 5% . 12 journal for economic educators, 11(2), fall 2011 12 effects of current and prior skipped classes on current exam performance tin-chun lin 1 abstract two hundred and three students in four introductory microeconomics classes (two sections in two semesters) participated in a study of the effect of skipped classes on exam performance and the impact of skipped classes in past exam periods on current exam performance. results showed a negative and significant correlation––one additional class missed was found to lower test scores by approximately 1.92–2.54 points and reduce exam performance by approximately 3.5– 6.4%. one additional class missed in the first and second exam periods was found to lower final exam scores by approximately 2.7 and 1.7 points, respectively, and reduce final exam performance by approximately 6.16% and 4.44%, respectively. key words: skipped classes; exam performance jel classification: a20; a22; c30 introduction the relationship between skipped classes and exam performance has been broadly investigated and discussed by education, psychology, and economics researchers (e.g., anikeeff, 1954; jenne, 1973; schmidt, 1983; jones, 1984; brocato, 1989; park and kerr, 1990; van blerkom, 1992; gunn, 1993; romer, 1993; day, 1994; durden and ellis, 1995; douglas and sulock, 1995; devadoss and foltz, 1996; marburger, 2001, 2006; rodgers, 2001; rocca, 2003; chung, 2004; krohn and o’connor, 2005; cohn and johnson, 2006; stanca, 2006; lin and chen, 2006; chen and lin, 2008). although researchers of this topic have adopted different methodologies and used different data sets, all have come to the same conclusion: exam performance is inversely and significantly correlated with skipped classes. the relationship between skipped classes in the past exam period and current exam performance, however, has not been broadly investigated. this issue is important because knowledge is a cumulative process—concepts and models taught in earlier lectures may be used to understand later lectures. therefore, students who miss earlier lectures may find it difficult to catch up on later lectures and may not do well on later exams, especially on a comprehensive final exam. for this reason, this study focuses on the impact of skipped classes on current exam performance in both the current and prior exam periods. this paper is organized as follows. first, two hypotheses, a basic framework, and data measurement information are presented. second, econometric models are built to investigate the issue and empirical results are reported. finally, conclusions are offered. 1 associate professor of economics, school of business and economics, indiana university – northwest, 3400 broadway, gary, in 46408, usa. phone: 1-219-980-6634; fax: 1-219-980-6916; email: tinlin@iun.edu. i would like to thank discussants at the sea conference in atlanta and the referee for a very helpful discussion and their advice mailto:tinlin@iun.edu 13 journal for economic educators, 11(2), fall 2011 13 hypotheses, basic framework, and data measurement hypotheses given the data available for this research, the following two testable (null and alternative) hypotheses were developed: hypothesis 1 :1 0 students’ skipped classes in the current exam period will not affect their current exam performance. :1 a students’ skipped classes in the current exam period will affect their current exam performance. hypothesis 2 :2 0 students’ skipped classes in the prior exam periods will not affect their current exam performance. :2 a students’ skipped classes in the prior exam periods will affect their current exam performance. basic framework an unobserved individual effect may be created by some individual unobserved heterogeneity variables, such as students’ habits and motivations for attending classes,. formally, the model for individual heterogeneity is illustrated below. itiiitit uzxy 0 , (1) where it y is the dependent variable observed for individual i at time t, it x is the time-variant regressor, i z is the time-invariant regressor, i is the unobserved individual effect (e.g., habits, motivation, or individual factors) , and it u is the error term. the two main methods of dealing with the unobserved individual effect ( i ) are to make the random effects or fixed effects assumptions. the random effects assumption is that the unobserved individual effect is uncorrelated with the independent variables (i.e., assuming that i is independent of it x , i z or 0, iiti zxe ), while the fixed effects assumption is that the unobserved individual effect is correlated with the independent variables (i.e., assuming that i is not independent of it x , i z or 0, iiti zxe ). adding dummy variables for each individual i is an alternative approach to removing the unobserved individual effect ( i ). therefore, dummy variables, such as elective course, living background, math background, and gender, were added to the model to remove the unobserved individual effect. consequently, a basic framework for a student’s exam performance is as follows: exam performance = f (student’s quality, working hours per week, total credits taken in a semester, frequency of studying for the exam, skipped classes, student’s living background, student’s math background, elective course, gender). data measurement to conduct this experiment, four factors need to be held constant. they are: 14 journal for economic educators, 11(2), fall 2011 14 (1) teacher’s instructional style and teaching materials. since there were two sections in each semester, a teacher’s instructional style and teaching materials was held constant. therefore, only one teacher was chosen in order to ensure the same instructional style and teaching materials. (2) incentive to attend class. in order to identify the effect of the student’s skipped classes on exam performance, students were given complete freedom to make their own choice. hence, there were no mandatory attendance policies, no attendance bonus, and no quizzes. both mandatory attendance policies and quizzes serve to enforce students’ class attendance while an attendance bonus encourages students to attend class. in addition, punishment due to mandatory attendance policies and a bonus may serve to change students’ original grades, leading to bias. (3) quality of classroom. the same classroom was used with two different sections each semester so that the instructor might maintain the same instructional style. the classroom had high-tech equipment, including a computer, an over-head projector, and a chalkboard. (4) same exams for two sections. the same exams (including midterm exams and final exam) were created for two different sections each semester for consistency. students in introductory microeconomics classes in spring 2007 and spring 2009 were the participants in this case study. each class met twice a week (tuesdays and thursdays). one section began at 10:00am while the other section began at 2:30pm. these were good attendance times for students, not too early or too late, and not during lunch time. note that no additional weekly review/tutorial classes were provided by graduate students for this course on this branch campus. daily attendance was taken, but there was no penalty for skipping class. there were two midterm exams and one final exam. the final exam was cumulative (i.e., comprehensive). each exam was one-third of the final grade. about 80% of the lectures were from textbooks, with the remainder from the instructor’s own examples and exercises. each exam included problems and essay questions taken word-for-word from the lectures, examples, and exercises in class. if students missed the day on which these examples and exercises were provided, they often found it harder to answer questions bearing on those examples on the exam because they could not easily find the information in textbooks. students also were given a weekly base study guide with answers to help them study. thus, 50–60% of the questions came from study guides (all questions in the study guides were developed from lectures and some harder questions were discussed in class) and the rest were from lecture notes and/or the textbook. the following variables were used in this study: 1. skipped class record. daily attendance for each exam period was taken, such that each student had an absence record. there were nine classes (excluding the exam day) between exam periods. 2. three exam scores. each student’s three exam scores were recorded. the scores were on a 100-point-scale. 3. student quality. many researchers use gpa or sat score to proxy student quality. each measures different dimensions. the gpa, regardless of a student’s major, is a measure of a student’s motivation and scholarly ability. the sat score, on the other hand, is a measure of a student’s innate ability. measurement of innate ability and motivation as well as scholarly ability is necessary. for that reason, student quality (qua) is defined as 15 journal for economic educators, 11(2), fall 2011 15 gpasat . students’ sat scores were provided by the admissions office, while students’ gpas were obtained by the registrar’s office. 4. total credits taken in the semester. each student’s total credits taken in the semester were provided by the registrar’s office. 5. gender. set to 1 for male students and 0 for female students. in addition to these five variables, six more variables were self-reported by students. a questionnaire was developed at the end of the semester. five minutes before the final exam began the questionnaire was handed to each student. since no question was confidential, all students were required to write down their names so that these self-reported data could be matched with the non-self-reported data. before the questionnaires were distributed to students, they were told that this survey was for a research project and definitely would not affect their final grades. these six variables are: 6. total working hours per week. students were asked to write down total working hours per week. 7. living with young children. students were asked whether or not they lived with children less than 10 years old. set yes as 1 and no as 0. 8. elective or required. students were asked whether this course was elective or required. set 1 as elective and 0 as required. 9. have taken college algebra. students were asked whether or not they had finished a college-level algebra class elsewhere. set yes as 1 and no as 0. 10. have taken college calculus. students were asked whether or not they had finished a college-level calculus class elsewhere. set yes as 1 and no as 0. 11. frequency of studying for exams. students were asked three questions: (1) how often did you study for exam i? (2) how often did you study for exam ii? (3) how often did you study for the final exam (exam iii)? 2 there were five choices for these questions. 1 = i study only 1 day before the test; 2 = i study only 2-3 days before the test; 3 = i study only 4-5 days before the test; 4 = i study one week before the test; 5 = i study regularly right after the class. table 1 reports means and standard deviations for the variables used in this study. it should be noted that the grades for each exam were original grades without curves. the effective number of total students in this study was 203. eleven students who dropped out of the class during the semester were excluded because they did not answer the questionnaire on the final exam day and did not complete all three exams. 2 students were not asked to write down the number of hours devoted to studying for the exam, because they might not precisely remember how many hours they had studied for the exam, but it might be easier for them to recall how often they had studied for the exam. 16 journal for economic educators, 11(2), fall 2011 16 table 1: mean and standard deviation of variables variables mean standard deviation scores for exam i ( e x a 1 ) 67.12069 16.55299 log value of scores for exam i ( l n e x a 1 ) 4.17208 0.27354 scores for exam ii ( e x a 2 ) 77.51478 15.17480 log values of scores for exam ii ( l n e x a 2 ) 4.32790 0.22413 scores for exam iii ( e x a 3 ) 50.87685 14.4312 log values of scores for exam iii ( l n e x a 3 ) 3.88504 0.31074 sat scores (sat) 1006.5025 139.00044 gpa 2.47828 0.595699 total working hours per week (whr) 29.18227 13.03352 log value of total working hours per week ( l n w h r ) 3.04852 1.15153 total credits taken in the semester (crd) 12.73891 3.37519 log value of total credits taken in the semester ( l n c r d ) 2.496597 0.34296 frequency of studying for first exam ( s t d 1 ) 2.91626 1.120414 log value of frequency of studying for first exam ( l n s t d 1 ) 0.98333 0.44248 frequency of studying for second exam ( s t d 2 ) 3.19212 1.15507 log value of frequency of studying for second exam ( l n s t d 2 ) 1.07826 0.43774 frequency of studying for third exam ( s t d 3 ) 2.92118 1.22422 log value of frequency of studying for third exam ( l n s t d 3 ) 0.96795 0.48335 number of absenteeism in the first exam period ( a b s 1 ) 0.88177 1.24908 number of absenteeism in the second exam period ( a b s 2 ) 1.50246 1.87578 number of absenteeism in the third (final) exam period ( a b s 3 ) 1.37931 1.97483 dummy variable: having young kids to live with (kid) 0.27586 0.44805 dummy variable: have taken college algebra (alg) 0.57143 0.496095 dummy variable: have taken college calculus (cal) 0.310345 0.46378 dummy variable: male students (mal) 0.51724 0.50094 dummy variable: elective course (ele) 0.157635 0.365300 econometric models and empirical results econometric models the effect of skipped classes on a student’s exam performance is investigated for exams i, ii, and iii, including whether skipped classes in the last exam period had an impact on current exam performance. exam performance is modeled as two types of functions. these two econometric models are: model 1: kidaabsastdacrdawhraquaaaexa iii 6543210 17 journal for economic educators, 11(2), fall 2011 17 110987 eleamalacalaalga (2) model 2: ii stdbcrdbwhrbquabbexa lnlnlnlnln 43210 21098765 elebmalbcalbalgbkidbabsb i , (3) where i = 1, 2, 3; e x a i = scores of exam i; qua = student quality (i.e., sat gpa); whr = total working hours per week; crd = total credits taken in the semester; s t d i = frequency of studying for exam i; a b s i = total number of absence during the period of exam i; kid = having young kids to live with; alg = have taken college algebra class; cal = have taken college calculus class; mal = male students; ele = elective course; and 1 2 , = stochastic disturbance with a mean 0 and a variance 2 . empirical results exam i the results for exam i are reported in table 2. the null hypothesis that students’ skipped classes in the current exam period do not affect their current exam performance was rejected. skipped classes in the first exam period have a negative and significant (at 5%) effect on the first exam score in both models. thus, missing class negatively affected a student’s achievement. the point estimate indicates that each additional missed class lowers the first test scores by approximately 1.92 points on average, or by approximately 3.523%. in addition, student quality exerted a positive and significant (at 1%) effect on first exam performance in both models. frequency of studying for the first exam also exerted a positive and significant (at 1%) effect on first exam performance. obviously, out-of-classroom effort is an important factor in determining a student’s exam performance, an effect that could be partially attributed to the format of the exam. the exam involved essays & problems, rather than multiplechoice questions, in an attempt to avoid the “opportunist” problem. selection of this format meant that students had to devote sufficient time and effort to studying for the exam. students who thought that they were smart and thus did not need to study often (only one or two days before the exam) were less likely to perform well on an essay & problem-based exam. for example, if a multiple-choice-based exam with five choices in each question were offered, the student who had not studied and chose the same answer for all questions could receive twenty credits (i.e., the probability of getting the correct answer is 20%). on the other hand, under the essay & problem-based exam, a student who did not study at all would likely receive zero credit. the difference between these two bases is twenty credits. nevertheless, some students may not precisely recall how often they studied for the first exam during the first exam period, so their response may be based on their exam grades. the coefficient on the male dummy was positive and significant at the 10% level in both models, indicating that gender had a statistically significant effect on first exam performance. this result is consistent with those in the education literature, such as helpern (1996) and hedge and nowell (1995)—males score higher on average than females on tests of mathematics ability. since economics involves mathematical skills, male students may do better in economics than female students, ceteris paribus. similarly, having finished a calculus class had a positive and significant effect on exam performance at the 10% level in both models, suggesting that understanding calculus benefits the learning of economics. the significance of the calculus dummy variable may also reflect a student’s choice of major and the degree to which they are 18 journal for economic educators, 11(2), fall 2011 18 more motivated and/or have higher innate ability. alternatively, students who have completed a calculus course may have a higher class standing than those who have not taken this course. therefore, more experienced students may perform better than those of lower class standing. working hours per week exerted a negative and significant (at 10%) on the first exam in model 1, while the effect was not statistically significant in model 2. this implies that the more time these students work, the less time they have for study and hence they may perform worse on exams. it should be noted that the literature typically reports that the relationship between hours worked per week and grades is nonlinear so that the logs (i.e., model 2) are appropriate. however, the empirical evidence here showed that the effect was significant in model 1 rather than in model 2. a possible reason could be that the extreme values (i.e., students working 40 hours or more per week) accounted for the significant estimated coefficient in model 1. finally, the coefficients for both total credit hours taken in the semester and living with young kids were not statistically significant at the 10% level. table 2: estimates of e x a 1 and l n e x a 1 explanatory variables exam i model 1 explained variable: e x a 1 model 2 explained variable: l n e x a 1 constant 37.717*** (5.74) 1.3469*** (3.25) qua 0.008379*** (7.55) qualn 0.34468*** (7.15) whr -0.14168* (-1.80) l n w h r -0.01268 (-0.88) crd -0.1687 (-0.52) l n c r d -0.01037 (-0.20) s t d 1 3.5218*** (4.09) l n s t d 1 0.14244*** (3.84) a b s 1 -1.9168** (-2.46) -0.03523*** (-2.69) kid 0.294 (0.13) 0.01268 (0.33) alg 0.334 (0.16) 0.01033 (0.30) cal 3.330* (1.65) 0.06387* (1.71) mal 3.697* (1.90) 0.05553* (1.69) ele 1.673 (0.66) 0.02269 (0.53) r 2 0.415 0.379 r 2 0.384 0.347 f-statistics 13.60 11.73 sample size 203 203 (t-value) *** denotes statistical significance of the t-statistic at the 0.01 level; * denotes statistical significance of the t-statistic at the 0.10 level. exam ii the results for equations (2) and (3) for exam ii are presented in table 3. the null hypotheses that students’ skipped classes in the prior and current exam periods do not affect their current exam performance were rejected. skipped classes in the first exam period exerted a 19 journal for economic educators, 11(2), fall 2011 19 negative and significant (5% in model 1; 10% in model 2)) effect on second exam performance. skipped classes in the second exam period also exerted a negative and significant (1%) effect on second exam performance in both models. the coefficient of skipped classes in the second exam period indicated that one additional class missed could lower the second test scores by approximately 2.1 points and reduce exam performance by approximately 3.33%. although the second exam was not cumulative, skipped classes in the first exam period still have a statistically significant effect on second exam performance. this implies that concepts and models taught in earlier lectures are useful in understanding later lectures. students who missed some lectures in the first exam period may miss important concepts used in the second exam. for example, we might expect a student who skipped supply/demand material to perform more poorly on market efficiency and structure questions in a future exam. student quality and student’s frequency of studying for the second exam still exert a positive and significant (1%) effect on second exam performance in both models. working hours per week exert a negative and significant (5% and 10%, respectively) effect on second exam performance in both models (except column 4). having finished a calculus class had a positive and significant (5%) effect on second exam performance in both models, implying that students who understand calculus have an easier time learning economics. the coefficients on the male and elective dummy variables, however, did not exert a significant effect on second exam performance in either models. the second exam materials include market efficiency and the theory of consumer choice (e.g., marginal utility and indifference curves). the chapter on consumer choice theory is more abstract and mathematical. therefore, students who understand calculus likely do better than students who do not understand calculus. moreover, this chapter may be more difficult than the other chapters. hence, students who frequently missed class during the second exam period found it difficult to study and did not do well on exams. exam iii the results for equations (2) and (3) for exam iii are reported in table 4. again, the null hypotheses that students’ skipped classes in the prior and current exam periods do not affect their current exam performance were rejected. skipped classes during the third exam period had a negative and significant (1%) effect on third exam performance in both models. the coefficient for skipped classes in the third exam period implies that one additional class missed lowers the third test score by approximately 2.54 points on average and reduces exam performance by approximately 6.44%. moreover, skipped classes in the previous exam periods (exam i and ii periods) also had negative and significant (1%) effects on final exam performance in both models. the coefficient for skipped classes in the first exam period indicates that one additional class missed in that period reduces the third test score by approximately 2.7 points on average and final exam performance by approximately 6.16%. the coefficient for skipped classes during the second exam period implies that one additional class missed in that period reduces the third test score by approximately 1.73 points on average and final exam performance by approximately 4.44%. obviously, when the final exam is cumulative, previous skipped classes in the first and second exam periods significantly affect final exam performance. this implies that concepts and models covered in earlier lectures are also used on later exams. students who missed class in earlier exam periods have difficulty performing well on the final exam. 20 journal for economic educators, 11(2), fall 2011 20 table 3: estimates of e x a 2 and l n e x a 2 explanatory variables exam ii model 1 explained variable: e x a 2 (1) (2) model 2 explained variable: l n e x a 2 (3) (4) constant 49.586*** (7.95) 53.187*** (8.77) 2.0365*** (5.90) 2.2164*** (6.67) qua 0.007392*** (7.18) 0.0069617*** (7.00) qualn 0.2742*** (6.84) 0.25417*** (6.58) whr -0.15844** (-2.16) -0.12364* (-1.75) l n w h r -0.01919* (-1.65) -0.01386 (-1.21) crd 0.2146 (0.71) 0.2752 (0.95) l n c r d 0.02457 (0.57) 0.03696 (0.89) s t d 2 2.7900*** (3.61) 2.2526*** (2.98) l n s t d 2 0.11291*** (3.66) 0.08666*** (2.88) a b s 1 -1.4454** (-1.99) -0.02079* (-1.89) a b s 2 -2.0998*** (-4.48) -0.033314*** (-4.69) kid 0.739 (0.35) 0.246 (0.12) 0.0062 (0.19) -0.00062 (-0.02) alg -0.399 (-0.21) -0.516 (-0.29) 0.00102 (0.04) -0.00167 (-0.06) cal 4.748** (2.34) 4.455** (2.28) 0.0723** (2.33) 0.06542** (2.20) mal 0.059 (0.03) -0.473 (-0.27) -0.00156 (-0.06) -0.00789 (-0.30) ele -0.873 (-0.37) -0.938 (-0.41) -0.01227 (-0.34) -0.01366 (-0.40) r 2 0.396 0.441 0.354 0.409 r 2 0.364 0.412 0.320 0.378 f-statistics 12.57 15.18 10.50 13.30 sample size 203 203 203 203 (t-value) *** denotes statistical significance of the t-statistic at the 0.01 level; ** denotes statistical significance of the t-statistic at the 0.05 level; * denotes statistical significance of the t-statistic at the 0.10 level. 21 journal for economic educators, 11(2), fall 2011 21 table 4: estimates of e x a 3 and l n e x a 3 explanatory variables exam iii (final exam) model 1 explained variable: e x a 3 (1) (2) (3) model 2 explained variable: l n e x a 3 (4) (5) (6) constant 30.698*** (5.76) 32.102*** (5.96) 33.844*** (6.69) 1.238*** (3.28) 1.5828*** (3.65) 1.5523*** (3.93) qua 0.00572*** (6.28) 0.00551*** (6.00) 0.005502*** (6.41) qualn 0.30722*** (6.09) 0.28785*** (5.72) 0.2913*** (6.34) whr -0.1898*** (-2.94) -0.18521*** (-2.85) -0.18317*** (-3.03) l n w h r -0.04032*** (-2.70) -0.03785** (-2.54) -0.03484** (-2.56) crd -0.0719 (-0.27) -0.0954 (-0.35) -0.0283 (-0.11) l n c r d -0.01365 (-0.25) -0.00695 (-0.13) 0.01504 (0.30) s t d 3 3.6374*** (5.43) 3.5472*** (5.23) 2.9104*** (4.49) l n s t d 3 0.22423*** (6.19) 0.21033*** (5.76) 0.16709*** (4.89) a b s 1 -2.6969*** (-4.17) -0.06157*** (-4.45) a b s 2 -1.7325*** (-4.00) -0.04439*** (-4.81) a b s 3 -2.5408*** (-6.63) -0.06445*** (-8.00) kid -0.587 (-0.32) -1.097 (-0.59) -1.061 (-0.61) -0.01909 (-0.48) -0.03056 (-0.77) -0.02937 (-0.81) alg 0.098 (0.06) 0.712 (0.43) 0.828 (0.53) 0.00194 (0.05) 0.01632 (0.46) 0.02118 (0.65) cal 3.234* (1.80) 3.119* (1.73) 3.375** (2.00) 0.0696* (1.79) 0.06392* (1.65) 0.0674* (1.90) mal 2.408 (1.52) 1.761 (1.11) 1.447 (0.97) 0.03023 (0.88) 0.01521 (0.45) 0.00706 (0.23) ele 0.781 (0.38) 0.755 (0.36) 1.586 (0.81) -0.00774 (-0.17) -0.00847 (-0.19) 0.01254 (0.31) r 2 0.482 0.479 0.540 0.476 0.484 0.566 r 2 0.455 0.451 0.516 0.448 0.457 0.544 f-statistics 17.88 17.63 22.57 17.42 17.99 25.08 sample size 203 203 203 203 203 203 (t-value) *** denotes statistical significance of the t-statistic at the 0.01 level; ** denotes statistical significance of the t-statistic at the 0.05 level; * denotes statistical significance of the t-statistic at the 0.10 level. 22 journal for economic educators, 11(2), fall 2011 22 in addition, taking a closer look at the t-values for a b s 1 , a b s 2 , and a b s 3 , shows that the tvalue for a b s 3 is much larger in absolute value than the t-values for a b s 1 and a b s 2 . the larger t-statistic for a b s 3 ,given the size of the estimated coefficient, is due to a relatively smaller estimated standard error. that is, the fit is better than for a b s 1 and a b s 2 . furthermore, student quality still has a positive and significant (1%) effect on final exam performance. amount of time spent studying for the third exam exerts a positive and significant (1%) effect on final exam performance in both models. working hours per week has a negative and significant (1% and 5%) effect on final exam performance in both models. although total credits taken during the semester and living with young kids exerted negative effects on final exam performance in both models, these effects are not statistically significant. in addition, student’s math background (calculus) had a positive and significant (5% and 10%) effects on final exam performance, while algebra did not exert a statistically significant effect, although the effect is positive. finally, the coefficients on the male and elective course dummy variables are not significant. conclusions in the case study described in this paper, two hundred and three students in four introductory microeconomics classes (two sections in two semesters) participated in a study of the effect of skipped classes in current and previous exam periods on current exam performance since knowledge is cumulative—concepts and models taught in earlier lectures may be used in later lectures and exams—students who missed earlier lectures appear to have difficulty catching up on later lectures and do not perform as well on later exams, especially on a comprehensive final exam. the data for exam performance in this study were taken from students’ responses to essay & problem questions. the advantage of essay & problem questions is that students’ explanations and calculation process must be read in order to ascertain their understanding of the materials and award points. thus, essay and problem questions may more precisely reflect a student’s exam performance. skipped classes and exam performance are negatively and significantly correlated, in the absence of guessing, as in browne et al. (1991), who found significant positive effects of attending lectures on essay tests. these results imply that performance on problems and essays are directly related to attendance at lectures. finally, the point estimates showed that one additional class missed reduced test scores by approximately 1.92–2.54 points on average and reduced exam performance by approximately 3.5–6.46%. absenteeism in past exam periods (exams i and ii) also had negative and significant effects on final exam performance: one additional class missed in the first and second exam periods lowered final exam scores by approximately 2.7 and 1.7 points respectively, and final exam performance by approximately 6.16% and 4.44%, respectively. 23 journal for economic educators, 11(2), fall 2011 23 references anikeeff, m. 1954. “the relationship between class absences and college grades”. journal of educational psychology. 45 (4): 244–249. brocato, j. 1989. “how much does coming to class matter? some evidence of class attendance and grade performance.” educational research quarterly. 13(3): 2–6. browne, m.n. et al. 1991. “the impact of teachers in economic classroom.” the journal of economics. 17: 25–30. chen, j. and lin, t. f. 2008. “class attendance and exam performance: a randomized experiment.” journal of economic education. 39(3): 213–227. chung, c. j. 2004. “impact of attendance, instructor contact, and homework completion on achievement in a developmental logic course.” research & teaching in developmental education. http://findarticles.com/p/articles. cohn, e., and johnson, e. 2006. “class attendance and performance in principles of economics.” education economics. 14(2): 211–233. day, s. 1994. “learning in large sociology classes: journals and attendance.” teaching sociology. 22: 151–165. devadoss, s., and foltz, j. 1996. “evaluation of factors influencing student class attendance and performance.” american journal of agricultural economics. 78(3): 499–507. douglas, s. and sulock, j. 1995. “estimating educational production functions with correction for drops.” journal of economic education. 26(2): 101–112. durden, c., and ellis, v. 1995. “the effects of attendance on student learning in principles of economics.” american economic review. 85(2): 343–346. gunn, p. 1993. “a correlation between attendance and grades in a first-year psychology course. canadian psychology. 34(2): 201–202. halpern, d. f. 1996. “a process-oriented model of cognitive sex differences.” learning and individual differences. 8: 3–24. hedges, l.v. and nowell, a. 1995. “differences in mental tests scores, variability, and numbers of high scoring individuals.” science. 269: 41–45. howard, g. s., and maxwell, s. e. 1982. “do grades contaminate student evaluations of instruction?” research in higher education. 16(2): 175–188. jenne, c. h. 1973. “attendance and student proficiency change in a health science class.” journal of school health. 43: 125–126. jones, h. 1984. “interaction of absences and grades in a college course.” journal of psychology. 116(1): 133–136. krohn, g. a. and o’connor, c. m. 2005. “student effort and performance over the semester.” journal of economic education. 36(1): 3–28. lin, t. f., and chen, j. 2006. “cumulative class attendance and exam performance.” applied economics letters. 13(14): 937–942. marburger, r. 2001. “absenteeism and undergraduate exam performance.” journal of economic education. 32(2): 99–110. marburger, r. 2006. “does mandatory attendance improve student performance?” journal of economic education. 37(2): 99–110. park, h., and kerr, p. 1990. “determinants of academic performance: a multinational logit approach.” journal of economic education. 21(2): 101–111. rocca, k. 2003. “student attendance: a comprehensive literature review.” journal on excellence in college teaching. 14(1): 85–107. http://findarticles.com/p/articles 24 journal for economic educators, 11(2), fall 2011 24 rogers, r. 2001. “a panel-data study of the effect of student attendance on university performance.” australian journal of education. 45(3): 284–295. romer, d. 1993. “do students go to class? should they?” journal of economic perspectives 7(3): 167–174. stanca, l. 2006. “the effects of attendance on academic performance: panel data evidence for introductory microeconomics.” journal of economic education. 37(4): 251–266. van blerkom, l. 1992. “class attendance in an undergraduate course.” journal of psychology. 126(5): 487–494. 13 | journal for economic educators, 12(1), 2012 patterns of homework initiation for web-based activities in economics: a study of academic procrastination richard c. schiming 1 abstract this study investigates the impact that certain demographic and academic characteristics have on the degree of academic procrastination by college students in a principles of macroeconomics course. the study employs an objective measure of academic procrastination (homework initiation) rather than the self-reported measures typically employed in the literature. the empirical results indicate that students who procrastinate less are academically stronger, nontraditionally aged, or had a previous college level course in economics. upper level students tend to procrastinate more. the amount of academic procrastination varied during the term for each student but procrastination generally worsened as the academic term progressed. key words: academic procrastination, principles of macroeconomics jel classification: a22 introduction academic procrastination has long been an issue in higher education. the research in this paper examined the pattern of homework initiation in a variety of web-based homework activities in principles courses in economics. by comparing the day on which students first began a web-based assignment to the date it was due, certain academic and demographic characteristics were found to affect the degree of academic procrastination that students exhibited. the research also uncovered a consistent pattern of student homework initiation at this institution. review of the literature as befits such a perennial issue in education, academic procrastination has been widely studied in the research literature. pychl et al. (2000) estimated that over 70 percent of college students procrastinate to some degree. most of the literature focuses on the personal characteristics and attitudes of the students that affect periodic or persistent academic procrastination. a smaller subsection of the literature discusses the characteristics of a given course or assignment that may encourage or discourage timely completion of course assignments. student attitudes and academic procrastination in terms of student attitude, typical studies found that the largest single explanatory variable for the variances in students’ self-reported academic procrastination was the fear of ___________________ 1 professor of economics, minnesota state university, mankato. the author wishes to thank kate hansen, alexander teney, and the referees for their helpful comments and suggestions. 14 | journal for economic educators, 12(1), 2012 failure. another powerful characteristic found by solomon and rothblum (1984) was the aversiveness (sic) of the assigned task. ferrari et al. (2000) added fear of social disapproval as a significant cause of academic procrastination. reasinger and brownlee (1996) listed the significant causes (or at least predictors) of academic procrastination as perfectionism, a lack of external motivation, and an external attributional style. according to senegal et al. (1995), the two most significant variables explaining variations in academic procrastination were the student’s self-characterization as a procrastinator and blaming others for the assigned task. students who were intrinsically motivated by the assigned material were less likely to procrastinate than students who felt the assignment was a burden imposed on them that they must complete. other psychological phenomena have been associated with academic procrastination. one common explanation was the use of “self-handicapping” by students whereby they deliberately delayed their study efforts to use that delay as a plausible explanation for their poor performance. rather than have to admit that they are not as intelligent as they wish and that the lack of intelligence caused their poor academic performance, they blamed their procrastination as the only reason that they did not do as well as they had hoped. beck et al. (2000) found that this self-handicapping behavior was present in studying for examinations. shame and guilt were important in the determination of academic procrastination as well. fee and tangnez (2000) found overall feelings of shame were more closely associated with procrastination than were task specific feelings about failure. pychyl et al. (2000) delineated a typical pattern whereby declining motivation led to academic procrastination that led to increasing shame that led to more academic procrastination. perfectionism was also frequently mentioned as a cause of student procrastination. this perfectionism was found in two dimensions: self-imposed perfectionism where the student’s own goal was to achieve perfection and socially-imposed perfectionism where the student believed that societal norms expected perfection. onwuegbuzie (2000) found that overall academic procrastination was positively related to socially imposed perfectionism and that the fear of failure promoted the individual response of academic procrastination to both socially and self-imposed perfectionism. fee and tangnez (2000) discovered that the mix of shame and socially imposed perfectionism was an especially potent link to overall procrastination. student demographics and academic procrastination in terms of basic demographic characteristics, there were some common variables that were frequently discussed in the literature. however, the impacts of some of these major demographic characteristics were often ambiguous. in terms of gender, four of the studies (reasinger and brownlee (1996); prohaska et al. (2000); senegal et al. (1995); and brownlow and reasinger (2000)) found that women procrastinate less than men, while owens and newbegin (2000) found that there was no significant difference in the degree of academic procrastination between men and women. in terms of student age, the evidence was also contradictory. hill et al. (1978) found that older students procrastinated more but prohaska et al. (2000) found that older students reported less academic procrastination. that discrepancy might well be due to the different measures of age and population samples, since the former study measured academic procrastination in traditional age students while the latter examined non-traditional age students. the relationship between student academic performance and academic ability was similarly mixed. some studies demonstrated that students with lower gpas were associated 15 | journal for economic educators, 12(1), 2012 with more procrastination (ferrari et al. (2000): hill et al. (1978); and rayburn and rayburn (1999)). however, pychyl et al. (2000) and beck et al. (2000) found no significant difference in grades or test results between academic procrastinators and non-procrastinators. course, assignment, term and academic procrastination there is much less literature on the external characteristics of course, assignment, and academic term on the amount of academic procrastination in college. ferrari and schel (2000) discovered that early in an academic term, students procrastinated more in “nonpleasurable academic tasks” and completed pleasurable tasks sooner. later in the same term, students reported that they were equally likely to complete both pleasurable and nonpleasurable tasks. the implication is that as the academic term proceeded, the students buckled down more diligently on the less pleasurable academic tasks. due to the fear of failure, students reported that they are more likely to finish an assignment if the tasks “reflect their ability in a nonthreatening, engaging way”. easier and less punitive assignments invited less procrastination. typically the timing of the assignment during the academic term did not have a significant impact on the students’ likelihood to procrastinate. ferrari and schel (2000) found the occurrence of academic procrastination was often consistent throughout the academic term. tuckman (1990) found that the length of the assignment (as measured by the number of questions or problems within the assignment) was directly related to academic procrastination, especially for students of average and above academic ability. the longer the assignment and the more points at stake, the greater the degree of procrastination and the lower the completion rate for the assignment. students procrastinated more on long assignments because of the amount of work involved rather than procrastinating less because of the points they could earn. finally, milgram et al. (1993) found that students tend to be equal opportunity procrastinators: that is, they tended to procrastinate equally in all of a given term’s courses. much of the existing literature was focused on student characteristics and attitudes that affect academic procrastination. there has been less analysis of other external characteristics that may affect academic procrastination. it is also important to note that most of the studies rely on self-reported and sometimes self-defined academic procrastination by the students. the research in this study offers both a quantifiable measure of academic procrastination unaffected by student self-definition or self-reporting and a more complete analysis of external impacts on academic procrastination. by the use of this impartial measure, the effect of certain demographic and academic characteristics on the degree of academic procrastination is investigated more thoroughly. data and methodology in my courses, i developed and employ a variety of web-based homework exercises that illustrate key economic concepts. for each exercise, i announce the assignment at the beginning of one class session with the due date at the beginning of the next class session. since the assignments are found only on my website, the students are asked to print out the exercise, complete it, and hand it in by the due date. students lacking access to a printer are allowed to submit handwritten answers. many of the computer printouts carry a date stamp showing the date on which the student first printed out the assignment. sixty-nine percent of all the submitted homework carried a date stamp. 16 | journal for economic educators, 12(1), 2012 this date stamp thus represented the first time that the student engaged with the material and began to complete the assignment. this engagement represented the initiation of homework. while some students might have initially viewed the homework on my course webpage to see what was required of them before they printed it out, the date stamp ultimately represented the first time the student seriously considered completing the assignment. thus, the definition of academic procrastination employed in this paper is the difference between when the assignment was due and the time that the assignment was first printed out by the student. the greater the time gap, the less is the degree of academic procrastination. thus, a student who printed out the exercise two days before it was due was deemed to exhibit less academic procrastination than a student who printed out the exercise on the day it was due. the initiation of a homework assignment is a useful proxy for procrastination. a student who is starting the assignment nearer the due date will also be completing the assignment close to the due date as well. in this study, over 60 percent of the assignments were initiated either the day before or the day of the due date. this measure of procrastination is not the traditional measure of procrastination in the literature that compares the due date to the time of completion of the assignment. the measure employed here has the advantage over the traditional measure of not requiring self-reporting by the students as to when they completed the assignment. this self-reporting has been a consistent weakness in the measurement of procrastination. i collected data in the principles course i taught (principles of macroeconomics) during a single spring semester. forty-seven students of the forty-nine students enrolled in the section gave their permission and provided the basic demographic and academic information required for this study. the course met on mondays, wednesdays, and fridays at 10 a.m. table 1 summarizes the demographic and academic information provided by the students. table 1 demographic and academic characteristics characteristic description mean sd gpa gpa during semester 3.06 0.55 act score on act 22.05 3.96 age age in years 19.93 1.76 nbusm 1 if non-business major or undecided 0.64 0.49 nbsd 1 if seeking non-bs degree 0.53 0.50 class 1 = first year, 2 = sophomore, etc. 2.06 0.87 male 1 if male 0.77 0.43 hhww hours worked at job monday friday 10.41 10.91 hwwe hours worked at job during weekends 5.06 6.07 load credit hours taken during semester 14.70 2.69 hse 1 if had economics course in high school 0.45 0.50 ce 1 if had economics course in college 0.28 0.05 oc 1 if owned own computer 0.89 0.31 op 1 if owned own printer 0.77 0.43 housing 1 if living in residence hall 0.38 0.49 all forty-seven students provided information for the following variables: age, busm. nbsd, class, male, hse, ce, oc, op, and housing. forty-four students provided gpa 17 | journal for economic educators, 12(1), 2012 and load data; forty-six students provided hhww and hhwe data; and thirty-seven students provided act data. for each online exercise assigned, the degree of academic procrastination was classified into three categories: homework initiated on the day the assignment was due (day of), homework initiated the day before the assignment was due (day before), and homework initiated two or more days before the assignment was due (two or more). for each assignment, the specific student score on the assignment and the academic and demographic information was noted as well as the degree of the academic procrastination. results two data sets were analyzed: one for the survey data and one for the regression results. the survey results were for the forty-seven students who provided the basic academic and demographic information. the regression results were for the thirty-five students who provided the more complete academic and demographic information. table 2 illustrates the number of observations provided for each data set. table 2 total observations and regression observations assignments possible for all students (49 students) 441 assignments submitted from all students (49 students) 411 assignments submitted from all students who provided some demographic information (47 students) 395 assignments submitted with date stamp for all students who provided some demographic information (47 students) 272 assignments submitted with date stamp for all students who provided complete demographic information (35 students) 205 survey results there are a number of important demographic and academic characteristics of the students who participated in this study: the students in this class were about equally split between those seeking the bachelor or arts (ba) degree and those seeking the bachelor of science (bs) degree. students seeking the bs degree were most likely business or economics majors for whom this class was a requirement. ba students were generally taking the class as part of a general education requirement. seventy-seven percent of the respondents were men. although a majority of students worked during the week (62 percent) and/or during the weekend (57 percent), more than half the students worked less than 10 hours during the week and/or less than six hours on the weekend. all but two of the students took between twelve and eighteen credit hours during the semester under examination. my university has a banded tuition program where the cost of tuition is the same for any amount of credit hours between twelve and eighteen credit hours. most students opted for this course load. forty-five percent of the students took an economics class in high school and twenty-eight percent had already taken an economics course in college prior to this class. 18 | journal for economic educators, 12(1), 2012 eighty-nine percent of the students had their own computer and 77 percent had their own printer. thirty-eight percent of the students lived on campus. table 3 documents some of the interesting patterns in homework initiation drawn from the 272 assignments with date stamps that were submitted by the forty-seven students who provided the basic demographic and academic information. table 3 patterns of homework initiation number of students 47 number of assignments with date stamp 272 correlation of degree of academic procrastination and score on activity 0.22751 always started due day (completing at least half the assignments) 0 always started day before due date (completing at least half the assignments) 6 always started two or more days before due date (completing at least half the assignments) 7 less academic procrastination over semester 3 more academic procrastination over semester 18 same degree of academic procrastination over semester 12 always started due day for high scorers 0 always started day before due date for high scorers 0 always started two or more days before due date for high scorers 2 less academic procrastination over semester for high scorers 0 more academic procrastination over semester for high scorers 3 the percentage correct on each assignment was correlated with the degree of academic procrastination. the assignments were not extremely difficult or time consuming so, as seen in table 3, the correlation between the percent correct on each assignment and the degree of academic procrastination was low. looking at the thirty-three students who had completed at least half of all the homework assignments with date stamps, several interesting patterns emerged. none of the thirty-three students always initiated the assignment on the day it was due. six students always started on the day before the due date and seven students always started two or more days before the due date. thus only thirteen students had a consistent pattern of initiating homework. for the other twenty students, the pattern of initiating homework varied during the course of the academic term. three of the students demonstrated less academic procrastination as the academic term progressed (as measured by the average procrastination for the first half of the assignments compared to the average for the last half of the assignments for students completing at least half the assignments). eighteen of the students exhibited more academic procrastination over the academic term while twelve students showed the same degree of academic procrastination during the first and second halves of the academic term. in general, students tended to procrastinate more as the term went on. 19 | journal for economic educators, 12(1), 2012 there were five students who scored consistently well on the exercises during the academic term (at least 80 percent of the assignments scored at 100 percent correct). of this group, none of the students started the homework on the day of the assignment. on the other hand, two of the other high scorers on the homework started each assignment two or more days before it was due. for the same five high scorers, none of the students exhibited less academic procrastination as the academic term went along while three students exhibited more procrastination over the term. regression results the regression results were based on the homework initiated by the thirty-five students who provided the more complete set of academic and demographic data solicited in the survey. for each student who provided a more complete set of data, each individual homework assignment submitted with a date stamp provided one observation. thus, if one student with the complete set of data submitted seven homework assignments with a date stamp, this yielded seven observations. the degree of academic procrastination (“0” = day of; “1” = day before; and “2” = two or more) was regressed against the complete list of demographic and academic characteristics of the individual student. as seen in table 2, 205 specific observations (individual assignments with a date stamp submitted by the thirty-five students who provided complete information) in the principles of macroeconomics course were included in the regression analysis. for each assignment, the degree of academic procrastination was regressed against various academic, demographic, and personal characteristics. in the regression analysis, class was decomposed into senior (1 = senior standing, 0 = otherwise), junior (1 = junior standing, 0 = otherwise), and soph (1 = sophomore standing, 0 = otherwise) with first year students’ coefficient implicitly equaling zero. thus the other class standings were compared to the degree of procrastination exhibited by first year student. since the degree of timeliness ranges from a “0” for work begun the day the assignment was due to a “2” for work begun two or more days before the due date, negative coefficients indicate variables that reduced timeliness (added to academic procrastination). table 4 contains the regression results for this principles of macroeconomics course. looking at the determinants that were statistically significantly different from zero (defined as a 0.05 type i error level or lower), the regression results indicated that: those with a higher gpa or a higher act score procrastinated less. older students procrastinated less. students with sophomore and junior standing procrastinated more than those with first year standing. students who took a college-level economics course prior to enrolling in principles of macroeconomics procrastinated less. it is also important to note in table 4 which independent variables did not have a statistically significant impact on the degree of academic procrastination. the following variables that were statistically insignificant in their impact on procrastination: academic major, degree sought, senior standing, gender, hours worked during the week, hours worked on weekends, academic load, completion of a high school economics class, having one’s own computer and printer, and students’ housing situation. 20 | journal for economic educators, 12(1), 2012 table 4 regression results variable m se gpa .264** .158 act .040*** .017 age .246*** .084 nbusm .070 .137 nbsd -.091 .142 soph -.257** .130 junior -.607*** .255 senior -1.046* .666 male -.184 * .135 hwwd .002 .006 hwwe .011 .009 load .026 .023 hse .105 .119 ce .462*** .151 oc -.035 .293 op -.028 .242 housing .062 .114 constant -5.46*** 1.709 r square .276 * = significantly different from zero at the 0.10 type i error level; ** = significantly different from zero at the 0.05 type i error level; and *** = significantly different from zero at the 0.01 type i error level. these regression results shed more light on what is traditionally found in the literature. previous studies provided ambiguous results regarding academic skills and achievement with some studies finding better students procrastinate more while other studies found poorer student engaging in more procrastination. in this study, better students (whether measured by gpa in college or act score prior to college) procrastinated less. the class standing of the students provided an interesting result. students with sophomore or junior class standing exhibited significantly more academic procrastination than first year students. seniors also exhibited more procrastination than first year students, although the coefficient was significant only at the 0.10 level. one might speculate that characteristics of the sophomore, junior, and senior years lent themselves to procrastination. perhaps more experienced and practiced students had learned the process of just-in-time completion of their academic work and were engaged in applying that process. those students also might schedule extra-curricular and co-curricular activities more heavily, facilitating academic procrastination. first-year students, relatively new to the pace of academic demands, may be more likely to start school work sooner and to minimize participation in extra-curricular and co-curricular activities. not all competing demands on students’ time provided significant impacts on procrastination. while one might expect the competing responsibilities of employment and schooling to significantly impact the timeliness with which students initiated their homework, 21 | journal for economic educators, 12(1), 2012 the number of hours worked by students as well as their academic loads had no significant influence on the degree of procrastination the standard literature on the impact of the age of the student on procrastination also provides conflicting conclusions. in this study, older students procrastinated less. perhaps these students had more family and job responsibilities leading to more organized, timely, and motivated academic work. for the students in this study, previous enrollment in a college level economics course reduced the tendency to procrastinate. previous experience in economics might give students a deeper understanding of the pedagogy and rigor of economics, encouraging them to initiate their homework in a more timely fashion. in some ways, the more interesting findings were the variables that did not significantly impact the degree of student procrastination. the major and degree sought by the students had no significant impact on procrastination. having a non-business major did not significantly affect procrastination. seeking a bachelor of arts (a non-business degree) had no significant effect on procrastination. given that this general education class has a majority of first year students and sophomores, the commitment to a particular major or degree may not be as strong for these students as for juniors or seniors. this lack of commitment may encourage procrastination. one might also imagine that a stronger commitment to a more technical or rigorous major or degree would affect the student’s procrastination, yet it did not. while the literature provides mixed results for the impact of gender on procrastination with either no impact of gender or females procrastinating less, this study suggests (coefficient significant at the 0.10 level) that women procrastinate less than men. findings based on the results above, a preliminary picture of academic procrastination in this course at my institution emerged: 1. most of the students did not have a consistent pattern of homework initiation. rarely did a student start her or his homework at the same point in the homework cycle during the entire academic term. sometimes a student initiated an online assignment very early in the homework cycle and other times at the last minute. this may represent a rational response by the student to other academic or extra-curricular responsibilities. it certainly makes sense to postpone starting on a five-point homework assignment in order to spend time studying for a 100-point midterm examination in another subject. 2. academic procrastination generally got worse as the academic term progressed. for most students, the pattern of homework initiation got closer to the due date as the term wore on. this illustrated a kind of “new year’s resolution” mentality in which the students started the academic term resolved to initiate their homework in a timely manner only to see this resolution fade over the term as assignments increased and dedication waned. 3. weekends were “homework-free” zones. an analysis of the overall submission pattern indicated that homework assigned on a friday and due the following monday had the greatest degree of academic procrastination. the most typical pattern was for students to get the assignment on friday and then initiate the assignment on monday when the work was due. since hours of employment on the weekends was insignificant, the amount that students worked on the weekend did not affect their 22 | journal for economic educators, 12(1), 2012 degree of academic procrastination. whether they worked a little or a lot on the weekend, they did not initiate homework on saturday or sunday. this suggests that students believe that doing homework on weekends is not required to succeed academically. 4. as one might expect, students who were weaker academically (whether measured by gpa or act) tended to procrastinate more. the literature previously cited often found that such students used procrastination as an excuse for poor academic performance, as a built-in expiation for their academic problems, and a self-fulfilling prophecy. 5. older students tended to procrastinate less. this result supports the frequent anecdotal observations by many faculty members that students of non-traditional college age are often highly motivated to succeed in their academic programs. older students typically have more family obligations that may encourage more efficient time management techniques. 6. sophomore and junior class standing had significant impacts on the likelihood of academic procrastination, while the impact of senior standing was slightly less significant. perhaps these students were in the rarified region where they had found the study habits that work most efficiently for them (which included a substantial degree of academic procrastination). similarly, these students may have found that their course work in their major took precedence over this introductory general education course and so tended to procrastinate more in this lower level course. 7. for instructors, there is little to be done in course design (other than not assigning homework over the weekend) that can reduce the tendency of students to procrastinate. interestingly, there also seems to be little that students can do to reduce procrastination. the determinants under their control such as major, degree, hours worked, academic load, owning their own computer and/or printer, or housing situation did not significantly affect the timeliness of their homework initiation. determinants that do significantly affect procrastination such as academic ability, sophomore, junior, or senior standing, and age are not easily manipulated by students. the one variable under students’ control that may reduce procrastination is previous enrollment in a college level economics course. conclusion this paper presents an analysis relating the degree of academic procrastination to a variety of student academic and demographic characteristics. the results are based on a more objective measure of academic procrastination than typical studies in the literature that rely on self-identified or self-reported academic procrastination. the results also shed light on some of the conflicting effects of student demographics reported in the literature. this study finds that most student-specific academic and demographic characteristics do not significantly affect procrastination and those that do affect it are largely beyond the student’s control. consequently, one is left with the conclusion that a tendency toward procrastination is more a psychological phenomenon that students must understand and address on their own rather than a condition generated by characteristics that can be manipulated by instructors. professors that wish to reduce procrastination should, it seems, focus their attention on the psychological causes mentioned in the literature (most importantly, fear of failure, perfectionism, and selfhandicapping) and ameliorate student concerns in these areas to reduce procrastination. 23 | journal for economic educators, 12(1), 2012 references ackerman, david s., and barbara l. gross. 2005. “my instructor made me do it: task characteristics of procrastination.” journal of marketing education, 27 (1): 5-13. bakunas, boris. 2001. “beat procrastination – now!” principal, 80 (3): 40-42. beck, brett l., susan r. koons and debra l. milgram. 2000.“correlates and consequences of behavioral procrastination: the effects of academic procrastination, self-consciousness, self-esteem, and self-handicapping. “ journal of social behavior and personality, 15 (5): 3-13. brownlow, sheila and renee d. reasinger. 2000. “putting off until tomorrow what is better done today: academic procrastination as a function of motivation in college work.” journal of social behavior and personality, 15 (5): 15-34. burns, lawrence r., katherine dittman, ngoc-loan nguyen, and 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procrastination among university students.” journal of college student development, 36 (4): 361-367. ferrari, joseph r. and steven j. schel. 2000. “toward an understanding of academic and non-academic tasks procrastinated by students: the use of daily logs.” psychology in the schools, 37 (4): 359-366. ferrari, joseph r., sabrina m. keane, raymond n. wolfe, and brett l. beck. 2000. “the antecedents and consequences of academic excuse-making: examining individual differences in procrastination.” journal of social behavior and personality, 15 (5): 199-215. freedman-doan, peter and margaret libsch. 1997. “student reports of time spent on homework: results from 20 years of national samples.” nassp bulletin, 81 (59): 95-98. hill, mary b., david a. hill, albert a. chabot, and james f. barrall. 1978. “a survey of college faculty and student procrastination.” college student journal, 12 (3): 256-62. lamwers, linda j., christine jazwinski, and sarah lalonde. 1985. “comparison of three methods to reduce student procrastination.” paper presented at the annual convention of the american psychological association, august, in los angeles, california. meyer, cheryl. 2000. “academic procrastination and self-handicapping: gender 24 | journal for economic educators, 12(1), 2012 differences in response to non-contingent feedback.” journal of social behavior and personality, 15 (5): 87-102. milgram, norman, gila batori, and doron mowrer. 1993. “correlates of academic procrastination.” journal of school psychology, 31 (4): 487-500. okellana-damacela, lucia e., r. scott tindale, and yolanda suarez-balcazar. 2000. “decisional and behavioral procrastination: how they relate to self discrepancies.” journal of social behavior and personality, 15 (5): 225-238. onwuegbuzie, anthony j. 2000. “academic procrastination and perfectionist tendencies among graduate students.” journal of social behavior and personality, 15 (5): 103-109. onwuegbuzie, anthony j. 2000. “i’ll begin my statistics assignment tomorrow: the relationship between statistics anxiety and academic procrastination.” paper presented at annual meeting of the american educational research association, april, in new orleans, louisiana. orpen, christopher. 1998. “the causes and consequences of academic procrastination: a research note.” westminster studies in education, (21): 73-75. owens, anthony m. and ian newbegin. 2000. “academic procrastination of adolescents in english and mathematics: gender and personality variations.” journal of social behavior and personality, 15 (5): 111-124. paden, nita and roxanne stell. 1997. “reducing procrastination through assessment and course design.” marketing education review, 7 (2): 17-25. prohaska, vincent, peter morrill, iraida atiles, and alfredo perez. 2000. “academic procrastination by non-traditional students.” journal of social behavior and personality, 15 (5): 126-134. pychyl, timothy a., jonathon m. lee, rachelle thibodeau, and allan blunt. 2000. “five days of emotion: an experience sampling study of undergraduate student procrastinators.” journal of social behavior and personality, 15 (5): 239 254. pychyl, timothy a., richard w. morin, and brian solomon. 2000. “procrastination and the planning fallacy: an examination of the study habits of university students.” journal of social behavior and personality, 15 (5): 135-150. rayburn, l. gayle and l. michael rayburn. 1999. “impact of course length and homework assignments on student performance.” journal of education for business, 74 (6): 325-331. reasinger, renne and sheila brownlee. 1996. “putting off until tomorrow what is better done today: academic procrastination as a function of motivation toward college work.” paper presented at the annual meeting of the southeastern psychological association, march, in norfolk, virginia. scher, steven and joseph r. ferrari. 2000. “the recall of completed and non completed tasks through daily logs to measure procrastination.” journal of social behavior and personality, 15 (5): 255-265. senegal, caroline, richard koestner, and robert j. vallerand. 1995. “self-regulation and academic procrastination.” journal of social psychology, 135 (5): 607-619. sigall, harold, arie kruglandski, and jack fyock. 2000. “wishful thinking and procrastination.” journal of social behavior and personality, 15 (5): 283-296. solomon, l. j. and e. d. rothblum. 1984. “academic procrastination: frequency and 25 | journal for economic educators, 12(1), 2012 cognitive-behavioral correlates.” journal of counseling psychology, (31): 503 509. specter, marc h. and joseph r. ferrari. 2000. “time orientation of procrastinators: focusing on the past, present, and future.” journal of social behavior and personality, 15 (5): 197-202. stainton, murray, clarry h. lay, and gordon flett. 2000. “trait procrastination and behavior/trait-specific cognitions.” journal of social behavior and personality, 15 (5): 297-312. tuckman, bruce w. 1992. “does the length of assignment or the nature of grading practices influence the amount of homework students are motivated to produce?” journal of general education 41: 190-199. wolters, christopher. 2003. “understanding procrastination from a self-regulated learning perspective.” journal of educational psychology 95 (1): 179-187. journal for economic educators • volume 5 • number 3 • fall 2005 8 an economic analysis on intermediate microeconomics: an ordered probit model by chin w. yang and rod d. raehsler* abstract an ordered probit model is utilized in this study to determine primary factors leading to academic success among undergraduate students taking intermediate microeconomics. using a sample of 169 students enrolled in intermediate microeconomics during the 2003-2004 academic year, it is found that individual student cumulative grade point average or total score on the scholastic aptitude test along with choice of academic major influence the expected grade in intermediate microeconomics. introduction a significant body of research has developed in economic education that attempts to determine factors influencing academic performance in a wide variety of courses. the vast majority of work concentrates on student performance in the principles of macroeconomics and the principles of microeconomics courses offered by all universities. the prevalence of studies devoted to the beginning courses in economics is primarily a result of the availability of large data sets due to greater demand for these courses. spector and mazzeo (1980) present a study of grades in introductory economics close to the approach of our analysis by utilizing a probit model to determine factors influencing final grades. anderson, benjamin, and fuss (1994), borg and shapiro (1996), becker and watts (1999), okpala, okpala, and ellis (2000), ziegert (2000), marburger (2001), cohn, cohn, balch, and bradley (2001), walstad (2001), and grimes (2002) are a few important examples of studies that discuss evaluation of students and faculty in a principles of economics environment. an equally significant amount of literature has been devoted to teaching methods and techniques in principles of macroeconomics and principles of microeconomics courses. examples of this growing area of analysis include sowey (1983), becker and watts (1996), chizmar and ostrosky (1998), raehsler (1999), vachris (1999), parks (1999), oxoby (2001), becker and watts (2001a, 2001b), colander (2003), and jensen and owen (2003). to a somewhat lesser extent, work has recently been done to determine factors relevant to grades earned by students in intermediate macroeconomic theory as well as in econometrics. froyen (1996), salemi (1996), smith (1997), findlay (1999), gartner (2001), borg and stranahan (2002), walsh (2002), and weerapana (2003) represent a good cross-section of papers dealing with teaching intermediate macroeconomics and related upper-level economics courses. becker (1987), murray (1999), spinelli (2001), kennedy (2001), matthews (2001), and elder and kennedy (2001) present a similar body of study for statistics and econometrics courses. in contrast, relatively little attention has been given to studying academic performance in intermediate microeconomic theory. two articles published by peter von allmen (one co-authored with george brower) are notable exceptions. von allmen and brower (1998) utilized a survey of all economics department chairs to determine how calculus was used in intermediate microeconomics and its importance in course content. it is interesting to note that they were able * chin w. yang, yang@clarion.edu, rod d. raehsler, raehsler@clarion.edu, department of economics, clarion university of pennsylvania, clarion, pa 16214. journal for economic educators • volume 5 • number 3 • fall 20059 to obtain a relatively high proportion of responses from economics departments across a wide variety of academic environments. their survey results indicate that the use of calculus in intermediate microeconomics varies widely across universities and is influenced by school enrollment and the general belief as to whether it helps in the understanding of marginal analysis. they also find that there is a substantial mismatch between what students are taught in an undergraduate calculus course and what economists believe students need to know by the time they take intermediate microeconomics. the authors also provide an interesting comparison of theoretical versus applied calculus as it pertains to material taught in microeconomics. of greatest relevance to the current analysis is the work by von allmen (1996) in which the impact of quantitative prerequisites on student grades in intermediate microeconomics is studied. in his analysis, von allmen utilizes an ordered probit model to show that there is a strong link between performance in calculus courses and student performance in intermediate microeconomics. this provocative article has generated some related literature within and outside the economics discipline that merits some attention. outside the field two articles of note utilize an empirical methodology similar to that presented in the von allmen (1996) paper and to that employed in our work. brahmasrene and whitten (2001) identify various factors leading to a successful performance on the certified public accountant (cpa) examination. they find that undergraduate grade point average, student age, private accounting experience by the student, and gender are each significant determinants of predicted success on the cpa examination. in a similar fashion, didia and haswat (2001) identify significant factors that determine academic performance in an introductory finance course. they find that undergraduate grade point average and prior academic performance in economics, accounting, and mathematics courses represent the most important positive factors that will influence a student’s grade in a beginning finance course. it is interesting to note that hours of study were found to have a negative impact on the final grade in introductory finance. this troubling result may be the result of unreliable reporting of study hours by students, multicollinearity between independent variables, or the existence of outliers and is not an issue addressed in the paper. rather than extend the work of von allmen (1996) across other courses and fields, our work will concentrate on intermediate microeconomics to see whether there are any similarities and differences. clarion university and moravian college (the sample of students used in the von allmen study) are similar in that each program requires business students to take intermediate microeconomics. this, of course, ensures a stable and large sample size. the academic environments are different, however, with respect to the total enrollment of students for each school and admission requirements. moravian college is a private and selective liberal-arts institution while clarion university is a public institution with more inclusive admission standards. as a consequence, students at the two institutions are likely to be very different from each other. the two campuses primarily enroll students from the state of pennsylvania and have similar average class sizes. therefore, students between the two schools do share some geographic characteristics and experience similar classroom environments. our work represents an important refinement of the von allmen study with respect to statistical analysis and sample size. results appear to be significantly different, and we proceed by doing a statistical analysis on the marginal probabilities, something not done in von allmen (1996). in addition to collecting a larger sample size, we also provide results on the threshold variables in our ordered probit model. therefore, even though the two papers utilize a similar empirical model, our work represents a noticeable improvement in data and statistical presentation. journal for economic educators • volume 5 • number 3 • fall 2005 10 data data for this study came from clarion university, a public university in western pennsylvania. enrollment at clarion university is approximately 6,000, and the school is part of the pennsylvania state system of higher education, a collection of 14 universities that collectively make up the largest higher education provider in the state of pennsylvania (106,000 students across all campuses). the college of business administration has a current enrollment of approximately 900 students and offers seven various academic majors leading to a bachelor of business administration degree. these include accounting, management, industrial relations, economics, international business, finance, real estate, and marketing. the college is accredited by the association to advance collegiate schools of business (aacsb) and has enjoyed this status since 1998. intermediate microeconomics is a current requirement of all business majors at clarion university and helps the college uphold an acceptable level of rigor and analytic ability required of all students per aacsb accreditation guidelines. regarded by many students as a difficult, abstract, and quantitative-oriented course, intermediate microeconomics tends to be an overwhelming challenge for many students who are not adequately prepared for quantitative study and is uniformly disliked by a stable subset of business majors. even though this last observation is anecdotal in nature, it is clear that any analysis of factors leading to academic success or failure in this course is an important endeavor. the sample of 196 students was collected from computerized student transcript records of clarion university business majors with at least a junior standing as of april 2004. only those students who received final grades in intermediate microeconomics during the 2003-2004 academic year and had completed the scholastic aptitude test (sat) were included in the sample. all students in the sample completed both principles of economics courses (macroeconomics and microeconomics) in addition to the business statistics two-course sequence required of all business majors. these prerequisites are similar to those observed by von allmen (1996) and are indicative of most business college programs. data for each student are collected measuring the number of credit hours (hour), the cumulative grade point average (gpa), and the combined sat score (sat). the final grade in intermediate microeconomics is recorded for each student and is converted for use in the ordered probit model. this conversion is explained in the following section of this paper. two different instructors taught intermediate microeconomics during the sample period. as each instructor (both are tenured professors) used a different textbook, it is appropriate to include a dummy variable accounting for this difference. a dummy variable is also included to account for the different academic majors of students in the sample. the value of the dummy variable is 1 for students majoring in accounting, economics, or finance and 0 otherwise (primarily marketing and management majors). given that a significant number of students in the college of business administration choose a double major in economics and finance and a smaller group of students elect to double major in accounting and economics, this appears to be a natural grouping to consider. there is also some support in the literature (didia and haswat 2001) that suggests a strong grade linkage between accounting, economics, and finance courses. as such, there is some historical and theoretical support for developing the dummy for academic major in this fashion. gender was included as an explanatory variable in the von allmen study and was included in the initial model in the current analysis. since it was found to be statistically insignificant, it has not been included in the discussion. methodology prior studies have largely utilized multiple regression, probit, or logit models to analyze statistical relations between grades and other explanatory variables. because of the discrete nature of the dependent variable in this study, ordinary least squares regression would be an inappropriate journal for economic educators • volume 5 • number 3 • fall 200511 model. as a consequence, most recent studies of student grades choose a model for discrete choice; typically a logit or probit analysis. a simple binary logit or probit specification (y = 1 for the letter grade a, y = 0 for a grade of b or c) as utilized in spector and mazzeo (1980) gives only two discrete outcomes, thereby arbitrarily aggregating grade outcomes into two groups. lumping grades arbitrarily together implies that grades of b and c or c and d are equivalent measures of student performance; a proposal likely to be rejected by most instructors and students alike. with this in mind, a multinomial model for discrete choice of ordered data is more applicable to grade data. while the multinomial outcomes logit model is a significant improvement, it does suffer from the well-known independence of irrelevant alternatives assumptions as outlined in greene (1991). as an example, greene shows that the odds ratio between car and bus passenger numbers changes if one further differentiates cars into domestic and foreign makes and models. therefore, as in von allmen (1996), we opt for the ordered probit model in which letter grades a, b, c, d, and e correspond to censoring values 4, 3, 2, 1, and 0, respectively (clarion university assigns e as the failing grade rather than f). historical grade rubrics in the economics department at clarion university are intrinsically ordinal in nature. a curving formula ŷ = √y * 10 where ŷ is a curved score and y is the original score is a simple example that can be used to outline this procedure. average scores on examinations based on test banks very often fall below the standard 75 percent target when using a standard grading scale (90 percent for an a, 80 percent for a b, and so on). using this specific curving technique clearly benefits low achievers (y = 49 leads to a curved score of 70) more than it benefits high achievers (y = 90 leads to a curved score of 94.9). nevertheless, this curving technique does preserve the rank of examination scores (y1 > y2 => ŷ 1 > ŷ 2 ) as well as the grade boundary conditions (√0 * 10 = 0 and √100 * 100 = 100). in addition, we have observed that some majors register more complaints on the course than do other majors. given that grade issues exist for both instructors and students in intermediate microeconomics, it is of great interest and importance to analyze the model with the most recent data set collected. given that five letter grades (a through e) are ordinal in nature, an ordered probit model is applied to 169 intermediate microeconomics students taking the course during the 2003-2004 academic year. it is important to use a model of this kind because the difference between a and b may not be the same as that between b and c (and so on) due to a variety of curving methods and grading rubrics. the standard ordered probit model is widely used to analyze discrete data of this variety and is built around a latent regression of the following form: ŷ = x′β + ε (1) where x and β are standard variable and parameter matrices, and ε is a vector matrix of normally distributed error terms. obviously predicted grades ( ŷ ) are unobserved. we do, however, observe the following: y = 0 (or grade of e) if ŷ ≤ 0 (2) y = 1 (or grade of d) if 0 < ŷ ≤ µ1 (3) y = 2 (or grade of c) if µ1 < ŷ ≤ µ2 (4) y = 3 (or grade of b) if µ2 < ŷ ≤ µ3 (5) y = 4 (or grade of a) if µ3 ≤ ŷ (6) where µ1 , µ2, and µ3 are threshold variables in the probit model. the threshold variables are unknown and determined in the maximum likelihood estimation procedure for the ordered probit. journal for economic educators • volume 5 • number 3 • fall 2005 11 in terms of available data for this study, the first model considered as the latent regression can be formulated as: yi = β0 + β1 houri + β2gpai +β3 majori +β4 instructi +ei (7) where yi is the final grade for intermediate microeconomics, hour is the number of credit hours, and gpa is the cumulative gpa. major and instruct denote the academic major and instructor dummy variables described in the previous section. it is assumed that ei is normally distributed across observations and is normalized with the mean and variance of zero and one. note that three (five categories minus two) threshold values are to be estimated jointly with the regression coefficients. from the three values (µi), we could readily estimate the probability of an individual student’s achieving each particular final grade (a, b, c, d, or e) given values of the explanatory variables. greene (1991) outlines this methodology. the threshold variables are estimated jointly with the model. one possible difficulty in interpreting the results of parameters estimated for equation (7) involves the use of gpa as an explanatory variable. nevertheless, we find that gpa is an important variable to focus on when conducting marginal analysis on our model. from a practical standpoint, the primary rationale for placing the cumulative grade point average in the model is that students with a proven track record of successful academic achievement or ability will likely do better in the intermediate microeconomics course. therefore, we would expect that β2 would be positive and significant. one problem is that the distribution of grades is not uniform across the various academic disciplines. some fields provide significantly higher grades than others, making gpa less a measure of academic preparedness and more dependent on the major chosen by the student. the economics department at clarion university routinely assigns lower grades to students and often meets to discuss grade issues in order to minimize any grade inflation from entering the major. this variability in gpa across majors might actually mask the impact of academic major on the final grade in intermediate microeconomics, an important result sought in this paper. the aggregate sat score, however, would be a measure that transcends academic major and reflects a level of quantitative and verbal preparedness independent of gpa variability (not independent of gpa). therefore, the second latent regression model used to develop the ordered probit analysis considered in this paper is given as: yi = β0 + β1 houri + β2sati +β3 majori +β4 instructi +ei (8) results for each model will be presented in the next section along with an explanation. from the slope parameter and threshold estimates, it is relatively straightforward to calculate probabilities of receiving the five letter grades assigned in intermediate microeconomics. given the cumulative normal function φ (β x), the probabilities can be shown as below: prob [y=0 or e] = φ (-β x) (9) prob [y=1 or d] = φ [µ1 – β x] φ (-β x) (10) prob [y=2 or c] = φ [µ2 – β x] φ (µ1 – β x) (11) prob [y=3 or b] = φ (µ3β x) φ(µ2 – β x) (12) prob [y=4 or a] = 1 φ (µ3 – β x) (13) where β x is a set of specific values of x for the estimated coefficients (β) and the threshold values (µ’s). journal for economic educators • volume 5 • number 3 • fall 200512 results and discussion equation (7) was initially estimated including the instructor dummy variable. after discovering that this dummy variable was statistically insignificant, the model was re-estimated excluding instruct from the model. unlike students in the von allmen (1996) study where no student received a failing grade in a sample of 99 (a result we will hide from our students), we were able to consider three threshold variables since all five grades were observed in our sample of 196 students. the empirical results are represented in table 1. the two instructors who taught the course using different textbooks are first included in the model to control for potential differences in grades attributable to instructors. however, because the instructors are of comparable academic background and used the textbooks of similar level, we expect the results are close as shown in table 1. alternatively, the sat scores can be a useful predictor. table 2 reports the estimated result when gpa is replaced by sat score. a comparison of table 1 and table 2 suggests that either gpa or sat explains a significant portion on the probability of getting a letter grade. on the contrary, number of credit hours plays a cameo role, and choice of instructor is indeed insignificant. the dummy variable of majors is significant (p value = 0.049 or 0.045) when sat is used and appears to be marginally significant (p value = 0.146 or 0.135) when gpa replaces sat. as is well known in the literature, sat is a good predictor for freshmen, and its explanatory power wears off as students become sophomores and so on. the intermediate microeconomics course is a junior level course required for all business majors in the college. as such, we opt for the probit model with the gpa variable. this is further echoed by the much greater scaled r2 (0.55 vs. 0.09). estrella (1998) points out that the scaled r-squared measure, unlike the mcfadden rsquared, is a nonlinear transformation of the likelihood ratio for multinomial logit or probit. however, care must be exercised since a satisfactory measure of fit is lacking in the model of discrete dependent variables. as pointed out by greene (1991), the maximum linked likelihood estimator is not chosen to maximize a fitting criterion in predicting y. it is important to point out at this stage that the result using sat scores circumvents different grading standards across majors. as such, it is not surprising that academic major is a significant predictor of student grades in intermediate microeconomics when the sat score is used in its place. the dummy variable for instructors is insignificant, indicating consistent grading across the two faculty members assigned to teach intermediate microeconomics. this could well be a result of efforts by the department of economics at clarion university to instill a consistent grading pattern for each course across all faculty members in economics. we have been consistently used as a model for responsible grading practices on our campus. using equations (9) through (13), one is able to calculate the probabilities of receiving five letter grades. it entails the use of the estimated threshold values given the cumulative normal function φ (β x). for a typical student in our college who took the intermediate microeconomics course, given average values of gpa, credit hours, major, and instructor, are 2.979, 103.124, 0.479, and 0.503. this translates into β x = 2.622, and from a normal cumulative probability table, the expected probability of obtaining letter grades a, b, c, d, and e can be readily calculated as 4.55 percent, 34.04 percent, 53.657 percent, 7.34 percent, and 0.44 percent, respectively. the microeconomics course is one of the more rigorous courses a business student is required to take. the fact that more students get a letter grade of c is not unexpected and actually is in fair agreement with the result of the probit model. journal for economic educators • volume 5 • number 3 • fall 2005 13 table 1: estimates of the ordered probit model i (equation 7). with instructor dummy without instructor dummy variables, measures estimate t ratio p value estimate t ratio p value constant -4.84 -5.278 0.00 -4.805 -5.254 0.00 hour 0.006121 0.999 0.317 0.0063 1.031 0.303 gpa 2.236 9.617 0.00 2.233 9.609 0.00 major 0.255 1.454 0.146 0.261 1.495 0.135 instructor 0.096 0.554 0.58 µ1 1.158 5.366 0.00 1.156 5.373 0.00 µ2 2.908 11.2326 0.00 2.909 11.251 0.00 µ3 4.315 13.725 0.00 4.312 13.745 0.00 sample size 169 169 scaled r2 0.555 0.555 table 2: estimates of the ordered probit model ii (equation 8). with instructor dummy without instructor dummy variable estimate t ratio p value estimate t ratio p value constant -0.624 -0.689 0.49 -0.601 -0.666 0.506 hour 0.0045 0.774 0.439 0.00462 0.793 0.428 sat 0.002 2.959 0.03 0.00199 2.951 0.03 major 0.333 1.971 0.049 0.338 2.004 0.045 instructor 0.061 0.37 0.711 µ1 0.946 5.144 0.00 0.945 5.148 0.00 µ2 2.178 10.556 0.00 2.178 10.569 0.00 µ3 3.085 13.621 0.00 3.085 13.634 0.00 sample size 169 169 scaled r2 0.0930 0.0924 with a fair amount of calculation, the coefficients in the ordered probit model can be interpreted readily. evident from equations (9), (10), (11), (12), and (13), the marginal effects of the explanatory variable gpa on the probability of getting a letter grade for an average student are calculated as follows: ∂ prob [ y=0 or e]/ ∂gpa = -φ (β′ x) * ( !̂ 2) (14) = -φ (2.62) * 2.236 = -0.0129 * 2.236 = -0.029 ∂ prob [ y=1 or d]/ ∂gpa = [φ(-β x)φ(µ1 – β x) * ( !̂ 2) (15) = [φ (-2.62) φ (1.158 -2.62) ] * 2.236 = -0.278 ∂ prob [ y=2 or c]/ ∂gpa = [ φ (µ1 – β x) φ (µ2 – β x)] * ( !̂ 2) (16) = [ φ (1.158-2.62) -φ (2.408 -2.62)] * 2.236 = -0.548 journal for economic educators • volume 5 • number 3 • fall 200514 ∂ prob [y=3 or b]/ ∂gpa = [φ (µ2β x) φ (µ3 – β x)] * ( !̂ 2) (17) = [φ(2.908-2.62) φ (4.3152.62)] * 2.236 = .641 ∂ prob [y=4 or a]/ ∂gpa = φ (µ3 – β x) (18) = φ (4.315 – 2.62) * 2.236 = 0.214 where φ is the normal density function. notice that the sum of the marginal effect equals zero. table 3 reports the two marginal effects that each continuous explanatory variable has on letter grades. table 3: marginal effects of the explanatory variables on letter grades variable/ grade hour gpa a 0.0586% 21.4% b 0.1755% 64.1% c -0.15% -54.8% d -0.076% -27.8% e -0.0079% -2.9% an examination of table 3 indicates that as gpa is up by one point, probabilities of obtaining a and b are expected to increase by 21.4 percent and 64.1 percent. on the contrary, probabilities of receiving c, d, and e are expected to decrease by 54.8 percent, 27.8 percent, and 2.9 percent, respectively, for an average business major in our college. by the same token, we can calculate the marginal effects emanating from numbers of credit hours taken. since it is not statistically significant, the effects are trivial as shown in table 3. the derivative used in measuring marginal effects does not apply to dummy variables that assume values of zero or one. different majors do not seem to exert noticeable influence on probabilities of receiving letter grades (p value of 0.146 in table 1) when divided this way. similarly, different instructors play only a trivial role (p value of 0.58). we first calculate the explanatory variables (-β x) at mean values with major equal to 0 (marketing and management) and with major equal to 1 (economics, finance, and accounting). the two categories of academic majors were chosen due to the small number of students majoring in economics and finance. implications of this will be addressed in the conclusion of this paper. we then substitute these values along with the estimated µ’s into (2) through (6). since the procedures are the least obvious of all the models (greene, 1991, p. 705), we report the intermediate steps and results in table 4. a complete set of calculations of these values is available on request. the change between the two values of the dummy variable is only relevant for the five probability figures. it is important to note that in table 4 rounding errors to the third decimal place occurred since we used the cumulative normal table, which contains z-values with only two decimal places. journal for economic educators • volume 5 • number 3 • fall 2005 15 table 4: impacts of major on grades in microeconomics theory major = 0 major =1 change β′ x -2.500 -2.755 µ1β′x -1.342 -1.597 µ2β′x 0.410 0.153 µ3β ′x 1.815 1.56 equation (9) p[y=0 or e] 0.0062 0.003 -0.0032 equation (10) p[y=1 or d] 0.0839 0.052 -0.0319 equation (11) p[y=2 or c] 0.5653 0.5047 -0.0606 equation (12) p[y=3 or b] 0.3062 0.3798 0.0736 equation (13) p[y=4 or a] 0.0347 0.0594 0.0247 the results of table 4 reveals that, for a typical student with an accounting or economics or finance (aef) major versus the marketing or management major (mm), the probability of receiving (i) b or a is expected to increase by 7.36 percent or 2.47 percent and (ii) c, d, or e is expected to decrease by 6.06 percent, 3.19 percent, or 0.32 percent, respectively. the results are not really unexpected; the aef majors of this college are geared more toward analytical and quantitative training. however, usual caveats apply: the effect is statistically significant since the coefficient of the dummy variable only has a p value of 14.6 percent. conclusions past literature focuses primarily on economic education in principles of macroeconomics and microeconomics or even econometrics. little result is known on the teaching of intermediate microeconomics courses. in many universities and colleges, intermediate microeconomics is an elective course. therefore, large samples in a short time span may not be feasible. from the academic year 2003-2004, a sample of 169 students was employed to estimate the ordered probit model. it is found that gpa is the most significant explanatory variable in predicting probabilities of receiving letter grades for the course. the ordered probit model represents an improvement in methodology over the binary probit model or logit model by spector and mazzeo (1980) and others. the ordinal nature of grading rubrics in our college makes the ordered probit a desired choice. the majority (53.65 percent) of students taking the course receive a letter grade c, possibly indicating that faculty in the department of economics at clarion university practice very stringent grading standards. on the other hand, this relatively high number of c’s for a junior-level course might be indicative of inadequate training in quantitative and abstract thinking for a typical business major in this sample. however, 38.59 percent of students are expected to receive b or a. it speaks to the fact that a diligence variable (gpa) is the largest determining factor. surprisingly enough, different majors play a noticeable role in the model: accounting, economics, and finance (aef) majors appear to have an edge in grades over that of management and marketing (mm) majors. note that an increase of gpa by one unit, ceteris paribus, is expected to (i) increase the probability of receiving a or b by 21.4 percent and 64.1 percent and (ii) decrease the probabilities of obtaining c, d, or e by 54.8 percent, 27.8 percent, and 2.9 percent, respectively. as for impacts journal for economic educators • volume 5 • number 3 • fall 200516 of the dummy variable for a typical aef major, probabilities of getting a or b are expected to go up by 2.47 percent and 7.36 percent. on the other hand, it is expected to decrease by 6.06 percent, 3.19 percent, and 0.32 percent in receiving letter grades c, d, or e. in sum, while intermediate microeconomics is viewed as one of the more rigorous courses in terms of logical and abstract training, it provides ample opportunities for diligent students to receive a satisfactory grade. unlike work presented in von allmen (1996), the dummy variable for instructor is not significant in our sample. one explanation for this relates to a long-standing policy practiced by the department of economics at clarion university of discussing grading practices across instructors each semester. while the primary purpose of that practice is to limit grade inflation, it has resulted in a very consistent grading pattern across instructors. in addition to some of the important results described above, this paper also studies the marginal effects of gpa and credit hours on expected grades using the probit model specification. this is an exercise that is missing from previous work and represents a useful means of determining the full impact of explanatory variables on grades. we also provide readers with results on our three threshold estimates, necessary in an ordered probit model. this allows other researchers at other academic institutions to replicate our work and completely compare results. our analysis of grades in this course and other courses in economics will continue in order to obtain a larger sample size and identify additional factors influencing student success. our current analysis enjoys a larger sample size compared to previous research (by virtue of requiring intermediate microeconomics in the curriculum); however, more information is always beneficial. future work will also concentrate on factors leading to grade improvement (from principles of microeconomics) rather than grade attainment and incorporate performance in quantitative courses as outlined by von allmen (1996). references becker, william e. 1987. “teaching statistical methods to undergraduate economics students.” american economic review 77 (may): 18-24. becker, william e., and michael watts. 1996. “chalk and talk: a national survey on teaching undergraduate economics.” american economic review 86 (may): 33-48. becker, william e., and michael watts. 1999. “how departments of economics evaluate teaching.” american economic review 89 (may): 344-350. becker, william e., and michael watts. 2001a. “teaching economics at the start of the 21st century: still chalk and talk.” american economic review 91 (may): 440-446. becker, w.e., and m. watts. 2001b. “teaching methods in u.s. undergraduate economics courses.” journal of economic education 32: 269-280. beckman, s.r. 2003. “cournot and bertrand games.” journal of economic education 34: 27-35. borg, m.o., and h.a. stranahan. 2002. “personality type and student performance in upper level economics courses: the importance of race and gender.” journal of economic education 33: 3-14. borg, m.o., and s.l. shapiro. 1996. “personality type and student performance in principles of economics.” journal of economic education 27: 3-15. brahmasrene, t., and d. whitten. 2001. “assessing success on the uniform cpa exam: a logit approach.” journal of education for business 77: 45-50. cohn, e., s. cohn, d.c. balch, and j. bradley. 2001. “do graphs promote learning in principles of economics?” journal of economic education 32: 299-310. colander, d. 2003. “integrating sex and drugs into the principles course: market failures vs. failures-of-market outcomes.” journal of economic education 34: 82-91. didia, d., and b. hasnat. 1998. “the determinants of performance in the university introductory finance course.” financial practice and education 8: 102-107. elder, j., and p.e. kennedy. 2001. “testing for unit roots: what should students be taught?” journal of economic education 32: 137-146. journal for economic educators • volume 5 • number 3 • fall 2005 17 estrella, a. 1998. “a new measure of fit for equations with dichotomous dependent variables.” journal of business and economic statistics (april): 198-205. findlay, d. 1999. “the is-lm model: is there a connection between slopes and the effectiveness of fiscal and monetary policy?” journal of economic education 30: 373-382. froyen, r.t. 1996. “the evolution of macroeconomic theory and the implications for teaching intermediate macroeconomics.” journal of economic education 27: 106-115. gartner, m. 2001. “intermediate macroeconomics tutorials and applets.” journal of economic education 32: 93. greene, w.h. 1991. econometric analysis. new york: macmillan publishing company. grimes, p.w. 2002. “the overconfident principles of economics student: an examination of a metacognitive skill.” journal of economic education 33: 15-30. jensen, e.j., and a.l. owen. 2003. “appealing to good students in introductory economics.” journal of economic education 34: 299-325. kennedy, peter e. 2001. “bootstrapping student understanding of what is going on in econometrics.” journal of economic education 32: 110-23 lawler, kevin, et al. 2000, econometrics: a practical approach. london: routledge press. matthews, peter h. 2001. “positive feedback and path dependence using the law of large numbers.” journal of economic education 32: 124-36. murray, m.p. 1999. “econometrics lectures in a computer classroom.” journal of economic education 30: 308-324. oxoby, r.j. 2001. “a monopoly classroom experiment.” journal of economic education 32: 160-168. parks, r. 1999. “macro principles, powerpoint, and the internet: four years of the good, the bad, and the ugly.” journal of economic education 30: 200-209. raehsler, r.d. 1999. “simple bargaining experiments in an introductory economics course” journal of economics 25: 103-120. salemi, m. 1997. “microeconomic concepts students should learn prior to intermediate macroeconomics.” journal of economic education 28 (3): 116-125. spector, l., and m. mazzeo. 1980. “probit analysis and economic education.” journal of economic education 11: 37-44. spinelli, m.a. 2001. “the use of technology in teaching business statistics.” journal of education for business 77: 41-44. sowey, eric r. 1983. “university teaching of economics: a personal review.” econometrics review (may 2): 255-289. vachris, m.a. 1999. “teaching principles of economics without ‘chalk and talk’: the experience of cnu online.” journal of economic education 30: 292-307. von allmen, p. 1996. “the effect of quantitative prerequisites on performance in intermediate microeconomics.” journal of education for business 72: 18-22. von allmen, p., and g. brower. 1998. “calculus and the teaching of intermediate microeconomics: results from a survey.” journal of economic education 29: 277-284. walsh, c.e. 2002. “teaching inflation targeting: an analysis for intermediate macro.” journal of economic education 33: 333-346. walstad, w.b. 2001. “improving assessment in university economics.” journal of economic education 32: 281-295. weerapana, a. 2003. “intermediate macroeconomics without the is-lm model.” journal of economic education 34: 241-262. ziegert, a.l. 2000. “the role of personality temperament and student learning in principles of economics: further evidence.” journal of economic education 31: 307-322. 1 48 journal for economic educators, vol. 8, no. 1, spring 2008 an economics capstone course from creation to presentation dennis s. edwards 1 abstract this paper details a methodology used to construct a capstone course for the economics major. the capstone course should require students to utilize key concepts that they have learned. the lack of a meaningful topic, however, detracts from a showcase for student understanding. the author details the use of michael porter‟s (1998) location quotients and competitive cluster theory in a capstone course. applying these concepts increases student understanding of state industries as well as exposing them to an alternative theory of competition not necessarily included in intermediate microeconomic theory. introduction the capstone course of the economics major is a pivotal point in an undergraduate student‟s life. even though the course comes at the end of the undergraduate program, it can act as a catalyst in preparing students for the next stage of their lives: graduate school, research analyst for business or government, or the business world. this paper chronicles my experience with the capstone course during the spring 2007 semester. it is worthwhile to share my experiences, both positive and negative, with other professors who wish to create a similar course for their students. other notable examples of capstone course creation can be found in donihue (1995); elliott, meisel, and richards (1998); and, carlson, cohn, and ramsey (2002). in my course, i focused on location quotients and michael porter‟s (1998) theory of cluster competition. what is attractive about this theory of competition is its extensive use both in the united states and abroad. as porter claims, “cluster-based reports and case studies” have been used in thirty-five different instances (many more by now), encompassing eight u.s. states and regions, as well as nine countries over the areas of north and central america, south america, europe, africa, and new zealand (porter, 1998; 284-287). clusters are groupings of common entities. a cluster may include downstream firms, suppliers, trade associations, research universities, and think tanks. for example, an automotive cluster might include a manufacturer, glass and plastics firms, a university that has a program in automotive engineering, and so on. the members of the cluster provide an overall synergy. a more thorough discussion of clusters is included in the appendix. location quotients are described in the following section. the capstone course, with its emphasis on application, distinguishes the economics major from many others. at my university, the professor may choose to run the course with or without assistance from our center for economic and community development. as our economics faculty progresses along the learning curve, the center will likely become more integrated into the course. in seminal work, siegfried, et al (1991; siegfried, 1998) describe the nature of a capstone course for an economics program. “a capstone experience can help complete the process of 1 assistant professor of economics, coastal carolina university. 49 journal for economic educators, vol. 8, no. 1, spring 2008 intellectual maturation” (siegfried, et al, 1991; 24). it is also important to organize such a course with hansen‟s (1986, 2001) proficiencies in mind: research and interpret existing knowledge; interpret economic data; apply; create new knowledge. this has also been advocated by salemi and siegfried (1999). adkins and newsome (2006), however, provide a a worrisome investigation into the lack of implementation of hansen‟s proficiencies by department chairs. given that the capstone course entails analyses of existing work, an implied emphasis is on learning through writing. numerous works have documented the benefits of learning economics through writing (fels, 1984; field, wachter, and catanese, 1985; hansen, 1993; mcelroy, 1997; petr, 1998; siegfried, 2001). bartlett and king (1990) provide an example of teaching economic analysis and research using the scientific method. crowe and youga (1986; 219) identify writing in economics as a tool for active learning. writing is a “record of thought,” or reflection, and a “monitoring device,” through thought processing. davidson and gumnior (1993) believe that economics writing should promote basic learning of concepts as well as an increased desire to read more about economics. in a survey of economics alumni, simpson and carroll (1999) found that skills in writing correspondence and internal reports were necessary for professional development. greenlaw (2003) found that students in a course with a writing curriculum performed better than a control group in an empirical investigation of student performance in two courses of macroeconomic principles,. palmini (1996, p. 207) emphasizes an “audience awareness” approach to writing wherein students develop writing and preparation skills for different audiences (i.e., highly educated professionals versus general audiences). following palmini‟s approach, our students presented material orally to a general lay-audience and wrote a paper for a professional audience (such as journal referees). section 2 provides a brief discussion of location quotients. section 3 addresses the methodology used in creating the course. section 4 discusses students‟ anonymous evaluation of the project in which they rated their experiences vis-à-vis hansen‟s proficiencies. section 5 concludes. location quotients many location quotient analyses are done with employment data. we opted for gross state product instead, because these data reflect the value of production. students were given the following model: (1) ilq = (industry i gsp for south carolina)/(total gsp for south carolina) (industry i gdp for the u.s.)/(total u.s. gdp) the location quotient (lq) for industry i reflects the state industry‟s performance relative to the industry‟s national performance. strictly speaking, if an industry‟s lq is equal to one, it is a non-basic industry for the state. in other words, the industry supply simply meets output demand. an lq of less than one also suggests that the industry is non-basic and is insufficient to meet state demand. an lq of greater than one, however, suggests that this is an export (basic) industry, in that not only is basic demand met, but also some goods and services are exported to other areas outside the state. this is common terminology is similar to that found elsewhere (i.e., the florida state university department of urban and regional planning). upon calculation of lq for each industry in south carolina, we ranked them from largest to smallest. this indicated the industries in the state that were solid exporters with the potential 50 journal for economic educators, vol. 8, no. 1, spring 2008 for strong clusters. a high lq does not automatically guarantee a cluster, as described below. doing this for each year from 1997 to 2004 identified the state industries that were growing or decaying relative to their national counterparts over time. course methodology choosing an appropriate topic for a senior research seminar can be quite daunting. a professor should choose a topic that is not only worthwhile and current, but that also allows students to utilize concepts and methods learned in prior courses. for example, a capstone course could be taught as an extension of a field course (salemi and siegfried, 1999; carlson, cohn, and ramsey, 2002) or from the elective choice standpoint of students (mcgoldrick, 1998). keep in mind that the project is not a dissertation. i followed the principle that people should write what they know. in choosing location quotient and cluster analysis, i was not pursuing an unknown frontier of research. while mcgoldrick promotes the virtues of service learning through volunteerism, i encouraged original research by the students for public consumption by the community. our work culminated in an article submitted for review at a regional economics journal. authorship of an article in a scholarly journal is rare for undergraduates. upon publication of the paper, my aim is to issue a press release from the university showcasing the students‟ efforts, while i direct the local and professional communities to our findings. a disconnect between the expected course content and actual course coverage in certain prerequisites is a potential problem for the capstone course (evensky and wells, 1998). for example, our students take a semester of statistics, but background of the instructors of these classes, and hence the course coverage, is not uniform. given the absence of a thorough econometrics background among the students, i wished to avoid a project requiring a lot of mathematical rigor. specifically, i sought to avoid spending half of a semester on the finer points of regression, heteroskedasticity, autocorrelation, and so on. while students encounter regression in a decision analysis course, it is typically taken two years before the capstone course. the review required to use regression analysis would take valuable time away from the project itself (bartlett and king, 1990). location quotient and cluster analysis allowed me to avoid this trap. the local flavor of the topic can also help spark interest for an audience. for example, kurre (1992, 1993) used regional economics (metropolitan statistical areas and spatial cost of living indices) to reinforce student learning and provide students an opportunity to exercise the economic tools. location quotient research again fit the bill. one of the biggest concerns with group projects is the free-rider problem. i was able to avoid this by having all each student do the same assignment for more than three-fourths of the course. everyone had to download the data; everyone had to run the location quotient numbers; everyone had to write an analysis of two bodies of work; and, everyone was involved in the presentation of our work to students and faculty at the end of the term. the students had the responsibility to share the qualitative data gathering, the data analysis, and the creation of the power point slides for the presentation. i did not simply make the assignments and let the students do all the heavy lifting, but followed mcelroy‟s (1997) mentoring approach. i ran the location quotient numbers and completed written analyses on the assigned bodies of work just as the students did. this helped me check whether the students were on the right track. it also demonstrated that i was working with the students as i adhered to the same due dates. setting up due dates for each stage kept 51 journal for economic educators, vol. 8, no. 1, spring 2008 students on a short tether at the beginning, letting them get a feel for the overall project before they were turned loose, and also helped prevent procrastination. the readings we hit the ground running on the first day. i gave the students three handouts dealing with location quotients and cluster theory. the class did not write an analysis of these readings. i simply wanted them to get a feel for what others had done, which is, in and of itself, of importance to a researcher. these readings were readily available on the internet and each student received a printed copy. the first readings were: “porter‟s cluster strategy versus industrial targeting,” by douglas woodward of the university of south carolina from july 2005 (from a presentation that porter had done for business and government leaders in south carolina in 2003); “the tide that lifted most boats: using location quotients to identify minnesota industry trends during expansion of 1992-2000,” by kyle uphoff of the department of employment and economic development from october 2003; and, “target business analysis for north carolina‟s eastern region,” by market street services, inc., from february 2004. the woodward (2005) paper was especially vital to our beginning. it defined clusters and how they work. it also provided direction on a reading from the south carolina competitiveness initiative that i assigned later in the course. i instructed students to purchase a copy of porter‟s (1998) book, on competition. this book is a treasure trove of porter‟s work on competition and competitive theory. each chapter presents one of his past essays on competition and/or cluster theory. i assigned the introduction as well as chapter 7, “clusters and competition: new agendas for companies, governments, and institutions,” which is his essay on clusters. the first written assignment was on chapter 7. students were to read the chapter and a write an analysis of no more than five double-spaced pages. from my experience, students do not necessarily like a maximum length, although they seem to love a minimum. i provided a maximum page limit, because i wanted the students to write succinctly. the business world will require their analyses to be direct and concise. the second written assignment dealt with a 2005 paper, “a strategic plan for south carolina,” by the south carolina competitiveness initiative (hereinafter “plan”). this document contained more than 100 pages of text and graphs. i split the reading of the plan into two parts over two weeks. students then had to write an analysis of the entire paper, limited to a maximum of six pages. i graded each written assignment for understanding and grammar, but the students also peer-reviewed each other‟s papers. peer review can expose students to different approaches in understanding concepts [hansen (1993)] and promote standards that assist them in becoming better writers (smith, broughton, and copley, 2005). i did not follow up on the students‟ peer reviews with a comment sheet or any other feedback. i explained that we were all working toward a common goal: the improvement of everyone‟s work. empirical data gathering as students were going through the readings and writing their analyses, they also gathered the data for the location quotient analysis. our data were downloaded from the bureau of economic analysis website. this website provided industry and sub-industry real gross state product (gsp) from 1997 to 2004 for south carolina. each student downloaded this data into an excel spreadsheet to be used for constructing the location quotient numbers. when we noticed 52 journal for economic educators, vol. 8, no. 1, spring 2008 movements in the lq numbers over time, we focused our attention on the possible reasons for the changes in the numbers. this brought the course to the qualitative analysis stage. qualitative data gathering and analysis within a few days of analysis, the students made copious notes. they also wrote individual reports on their hypotheses as to why the lq numbers were changing. given the vast amount of information available on the internet, students relied on official government or industry websites for much information. they avoided questionable and partisan sources. professors must communicate this limitation if they wish to conduct a research seminar. i also stressed the importance of finding duplicate sources for information, especially if the original source material might not be entirely reliable. written and oral presentations all of our material culminated in a final written report, part of which was taken from the students‟ written analyses of the assignments above. i put the final outline and paper together in an attempt to incorporate a smooth flow of presentation. from my perspective, i ran the course with the idea of a possible journal submission in mind. while our complete analysis is currently undergoing blind review at an academic journal, some broad interpretations are provided in the conclusion below. in the final performance evaluation, students were graded on attendance; their location quotient effort; the written reports; the qualitative data gathering and analysis; and, the oral presentation in business dress before faculty, students, and invited guests. during the students‟ dry run, i stressed that anyone can read a presentation, but that preparation is required to actually present it to an audience. i asked several attendees about their thoughts (both positive and negative) regarding the presentation. an assistant professor of economics provided these comments: the students did an excellent job. they seemed to be fairly confident in front of an audience in a fairly large room. they created an excellent power point presentation with good visuals, particularly the map of south carolina that showed the concentrations of industries. the only difficulty they had was in answering some of the questions; particularly, what can be done to attract more industries to the grand strand area? it would have been useful to have a discussion with the students about policy implications and about how firms respond to economic incentives prior to the presentation. on the same day as the presentation, our university was interviewing a job market candidate in economics. the search committee chairman inserted our presentation into the candidate‟s itinerary. the candidate, now an assistant professor of economics, commented: i remember very well your students‟ presentation of the paper concerning industrial clusters in south carolina. i was on the job market at the time and was at our institution for an on-site interview. one of the events on my agenda was watching their presentation. it was the only time in all of my campus visits that i actually got to see students present their work. i was very impressed. the four students handled themselves quite professionally and did an excellent job fielding questions. several faculty including myself [sic] asked the students 53 journal for economic educators, vol. 8, no. 1, spring 2008 questions about the implications of their research. their answers demonstrated a firm grasp of the topic, and again i left very impressed. during the middle of the spring 2007 semester, one of the non-traditional students from the class attended a local chamber of commerce canadian business conference in a neighboring city to our university. this student interacted with u.s. ambassador to canada david wilkins and south carolina governor mark sanford. the student asked questions regarding horizontal and vertical integration issues between canadian and u.s. firms. while the firms‟ profits returned to canada, the canadian representatives described how their firms benefit the local south carolina economy by creating jobs and purchasing from local suppliers. my student also asked the canadians about clusters and porter‟s competition theory. after the session, individuals began asking this student where he worked, given both his age and his ability to discuss these issues intelligently. they were surprised when he replied that this was all part of his senior project in economics! hansen evaluation results at the end of the project, i gave the four students an anonymous evaluation form. this form asked them to rank the course on a scale from 1 to 5 on each of hansen‟s (2001) six proficiencies. the questions stated hansen‟s proficiencies exactly, although students were not told this. the results are reported in table 1. table 1 evaluation responses to hansen’s (2001) proficiencies key: 1—absolutely not 2—not really 3—neutral 4—pretty much agree 5—absolutely agree ar—average response for each question student response question 1 2 3 4 1. did this course help you in accessing existing 4 4 5 4 knowledge? (ar = 4.25) 2. did this course help you display command of 4 3 5 4 existing knowledge? (ar = 4.00) 3. did this course help you interpret existing 4 4 5 4 knowledge? (ar = 4.25) 4. did this course help you to interpret and 5 5 5 4 manipulate economic data? (ar = 4.75) 5. did this course help you to apply existing 4 4 4 5 knowledge? (ar = 4.25) 6. did this course help you to create new 5 5 4 5 knowledge? (ar = 4.75) 54 journal for economic educators, vol. 8, no. 1, spring 2008 as can be seen from the table, the average response is four or above for each of hansen‟s proficiencies. this was quite encouraging. since the capstone course is designed for students to add to the economics literature, the high rankings given to the last proficiency (creating new knowledge) confirmed the course‟s success in this regard. of course, only four students providing feedback is not a large number of observations. that is a valid criticism. if i run the course again, i will follow up on a similar evaluation with that group. students also offered additional comments on the evaluations. student 3 stated, “tight schedule. could really use more time to go more in depth. but, very helpful and extremely intense (in a good way).” student 4 replied, “it was satisfying to be able to use what i learned in previous economics classes and apply it to something actually happening in the world.” these were the only written comments on the hansen evaluation. the course evaluation results are available from the author upon request. our business college has instituted an alumni tracking system utilizing the permanent assignment of students‟ school email addresses. by periodically checking with our alumni, we can measure their success (and indirectly, our success) with their job placement. after more time passes, i will check with the participants from this course to see if the skills they acquired are being put to use in their current employment. of the four students from the class, two have secured career employment upon their graduation, one went to germany, and the other returned to her native iceland. the appendix draws from the cluster analysis material that i wrote and distributed to the students as part of the readings assignment described above. i offer this as a primer for any readers wishing to try a cluster analysis. conclusion our findings identified both positive and negative trends in the south carolina economy. although a high lq does not guarantee a cluster, the data can be used to identify potential clusters. for example, in recent years, the south carolina textile industry has been declining relative to the united states, but it is still the most important industry in the state. we noticed, however, that south carolina had high lq numbers in industries that have the potential for interconnectivity: textiles; automotive; chemicals and plastics (for automobile parts); and, waste remediation and services (for industrial waste removal from increased automobile production). this paper provides a step-by-step guide for colleagues wishing to use location quotient theory and porter‟s cluster analysis to create a project for the economics capstone course. as described above, the capstone course has been advanced as a vital tool in testing student understanding of learned economics concepts. additionally, it provides the instructor one last opportunity to shape the students‟ research, computer, analytical, writing, and presentation skills. i identified several missed opportunities in my own evaluation of the capstone course. first of all, the students were constrained by my topic choice, meaning they may have spent a semester working on something they did not particularly enjoy. on the other hand, numerous other economic concepts came up in our industry analyses: multiplier effects, industry employment, wages, and favorable state business tax conditions, among others. secondly, i could have required the students to do more research from academic journals. i was their primary source of scholarly literature. i did this to expedite the project, but it denied students an opportunity. their research in support of the project primarily focused on newspapers, periodicals, and the internet. 55 journal for economic educators, vol. 8, no. 1, spring 2008 third, despite the misgivings stated above, a regression analysis could have been performed. although determining lq numbers does not require regression, an empirical analysis of statistically significant movements in the lq numbers over time would have been beneficial. fourth, i also could have brought in a management professor knowledgeable about cluster theory for a guest lecture on competitiveness. this would have provided students with another resource. nevertheless, i am convinced that the benefits of the project outweigh these miscues, particularly if our submission gets published. lastly, for those economics programs that do not currently provide a capstone course, i highly recommend its inclusion. 56 journal for economic educators, vol. 8, no. 1, spring 2008 references “a bar is born.” cheers, 1989. season 8. nbc network. writer: phoef sutton. director: james burrows. 12 october (www.tv.com). adkins, r. and m. newsome. 2006. “designing the economics curriculum: a survey of the use of „big ideas‟ and proficiencies.” journal of economics and finance education. 5(2): 7-16. bartlett, r. and p. g. king. 1990. “teaching economics as a laboratory science.” journal of economic education. 21(2): 181-93. baye, m. r. 2006. managerial economics and business strategy 5th ed. new york: mcgraw-hill/irwin. bureau of economic analysis. “real gdp by state (formerly gsp) in millions of chained 2000 dollars.” retrieved january 2007 from [http://www.bea.gov/ regional/gsp/]. carlson, j. l., cohn, r. l., and d. d. ramsey. 2002. “implementing hansen‟s proficiencies.” journal of economic education. 33(2): 180-91. crowe, d. and j. youga. 1986. “using writing as a tool for learning economics.” journal of economic education. 17(3): 218-22. davidson, l. s. and e. c. gumnior. 1993. “writing to learn in a business economics class.” journal of economic education. 24(3): 237-43. donihue, m. r. 1995. “teaching economic forecasting to undergraduates.” journal of economic education. 26(2): 113-21. elliott, d., meisel, j., and w. richards. 1998. “the senior project: using the literature of distinguished economists.” journal of economic education. 29(4): 312-20. evensky, j. and m. wells. 1998. “making a series of courses into a program: a case study in curriculum development.” journal of economic education. 29(1): 72-80. fels, r. 1984. “student papers on macroeconomic policy.” journal of economic education. 15(3): 237-38. field, w. j., wachter, d. r., and a. v. catanese. 1985. “alternative ways to teach and learn economics: writing, quantitative reasoning, and oral communication.” journal of economic education. 16(3): 213-17. florida state university department of urban and regional planning. “planning methods iii: forecasting.” retrieved 30 january 2006, from [http://garnet.acns.fsu.edu/~tchapin/urp5261/topics/econbase/lq.htm]. 57 journal for economic educators, vol. 8, no. 1, spring 2008 greenlaw, steven a. 2003. “using writing to enhance student learning in undergraduate economics.” international review of economics education. 1(1): 61-70. hansen, w. l. 2001. “expected proficiencies for undergraduate economics majors.” journal of economic education. 32(3) the scholarship of teaching economics: 231-42. _____. 1993. “teaching a writing intensive course in economics.” journal of economic education. 24(3): 213-18. _____. 1986. “what knowledge is most worth knowing—for economics majors?” american economic review papers and proceedings of the ninety-eighth annual meeting of the american economic association. 76(2): 149-52. kurre, james a. 1993. “using spatial cost of living differences as a teaching tool.” regional science perspectives. 23(1): 101-20. _____. 1992. “teaching regional economics through analysis of metropolitan economies.” review of regional studies. 22(2): 137-47. market street services, inc. 19 february 2004. “target business analysis for north carolina‟s eastern region.” pdf file originally retrieved from an internet search in 2006. official website: [http://www.marketstreetservices.com]. mcelroy, j. l. 1997. “the mentor demonstration model: writing with students in the senior economics seminar.” journal of economic education. 28(1): 31-35. mcgoldrick, k. 1998. “service-learning in economics: a detailed application.” journal of economic education. 29(4): 365-76. palmini, d. j. 1996. “using rhetorical cases to teach writing skills and enhance economic learning.” journal of economic education. 27(3): 205-16. petr, j. l. 1998. “student writing as a guide to student thinking.” in walstad and saunders (eds.), teaching undergraduate economics—a handbook for instructors. 1998. boston: irwin/mcgraw-hill. porter, m. e. 1998. “clusters and competition—new agendas for companies, governments, and institutions.” in michael porter (ed.), on competition. boston: harvard business school publishing, 197-287. _____. 1998. on competition. boston: harvard business school publishing. salemi, m. k. and j. j. siegfried. 1999. “the state of economic education.” american economic review papers and proceedings of the one hundred eleventh annual meeting of the american economic association. 89(2): 355-61. 58 journal for economic educators, vol. 8, no. 1, spring 2008 siegfried, j. j. 2001. “principles for a successful undergraduate economics honors program.” journal of economic education. 32(2): 169-77. _____. 1998. “the goals and objectives of the economics major.” in walstad and saunders (eds.), teaching undergraduate economics: a handbook for instructors. 1998. boston: irwin/mcgraw-hill. _____, bartlett, r. l., hansen, w. l., kelley, a. c., mccloskey, d. n., and t. h. tietenberg. 1991. “the economics major: can and should we do better than a b-?” american economic review papers and proceedings of the hundred and third annual meeting of the american economic association. 81(2): 20-25. simpson, m. s. and s. e. carroll. 1999. “assignments for a writing-intensive economics course.” journal of economic education. 30(4): 402-10. smith ii, h. m., broughton, a., and j. copley. 2005. “evaluating the written work of others: one way economics students can learn to write.” journal of economic education. 36(1): 43-58. south carolina competitiveness initiative. 2005. a strategic plan for south carolina. retrieved january 2007, from [http://competesc.org/strategydocument.pdf]. uphoff, k. october 2003. “the tide that lifted most boats: using location quotients to identify minnesota industry trends during expansion of 19922000.” minnesota employment review supplement. retrieved 9 january 2007, from [http://www.deed.state.mn.us/lmi/publications/review/1003supp.htm]. walstad, w. b. and p. saunders (eds.). 1998. teaching undergraduate economics—a handbook for instructors. boston: irwin/mcgraw-hill. woodward, d. 1 july 2005. “porter‟s cluster strategy versus industrial targeting.” retrieved from [http://www.nercrd.psu.edu/industry_targeting/researchpapersandslides/ indcluster.woodward.pdf]. 59 journal for economic educators, vol. 8, no. 1, spring 2008 appendix an overview of cluster theory as advanced by michael porter conventional wisdom states that the globalization of the world economy has all but rendered firm location obsolete. in an episode of the hit series cheers, sam the bartender is thinking of opening a new bar in a high crime area of boston. dr. frasier crane, the pompous psychiatrist, explains that there is an old real estate dictum: “the three most important things in looking for a property are location, location, location.” woody, the dim-witted bartender, refutes that that is only one thing. dr. crane explains that is the point; there is only one rule in real estate. woody, even more confused, rebuts that real estate people must be stupid. seeing that he is not getting anywhere, dr. crane gives up, sighs, and agrees, “because real estate people are stupid” [“a bar is born” (1989)]. michael porter, the eminent professor at harvard university who has done voluminous work on the theory of competition, explains that location is one of the key elements of cluster theory. according to porter, “clusters are geographic concentrations of interconnected companies, specialized suppliers, service providers, firms in related industries, and associated institutions…in particular fields that compete but also cooperate” [porter (1998), p. 197-98]. examples of clusters can be found in the financial services sector in new york city, new york; textiles in north and south carolina; and high technology in silicon valley, california. porter‟s theory is that companies benefit from the presence of competition—not the absence. the attraction of clusters comes about because the entities (downstream companies, upstream suppliers, pools of specialized labor, and research groups or universities) are all interconnected so that complementarities exist. in other words, relationships between firms have vertical associations (suppliers, distribution centers) and horizontal relationships (competitors), along with tangentially related entities (trade associations, universities, research groups, and think tanks). specifically, porter elaborates that, “most cluster participants do not compete directly, but serve different industry segments” [porter (1998), p. 205]. hence, the cluster creates synergistic relationships among its members. additionally, the interrelationship of all the entities described above produces (or has the potential to produce) positive externalities (such as technological spillovers). this makes clusters function to foster competition. for example, porter explains that complementary relationships, technological spillovers, information, buyer needs, and employee skills can all be seen in a cluster relationship, rather than among industry-specific firms [porter (1998), p. 205]. clusters may replace vertical integration relationships. in clusters, the interrelationships and availability of suppliers make the need for in-house production of inputs unnecessary. in fact, this availability of input suppliers and lack of need for vertical integration can free up “management attention that may be better spent elsewhere” [porter (1998), p. 215]. accordingly, from a managerial economics perspective, there is little need for downstream firms to lock themselves into long-term contracts with suppliers, as long as the cluster has more than one option in obtaining upstream inputs [see, for example, discussions on opportunism and input procurement by contracts in baye (2006), p. 211-217]. additionally, the informal relationships that may develop among cluster participants should not be overlooked. this mutual dependence can also undermine the cluster. for example, if the number of suppliers is small and all of them perform poorly, this weak link in the chain will force the downstream firm to outsource for inputs, weakening the very advantage of the cluster [porter (1998), p. 214, 217]. nevertheless, since cluster theory advocates enhanced competition, 60 journal for economic educators, vol. 8, no. 1, spring 2008 reputation, pride, and standing in the local community, the incentive for good performance by cluster participants is quite strong [porter (1998), p. 219]. if a cluster increases profitability by causing downstream firms to become more economically efficient (lowering their total cost per unit), it also promotes increased competition due to the increased profitability. the increased number of firms will make it more difficult for downstream firms to collude and put up entry barriers [porter (1998), p. 225]. clearly, geography is of critical importance in identifying clusters. porter states that, “clusters are more likely to span political borders where there is a common language, short physical distances…similar legal systems and other institutions, and minimal trade or investment barriers” [porter (1998), p. 230 (emphasis added)]. lastly, an important distinction needs to be made between cluster theory and industrial policy. porter emphasizes that all clusters should be encouraged so that innovation is fostered. industrial policy is usually targeted to a specific industry, which focuses not on innovation, but on market share or the limiting of competition [porter (1998), p. 248-49]. the steel tariff imposed by the bush administration in 2002 is a clear example of industrial policy. the steel industry gained at the expense of u.s. consumers and those industries which rely on steel inputs in production. 39 journal for economic educators, 13(1), 2013 the effects of fiscal and monetary policies on economic outcomes: a classroom activity using mankiw's "presidential game" hilde patron and william j. smith 1 abstract we describe the use of a serious game in intermediate macroeconomics: mankiw’s presidential game. students in the classroom are assigned different roles as monetary and fiscal policy makers, while the online game is used to estimate the impact of their decisions. after the game, the instructor and students discuss the problems they experienced with the implementation of the different policies. students are given a take-home assignment to complete the activity. key words: short-run macroeconomics, classroom activity, learning, serious games jel classifications: a22, e5, e6 introduction computer simulation models have been around for decades and have been used to hone the skills of astronauts, to test design integrity, and generally to simulate complex systems that involve the interaction of multiple influences. the major benefits of computer simulations are that they provide both a platform for testing theory and a setting for simulating what may otherwise be costly decision processes, but doing so safely within a controlled environment. furthermore, computer simulations can provide a perspective unavailable to any individual in the real world and insight into multiple points of view. simulations that are designed for problem solving, training, or education have been referred to as “serious games.” the typical purpose of serious games is instruction, but this does not preclude their ability to entertain. betz (1995) found that serious games illustrate entire interactive systems, are able to help the student organize and integrate complex skills, and illustrate the impacts of actions on complex systems. according to ritterfield, cody and vorderer (2009), two key features of serious games are that they are immersive and educational. casual games may immerse the player, but often provide no educational benefits. teachers have recognized that serious games can support important knowledge and skill development, including strategic thinking and planning, the use of data and math, and the use of interpersonal skills for negotiation and group decision making (kirriemuir and mcfarlane, 2006). in addition, using games, especially immersive games, may be educationally valuable because they are built to motivate the student-player. specifically, these games employ features such as challenge, control, interaction with other players, and putting students in competition with each other in the pursuit of a particular goal (ritterfield, cody and vorderer ed., 2009). below, we describe the use of one serious game in the classroom (the presidential game) and compare it with a popular alternative (the fed chairman game). both games were h 1 the authors are associate professors in the department of economics, university of west georgia. hpatron@westga.edu and wjsmith@westga.edu. mailto:hpatron@westga.edu mailto:wjsmith@westga.edu 40 journal for economic educators, 13(1), 2013 designed to be used by students in a macroeconomics course to help them gain insight into the dynamic nature and the interactions that occur in the implementation of fiscal and monetary policy, especially in the presence of different historical events and economic shocks. macroeconomics and money and banking courses usually cover at least one short-run macroeconomic model. the is-lm, is-mp, or aggregate supply-aggregate demand models can be used to describe how output and inflation are determined in the short run, how different events influence the economy, and how monetary and fiscal policies can be used to influence short-run economic outcomes. the implications for economic stabilization drawn from these models are clear. for example, to stimulate the economy the government could increase spending or lower taxes, and the central bank could lower interest rates (or increase money supply). real life economic stabilization is not as straightforward. lags, uncertainty, and estimation errors, among other things, make economic policy-making a complex endeavor. a great way to review the lessons from these short-run models and to introduce students to the difficulties of real life economic policy making is to have them play a short-run economic policy game. two very interesting and fun serious games are the fed chairman game, hosted by the federal reserve bank of san francisco’s website, 2 and the presidential game, hosted by gregory mankiw’s macroeconomics textbook’s website. 3 both the fed chairman game and the presidential game place the player in a variety of situations and then force the player implement one of the typical assortment of policy prescriptions, including doing nothing. the fed chairman game puts the player in the role of the federal reserve chair and its board of governors. the focus of the game is implementing policies available to the fed to ensure us economic stability. the presidential game puts the player in the role of both the federal reserve board of governors and all two branches of the us federal government, the executive and legislative branches. the focus of the game is on both monetary and fiscal policy to ensure us economic stability. the presidential game has one significant advantage over the fed chairman game. although the presidential game allows for an idealistic level of coordination between these two branches of government, it also allows the player to determine both monetary and fiscal policy simultaneously. one can further increase the realism of the game by sub-dividing the class into groups and assigning each a group a set of decisions. allowing the players control over both monetary and fiscal policy provides added insights into the interactions between these two types of macroeconomic policies. stimel (2009) describes how he uses the fed chairman game in his principles and intermediate macroeconomics courses, and presents some follow up assignments to accompany this game. here, we describe how to use the presidential game in intermediate macroeconomics classes and suggest possible classroom discussion topics and follow-up assignments. instructions the presidential game has (a maximum of) sixteen periods. in each period, a player inputs into the computer the rate of money growth, the ratio of government spending to output, and the ratio of taxes to output. the objective of the game is to maintain a “healthy” level of economic activity. the president’s performance is measured with an approval rating; if this falls under 30%, the president is removed and the game ends. 2 http://www.frbsf.org/education/activities/chairman/index.html 3 http://bcs.worthpublishers.com/mankiw8/default.asp#796152__806174__ 41 journal for economic educators, 13(1), 2013 to play the game in class the instructor needs a computer with shockwave player, an internet connection, and 10-15 minutes of class time. we divide students into three groups: the president, congress, and the fed. the president and congress choose spending and tax ratios, while the fed chooses the money growth rate. we nominate a student to be president, and try to choose a student who is outgoing and engaging and who has done well in the class up until that point. the president chooses three students to be the central bankers, and these students choose a chairman among themselves. all other students in the class make up congress. after students are assigned to the different groups, we explain the rules of the game. although the game allows for taxes and government spending to be changed every period, we restrict fiscal policy decisions in the classroom to every three periods. the president makes a recommendation to congress and congress votes on it. decisions are enacted after a majority vote. all fiscal policy deliberations are made in public in front of the other students. monetary policy decisions are made every period. the central bankers deliberate in private (quietly among themselves) and announce their decisions out loud to the class. the instructor enters the decisions into the computer as they are announced so that students can immediately see how the economy is progressing in graphs and tables. the game may be played more than once during a class period. the second time the game is played, instructors can switch the order in which fiscal and monetary policy decisions are made, for example, or they can increase or decrease the frequency with which they are made. classroom discussion after the game is over, we discuss the activity with the students. some interesting points to discuss include: 1. did the economy react as predicted by the models? 2. were there too many unexpected shocks or did the economy run smoothly? 3. did central bankers believe that fiscal decisions hampered or aided their performance? did they think that fiscal policy was too lax, too restrictive, or just right? 4. did congress believe that central bankers chose appropriate policies? or did congress think that central bankers were too aggressive (or not aggressive enough)? this discussion allows us to introduce topics such as inside and outside lags of economic policy, the complex nature of economic shocks, the (lack of) coordination of monetary and fiscal policy, the advantages and disadvantages of using rules rather than discretionary policy, and the importance of choosing the right type of person to lead the central bank. follow-up assignment the class activity can be followed with an assignment. we ask students to play the game at home under two different scenarios and to report their results. the assignment is posted in the university’s classroom management site and students are asked to submit their answers in an electronic drop-box. the instructions to the assignment are given below. playing in a classroom setting versus playing the game alone provides the student with different perspectives about the problems associated with monetary and fiscal policy. in the classroom setting, students divide up playing different roles and are forced to coordinate and collaborate in the process of developing strategies to deal with macroeconomic issues each group, the president, congress and the fed chair and board of governors, has a different set of objectives in the game. as such, a particular group may find it difficult to translate its objectives 42 journal for economic educators, 13(1), 2013 into actions, especially when other groups can enact policies that either offset their policies or cause their policy to miss its mark. this added touch of realism provides insight into the political as well as technical problems faced by each of these economic actors. the students may soon realize that coordinating fiscal and monetary policy for the us economy is like putting the different controls of a car, such as the brakes, the gas pedal, and the steering wheel into the hands of different individuals intent on heading to different destinations, and then attempting to drive. playing the game at home provides each student the opportunity to act as the supreme economic dictator. initially, the student is required to keep fixed taxes and government spending equal to 0.15 of gnp. this restriction reduces the game’s complexity and focuses the student’s attention on monetary policy alone, effectively reducing the presidential game to the fed chair game. in the second phase, that game starts again and all policy actions are open to the student’s choices. this reinforces the level of difficulty facing anyone attempting to coordinate policy across a national economy and gives the student an opportunity to play all roles in the game instead of just one. when the student is playing alone, technical expertise in a variety of different policies becomes more important, rather than the problems of coordination. furthermore, by comparing the time and negotiations involved in the classroom experience to that of the individual outside of class, a teacher can easily motivate a discussion of the complex political processes involved in economic policy changes. conclusion and recommendations there are several possible pedagogical benefits derived from using a serious game for instructional purposes. games may increase the level of learning because they involve real-time active problem-solving skills that keep students engaged and focused on the subject matter. furthermore, playing a role in a game increases the learning incentives for the student-player by tapping into the student’s competitive nature. since serious games have been applied in a variety of settings, teaching economic concepts, such as fiscal and monetary policy, is a natural extension of other types of simulation or role playing games. there are a multitude of different types of exercises that may increase a student’s ability to understand complex materials. the difficulty for the typical instructor is not in developing exercises that, if performed, will allow a student to develop and hone new skills, but in making the learning process more attractive to students and providing a medium in which the student is an active seeker rather than a passive observer in the educational process. serious games may provide such an educational medium. references betz, joseph a. 1995-1996, computer games: increase learning in an interactive multidisciplinary environment. journal of educational technology systems, volume 24, number 2, 195-205. kirriemuir, j., and mcfarlane a. 2006. literature review in games and learning, futurelab series, report 8. bristol, uk mankiw, n. gregory. 2012. macroeconomics, 8 th edition. new york: worth publishers. ritterfield, u., cody m., and vorderer p., (edited, 2009), serious games: mechanisms and effect. taylor and francis, new york, ny. stimel, derek. 2009. using the san francisco federal reserve’s online fed chairman game in the classroom. mountain plains journal of business and economics, vol 10, 16-28. 43 journal for economic educators, 13(1), 2013 presidential game assignment go to the textbook's companion website http://bcs.worthpublishers.com/mankiw8/default.asp#t_796152____ and select the "presidential game". alternatively, you may go directly to the game by directing your browser to http://bcs.worthpublishers.com/mankiw8/default.asp#796152__806174__ you are going to play the game twice. your goal is to keep inflation close to 2% or 3% and unemployment close to 5.5%. the first time you play the game set taxes and government spending equal to 0.15 (of gnp). these values cannot change while you play the game. your only tool is money supply. make a table reporting your choice of money supply and the resulting values of inflation and unemployment every period. include a short sentence explaining your decisions. use the is-lm or as/ad terminology/model to explain your choices. a sample table is provided at the end of this assignment. the second time you play the game you are free to choose money supply, taxes and government spending. record your choices (for all three values) and the resulting unemployment and inflation rates. report all values neatly in a table. include a short sentence explaining your choices. use the islm or as/ad terminology/model to explain your decisions. conclude with a paragraph explaining your performance. did you do better when fiscal policy was fixed or when you were allowed to select fiscal and monetary policy? sample table: year g t m reasoning 2011 0.20 0.20 0.08 2012 0.20 0.20 0.08 2013 0.15 0.15 2014 0.15 0.15 http://bcs.worthpublishers.com/mankiw8/default.asp#t_796152____ http://bcs.worthpublishers.com/mankiw8/default.asp#796152__806174__ 42 journal for economic educators, 9(1), summer 2009 undergraduate research the environment of microfinance institutions: the role of economic freedom1 phillip kamau njoroge and e. anthon eff2 introduction microfinance provides saving and lending services to the poor. it is not conceptually different from banking in the usa. people are able to save money at and borrow money from microfinance institutions. they are compensated for saving and charged for borrowing by an interest rate that compounds on savings or loans. it is different primarily in the magnitude of the financial transactions. loans to the poor are much smaller on average than loans traditionally given by banks; these loans can be as small as $71. also, because of their poverty, borrowers tend to have little or no collateral to secure loans (murdoch, dec. 1999). the grameen bank of bangladesh, founded by mohammad yunus, was one of the first microfinancing institutions. he came upon a group of villagers that were unable to pay off their debt to a money collector and found that he was able to lend them what they needed out of pocket. moved by this situation, he started a lending service that avoided the high interest rates that the traditional moneylenders charged. the moneylenders charge rates as high as 100% per month on the loans they give; the current average rate for the grameen bank is around 79% annually. lending to the poor usually means that a lender will not be able to get any collateral to secure the loan. the grameen bank was able to solve the collateral problem by lending to “solidarity groups”. solidarity groups are groups of five people that take loans out together where the groups are held responsible for each individual’s portion of the loan. it seems that the factor that makes solidarity groups work to keep repayment rates high is the social element of the solidarity group, rather than the enforcement of group repayment (pankaj, 1996). furthermore, the grameen bank has been able to help poverty stricken women in a country that is traditionally male dominated. the bank serves 95% women and maintains a high repayment rate around 98%. the resulting lower bad debt expense helps to keep interest rates down. the model of the grameen bank has been copied numerous times with high levels of success (hassan, 2002). microfinance has been hailed as having the means to end poverty in the world, but this is not a consensus in the literature. one important criticism of microfinance is that there is no empirical evidence to support the claims that microfinance actually improves the condition of the poverty stricken. unfortunately, the data are not sufficient to analyze effects of microfinancing institutions on their customers (hulme, 2000). another criticism of microfinance is the high interest rate charged. since each account is small in relation to the expenses incurred for maintenance of these accounts, costs are relatively higher for microfinancing, and higher interest rates must be charged to offset the higher costs. entrapment of very poor borrowers may also 1 this paper was written in part due to a grant provided by the ronald e. mcnair scholars program to mr. njoroge with dr. e. anthon eff serving as mentor. this program prepares students from underrepresented groups for success in graduate school by offering grants for research projects. 2 phillip njoroge, middle tennessee state university, pkn2b@mtsu.edu; dr. e. anthon eff, associate professor of economics, middle tennessee state university, eaeff@mtsu.edu. 43 journal for economic educators, 9(1), summer 2009 occur. once a borrower takes a loan from a microfinance institution, the borrower may use all of his available income to pay off the loan, then needs to borrow again to survive. this can create a debt trap that keeps borrowers permanently indebted to their microfinance bank (murdoch, 1999b). despite the numerous criticisms of microfinance, it seems that it is a worthwhile subsidy for governments to undertake (schreiner 2003). most microfinance institutions, including the grameen bank, are government subsidized. there is some controversy surrounding the necessity of these subsidies. some state that microfinance cannot exist without governmental subsidy, while others claim that it is possible for a non-subsidized version of these banks to exist. if governments are committed to subsidizing microfinance, understanding the correlates to its prevalence would allow governments to make more informed decisions about policy affecting microfinance (morduch, 1999a) in the literature, individual microfinance banks have been shown to be stable even in cases where their respective country’s economy is not (rhyne, 2001), but the influence of instability and lack of freedom on the operation of these banks is not examined. we examine political indices that are commonly considered to have an effect on economic institutions, such as indices that measure levels of freedom and stability. we expect economic freedom and stability to positively correlate with the prevalence of microfinance institutions. analysis data from eighty countries across five continents were gathered to predict the prevalence of microfinancing institutions by measures of freedom and instability. we used cross-sectional data for 2006. variable names, means and standard deviations are given in table 1. the number of microfinance institutions is normalized by population for each the country then logged (lnmfipop). the indices for freedom are given on a scale from zero to 100. higher ratings are correlated with higher levels of freedom, but the data should not necessarily be interpreted as ratio data. efscore is the overall score of a particular country; proprights is the measure of individual property rights. a more thorough discussion of these indices can be found at http://www.heritage.org/index/pdf/index09_methodology.pdf. pchef is the percent change of the economic freedom score from 2005 to 2006, and serves as a rudimentary measure of stability. gdp is measured in purchasing price parity (ppp) per capita to capture the overall level of poverty in each country. the percent change variables are an attempt to capture instability in each country. pop is the population of the country, and popdens is the population divided by the table 1 summary statistics variable max min mean median mode std. dev. efscore 79.3 40 57.4114 57.1 57.2 6.882549 proprights 90 10 36.5823 30 30 15.598 pchef 0.13801 -0.0936 0.01009 0.00759 0.04266 0.043727 pop 1.3e+09 279912 5.9e+07 1.2e+07 1.92e+08 popdens 2650.55 4.68985 294.183 173.218 392.5583 gdp 17300 731 5351.11 4521 4238.055 lnmfipop 2.28448 -4.7829 -0.1275 0.07595 1.353186 44 journal for economic educators, 9(1), summer 2009 land area of the country in square miles. the dependent variable, lnmfipop, is the natural logarithm of the number of microfinancing institutions divided by the population of that country. ordinary least squares regression analysis is used to analyze correlations between groups of independent variables and the dependent variable. all of the freedom indices are included ex ante; the model is pared using a stepwise algorithm in r. table 2 regression output variable estimate std. error pr(>|t|) (intercept) -5.750 1.240 1.48e-05 efscore 0.127 0.026 7.53e-06 proprights -0.030 0.012 0.012 pchef -4.170 2.950 0.162 pop -2.87e-09 6.37e-10 2.54e-05 popdens 6.27e-04 3.14e-04 0.049 gdp -1.00e-04 3.24e-05 0.003 r2=.4622, n=79 the model is tested for endogeneity using the hausman test. the variables being tested for a feedback relationship are lnmfipop and gdp. if there is endogeneity, the parameter estimates and the standard errors will be incorrect. gdp is estimated using an ols linear regression, and the residuals from this regression are used in the restricted model. if the residuals are statistically significant, the hausman test shows that gdp is endogenous. the p-value for the residuals is .69, indicating that gdp is not endogenous and that no correction is needed for gdp in the restricted model. the model is tested for multicollinearity using variance inflation factors (vifs).3 if there is multicollinearity, it is possible that the standard errors are biased and may lead to the inclusion of variables that should be excluded from the model. table 3 vif test variable vif score efscore 2.394 proprights 2.423 pchef 1.219 pop 1.095 popdens 1.109 gdp 1.380 3 the variance inflation index (vif) is calculated by regressing each of the independent variables by the other independent variables. it is a statistic without a distribution; a vif score of 10 or higher indicates that there is multicollinearity. 45 journal for economic educators, 9(1), summer 2009 the vif scores show that there is no multicollinearity in the model. the standard errors are not biased, so no correction for multicollinearity is necessary. the model was tested for heteroskedasticity using a lagrange multiplier test. if there is heteroskedasticity, it is possible that the standard errors are incorrect, which could lead to the inclusion of variables that should be excluded from the model. the null hypothesis for this test is that there is no heteroskedasticity. we find the p-value for this test is 0.0056969, indicating that the model has heteroskedasticity. to correct for this, robust standard errors are calculated. 4 table 4 robust standard errors variable t-value (intercept) 6.75e-05 efscore 5.90e-05 proprights 0.051 pchef 0.348 pop 0.053 popdens 0.055 gdp 0.002 pchef is not significant when heteroscedasticity is corrected. this variable is removed from the restricted model. the model is tested for spatial autocorrelation using moran's i test.5 table 5 if there is spatial autocorrelation, it is possible that necessary variables are being left out of the model. it can also cause the standard errors and the p-values to be incorrect. the p-value for the spatial autocorrelation test is 0.00000000133, indicating that there is spatial autocorrelation. to correct for the autocorrelation, a maximum likelihood estimation technique that accounts for spatial autocorrelation is used. spatial autoregressive model variable estimate log likelihood lr statistic pr(>|z|) (intercept) 4.899 efscore 0.108 -117.430 20.060 7.52e-06 proprights -0.025 -110.400 6.000 0.014 pop -2.60e-09 -116.780 18.760 1.48e-05 popdens 0.001 -110.010 5.205 0.023 gdp -1.00e-04 -112.970 11.141 0.001 rho= 0.46072, lr test value=9.3278, p-value: 0.0022571, log likelihood: -107.4035, ml residual variance (sigma squared): 0.86578, (sigma: 0.93048) 4 a full discussion of the use of robust standards errors can be found in “using heteroscedasticity consistent standard errors in the linear regression model” (long and ervin, 2000). 5 spatial autocorrelation exists when the residuals of a regression are spatially correlated. spatial autocorrelation gives statistical problems similar to temporal autocorrelation. the moran’s i test finds spatial autocorrelation using a spatial proximity matrix; the null hypothesis is that there is no spatial autocorrelation. 46 journal for economic educators, 9(1), summer 2009 discussion in the final model, general economic freedom has a positive effect on microfinance activity. proprights has a counterintuitive negative sign. free market economic theory suggests that economic freedom encourages economic activity. there might be some correlation between the nature of public subsidization of many microfinance institutions and the negative correlation of property rights to microfinancing. if, for example, a country raises money to pay for the subsidy by property seizure, there would be some correlation in the amount of subsidy and the property rights index. population is negatively related to microfinance. because the number of microfinance institutions is used, the size of the microfinance institution cannot be considered in this analysis. it is possible that microfinance institutions expand rather than multiply to meet the needs of the poor so that population does not discourage microfinancing institutions from operating. countries with higher population densities have higher levels of microfinance activity. higher population density lowers transaction costs for microfinance activities and makes it more attractive to operate in densely populated areas. gdp is negatively correlated with microfinance: poorer countries attract microfinancing institutions. the instability indices did not prove to be statistically significant, so the annual changes in market freedom did not affect the prevalence of microfinance in the data. the scope of this research is limited heavily by the availability of reliable data. only data on number of borrowers and number of microfinance institutions were available for analysis. having the amount of microfinance activity measured in the size of savings and loans made would be more desirable. this data is self reported; it is subject to any bias that self reporting may cause among microfinance institutions. another problem with the data for this project is the bias for the countries that had to be excluded due to lack of data. afghanistan and sudan had to be excluded, for example, which would seem to bias our analysis against countries that were engaged in war in 2006. six out of nine countries that were excluded due to lack of data were african countries, which would also bias the data against africa. as more data are made available from microfinance institutions, more thorough analyses can be conducted. certainly time series analysis would be useful in determining the positive and negative effects that microfinance institutions have on the countries in which they operate. being able to support or refute the claims on microfinance's ability to end poverty would be useful. determining the extent of the benefits of microfinance may enhance policymakers' ability to alleviate poverty. references hulme, david. 2000. "impact assessment methodologies for microfinance: theory, experience and better practice" world development, 28(1), 79-98. jain, pankaj s. 1996. "managing credit for the rural poor: lessons from the grameen bank" world development, 24(1), 79-89. long, j. scott, and laurie h. ervin. 2000. “using heteroscedasticity consistent standard errors in the linear regression model” the american statistician, 54(3), 217-224. morduch, jonathan. 1999a. “the role of subsidies in microfinance: evidence from the grameen bank” journal of development economics, 60, 229-248. morduch, jonathan. 1999b. "the microfinance schism" princeton university, new jersey, usa. morduch, jonathan. 1999c. "the microfinance promise" .journal of economic literature, 37, 1569-1614. 47 journal for economic educators, 9(1), summer 2009 patten, richard h., jay k. rosengard, don e. johnston, jr. 2001. "microfinance success amidst macroeconomic failure: the experience of bank rakyat indonesia during the east asian crisis" world development, 29(6), 1057-1069. rhyne, elizabeth. 2001. "mainstreaming microfinance: how lending to the poor began, grew, and came of age of age in bolivia" west hartford, ct. schreiner, mark. "a cost-effectiveness analysis of the grameen bank of bangladesh" development policy review, 21(3), 357-382. the microfinancing institution data were gathered from http://www.themix.org/publications.aspx?level1=002-reg. freedom indices were gathered from the heritage foundation's website index of economic freedom at http://www.heritage.org/research/features/index/downloads.cfm. for this project, indices were created to measure political instability from the political instability task force's datasets at http://globalpolicy.gmu.edu/pitf/pitfdata.htm. data for gdp and government spending were gathered from the un's data website http://data.un.org. a classroom economic experiment: how to estimate unemployment rate 33 | journal for economic educators, 11(1), summer 2011 experiential learning based discussion vs. lecture based discussion: how to estimate the unemployment rate inhyuck “steve” ha 1 and jessica hollars wisniewski 2 abstract this pedagogical method to estimate the unemployment rate is appropriate for an undergraduate course in macroeconomics. class instructors can use the experiment to make many macroeconomic principles readily apparent to the unskilled reader. this experiment examines the dynamics of calculating the unemployment rate by means of an assessment instrument. students can learn that the unemployment rate is calculated using estimates of the size of the labor force, which includes individuals who are both employed and unemployed. in addition, they discover that their estimated unemployment rate agrees with the estimates made by leading economic indices. thus, by participating in the experiment, students better understand how to calculate the unemployment rate and how to understand published unemployment estimates. jel codes: a22, c90, e24 key words: economic experiment, unemployment rate introduction the study of economics is broad in scope. it is “the social science that deals with the production, distribution and consumption of goods and services and with the theory of management of economies or economic systems (houghton, 2000).” since the information is of great breadth, communicating known facts can be difficult. at the same time, while learning fact-based information is important, active learning stimulates the mind to process information more effectively. it enhances a student’s ability to solve problems by putting economic ideas and facts to use. practical examples and experiments encourage student participation and are widely used in classroom settings to demonstrate abstract ideas. thus, experiments are a very useful tool in economics education. traditionally, the study of economics has not been an experimental science (holt, 1999). recently, however, the use of classroom experiments has grown in economics courses. as an article in the journal of economic education states, “textbooks for introductory courses often come with supplements of classroom games or focus exclusively on classroom experiments” (dickie, 2006). a test was conducted to determine whether classroom experiments increase learning in introductory microeconomics. although the evidence was limited and mixed, results from a student survey indicated “that experiments helped half the students learn better than lectures did, compared with one-eighth who found the lectures more helpful” (dickie, 2006). emerson (2004) stated that, “the use of experiments in the principles classroom provides students 1 associate professor of economics, college of business, western carolina university, forsyth 124, cullowhee, nc 28723. 2 research associate, college of business, western carolina university, forsyth 104, cullowhee, nc 28723. 34 | journal for economic educators, 11(1), summer 2011 with an experiential learning opportunity: the chance to participate in a controlled market environment and to observe market forces that are normally only talked about and described as movements on a graph.” thus, “the use of classroom experiments provides an important connection between theories and key features of the markets and institutions being studied” (holt, 1999). educational tools used in economic courses go beyond the traditional textbook material. learning economics has become easier with the help of multimedia presentations, experiments and exercises. understanding key topics, such as inflation and the unemployment rate, can pose a challenge to students who haven’t fully mastered introductory course material. in calculating the unemployment rate, a common mistake made by students is defining the denominator. the problem arises when students use population rather than labor force as the denominator. additionally, understanding the unemployment rate in macroeconomics differs from unemployment in microeconomics. recognizing the dynamics of both microeconomic and macroeconomic issues when discussing the unemployment rate is more effective when interactive presentations are involved. students can easily understand the causes of fluctuations in the unemployment rate if they understand how it is calculated. for example, based on the u.s. bureau of labor statistics household survey data, u.s. nonfarm payroll employment was reduced by 17,000 persons in january 2008, while the national unemployment rate declined to 4.9% from 5.0% during the same month. declination in both employment and the unemployment rate may not be easy to understand, but it occurred again in november 2009 when nonfarm employment declined by 11,000 persons while the national unemployment rate dropped from 10.2% to 10.0%. without an understanding of how the unemployment rate is estimated, students were puzzled when these observations were introduced. the unemployment rate can often confuse laypeople when substantial changes in the labor force occur. in the classroom experiment discussed in this paper, students are given the opportunity to learn about the unemployment rate by engaging in a hands-on activity. the primary focus of this experiment is to estimate the unemployment rate. the students insert their own household information into a matrix. please note that the instructor should make sure that the students are able to distinguish between a household and a family. the matrix is designed to organize a student’s records of five households. based on the matrix totals, students are able to calculate the unemployment rate. from this experiment, students will learn that the unemployment rate is determined based only on those individuals in the labor force and that the unemployment rate is directly related to those employed and unemployed, and is only indirectly related to changes in population. furthermore, students will learn that an increase in the total unemployed population, in relation to the employed, leads to a rise in the unemployment rate. likewise, students will understand that when the total employed population increases and the unemployed population remains steady, the unemployment rate declines. description of the classroom experiment this 45-minute experiment in estimating the unemployment rate is based on data taken directly from the students’ own lives. by using personal data, students are able to extrapolate their daily experience to understand how the unemployment rate is calculated and how it fluctuates due to changes in the labor force. 35 | journal for economic educators, 11(1), summer 2011 the foundation of the experiment is students’ generation of the data to be used with the aid of an assessment instrument. the instructor forms groups of four or five and distributes a blank matrix into which students insert their own household information. the matrix consists of six categories. the six categories include households with individuals who are: 1) under 16 and/or institutionalized, 2) not in the labor force, 3) employed, 4) unemployed, 5) the total household population and 6) the unemployment rate (left blank until students calculate it). students should be informed of the definition of each element before they begin. the instructor may need to introduce or review each of the concepts in the experiment by asking questions, such as “where does a full-time student belong?” and “where does a military person belong?” it is strongly recommended that the instructor explain the definition of “being employed.” students are often confused between the concepts of “being unemployed” and “not being in the labor force.” the instructor also needs to explain how an unemployed person can be excluded from labor force under certain conditions. according to the u.s. bureau of labor statistics, unemployed persons are “16 years and over who had no employment during the reference week, were available for work, except for temporary illness, and had made specific efforts to find employment sometime during the 4-week period ending with the reference week.” the unemployment rate is the number of unemployed workers divided by the total civilian labor force, which includes both the unemployed and the employed. in practice, however, measuring the number of unemployed workers actually seeking work is extremely difficult. it might be beyond the scope of an introductory macroeconomic course to explain the several different methods used to measure the number of unemployed workers in details. however, it is necessary to emphasize that the statistics are estimates and that each country has a slightly different definition of unemployment. the matrix is designed to organize the students’ records of their households. within each group of four or five, each student records his/her data in the designated boxes under column headings hh1, hh2, hh3, hh4 and hh5. see table 1 for the assessment instrument that students use. table 1: assessment instrument number of people (in thousands) hh 1 hh2 hh3 hh4 hh5 group class note under 16 and/or institutionalized 71,485.8 in mental hospitals, or correctional inst. not in labor force 82,316.0 homemakers, voluntary 'withdrawal' for educational, retirement, or other purposes employed 138,864.0 a unemployed 15,142.0 b civilian labor force 154,006.0 c = a + b population 307,807.8 unemployment rate 9.8% b / c source: bureau of labor statistics (september 2009) 36 | journal for economic educators, 11(1), summer 2011 for each column heading, a student inserts the number of members in his/her household who conform to any of the six categories. the second column shows the u.s. statistics as an example of reasonable approximations of what each is supposed to measure, while the last column contains definitions and formulas. in the case that no family member conforms to one or more descriptions, a zero should be placed in the corresponding box. once everyone in the group has finished recording data, the group reviews all the data in the matrix. once the students have completed their review of the designated boxes, they calculate the total number of household members in each of the six categories. the sum is written under the column heading “group.” based on the totals, students are able to calculate the unemployment rate for their group. since the unemployment rate is based on those individuals in the labor force, all categories except the employed and unemployed categories are ignored. the unemployment rate is calculated based on the numbers entered in the employed and unemployed rows. after each group has calculated an unemployment rate, the instructor gathers the group totals to display the results to the class. the instructor then computes the overall unemployment rate. in this way, the class can see exactly how the unemployment rate is calculated. results of the classroom experiment this in-class experiment was conducted in our introductory economics courses at western carolina university (wcu). the experiment was run twice, in spring 2009 and fall 2009. this paper reports the results from both semesters. table 2: results of the classroom experiment section 1 section 2 total section 1 section 2 total under 16 and/or institutionalized 57 30 87 34 30 151 not in labor force 107 76 183 92 52 327 employed 203 130 333 132 111 576 unemployed 29 17 46 18 20 84 civilian labor force 232 147 379 150 131 660 population 396 253 649 276 213 1,138 unemployment rate 12.5% 11.6% 12.1% 12.0% 15.3% 12.7% nc unemployment rate when the data were collected spring 2009 fall 2009 10.8% 11.0% source: class experiments 2009 in each course section, the students were formed into groups of four. after each group finished collecting data and discussing its findings, all group results were reported. table 2 summarizes the aggregated findings for each class section. when the experiments were conducted, in both the spring and fall semesters, the actual unemployment rate in north carolina was 10.8% and 11.0%, respectively. surprisingly, the spring 2009 results of section 2 and fall 2009 results of section 1 were very close to the actual 37 | journal for economic educators, 11(1), summer 2011 unemployment rate in north carolina at that period in time. however, both the spring 2009 section 1 results and fall 2009 section 2 results overestimated the unemployment rate. it is surprising that the class results revealed a higher unemployment rate than north carolina considering that, in general, college students have relatively higher family incomes and their parents tend to have higher levels of education, both of which are inversely related to unemployment. this may be caused by a sampling bias, which also can be discussed with students. effectiveness of the classroom experiment the pedagogical difference between an experimental group and a control group is statistically different. for the purpose of this study, the experimental group is composed of all groups of students that engage in the unemployment rate activity. the control group is composed of all groups of students that were taught how to calculate the unemployment rate through class lecture. to alleviate room for error, the same faculty member taught both groups, including experimental and control groups, during the same semester. table 3: difference in means: experimental vs. control groups experimental control n = 59 n = 29 midterm exam 28.8% 24.1% 0.458 0.648 final exam 42.4% 7.1% 3.510 0.001 source: authors' estimation t value pr > |t| mean value the difference in means between the two groups is shown in table 3. the sampling distribution was computed for the fall 2009 semester only. the number of observations for the experimental group and control group are 59 and 29, respectively. based on the sample data, the independent mean difference test was applied. results show that students who engage in the classroom experiment retain and understand the purpose of the unemployment rate better than students who merely listen during a class lecture. to illustrate, 28.8% of the experimental group understood how to calculate the unemployment rate on the midterm exam while only 24.1% of those in the control group did. this difference in means was not statistically significant. surprisingly, the difference based on the final exam is statistically significant one and a half months later. forty two percent of the experimental group was able to calculate the unemployment rate correctly on the final exam, in contrast to only 7.1% of those in the control group. the results illustrate that the experiment is more beneficial to long-term memory than is the lecture style teaching method. suggested questions for discussion the following questions can provide the basis for follow-up discussion. it is recommended that each student answer the questions for himself/herself, prior to open discussion. 1. how is the unemployment rate measured? how would you interpret the unemployment rate? 38 | journal for economic educators, 11(1), summer 2011 2. what was the unemployment rate in your group? what was the unemployment rate for the entire class? are they close to each other? are they close to the state and/or national unemployment rate? if not, what does it imply? 3. what individuals make up the labor force? how does the size of the labor force affect the unemployment rate? in other words, what could happen to the unemployment rate if the labor force participation rate increases or decreases? 4. how could part-timers or discouraged workers affect the unemployment rate? conclusion this experiment demonstrates how the unemployment rate is estimated. students are introduced to one of the most fundamental concepts in economics – unemployment rate – by participating in an economic experiment. in doing so, they identify the labor force rather than total population as the basis of unemployment when they figure out who is employed or unemployed in the sample households. the follow-up discussion embraces policy issues such as how employment statistics can mislead people when there are substantial changes in labor force. independent mean difference testing showed the experiential approach to teaching the unemployment rate to be significantly more effective than teaching the concept lecture style. the results suggest that the unemployment rate is more effectively taught through active learning methods. references dickie, m. 2006. do classroom experiments increase learning in introductory microeconomics? journal of economic education 37(3): 267-288. emerson, t. 2004. comparing student achievement across experimental and lecture-oriented sections of a principles of microeconomics course. southern economic journal, 70(3): 672-693. holt, c. 1999. teaching economics with classroom experiments: a symposium. southern economic journal. 65(3): 603-610. houghton, mifflin. 2000. definition of economics. retrieved january 28, 2008, from http://education.yahoo.com/reference/dictionary/entry/economics u.s. department of labor, bureau of labor statistics. 2008. www.bls.gov http://education.yahoo.com/reference/dictionary/entry/economics http://www.bls.gov/ 41 |journal for economic educators, 20(1), 2020 factors impacting student success in introductory economics courses mary m. kassis and david j. boldt1 abstract the study seeks to determine the impact of various individual and academic characteristics on grades earned in introductory economics courses. students enrolled in these courses in a regional state university during 2015-16 were asked questions on topics such as the number of hours they work per week, whether or not they live on campus, their marital status, the educational background of their parents, involvement in various campus activities, the utilization of various campus services such as tutoring and advising, and their sources of funding for college. these data were then matched with registration and academic data available from the university for each of these students. the regression results show that high school (or college) gpa, standardized test scores, participation in an honors program, earned credit hours, and the use of own family funds or access to student loans were positively associated with academic performance. on the other hand, academic performance in introductory economics was negatively impacted by participation in the campus music and theater program and by taking classes in the afternoon or evening time slots. the results also show significant instructor effects on academic performance. key words: achievement, engagement, factors impacting academic performance, jel classification: a20, a22 introduction a number of factors impact academic success. as noted by kuh, et al. (p. 5), “who students are, what they do prior to starting their postsecondary education, and where and how they attend college all can make a difference in their chances for obtaining a baccalaureate degree.” in this research, we hope to contribute to a better understanding of the contributing factors to college academic success. after a brief review of the literature, we discuss the data we have obtained for the analysis. individual survey data was gathered from students in introductory economics classes in 2015-2016. students were asked questions on topics such as the number of hours they work per week, whether or not they live on campus, their marital status, the educational background of their parents, involvement in various campus activities, utilization of various campus services such as tutoring and advising, and their sources of funding for college. these data were then matched with registration and academic data available from the university for each of these students. results of ordered logit regressions as well as the marginal effects of the significant explanatory variables are then discussed. 1 professors of economics, department of economics, university of west georgia, 1601 maple st., carrollton, ga 30118 42 |journal for economic educators, 20(1), 2020 review of the literature the research literature suggests that a number of factors impact academic success at the university level. kuh, et al. (2006) conducted an extensive review of the literature as to what matters for student success in college. for these researchers, student success was not exclusively “academic success” but also was associated with such goals as “satisfaction,” “engagement in educationally purposeful activities,” and the “attainment of educational objectives.” as expected, a number of factors matter for student success. rigorous preparation in elementary and secondary school is important. adequate financial resources matter. early intervention and sustained attention seem to help in keeping certain at-risk students enrolled. students who find something or someone worthwhile to connect with at a college are more likely to achieve their academic goals. academic programs that engage students such as first-year seminars, learning communities, undergraduate research programs, and effective academic advising all are positively linked to student success. carini, kuh and klein (2005) found that “student engagement” was an important predictor of academic success. these researchers found that student engagement was positively related to grade point average. for the purposes of their study, student engagement was measured by a number of factors such as the quality of relationships with faculty, institutional support, relationships with fellow students, and individual initiative. in an interesting finding, the researchers also concluded that low ability students (as measured by sat scores) seemed to benefit the most by being engaged in a university. strayhorn (2012) found that a “sense of belonging” can affect a college student’s academic performance. his definition of “a sense of belonging” refers to students’ perceived social support on campus, a feeling of connectedness, and the experience of mattering (p. 122). involvement in various campus activities such as participating in student government, using campus recreational facilities, playing a team sport, socializing with faculty outside of class, membership in fraternities or sororities, and hours spent on out-of-class academic work were all positively related to a “sense of belonging.” zacherman and foubert (2014) found that some participation in cocurricular activities such as student government and intercollegiate sports was positively related to academic performance. however, as involvement in such activities exceeded 30 hours per week, students experienced a detrimental impact on their grades. the impact was most pronounced for male students. moore, et.al. (1998) conducted an extensive review of the research on student involvement in the college setting. the authors noted that a number of studies had found a positive relationship between involvement and student learning. in addition to having a positive impact on academic performance, involvement in extracurricular activities was an important factor in job placement and in the achievement of life goals. somewhat surprisingly, the authors noted that the research literature found that involvement in a fraternity or sorority did not have a significant impact (positive or negative) on academic performance but such involvement was associated with other positive outcomes. several studies mentioned in the paper did find that factors such as orientation classes, friendship with at least one faculty member, advising services, and learning communities were all positively associated with academic performance. in his research, grubb (2006) specifically addressed the question “does going greek impair undergraduate academic performance?” the results were mixed. controlling for a number of variables, fraternity males had lower gpas vs. nonfraternity males while the effect of sorority 43 |journal for economic educators, 20(1), 2020 membership was much weaker. while greek membership seemed to negatively impact gpas, it likely has a positive impact on time to graduation. in another study, soria, fransen and nackerud (2013) examined the impact of library use on student retention and academic success. their results suggest that first-time, first-year undergraduate students who use the library have a higher gpa than non-library users. zhao and kuh (2004) examined whether participation in learning communities was linked to student success. they found that participation in learning communities was positively linked to academic performance and to the overall satisfaction with the college experience. in an interesting study focusing on underrepresented students, gershenfeld, hood and zhan (2016) found that first semester gpa was a better predictor of college success (such as the six-year graduation rate) than measures such as an act score. in a study focusing on prior achievement and background, anderson, benjamin and fuss (1994) found that the most important factors determining success in college introductory economics courses were high school grades in the final year of high school and whether or not a student completed a high school calculus class. these researchers also found that males outperformed females in college economics courses. there has also been some empirical research on the impact of course scheduling on academic performance. dills and hernandez-julian (2008) found that students performed best in late afternoon classes and in classes that meet more often (e.g. monday/wednesday/friday as opposed to monday/wednesday or tuesday/thursday classes). carrington (2010) concluded that academic performance in intermediate accounting courses was not statistically different for students enrolled in compressed courses (summer or one day per week) compared to two day per week regular semester courses. on the other hand, students on a three days per week schedule were significantly less successful in intermediate accounting compared to students taking more compressed offerings. another factor that is thought to impact academic achievement is the number of hours that a student works. body, bonnal and giret (2014) found an adverse effect for students working more than 8 hours per week. however, the academic performance of students with more flexibility in their employment situation seems to be less impacted by the number of hours worked. based on their empirical findings, the researchers suggested that additional financial aid along with more flexibility in class offerings might help students perform at a higher level in college. kalenkowski and pabilonia (2010) found that hours worked had a negative effect on gpa for first term students. the negative impact on academic achievement was much larger for students enrolled in two-year colleges (compared to four-year college students). on the other hand, dundes and marx (2006) found that the academic performance of undergraduates who worked 10-19 hours per week was superior to all other students. data our data come from two different sources. during the 2015-2016 academic year, students in the introductory economics courses of our university were surveyed. three courses were included in the survey – principles of macroeconomics (econ 2105), principles of microeconomics (econ 2106) and economics for everyone (econ 2100). in the surveys, students were asked questions about their employment, family background, commute times, campus involvement, and financial aid situation. a copy of the survey is included in the 44 |journal for economic educators, 20(1), 2020 appendix. the responses to these surveys were merged with academic data available from the university including the grade in the course, high school and college gpa, standardized test scores, total hours attempted, and major. participation in this study was voluntary and followed all the guidelines of the university’s institutional review board (irb). for this paper we look at students in the principles of macroeconomics and principles of microeconomics courses. we have data on 637 students who took those courses in fall 2015 and spring 2016. however, we are not able to use all of these students in our regression analysis because some students are missing data for key variables. some students in our sample do not have a standardized test score reported and many were missing a high school gpa. some of the students also did not answer all the survey questions. our final sample consisted of 520 students.2 of these 520 students, 56 students were first semester freshmen and therefore did not have a previous college gpa. table 1 reports the variable definitions and the descriptive statistics for the data of the 520 students in our sample. our sample is relatively evenly split between the fall 2015 and spring 2016 semesters and between principles of macroeconomics and principles of microeconomics, with 55% of students in a fall course and 50% enrolled in principles of macroeconomics. the students in our sample were on average 19.7 years old and 46% of the sample were male while 38% were black. about 39% of our sample does not work either on or off campus while about 14% work more than 30 hours a week and 15% work a job on campus. approximately 34% of the sample lived in a non-greek resident hall and 42% lived off-campus but not with family. of those that commuted to campus, 4% had commutes of 45 minutes or longer. the students in our sample participated in various campus activities. twenty-two (22) percent of the sample have participated in a fraternity or sorority, 7% have been involved in a college music or theater group, while 4% and 5% of the sample have participated in the student government association or the student activity council, respectively. sixty-one (61) percent of the sample report having attended a university event such as an athletic event or concert, and 56% have used the campus recreation center. thirteen (13%) of the sample reported being part of the university’s honors college. in order to fund their college education, 57% reported using loans, 63% were using own or family funds, 56% were hope scholarship recipients, and 40% reported having received a pell grant. the average sat score of the students in our sample was 966 on the 1600 scale,3 and the 464 students in our sample who were returning college students had an average gpa at the start of the semester of 3.02. the students in our sample were taking on average 13.8 hours in the semester they were surveyed, and on average they had earned 34.7 credit hours at the start of the semester. thirty (30) percent of our sample earned a grade of a in their principle of economics course, 32% received a b, 25% received a c, 11% a d and 2% an f. since students had to be present in class in order to complete the survey in face-to-face classes, 2 in addition to removing students with missing information, the data for one instructor was excluded since she only taught online courses and few of her students completed the survey. following our institutional irb regulations, we also excluded any student who was under 18 at the time of the survey. 3 the standardized test scores in our data are the sat score for students who have a sat score reported. if students only had an act score reported, their act score was converted to an sat score using the act-sat concordance tables published in october 2009 (http://www.act.org/content/dam/act/unsecured/documents/actcollegeboardjointstatement.pdf). 45 |journal for economic educators, 20(1), 2020 the grades in our sample are biased upward since weaker students are also less likely to attend class. table 1 descriptive statistics (n=520) mean std. dev. minimum maximum advisor see advisor every semester 0.9134615 0.2814283 0 1 afternoon econ class between noon & 5:00pm 0.2423077 0.4288921 0 1 agestart age on first day of semester 19.68654 1.729215 17 41 athlete ncaa athlete 0.05 0.2181548 0 1 attend_event attend university athletic event or concert 0.6057692 0.4891554 0 1 black race = black 0.3826923 0.4865122 0 1 busmajor business major 0.7480769 0.4345353 0 1 commute45to60 commute 45-60 minutes 0.0211538 0.1440356 0 1 commuteover60 commute more than an hour 0.0192308 0.1374674 0 1 dad_bachelor dad’s highest education = bachelor degree 0.2346154 0.4241662 0 1 dad_grad dad’s highest education = graduate degree 0.0980769 0.297705 0 1 dad_some_hs_or_less dad’s highest education = some hs or less 0.0673077 0.2507954 0 1 earnedhrs total hours earned at start of semester 34.71923 21.34852 0 148 eveningwork works the evening shift 0.3096154 0.4627802 0 1 evening_night econ class meets after 5:00pm 0.1615385 0.3683813 0 1 fall econ class fall 2015 0.55 0.4979728 0 1 fraternity participated in fraternity 0.1 0.3002889 0 1 grade_gpa principles of econ grade in modified gpa terms 2.780769 1.019093 1 4 gpastart college gpa at the start of the semester (n=464) 3.023606 0.560835 1.6364 4 greek live in greek housing 0.0442308 0.2058054 0 1 half_sem econ course was half semester 0.0846154 0.2785765 0 1 honors student in the honors college 0.1307692 0.3374724 0 1 46 |journal for economic educators, 20(1), 2020 hope georgia hope scholarship recipient 0.5615385 0.4966764 0 1 hsgpa high school gpa 3.264519 0.4795568 1.94 4 learning_comm participated in a learning community 0.1423077 0.3497019 0 1 loans loans to fund school 0.5711538 0.4953878 0 1 macro principles of macro course 0.4961538 0.5004667 0 1 male gender = male 0.4576923 0.4986866 0 1 married relationship status = married 0.0076923 0.0874519 0 1 mom_bachelor mother’s highest education = bachelor degree 0.2615385 0.4398957 0 1 mom_grad mother’s highest education = graduate degree 0.1384615 0.3457163 0 1 mom_some_hs_or_less mother’s highest education = some hs or less 0.0461538 0.2100202 0 1 music_theater participated in college music or theater group 0.0673077 0.2507954 0 1 non_greek participated in non-greek student organization 0.2903846 0.454377 0 1 off_campus live off-campus but not with family 0.4153846 0.4932627 0 1 oncampusjob works a job on campus 0.1480769 0.3555182 0 1 online econ course was online 0.0480769 0.2141348 0 1 overnight works overnight shift 0.0346154 0.1829796 0 1 own_family_funds funding college with own family funds 0.625 0.4845891 0 1 parent parent of child under 18 0.0134615 0.1153513 0 1 pell funding college with a pell grant 0.4019231 0.4907587 0 1 prof_rel_none no professor mentors 0.6346154 0.4820015 0 1 rec__center has used campus rec. center 0.5557692 0.4973585 0 1 res__hall live in on-campus residence hall 0.3365385 0.4729805 0 1 sac participated in the student activity council 0.0519231 0.2220854 0 1 satact standardized test scores converted to sat scale 966.25 129.2366 580 1460 sga participated in student government 0.0423077 0.201484 0 1 47 |journal for economic educators, 20(1), 2020 sorority participated in a sorority 0.1211538 0.3266202 0 1 tothrs_currsem total hours attempted current semester 13.84038 2.206905 6 27 tutoring_yes has used tutoring for core classes 0.4961538 0.5004667 0 1 uwg_family parent or sibling uwg student or alum 0.2211538 0.4154235 0 1 work30hrs work 30 or more hours 0.1365385 0.3436901 0 1 worknone not employed 0.3884615 0.4878698 0 1 work_study funded education with work study 0.075 0.263645 0 1 regression results our results are presented in tables 2 and 3. the regression results presented in table 2 look at our entire sample of 520 students. however, since the literature suggests that college gpa is one of the best predictors of academic success, we also ran regressions on the 464 returning students so that we could include college gpa as a variable (see table 3). for our dependent variable in each regression, we measure the student’s success in the course using the student's course grade converted to a modified gpa scale (grade_gpa). a grade of a is represented by a 4, a grade of b is represented with a 3, a grade of c is represented with a 2, and a grade of d or f is represented with a 1. the grades of d and f were combined into one category because there were only 12 students in our sample of 520 that earned a grade of f. as mentioned earlier, this is likely the result of the in-class consent process, since the weakest students often do not attend class. in addition, the university does not consider a grade of d to truly be success in a course. when looking at student progression and retention issues, the university commonly looks at the dwf rate for the course, which measures the percentage of students who withdraw from the course or receive grades of d or f. while a grade of d is technically a passing grade at the university, a grade of d may still hold students back in terms of being able to take upper level courses or having a gpa high enough to graduate. since our dependent variable is ordered, we estimate our regressions using an ordered logit model. following greene (1993), the equation to be estimated is: y* = β'x + ε where y* is an unobserved measure of student success in the principles of economics course. we observe the student’s letter grade: y = 1 (grade d or f) if y* ≤ µ1 y = 2 (grade c) if µ1 < y* ≤ µ2 y = 3 (grade b) if µ2 < y* ≤ µ3 y = 4 (grade a) if y* > µ3 48 |journal for economic educators, 20(1), 2020 where µ are unknown threshold values that will be estimated. in this model, a positive and significant β coefficient indicates that a change in the independent variable increases the probability of getting an a in the course and decreases the probability of getting a d or f in the course while a negative and significant coefficient suggests that an increase in the independent variable would lower the probability of getting an a in the course and increase the probability of getting a d or f. looking first at the regression results in table 2, which includes our whole sample of 520 students, we see that the probability of getting a high grade in a principles of economics course is positively and significantly related to several academic variables including high school gpa, standardized test scores, and total hours earned at the start of the semester (a measure of experience). in addition, students who participated in the honors college had a higher probability of succeeding in their economics course. students who do not work or who work on campus also had a higher probability of getting a high grade in economics. however, working 30 or more hours did not have a significant impact on the probability of getting a high grade (or a low grade). several of the sources of funding for education also had a positive and significant impact on the probability of getting a high grade in principles of economics courses. financing your education with loans or your own or family funds had a positive and significant impact on the probability of success. this suggests that having a financial stake in your education may give a student an incentive to perform better. students who used a state of georgia hope scholarship as a funding source also had a higher probability getting a high grade. however, using a pell grant to fund your education did not have a significant impact on performance. students taking principles of macroeconomics also had a higher probability of getting a high grade than student taking principle of microeconomics after controlling for instructor and other course related characteristics. table 2 also suggests that several of the variables had a negative and significant impact on the probability of getting a high grade (and increased the probability of getting a d or f). participating in a music or theater activity on campus appears to lower the probability of getting a high grade. this may reflect the time involved in these activities, which may take away from the student’s study time. none of the other campus activities variables appear to have had a significant impact on the probability of success in principles of economics courses. most of the variables measuring the education level of the student’s mother and father were not significant, although having a father with a graduate degree had a positive impact on a student’s probability of success in their economics course. taking an economics course in the afternoon or evening also lowers the probability of earning a high grade in principles of economics courses. we also include instructor dummy variables, several of which are significant. this suggests that it may be more difficult to get a high grade in courses taught by certain instructors, indicating that some instructors may be tougher graders or have more difficult courses than others. the regression in table 2 does not include college gpa as an explanatory variable since first semester freshmen did not have gpa at the start of the semester when they took their principles of economics course. however, other researchers have found that success in previous college courses is a strong predictor of future success (gershenfeld, et al. 2016). in table 3, we summarize the results of the model excluding first semester freshmen and including college gpa 49 |journal for economic educators, 20(1), 2020 at the start of the semester4. as expected, college gpa is positive and significant. most of the other variables performed the same as in the regression that included first semester freshmen (table 2). however, there were a few variables that were significant in the regression that controls for college gpa that were not significant in the previous regression. the total hours being taken in the current semester was negative and significant in this regression, suggesting that taking more credit hours lowers the probability of getting a high grade in principles of economics. having taken economics in the fall was negative and significant in this regression, suggesting that students who took the course in the fall had a lower probability of success. having a mother with a graduate degree had a negative and significant impact on the probability of success, but having a father with a graduate degree was not significant in this regression. taking the course in a half semester format was positive and significant. having used the georgia hope scholarship to fund your education was not significant in the regression that excludes first semester freshman, suggesting that some of the information from that variable may be picked up in the college gpa variable. working an on-campus job did not have a significant impact on the probability of success in the course in this regression while participating in the work study program was negative and significant. in addition to calculating the regression coefficients from the ordered logit regression, the average marginal effect of the significant variables on earning an a, b, c or d/f were also estimated and are presented in tables 4 and 5. the interpretation of the estimated marginal effects depends on whether the variable is continuous (such as gpa, hours, or standardized test scores) or whether the variable is a binary indicator (such as whether the student is taking macroeconomics or is in the honors college). for continuous variables, the average marginal effects provide an approximation of the impact of a one unit change in x on a student’s probability of getting a particular grade in the course, holding the other variables constant. for binary indicator variables, the average marginal effect provides an estimation of how the probability of getting a particular grade changes on average as the indicator changes from zero to one.5 table 4 shows the marginal effects for the variables that were significant in the ordered logit regression for the full sample, which includes first semester freshmen. the continuous variables in this table are high school gpa (hsgpa), standardized test scores (satact), and the number of earned hours (earnedhrs). the estimated average marginal effects indicate that a one unit (one point) change in high school gpa decreases the probability of a student getting a d or f on average by 0.0981 or 9.81 percentage points and increases the probability of a student getting an a on average by 0.1411 or 14.11 percentage points. the marginal impact of 4 our measure of college gpa at the start of the semester is taken from the student’s academic records. the university allows students to retake courses and replace their previous grades with the most recent grade. when a course is replaced, the past semester gpas on the student’s transcripts and hours earned are recalculated to reflect the impact of the grade replacement. our data reflects the gpa and hours earned at the start of the semester as reflected on the student’s transcript at the time we received the data from the university and will reflect any grade replacements between the start of the semester and when we received the academic data from the university. 5 for categorical indicator variables such as instructor or works hours, the average marginal effects calculation accounts for the fact that the students can only be in one category at a time. for example, a student can’t be assigned to two different instructors for the same class. 50 |journal for economic educators, 20(1), 2020 standardized test scores indicates that a one unit (one point) increase in the standardized test score (satact) decreases the probability of getting a d or an f on average by 0.04 percentage points and increases the probability of getting an a on average by 0.05 percentage points. a one unit (one hour) increase in earned hours will decrease the probability of getting a d or an f on average by 0.11 percentage points and will increase the probability of getting an a by 0.16 percentage points. looking at the indicator variables, the biggest marginal impact on the probability of getting a d or an f in principles of economics appears to come from instructor effects. taking the class from instructor 3 or instructor 5 raises the probability on average of getting a d or an f by 31.41 percentage points and 28.75 percentage points respectively. on the other hand, taking the course from instructor 6 or instructor 7 lowers the probability of getting a d or an f by 16.91 percentage points and 10.50 percentage points respectively. participating in a music or theater activity or taking the class in the afternoon or evening also increases the probability of getting a d or an f on average by 10 percentage points or more. taking macroeconomics (rather than microeconomics) and having been a hope scholarship recipient lowered the probability on average of getting a d or an f by more than 10 percentage points. taking a macroeconomics course, participating in the honors college, or taking the class from instructor 6 had the largest positive impact on the probability of getting an a, increasing the probability on average by 20.92 percentage points, 22.24 percentage points, and 46.28 percentage points respectively. the largest negative average marginal effects on getting an a came from taking the class in the evening or taking the class from instructor 3 or 5. in most cases the average marginal effects tended to be smaller in magnitude and less likely to be significant in their impact on the probability of a student getting a b or a c in their principles of economics course. the marginal effects in table 5, for the sample without first semester freshmen, are similar to the marginal effects for the larger sample. one difference in this table is the presence of college gpa. the average marginal effects estimate indicates that college gpa has a much larger impact on the probability of success and failure in the principles of economics course than high school gpa. for example, a one unit (one point) increase in college gpa decreases the probability of getting a d or an f in course on average by 20.12 percentage points and increases the probability of getting an a in the course by 27.28 percentage points while a one point increase in high school gpa only decreases the probability of getting a d or an f on average by 5.22 percentage points and only increases the probability of getting an a on average by 7.08 percentage points. table 2 ordered logistic regression, dependent variable grade_gpa full sample (n=520) variable coefficient std. error z-statistic prob. agestart 0.0734649 0.0806993 0.91 0.363 hsgpa 1.198954 0.271533 4.42 0*** male 0.1187882 0.2224517 0.53 0.593 51 |journal for economic educators, 20(1), 2020 black -0.237737 0.2608107 -0.91 0.362 work30hrs -0.1988068 0.3007635 -0.66 0.509 worknone 0.7102173 0.2605855 2.73 0.006*** oncampusjob 0.5981651 0.355165 1.68 0.092* eveningwork 0.1538403 0.2471765 0.62 0.534 overnight -0.0339962 0.5618978 -0.06 0.952 workstudy -0.3483692 0.4215202 -0.83 0.409 tutoring_yes -0.2219807 0.2042446 -1.09 0.277 prof_rel_none -0.0246371 0.2108709 -0.12 0.907 fraternity 0.1777819 0.3748451 0.47 0.635 sorority 0.0563689 0.343721 0.16 0.87 sac -0.0222988 0.4691287 -0.05 0.962 sga -0.0305063 0.5003301 -0.06 0.951 non_greek -0.025835 0.2190631 -0.12 0.906 learning_comm 0.0647459 0.2757008 0.23 0.814 music_theater -1.195687 0.3906097 -3.06 0.002*** athlete -0.1789853 0.4355678 -0.41 0.681 attend_event -0.1778489 0.2311556 -0.77 0.442 honors 1.624357 0.3835909 4.23 0*** rec_center 0.0848014 0.2230449 0.38 0.704 macro 1.900541 1.024748 1.85 0.064* busmajor 0.088849 0.2330476 0.38 0.703 tothrs_currsem -0.0054582 0.0495649 -0.11 0.912 dad_some_hs_or_less 0.30888 0.4280532 0.72 0.471 dad_bachelor -0.2643935 0.2588971 -1.02 0.307 dad_grad 0.6287073 0.3737157 1.68 0.093* mom_some_hs_or_less 0.1213668 0.4969579 0.24 0.807 mom_bachelor 0.1351115 0.2440837 0.55 0.58 mom_grad -0.2144894 0.3126909 -0.69 0.493 res_hall -0.0170828 0.3540142 -0.05 0.962 52 |journal for economic educators, 20(1), 2020 greek -0.6644721 0.5811043 -1.14 0.253 off_campus 0.1579777 0.3096445 0.51 0.61 online 0.1491116 0.623559 0.24 0.811 half_sem 1 0.6641812 1.51 0.132 commute45to60 0.3430847 0.6875072 0.5 0.618 commuteover60 -0.5242613 0.617884 -0.85 0.396 afternoon -1.244762 0.5561454 -2.24 0.025** evening_night -1.650783 0.6975104 -2.37 0.018** advisor 0.4922113 0.3371117 1.46 0.144 hope 1.389068 0.2365279 5.87 0*** parent -1.321003 0.8161039 -1.62 0.106 uwg_family 0.0810828 0.2454443 0.33 0.741 pell 0.2556972 0.2143361 1.19 0.233 own_family_funds 0.4691396 0.2160095 2.17 0.03** loans 0.6930045 0.2318715 2.99 0.003*** satact 0.0046545 0.0009714 4.79 0*** fall -0.3907046 0.3096814 -1.26 0.207 earnedhrs 0.0134556 0.0061555 2.19 0.029** married -0.5241117 1.222126 -0.43 0.668 instructor1 0.9609558 0.8378436 1.15 0.251 instructor2 -0.0444057 0.8016009 -0.06 0.956 instructor3 -2.51131 0.7156429 -3.51 0*** instructor4 0.3131236 0.7871902 0.4 0.691 instructor5 -2.318563 0.8329787 -2.78 0.005*** instructor6 3.576282 0.9880061 3.62 0*** instructor7 1.38009 0.6692121 2.06 0.039** µ1 10.32899 2.468229 µ2 12.48958 2.484555 µ3 14.87268 2.51264 53 |journal for economic educators, 20(1), 2020 pseudo r2 0.286 *** significance at the 0.1 level ** significance at the 0.5 level * significance at the .10 level table 3 ordered logistic regression, dependent variable grade_gpa no first semester freshmen (n=464) variable coefficient std. error z-statistic prob. gpastart 2.781446 0.3215956 8.65 0*** agestart 0.0669303 0.0924236 0.72 0.469 hsgpa 0.7222605 0.3149055 2.29 0.022** male 0.1811649 0.2518605 0.72 0.472 black -0.215476 0.2951353 -0.7 0.465 work30hrs -0.2835951 0.3204826 -0.9 0.376 worknone 0.7271525 0.2938267 2.47 0.013** oncampusjob 0.5570614 0.3880353 1.44 0.151 eveningwork 0.2732396 0.2709801 1.01 0.313 overnight -0.1957989 0.5973836 -0.3 0.743 work_study -0.9953167 0.4757574 -2.1 0.036** tutoring_yes -0.0709859 0.2256546 -0.3 0.753 prof_rel_none -0.0236531 0.2367375 -0.1 0.92 fraternity 0.1294735 0.4136026 0.31 0.754 sorority -0.0916833 0.3820446 -0.2 0.81 sac 0.0109078 0.4863789 0.02 0.982 sga -0.0691572 0.5273236 -0.1 0.896 non_greek -0.0688091 0.233095 -0.3 0.768 learning_comm -0.0574211 0.2915491 -0.2 0.844 music_theater -1.119161 0.4237452 -2.6 0.008*** athlete -0.0505629 0.5002414 -0.1 0.919 attend_event 0.0432721 0.2556508 0.17 0.866 honors 1.1571 0.444211 2.6 0.009*** 54 |journal for economic educators, 20(1), 2020 rec_center -0.0273409 0.2514503 -0.1 0.913 macro 2.292052 1.173404 1.95 0.051* busmajor 0.3181012 0.2705848 1.18 0.24 tothrs_currsem -0.0984543 0.0545714 -1.8 0.071* dad_some_hs_or_less 0.3237324 0.467894 0.69 0.489 dad_bachelor -0.2047111 0.2873237 -0.7 0.476 dad_grad 0.474179 0.4184059 1.13 0.257 mom_some_hs_or_less -0.1662679 0.5636178 -0.3 0.768 mom_bachelor 0.0300613 0.2747801 0.11 0.913 mom_grad -0.5753843 0.3467498 -1.7 0.097* res_hall 0.367644 0.402574 0.91 0.361 greek -0.6380615 0.6175933 -1 0.302 off_campus 0.448605 0.3497796 1.28 0.2 online 0.5261565 0.6825247 0.77 0.441 half_sem 1.440279 0.7860849 1.83 0.067* commute45to60 -0.2882024 0.7423425 -0.4 0.698 commuteover60 -0.0663865 0.7664578 -0.1 0.931 afternoon -1.417396 0.5606622 -2.5 0.011** evening_night -1.894845 0.7280937 -2.6 0.009*** advisor 0.4521394 0.3860098 1.17 0.241 hope 0.3984949 0.2918254 1.37 0.172 parent -1.536307 1.018979 -1.5 0.132 uwg_family -0.1581607 0.2827952 -0.6 0.576 pell 0.1612291 0.2419495 0.67 0.505 own_family_funds 0.4669005 0.2445034 1.91 0.056* loans 0.8569521 0.2678913 3.2 0.001*** satact 0.0038326 0.0011272 3.4 0.001*** fall -0.5736683 0.3474169 -1.7 0.099* earnedhrs 0.0165429 0.0074697 2.21 0.027** married -1.625912 1.399125 -1.2 0.245 55 |journal for economic educators, 20(1), 2020 instructor1 1.32799 1.010695 1.31 0.189 instructor2 -0.0188227 0.943139 -0 0.984 instructor3 -3.523294 0.7567301 -4.7 0*** instructor4 -0.0502486 0.8310903 -0.1 0.952 instructor5 -2.812246 0.874334 -3.2 0.001*** instructor6 4.054109 1.126252 3.6 0*** instructor7 1.883593 0.7863027 2.4 0.017** µ1 14.40428 2.877212 µ2 16.86877 2.903221 µ3 19.60884 2.94726 pseudo r2 0.3629 *** significance at the 0.1 level ** significance at the 0.5 level * significance at the .10 level 56 |journal for economic educators, 20(1), 2020 table 4 marginal effects of significant variables for the full sample (n=520) grade d or f grade c grade b grade a dy/dx std. err. dy/dx std. err. dy/dx std. err. dy/dx std. err. hsgpa -0.0981*** 0.0223 -0.0657*** 0.0158 0.0226*** 0.0075 0.1411*** 0.0315 worknone -0.0560*** 0.0202 -0.0399*** 0.0149 0.0110** 0.0046 0.0849*** 0.0312 oncampusjob -0.0446* 0.0239 -0.0353 0.0224 0.0064** 0.0031 0.0734 0.0452 music_theater 0.1179*** 0.0443 0.0504*** 0.0125 -0.0440** 0.0205 -0.1243*** 0.0351 honors -0.0950*** 0.0161 -0.1118*** 0.0288 -0.0156 0.0167 0.2224*** 0.0566 macro -0.1592* 0.0862 -0.0733*** 0.0195 0.0232*** 0.0078 0.2092** 0.1002 dad_grad -0.0456* 0.0242 -0.0375 0.0242 0.0052 0.0034 0.0779 0.0482 afternoon 0.1073** 0.0514 0.0479*** 0.0127 -0.0187** 0.0093 -0.1365** 0.0545 evening_night 0.1509** 0.0699 0.0553*** 0.0103 -0.0315** 0.0138 -0.1747*** 0.0637 hope -0.1123*** 0.0197 -0.0918*** 0.0187 0.0320*** 0.0100 0.1722*** 0.0295 own_family_funds -0.0388** 0.0182 -0.0260** 0.0122 0.0097* 0.0055 0.0551** 0.0250 loans -0.0584*** 0.0202 -0.0344*** 0.0109 0.0134** 0.0059 0.0794*** 0.0254 satact -0.0004*** 0.0001 -0.0003*** 0.0001 0.0001*** 0.0000 0.0005*** 0.0001 earnedhrs -0.0011** 0.0005 -0.0007** 0.0003 0.0003* 0.0001 0.0016** 0.0007 instructor3 0.3141*** 0.0705 0.0046 0.0296 -0.1346*** 0.0246 -0.1841*** 0.0502 instructor5 0.2875*** 0.0902 0.0107 0.0305 -0.1225*** 0.0315 -0.1757*** 0.0561 instructor6 -0.1691*** 0.0566 -0.2036*** 0.0233 -0.0901*** 0.0323 0.4628*** 0.0765 instructor7 -0.1050** 0.0463 -0.0753 0.0521 0.0122 0.0178 0.1682* 0.0869 *** significance at the 0.1 level ** significance at the 0.5 level * significance at the .10 level 57 |journal for economic educators, 20(1), 2020 table 5 marginal effects of significant variables for the sample without first semester freshmen (n=464) grade d or f grade c grade b grade a dy/dx std. err. dy/dx std. err. dy/dx std. err. dy/dx std. err. gpastart -0.2012*** 0.0243 -0.1289*** 0.0185 0.0573*** 0.0138 0.2728*** 0.0279 hsgpa -0.0522** 0.0227 -0.0335** 0.0152 0.0149** 0.0074 0.0708** 0.0306 worknone -0.0502** 0.0197 -0.0352** 0.0147 0.0126** 0.0053 0.0728** 0.0296 work_study 0.0820* 0.0440 0.0374*** 0.0136 -0.0285 0.0174 -0.0908** 0.0396 music_theater 0.0947** 0.0404 0.0403*** 0.0119 -0.0345** 0.0169 -0.1005*** 0.0345 honors -0.0681*** 0.0206 -0.0649** 0.0286 0.0056 0.0073 0.1274** 0.0531 macro -0.1627** 0.0813 -0.0804*** 0.0213 0.0277*** 0.0086 0.2154** 0.1012 tothrs_currsem 0.0071* 0.0039 0.0046* 0.0026 -0.0020* 0.0012 -0.0097* 0.0053 mom_grad 0.0445 0.0283 0.0245* 0.0136 -0.0145 0.0102 -0.0545* 0.0317 half_sem -0.0813** 0.0328 -0.0785* 0.0465 0.0045 0.0141 0.1553* 0.0908 afternoon 0.1080** 0.0451 0.0453*** 0.0120 -0.0250** 0.0110 -0.1283*** 0.0457 evening_night 0.1529** 0.0638 0.0522*** 0.0101 -0.0394*** 0.0147 -0.1657*** 0.0557 own_family_funds -0.0340* 0.0180 -0.0219* 0.0117 0.0105* 0.0061 0.0455* 0.0237 loans -0.0640*** 0.0206 -0.0357*** 0.0106 0.0182*** 0.0068 0.0816*** 0.0242 satact -0.0003*** 0.0001 -0.0002*** 0.0001 0.0001*** 0.0000 0.0004*** 0.0001 fall 0.0414* 0.0248 0.0260* 0.0158 -0.0108* 0.0065 -0.0566* 0.0343 earnedhrs -0.0012** 0.0005 -0.0008** 0.0003 0.0003** 0.0002 0.0016** 0.0007 instructor3 0.3710*** 0.0563 -0.0026 0.0297 -0.1437*** 0.0241 -0.2248*** 0.0453 instructor5 0.2893*** 0.0763 0.0168 0.0302 -0.1088*** 0.0254 -0.1973*** 0.0532 instructor6 -0.1634*** 0.0576 -0.1878*** 0.0234 -0.0915*** 0.0253 0.4427*** 0.0721 instructor7 -0.1145*** 0.0431 -0.0842 0.0528 -0.0020 0.0244 0.2008** 0.0903 *** significance at the 0.1 level ** significance at the 0.5 level * significance at the .10 level 58 |journal for economic educators, 20(1), 2020 conclusions the regression results in the two models presented in this paper show a consistent relationship between a number of independent variables and the likelihood of earning a high grade in an introductory economics class. students with a high gpa (either high school or college) or a high standardized test score were more likely to have earned a high grade. in addition, students who did not work were more likely to have performed better in introductory economics courses. other independent variables positively associated with the likelihood of a successful academic outcome were participation in the university honors program, making use of student loans or own family funds to pay for college, earned hours prior to the start of the semester, and taking a macroeconomics principles course. the independent variables that negatively impacted academic performance in both models were taking economics in the afternoon or evening and participation in the music/theater program. it is interesting that certain independent variables were never significant in the models. these included race, gender, commuting time, participation in campus activities (with the exception of music/theater), membership in a fraternity or sorority, working more than 30 hours per week and a relationship with a professor. the results do show significant instructor effects on grades. the calculated marginal effects show that college gpa has a much greater impact on the probability of success than high school gpa and that taking a class from a particular instructor can significantly increase (or decrease) the probability of getting a poor grade in an introductory economics class. the results provide some potentially useful information for academic advisors and students. first, our data analysis suggests that it is best not to work at all, if possible. if you must work, it is best to work on campus. secondly, participation in the honors program has a positive effect on academic performance (even while controlling for gpa and standardized test scores). any eligible student should be encouraged to participate in such a campus program. in addition, financing your education with loans or your own or family funds had a positive and significant impact on the probability of success. this suggests that having a financial stake in their education may give a student an incentive to perform better. our research also shows that afternoon and evening classes do not seem to be the best class time options for academic success. this may be a unique situation for this university as students may have had no choice but to enroll in these classes as other more preferable class selections (late morning or online) tend to fill up rapidly. this is a concern particularly for students with the fewest completed academic hours as these individuals are the last in line to sign up for classes under our university registration system. the only consistently significant campus involvement variable was whether or not a student participated in the music/theater program. it’s possible that participation in music and/or theater programs is such a time-consuming endeavor that it negatively impacts grades in courses such as introductory economics. one way to offset such an outcome might be an increase in scholarship funding for such students so that they will not have to work as much to support their way through college. instructor effects were also significant, suggesting that students may benefit from examining their faculty options and choosing to take the course from an instructor who best fits their learning style and academic goals. the conclusions of this study are clearly limited as we examined only academic performance in introductory economics at a single university. in addition, the sample contains only those students who attended class on the day in which the survey instrument was distributed 59 |journal for economic educators, 20(1), 2020 and who also agreed to participate in the study. it would clearly be useful to expand this research to look at how various factors impact academic performance in non-economics courses as well as at other universities. however limited the results might be, they do provide some guidance to both students and advisors as they seek to improve academic outcomes. references act-sat concordance tables. 2009. <http://www.act.org/content/dam/act/unsecured/documents/actcollegeboardjointstate ment.pdf>. accessed 28 january 2019. anderson, g., d. benjamin, and m. fuss. 1994. “the determinants of success in university economics courses.” journal of economic education, 25 (2): 99-119. body, k., l. bonnal, and j. giret. 2014. “does student employment really impact academic achievement? the case of france.” applied economics, 46 (25): 3061-3072. carini, r., g. kuh, and s. klein. 2006. “student engagement and learning: testing the linkages.” research in higher education, 47 (1): 1-32. carrington, l.g. 2010. “the impact of course scheduling on student success in intermediate accounting.” american journal of business education, 3 (4): 51-60. dills, a.k. and r. hernandez-julian. 2008. “course scheduling and academic performance.” economics of education review, 27 (6): 646-654. dundes, l. and j. marx. 2006. “balancing work and academics in college: why do students working 10 to 19 hours per week excel?” journal of college student retention: research, theory and practice, 8 (1): 107-120. gershenfeld, s., d. hood, and m. zhan. 2016. “the role of first-semester gpa in predicting graduation rates of underrepresented students.” journal of college student retention, theory & practice, 17 (4): 469-488. greene, w. h. 1993. econometric analysis, second edition, new york: macmillan. grubb, f. 2006. “does going greek impair undergraduate academic performance?” american journal of economics and sociology, 65 (5): 1085-1110. kalenkoski, c.m. and s.w. pabilonia. 2010. “parental transfers, student achievement, and the labor supply of college students.” journal of population economics, 23 (2): 469-496. kuh, g., j. kinzie, j. buckley, b. bridges, and j. hayek. 2006. “what matters to student success: a review of the literature. final report for the national postsecondary education cooperative and the national center for education statistics. bloomington, in: indiana university center for postsecondary research. moore, j., c. lovell, t. mcgann, and j. wyrick. 1998. “why involvement matters: a review of research on student involvement in the collegiate setting.” college student affairs journal, 17 (2): 4-17. soria, k.m, j. fransen, and s. nackerud. 2013. “library use and undergraduate student outcomes: new evidence for students’ retention and academic success.” portal: libraries and the academy, 13 (2): 147-164. strayhorn, terrell l. 2019. college students’ sense of belonging, second edition, new york: routledge. http://www.act.org/content/dam/act/unsecured/documents/actcollegeboardjointstatement.pdf http://www.act.org/content/dam/act/unsecured/documents/actcollegeboardjointstatement.pdf 60 |journal for economic educators, 20(1), 2020 zacherman, a. and j. foubert. 2014. “the relationship between engagement in cocurricular activities and academic performance: exploring gender differences.” journal of student affairs research and practice, 51 (2): 157-169. zhao, c. and g. kuh, 2004. “adding value: learning communities and student engagement.” research in higher education, 45 (2): 115-137. 61 |journal for economic educators, 20(1), 2020 appendix – student background survey 1. how many hours do you work for pay off campus? _____ none _____ 1-9 hours per week _____ 10-19 hours per week _____ 20-29 hours per week _____ 30-39 hours per week _____ 40 or more hours per week 2. how many hours do you work for pay on campus? _____ none _____ 1-9 hours per week _____ 10-19 hours per week _____ 20-29 hours per week _____ 30-39 hours per week _____ 40 or more hours per week 3. if you answered yes to question 1 or question 2, when do you primarily work? _____ daytime (approximately 8:00 am-5:00 pm) _____ evening (approximately 5:00 pm12:00 midnight) _____ overnight shift (approximately 12:00 midnight -8:00 am) 4. where do you currently live? _____ a residence hall _____ the greek village _____ off-campus housing (not at home with family) _____ at home with family 5. how long does it take to get from your apartment or house to campus? _____ zero (i live on campus) _____ i live close to campus so i am able to walk, ride a bike or take the campus bus _____ less than 10 minutes driving _____ 11-20 minutes driving _____ 21-30 minutes driving _____ 31-45 minutes driving _____ 45-60 minutes driving _____ more than 60 minutes driving 6. do you have internet access at your primary residence? _____ yes _____ no 7. what is your relationship status? _____ single _____ married _____ in a committed relationship 62 |journal for economic educators, 20(1), 2020 8. are you an international student? _____ yes _____ no 9. are you the parent of child under the age of 18? _____ yes _____ no 10. if you answered yes to question 9, indicate how many children you have. _____ 1 _____ 2 _____ 3 _____ 4 or more 11. are you the primary care giver of a sibling (brother or sister) under 18? _____ yes _____ no 12. what is the highest level of education attained by your mother? _____ some high school _____ high school graduate _____ some college _____ associate’s degree _____ bachelor’s degree _____ graduate degree 13. what is the highest level of education attained by your father? _____ some high school _____ high school graduate _____ some college _____ associate’s degree _____ bachelor’s degree _____ graduate degree 14. do you have a parent or a sibling who is a current student at uwg or an uwg alumni? _____ yes _____ no 63 |journal for economic educators, 20(1), 2020 15. have you participated in any of the following activities since you have been a uwg student? (check all that apply) _____ student government association (sga) _____ student activities council (sac) _____ fraternity or sorority _____ non-greek student organization (religious group, intramurals, campus clubs, etc.) _____ learning community _____ musical ensemble, marching band or campus theater group _____ attended a uwg athletic event or an on-campus concert _____ ncaa athlete _____ student in the honors college _____ utilize the campus recreation center 16. how many professors have you gotten to know outside of the classroom (as a mentor or friend)? _____ none _____ 1 _____ 2 _____ 3 _____ 4 _____ 5 or more 17. do you see an academic advisor every semester? _____ yes _____ no 18. have you ever used the tutoring services for core curriculum classes offered through the center for academic success? _____ yes, i have used the tutoring services _____ no, i have not used the tutoring services but i knew they were available _____ i did not know tutoring services were available 19. how are you funding your way through school? (check all that apply) _____ own/family funds _____ hope scholarship _____ pell grant _____ federal work study _____ loans _____ athletic scholarship _____ scholarships (other than hope or athletic) _____ uwg tuition assistance program (tap for uwg employees) _____ military assistance (gi bill, tuition support, etc.) 20. for tuition purposes, are you considered to be a georgia resident (pay in-state tuition)? _____ yes _____ no microsoft word jeefall05g.doc journal for economics educators • volume 5 • number 3 • fall 2005 1 the effect of powerpoint on student performance in principles of economics: an exploratory study by m. gale blalock and robert d. montgomery • abstract due to technological advances and media-savvy college students, the use of multimedia presentations on college campuses has increased rapidly. both faculty and students think that multimedia presentations enhance learning. empirical evidence supporting these perceptions is inconsistent, however. the purpose of this study is to empirically test whether multimedia presentation formats improve student learning of economics over traditional lecture methods. the results indicate that multimedia presentations can improve test scores significantly. additionally, students who are above-average academic performers receive more benefit from multimedia presentations than students of below-average academic performance. introduction technological advances and media-savvy customers have led to a boom in the use of multimedia presentations in college classrooms. multimedia formats are popular with faculty and students alike. in fact, faculty and students think (i.e., perceive) that the use of multimedia presentations improves student learning (hogarty, lang, and kromrey 2003). the empirical evidence supporting this perception is inconsistent, however. the purpose of this study is to empirically test whether multimedia presentation formats improve student learning of economics over traditional lecture methods. the effects of grade point average, sat and/or act scores, and effort on homework were controlled for. literature review control theory predicts that providing freedom in learning increases learning compared to traditional methods (eveland and dunwoody 2001). print media dictate learning in a linear fashion (i.e., top to bottom, left to right). web pages allow the viewer to process information in a nonlinear fashion (i.e., scan text, jump from link to link, process animation, etc.) applying control theory to the use of multimedia presentations, one would expect increased learning with multimedia because viewers can control how they process a screen. similarly, the theory of structural isomorphism suggests that navigating a web page more closely mimics the associated nature of memory and information processing than does navigating a print article (eveland and dunwoody 2001). therefore, this theory predicts that learning in a nonlinear fashion will be greater than in a linear fashion. thus, the theory of structural isomorphism would predict increased learning from multimedia presentations. the contiguity effect states that a coordinated presentation of verbal and nonverbal information is more effective than a separate presentation of the verbal and the visual (michas and berry • m. gale blalock, professor of economics, university of evansville, gb3@evansville.edu; robert d. montgomery, associate professor of marketing, university of evansville, rm44@evansville.edu. journal for economics educators • volume 5 • number 3 • fall 2005 2 2000). if an instructor meaningfully integrates text with visual images in a multimedia presentation, proponents of the contiguity effect would predict increased student learning. dual-coding theory posits that there are two distinct information processing systems; one for verbal information and one for visual information. this theory predicts that learning improves when both systems are employed (michas and berry 2000). again, proponents of this theory would predict better learning from multimedia presentations than traditional presentations. trindade, fiolhais, and almeida (2002) propose that students learn better from processes that are sensory, visual, inductive, and active, while lectures tend to be verbal, deductive, and passive. multimedia presentations allow for graphical simulations, which allow for mental imagery and associated knowledge, which should lead to increased learning. proponents of multimedia presentations believe they improve learning through enhanced attention (luna and mckenzie 1997), improved recall through multimodal benefits, a matching of technologically savvy learning styles with the latest technology, and an increase in organization. the theory of cognitive load states that hypermedia such as the web may reduce learning by increasing cognitive load and disorientation (eveland and dunwoody 2001). similarly, michas and berry (2000) and goolkasian (2000) both found a split-attention effect. this theory posits that learning is reduced when people are required to attend to multiple modes of information that are in need of integration. critics complain that multimedia presentations exhibit a lack of creativity (wineburg 2003), cause a strangling of interaction (microsoft.com), promote style over substance, inhibit learning through excessive clutter, and often cause material coverage to be sacrificed. a study by becker and watts (1996) found that there was a lack of innovation in the teaching of economics across the country. they propose using a variety of teaching methods to actively engage students and increase their involvement in the learning process, which will increase their interest and learning of the subject. a study by luna and mckenzie (1997) indicates that both faculty and students think multimedia presentations enhance learning. however, test results showed no difference between multimedia and traditional lecture formats. similarly, eveland and dunwoody found no difference in learning for print versus the web at the .05 level. at the .10 level, however, learning was better for print than the web. this series of inconsistent empirical results may be explained by situational factors such as nature of the topic (e.g., medicine, political science, engineering, etc.) or characteristics of the users (e.g., degree of technological savvy or level of education). methodology in an attempt to assess the effect of applying new technology to the classroom, two sections of principles of macroeconomics were chosen. these two sections met back to back in the same classroom. the professor was the same for each. in the class meeting at 10 a.m. on monday, wednesday, and friday, a lecture was prepared using the powerpoint presentations provided by mcgraw hill for the 15th edition of mcconnell and brue’s economics, but rather than employing the powerpoint slides in the lecture, the instructor relied on the chalk-and-talk presentation style except for a few lectures on the multiple expansion of credit by the banking system. in the 11 a.m. monday, wednesday, and friday section, the powerpoint slides were used as often as possible but stayed very close to the lecture outline used in the 10 a.m. section. both sections had the powerpoint slides available as reference material on the course web site. in an attempt to control for the effects of control theory and structural isomorphism, subjects in both experimental conditions were allowed to process information in a manner of their choosing (i.e., linear vs. nonlinear). processing information in a linear fashion requires the individual to process information from top to bottom and left to right. processing information in a nonlinear fashion journal for economics educators • volume 5 • number 3 • fall 2005 3 allows the individual to scan text, process pictures or words in the order of their choosing, or jump around the page. each section was examined with identical tests on the same dates. student performance is measured as the total number of correct answers on four exams with 185 questions. explanatory variables included the student’s score on the sat or act measured as standard deviations from the mean of the two sections combined (z-score). in the case where the student took both exams, we calculated z-score based only on sat. weighted high school grade point average (whgpa) is chosen because the students were predominantly first-semester freshmen. the weighting is done by the university admissions office to adjust the high school grade point average for performance in honors classes in high school. student involvement with the course is measured by the number of homework assignments turned in on the date due and is measured by (effort). a dummy variable for the use of the powerpoint in the second section of the course is used to capture the effect of the digital presentation style in the second section of the course. all of the variables are normally distributed except for effort and ppt. effort has a -1.46 skewness coefficient, which indicates the distribution is skewed to the left with relatively few small values. this finding is further corroborated in the mean of effort, showing 93.9 percent of the students turned in all of their assignments on time. ppt has a kurtosis coefficient of -2.005, indicating a relatively flat distribution, which would be expected for a dummy variable. descriptive statistics are presented in table 1. while enrollment in the classes 57 students, lack of data caused two incomplete observations. these were not included in the statistical analysis. there were 24 students in the class where chalk was generally used and 33 students in the class receiving the multimedia presentation. performance is the total number of questions answered correctly on four examinations issued during the semester. the number of questions possible was 185. the two class mean performance on the exams was 77 percent correct. the maximum was 171 questions, or 92 percent, correct. the variable z-score was constructed to standardize the performance on the sat exam and the act exam by presenting this performance as standard deviations above the class mean. the z-scores’ near-zero but nonzero mean is interpreted as coming from the fact that some students took both exams in high school. the students in these classes who took the sat in high school scored an average of 1,095. the students in these classes who took the act scored an average of 22.5. ninety-four percent of the students in class were able to turn in all of their homework on time. table 1: descriptive statistics. performance z-score whgpa eff0rt ppt sat act mean 143.509 0.038 3.431 0.939 0.564 1095.11 22.458 standard error 2.238 0.138 0.080 0.014 0.067 19.12 0.730 median 147.000 -0.128 3.540 1.000 1.000 1060.00 22.500 mode 159.000 -0.742 3.610 1.000 1.000 1000.00 23.000 standard deviation 16.601 1.023 0.596 0.102 0.501 128.25 3.575 sample variance 275.588 1.047 0.356 0.010 0.251 1644.83 12.781 kurtosis -0.437 -0.488 0.130 0.995 -2.005 -2.54 -0.753 skewness -0.563 0.488 -0.748 -1.494 -0.264 5.15 0.343 range 67.000 4.444 2.700 0.333 1.000 570.00 12.000 minimum 104.000 -1.755 1.710 0.667 0.000 870.00 17.000 maximum 171.000 2.689 4.410 1.000 1.000 1440.00 29.000 journal for economics educators • volume 5 • number 3 • fall 2005 4 the correlation matrix (table 2) shows strong correlation among many of the variables. given the small sample size, a correlation coefficient with an absolute value exceeding 0.26 is significant at the 0.05 level (0.306 for 0.01 level of significance). in that we relied only on the sat in the case where the student had taken both the act and the sat, the sat and z-score are perfectly correlated. performance is significantly correlated with z-score, whgpa, effort, sat and act. a key finding of this correlation analysis is that ppt, the dummy variable for the digital presentation method, is not significantly correlated to performance or any of the other variables under investigation. in economics and business, there are many cases where it is unreasonable to assume that a variable y is a function of just a single variable x. a more appropriate way to determine the true relationship may be to construct a multiple regression model that includes all the important variables influencing y (kenkel 1989). table 2: correlation matrix. performance z-score whgpa eff0rt ppt sat act performance 1 z-score 0.51456504 1 whgpa 0.55755977 0.531830 1 effort 0.34780480 0.064382 0.218579 1 ppt 0.17221600 0.105152 -0.105770 0.122245 1 sat 0.45099732 1 0.516077 0.052872 0.093596 1 act 0.56500352 0.885209 0.674948 0.234456 0.130962 0.740095 1 results table 3 reports the results of the regression models. in model 1, the only explanatory variable was the dummy variable, which was unity for the observations from the class receiving the multimedia presentation but zero for the class receiving the traditional “chalk and talk” presentation. the adjusted r square = .044 indicates that the powerpoint presentation explains 4 percent of the variance in student performance. while the coefficient for ppt is not significant at the .05 level, a p-value at 0.068 suggests that further investigation is warranted. the interpretation here is that students in the first class got 139/185 or 75 percent of the answers correct while students in the second class got eight more answers correct over the course of the semester for 143/185 or 77 percent. in order to gain more understanding of the effects of the variables other than presentation style, model 2 was estimated with performance as the dependent variable and z-score, whgpa, and effort as independent variables (table 3, model 2). the variable effort is not significant in explaining performance in these two principles of economics sections. it measured the number of homework assignments turned in on the date due. in these two classes 94 percent of the students completed their homework 100 percent of the time. its variability as measured by its standard error is so small compared to its explanatory power that it adds little to our understanding of the phenomena under investigation. z-score, the coefficient of scores on standardized tests measured in standard deviations from the mean of this sample, has a strong p-value of (0.006). the coefficient of 5.94, taken with the reported maximum of 2.689 standard deviations above the mean of 0.038 would account for an increased performance of some 16 more questions correctly answered than the class average. weighted high school gpa (whgpa) has a p-value of (0.019) and a coefficient of 8.08. the maximum gpa in the sample was 4.4 compared to an average gpa journal for economics educators • volume 5 • number 3 • fall 2005 5 of 3.4 so that having the top gpa in the sample would add eight correct questions to the student’s total performance. model 3 presented in table 3 is estimated omitting effort but includes ppt, z-score, and whgpa. as would be expected, the r-square increases, the f-statistic for the entire equation increases and the level of significance for the f-statistic improves. these results suggest that using a multimedia presentation style can increase student performance on objective (multiple-choice) exams by a statistically significant amount. in an attempt to determine interaction effects between method of presentation and grade point average, the data were sorted by weighted high school grade point average and partitioned at the median. for convenience the median was left in the lower half of the sample. the results are dramatic. the p-value for the coefficient of ppt for the top half of the class is 0.024. (see table 3, model 4). the p-value for the coefficient of ppt for the bottom half of the class is 0.665. (see table 3, model 5). table 3. variable model 1 model 2 model 3 model 4 model 5 intercept 138.875 (0.000) 93.229 (0.000) 101.689 (0.000) 73.698 (0.005) 168.018 (0.000) ppt 8.222 (0.068) 8.145 (0.027) 16.028 (0.024) 1.620 (0.665) z-score 5.974 (0.006) 4.995 (0.019) 5.692 (0.233) 6.106 (0.003) whgpa 8.808 (0.019) 10.795 (0.003) 19.153 (0.016) 5.468 (0.498) effort 21.111 (0.245) r-square 0.061 0.392 0.433 0.264 0.255 f-statistic 3.470 (0.068) 10.970 (0.000) 13.008 (0.000) 3.985 (0.021) 4.197 (0.016) n 55 55 55 26 29 p-values are in parentheses conclusions and recommendations the results of this study indicate that multimedia presentations can improve student test scores in economics significantly. additionally, the results indicate that students who have already proven themselves to be above-average academic performers receive far more benefit from multimedia presentations than students of below-average academic performance. a possible explanation for these positive findings is that these college students are technologically savvy and better able to process high-tech deliveries. this series of results provides support for dual-coding theory, which predicts that student learning improves when material is presented both visually and verbally as opposed to having either visual or verbal presentation alone. it is recommended that teachers match their use of technology with the degree of technological savvy of their audience. journal for economics educators • volume 5 • number 3 • fall 2005 6 • use a variety of modes (e.g., verbal, visual, dynamic, etc.) to drive home a consistent message. • use multimedia to complement rather than replace your presentation. • avoid clutter and unrelated visuals because they inhibit learning. • don’t rush a multimedia presentation. student satisfaction is related to the perception of having the appropriate time to view a screen (sozmem 2002). future research should one wish to further this study, the effect of timing on student performance should be studied. the students did get identical exams, but students in the first class may have shared information about the exam with a close friend in the second section. however, they only had 10 minutes between classes to do so. future researchers could replicate the experiment with the earlier class receiving the digitally enhanced presentation and the later class the “chalk and talk” presentation. a limitation of this research is small sample size. future research into the effects of multimedia presentations on learning should include multiple trials with hundreds of subjects. teacher efficacy has been shown to be related to teaching effectiveness. a measure of selfefficacy of the instructors with regard to the use of technology may explain some of the inconsistent results in the literature. another avenue for investigation might include the publisher’s digital presentation included with the text compared to a “pared-down” or “spiced-up” digital presentation more suited to the individual instructor’s and/or the students’ tastes. specifically, the effect of different vs. consistent backgrounds, text vs. text and visuals vs. animation, degree of computer savvy of the students, and different layouts could be tested for effectiveness. demographic variables that deserve future investigation include gender, major, and year in school. finally, luna and mckenzie (1997) and trindade et al. (2002) suggest that students with different learning styles benefit from different teaching methods. future research should measure learning style and correlate that style with learning performance. references becker, william e., and michael watts. 1996. “chalk and talk: a national survey on teaching undergraduate economics.” american economics review 86:448-453. boczkowski, pablo j. 2004. “the processes of adopting multimedia and interactivity in three online newsrooms.” journal of communication (june):197-213. callow, jon. 2003. “talking about visual texts with students.” reading online (april). dexter, sara, and eric riedel. 2003. “why improving preservice teacher educational technology preparation must go beyond the college’s walls.” journal of teacher education 54 (4, september/october):334-346. eveland, william p., and sharon dunwoody. 2001. “user control and structural isomorphism or disorientation and cognitive load?” communication research 28: 48-78. goolkasian, paula. 2000. “pictures, words, and sounds: from which format are we best able to reason?” journal of general psychology 127:439-459. henson, robin k., lori r. kogan, and tammi vacha-haase. 2001. “a reliability generalization study of the teacher efficacy scale and related instruments.” educational and psychological measurement 61:404-420. hogarty, kristine y., thomas r. lang, and jeffrey d. kromrey. 2004. “another look at technology use in classrooms: the development and validation of an instrument to measure teachers’ perceptions.” educational and psychological measurement 63: 139-162. journal for economics educators • volume 5 • number 3 • fall 2005 7 kenkel, james l. 1989. introductory statistics for management and economics. 3rd ed. pswkent publishing company. luna, carl j., and joseph mckenzie. 1997. “testing multimedia in the community college classroom.” the journal 24(7). smith, paul c., 1997. “psychology in the design of multimedia presentations in the classroom: an interview with richard s. velayo.” teaching of psychology24(2). sozmem, yildirim. 2002. “interactive lecture supported by multimedia presentation: a new teaching tool for faculties with crowded classes and limited budgets.” education for health 15: 391-393. trindade, jorge, carlos fiolhais, and leandro almeida. 2002. “science learning in virtual environments: a descriptive study.” british journal of educational technology 33(4). tuttle, harry grover. 1995. “dos and don’ts of multimedia presentations.” multimedia schools 2(5, nov/dec2). wineburg, sam. 2003. “powerpointless.” american school board journal (november). wuorio, jeff. 2004. “presenting with powerpoint: 10 dos and don’ts.” microsoft.com. hicks 67 entrance, exit and merger activity in tennessee’s banks: a multivariate analysis of market behavior and the business cycle by michael j. hicks * abstract this paper evaluates the joint contribution of market behavior and macroeconomic fluctuations on merger, entrance and exit in tennessee’s banking industry from 1966 through 1997. the results suggest minimal business cycle influence on firm entrance, merger or exit through five business cycles. instead rival behavior, in the form of low cost facility expansion, appears to be correlated with entrance. this suggests that banks respond more in aggregate to rival behavior than to macroeconomic fluctuations in this market. econometric methods of note include a vectorautoregression exogenous, with error correction specification. i. introduction the spate of banking mergers in the 1990's is of considerable interest to economists studying industrial markets as well as those investigating the aggregate economy. the former are concerned with market power is sues arising from concentration in markets, while the latter are concerned with cyclical business activity. at the confluence of these two areas of interest is the nature and cause of mergers, entrance and exit in the banking industry. this industry is important both for its size and the role banking plays in the transmission of monetary policy. the interest concerning this market may be distilled into two concerns: a) the more concentrated an industry becomes, the higher the price and b) the less frequent will be price adjustments, simply prices may be sticky. a full accounting of these concerns is outside the scope of this research; but, the first possesses clear antecedents in the work of industrial economists over the past fifty years, while the second assertion is a critical element of the body of research known variously as new keynesian or new monetarist macroeconomics (hicks, 1998). sticky prices represent a major causative element in cyclical fluctuations in this interpretation of the macroeconomy. without enumerating the problems associated with market power and sticky prices i will simply suggest the cyclicality of mergers and the concentration of firms is important to both sets of researchers. so, the questions of central interest concern ma rket power and the cyclical nature of entrance, mergers and exit. this paper will examine the entrance, merger activity and exit of banks in tennessee from 1966 through 1997, assessing both market power contribution and the cyclicality of these business d ecisions. ii. background * director of applied research, center for business and ec onomic research, marshall university, elizabeth mcdowell lewis college of business, 400 hal greer blvd, huntington, west virginia, 25755-2300 (304) 696 2313. email: hicksm@marshall.edu 68 two stylized descriptions of merger/entrance/exit activity emerge as potential candidates in empirical tests. the first is based in firm behavioral response to cyclical fluctuations. the procyclicality of pricing theory (bils, 1989) suggests that firms are more likely to adjust prices asymmetrically in response to business cycle fluctuations. hence price adjustment and profits will follow from upturns in the business cycle. this informally suggests that merger and entrance activity are likely to follow expansions with exits occurring during contractions. this is one macroeconomic explanation for the potential cyclicality of business mergers and entrance and exits. the economic base theory (see mayo and flynn, 1988) also suggests cyclicality to merger, entrance and exits. this theory suggests regional economic activity (with some emphasis on exports) tends to promote entrance. both macro explanations predict some procyclicality of entrance, exit and mergers. the microeconomic description of merger activity rests in the framework of oligopoly behavior espoused by industrial economists. these theories have in common the inference that mergers occur to effect market power or reduce costs. simply, mergers and expansion are the result of rival behavior or technological change. they will not necessarily follow a business cycle, but should occur either due to rival behavior or cost changes. existing micro research into mergers, entrance and exit began with bain (1949, 1956) extending through the period of static theoretical analysis of the 1950's and 1960's. orr (1974) presented a dynamic model of entrance with empirical evidence from canadian manufacturing firms. this work provided the basis for more extensive analysis of entrance that included gorecki [1975], kessides [1986] and audretsch and acs [1989]. each of these authors attempted to focus on verifiable micro elements such as innovation and profits. the explosion of studies in this period examined barriers to entry, economies of scale and price-cost margin effects on entry, exit and merger activity. the result being research primarily into market structure/performance and cost analysis of entry decisions. contemporary studies of advertising and entrance (jaumandreu and mato, 1987), fixed costs (baumol and willig, 1981) and dynamic entry deterrence (dixit, 1980) and others offered a multitude of explanatory theories and evidence of firm behavior that delved more deeply into firm profit motivation and barriers to entry. this later development also had roots in game theoretic interpretations which was beyond the grasp of empirical economics. in the mid 1980's this research was extended by perhaps the most important economic book of the decade contestable markets and the theory of industry structure (baumol, panzar and willig, 1982, 1988) which dealt extensively with industry structure, investment and entrance, outlining micro conditions for entrance and implications for oligopoly pricing behavior. thus, the underlying causes of entrance, exit and merger differ between the micro and macro theories and may be examined empirically. the macro explanation suggests that indications of cyclical fluctuations will generate mergers, entrance and exits, while the microeconomic theory relies on behavioral responses by firms to rival action or cost changes. simultaneous testing of these alternative explanations may potentially answer the question whether it is primarily the macroeconomy, rival behavior, or some combination of the two that spawns merger activity in banks. at the confluence of industrial economics and macroeconomics have been competition policy analysts. anti-trust officials have long associated mergers and entrance with the business cycle; however, there has not emerged a detailed analysis of dynamic entrance, merger and exit of firms coupled with more advanced statistical methods available in the past decade. this study seeks to analyze the cyclical and behavioral responses of firms in a dynamic test of entry, exit, and mergers. the hope is that evidence of cyclical and behavioral components of entry, exit and mergers will spawn additional research into dynamic market behavior. from this expansive coverage of entrance, merger and exit came a number of repeated empirical observations concerning firm entrance. these were detailed by geroski (1991, pp 282) as: a) entrance is short -lived and rarely successful, b) entrance is difficult to measure clearly, c) the types of entry vary remarkably and d) entrance may not often be worthwhile to the firm. these “reflections on the entry process” provide industrial economists the necessary groundwork for continued study of entry, with a few guidelines. these heuristics may be summarized as a suggestion to: employ easily defined markets, use clearly defined methods of measuring entrance and employ richer time series data to capture dynamic effects. this has implication for market selection, data frequency and econometric modeling. this study will attempt to meet these rules of t humb. iii. method and data causality in time series econometrics depends upon the exogeneity of independent variables in a multivariate test. this exogeneity may be tested in part by the cointegrative behavior of variables employed in the test. the absence of cointegration and granger causality suggests weak exogeneity between variables (campos, erickson and hendry, 1996). this condition is necessary for a structural equation to meet the assumptions of the classical linear model. unfortunately, with variables of interest such as mergers, exits and entrances this will seldom be the case. this suggests a restrictive structural models may present a real analytical problem—it simply cannot distinguish well between endogeneity and exogeneity in variables, so causation cannot be inferred. an attractive method for including exogenous variables and potentially endogenous variables in a multivariate framework is the vectorautoregression exogenous (varx). this time series econometric technique employs both potentially endogenous variables and structural components, or exogenous variables. exogeneity of variables may be suggested either through theoretical or statistical analysis, following which restrictions on directional causation is placed. likewise, the nature of endogeneity may be inferred from a theoretical or statistical basis. this differs from the traditional structural model that typically does not employ statistical exogeneity tests. this model assumes and tests the exogeneity of economic variables. specifically, the assumption that mergers and related business strategy do not cause business cycles. further, the endogeneity of business response is assumed. that is, mergers, exits, entrances, changes in the quantity of branches or offices potentially are the result of endogenous behavioral response by firms. the data employed in this study were collected from the bureau of labor statistics, department of the census and the center for business and economic research, the university of tennessee. all data are public and 69 consists of annual data on tennessee’s total state banks, entry, mergers, branches and offices in tennessee from 1966 through 1997. from these exits are calculated. additional variables of gross state product (tngsp) and gross private domestic investment (gpdi) will be employed, both in real terms. a business cycle dummy variable reccdummy was constructed. of note here is the use of annual data. a previous study of firm exit and entrance in tennessee (mayo and flynn, 1988) employed quarterly data in a multi-sectoral empirical evaluation of entrance. the choice of annual data is used here to meet goreski’s [1991] standards of precisely measuring entry, exit and merger activity. 1 iv. the model and results firm decisions to enter or exit a market, to vary the number of branches and offices, or to merge are all viewed as endogenous. exogeneity restrictions were placed on the business cycle variables and confirmed statistically through the absence of granger causality and cointegration in a johansen cointegration test. the endogenous variables were cointegrated with an order 1 (johansen test) so the varx was transformed to an error correction model (ecm), through first differencing of the data. the resulting differenced v ariables were not cointegrated.2 the total number of cointegrating equations suggested was four (johansen cointegrating test), assuming a trend and intercept in the data. the latter assumptions were based on a simple observation of the variables. see figure 1. this presents the interesting observation that the ratio of branches to banks and offices to banks, as well as the endogenous variables themselves all displayed an obvious time trend. the trend and intercept assumptions may be interpreted as suggesting a long run, but trending relationship is occurring. this type of assumption seems appropriate given the cointegration tests, and will not be analyzed further. the resulting error correction model takes the form (in first differences): yi,j = á i + ã i ô i + bi,j,t-n yi,j,t-n + öi,j xi,j + ei,t (1) where yi,j are the endogenous variables, á i the intercept, ô i the time trend with parameter ãi. bi,j,t-n the vector of parameters of endogenous and lagged endogenous variables yi,j,t-n and öi,j the parameter estimates of the exogenous, 1this is not a critique of the use of shorter data frequency, simply an effort to include a more precise measurement of these variables. any shorter period may not reveal the actual period in which effective entrance (not just a business license or merger agreement) occurred. for example, while mergers may occur in one perio d, where does the effect occur? also, where does the exit/entrance effect occur within a given month or quarter. annual data at least keeps us honest in dealing with geroski’s comments on the existing research. 2the existence of a unit root in the first differences was strongly rejected four out of five variables (reject at greater than 1% confidence) while this hypothesis could be rejected at the 10% level for the merger variable in the adf test and at the 1% for the phillips-perron test. (augmented dic key-fuller and phillips-perron tests, all failed to reject an absence of the unit root at the 10% level). 70 contemporaneous business cycle variables xi,j and ei,t the error term. 3 interpretation of the intercept and trend are not important in this study, nor is interpretation of the cointegration equations or their normalizations. one problem associated with the error correction model is the obvious concerns with estimation of first differences (in this case). that is the loss of explanatory power as sociated with estimation of differenced, not level variables. this is of course necessary given the non-stationarity determined in the cointegration tests. non-stationarity implies a non-stable relationship between v ariables, the source of which is more than the trending nature of the variables. this question is important for industrial economists because it suggests a dynamic adjustment to market structure as the number of branches, offices, and total banks changed d uring the sample period. however, further analysis of this is beyond the scope of this study.4 the results appear in table 1. 3the ecm model removed some of the distributional concerns of the data. these were, in essence, a numeric count (potentially a poisson or negative bi-nomial distribution.) separate regression tests suggest parameter stability under these alternate distributional assumptions. this linked with the observation that poisson and normal distributions both generate asymptotically efficient estimates points to robustness in the estimation. 4this is part of a larger study of the regional banking structure, that is currently ongoing 71 (lower line) (upper line) table 1, error correction model results entrance mergers offices branches exit entrance t-1 -0.244 (-0.77) -.32 (-0.48) -3.01 (-0.75) -5.12 (-1.43) -0.09 (-0.13) entrance t-2 -0.07 (-0.24) -0.60 (-0.99) -4.93 (-1.36) -1.03 (-0.32) -0.58 (-0.91) mergers t-1 0.31 (0.57) 0.11 (0.09) -6.05 (-0.87) -10.43 (-1.69) -0.03 (-0.02) mergers t-2 -0.12 (-0.24) 0.65 (0.61) -4.02 (-0.62) -5.66 (-0.99) 0.39 (0.33) offices t-1 -0.88*** (-2.49) -0.007 (-0.09) -0.48 (-1.08) -0.67* (-1.67) -0.06 (-0.69) offices t-2 -0.08*** (-3.38) -0.004 (-0.09) -0.43 (-1.32) -0.79*** (-2.73) -0.03 (-0.05) branches t-1 0.08 (1.51) 0.06 (0.60) -0.12 (-0.20) -0.11 (-0.19) 0.06 (0.53) branches t-2 0.08** (2.09) 0.05 (0.59) 0.19 (0.37) -0.03 (-0.08) 0.07 (1.07) exit t-1 -0.13 (-0.45) 0.48 (0.74) 4.40 (1.13) 6.30* (1.83) 0.73 (1.06) exit t-2 0.11 (0.26) -0.35 (-0.39) -0.35 (-0.39) 4.14 (0.87) -0.02 (-0.02) intercept -15.95 (-1.59) 9.52 (0.45) -79.85 (-0.63) -357.66*** (-3.17) 17.63 (0.78) tngsp -0.0003 (-0.39) -0.0002 (-1.41) 0.0006 (0.66) 0.001 (1.28) -0.0002 (-1.20) reccdummy 0.67 (0.47) 2.55 (0.84) -36.2* (-1.99) -0.13 (-0.008) 1.41 (0.43) gpdi 1.13 (1.38) -1.18 (-0.68) 13.26 (1.27) 32.20*** (3.50) -1.45 (-0.79) adj r2 0.45 0.59 0.45 0.35 0.61 akaike ic -46.519 -67.350 -117.540 -114.221 -69.100 *** significant at the 1% level, ** significant at the 5% level, * significant at the 10% level, asymptotic t -statistics in parentheses these results present very intriguing issues regarding entrance and exit. firstly, neither economic or market behavioral variables appear to affect exit in this market. this may be explained by simply noting that firm exit may 72 occur at intermittent lags that do not permit clear statistical analysis. likewise, changes in merger activity could not be explained either through riv al behavior or cyclical economic variables. this result may be explained in the same manner as exits, simply, firms merge acyclically due to variable lags in economic response, or through variable lags in rival behavior. third, the number of offices was reduced during a recession. this may be viewed as a cost savings measure or as reductions during a period of low demand for banking services. these results should be interpreted as marginal, with limited informational value in this study other than a statistical rejection of rival behavior and cyclical contribution to these variables. of strong explanatory interest is the behavioral response of the number of new branches caused by changes in lagged number of offices, and the lagged number of exits and the change in gross private domestic investment. a reduction of one hundred total offices in a previous year led to an increase of sixty seven branches in the current year, while a similar reduction two years previously leads to an increase of seventy nine b ranches. this may be interpreted as a behavioral response of banks to changes in the number of rival retail locations. the cost differences associated with branches and offices would lead the firm to increase its branches during periods of increased demand. this result is supported by the large increase in the number of branches as a result of increases in gross private domestic investment. increased demand, and reduced offices in previous periods lead to a larger number of bank branches, a more costly full service retail outlet. of greatest interest is the entrance variable. entrance in the market by a new firm occurs in this model, primarily as a negative response a change in the number of offices. there is a positive response to the number of branches, suggesting in part the endogeneity of branches with entrance. these results suggests entrance is based not on cyclical fluctuations but in structural changes in the market. this is a very interesting result that implies macroeconomic variables are not of significant effect in determining the number of exits and entrances in the banking market in tennessee. v. conclusions the particular causes of firm entrance, exit and merger activity are the subject of ongoing and fertile research. studies performed primarily by industrial organization researchers point to both firm level variables (primarily profits) as well as cyclical fluctuations. the majority of these studies find some weak cyclicality to mergers, exits and entrances. this study, using a somewhat more advanced statistical technique than is commonly employed in microeconomic analysis fails to uncover compelling evidence of cyclicality to mergers, exits and entrance. these results point instead to a series of behavioral responses by rivals to the number of bank offices existing in the market. this suggests that reductions in the low cost retail banking outlets tend to increase the number of higher cost outlets as well as entrance by firms, in later periods. this particularly interesting result suggests a substitutability between the high cost branches and low cost offices. that branches respond to the cyclical demand 73 74 variable of gross private domestic investment suggest that these variables respond to demand variations as well. as with any study of a sub macroeconomic (regional) economic variable the lack of general applicability is a potential problem, due to structural variations in banking regulation across states. also, since this is annual data some response power is lost—that is t he tradeoff made in this study. both these unavoidable problems, once noted present few additional problems with a study of this type. another potential problem is the behavioral response of aggregate markets should be viewed in closer detail. while i h ave found behavioral responses greater that responses to aggregate economic variations, i would hesitate to draw micro market inferences from these results (primarily anti-trust analysis). further study, of local and regional markets as well as national level statistics are warranted, and should provide useful understanding of these issues. 75 references audretsch, d.b. and z. j. acs. “innovation as a means of entry: an overview” in entry and market contestability, ed. geroski and schwalbach, 1991 blackwell, uk. bain, j.s. (1949) “a note on pricing in monopoly and oligopoly” american economic review, 39, pp. 448-64. bain, j.s. (1956) barriers to new competition, harvard university press, cambridge, ma baumol, w. j, j.c.. panzar and r. d. willig (1982) contestable markets and the theory of industry structure, harcourt brace jovanovich, san diego. baumol, w. j, and r. d. willig. “fixed costs, sunk costs, entry barriers, and sustainability of monopoly.” quarterly journal of economics, 95, pp 405-31. bils, m. “cyclical pricing of durable goods” nber working paper no. 3050. cambridge mass. national bureau of economic research. 1989. campos, j., n. r. ericsson and d. f. hendry (1996) “cointegration tests in the presence of structural breaks” journal of econometrics 70(1) pp 187-220. dixit, a. “the role of investment in entry deterrence” economic journal 90. pp. 95-106. enders, w. applied econometric time series. john wiley & sons, inc. new york, 1995. geroski, p.a. (1991) “domestic and foreign entry in the united kingdom: 1983-1984" in entry and market contestability, ed. geroski and schwalbach, 1991 blackwell, uk. geroski, p.a. (1991) “some data driven reflections on the entry process" in entry and market contestability, ed. geroski and schwalbach, 1991 blackwell, uk. green, w. econometric analysis 3 rd edition, simon & schuster, inc. 1997, upper saddle river, new jersey, 1997. hamilton, j. d. time series analysis, princeton university press, princeton, new jersey, 1994. hicks, m.j. hierarchial delays as a source of sticky prices: evidence from two workably competitive industries ph.d. dissertation, university of tennessee, 1998. kennedy, p. a guide to econometrics, 3rd edition, the mit press, cambridge, massachusetts, 1994. jaumandreau, j. and g. mato “margins, concentration and advertising: a panel data analysis.” mimeo, 1987. kessides, i.n. (1991) “entry and market contestiblity: the evidence from the united states” in entry and market contestability, ed. geroski and schwalbach, 1991 blackwell, uk. mata, j (1991) “sunk costs and entry by small and large plants” in entry and market contestability, ed. geroski and schwalbach, 1991 blackwell, uk. mayo, j. w. and j. e. flynn .firm entry and exit: economic linkages in tennessee, center for business and economic research, university of tennessee, knoxville, tennessee. 1988. 76 orr, d. “the determinants of entry: a study of the canadian manufacturing industries.” review of economics and statistics, 56. pp. 58-65. rohlf, f. j. and r. r. sokal. statistical tables, 3 rd edition. w.h. freeman and company, new york, 1995. sims, c. “bayesian skepticism on unit root econometrics” journal of economic dynamics and control 12 (1988) pp 463-74. preliminary thesis 15 journal for economic educators, vol. 8, no. 1, spring 2008 undergraduate research social mobility in the united states as a markov process zol alexei hooper and e. anthon eff 1 abstract previous research on intergenerational mobility in income, occupation, or social class as a markov process typically uses regression models to analyze cross-sectional data. in this paper we draw data from the national longitudinal survey of youth (nlsy) to build markov transition states, producing a set of stylized facts from these longitudinal data. we derive the probabilities that children will repeat the occupational, educational, or child-raising choices of their parents. this gives us insight into how such lifestyle choices are vertically transmitted from parents to children, and the degree of persistence of these choices over the generations. introduction there has been much research on intergenerational mobility. as gaer, schokkaert, and martinez (2001) postulate, we attempt to measure it not only for a description of movement, but also to learn something about economic opportunity and the equality or inequality of life chances and opportunities. for example, if the inheritability of status is so large as to limit equality of opportunity, when and how should government step in to level the playing field (ahlburg, 1998)? for that matter, what exactly is being inherited? whereas earlier studies like blau and duncan (1967) concentrated more on a person’s socio-economic status in and of itself relative to his/her parents, later approaches such as jenks et al. (1979) began to focus on the determinants of status i.e. the level of investment in a child. certainly from a government intervention standpoint, it is important to know the component causes of (im)mobility rather than just the end effect. background to interpret data, we must use a set of assumptions that will destroy some trees so as to make the forest visible. the first of these assumptions is the markov assumption, or more accurately, the assumption that transition probabilities have the markov property. in a system with the markov property, the probability of achieving any given future state is conditioned only on the present state and not on the past states. for example, in dice-driven board games, the probability of adopting any of the set of possible future states, given the present state depends only on how the dice are rolled and not on how the game acquired the present state. this assumption allows us to treat people in the same categories as having the same transition probabilities. also, it provides a method to estimate future transitions, for which there are no data, using the distribution of status in the present state. 1 zol alexei hooper, actuarial science major, middle tennessee state university; e. anthon eff, associate professor, economics and finance department, middle tennessee state university. this article is based on an honors thesis by zol a. hooper mentored by e. anthon eff. 16 journal for economic educators, vol. 8, no. 1, spring 2008 hodge (1966) compared actual movement data with a simulation based on the markov chain. among his findings was that only 13.4% of grandsons in his data set would need to change occupations to come in line with the “perfect” mobility condition in which every generation is independent of the last. this implies that the cumulative effect of the generations before the parents (the past states) does not matter greatly. even so, there are still caveats. bowles & gintis (2002) point out two common types of measurement error in income mobility studies: the misreporting of parents’ income and transitory influences on children’s income that do not necessarily reflect permanent status. these transitory influences exaggerated early estimates of mobility by underestimating a core metric of mobility called the elasticity of earnings. the elasticity of earnings communicates how quickly the offspring’s earnings change with respect to the parent’s income. it is measured by finding the average percentage change in the earnings of the population of offspring when the population of parents’ earnings changes by one percent. a large elasticity of earnings indicates that the offspring’s earnings are strongly affected by the parent’s earnings, which is not desirable in an economy that strives to provide equal opportunity for all. according to zimmerman (1992), these two errors led early researchers to conclude that the elasticity of earnings was no more than 0.2. his own estimates, which correct for these errors, find elasticities closer to 0.4, indicating much less mobility than was previously thought. a second assumption that goes hand-in-hand with the markov assumption is that of homogeneity—that the entire population under study is subject to the same transition probabilities. homogeneity allows us to treat the relative number of persons making a specific movement, as in a table of actual movement data for example, as probabilities which can be assembled into a markov transition matrix. mcfarland (1970) notes that separating the population into various classes may achieve a better fit at the cost of more variables and the need for more data. he further cautions that attempts to estimate the n-step transition matrix by raising the one-step matrix to the nth power may overestimate mobility. the assumption violation that he is warns about here, however, is that of stationarity—the assumption that transition probabilities remain constant (stationary) over time. by many accounts, mobility decreases over time. as he puts it, “if the proportion of people moving declines over time, then there is considerable appeal to the notion that, in one way or another, the probability of moving declines over time,” (mcfarland, 1970, p. 466). many personal traits can determine a person’s economic success, but some matter more than others. bowles, gintis, and groves (2005) argue that the transmission of iq, even if we can assume that to be a measure of pure intellect, or cognitive ability, is not nearly as important economically as the level of schooling completed, which is a function of intellect, motivation, and resources, or cognitive performance. recent findings by bouchard (2004) indicate that a wide variety of human traits previously thought to be shaped solely by the environment are in fact heritable. he also finds that the effect of genetics on intelligence, political leanings, and religiosity increase with age. restuccia and urrutia (2004) assert that economic opportunity is largely influenced by investment in early education and that this explains the relatively high persistence in earnings between generations in the u.s. that is, families which are too poor to afford the resources to invest in their children’s early (formative) education are more likely to produce adults who have a relatively lower chance of completing college. if we assume that this connection between early education and economic opportunity is true, then its effect is bolstered by the relative opportunity cost of having children. that is, a 17 journal for economic educators, vol. 8, no. 1, spring 2008 person who gives up less economic opportunity top bear children, or perceives that s/he gives up less opportunity, is more likely to bear them. thus, poor persons are more likely to have children in youth while they lack adequate resources to invest in their children’s education. meanwhile, those who have waited a relatively long time to bear children, perhaps by choosing to complete their schooling and obtain a job first, are more likely to be able to afford the resources that would allow their children to maximize their potential. in the spirit of recent work that seeks to quantify factors other than income, we want to investigate the transmission of lifestyle choices using markov chains in the same way as they have been used to study intergenerational income in years past. table 1 number of respondents persons living with at age 14 category 8570 father-mother marcou 191 father-stepmother father 30 father-other woman relative father 9 father-other woman father 146 father-no woman father 6 father-missing woman father 841 stepfather-mother mother 14 stepfather-stepmother othrel 2 stepfather-woman relative othrel 2 stepfather-other woman othrel 2 stepfather-no woman othrel 102 man relative-mother mother 2 man relative-stepmother othrel 235 man relative-woman relative othrel 1 man relative-other woman othrel 17 man relative-no woman othrel 54 other man-mother mother 1 other man-stepmother othrel 9 other man-woman relative othrel 57 other man-other woman nonrel 6 other man-no woman nonrel 2124 no man-mother mother 1 no man-stepmother othrel 138 no man-woman relative othrel 18 no man-other woman nonrel 3 no man-no woman nonrel 22 other arrangement nonrel 3 on my own nonrel 60 missing man-mother mother 1 missing man-woman relative othrel framework the various descriptors of social mobility that we collect are intended to give a more balanced picture than what could be obtained from job category alone. because occupations are continually being created and made obsolete, social mobility cannot be defined solely in terms of 18 journal for economic educators, vol. 8, no. 1, spring 2008 occupation. but the movement from one generation to the next can still be described in terms of education level, prestige level, and family structure. family structure the nlsy contains several variables that can be used to keep track of respondents from the 1970 census and tie them together. the variable r0001900 records the living arrangements of the respondent when s/he was 14 years old. of those respondents, the 12,667 that completed the survey were arranged as shown in table 1. for subsequent years (1982-1994, 1996, 1998, 2000, 2002, 2004), the nlsy follows those same children with a variable for the usual living arrangement for each child. the 3,104 respondents who had had at least one child produced the categories shown in table 2. table 2 number of respondents with first child in category for 1982 living arrangement for child, 1982 category 2555 in r's household r. married: marcou; r. unmarried male: father; r. unmarried female:mother 405 with other parent r. female: father; r. male: mother 61 with other relatives othrel 4 in foster care nonrel 28 with adoptive parents nonrel 2 long term care institution nonrel 0 away at school nonrel 45 deceased 0 lives part-time with both parent othrel 0 lives part-time with r and other othrel 4 other othrel 0 child deleted to control for age, only those records for children exactly 14 years old were extracted. then, in order to make transition matrices from these data, the data were collapsed into five types of living arrangements for each sex: with both biological parents; with father; with mother; with other relatives; and with non-relatives. in order to obtain proportions representative of the entire u.s. population, the weights for the transition matrices reflected those measured for the respondents in 1979 (r0216100). occupational category the nlsy contains one variable (r0006900) giving the occupation code of the 1970 census for the longest job the respondent’s mother held in 1978 and a corresponding variable (r0008300) for the occupation code for the respondent’s father. other variables give the occupation of the respondent in 1994 and 2000. the occupation codes for up to five different jobs are given for each year. in addition, the principal occupation of the respondent’s most recent spouse is given (1979-1992, 1995). together with the sex of the respondent, these data make 19 journal for economic educators, vol. 8, no. 1, spring 2008 possible transition matrices between the occupation of a parent and the occupation of a child or child-in-law. in order to make transition matrices from the 440 occupation codes from the 1970 census, we first aggregated occupations into several broad classes: clerical, craftsmen, farm labor, farmers, laborers, managers and officials and proprietors, military, operatives, private household workers, professional and technical, sales, and services. we decided to focus only on the relationship between a parent’s occupation and that of same-sex children and children-in law. we therefore produced four sex-based transition matrices: fathers to sons; fathers to sonsin-law; mothers to daughters; mothers to daughters-in-law. keeping in mind that these data come from 1978, the two matrices based on the father’s occupation are likely to be the most illuminating. we again used the weights for the respondents in 1979 (r0216100), in order to obtain proportions representative of the entire u.s. population. the weights for each respondent were divided by the number of times they appeared in the data. occupational prestige we also used the occupational prestige scores developed by stevens and featherman (1981) for the 1970 census codes. each record was assigned its occupational prestige, and (using weights) the observations were divided into 11 quantiles. the table below shows the prestige range for each quantile, as well as the number of occupations in each and the percent of all observations in each. the quantiles were calculated for only two transition matrices—fathers to sons and fathers to sons-in-law—and the quantiles are slightly different for each of these since the observations are different for each of these. table c rank minimum score maximum score number of occupations percent fathers to sons 0 905 1,469 35 9.9 1 1,474 1,725 30 9.3 2 1,740 1,909 21 9.6 3 1,918 2,064 20 9.7 4 2,065 2,604 35 8.8 5 2,620 3,477 42 9.4 6 3,520 4,181 17 7.1 7 4,246 4,934 17 6.2 8 5,023 5,023 1 10.7 9 5,033 7,008 34 9.7 10 7,034 9,166 51 9.6 fathers to sons-in-law 0 905 1,501 42 9.8 1 1,508 1,746 29 9.9 2 1,750 1,950 24 9.0 3 1,959 2,078 18 9.8 4 2,091 2,604 37 9.4 5 2,620 3,438 39 10.0 6 3,461 4,181 21 7.4 7 4,246 4,964 19 6.5 8 5,023 5,023 1 10.9 9 5,033 7,307 42 9.9 10 7,364 9,166 50 7.6 highest grade completed the nlsy also contains variables giving the highest grade completed by the respondent’s mother (r0006500) and father (r0007900), as of 1979. other variables give the highest grade 20 journal for economic educators, vol. 8, no. 1, spring 2008 completed by the respondent (1979-1992). we make four sex-based transition matrices for the highest grade completed using the largest of the figures given for the respondent and the 1979 weights (r0216100). findings first, remember a few things about the framework: that the data for the parents’ principal occupation are coming from 1978, that the weight of each person is divided by the number of times s/he appears, and that the latest surveys of respondents’ spouses occurred in 1979-1992 and 1995, whereas the surveys of the respondents themselves occurred in 1994 and 2000. from the nlsy data we produce a set of fifteen of transition matrices for the four categories. these are found in the appendix. the transition matrices show the distribution of movement between the statuses of the respondents and their children in various descriptors of social mobility. to help digest this data, we generate the steady state matrices by raising the transition matrices to the 99 th power. remember the example of the dice-driven board game? when we multiply the transition matrix by itself, we are in effect doing the same thing as rolling the dice in a board game. at any given time in the game, the status of the next round depends on the status of the present round, the present round being the data that forms the transition matrices. the status of each subsequent round in the future, however, depends less and less on the status of the current round and more and more on the probabilities that determine how the game shifts from one round to the next. by the time the game has been run for 99 rounds (this is an arbitrary number chosen by the authors that is intended to be overkill), we assume that the state of the game depends completely on the probabilities of making each kind of transition, and not at all on the state of the game in the beginning. put differently, it means that the category of occupation of this generation’s children, the status of this round of the game, does not at all affect the category of occupation of this generation’s children’s children’s … children’s children. therefore, the rows of the steady state matrices are all equal, so for each category, we have transposed just one row from each of its matrices into a column of the steady state matrix. for example, the steady state matrix for family structure (table 1) has three columns, one for each transition matrix in that category. the steady state matrices represent a projection of the trends in the transition matrices. they are not predictions. they are instead matrices that project the state that would result if the trends of the present remain steady. essentially the steady state is the logical extreme of the hypothesis that the percentage of persons who make each transition in the transition matrix represent the probability of making that transition. the steady state also acts as a summary of the transition matrices by collapsing the data of each transition matrix into just one row. family structure from table i in the appendix, the reader can see that fewer than half of the male children were raised by couples. actually, there is a strong trend ( ≥ 38%) of males being raised by single mothers regardless of the family structure of the parents. females (table ii) are more likely than males to be raised by couples, although females also show a significant likelihood of being raised by a single mother. interestingly, the children of males raised by “others” were predominantly raised by relatives as opposed to couples or single mothers. other than this, the children of both sexes are predominantly raised by couples and single mothers. the trends in the transition matrices point toward most children being raised by either couples or single mothers. although once the data is collapsed into table 3, the almost mirror 21 journal for economic educators, vol. 8, no. 1, spring 2008 image reversal between the sexes of numbers for couples versus single mothers is more pronounced. steady state of family structure in percentages, rows are guardians, columns are sex table 3 guardian male female total couple 36.216 50.321 46.745 mother 51.295 33.590 38.000 father 6.036 8.090 7.498 relative 6.363 4.658 5.174 other 0.090 3.340 2.583 occupational category appendix tables iv through ix show some significant differences between career paths with regard to sex and marital status; however, age is a confounding variable. for example, we cannot tell just by looking whether the increased tendency of wives relative to unmarried daughters to hold clerical jobs is due to marital status or age at the time of this part of the survey. we speculate that the lower unemployment among married children is related more to marital status than age, considering that the married people are actually younger. categories of occupation that appear more prevalent in males include those of managers, officials, and proprietors, operatives, craftsman, and laborers. categories more prevalent in females include clerical, professional, technical, private household worker, and services. while unemployment is lower for married persons of either sex, unmarried males have the highest unemployment while married males have the lowest, as shown in table 4. steady state of occupational category of longest held job in percentages, rows are categories, columns are children table 4 father father mother mothers father mother occupation son daughter son daughter s*-in-law d*-in-law matrix matrix matrix matrix matrix matrix clerical 5.259 23.939 4.800 23.865 5.115 31.681 craftsman 18.316 1.576 17.169 2.025 23.024 1.566 farm labor 0.425 0.077 0.716 0.191 0.992 0.248 farmers 0.383 0.030 0.495 0.119 0.411 0.046 laborers 7.324 1.850 6.637 1.955 7.835 1.300 man, off, prop 16.160 13.579 16.933 13.881 11.676 8.404 military 0.140 0.004 0.221 0.000 4.721 0.697 operatives 12.415 4.531 12.975 3.951 17.158 3.947 private hhw 0.063 1.956 0.110 1.245 0.030 1.311 prof, tech 17.094 24.077 17.680 24.931 14.404 22.110 sales 4.860 4.794 4.711 4.435 5.393 6.885 services 8.366 14.982 8.063 14.683 6.529 14.949 other/none 9.193 8.604 9.489 8.719 2.712 6.857 *son-in-law, daughter-in-law 22 journal for economic educators, vol. 8, no. 1, spring 2008 occupational prestige tables x and xi in the appendix show the distribution of occupational prestige for sons and sons-in-law. a quick glance at the distribution of prestige for blood sons shows that they roughly equal their fathers; six of the table’s eleven modes fall along the diagonal. additionally, most of the double-digit percentages correspond to low-to-low or high-to-high transitions. it is interesting to note that low-to-low-and high-to-high transitions are also common in the prestige distribution of sons-in-law. this is despite the fact that the sons-in-law had not had as long to build their careers before being surveyed as had the blood sons. singling out the double-digit percentages will more visibly show that the middle class disproportionately transitions to low prestige levels in these data. although table 5 shows the bimodal distribution of prestige for blood sons, the prevalence of high-to-high transitions for sons-in-law is relatively muted compared to table xi. steady state of occupational prestige in percentages, rows are prestige level, columns are sons table 5 prestige blood in-law 0 10.162 13.373 1 9.362 13.023 2 10.169 11.026 3 7.507 7.543 4 7.708 9.490 5 6.374 7.825 6 6.300 6.030 7 8.704 8.717 8 12.389 7.672 9 10.982 8.887 10 10.343 6.414 highest grade completed tables xii through xv in the appendix show the distribution of highest grade completed for parent and child, male and female. there are some interesting trends in education in these data that are similar for all of the tables. the reader will notice a very prevalent triangle of zeros in each table that indicates the very low probability that any respondent would have attained less education than his/her parent. also there is an area of low probability in the upper right corner of every table that corresponds to the low probability of uneducated parents to produce extremely educated children. the most common educational attainments for these data are a high school degree or a bachelor’s degree. the reader can see that virtually every mode corresponds to children achieving either a high school diploma or a bachelor’s degree. as a group, daughters conform more strictly to this tendency. further, the mode for daughters switches from diploma to baccalaureate earlier than it does for sons. given the descriptions above, the summary that table 6 provides should not be surprising. the authors suggest that the reader look at the appendix directly, especially for this category, because of the large loss of detail between the transition matrices and the steady states. 23 journal for economic educators, vol. 8, no. 1, spring 2008 steady state of highest grade completed in percentages, rows are highest grade completed, columns are children table 6 father father mother mother grade son daughter son daughter matrix matrix matrix matrix null 0.000 0.000 0.000 0.000 0 th 0.000 0.000 0.000 0.000 1 st 0.000 0.000 0.000 0.000 2 nd 0.000 0.000 0.000 0.000 3 rd 0.000 0.000 0.000 0.000 4 th 0.001 0.000 0.002 0.000 5 th 0.010 0.008 0.012 0.009 6 th 0.006 0.004 0.006 0.004 7 th 0.184 0.200 0.209 0.071 8 th 0.692 0.626 0.678 0.319 9 th 1.764 0.994 1.672 0.675 10 th 3.104 2.507 2.991 2.038 11 th 4.770 3.329 3.999 1.870 12 th 32.088 28.611 27.199 18.813 13 th 9.172 8.863 7.089 9.463 14 th 9.641 11.052 8.174 11.533 15 th 4.898 6.873 6.192 7.314 16 th 19.212 21.786 20.929 28.599 17 th 4.335 6.973 5.727 7.217 18 th 4.507 4.585 6.502 6.531 19 th 2.553 2.017 3.367 2.832 20 th 3.063 1.569 5.254 2.711 conclusions the family structure of male respondents is further from the societal ideal of a nuclear family than that of female respondents, with more males raised by mothers than by couples. there are significant differences in occupational categories between married and unmarried children, although we cannot say whether occupation drives marriage or vice versa. the earlier survey of the spouses is a confounding factor, but certainly it would be surprising to find that having less time to develop one’s career improves the chances of holding a job. the unmarried children in the data tend to maintain approximately the same job prestige as their parents. the children’s spouses, who were surveyed earlier, tend to hold less prestige than the parents, especially when the parents have a medium level of prestige. the one-step matrices for education display several interesting patterns. children tend to slightly exceed the educational attainments of their parents. there is a pronounced pattern of children exactly attaining high school degrees until their parents have completed some college. the pattern is more consistent with females regardless of the parent. it tends to take more highly educated parents to produce a son with a baccalaureate compared to a daughter. even once the parents have enough education to make a bachelor’s degree the most likely outcome, a son will be less likely to get one than a daughter. this may tie in with the lower probability that sons are raised by couples. 21 journal for economic educators, vol. 8, no. 1, spring 2008 references ahlburg, d. 1998. “intergenerational transmission of health.” the american economic review, 88.2 (may): 265-70. blau, p. m., and o. dudley duncan. 1967. the american occupational structure. new york: john wiley and sons. bouchard, t. j., jr. 2004. “genetic influence on human psychological traits” current directions in psychological science. 13.4 (august): 148-151. bowles, s., h. gintis, and m. o. groves. 2005. unequal chances. new jersey: princeton university press. bowles, s., and h. gintis. 2002. “the inheritance of inequality.” the journal of economic perspectives, 16.3 (summer): 3-30. gaer, d. van de, e. schokkaert, and m. martinez. 2001. “three meanings of intergenerational mobility.” economica, new series. 68.272 (november): 519-37. hodge, r. w. 1966. “occupational mobility as a probability process.” demography, 3.1 (february): 19-34. jenks, c., s. barlett, m. corcoran, j. crouse, d. eaglesfield, et al. 1979. who gets ahead? the determinants of economic success in america. new york: basic books, inc.. mcfarland, d. d. 1970. “intergenerational social mobility as a markov process: including a time-stationary mark-ovian model that explains observed declines in mobility rates over time.” american sociological review. 35.3 (june): 463-76. restuccia, d., and c. urrutia. 2004. “intergenerational persistence of earnings: the role of early and college education.” the american economic review. 94.5 (december): 1354-78. stevens, g. and d. l. featherman. 1981. “a revised socioeconomic index of occupational status.” social science research. 10 (december): 364-95. zimmerman, david j. 1992. “regression toward mediocrity in economic stature.” the american economic review, 82.3 (june): 409-29. 22 journal for economic educators, vol. 8, no. 1, spring 2008 appendix family structure, rows are guardians, columns are children measured in percentages, with mode bolded for readability sex: male table i guardian couple mother father relative other couple 46.532 43.067 6.732 3.420 0.249 mother 32.445 52.516 7.010 8.030 0.000 father 35.484 64.516 0.000 0.000 0.000 relative 9.111 75.918 0.000 14.971 0.000 other 0.000 38.753 2.149 59.098 0.000 sex: female table ii guardian couple mother father relative other couple 59.719 27.062 8.823 2.001 2.395 mother 41.414 42.941 6.501 5.501 3.642 father 40.236 26.075 14.377 14.313 4.999 relative 34.193 52.503 4.655 4.128 4.522 other 45.234 29.739 2.582 13.569 8.876 sex: total table iii guardian couple mother father relative other couple 56.591 30.859 8.327 2.338 1.886 mother 39.218 45.286 6.626 6.120 2.750 father 39.085 35.388 10.894 10.846 3.788 relative 30.684 55.778 4.004 5.645 3.889 other 33.723 32.033 2.472 25.155 6.617 22 journal for economic educators, vol. 8, no. 1, spring 2008 occupational category, rows are fathers, columns are sons measured in percentages, with mode bolded for readability table iv occupation cleric craft farm l. farm labor man milit oprtv house prof, t sales servc null clerical 6.945 15.344 0.000 0.000 5.167 13.810 0.000 11.281 0.000 18.398 6.308 12.035 10.714 craftsman 5.748 23.990 0.309 0.531 8.268 14.362 0.020 14.549 0.000 12.041 3.581 7.072 9.529 farm labor 2.183 20.915 7.141 2.329 12.451 7.508 0.000 24.847 0.210 4.702 2.954 5.301 9.458 farmer 2.506 17.045 5.075 16.439 5.709 10.240 0.642 14.408 0.000 11.515 4.003 5.620 6.798 laborer 4.475 23.663 0.144 0.655 15.446 8.121 0.165 19.517 0.129 5.686 3.716 9.170 9.113 man, o, p* 3.371 15.552 0.620 0.116 4.923 22.656 0.143 9.128 0.165 23.070 8.492 4.823 6.940 military 2.474 23.307 1.016 0.000 5.892 15.859 0.000 15.568 0.000 14.608 3.728 10.335 7.213 operatives 4.577 21.667 0.481 0.107 8.588 13.288 0.244 16.419 0.000 10.078 2.981 12.598 8.972 household* 0.000 25.135 0.000 0.000 12.560 0.000 0.000 25.135 0.000 0.000 12.560 24.612 0.000 prof, t* 4.331 11.374 0.460 0.572 3.843 21.730 0.079 4.323 0.138 33.154 5.039 5.821 9.137 sales 10.485 18.443 0.000 0.000 3.336 19.962 0.095 8.798 0.000 17.878 8.436 4.018 8.549 services 7.708 16.962 0.060 0.080 9.484 11.460 0.479 16.012 0.000 11.161 3.529 14.111 8.955 null* 5.258 18.671 0.684 0.310 9.155 12.627 0.113 16.417 0.028 10.560 2.718 10.640 12.819 *managers, officials, and proprietors; private household workers; professional and technical; unemployed/data not available 23 journal for economic educators, vol. 8, no. 1, spring 2008 occupational category, rows are fathers, columns are daughters measured in percentages, with mode bolded for readability table v occupation cleric craft farm l. farm labor man milit oprtv house prof, t sales servc null clerical 29.317 1.859 0.000 0.000 1.914 14.712 0.000 5.199 2.064 16.539 5.761 18.052 4.582 craftsman 28.656 2.829 0.510 0.282 1.708 11.510 0.000 6.911 1.386 15.237 4.200 16.315 10.457 farm labor 29.249 1.354 3.723 0.000 3.535 7.668 0.000 12.188 1.771 7.474 5.562 17.758 9.717 farmer 21.128 2.184 0.000 1.704 1.696 12.804 0.000 1.900 0.845 31.193 1.109 14.059 11.377 laborer 29.301 2.148 0.000 1.058 3.730 9.913 0.137 10.118 1.611 11.026 2.472 20.294 8.192 man, o, p* 21.995 1.952 0.116 0.000 0.770 18.151 0.000 2.240 0.761 29.082 4.600 10.372 9.960 military 21.061 0.000 0.000 0.000 0.882 16.627 2.124 3.671 0.528 28.275 3.651 19.541 3.638 operatives 23.810 3.560 0.402 0.127 2.598 9.571 0.000 8.082 1.230 17.176 3.880 21.072 8.491 household* 21.945 0.000 0.000 0.000 0.000 0.000 0.000 0.000 35.968 0.000 10.524 31.563 0.000 prof, t* 16.832 0.608 0.000 0.000 1.572 14.479 0.000 1.626 1.371 39.031 5.163 8.441 10.877 sales 23.802 0.531 0.000 0.000 1.721 12.164 0.000 2.078 1.692 28.406 6.368 16.106 7.133 services 27.161 1.580 0.094 0.000 2.975 11.945 0.000 7.777 0.090 19.428 2.585 16.693 9.674 null* 24.869 2.442 0.209 0.000 1.903 10.739 0.012 7.598 1.415 14.648 4.137 20.027 12.001 *managers, officials, and proprietors; private household workers; professional and technical; unemployed/data not available 24 journal for economic educators, vol. 8, no. 1, spring 2008 occupational category, rows are mothers, columns are sons measured in percentages, with mode bolded for readability table vi occupation cleric craft farm l. farm labor man milit oprtv house prof, t sales servc null clerical 5.566 20.246 0.370 0.452 6.429 16.612 0.000 9.914 0.089 19.502 5.021 7.569 8.231 craftsman 5.686 17.798 0.000 0.000 7.269 14.851 0.310 14.073 0.000 11.541 5.694 12.240 10.540 farm labor 5.370 21.171 8.471 5.335 12.210 5.085 0.000 24.170 0.310 1.683 1.927 6.813 7.455 farmer 0.000 15.172 3.623 0.000 16.084 11.865 11.865 27.189 0.000 0.000 0.000 0.000 14.202 laborer 4.868 17.429 3.869 0.000 12.676 10.526 0.000 29.892 0.000 14.651 0.000 2.201 3.887 man, o, p* 3.467 15.082 1.243 0.406 3.666 24.192 0.000 5.637 0.597 23.758 4.068 6.735 11.148 military 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 50.000 50.000 0.000 0.000 operatives 5.149 24.108 0.208 1.247 9.372 11.941 0.000 17.462 0.000 11.307 2.977 5.916 10.312 household* 4.934 23.619 0.169 0.000 14.931 7.794 0.000 18.488 0.159 7.445 1.498 15.475 5.489 prof, t* 4.351 10.734 0.000 0.381 2.619 20.794 0.343 8.352 0.000 28.961 7.724 7.285 8.457 sales 6.006 16.394 0.414 0.264 5.622 21.244 0.566 9.466 0.000 18.005 5.328 8.409 8.282 services 4.777 19.804 0.334 0.748 9.518 12.340 0.105 16.048 0.000 11.582 3.099 11.891 9.754 null* 5.236 18.793 0.832 0.685 7.625 15.446 0.138 14.059 0.025 13.355 4.475 8.803 10.527 *managers, officials, and proprietors; private household workers; professional and technical; unemployed/data not available 25 journal for economic educators, vol. 8, no. 1, spring 2008 occupational category, rows are mothers, columns are daughters measured in percentages, with mode bolded for readability table vii occupation cleric craft farm l. farm labor man milit oprtv house prof, t sales servc null clerical 29.071 1.513 0.170 0.255 1.013 13.441 0.000 3.412 1.786 22.297 4.145 14.208 8.690 craftsman 27.646 2.104 0.000 2.014 1.056 14.952 0.000 4.320 3.257 17.400 2.841 12.963 11.447 farm labor 18.605 1.130 4.922 0.000 1.873 3.593 0.000 14.218 0.000 19.472 0.000 21.930 14.258 farmer 0.000 0.000 0.000 0.000 0.000 0.000 0.000 37.428 0.000 10.848 0.000 37.428 14.296 laborer 17.163 8.281 0.000 0.000 6.874 16.787 0.402 0.912 0.000 22.471 9.987 12.007 5.117 man, o, p* 22.028 2.095 0.000 0.000 4.113 16.908 0.000 2.766 1.623 23.080 4.682 14.832 7.874 military 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 operatives 26.024 3.497 0.000 0.000 2.220 10.947 0.000 12.510 1.713 14.599 3.239 15.839 9.413 household* 24.817 3.087 0.000 0.000 3.428 6.708 0.000 10.363 1.635 13.079 3.010 25.288 8.585 prof, t* 18.235 1.770 0.142 0.000 1.084 14.694 0.068 1.294 0.641 38.945 4.921 10.385 7.819 sales 22.024 1.732 0.082 0.000 1.419 16.804 0.480 1.633 2.692 19.988 4.867 19.474 8.804 services 27.579 1.845 0.508 0.000 2.346 11.990 0.000 6.860 0.428 17.222 3.590 18.545 9.086 null* 23.168 2.284 0.311 0.200 1.995 11.425 0.000 6.303 1.113 19.351 4.645 17.512 11.693 *managers, officials, and proprietors; private household workers; professional and technical; unemployed/data not available 26 journal for economic educators, vol. 8, no. 1, spring 2008 occupational category, rows are fathers, columns are sons-in-law measured in percentages, with mode bolded for readability table viii occupation cleric craft farm l. farm labor man milit oprtv house prof, t sales servc null clerical 4.815 23.422 0.000 0.000 6.627 16.011 3.440 15.175 0.000 13.318 3.494 11.506 2.193 craftsman 5.679 25.302 0.916 0.455 8.063 10.935 3.718 19.348 0.019 11.433 5.149 6.439 2.544 farm labor 2.353 25.502 10.812 0.459 16.275 1.716 1.686 23.216 0.000 7.304 1.590 6.273 2.815 farmer 3.573 23.868 7.410 5.400 5.351 6.940 0.946 15.100 0.000 11.133 6.827 10.579 2.874 laborer 5.751 23.659 1.135 0.134 11.257 7.464 3.740 22.923 0.060 11.613 2.845 6.104 3.315 man, o, p* 4.068 21.163 0.524 0.439 7.144 14.376 4.235 11.118 0.045 18.329 9.599 6.097 2.863 military 1.858 24.393 0.000 0.000 7.660 13.910 18.086 7.483 0.000 16.924 4.926 3.261 1.498 operatives 5.448 28.425 1.608 0.499 8.704 7.885 5.198 23.223 0.085 7.281 1.897 7.276 2.473 household* 0.000 19.717 0.000 0.000 7.158 14.311 6.282 39.433 0.000 0.000 0.000 6.282 6.817 prof, t* 5.306 15.202 0.870 0.806 4.996 15.021 3.253 12.313 0.000 25.622 8.006 5.367 3.238 sales 4.562 16.896 0.489 0.101 6.852 17.444 2.843 12.785 0.024 20.132 9.325 5.753 2.794 services 6.734 24.678 0.450 0.059 8.857 9.066 5.720 17.931 0.000 12.443 4.594 6.993 2.476 null* 4.629 21.299 1.325 0.261 7.938 11.796 5.097 20.545 0.000 10.526 4.705 8.037 3.843 *managers, officials, and proprietors; private household workers; professional and technical; unemployed/data not available 27 journal for economic educators, vol. 8, no. 1, spring 2008 occupational category, rows are mothers, columns are daughters-in-law measured in percentages, with mode bolded for readability table ix occupation cleric craft farm l. farm labor man milit oprtv house prof, t sales servc null clerical 37.914 1.138 0.268 0.083 1.396 7.926 0.266 2.885 1.315 21.463 5.530 12.956 6.859 craftsman 25.741 3.878 0.000 0.551 1.258 10.905 0.212 7.548 0.228 19.306 6.681 17.292 6.399 farm labor 17.484 4.340 1.314 0.000 1.041 1.120 0.000 13.534 3.039 6.697 2.837 41.336 7.259 farmer 33.069 0.000 0.000 0.000 0.000 3.313 0.000 8.494 9.063 8.494 0.000 26.051 11.515 laborer 20.871 1.535 0.000 0.000 4.274 8.100 3.495 9.910 2.434 3.256 12.013 28.523 5.590 man, o, p* 29.170 2.576 0.000 0.000 0.719 11.659 0.272 1.617 1.804 21.002 7.504 17.843 5.833 military 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 100.000 0.000 0.000 operatives 32.064 2.732 0.600 0.000 1.521 4.614 1.293 12.466 1.740 13.382 4.052 19.308 6.227 household* 36.868 0.457 0.419 0.071 1.590 6.924 0.248 7.196 2.180 8.286 7.200 18.485 10.077 prof, t* 23.787 1.133 0.073 0.000 1.077 10.638 1.152 1.140 0.967 34.581 6.806 11.807 6.839 sales 41.114 1.228 0.000 0.000 1.849 7.636 0.492 3.563 0.291 18.256 6.897 11.705 6.969 services 30.498 2.220 0.516 0.000 1.062 6.635 0.962 6.775 1.643 16.516 6.150 20.190 6.835 null* 30.434 1.708 0.544 0.148 1.665 7.149 0.792 7.528 1.738 17.082 5.603 16.776 8.833 *managers, officials, and proprietors; private household workers; professional and technical; unemployed/data not available 28 journal for economic educators, vol. 8, no. 1, spring 2008 occupational prestige, rows are fathers, columns are sons measured in percentages, with mode bolded for readability table x prestige 0 1 2 3 4 5 6 7 8 9 10 0 21.660 16.192 16.495 8.677 5.914 5.255 5.164 6.068 6.429 5.477 2.670 1 15.026 17.108 10.650 7.517 9.664 5.862 6.065 6.210 9.770 6.078 6.049 2 12.237 12.925 12.796 8.484 9.547 8.151 9.298 7.398 9.694 6.083 3.386 3 13.660 9.573 12.553 15.589 9.484 4.670 4.934 5.885 8.669 8.541 6.441 4 12.192 8.865 11.698 7.849 11.569 5.868 9.221 9.480 8.337 8.401 6.521 5 10.011 6.684 9.573 8.194 9.781 12.007 5.833 9.016 12.950 9.933 6.018 6 6.738 9.146 10.957 8.631 5.888 7.555 7.130 10.096 12.061 14.126 7.671 7 5.203 7.518 10.243 6.845 9.386 4.653 5.730 9.547 15.624 11.806 13.444 8 4.950 6.252 8.833 5.607 4.983 6.353 5.809 10.403 19.950 12.141 14.721 9 7.067 4.596 4.584 4.365 5.550 5.488 4.859 10.888 15.828 20.476 16.301 10 4.253 4.474 5.426 4.327 5.700 6.028 5.874 10.196 13.409 15.914 24.399 29 journal for economic educators, vol. 8, no. 1, spring 2008 occupational prestige, rows are fathers, columns are sons-in-law measured in percentages, with mode bolded for readability table xi prestige 0 1 2 3 4 5 6 7 8 9 10 0 21.916 13.682 14.551 7.450 10.950 5.939 6.277 6.201 4.205 5.673 3.155 1 17.472 18.363 11.751 5.588 11.296 9.218 6.363 5.810 6.145 5.429 2.565 2 15.466 20.221 14.350 8.332 10.451 9.066 4.256 4.684 6.553 4.005 2.616 3 12.808 10.100 10.241 12.460 11.920 7.005 8.083 8.013 5.676 9.017 4.676 4 10.190 14.205 12.640 8.319 11.219 7.761 5.856 7.901 9.138 8.088 4.683 5 9.835 12.032 11.377 8.758 10.711 8.725 5.397 8.518 7.815 10.407 6.426 6 13.411 13.673 10.745 5.871 8.307 8.533 5.081 10.847 8.532 9.644 5.356 7 9.982 6.630 8.526 8.354 6.122 7.148 8.198 13.754 8.497 10.669 12.120 8 11.879 10.996 9.743 7.943 6.545 8.957 5.441 10.463 9.200 10.674 8.158 9 8.990 8.544 6.343 6.299 6.923 6.993 4.987 11.331 12.668 13.808 13.116 10 5.771 8.038 6.286 3.650 6.989 6.801 6.597 14.526 9.238 18.091 14.013 30 journal for economic educators, vol. 8, no. 1, spring 2008 highest grade completed, rows are fathers, columns are sons measured in percentages, with mode bolded for readability table xii grade null 0th 1st 2nd 3rd 4th 5th 6th 7th 8th 9th null 0.000 0.000 0.103 0.000 0.048 0.059 0.480 0.405 1.237 5.268 7.200 0 th 0.000 0.000 0.000 0.000 0.767 3.945 0.000 2.048 0.000 5.014 10.297 1 st 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 7.915 21.427 0.000 2 nd 0.000 0.000 0.000 0.000 1.076 5.743 0.000 6.851 2.022 9.308 6.339 3 rd 0.000 0.000 0.000 0.000 0.000 0.000 1.403 2.312 4.057 11.417 7.913 4 th 0.000 0.000 0.000 0.000 0.883 0.483 0.799 0.850 4.995 6.777 13.187 5 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.997 5.328 13.316 6 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 1.017 2.518 8.317 8.390 7 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.845 2.538 7.535 8 th 0.000 0.000 0.000 0.000 0.000 0.080 0.063 0.000 0.850 6.326 5.546 9 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.111 1.793 2.144 5.065 10 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.141 1.105 4.618 4.939 11 th 0.000 0.000 0.000 0.000 0.000 0.000 0.073 0.000 0.441 0.697 2.849 12 th 0.000 0.000 0.000 0.000 0.000 0.000 0.019 0.000 0.244 0.792 2.194 13 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.266 2.303 14 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.110 0.273 1.814 15 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 2.520 0.328 16 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.963 17 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 18 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 19 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 20 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 1.298 31 journal for economic educators, vol. 8, no. 1, spring 2008 highest grade completed, rows are fathers, columns are sons measured in percentages, with mode bolded for readability table xiii (cont.) grade 10th 11th 12th 13th 14th 15th 16th 17th 18th 19th 20th null 11.284 13.565 36.336 7.844 5.639 2.484 4.489 0.864 1.068 0.718 0.909 0 th 5.338 10.968 36.107 9.445 5.525 5.248 2.246 2.490 0.000 0.564 0.000 1 st 5.077 20.254 14.579 20.050 10.698 0.000 0.000 0.000 0.000 0.000 0.000 2 nd 21.496 4.187 30.637 3.591 2.399 4.742 1.609 0.000 0.000 0.000 0.000 3 rd 9.595 10.144 35.193 8.440 1.365 3.834 2.365 0.000 0.882 0.000 1.080 4 th 8.481 15.480 28.528 2.768 5.396 0.676 7.919 1.304 0.000 1.473 0.000 5 th 14.864 6.961 39.906 3.423 5.737 4.090 1.560 2.427 0.000 0.561 0.829 6 th 7.686 11.267 33.909 3.310 5.439 1.107 8.906 0.200 1.928 2.712 3.295 7 th 14.040 18.022 40.248 3.849 4.037 1.060 4.316 1.719 0.000 0.000 1.791 8 th 7.145 9.892 42.103 6.227 5.803 4.329 7.016 2.296 1.152 0.170 1.002 9 th 7.389 12.760 49.798 6.894 6.258 2.589 3.731 0.565 0.904 0.000 0.000 10 th 6.444 13.828 39.897 8.787 7.408 4.641 4.405 0.525 0.862 0.724 1.675 11 th 7.034 8.921 50.023 9.104 6.428 2.103 10.478 0.974 0.000 0.000 0.875 12 th 4.545 6.607 46.939 10.097 8.094 3.199 11.464 2.136 1.845 1.074 0.751 13 th 4.108 3.738 27.590 12.250 11.396 6.795 17.466 3.035 6.461 2.198 2.392 14 th 2.773 3.280 26.935 10.041 11.181 5.633 24.302 3.791 4.950 2.744 2.173 15 th 0.433 4.315 24.326 14.988 16.611 6.140 18.410 8.501 2.921 0.000 0.507 16 th 0.923 2.222 18.890 8.937 12.432 5.148 30.583 6.649 5.261 5.953 2.040 17 th 0.000 1.749 19.416 4.686 8.877 7.923 21.314 12.355 14.607 4.292 4.782 18 th 1.322 1.109 10.891 1.763 7.228 7.240 36.474 5.335 12.165 5.757 10.715 19 th 0.000 0.000 25.575 0.609 0.651 5.586 19.514 6.200 7.470 1.090 33.306 20 th 0.000 1.450 7.124 6.914 9.652 9.170 32.175 9.312 8.767 3.323 10.816 32 journal for economic educators, vol. 8, no. 1, spring 2008 highest grade completed, rows are fathers, columns are daughters measured in percentages, with mode bolded for readability table xiv grade null 0th 1st 2nd 3rd 4th 5th 6th 7th 8th 9th null 0.000 0.000 0.144 0.000 0.061 0.310 0.363 0.444 2.958 3.385 6.265 0 th 0.000 0.000 0.000 0.000 3.568 2.104 0.000 6.362 3.350 5.941 9.581 1 st 0.000 0.000 0.000 0.000 0.000 4.769 0.000 3.149 0.000 3.868 4.915 2 nd 0.000 0.000 0.000 0.000 3.051 0.000 0.000 3.167 2.210 9.543 0.955 3 rd 0.000 0.000 0.000 0.000 0.465 0.000 0.917 1.848 0.464 5.131 12.315 4 th 0.000 0.000 0.000 0.000 1.449 0.000 0.000 0.655 8.836 5.030 4.763 5 th 0.000 0.000 0.000 0.000 0.000 0.000 1.059 1.359 1.785 1.361 4.588 6 th 0.000 0.000 0.000 0.301 0.208 0.000 0.726 0.452 0.620 4.892 7.492 7 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.466 0.000 6.129 3.256 8 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.093 0.615 2.374 5.619 9 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 1.148 1.587 6.373 10 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 1.123 2.030 4.127 11 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.073 0.406 1.880 3.419 12 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.498 0.509 1.542 13 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 1.502 0.680 14 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.783 0.253 15 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.222 0.548 16 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.463 17 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 1.280 0.000 18 th 0.000 0.000 0.000 0.000 0.000 0.000 0.180 0.000 0.000 0.000 0.000 19 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 20 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.213 33 journal for economic educators, vol. 8, no. 1, spring 2008 highest grade completed, rows are fathers, columns are daughters measured in percentages, with mode bolded for readability table xv (cont.) grade 10 th 11 th 12 th 13 th 14 th 15 th 16 th 17 th 18 th 19 th 20 th null 8.033 9.180 38.134 7.776 8.142 3.076 7.037 2.162 1.693 0.430 0.408 0 th 8.135 11.425 26.584 6.085 4.847 3.805 2.862 5.350 0.000 0.000 0.000 1 st 18.210 7.049 27.489 4.799 19.983 2.350 3.420 0.000 0.000 0.000 0.000 2 nd 8.563 3.919 48.248 4.996 9.809 0.881 3.373 0.000 1.285 0.000 0.000 3 rd 10.181 5.460 37.129 6.929 5.094 3.870 9.675 0.522 0.000 0.000 0.000 4 th 7.274 6.968 35.293 11.067 3.821 4.482 5.153 0.000 4.639 0.000 0.571 5 th 5.953 3.273 47.576 4.847 11.126 5.247 10.327 0.511 0.988 0.000 0.000 6 th 5.104 9.451 37.643 9.635 6.456 3.809 9.371 2.472 0.795 0.173 0.401 7 th 9.447 2.800 52.983 9.487 6.378 2.508 4.448 0.389 0.000 0.000 1.709 8 th 5.750 6.987 46.271 12.871 4.603 4.295 7.087 2.020 1.279 0.000 0.136 9 th 6.945 9.642 48.643 8.298 9.054 4.219 3.432 0.000 0.256 0.000 0.403 10 th 6.947 4.784 51.933 10.058 5.119 3.861 7.002 0.216 1.490 0.720 0.590 11 th 7.214 11.423 45.828 8.190 9.262 3.552 4.287 1.132 1.815 0.000 1.520 12 th 3.835 4.060 42.431 10.799 10.295 5.262 13.641 2.994 2.626 0.482 1.026 13 th 1.555 2.475 39.301 11.783 8.477 12.677 14.647 3.930 1.478 0.000 1.495 14 th 3.153 5.727 25.935 12.845 18.144 8.869 14.710 5.413 3.729 0.366 0.074 15 th 3.331 2.223 19.637 4.831 10.263 8.140 26.724 9.324 9.959 4.798 0.000 16 th 0.713 2.134 16.835 6.937 10.655 7.872 33.097 11.457 4.860 2.821 2.157 17 th 0.000 0.000 11.282 6.200 9.125 2.540 33.440 20.368 8.587 4.169 3.009 18 th 0.000 0.263 6.972 4.324 17.261 6.382 37.529 7.258 10.772 4.517 4.542 19 th 0.000 0.000 9.518 1.088 6.362 8.769 42.373 7.197 11.828 12.866 0.000 20 th 0.000 2.491 5.958 6.750 12.604 3.407 38.081 4.976 6.880 7.589 11.050 34 journal for economic educators, vol. 8, no. 1, spring 2008 highest grade completed, rows are mothers, columns are sons measured in percentages, with mode bolded for readability table xvi grade null 0 th 1 st 2 nd 3 rd 4 th 5 th 6 th 7 th 8 th 9 th null 0.000 0.000 0.177 0.000 0.174 0.102 0.460 0.558 1.229 6.277 10.190 0 th 0.000 0.000 0.000 0.000 1.044 1.926 0.000 2.849 2.246 5.511 5.521 1 st 0.000 0.000 0.000 0.000 0.000 9.901 0.000 0.000 0.000 9.346 12.091 2 nd 0.000 0.000 0.000 0.000 2.864 4.845 0.000 5.332 1.471 1.228 4.582 3 rd 0.000 0.000 0.000 0.000 0.000 2.864 2.428 3.035 1.806 2.311 5.071 4 th 0.000 0.000 0.000 0.000 0.000 0.000 2.937 2.673 2.233 7.978 8.868 5 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 3.073 5.209 4.478 6 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 2.004 0.280 8.413 8.681 7 th 0.000 0.000 0.000 0.000 0.000 0.980 0.000 0.307 6.629 10.129 9.897 8 th 0.000 0.000 0.000 0.000 0.000 0.000 0.102 0.000 1.670 7.139 6.135 9 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.748 5.685 9.330 10 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.062 2.117 5.229 5.374 11 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.076 1.138 2.378 4.775 12 th 0.000 0.000 0.000 0.000 0.000 0.000 0.041 0.000 0.106 0.760 1.955 13 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.473 0.000 2.021 14 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.953 15 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 1.525 16 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.255 0.851 17 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 1.317 18 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 19 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 20 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 35 journal for economic educators, vol. 8, no. 1, spring 2008 highest grade completed, rows are mothers, columns are sons measured in percentages, with mode bolded for readability table xvii (cont.) grade 10 th 11 th 12 th 13 th 14 th 15 th 16 th 17 th 18 th 19 th 20 th null 9.718 15.054 35.936 5.818 3.378 2.990 4.452 1.693 1.348 0.139 0.307 0 th 8.249 12.693 37.326 3.787 2.208 11.065 3.730 1.078 0.000 0.767 0.000 1 st 7.674 0.000 32.692 21.106 7.189 0.000 0.000 0.000 0.000 0.000 0.000 2 nd 8.979 13.643 41.278 6.466 9.312 0.000 0.000 0.000 0.000 0.000 0.000 3 rd 12.151 8.533 35.019 17.540 2.764 1.738 1.955 1.436 0.000 0.000 1.347 4 th 14.549 13.828 25.136 3.310 12.199 2.207 1.833 1.083 0.000 1.165 0.000 5 th 6.775 17.330 37.691 11.793 5.215 0.000 6.719 0.000 0.000 0.619 1.098 6 th 6.961 16.434 31.421 6.777 5.785 2.871 4.514 1.220 2.319 0.000 2.321 7 th 12.236 12.329 36.046 3.313 4.577 1.135 1.679 0.744 0.000 0.000 0.000 8 th 9.348 13.691 41.887 6.536 3.479 2.107 4.590 1.824 1.397 0.095 0.000 9 th 13.182 13.363 37.452 9.109 4.743 0.588 4.123 0.492 0.098 0.844 0.244 10 th 9.018 10.026 38.872 8.132 9.226 2.899 5.456 0.781 1.113 0.883 0.814 11 th 5.405 12.217 45.448 7.631 8.226 4.361 6.096 0.423 1.005 0.073 0.747 12 th 4.153 6.083 43.029 9.754 8.906 3.873 14.615 2.232 2.046 1.275 1.172 13 th 3.182 3.869 30.024 8.896 13.970 3.902 16.921 6.294 8.027 1.119 1.301 14 th 2.560 2.783 22.227 11.347 7.078 5.729 25.273 9.603 3.799 3.068 5.581 15 th 1.893 2.500 17.782 11.813 7.072 5.090 25.400 7.394 7.873 9.346 2.312 16 th 1.246 1.913 12.633 4.452 12.998 5.670 29.606 6.199 9.984 7.429 6.764 17 th 0.000 2.690 25.949 0.917 2.116 13.149 25.275 6.959 5.756 4.806 11.065 18 th 3.880 0.000 20.513 4.702 1.524 18.222 31.321 1.296 7.138 3.644 7.762 19 th 0.000 0.000 13.561 0.000 0.000 1.829 34.739 33.051 0.000 0.000 16.820 20 th 0.000 0.000 10.587 1.944 1.624 11.508 14.370 9.050 30.654 0.000 20.263 36 journal for economic educators, vol. 8, no. 1, spring 2008 highest grade completed, rows are mothers, columns are daughters measured in percentages, with mode bolded for readability table xviii grade null 0 th 1 st 2 nd 3 rd 4 th 5 th 6 th 7 th 8 th 9 th null 0.000 0.000 0.316 0.000 0.473 0.681 0.000 0.346 1.408 5.023 10.244 0 th 0.000 0.000 0.000 0.000 4.256 3.021 1.169 5.191 0.874 9.231 6.401 1 st 0.000 0.000 0.000 0.000 0.000 8.404 0.000 0.000 0.000 0.000 8.295 2 nd 0.000 0.000 0.000 0.000 1.938 0.000 2.206 3.049 10.590 8.305 8.053 3 rd 0.000 0.000 0.000 0.982 0.711 0.000 3.254 4.092 5.288 7.383 9.556 4 th 0.000 0.000 0.000 0.000 0.000 0.000 1.074 2.170 17.816 3.420 11.532 5 th 0.000 0.000 0.000 0.000 0.000 0.000 0.967 2.140 1.217 4.251 13.101 6 th 0.000 0.000 0.000 0.000 0.722 0.000 1.020 0.691 3.628 2.877 9.387 7 th 0.000 0.000 0.000 0.000 0.000 0.000 0.206 0.325 7.797 3.986 5.664 8 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.698 2.286 3.313 4.325 9 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.156 0.626 4.026 4.248 10 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.535 2.531 3.795 11 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.906 1.152 3.318 12 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.135 0.697 1.817 13 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.207 14 th 0.000 0.000 0.000 0.000 0.000 0.000 0.077 0.000 0.000 0.641 0.000 15 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 16 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.442 17 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 18 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 19 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 20 th 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 37 journal for economic educators, vol. 8, no. 1, spring 2008 highest grade completed, rows are mothers, columns are daughters measured in percentages, with mode bolded for readability table xix (cont.) grade 10 th 11 th 12 th 13 th 14 th 15 th 16 th 17 th 18 th 19 th 20 th null 5.881 8.572 37.023 4.939 7.568 3.498 7.532 4.444 0.949 0.158 0.945 0 th 8.377 5.759 22.773 8.848 12.774 4.593 4.612 0.782 1.339 0.000 0.000 1 st 23.113 7.372 38.565 0.000 11.051 3.200 0.000 0.000 0.000 0.000 0.000 2 nd 9.896 4.039 33.192 7.181 8.234 0.000 0.000 1.681 1.636 0.000 0.000 3 rd 6.855 5.434 27.800 8.044 6.505 1.625 10.835 1.635 0.000 0.000 0.000 4 th 12.861 6.713 32.783 4.492 1.832 2.267 2.342 0.699 0.000 0.000 0.000 5 th 9.182 14.771 33.203 5.101 7.266 2.572 6.228 0.000 0.000 0.000 0.000 6 th 7.561 10.466 35.554 10.379 6.520 2.888 3.661 2.699 1.043 0.000 0.905 7 th 4.244 3.190 50.609 8.287 8.592 3.882 2.895 0.000 0.325 0.000 0.000 8 th 8.063 9.492 47.590 7.487 4.467 2.254 7.455 1.282 0.411 0.277 0.600 9 th 12.113 8.561 45.156 9.128 6.343 5.107 2.789 0.137 0.514 0.000 1.096 10 th 11.018 5.943 50.207 8.046 7.606 3.743 5.303 0.254 0.475 0.379 0.167 11 th 6.613 9.813 52.249 8.352 5.890 2.120 8.093 0.775 0.591 0.000 0.127 12 th 2.405 4.620 40.832 10.912 10.105 5.367 14.301 3.931 3.138 0.689 1.050 13 th 3.197 2.553 18.451 17.971 15.958 12.152 18.286 6.166 4.163 0.793 0.104 14 th 2.408 2.274 16.668 9.063 16.120 8.900 26.006 7.291 4.809 2.539 3.205 15 th 3.334 0.000 20.515 1.457 15.143 8.458 36.176 1.733 10.825 0.614 1.743 16 th 0.963 0.350 8.971 8.299 11.279 7.325 35.466 9.884 7.207 6.744 3.069 17 th 0.369 0.000 4.443 3.138 11.077 14.774 32.390 16.311 8.351 3.444 5.703 18 th 0.000 0.000 7.348 3.848 12.065 2.870 37.608 12.613 11.315 1.589 10.745 19 th 0.000 0.000 3.484 0.000 0.000 0.000 69.262 0.000 27.254 0.000 0.000 20 th 0.000 0.000 0.000 47.742 0.480 0.000 49.038 2.739 0.000 0.000 0.000 chapter 5: international macroeconomics 23 journal for economic educators, 13(1), 2013 23 rules of thumb for balance of payments accounting1 benjamin atkinson 2 abstract balance of payments accounting can be confusing for students, because it is sometimes difficult to determine whether a certain transaction (e.g., a currency exchange) is a debit or a credit to a certain account. it is therefore the purpose of this paper to summarize the standard balance of payments concepts according to useful rules of thumb, which are intended to help students more easily determine how a given international transaction affects each balance of payment account. key words: balance of payments accounting, international economics, teaching jel classification: a22 introduction teaching balance of payments (bp) accounting can be quite challenging, as it can be difficult to explain to students how we know whether a certain international transaction results in a debit or a credit to one of the bp accounts. for example, when a monetary authority engages in a foreign exchange intervention, do we consider the currency exchange to be a purchase of a foreign currency or a sale of the domestic currency? with this problem in mind, the main contribution of this article is not in explaining the balance of payments concepts themselves, as they can be found in any standard international economics textbook (e.g., krugman, obstfeld, and melitz, 2012; salvatore, 2012; and sawyer and sprinkle, 2009). instead, the contribution is to summarize these concepts according to useful rules of thumb, which are intended to help students more easily determine how a given international transaction affects each balance of payment account. the article proceeds as follows: the next section summarizes the balance of payment concepts that are used to develop the aforementioned rules-of-thumb. then, the rules-of-thumb are summarized. i conclude with some numerical applications of these rules-of-thumb. balance of payments concepts the success (or failure) of monetary and fiscal policies in an open economy depends, in part on how these policies affect the accounts contained in the balance of payments (bp): a 1 i first wish to extend my gratitude to past students in my econ 2229 (international money and finance) class at mru, who provided helpful feedback to me during the past three years while i developed the rules of thumb presented in this paper. i am also grateful to an anonymous referee for valuable comments and suggestions for improvement to this paper. i remain solely responsible for any errors or omissions. 2 assistant professor of economics, department of policy studies, mount royal university, 4825 mount royal gate sw, calgary, alberta t3e 6k6. email: batkinson@mtroyal.ca. mailto:batkinson@mtroyal.ca 24 journal for economic educators, 13(1), 2013 24 summary statement of all transactions of the residents of a nation with the rest of the world during a particular period of time (usually a year). there are three types of transactions included in the bp accounts: trade of goods and services in world product markets trade of capital assets in world financial markets the international exchange of gifts furthermore, each type of transaction is included in one of two specific bp accounts: current account: includes trade of goods and services, as well as gifts capital and financial accounts: includes trade of capital and foreign exchange like accountants, the federal government keeps track of its balance of payments by essentially (but not literally) entering every transaction twice: once as a debit and once as a credit – a procedure known as “double-entry bookkeeping.” under this accounting procedure, every transaction has both a debit and a credit to balance, because there are typically two sides to every transaction: every dollar spent by one person must be a dollar in revenue for someone else. in particular, for the domestic economy a transaction involves a: bp credit when a payment is received from foreign businesses, governments or individuals by domestic businesses, governments, or individuals. bp debit when a payment is made to foreign businesses, governments or individuals by domestic businesses, governments, or individuals. therefore, whenever we need to classify a transaction as either a debit or a credit, we can ask ourselves the following question: are we making payments to foreigners or are they making the payments to us? let’s now examine each of the above three transactions in more detail, starting with trade in goods and services. this interaction is the most important part of the current account, and can be divided into two types of transactions: exports are domestically-produced goods and services that are sold abroad, and are bp credits because foreigners are paying us for our goods and services. imports are foreign-produced goods and services that are sold domestically, and are bp debits because we are paying foreigners for their goods and services. net exports (trade balance) equal exports minus imports, and we can say that we have: a trade surplus if net exports are positive a trade deficit if net exports are negative balanced trade if net exports are zero 25 journal for economic educators, 13(1), 2013 25 the second interaction included in the bp accounts involves trade of capital assets and foreign currencies. these transactions can be divided into two categories: capital outflows involve foreign assets being sold to domestic residents, and are represented by debits in the bp accounts; we are paying foreigners for their assets (i.e., payments for assets are flowing outward from domestics to foreigners). capital inflows involve domestic assets being sold to foreign residents, and are represented by credits in the bp accounts; foreigners are paying us for our assets (payments for assets are flowing inward from foreigners to domestics). flows of financial capital are reflected in the capital and financial accounts (hereafter just called the capital account) of the balance of payments. however, the income earned on these investments (e.g., debt payments and dividends) are included in the current account because money actually crosses borders, unlike the equipment and infrastructure that remain in a country. in other words, if a transaction involves something crossing international borders, then it is in the current account; if it remains in the original country so that only ownership changes hands, then it is in the capital account. just as the difference between exports and imports is net exports, net capital outflows are calculated as the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners. therefore, if a canadian resident buys stock in apple, the purchase increases canadian net capital outflow; on the other hand, if a japanese resident buys a canadian government bond, the purchase reduces canadian net capital outflow. note that capital flows can take two forms: foreign direct investment (fdi): investor actively manages investment foreign portfolio investment (fpi): investor only plays a passive role the final type of international interaction is known as a unilateral transfer (“gift”), such as government grants, pensions, charitable donations and foreign aid. this component of the bp accounts can also be divided into two types of transactions: when a domestic government, individual or firm gives a gift to a foreigner, it is a debit in the bp accounts because we are making payments to foreigners. when a domestic government, individual or firm receives a gift from a foreigner, it is a credit in the bp accounts because foreigners are making payments to us. note that such transfers involve international market transactions because currencies must be converted in foreign exchange (fx) markets. we also include unilateral transfers in the current account because the gift actually crosses international borders. finally, there is one more component of the bp accounts: a statistical discrepancy that 26 journal for economic educators, 13(1), 2013 26 exists because debits are unlikely to perfectly offset credits in practice (since we cannot literally account for every single transaction). fortunately, it is very small for countries such as canada and the united states. rules of thumb in summary, we can use the following rules of thumb to determine how an international transaction will affect the bp accounts: a) if no money ever crosses borders, then there is no effect on the bp accounts. b) if we export goods and services, then there must be: i) a credit in the current account (nx rises): sell domestic asset (goods and services) to a foreign individual, business or government. ii) a debit in the capital account (nco rises): buy foreign asset (currency) in exchange for domestic asset (currency) to complete the transaction. iii) all underlined words are changed to their opposite terms if we import goods and services instead of exporting them (i.e., we change “credit” to “debit”, “sell” to “buy”, “domestic” to “foreign”, “rise” to “fall”, etc.). c) if we purchase ownership in foreign companies (fdi or fpi) then there must be: i) a debit in the capital account (nco rises): buy foreign asset (business). ii) a credit in the capital account (nco falls): sell domestic asset (currency) in exchange for foreign asset (currency) to complete the transaction. iii) this transaction does not affect the current account (nx) at all, because goods and services do not cross borders. only ownership changes hands. iv) all underlined words are changed to their opposite terms if we instead sell ownership in domestic companies. d) with a foreign exchange intervention such that foreigners are sold more domestic currency by a domestic bank, then: i) there must be a debit in the domestic capital account (nco rises): buy foreign asset (currency) in exchange for domestic asset (currency); this fx is held in reserve (so they do not return to the foreign country). ii) the domestic currency sold will then turn into either a credit in the capital account (nco falls) if we sell domestic assets (companies) internationally, or a credit in the current account (nx rises) if we sell domestic goods and services internationally. iii) all underlined parts are changed to their opposite terms if domestics are sold more foreign currency by a foreign bank. e) if we give foreign aid to foreigners, then there must be: i) a debit in the current account (net unilateral transfers fall): give gifts to foreigners (analogous to making a payment to them). notice that the gift crosses international borders, so it is part of the current account. ii) a credit in the capital account (nco falls): sell domestic asset (currency) in exchange for foreign asset (currency) to complete the transaction. iii) all underlined words are changed to their opposite terms if we instead receive gifts from foreigners (i.e., change “give” to “receive”, “to” to “from”, etc.). 27 journal for economic educators, 13(1), 2013 27 conclusion and applications the purpose of this paper was to create some rules of thumb that can be used to teach students how a given transaction will affect the balance of payments accounts. the following applications are now offered to demonstrate how these rules of thumb can be used. applications: explain how each of the following transactions generates a credit and a debit in the canadian balance of payments accounts, specifically in terms of how it would affect net capital outflows (nco) and net exports (nx). all dollar amounts quoted are in terms of canadian dollars. a) china national offshore oil corporation (cnooc) acquires calgary-based nexen inc. for $15.1 billion. answer: first, there is a decrease in nco (credit in the capital account) of $15.1 billion because foreigners are paying us for our assets (in this case, ownership in nexen). we then need to find a corresponding debit, and since no goods or services are crossing the border, nx cannot change; there must be a debit in the capital account (a rise in nco) of $15.1 billion, which implies we need to buy foreign assets (so payments for assets are flowing outward). specifically, we will purchase chinese renminbi in exchange for 15.1 billion canadian dollars so that cnooc can pay for its ownership of cnooc in canadian dollars. since the canadian dollars do not ultimately leave canada, the renminbi is the currency that we use to determine whether the change in nco is a debit or a credit. notice that under the rules of double-entry bookkeeping, there is both a debit and a credit in the balance of payments accounts, and the value of the total debit ($15.1 billion) is necessarily identical to the value of the total credit. b) the canadian government carries out an official foreign exchange intervention in which it uses euros held in a german bank to buy 10 million canadian dollars from its citizens. answer: we are selling domestic currency to a foreign bank, so there will definitely be a credit in the canadian capital account of $10 million (nco falls): a foreigner (the german bank) is paying us for our assets (canadian dollars), using euros (so the payments are flowing inward). the number of euros received by canadians (which are equivalent to 10 million canadian dollars) will likely be spent in the eu, so we will likely purchase either eu goods and services (so nx falls, a debit in the current account); or eu companies (so nco rises, a debit in the capital account as payments are flowing outward). since the canadian dollars remain in a different country (because they are not given directly to citizens of any country), they are the reason for there being a credit in the canadian capital account. c) canadians donate $1 million to support new jersey victims of hurricane sandy. answer: no goods or services are being sold internationally, so nx cannot change. 28 journal for economic educators, 13(1), 2013 28 however, unilateral transfers are part of the current account; in this case, this transaction will be counted as a current account debit of $1 million because we are giving gifts to foreigners. this means we must also see a credit in the capital account of $1 million for the balance of payments accounts to balance (nco falls), and this happens with currency exchanges: we will sell one million canadian dollars in exchange for the equivalent in u.s. dollars. since the foreign currency (u.s. dollars) does not leave its home country in the end, while the canadian dollars remain outside canada, the canadian dollar is the key variable: there will be a credit in the capital account as we sell our domestic assets (canadian dollars) in exchange for foreign assets (u.s. currency); in other words, payments for assets are flowing inward. d) calgary transit purchases equipment from the u.s. for $20 million to build an lrt line that will go to mount royal university. answer: this time, the first transaction involves goods crossing the border. since a canadian company is buying equipment from the u.s., canadian imports rise meaning there is a debit in the current account (a fall in nx) of $20 million. next, these u.s. firms want to be paid in u.s. dollars so the canadian firm will sell 20 million canadian dollars in exchange for the equivalent in u.s. dollars. since canadian dollars leave the country and stay there while u.s. dollars remain in the u.s. in the end, this currency exchange leads to a credit in the capital account (a fall in nco); we are selling our assets to foreigners, and payments for assets are flowing inward. references krugman, paul r., maurice obstfeld and marc j. melitz. 2012. international economics: theory & policy. ninth edition. toronto: addison-wesley. salvatore, dominick. 2012. introduction to international economics. third edition. new jersey: john wiley & sons inc. sawyer, w. charles and richard l. sprinkle. 2009. international economics. third edition. upper saddle river, new jersey: pearson education inc. regression project 40 journal for economic educators, 10(1), summer 2010 undergraduate research public transportation ridership levels christopher r. swimmer and christopher c. klein1 abstract this article uses linear regression analysis to examine the determinants of public transportation ridership in over 100 u. s. cities in 2007. the primary determinant of ridership appears to be availability of public transportation service. in fact, the relationship is nearly one to one: a 1% increase in availability is associated with a 1% increase in ridership. the relative unimportance of price may be an indicator of the heavy subsidization of fares in most cities, leaving availability as the more effective policy tool to encourage use of public transport. key words: identification, public transportation, ridership. jel classifications: a22, c81, h42 introduction what makes one city more apt to use public transportation relative to another? this is an important issue that has been studied by others in various ways. glaeser et al. (2008), find that the availability of public transportation is a major explanatory factor in urban poverty. glaeser and shapiro find evidence that car cities, where a large percentage of people drive themselves to work, grew at the expense of public transportation cities as the percentage of cities’ population taking public transportation declined between 1980 and 2000. murray et al. (1998), conclude that the performance of a public transport system is determined largely by the proximity of public transport stops to the regional population. initially, the data were gathered for the top 136 metropolitan statistical areas in the u.s. using the raw number of unlinked trips on public transportation as the measure of ridership. due to the wide variation in population and ridership across cities, the per-capita unlinked trips were calculated for use as the dependent variable. missing values reduced the number of observations to 105. the regression analysis utilizes the process of backwards selection by eliminating a single variable per regression based on the highest p-value that is attained. this process will continue until each coefficient’s p-value is less than .10. first, however, park’s test for heteroscedasticity is performed. after the backwards selection, an f-test is performed to confirm the appropriateness of the resulting equation. 1 mr. swimmer, as an undergraduate economics major at middle tennessee state university, prepared the initial draft of this paper for an econometrics class taught by dr.klein in the economics and finance department at middle tennessee state university during the spring semester 2009. christopher c. klein is associate professor, economics and finance department, middle tennessee state university, murfreesboro, tn. cklein@mtsu.edu. 41 journal for economic educators, 10(1), summer 2010 data and variables eleven independent explanatory variables were chosen as described below.  metropolitan density: density in this analysis will be defined as the population divided by the metropolitan area. the reasoning for selecting this is that public transportation is more efficient in areas of higher density. the coefficient should be positive in value.  metropolitan area: the metropolitan statistical area is generally characterized as the official area of an incorporated city along with its immediate sphere of economic influence. there are two opposing theories for this variable. the first is that a larger area makes public transportation less efficient for those riding. the second is that a larger area simply implies greater economic activity.  average distance: average distance is the typical number of miles traveled using public transportation. the theory is that a person who expects a longer trip will be less likely to endure the apparent inconvenience of using public transit. the coefficient should be negative.  service availability: service availability is the maximum availability of transit cars in each metropolitan area. as in glaeser (2008), this variable measures the convenience of public transportation. its coefficient is expected to be positive.  gas price index: the gas price index is indexed relative to the national average to account for the volatility of gas prices. the gas price index will serve as the price of an input to a substitute mode of transportation, the private automobile. the coefficient is expected to be positive.  commute time: commute time is defined as the average time in minutes one spends traveling from home to work in a particular metropolitan area. the theory is that a higher commute time implies a higher density of traffic, meaning people will be inclined to drive less. this would give the coefficient a positive sign.  poverty rate: the poverty rate is the percentage of inhabitants living below the poverty line calculated by the us census bureau. if automobiles are considered luxury goods, then impoverished people will use them less and use public transport more.  median income: the theory is that public transport is an inferior good, such that people consume less as their incomes increase. the coefficient should be negative.  firms per capita: firms per capita is the number of all registered firms within the official city area divided by the population. the theory is that if a city has a higher density of firms within its city limits, more people will be drawn into the city for work and leisure. therefore, it is expected that if the firms per capita increases, so will the ridership level.  educational attainment: educational attainment is the percentage of residents holding a bachelor’s degree or higher. the theory here is that people with higher educational attainment have greater choice, and those with choice will opt out of using public transportation. in this case the coefficient would be negative.  rail service: this will be used through a dummy variable with “1” indicating the availability of rail service in the city. the coefficient of this is expected to be positive. if data were absent then the entirety of the corresponding observation was removed. this resulted in the deletion of 31 rows, leaving a total of 105. first results summary statistics and the results of the first regression are reported below: 42 journal for economic educators, 10(1), summer 2010 variable mean variation variance std. dev. upper lower ridership rate 25.3441 90673.0079 871.8558 29.52721 199.83 2.74 distance per trip 4.65919 205.206403 1.973138 1.40468 12.60 1.84 metropolitan area 4088.316 2853755053 27439952 5238.31580 39370.3 395.8 metro. density 365.6871 13235200.1 127261.5 356.73735 2361.37 33.38 median income 35888.49 5252235907 50502268 7106.49480 $66,384 $23,483 commute time 22.43973 1938.40236 18.63848 4.31723 43.9 16.6 poverty rate 0.178567 0.29388052 0.002826 0.05316 30.6% 7.3% bachelor's rate 0.253778 0.68076697 0.006546 0.08091 48.2% 8.6% firms per person 0.037509 0.04933903 0.000474 0.02178 0.10749 0.00784 gas price index 1.001302 0.59431081 0.005715 0.07559 1.239561587 0.893528 service availability 0.000501 1.1647e-05 1.12e-07 0.00033 0.00177 0.00009 this regression as a whole is extremely significant under the f-test and most of the coefficients are significantly different from zero under the t-tests. the adjusted r-square for the model is reasonably high at almost 0.72. the park test (gujarati, 2006; 402), however, indicated that the regression residuals are heteroscedastic.2 2 the natural logs of the squared residuals from the first regression are regressed against the predicted values of ridership. a significant slope coefficient (in this case, a p-value of less than 0.01) indicates heteroscedasticity. heteroscedasticity biases the standard errors and makes the t-tests, f-test, and r-squared unreliable. 43 journal for economic educators, 10(1), summer 2010 to address the heteroscedasticity, the variables were converted to natural logarithms. the park test on the residuals of the log-linear form of the first regression could not reject the null hypothesis of no heteroscedasticity (p-value of .993). consequently, the backwards selection was performed on the log-linear equation producing the following result: somewhat surprisingly, the adjusted r-square in this log-linear regression is higher at 0.82 than the 0.72 of the original linear regression.3 the model obtained from this regression analysis is: ln(ridership) = 6.434 + 0.214*ln(density) + 0.340*ln(area) 0.650*ln(distance) + 1.094*ln(availability) + 0.631*ln(commute) further analysis a referee suggested that the price of public transportation had been left out and should be included. data on fare revenue per unlinked trip were available for 102 of the cities. including the natural logarithm of this price variable (lnp) among the explanatory variables produced the following result: regression statistics r square 0.865596696 adj. r square 0.849169625 standard error 0.358347148 observations 102 3 an f-test comparing the log-linear version of the first regression to that reported here resulted in an f statistic of 0.727, which is not significant at the 0.10 level. 44 journal for economic educators, 10(1), summer 2010 f significance f regression 52.69330857 2.18186e-34 coefficients standard error t stat p-value intercept -3.26071421 4.808313864 -0.67814088 0.499422224 lnp 0.139746246 0.082260825 1.698818916 0.092807818 lnavail 0.964385568 0.07966288 12.10583357 1.37723e-20 lndist -0.60584290 0.149233404 -4.05970036 0.000104612 lndensty -0.07895075 0.066377366 -1.18942281 0.237401828 lninc 1.213959462 0.520481941 2.33237576 0.02191162 lnttime -0.10834237 0.412516569 -0.26263763 0.793430151 lnpov 0.896332121 0.268601936 3.337027776 0.001232307 lnbach 0.019760397 0.155307994 0.127233614 0.899039345 lnfperc 0.708435222 0.142184294 4.982513897 3.01763e-06 lngasp 1.179287777 0.592875657 1.98909799 0.049727071 lnfirms -0.63472259 0.117240165 -5.41386641 5.07501e-07 although this increased the adjusted r square, the price variable is positive and significant. this is a classic indicator of an identification problem: the price variable has the wrong sign – it should be negative in a demand equation – suggesting that the regression fails to identify the demand equation for public transportation. the remedy is to perform a two-stage least squares (2sls) regression. to do so requires an instrument for the first stage price equation that does not appear in the second stage ridership equation. since lndensity is not significant above, it is deleted from the ridership equation and used as an instrument for the price equation. this makes sense as an instrument, because costs of providing trips should rise as density falls – vehicles must travel farther to pick up the same number of riders. the 2sls procedure performed in sas produced an adjusted r square of 0.7904 and the coefficient estimates shown below: parameter estimate std err t value pr > |t| int -7.48035 5.8315 -1.28 0.2028 lnp -0.3605 0.4563 -0.79 0.4315 lnavail 1.00824 0.0989 10.20 <.0001 lndist -0.53142 0.2017 -2.63 0.0099 lninc 1.479599 0.5278 2.80 0.0062 lnpov 0.805217 0.2820 2.86 0.0053 lnfperc 0.621974 0.1987 3.13 0.0023 lnfirms -0.67034 0.1198 -5.59 <.0001 lngasp 2.179802 1.0459 2.08 0.0399 45 journal for economic educators, 10(1), summer 2010 the 2sls results yield a correct negative sign for lnp, but it is not significant. of the variables that were initially significant in our first analysis without the price variable, only lnavailability and lndistance remain, but display the expected signs. interestingly, the income variables (lninc, lnpov) are now significant with positive signs, suggesting that public transportation is a normal good, but that this effect may be more pronounced at low income levels. the log of the gas price index and the log of the number of firms per capita are also positive as expected. conclusion the first results seemed fairly successful. the insignificant variables were poverty rate, bachelor’s degree rate, median income, gas price index, rail availability, and firms per capita, while the independent variables that turned out to be significant were metropolitan density, metropolitan area, average distance traveled, average commute time, and service availability. the significant variables had the correct signs. the addition of price as an explanatory variable, however, changed many of these results. initial results here indicated an identification problem and a two-stage least squares procedure was performed in response. the 2sls results confirmed ridership’s positive relationship to availability and its negative relationship to distance traveled, but the other relations in the first results were overturned. the income variables became positive and significant, as one would expect in a demand equation. gasoline prices and firms per capita also became positive and significant, as was expected. the price variable’s coefficient was negative, as one would expect in a demand equation, but it was not significant. this seeming unimportance of price may be due to the already heavy subsidization of fares with tax revenues in most cities. overall, if one is interested in encouraging ridership of public transportation, the results suggest that availability trumps price as a policy variable. in the log-linear form, a 1% change in the independent variable causes a 1% change times the coefficient in the dependent variable. the coefficient on the log of availability is approximately 1 in all of these results: an increase, say, of 10% in availability would be expected to increase ridership by 10%. the research possibilities on this topic certainly have not yet been exhausted. tourism data could be included in the regression analysis to reflect those who visit a city and have little choice but to use public transportation while on vacation or business. the number of automobiles per capita and transportation expenditures also may correlate with the public transportation ridership level. references american public transportation association. 2009. "2008 annual report." accessed 20 mar. 2009 <http://www.apta.com/about/annual_report_08.cfm>. american public transportation association. 2008. 2008 public transportation fact book. june. glaeser, edward l., matthew e. kahn, and jordan rappaport. 2008. “why do the poor live in cities? the role of public transportation.” journal of urban economics, 63, 1-24. 46 journal for economic educators, 10(1), summer 2010 glaeser, edward l. and jesse m. shapiro. 2003. “urban growth in the 1990s: is city living back?” journal of regional science, 43(1), 139-165. gujarati, damodar n. 2006. essentials of econometrics. 3rd ed., boston: mcgrawhill/irwin. murray, alan t., rex davis, robert j. stimson, and luis ferreira. 1998. “public transportation access.” transportation research, 3(5), 319-328. u.s. census bureau. 2006. statistics about metropolitan areas. accessed 15 mar. 2009 <http://www.census.gov/epcd/www/metros.htm>. u.s. department of transportation, bureau of transportation statistics. 2002. national household travel survey. washington, dc. indifference curve analysis: the good, the bad and the ugly 7 | journal for economic educators, 12(1), 2012 7 indifference curve analysis: beyond simplifying assumptions 1 walter e. block 2 and josé antonio manuel aguirre sotelo 3 abstract this article presents the proper analysis of indifference curve systems once some of the simplifying assumptions used to teach beginning students are relaxed. first, the diminishing mrs assumption is relaxed to allow the existence of concave 4 indifference curves. then the more-is-better assumption is relaxed. this reveals a potential source of confusion for students: usually one can find the optimum of a system by choosing the point where the budget line touches the most northeastern indifference curve, but once the more-is-better assumption is relaxed, the preference order of the indifference curves becomes the main criterion – not geographical location. once both assumptions are removed, we study the case where too much of a good thing can become a bad thing – that is, where the consumer can encounter satiation. key words: indifference curve, convex, concave, budget line jel classification: b40 introduction several simplifying assumptions are typically made when introducing students to indifference curve analysis,. these assumptions, although useful, give students only a partial view of the whole edifice of indifference curves. we focus on the proper analysis of indifference curve systems once some of these assumptions have been relaxed. the assumption of diminishing marginal rates of substitution (mrs) is withdrawn first to arrive at concave indifference curves. then, the more-is-better assumption is relaxed to arrive at the case where the goods become bads in all or part of the indifference curve system. after parting with these assumptions, we present some of the consequences for the analysis of indifference curves. in the following section, we set out what we believe is the correct indifference curve analysis. we conclude in the third section. indifference curve analysis the ordinary downward sloping, convex-to-the-origin 5 indifference curve (our diagram 1) is only one small part of the indifference curve edifice. for this case, we make the artificial assumptions that more of a good is always preferred to less and that both goods in the two dimensional version of this diagram are subject to diminishing mrs. when a budget line is 1 we thank a particularly industrious referee of this journal for comments made on an earlier version of this paper. we of course, alone, are responsible for all remaining errors and infelicities. 2 harold e. wirth eminent scholar endowed chair and professor of economics, joseph a. butt, s.j. college of business, loyola university new orleans,(504) 864-7934, wblock@loyno.edu. 3 jaguirre@uno.edu, jaguirre@vt.edu 4 concave to the origin. 5 or, for short, convex indifference curves. mailto:wblock@loyno.edu mailto:jaguirre@uno.edu 8 | journal for economic educators, 12(1), 2012 8 added, we arrive at diagram 2. in this diagram, the optimum is b, because at this point the budget line is tangent to the most preferable indifference curve it can reach. diagram 1: convex indifference curves diagram 2: convex indifference curves with budget line when we relax the assumption that both goods are subject to diminishing mrs, we can conceive a concave indifference curve system that looks like diagram 3. diagram 3: concave indifference curves in this case, the consumer shows increasing mrs. that is, the more of x he has, the more he values an additional unit of x. many intermediate micro texts show diagrams similar to landsburg’s (2011, 59, ex. 3.10), repeated in our diagram 4, where we label the indifference curves. since we are still holding the more-is-better assumption, we know that i1<i2<i3<i4. since i4 is the most preferred indifference curve, the utility maximizing point occurs at one of the axes, where the budget line intersects i4 (point a), and there is no tangency between the budget line and an indifference curve at this point. this situation is widely known as the corner solution. before we relax the second simplifying assumption, we want to point out a potentially confusing result for students. so far, in both convex and concave indifference curve systems, the optimum occurs where the budget line meets the highest indifference curve, (i2 in diagram 2, and i4 in diagram 4). as we show below, it is erroneous to assume that the optimum always occurs where the budget line touches the highest indifference curve geographically. to exemplify this potential confusion, we will show two cases of utility functions that yield indifference curve systems like the one on diagram 4, yet have different optimums. y x y x i1 i2 i3 a b y x 9 | journal for economic educators, 12(1), 2012 9 diagram 4: consumer choice with non-convex indifference curves the first case is: , where a and b are positive constants. in this case, the system satisfies the condition that i1<i2<i3<i4, and the corner solution is correct. if we relax the more-is-better assumption, we can consider the case of garbage goods, or “bads,” which leads us to the second utility function: . in this case, the indifference curve system looks exactly like the one for u1, except that the ordering condition for the indifference curves is reversed. that is, i1>i2>i3>i4. the optimum occurs where the budget line is tangent to i1 (point o in diagram 4). in this case, point a (the corner solution) is a utility minimizing point. the purpose of these examples is to show that using a geographical location criterion for selecting an optimum is not strong enough. in fact, the optimum point cannot be determined when the ordering condition of the indifference curves is unknown. now that we have relaxed these simplifying assumptions, we are able to study the case where too much of a good thing can become a bad thing. not only is marginal utility diminishing, it can also become negative; then, a good becomes a bad, or trash, or a garbage good. when these cases are incorporated into the analysis, we arrive at diagram 5 in which a family of seven circular indifference curves is depicted. we drew circular indifference curves for simplicity, but the main idea here is that a family of indifference curves is nothing else than a contour map of the two-variable utility function. diagram 5 represents the case where too much of a good thing becomes a bad thing. the indifference curves are labeled in order of decreasing desirability. that is, i7>i6>i5>i4>i3>i2>i1; location on i1 is the least preferred position. an important element shown in this diagram is that of satiation. if the consumer is located on i7, he cannot become more satisfied by changing his consumption. x non-convex indifference curves always lead to a corner solution. the consumer pictured here will choose point a, which is on the highest indifference curve. a y b c o d e i1 i2 i3 i4 10 | journal for economic educators, 12(1), 2012 10 diagram 5: family of circular indifference curves in diagram 6 we illustrate the tangency points between the budget line and the indifference curves for the “ordinary” part of the indifference map. the only departure from normal practice is that we show these tangency points for the entire, circular indifference curve set, 6 not just the downward sloping convex part. diagram 6: family of indifference curves with budget lines this leads us to our diagram 7, the high point of our entire analysis. we again employ a family of circular indifference curves. this time, however, the budget line is tangent to indifference curve i6 at point a and intersects indifference curve i1 at point b. which point is preferred by the consumer? clearly, a>b, since a lies on indifference curve i6, b lies on i1, and i6>i1. to be sure, one can easily err, here. one might think that i1 is preferred to i6, because part of i1 lies higher that i6 geographically (up and to the right of all of i6), but this would be a grave error. the closer to the satiation point, the more preferable the indifference curve and i6 is closer to this point, i7, than is any part of i1. 6 some of the few texts that utilize circular indifference curve families are varian, 2006. p. 43, figure 3.7; boulding, 1966, 605, figure 136; mathis and koscianski, 2002, p. 60, figure 3.13; vickrey, 1964, p. 37, figure 6 and mccloskey, 1982, p. 27, figure 2.2. this is greatly to their credit, as most texts do not offer this crucially important aspect of indifference curves. y x i1 i2 i3 i4 i5 i6 i7 7 6 5 4 3 2 1 i v iv ii iii a x i1 i2 i3 i4 i5 i6 i7 11 | journal for economic educators, 12(1), 2012 11 let us look at this indifference curve set as if it were a three dimensional contour map, with i7 as the very tip top of the mountain. when viewed from this perspective, i6 is the next highest ridge on this mountain, and i1 is at the very bottom of the hill, at ground level. diagram 7: tangency with the budget line we have claimed that a is preferable to b since i6>i1. but what point will the consumer choose? if the consumer is constrained to spend his entire budget on goods x and y, then he will choose point a. alternatively, if the consumer is allowed to save (or destroy) part of his budget, then he will surely position himself on the very top of the mountain at i7. at i7 the consumer faces a state of satiation – additional quantities of both x and y have now become garbage such that any additional consumption decreases utility. conclusion the diminishing mrs and more-is-better assumptions are useful to introduce students to indifference curves without overwhelming them with details. relaxing these assumptions, however, allows a richer analysis and understanding of the subject. relaxing the diminishing mrs assumption makes it possible to study a concave indifference curve, where the optimum is given by the corner solution. if, in addition, the more-is-better assumption is also relaxed, the corner solution does not necessarily apply. in this case, using a geographical location criterion for selecting an optimum (selecting the point where the budget line meets the most northeastern indifference curve) is not accurate, because the preference ordering of the indifference curves must be considered. withdrawing these assumptions allows us to study the case where too much of a good thing becomes a bad thing. in this case, we find circular families of indifference curves. their treatment is similar to the traditional indifference curves in that the optimum lies on the most preferable indifference curve within the budget constraint. in contrast to the traditional analysis, however, this may not be a point on the budget line. when satiation is present, the optimum can be a point below the budget line. references boulding, kenneth e. 1955. economic analysis, vol i. microeconomics. 4 th ed., new york: harper & row. landsburg, steven e. 2011. price theory and applications. 8 th ed. south-western, cengage learning. y x i1 i2 i3 i4 i5 i6 i7 a b 12 | journal for economic educators, 12(1), 2012 12 mathis, stephen a. and janet koscianski. 2002. microeconomic theory: an integrated approach. upper saddle river, n.j.: prentice hall. mccloskey, donald n. 1982. the applied theory of price. new york: macmillan. varian, hal r. 2006. intermediate microeconomics: a modern approach. 7 th ed. new york: w.w. norton. survey results 60 journal for economic educators, 8(2), fall 2008 60 the use of prs in introductory microeconomics: some evidence on performance and attendance christopher n. annala, shuo chen, daniel r. strang 1 abstract this paper uses a sample of 425 students from 4 large sections of introductory microeconomics during the period 2005 – 2007 to examine the impact of using the personal response system (prs or clickers) on class attendance and exam performance. the evidence suggests that the use of prs has led to improved attendance. the exam scores are similar to classes that used online quizzes instead of the prs. a survey of student attitudes towards the prs indicates that the use of prs helps with student learning and reinforcing important concepts. based on the results of this study the authors believe that the prs is a useful tool for all instructors, particularly those faced with large sections. introduction this paper studies the use of the personal response system (prs or clickers) in large sections of introductory microeconomics. the use of prs is another in a long line of innovations in the delivery of content and the assessment of student learning. the prs is a logical extension of the technology available in many classrooms and lecture halls, including projection systems and computers. the prs also presents the opportunity for real time assessment; the instructor can monitor student learning at any point in a lecture or class discussion. this ―instant feedback‖ enables the instructor to provide additional coverage of topics that appear to give students difficulty. in this paper we examine evidence on prs in two important areas: attendance and performance. in addition to straightforward quantitative measures, we also present the results of an attitudinal survey that was administered to better understand the impact of prs on students. the results indicate that the use of prs has had two important impacts. first, the use of prs has led to improved attendance. second, through the survey, students indicated that the use of prs helped them to focus on material they found difficult to reinforce important concepts. based on these results we believe that the prs is a useful tool in the toolbox of all instructors, particularly those faced with large sections. it helps to force the students to attend class and it removes, to some degree, the anonymity some students feel in large lectures. literature review there has been a growing use of technology in economic pedagogy in the past 10 years. a key issue is the effect of technology on student performance. sosin, et al (2004) use the post and pre-course scores on the test of understanding college economics (tuce) to compare the effects of different technologies including powerpoint, email, courseware, and web browsing. they find that using extensive technology in class leads to a small, but significant, improvement 1 christopher n. annala, associate professor of economics, suny geneseo; shuo chen, assistant professor of economics, suny geneseo; daniel r. strang, professor of economics, suny geneseo. 61 journal for economic educators, 8(2), fall 2008 61 in student performance. interestingly, they find that individual technologies have different effects. for example, powerpoint has a negative effect on student performance, courseware has a positive effect only in macro courses, and e-mailing materials has a positive effect only in micro courses. agarwal and day (1998) use both tuce scores and final grades to analyze the impact of internet tools, such as email, class mailing list discussion, and web pages on economic education. they find a positive correlation between use of internet tools and exam grades. manning (1996) reports that e-mail improved students’ communication with the instructor and with other students in her economics classes. as goffe and sosin (2005) point out, there is a trend toward using more technological innovations in economic teaching. the personal response system (prs) is one of the new technologies. a number of instructors report that the prs enhances teaching and learning experiences (e.g., wood, 2004; briggs, 2006; elliott, 2003). the existing literature reports that using the prs enhances student-instructor interaction and student concentration in class. siegel (2004) also reports that using a technology similar to the prs in an undergraduate architectural engineering class increases class attendance, when 5 percent of the final grade is associated with student participation. hoffman and goodwin (2006) employ a prs in teaching library literacy at texas a & m university, finding that the clickers make the classroom more interactive and learner-centered. several studies find a correlation between attendance and learning in undergraduate economic education. romer (1993) finds a correlation between attendance and performance after controlling for gpa. earlier studies report similar results (e.g. schmidt, 1983; park and kerr, 1990). romer (1993) also points out that attendance is not exogenous and so the effects of omitted variables cannot be singled out. two recent studies (cohn and johnson, 2006; stanca, 2006) present evidence that attendance has a significant effect on learning after controlling for an array of variables that reflect student heterogeneity in demographics, ability, effort, and motivation. marburger (2006) experiments with enforcing a mandatory attendance policy and finds significantly reduced absenteeism and improved exam performance. hence, if using the prs effectively increases attendance, it should be expected to increase exam performance. although there are a number of descriptive studies on using the prs, there are few quantitative analyses of the impact of using the prs on student performance. two recent studies have sought to provide a detailed quantitative analysis of the link between prs and performance. first, ball et al (2005) study a wireless interactive teaching system (wits) used in principles of economics classes. using the system significantly increased final grades compared to a control class. further, women and freshmen realized the largest improvement from using the system. in ball, et al (2005), however, the students use the handheld device only when acting as economic agents in classroom games. it is not surprising that students get a better understanding of the games by participating in the games instead of just reading the game results. we add to this evidence by collecting data on a prs used as a formal tool of assessment. we then estimate a regression equation to study the impact of prs on final exam grades. the study most closely related to ours is by carnaghan and webb (2007). here the authors use ―group response systems‖ in a management accounting course. these authors study issues similar to ours in that they perform an attitudinal survey and estimate the impact that prs has on exam scores. the setup of the carnaghan and webb study differs from ours, however, but there are a number of similarities and similar conclusions. students state that the prs was useful in 62 journal for economic educators, 8(2), fall 2008 62 learning/reinforcing the material, but there was little impact on exam performance from the use of prs. these issues are discussed in greater detail below. methodology this study utilizes information on students in four sections of principles of microeconomics gathered over a two year period. the four sections include a section of 110 students in the fall of 2005, a section of 113 students in the fall of 2006, and two sections in the spring of 2007, with one section at 100 students and the other at 102. the same professor served as the instructor for all four sections. one section used online quizzes (fall of 2005) in which the class was divided into threeperson teams and the team members worked together on the quizzes. the quiz sessions were conducted by the three-person teams outside the classroom and no restrictions were imposed on resources used by students during quiz sessions. additionally, the three-person teams were allowed to make multiple attempts at the quizzes and to submit the highest quiz scores for inclusion in the course grade. in contrast, the clicker sections administered quizzes during the lecture periods. students were encouraged to confer on their answers and were awarded points for the answers based on the following scheme: 2 points for each correct answer, 1 point for each incorrect answer, and 0 points for failure to answer. duncan (2005) recommends this point allocation scheme, suggesting that, ―many instructors have the goal of increasing participation through clicker use. one way to do this is to give partial credit for wrong clicker answers.‖ anecdotally, the students seemed to like the award system. students were encouraged to confer for two reasons—to promote the synergies of students working together, and more pragmatically, to avoid the enforcement of a no-collaboration restriction. a notable difference between the online quizzes and the clicker quizzes was that the online approach allowed students a virtually unlimited number of quiz attempts. in the fall of 2006, the instructor initiated the use of a prs to instantaneously record student responses to quiz questions. each student was required to have a prs unit (clicker) and responded to quiz questions that the professor administered during the lecture sessions. the students were informed that 20% of their course grade was based upon their performance on ―clicker quizzes.‖ the class was taught at 8:30 a.m. on tuesdays and thursdays. quizzes were administered on most days during which a major exam was not being administered or discussed. the quizzes were administered at various points during the class sessions--beginning, middle and end. on some occasions, two quizzes were given during a single class session. table 1 describes the variables used in the experimental design. although clickers were not used in the fall of 2005, many of the other potentially significant factors were the same as those for the fall of 2006 section. the classes were taught at 8:30 a.m. on tuesdays and thursdays, the number of students was virtually same (110 versus 113) and testing procedures, with the exception of the quizzes, were the same. there is no reason to believe that the composition of students in terms of major/non-major and class year was different in any significant way. table 1 provides comparison data between the two cohorts from the fall of 2005 and fall of 2006. these data come directly from the student opinion of 63 journal for economic educators, 8(2), fall 2008 63 table 1: experimental design variable section fall 2005 fall 2006 spring 2007 spring 2007 time t th 8:30 am t th 8:30 am t th 8:30 am t th 11:20 am instructor prof. xxx prof. xxx prof. xxx prof. xxx class size 110 113 100 102 gender 55% male 45% female 46% male 53% female 48% male 51% female 55% male 44% female required course 83% yes 17% no 87% yes 13% no 52% yes 48% no 69% yes 31% no class standing 48% freshman 31% sophomore 14% junior 5% senior 40% freshman 42% sophomore 12% junior 4% senior 46% freshman 31% sophomore 9% junior 13% senior 58% freshman 25% sophomore 11% junior 4% senior expected grade (student response) 31% a 52% b 14% c 34% a 54% b 8% c 44% a 40% b 18% c 32% a 46% b 17% c hours spent studying outside of class 35% 0-2 49% 3-5 11% 6-8 37% 0-2 48% 3-5 6% 6-8 37% 0-2 48% 3-5 14% 6-8 27% 0-2 53% 3-5 16% 6-8 quiz method on-line prs prs prs quiz weight in final grade 20% 20% 20% 20% teamwork permitted yes yes yes yes textbook microeconomics, mcconnell and brue microeconomics, mcconnell and brue microeconomics, mcconnell and brue microeconomics, mcconnell and brue final exam version a version a version b version c 64 journal for economic educators, 8(2), fall 2008 64 faculty instruction (sofi) surveys which are completed by the students. 2 in addition to the demographic similarities, the same textbook was used in both sections. thus, the only major difference was that students in the fall 2005 section received 20% of their grade from quizzes provided by the textbook publisher that they took online, whereas students in the fall 2006 section received 20% of their grade from clicker quizzes. the use of clickers offers the advantage of ease of maintenance of attendance records. attendance information was recorded for the three sections of microeconomics in fall 2006 and spring 2007. it was not practical to collect attendance data for the fall 2005 section. the grades for all four sections were based on the same formula: 20% of the grade was based upon quizzes, 50% on three preliminary exams spaced out throughout the semester, and 30% from a comprehensive final. all of the preliminary exams and the final were multiple choice exams. in order to a measure of the impact of clicker quizzes, the same final examination was administered to the all sections. given that virtually every other key variable except for the use of clickers was the same across the sections, differences in the final examination results are attributed to the impact of the clicker quizzes versus online quizzes. analysis in examining our preliminary evidence, we found that the use of the prs seemed to have positive effects on attendance (table 2). romer (1993), for example, reported an average attendance rate of 67 percent in undergraduate economics classes at three major universities. he also reported higher absenteeism in large classes and principles courses. in comparison, the attendance rates in our classes using the prs were 88% in fall 2006, 87% in the spring 2007 8:30 a.m. section, and 89% in the spring 2007 11:20 a.m. section. moreover, in the three prs classes, thirty-six percent of the students had perfect attendance; 60 percent missed one class; and 75 percent missed none or fewer than two classes (table 3). our university does not allow attendance to count as part of the student grade, so few if any faculty take attendance, especially in classes of this size. nevertheless, we do have selfreported results from the student surveys in both the fall of 2005 and fall of 2006. these results show a dramatic increase in the number of students responding ―always went‖ to the question, ―how was your attendance?‖ in the fall of 2005, 48 percent of students indicated that they ―always went‖ compared to 75 percent of students in fall of 2006. 3 although one might question the reliability of self-reported attendance results, the top two categories (4 and 5, with 5 translating to always went) were selected by 91% of the students responding in the fall of 2006 and this is consistent with the attendance numbers actually recorded via the clickers (table 4). the strong relationship between self-reported attendance and clicker attendance seems to validate the use of self-reported attendance. in the fall of 2005, the two top categories of self-reported attendance (i.e. 4 and 5) were selected by 79% (48% + 31%) of the students responding. simple triangulation of these results suggests the actual attendance 2 a slight complication may arise when comparing student surveys, because our school converted from an in-class paper and pencil op-scan survey to an on-line survey in spring 2006. we believe that this change has only a marginal effect on the comparison, but felt that it should be noted. 3 there is a difference between the self-reported attendance from the student opinion survey and our estimate, due to the fact that in 2006 the new student survey is on-line and not all students filled out the on-line survey. 65 journal for economic educators, 8(2), fall 2008 65 during this semester was significantly lower than the 88% attendance regularly observed in subsequent semesters using clicker attendance information. table 2: attendance rates (based on prs response) class attendance fall 06 88% spring 07 8:30 section 87% spring 07 11:20 section 89% table 3: percentage of students who missed classes number of missed classes percentage of students cumulative percentage of students 0 36.0 36.0 1 23.7 59.7 2 14.9 74.6 3 9.4 84.0 4 4.2 88.2 5 2.9 91.1 6 5.2 96.3 7 1.0 97.3 8 or more 2.6 100.0 table 4: self-reported attendance information from student surveys. students respond using a spectrum (1 to 5) to the question: how was your attendance? attendance fall 2005 no prs fall 2006 with prs 1. missed 50%+ 1% 0% 2. 4% 0% 3. missed 25% 16% 9% 4. 31% 16% 5. always went 48% 75% the evidence suggests that the use of prs in the classroom had positive benefits in terms of attendance, but we are also interested in determining whether the use of the prs is related to success in the course. in the survey, students were asked to respond to the statement; ―the results of my in-class quizzes using clickers and my exam scores were strongly related.‖ a total of 58 students, or 31.35% of students, indicated that they ―strongly agreed‖ or ―agreed‖ with the statement. to further study the relationship between performance on the in-class prs quizzes and student performance on the final exam, we estimated the following regression equation: 66 journal for economic educators, 8(2), fall 2008 66 i egradequizprsgradeexamfinal )__(__ 10 the results of the regression estimation appear in table 5. based on the t-statistics, the results indicate that higher quiz grades are significantly associated with higher final exam scores. it must be noted that the relationship is relatively weak, given the generally low adjusted r 2 values. for comparison purposes, and as a test of robustness, we estimate the same regression equation using data from the previous semester, fall 2006. these results are similar to the spring 2007 results, where the coefficient on quiz grades is statistically significantly different from zero at conventional levels, yet the regression provides a relatively poor fit as demonstrated by an adjusted r 2 of 0.175. table 5: estimation results: dependent variable is final exam score. (t-statistics in parentheses) spring 2007 8:30 section spring 2007 11:20 section spring 2007 combined sections fall 2006 combined sections constant 37.896 (5.45) 52.305 (6.52) 44.683 (8.52) 41.738 (6.483) quiz grade 0.216 (5.23) 0.045 (2.38) 0.162 (5.36) 0.184 (4.98) adjusted r 2 .212 .044 .122 .175 observations 98 101 199 112 another measure of the impact of clickers utilized the results on the final examination for students in the sections for the fall of 2005 and the fall of 2006. the same multiple choice exam (version a in table 1) was administered to both sections. since most other key variables were controlled, including instructor, time of day, class size, instructional format, and student audience, any difference in results on the final could be attributed to clickers. the results are presented in table 6. table 6. difference in means of exam grades class section number of students quiz method mean grade on final exam standard deviation fall 2005 110 online 74.7 16.0 fall 2006 113 prs 73.4 14.4 a simple test of difference in means indicates that there is no significant difference in the means for the two finals. one might expect that if clicker quizzes represent a superior form of pedagogy, then the mean grade on the final exam for the clickers section (fall 2006) would 67 journal for economic educators, 8(2), fall 2008 67 exceed that for the section using online quizzes (fall 2005). initially this absence of a significant difference in performance was perplexing. on further consideration, however, it might be understandable. in both treatments students were given the opportunity to test their learning by taking quizzes. in the case of the online quizzes, students were encouraged to take multiple quizzes to review each topic. this was not the case for the clicker quizzes. so, in both cases students had the opportunity to test their knowledge using quizzes. if there is value in both online quizzes taken by students outside the classroom and clicker quizzes taken during class sessions, perhaps some combination of the two modalities would be closer to optimal. this presents an opportunity for future research on the effect of prs on student performance. although the impact of prs use on grade performance is not a compelling reason for an instructor to adopt prs for assessment, there are other potential benefits to the use of prs. through the use of a survey we attempt to identify some of these encouraging results. survey results a survey was developed by the authors to ascertain the student’s perceptions and attitudes regarding the use of prs. the survey consisted of 16 questions, including both demographic and attitudinal questions. the survey was administered in the two introductory microeconomics classes in spring 2007, taught by the same professor, in back-to-back time slots, with a combined total of 195 students. ten (10) students indicated economics as their major (or double major), an additional 50 students indicated a major of business administration, and 18 students identified their major as accounting. these students account for 28.25% of the total and represent students within the school of business. a total of 119 students (61.66%) indicated that introductory microeconomics fulfills a major requirement for their particular program. as this is an introductory course, 81.54% of students identified their class level as either freshman or sophomore. table 7: sample by major, fall 2007 major count economics 10 business administration 50 accounting 18 other 117 total 195 we also asked students to indicate their gpa based on quartiles developed from previous semesters. these results are presented in table 8. 46.39% of students stated that their gpa was 3.04 or greater and 18.56% of students indicated a gpa less than 2.68. a category was also included for students who may not have a college yyy gpa, as they may be transfer students or spring semester enrollees. to gain a better understanding of the group, students were asked two questions regarding their experience with prs. the first question asked whether this was the first class in which they had used the prs, to which 172 or 89.12% answered yes. twenty-one (21) or 10.88% of students indicated prior experience with prs. the students were also asked if the prs was easy to operate; 94% of students either ―strongly agreed‖ or ―agreed‖ (table 9). this indicates that 68 journal for economic educators, 8(2), fall 2008 68 potential technical issues should not bias our results and that students were comfortable with the technology. table 8: my current gpa falls into which category, fall 2007 gpa count below 2.68 36 from 2.68 to 3.03 53 from 3.04 to 3.51 55 above 3.51 35 i don’t currently have a college yyy gpa 15 total 194 table 9: clickers (prs) were easy to operate, fall 2007 response option count strongly agree 98 agree 85 no opinion 3 disagree 6 strongly disagree 1 total 193 one of our most important questions about the use of prs was whether or not daily, or near-daily, prs quizzes, given at various times during the class, (beginning, middle, or end of class) and frequently given twice during a class, would have a positive effect on attendance. increased attendance appears to improve classroom performance (stanca, 2006; marburger, 2006). the use of the prs for quizzing was designed to provide a strong incentive for students to attend class. table 10 presents the results when students were asked to provide an approximation of their attendance; 90.21% of students indicated that their attendance exceeded 81% of classes. these results match closely with the other attendance measures presented in tables 2 through 4. on a related issue, we also asked students whether the use of prs increased their attendance in the class, to which 85.57% of students either ―agreed‖ or ―strongly agreed,‖ (table 11). 4 several of the remaining questions focused on the relationship between the use of the prs and class performance. these questions included (1) whether the use of prs quizzes increased focus during class, (2) whether the quizzes helped students identify what they needed to study, (3) whether the prs quizzes helped students better remember the material covered 4 based on casual observation, the authors believe that the student responses represent the truth, as attendance appeared to be much higher with the use of prs than in previous semesters. furthermore, as demonstrated by the comparison to fall 2005, these results appear to have been borne out empirically. 69 journal for economic educators, 8(2), fall 2008 69 during lecture, and (4) whether the prs quizzes were helpful in reinforcing course material. the results of these questions appear in table 12. table 10: my approximate class attendance was, fall 2007 response option count 91 percent or more 161 81 to 90 percent 14 71 to 80 percent 13 61 to 70 percent 4 60 percent or less 2 total 194 table 11: the use of clickers (prs) in this class increased my attendance in this class, fall 2007 response option count strongly agree 114 agree 52 no opinion 14 disagree 13 strongly disagree 1 total 194 table 12. additional items surveyed, fall 2007 response option question strongly agree agree no opinion disagree strongly disagree total focus 54 85 22 29 4 194 what to study 32 115 21 16 1 185 remember 24 98 33 29 1 185 reinforcement 49 103 21 11 1 185 the student responses indicate that the prs was an important tool in identifying the material that required additional study, as 79.46% of students selected ―strongly agree‖ or ―agree‖ to the statement: ―the in-class quizzes using clickers gave me ideas about what i needed to study.‖ additionally, students also believed that the use of the prs quizzes were helpful in reinforcing the course material, as 82.16% of students either ―strongly agreed‖ or ―agreed‖ with the statement: ―the in-class quizzes using clickers were effective in reinforcing the course material.‖ we believe that these results, combined with the evidence related to attendance by romer (1993), represent important information in better understanding how to present and assess the large amount of material covered in a typical introductory economics course. based on the survey results, the use of the prs appears to increase student attendance. once the students are 70 journal for economic educators, 8(2), fall 2008 70 in the classroom, the use of the prs enables real time assessment, which helps students not only remember the material, but also to identify areas which presented problems for them. concluding remarks we present results related to the use of prs in large sections of introductory microeconomics. the empirical evidence indicates that the use of prs has positive effects on student attendance. based on our survey, we also find that students generally had a positive response to the use of prs for real time assessment. unfortunately, the results of our simple quantitative analysis were not particularly strong. this may be the result of model misspecification, including omitted variable bias. it may also be the case that the use of prs represents a mediating variable between attendance and performance. future research may better reveal the link between the use of prs and student performance. nevertheless, we believe that our results indicate that prs may be a useful tool in increasing student attendance, which according to the existing research is closely related to performance. the use of prs can be a valuable instrument for instructors desiring to improve attendance and to better monitor students’ performance in real time. references agarwal, r., and a. e. day. 1998. ―the impact of the internet on economic education.‖ journal of economic education, 29: 99 – 110. ball, s. b., c. c. eckel, and c. rojas. 2005. ―technology improves learning in large principles of economics classes: using our wits.‖ presentation at the american economic association meeting, san diego, january. briggs, l. l. 2006. ―response devices keep fsu students focused.‖ http://campustechnology.com/articles/41307/, accessed on 3/16/2007. carnaghan, c., and a. webb. 2007. ―investigating the effects of group response systems on student satisfaction, learning, and engagement in accounting education.‖ issues in accounting education, 22: 391-409. cohn, e., and e. johnson. 2006. ―class attendance and performance in principles of economics.‖ education economics, 14: 211 – 233. duncan. 2005. clickers in the classroom. pearson-addison wesley, san francisco. elliott, c. 2003. ―using a personal response system in economics teaching.‖ international review of economics education, 1: 80 – 86. goffe, w. l., and k. sosin. 2005. ―teaching with technology: may you live in interesting times.‖ journal of economic education, 36: 278 – 291. hoffman, c. and s. goodwin. 2006. ―a clicker for your thoughts: technology for active learning.‖ new library world , 107: 422. manning, l. m. 1996. ―economics on the internet: electronic mail in the classroom.‖ journal of economic education, 27: 201 – 204. marburger, d. r. 2006. ―does mandatory attendance improve student performance?‖ journal of economic education, 37: 148 -155. park, k. h., and p. m. kerr. 1990. ―determinants of academic performance: a multinomial logit approach.‖ journal of economic education, 21: 101 – 111. romer, d. 1993. ―do students go to class? should they?‖ journal of economic perspectives, 7: 167 – 174. http://campustechnology.com/articles/41307/ 71 journal for economic educators, 8(2), fall 2008 71 schmidt, r. m. 1983. ―who maximizes what? a study in student time allocation.‖ the american economic review, 73: 23 – 28. siegel, j. a. 2004. ―intice – interactive technology to improve the classroom experience.‖ http://www.ph.utexas.edu/~ctalk/bulletin/intice.htm, accessed 6/16/2007. sosin, k., b. j. blecha, r. agarwal, r. l. bartlett, and j. i. daniel. 2004. ―efficiency in the use of technology in economic education: some preliminary results.‖ the american economic review, 94: 253 – 258. stanca, l. 2006. ―the effects of attendance on academic performance: panel data evidence for introductory microeconomics.‖ journal of economic education, 37: 251 – 266. wood, william. 2004. ―clickers: a teaching gimmick that works.‖ developmental cell, 7:796-98. http://www.ph.utexas.edu/~ctalk/bulletin/intice.htm 25 journal for economic educators, 11(2), fall 2011 25 payment methods and practices among college students: a classroom discussion tool david boldt, hilde patron and william j. smith 1 abstract technological innovations have changed the way we pay for goods and services. while cash and checks are still popular, the degree to which we use paper-based payment methods is steadily declining. most notably, in the last few years we have begun to rely heavily on electronic payment options including credit and debit cards, online bill payments, and e-money. near field communication technology, such as cell phones, appears to be the next big step in this rapidly changing field. in this paper, we discuss the results of a survey that we developed to introduce students to these and other changes in payment technologies. the survey can be used to encourage classroom discussion when history of money, types of money, or monetary aggregates are introduced. we also analyze data collected from our students and suggest possible classroom discussion questions. key words: payments methods, classroom activity, survey jel classification: a22, e42 introduction technological innovations have changed the way we pay for goods and services. while cash and checks are still popular, the degree to which we use paper-based payment methods is steadily declining. most notably, in the last few years we have begun to rely heavily on electronic payment options including credit and debit cards, online bill payments, and e-money. in many countries, these changes have outpaced those in the u.s. 2 for example, while there are a few cases of cell phone technology being used in the u.s. to pay for items or transfer funds (marte 2009), consumers in korea and japan have been using this technology for years. 3 there are also some examples in different countries of biometric payment methods such as fingerprint scanning 4 and body implants. 5 in this paper, the results of a survey developed to introduce students to changes in payment technologies are discussed. the survey can be used to elicit classroom discussion at the time that history of money, types of money, or monetary aggregates are introduced. these topics are usually taught in principles of macroeconomics, intermediate macroeconomics, and money and banking courses. bringing student experiences into the classroom and comparing them with national and international trends is a fun way to get students involved in learning. 1 h. patron and w.j. smith are associate professors, and d. boldt is professor and chair, department of economics, university of west georgia. contact author: hilde patron, hpatron@westga.edu. we are thankful to ranjini thaver and the participants of the 2011 academy of economics and finance meeting for the helpful comments and suggestions. any errors are our own. 2 humphrey, pulley, and vesala (1996) show trends in payment methods in several industrialized economies. 3 “in south korea, all life is mobile”. the new york times. 4 see “the latest way to pay is at our fingertips” in seattle pi, or the abc report http://abcnews.go.com/technology/story?id=3902517&page=1. 5 “barcelona clubbers get chipped”. bbc news. mailto:hpatron@westga.edu 26 journal for economic educators, 11(2), fall 2011 26 in the next section we discuss several sources of information that instructors can use to introduce students to the evolution of the payments system, including newspaper articles, online videos, and data sources. we then describe a survey that we developed to use in our courses. finally, we analyze the data collected from our students and compare it with national trends. sources of information there are several data sources available to instructors to introduce students to changes in the payments system both in the u.s. and abroad. detailed sources of information on the prevalence, frequency of use, and trends of payment technologies include the federal reserve payment studies, the survey of consumer finances conducted by the national opinion research center at the university of chicago, and the boston federal reserve survey of consumer payment choice. the main differences are that the first study obtains data from financial institutions while the latter two get data directly from consumers. these sources are freely available online. private companies also have conducted similar studies, such as javelyn strategy & research, and visa, inc. these data are not freely available and are expensive. some excellent articles that summarize these and other data sources include foster et al. (2010), herbst-murphy (2010), mester (2006), and garcia-swartz, hahn, and layne-farrar (2004). several short videos are freely available online for showing in the classroom. these include a visa commercial in which the line to pay goes smoothly until a customer tries to use cash 6 ; a 20/20 segment that discusses fingerprint scanning at a seattle grocery store as well as microchip implants and retina scanning (á la tom cruise in the movie “mission impossible”) as potential payment technologies 7 ; a five news segment that discusses near-field communication technology in cell phones; 8 and a video that shows customers of night clubs in barcelona and amsterdam with microchips containing personal and financial information implanted in their arms radio frequency technology is used to identify the customers and to draw funds from their financial institutions when they purchase drinks. 9 finally, there are newspaper articles that show different trends in payment technologies, including money transfers by texting (marte, 2009), cell phones as all inclusive electronic wallets (sang-hun, 2009), and fingerprint scanning and implant technologies (bbc news, 2004; seattle pi, 2002). while all these sources are useful – and some of them are even entertaining – students are more likely to get involved in a discussion if the instructor draws on their experiences. in the next section, we discuss a survey that we designed with this purpose in mind. payment methods survey we developed a series of questions that ask students whether or not they have ever used a variety of payment methods, whether or not they use them on a regular basis, which are their preferred ways to pay for small and large value transactions, and how these preferences have changed over the years. since we wanted to be able to compare students’ answers with national trends, some of our questions are based on the boston federal reserve survey of consumer payment choice. on the other hand, certain questions, such as the degree to which students barter, are unique to our survey. 6 http://www.youtube.com/watch?v=xy_pxlw1b_c&feature=player_detailpage 7 http://www.youtube.com/watch?v=ybkswuihvl8&feature=related 8 http://www.youtube.com/watch?v=zyqmwfrqx_k 9 http://www.youtube.com/watch?v=hts48e0nfxi&p=4b1269095e1791d4&playnext=1&index=5 27 journal for economic educators, 11(2), fall 2011 27 we consider twelve different payment methods: barter, or the exchange of goods and services for other goods and services; precious metals such as gold or silver; cash (coins and paper bills); credit cards (such as visa, mastercard, american express, etc.); debit or check cards; checks; electronic bank deductions (such as automated bill payments); biometric payment methods (such as fingerprint scanning); cell phone technology (such as microchips embedded in cell phones or payment by texting); traveler’s checks; e-money (such as paypal); and money orders. the complete survey may be administered online or in person. we have done both. instructors should distribute the questionnaire, or make it available online, at least one class period before the intended discussion date in order to process the responses. instructors electing to use the in-class version should allow students 5 to 10 minutes of class time to complete the survey. classroom statistics and discussion topics we have administered the survey in several courses. table 1 summarizes responses from 142 students. fifty-seven students in the sample (40.14%) are women and 85 (59.86%) are men. most students in the sample are white (69.01%) or african american (25.35%). the average and median age of the students are 24 and 22 years. table 1: frequency of use (n=142) question have you used the payment method listed below at least once in your life? do you use the payment method listed below regularly? 1.barter 85.21% 42.96% 2.precious metals† 5.26% 5.26% 3.cash 98.59% 95.77% 4.credit cards 87.32% 72.54% 5.debit or check cards 97.89% 93.66% 6.checks 92.25% 47.18% 7.electronic bank deductions 69.01% 51.41% 8.biometric methods 2.11% 2.11% 9.cell phones 37.32% 24.65% 10.traveler's checks 24.65% 2.11% 11.e-money 73.94% 36.62% 12.money order 69.72% 23.24% † sample = 57 according to the survey, bartering is not uncommon among students. almost 43% of students said that they bartered regularly and over 85% said that they had bartered at least once in their lives. as seen in table 2, younger students were more likely to say that they bartered on a regular basis while older students were more likely to say that they engaged in electronic bank transfers. 28 journal for economic educators, 11(2), fall 2011 28 table 2: frequency of use by age payment method difference between the proportion of older and younger students (old – young) 1.barter -0.2985 * 2. precious metals † -0.0790 3.cash -0.0084 4.credit cards -0.0120 5.debit or check cards 0.0016 6.checks 0.1082 7.electronic bank deductions 0.2873 * 8.biometric methods -0.0385 9.cell phones -0.0504 10.traveler's checks -0.0385 11.e-money -0.0124 12.money order 0.0036 * 1% significance level, ** 5% significance level, *** 10% significance level † sample = 57 table 3: frequency of use by gender payment method difference in the proportion of men and women (men – women) 1.barter 0.0728 2. precious metals † 0.0909 3.cash -0.0120 4.credit cards 0.0687 5.debit or check cards 0.0114 6.checks -0.0204 7.electronic bank deductions -0.0204 8.biometric methods -0.0353 *** 9.cell phones 0.2066 * 10.traveler's checks 0.0353 11.e-money 0.0842 12.money order 0.1245 ** * 1% significance level, ** 5% significance level, *** 10% significance level † sample = 57 in a follow-up classroom discussion students explained that they typically bartered with textbooks at the beginning of the semester, with goods and services on craig’s list, and informally among family and friends for different services. some students mentioned bartering car rides for gas money, books for tutoring, and video games and dvds for other items of the same type. an informal polling of the 27 students in this class revealed that 60% felt that bartering was a convenient way to trade. finally, while the majority of students (56%) declared 29 journal for economic educators, 11(2), fall 2011 29 that the state of the economy did not influence the frequency with which they bartered, 37% said that they bartered more frequently during recessions. table 4: frequency of use by race payment method difference in the proportion of white and nonwhite students (white – non-white) 1.barter 0.0297 2. precious metals † 0.0314 3.cash -0.0612 *** 4.credit cards 0.0960 5.debit or check cards -0.0918 ** 6.checks 0.0909 7.electronic bank deductions 0.0863 8.biometric methods -0.0023 9.cell phones -0.1039 10.traveler's checks -0.0023 11.e-money -0.0622 12.money order -0.2231 * * 1% significance level, ** 5% significance level, *** 10% significance level † sample = 57 three students answered that they traded metals on a regular basis. the in-class discussion revealed that these are either students who weld or work with scrap metals, or students who are members of the society for creative anachronism (sca). in their own words: “i received items i couldn’t make myself, like a pair of stainless steel fluted leg armor, food, clothes(for sca) and so on. we barter and help each other out a lot.” 10 fifty-three mostly male students (37.32%) said that they had paid for items with cell phones (table 3). while this is a surprising number these students have been exposed to the technology in atlanta’s sports arena (philips arena) where customers can pay for concession stand purchases with special cell phones. the percentage of respondents who said that they regularly used money orders is also surprisingly high, especially for non-white students (table 4). this is an idiosyncrasy of the housing market where the school is located. many apartment complexes require tenants to pay rent using money orders. 10 we do not consider the entire sample when analyzing the two questions dealing with trading in precious metals; we only consider a sub-sample of 57 students from two upper level courses. the responses to these questions in lower level courses appeared to be inconsistent with each other and unreliable. 30 journal for economic educators, 11(2), fall 2011 30 figure 1: preferred payment methods (small value transactions) figure 2: preferred payment methods (large value transactions) finally, as seen in figures 1 and 2 and table 5, 11 cash and checks have become less popular while debit and credit cards have become more popular among students. this trend coincides with national and international patterns (see e.g. humphrey et al. 1996). the move away from paper-based payment methods can also be seen by comparing students’ preferred payment methods with those of their parents and grandparents. more specifically, the younger 11 figure 1 summarizes the responses to the questions “which is your preferred method of payment for small value transactions?” and “which was your preferred method of payment for small value transactions x years ago?” where x refers to one, two three, four, or five years. similarly, figure 2 summarizes the responses to the questions: which is your preferred method of payment for large value transactions?” and “which was your preferred method of payment for large value transactions x years ago?” 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00% t-5 t-4 t-3 t-2 t-1 t cash checks credit cards debit cards grandparents (checks &cash) parents (checks & cash) 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% t-5 t-4 t-3 t-2 t-1 t grandparents (checks &cash) credit cards checks debit cards cash 31 journal for economic educators, 11(2), fall 2011 31 generations are more inclined to pay by electronic means and the older generations are more inclined to use cash and checks. for example, students reported that their parents and grandparents preferred to pay for small value items with cash (63.38% of parents and 81.69% of grandparents); grandparents preferred to pay for large value items with checks (38.73%) and cash (33.80%), while parents preferred credit cards (39.44%) and checks (24.65%). table 5: change in frequency of use (n=142) do you use the payment method with more, less or same frequency than before? more frequently less frequently with the same frequency cash 11.27% 74.65% 14.08% checks 9.86% 74.65% 15.49% credit cards 47.89% 26.06% 26.05% debit cards 80.99% 7.75% 11.26% electronic bank deductions 38.73% 15.49% 45.78% e-money 30.99% 22.54% 46.47% conclusions we present a survey developed to introduce students to changes in the payments system. the survey asks students whether or not they have ever used a variety of payment methods and the frequency with which they use them. the survey considers twelve alternative methods: barter, precious metals, cash, checks, debit cards, credit cards, biometric payment methods, cell phones, traveler’s checks, money orders, electronic bank deductions, and e-money. having administered the survey several times, both online and in a classroom setting, we find that students’ preferred payment methods follow national and international patterns. cash and checks are losing ground as preferred payment methods, while debit and credit cards are becoming more popular. this result is particularly pronounced for large value transactions. we found some interesting results and conducted classroom discussions around them. many students engage in barter on a regular basis, for example, finding it more advantageous to barter textbooks than to participate in a used book market. they also regularly trade dvds, video games, electronic devices and services. the prevalence of barter led to discussions on tax evasion as well as the winners and losers in a barter society. another result that was discussed in class was the common use of money orders by students. during this discussion, it surfaced that many apartment complexes require students to pay rent using money orders, because landlords cannot be sure that their personal checks have sufficient funds. even though there are significant transaction costs associated with money orders, many students are familiar with them and use them, because they are required by rental agreements. some serious topics brought up by the survey include the underground economy, tax evasion, privacy concerns, and whether or not the concept of “money supply” as taught to students needs to be revised to include the ever changing nature of money and payments methods. while our survey concentrated on students’ preferences, it did not ask for the reasons behind their choices. for instance, why do some students rely on credit cards while others do not? why do some students rely on cash while others do not? is there a rational or an irrational 32 journal for economic educators, 11(2), fall 2011 32 explanation behind their choices? more research is needed to understand why students choose the payment methods that they do. another question that we did not address, but is worth considering in our next iteration, is whether or not individuals always have a choice of payment method. some sellers restrict payments to cash only, cash or money order, or some selected credit cards. this can potentially lead to an interesting classroom discussion regarding the concept of “legal tender.” although currency may be recognized as “legal tender” by the government, for instance, under some circumstances currency is not accepted to meet debt obligations. finally, another necessary step in our research is to look at other communities, both inside and outside a university setting, and in the u.s. and abroad. individuals (students or otherwise) in more metropolitan areas may be more inclined to use electronic payment methods, while individuals in more rural areas may rely more heavily on cash. similarly, cultural idiosyncrasies may influence payment method choices. furthermore, given our research design, we cannot tell how accurately our students provided information as to their parents and grandparents payment preferences. extending our research to a broader community will help to determine the true preferences of older generations and the accuracy of students’ perceptions. references: bbc. “barcelona clubbers get chipped”. bbc news. september 29, 2004. available at http://news.bbc.co.uk/2/hi/technology/3697940.stm. retrieved june 15, 2010. federal reserve system. “the federal reserve payments study. noncash payment trends in the united states: 2003-2006.” the federal reserve system: washington, d.c. foster, kevin, erik meijer, scott schuh and michael a. zabek. 2010. “the 2008 survey of consumer choice”. federal reserve bank of boston. public policy discussion paper. april 2010. garcia-swartz, daniel d., robert w. hahn, and anne layne-farrar. 2004. “the move toward a cashless society: a closer look at payment instrument economics” (october 2004). aei-brookings joint center working paper no. 04-20. available at ssrn: http://ssrn.com/abstract=641441 herbst-murphy, susan. 2010. “trends and preferences in consumer payments”. discussion paper payment cards center. available at http://www.philadelphiafed.org/paymentcards-center/publications/discussion-papers/2010/d-2010-visa-payment-panelstudy.pdf. retrieved october 22, 2010. humphrey, david b., lawrence b. pulley, and juka m. vesala. 1996. “cash, paper, and electronic payments: a cross-country analysis”. journal of money, credit, and banking, 28 (4): 914-939. mester, loretta j. 2006. “changes in the use of electronic means of payment: 1995-2004”. business review q2: 26-30. available at http://www.philadelphiafed.org/research-anddata/publications/business-review/2006/q2/br_q2-2006-4_changes-electronic-means.pdf. retrieved october 22, 2010. marte, jonnelle. “dad, can you text me $200”. the wall street journal, june 23, 2009. available at http://blogs.wsj.com/wallet/2009/06/23/dad-can-you-text-me-200/ retrieved on october 22, 2010. national opinion research center, university of chicago (www.norc.uchicago.edu). http://news.bbc.co.uk/2/hi/technology/3697940.stm http://ssrn.com/abstract=641441 http://www.philadelphiafed.org/payment-cards-center/publications/discussion-papers/2010/d-2010-visa-payment-panel-study.pdf http://www.philadelphiafed.org/payment-cards-center/publications/discussion-papers/2010/d-2010-visa-payment-panel-study.pdf http://www.philadelphiafed.org/payment-cards-center/publications/discussion-papers/2010/d-2010-visa-payment-panel-study.pdf http://www.philadelphiafed.org/research-and-data/publications/business-review/2006/q2/br_q2-2006-4_changes-electronic-means.pdf http://www.philadelphiafed.org/research-and-data/publications/business-review/2006/q2/br_q2-2006-4_changes-electronic-means.pdf http://blogs.wsj.com/wallet/2009/06/23/dad-can-you-text-me-200/ http://www.norc.uchicago.edu/ 33 journal for economic educators, 11(2), fall 2011 33 sang-hun, choe. “in south korea, all life is mobile”. the new york times. may 24, 2009. available at www.nytimes.com/2009/05/25/technology/25iht-mobile.html. retrieved june 15, 2010. seattle pi. “the latest way to pay is at our fingertips”. april 27, 2002. available at www.seattlepi.com/local/68217-thumb27.shtml. retrieved june 15, 2010. http://www.nytimes.com/2009/05/25/technology/25iht-mobile.html.%20retrieved%20june%2015 http://www.nytimes.com/2009/05/25/technology/25iht-mobile.html.%20retrieved%20june%2015 http://www.seattlepi.com/local/68217-thumb27.shtml.%20%20retrieved%20june%2015 rational expectations in the classroom: a learning activity 1 journal for economic educators, 10(2), fall 2010 rational expectations in the classroom: a learning activity calvin blackwell1 abstract the author describes a technique whereby students truthfully reveal their perceptions regarding the difficulty of an assignment. after completing the assignment, each student guesses his/her class’ average score on the assignment. the student is informed that if his/her guess is within one percentage point of the actual class average, then he/she will earn two extra points on the assignment. this mechanism gives each student the incentive to truly express his/her opinion regarding the difficulty of the assignment. the author provides evidence that students, as a group, are quite adept at guessing the class average. in addition to its usefulness in explaining the rational expectations hypothesis, this activity is helpful for assessing the students’ perceptions of the difficulty of particular assignments. keywords: teaching practices, rational expectations jel classification: a2 introduction the assumption that agents use all available information to make predictions about the future is common to many types of economic models. this assumption, denoted “rational expectations” was first introduced by muth (1961), and is now used, among other places, in game theoretic models, models of financial markets and macroeconomic models. as such, rational expectations can be a topic in a wide variety of courses in economics and finance. as a subject matter, rational expectations lends itself well to classroom activities, and several pedagogical papers outline active learning approaches. for example, peterson (1990) presents a simple classroom experiment in which students are given incentives to formulate their own “rational” expectations regarding a policy variable. the experiment illustrates how agents formulate expectations and how those expectations can impact policy. a similar experiment is presented by hazlett (1996). in peterson’s activity students act as firms and decide how much to produce, while in hazlett’s activity students act as workers and decide how much time to spend working. in both experiments unanticipated changes to the money supply can affect the students’ payoffs, either through changes in the firm’s real profits or the employee’s real wage. ball and holt (1998) use an experimental asset market to introduce rational expectations. their approach illustrates the existence of behavioral discrepancies with the standard theory, as their experiment has the potential to create price “bubbles,” or irrational increases in the price of the asset. strulik (2004) takes a different approach, and shows how to use microsoft excel to teach rational 1 associate professor, department of economics and finance, college of charleston. address: 66 george st., charleston, sc 29424. phone: 843.953.7836. email: blackwellc@cofc.edu. my thanks go to sarah dwyer for providing the title to this paper, to heather tierney for all her help, to several anonymous reviewers for many useful comments, and to all my students for providing the opportunity for me to practice my classroom skills with them. 2 journal for economic educators, 10(2), fall 2010 expectations. he uses some simple backward iteration solution techniques to teach the intuition behind rational expectations. bonwell and eison (1991) recommend that faculty in higher education select teaching strategies that promote active learning. the active learning exercises presented by peterson (1990), hazlett (1996) and ball and holt (1998) are effective in part because they put the student at the heart of the action. instead of being passive observers of market activity, these exercises put the student in the role of an active decision-maker in the economy. this change in perspective often gives students a better understanding of the underlying economic theory. although the activities presented in each of the previously mentioned papers is novel and effective, each activity also requires significant preparation time, and generally takes most of a class period to complete. in this paper i present a quick and easy way to introduce the intuition behind rational expectations. although my activity lacks the depth of the approaches mentioned above, its simplicity makes it appropriate for instructors who merely wish to introduce the basic concept of rational expectations without sacrificing an entire lecture. in addition, i show how this activity can be used to help an instructor determine his/her students’ overall perception of the difficulty of an assignment or exam. the activity upon completing a given assignment (usually an exam), each student guesses the score of the class’ average on the assignment. the student is informed that if her guess is within x percentage point(s) of the actual class average, she will earn y extra points on the assignment. (the instructor should pick values of x and y that she or he finds appropriate.) figure 1 shows a sample form from one of my classes. the student is told that she will earn 2 extra points (out of a possible 100 points for the exam) if her guess of the class average is within 1 percentage point of the actual class average. the fact that the student will only earn the bonus if she guesses correctly provides her with an incentive to make the best guess possible; that is, each student has an incentive to take the task seriously. figure 1. elicitation mechanism generally i give my first exam approximately four weeks into the semester. depending upon the class i am teaching, the discussion of the activity occurs when i return the exam (for most classes), or, when i teach principles of macroeconomics, later in the semester when i cover the rational expectations hypothesis. extension exam 1 – econ 201 professor calvin blackwell name:______________________ 24 september 2004 the class average will be: _______ [+2] bonus: you will receive 2 extra points if your guess for the class average is within 1 point of the true average. put your guess in the space provided. 3 journal for economic educators, 10(2), fall 2010 for a more sophisticated demonstration of the rational expectations hypothesis, one could run three separate guessing games, and have students’ make guesses: i) before taking the test, ii) after taking the exam (as described above), and iii) after talking to their classmates. all three guesses would need to be incentivized in some manner. discussion the true class average of the assignment, which in this instance is also the true population average of the activity, is represented by ρ , where 1 1 n i in ρ ρ = = ∑ (1) with iρ representing the true student score on the assignment of the i th student where i refers to the ith student with i = 1,…, n and n being equal to the total number of students involved in the activity, and is thereby equal to the population of the activity. analogously, p is the average of the students’ guesses of what they think will be the true class average of the assignment and is represented by the following equation: 1 1 n i i p p n = = ∑ (2) pi representing the guess of the true class average of the assignment of the ith student. if we assume the ith student has rational expectations in regards to his/her estimate of the true class average of the assignment ip , then, the expectation of ip must be equal to ρ , although any particular ip may be incorrect. hence, ip may be defined as ii up += ρ (3) where ui is the error term whose magnitude could have a range of (-100, 100) and has a mean of zero and finite variance2 ( ) ( ) ( ) ( ) ( ) ( )0i i ie p e u e e u e eρ ρ ρ ρ= + = + = + = . more formally, ui ~ (0, σ2), which implies: (4) equation (4) is the application of the rational expectations hypotheses to this activity, which can be statistically tested with the following equation: ρ=p (5) once the true class average, ρ , and the average guess of the true class average, p , are calculated the comparison of these two statistics3 when i reach the point in my class when we are covering the topic of rational expectations, i ask the students to mentally recall the process by which they formulated a guess. provide the grist for the in-class discussion to come. the preceding exposition is intended for my academic audience, and is un-necessary for principles students. i recommend that this activity be done in classes of at least 15 students so that the statistical properties of equation 5 can be reasonably approximated by the normal distribution. generally, the more students involved the better. 2 please note that this variance is a function of the information available to the students. the rational expectations hypothesis states that agents efficiently use new information, so as that information increases, the variance should decline. therefore, if the extension mentioned earlier, then the variance should decline at each stage, i.e., from guessing the average with no information, to guessing the average after the exam, to guessing the average after taking the exam and discussing it with the class. 3 before returning the students’ exams, i make certain to record on a spreadsheet each student’s grade on the exam and his/her guess as to the class average. 4 journal for economic educators, 10(2), fall 2010 usually this process involves primarily their own perception of the difficulty of the exam, but it may also involve their perceptions of other students’ abilities and preparedness. i then point out that there is no benefit to falsifying one’s guess – the student can only earn extra credit by correctly guessing the average. at this moment in the discussion i then tell the students that there is a natural way to aggregate this information – to look at the average guess and compare it to the true class average. i present this information and then we discuss why it matches or not. normally, the match is close, within three percentage points. i then point out that the mechanisms of finding the class average guess and rational expectations are quite similar; that is, both mechanisms involve aggregating all the information available, even if that information is not available to each individual, and that the aggregated information (or the “rational expectation”) is usually quite accurate. if time permits, a follow-up exercise (figure 2) can be presented to the students. one approach is to have the students attempt to answer the question below on their own and then have students form pairs and compare their answers. this approach works well even in large classes. figure 2. follow-up exercise the iowa electronic markets allow students to place “bets” on the outcomes of u.s. presidential elections. specifically, the markets allow students to predict the percentage of the popular vote each candidate will win in the general election. the more accurate the prediction, the more money the student wins. □ according to the rational expectations hypothesis, what will be the relationship between the market’s prediction and the actual outcome? □ in fact, this market is one of the most accurate predictors available. is this consistent with the rational expectations hypothesis? explain. the results from my principles of macroeconomics course during the fall semester of 2004 are quite typical. i taught two sections, one with 37 students and one with 51 students. in the smaller section, the class average for the first exam ( ρ ) was 78.4%, while the average guess ( p ) was 78.7%, with 9 students correctly guessing within one point of the actual average.4 ρ however, in the other section, for the first exam was 73.6%, while p was 81.0%, a much larger difference.5 ρ in addition, only 2 students correctly guessed within one point of the actual average. interestingly, for this second class, on the next exam was 73.41%, while p was 75.7% and 13 students correctly guessed within one point of the actual average, indicating that the students got better at guessing as they became more familiar with the task.6 4 testing equation 5 with a simple t-test results in accepting the null hypothesis (p-value = 0.506). in any event, no matter how closely the actual average and the average guess match, the instructor will have some interesting material to discuss. for example, the instructor can discuss the fact that a rational expectation is still an expectation, and thus contains an element of randomness, and so may not always be correct. instructors with a behavioralist bent may want to talk about what the results say about the rationality of real people and their ability to use information effectively. 5 testing equation 5 with a t-test here results in rejecting the null hypothesis (p-value = 0.0001). 6 testing equation 5 with a t-test here again results in rejecting the null hypothesis, but at a lower level of significance (p-value = 0.001). 5 journal for economic educators, 10(2), fall 2010 in more advanced classes, or if time permits, i may use this activity to discuss some subtler points regarding rational expectations. the first point deals with the effect of more/improved information. here i can use the data from extension mentioned earlier, in which the students were polled three about the class average. as time progresses the students possess more information, so the rational expectations hypothesis (which posits that information is not wasted, i.e. used optimally) predicts that the accuracy of the students’ guesses should increase, and the variance of those guesses should decrease. this prediction from the rational expectations hypothesis can be tested against the students’ data. furthermore, this information should be incorporated optimally, i.e., by using bayes rule. depending upon the course, a discussion of bayes rule and its relation to the rational expectations hypothesis may be appropriate. the second point regards the assumption of common knowledge. the simplest version of rational expectations assumes all agents have the same information. in this activity, each student has a unique information set (because she knows her own ability and preparedness better than she knows her fellow students’ abilities and preparedness). however, this situation is generally the case in other real world situations (e.g., stock trading when some traders have inside information) in which agents are assumed to use rational expectations.7 the third point is that even when the assumption is not an accurate reflection of the world, if the predictions based on that assumption are accurate, we can still be satisfied with the assumptions. often during the course of the discussion, students question whether or not individuals are actually as “rational” as the rational expectations hypothesis assumes. i then typically present both sides of this ongoing debate. first, i discuss why someone might make a mistake. here i draw on the students’ personal experiences (we have all seen other people do mysterious things!) and discuss some research about forecasting that seems to indicate there are systematic biases. for example, maki and berry (1984) show that students have difficulty predicting their own performance, grimes (2002) finds economics students to be overconfident when asked to predict their own grades on a future exam, and balch (1992) concludes that overconfidence in one’s own ability increases as ones’ ability decreases! i then move the discussion to the common arguments for rationality: that occasional mistakes do not imply irrational decisions, that mistakes are not systematic, that irrationality will be disciplined and driven out by the market. there is ample evidence (though not conclusive) supporting these arguments. for example, berg, nelson and reitz (forthcoming) show that the predictions of the iowa electronic markets are more accurate than polls for predicting presidential elections. dwyer, williams, battalio and mason (1993) show that experimental subjects make predictions in a manner consistent with rational expectations. finally, i bring up one of the key differences in these two strands of research: the existence of incentives. i point out that when incentives are introduced, many (although not all) of the “irrational” results go away.8 a different type of discussion could result if this exercise were used in an econometrics or statistics course. the instructor could use the generated data to test the rational expectations hypothesis (as in footnotes 3 5) with a t-test or the data could be used to test for i like to remind students that incentives matter, and that if i want to influence students’ behavior in a particular way, i need to provide the proper incentives. 7 this situation is similar to the assumption of asymmetric information made by lucas in his 1973 paper on the phillips curve. 8 see fehr and tyran (2005) for a more detailed discussion of how incentives and institutions relate to “irrationality.” 6 journal for economic educators, 10(2), fall 2010 overconfidence, for example, by regressing actual student scores on predicted scores or mean squared error. lagniappe this mechanism can serve a second purpose – to help a professor gauge the difficulty of an assignment or exam. because the student has no incentive to bias his or her guess9 , the average guess contains information on how each student believed the class would perform as a whole. low average guesses indicate poor expected performance, and could be indicative of a difficult or confusing assignment. this information is potentially useful to all professors, but especially to new instructors who may have difficulty calibrating the difficulty of their exams and assignments. references balch, william r. 1992. “effect of class standing on students’ predictions of their final exam score.” teaching of psychology, 19(3): 136-41. ball, sheryl b. and charles a. holt. 1998. “classroom games: speculation and bubbles in an asset market.” journal of economic perspectives, 12(1): 207-18. berg, joyce, forrest nelson and tom rietz. 2008. “prediction market accuracy in the long run.” international journal of forecasting, 24: 285-300. bonwell, charles c. and james a. eison. 1991. active learning: creating excitement in the classroom. ashe-eric higher education report no. 1. washington, d.c.: the george washington university, school of education and human development. dwyer, gerald p., arlington w. williams, raymond c. battalio and timothy l. mason. 1993. “tests of rational expectations in a stark setting.” the economic journa,l 103: 586601. fehr, ernst and jean-robert tyran. 2005. “individual irrationality and aggregate outcomes.” journal of economic perspectives, 19(4): 43-66. grimes, paul w. 2002. “the overconfident principles of economics student: an examination of metacognitive skill.” journal of economic education, 33(1): 15-30. hazlett, denise. 1996. “the lucas island experiment.” classroom expernomics 5(2). available at http://www.marietta.edu/~delemeeg/expernom/f96.pdf. accessed 19 august 2010. maki, ruth h. and sharon l. berry. 1984. “metacomprehension of text material.” journal of experimental psychology: learning, memory, and cognition, 10(4): 663-679. muth, john f. 1961. “rational expectations and the theory of price movements.” econometrica, 29(3): 315-35. peterson, norris a. 1990. “a rational expectations experiment.” journal of economic education, 21(1): 73-78. strulik, holger. 2004. “solving rational expectations models using excel.” journal of economic education, 35(3): 269-83. 9 we all know the favorite answer students give to the question, “how hard was the exam?” “it was really hard, professor!” regression results replicating ballard and johnson: 6 journal for economic educators, 13(1), 2013 predicting student performance using online one-minute papers lee e. erickson and patricia a. erickson 1 abstract one-minute papers are often used to encourage students to think and write briefly about their own learning, because teachers believe that metacognition and writing help students to learn. the proportion of online one-minute papers that students submit, however, has not previously been used to explain student achievement in economics. this paper shows that the completion rate is a very significant predictor of student performance after controlling for other variables already noted in the literature. removing small observation categories does not affect the significance or stability of key regression coefficients. students who complete online oneminute papers more regularly also perform better in principles of microeconomics. key words: one-minute papers; online surveys; predicting student performance jel classifications: a20, a22 introduction in economics, the learning of later topics often builds on one’s understanding of earlier concepts. consistent effort is more effective than cramming, but students tend to procrastinate. too often students come to class unprepared, sit as passive observers and postpone focused effort until immediately before points of major accountability. one-minute papers encourage students to seek deeper understanding more promptly by engaging in metacognition and writing. the traditional one-minute paper asks students a few open-ended questions at the end of class (angelo and cross 1993): what was the most important thing that you learned today? what important question remains unanswered? mosteller (1989) reported getting better information from students when he asked them “what was the muddiest point in the lecture?” chizmar and ostrosky (1998) and vredenburg (2004) implemented one-minute papers online. our students had weekly opportunities to complete online surveys through the university’s course management system. these online one-minute papers were available for a limited time after the last class prior to in-class review times for quizzes and tests. our anonymous surveys asked students the following questions: did you do the assigned reading before class each day? what is clearest to you? what is least clear? where are you having trouble? do you have any other comments, suggestions or questions? student responses to these online surveys then directed the in-class reviews for quizzes and tests. there are advantages to doing these one-minute papers anonymously, online, outside of class. responses cannot be traced to individual students, so some may be more honest. online responses are more legible and may be longer, because some students find typing easier than handwriting. doing self-appraisals online reduces the dominance of a few vocal students, 1 lee e. erickson is a professor of economics (leerickson@taylor.edu) and patricia a. erickson is an adjunct instructor of mathematics (pterickson@taylor.edu); both are at taylor university, 236 west reade avenue, upland, indiana 46989. we thank peter kennedy, kenneth constantine and anonymous referees for helpful comments. mailto:leerickson@taylor.edu mailto:pterickson@taylor.edu 7 journal for economic educators, 13(1), 2013 because those who are shy in class are less so online (vredenburg 2004). some responses may be more thoughtful than if they were done at the end of a class, and the self-appraisal does not require class time. anonymous responses also have a disadvantage. students who reflect and write very little receive the same credit as students who reflect and write much more. for example, a student could get credit for doing the assignment by writing “the rain in spain stays mainly in the plain,” although this may not be relevant or even true. in our experience few students actually completed the surveys without any reflection at all. doing online one-minute papers regularly requires students to consistently remember to do them. students were regularly reminded about the survey during class, but recall was needed at the appropriate time after class. students are more likely to remember the assignment when they are studying for tests and quizzes. a student whose habit is to begin her study for tests and quizzes further ahead of these accountability points is more likely to complete the online oneminute papers during the designated time. those who cram for tests and quizzes are more likely to miss the deadlines for these assignments. other authors have compared the performance of students in course sections that completed one-minute papers with those in sections that did not. chizmar and ostrosky (1998) found that one-minute papers increased students’ economic knowledge as measured by the test of understanding in college economics (tuce) after controlling for semester gpa excluding the economics grade. das (2010) found that students who wrote one-minute papers performed better on a post-test, after controlling for gpa and gender, than students who did not. stowe (2010) reported that students who completed one-minute papers had higher course grades than those who did not complete them, after controlling for cumulative gpa, sat scores, absences and gender, but the significance of the results was sensitive to the model specifications. data and methodology rather than using experimental and control sections of a course as others have done, we gave all students the same opportunities to do one-minute papers and noted the differences in student completion rates for this assignment. more specifically, our “self-appraisal percent” variable is the proportion of online one-minute papers that students completed. while this one-minute paper completion rate has not previously been used to predict student performance, many other variables have been studied. cumulative gpa has been shown to be an important predictor of student success in economics (park and kerr 1990; durden and ellis 1995; didia and hasnat 1998; ballard and johnson 2004; krohn and o’connor 2005, and grove, wasserman and grodner 2006). math skills are widely reported to be important predictors of student achievement in economics courses (anderson, benjamin, and fuss 1994; durden and ellis 1995; ballard and johnson 2004; and pozo and stull 2006). men have been found to outperform women, especially on multiple choice tests (lumsden and scott 1987; anderson, benjamin, and fuss 1994; ballard and johnson 2004; and krohn and o’connor 2005), but others found no significant gender differences (williams, waldauer, and duggal 1992; lawson 1994; and swope and schmitt 2006). our data represent ten semesters of principles of microeconomics courses taught by the same instructor. the fraction of one-minute papers that students completed and their performance on each weekly quiz and each unit test were recorded. test scores were about 80% of the total possible points and quiz scores accounted for the remainder. 8 journal for economic educators, 13(1), 2013 students self-reported gender, ethnic group, class standing, whether principles of macroeconomics had been completed, whether a calculus course 2 had been completed, whether the university’s remedial math course had been required 3 , whether the issues in economics course 4 had been taken, and whether principles of microeconomics was required for the student’s major. dummy variables for the different semesters, ethnic groups and class levels were created. the total sample size was 476 over this five-year period. incomplete data for a few students reduced the sample size to 470. to avoid including the principles of microeconomics course grade in the gpa variable, cumulative gpa at the beginning of the semester was used. gpa, act and sat scores were retrieved from student records. a few students were excluded from the sample, because as freshmen or transfer students they did not have a prior gpa at our university. sat scores were converted to act scores using concordances (dorans 1999; act 1998). the percentage of points earned could not be used directly as our dependent variable, because it includes the extra credit meant to motivate completion of the online surveys. these extra credit points would have been about 3% of the total points possible, if all of the surveys had been done. the last quiz in each semester was a bonus quiz. so we delete the extra credit points for the self-appraisals and the bonus quiz to construct a new dependent variable. our “assessment percent” variable is the proportion of test and quiz questions that were answered correctly throughout the semester. this removes the influence of the variability in the length and number of quizzes and tests from one semester to another and measures the course grade without the influence of any extra credit. descriptive statistics are given in table 1. because the self-appraisals were done online outside of class and were not required, the average student completed only 60% of them. almost all of the students were caucasian, about two thirds were male and most had taken a calculus course. ordinary least squares regression was used to estimate the linear relationship between assessment percent and the independent variables. a linear model is appropriate, because the residuals appear to be normally distributed. results the regression results for the complete data set are given in table 2. the variables in the full model explain over 60% of the variation in assessment percent according to the adjusted r 2 . there is not a high correlation among the quantitative predictor variables. the largest pearson r correlation coefficient for any pair of independent variables was 0.59 for the relationship between gpa and act composite. 2 credit for a calculus course could have been earned by passing the ap® exam or by passing a college course. the advanced placement program® (ap®) is administered by the college board and allows high school students to earn college credit by taking ap® courses and passing ap® exams given at the end of these courses. 3 all students at our university are required to demonstrate mathematics proficiency. they may do this by scoring sufficiently high on the sat or act mathematics tests or by passing a mathematics department proficiency exam covering basic math skills and algebra. those who do not pass the mathematics proficiency exam are required to complete a remedial math course and re-take the exam until they do pass it. 4 “issues in economics” is a general education course intended for students who do not plan to take other economics courses. 9 journal for economic educators, 13(1), 2013 table 1: descriptive statistics variable percent in category mean standard deviation assessment percent 0.8 0.1 self-appraisal percent 0.6 0.3 gpa at the beginning of the semester 3.2 0.5 act composite 25.6 3.9 basic math quiz score 8.1 1.6 male 67.4% principles of macroeconomics course completed 3.6% calculus course completed 54.8% remedial math course completed 8.0% african or african american 3.2% asian or asian american 2.1% caucasian 93.3% hispanic 1.3% spring 2004 11.3% fall 2004 9.0% spring 2005 10.5% fall 2005 10.1% spring 2006 10.3% fall 2006 10.3% spring 2007 9.7% fall 2007 10.3% spring 2008 9.9% fall 2008 8.6% freshman 14.3% sophomore 63.5% junior 17.9% senior 4.4% issues in economics course completed 1.5% repeating principles of microeconomics course 3.6% principles of microeconomics course required 83.2% 10 journal for economic educators, 13(1), 2013 table 2: full and reduced models for the complete data set full model reduced model coefficient t-statistic p-value coefficient t-statistic p-value constant 0.004 0.10 0.92 0.028 0.79 0.43 gpa 0.133 12.73 0.00 0.131 12.68 0.00 male 0.042 4.68 0.00 0.044 4.95 0.00 self-appraisal percent 0.078 4.23 0.00 0.081 4.38 0.00 act composite 0.006 3.87 0.00 0.005 3.60 0.00 principles of macroeconomics 0.054 2.37 0.02 0.070 3.25 0.00 calculus course 0.030 3.38 0.00 0.028 3.13 0.00 basic math quiz 0.008 2.54 0.01 0.008 2.63 0.01 remedial math course -0.037 -2.36 0.02 -0.041 -2.62 0.01 african or african american 0.062 2.79 0.01 0.062 2.76 0.01 asian or asian american 0.033 1.16 0.25 0.033 1.16 0.25 hispanic 0.028 0.78 0.44 0.025 0.72 0.47 spring 04 0.057 3.22 0.00 0.053 3.01 0.00 fall 04 0.029 1.56 0.12 0.028 1.52 0.13 spring 05 0.052 2.87 0.00 0.045 2.56 0.01 fall 05 0.031 1.74 0.08 0.033 1.80 0.07 spring 06 0.067 3.68 0.00 0.060 3.41 0.00 fall 06 0.021 1.19 0.23 0.021 1.15 0.25 spring 07 0.014 0.74 0.46 0.013 0.70 0.48 fall 07 0.020 1.12 0.26 0.022 1.20 0.23 spring 08 0.046 2.56 0.01 0.044 2.40 0.02 freshmen -0.016 -1.28 0.20 junior 0.016 1.48 0.14 senior 0.013 0.66 0.51 issues in economics 0.043 1.29 0.20 repeating principles of microeconomics 0.016 0.72 0.47 required 0.009 0.87 0.38 adjusted r 2 60.7% 60.4% f (p-value) 28.87 (0.00) 36.76 (0.00) n 470 470 partial f (p-value) 1.20 (0.30) 11 journal for economic educators, 13(1), 2013 non-significant variables can inflate the apparent percent of the variation in the dependent variable explained by the regression. we remove from the full model those variables with p-values more than 0.05. groups of indicator variables must be removed or kept together in reducing the model, because they function together to describe multilevel categories. so freshman, junior and senior were removed together, because they jointly describe class level, and none of them was significant at the 0.05 level. although asian or asian american and hispanic were not significant predictors, they remain in the model because african or african american was significant. similarly, all of the indicator variables for semester were kept in the reduced model, because some of them were significant predictors. a partial f-test shows that the reduced model is not significantly worse at predicting assessment percent than the full model. the more streamlined model explains almost as much of the variation in the dependent variable as the full model does. self-appraisal percent is more significant than any of the other explanatory variables except for cumulative gpa and gender. the fact that men performed better than women may be because all of the test questions and most of the quiz questions were multiple choice. act composite, completing principles of macroeconomics prior to principles of microeconomics, completing a calculus course, ballard and johnson’s (2004) basic math quiz, and needing to take our university’s remedial math course are also very significant predictors in the reduced model. if the self-appraisal percent were increased by ten percentage points, assessment percent would be predicted to increase by about 0.8 percentage points, according to the reduced model for the complete data set. the “african or african american” variable is positive and very significant, however only 3% of the students are in this category. other data categories also represent very small percentages of the total observations. less than five percent of the students are in each of the following categories: african or african american, asian or asian american, hispanic, seniors, issues in economics completers, principles of microeconomics repeaters and principles of macroeconomics completers. in the spirit of sensitivity testing, we homogenize the data by removing observations in these low frequency categories. the results for the homogenized data are shown in table 3. the coefficients for the most significant variables in the full and reduced models for the homogenized data (shown in table 3) are very similar to those for the full and reduced models for the complete data set (shown in table 2). since these coefficients appear stable, the low frequency categories do not appreciably distort the reduced model for the complete data set. our self-appraisal variable remains a very significant predictor of student achievement. conclusion students who complete online one-minute papers more regularly also perform better in principles of microeconomics. self-appraisal percent is the most significant explanatory variable after cumulative gpa and gender. these results persist even after small categories are removed. 12 journal for economic educators, 13(1), 2013 table 3: full and reduced models for the homogenized data set this does not tell us whether frequent completion of one-minute papers improves performance or whether doing the assignment is associated with an otherwise omitted student characteristic. it could measure prompt, consistent study time, that is, a lack of procrastination. to complete one-minute papers more frequently, students need to remember the task in time to do it, and they are more likely to do this if they are studying further ahead of tests and quizzes. active student engagement outside of class may increase self-appraisal percent. the one-minute paper assignment, however, may also encourage timely study. so even if frequent completion of one-minute papers is associated with a lack of procrastination, we do not know the direction of causality. also doing the one-minute papers involves both reflection and writing. further research is needed to distinguish the independent effects on student performance of procrastination, metacognition and writing. full model reduced model coefficient t-statistic p-value coefficient t-statistic p-value constant -0.035 -0.85 0.40 -0.024 -0.59 0.55 gpa 0.140 12.31 0.00 0.139 12.26 0.00 male 0.046 4.76 0.00 0.046 4.73 0.00 self-appraisal percent 0.082 4.13 0.00 0.083 4.18 0.00 calculus course 0.037 3.74 0.00 0.037 3.71 0.00 act composite 0.006 3.63 0.00 0.006 3.64 0.00 remedial math course -0.042 -2.57 0.01 -0.042 -2.54 0.01 basic math quiz 0.006 1.94 0.05 0.007 2.05 0.04 spring 04 0.076 3.96 0.00 0.077 4.00 0.00 fall 04 0.032 1.59 0.11 0.032 1.62 0.11 spring 05 0.075 3.78 0.00 0.075 3.79 0.00 fall 05 0.050 2.58 0.01 0.050 2.59 0.01 spring 06 0.085 4.18 0.00 0.084 4.14 0.00 fall 06 0.028 1.46 0.14 0.028 1.46 0.15 spring 07 0.031 1.46 0.15 0.029 1.37 0.17 fall 07 0.029 1.48 0.14 0.029 1.48 0.14 spring 08 0.050 2.57 0.01 0.049 2.54 0.01 freshmen -0.026 -1.93 0.05 -0.027 -2.01 0.05 junior 0.017 1.41 0.16 0.017 1.49 0.14 required 0.013 1.09 0.28 adjusted r 2 63.5% 63.5% f (p-value) 36.78 (0.00) 38.73 (0.00) n 392 392 partial f (p-value) 1.18 (0.28) 13 journal for economic educators, 13(1), 2013 references act, inc. 1998. “concordance between sat i verbal score and act english score.” laregentsarchive.com. <http://www.laregentsarchive.com/pdfs/planning/mp%20sat%20to%20act%20conc ordance%20table%20for%20english.pdf>. accessed 27 april 2013. anderson, b., h. benjamin and m.a. fuss. 1994. “the determinants of success in university introductory economics courses.” journal of economic education, 25(2): 99-119. angelo, t.a. and k.p. cross. 1993. classroom assessment techniques: a handbook for college teachers, 2 nd edition. hoboken: jossey-bass publishers. ballard, c.l. and m.f. johnson. 2004. “basic math skills and performance in an introductory economics class.” journal of 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graduates over the entire curriculum: the determinants of success.” journal of economic education, 37(4): 387394. vredenburg, d. 2004. “using on-line discussion forums for minute papers.” the teaching professor, 18(10): 6. williams, m., c. waldauer, and v. duggal. 1992. “gender differences in economic knowledge: an extension of the analysis.” journal of economic education, 23(3): 219-231. http://www.laregentsarchive.com/pdfs/planning/mp%20sat%20to%20act%20concordance%20table%20for%20english.pdf http://www.laregentsarchive.com/pdfs/planning/mp%20sat%20to%20act%20concordance%20table%20for%20english.pdf http://www.ets.org/media/research/pdf/rr-99-02-dorans.pdf http://www.ets.org/media/research/pdf/rr-99-02-dorans.pdf 108 | journal for economic educators, 14(1), summer 2014 108 undergraduate research working for the weekend: a time allocation model for student workers 1 joe s. ballard 2 and e. anthon eff 3 abstract an important area of consumer choice is time allocation and its role in dictating behavior. for the typical student worker, the time allocation decision involves three primary activities: paid employment, academic pursuits, and leisure pursuits. exogenous factors such as the wage rate, price of consumption, rate of effective studying, desired academic grade, and total time available influence an individual’s choice of time to spend on work, study, and leisure. the effects of these exogenous factors reveal a bifurcation in the student worker’s time allocation decision: a laborleisure tradeoff versus academics. the time allocation model developed here derives these effects for the hybrid case of the student worker. key words: time allocation, student workers, employment, leisure, academics, utility maximization jel classification: c30, d11 introduction utility maximization has traditionally been examined in relation to labor-leisure choice. 4 if an individual is not satisfied with the amount of income she receives, she will likely choose to work more hours (assuming it is within her power to control the number of hours worked). on the other hand, if an individual feels overworked and is willing to forgo a portion of her income, she will likely choose to work fewer hours and devote more time to leisure. when the concept of utility maximization is presented in this manner, it becomes apparent that the individual’s choice is dictated by another, arguably more important factor: time. by its very nature, time is unlike any other resource. resources such as capital and labor are subject to both marginal increases and decreases in quantity; time, on the other hand, is subject only to marginal decreases. people are only "losing" time, so to speak. in addition, other resources can be traded while time cannot, for "time cannot be borrowed, traded, sold, or stored; but only consumed at a constant rate" (klein, 2007, p. 3). so, how can an individual be expected 1 this research was undertaken in partial fulfillment of the requirements for graduation through the university honors college with distinction at middle tennessee state university during the fall semester of 2013. dr. eff acted as honors faculty advisor. 2 graduate student, department of economics, the ohio state university, columbus, oh 43210 3 professor, department of economics & finance, middle tennessee state university, mtsu box 27, murfreesboro, tn 37132 4 labor-leisure choice refers to the decision made by an individual as to how many hours out of the day to work. the choice is modeled assuming that consumers desire leisure as well as the consumption of goods (silberberg, 2001). 109 | journal for economic educators, 14(1), summer 2014 109 to allocate efficiently a resource that acts unlike any other? how is an individual’s utility influenced by the efficient (or inefficient) allocation of her own time? a review of works applying utility maximization to time allocation, specifically, studentworker time allocation, forms the basis for the theoretical model presented below. literature review becker (1965) provided the first theoretical analysis of time allocation based on the idea that individuals in households divide time into alternating segments of production and consumption. as a result, time allocation is subject to one basic constraint because "time can be converted into goods by using less time at consumption and more at work" (becker, 1965, p. 496). this theory, however, does not provide adequate explanation for individuals who do not spend all of their time either "producing" or "consuming." a notable case is that of the student. multiple studies have focused on student time allocation with regard to academic performance. kelley (1975), schmidt (1983), and dolton, marcenaro, and navarro (2001) found positive correlations between good study habits and high performance in classes. good study habits include taking notes, studying course material outside of class, and attending lectures. similarly, negative correlations were found between excessive leisure time and high performance in classes. nevertheless, the modern student does not gain utility solely from academic performance. how do additional responsibilities and interests factor into a student's time allocation? what if students choose to allocate their time across leisure, school, and work? the national center for education statistics found that 40 percent of undergraduates ages 16 to 24 worked while enrolled in college full-time in 2010, while roughly 73 percent worked while enrolled in college part-time (national center for education statistics, 2012). the effects of student employment on academic performance appear to be positive. "quantitative studies consistently show that retention rates are higher for students who work a modest number of hours per week (ten to fifteen) than they are for students who do not work at all or those who work more than fifteen hours per week" (perna, 2010, p. 30). using data from the 2003-2008 american time use surveys, kalenkoski and pabilonia (2011) found that employment decreases the amount of time high school students spend on both "productive" and “unproductive” activities. in fact, as students worked more hours, the amount of time spent on "unproductive" activities decreased more than the amount of time spent on "productive" activities. statistical analysis suggests that employment has a significant impact on the way students spend their time. simply stated, time spent working may not be spent doing any other activity. thus, a model of student time allocation should consider employment as seriously as leisure and schoolwork. the time allocation model constructing the lagrangian function the traditional time allocation model examined labor-leisure tradeoffs and the production and consumption of households. a student worker’s time allocation model should utilize the traditional labor-leisure tradeoff while incorporating academic activity. suppose that the typical student worker gains utility from time spent in three activities: paid employment, academic pursuits, and leisure pursuits. the utility function of such a student worker can be represented as: ( ) ( ) where indicates time spent in employment, indicates time spent on academics, and 110 | journal for economic educators, 14(1), summer 2014 110 indicates time spent in leisure. naturally, the generality of this utility function accommodates all forms of student workers, no one specific case. in addition, an increase in any time-use variable, , necessarily results in an increase in total utility. ( ) for any time-use variable, . diminishing marginal utility 5 implies ( ) that is, each additional increase in time spent in a particular activity leads to a marginally smaller increase in total utility for the individual. 6 moreover, the time-use variables, , are mutually exclusive; time spent working, , does not directly affect performance in academics or leisure, time spent studying, , does not directly affect performance in paid employment or leisure, and time spent relaxing, , does not directly affect performance in paid employment or academics. in this model, the student worker’s utility function is maximized subject to three basic inequality constraints: two budget constraints and one time constraint. the budget constraints are based on interactions of the three activities at hand. stemming from the traditional labor-leisure relationship, ( ) where represents the wage rate for paid employment and represents the price of consumption for leisure. an additional budget constraint relates study time to a desired grade in academics. here, ̅ ( ) where r denotes the rate of effective studying and ̅ denotes the desired grade of the representative individual. the third constraint ensures the stability of the time-use variables of the model. for some total amount of activity time, t, ( ) thus, in this model, the student worker maximizes the utility function, ( ) ( ) subject to the constraints, ( ) ̅ ( ) ( ) obtaining a meaningful solution to the constrained maximization problem is a task most easily accomplished through utilization of the lagrangian method. the aforementioned utility function and constraints can be expressed in the following lagrangian form: ( ) ( ) ( ) ( ̅) ( ) ( ) 5 william stanley jevons discussed diminishing marginal utility in his seminal work, the theory of political economy, stating, “we may state as a general law, that the degree of utility varies with the quantity of commodity, and ultimately decreases as that quantity increases” (jevons, 1888, p. 53). 6 for the remainder of this paper, all will be denoted as , all will be denoted as , and all will be denoted as . this practice greatly simplifies notation when representing second-order conditions in matrix form. 111 | journal for economic educators, 14(1), summer 2014 111 where each represents the lagrangian multiplier for the corresponding constraint. deriving and interpreting the first-order conditions the presence of inequality constraints in the utility maximization model leads to the implementation of kuhn-tucker conditions as the first-order necessary conditions of the problem. differentiation of the lagrangian function produces the following set of kuhn-tucker conditions: ( ) ( ) ( ) ( ) ( ) ( ) ( ) ̅ ( ) ( ̅) ( ) ( ) ( ) ( ) ( ) ( ) note that equations (8.5), (8.6), (8.8), (8.9), (8.11), and (8.12) represent the complementary slackness conditions 7 of the problem. in this case, because the utility function is assumed to be concave and the constraints are linear, the problem can be modified into an equality-constrained problem and the constraints themselves can be assumed to be binding. assuming binding constraints, complementary slackness conditions are no longer necessary, and the following set of first-order conditions is established in relation to the equality-constrained problem: ( ) ( ) ( ) ( ) ̅ ( ) ( ) the economic significance of the first-order conditions is dictated by the marginal effects of the lagrangian multipliers and time-use variables on the student worker’s utility. equations (9.4.a), (9.5.a), and (9.6.a), representing the marginal effects of the lagrangian multipliers on the objective function, lead to the following interpretations of the lagrangian multipliers: ( ) ( ) ( ) ( ) rearranging equations (9.1.a), (9.2.a), and (9.3.a) allows one to observe the marginal effects of the time-use variables on an individual’s utility: ( ) ( ) 7 complementary slackness conditions imply that strictly satisfying a constraint causes the corresponding lagrangian multiplier, , to equal zero. on the other hand, if , then the constraint must equal zero. 112 | journal for economic educators, 14(1), summer 2014 112 ( ) provided that is large enough, an individual is willing to have negative utility of work. economic intuition supports this claim, dictating that an individual may be willing to obtain disutility, or “pain,” from working if her expenditures are “low enough” and her wage is “high enough.” similar interpretation can be established regarding the marginal utility of studying. an individual who holds sufficiently “low” academic standards and a sufficiently “high” rate of effective studying may still be willing to obtain disutility from studying. on the other hand, no matter the size of , an individual is not willing to have negative utility of relaxing. a rational individual will not willingly spend money and time to inflict pain or suffering on herself when she could instead work to earn money or study to obtain academic benefit. an equivalency relationship regarding the time-use variables can be established: ( ) because the lagrangian multipliers and exogenous rates are positive, the marginal utility of relaxing is necessarily larger than the marginal utility of working and the marginal utility of studying. this is expected because an individual is willing to obtain even disutility from working and studying if and are large enough while utility obtained from relaxing must be positive. in addition, from an economic standpoint, the negative correlation found between the wage effect and the price effect is expected, for production and consumption are inverse operations. deriving the second-order conditions and forming the bordered hessian 8 total differentiation of each of the first-order conditions yields the following set of second-order conditions: ( ) ( ) ( ) ( ) ̅ ( ) ( ) our goal is to explain how changes in the exogenous variables of the model affect the relative values of the endogenous variables. by separating the exogenous partial derivatives from the endogenous partial derivatives in the second-order conditions, one can easily obtain the desired comparisons. the set of second-order conditions may be rewritten in the following manner: ( ) ( ) ( ) ( ) ̅ ( ) ( ) to determine comparative statics results, the most effective course of action is to solve for marginal effects by utilizing cramer’s rule. with this process in mind, constructing the bordered hessian, or matrix form, of second-order conditions is necessary: 8 the accuracy of the second-order conditions was confirmed using wxmaxima. 113 | journal for economic educators, 14(1), summer 2014 113 [ ] [ ] [ ̅ ] ( ) examining and discussing the marginal effects of the exogenous variables 9 the choice variables of the representative student worker are the three time-use variables; their marginal effects are the focus of the comparative statics analysis in this study. because the time-use variables are affected by changes in the exogenous variables, the most logical approach to examining the student worker’s time allocation decision is to determine the comparative statics results of the model and then interpret each of them in an economic setting to judge how the representative individual should behave. the following section is concerned with expanding the economic relevance of the time allocation model through comparative statics analysis. the wage rate the first exogenous variable in the time allocation model is the wage rate, w. in order to observe the marginal effect of the wage rate on each of the time-use variables of the model, the bordered hessian of second-order conditions must be modified utilizing the marginal wage effect. all other marginal exogenous effects can be momentarily disregarded. applying this condition to the preceding matrix form of second-order conditions produces the following matrix form: [ ] [ ] [ ] ( ) determining the marginal effect of the wage rate on time spent working is accomplished by solving for . by implementing cramer’s rule, is found in the following manner: | | | | | | | | ( ) where represents the bordered hessian of second-order conditions. comparative statics analysis is utilized to determine the economic significance of this effect. because the bordered hessian for the model contains three choice variables and three constraints, the sign of its 9 when implementing cramer’s rule to solve for marginal effects, determinants were solved using wxmaxima. 114 | journal for economic educators, 14(1), summer 2014 114 determinant must be negative to obtain a maximum. therefore, applying signs to obtains the following result: | | ( ) ( ) ( ) ( ) thus, a wage rate increase causes the representative student worker to decrease the amount of time she spends working. this effect acts in accordance with the common microeconomic concept of the backward-bending labor supply curve. though increases in the wage rate are typically met with increases in the number of hours worked at low levels of labor, the constraints placed on an individual in this model cause a redistribution of time to academics and leisure in response to a wage increase. the remaining comparative statics results of the time allocation model are displayed below in table 1: table 1: comparative statics results exogenous variables endogenous variables w r c ̅ t (-) (+) (+) (-) (+) 0 (-) 0 (+) 0 (+) (+) (-) (-) (+) economic interpretation of the remaining results follows. for the representative student worker, time spent studying is not affected by a change in the wage rate. at first glance, this result may appear to be slightly perplexing. as long as it can be shown that there exists an inverse relationship between time spent working and time spent relaxing with respect to a change in the wage rate, then the efficacy of the model is not jeopardized by this result. when the representative student worker experiences a wage increase, she chooses to spend more time relaxing, or “consuming.” from an economic standpoint, neglecting inflation and taxes and holding all else constant, a wage increase provides an individual with more disposable income. obtaining a higher level of purchasing power, a rational individual will choose to purchase more normal goods; therefore, it is reasonable to conclude that the individual will also devote more time to leisure. the rate of effective studying the second exogenous variable in the time allocation model is the rate of effective studying, r. there exists a positive correlation between the rate of effective studying and time spent working. consider the rate of effective studying to be a productivity measure related to academics; then the representative student worker chooses to work more when her ability to study more efficiently improves. in most cases, a rate of studying would be measured subjectively, in terms of an individual’s perception of her own productivity. because there is no proper means of quantifying such a measure, the rate of effective studying is simply a conceptual construct devised to assist in the observation of behavior patterns in the time allocation model. a negative correlation exists between the rate of effective studying and time spent studying. as the student worker’s study rate increases, the individual chooses to devote less time to studying. to obtain some real-world perspective on this observation, it is helpful to imagine a 115 | journal for economic educators, 14(1), summer 2014 115 scenario in which two students, completely identical in all academic abilities, characteristics, and tendencies, prepare for the same exam under different studying conditions. one student studies in a quiet environment devoid of distractions and external influences; the other student studies in a noisy environment where friends are watching television and talking loudly. based on the equivalent abilities of the two students, the first student necessarily has a higher rate of effective studying. for this reason, the first student will require less study time in order to achieve the same level of preparedness for the exam. assuming that the individuals in this model act rationally, it is in the first student’s best interest to achieve the desired level of preparedness and study for no additional time. there exists a positive correlation between the rate of effective studying and time spent relaxing. it is important to note that an increase in r is equivalent to an increase in the price of study time, where represents the quantity of study time “purchased.” when r increases, the relative prices of work time and relaxation time decrease. as a result, a substitution effect is experienced by the individual, and she chooses to substitute toward “purchasing” more of the relatively less expensive goods; in this case, the individual spends more time working and relaxing. the price of consumption the third exogenous variable in the time allocation model is the price of consumption, c. as expected, the marginal effect of the price of consumption on time spent working is inversely related to the marginal effect of the wage rate on time spent working. because the first budget constraint is linear, proportionality is observed with regard to the marginal effects of the exogenous rates. an increase in c is equivalent to an increase in the price of leisure time, where represents the quantity of leisure time “purchased.” when observing an increase in c, the equality constraint, , necessitates an increase in either w or to maintain the balance of the relationship. because the wage rate remains fixed when examining the marginal effect of the price of consumption, the amount of time spent working must increase. intuitively speaking, this is a sensible result; when an individual experiences a price increase with regard to consumption, there is necessarily a greater strain on the individual’s disposable income. to maintain a comparable level of disposable income with the higher price, the individual chooses to work more hours. an increase in the price of consumption has no effect on time spent studying. this conclusion comes as no surprise due to the observed marginal effect of the wage rate on time spent studying. because production and consumption are inverse operations and their rates are proportional in the first budget constraint, their marginal effects should be inverses, as well. if an inverse relationship can be observed between time spent working and time spent relaxing with respect to a change in the price of consumption, then the efficacy of the model will not be negatively impacted by the result of . the economic explanations of the results, and , are less than satisfactory at this moment; speculation regarding the student worker’s utility function will provide greater insight into these results at a later stage of this study. there exists a negative correlation between the price of consumption and time spent relaxing. an increase in c effectively represents an increase in the price of leisure time; as a result, because spending time in leisure activities has become relatively more expensive, a rational individual will substitute away from relaxing. when relaxing becomes relatively more expensive, working obviously becomes relatively less expensive because production and consumption are inverse operations. when examining the first budget constraint, one can also 116 | journal for economic educators, 14(1), summer 2014 116 hypothesize that an individual who consumes at a higher price is not able to sustain consuming for a long period of time; thus, time spent in leisure activities must lessen in order to accommodate the heightened price of consumption. the student’s desired grade the fourth exogenous variable in the time allocation model is the student’s desired grade, ̅. because a student completes a number of assignments, ̅ denotes a preferred grade average across all assignments, as determined by the respective student’s set of preferences. there exists a negative correlation between academic standards and paid employment. this result corresponds with real-world expectations, for it provides insight into the varying work and academic preferences of student workers and workers. student workers, on average, do not work as many hours as workers; by pursuing higher education, the student worker forgoes obtaining some monetary gains in the present in order to obtain potentially greater gains in the future. observing the choice to work as a continuum, it is reasonable to assume that some student workers place higher stock in potential future gains than others. therefore, it follows that student workers who place higher importance on achieving academic success in the present choose to work fewer hours because their labor-leisure motivations are subordinated by their academic motivations. as a student’s academic standards increase, the individual chooses to spend more time studying. note that this result does not imply that students who study more necessarily earn better grades, and the result in no way displays a positive correlation between time spent studying and academic performance. an interpretation of this result was referenced while examining the marginal effect of the student’s desired grade on time spent working; certain student workers favor academic motivations over labor-leisure motivations. future research could observe the impact of this bifurcation on the life-cycle of the student worker. a negative correlation exists between the student’s desired grade and time spent relaxing. at first glance, it may seem puzzling that a marginal increase in the student’s desired grade would negatively impact both time spent working and time spent relaxing. because production and consumption are inverse operations, one may expect their time-use variables to shift in opposite directions regardless of the observed marginal effect. however, academic motivations of the individual are distinguished from labor-leisure motivations, so the combined weight of time spent working and time spent relaxing is measured against the weight of time spent studying. this trade-off, in essence, demonstrates the true nature of the student worker’s time allocation decision, and it is the bifurcation of this decision that dictates that the student spend less time both working and relaxing when her academic aspirations increase. the total allotment of activity time the fifth exogenous variable in the time allocation model is the total allotment of activity time, t. while t can be assigned a specific value such as 24 hours for a day or 7 days for a week, it is best to maintain generality and assume that an individual performs miscellaneous activities not incorporated into the three choice activities of the model. an increase in the total allotment of activity time causes an increase in the amount of time spent working for the representative student worker. naturally, if an individual is granted more activity time, she will allocate it to those activities that are most beneficial from a rational standpoint. thus, it is no surprise that an individual chooses to devote more time to working, for the marginal income of each additional hour worked is the wage rate. as a result, an increase in 117 | journal for economic educators, 14(1), summer 2014 117 the total allotment of activity time necessarily leads to an increase in the representative student worker’s income, assuming that the individual responds rationally to the change. comparative statics analysis shows that a change in the total allotment of activity time has no direct effect on the relative amount of time spent studying for the representative student worker. one may wonder why an individual would not allocate more time toward all beneficial activities if given the opportunity. in this model, the time-use variable associated with academic pursuits is not measured against another time-use variable as those related to employment and leisure are. because the product of the rate of effective studying and time spent studying must maintain an equivalency relationship with only the student’s desired grade in the second budget constraint, an increase in total activity time does not necessitate an increase in study time. an individual, when reaching a level of academic preparedness that equals the desired grade objective, chooses to spend more time working and relaxing because those activities have tangible benefits and their relationship in the first budget constraint imposes balance on production and consumption. an increase in the total allotment of activity time causes the representative student worker to spend more time relaxing. it is interesting that an individual faced with more activit y time in this model chooses to work and relax more but study less. as previously noted, this is due to the separation of labor-leisure and academic motivations in this model. the preferred amount of study time is constrained by a constant, specifically the individual’s desired grade; on the other hand, the preferred amounts of work and relaxation time are constrained by an equivalency relationship that is weighted by the wage rate and the price of consumption. though the representative individual is a student, she still adheres to the consumer choice principle of nonsatiation. therefore, as the student works more hours, she proportionally increases consumption under the assumption that “more is better,” so long as no wage or price changes occur. production fuels consumption and vice versa; thus, as the total allotment of activity time increases, a rational individual chooses to spend more time working and relaxing. discussing the student worker’s time allocation decision the preceding comparative statics results provide tremendous insight into the time allocation decision of the representative student worker. the following marginal effects are observed to be unambiguously positive: , , , , ̅ , , and . conversely, the following marginal effects are observed to be unambiguously negative: , , , ̅ , and ̅ . in addition, three of the marginal effects equal zero: , , and ; these effects in no way directly influence the relative values of the time-use variables. based on the results, one may surmise that academics exist independently of employment and leisure in this model; however, because the student obtains utility from all three activities, and the values of time spent in each activity are dependently related in the time constraint, it seems as though this conclusion is not accurate. instead, though the student worker performs three general activities, a bifurcation exists; that is, a labor-leisure tradeoff is weighed against academics in the student’s time allocation decision. a fitting explanation is that the typical student worker leads a “double life,” so to speak. while changes in the wage rate and price of consumption have no direct effect on time spent studying, changes in the rate of effective studying and desired grade of the individual influence the relative values of time spent working and relaxing. the constraints are constructed in such a way that the magnitudes of production and consumption are balanced, but the 118 | journal for economic educators, 14(1), summer 2014 118 magnitude of academic preparation is measured against the academic standards of the respective student. thus, it follows that the decision regarding study time is strongly influenced by the academic motivations of the student worker and not the exogenous effects related to the wage rate, price of consumption, and total allotment of activity time. economic intuition supports such an observation, dictating that a rational individual who strongly favors labor motivations over academic motivations does not choose to pursue higher education in the first place. those individuals who do pursue higher education naturally give much consideration to time spent on academics; as a result, their decisions regarding time spent in paid employment and leisure activities are strongly influenced by academic motivations. conclusion the human understanding of economics relies on individual decision-making. in terms of microeconomic analysis, rational, self-interested individuals are fueled by the desire to maximize utility. as a result, utility maximization forms the very foundation of consumer choice. while consumer choice is typically examined in relation to production and consumption, it shares a strong connection with time allocation. after all, how individuals choose to spend their time directly impacts their market behavior. many economic agents occupy the role of worker, allocating time between alternating segments of production and consumption; however, some individuals also allocate time toward academic pursuits. because academic pursuits necessarily exist outside of the scope of traditional labor-leisure choice, the time allocation decision of the student differs from that of the worker. the model of this study intuitively explains the bifurcation found in the student worker’s time allocation decision. considering the nature of the time and budget constraints placed on the representative student worker, the marginal effects of the wage rate and price of consumption behave as expected with regard to the individual’s labor-leisure decision; an increase in the wage rate causes a decrease in time spent working and an increase in time spent relaxing, while an increase in the price of consumption causes an increase in time spent working and a decrease in time spent relaxing. at the same time, the student worker’s decision to spend more or less time studying is not affected by changes in the wage rate and price of consumption. the representative student worker only chooses to spend additional time studying if her academic standards increase or her ability to study effectively diminishes. observing labor-leisure choice and academic choice in this model allows one to form significant conclusions regarding the preferences of the typical student worker. the relative weight of a student worker’s academic motivations dictates how she addresses her time allocation decision. having higher academic standards draws the individual toward studying and away from working and relaxing, while having lower academic standards has the opposite effect. here, an individual’s choice to work and relax more characterizes her behavior as being “present-oriented,” while an individual’s choice to study more characterizes her behavior as being “future-oriented.” it is this assessment of expected utility that reveals the true nature of the student’s time allocation decision. overall, this model provides valuable information about human behavior and individual preferences by shedding light on the motivations driving the typical student worker’s time allocation decision. references becker, g. s. 1965. “a theory of the allocation of time.” the economic journal, 75, 493-517. <http://www.jstor.org/stable/2228949>. accessed 15 january 2013. 119 | journal for economic educators, 14(1), summer 2014 119 jevons, w. s. 1888. the theory of political economy. 3 rd edition. <http://files.libertyfund.org/files/625/jevons_0237_ebk_v7.0.pdf>. accessed 10 december 2012. kalenkoski, c. m., & pabilonia, s. w. 2011. “time to work or time to play: the effect of student employment on homework, sleep, and screen time.” <http://www.bls.gov/osmr/pdf/ec110080.pdf>. accessed 6 february 2013. kelley, a. c. 1975. “the student as a utility maximizer.” the journal of economic education, 6, 82-92. <http://www.jstor.org/stable/1182457>. accessed 1 february 2013. klein, c. c. 2007. “the economics of time as a resource.” <http://capone.mtsu.edu/berc/working/econtime-wp07.pdf>. accessed 15 january 2013. national center for education statistics. 2012. college student employment. <http://www.nces.ed.gov/programs/coe/pdf/coe_csw.pdf>. accessed 18 january 2013. perna, l. w. 2010. “understanding the working college student.” academe, 96(4), 30-33. <http://www.aaup.org/article/understanding-working-college-student#.ur6kr2eww54>. accessed 18 january 2013. schmidt, r. m. 1983. “who maximizes what? a study in student time allocation.” the american economic review, 73(2), 23-28. <http://www.jstor.org/stable/1816808>. accessed 18 january 2013. silberberg, e., & suen, w. 2001. the structure of economics: a mathematical analysis. 3 rd edition. new york: irwin/mcgraw-hill. the cost of university education: where do the lost years go 43 journal for economic educators, 12(1), 2012 the opportunity cost of education: where do the lost years go? hafizur rahman, jim seldon and zéna seldon 1 abstract economists often introduce their classes to opportunity cost concepts by pointing out the additional incomes students could be earning were they employed full time rather than attending university. a potential additional cost, a reduction in years of future labor force participation, is unlikely to be mentioned. we argue that although this ‘work-life’ effect may safely be ignored in calculating rates of return to education, it must be taken into account if the goal is to correctly identify the cost of individuals’ time out of the labor force, particularly for purposes other than education. the fact that this issue was raised in a court case by a vocational analyst provides “real” life example of how this “work life” effect matters and may serve to intrigue our students and validate the study of our discipline. our paper demonstrates the appropriate methodology and information necessary to identify work-life costs and suggests introducing the concept at introductory levels. key words: opportunity cost, labor market, work-life effects of time out of labor force jel classification: a22 introduction introductory texts and principles instructors frequently illustrate opportunity costs with an example designed to capture classroom interest: the earnings students sacrifice when they take time out of the labor force to pursue degrees. 2 the goal, presumably, is to help personalize the fact that economic cost is a complex notion and to make clear that accounts recording flows of expenditures and receipts will seldom be adequate to the task of measuring it. the same information is routinely utilized by researchers investigating internal rates of return to higher education. they solve for the discount rate that equates the present value of direct costs plus earnings foregone to the present value of future income increases predicted to flow from possession of the relevant academic credential. 3 mention is unlikely to be made of the fact that remaining out of the labor force during study may also result in fewer years of potential employment. we observe below that in estimating rates of return to education those ‘lost’ years may safely be ignored, the omission of what we term a “work-life” effect is far from moot in 1 respectively interim associate dean, school of business and economics, professor (deceased), department of economics and associate professor, department of economics, thompson rivers university, kamloops, bc, canada. all authors have contributed equally and they are listed in alphabetical order by last name in keeping with the convention generally followed by economists. 2 casual sampling of texts and conversations with colleagues teaching introductory economics courses suggest that lists of either texts or instructors not at some stage presenting an education example would be quite short. 3 becker (1964) is the classic human capital reference, and the already-vast empirical literature following mincer (1974) is continually expanding. psacharopoulos (1973, 1994), psacharopoulos and patrinos (2002) provide a useful summary and updates, while informative discussions of the rate of return estimation process are provided by appleby et al (2002) and boothby and rowe (2002). 44 journal for economic educators, 12(1), 2012 other applications. frank (2005) argues that introductory economics courses pay too little attention to realworld opportunity cost applications, while ferraro and taylor (2005) suggest that economists may not explain, understand, or quantify those costs as well as they ought. ignoring work-life effects might reflect an imperfect understanding of opportunity cost. alternatively, failure to mention them could be a deliberate simplification made to avoid distracting introductory students from the core concept of opportunities foregone; or it may be in tacit recognition of the fact that for some purposes the effect can be ignored. whatever the reason, it is shown below that the cost of events or activities that keep individuals out of the labor force will be systematically understated if work-life impacts are not taken into account. the following section turns to a discussion of work-life impacts in cost-of-time questions. section 3 describes an approach that takes those effects into account. section 4 considers extended retirement ages associated with education. section 5 concludes. time costs, education and rates of return in a recent civil trial (manke, 2005) a vocational analyst testifying on the cost of mitigating an earning capacity loss by a plaintiff who had suffered a disabling injury explained that he had measured the cost of time out of the labor force to attend university using two different methods. the first, conventionally, estimated the wages and other employment benefits that would be foregone during the five years he judged it would take his client (a recent high school graduate) to earn a degree. the second, in contrast, comprised the earnings of individuals with high school but no further education currently in the five years prior to normal retirement age. he then offered as a best estimate the mean of the two figures. under cross-examination the analyst defended his methodology by pointing out that although someone who had recently completed high school might be giving up (for example) earnings averaging $20,000 a year while pursuing a degree, she would at the same time be shortening her potential working years by five – in effect, the last five, during which foregone income would be substantially higher. (the injury itself was not expected to affect the injured party’s life or work-life expectancy.) thus, he argued, an alternative cost measure would be the earnings given up in the five years at career-end, and a reasonable estimate of the true cost would be the mean of the two figures. the arithmetic is straightforward: if the current earnings of individuals nearing the end of their work lives are $60,000 annually compared with today’s starting wages of $20,000 for comparably-educated workers, the analyst’s methodology generates a sacrifice caused by taking five years out of the labor force immediately following high school averaging $40,000 and totaling $200,000. the methodology obviously is deficient in failing to account for differences in current and future dollars. although un-discounted figures may provide tolerable approximations for short time periods, over a span of forty years or more they clearly do not. at a real discount rate of two per cent the present value of $60,000 to be earned forty years hence would be only $27,173. thus, even if averaging were an appropriate procedure, the ‘correct’ annual figure would be on the order of $23,500 rather than $40,000. although the averaging approach is clearly flawed, it highlights a potentially important omission in the usual discussion of the opportunity cost of time out of the labor force. to show this, we briefly discuss of rates of return to investment in education. figure i reproduces the standard diagram used to illustrate educational returns. the 45 journal for economic educators, 12(1), 2012 process begins with a comparison of average earnings, by age, of individuals who have attained a particular education level and the respective earnings of those who have attained the next higher level, adjusting when possible for individual ability differences (leigh and ryan, 2006). in legal proceedings the estimate generally is of earning capacity rather than actual earnings, but in practice the latter are often used to estimate the former. for the purposes at hand, no distinction need be made between them. in the diagram, α represents the annual earnings for an eighteen year old high school graduate. the dotted line shows age-specific earnings of individuals with high school education only, assuming for simplicity that the work-life of those individuals begins at age eighteen and terminates at sixty-five regardless of his choices about labor market participation. 4 the dashed line shows the earnings profile of otherwise identical individuals who have taken five years out of the labor force between eighteen and twenty-three. they join the workforce with degree in hand where γ represents the annual earnings of this twenty three year old university graduate. figure i earnings profiles with and without a degree for purposes of illustration, direct costs such as tuition, books and additional living expenses are ignored, as are the effects of education on retirement age (cf trostel and walker, 2006) while earnings during study are shown as zero. the pattern of actual earnings and the time taken to complete “four year” degrees will vary by individual, for although student earning capacities typically rise with age (via education) and with experience (usually part-time), so will the cost of delaying graduation. 5 4 given world-wide changes in social security and pension payment, one could, of course, legitimately argue for a different age, for example, sixty-seven. 5 as is standard when this diagram is used by introductory texts, for the purposes of illustration, we make a few simplifying assumptions. these include a uniform retirement age and ignore such issues as potential earnings b a age 65 23 18 annual earnings w/o degree, entry age 18 with degree α β γ d 46 journal for economic educators, 12(1), 2012 area a thus shows earnings foregone during enrollment in undergraduate study. area b shows the additional earnings of those who have acquired degrees, over and above the earnings of those with high school completion and no further education (area d) for the period between graduation and retirement. 6 the standard diagram does not address the question of the pay levels that would result were an individual to remain out of the labor force for the years between eighteen and twentythree, but not upgrade their capabilities or credentials. in the absence of this discussion, one might assume that if she started her career at age twenty-three her annual earnings would be identical to those she would have received had she worked full time during the previous five years. figure ii illustrates a more plausible case. figure ii earnings adjusted for time out of the labor force in figure ii, the earnings profile of someone beginning a career after remaining out of the labor force for five years following high school without obtaining additional education (the solid line, beginning at δ) lies below the profile of the same individual with five additional years of work experience (the dotted line passing through β.) the effects on earnings of age alone, reflected in the level of β and the subsequent potential earnings path, will vary by individual and occupation. however, someone first entering the labor force at twenty-three with a high school education earned at eighteen is expected to earn less at each age than had the same person begun work at eighteen and thus gained five additional years’ experience. in figure ii, δ, base pay at twenty three (net of educational or other benefits from use of the previous five years) is the same as the individual would have earned entering the labor force from part-time jobs during study, variable length of study to complete “four year” study, etc. the exclusion of direct costs does not change the nature of the illustrations in figure i and figure ii and the differences highlighted between them. 6 impacts on the probability of involuntary unemployment are accounted for in the magnitudes of b and d. b a age 65 23 18 annual earnings w/o degree, entry age 18 with degree c w/o degree, entry age 23 α β γ δ e 47 journal for economic educators, 12(1), 2012 at eighteen (α) and thus is below what he or she could have been earning at twenty-three after five years of experience (β). that is, the base wage for a high school graduate beginning work at age 23 must be the same whether the five years out of the labor force were used to raise a family, ski the alps, or earn a degree. the solid line in figure ii thus shows the ‘pure’ effect of time out of the labor force, allowing clear separation of costs from the consequences of whatever use was made of the time. given entry-level pay rates rising through time it is plausible that first-year earnings could be higher for a person entering the labor force after a gap of several years than would have been the case immediately following high school. that is, δ could be greater than α. even then, employers would almost certainly not offer as high pay rates (β) to job applicants with five years fewer work experience and no educational or other achievement to show for those years. starting pay for recent high school graduates might even be higher than for 23-year-olds who had completed high school five years earlier and taken those years out of the labor force without enhancing their credentials or capabilities in the interim. ultimately, the size of the differential is an empirical issue; but it would be typical to find β higher than δ. 7 remaining out of the labor force between ages 18 and 23 thus can be seen to have a total cost represented by area a (foregone earnings) plus area c (reduced future earnings or earning potential.) despite having no obvious association with the lost years that worried the vocational analyst, area c shows the sacrifice of future earning capacity resulting from time out of the labor force, abstracting from any income gains that could flow from use of that time to acquire additional human capital. area c is not an alternative measure of opportunity costs, however, but a distinct component of them. work-life costs are hidden in figure i because observed age-earnings profiles do not identify what could have been earned by degree-bearing individuals had they remained out of the labor force and not obtained degrees. fortunately, that omission is of no consequence in calculating ex post rates of return to education. in that procedure, comparison of areas a and b – or in standard econometric practice, a plus d with b plus d – is sufficient. area c in figure ii can be ignored because as both a cost (of time out of the labor force) and a benefit (from enhanced education presumably undertaken during that time) its magnitude does not influence the internal rate of return to educational investment. for individual decision-makers, however, the issue is of more than purely academic interest whether valuing the cost of a gap year, the time a parent might take out of the labor force to raise a family or a daughter to serve as a caregiver for elderly parents,. nor would this issue be trivial for someone who spends an extended period as a discouraged worker during a period of high unemployment, as has recently been the case for many young people in europe as well as north america. since even in present value terms the cost calculations cannot be as simple as averaging the earnings sacrificed at the beginning and end of a career, the next section turns to discussion of the appropriate methodology. 7 jacobsen and levin (1995) discuss issues and evidence. there are obviously other possible scenarios such as partially completed degrees, certificates and diplomas which will put earnings of individuals somewhere between high school diploma and college degree. 48 journal for economic educators, 12(1), 2012 earning capacities and time costs: present values table i displays hypothetical age-specific earning capacity profiles consistent with the numerical example presented earlier in section 2 for the civil trial case. 1 2 3 age (years) earning capacities w/ high school education (constant dollars) earning capacity loss in first 5 years only (constant dollars) 18 $18,991 $0 19 $19,483 $0 20 $19,987 $0 21 $20,504 $0 22 $21,035 $0 23 $21,579 $21,579 24 $22,138 $22,138 25 $22,710 $22,710 ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 63 $59,961 $59,961 64 $61,513 $61,513 65 $63,104 $63,104 pv (2% discount rate) $600,023 $508,629 in this example the individual does not suffer loss of earnings capacity at age 23 for being away from the labor force because annual income is the same as those who started working at the age of 18. table i earnings losses from time out of the labor force, income effects in the first five years only the undiscounted loss of potential earnings from remaining out of the labor force between ages eighteen and twenty-three averages $20,000 per year while the (also undiscounted) average over the final five years is $60,000. for simplicity, earnings from age 18 through 22 again are assumed to be zero and direct costs are ignored. potential earnings in the second column of table i display constant year-over-year percentage increases (of approximately 2.7 percent) for years in which the individual is employed, rather than the decreasing marginal earnings pattern shown in figures i and ii. in practice, earnings tend to rise fairly steeply early on in one’s career, after which they rise more slowly. 8 fortunately the logic here is unaffected by differing potential earnings patterns, and as a practical matter the precise shapes of the profiles generally will be of relatively minor significance to the differing opportunity cost patterns. what matters for the purposes of measuring both costs and benefits are the shifts from one profile to the other – downward as a consequence of time out of the labor force and upward as a result of additional education. the third column of table i shows the same annual earning capacities as the second except for the zero values in the first five years of potential employment. the horizontal arrow 8 thanks to two referees for suggesting this addition. 49 journal for economic educators, 12(1), 2012 emphasizes the point that earning capacities at age twenty three and beyond are identical whether or not the individual has previous work experience. the cost of being out of the labor force from ages eighteen through twenty two is given by the difference in the present values of the two streams, represented by area a. for a two percent real discount rate (risk-free investment earnings two percentage points above average annual increases in employment earning capacity) that difference amounts to approximately $91,000. at a discount rate of 4 percent, it is just over $88,000. even with differences only in the initial five year period, the $100,000 that would normally be used in classroom examples can diverge from the discounted value. failing to account for work-life effects can result in considerably greater discrepancies. table ii replicates table i except that (as indicated by the sloping arrow) the earning capacities of otherwise equivalent workers now depend entirely on years of labor force participation. in table i, a labor force entrant aged twenty-three was assumed able to earn the same amount at each age as could an otherwise identical counterpart who had begun work five years earlier at age 18. table ii parallels figure ii in assuming that the potential earnings of a 23-year old with no work experience would be the same as those of a comparably educated 18year old beginning employment without experience. 1 2 3 age (years) earning capacities w/ high school education (constant dollars) earning capacity loss in first five years & over career (constant dollars) 18 $18,991 $0 19 $19,483 $0 20 $19,987 $0 21 $20,504 $0 22 $21,035 $0 23 $21,579 $18,991 24 $22,138 $19,483 25 $22,710 $19,987 ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ 63 $59,961 $52,770 64 $61,513 $54,136 65 $63,104 $55,537 pv at 2% discount rate $600,023 $447,633 note as per r1-8: in this example the individual does suffer loss of earnings capacity at age 23 for their lack of experience for being away from the labor force for five years. table ii earnings losses from time out of the labor force, income effects in the first five and later years table ii shows that with a two percent real discount rate the present value of lifetime earnings of an individual with a high school education and continuous employment from age eighteen through sixty five would be some $152,000 greater than that of a counterpart who began work at age twenty three at the same wage as the eighteen-year old. that cost figure is two 50 journal for economic educators, 12(1), 2012 thirds greater than the $91,000 from table i and more than fifty per cent greater than the undiscounted five-year figure. at a four percent discount rate, taking the work-life effect into account would increase the five-year cost of time out of the labor force from $88,000 to over $128,500, while at a zero percent rate the cost of delaying entry into the labor force by five years would amount to $300,000 rather than the conventional $100,000 classroom illustration. alternative discount rates, differing potential income streams (associated with different college majors, for instance) and patterns of time out of the labor force (such as in full-time versus part-time study) will generate varying discrepancies. in each instance, however, earnings foregone during university study will understate the true opportunity costs by amounts that could be quite substantial. retirement age retirement decisions are driven by a complex set of factors faced by the individual that could vary along gender lines or with the manner in which incentive structures are set up. it is an empirical issue and one that could change with changing times and demographic factors (diamond, 2011). empirical work suggests that increased education tends to correlate with later retirement ages. while it is possible that educated individuals are attempting to recapture the gains from the last five years of high earning capacity, while those who did not seek additional education conclude that they have worked the requisite forty seven years. it would seem more probable, however, that the character of the jobs one is likely to do with additional education put lower stress on the employee, reducing a push factor older workers might otherwise face. but once again, the individual who took time out but did not choose to obtain extra education, will find his options reduced and will be unable to capture what would have been higher earnings years. conclusion best estimates of opportunity costs incurred by taking time out of the labor force can be derived by identifying each future year’s anticipated earning capacity under alternative scenarios and comparing present values of the differing income streams. costs include the usual example of income foregone during the absence itself but also (typically) involve foregone future earning capacity. that future cost, omitted in introductory examples and hidden in educational rate of return calculations, is accounted for not by focusing on ‘lost’ years of potential future employment but by spelling out consequent year by year differences in earning capacities. time out of the labor force may – depending on its use – have benefits in the form of enhanced future earning capacity. in turn, those benefits may or may not be sufficient to offset one or both opportunity cost components. only the net effect need be considered when the goal is determination of aggregate rates of return to investment in education, although it can always be misleading to ignore a cost simply because there are benefits to balance against it. at the individual level, where the outcomes flowing from specific choices (say, from choosing to major in accounting rather than english literature) may be associated with differential risks of achieving mean post-education income profiles, decision-makers’ failure to be explicit about potential future work-life costs might have more serious implications. flowing out of the vocational analyst’s testimony, discussion in this paper has considered time out of the labor force for educational purposes prior to the beginning of an individual’s career. but it notes that the same qualifications apply no matter what the reason for the hiatus 51 journal for economic educators, 12(1), 2012 and no matter which years of potential employment are involved – a ‘gap year’ between high school and university, graduation delayed to accommodate a part-time job, unemployment flowing from a bad economic times, a semester lost owing to illness, time out to raise a family, and so on. only when an individual withdraws permanently from the labor force, in whole or in part, will foregone income during the period of absence or reduced participation comprise the total cost. what is required to best answer questions involving the cost of time is straightforward: to be as precise as possible about alternative year-by-year earning capacities before, during and after the span for which cost is to be determined, holding other factors (including educational achievement) constant, then to compare present values of the alternative streams. whether we think about this case in the context of the value of education, a cost of the financial crisis, or a real life example raised by a vocational analyst testifying to earning capacity loss suffered by an injured plaintiff, our augmented diagram provides us as teachers of economics with a world of possibilities that we believe should not be limited to the value of education. as albert einstein is frequently quoted, ‘explanations should be made as simple as possible, but not more so.’ 9 when setting our students on the path to understanding opportunity costs, might failing to mention future work life effects be an instance of ‘more so?’ references appleby, john et al. 2002. is post-secondary education in canada a cost-effective proposition? working paper w-01-9e, isbn 0-662-33422-1, applied research branch, human resources development canada publications centre, hull, quebec. becker, gary.1964. human capital, university of chicago press. boothby, daniel and geoff rowe. 2002. rate of return to education: a distributional analysis using the lifepaths model, working paper w-02-8e, isbn 0-662-33428-0, applied research branch, human resources development canada publications centre, hull, quebec. diamond, peter. 2011. “demographic change, retirement and healthcare.” interviewed by romesh vaitilingam, 2 september 2011. http://voxeu.org/index.php?q=node/6925 dillman, everett g. 1988. “age-earnings cycle: earnings by education.” the journal of forensic economics, 2(1): 105-116. ferraro, paul j. and laura o. taylor. 2005. “do economists recognize an opportunity cost when they see one? a dismal performance from the dismal science.” contributions to economic analysis and policy, 4(1), article 7. http://www.bepress.com/bejeap/contributions/vol4/iss1/art7 frank, robert h. 2005. “the opportunity cost of economics education.” the new york times, september 1. 9 the source of the aphorism appears to have been einstein’s rather less quotable statement that “[t]he supreme goal of all theory is to make the irreducible basic elements as simple and as few as possible without having to surrender the adequate representation of a single datum of experience.” from “on the method of theoretical physics” the herbert spencer lecture, oxford (10 june 1933); published in philosophy of science, vol. 1, no. 2 (april 1934), pp. 163-169. http://voxeu.org/index.php?q=node/6925 http://www.bepress.com/bejeap/contributions/vol4/iss1/art7 52 journal for economic educators, 12(1), 2012 frank, robert h. and ben s. bernanke. 2005. principles of economics, 2/e. new york: mcgraw-hill/irwin. jacobsen, joyce p. and laurence m. levin. 1995. “effects of intermittent labor force attachment on women’s earnings.” monthly labor review, 118(9): 14-19. leigh, andrew and chris ryan. 2008. “estimating returns to education using different natural experiment techniques.” economics of education review, 27: 149-160. manke & manke v physicians insurance company of wisconsin et al. 2005. la crosse county circuit court, state of wisconsin; court of appeals of wisconsin published opinion, case no. 2005ap1103, 2006 wi app 50. mincer, j. 1974. schooling, experience and earnings, national bureau of economic research/columbia university press, new york. psacharopoulos, george. 1973. returns to education: an international comparison, elsevier: london. psacharopoulos, george. 1994. “returns to investment in education: a global update.” world development, 22(9):1325-1343. psacharopoulos, george and h. a. patrinos. 2002. “returns to investment in education: a further update.” world bank policy research working paper 2881, september. trostel, philip and ian walker (2006) “education and work” education economics, vol. 14, no. 377-399. http://research.tru.ca/cv.php## 21 journal for economic educators, 10(1), summer 2010 is financial literacy improved by participating in a stock market game? cynthia harter and john f.r. harter1 abstract this study investigates the effectiveness of the stock market game (smg) in improving student scores on a general multiple-choice test covering basic financial concepts. teachers in the test group used the stock market game and a complementary curriculum in class while teachers in the control group did not. students in both groups completed the same online pre and post-tests, demographic surveys, and math aptitude tests. the results of ordinary least squares regression show that playing smg along with teaching seven general lessons from the learning from the market curriculum improves student performance on the financial literacy assessment. key words: stock market game, financial literacy, student assessment jel classification: a21 introduction the stock market game (smg) is a 30-year-old foundation for investor education program that has been used by more than 10 million students in all 50 us states and worldwide. this simulation provides students an opportunity to invest a hypothetical $100,000 in a stock portfolio over a period of time. the program claims that students “think they’re playing a game” while teachers “know they’re learning economic and financial concepts they’ll use for the rest of their lives” (www.stockmarketgame.org). while there are limited statistical analyses on the impact of the smg on students’ knowledge, recent studies support the simulation as contributing positively to students’ academic performance. survey results collected and published by the jump$tart coalition for personal financial literacy illustrate that “since 2000, the first year of the study, students who participated in smg have consistently outperformed all other students who participated in all other forms of money management education” (destefano, 2008). specifically, the 2006 jump$tart coalition survey results showed that students who played a stock market game simulation performed better in terms of financial literacy than other students (www.jumpstart.org). findings from the first national assessment of educational progress in economics show that students who participated in a stock market game simulation performed better in general economics (walstad and buckles, 2008, and destefano, 2008). a recent study of high school students’ understanding of economics in mississippi also found that participating in a stock market game simulation had a positive and significant effect on students’ posttest scores on the general test of economic literacy (grimes, millea, and thomas, 2008). 1 cynthia harter, director, center for economic education, 106 beckham, eastern kentucky university, 521 lancaster avenue, richmond, ky 40475, (859) 622-1390, (859) 622-5065 (fax), e-mail: cynthia.harter@eku.edu john f.r. harter, professor, department of economics, 106 beckham, eastern kentucky university, 521 lancaster avenue, richmond, ky 40475, (859) 622-1773, (859) 622-5065 (fax), e-mail: john.harter@eku.edu 22 journal for economic educators, 10(1), summer 2010 given these results, a more direct evaluation of the effectiveness of the stock market game on student achievement is timely. we constructed a study of the effectiveness of playing the stock market game online, accompanied by a complementary curriculum, using a test group and a control group in the central and eastern parts of our state. our goal is to test the effectiveness of smg. the teachers need to use some sort of curriculum with the game, however, and the teachers in the study had a wide range of abilities and experiences with smg. at the game’s web site (www.stockmarketgame.org), a teacher support center offers many curricula and classroom helps. in order to minimize the effect of the accompanying curriculum, learning from the market was chosen because most of the lessons in the curriculum cover only basic content. since we are primarily interested in the effectiveness of the game in improving student achievement, we felt that requiring only basic content to be covered would give the teachers the confidence they needed to implement smg, while not providing too much content outside of the game. methodology and analysis during the spring of 2007, all of the high schools in a wide geographic region of the central and eastern parts of our state were identified. initially, random sampling was contemplated, but the small number of participants led us to invite all of the teachers in the population to participate in our study. stipends of $300 were offered to the test group participants and $150 to the control group participants in order to encourage participation. this resulted in 19 teachers in the test group and 20 teachers in the control group. during the summer of 2007, we trained the teachers from the test group in the stock market game and the learning from the market curriculum. the summer training was offered at two different times in two different locations so as to accommodate teachers’ schedules and locations. the teachers were reimbursed for mileage and provided with breakfast and lunch on the training days. the teachers received online access to the required lessons and many other resources. they each received a folder containing instructions on how to access every necessary website and where to find every necessary assessment. all of the information was posted in a password-protected blackboard website. each test group teacher was allowed up to five free teams to play smg during the fall 2007 semester. they registered for and played smg with students during that semester and also taught the required lessons (1 through 7) from learning from the market. after teaching the curriculum and after the students played the stock market game, the teachers were asked to complete a survey containing questions about their demographic data, financial education and experience. the survey included questions about their assessment of the usefulness of the game and curriculum. the control group teachers received no training. they were instructed to test their students at the beginning and end of the fall 2007 semester, and to teach economic and financial concepts as they normally would during that semester. they also completed a survey containing questions about their demographic data, financial education and experience, and also about what materials they used to teach economic and financial concepts during this semester.2 2 the control group teachers reported using the following materials: economics: principles in action by prentice-hall, econedlink, banking & financial systems text, www.moneyskill.org, essentials of marketing, entrepreneurship, and retailing, national endowment for financial education, accounting and finance 1 curriculum by kentucky career and technology business education division, managing your personal finances, http://www.stockmarketgame.org/� http://www.moneyskill.org/� 23 journal for economic educators, 10(1), summer 2010 the students in both the test group and the control group were given an online smg pretest and posttest that we developed using questions from jump$tart’s survey and other sources. the test was intentionally broad so as not to test only knowledge about the stock market. students also answered a demographic questionnaire to report gender, race, grade level, and parental academic achievement. students also took an online multiple-choice math test to provide a proxy for general academic ability, since aptitude variables are consistently significant explanators of learning economics (becker, 1997). lacking data on other tests taken by our subjects, we chose a standardized math test, since such a test was shown to be a good predictor in past studies (ballard and johnson, 2004, and harter and harter, 2004). we sent stipends of $300 to the test group teachers and $150 to the control group teachers who completed all of the requirements of the study. we also invited all of the control group teachers to take advantage of smg training in early 2008 and offered up to five free teams for each teacher to play during spring 2008. results ten (10) teachers participated in the test group throughout the fall semester. when we discovered that a couple of the teachers had their students take the wrong assessments, we emailed them to correct this. one teacher was unable to fulfill the requirement to have her students take the correct smg posttest, so she was not eligible for the stipend for completing the project. nevertheless, she and her students did complete some of the assessments and questionnaires and are included in the descriptive data, but not in the statistical analyses. eleven (11) teachers were in the control group. when we discovered that some of the teachers did not have their students complete all of the online testing, we contacted them and requested that the students complete the assessments. three of the teachers were not able to have their students complete all of the requirements. in some cases, it was only the demographic questionnaire that students did not complete. since the teachers and students did complete some of the assessments and questionnaires, they are included in the descriptive data. from table 1, it is clear that most of the teachers in our study are female, white, and aged 35-49. the teachers in the test group have slightly more years of teaching experience and attendance at economics workshops. they have earned an average of more than 3 graduate credits in economics as compared to an average of 1.64 credits for the control group teachers. pbs series dollar$ & sense: fundamentals of investing, investing in stocks, investing in mutual funds, teachermade powerpoints, pnc bank-provided brochures, www.moneyinstructor.com http://www.moneyinstructor.com/� 24 journal for economic educators, 10(1), summer 2010 table 1 – descriptive results for teachers percentages by category for gender, race, and age mean values for others variable whole group (21 teachers) test group (10 teachers) control group (11 teachers) gender female male 0.81 0.19 0.90 0.10 0.72 0.27 race black/african-amer. white 0.05 0.95 0.00 1.00 0.09 0.91 age 25-34 35-49 50 or above 0.19 0.67 0.14 0.00 0.70 0.30 0.36 0.64 0.00 years of teaching experience 10.88 11.60 10.23 years of teaching finance/econ 5.86 6.40 5.36 number of econ. workshops attended 6.79 6.86 6.75 graduate credits earned in economics 2.43 3.30 1.64 in table 2, we provide descriptive results for the student responses. there are 730 students in the data set with 395 students in the test group and 335 students in the control group. not all of the students responded to all of the questions and assessments, so the total number of responses for each variable are listed in the column with the variable names. there are slightly more males than females in the study and most are white. nearly 40% of the students are high school freshman, while about 35% are seniors. most of the students live with both parents, and about one-third have neither mothers nor fathers who attended college. more than one-half of the students do not work and about two-thirds of the students report that they will definitely attend college. less than one-third of the students think they probably will or definitely will invest in the stock market one day, while about 25% of the students in the test group report that they are more likely to invest after playing the stock market game. 25 journal for economic educators, 10(1), summer 2010 table 2 – descriptive results for students percentages by category (non-responses are omitted.) variable whole group (730 students) test group (395 students) control group (335 students) gender (n=545) female male 46.97 53.03 45.85 54.15 48.64 51.36 race (n=545) am. indian or alaska native asian black/african-amer. native hawaiian or other pacific islander white some other race 0.37 0.73 2.20 0.55 90.28 5.87 0.62 0.62 3.08 0.62 86.15 8.92 0.91 0.91 0.45 96.36 1.36 grade (n=545) 9th 10th 11th 12th some other grade 38.53 17.43 8.81 35.05 0.18 41.23 23.38 9.85 25.23 0.31 34.55 8.64 7.27 49.55 live with (n=543) both parents mostly mom mostly dad neither parent 60.77 26.52 7.18 5.52 59.88 25.62 7.10 7.41 62.10 27.85 7.31 2.74 mother’s education (n=540) no college some college college graduate graduate degree don’t know 31.85 17.04 18.89 14.63 17.59 32.09 15.26 18.69 13.08 20.87 31.51 19.63 19.18 16.89 12.79 father’s education (n=543) no college some college college graduate graduate degree don’t know 33.70 14.73 16.21 12.34 23.02 33.13 14.55 14.86 11.76 25.70 34.55 15.00 18.18 13.18 19.09 26 journal for economic educators, 10(1), summer 2010 help with smg (n=323) none some a lot 77.40 20.74 1.86 plans to go to college (n=544) definitely not probably not undecided probably will definitely will 1.10 3.68 6.99 23.35 64.89 1.54 4.94 8.95 24.38 60.19 0.45 1.82 4.09 21.82 71.82 do you work? (n=543) no yes, part-time yes, full-time yes, on occasion 56.72 30.20 2.39 10.68 58.82 24.15 3.10 13.93 53.64 39.09 1.36 5.91 likely to invest in stock market (n=544) definitely not probably not undecided probably will definitely will 14.52 24.45 38.60 17.10 5.33 16.98 23.77 39.51 14.81 4.94 10.91 25.45 37.27 20.45 5.91 has smg changed likelihood to invest? (n=323) no yes, more likely yes, less likely undecided did not play smg 38.39 25.39 6.19 29.72 0.31 ever played smg before this semester? (n=543) no yes 86.37 13.63 88.24 11.76 83.64 16.36 was smg better way to learn? (n=323) no, it was worse. liked it the same. yes, i liked it better. 13.93 26.93 59.13 27 journal for economic educators, 10(1), summer 2010 in table 3, we report student scores on the assessments. the first test is a multiple-choice math test in which the questions were selected from an old version of the preliminary scholastic aptitude test. this score is a percentage of correct answers and is used as a proxy for students’ general academic ability. the students in the control group have a higher average score on the math test (33.54) than the students in the test group (29.44). using a difference-of-means test to determine whether this difference is statistically significant, we find a t-statistic of -1.69. therefore, the difference is statistically significant only at the 0.10 level of significance. table 3 mean values for student test scores standard deviations in parentheses variable whole group (730 students) test group (395 students) control group (335 students) t-statistic comparing means for test group and control group math test 31.21 (18.44) n=609 29.44 (17.07) n=346 33.54 (19.91) n=263 -1.69* smg pretest 42.49 (15.26) n=601 41.22 (14.61) n=342 44.18 (15.96) n=259 -1.67* smg posttest 57.87 (22.02) n=572 64.36 (22.55) n=343 48.15 (17.12) n=229 6.49** subset pretest 42.77 (20.15) n=600 41.23 (19.58) n=341 44.79 (20.75) n=259 -1.31 subset posttest 56.88 (24.47) n=571 61.78 (23.91) n=342 49.56 (23.49) n=229 3.30** *significant at the 0.10 level **significant at the 0.01 level the scores on the smg pretest and the smg posttest are percentages of correct responses on a multiple-choice assessment constructed from jump$tart’s survey and other sources. the test was purposely made broad so as not only to test knowledge about the stock market, but to test knowledge of other financial concepts such as purchasing life insurance, buying a car, and using credit. the students in the control group had a slightly higher average score on the pretest (44.18) than the students in the test group (41.22). the t-statistic for a difference-of-means test of these scores is -1.67 which is statistically significant at the 0.10 level of significance. note that the students in the test group performed much better on the smg posttest than the students in the control group. the test group average is 64.36 while the control group 28 journal for economic educators, 10(1), summer 2010 average is 48.15. the t-statistic for a difference-of-means test of these scores is 6.49 which is statistically significant at the 0.01 level of significance. this suggests that playing the smg and using the learning from the market curriculum improved student performance on the assessment. to investigate this issue further, the ten questions on the smg assessment that were not specific to the stock market were isolated and the students’ scores on this subset were determined. the pretest and posttest averages on the subset questions are provided in table 3 and labeled as subset pretest and subset posttest. students in the test group scored an average of 41.23 on the subset pretest while students in the control group scored an average of 44.79. the t-statistic for a difference-of-means test of these scores is not statistically significant. this suggests that neither group knew more or less than the other about financial concepts that are not related to the stock market at the beginning of the fall 2007 semester. the posttest average scores, however, are very different for the two groups. the test group average is 61.78 while the control group average is 49.56. the t-statistic for a differenceof-means test of these scores is 3.30 which is statistically significant at the 0.01 level of significance. this suggests that playing the smg and using the learning from the market curriculum improved student performance even on the assessment questions that were not related to the stock market. to further analyze the effects of playing smg on student assessment scores, an ordinary least squares regression was used. this method follows the work of others who have tested whether a particular teaching method or resource, such as new technology, is beneficial. for example, agarwal and day (1998) found that internet use had a positive effect on both tuce iii scores and final grades in introductory economics. rankin and hoaas (2001) studied whether computer-assisted instruction improved student performance, finding no such improvement. they also found no effect on student attitudes and teaching evaluations. harter and harter (2004) tested the effectiveness of online quizzes, finding no link between the use of the technology and student performance on examinations. in the econometric model used here, the dependent variable is students’ test scores and the independent variables initially included the following student characteristics: • gender • race • grade level • whether students live with both parents • whether each parent attended college • whether students report that they definitely will invest in the stock market • whether students report that they definitely will attend college • whether the students reported having played smg prior to this semester • score on high school math multiple-choice test • whether the students were in a class that played smg and used learning from the market during fall 2007 (the test group) a dummy variable denoting that the teacher was 25-34 years of age as opposed to older was constructed on the hypothesis that a younger teacher could affect student performance. whether this effect is positive or negative is not clear. younger teachers might be technologically savvy and more comfortable playing the online simulation, contributing positively to student learning. conversely, older teachers might have more experience teaching the content, and this might 29 journal for economic educators, 10(1), summer 2010 contribute positively to student learning. the number of graduate credits in economics earned by the teachers were included, since teachers’ graduate economics credits contribute positively to student performance (watts, 2006). due to lack of diversity in our group of teachers, variables describing teacher gender and race were not included. a correlation analyses on the full set of variables revealed that the variable describing students’ plans to attend college was highly correlated with a number of other variables (grade level, whether they live with both parents, parents’ education levels, and whether they planned to invest in the stock market). the variable describing students’ grade levels was highly correlated with investment and college plans and the father’s education level. having played smg in a prior semester was highly correlated with students’ plans to invest, and mothers’ and fathers’ educational attainment levels were highly correlated with each other. consequently, college plans, grade level, having previously played smg, and mother’s education level were omitted from the regression. table 4 ols regression dependent variable – smg posttest variable coefficient t-statistic p-value female 1.543 0.800 0.424 white 1.939 0.619 0.536 live with both parents 3.728 1.906 0.057 dad did not attend college -4.114 -2.041 0.042 will invest in stock market 4.977 1.200 0.231 math score 0.423 8.254 <0.001 played smg 18.731 7.558 <0.001 teacher age < 35 6.573 1.816 0.070 teacher’s graduate credits in econ 0.548 2.759 0.006 constant 27.513 6.137 <0.001 n = 435 adj. r-squared = 0.24 table 4 gives the results of an ordinary least squares regression to investigate student scores on the whole smg posttest. students’ academic ability as measured by performance on the math test and playing smg are positive and significant. living with both parents and having a younger teacher are also positive and significant at the 0.10 level of significance. the teacher’s graduate credit hours in economics is positive and significant, while having a dad who attended no college as opposed to attending at least some college, graduating, or attending graduate school is a negative predictor of test score. none of these results are surprising, and they provide evidence that playing smg and using the basic lessons from learning from the market does improve student performance. 30 journal for economic educators, 10(1), summer 2010 table 5 shows the results of an ordinary least squares investigation of determinants of scores on only the subset posttest (which includes only those ten assessment questions that are not specifically related to the stock market). again, students’ academic ability as measured by performance on the math test and playing smg are positive and significant, as is teacher’s graduate credit hours in economics, and having a dad who attended no college is a negative and significant predictor of test score. interestingly, being female and having definite plans to invest in the stock market are positive and significant predictors of this test score. table 5 ols regression dependent variable – subset posttest variable coefficient t-statistic p-value female 4.104 1.868 0.062 white 1.870 0.525 0.600 live with both parents 2.934 1.317 0.188 dad attended college -4.442 -1.935 0.054 will invest in stock market 8.772 1.858 0.062 math score 0.467 7.997 <0.001 played smg 13.823 4.898 <0.001 teacher age < 35 4.336 1.052 0.293 teacher’s graduate credits in econ 0.949 4.199 <0.001 constant 26.364 5.165 <0.001 n = 435 adj. r-squared = 0.21 conclusion these results show that playing smg along with teaching lessons 1-7 of learning from the market does improve student performance on an assessment about financial concepts. the naep results and results from the mississippi study are reinforced here. an important point to note about this finding is that the teachers were required to use a combination of the basic content lessons and smg. it is possible that using smg without any content lessons may not improve performance on the assessment, even though the lessons were chosen specifically to minimize that possibility. some definitions and structure are necessary to using the stock market game in a class, and it seems unlikely a teacher would use smg with less content than in the lessons drawn from learning from the market. in order to follow up with the participants regarding these findings, we asked the teachers a few more questions during the summer of 2008, receiving responses from 60% of the participants. we asked if they planned to play smg again and whether or not they would use the learning from the market lessons if they did play the game. we also asked if they looked at the assessment and made a concerted effort to cover the concepts from the smg assessment. 31 journal for economic educators, 10(1), summer 2010 we learned that all of the teachers liked the lessons and plan to use them again – even the one teacher who said that she or he does not plan to play smg again. of the six who responded, two reported looking at the tests, while the others said they concentrated on the content in the lessons and used other assessments as well as the online test. hence, while there may be some “teaching to the test” effect that explains the higher posttest score for the test group, the entire effect could not be attributed to this. because the teacher support center that is part of the online stock market game contains so many different resources, testing the effectiveness of playing the game is a difficult undertaking. we provided our teachers with basic lessons in order to control what they were using in the classroom, but they could also use investment websites, economics texts, and other resources that would affect student learning. some of the teachers in our study had their students participate in the investwrite competition while playing smg. this is a teacher-designed writing competition in which students describe their investment strategies. teachers are encouraged to have their students compete while playing smg. the research and critical thinking skills used in this assignment could improve student knowledge of economics and financial literacy. thus, it is difficult to isolate the factors driving the result. there are several reasons that this study is important. it shows that playing smg while covering basic content about the stock market improves student performance as compared to using other means to teach financial concepts. advocates of financial literacy can use these results to support use of the smg. also, there is very little previous work on the efficacy of smg, and this work helps to fill that void. untested subsidiary benefits of the study may include teachers’ continuing use of the curriculum and smg in the future, exposing more students to smg than those involved in our study, and that students will make better financial decisions throughout their lifetimes. teachers and students may become more comfortable with the concepts. as support for this speculation, we asked teachers in our study to use a scale of 1 to 4 to rate their level of satisfaction with the stock market game and accompanying resources. a rating of 1 meant that they were not satisfied while a rating of 4 meant that they were very satisfied. the average rating of 3.5 for the test group teachers suggests that they did like the smg and the lessons. we also asked them to use a scale of 1 to 4 to rate their level of satisfaction with the training they received. a rating of 1 meant that they were not satisfied while a rating of 4 meant that they were very satisfied. the average rating of 3.7 suggests that they were very satisfied with the training as well. references agarwal, rajshree, and a. edward day. 1998. “the impact of the internet on economic education.” journal of economic education. 29(2): 99-110. ballard, charles l., and marianne f. johnson. 2004. “basic math skills and performance in an introductory economics class.” journal of economic education. 35(1): 3-23. becker, william e. 1997. “teaching economics to undergraduates.” journal of economic literature. 35(3): 1347-73. destefano, francis j. “impact of smg program on economic literacy of high schools students, an analysis of naep results.” <http://www.leadershipmattersny.com>. accessed 10 september, 2008. “financial literacy: improving education.” 2006 national jump$tart coalition survey executive summary. <http://www.jumpstart.org/upload/2006 executive summary draft final.doc>. accessed 15 september, 2006. 32 journal for economic educators, 10(1), summer 2010 harter, cynthia l., and john f.r. harter. 2004. “teaching with technology: does access to computer technology increase student achievement?” eastern economic journal 30(4): 507-514. grimes, paul w., meghan j. millea, and m. kathleen thomas. 2008. “district level mandates and high school students’ understanding of economics.” the journal of economics and economic education research. 9(2): 3-16. rankin, elizabeth l., and david j. hoaas. 2001. “does the use of computer-generated slide presentations in the classroom affect student performance and interest?” eastern economic journal 27(3): 355-366. stock market game. <http://stockmarketgame.org>. accessed 10 september, 2008. walstad, william b., and stephen buckles. 2008. “the national assessment of educational progress in economics: findings for general economics.” american economic review: papers & proceedings. 98(2): 541-46. watts, michael. 2006. “what works: a review of research on outcomes and effective program delivery in precollege economic education.” national council on economic education. <http://www.councilforeconed.org/eee/research/whatworks.pdf>. accessed 15 may, 2010. 26 | journal for economic educators, 12(1), 20012 lessons learned from a course-embedded assessment process: foreign exchange markets in principles of economics elizabeth knowles 1 and glenn knowles 2 abstract this paper details a dynamic process of course-embedded assessment of student learning about foreign exchange markets. three iterations of the assessment have occurred, and modest improvements in student outcomes are demonstrated. the process reveals the apparent difficulties that students face with using a demand and supply model to analyze changes in foreign exchange markets. in addition, faculty discussions have informed changes in both teaching and assessment techniques. key words: assessment; foreign exchange; principle of economics jel classification: a22 introduction at its best, assessment of student learning is a dynamic process used to promote continuous improvement. besides validating effective pedagogy and increasing student learning, assessment in introductory economics courses may perform several other important functions. as a prerequisite for many downstream courses in economics and finance, it is imperative to demonstrate that learning outcomes are achieved in the principles of economics course. in addition, many introductory economics courses reside in the general education programs of their institutions, and documentation of the courses’ contributions to programmatic goals may be necessary. finally, if the economics coursework is completed in a business college that is accredited by aacsb international, assurance of learning must be documented for the program outcomes. as part of the core curriculum, principles of economics courses contribute to these overall goals. barbara walvoord (2004, p. 2) defines assessment as “the systematic collection of information about student learning, using the time, knowledge, expertise, and resources available, in order to inform decisions about how to improve learning.” in general, successful assessment includes the definition of goals or outcomes, the gathering of evidence of student learning and the subsequent use of that information to improve future student learning (walvoord 2004). both direct and indirect assessment approaches may lead to improvements in learning. direct assessment techniques evaluate actual student work (such as papers, exams, or presentations); while indirect approaches evaluate students’ beliefs or perceptions about their learning (maki 2004; walvoord 2004). there are advantages and disadvantages to each approach, and a myriad of techniques can be used to implement them. however, many accrediting institutions emphasize the need for at least some direct measurements of learning within courses and programs. for example, in 2003 aacsb international revised its assurance 1 senior lecturer, department of economics, university of wisconsin – la crosse. 2 associate professor, department of economics, university of wisconsin – la crosse. 27 | journal for economic educators, 12(1), 20012 of learning standards to mandate direct assessment, and stated that indirect measures could not be substituted (aacsb 2007). direct assessment is most commonly implemented through either course-embedded assessment or standardized exams. course-embedded assessment uses the student performance on assignments or exams that already occur within the curriculum to indicate achievement of objectives, while standardized exams rely on an external source to measure performance. in economics, the most common standardized assessment instrument is the test of understanding of college economics or tuce, which is available through the council for economic education. the tuce, first developed in 1975, is currently in its fourth edition and has two main objectives (walstad and rebeck 2008). the first is to offer an assessment instrument for both the principles of macroeconomics and microeconomics courses. the second is to provide normreferenced data for comparison to a national sample. in the principles course, it is often used in a pretest and posttest format to demonstrate value added. recently, the tuce has been used as an assessment instrument to satisfy the aacsb international assurance of learning standards for accreditation (doyle and wood 2005; breslawski 2008) and for other accreditation agencies (balassi 2010). the current version of the tuce consists of 30 multiple choice questions each for microeconomics and macroeconomics. each test has six content categories. despite the wide use of the tuce, it has been criticized (walstad 2001). while it may satisfy assessment standards for an outside accreditation agency, it may not provide adequate feedback to instructors for improvements in teaching and learning, especially when the course objectives are different from the content categories in the tuce. in this sense, the tuce is more summative than formative, making it difficult to use the tuce to improve the quality of student learning. nonetheless, the tuce may help to target areas for evaluation with courseembedded assessment. in this way, standardized tests and course-embedded assessment can function as complements. course-embedded assessment is integrated directly into the curriculum. in the specific application described here, a classroom activity focusing on a narrow set of learning outcomes about foreign exchange markets is evaluated for student learning. embedding assessment in the course has some clear advantages over standardized exams, and has been viewed as an improvement over past approaches in the assessment of general education courses (gerretson and golson 2005). course-embedded assessment has also been used to document assurance of learning in colleges of business accredited by aacsb international (ammons and mills 2005). because the assessment focuses on student learning outcomes which are defined by faculty, not an outside agent, there is no disconnect between what is taught and what is assessed. in addition, when the assessment is part of curricular materials, faculty are less likely to feel that assessment is an additional burden in terms of time and effort. as a result, the assessment may be more likely to lead to tangible changes in teaching pedagogy that will improve student learning. finally, if the assessment results will be used to demonstrate a contribution to programmatic outcomes, course-embedded assessment can be closely align with the core mission at a teaching institution. despite the desire to improve student learning, there are several aspects of assessment that many instructors find objectionable and may cause a considerable amount of resistance. the primary driver for assessment often comes from outside the department, such as an accreditation agency. imposition from outside brings with it inherent resistance. the second aspect is that the learning curve for designing assessment processes is steep and long, especially for courseembedded assessment. instructors may need to cycle through numerous iterations of assessment 28 | journal for economic educators, 12(1), 20012 before the process yields the understanding that they seek. finally, instructors may be surprised or disappointed by the results of the assessment process. this can be very discouraging during the initial iterations of assessment. this paper details the dynamic process of course-embedded assessment and how it can successfully drive productive discussions about student learning. the assessment process in principles of economics for a decade and a half, assessment in the principles of economics in the economics department at the university of wisconsin – la crosse (uw-l) used an internally developed multiple-choice test in a pretest and posttest format. the test covered generally accepted content areas in the courses. the process was static and there was little systematic consideration of the results. although the test provided some feedback on what students had learned, it was difficult to use the results to improve learning, in part because the content was not associated with clearly defined learning outcomes. in ensuing years, learning outcomes were written and periodically revised for both the introductory microand macro-economics courses. the revisions have addressed changing content in the courses, such as an increased emphasis on long run economic growth in macroeconomics. the outcomes are clearly worded to reflect what a student will be able to do, rather than what the faculty will cover in the course. the development of course learning outcomes is an essential first step in the assessment process. at uw-l, both principles of economics courses reside in the general education program (gep). beginning in the fall of 2008, each course in the gep was required to complete a courseembedded assessment to evaluate one of the general education outcomes. this was a direct result of recommendations by the north central association of the higher learning commission, the accrediting agency for uw-l (general education task force 2007). to fulfill this requirement for the principles of macroeconomics course, the economics department decided to assess student understanding of foreign exchange markets and changes in currency prices. this content area was identified by instructors as one with which students struggled. while the economics faculty had participated in intermittent, ad hoc discussions about how to present foreign exchange markets, the conversations had not been structured around an effort to discern the issues with student learning. still, several tentative issues had surfaced. the first was that although students demonstrated basic graphing skills, they might not be able to apply those skills to interpret a demand and supply model. the second was that prior exposure to the demand and supply model may have been insufficient for students to successfully apply it to an understanding of foreign exchange markets. at uw-l, foreign exchange markets are addressed primarily in the principles of macroeconomics class. there is no sequencing requirement that would place students in microeconomics prior to macroeconomics, thus giving students increased familiarity with the basic model. besides addressing an area of student learning about which faculty were already concerned, applying course-embedded assessment to student understanding of foreign exchange markets allowed the department to assess both course and program outcomes. one of the objectives of the principles of macroeconomics course is to “use the market demand and supply model to predict changes in currency prices.” in assessing this objective, the uw-l gep outcome of “construct and use models to analyze, explain or predict phenomena” was also addressed. the assessment also measured learning with respect to the college of business administration’s undergraduate global competency outcome. 29 | journal for economic educators, 12(1), 20012 to meet the general education assessment requirement, the economics department developed a common task to be delivered across all sections of macroeconomics taught by all instructors. the task had to adhere closely to the course outcome and explicitly address the general education outcome. the initial task had three sequential parts of increasing difficulty: 1) students must draw and correctly label an equilibrium in a foreign exchange market; 2) students must identify the changes in the market when consumer preferences change by appropriately shifting a demand or supply curve; and 3) students must identify a scenario that would result in an appreciation or depreciation of a currency. these steps capture the elements found necessary to demonstrate understanding of the course objective. see appendix 1 for the task in its entirety. besides the common task, there were common administration details for faculty to follow. these included the timing of the exercise, incentives for students to complete the task, and the protection of the task so that it did not circulate among students. these details are also included in appendix 1. finally, the faculty developed a rubric with which to assess student performance. the decision was made to follow the hierarchical nature of the task by designing a rubric that specified hierarchical levels of performance. this loosely followed bloom’s taxonomy, moving from knowledge to application and analysis (1956). the most controversial part of the rubric design was the first step: that the axes of the demand and supply model must be labeled correctly. if students were unable to correctly label the axes of their graph, the work was deemed “unsatisfactory”, and was not considered further. the controversy concerned whether or not a student could “construct and use” the model if they did not know what the axes represented. although no consensus was reached, many of the faculty saw this skill as an essential element upon which the rest of the answer must be predicated. additional levels of performance are explicitly defined in the rubric provided in appendix 2. for a student to reach a particular level of performance, all previous levels had to be satisfied. the rubric does not generate an overall “grade” for the assessment task. instead, it indicates the highest bar to which a student performed. put differently, instructors are able to identify the specific element of the task that prevented the student from progressing through the problem successfully. this approach provides a feedback loop to faculty identifying what students have failed to learn. this is different from assigning a summative grade for the completion of a task that can mask the individual elements that students do not understand. at the conclusion of the semester, the results were compiled across all sections without identifying the results by individual faculty member. this kept the focus of the assessment results on student learning instead of faculty performance. if results are reported by faculty member, then an incentive exists for faculty to game the process for merit or retention purposes. the process emphasizes the participation of faculty in assessment activities as an essential contribution to the department. 30 | journal for economic educators, 12(1), 20012 understanding the initial assessment results the assessment task was first administered during the 2008 academic year to 391 students across all sections of principles of macroeconomics. the results were distributed to the department, and a meeting was held to discuss the findings and consider alternative methods to improve learning. the faculty found the results presented in in table 1 unacceptable. nearly half of the students had difficulty getting past the first level in the rubric, because they were unable to correctly label the axes of the graph. interestingly, over half of the students of one instructor received unsatisfactory scores because the graphs were not labeled correctly, but many of these same students drew an appropriate shift of the curve in the second step. other students could articulate a response to the question in a text format, but were unable to draw a graph to illustrate the solution they described. this prompted discussion about whether students can to fail to understand the use of the model to explain changes in exchange rates, but still intuitively understand exchange rate fluctuations. table 1: initial results from foreign exchange markets assessment task (2008) rubric category total number of students n = 391 proportion of all respondents unsatisfactory 182 .47 underdeveloped 87 .22 competent 46 .12 proficient 31 .08 exemplary 45 .11 the initial poor performance of students on this assessment task was a surprise. most instructors taught the topic as an extension of the demand and supply model and thought that students would be able to move from the depiction of a product market to the foreign exchange market. this expectation may not have been met because the prior knowledge was insufficient (ambrose et al. 2010). this is possible since the curriculum at uw-l does not require the sequencing of principles of microeconomics before macroeconomics, which would increase exposure to the basic demand and supply model. the results also seem to demonstrate students’ difficulty with transfer of knowledge of the demand and supply model from one context to another. willingham (2009, p.99) explains this by arguing that when we learn something new, our “background knowledge will … shape how you interpret what comes next”. if student understanding of the supply and demand model was “surface structure” (willingham 2009, p. 98), then students may fail to see that the application of the demand and supply model in the foreign exchange market is similar to the application of the demand and supply model in a product market. discussions about the results revealed that there were significant differences among instructors in how this material was taught. the differences included: using a graph of both currency markets involved in the exchange versus only one market; discussing examples versus illustrating examples with graphs; using group versus individual active learning activities; and incorporating exchange rates into other topics in the course versus covering exchange rates as a self-contained unit at the beginning or the end of the course. the timing of the assessment task relative to course coverage may also have contributed to the poor outcome, indicating student difficulty with retaining knowledge about the model. in 31 | journal for economic educators, 12(1), 20012 this initial administration of the assessment task, most of the instructors addressed foreign exchange markets early in the semester, immediately following their coverage of the supply and demand model. the assessment was delivered during the last three weeks of the semester. the results may indicate that students never generated long-term memory for explaining the fluctuations of foreign exchange markets. willingham (2009, p.61) concludes that “memory is the residue of thought” and without repeated opportunities to think about the implications of exchange rate markets, students do not exercise enough thought to retain the essential concepts. another possibility is that the assessment task required students to construct a response rather than choosing from a menu of possible solutions as in a multiple-choice question. this may have been the first time that students were tested on this concept in this manner, as some faculty rely solely on multiple-choice exams. there has been considerable debate about the difficulty of multiple-choice versus constructed-response questions. chan and kennedy (2002) concluded that for some types of multiple choice questions, students perform better than if they had constructed their own answer. if that were true here, it would provide another explanation for the results. specifically, if a multiple-choice question about exchange rates included a labeled diagram, students would never have had to create a figure on their own. the faculty also considered that students might lack very broad skills that are essential to this learning objective, such as the ability to interpret graphical representations of data. van dyke and white (2004) studied students’ ability to use graphs upon entering calculus or applied calculus at american university. their findings indicated that students may not know how to read a graph and do not discern which aspects of a graph to focus on (van dyke and white 2004, pp. 42-43). this might explain students’ shifts in demand or supply curves that had no logical connection to the problem, or why students that described the effect on the market accurately could not use the demand and supply model to articulate their results. the results also prompted faculty discussions about the development of an assessment task and rubric that are hierarchical in nature. the task was written in such a way as to capture various levels of bloom’s taxonomy, and there was considerable agreement about this approach. the rubric design, however, immediately classified students as “unsatisfactory” due to their inability to label the graph correctly and disregarded the rest of their work. consequently, other important information about student learning may have been lost. this is evidenced by the faculty’s practice of generating two scores for the student work in this assessment task: a rubric score and a “grade” which accounted for other aspects of student performance. impact on instruction the discussion about student performance and improvements to instruction focused on several areas. first, faculty proposed spending more time presenting demand and supply as a model and emphasizing the relationships between variables in the graph. this allowed faculty to clearly articulate that labeling the axes of a graph is necessary to understand the subsequent changes in equilibrium price and quantity. one faculty member tried to demonstrate this by showing students a straight line with an inverse relationship between the x and y variable, and then asking students what the graph depicted. most said that it was a demand curve, but then the instructor pointed out that it could be a production possibilities curve with constant costs. this demonstrated the point that labeling the axes mattered. the most specific instructional difference about the presentation of foreign exchange markets that the department’s faculty discovered was whether one or two currencies were depicted by the demand and supply models. some faculty presented foreign exchange markets by 32 | journal for economic educators, 12(1), 20012 drawing the market for one currency and narrating the relationship to the other currency; others drew the currency markets for two countries side by side for every example. sometimes the approach was influenced by the course text. three different texts were in use during the initial assessment and each text used a different approach to drawing the demand and supply of a currency. the instructors who drew two corresponding markets felt strongly that this method was the most helpful for students and encouraged others to try this approach. specifically, when drawing the exchange markets, students should consider why the demand for any currency might change and then the respective change in supply in the other currency market could be shown. the other ideas discussed by faculty were less content-oriented and more about how the students encountered the material in the classroom. most instructors provided active learning through in-class practice and/or homework problems. some of these practice opportunities required individual work and others were group exercises. although group or cooperative learning was seen to have an important role in learning about foreign exchange markets, free rider issues were also identified. this suggests that practice problems should include an individual element. repetition was also important. several instructors chose to revisit foreign exchange markets at several points during the semester by looking at the impact that gdp, inflation, or interest rates had on the market. others chose to move the coverage of the material about foreign exchange markets closer to the end of the semester. this meant that the material was covered closer to the completion of the task. subsequent iterations of the assessment task after the first year, the same assessment task was repeated in the 2009 academic year to see if the changes in instruction improved the outcome. the hypothesis was that with improvements in instruction that address students’ learning difficulties, students’ scores should improve. the results for 2009, found in the second column of table 2, showed modest improvement. two independent samples t-tests were run to determine whether the reduction in the proportion of students that scored unsatisfactory was statistically significant, and subsequently whether the reduction in the proportion of students that were unsatisfactory and underdeveloped was statistically significant. the change in the unsatisfactory category was not different, but the proportion of students in the two lowest categories combined was significantly less (table 3). this suggests that while the changes faculty made did not impact the success of students in terms of labeling the axes of their models, there was movement into the “competent” range or above. 33 | journal for economic educators, 12(1), 20012 table 2: initial and subsequent results from exchange rate markets assessment tasks rubric category initial results 2008 total number and percent of all respondents n= 391 results 2009 total number and percent of all respondents n = 468 results 2010 total number and percent of all respondents n = 279 unsatisfactory 182 .47 198 .42 87 .31 underdeveloped 87 .22 73 .16 65 .23 competent 46 .12 46 .10 6 .02 proficient 31 .08 40 .08 33 .12 exemplary 45 .11 111 .24 88 .32 note: in the fall of 2010, the final question of the task was changed, so that the categories of “proficient” and “exemplary” are not precisely comparable to previous years. table 3: independent samples test comparing results by year 2008 vs. 2009 2009 vs. 2010 proportion unsatisfactory mean difference (std. error of difference) .042 (.034) .111** (.036) proportion unsatisfactory and underdeveloped mean difference (std. error of difference) .109** (.033) .034 (.038) **significant at .01 significance level in fall 2010, question three in the task was changed. questions 2 and 3 in the original task both involved shifts in demand or supply in foreign exchange markets. since more students successfully completed both of these questions in 2009, the decision was made to change question 3 to consider an implication of the foreign exchange markets. specifically, the fall 2010 version of the task asked students to consider how a change in exchange rates affected net exports and aggregate demand. this means that the results reported in table 2 for 2010 are not comparable to the categories of “proficient” and “exemplary” in 2008 and 2009. nonetheless, changes in instructional strategies continued to show improvement as students moved up the levels of the rubric. most notably, a statistically significant smaller proportion of students were classified as “unsatisfactory” (see table 3). summary and lessons learned using the demand and supply model to teach exchange rates the assessment process has revealed several things about the use of the demand and supply model by students. many faculty involved in the discussion have seriously reconsidered what they thought their students understood, particularly when a graph is drawn to convey a concept. what is a highly functional and descriptive picture to us as economists, is clearly not so for many of the students. this realization has informed the teaching of many aspects of principles of economics, in addition to the specific case here. since economists regularly rely on 34 | journal for economic educators, 12(1), 20012 graphical representations of decision-making and policy effects, they must be cognizant of the difficulty that students have with this visualization. in addition, the need for repetition and active learning opportunities has been reinforced. free rider issues should be addressed by including individual learning activities as well as group activities. at this time, no conclusions can be made about which of the specific pedagogical changes made by faculty was most effective. in order to make the burden of the assessment low and to avoid faculty concern about the use of the data for merit purposes, it was aggregated with no identification of students or faculty. a more thorough analysis would control for instructional method, instructor, prior knowledge of the student, and student demographics. as the department moves along the assessment learning curve, the collection of data can be refined to control for the different methods. course-embedded assessment process for the principles course in economics, an assessment task designed with steps of increasing difficulty can take apart a complex task into its component parts and reveal where difficulties in student learning arise. this knowledge is essential for improving teaching and learning. furthermore, the initial step(s) in the task can assess prerequisite knowledge or basic skills, especially math skills. ballard and johnson (2004, p. 21) found “that mastery of extremely basic quantitative skills is among the most important factors for success in introductory microeconomics”. thus, assessment of prerequisite knowledge is an important initial step in any course-embedded assessment. on the other hand, a rubric that is hierarchical, or stops recording student performance when a step is not achieved, may result in the loss of important information. a rubric that evaluates and records performance at each step may be preferable. if a task or rubric does not fully reveal information about student learning, faculty should use this to inform further development of assessment tools. an essential aspect of the assessment process is to allow the task and rubric to evolve to better assess student learning. the process followed in the principles course has influenced additional assessment activities within the department. there is increased recognition of the importance of defining student learning outcomes. in addition to revising the outcomes for the principles class, faculty have written outcomes for the department’s intermediate theory courses as well. since multiple instructors teach these courses, this effort to articulate course objectives drives discussions about common topics across all sections. the use of course-embedded assessment has had some traction because it allows faculty to create exercises that reflect the skill and/or content that they feel is important. this reduces, but does not eliminate, resistance to assessment activities. further support for course-embedded assessment became apparent when the department used this approach to measure competency in the major for program assessment. the nature of the discussion about learning has improved because of the common task and rubric. no time was lost discussing the exercises that individual instructors gave their students and then trying to determine where the content intersected. the common activity gave faculty a basis for discussion and the conversation that has occurred around this task has been lively and challenging. explicit in the process was that student learning was being evaluated and not faculty teaching. this opened up the platform for discussions around teaching and learning. the discussions embodied the suggestion of abrose et al. (2010, pp.112-113) to use discussions with colleagues to help faculty move past their own expertise and break a task down into the component parts that students need to understand. the course-embedded assessment process has 35 | journal for economic educators, 12(1), 20012 helped the participants do just that. the results of the assessment process show statistically significant improvements in student learning that can be attributed to identifying the challenges students face and making subsequent changes in pedagogy. references aacsb international accreditation coordinating committee, & aacsb international accreditation quality committee. 2007. aacsb assurance of learning standards: an interpretation. ambrose, susan a., michael w. bridges, michele dipietro, marsha c. lovett, and marie k norman. 2010. how learning works: seven research-based principles for smart teaching. san francisco, ca: jossey-bass. ammons, janice l. and sherry k. mills. 2005. “course-embedded assessments for evaluating cross-functional integration and improving the teaching-learning process.” issues in accounting education 20 (1): 1-19. balassi, steven j. 2010. “comprehensive assessment in economics education.” paper presented at the west-coast annual economics teaching conference, reno, nevada, april 8-10. ballard, charles l. and marianne f. johnson. 2004. “basic math skills and performance in an introductory economics class.” journal of economic education 35(1): 3-23. bloom, benjamin. s. 1956. taxonomy of educational objectives: handbook i: cognitive domain, n.y.; david mckay company, inc. breslawski, steven t. 2008. “downstream retention of content and cognitive constructs as measured by the test of understanding of college economics – macroeconomics.” 2008. american institute of higher education proceedings 1(2):228-233. chan, nixon and peter e. kennedy. 2002. “are multiple-choice exams easier for economics students? a comparison of multiple-choice and “equivalent” constructed-response exam questions.” southern economic journal 68(4): 957-971. doyle, joanne m. and william c. wood. 2005. “principles course assessment, accreditation, and the depreciation of economic knowledge.” journal of education for business 80:165-171. gerretson, helen and emily golson. 2005. “synopsis of the use of course-embedded assessment in a medium sized public university’s general education program.” journal of general education 54 (2): 139-149. general education task force. 2007. “university core assessment plan.” university of wisconsin – la crosse. <http://www.uwlax.edu/facultysenate/42nd/fs%20mtgs/11-1507/ged%20assessment%20plan%2010-07.htm> accessed 29 may 2012. maki, peggy l. 2004. assessing for learning. sterling, va: stylus publishing, llc. van dyke, franny and alexander white. 2004. “making graphs count.” mathematics teaching 188: 42-45. walstad, william b. 2001. “improving assessment in university economics.” journal of economic education 32 (3): 281-294. walstad, william b. and ken rebeck k. 2008. “the test of understanding of college economics.” american economic review: papers and proceedings 98(2): 547-551. walvoord, barbara e. 2004. assessment clear and simple. san francisco, ca: jossey-bass. willingham, daniel t. 2009. why don't students like school? san francisco, ca: jossey-bass. 36 | journal for economic educators, 12(1), 20012 appendix 1. the assessment task (initial and subsequent versions) general education student learning outcome: 1.6 construct and use models to analyze, explain or predict phenomena. economics department learning outcome: use the market demand and supply model to predict changes in currency prices. instructional content and administration: the content is based on the fundamental model used in economics – demand, supply and equilibrium. the application of the model includes a global focus, as the student must use the model to analyze and predict movements in the exchange rate, and subsequently consider the impact of exchange rates on trade. administration details: all instructors teaching eco 1xx in the fall semester will administer the task. the identical task will be administered by instructors of the course during the last three weeks of the fall semester or during finals week to individual (not groups of) students during a class period. some credit will be given to students as an incentive for participation. instructors will not return the assignment after it is scored, so that no advantage is gained by students completing the task in a subsequent week. all tasks will be scored by the instructor of each class using the uniform rubric it is recommended that if an instructor teaches eco 1xx only in the spring semester that the task is administered then. assessment task: 1. consider the euro or u.s. dollar market. the current exchange rate is 1.50 u.s. dollars per euro (or 0.67 euros per u.s. dollar). graphically illustrate the exchange market and indicate the equilibrium exchange rate. clearly label the axes and the curves. 2. consider the following scenario: u.s. consumers’ preferences change so that they prefer fewer european goods. use the graph of the exchange market from question 1 to predict the change in the equilibrium exchange rate. clearly label the axes and the curves. 3. initial task: propose a scenario which would cause the u.s. dollar to depreciate against the euro. the scenario should be different from a change in u.s. consumers’ preferences. explain and diagram the exchange market to illustrate the depreciation. clearly label the axes and the curves and be specific in describing the scenario. 37 | journal for economic educators, 12(1), 20012 3. subsequent task: now consider a different scenario. suppose the mexican peso appreciates against the currencies of its major trading partners. holding everything else constant, what do you expect to happen to mexico’s net exports over time and why? what is the impact on mexico’s aggregate demand from this change in net exports? appendix 2: the common rubric for evaluating student performance performance level criteria and standards unsatisfactory for question 1: axes or curves on diagram are not drawn or labeled correctly. underdeveloped for question 1: axes of diagram for question 1 are labeled correctly; and demand and supply curves are correctly drawn and labeled; and the equilibrium exchange rate is correctly indicated and labeled. competent for question 2: the decreased supply of u.s. dollars (or decreased demand of euros) is correctly depicted; and the new equilibrium is indicated to show the appreciation of the dollar (or depreciation of the euro). proficient (initial version) for question 3: a scenario is explained or drawn correctly to show a depreciation of dollar exemplary (initial version) for question 3: a scenario is explained and drawn correctly to show a depreciation of dollar: changes made in subsequent iteration: proficient (subsequent version) for question 3: net exports or aggregate demand are identified as declining. exemplary (subsequent version) for question 3: net exports and aggregate demand are identified as declining; and the explanation identifies that the change in the exchange rate affects the price of the goods. notes: subsequent version is presented for fall 2010. performance level is indicated by the highest sequential box checked. a note on elasticity exposition: keeping off the slipery slope 1 journal for economic educators, 10(1), summer 2010 elastic inelastic d d p p q q figure 1. misleading demand elasticity diagrams simplifying the price elasticity of demand thomas andrews 1 cynthia benzing abstract ockham’s razor is a reminder to keep things simple, but this principle is often ignored in the elasticity chapters of many economics textbooks. many texts invoke slope unnecessarily and in contradictory ways. discussions of the determinants of the price elasticity of demand have the potential to further confuse students, as do elasticity estimates that are dated and inappropriate. principles instructors could better explain the price elasticity of demand by concentrating on the price-quantity point on a demand curve and the mid-point formula, while avoiding rotating demand curves and relying less on simplistic determinants and outdated estimates. key words: elasticity of demand, price elasticity, demand jel classification: a1, a2 “one should not increase, beyond what is necessary, the number of entities required to explain anything.” ockham’s razor introduction several years ago on the heels of a standard lecture on elasticity, i asked the class the following question: “is the demand for movie theater popcorn price elastic or inelastic at the current price?” the students began an enthusiastic debate based on four characteristics of price elasticity of demand (number of substitutes, percentage of income, necessity versus luxury, and time) and the two graphs shown in figure 1. the class finally decided the demand was “price inelastic” because movie popcorn comprises a small percentage of income and lacks a good substitute. by the end of the discussion, we were all convinced we were right, and that surely the demand curve for popcorn would be relatively steep. 1 t. andrews is an associate professor of economics and c. benzing is a professor of economics, department of economics & finance, west chester university of pennsylvania, west chester, pa 19383 2 journal for economic educators, 10(1), summer 2010 later, i realized my somewhat obvious mistake: the demand for movie popcorn had to be price elastic, not inelastic. five dollars for a container of popcorn is a raw display of monopoly power, and profit maximizing monopolies operate in the price elastic portion of the demand curve. it turns out that i had been misled by my own principles text and a failure to abide by ockham’s razor. consideration of the slope and the determinants of price elasticity of demand had led to an incorrect conclusion. it can be argued, at least theoretically, that if goods are sold by firms with some degree of monopoly power, then those goods probably have prices that place them in the price elastic part of their demand curves. that relatively minor insight is enough to expose a host of problems with the way we still teach price elasticity of demand. perhaps, some economists have forgotten nieswiadomy’s (1986) succinct demonstration in the journal of economic education that used simple mathematics to show that for linear demand curves, price elasticity depends on the price of the good and the price intercept, but not the slope. for: dqcp −= (1) the price elasticity of demand is: pc p e − = (2) the slope term (d) does not appear in equation 2 and is, therefore, not a determinant of price elasticity of demand. yet, many principles of economics authors in one manner or another still imply that slope is a determinant of the price elasticity of demand.2 principles textbooks have tended to confuse students with respect to price elasticity of demand in three ways. first, textbook authors often use graphs that lead students to confuse slope with the price elasticity of demand. second, textbook authors over-rely on specific factors in determining price elasticity of demand. lastly, some authors include tables of outdated price elasticity numbers that could lead students to believe that price elasticity of demand is constant over time regardless of changes in many significant factors. where we’re going wrong how elasticity and slope are confused a number of microeconomics principles texts (bade & parkin, 2009; hubbard & o’brien, 2008; mankiew, 2004; mcconnell, brue, & flynn, 2009; j. miller, 2009) continue to include figures that use a relatively flat curve to illustrate a relatively price elastic demand curve and a relatively steep curve to illustrate a relatively price inelastic demand curve. for instance, authors sometimes use a figure like figure 2 to claim that the relatively steep demand curve for cigarettes is illustrative of a product facing price inelasticity of demand. such a figure contributes to the confusion that persists between price elasticity of demand and the slope of the demand curve. the demand curve in figure 2, like any linear demand curve, has a portion over which the demand is price inelastic and a portion over which the demand is price elastic. 2 karl case's comments on the nieswiadomy article and his textbook coauthored with ray fair and sharon m. oster (2008) are notable exceptions. 3 journal for economic educators, 10(1), summer 2010 consequently, figures like figure 2 have the potential to mislead the reader into thinking that all points along a relatively steep demand curve are points of price inelasticity. the entire demand curve, which is truncated in figure 2, is shown in figure 3. students should understand that, given a sufficiently high price, the demand in figure 2 might well be price elastic. portraying steep or flat demand curves as either price inelastic or elastic, respectively, is in direct conflict with figure 3 which is also included in most principles texts. as shown in figure 3, the price elasticity of demand changes along a linear demand curve. because many texts include some diagrams showing that position on a demand curve determines price elasticity and other diagrams that imply slope determines price elasticity, students become confused. confusion between slope and the price elasticity of demand might also be related to the price elasticity formula itself: d p inelastic demand elastic demand figure 3. steep demand curve q d p q figure 2. common, but misleading, inelastic demand diagram 4 journal for economic educators, 10(1), summer 2010 * p q e q p ∆ = ∆ (3) it is obvious from equation 3 that a product’s price elasticity of demand is related to the slope since δq/δp = 1/slope. it is also clear from the equation that for a given price-quantity combination a different slope will lead to a different price elasticity of demand. however, using a formula that invokes slope has the potential to mislead students into thinking that the slope of a linear demand function determines elasticity rather than a combination of position and slope. luckily for students, only one principles textbook (frank & bernanke, 2009) of the 17 textbooks examined uses a price elasticity of demand formula that explicitly includes the inverse of the slope such that the elasticity = (p/q) x (1/slope). comparing and rotating demand curves principles textbooks need to continue to strengthen the qualifier “for a given pricequantity combination.” the qualifier means that care must be taken when comparing the demand curves for two goods because they may not have similar price and units of quantity. even if the price and quantity are nominally the same, the units for quantity may still make the slopes logically incomparable. a classic example of this misunderstanding was shown in the second edition of samuelson’s economics (1951). samuelson compared the demand for wheat and automobiles by overlaying the two demand curves using what the author calls “a careful juxtaposition of scales.” samuelson’s figure is reproduced in figure 4 and is used in the 1951 text to reinforce the notion that the demand for wheat is more price inelastic than that facing automobiles. unfortunately, it is difficult to conjure an actual scale that would make the comparison meaningful. in other words, it makes little sense to compare the slope of the demand for cars with the slope of the demand for wheat as any contrast in slopes could easily be reversed by redefinition of units (bushels, tons, etc.). in fact, the problem associated with the arbitrary definition of units d po d q p qo figure 4. comparing slopes for different goods autos wheat 5 journal for economic educators, 10(1), summer 2010 is often cited in principles texts as one of the primary reasons for using price elasticity as a measure of demand sensitivity instead of slope. despite that, many principles textbooks still place the demand curves for two different products side-by-side to illustrate how the steeper demand curve indicates a greater price inelasticity of demand regardless of how the products’ units are measured. in some principles textbooks there is a graph that shows two different demand curves for the same good. as shown in figure 5 one demand curve is sometimes superimposed on the other demand curve. at the point of intersection, the curves share the same price and quantity combination, but the slopes differ. in this situation, the flatter curve shows a good facing a greater price elasticity of demand at the common price-quantity combination, but it should be noted that both curves still have elastic and inelastic ranges. the price (po) is merely closer to the top of the more “elastic” demand curve. the “rotating” demand curve shown in figure 5 which changes both slope and intercept for the same good is difficult to explain to principles students. most principles students have previously been taught that non-price determinants shift the demand curve rather than rotate it. so, what could cause such a change in slope? although some factors clearly rotate the curve, these are generally not cases that can be effectively introduced at the principles level and certainly not in the elasticity chapter. for example, some forms of advertising rotate the demand curve while other forms of advertising are more likely to shift the demand curve outwards. according to johnson and myatt (2006) and meyerhoefer and zuvekas (2008), rotation is more likely to occur when advertising contains real information about a specialized product, while a demand shift is more likely to occur when the advertising makes consumers aware of the existence of a non-specialized product thereby stimulating demand among a large fraction of the mass market. of the 17 microeconomic principles texts reviewed, only two (schiller, 2008; slavin, 2009) contain figures in the elasticity chapters that show a rotation in the demand curve d’ po d q p qo figure 5. changing slopes for the same good 6 journal for economic educators, 10(1), summer 2010 due to advertising. this case of rotating demand curves is probably something best introduced later in the course or in an intermediate level microeconomics class. while the rotational aspect of advertising is not something we would expect principles students to comprehend, the difference between short-run and long-run is something that can be taught at the introductory level. figure 5 can be used to show the effect of time on the price elasticity of demand such that the steeper curve, d’, shows the short-run demand curve and the flatter curve, d, shows the demand curve for the same good in the long-run. at any given price, the price elasticity of demand for a good in the long-run will be more elastic than the price elasticity of demand for the same good in the short-run. changes in other common determinants of price elasticity (besides time) could also change the slope of the demand curve for a specific good. and, while it is true, that at any given price the flatter demand curve will be more price elastic than the steeper demand curve, it is also true, that a good initially facing an inelastic demand might still be facing an inelastic demand if both points are in the lower half of both curves. a change in the slope of a demand curve does not necessarily mean that the price elasticity of demand for that good has changed from being inelastic to elastic or vice-versa. comparisons of demand curves for different products and rotating demand curves for a single product have the potential to distract students from the fact that price elasticity of demand is determined by the price-quantity combination chosen on a linear demand curve irrespective of the slope. in short, graphically introducing a slope change (or rotation) in a principles discussion must be carefully done and restricted to the time factor so as not to add an unnecessary layer of complexity that would not survive ockham’s razor. determinants of price elasticity of demand can be misleading almost all microeconomics textbooks contain a section on the factors or determinants that affect price elasticity of demand. products that are price inelastic are typically described as necessities with few substitutes that absorb a small fraction of income. conversely, products that are price elastic tend to be luxuries with many substitutes that absorb a large amount of income. these factors are generally introduced to help students distinguish between price elastic and price inelastic products and, although they have an intuitive appeal and some logical basis, they also have the potential to confuse and mislead students. (the textbooks by case, fair & oster (2008) and frank & bernanke (2009) are examples of a few principles textbooks that no longer include “luxury versus necessity” as a determinant of the price elasticity of demand.) these factors can sometimes obscure the fact that the ultimate determinant of a product’s price elasticity of demand is its price-quantity combination or position on the demand curve. thus, the price elasticity of demand for luxuries that consume substantial income with many substitutes may still be price inelastic if the price falls low enough on a linear demand curve. conversely, if necessary goods consuming a small fraction of income with few substitutes have prices that are high enough, demand will be price elastic. the intuition from slope to price elasticity only works if products in the first “elastic” category tend to have prices in the upper half of their demand curves, while goods in the second category tend to have prices in the lower half of demand. although luxuries are generally more expensive, they are not always so. while the determinants may be easily applied to some products, there are many products that elude categorization based on these common factors. an example of the confusion related to these factors can be drawn from the demand for cigarettes. the standard “intuition” is that cigarettes meet all the requirements for price inelastic demand. while this intuition might 7 journal for economic educators, 10(1), summer 2010 provide valuable insight into price elasticity when cigarettes are $1.50 per pack, as they were in 2002 in new york city, tax hikes have pushed the prices to $8 per pack and consumption has fallen (new york times, may 7, 2004). what was true of price elasticity of demand at $1.50 is not as obviously true at $8. from a policy perspective, the inferences we can make about the slope of demand using the determinants might be misleading regarding the price elasticity of demand. in another example, is the demand for latte price elastic or price inelastic? although some students might assume its demand is price elastic because it is a luxury, others might conclude its demand is price inelastic because it consumes a small portion of a consumer’s income. others might believe that latte faces many close substitutes in cappuccino, coffee, etc. and, therefore, conclude that the demand for latte is price elastic. obviously, the determinants of price elasticity of demand do not necessarily contribute to a student’s understanding of the price elasticity of demand for lattes. although many textbooks select goods and/or services that can be easily categorized by using the determinants, instructors need to recognize the limitations of using these factors to determine a product’s price elasticity of demand. misleading historical elasticities’ tables some textbooks include tables that list goods and services with one number reflecting each good’s price elasticity of demand. typical lists include goods such as: salt, matches, toothpicks, short-run airline travel, gasoline, residential natural gas, coffee, fish, tobacco, legal services, physician services, beer, shoes, taxi service, and automobiles. these numbers are sometimes based on dated studies. some textbooks still use houthakker and taylor’s (1970) severely outdated estimates of price elasticities of demand from misspecified equations. see appendix a for a discussion of what their numbers actually represent. by presenting them, authors ignore the possibility that changes in the real prices of these goods as well as changes in the goods themselves, consumer tastes, technology, and their markets may have significantly altered their price elasticities of demand since the studies were done. in the 4th edition of frank and bernanke’s principles of microeconomics book (2009) the table on p. 101 uses elasticity estimates from sources dated 1970, 1975, 1977, and 1996. although the price elasticities of demand may have been correct when they were computed, these tables give students the illusion that price elasticities are constant and unchangeable over time. appendix b shows which microeconomic principles books in a sample of 17 textbooks include misleading slope diagrams and outdated historical elasticities tables. solutions concentrate on position on the demand curve and the formula the discussion of price elasticity of demand can be improved by placing emphasis where it belongs: on the relative price level. to put it simply, if the price of a product is in the upper half of a linear demand curve, then demand is price elastic; otherwise it is price inelastic. samuelson and nordhaus (2010) suggest a “trick” for calculating the price elasticity of demand. the elasticity of a linear demand curve is the ratio of the length of the curve below the price to the length above. while the calculations of the length of line segments are not particularly simple, the intuition is helpful. if there is more line above the price than below, the demand is 8 journal for economic educators, 10(1), summer 2010 price inelastic. the point of the exercise is clear. slope does not matter. what matters is where the price resides on a linear demand curve. further, although it is typically true that a firm mass producing a low cost good with little or no control over price is likely to operate in the price inelastic part of its demand curve, while a firm that is producing a high cost good in a monopolistic or monopoly market is likely to operate in the price elastic part of its demand curve, instructors cannot use these determinants to motivate a principles discussion of price elasticity of demand. after all, price elasticity of demand is covered in the first half of the semester while cost curves and market structure are covered in the second half of the semester. as a consequence, instructors must use the price-quantity combination on the linear demand curve regardless of a firm’s cost curves and market structure to provide the basis for distinguishing between a demand that is price inelastic or price elastic. the mid-point formula (formula 4), which is the most common approach used by principles textbooks, shows students how to quantify the price elasticity of demand without reference to the slope of the demand curve. this formula reinforces the notion that slope is not relevant in determining the price elasticity of demand. ( ) ( )        ÷− ∆ ÷      ÷∆+∆ ∆ = 22 2121 pp p qq q e d (4) price elasticity of demand formulas that explicitly incorporate slope (frank and bernanke, 2009) should be avoided in principles textbooks since they may lead to confusion on the part of students. use two demand curves to show different elasticities without changing slope when students are being introduced to the elasticity concept, a rotated demand curve should be limited to discussions of the effect of time on demand. instead of rotating a demand curve or showing demand curves with different slopes, differences in price elasticity or changes in elasticity due to a non-price determinant can be shown using two separate demand curves with the same slope. this helps students understand that it is a product’s position on its demand curve, and not the slope of the curve, that determines the price elasticity of demand. for example, in the case of market segmentation and price discrimination, two different markets for the same product can be shown using two demand curves with the same slope. although it is true that the slope of the demand curve may differ for two groups of consumers, it is less likely for students to confuse slope with the concept of price elasticity when both demand curves have the same slope. to illustrate, consider the u.s. market for cigarettes. smoking studies have shown that children have a higher price elasticity of demand for cigarettes than adults. assuming children have lower income than adults and that cigarettes are a normal good, the u.s. cigarette market can be shown as two separate demand curves with similar slopes. in figure 6, adolescents have the inside demand curve (d1) and adults have the outside demand curve (d2). if one assumes that price is as shown in figure 6, the demand for cigarettes is price elastic for adolescents (d1) and price inelastic for adults (d2). because the two demand curves show differences in the willingness to pay, this approach illustrates how a market can be segmented and each group of consumers charged a different price. at a uniform price, the outside curve will be more inelastic (the price is closer to the bottom of the curve), so raising the price in that market will increase total revenue. in contrast, 9 journal for economic educators, 10(1), summer 2010 an increase in price in the other market which is price elastic would cause a decrease in total revenue. figure 6 can also be used to show students how a shift in a demand curve due to a change in any of the demand shifters, can change elasticity without necessitating a change in the slope of that demand curve. when principles students study the elasticity chapter, they have already covered demand shifters such as changes in income, the price of another good, population, etc. an instructor can use figure 6 to show how a shift in the demand curve can change the price elasticity of demand at a given price. the topic of price discrimination is often presented during a discussion of imperfect markets. at that point in the course, principles students are less likely to confuse slope with elasticity and are better able to handle two groups of consumers with demand curves that differ in slope. however, in the textbook chapter covering elasticity, which occurs early in the course, the juxtaposing of two demand curves with different slopes should be avoided. other suggestions principles textbooks have used four non-price factors to explain the price elasticity of demand. while time is an important determinant, the other three commonly used factors (number of substitutes, percentage of budget or income, and necessity versus luxury) can sometimes lead to more, rather than less, confusion among students. instructors should caution students about applying these sometimes ambiguous determinants. discussing the determinants has the potential to divert principles student from understanding that the most important and unambiguous determinant of the price elasticity of demand is the price-quantity position on the linear demand curve. finally, the continued usage of dated estimates some from the houthakker and taylor studies (1970) of price elasticity has the potential to mislead students into believing that price d1 p figure 6. market segmentation and different elasticities for cigarettes using two demand curves with the same slope. d2 q inelastic elastic 10 journal for economic educators, 10(1), summer 2010 elasticity of demand is constant despite changes in many other factors such as technology, advertising, tastes, relative prices, and market structure. rather than rely on outdated price elasticities of demand, professors might refer students to the united states department of agriculture website (usda) to obtain more current price elasticities of demand for various agricultural products in many different countries. the website www.ers.usda.gov/data/elasticities/query.aspx provides price elasticities of demand across countries and within countries. for instance, a professor can ask students to compare the price elasticity of demand for rice in china (urban versus rural consumers) and the united states. an instructor might then ask students why the demand for rice may have become more price elastic in china since the 1990s. this analysis also shows students how estimates of price elasticity of demand can differ fairly dramatically according to when the estimate is calculated, the group of consumers, and the research method. conclusion the position along a linear demand curve is the most important determinant of the price elasticity of demand for a product. following ockham’s razor, the instructor should emphasize this simple and unambiguous fact. authors of principles textbooks could improve their presentation of the price elasticity of demand by avoiding diagrams that appear to confuse slope and elasticity; avoiding rotating demand curves, except in the case of time; and applying nonprice determinants with greater caution. instructors can provide students with greater clarity by continuing to utilize the mid-point formula, by providing a graph that clearly shows how elasticity changes along a linear demand curve, and by discussing more current price elasticities of demand. since the concept of elasticity is often introduced early in a microeconomics course, it is also suggested that changes or differences in the price elasticity of demand for one product be shown without changing the slope of the demand curve. in other words, the market demand curve can be shifted or segmented while keeping the slope the same. during the last few years there has been some improvement in the way principles textbooks approach the price elasticity of demand, but more can be done. hopefully, this article will encourage authors and instructors to embrace greater simplicity with more emphasis on price and position, and less emphasis on rotating demand curves, ambiguous determinants, and dated elasticities. references bade, robin and michael parkin. 2009. foundations of microeconomics. 4th edition. new york, ny: pearson addison wesley. baumol, william j. and alan s. blinder. 2008. microeconomics: principles and policies. 11th edition. mason, ohio: south-western college publishing. boyes, william and michael melvin. 2005. microeconomics. 6th edition. new york, ny: houghton mifflin. case, karl e., ray c. fair, and sharon oster. 2008. principles of microeconomics. 9th edition. upper saddle river, nj: prentice hall. colander, david c. 2008. microeconomics. 7th edition. new york, ny: mcgraw-hill irwin. frank, robert h. and ben s. bernanke. 2009. principles of microeconomics. 4th edition. new york, ny: mcgraw-hill irwin. houthakker, hendrik s. and lester d. taylor. 1970. consumer demand in the united states: http://www.ers.usda.gov/data/elasticities/query.aspx� 11 journal for economic educators, 10(1), summer 2010 analyses and projections. 2nd edition. cambridge, ma: harvard university press. hubbard, glenn and anthony p. o’brien. 2008. microeconomics. 2nd edition. upper saddle river, nj: pearson/prentice hall. johnson, justin p. and david p. myatt. 2006. on the simple economics of advertising, marketing, and product design. the american economic review, 96(3), 756-784. mankiw, n. gregory. 2004. principles of economics. 3rd edition. mason, oh: thomson south -western. mcconnell, campbell r., stanley l. brue, and sean m. flynn. 2009. microeconomics: principles, problems and policies. 18th edition. new york, ny: mcgraw-hill irwin. meyerhoefer, chad d. and samuel h. zuvekas. 2008. the shape of demand: what does it tell us about direct-to-consumer marketing of antidepressants? the b.e. journal of economic analysis & policy, article 4, 8(2), 1-32. miller, james d. principles of microeconomics. 1st edition. new york, ny: mcgraw-hill irwin. miller, roger l. 2006. economics today: the micro view. 13th edition. new york, ny: pearson addison wesley. new york times [serial online]. 2004. kicking the habit in new york may 17:20. nieswiadomy, m. 1986. a note on comparing the elasticities of demand curves. journal of economic education (spring), 125-128. rittenberg, libby and timothy d. tregarthen. 2009. principles of economics. 1st edition. flat world knowledge. book available on-line at http://www.flatworldknowledge.com/beta-.2/principles-microeconomics. samuelson, paul a. and william d. nordhaus. 2010. microeconomics. 19th edition. new york, ny: mcgraw-hill irwin. schiller, bradley r. 2008. the microeconomy today. 11th edition. new york, ny: mcgraw -hill irwin. slavin, stephen l. 2009. microeconomics. 9th edition. new york, ny: mcgraw-hill irwin. stiglitz, joseph e. and carl e. walsh. 2006. principles of microeconomics. 4th edition. new york, ny: w.w. norton & company. taylor, john b. and akila weerapana. 2009. principles of microeconomics. 6th edition. new york, ny: houghton mifflin. appendix a: reporting elasticity estimates many microeconomics principles textbooks devote some time to reporting price elasticity of demand estimates in a table. one widely cited report on price elasticity is the work by houthakker and taylor (1970) on consumer demand in the united states. estimates from this source have become so common in principles texts that they sometimes do not even get a full citation. what the authors fail to note is the context of these estimates. these estimates were published in 1970 based on results completed in 1967 using annual data from 1929 to 1964 excluding the war years. the purpose of the work was to project personal consumption expenditures for 1970. the forty year difference aside, the price elasticities of demand reported in that study are not true price elasticities of demand as defined in equation a. for example, one commonly reported estimate is for restaurant meals which has an elasticity of -2.27. this estimate is found on page 63 of the second edition of the houthakker and taylor book and is based on the following equation: 1.9741 .0668 1.3682t t t tq q x p−= − + ∆ − ∆ (a) http://www.flatworldknowledge.com/beta-.2/principles-microeconomics� 12 journal for economic educators, 10(1), summer 2010 where q is per capita personal consumption expenditures on purchased meals in current dollars and x is total per capita personal consumption expenditures and p is a relative price index. the elasticity calculated from this equation is more accurately a spending elasticity rather than a price elasticity of demand (i.e. q translates to p*q). also, note the lack of substitute prices or other structural variables in equation a. this point is not meant to criticize the original study for its purpose was not to estimate a structurally accurate demand equation but rather to forecast consumption expenditures. however, economists should be taken to task for misrepresenting the results of that study to principles students for nearly four decades. mcconnell and brue (18th edition, 2009) still reports telephone service demand as being inelastic (.26) based on the houthakker-taylor study. an estimate of telephone service expenditures from the first half of the twentieth century is certainly of questionable relevance today. appendix b: selected textbook overview column 4 in the table below indicates which textbooks have slope diagrams that refer to steeper demand curves and less steep demand curves as relatively price inelastic and price elastic, respectively. the last column indicates textbooks that show houthakker-taylor price elasticities of demand or other dated elasticity estimates. all of the textbooks below use some determinants of the price elasticity of demand to explain elasticity. author title ed./year misleading slope diagrams dated elasticity estimates (ht indicates usage of houthakkertaylor elasticities) bade & parkin foundations of microeconomics 4th/2009 yes elasticity esimates are fairly current. baumol & blinder microeconomics: principles & policies 10th/2006 yes elasticity estimates are dated (ht). boyes & melvin microeconomics 6th/2005 no no table case, fair & oster principles of microeconomics 9th/2008 no no table colander microeconomics 7th/2008 no some elasticity estimates are dated (ht); others more current. frank & bernanke principles of microeconomics 4th/2009 no some elasticity estimates are dated (ht); others more current. hubbard & o’brien microeconomics 2nd/2008 yes no table mankiw principles of microeconomics 3rd/2004 yes no table mcconnell, brue & flynn microeconomics 18th/2009 yes dates and sources of elasticities are unclear. miller, j.d. principles of microeconomics 1st/2009 yes elasticity estimates are fairly current. miller, r.l. economics today the micro view 13th/2006 no dates and sources of elasticities are unclear. 13 journal for economic educators, 10(1), summer 2010 rittenberg & tregarthen principles of economics 1st/2009 no uses current elasticity estimates for crude oil demand across countries. samuelson & nordhaus microeconomics 19th/2010 yes no table schiller the microeconomy today 11th/2008 no some elasticity estimates are dated (ht); others more current. stiglitz & walsh principles of microeconomics 4th/2006 yes no table taylor & weerapana principles of microeconomics 6th/2009 no dates and sources of elasticities are unclear. slavin microeconomics 9th/2009 yes dates and sources of elasticities are unclear. long-run economic growth and policy: the mali case 16 journal for economic educators, 10(2), fall 2010 16 long-run economic growth and policy: a case about mali derek stimel* abstract a short case about long-run economic growth issues in the african nation of mali is presented. issues discussed in the case include challenges related to mali’s education system, investment, and trade. basic facts and statistics about mali are provided. analysis of public policy issues and the inherent challenge of extreme poverty are natural outgrowths of the case. the case serves as a foundation for in-class discussion or a take home assignment. the basic case objective is to add real-world context to what can often be a very technical presentation of growth issues. though designed for a principles of macroeconomics course, the case would also be appropriate for a development course or an international economics course. in addition to the case itself, comments on preparation for teaching the case, conducting discussion related to the case, and possible assignments to go with the case are provided. also, a brief motivation for using cases in principles of macroeconomics is provided. keywords: case, economic growth, productivity, mali jel code: a20, a22 introduction long-run economic growth, assumed improvement in living standards that accompany growth, and the challenges associated with achieving growth in impoverished countries have long interested economists. the famous quote from robert lucas illustrates that. “the consequences for human welfare involved in questions like these are simply staggering: once one starts to think about them, it is hard to think about anything else” (lucas, 1988, p. 5). in a principle of macroeconomics course, the magnitude and complexity of these issues can easily be lost. a real-world case about growth challenges in the african nation of mali is presented here. while other countries may have equally been chosen for this purpose, mali is surely a relevant example. despite some progress in growth and living standards has been made (with average incomes over $3 a day, mali technically exceeds the common $2 a day threshold for extreme poverty), mali faces numerous challenges. the case presented is purposely kept brief in order not overwhelm students with rudimentary knowledge of economic principles while still providing enough context to gain a sense of the complex issues. in addition to the case itself, preparation, case discussion suggestions, possible assignments, and issues of assessing the case are discussed. while designed for a * assistant professor of economics, menlo college, 461 brawner hall, 1000 el camino real, atherton, ca 94027, dstimel@menlo.edu. i would like to thank patrick conway for comments on a preliminary draft. i would also like to thank chris klein and two anonymous referees for their helpful comments. any remaining errors are my own. mailto:dstimel@menlo.edu� 17 journal for economic educators, 10(2), fall 2010 17 principles of macroeconomics course, the case would also be appropriate for a development course or international economics course, especially as an refresher or introduction to those topics. finally, for interested readers, we also provide a brief rationale for using cases in principles of economics courses in appendix a. before providing the text of the case itself, an understanding of how long-run economic growth is often presented in principles of macroeconomic is helpful. to aid in that regard, we discuss the model presented in brief principles of macroeconomics, fifth edition, by greg mankiw, which is a representative example. productivity (output per unit of labor) is a function of technology and various inputs. the function is assumed to exhibit constant returns to scale and diminishing returns in any one input. inputs include capital (e.g., equipment, machines, buildings, and tools), natural resources (e.g., oil, ores, and waterways), and human capital (e.g., education and on the job skills). each input is defined as per unit of labor. thus inputs go into a “black box” production process, which is affected by technology, and goods and services are the resulting output. income derives from the sale of those goods and services and so living standards depend on increasing production relative to the amount of labor (or more broadly, people) in a country. saving and investment (domestic and foreign) can enter by adding to the capital stock. useful for organizing and categorizing issues of long-run economic growth, the model perhaps suffers from oversimplifying the complex challenges a country faces in designing policies to promote growth. increasing living standards are a simple matter of increasing the inputs or inventing or acquiring better technology in the model. the model does allow for the impact of political instability, trade policy, or corruption, but in effect, they are assumed exogenous factors. for example, if a country is lacking in an input such as human capital, an appropriate policy response is simply to increase human capital through more spending on education. while a useful framework, because of the technical details, students often fail to make that connection or appreciate the difficulty that policymakers face in reality. the mali case we present is designed to provide students an introductory sense of that complex reality. 18 journal for economic educators, 10(2), fall 2010 18 a case about mali as you step off the plane, you are not quite sure what you have gotten yourself into. one minute you were a junior professional associate at the world bank headquarters in washington d.c., the next minute you were being sent to mali to provide technical advice to the local government. you’ve been asked to take a meeting with a government official to provide an overview of mali’s recent economic growth history and its future prospects based on current challenges. as you enter the waiting car, you realize that you have just set foot in one of the poorest countries on earth. in 2007, mali ranked 178 of 182 countries on the human development index (world bank, 2010). you recall the history of this landlocked african nation. mali once was a colony of france. it gained independence in 1960, but a dictatorship reigned after that. a military coup in 1991 led to the establishment of a democratic style government and recently peaceful elections were held. despite this improvement, the country still lacks in many ways. located in northwestern africa, the country is mostly desert (the saharan), and surrounded by relatively unstable countries like algeria and cote d’ivoire (central intelligence agency, 2010). the malian military has been battling a rebel group and terrorist organizations (world bank, 2010). the echoes of french colonization are seen clearly in mali’s education system. most courses and textbooks use the french language, which is the official language of the country. most of the population speaks bambara or one of many other african languages. the country lacks qualified teachers, classrooms, and materials. also, the agrarian based economy creates incentives for children to work rather than attend school. only 60% of eligible students enroll in school. of those, roughly a third will graduate. corruption is rampant as well. teachers and administrators can be bribed for everything from grades to scholarships or even diplomas themselves. (bender et al, 2007) transparency international ranks mali as 111 of 180 countries on its corruption perceptions index in 2009 (transparency international, 2010). the world bank has been coordinating donors as well as providing resources itself for at least the past 15 years. (bender et al, 2007) as you are shepherded through the capital of bamako to your meeting, you turn your attention to the papers you have brought along. the briefing sheet states that 80% of the labor force relies on fishing and farming the population growth rate is relatively high compared to sub-saharan african countries overall. the rate of hiv infection is low compared to other sub-saharan african countries, but still high relative to an industrial country like the u.s. (central intelligence agency, 2010) the economy of the country relies heavily on trade, roughly three times as much as the u.s. does but nowhere near as much as some southeast asian countries. mali’s primary exports are cotton and gold while its primary imports are food, energy, and capital goods (central intelligence agency, 2010). mali depends on foreign aid from the world bank and other sources (central intelligence agency, 2010). the country’s real investment as a share of real gdp was about 1/4 of what it was in the u.s. in 2004 (heston, summers, and aten, 2009). according to the world bank, the country ranks 156 of 183 countries on the 2010 ease of doing business index (world bank, 2010). you enter your meeting with a lot on your mind. the government official greets you warmly and asks, “what is the biggest challenge my country faces for economic growth?” momentarily pausing, you begin to speak... 19 journal for economic educators, 10(2), fall 2010 19 mali socioeconomic data: annual averages by decade variable decade 1960s 1970s 1980s 1990s 2000s population (thousands) 4,940 6,127 7,315 8,903 10,982 labor force (thousands) --2,311 2,682 3,301 gdp per capita (2005 usd) 647.26 662.45 811.07 983.32 1,209.30 consumption per capita (2005 usd) 574.72 714.77 807.93 866.48 960.73 investment per capita (2005 usd) 36.01 57.49 69.92 85.29 92.84 government spending per capita (2005 usd) 109.48 67.55 149.05 226.82 281.02 openness (%) 36.78 58.04 54.22 53.37 59.62 gross capital formation (% of gdp) 17.00 15.50 17.20 22.60 23.63 foreign direct investment, net inflows (thousands usd) -1,325 2,273 23,679 132,025 external total debt stocks (thousands usd) -377,149 1,405,397 2,908,028 2,687,895 net official development assistance and official aid received (thousands usd) 14,741 90,779 320,610 431,732 650,708 inflation rate (%) 12.50 9.00 6.40 6.10 5.11 life expectancy at birth (years) 36.71 38.56 41.41 44.09 46.99 under 5 mortality rate (deaths per 1000 births) 417.90 354.25 285.40 241.55 201.90 adult literacy rate (%) -9.43 -19.04 25.09 data are annual averages by decade constructed from the penn world tables, version 6.3 available at http://pwt.econ.upenn.edu and from the world bank available at www.worldbank.org. for some variables (for example under 5 mortality and literacy rates), early decade averages are based only on limited years of available data. for the 2000s, years are for 2000-2008. for further reference, the cia world factbook (www.cia.gov) reports the following recent information for mali. for 2010, the adult literacy rate is 46.4%, life expectancy at birth is 52.17 years, the population growth rate is 2.6%, population level is 13,796,354, and the median age of the population is 16.2 years. real gdp growth was 4.0% in 2009, inflation was 2.7% in 2007, and the unemployment rate was 30% in 2004. for 2009, gdp per capita was $1,200 annually on a purchasing power parity basis. http://pwt.econ.upenn.edu/� http://www.worldbank.org/� http://www.cia.gov/� 20 journal for economic educators, 10(2), fall 2010 20 teaching note conway (n.d.) provides a useful framework for preparing to teach a case, especially as it relates to case discussion, which he calls the “great” method.1 the acronym stands for goals for the session, reverse engineering, entry scenario, advance the discussion, and trace out the reasoning. as we proceed with discussing suggestions for teaching the mali case, we implicitly follow the great method. we discuss three possibilities (a discussion, a role-playing scenario, and a take-home assignment) for incorporating the mali case into a principles classroom. the assignment would work in a development or international economics course especially as a refresher for long-run economic growth. we also discuss summative (i.e. graded) assessment of the mali case as well. learning outcomes for the mali case we identify three goals or learning outcomes that are appropriate for a principles of macroeconomics course. 1. demonstrate a link between real-world data and a long-run economic growth model (i.e. production function). 2. demonstrate recognition of challenges and complexity for long-run economic growth in a developing country. 3. demonstrate a link between economic policy and long-run economic growth with a long-run economic growth model (i.e. production function). in a nutshell, the proposed learning outcomes involve students being able to show an understanding of the connection between the theoretical growth model (described in the introduction) and real-world growth issues. further students should be able to appreciate the inherent challenges for a developing country in implementing effective growth policies in those circumstances. to achieve the first learning outcome, a student needs to be able to take some aspect of the information provided and link it to a production function. as one example, from the data table, we can see that real gdp per capita, while low, has been rising over the decades in mali and that real investment per capita has risen as well. if a student is able to make the link that the additions to the capital stock through investment are one factor leading to an increase in productivity and average income, they will have achieved the first learning outcome. for the second learning outcome, a sense of the conflicting information would be sufficient. as one example, from the data table, there is some evidence of increased literacy rates over the decades, yet they remain relatively low in mali at 46.4% in 2010. so one might describe human capital in mali as improved over what it once was. yet, as presented in the case text, there are clear problems in the malian education system today. that raises the question of how much actual improvement in human capital has taken place (or perhaps how awful was it if current circumstance represents improvement)? there is no way to definitively answer the question with information from the case. if a student recognizes that ambiguity, they will have achieved the second learning outcome. 1 examples can be found at his website. the direct link is http://www.unc.edu/home/pconway/aea2000/caseexap.htm. http://www.unc.edu/home/pconway/aea2000/caseexap.htm� 21 journal for economic educators, 10(2), fall 2010 21 for the third learning outcome, a student needs to be able to suggest an economic policy that would potentially address on of the growth challenges mali faces and then be able to explain how that policy affects productivity based on a production function. as an example, if a student looks to address the problems in the education system, they must be able to explain how the policy improves human capital and then by extension improves productivity and living standards. preparing students for the case prior to teaching the case, students are likely to require some preparation. while the case could be used as an introduction to long-run economic growth, it may be best used after an introductory lecture on economic growth. in particular students should be exposed to the production function (discussed in the introduction) before working their way through the particulars of mali and associated statistics. some case details are likely to be unfamiliar to principles students. they may not know what the world bank does. providing a basic overview of the role of the world bank, in particular, the world bank function of providing technical assistance to countries would be helpful. further along those lines, students will be unfamiliar with the junior professional associates program for the world bank. that program allows recent college graduates to work for the world bank for a two-year period. junior professional associates then take that experience back into the private sector or graduate school, a nongovernmental organization, etc. we used this in the case because it places the student in a position that is relatively closer to their age range than the typical world bank job, which tends to require a graduate degree. requiring students to visit the world bank’s website as an un-graded assignment and read about the junior professional associates program and the basic mission of the world bank would be useful. students are also unlikely to be familiar with each statistic provided in the case. it is at the discretion of the instructor whether a preparatory assignment requiring students to look up the definitions of these statistics is appropriate or whether the instructor would prefer to simply provide definitions to the students. openness, which is exports plus imports as a percentage of gdp, and gross capital formation, which is additions to fixed assets and net inventory changes, are the two statistics students are likely the most unfamiliar with. students may also be unfamiliar with the components of the corruption perceptions index or the ease of doing business index, but they will readily understand the general concept of those measures, which is sufficient for the case. finally, one of the appealing features of this case is that the information provided is not sufficient for fully understanding mali’s situation. that introduces real world ambiguity, which is often a fact of life in decision-making and wrestling with complex issues. one example of that is the data presented may not be in a form that is desirable or may have holes or gaps in it. for example, real gdp per capita for mali is provided here. clearly it is correlated with productivity, but it is not technically output per unit of labor.2 2 the penn world tables do contain more direct measures of productivity but including real gdp per capita maintains consistency with the other the other national accounts data provided (consumption, investment, government spending). a more direct measure could be recovered with the labor force data provided. similarly, some of the variables are available only in nominal rather than real terms. also, the data can be combined in various ways. for example, national savings per capita 22 journal for economic educators, 10(2), fall 2010 22 can be constructed using the identity national savings equals income minus consumption and government spending. while perhaps beyond the scope of a principles of macroeconomics course, forcing students to contemplate the details of the data would be one way to leverage the case for a development or international economics course. teaching the case three options for teaching the case are presented: a traditional in-class discussion, an in-class role-playing scenario, and a take-home assignment. for the in-class discussion, one 50-minute class period is sufficient, though actual time used can vary substantially depending on the level and quality of student participation. for the roleplaying scenario, one 50-minute class period plus either a small portion of another class period or an outside class assignment is sufficient. the take-home assignment need not take up any class time as it is equivalent to a homework assignment. for the in-class discussion, a maximum class size of 20-25 is best. students are provided the text of the case at least one class period in advance. on the day of the discussion, break students into small groups of no more than five students (three or four is optimal). the basic format is then to ask a question, give the groups time to formulate a response, and then solicit responses from all or a subset of the groups depending on the time constraint, and then proceed to the next question. the following is a sequence of questions tied to the learning outcomes described previously and provides a natural way to make a formative (i.e. not graded) assessment of those outcomes. 1. over recent decades, has mali experienced long-run economic growth? provide one reason why they have or have not. use the production function to explain your reasoning. 2. what is mali’s biggest challenge for future economic growth? recommend a way to overcome that challenge. 3. are there any stumbling blocks or problems with your recommendation? if so, list one. 4. can you think of a way to get around that problem? if so, suggest it, if not, state why not. 5. if mali follows your advice, will it be better off? if so, explain how and why, if not, explain why not. use the production function as part of your explanation. providing students a handout on the day of the discussion that includes these questions and enough space that they can record their answers is helpful. keeping sequential note of the responses on the board (dry-erase, chalk, etc.) is helpful too, as it will allow the instructor to correct any faults in student logic. students can then make those corrections themselves on their handout. notice that in answering these five questions, students will be proceeding through the logic necessary for the learning outcomes. discussion question #1 relates to learning outcome #1, discussion questions #2-4 relate to learning outcome #2, and discussion question #5 relates to learning outcome #3. with a 50-minute class period, allocate roughly 10-minutes to answering each question. one way to speed up the discussion is to use only one group’s answer for discussion question #2 and answering subsequent questions based on that one answer. finally, consider collecting all of the 23 journal for economic educators, 10(2), fall 2010 23 answers at the end for a small participation credit if you feel it is necessary to increase student engagement with the case. in principles of macroeconomics, expect students to gravitate more to the qualitative information rather than the quantitative information (i.e. the text rather than the data table). for example, students may tend to look at mali’s recent growth history based on problems of political instability (colonization, a coup, a recent democracy, unstable neighbors) rather than looking straight for a productivity proxy like real gdp per capita. similarly, education and health issues may be common challenges mentioned by students for mali. of the statistics, life expectancy, mortality, and adult literacy may be the most mentioned in support of student arguments. students may also fail to combine information as well. for example, mali is heavily reliant on trade, yet as a landlocked country, distribution of goods and services is a challenge. during discussion discussion, the instructor can serve to guide students back to the production function. even simply drawing a well-labeled production function on the board can help in that regard. especially as health and education may be the common answers, reminding students of the definition of human capital is useful. an alternative to a standard discussion of the case is to have students create and then act out a role-playing scenario. one advantage of this is that it combines elements of a take-home assignment with in-class participation, and can form the foundation for a more comprehensive project if desired. one disadvantage is that it can be a bit more time consuming than a standard discussion. towards the end of a class period, place the students into small groups and provide them with the case. outside of class, require each group to prepare a short dialogue or “mini-play” with two roles: the government official and the world bank junior professional associate. encourage students to access more information about mali online if they want as long as they provide references. each group selects two members to act out the dialogue for the class. the group also turns in the dialogue as well for homework credit. for this option a simple set of instructions with prompts is helpful. for example, there must be at one to two pages of dialogue. students should think about what the government official would ask the world bank associate. they should think about what the associate would say, the advice the associate might give, and how the government official might respond. students should be sure to recall the production function discussed in class and how it might help for explanations of mali’s circumstances. finally if an instructor prefers to not use class time at all, this mali case would work well as a take-home project or homework assignment. a simple example of that would be to assign the discussion questions mentioned above to students and require short responses for each. a more involved assignment would be to require each student to write a one to two page “friend of mali” brief in which they must briefly summarize mali’s economic circumstances, discuss one challenge for mali’s future living standard improvements, and make one suggestion that would help improve mali’s circumstance and explain how it would do so. assessment the mali case naturally serves as a formative assessment of student understanding of long-run economic growth issues and a production function. during the back and forth of a discussion, the acting out of a mini-play, or the submission of a written homework 24 journal for economic educators, 10(2), fall 2010 24 assignment about the case, an instructor can observe which students are making the complex connections needed to understand mali’s long-run growth prospects. to the extent there is a participation or homework score associated directly with the case, the mali case is also a valid summative assessment. still, it can be helpful to connect additional summative assessments to the mali case at a later date in order to gauge student retention of the material and maintenance of the learning outcomes. two suggestions are offered. first, if the case is discussed in class or the mini-play is used, we recommend the instructor take notes of the key points that students made about mali and then summarize those points for the students either at the end of that class period or the beginning of the subsequent class. for example, suppose the main avenue of the discussion is that mali’s education system needs overhauled. a multiple-choice question on a future exam might be “in response to the lack of human capital in mali, the class suggested a policy response of …” included as a choice should be “overhaul of the education” system. in designing these types of questions, it is vital, though, to use the precise language that was used in class that day. perhaps more involved than an exam is to create an additional small project based on the mali case. for example, have students research a different african nation (rwanda for example) and write brief paper comparing and contrasting rwanda and mali’s recent growth experience and growth challenges. this has the added benefit of familiarizing students with at least some of the common data sources directly used in the mali case. a key disadvantage is that students can become lost in this, especially principles students who are generally unfamiliar with economic reasoning let alone economic data sources and their issues. this assessment tool may be better suited for a development or international economics course. in fact, one key factor that the case does not address is mali’s exchange rate. development or international economics students could be asked to investigate mali’s exchange rate online and explain how it impacts, if at all, mali’s longrun growth prospects. conclusion despite signs of progress, mali clearly faces many current and future challenges to long-run economic growth and improving living standards. the short case presented here provides real world facts about mali that students can wrestle with and try to reconcile with the conceptual production model presented in class. hopefully the case serves as a starting point for students to contemplate and appreciate the challenges of poverty and growth as economists do. references bender, p., a. diarra, k. edoh, and m. ziegler. 2007. evaluation of the world bank assistance to primary education in mali: a country case study, washington d.c: the world bank. boehrer, j. 1996. how to teach a case. the electronic hallway. http://hallway.org/cases/. accessed 21 june 2009. bloom, b., m. engelhart, e. furst, w. hill, and d. krathwohl. 1956. taxonomy of educational objectives handbook i: cognitive domain. new york: david mckay. carlson, j.a. and d.w. schodt. 1995. “beyond the lecture: case teaching and the http://hallway.org/cases/� 25 journal for economic educators, 10(2), fall 2010 25 learning of economic theory.” journal of economic education, 26(1): 17-28. carlson, j.a. 1999. “a case method for teaching statistics.” journal of economic education, 30(1): 52-58. central intelligence agency. 2010. cia the world factbook – mali. http://www.cia.gov/. accessed 5 august 2010. conway, p. n.d.. examples of creating and using cases. http://www.unc.edu/. university of north carolina at chapel hill. accessed 21 june 2009. heston, a., r. summers, and b. aten. 2009. penn world table version 6.3. http://pwt.econ.upenn.edu/. center for international comparisons of production, income and prices at the university of pennsylvania. accessed 5 august 2010. lage, m. j., g. j. platt, and m. treglia. 2000. “inverting the classroom: a gateway to creating an inclusive learning environment.” the journal of economic education, 31(1): 30-43. lucas, r. e. 1988. “on the mechanics of economic development.” journal of monetary economics, 22: 3-42. mankiw, n. g. 2006. brief principles of macroeconomics. fifth edition. thomson southwestern publishing. salemi, m. 2002. “an illustrated case for active learning.” southern economic journal, 68(3): 721-731. world bank. 2010. mali country brief. http://go.worldbank.org/. accessed 5 august 2010. appendix: cases and principle of economics one of the biggest challenges in a course, especially an introductory economics course, is balancing the level of abstraction with real world practicality. in an introductory economics course this is often due to the simplifying assumptions of the models presented. these assumptions may be needed to clearly articulate the main ideas but they often do so at the expense of the ambiguity and messiness that exists in real world situations (carlson and schodt, 1995). as a result students may not make a connection between technical details and practical relevance. salemi (2002) provides a rationale for incorporating active learning in the classroom. one type of active learning is a case. carlson and schodt (1995) and carlson (1999) provide a rationale for using cases to teach economics and statistics, respectively. some evidence of the efficacy of cases is also in carlson and schodt (1995). as described in boehrer (1996) a case provides a narrative grounded in either real world detail or if fictional, enough realism to be believable. the key to a case is that the student is placed in the role of active participant such as the role of a decision-maker or advisor. this is the main difference between a case and a case study; a case study describes an already made decision and students are left to analyze that decision (boehrer, 1996). a case provides information but may not necessarily provide all the information needed or desired. or a case may provide contrasting or contradictory information. thus an additional key to a case is that there is no clear right answer to the decision that the student is faced with. in that regard, a case differs from a context-rich problem (such as a detailed homework question) where there is a specific answer and the information needed to obtain it is provided. http://www.cia.gov/� http://www.unc.edu/� http://pwt.econ.upenn.edu/� http://go.worldbank.org/� 26 journal for economic educators, 10(2), fall 2010 26 as principles of macroeconomics is often a general education requirement in colleges and universities, providing connections to students of different backgrounds and interests is important. a varied approach is one way to appeal to heterogeneous learning styles (lage, platt, and treglia, 2000). the case method can serve as one of those approaches. the appeal of the case is that it helps connect course material to a real world situation. it does so while requiring students to apply more analytical reasoning than is often found in many other types of questions or assignments. one drawback is that a case can be more time consuming than a lecture. thus using a case in a principles course may result in fewer topics covered. though a valid concern, the expected benefit from case analysis in principles of economics is higher-order student learning (such as in the bloom et al, 1956, sense of the term). 13 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 1 ( 1 ) , s u m m e r 2 0 1 1 13 on cognitive ability and learning in a beauty contest1 oliver schnusenberg 2 andrés gallo 3 abstract we reinvestigate a version of the beauty contest originally developed by keynes (1936) with a focus on cognitive reflection. using a sample of 166 undergraduate students at a regional university in florida, we confirm previous research by burnham et al. (2009) that cognitive reflection, as measured by frederick’s (2005) cognitive reflection test, matters in the first round of the game; players with a higher crt score pick significantly lower numbers, and their responses cluster more. unlike previous research, however, we find that cognitive ability is important only when faced with a new situation. in subsequent rounds of the game, cognitive ability is subordinate to a learning effect and players’ responses and the variability of responses are not significantly related to crt scores. this finding is important in financial markets, since it implies that anticipating the decisions and actions of other players is a function of experience, not necessarily cognitive ability. key words: beauty contest, cognitive reflection test, cognitive ability, crt jel classification: a22 introduction the beauty contest was first discussed numerically by moulin (1986), although it was introduced originally by keynes (1936). in this contest, players choose a number between 0 and 100. the winning entry is the one closest to a given percentage (most often 2/3) of the mean choice of players. the nash equilibrium of this game is that everyone chooses 0. typical experiments, however, show that the typical winning entry is about 17 (see, for example, thaler 1998, nagel 1995). montier (2010) references this game as well to illustrate how difficult it is to incorporate everybody else’s decision making process into your own. also recently, burnham et al. (2009) utilized a cognitive test to see if the cognitive ability of an individual is associated with the response in the beauty contest. they found that higher cognitive ability improves the performance in the beauty contest game. this paper complements and expands their research since it uses a cognitive test in the selected group of subjects but it assesses whether the cognitive ability holds in repeated games. this paper shows that, similarly to burnham et al. (2009), cognitive ability is important in the first round of the game, but once the game is played repeatedly this advantage disappears. this result adds a very important dimension to behavioral economics since it indicates that cognitive ability can be important when dealing with new situations, while repeating interaction creates a feedback mechanism for participants that can reduce the effect of any advantage in cognitive ability. 1 we would like to thank the participating students at the university of north florida for completing the survey. we also thank an anonymous reviewer for helpful comments and suggestions. 2 associate professor of finance, department of accounting & finance, university of north florida 3 associate professor of economics, department of economics & geography, university of north florida 14 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 1 ( 1 ) , s u m m e r 2 0 1 1 14 the remainder of this paper is organized as follows. the hypotheses are presented in next. the data is presented in the third section, followed by the results. the paper concludes and presents some implications in the last section. hypotheses individuals tend to think in either an x system or a c system. the x system represents the emotional approach to decision making, while the c system is a more logical way of processing information. the c system is deliberate, deductive, and logical, while the x system is automatic and effortless. klein (1999) summarizes the conditions under which people are more likely to use the more automatic system 4 : when the problem is ill structured and complex when information is incomplete, ambiguous, and changing when the goals are ill-defined, shifting, or competing when stress is high, because either time constrains and/or high stakes are involved when decisions rely upon an interaction with others the highlighted areas are present in the numerical beauty contest. clearly information is incomplete, since no player knows how the other players will play the game. moreover, the optimal decision for a player depends on the expectations about the other players’ play of the game. in addition, if we view the numerical beauty contest as a corollary to the stock market, playing the stock market game (i.e., guessing the price everybody else is willing to pay for a stock) results in high stress because a trader’s job may require swift execution and/or substantial amounts of money. given this context, it stands to reason that most people will use system x in order to play the numerical beauty contest. frederick (2005) developed a cognitive reflection test (crt) consisting of three questions, which can easily be used to measure the ability of the c-system to control the x-system. montier (2010) elaborates: “i’ve found that the number of frederick’s questions that you get correct correlated with your general vulnerability to a whole plethora of other behavioral biases….those who get zero questions right seem to suffer more pronounced examples of the biases than those who get three questions right.” burnham et al. (2009) used a cognitive ability test developed by the company assessio, which is consistent with the test that we use in our experiment. we expect that those contestants that answer more questions correctly on the crt will play the game differently than those who answer zero or only one question on the test correctly. specifically, the crt was designed to assess a specific cognitive ability; it assesses individuals' ability to suppress an intuitive and spontaneous ("system x") wrong answer in favor of a reflective and deliberative ("system c") right answer. 5 in the remaining discussion, we will use the terms “cognitive ability” and “cognitive reflection” alternative to refer to this intended meaning of the crt test. in the context of the beauty contest, it stands to reason that c-system users will pick numbers that are closer to the nash equilibrium of zero, since they are likely to reason more through the thinking that the contestants will follow. this hypothesis is also informed by the empirical results provided by burnham et al. (2009). 4 also summarized in montier (2010). 5 obrecht, chapman, and gelman (2007), for example, find that higher crt scores are correlated with mean differences in comfort with statistical concepts; pinillos et al (2011) find that taking the crt and answering questions correctly activates system c processes for subsequent tasks. 15 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 1 ( 1 ) , s u m m e r 2 0 1 1 15 h1: c-system users will pick lower numbers than x-system users in the contest. furthermore, if system c users think through the reasoning of other players to a greater extent, then it stands to reason that their responses will be closer together. consequently, we hypothesize that the standard deviation of their responses will be lower: h2: c-system user responses will be more clustered and exhibit a lower standard deviation. given the empirical results regarding the better performance of subjects with higher cognitive ability, we want to explore whether this advantage holds in repeated instances of the game. to do that, we have the same group of subjects play this game two more times. accordingly, our third hypothesis is, h3: c-system user responses will be consistently lower than x-system users responses in further rounds of the game. data to conduct the contest, we utilized students in an introductory business undergraduate course at a regional university in florida. students were asked to answer frederick’s (2005) three crt questions as well as the numerical beauty contest question, which are reproduced in the appendix. in the first round, 166 students participated in the survey. after the first round, students were shown the distribution of answers as in figure 1. figure 1. distribution of round 1 answers in the beauty contest. students were also told the average and winning entry. no additional information was provided. 6 students were then told that the contest would be played again 7 and, while anyone was welcome to play and anyone could win, the distribution and winning number would be 6 in this environment we wanted to reflect market situations as accurately as possible. in any normal financial market operation, market participants make their decisions, observe the results, and then use that information as feedback for their decision next time. 7 camerer and ho (2000) find that the responses converge to the nash equilibrium of zero after about 10 rounds. 0 2 4 6 8 10 12 14 16 0 5 1 0 1 5 2 0 2 5 3 0 3 5 4 0 4 5 5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 9 0 9 5 1 0 0 f re q u e n cy number picked 16 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 1 ( 1 ) , s u m m e r 2 0 1 1 16 based only on the distribution of those students who participated in the contest the first time. 8 we added this requirement so that the students who participate in both rounds adjust their play of the game only in response to others playing the game repeatedly, not to newcomers to the game who have not had a chance to “learn” how to play the game. 94 students participated in the second round. students were then told that the contest would be conducted a third time. students were presented with the distributions of the first two rounds (figures 1 and 2) and the averages in each round. again students were told that anyone could play and win, but the distribution that determines the winner would be based only on those students who played both previous rounds. seventy students participated in the third round. figure 2. distribution of round 2 answers in the beauty contest. as compensation for participating in the survey, students in each round were offered a quiz question should they win the contest. 9 8 we added this requirement to observe how the students that participated in the first round would play the game in subsequent rounds. 9 a quiz in the class is worth about 2.5%, with about seven questions per quiz. simple math shows that this is a very small incentive for participating in the study. moreover, we did not provide any incentive for answering the crt questions correctly. this is because we wanted to identify whether students are natural system x or system c thinkers. our results reveal that those who spend more time on answering the questions on the crt correctly adjust the answers to the beauty contest more, which is exactly what we predicted. if all participating students simply provided random answers (because the incentive is not high enough), then we would expect the answer to the crt and the beauty contest to be uncorrelated. we acknowledge that there is a selection bias that may cause random correlation between the beauty contest and the crt results if only some of the students provide random answers. 0 1 2 3 4 5 6 7 8 0 4 8 1 2 1 6 2 0 2 4 2 8 3 2 3 6 4 0 4 4 4 8 5 2 5 6 6 0 6 4 6 8 7 2 7 6 8 0 8 4 8 8 9 2 9 6 1 0 0 f re q u e n cy number picked 17 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 1 ( 1 ) , s u m m e r 2 0 1 1 17 results the distribution of numbers picked for all three rounds is shown in figures 1 through 3. figure 3. distribution of round 3 answers in the beauty contest. a comparison of the figures clearly indicates that the range of numbers has decreased across the two rounds. in round 1, the average number picked was 32.05, which made the winning entry 21. in round 2, the average number picked was 20.26, which rendered the winning number 14. in the third round, the average number picked was 10.81, with a winning entry of 7 10 . in round 1, three students picked the number 21, while seven students picked the winning number in round 2 and eight students picked the winning number in the third round. the convergence of the answers toward the nash equilibrium of zero in later rounds corresponds to the findings of camerer and ho (2000). descriptive statistics from frederick’s (2005) cognitive reflection test (crt) are shown in table 1. panel a shows the results for the combined results from all three rounds. as is evident from panel a, the average number picked is lower for students who answer more questions correctly on the crt. for example, while the average (median) number picked for students who answered no questions on the crt correctly is 28.90 (23.00) in all three rounds of the beauty contest, the average (median) number picked for those students who answered all questions on the crt correctly is 21.34 (17.00). the difference in the numbers picked between those who answered none of the questions correctly versus those who answered them all correctly is significant (p-value = 0.015). there is also a decrease in the standard deviation of answers across the categories; for those answering no questions on the crt correctly, the standard deviation of numbers picked is almost 20, while it is slightly less than 15 for those answering all questions on the crt correctly. this difference in variances is highly significant (p-value = .005). 10 all these averages are statistically different from each other. we run a t-test for unpaired samples with different variance and the averages are statistically different at 99.5% of confidence. 0 5 10 15 20 25 0 4 8 1 2 1 6 2 0 2 4 2 8 3 2 3 6 4 0 4 4 4 8 5 2 5 6 6 0 6 4 6 8 7 2 7 6 8 0 8 4 8 8 9 2 9 6 1 0 0 f re q u e n cy number picked 18 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 1 ( 1 ) , s u m m e r 2 0 1 1 18 panel b of table 1 shows the results for round 1 only, panel c shows the results for round 2 only, and panel d shows the results for round 3 only. p-values for tests of differences in means and variances are presented in panel e. within each round, the average and median numbers picked decrease consistently as students are more reflective on the crt test, 11 although the result is much less pronounced in round 3 of the game. some of the differences in means in panel e are statistically significant for different crt scores in round 1, but most are not significant in rounds 2 and 3. table 1. descriptive statistics of frederick’s cognitive reflection test in both rounds. panel a – all rounds questions correct frequency avg. number picked median number picked std. deviation of answer 0 94 28.90 23.00 19.73 1 64 23.36 20.00 18.62 2 78 22.60 17.00 17.29 3 94 21.34 17.00 14.71 total 330 24.18 18.00 17.80 panel b – round 1 questions correct frequency avg. number picked median number picked std. deviation of answer 0 51 38.12 33.30 21.29 1 28 31.48 28.50 19.85 2 41 29.43 28.00 19.84 3 46 28.00 25.75 15.60 total 166 32.05 28.00 19.53 panel c – round 2 questions correct frequency avg. number picked median number picked std. deviation of answer 0 25 21.48 21.00 10.43 1 19 23.26 21.00 17.91 2 21 20.10 17.00 8.79 3 29 17.36 16.00 11.16 total 94 20.26 17.00 12.21 panel d – round 3 questions correct frequency avg. number picked median number picked std. deviation of answer 0 18 13.07 13.00 6.43 1 17 10.12 8.00 6.13 2 16 8.40 8.50 5.47 3 19 11.32 9.00 8.39 total 70 10.81 9.00 6.83 11 the only exception to this is 2 and 3 questions correct for round 3. 19 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 1 ( 1 ) , s u m m e r 2 0 1 1 19 panel e – p-values for tests of different averages and variances with respect to crt score crt scores round 1 average round 2 average round 3 average round 1 variance round 2 variance round 3 variance 0 vs 1 0.1707 0.7018 0.1741 0.7075 0.0143** 0.8555 0 vs 2 0.0463** 0.6275 0.0288** 0.6506 0.4414 0.5340 0 vs 3 0.0085*** 0.1667 0.4798 0.0363** 0.7427 0.2771 1 vs 2 0.6756 0.4912 0.4005 0.9810 0.0028*** 0.6609 1 vs 3 0.4330 0.2101 0.6257 0.1505 0.0239** 0.2129 2 vs 3 0.7114 0.2254 0.3369 0.1185 0.2733 0.0993* * significant at the 10% level ** significant at the 5% level *** significant at the 1% level similarly, the standard deviation of answers picked is smaller for students who reflect more on the answers they provide in round 1 and, to a lesser extent, round 2. by round 3, the answers from more reflective students tend to have a higher standard deviation. the results for round 2 presented in panel c of table 1 are less obvious. the average and median numbers decrease for students who scored higher on the crt, but this trend is less pronounced than for the first round of the contest. the insignificant results of the t-tests, in panel e of table 1, corroborate this result. similarly, while it appears that the standard deviation is decreasing slightly for students with higher crt scores, the evidence is less convincing in this round; even though it does appear that the variance decreases between students answering one question correctly versus those answering two or three questions correctly, the variance for those students answering one question on the crt correctly is significantly greater than the variance for those answering none correctly. the results for round 3 presented in panel d of table 1 are very similar to the round 2 results, with one important difference. students who scored very high on the crt appear to both pick higher numbers and exhibit a higher variance than those who scored lower. the results presented in table 1 suggest that the level of reflection that students exhibit is a rather pronounced predictor of student responses in the first round of the contest. this makes sense, as a higher level of reflection or reasoning will lead students to pick a lower number. it also makes sense that this group of students will give responses that cluster more than students who are more impulsive, leading to a lower variance in their responses. as the contest progresses into subsequent rounds, however, it appears that the results on the crt test become a less useful predictor of student responses as well as the variance of responses. in other words, in later rounds there is a less pronounced difference between those students who think impulsively versus reflectively as measured by the crt. to further investigate whether the crt results can be used to predict performance in the beauty contest, we next classify students into system x (impulsive) versus system c (reflective) groups. the system x group contains those students with either 0 or 1 answers correct on the crt, while the system c group contains those students with either 2 or 3 answers correct on the crt. we then repeat the analysis from table 1 for these two groups. 20 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 1 ( 1 ) , s u m m e r 2 0 1 1 20 the results from the analysis of system x and system c groups are presented in table 2. as in table 1, the combined results for rounds 1 and 2 are presented in panel a, while round 1 and round 2 results are presented in panels b and c, respectively. as shown in the third line of panel a, the difference in the average and median number picked between system x and system c users is significant at the 1% and 5% level, respectively. moreover, the difference in the standard deviation of answers is significant at the 5% level. this indicates that system c users, on average, pick lower numbers and exhibit less variability in their answers than system x users across all three rounds of the contest. table 2. system x and c descriptive statistics in both rounds. panel a – all rounds system frequency avg. number picked median number picked std. deviation of answer x 158 26.66 22.50 19.42 c 172 21.91 17.00 15.90 difference 4.75*** 5.50** 3.52** panel b – round 1 system frequency avg. number picked median number picked std. deviation of answer x 79 35.77 32.00 20.91 c 87 28.67 27.00 17.64 difference 7.10*** 5.00*** 3.27 panel c – round 2 system frequency avg. number picked median number picked std. deviation of answer x 44 22.25 21.00 13.97 c 50 18.51 17.00 10.24 difference 3.74* 4.00* 3.73** panel d – round 3 system frequency avg. number picked median number picked std. deviation of answer x 35 11.63 9.00 6.37 c 35 9.98 9.00 7.26 difference 1.65 0.00 -0.89 * significant at the 10% level ** significant at the 5% level *** significant at the 1% level panel b shows the results from round 1. for the average number picked and the median number picked, the difference between x and c system users is highly significant, but the difference in the standard deviation of answers is not significant. thus, while more reflective students apparently pick lower numbers, they do not seem to cluster more. the round 2 results in 21 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 1 ( 1 ) , s u m m e r 2 0 1 1 21 panel c show less convincing results for the average and median number picked. the respective difference between x and c system users of 3.74 and 4.00 is only significant at the 10% level. in round 2, however, the standard deviation of answers is significantly higher for the more impulsive system x users. panel c, showing the results from round 3 of the contest, illustrates that the crt test results become even less important in subsequent rounds. neither the average numbers picked, the medians, nor the standard deviations differ at conventional significance levels. the results from table 1 and 2 combined provide strong evidence that more reflective students pick lower numbers in the beauty contest, particularly in the first round of the contest, than the more impulsive students. moreover, at the extreme ends of the crt (0 versus 3 questions correct), there is a significant difference in the variability of answers, with the more reflective students’ answers clustering more. while this difference in the standard deviation of responses is not observed in the extreme cases in the second round of the contest, it is observable when system x and system c are classified as (0, 1) and (2, 3) crt questions correct, respectively. in round 3 of the contest, however, the differences are not significant for either system x or system c users or for the extreme cases. as an additional test of the relationship between the number picked and the responses on the crt, we performed a regression analysis. we pool the results from the three rounds and we also present a regression individualizing each round with a different variable. as a result, we ran three simple ols regressions using the number picked as the dependent variable and the number of correct crt responses as the independent variable. the regression results are displayed in table 3. the columns in table 3 show the regression results for the three rounds of the beauty contest combined in one variable (round) and another variable representing the score in the crt test (crt test). model 1 regresses the number picked on round and on dummy variables of the crt score in each round. model 2 regresses the number picked on round and on crt test. in both models, the results show that the coefficient of the variable round is negative, which indicates that the score drops strongly in every successive round. of particular interest is the coefficient of the variable crt test in model 2, which indicates that the number picked decreases by about 2.307 for each additional question answered correctly on the crt, on average. however, for each additional round played, the average number picked decreases by 10.7 points. this implies that, given that the initial average number was 32.05, it should take about four rounds to reach convergence to zero. this result implies that the learning effect, playing an extra round, is stronger than the cognitive effect, a higher score in the cognitive ability test. this importance of the learning effect is also reflected in the quite substantial adjusted r-squared of .25 for the pooled regression. for each round individually, the adjusted rsquared is a maximum of only .04 for the round 1 regression. if we run the same regressions but with different variables for the crt score in each separate round (model 1), these results are even more telling. the variables labeled crt*roundi (i=1,2,3) represents a variable that contains the crt test scores for each separate round, i. the results show that the crt test score was highly significant (-3.23) in round 1, marginally significant in round 2 (-1.01) and statistically insignificant in round 3. this implies that subjects with a higher cognitive result will enjoy a strong initial advantage. in the second and third rounds of the game the coefficient for the cognitive test is not as significant, confirming the weaker results for these rounds from tables 1 and 2. this also reflects the results from the 22 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 1 ( 1 ) , s u m m e r 2 0 1 1 22 pooled regression regarding the importance of experience compared to cognitive knowledge in repeated games. table 3. regression results using crt answers to predict beauty contest scores (t values in parentheses). independent variables model 1 model 2 crt*round1 -3.23*** (-3.31) crt*round2 -1.01** (-2.01) crt*round3 -0.11 (0.22) crt test -2.31*** (-3.20) round -12.87*** (-7.36) -10.73*** (-10.04) constant 49.62*** (15.25) 46.03*** (20.18) adj. r2: 0.25 f-test: 28.64 pr. = 0.000 number of observations: 330 adj. r2: 0.25 f-test: 55.98 pr. = 0.000 number of observations: 330 * significant at the 10% level ** significant at the 5% level *** significant at the 1% level the results indicate that the initial responses students provide may be influenced by the system they use to analyze the information. moreover, it also appears that the learning that takes place between rounds of the contest may not be influenced by the cognitive system employed by students. indeed, if we define “learning” as the adjustment in responses between the two rounds, we find that “learning” for system x users is 12.83, while it is 10.64 for system c. the difference of 2.19 is not significant (p-value = 0.29) and neither is the difference in variances in “learning” (p-value = 0.82). the findings for “learning” between rounds 2 and 3 are virtually identical, with a system x user average of 10.31, and a system c user average of 9.17 (p-value of difference test equals 0.34), with an insignificant difference in variances (p-value = 0.77). conclusion and discussion overall, it seems that students’ initial response is, perhaps, influenced by the cognitive system students use; more reflective students put more thought into the answer they provide and the answer is therefore closer to the nash equilibrium of zero. that is, system c users’ responses are closer to the “textbook” answer and, at least in the extremes, these students’ responses cluster more than those of their more impulsive counterparts. it does not appear, however, that either system c or system x users adjust their responses faster, and there is much less convincing evidence that the two groups differ in their responses and the variability of their responses in 23 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 1 ( 1 ) , s u m m e r 2 0 1 1 23 subsequent rounds of the contest. in this small setting, adjustment of responses in a beauty contest does not appear to be influenced by cognitive reflection as measured by the crt. 12 we confirm previous research by burnham et al. (2009), which illustrates the importance of cognitive reflection in games like the beauty contest, where the answer depends on the answer other players will provide. unlike previous literature, however, we find that cognitive reflection is only important in the initial stage of a game, when the players are playing for the first time. this indicates that cognitive ability is important only when faced with a new situation. in subsequent rounds of the game, a player’s cognitive ability does not influence the rate of response adjustment. our findings are important in any market, especially financial markets, since they imply that interaction with other market participants is more important than simple cognitive ability the longer one participates in the market; anticipating the decisions and actions of other players is a function of experience, not necessarily cognitive ability. a possible extension to the present paper would be to see if individuals’ trading behavior in financial markets varies based on their crt results, which may confirm the previous conjecture. we would expect individuals with more extensive trading experience to more successfully incorporate other market participants’ actions, whether their crt scores are high or low. at this point, we can only speculate as to the relevance of our findings in the financial markets, but our results could be tested in that setting. the question that remains to be answered is whether cognitive or impulsive users are better at incorporating other players’ choices into their decision-making process. while system c users pick answers initially that are closer to the theoretical equilibrium of zero, this will not help them “win” the contest unless most of the other players are also system c users or unless they correctly predict, using reflection, how the other users in the contest play the game. an interesting follow-up study would be to ask students directly whether they believe the other participants are impulsive or reflective. that is, how much noise do the participants expect to encounter when they play the game? perhaps some evidence that system c users can play the game fairly well in round 1 comes from the observation that two of the three winners in the first round are classified as system c. in round 2, however, only two out of seven winners are classified as system c. the other winners are the “lucky” noise traders. references burnham, t.c., d. cesarini, m. johannesson, p. lichtenstein, and b. wallace. 2009. “higher cognitive ability is associated with lower entries in a p-beauty contest. journal of economics behavior & organization 72(1): 171-175. camerer, c.f. and t.h. ho. 2000. strategic learning and teaching, california institute of technology social science working paper 1100. frederick, s. 2005. “cognitive reflection and decision making,” journal of economic perspectives 19(4): 24-42. keynes, j. m. 1936. the general theory of employment, interest and money, harcourt brace and co. klein, g. 1999. sources of power: how people make decisions, mit press. montier, j. 2010. the little book of behavioral investing, john wiley & sons, ltd. 12 of course, this is only a small experiment in one classroom setting. the results may differ substantially if the experiment is extended to the financial markets or if cognitive reflection is measured differently. moreover, it is possible that system c users do not adjust their responses because they start with a better answer. therefore, they have less reason to adjust their answer. 24 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 1 ( 1 ) , s u m m e r 2 0 1 1 24 moulin, h. 1986. game theory for the social sciences, 2nd ed., nyu press. nagel, r. 1995. “unraveling in guessing games: an experimental study.” american economic review 85(5): 1313-1326. obrecht, n.a., g.b. chapman, and r. gelman, 2007. “intuitive t tests: lay use of statistical information. psychonomic bulletin & review 14(6): 1147-1152. pinillos, n.á., n. smith, g.s. nair, p. marchetto, and c. mun. 2011. “philosophy's new challenge: experiments and intentional action.” mind and language 26(1): 115-139. thaler, r. 1998. “giving markets a human dimension,” in the complete finance companion, financial times/prentice hall. appendix 1. a bat and a ball cost $1.10 in total. the bat costs $1 more than the ball. how much does the ball cost? 2. if it takes five machines five minutes to make five widgets, how long would it take 100 machines to make 100 widgets? 3. in a lake, there is a patch of lily pads. every day, the patch doubles in size. if it takes 48 days for the patch to cover the entire lake, how long would it take for the patch to cover half the lake? 4. pick a number from the range 0 to 100. the winner will be the person who picks the number closest to two-thirds of the average number picked. us unemployment rate dynamics: a simultaneous test of stationarity and linearity 43 journal for economic educators, 8(2), fall 2008 nonstationarity and nonlinearity in the us unemployment rate: a re-examination dipak ghosh and swarna (bashu) dutt 1 abstract conventional econometric tests cannot distinguish nonstationarity from nonlinearity because of the joint modeling of unit roots with threshold effects. caner–hansen (ch, 2001) provides a new test which for the first time can simultaneously test for both (without any prior assumption of stationarity). their threshold unit root tests are more powerful than conventional augmented dickey-fuller tests, especially when the true process is nonlinear. they look at unemployment among adult males, and find contrary to many previous studies, that it is a “stationary nonlinear threshold process”. this paper attempts to re-examine and reconfirm the ch methodology by using unemployment in the civilian labor force. we extend the data up to december 2004, to see if the results hold up to the recent turbulent times, when unemployment changed dramatically from 3.9 % (1999) to 6.2 % (2003). our results support the premise that us unemployment is a stationary threshold autoregressive process. introduction “two key features of us unemployment, which are well documented in the literature, are that shocks to the series seem rather persistent and that it seems to rise faster during recessions than it falls during expansions. the first feature is commonly called long memory, ……..the second feature is commonly called nonlinearity……” 2 the concern over the slow recovery of the u.s. unemployment rate even when the u.s. economy is growing out of a recession ties in directly to this statement by van dijk et. al. (2002). a study of nonlinearity in the unemployment data is therefore particularly appropriate. since us unemployment has always exhibited an asymmetric behavior (for example steep increases ending in sharp peaks, alternating with a gradual and longer decline), theory suggests the presence of nonlinearities, and hence the application of nonlinear statistical methods seems appropriate, which is what has been attempted here. presence of a unit root (nonstationarity, absence of mean reversion) would imply that the data series in question moves in a random manner (a random walk) over time, whereas absence of a unit root (stationarity, mean reversion) implies that the data reverts to a mean value over time. the traditional tests cannot, however, distinguish between non-stationarity and non 1 dipak ghosh, associate professor of economics, department of accounting & is, emporia state university, emporia, ks; swarna (bashu) dutt, professor of economics, richards college of business, university of west georgia, carrollton, ga. the authors would like to thank bruce hansen for making the gauss programs for estimating the caner-hansen procedure available. dutt would like to thank the university of west georgia for their faculty research grant (#: 10000-1014408-12100-11000: 2007-08). 2 dijk, et. al. (2002) 44 journal for economic educators, 8(2), fall 2008 linearity. linearity refers to the property that the econometric model describing the data remains stable over time. when the model changes during the sample period, the data are non-linear. for example, if the fisher equation for the united states is estimated, a change in the model in the late 1970s and early 1980 is expected due to the oil price shocks and subsequent federal reserve policy. traditional unit root tests, such as the augmented dickey-fuller (adf, 1979, 1981), the phillips-perron (1988), and the kpss (1992), interpret this change in the model parameters as non-stationarity. nevertheless, the model has undergone a shift in the parameters before and after the event (oil price shocks) and could very well be stationary if we run the tests in the pre and post event data separately. since we do not know a priori whether there is a shift in the model parameters, we cannot test the two sub-samples separately. therefore, we need an econometric test that can distinguish between non-stationarity and non-linearity. the canerhansen procedure is one such test. the threshold autoregressive (henceforth tar) models introduced by tong (1978) lie in the forefront of nonlinear techniques, but these models cannot simultaneously distinguish between nonstationarity and nonlinearity. recent examples include studies by chan (1991, 1993), chan and tsay (1998) and hansen (1996, 1997, and 2000). in all of these, the maintained hypothesis is that the data are stationary (no unit roots), then nonlinearity and regime shifts were tested for. to date there is no statistical distribution theory to distinguish non-stationarity from nonlinearity, without assuming stationarity a priori. caner-hansen (henceforth ch, 2001) is the first attempt at developing a rigorous asymptotic theory which simultaneously tests for both effects. a wald test is developed to detect thresholds, with both wald and “t” tests for unit roots. a wald test is a test of restrictions on a model (similar to the lagrange ratio and lagrange multiplier tests). it is more effective than the other available tests when the model under the null hypothesis is easier to estimate than the model under the alternate hypothesis. this is the case for our model, since the model under the null hypothesis is the linear model and the model under the alternate hypothesis is the nonlinear model. ch test for both stationarity and linearity in us unemployment (among adult males). they find that it is a stationary nonlinear process. we confirm these results by using a broader unemployment series, unemployment in the civilian labor force, and extend it to 2003. this takes into consideration the most recent volatile period when unemployment ranged from as low as 3.9 % (1999) to as high as 6.2% (2003). our results support the findings of ch, signifying that this other measure of unemployment is also a stationary, but nonlinear process. literature review this study is prompted by the lack of unanimity in the literature on us unemployment. here, a few recent, but important contributions in unemployment dynamics are discussed. our starting point is hansen (1997), who constructed a confidence interval estimate under tar models. he tests for the presence of nonlinearities in us unemployment among males age 20 and over, using standard adf tests of nonstationarity. nonlinearity is rigorously tested using two different threshold choices. he reports clear regime shifts, one for decreasing and one for increasing unemployment. our concern with hansen’s tests is that conventional adf unit root tests have very low power in tar models, as demonstrated by pippenger and goering (1993). montgomery, et al (1998) study the forecasting performance of multiple econometric time series models (arima, varma, tar and msa etc.) in regard to the us unemployment rate. both linear and nonlinear techniques, as well as a combination of the two, are applied to determine their relative strengths and weaknesses. since us unemployment had always 45 journal for economic educators, 8(2), fall 2008 exhibited an asymmetric pattern (for example, steep increases ending in sharp peaks, alternating with gradual and longer declines), theory suggests the presence of nonlinearities, and hence the application of nonlinear statistical methods. using minimum mean square error as the testing criteria for model credibility, they find that nonlinear models significantly improve forecasting performance. even better results were evident when these models were combined with univariate tar methods. nonlinearities could not be fully exploited given the state of the literature at that point. this would change only after the ch 2001 test. finally, chen and tsay (henceforth ct, 1998) start with a two regime tar model, a substantial improvement over standard tar models. 3 this continuous autoregressive model is applied to the us civilian unemployment data, which exhibits clear nonlinear characteristics, evident from its asymmetric cyclical behavior. caner-hansen model: in all the studies mentioned above and in the literature examining regime shifts (shifts in the parameters of the model describing the data), the maintained assumption is that the data under consideration are ergodic 4 and stationary. the tests then conducted are for data series nonlinearity and its type. ch (2001) is the first rigorous treatment of the simultaneous existence of both nonstationarity and nonlinearity. there are wald and “t” tests for unit roots, and a sequential wald test for threshold effects. the wald test of nonlinearity has a nonstandard asymptotic null due to an unidentified parameter under the null hypothesis (hansen, 1996). this null hypothesis has two components, one reflecting the unit roots, but free from nuisance parameters, and the other similar to the stationary case, but dependent on nuisance parameters. the resulting distributions are non-standardized and have to be derived in every case. the unit root wald test has an asymptotic null distribution, depending on whether there is a threshold effect or not. these tests are more powerful than the conventional augmented dickey-fuller unit root tests when the true process is indeed nonlinear. 5 moreover, conventional unit root tests consistently fail to reject the hypothesis that post war unemployment is non-stationary, mainly because of their inability to jointly model unit roots and regime shifts. a technical description of the caner-hansen procedure is given in the appendix. data we use monthly data for unemployment in the civilian labor force for the period january 1948 to december 2004. the data were obtained from the website of the bureau of labor statistics. a graph of the unemployment data is provided in figure 1. the nonlinearity seems to show up in the rapid rise in the unemployment rate during recessions, followed invariably by a more gradual decline during an expansion. 3 see tiao and tsay (1994) who built a two-regime tar model to study the dynamics of the us real gnp. it shows clear evidence that the true autoregressive function is continuous everywhere. hence a new model is applied to unemployment in chan and tsay (1998). 4 ergodicity implies that in a time series, every observation will contain at least some unique information. ergodicity and stationarity are necessary for estimation of parameters. 5 tsay (1997) introduces unit root tests in the presence of threshold effects, but the autoregressive lags are constant across regimes (which is not true here) making it a special case of the ch methodology. also, gonzalez and gonzalo (1998) examine a tar(1) model with nonstationarity, but of a particular geometrically ergodic type. 46 journal for economic educators, 8(2), fall 2008 unemployment in the u.s. civilian labor force 47 journal for economic educators, 8(2), fall 2008 non-stationarity and nonlinearity test results 6 preliminary tests conducted using the standard augmented dickey-fuller (adf) procedure indicates the unemployment series is nonstationary in line with the literature (estimate of ρ is –0.015 and its t-statistic, which is the adf statistic, is –2.73, which is insignificant (less than the critical value), and indicates a unit root in the linear model. even if the model is nonlinear (model parameters change from one sub-sample to another beyond a certain threshold), however, a unit root could result. this may occur even if the data are indeed stationary in the two sub-samples separately. the jump in the model from one set of parameters to another (caused by a precipitating economic event) could, in itself, indicate the apparent presence of a unit root in the data. in order to determine whether we have a linear model (no change in model parameters) with a unit root, or a non-linear model with no unit root, or a non-linear model with a unit root, we apply the caner-hansen procedure to our data. table 1 threshold and unit root tests: unconstrained model bootstrap threshold test unit root tests, p-value r1t t1 t2 m wt 1%c.v. pvalue asym boot asym boot asym boot 1 62.3 41.3 0.0002 0.174 0.0974 0.0896 0.0358 0.955 0.749 2 46.2 41.8 0.0049 0.226 0.134 0.403 0.174 0.486 0.210 3 51.2 42.0 0.0011 0.240 0.145 0.136 0.0590 0.944 0.690 4 69.8 41.2 0.0000 0.148 0.0908 0.256 0.110 0.511 0.229 5 60.0 41.4 0.0002 0.0526 0.0350 0.411 0.178 0.127 0.0513 6 68.7 40.7 0.000 0.0855 0.0571 0.258 0.114 0.328 0.140 7 83.6 41.1 0.000 0.117 0.0747 0.344 0.156 0.323 0.132 8 87.9 40.5 0.000 0.0544 0.0370 0.341 0.153 0.164 0.0654 9 79.9 41.4 0.000 0.0877 0.0562 0.111 0.0480 0.643 0.304 10 77.9 40.3 0.000 0.145 0.0947 0.216 0.0941 0.575 0.262 11 80.3 40.7 0.000 0.159 0.0977 0.163 0.0732 0.728 0.372 12 71.5 40.4 0.000 0.100 0.0651 0.532 0.248 0.167 0.0654 notes: bootstrap p-values are calculated from 10,000 replications. the wald statistic in table 1 tests for the existence of a threshold, a point in the data where the model parameters change from one level to another, or, in other words, the existence of non-linearity in the data. from table 1, the wald statistic, wt, for threshold variables of the form zt = yt – yt-m with delay parameters m =1,…,12, is highly significant across all lags (the pvalue is less than 0.01). this implies rejection of the null hypothesis of a linear model in favor of a threshold model at the 1 percent level. the results are sensitive to the choice of “m”, making it necessary to select “m” endogenously. that is, one must first estimate m, instead of assuming a certain value of m, and use the estimated value of m in the rest of the procedure. the 6 the econometric tests were done using gauss. the software has been made available by bruce hansen on his website. 48 journal for economic educators, 8(2), fall 2008 least squares estimate of m is equivalent to determining “m” such that wt is maximized. according to table 1, this corresponds to a value of m=8. we then calculate the threshold unit root test statistic r 1 t, t1 and t2, for all lags. out of the 12 bootstrap p-values of r 1 t, 10 are significant at the 10 percent level and 2 are significant at the 5 percent level. at m=8, the bootstrap p-value of t1=0.153 (insignificant) and of t2=0.0654 (significant at the 10 percent level), which is evidence of partial unit roots. in addition, examination of the actual estimates of ρ1 and ρ2 (omitted, but available on request), indicates stationarity in the data. these indicate a non-linear but stationary data set (there is a shift in the model, but each sub-sample, with different parameters, is individually stationary). conclusion we have shown evidence in favor of the presence of stationarity in the u.s. unemployment rate after the second world war. the pattern is visible in figure 2, but is even more evident in figure 3. figure 3 shows the deviations of the change in the unemployment rate from the threshold estimate. we can see that there are significant changes around major economic events: the oil price shocks in the 1970s; the late 1970s and the early 1980s right around the time president reagan came into office; the late 1980s and the early 1990s during the previous recession and the slow recovery; and again around 2001-2002 during that recession and subsequent recovery. arestis, et al (2002) reach a similar conclusion concerning the presence of nonlinearities in u. s. budget deficits, concluding that this is due to “asymmetries in the adjustment process.” d. van dijk, et al (2002) use a fi-star model to analyze u.s. unemployment, as suggested by caner and hansen (2001), which also supports both the ch results and ours. these results are particularly important in light of the recent concern over the slow recovery of the unemployment rate in the 1990s, probably due to “asymmetries” in the labor market (eg. outsourcing). our results, as well as a glance at figure 2, show that these asymmetries are not a new occurrence. they have always existed in the u.s. labor market. this suggests an inevitable slow recovery of unemployment during an expansion, since this has occurred frequently in the past. there may not be any new government policy that could quicken the adjustment process. 49 journal for economic educators, 8(2), fall 2008 u.s. civilian unemployment rate, classified by regime 50 journal for economic educators, 8(2), fall 2008 deviations of the change in unemployment from the threshold estimate 51 journal for economic educators, 8(2), fall 2008 references arestis, philip, andrea cipollini, and bassam fattouh. 2002. “threshold effects in the u.s. budget deficit,” working paper, levy institute of bard college. caner, mehmet and bruce. e. hansen. 2001. “threshold autoregression with a unit root,” econometrica, 69: 1555-96. chan, kung sik. 1991. “percentage points of likelihood ratio tests for threshold autoregression.” journal of the royal statistical society, series b, 53: 691-96. chan, kung sik. 1993. “consistency and limiting distribution of the least squares estimator of a threshold autoregressive model.” the annals of statistics, 21: 520-33. chan, kung sik and ruey s. tsay. 1998. “limiting properties of the least squares estimator of a continuous threshold autoregressive model.” biometrika, 45: 413-26. dijk, dick van, philip hans franses, and richard paap. 2002. “a nonlinear long memory model, with an application to us unemployment. journal of econometrics,110: 135-165. dickey, david a. and wayne a. fuller. 1979. “distribution of the estimators for autoregressive time series with a unit root.” journal of the american statistical association, 74: 42131. dickey, david a. and wayne a. fuller. 1981. “likelihood ratio statistics for autoregressive time series with a unit root.” econometrica, 49: 1057-72. gonzalez, martin and jesus gonzalo. 1998. “threshold unit root models.” u. carlos ii de madrid. hansen, bruce e. 1996. “inference when a nuisance parameter is not identified under the null hypothesis.” econometrica, 64: 413-30. hansen, bruce e. 1997. “ inference in tar models.” studies in nonlinear dynamics and econometrics, 1: 119-31. hansen, bruce e. 2000. “ sample splitting and threshold estimation.” econometrica, 68: 575-603. kwiatkowski, dennis, peter c.b. phillips, peter schmidt, and yongcheol shin. 1992. “testing the null hypothesis of stationarity against the alternative of a unit root.” journal of econometrics 54: 159-78. montgomery, alan l., victor zarnowitz, ruey s. tsay, and george c. tiao. 1998. “ forecasting the us unemployment rate.” journal of the american statistical association, 93: 1035-70. phillips, peter c.b. and pierre perron, (1988), "testing for a unit root in time series regression", biometrika, 75: 335-46. pippenger, michael k. and gregory e. georing. 1993. “a note on the empirical power of unit root tests under threshold processes.” oxford bulletin of economics and statistics, 55: 473-81. tiao, george c. and ruey s. tsay. 1994. “some advances in non-linear and adaptive modeling in time series.” journal of forecasting, 13: 109-31. tong, howell. 1978. “on a threshold model.” in pattern recognition and signal processing, c. h. chen, ed., amsterdam: sijhoff and noordhoff. tsay, ruey s. 1997. “unit root tests with threshold innovations.” university of chicago. 52 journal for economic educators, 8(2), fall 2008 appendix a standard tar model is tztztt tt xxy      )(12)(11 11 11 (1) where et is an i.i.d. error process and λ is an unknown threshold, within the interval λ є λ = [ λ1, λ2 ] where each segment has a significant presence to be dubbed a regime. the i.i.d errors ensure that the first difference of the series ∆yt is stationary and ergodic, so that yt is itself integrated of order one. the regimes (i.e, the tar models) are estimated by least squares. )(1)(1)( )1)1 (1(1 1   tztztt tt xxy        (2) the threshold λ is estimated by minimizing σ 2 (λ):    ),(nmiarg 2 (3) the first difference model : tztztt tt xxy       )(12)(11 11 11 (4) is estimated using the standard wald and “t” statistic. here the statistics are standard, but the sampling distribution is non standard. the test in equation1 is for the presence of threshold effects, under the joint hypothesis h0 : θ1 = θ2, implying no regimes. this is the wald statistic where )1( 2 0      tw t (5) under the null of no threshold effects, λ is not identified, hence the testing procedure is nonstandard. the null hypothesis of h0 : θ1 = θ2 = θ, simplifies the model to tttt yyy    11 ~ . (6) yt-1 = (δyt-1 ……. δyt-k )΄ are two bootstrap methods, one for stationarity and other for the nonstationary case. since the order of integration is unknown (true for most situations) the authors recommend calculating “ρ” both ways, and drawing our inference on the larger value. in testing for unit roots and nonstationarity ch discuss three possibilities. in equation 1, ρ1 and ρ2 are the determinants of stationarity of yt. under the null hypothesis, 1) h0 : ρ1 = ρ2 =0, δyt is stationary, indicating yt is an i(1) process 2) if ρ1 < 0, ρ2 < 0 and (1+ ρ1) (1+ ρ2) <1, then the series is stationary and ergodic 3) h1 : ρ1 < 0 and ρ2 < 0 what if it is the intermediary case of a partial unit root ? then, ρ1 < 0 and ρ2 = 0 h2 : or ρ1 = 0 and ρ2 < 0 here yt is stationary in one regime and nonstationary in another. their test can distinguish amongst the three. the difficulty is that the null of a unit root (ρ1 = ρ2 =0) is compatible with both the existence of a threshold (θ1 ≠ θ2) and the nonexistence of a threshold (θ1 = θ2). but ch determines that the assumptions of these two situations are different and hence we can 53 journal for economic educators, 8(2), fall 2008 simultaneously distinguish between nonstationarity and nonlinearity. using theorems 5 and 6 of ch, the distinction between linearity and nonlinearity lies in the identification of the threshold parameter λ. with no threshold effects, λ is not identified, and so its estimate, λˆ , is random and so is rt. with threshold effects, λ is identified, and with no randomness in rt, it is equivalent to the case where λ0 is known. ch recommend (with caution) the implementation of bootstraps since both the identified and unidentified effects can be imposed. the unidentified threshold bootstrap imposes the restriction θ = θ1 = θ2 (no thresholds) and ρ = 0 (unit root). in this case the bootstrap p-value is the percentage of simulated test statistic r b t that exceeds rt. the identified threshold bootstrap requires simulation of the tar process, and calculating r b t. again the bootstrap p-value is the percentage of simulated r b t that exceeds rt. (5) 7 thus we conclude that in the presence of nonlinearity, the ch threshold unit root tests have more power than the standard adf tests. 7 ch run monte carlo simulations to show their relative strength vis-à-vis the conventional dickey-fuller (adf) tests in the presence of thresholds. case 1: this is where the condition ρ1 = ρ2 is imposed and δμ = 0 (no regimes), the adf is more powerful than the ch threshold unit root test. but as δμ increases, the r1t and r2t tests gather more power than the adf test. case 2: this is where ρ1 = 0, ρ2 varies and δμ = 0, a partial unit root model. here r1t and r2t have substantially greater power than the adf test. the adf test is particularly weak when δμ is large. here the t-ratio test is itself enough to distinguish between the pure unit root, the partial unit root and the stationary cases. case 3: this is where ρ1 is fixed, ρ2 varies and δμ = 0, the stationary case. here also r1t is the most powerful test with r 2t a close second. taylor.pdf 60 on the equivalency of profit maximization and cost minimization: a note on factor demands by beck a. taylor∗ abstract students are often confused when introduced to the two conceptually different factor demands of the firm: those demands for inputs which originate from the firm’s desire to maximize profits, and those that are constructed to minimize the cost of producing a target level of output. these two demands for inputs are, of course, equivalent when the firm is optimizing. this note demonstrates that an often used method of teaching these concepts makes it impossible for students to visually compare these different input demands because different technologies are assumed. i provide a graphical proof of the equivalency of these factor demands by assuming the same technology in both the cost-minimization and profit-maximization problem. by employing this new analysis, it is hoped that students will gain a better understanding and instructors will gain a better teaching tool regardless of whether the course is calculus or graphically based. (jel. a22, d21) i. introduction a common problem students face in an intermediate microeconomics course is learning the different applications of observable (profit-maximizing) and conditional (cost-minimizing) factor demands.1 part of the problem is probably poor terminology.2 more significant, in my opinion, is the fact that the average student has difficulty understanding why a firm would have two conceptually different demands for the same input. of course, when a firm is optimizing, the two demands are equivalent. the common argument is that if a firm is profit maximizing then it must be cost minimizing, or there would exist a cheaper (more profitable) way to produce. this point is easily proved analytically.3 to my knowledge, however, no student-friendly graphical depiction of this equivalency exists. this note points out the shortcomings of a popular treatment of this issue and provides a graphical proof of the equivalency of each type of factor demand under the assumption of profit maximization. the following presentation will benefit both instructors who utilize calculus techniques and those who employ only graphical analysis. ii. the traditional approach observable factor demands, constructed from the firm’s profit-maximization problem, are the firm’s optimal choices of input quantities and are a function of input prices and the price of the output good. conditional factor demands, on the other hand, are the firm’s optimal choices of input quantities which are a function of input prices and the output level of the firm. these factor demands represent the least-cost method of producing a conditional level of output and are constructed from the firm’s cost-minimization problem. the most common application of observable factor demands is the construction of factor demand curves and the calculation of comparative statics with respect to input and output prices. the most common application of conditional factor demands is the construction of the firm’s cost function. many textbook authors present the firm’s cost-minimization problem in the following manner.4 assume that a perfectly-competitive firm has a monotonic and strictly convex technology represented by the production function (1) ( )21 , xxfy = , ∗ assistant professor, department of economics, hankamer school of business, baylor university, waco, tx 76798-8003. email: beck_taylor@baylor.edu 61 where xi represents the amount of input i used per period, and y represents the resulting output per period. 5 the firm’s conditional factor demands, xi c, are the choices of input quantities which minimize the cost of producing some target level of output, y0. in figure 1, all of the input combinations used to produce exactly y0 units of output are shown by the isoquant with the equation (2) ( ) 021 , yxxf = . the firm takes input prices (w1,w2) as given. thus, costs to the firm can be written (3) 2211 xwxwc += . graphically, the firm’s cost-minimization problem reduces to finding the lowest (closest to the origin) isocost line which allows y0 units of production. in the input-input space, isocost lines have the equation (4) 1 2 1 2 2 x w w w c x −= . in figure 1, the lowest isocost line is drawn. equality of the slopes of both the isoquant and isocost functions (tangency) is a sufficient condition for cost minimization. this, of course, implies that the ratio of marginal products (slope of the isoquant) equals the ratio of input prices (slope of the isocost). rearrangement of this equality yields the familiar result that in order to minimize costs, firms use inputs until the marginal products per dollar spent are equal across inputs. this result in shown in figure 1. when the discussion changes to profit maximization and observable factor demands, however, some students begin to question the difference between these two conceptually different factor demands. one of the problems with the traditional presentation, in my opinion, is that when the discussion shifts to profit maximization and observable factor demands, instructors often change the technology from a 2-input/1-output technology to a 1input/1-output technology. figure 2 demonstrates this traditional treatment. the firm’s technology is now represented by the production function (5) ( )xfy = .6 the graphical analysis is no longer presented in input-input space, but rather input-output space. it is therefore impossible for the student to visually compare the input choices from the previous cost-minimization problem with those from the firm’s profit-maximization problem. define the firm’s profit as (6) wxpy −=π . conceptually, the firm’s problem reduces to finding the highest (away from the origin) isoprofit line for which a portion still lies in the feasible set of production. in input-output space, isoprofit lines have the equation (7) x p w p y += π . the highest isoprofit line is depicted in figure 2. given the needed assumptions about technology, a sufficient condition for profit maximization is the equality of the slopes (tangency) of the production and isoprofit functions. thus, the observable factor demand for the input, xo, is found by setting the marginal product of the input (slope of the production function) equal to the input price divided by the output price (slope of the isoprofit line). rearrangement of this condition yields the familiar result that the competitive firm will employ the resource until its marginal revenue product equals its input price. this result is shown in figure 2. 62 iii. a graphical proof to allow students to visually compare optimal choices of inputs in both the cost-minimization and profitmaximization context, i will present the analysis using the same technology for both problems. students will be able to see the equivalency of both types of factor demands under the condition of profit maximization. assume that a competitive firm employs a 2-input/1-output monotonic and strictly convex technology represented by the production function in (1). this production function is shown in figure 3. our first task is to determine the profit maximizing choices of inputs, the observable factor demands x1 o and x2 o. profit for the firm can be written (8) 2211 xwxwpy −−=π . much like the traditional 1-input/1-output case examined earlier, the firm’s profit maximization problem here reduces to finding the highest isoprofit plane for which a portion still lies in the feasible set of production. isoprofit planes in output-input-input space have the equation (9) 2 2 1 1 x p w x p w p y ++= π . the highest isoprofit plane along with the optimal choices of inputs and resulting optimal output are shown in figure 3. the next step is to move the graphical analysis into 2-diminsional input-input space by projecting a level set of the isoprofit plane and production function at the optimal level of output y* onto the input space. the corresponding level sets are shown in figure 4. the curved line is the familiar isoquant with the equation (10) ( ) *21 , yxxf = , and the straight line is the level set of the isoprofit function with the equation (11) 1 2 1 2 * 2 2 x w w w y w p x −−= π . figure 4 looks very similar to figure 1. in fact, to convince students that observable and conditional factor demands are equivalent when the firm is optimizing, the next step is to show that figures 1 and 4 are exactly the same.7 note that the slope of the isoprofit level set in figure 4 is –w1/w2. this ratio of input prices is also the slope of the isocost line drawn in figure 1. thus, to prove that the two lines are coincident, students must show that their vertical (or horizontal) intercepts are the same. the vertical intercept of the isocost line in figure 1 is c/w2. the vertical intercept of the isoprofit level set in figure 4 is ( ) 2*2 wywp π− . equating these two expressions yields (12) cpy −= *π , which is the correct expression for the firm’s profit.8 this analysis has shown, therefore, the equivalency of observable and conditional factor demands under the assumption of profit maximization. iv. conclusion a traditional textbook treatment of observable and conditional factor demands presents the analysis in a way that obscures the potential insights of students into the equivalency of these two conceptually different demands under the assumption of profit maximization. this note presents a graphical analysis that enhances the prospect for students' understanding of this important relationship. by assuming the same technology for both the profitmaximization and cost-minimization problems, the analysis is reduced to a single two-dimensional graph. this type 63 of analysis should assist students who find the concept of two different factor demands troubling. instructors in courses that employ either calculus or graphical analysis may find this presentation helpful in convincing students that profit maximization necessarily implies cost minimization. iv. notes 1. i have taken some liberty with terminology here. demands for inputs from the firm’s profit-maximization problem are generally called factor demands and are generally observable in practice. on the other hand, the firm’s conditional factor demands, those demands for inputs which minimize the cost of producing a target level of output, are a theoretical construct and generally not observed in practice. 2. i consider this terminology to be in the same ignominious league as “changes in demand” versus “changes in quantity demanded.” 3. to find the least-cost method of producing y units of output per period, the firm equates the marginal product per dollar spent across all inputs. if the firm employs a monotonic and strictly convex technology represented by the production function ( )nxxxfy ,...,, 21= , where xi represents the amount of the ith input used per period, then the unique conditional factor demands of the firm, ( )ywwwx nci ,,...,, 21 , are implicitly defined by the equations n n w xf w xf w xf ∂∂ == ∂∂ = ∂∂ ... 2 2 1 1 and ( )nxxxfy ,...,, 21= , where the wi represent exogenous input prices. next, define the firm’s profit as ( ) ∑ = −= n i iin xwxxxpf 1 21 ,...,,π , where p represents the exogenous output price. the (observable) factor demands of the firm, ( )pwwwx noi ,,...,, 21 , are implicitly defined by the first-order conditions for profit maximization, 0=−∂∂=∂∂ iii wxfpxπ , i = 1,...,n. rearrangement of these n equations also shows that profit maximization leads the firm to employ each input until marginal products per dollar spent are equal across all inputs. thus, when the firm is optimizing, observable and conditional factor demands are equivalent. 4. this presentation and my later discussion of the firm’s profit-maximizing problem are shown in many intermediate microeconomics texts, including varian (1996). 64 5. a 2-input/1-output technology is assumed to make graphical analysis possible. of course, all results can be generalized to an n-input technology. 6. decreasing returns to scale technology is needed over some range of inputs and corresponding output for the firm’s profit-maximization problem to be well-defined. 7. the isoquant in figure 1 is drawn for an arbitrary target output level, y0. conceptually, we now replace this isoquant with the isoquant associated with producing y* units of output, the profit-maximizing level of output from figure 3. 8. equating the horizontal intercepts will yield the same result. references varian, hal r. intermediate microeconomics: a modern approach. new york: w.w. norton & co. 1996. 65 x2 c/w2 mp1/w1 = mp2/w2 x2 c ( ) 021 , yxxf = x1 c c/w1 x1 figure 1 cost minimization with 2-input/1-output technology y y = π/p + (w/p)x y = f(x) y(xo) π/p pmp = w xo x figure 2 profit maximization with 1-input/1-output technology 66 x2 y* x2 o x1 x1 x1 o figure 3 profit maximization with 2-input/1-ouput technology x2 (p/w2)y * π/w2 x2 o ( ) *21 , yxxf = x1 o (p/w1)y * π/w1 x1 figure 4 level sets of the production and isoprofit functions references 61 journal for economic educators, vol. 8, no. 1, spring 2008 61 the adoption of specialized high school financial literacy curriculum modules david fehr 1 abstract this article explores the implementation of sophisticated financial literacy teaching materials developed specifically for a high school audience in a high technology environment. considerable research has been devoted to understanding both the general reasons that innovation does or does not get adopted by the target population and the specific aspects of implementation of new curriculum materials at the high school level. recent work evaluating successes and failures in the implementation of new curricula for foreign languages, mathematics, physics and general science is reviewed in order to draw inferences that may assist in an implementation program for financial literacy modules. questions of the following types are addressed: are there risks to the teacher in adopting novel curricula? does extensive professional development need to accompany new curriculum adoption? are there psychological hurdles that teachers need to address before adoption? are there institutional impediments? how does teacher work environment affect adoption? introduction on december 1, 2005, the southern new hampshire university (snhu) center for financial studies (cfs) was awarded a grant from the national association of securities dealers (nasd) investor education foundation entitled, financial literacy training for high school students. the purposes of the grant were (1) to develop for the high school audience eight selfcontained curriculum modules that focus on investor literacy topics and (2) to implement the curriculum modules in conjunction with the montgomery county (maryland) public school (mcps) system. the impetus for the grant came from a successful high school field trip program at snhu‟s cfs. the cfs is a state-of-the-art, high technology academic trading room that snhu built in 2001. from the beginning, the university decided that the center should provide services to the southern new hampshire community at large, as well as our university community. to that end, we invited local high schools to bring students to our campus, and our cfs, on field trips. at the field trip events in the cfs, we deliver various financial literacy lessons, taking full advantage of the specialized assets in the center – thirty individual trading stations with dual monitors, electronic data boards and stock ticker, and sophisticated audio visual equipment. financial literacy topics range from diversification and investment for retirement to effective credit card management. the lessons are highly interactive and hands-on. in most cases, the students are doing computer analysis within the first ten minutes of class, typically using internet calculators, worksheets and data sources. the center has hosted about thirty-five field trips, servicing almost 600 students, since it opened in 2001. these sessions have been very well received by both students and teachers. in fact, the field trip program has become self-sustaining. the same teachers bring new students to the cfs every year and sometimes every semester. it soon became clear to us that virtually all 1 director, center for financial studies, associate professor of economics/finance, southern new hampshire university. 62 journal for economic educators, vol. 8, no. 1, spring 2008 62 of the value-added in our field trip program could be delivered in any internet-ready computer room. this opened an opportunity to “export” our concept beyond the cfs by delivering the lessons anywhere an internet-ready room was available. discussions with the nasd investor education foundation led to the decision to formalize the development of the curriculum materials in order to insure that each module contained not only the subject matter, but also teaching strategies and ancillary support materials for the teachers. the eight financial literacy modules are 2 : module key topics creating and monitoring a diversified stock portfolio advantages of diversification; conceptual discussion; selecting a diversified stock portfolio across industry sectors; monitoring and tracking your diversified portfolio (10 pages) investing for retirement conceptual discussion; determining retirement income needs; establishing a saving pattern to meet retirement needs; discussion of retirement financial vehicles (14 pages) portfolio and risk management advantages and disadvantages of dollar cost averaging; portfolio rebalancing strategies; laddering to achieve desired cash flow patterns (9 pages) asset allocation and security selection understanding risk tolerance and risk capacity; presenting alternative asset allocation strategies based on the risk assessment; security selection to pick investments within an asset class (10 pages) investing in mutual funds structure of mutual funds; advantages and disadvantages of mutual fund investing; narrowing the available mutual funds to make an investment choice (18 pages) internet resources for bond, bond mutual fund and exchangetraded fund (etf) investors exploring bond investing; bond mutual funds; understanding etfs (exchange-traded funds) (11 pages) personal financial statements creating a net worth statement; creating an income statement; developing a budget; building an emergency fund (13 pages) selecting a financial advisor identifying a qualified financial advisor; working with your advisor; understanding advisor fees; dealing with financial advisor problems (10 pages) 2 the eight financial literacy modules along with ancillaries are available in their entirety at http://www.snhu.edu/1566.asp. handouts suitable for distribution to students are also provided. please note that the modules are branded under the finra investor education foundation label. after the completion of our nasd project, nasd merged with a related regulatory body to form the financial industry regulatory authority (finra). we were asked to re-brand our modules accordingly. http://www.snhu.edu/1566.asp 63 journal for economic educators, vol. 8, no. 1, spring 2008 63 during the grant period from december, 2005, through early fall, 2006, we prepared the eight curriculum modules and visited mcps several times to beta test selected modules in high school classes, to discuss the modules with teachers and staff, and to set the stage for the potential adoption of the modules by mcps teachers. as with our field trip programs at snhu, teachers, students and academic staff were enthusiastic about the curriculum materials 3 . discussions with the teachers generally focused on minor refinements to the modules, and more importantly, how the curriculum materials would mesh with existing courses. during this time period, we also received high quality feedback from the nasd foundation on module content. as a final deliverable for the nasd grant, we met with relevant mcps teachers (primarily those teachers currently working in the individual schools‟ academy of finance programs) for a full day training session to review module content and to assist with implementation. at this event, we: provided all participants with a cd containing all curriculum modules and ancillaries, delivered our versions of the classroom sessions for two modules (creating and monitoring a diversified stock portfolio and investing for retirement), and presented selected lessons from the other modules. while most teachers indicated that they intended to implement some of the material in their upcoming classes, follow through to date has been spotty. certainly the rate of adoption has not been consistent with the level of enthusiasm that the teachers projected for both the materials and the financial literacy program. the research herein explores factors that could contribute to this seeming inconsistency. the purpose of this inquiry is to study aspects of the adoption of new curriculum by high school level teachers, including an evaluation of potential impediments to adoption. the next section reviews the relevant literature and relates it to the adoption of our financial literacy modules. academic research that has addressed new curriculum adoption for the high school disciplines of foreign languages, mathematics, physics and general science is highlighted. this is followed by very brief synopsis. even as the primary objective of our nasd grant was to prepare the curriculum modules, the foundation made it quite clear that the ultimate distribution and adoption of the modules was of paramount importance. the foundation decided to fund the development of the modules, because the modules would support the foundation‟s stated goal to educate young people in investing for retirement and in acquiring related financial skills. both the foundation and our project team, however, understood that this initial grant was meant as a precursor for follow-up work by us or others to actively promote distribution and adoption of the modules. the present study provides background research for the marketing/distribution phase of this project. literature review relating to the adoption of financial literacy modules rogers (1995) presents a comprehensive evaluation of the adoption of innovation, and is a primary reference for much recent research on the topic. he explores how innovation propagates through a target population in a wide range of fields, studying elements which can 3 the grant budget and work plan did not include the preparation and administration of a formal evaluation instrument for the modules. 64 journal for economic educators, vol. 8, no. 1, spring 2008 64 both promote and impede the adoption of the innovation. adoption could be affected by attributes that are internal to the innovation and features that are present in the external environment. relevant internal attributes of an innovation include specific features of the innovation itself that might correlate with the rate and level of adoption. attributes of this type considered by rogers include: are the ideas and mechanisms in the innovation superior to existing solutions? is the innovation complex and therefore difficult for new users to understand? are both costs and benefits to the innovation readily observable? is the mechanism of the innovation compatible with or similar to existing solutions? emphasizing this internal attribute evaluation approach, fehr and bristol (2006) report on the adoption of three complex financial innovations. by examining the internal attributes of (1) “real” option valuation techniques, (2) a proposed new paradigm for financial consulting predicated on the widespread use of sophisticated financial instruments, and (3) fixed income valuation systems based on complex extensions of the black-scholes methodology, fehr and bristol were able to mount arguments as to why these innovations have had a very poor track record. the present research does not concentrate on internal attributes to evaluate the adoption of the financial literacy modules by high school teachers. while the modules are sophisticated in the sense that they make creative use of internet websites, end users of the curriculum are comfortable with internet applications. further, the financial concepts in each lesson are not complex but, in fact, quite elementary. the goal of our financial literacy program has always been to provide basic information in a format that will resonate with the high school audience. our emphasis is to explore issues external to the attributes of the financial literacy curriculum that will negatively impact adoption by high school teachers. for example: are there risks to the teacher in adopting novel curricula? does extensive professional development need to accompany new curriculum adoption? are there psychological hurdles that teachers need to address before adoption? could there be institutional impediments present? how do selected modules impact the overall curriculum? how does the teacher work environment affect adoption? cuban (1999) lists five impediments, some of which are based on technology issues, to the adoption of new curriculum by high school teachers: contradicting advice from experts inherent unreliability of technology intractable working conditions demands from others policymakers‟ disrespect for teachers‟ opinions 65 journal for economic educators, vol. 8, no. 1, spring 2008 65 while our financial literacy curriculum modules have only a modest technology component, is it possible that the technology causes teachers to hesitate to embrace the curriculum? cuban notes that most teachers use computers much more extensively at home than at school, suggesting that the technology issue is not one of computer “phobia.” in fact, the first of cuban‟s five impediments, contradicting advice from experts, speaks to one possible explanation for the hesitancy by teachers to adopt a technology-laden curriculum. over the past twenty plus years, advice from experts has changed regularly. cuban catalogues the progression from basic language programming to word processing and spreadsheet programs to hypertext approaches. while this is the reality of a rapidly changing computer/technology environment, it nonetheless imposes “learning curve” costs on teachers, which they increasingly may be unwilling to pay. further, teachers often perceive an inherent unreliability of technology which complicates adoption if teachers anticipate that adequate technical support at the high school will not be sufficient or available. at some point, teachers may refuse to face the inevitable software and hardware issues that arise. realities of the day-to-day work environment for most teachers impact adoption decisions for both technology-based and conventional curriculum. intractable working conditions such as heavy teaching loads, multiple class preparations per day, a considerable grading load and large classes could well be impediments to new curriculum adoption. in addition, teachers are responsible for classroom discipline, may be accountable for student performance on standardized tests, and have further responsibilities to their school district and state. given these demands from others, they may have neither the time nor the energy to undertake new curriculum adoption. finally, cuban suggests that teachers hesitate because of policymakers’ disrespect for teachers’ opinions. it is clearly counter-productive for teachers to be dictated to on curriculum and other academic matters. in fact, cuban argues that technology and curriculum use implemented by fiat by administrators usually leads to unsatisfactory results. our approach to the implementation of the financial literacy curriculum modules is to address elements over which we can have some control. we have encouraged teachers, students and staff to provide feedback on our modules, and have built in considerable beta testing in the initial phases of the curriculum development process. regarding the technology itself, we‟ve had few problems during the beta tests and virtually no hesitation from teachers. we have made clear to the teachers that internet connections may be slow and/or dropped, that the format of the relevant web pages may change through time, and that close coordination will be required to insure that students progress through the lessons at the same pace. russell (1998) considers impediments to adoption that may be driven by teacher attitudes. her reference point is the introduction of a new mathematics curriculum. issues of concern to russell include: teachers may not want to learn to use the new curriculum. teachers may not be prepared (academically) to teach the new curriculum. teachers may believe that a traditional textbook approach is superior. teachers may not want to learn a new pedagogical approach. teachers may not want to explain curriculum changes to parents. 66 journal for economic educators, vol. 8, no. 1, spring 2008 66 russell concludes that regular teacher training and professional development lead to the highest probability for success in addressing these teacher issues. curricular innovation is less likely to be successful if it is mandated and more likely to be successful if teachers are part of the entire process. even though we have built teacher training and consultation into all phases of our project, concern for the academic preparedness of teachers is appropriate. for example, bristol, fehr and tripp (2003) report that less than 20% of social studies teachers in the state of new hampshire have completed more than a single college-level economics course, but are nonetheless certified to teach economics. in our beta testing, it appeared that some teachers were not fully comfortable with the subject matter. the logical response is surely more training and professional development. russell also explores how the use of the novel curriculum itself may be an attempt to compensate for unprepared teachers. is it possible to give teachers highly scripted teaching materials and expect that the “materials themselves will improve student learning”, independent of the quality of the teacher? russell concludes that this approach is dangerous – the curriculum change will likely be cosmetic only, with students not reaping the full advantage of the new curriculum. further, teachers may well view the new curriculum as an „activity” and not a serious component of learning when the curriculum is substituted for teacher responsibility. it has been suggested to us by some teachers and administrators that inclusion of a regimented teaching script (including jokes and asides!) would promote the adoption of our curriculum. while we have attempted to make the modules teacher-friendly, including glossaries, lesson plans, handouts and complete ancillaries, we have not gone the fully scripted route. we believe that the teacher must be an actively engaged partner in both the adoption and delivery of the curriculum. having built the case for investing resources in comprehensive teacher training and professional development, braslavsky (1999) presents insights as to how the training itself could affect curriculum adoption. her description begins with the concept of „isomorphism” in teacher training – the tendency for teachers to be trained solely in their fields of specialization. limited interdisciplinary training carries the potential for a compartmentalized and rigid outlook by the teachers. if true, teachers would likely be less inclined to adopt new and novel curriculum. further, at a more macro level, secondary education would be seriously fragmented if each teacher concentrates entirely on a specialized academic discipline. braslavsky argues that isomorphism will be reduced only if teacher training concentrates on “horizontal learning”. the current versions of our financial literacy modules and the format of our presentations to teachers may not go far enough along these lines. while we have not observed rigidity of the type described by braslavsky, we expect to become more creative in our interdisciplinary efforts. for example, we have considered approaching mathematics teachers to use some of our covered financial techniques, such as interest rate mechanics, as case examples in their math classes. brown and campione (1996) describe characteristics of successful instructional programs that promote learning in innovative environments: emulate research probe engage in critical thinking reflection our modules were developed with these attributes in mind. using our creating and monitoring a diversified stock portfolio module as an example, students research industries and 67 journal for economic educators, vol. 8, no. 1, spring 2008 67 stocks to construct a suitably diversified portfolio (emulate research), are questioned as to the criteria that they used in the selection (probe), are asked to justify individual stock selections based upon the chosen criteria (engage in critical thinking), and set up ongoing monitoring of the portfolio to assess the decisions made (reflection). similar components are present in all eight curriculum modules. the annenberg media learner publication, workshop 4 reworking the curriculum, argues that teachers may not feel “safe” in adopting novel curricula. teachers may perceive political pressure to stick with traditional approaches to learning. the workshop argues that, in these situations, school administrators, particularly the principal, must be a “courage provider” to make it safe for teachers to adopt the new curriculum. to date, this safety issue has been a nonfactor in our program – we have not sensed any element of academic risk from the viewpoint of the teachers. in addition to russell‟s (1998) presentation on the adoption of new mathematics curriculum, selected studies have looked at curriculum adoption in foreign languages (rose, 1977), general science (center for curriculum materials in science, 2005), and physics (cushman, 1998). in the foreign language teaching profession, rose (1977) contends that there is often considerable “separation” between university educators and high school teachers. he suggests that this can arise as high school teachers often deal only with elementary aspects of the discipline (based upon working with beginning learners), while their university counterparts operate at higher levels of instruction. since the university community often has a primary role in developing new curriculum, this potential antagonism can present a meaningful hurdle in the adoption process. we have not experienced this phenomenon in our financial literacy work but agree with rose that the best way to improve communication between such groups is with comprehensive in-service teacher education programs conveniently scheduled for all parties. in general science, the center for curriculum materials in science (2005) suggests that it is important that curriculum materials be sufficiently flexible so that teachers can tailor and adapt the materials to meet their individual needs. further, the curriculum must be responsive to teachers‟ different levels of preparation and prior knowledge. also, teachers must understand and embrace the underlying rationale for the innovation to be comfortable migrating to the new materials. as such, the curriculum materials should not be “handed down from the master”, but rather teachers should be integral to the entire adoption process. as with our other references, the policy recommendation is to provide comprehensive professional development for teachers. our modules do allow for great teacher flexibility. in fact, teachers have been actively courted so that their feedback is reflected in the final draft of the curriculum materials. in her examination of a new high school level physics curriculum, cushman (1998) reinforces many of these points, including the need for “courage” to adopt novel curriculum, concern for the level of teacher preparedness and interest, the importance of lessons in which students participate actively, and the importance of high quality teacher training. synopsis an overriding theme in virtually all of the academic references cited above is the need for comprehensive and ongoing teacher training and professional development to facilitate new curriculum adoption. based upon work with the montgomery county public school system, we 68 journal for economic educators, vol. 8, no. 1, spring 2008 68 concur with this emphasis and conclude that comprehensive teacher training is the single best step to foster adoption of the financial literacy curriculum modules. during an approximately six month period, we provided teachers with three opportunities to review module content, to evaluate pedagogy, and to receive training. two of these sessions included students; one session was for teachers only. because of our nasd grant provisions and the grant timeline, each of the three potential training opportunities also included wide ranging discussions of module strengths and weaknesses as well as their appropriateness for a high school audience. these latter activities were helpful in the development of the modules and complied with the grant requirement to beta test the modules at the mcps system. while teachers impressed upon us the importance of module related professional development and training, our grant format did not allow us to concentrate solely on training. as such, these grant requirements diluted our capacity to provide and evaluate peer-to-peer teacher training. now that beta tested final versions of the modules are available, the natural next research steps are to explore (1) how best to provide teacher training and (2) whether such teacher training is sufficient to promote wide spread adoption of the curriculum. our project sponsor, the nasd investor education foundation, is also well aware of the need for comprehensive teacher training. the foundation recently sponsored the 2006 report of the national association of state boards of education commission on financial and investor literacy entitled, who will own our children? recommendation #3 of that report, ensure that teachers and/or staff members teaching financial literacy concepts are adequately trained, states: “the commission recommends that states, school districts, and/or schools provide the resources to ensure that individuals teaching financial and investor education concepts are adequately prepared. this includes providing the professional development needed to meet the goals identified for the curriculum. the commission also envisions that state boards of education contribute to preparing teachers by encouraging recertification”. a related area of future research will investigate the availability of funding to support face-toface teacher training. when we explored possible funding from the nasd investor education foundation for peer-to-peer teacher training, the foundation hesitated based on a concern that training of this type is not the most cost effective approach. our understanding was that the foundation prefers to support a professional marketing/distribution program in order to reach a large audience of teachers at a lower per capita cost. we chose not to submit a grant application to the nasd foundation to fund module distribution along these lines, because we were unable to devise a marketing strategy to which we attributed a high probability of success. various related research avenues suggest themselves. is there an alternative marketing strategy, as opposed to the more expensive to peer-to-peer training, that promotes significant curriculum adoption? do other foundations and other suppliers of funding have a similar cost/benefit approach? is there a way to dovetail training with the award of continuing education teacher credits, making a peer-to-peer approach more palatable to all parties? for example, would individual teachers and/or school districts be willing to share costs with foundation support, if continuing education credits are awarded? given the considerable financial resources and developmental efforts already committed to the modules, it will be important to address these module training and distribution topics in further research. 69 journal for economic educators, vol. 8, no. 1, spring 2008 69 references annenberg media learner.org. workshop 4 – reworking the curriculum, http://www.learner.org/channel/workshops/principals/materials/workshop4.html. ball, d. l. and d. k. cohen. (1996). "reform by the book: what is-or might be-the role of curriculum materials in teacher learning and instructional reform?" educational researcher 25. 9 (1996): 6-8,14. braslavsky, c. (1999). “some consequences of adopting a new identity for the secondary education curriculum”, final report, chapter vi, secondary education curriculum in latin america: new tendencies and changes, international bureau of education. brown, a.l. and campione, j.c. (1996). “psychological theory and the design of innovative learning environments” in l. schauble & r. glaser, innovations in learning: new environments of education. mahwah, nj:erlbraum. bristol, k., d. fehr and g. tripp (2003). “using an academic trading room to enhance economics literacy training”, southern new hampshire university center for financial studies working paper no. 2003-06, http://www.snhu.edu/1564.asp. center for curriculum materials in science. (june,2005). national research agenda, aaas project 2061, http://www.project2061.org. cuban, l. (1999). “the technology puzzle”, education week, august 4. cushman, k. (nov, 1998). “what‟s out there? curricula that support essential school ideas”, horace, vol. 15, no. 2. dede, c. (2000). “emerging influences of information technology on school curriculum”, journal of curriculum studies, vol.32, no. 2, pg. 281-303. fehr, d.w. and k. bristol (2006). “hiccups in the adoption of innovation for complex financial models”, advances in financial education, vol. 4, 23-39. killion, j. p. (1996). "staff development and curriculum development: two sides of the same coin." journal of staff development, vol. 14, no. 1, 38-41. national association of state boards of education commission on financial and investor literacy (2006). “who will own our children?” http://www.nasbe.org/financial_literacy.htm. rogers, e. m. (1995). diffusion of innovations, 5 th edition, new york: free press. rose, r. (sept, 1977). “bridging the gap: college fl departments and high school teachers,” adfl bulletin, vol. 9, no. 1, pg. 37-38. http://www.learner.org/channel/workshops/principals/materials/workshop4.html http://www.project2061.org/ 70 journal for economic educators, vol. 8, no. 1, spring 2008 70 russell, s. j. (1998). “mathematics curriculum implementation: not a beginning, not an end”, hands on!, vol. 21, no. 1. russell, s. j. (1996). "the role of curriculum in teacher development", in reflecting on our work: nsf teacher enhancement in k-6 mathematics, eds. s.n. friel and g.s. bright. lanham, md: u p of america, pg. 247-254. internet paper 1 journal for economic educators, 11(2), fall 2011 1 teaching graduate economics: online vs. traditional classroom instruction doris bennett, cynthia mccarty and shawn carter 1 abstract the use of online course offerings in college, including graduate business courses, has grown sharply in recent years (eastman, swift, bocchi, jordan and mccabe, 2003). results of previous research comparing student performance in lecture versus online classes are mixed. this paper focuses specifically on student performance in mba managerial economics classes, analyzing learning differences between those in online and traditional lecture classes. in addition to comparing overall performances, we tested further to determine if gender, ethnicity, and levels of achievement and aptitude are factors in explaining differences in performance between, as well as within, lecture and online classes. our empirical results demonstrate that the grade difference between stronger and weaker students, as defined by aptitude and effort, is significantly larger for online students. key words: mba, managerial economics, online instruction, lecture instruction, student assessment jel classification: a23 introduction between 2003 and 2009, enrollment in online college classes increased at the national level by 19% per year (allen and seaman, 2010). because much of the growth in online enrollment is due to new students who weren’t previously enrolled in college classes, the growth in online courses has helped to fuel overall growth in the number of students in higher education courses. after conducting a survey of economics departments, coats and humphreys (2003) concluded that many of those enrolling in online economics courses are non-traditional students, such as working adults and those not seeking degrees. the growth in online enrollment during the same period of time was 16% at our school, a regional public university with just under 10,000 students and approximately one hundred mba students. while the increase in students is welcome to educators and administrators, the fact that much of the gain is in online enrollment necessitates continuing research to compare the quality of online versus classroom lecture instruction. previous research is inconclusive with respect to student performance in online versus lecture classes. in most of the research to date, students’ overall performance in online classes was compared to overall performance in lecture classes. our concern with this method is that studying the overall outcome may hide the costs to certain segments of the student population. some divisions of students may suffer with the widespread adoption of online courses. this paper expands the research to determine if gender, ethnicity, and levels of achievement and aptitude are factors in explaining differences in performance not only between lecture and online classes, but also within the different modes of instruction. in other words, even if there is little 2 journal for economic educators, 11(2), fall 2011 2 overall difference between students taking online and traditional classes, one or more groups of students may suffer significantly if online courses replace traditional lecture ones. for our research we chose students from a graduate level managerial economics course. all of the managerial economics courses are taught by the same professor using the same textbook. this is an applied microeconomics course, with one economics prerequisite, undergraduate principles of macroeconomics, and no calculus prerequisite. in keeping with the university’s mission as a “student-centered” university, the professor emphasizes problemsolving, game theory, and written essays requiring students to apply economic concepts to their daily lives. literature review most of the research comparing online and traditional economics classes has focused on undergraduate courses. online undergraduate economics students tend to have certain characteristics. brown and liedholm (2002) found that those taking internet principles of microeconomics courses had higher act scores, more college experience, longer work schedules, and fewer reported study hours than traditional students. shoemaker and navarro (2000) determined that the online students in their introduction to macroeconomics courses were less likely to have taken previous economics courses and had higher gpas than their traditional macroeconomics students. keri (2003) noted that online economics students tend to be older, with the average age at 28. the evidence on how undergraduate economics students perform and the pertinent factors affecting performance in internet versus traditional courses has been inconclusive. navarro (2000) analyzed roughly 50 colleges which together had offered over 100 internet economics courses. he found that lack of student motivation and self-direction were major factors contributing to poor grades in online economics classes. gabe keri (2003) found that end-of-semester grades for online economics courses were positively correlated with years in college. brown and liedholm (2002) found that although women scored significantly lower than men in traditional microeconomics courses, there was no significant difference in how each performed in online courses. overall, they found that traditional students scored higher than those taking the online courses, noting that the traditional students did significantly better on the more complex subject matter. they did not find a significant difference in scores on basic conceptual questions. in contrast, shoemaker and navarro (2000) found that internet principles of macroeconomics students scored significantly higher than traditional students. they also noted that gender, ethnicity, class level, and previous economics courses taken made no statistical difference in the outcomes. figlio, rush, and yin (2010) did an experiment at a selective university where roughly 1400 students were randomly assigned to either online or live lecture sections of a large introductory microeconomics class. the only difference between the two modes was the delivery of the lectures. some students viewed the lectures in person, while the online students viewed the videotaped lectures on the internet. they found that for all students, the average test score was higher for the live instruction students. more interestingly, they found that the test scores for hispanic students, male students, low ability (low act), and low-achievers (based on prior gpa) were dramatically higher in the live instruction section. although scant research comparing learning in online and traditional formats has been done with graduate economics courses, more has been done for the broader category of graduate 3 journal for economic educators, 11(2), fall 2011 3 business courses. research in the learning differences between online and lecture courses for graduate business courses generally indicates that students earn lower scores in most online courses. anstine and skidmore (2005) reviewed mba managerial economics and statistics courses, finding that average test scores from online and traditional courses were similar, but when they did an ols regression, controlling for such factors as pretest scores, entrance exam scores, math background, gpa, gender, age, and reported study hours, online students scored significantly lower than did traditional students. when they did separate regressions for the two courses, however, the difference was significant only for the statistics class. more recently, hayes and lu (2010) analyzed three mba classes (finance, information systems, and operations management), online and traditional, using a common text, syllabus, and group of faculty teaching that course. students scored lower in the on-line format than in the face-to-face. specifically, the sample students scored significantly lower on the analytical problems in the online courses. does the amount of quantitative analysis impact student performance in an online course versus a traditional one? brownstein, brownstein, and gerlowski (2008) analyzed two sections of a course in domestic and global business environment, a graduate business course that relied heavily on writing assignments to assess learning one online, one traditional. no significant differences in learning outcomes were measured between the online and the traditional sections. in addition to online courses, some graduate business programs have introduced a hybrid format of 18-25 contact hours with other communication done via computers. terry (2007) analyzed 356 mba student results from macroeconomics, finance, and computer information systems classes and found that student grades, retention, and course evaluations were lower for online than traditional or hybrid classes. although student performance on class assignments was equivalent across the different modes, online students scored 4% lower on the final exam than students in the other styles. gmat and gpa scores and an undergraduate major in the discipline of the course had a positive and significant effect on final exam performance. gibson (2008) compared a relatively small set of student outcomes from three mba human resource management classes, two online classes (24 students) and one weekend lecturestyle class (12 students). all students worked full-time. both modes had identical midterms and finals that were untimed, week-long, and turned in via the computer, plus research papers. the traditional students did slightly better on the final exams, papers, and the final grade. harmon and lambrinos (2007) assessed the learning outcomes from a small hybrid graduate principles of economics class taught for those who had made a bor lower in the two undergraduate economics courses. eight mba and five engineering students were in the class. half the lectures were face-to-face and half recorded in powerpoint and available electronically. student answers to questions from the online portion were compared with those covered in the classroom. students performed better on the questions coming from those chapters covered online. gpa and gender were not significant. in an earlier study, terry, lewer, and macy (2003) analyzed the results of 242 graduate students in just two courses, macroeconomics and financial economics, with about one third in traditional, one third in online and one third in hybrid classes. they found that the attrition rate in the traditional class setting (3.6%) was much lower than the online (13.8%) and hybrid (9.0%). they also found that overall student performance, faculty evaluation, and course evaluation were significantly lower for online classes. in accord with harmon and lambrinos (2007), the online students scored lower on the common final exam given to all classes. the 4 journal for economic educators, 11(2), fall 2011 4 authors noted that the quality gap between online and other classes was narrowing over time andt that personal interaction and community seemed to be important contributors to successful academics. despite these mixed and inconclusive results, higher education administrators are moving forward with offering more online classes. methodology and results student learning was measured by the final average grade in the course. factors hypothesized to influence the final grade were: type of instruction, online or traditional lecture, ethnicity, gender, undergraduate gpa, graduate gpa, gmat scores (total, quantitative, and verbal), and whether the student was an undergraduate business or nonbusiness major. since most research has shown that men outperform women in economics (anderson, benjamin, and fuss, 1994; ballard and johnson, 2005; becker, 1997; dynan and rouse, 1997; greene, 1997; ziegert, 2000), we hypothesized that the final average for men would be higher than the final average for women. based on the findings of figlio, rush, and lin (2010), who found that hispanic students performed better in lecture classes, and on our teaching experience, we hypothesized that scores of minority students would be lower than those of non-minority students. the three gmat scores are indicators of students’ overall, quantitative, and verbal aptitudes. graduate gpa and undergraduate gpa measure how much effort a student has put into his or her studies. gpas, gmat scores, and having an undergraduate degree in business are expected to have a positive effect on performance. descriptive statistics for the variables used in our analysis of online and in-class instruction are given in table 1. the mean and standard deviation were calculated for the combined sample, and then for the sample separated into lecture and online classes. a t-test for differences in the means between the lecture and online classes was performed, and the p-value, or significance level, for the difference in means is reported in the last column. the final average score in the online classes, 81.24, was slightly higher than that in lecture classes, 79.64, but the difference was not significant. the undergraduate gpa, total gmat score, and verbal gmat score were all slightly higher for the online students, but the difference was not significant. the graduate gpa was significantly lower at the 0.07 level for the online students. the online students had quantitative gmat scores that were lower than the lecture classes, but the difference was not significant. table 2 contains summary statistics for the final grade average by gender for the combined sample and for both types of instruction separately. although both men’s and women’s scores were higher in the online course than in the lecture, the difference was not significant. the difference in the means between women and men in the lecture classes was significant at the .004 level. in the online classes, the mean score of the men, 85.5, was significantly higher than the mean score for women, 79.4, at the .01 level. in the combined sample of lecture and online classes, the men’s average score, 83.8, was significantly higher than the women’s average score of 77.8. these results support previous research showing that men outperform women in economics, especially in micro courses, in both online and lecture classes. 5 journal for economic educators, 11(2), fall 2011 5 table 1 descriptive statistics by course and type of instruction all classes traditional lecture online difference between means p-value final average 80.30 (8.44) 79.64 (8.86) 81.24 (7.82) 0.38 undergraduate gpa 3.17 (0.43) 3.16 (0.46) 3.18 (0.39) 0.77 graduate gpa 3.29 (0.44) 3.36 (0.39) 3.18 (0.50) 0.07 total gmat 463.33 (76.51) 463.82 (64.70) 464.10 (91.79) 0.95 verbal gmat 26.87 (6.51) 26.60 (6.27) 27.24 (6.91) 0.65 quantitative gmat 26.71 (6.51) 27.06 (5.92) 26.22 (8.25) 0.60 number of observations 90 53 37 values in parentheses are standard deviations. table 2 final averages by gender and type of instruction all classes traditional lecture online differences between means p-value women 77.8 (8.85) n=53 76.3 (9.28) n=27 79.4 (8.26) n=26 0.25 men 83.8 (6.45) n=37 p=.000354 83.1 (7.01) n=26 p=.004 85.5 (4.94) n=11 p=.01 0.20 values in parentheses are standard deviations. 6 journal for economic educators, 11(2), fall 2011 6 table 3 final averages by ethnicity and type of instruction all lecture online p-value minority 79.3 (6.1) n=14 77.7 (7) n=9 81.2 (2.4) n=5 0.10 non-minority 80.5 (8.8) n=76 p=.54 80 (9.2) n=44 p=.39 81.3 (8.4) n=32 p=.55 0.53 values in parentheses are standard deviations. comparing scores by students’ ethnicity, table 3, both groups performed better in the online classes than in the lecture classes. minority students’ average score in the online classes, 81.2, was significantly higher at the 0.10 level than the average score in the lecture classes of 77.7. there was no significant difference for non-minority students between the lecture and online classes. in both the lecture and online classes, the non-minority students scored better than the minority students, but the difference was not significant in either case. table 4 averages by level of achievement and type of instruction all lecture online p-value low achievers 76 (8.7) n=30 75.2 (9.5) n=15 76.7 (8) n=15 0.637 high achievers 83.6 (8.2) n=36 p=0.0006 82.4 (9.1) n=25 p=0.024 86.2 (5) n=11 p=0.001 0.121 values in parentheses are standard deviations. to test the effect of student effort on the student’s performance, we divided the students based on graduate gpa into three categories, approximately equal in number: low achievers, those in the lowest one-third of the sample with a graduate gpa below 3.1, medium achievers with gpas in the middle one-third of the sample from 3.1 to 3.49, and high achievers in the top slightly more than one-third of the sample with a graduate gpa of 3.5 or more. the average score for the low achievers was 1.5 points higher in the online class compared to the lecture classes, but the difference was not significant. see table 4. the high achievers averaged 86.2 in the online classes and 82.4 in the lecture classes, but the difference was not significant. the largest and most significant differences occurred when achievement levels were compared across the lecture and online classes. in the lecture classes, the high achievers averaged 7.2 points higher than the low achievers, significant at the .024 level. the difference between the two 7 journal for economic educators, 11(2), fall 2011 7 groups was larger in the online classes where the high achievers averaged 9.5 points higher than the low achievers. this difference was significant at the .001 level. table 5 averages by aptitude and type of instruction all lecture online p-value low aptitude 75.9 (8.7) n=29 76.1 (8.6) n=18 75.7 (9.4) n=11 0.723 high aptitude 84.7 (8.1) n= 32 p=.0009 83.9 (9.6) n=18 p=.01 85.7 (6.1) n=14 p=.007 0.63 values in parentheses are standard deviations. to determine the effect of aptitude, the students were divided into three levels, based on the total gmat score in the entire sample. the 29 students with a gmat score of 420 or less were in the low aptitude group, while those with a gmat of 421 to 479 were in the medium aptitude group. the thirty-two students with scores of 480 and above were classified as high aptitude. see table 5. although the low aptitude group’s average score was slightly lower in the online classes, there were no significant differences between their scores and those of the high aptitude group in the lecture and online classes. within the lecture classes, however, high aptitude students averaged 7.8 points higher than low aptitude students, significant at the 0.01 level. in the online classes the difference in the averages was larger, 10 points higher for the high aptitude students and significant at the 0.007 level. again the difference between the stronger students and the weaker students, as measured by aptitude and by effort, was significantly larger in the online classes. in general, regardless of the type of instruction, men, non-minorities, high achievers, and high aptitude students performed better than women, minorities, low achievers, and low aptitude students. with respect to gender, ethnicity, and level of achievement, the online classes averaged slightly higher, but the difference was significant only in the case of the minority students. in the case of aptitude level, the low aptitude students scored slightly lower in the online classes. within the types of instruction, however, there were significant differences based on gender, achievement and aptitude level. for both achievement and aptitude levels, the difference in the scores was larger in the online classes compared to the lecture classes. the empirical model used in ordinary least squares estimation is: grade = f(g_gpa, u_gpa, gen, ol, maj, t_gmat, v_gmat, q_gmat, min) the variables are defined as: grade student’s final grade average for the course g_gpa student’s overall graduate school grade point average 8 journal for economic educators, 11(2), fall 2011 8 u_gpa student’s overall undergraduate grade point average gen dummy variable equal to1 if student is male. ol dummy variable for type of instruction equal to1 if the class is online. maj dummy variable equal to 1 if student is a business major. t_gmat student’s total gmat score. q_gmat student’s quantitative gmat score v_gmat student’s verbal gmat score min dummy variable equal to 1 if student is not a minority the results of the original regression of all of the variables on the final grade appear in table 6. table 6 regression results for all variables coefficient p-value vif constant 34.46 0.003 min 3.25 0.112 1.19 gen 4.06 0.011 1.23 o-l 3.80 0.011 1.09 t_gmat 0.03 0.005 1.31 u_gpa 1.68 0.34 1.16 g_gpa 7.75 0.00 1.40 maj 0.92 0.63 1.04 r 2 = 44.8% n=90 since the three forms of gmat scores are highly correlated, we used only the total gmat score to avoid multicollinearity. the variables representing major, undergraduate gpa, and all three forms of the gmat score were not significant. the undergraduate gpa did not indicate a significant positive effect on the overall course grade. this is not completely unexpected as many students become more serious with their studies when they are in graduate school. in support of the literature cited above, the gender coefficient was positive and significant (1%) showing that being male has a positive four point impact on the total course grade. taking the course online also has a positive and significant (1%) effect of almost four points on the total course grade, ceteris paribus. this is likely due students self-selecting the online course. many online students are business professionals who do not have the time or flexibility for the regular lecture classes. these students generally are better prepared and score higher in a managerial economics, business decisions-style class. having an undergraduate degree in business did not prove to have a positive impact on the expected course grade. this is perhaps due to the business prerequisites courses that non-business majors are required to complete before entering the mba program. our study did not find a statistically significant effect of minority status on the final grade. including the variables for ethnicity, gender, method of instruction, and graduate gpa, we ran the regression three more times, using each of the gmat scores individually to avoid 9 journal for economic educators, 11(2), fall 2011 9 multicollinearity. 1 q_gmat, the quantitative gmat score was not significant, but t_gmat and v_gmat were both significant. the results using the total and verbal gmat scores are presented in tables 7 and 8. table 7 regression results with t_gmat coefficient p-value vif constant 38.60 0.00 min 3.13 0.13 1.18 gen 3.61 0.012 1.15 o-l 3.80 0.011 1.08 t_gmat 0.03 0.003 1.28 g_gpa 8.19 0.000 1.31 r 2 = 43.5% n=90 table 8 regression results with v_gmat coefficient p-value vif constant 42.52 0.000 min -2.92 0.159 1.16 gen 3.56 0.021 1.17 o-l 3.65 0.015 1.09 v_gmat 0.34 0.005 1.23 g_gpa 8.53 0.000 1.27 r 2 = 43.1% the quantitative gmat score was not significant (at 10%) for any of the three sample groups. this is likely due to our teaching pedagogy that focuses on strategy and business decisions rather than more quantitative models. schroder (1993) illustrates the benefits of this approach for learning and retention. if we applied a more quantitatively rigorous, model-solving approach to the course, it is likely that the quantitative gmat score would become a more important determinant of expected outcome and course grade. the variable indicating achievement level, g_gpa, had a large impact of between 8.19 and 8.53 points on the final average for each point of g_gpa, ceteris paribus. g_gpa had the highest significance level of any of the variables in the regressions in tables 7 and 8. the variables measuring aptitude, the total and verbal gmat scores, had positive coefficients and were also highly significant. these regression results underscore the importance of aptitude and achievement level on student performance. 1 we tried other empirical specifications of the model, but the principal results did not vary. 10 journal for economic educators, 11(2), fall 2011 10 summary and conclusion our research revealed men, high achievers, and high aptitude students had higher average scores than women, low achievers, and low aptitude students in the combined sample. although non-minority students’ scores were slightly higher, the difference was not significant. with respect to the different methods of instruction, minority students and high achievers had significantly higher scores in the online classes. nevertheless, when the differences in performance with respect to gender, ethnicity, aptitude and achievement levels were compared within a single mode of instruction, we found in both lecture and online classes that men, nonminorities, high achievers, and high aptitude students had higher averages. the differences in the average scores between high and low achievers and between high and low aptitude students were highly significant. in addition, the difference was significantly larger, 9.5 points, between the high and low achievers in the online classes. the difference between high and low aptitude students was also significantly larger, 10 points, in the online classes. our regression results also found positive and significant relationships between grade and aptitude, ability, effort and being male, ceteris paribus. for achievement and aptitude levels, we found that the difference between the lower and higher groups is much larger in the online classes, perhaps implying that this method of instruction widens the gap between the two groups. if this is the case, less selective schools with more low achievers may need to evaluate the effectiveness of online classes considering the possibility that they may further widen the gap between the low and high achievers. citing research claiming that student performance in online courses is equal or better in quality than in lecture courses, academic administrators have embraced online learning as a costsaver equivalent, especially with the decrease in state funding. although further testing on the impact of ethnicity, aptitude, and achievement levels should be conducted in other courses and at other universities before definite conclusions are drawn, our research in graduate level managerial economics suggests that the benefits of online education are not shared equally among all students. if this proves to be the case in other courses and at other institutions, then the substitution of online for lecture classes may not be justified, particularly at 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"new students--new learning styles." changes, 25(5): 21-26. shoemaker, j. and p. navarro. 2000. “policy issues in the teaching of economics in cyberspace: research design, course design, and research results.” contemporary economic policy, 18(3): 359-366. terry, neil. 2007. “assessing instruction modes for master of business administration (mba) courses.” journal of education for business, 82(4). terry, neil, joshua lewer and anne macy. 2003. “the efficacy of alternative instruction modes in economics.” journal of economics and economic education review, 4(1):2334. ziegert, a. 2000. “the role of personality temperament and student learning in principles of economics: further evidence.” journal of economic education, 31(4): 307-322. journal for economic educators, vol. 8, no. 1 1 journal for economic educators, 8(4), spring 2008 1 confounding issues in the deadweight loss of giftgiving h. kristl davison, mark n. bing, e. bruce hutchinson, and leila j. pratt 1 abstract when a gift is given, someone other than the final consumer makes the consumption choice. thus there is a possibility that the gift will not match the preferences of the receiver, i.e., the gift will represent a wise use of the money given the gift-giver‟s tastes but not necessarily a wise use of money given the recipient‟s tastes. in other words, gift giving can result in a deadweight loss. this paper addresses and clarifies the discrepancy between waldfogel's (1993) finding of a deadweight loss from gift giving and solnick and hemenway's (1996) finding of a deadweight gain from gift giving. it also builds on some of the concerns raised by ruffle and tykocinski (2000). jel classification code(s): a2, d11. introduction during the past decade-plus several articles (waldfogel 1993, 1996 and 1998; solnick and hemenway [hereafter sh] 1996, 1998 and 2000; list and shogren [hereafter ls], and ruffle and tykocinski [hereafter rt]) contributed to a discussion regarding the existence of a deadweight loss for christmas gift giving. two factors confound the above statistical efforts. first, while it is easy to instruct individuals to ignore sentimentality, it is often difficult for individuals to do so. a better approach is to remove sentimentality a priori. sh (1996, p. 1301-1303) report that “the greatest gain in value com[es] from gifts given by a „spouse or significant other,‟” and “gifts…specifically asked for were generally valued lower than gifts that had not been requested,” a “common” explanation for the higher valuation of unexpected gifts was that they “showed a lot of thought.” in addition, according to sh “experiments have demonstrated that the subjective value of an item can increase substantially after an individual has been given the item.” each of these findings represents a form of sentimentality. sentimentality is likely to be especially true for christmas gifts, the subject of much of this research, because of the giver's effort at creativity and originality. secondly, the appropriate measure for deadweight loss or gain is the difference between the market price of the gift and the amount the recipient would be willing to give up (pay) rather than do without the gift. thus the market price of the good must be determined. waldfogel, sh and ls use the recipient‟s estimate of the gift‟s price as a proxy. but this proxy may be biased; especially if the recipient is unfamiliar with the good and thus has no idea of its market price. 2 a biased proxy price causes measurement error in the deadweight loss or gain from gift giving. in 1 h. kristl davison, assistant professor of psychology, university of hartford; mark n. bing, assistant professor of psychology, university of tennessee at chattanooga; e. bruce hutchinson, professor of economics, university of tennessee at chattanooga; leila j. pratt, hart professor of economics, university of tennessee at chattanooga. 2 admittedly, to obtain the prices for each of many gifts received in a survey such as waldfogel‟s would be difficult – perhaps nearly impossible – but that does not change the correct measure of price. 2 journal for economic educators, 8(4), spring 2008 2 particular, the amount of deadweight loss or gain should vary based upon the value the recipient is willing to give up rather than do without less the actual market price and not the recipient‟s overor under-estimation of the market price. waldfogel (1993) used standard economic analysis to show that the market price of a gift will equal or exceed the value the recipient places on the gift provided that sentimental value is excluded. that is, a deadweight loss occurs. the 1996 article by sh, however, found a deadweight gain even though respondents were explicitly instructed to ignore any sentimental value attached to the gift. ls (1998; 1354) used auction data to provide support for waldfogel‟s original point estimates and for sh‟s basic intuition. waldfogel and sh both replied to ls. according to waldfogel (1998, p. 1358) “studies of recipient valuation of gifts must be very careful to distinguish recipient valuation of gift objects from recipient valuation of gift receipt." sh (1998; 1356) stated their "concern that subjects may not have accurately valued their expensive gifts." rt (2000) showed that gift valuations depend upon wording, and that valuations by economists and psychologists did not significantly differ. they concluded that “individuals do not always carry … preformulated valuations of objects” and that excluding sentimentality is difficult. replying to rt, sh (2000, p. 325) indicated that their results also “do not vary a good deal” among groups of undergraduates. more importantly, they note the poor cost estimation by rt‟s respondents: “for example, psychology students estimated the cost of the mask at 603 shekels and economics students at 375 shekels. actual retail price was 800 shekels.” sh go on to point out that, while rt‟s (2000, p. 320) choice of a “practical” and a “decorative” gift may avoid sentimentality, they fail to consider that students may have no knowledge of the market for a “table lamp with a gold base and a glass…shade” or of a “brown, hand-carved african wooden mask” and thus no idea of the value of these goods. the present research contributes to this on-going discussion through: (1) consideration of the “judgmental anchor upon which to base value estimates” (rt, p. 319); (2) finding that the determination of a deadweight loss depends on wording of the questions asked and used to measure deadweight loss; and (3) support for sh‟s conclusion that there is no statistical difference among responses of different groups of undergraduates. in particular this paper focuses on the relevancy of a recipient‟s knowledge of the market price of a gift, wording issues, and whether or not responses differ among undergraduate groups. we use mean responses to demonstrate that the deadweight varies between a loss or a gain based upon different types of measurement. 3 experiment and data during the first three weeks of the fall 2001 semester, a questionnaire (see appendix) was administered to students in principles of economics and introduction to psychology at utc (university of tennessee at chattanooga) concerning gift giving of two goods, a utc logo sweatshirt and a large pizza. 4 although ls (1998, p. 1350) noted deficiencies of a questionnaire approach, this approach parallels that of waldfogel, sh and rt. 3 the authors recognize that no deadweight loss or gain occurs unless the gift is actually purchased and given. our use of mean differences between estimated retail price, willingness-to-pay and actual retail price, etc. in table 3 seeks to clarify how different deadweight measures can change a deadweight loss into a gain. 4 for the few students enrolled in both courses, only the questionnaire from the first surveyed course was included. 3 journal for economic educators, 8(4), spring 2008 3 sentimentality was substantially, if not totally, removed by the setting, timing, and the gifts selected. in particular, we expect undergraduates to attach no sentimental value to pizza and, while some sentimental value may apply to a sweatshirt embossed with their university‟s logo, this is likely minimized by the fact that introductory courses – populated mostly by freshmen and sophomores were surveyed at the beginning of the academic year. in addition, u.s. undergraduates are likely to be very knowledgeable about the prices – another confounding factor of pizza and a school-logo sweatshirt. classroom discussions reveal undergraduates to be regular purchases of pizza and classroom observations show undergraduates to be frequent wearers of utc-logo sweatshirts. while it might be argued that the value of a pizza would vary with the student‟s level of hunger, the wording of the cost/price questions works to avoid that issue. of course, some students may dislike pizza or sweatshirts. in this case, they would be expected to assign low values to these gifts as would anyone with an undesirable object, especially when sentimentality is omitted. still, most undergraduates are apt to be near their margins for pizza and sweatshirts. the students received neither gift. the intention of the experiment and our measurement of deadweight loss were to focus on the undergraduates‟ knowledge of market price and its impact on deadweight measurement. the questionnaire used also partially addressed waldfogel‟s (1998, p. 1359) concern “that recipients would have made inframarginal purchases” that would therefore be valued above their cost. one major thrust of our study and its questionnaire was to resolve the discrepancy between the deadweight loss found by waldfogel, which is expected by standard economic theory, and the deadweight gain found by sh (1996). to accomplish this, the questionnaire asks each respondent three questions regarding the price of a large domino's three-topping pizza and a utc-logo sweatshirt: what is your estimate of the retail price (to the nearest dollar) of the gift? what amount (to the nearest dollar) would you be willing to pay to obtain this gift if you had not already received it? what is the minimum (to the nearest dollar) that you would accept for this gift? an important change from waldfogel's questionnaire was our identification of two specific gifts, whereas waldfogel referenced gifts actually received by the respondent. because we believe that an individual's valuation of a gift is at least partially determined by that individual's perception of its price, we chose items commonly purchased by college students. in addition, because we believe a student‟s expectation is impacted by familiarity with the price of a particular gift, we chose gifts that will likely vary in frequency of purchase – a pizza being purchased more frequently than a sweatshirt. results after deleting questionnaires with incomplete responses and those that contained obviously insincere responses (for example, the pizza price exceeding $100), our sample consisted of 464 student. 5 at the time the questionnaire was administered, the actual price (in whole dollars) for a large 3-topping pizza was $12 and for a logo sweatshirt purchased at the campus bookstore was $20. 6 5 the deletion of insincere responses was arbitrary. for example, a price of $100 for a large pizza in chattanooga, tn, is nonsensical, while a zero price or value would be correct for the student who detests pizza. we sought to be inclusive rather than exclusive. out of over 400 responses that some should be insincere or extreme does not surprise. indeed, sh (1996, p. 1300) mention that five of their 209 surveys showed extreme yields – more than five standard deviations above the mean – so their results were tabulated with and without the outliers. 6 the questionnaire did not stipulate whether or not the “actual price” included sales tax (9.25% in chattanooga, tn) though it does stipulate price to the nearest dollar. in retrospect we believe that students took 4 journal for economic educators, 8(4), spring 2008 4 fifty-six percent of all respondents were females and 42% males (2% did not indicate a gender). seventy-four percent of the respondents were 20 or younger. the racial composition of the sample was: 67% caucasian, 24% african-american, 5% asian, 3% hispanic, and 1% native american. with regard to religion, 36% indicated that they were protestant, 9% catholic; 51% indicated no religious preference. seventy-nine percent of the students surveyed were freshman (47%) or sophomores (32%). seventeen percent were juniors (17%) and four percent were seniors. by major, 34% were in business; 14% were in education, nursing, or social work; 17% were in science, mathematics, engineering, or computer science; 10% were in the social sciences; and, 25% listed their major as “other.” forty-three percent of the students were not employed; 51% worked part-time (between 1 and 25 hours per week). of those who reported being employed, 82% earned less than $10 per hour. finally, 43% lived with a parent or guardian – the university of tennessee at chattanooga is a “commuter” school. table 1 shows the descriptive statistics for the estimated retail price, price the student was willing-to-pay, and price at which the student was willing-to-sell the sweatshirt or the pizza. 7 min. max. mean st.dev. est. retail price 0 55 25.29 8.27 price to pay 0 60 17.39 8.60 price to sell 0 50 15.66 8.27 est. retail price 0 40 13.09 3.45 price to pay 0 30 10.70 3.82 price to sell 0 25 9.07 4.17 sweatshirt (price = $20.00) pizza (price = $11.00) table 1 descriptive statistics for prices of items tables 2a and 2b present bar graphs comparing the student responses according to estimated retail price, price willing-to-pay, and price willing-to-sell respectively from the sweatshirt and pizza data. (the reader should note carefully that the ranges represented on the horizontal axes are different.) the graphs show the distributions to be quite similar except for the $16-$20 data in table 2a. generally, students who provided low dollar estimates for the retail price also provided low price estimates for willing-to-pay and even lower price estimates for willing-to-sell. students who gave high dollar estimates for the retail price also gave high “actual price” to mean list price exclusive of sales tax. moreover, no student asked “does the price include sales tax?” or any version of this question. thus, it would seem that the sales tax issue, which did not draw the concern of any of several professors who reviewed the questionnaire, also did not draw the concern of any of the students. also, given the „directness‟ of the questionnaire, we do not believe any students gave consideration to possible discounts available for purchasing a pizza or a part of a pizza. the gift was the whole pizza without the sharing of slices. 7 the authors are aware that valuation studies typically observe that the average willingness-to-pay exceeds the average willingness-to-sell (see shogren, et al 1994). we obtain the opposite result. we doubt, given the questions in our survey, that our result is due to an endowment effect. waldfogel (1993), sh (1996), and rt (2000) do not provide this information on the questions asked. therefore, it is not possible to make a comparison. 5 journal for economic educators, 8(4), spring 2008 5 price estimate compared to their price estimates for willing-to-pay and even higher price estimates for willing-to-sell. table 2 a distribution of prices for sweatshirts table 2 b distribution of prices for pizza 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% $0-10 $11-15 $16-20 $21-25 $26-30 $31+ est. retail price price to pay price to sell 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00% 45.00% $0-8 $9-11 $12-14 $15-17 $18+ est. retail price price to pay price to sell 6 journal for economic educators, 8(4), spring 2008 6 of the 464 students sampled, 196 were enrolled in a (macroor micro-) principles of economics class and 268 were enrolled in introduction to psychology. table 3 shows the mean estimated retail price, price willing-to-pay and price willing-to-accept by the course in which the student was enrolled. for students enrolled in the introduction to psychology course, the mean estimated retail price, the mean price willing-to-pay, and the mean price willing-to-sell exceeded their counterparts for the students enrolled in principles of economics courses with the single exception of the willing to sell pizza price. a t-test on the equality of the means is statistically significant only for the willing-to-pay sweatshirt price. rt (p. 322) reported that the means estimated by psychology students exceeded those estimated by the intermediate microeconomics students. like the present study, they also observed that the magnitude of the differences in mean estimates increased with product price. econ. psych. econ. psych. std. error t-test for mean mean std. dev. std. dev. difference equality 24.80 25.65 8.034 8.433 0.777 -1.103 16.10 18.32 8.145 8.829 0.803 -2.767 15.39 15.85 8.297 8.253 0.777 -0.589 pizza 12.91 13.21 2.978 3.755 0.325 -0.944 10.60 10.78 3.438 4.088 0.360 -0.484 9.30 8.91 3.821 4.413 0.393 1.005 est. retail price price to pay price to sell table 3 statistics for means of estimates sweatshirt est. retail price price to pay price to sell the retail price estimates by students were 9 percent and 26 percent higher than the actual price for the pizza and sweatshirt respectively. the amount a student was willing to pay and the minimum a student was willing to accept, however, were below the actual retail price by an average of 3% and 18% for pizza and 13% and 22% for the sweatshirt (see table 1). also, note that the though the actual price of the sweatshirt ($20) was not quite twice the price of the pizza ($12), the standard deviation of the estimated price of the sweatshirt was more than twice the standard deviation of the estimated price of the pizza (see table 1). this comparison holds individually for students enrolled in economics and psychology classes (see table 3). these data comparisons demonstrate that students understandably estimate with better accuracy the actual price of a more frequently purchased product or better known product (pizza) than a less known product (sweatshirt). the economists' traditional deadweight loss measure, the excess of the amount the individual would be willing-to-pay rather than do without the good after deducting the price the individual is made-to-pay (market price) is upheld by our results. this conclusion supports waldfogel‟s (1993). indeed, the deadweight loss estimates range between 2 percent and 24 percent of market price comparing well with waldfogel's estimates (1993, p. 1328) that "giftgiving destroys between 10 percent and a third of the value of gifts." paired-sample t-tests (table 4) reveal that, for both of the items, the estimated retail price was significantly higher than the price the student was willing-to-pay (sweatshirt, t = -20.76, df = 7 journal for economic educators, 8(4), spring 2008 7 pairing mean mean difference t-test* difference t-test** est. retail retail 1.09$ 6.77 5.29$ 13.78 will. to pay retail (1.30)$ -1.69 (2.61)$ -6.54 will. to pay est. retail (2.38)$ -13.25 (7.91)$ -20.76 will. to sell will. to pay (1.62)$ -8.27 (1.73)$ -4.62 note. all t-tests are significant at p<0.001. () indicates a negative number. * df = 462, except for retail v. willing to pay (df = 463). ** df = 463. table 4 difference tests pizza sweatshirt 463, p < 0.001; pizza, t = -13.25, df = 463, p < 0.001); paired-sample t-tests for both items also indicate that willingness-to-pay was significantly higher than the price at which the student was willing-to-sell (sweatshirt, t = -4.62, df = 462, p < 0.001; pizza, t = -8.27, df = 462, p < 0.001). the mean differences reported in table 4 indicate that the measurement of deadweight loss or gain is clearly sensitive to the wording of the questions as well as to whether actual or estimated retail price is used, and to the way in which the recipient‟s willingness-to-pay is determined. 8 our study finds that respondents substantially, though by less than one standard deviation, overestimate the retail price of a gift. rt (pp. 320 and 322) found that respondents under-estimated the retail price. according to our study, this over-estimation is true even for gifts (goods) whose prices ought to be well known by the respondent. we also investigated whether the usefulness, importance, and value of an item was related to the estimated retail price, the price the student was willing-to-pay, and the price at which the student was willing to sell the item. descriptive statistics for usefulness, importance, and value for pizza and sweatshirts are in table 5. table 6 shows that usefulness, importance and value were each significantly related to estimated retail price, the price the student was willing-to-pay, and the price at which the student was willing-to-sell for sweatshirts. the strongest relationship was with the price the student was willing-to-pay. specifically, the more often a student expected to use the sweatshirt, the more important it was and the more the student valued it, the higher the estimated price. for the pizza, however, the relationships were less clear. only the usefulness of the pizza was significantly related to the price the student was willing-to-pay. these negative findings, along with the low mean for importance and value, may be due to the fact that pizza is a consumable with no enduring value. 8 some may argue that a gift, pizza or sweatshirt, is given with consideration to the recipient‟s preferences. namely, that a gift is likely given because the recipient has a strong preference for it. this would indicate our use of means is inappropriate. this may be true sometimes but not always. gift givers in many cases do not know or know well the recipient‟s preferences. for example, a relative who rarely visits may not know or realize the correct age of the recipient which could impact preferences for a particular gift. or, a gift may be given based on a general preference; such as giving an undergraduate economics major a copy of the wealth of nations. this argument would make an interesting topic for additional research. 8 journal for economic educators, 8(4), spring 2008 8 min. max. mean st.dev. usefulness 0 4 1.93 0.96 importance 0 4 1.42 0.89 value 0 4 1.62 0.97 usefulness 0 4 2.05 1.11 importance 0 4 1.31 1.06 value 0 4 1.24 1.08 sweatshirt pizza table 5 descriptive statistics for usefulness, inportance, and value sweatshirt usefulness 0.20** 0.44** 0.22** importance 0.10** 0.33** 0.16** value 0.15** 0.32** 0.17** pizza usefulness -0.08 0.14** 0.01 importance -0.08 0.07 0.03 value -0.05 0.03 0.09 price to sell table 6 intercorrelations of usefulness, importance, and value with item prices sweatshirt pizza est. retail price price to sell price to pay price to pay est. retail price ** significant at p<.01 we also considered the relationship of demographic characteristics to expected retail price, price willing-to-pay, and price willing-to-sell. significant gender differences arose in these variables for the sweatshirt but not for the pizza (see table 7). women provided higher prices for each of these variables than men. no significant differences were found in any of the prices across the other demographic variables: age, class, major, employment, income, or living with parents/guardian. 9 9 although there was a significant racial difference in the retail price estimate for the pizza and a significant religious difference in the price students were willing to pay for the pizza, such differences are not consistent across all the pricing variables, and were based on very unequal group sizes. 9 journal for economic educators, 8(4), spring 2008 9 mean st. dev. mean st. dev. t df est. retail price 24.07 8.7 26.26 7.90 -2.80** 452 price to pay 15.49 8.87 18.89 8.14 -4.24** 452 price to sell 14.46 7.81 16.38 8.32 -2.50* 452 est. retail price 13.03 3.56 13.10 3.33 -0.21 451 price to pay 10.84 3.59 10.62 3.99 0.61 451 price to sell 8.98 3.88 9.03 4.29 -0.13 451 table 7 descriptive statistics for prices of items by male/female sweatshirt pizza male female *significant at p<.02; **significant at p<.01. conclusion our study provides credence for the contention that the phrasing of questions regarding the price a person would pay rather than do without a good is crucial to the determination of deadweight gain or loss. rt agree. they write (p. 323) that the “most significant result is that the form of the value question dramatically affects the apparent welfare yield of gifts.” differences also result from whether the respondent is asked to estimate the retail price, the amount willing-to-be-paid, or the amount willing-to-be-accepted. it seems that the estimate of the market price by a typical respondent even for gifts the respondent is likely to buy frequently significantly exceeds the actual market price. the typical respondent also significantly under-estimates the amount he is willing-to-pay or to-accept relative to the market price. thus wording distinctions account for waldfogel's (1993) finding of a deadweight loss associated with gift giving as expected by microeconomic theory's willingness-to-pay concept and sh's (1996) finding of a deadweight gain when estimated retail price and a consumer's willingness-to-pay are compared. 10 journal for economic educators, 8(4), spring 2008 10 appendix: holiday gift giving survey code (link to survey) section #1 instructions: in this part of the survey, imagine you have received a gift certificate for the two items identified below. it is very important that you complete/fill-in the six blank spaces below. utc logo dominos large pizza sweatshirt with 3 toppings what is your estimated retail price (to the nearest dollar) of the gift? $__________ $____________ what is the amount (to the nearest dollar) you would be willing to pay to obtain the gift had you not already received it? $__________ $_____________ what is the minimum (to the nearest dollar) that you would accept for this gift? $____________ $______________ begin using scantron form. use the following scale to indicate: a. how often you expect to use each gift. 1. utc logo sweatshirt. a b c d e never rarely occasionally frequently all the time 2. domino‟s large pizza with 3 toppings. a b c d e never rarely occasionally frequently all the time b. how important is this gift to you? 3. utc logo sweatshirt. a b c d e not important not very somewhat very extremely at all important important important important 4. domino‟s large pizza with 3 toppings. 11 journal for economic educators, 8(4), spring 2008 11 a b c d e not important not very somewhat very extremely at all important important important important c. indicate how valuable each gift is to you. 5. utc logo sweatshirt. a b c d e very little minimal ok/somewhat high very high 6. domino‟s large pizza with 3 toppings. a b c d e very little minimal ok/somewhat high very high section #2 this scale consists of a number of words that describe different feelings and emotions. read each item and then mark the appropriate answer on your answer form. to what extent do you generally feel this way, that is, how do you feel on the average? use the following scale: a b c d e very slightly a little moderately quite a bit extremely or not at all 7. interested…………………………………………………………………… a b c d e 8. distressed. ........................................................................................................ a b c d e 9. excited. ............................................................................................................ a b c d e 10. upset. ............................................................................................................... a b c d e 11. strong. ............................................................................................................. a b c d e 12. guilty. .............................................................................................................. a b c d e 13. scared. ............................................................................................................. a b c d e 14. hostile. ............................................................................................................. a b c d e 15. enthusiastic. ..................................................................................................... a b c d e 16. proud. .............................................................................................................. a b c d e 17. irritable. ........................................................................................................... a b c d e 18. alert. ................................................................................................................ a b c d e 19. ashamed. ......................................................................................................... a b c d e 20. inspired. ........................................................................................................... a b c d e 21. nervous. ........................................................................................................... a b c d e 22. determined. ..................................................................................................... a b c d e 23. attentive. .......................................................................................................... a b c d e 24. jittery. .............................................................................................................. a b c d e 25. afraid. .............................................................................................................. a b c d e v e ry s li g h tl y o r n o t a t a ll a l it tl e m o d e ra te ly q u it e a b it e x tr e m e ly 12 journal for economic educators, 8(4), spring 2008 12 section #3 instructions: read each statement below and decide whether or not it describes how you tend to act, think, or feel. then, indicate your level of agreement with each statement using the following scale: a = strongly agree b = agree c = neutral/undecided d = disagree e = strongly disagree in my personal relationships: 26. it is more important for me to get from others. a b c d e 27. it is more important for me to give to others. a b c d e 28. it is more important for me to help others. a b c d e 29. it is more important for me to watch out for my own good. a b c d e 30. i am more concerned about what i received from others. a b c d e 31. i am more concerned about what i contributed to others. a b c d e 32. the hard work i do should benefit others. a b c d e 33. the hard work i do should benefit me. a b c d e 34. my personal philosophy in dealing with others would be if i don‟t look out for myself, nobody else will. a b c d e 35. my personal philosophy in dealing with others would be it‟s better for me to give than to receive. a b c d e section #4 instructions: please answer the following questions as accurately and honestly as possible. 36. how old are you? a b c d e 16-18 years 19-20 years 21-22 years 23-30 years 30 years & over 37. what sex are you? a. male b. female 38. what is your race? a. african american b. american indian/native american c. asian american d. caucasian e. hispanic, latino or cuban 39. what religion do you practice? a. catholic b. jewish c. moslem d. protestant e. none/other a. according to your earned credit hours, what class are you in at utc? 13 journal for economic educators, 8(4), spring 2008 13 b. freshman (0-23 semester hours earned) c. sophomore (24-59 semester hours earned) c. junior (60-89 semester hours earned) d. senior (90 or more semester hours earned) 41. what is you college/major at utc: a. business (accounting, finance, management, or marketing) b. education, nursing, or social work c. science, mathematics, engineering, or computer science d. social science (economics, political science, psychology, or sociology, etc.) e. other 42. are you employed? a. not employed b. 1-15 hours per week c. 16-25 hours per week d. 26-35 hours per week e. 35 or more hours per week 43. what is your income? a. $5.99 per hour or less b. $6.00-$7.99 per hour c. $8.00-$9.99 per hour d. $10.00-$11.99 per hour e. $12.00 or more per hour 44. do you live with your parents/guardian? a. yes b. no 14 journal for economic educators, 8(4), spring 2008 14 references: list, john a and shogren, jason f. 1998. “the deadweight loss of christmas: comment.” american economic review, 88(5), 1350-55. ruffle, bradley j. and tykocinski, orit. 2000. “the deadweight loss of christmas: comment.” american economic review, 90(1), 319-324. shogren, jason f., shin, seung y., hayes, dermot j., and kliebenstein, james b. 1994. “resolving differences in willingness to pay and willingness to accept.” american economic review, 84(1), 255-270. solnick, sara and hemenway, david. 1996. “the deadweight loss of christmas: comment.” american economic review, 86(5), 1299-1305. __________. 1998. "the deadweight loss of christmas: reply." american economic review, 88 (5), 1356-57. __________. 2000. "the deadweight loss of christmas: reply." american economic review, 90(1), 325. waldfogel, joel. 1993. “the deadweight loss of christmas.” american economic review, 83(5), 1328-36. __________. 1996. “the deadweight loss of christmas: reply.” american economic review, 86(5), 1306-08. __________. 1998. “the deadweight loss of christmas: reply.” american economic review, 88(5), 1358-59. 1 |journal for economic educators, 19(1), 2019 does business education promote unscrupulous behavior? nathanael d. peach1, robert buckley, caleb reynolds2,3 abstract this study seeks to determine factors that contribute to individual’s honesty in the marketplace and willingness to exploit market power. in order to identify these factors a survey was administered to undergraduate students enrolled in institutions across the united states. we find that perception of others has a multifaceted relationship with honesty and exploiting market power. respondents that believe others are likely to be honest are more likely to be honest themselves. but the relationship is symmetrical, believing others are dishonest leads to dishonest behavior. an increase in the perception of firm’s taking advantage of market power leads to respondents being more likely to do so themselves. in terms of expressing market power, individuals that believe raising the price of a good in response to a demand shock is fair will do so. business education is found to lead to more honest behavior but does not influence an individual’s propensity to exploit market power. individuals that believe others are altruistic are more likely to forego self-interested behavior. lastly, religiosity is found to increase honesty but not the use of market power. these findings suggest that educators ought to pay attention to the ways in which students form their perceptions of how individuals behave in the marketplace. key words: honesty, business education, religiosity, market power, social norms jel classification: a13, a22 introduction students of commerce have long recognized the importance of subjective elements of the human experience, such as personal beliefs and social norms, in the marketplace. adam smith’s impartial spectator, which plays an important role in the theory of moral sentiments, is a notable early attempt to formalize the linkage between notions of right and wrong with observable market outcomes. the impartial spectator acts as an internal conscience and external barometer of social norms. ideally, the spectator remains “impartial” and is not influenced by the shallow justifications we often put forth for ethically dubious actions. (everyone else cheated on the homework so it’s not a big deal that i did.) despite the power of smith’s device, he was unable to completely integrate the impartial spectator into his analysis of commerce. the impartial spectator disappears from his toolbox as quickly as it appeared; not even being mentioned once in the wealth of nations. the project of integrating agents’ notions of right and wrong with market outcomes, which smith left his indelible impression on, remains an active area of inquiry because of its 1 associate professor of economics, college of business, george fox university, 414 n. meridian st., newberg, or 97132 (corresponding author) 2 robert buckley and caleb reynolds conducted much of this research as part of an independent study led by nathanael d. peach 3 we are grateful to an anonymous reviewer for their insightful comments and the many people that graciously helped us administer the survey. 2 |journal for economic educators, 19(1), 2019 importance. north (2005) outlines the process of how agents’ mental models respond to and are shaped by their norms. he argues that this process serves as the very foundation of economic change; it forms culture and shapes the development of institutions. a tangible example of these linkages is provided by alesina, miano, and stantcheva (2018), where individual’s perceptions of immigrants (regardless of accuracy) influences their attitudes towards redistribution and many other public policies. sen (1988) argues that ignoring ethical issues, or, in north’s words, agents’ mental models, has “impoverished” economics and narrowed its “reach,” “relevance,” and “predictions.” behavioral and experimental economics, two of the most important economic fields to emerge in recent decades, are in many ways responses to criticisms such as sen’s. both are attempts to develop a deeper and more formal understanding of how subjective elements of the human experience influence economic outcomes. economists are likely to never arrive at a full understanding of the role of norms in economic outcomes because of their evolutionary nature. as norms change over time so too would agents’ interpretation of appropriate marketplace behavior. this is not to say that human nature is entirely fluid (the cardinal virtues have stood the test of time), but that ethical dilemmas and responses to them change over time. norms are shaped, formed, and acted upon in a host of settings; from the preschool to the corporate boardroom. in this study we focus on a setting of particular interest to professors of economics: the university. mccloskey contends that “virtues are matters of prepared feeling rather than a decision on the spot” (p. 154). education, and economics courses in particular, engage the formation of virtues in explicit and implicit ways. formal instruction, whether through lecture, readings, or some other means, explicitly aims at shaping virtue. students are told the right ways to do things to increase their prudence, or wisdom. there is also a more subtle way in which virtues may be shaped: through the topics considered and proposed solutions to problems. for example, the priority given to economic growth and efficiency signals that these are worthy goals, regardless of whether this is formally stated. the absence of other goals, such as equity, health, or environmental sustainability signals their insignificance. for many, the college years are a period of transition. they enter college largely protected from the marketplace by their parents and leave fully immersed as they begin their working years. education then plays an important role in “preparing the feelings” that individuals will put into action as they more fully participate in the economy. it can then be argued that the seeds of economic activity, cultural formation, and institutional development the very foundations of markets are sown in the classroom. before proceeding we ought to temper the importance of the classroom. to believe notions of right and wrong are completely formed by a single course, or even program of study, is too heroic. students’ opinions of economic issues are influenced by the classes they take, both through the professor and their peers’ opinions, and students maintain much of their own thoughts (hammock, routon, & walker, 2016; magee, 2009). in this study we seek to understand factors which influence individual’s honesty and attitudes towards profit maximization. to do so, scenarios originally posed in frank, gilovich, and regan (1993) (fgr) and kahneman, knetsch, and thaler (1986) (kkt) are applied. these studies are foundational in the literature on individual’s perception of acceptable behavior in the marketplace. kkt focus on attitudes towards profit maximizing behavior, while fgr focuses on scenarios in which self-interested behavior is at odds with socially desirable outcomes. by quantifying individual’s attitudes these studies moved the literature away from anecdotes and conjecture to more rigorous evaluation. the logical extension to these studies, and many they 3 |journal for economic educators, 19(1), 2019 have inspired, is to seek out factors which are influencing the individual’s attitudes. what leads one to conclude that price increases are acceptable in some scenarios but not others? why are economists more likely to be free-riders? kkt devote attention to notions of fairness, fgr to economics education. in order to consider a wide range of factors that may influence notions of honesty and market power a survey was administered to students at 14 colleges and universities across the united states. (the survey is outlined in the following section.) the survey consisted of three categories of questions: market scenarios (from kkt and fgr), attitudes, and demographics. the scenarios elicit opinions regarding honesty and use of market power in pricing decisions. attitudinal questions were related to education and the purpose of business. demographic considerations included the number of business courses taken, measures of religiosity, as well as standard categories such as race and gender. after cleaning the data for incomplete surveys, nonsensical responses, etc. a total of 662 responses are analyzed. the full data set is available upon request. literature the relationship between economic coursework and economic knowledge, being of intimate concern to professors, has been widely studied. it can be safely assumed that every course has the objective of increasing student’s knowledge of the content being studied. there are many reasons why this goal may not be realized; from the professor being ineffective to students being overwhelmed by the complexity of the subject matter. every semester thousands of students are successful in their courses and more than a few are not. it is safe to conclude that knowledge is being gained, for many, but not all. but is this knowledge fleeting? does it have a “half-life”? just because an individual understands the consequences of imperfect competition as a sophomore does not mean that they will 20 years later. once the course concludes it is possible that the individual would quickly lose the knowledge they commanded at a particular moment in time. (whether knowledge that is fleeting is truly knowledge is worth pondering but would lead us too far from the study’s goals.) despite the real possibility that students would not remember much from their courses later in life the consensus is that those that have taken economics courses have higher levels of economic knowledge and understanding (allgood, walstad, & seigfried, 2015; blinder & krueger, 2004; walstad & rebeck, 2002). even if we can be confident that courses increase the average individual’s knowledge of a subject this does not mean their attitudes or behaviors change. for many reasons the impact education has on attitudes and behaviors is less established than its impact on knowledge. as previously discussed, fgr (1993) is an early, seminal article in this literature. its importance is in part due to its provocative findings, that studying economics makes one more likely to behave as a free-rider and pursue self-interested behavior. but why would this occur? fgr (1993) argue that inundating students with models and theories based upon self-interested behavior eventually results in an acceptance that this is an acceptable way to behave. if free-riding is the rational thing to do, why would you do anything else? rationality is a virtue, foolishness is not. as individuals proceed through their studies their mental model of the prudent way to behave is adjusted accordingly. ghoshal’s (2005) study of business education reaches a similar conclusion: the priority business education places on theory and scientism justifies acting unethically in the marketplace. instructors are providing an implicit permission to ignore ethical dilemmas because they are not worth considering during one’s studies. as a result, the educational endeavor shapes individuals with juvenile conceptions of virtuous behavior. while studies with claims such as 4 |journal for economic educators, 19(1), 2019 these have been criticized (e.g., neubaum, pagell, drexler jr, mckee-ryan, & larson, 2009), the findings have not been entirely refuted. indeed, business or economics education has been shown to promote a host of problematic behavior from greediness to narrowly defining a firm’s social responsibility (allgood, walstad, & siegfried, 2015; wang, malhotra, & murnighan, 2011; lämsä, vehkaperä, puttonen, & pesonen, 2008). the full implications of these findings are sobering. if the pursuit of an academic major results in shaping attitudes and subsequently behavior the stakes of education are raised. demartino (2011) outlines the consequences of shallow ethics among professional economists, zingales (2015) the finance sector’s excessive focus on duping (rent-seeking) rather than the creating value, and cohn, fehr, & maréchal (2014) when dishonesty becomes the norm within an organization. if economics, or business education in general, is creating self-interested (or even selfish) people then we should expect that the marketplace, through the organizations and institutions engaged in it, will reflect the behaviors of such people. this is the corporate malfeasance that finds itself in headlines on a regular basis. of course education need not solely promote selfish and anti-social behavior. neubaum, pagell, drexler jr, mckee-ryan, and larson (2009) find that business education does not lead to “profit-first” attitudes. students temper the desire for profit with other considerations. they find that business students are more concerned about sustainability issues (in terms of both firms and the environment) than other students. may, luth, and schwoerer (2014), in a quasi-experimental study (with a fairly small control and treatment group, 30 in each), find that business ethics courses raise moral efficacy, courage, and moral meaningfulness. considering the full scope of this literature suggests that the relationship between education and morality is nuanced. before outlining the survey applied in this study the reader ought to be aware of an ongoing debate within the literature. namely, to what extent is selection bias dictating results? perhaps the observed relationships between course of study and attitudes has nothing to do with education. instead, individuals that study business or economics are already amendable to certain types of behaviors and subscribe to the worldviews articulated by these disciplines. if this is the case, then the aforementioned causation is nothing more than correlation. our attempt to control for selection bias is via a variable related to the number of business courses taken. with this variable we are able to control for exposure to traditional business education. while selection bias is a real concern, and ought to temper the implications of any study within this literature, it seems implausible that students would learn factual knowledge in courses but not have subjective considerations of the marketplace completely unaffected (frank, gilovich, & regan; 1996). survey in this section the survey’s design and methodology is outlined. after a general discussion of choices made during this process, the specific questions and prompts on the survey are presented. this discussion is complemented by the presentation of relevant descriptive statistics. survey design and administration the survey was designed to capture the influence of attitudes and demographics on marketplace decisions. first, respondents were asked to consider hypothetical scenarios. the scenarios posed in the survey were chosen because they place an ethical dilemma in a mundane context. every day we make decisions to behave more, or less, virtuously. while the outcomes of 5 |journal for economic educators, 19(1), 2019 these decisions rarely become the fantastic corporate scandals reported by the media, they are very important, serving as the building blocks of culture. after reading the scenario, respondents were asked to predict the behavior of a stranger and themselves. this allowed us to control for how individual’s conceptions of others may, or may not, influence their behavior. the remainder of the control variables were established through attitudinal and demographic questions. these questions and prompts followed the scenarios in order to mitigate possible biases they may introduce. the attitudes queried were related to motivation towards pursuing education, the purpose of education, as well as the purposes and motivations of businesses. responses to these questions allowed for causal channels between these views and marketplace decisions to be established. the survey ended with a host of demographic questions related to gender, race, field of study, etc. the demographics of particular interest were education, religiosity, and political affiliation. for a number of reasons, from the aforementioned literature to informal classroom interactions, we expected business education to have a negative impact on virtuous behavior in the marketplace. we had an anecdotal sense that business culture prioritized profit over other considerations. while many studies have found religiosity contributes to virtuous behavior, we wanted to test these findings in the context of mundane scenarios. we expected that religiosity would not impact decisions in these instances because of the subtle way in which the ethical dilemma was presented. political affiliation was included because of the caustic political environment we find ourselves in. we were curious as to whether this dimension of identity would influence decisions in the marketplace. the survey went through many iterations before it was finalized. a focus group was an invaluable step in this process. approximately 50 undergraduate students, in two different sections of a business ethics course, participated in the focus group. as the goal for this project was to further our understanding of the ways in which business education, and other factors, influence marketplace decisions these students were able to help us design a survey that elicited the desired data. feedback from the focus group resulted in edits to ensure the survey’s wording was understandable, free of unnecessary jargon, and that questions prompted the considerations intended. once the survey was completed the authors utilized their professional networks, through personal communication and announcements in professional associations, for assistance in administering the survey. the intent was to create a sample which was representative of undergraduates in the united states. the institutions within the study are anderson university (illinois), anderson university (south carolina), asbury university, bowling green state university, bryan college, cedarville university, george fox university, goshen college, grace college, oregon state university, point loma nazarene university, southern oregon university, truman state university, and university of wyoming. the reader may note a disproportionate number of private, religiously affiliated institutions. this was not design; it is the result of the authors’ working at such an institution. the impact of oversampling religiously affiliated institutions will be elaborated on in the following section. with one exception, the survey was administered electronically via email request. at one institution the survey was administered by hand at the end of a class. once the survey was completed the data were cleaned in a number of ways. first, incomplete surveys were removed from the sample. next, responses by graduate students and non-u.s. citizens were removed. the former because of the many ways in which this population differs from undergraduates; most relevant to this study being age, work experience, and number of courses taken. many studies 6 |journal for economic educators, 19(1), 2019 have found significant variation in attitudes towards markets across nations, for this reason nonu.s. citizens were removed in order to keep the sample coherent. of the 783 surveys received, 662 were kept, 85% of the initial sample. the reader interested in working with the data is encouraged to contact the lead author; all data are available upon request. survey questions and descriptive statistics the first scenario posed in the survey is from fgr (1993): “a business had been shipped 10 microcomputers but charged for 9” (p. 168). (the prompt was edited in our study, “ipad” replaced “microcomputer.”) respondents were asked the likelihood that the owner of the business would report the error as well as the likelihood that they would. descriptive statistics are presented in table 1. fgr report the change in respondents’ answers as they were seeking to determine if a particular economics course would influence the results. in the two courses analyzed by fgr there is a 40.0% increase in the number of students that expect the owner to not report the error and 38.3% increase in respondents saying they would not report the error (the average of the two microeconomics courses). in subsequent studies that have applied this scenario one consistent theme is worth highlighting. the mean for the individual reporting the error is consistently larger, typically by a magnitude of approximately 20 percentage points, than for the owner; individuals view themselves as considerably more honest than others (iida & oda, 201; yezer, goldfarb, & poppen 1996). table 1: likelihood a shipping error is reported owner likelihood personal likelihood mean 54.4% 76.7% median 50% 90% standard deviation 29.9 29.9 note: n = 665. the second scenario is from kkt (1986): “a hardware store has been selling snow shovels for $15. the morning after a large snowstorm, it believes it can raise the price to $20” (p. 729). respondents were asked the probability the hardware store would raise the price, if they would raise the price, and finally whether raising the price would be fair. descriptive statistics for this scenario are presented in table 2. the scenario is fascinating because it places the profit motive within a fairly mundane ethical dilemma. (certainly results would be different if the scenario was a natural disaster or lifesaving medications.) standard economic theory justifies raising the price; the snowstorm has increased demand. firms ought to respond to the increase in willingness to pay by raising their prices. but as kkt point out, the cause of the shock is important. in this case, it is an event that neither firms nor consumers have control over: the weather. the respondent must weigh profit against altruism. kkt conclude that the nature of this shock compels many to conclude raising the price would be unfair. 7 |journal for economic educators, 19(1), 2019 table 2: responses to increase in demand for snow shovels likelihood owner raises price personal price charged raising the price is fair mean 71.0% $16.60 76% median 75.0% $17.00 standard deviation 24.8 5.4 0.42 note: n = 567. ninety eight respondents indicated they would charge a price greater than $40. given the possibility that the unrealistic prices are a function of likely misreading of the question, these responses have been removed for this question. raising the price is fair is coded as = 1 if fair, = 0 if unfair. this scenario has been applied in a number of studies in many different nations (cipriani, lubian, & zago, 2009; frey & pommerehne, 1993; gorman & kehr, 1992; gao, 2009; maxwell & comer, 2010; thaler, 2015). across these studies the variation in the perception of whether a price increase is unfair is quite large. in kkt, 82% of respondents believe it is unfair. the lowest value is found in thaler, (2015) 24%. coincidentally, 24% of our sample believed the price increase was unfair. there are also notable differences across nationalities and between students and non-students. across these studies students, regardless of nationality, are much more likely to believe the price increase was fair than the general population. following the scenarios respondents were polled on their attitudes towards business and education. a brief description of these variables is presented in table 4; descriptive statistics can be found in table a1 of the appendix. attitudes towards business primarily had to do with its purpose. attitudes toward the purpose of business could greatly influence responses in the scenarios. for example, a student believing that business should primarily strive to make profit might suggest a higher fair price for a snow shovel than a student believing business ought to primarily serve the needs of the community. profitability suggests raising the price to exploit increased demand, while the service point of view suggests lowering the price to assist a community in need. within the education questions, respondents were asked how goals of service, wealth, and personal fulfillment related to their educational choices and beliefs. since the respondents in the survey were students, attitudes toward education could influence their opinions in the business scenarios. further, attitudes toward education could serve as a more tangible measure of beliefs than attitudes toward business, since most students have relatively little business experience and consider their education their full-time occupation. these questions also allowed us to control for ways in which selection bias might influence results between education and attitudes or behaviors. to better understand the role of religiosity in economic attitudes, the duke religion index (durel) originally presented in koenig, parkerson, and meador (1997) is applied. vitell’s (2009) survey on the literature is recommended to the reader interested in a thorough treatment of the relationship between religiosity and business ethics. he argues that the empirical evidence, while not as extensive as the subject matter warrants, suggests that religiosity contributes to more ethical behavior. conroy and emerson (2004) find that religiosity is statistically significant in 7 of the 25 ethical scenarios considered in their study. many of these scenarios would be classified under the broad heading of honesty; none would be considered 8 |journal for economic educators, 19(1), 2019 exercising market power. in some of the scenarios religiosity compels the individual to act more honestly, but in plenty it does not. the durel is comprised of five questions which gauge three dimensions of religiosity: organizational religiosity (or), non-organizational religiosity (nor), and intrinsic religiosity (ir). or is measured via the public practice of religious rituals such as attending mass or a bible study. nor is the private practice of religious activities such as mediation or prayer. ir seeks to gauge the extent to which an individual’s religious beliefs impact other areas of life. durel scores are the sum of the individual’s answer on the five questions, higher scores indicating higher levels of religiosity. descriptive statistics are presented in table a2 of the appendix. using durel scores, we can determine the role that religiosity, not just mere religious affiliation, plays in economics attitudes. the survey concluded with a host of demographic questions. exposure to business education could impact students’ behavior in the marketplace. the survey measured exposure to business education in two ways. first, respondents were asked their academic major and the number of business courses they had taken. to avoid multicollinearity, and to have a better measure of exposure, our analysis only used number of business courses (the absolute value of the correlation coefficient between the two variables was 0.624). we preferred number of business courses to the dummy variable for business major since this would allow us to measure the extent to which more business courses influenced results. it should be noted that this variable is measured in five categories: 0, 1 – 5, 6 – 10, 11 – 15, greater than 15. the mean, median, and standard deviation for this variable are 2.9, 3, and 1.4, respectively. the decision to apply a categorical variable was based upon the belief that it would provide a more accurate measure than an open ended question. the authors recognize that this question is not ideal. in future work efforts will be taken to identify and control for specific aspects of business education, such as ethics or finance, which may impact attitudes in different ways. not only do we expect business education to be meaningful, but also where the individual is pursuing their studies. in order to determine if universities with religious affiliation influence attitudes towards commerce, students at faith-based universities were sampled. of the final sample, 65.7% of respondents in our sample attend such institutions. this relatively large percentage indicates the sample is not representative of the population of undergraduate students. oversampling was not intentional, it is simply the result of different response rates. there are two other important ways in which the sample is not representative of the population of undergraduates. specifically, in our sample 75% of respondents are white and 51% are male. the distribution of race within the sample is presented in table a3. in 2016 the national percent for each group was 58% and 44%, respectively (national center for education statistics, 2019). within the demographics section political affiliation was also queried. political views could greatly influence an individual’s view of business and opinion of proper action in certain situations. butorovic and klein (2010 & 2011) find political ideology to be an important predictor of economic knowledge. in regression analysis ‘liberal’ and ‘progressive/very liberal’ were merged into the category of liberal, approximately 11% of the final sample. similarly, we combined ‘conservative’ and ‘very conservative’ into conservative, 44% of final sample. all other political ideologies (moderate, libertarian, not sure, and refuse to answer) represent the omitted category in the creation of the aforementioned dummy variables. the full distribution is presented in table a4. 9 |journal for economic educators, 19(1), 2019 methodology and findings each scenario was modeled as a function of key questions from the survey, ranging from expectations of others to standard demographics. our approach extends iida and oda’s (2011). they control for three factors: economics major, sex, and academic standing. our specifications include a host of other possible explanatory factors. standard ordinary least squares was applied to determine factors which had a statistically significant relationship with the dependent variable, the respondent’s reported behavior. table 3 presents the results from the ipad scenario. a brief description of relevant variables can be found in table 4. the probability that the respondent would report the error, with a range of 0 to 100%, is the dependent variable. table 3: ols results, dependent variable: likelihood you report ipad shipping error coefficient std. error t-ratio p-value constant 16.7131 10.1309 1.650 0.0995 * ipad_owner 0.5524 0.0366 15.090 0.0000 *** needs_others 0.4259 1.2577 0.339 0.7350 charity -2.1988 1.1136 -1.975 0.0487 ** max_profit 1.4599 1.0216 1.429 0.1535 own_needs 3.1801 1.0536 3.018 0.0026 *** comm -0.4264 1.1820 -0.361 0.7184 motiv 1.4388 1.0904 1.319 0.1875 purp_educ -0.6254 1.2653 -0.494 0.6213 others 1.3267 1.2669 1.047 0.2954 busn_courses 2.1564 0.6468 3.334 0.0009 *** univ_dv 3.2743 2.6752 1.224 0.2214 conservative 2.7727 2.1228 1.306 0.1920 liberal -5.6417 3.6518 -1.545 0.1229 durel 0.4202 0.2085 2.016 0.0443 ** race_dv -3.1899 2.5120 -1.270 0.2046 gender_dv -1.8868 1.9268 -0.979 0.3278 age 0.0093 0.2851 0.033 0.9739 mean dependent var 76.8172 s.d. dependent var 29.8077 r-squared 0.3827 adjusted r-squared 0.3664 f(17, 644) 21.1609 p-value(f) 0.0000 significance level: *** 0.01 ** 0.05 * 0.10 10 |journal for economic educators, 19(1), 2019 table 4: description of explanatory variables variable description ipad_owner probability an anonymous owner reports the error. snow_store probability a hardware store raises the price of a snow shovel. snow_dv is it fair to raise the price of a snow shovel? fair = 1 needs_others the primary purpose of business is to meet the needs of others. charity business professionals only engage in charitable acts when it benefits them. max_profit the primary purpose of business is to maximize profit. own_needs in business, in order to be successful, employees need to look out for their own needs first. comm it is more important for business to seek the welfare of its community than it is to seek the welfare of its owners. motiv the primary motivation in choosing my major is to make a lot of money. purp_educ the primary purpose of my education is to be prepared to serve others. others i view my education as preparation to care for the needs of people. busn_courses = 1 “0 courses,” = 2 “1 – 5 courses,” =3 “6 – 10 courses,” = 4 “11 – 15 courses,” = 5 “greater than 15 courses” univ_dv = 1 if faith-based institution, = 0 if not faith-based institution conservative = 1 if conservative or very conservative liberal = 1 if very liberal or liberal durel duke religion index race_dv = 1 non-caucasian, = 0 caucasian gender_dv = 1 male, = 0 female age reported age of respondent. note: attitudinal questions are coded such that their range is =1 if “strongly agree” to = 5 if “strongly disagree.” the respondent’s perception of others’ behavior impacts their behavior in many ways. the more the respondent believes an anonymous individual (the owner) will act honestly, the more likely they will act honestly the point estimate for ipad_owner being 0.55 and statistically significant at the 1% level. the notion that an individual’s behavior is based upon their expectation of others has been confirmed in experimental studies. mccabe, rigdon, and smith (2003) find that trust and reciprocity can be a more important predictor of behavior than 11 |journal for economic educators, 19(1), 2019 payoff motivations. the statistical significance and magnitude of own_needs’ coefficient is another manifestation of this relationship. this variable measures the extent to which an individual believes employees need to look after their own needs. the more altruistic the respondent believes others are in business the more likely they are to state they would report the error. a one-unit increase in this variable (measured as a categorical variable) corresponds to 3 percentage points more likely to report the error. charity is measured and coded such that an increase in this variable corresponds to a respondent disagreeing with the statement “business professionals only engage in charitable acts when it benefits them.” conversely, the more they agree with this statement the less likely they are to report the error. if one conceptualizes dishonesty in the scenario as an act of self-interest this finding makes sense, especially in light of the statistical significance of ipad_owner. the more one believes business owners are charitable not because of altruistic motivations, but out of self-interest, the less likely one is to act against his or her own self-interest by not reporting the error. the relationship between business courses and honesty was not expected, but upon reflection is sensible. the more business courses a respondent has taken the higher their reported honesty. as noted in the survey section, this variable is not calculated on a per class basis. rather, the survey contained five categories: 0, 1 – 5, 6 – 10, 11 – 15, greater than 15. a movement from one category of business courses to the next increases reported honesty by approximately 2 percentage points. this finding is congruent with may, luth, and schwoerer’s (2014) that business ethics courses raise moral efficacy, courage, and moral meaningfulness. finally, the durel variable, which measures respondent’s religiosity was significant (at the 5% level) and had the expected sign. given the importance of honesty in religious life this is not that surprising. more religious individuals are likely to report being more honest. it is worth highlighting the myriad of factors that do not have statistically significant relationships with honesty. to the dismay to those that relish lambasting their political opponents (a guilty pleasure perhaps we’re all guilty of from time to time) political ideology is not significant. additionally, demographic differences, motivations for pursuing higher education, or whether the student is at a faith-based institution do not matter. in table 5 the factors which determine whether an individual will take advantage of a change in market conditions are reported. the dependent variable is the price an individual would charge for a snow shovel the day after a snowstorm. the sample analyzed for this question was restricted to respondents that reported a price less than or equal to $40, a reasonable price given the information in the scenario. approximately 15% of the final sample reported they would charge a price of more than $40, with 5% stating they would charge $100, which is not realistic. in this scenario 566 responses were analyzed. prior to analyzing the results, the regression’s low adjusted r-squared ought to be acknowledged. while a robust set of explanatory variables have been controlled for, ranging from attitudes about business to political affiliation, factors outside of the model are certainly influencing the variation in reported price charged. the statistical significance of the intercept and its large absolute value support this suspicion. the regression’s overall f-statistic is significant at the 1% level, but its value is fairly small, suggesting that the model does an adequate job of explaining the pricing decision but certainly does not tell the entire story. 12 |journal for economic educators, 19(1), 2019 table 5: ols results, dependent variable: price you would charge coefficient std. error t-ratio p-value constant 10.8409 2.6040 4.163 0.0000 *** snow 0.0628 0.0103 6.106 0.0000 *** snow_dv 2.8430 0.5795 4.905 0.0000 *** needs_others -0.2429 0.2553 -0.952 0.3417 charity -0.2232 0.2564 -0.870 0.3846 max_profit -0.0461 0.2324 -0.198 0.8429 own_needs -0.3279 0.2220 -1.477 0.1403 comm 0.0453 0.2248 0.202 0.8403 motiv -0.0328 0.2191 -0.150 0.8812 purp_educ 0.2575 0.3068 0.839 0.4018 others -0.6658 0.3212 -2.073 0.0387 ** busn_courses 0.0406 0.1626 0.250 0.8029 univ_dv 0.5366 0.5751 0.933 0.3512 conservative 0.0048 0.4793 0.001 0.9921 liberal -1.2477 0.8469 -1.473 0.1412 durel 0.0446 0.0528 0.844 0.3988 race_dv 0.1953 0.5205 0.375 0.7076 gender_dv -0.3674 0.4495 -0.818 0.4140 age 0.1220 0.0726 1.680 0.0935 * mean dependent var 16.5741 s.d. dependent var 5.3876 r-squared 0.1986 adjusted r-squared 0.1722 f(18, 547) 6.5763 p-value(f) 0.0000 significance level: *** 0.01 ** 0.05 * 0.10 as in the previous scenario, perception of others influences the respondent’s decision. for every percentage point more likely a respondent expects the owner to raise the price, the price the respondent will charge increases by $0.06. while small at the margin, ceteris paribus, the difference between being 0% sure the owner will raise the price and 100% sure is $6. with a baseline price of $15 this is a meaningful change in price. somewhat surprisingly business education does not have a statistically significant relationship with price. a priori, we expected a positive relationship. it appears that exposure to business theory through coursework is not overwhelming individual’s ethical considerations. our findings support kkt’s (1986) hypothesis, that ethical motivations are often more important than what economic, or business, theory predicts or prescribes. snow_dv, is positive and economically significant. a respondent that considers it acceptable to raise the price will, on average, charge $2.79 more than one that believes it is unfair, approximately 18% of the starting price. the stronger a respondent’s altruistic impulse, in the form of considering their education as preparation to care for the needs others, the lower the price they would charge. (the variable others is categorical where 1 = definitely not true and 5 = definitely true) this finding aligns with expectations. after a storm, altruism would temper the impulse to raise the price of a snow shovel. the final statistically significant explanatory variable is age, though only at the 10% level (p-value = 0.094). were the statistical significance stronger this result would be worth 13 |journal for economic educators, 19(1), 2019 exploring further. since the result is fairly weak we will not speculate on age’s role in the pricing decision. in addition to the statistical insignificance of business education, a host of other variables which were expected to matter did not. religiosity of respondents nor attending a faith-based institution influenced respondent’s pricing decisions. similarly, political affiliation has no statistical significance; neither do demographics such as race or gender. conclusion before synthesizing the results of this study, two caveats ought to be reiterated. first, the inadvertent oversampling of certain groups (males, caucasians, and students at faith-based institutions) needs to be acknowledge. because the sample differs significantly from the national population of students the externally validity and application of our results is tempered. second, the low adjusted r-squared and importance of the intercept (statistically and economically) in the pricing scenario suggests that some relevant explanatory variables have not been controlled for. it is possible that one of these omitted variables are an important piece of the story. additionally, these omissions may bias the results, though it should be noted that in preliminary estimations the estimated coefficients were robust across multiple specifications. the robustness of these estimates gives us confidence that the presented estimates are not biased. with these caveats in mind we now offer concluding thoughts. our findings motivate further exploration of the ways in which individuals create their perception of others. in both scenarios, the perception of others’ behavior was statistically and economically (a large coefficient) significant. while perception of others is a function of a myriad of factors, our findings suggest business education could play a role in informing these perceptions. business education has the opportunity to influence how students believe others will behave in the marketplace. this can be done through the models or frameworks taught in the classroom as well as through and case studies considered. it is possible that too often our teaching methods highlight self-interested behavior or ethically dubious practices. the way business and commerce are presented in the classroom will impact student development. instances where commerce encourages virtuous behavior ought to receive attention in courses, too. in both scenarios believing others are altruistic compels the respondent to be more considerate of the needs of others. business education is found to increase honesty but not impact the propensity to take advantage of market power. in the spirit of transparency these are not the findings we expected when we began the study. our study fits within the literature that business education does not promote unscrupulous behavior. this could be due to the changing nature of the standard business curriculum. issues of corporate social responsibility, ethical scandals, etc. are becoming more and more standard educational fare. religiosity influences reported honest behavior but not pricing decisions. again, this was not the result expected when the study began. from our results it would be reasonable to conclude that religiosity positively contributes to honesty in the marketplace but does not extend to pricing decisions, at least as framed in the survey’s scenario. it is possible that individuals do not perceive pricing decisions as relevant to their religious life. the significance of the fairness dummy variable 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of economic perspectives, 10(1): 177-186. zingales, l. 2015. “presidential address: does finance benefit society?.” the journal of finance, 70(4): 1327-1363. 16 |journal for economic educators, 19(1), 2019 appendix table a1: attitudinal variables descriptive statistics mean median standard deviation needs_others 2.1 2 0.82 charity 3.1 3 0.95 max_profit 2.3 2 0.99 own_needs 3.2 3 0.99 comm 2.5 2 0.86 motiv 3.2 3 1.12 purp_educ 2.1 2 0.89 others 3.8 4 0.98 note: attitudinal questions are coded such that their range is =1 if “strongly agree” to = 5 if “strongly disagree.” brief descriptions of these variables are listed in table 4. table a2: duke religion index (durel) descriptive statistics organizational religiosity (or) non-organizational religiosity (nor) intrinsic religiosity (ir) durel mean 4.2 3.4 11.3 18.9 median 5 4 12 20.5 standard deviation 1.5 1.7 3.5 6.0 note: or and nor range from 1 to 6. ir includes three questions and ranges from 3 to 15. durel is the summation of individual’s scores. higher numbers indicate higher religiosity. table a3: racial composition group percent of sample african american 2.1% asian/pacific 11.7% hispanic 16.4% white 75.2% other/mixed 6.0% refuse to answer 2.4% 17 |journal for economic educators, 19(1), 2019 table a4: political ideology group percent of sample progressive/very liberal 2.6% liberal 8.7% moderate 19.4% conservative 37.7% very conservative 5.9% libertarian 5.1% not sure 15.6% refuse to answer 5.0% graddy.pdf 51 hierarchical menu structures as teaching/learning environments by duane b. graddy* abstract student-centered learning requires innovative pedagogical approaches for presenting ideas and materials that challenge learners to expand their depth of understanding. hierarchical menu structures provide a self-contained pedagogical framework for focusing student attention on the subject matter of a course. students can identify, clarify, and expand the course content quite easily within this frame of reference. the key to this approach is providing the student with a web interface that keeps them in the course environment as they navigate the specific lectures, assignments and projects. i. introduction maintaining the students' focus throughout a course in economics is challenging to say the least. students tend to wonder away from the material as the topics become more diverse and difficult. using the internet to supplement course materials may improve the results somewhat but even here students are pulled away from the course environment as they surf the web for the answers to specific questions and assignments. hierarchical menu structures are one way a teacher can create a self-contained course environment students can use a hierarchical menu structure to maneuver through their course materials in an efficient and effective manner. hierarchical menus can be designed for ease of use in identifying, learning, and researching course lectures, assignments, projects, and examinations. by using a hierarchical structure, students stay within the course interface while following the complex set of hyperlinks necessary to complete class assignments or projects. ii. pros and cons of hierarchical menu structures a hierarchical menu structure is an interactive menuing system that provides information in an outline format. primary topics have a series of subordinate folders or child topics that contain hyperlinked material at every level.1 the outline can be as simple or as detailed as the instructor deems necessary for the particular course being taught. an entire course can be integrated into the hierarchical menu. restructuring a course in this way has both advantages and disadvantages. the hierarchical menu structure is advantageous to students in several ways. 1. having nested groups of topics facilitates previewing, studying and evaluating course materials. 2. relating course material to external sources is simplified within the hierarchical structure. 3. research assignments are easier for the students to follow when topics are listed in an outline format. 4. student interest is enhanced by the system's ease of use and locational focus within the frame set. 5. the student stays in the course environment while working on assignments and projects. nevertheless, using a hierarchical menu structure to present course materials is more time-consuming to implement than straight hyperlinking of web sources so the question arises whether it is worth the effort to develop such a system. of course, i believe the answer to this query is yes. after the initial start-up, the system is relatively easy to expand and maintain. another issue for the nonprogrammer, like myself, is that small scripting errors can become major saturday projects. all in all, however, the advantages for the students outweigh the front-end and maintenance costs. * professor of economics and finance, middle tennessee state university, murfreesboro, tn 37132. email: dgraddy@mtsu.edu 1 jeff frentzen and henry sobotka, javascript: annotated achieve, berkeley, california, 1998, pp. 496497. 52 iii. example of a hierarchical menu system this section highlights some of the pedagogical aspects of a hierarchical menu system. i refer to this particular system as the course knowledge base. the design of this system includes material for four courses. the initial entry point for the course knowledge base is an icon for one folder. it is pretty unassuming to begin with but explodes to reveal an intricate menu of course materials and sources. the url for this site is http://www.mtsu.edu/~dgraddy/load-me.htm. the hierarchical menu has fourteen primary topics that constitute the knowledge base, or stated somewhat differently, establish the course environment. clicking on any of these primary topics reveals a detailed structure of subtopics or subfolders that contain material useful for the courses. for example if a student was assigned a project that required use of federal reserve board (bog) statistical information, she/he could click on the primary topic, policy and regulation, and then go directly to the bog statistical releases used in the course. an important aspect of this process is that the student doesn’t have to leave the course environment because within this frame set design the student has access to the complete hierarchical menu at all times unless the designer chooses to open a separate window. coding in a second window may be advantageous at certain times for example when you want to access the knowledge base while using an on-line workbook or problem set. the advantage of the student being able to remain within the course environment or knowledge base can be illustrated by assuming that he/she is uncertain about the definition of one of the interest rates listed in the bog release. take for example the definition of the federal funds rate. going to the left frame of the knowledge base, the student selects financial markets. the student then clicks on financial instruments and next selects the money markets subfolder. a list of money market instruments drops down. the student chooses federal funds. a description of federal funds appears in the righthand frame. another advantage of a hierarchical menu system is for organizing course materials. the instructor can provide a detailed outline of how the course material is organized so the student knows all of the resources 53 available at the inception of the course. using the first course as an example note the hierarchical structure of the material. the initial groupings: course announcements, lectures and quizzes, searches, data for in-class, assignments, workbook, and library, establish the general outline for the instructional resources. under each of these folders are sets of subordinate folders that contain hyperlinks to the specific course materials. basic resources are listed first; the course syllabus, purpose, assignments, downloads, and an interactive question and answers page. students can submit questions about the material anytime they desire. the lectures and quizzes folder houses much of the class resources. included in this folder are the lectures for the course, a series of selfstudying quizzes, review exercises called lecture vocabularies, interactive tests that are old exams from the course, and an other category for on-line handouts. the other three courses follow a similar format adding features unique to the particular subject matter. consider the following hypothetical assignment as a way to illustrate the usefulness of the hierarchical menu approach to the course interface. this assignment relates to policy making at the federal reserve system and requires use of materials from the www. to begin with the student reads the an article entitled, fed hikes rates by one quarter, describing the federal reserves a decision to increase interest rates by 25 basis points. 1. the article mentions that "the fomc raised its target on the federal funds rate from 4.75 percent to 5 percent .. ." "the fed also kept the discount rate at 4.75 percent .. ." describe the structure and decision-making process of the fomc. what is the federal funds rate and what is its role as a fed target? what is the fed discount rate? find historical data on the federal funds and the discount rate for the years 1990 1999. 2. the article goes on to say "changes in the fed funds rate are typically matched by banks' prime rates, short-term interest rates on treasury bills ...." contrast the definition of the federal funds rate (or federal funds) from question one to prime rates and treasury bill rates. 3. "fed chairman alan greenspan signaled the policy change in testimony to the joint economic committee two weeks ago ..." review this testimony and give your assessment of greenspan's position. by the way, who is alan greenspan? give a brief summary of his background. 4. irwin kellner, chief economist for cbs.marketwatch.com stated " if you believe in the wealth effect -and i do -it is adding fuel to the fire ..." what is kellner implying about the future state of the economy? the student might use the following process to complete the assignment within the hierarchical interface. a. go to policy and regulation then to federal reserve system. click on open market operations. b. click on fomc in the open market article. c. go to federal reserve system to discount window and click on discount rate in the article. d. go to financial markets to money markets to federal funds. 54 e. for the historical data go to financial markets to money market rate. f. go to treasury markets to definitions to treasury financing. g. go to policy and regulation to federal reserve information to bog testimony. h. go to federal reserve information to fomc member to alan greenspan. i. go to class material for economics 321 to searches to yahoo enter "wealth effect" review the search result. iv. folder tree script the hierarchical menu system used for the course knowledge base is an adaptation of a javascript developed by marcelino martins. the script is a free download at http:// www.geocities.com/paris/leftbank/2178/index.html or from other sources such as javascript: annotated archives code with commentary by jeff frentzen and henry sobotkan, osborne/mc graw-hill, 1998. a copy of the script is included as an appendix to this paper. the folder tree script consists of three files plus a series of icons, which can be change if desired. 1. load-me.htm is the frame-maker script. this is the file that contains all of the folder titles and hyperlinks to the information in the hierarchical menu. load-me.htm creates a menu in outline format where each top-level heading has a series of subordinate topics. the tree is displayed in terms of eight gif images.2 2. basetree.htm is the frame that holds the hierarchical menu system. the hierarchical menu is displayed through several gif files which contain the open and close folders, the document and link icons, the three line shapes -vertical branch, bottom corner, and vertical with right branch -that establish the tree/branch structure and blank for areas where no lines exist. 2 the components of the tree are part of a 1x2 table. the left cell encloses one more of the gif files. the right cell contains the accompanying text derived from the string in generatetree(). frentzen and sobotka, p. 507. 55 <html> <head> <title>introduction to knowledge base </title> </head> <body text="#80ff80" link="#ffff00" vlink="#ffff00" background="mgreen.jpg"> <br> <img align=right src="know1.gif"> <br> <br> <center><h2>site knowledge base</h2></center> <hr noshade size=3 color='#80ff80'> <table> <tr><td width=50><td> the site knowledge base provides a core learning structure for the courses included in this web site. in this area you will find what you need to be successful in the courses; that is, if you use it wisely. <font color="white">this site is best viewed with internet explorer 4.0</font> <br><br> </table> <hr noshade size=3 color='#80ff80'> </center> </body> 3. basefldr.htm is the file that makes up the initial target frame. the target frame holds the content that is identified in the hierarchical menu. v. cookbook approach to constructing folder-tree the following steps may help you construct your own hierarchical course menu system. 1. go to the folder-tree web site at http://www.geocities.com/paris/leftbank/2178/foldertree.html or other script library and download the three basic files necessary to construct the hierarchical menu system. 2. download all of the icons necessary to construct the exploding menu or choose some different icons for the basic folders. 3. begin editing the load-me.htm file to meet your course needs. (keeping all of the copyright notices in the script.) one way to edit the script easily is to copy and paste it into a word web page template at the html source level. of course, many other editors are available so it is really a matter of personal preference. this page provides the framework for developing an outline for your particular course needs. new folders and subfolders can be added to facilitate the construction of almost any course environment. 4. modify the basefldr.htm file to make your own entry page in the left frame. see the box below for a modified version of the basefldr.htm file. 5. load all of the files to the server and give the usual permissions. continue to expand and upgrade hierarchical menu by adding new folders, subordinate folders, and hyperlinks. 6. maintain the hierarchical menu by correcting broken hyperlinks and eliminating outdated material. vi. conclusions exacting course requirements necessitate innovative approaches to the teaching/learning environment. hierarchical menu structures provide a means of presenting all of a course’s resources in a compact system of folders and subfolders. the hierarchical menu outlines the entire course with each category or subcategory containing the material for that particular topic. essentially the students work on specific lectures, assignments and projects within the context of the entire course. developing a course knowledge base enhances the teaching/learning framework by providing a more complete interface for the students' to interact with. 56 for the nonprogrammer, the folder-tree script is an effective way to develop a course hierarchical menu structure. the script is easy to adapt to different course environments and can be expanded to meet the needs of most courses. folder-tree provides an effective framework for structuring course resources. references burns, j. javascript goodies, indianapolis, indiana, macmillan publishing, 1999. frentzen, j. and h. sobotka. javascript: annotated archives, osborne/mcgraw-hill, berkeley, california, 1998. graddy, d. " course web sites as learning environments for economics students", journal of the tennessee economics association, fall 1998, v.3, no. 1, pp. 35-42. holzschlag, m. web by design, sybex, san francisco, california, 1998. appendix brief comments on the foldertree script this section provides some brief comments about the foldertree, version 1 script. the reader will want to hyperlink to http://www.mtsu.edu/~dgraddy/load-me.htm to view the foldertree script. these comments about the script are in the context of the course knowledge base discussed above. a complete annotated reference on the foldertree script is presented in frentzen and sobotka, 1998. note that the three levels of the hierarchical menu are represented by three variables that are declared by the generatetree function. aux 1, aux2, and aux3 indicate the array level within the menu. for example in the course knowledge base, policy and regulation represents a first level folder, the second is financial statutes, policy issues, and so forth. the aux1 folders are appended to the knowledge base folder. the string is aux1= appendchild(folderstree, foldernode(“policy and regulation”)). then the second level of the menu is aux2= appendchild(aux1, leafnode(“financial statutes”)). the appendchild () function adds new branches (arrays) to the folderstree. the string for the first hyperlink in the financial statutes folder is appendchild(aux2, generatedocentry(0, “usc title 12: banks and banking”, “http://www.law.cornell.edu/uscode/12/”, “”)). the 0 or 1 entry in the string generatedocentry() indicates whether the page will be displayed in the right-hand frame or a new window. use of this feature depends on what the instructor is trying to accomplish with the hyperlink. for example, a student workbook is included in one of the courses. the workbook comes up as a separate window so the students can more easily maneuver back and forth from the workbook to the knowledge base and vice versa. the other two elements of the string are the link’s title and url. the generatetree() function is triggered by the onload handler within the frameset code, onload= ‘intializetree’. generatetree calls on the two array makers (tree branch creators) foldernode() and leafnode() to declare new branches for the hierarchical menu. each of the branch creators generates a four member array with the last member being the folder’s name. the other three components are flags that track various aspects of the array. the first two flags indicate whether each node or folder is open (1) or closed (0). the third flag shows whether the branch contains subfolders (0) or documents (1). the appendchild() subroutine attaches new objects to the end of the folderstree. the additions to the array can be from foldernode(), leafnode(), or generatedocentry() depending on whether they are primary headings in the hierarchical menu, subheadings or linked documents. in the course knowledge base all of the links are prefixed by http// ,even local documents, so they carry an anchor tag of 1. 46 journal for economic educators, 11(2), fall 2011 46 undergraduate research salary caps and competitive balance in professional sports leagues evan s. totty 1 and mark f. owens 2 abstract this paper examines the effects of salary caps on competitive balance in professional sports leagues in the united states. we find no evidence to suggest that salary caps improve competitive balance, as measured by the variation in wins between the best and worst teams in a league in a given year, in any of the major sports leagues. further, depending on the measure of competitive balance, it appears that salary caps decreased competitive balance in the nba, which has specific components that differ from those of the nhl and nfl. the results also suggest that revenue sharing arrangements promote competitive balance in a manner that is consistent with economic theory. key words: salary caps, competitive balance, free agency, standard deviation, herfindahlhirschman index jel classification: d63, l83 introduction sports leagues have become large revenue generators over the last several decades. player salaries, as well as the profits that teams and leagues generate, have increased considerably. as the value of sports leagues and franchises has increased, their connections to local economies have strengthened and the performance of the local team has become an important economic force in the community as well as a source of pride for fans. as such, policies that affect the competitiveness of teams within a league are an important topic of study. one topic that has received considerable attention is the impact of policies that limit player salaries. player salaries represent the largest component of operating cost to team owners and salary caps place a limit on the amount of money that an individual team can spend on player salaries. salary caps have been introduced over the last three decades in three of the four major sports leagues in the united states: the national basketball association (nba), the national hockey league (nhl), and the national football league (nfl). major league baseball is the only major sports league in the united states that does not have a salary cap. salary caps are a unique area of study for several reasons. the specific rules and enforcement of the salary cap are predetermined each season based on a set of criteria established in each league’s collective bargaining agreement between the owners and the players 1 department of economics & finance, middle tennessee state university, mtsu box 27, murfreesboro, tn 37132 2 assistant professor of economics, department of economics & finance, middle tennessee state university, mtsu box 27, murfreesboro, tn 37132 47 journal for economic educators, 11(2), fall 2011 47 union. collective bargaining dictates that the details of these arrangements, which are largely exempt from antitrust laws, become well known. thus, the details of the arrangements are fairly transparent. at present, the nfl and nba are both in the process of renegotiating their collective bargaining agreements to determine the salary caps going forward. moreover, the final outcomes for professional leagues over time can be easily measured in wins and losses. contrary to most of the popular arguments for salary caps, which rest on the assumption of improved competitive balance, there are strong economic arguments to suggest that competitive balance may be completely unaffected by a salary cap, if owners are profit maximizers. we find no evidence in our data to suggest that salary caps have helped competitive balance, measured as the variation in wins between the best and worst teams in a league in a given year, in professional sports. further, there is some indication that the introduction of the salary cap in the nba is associated with a significant decrease in competitive balance. this derives from specific components of the nba salary cap which differ from those of the nfl and nhl. we also find that revenue sharing and free agency may be better able to address the fundamental disparities between teams which lead to competitive imbalance. unlike salary caps, these policies appear to increase competitive balance significantly in our data across all specifications. background salary caps have been introduced over the last three decades in the nba, nfl and the nhl. the nba became the first professional sports league in the united states to implement a salary cap system prior to the 1984-1985 season. the nfl installed a cap system prior to the 1994 season and the nhl began using a salary cap in the 2005-2006 season. the structure of each league’s salary cap system is unique. the systems vary in terms of the monetary limit of the salary cap, how this limit is determined, what components of player pay count against the salary cap, and what, if any, exemptions exist to allow teams to spend over the salary cap. 3 the nhl and nfl each employ a “hard cap” that teams are required to stay under at all times. teams that violate the cap are subject to fines, cancellation of contracts, and/or loss of draft picks. past studies have shown that, even in the nfl, average league payrolls are commonly above the salary cap and large-market owners violate the salary cap both frequently and by large margins (fort & quirk, 1995). the nba, on the other hand, employs a “soft cap” with exemptions that allows teams to spend above the salary cap when they qualify for the exemption. one such exemption is known as the larry bird exception, which provides an advantage in salary bargaining to a team with rights to a particular player, by permitting them to exceed the cap for that player. another example is the mid-level exception. this allows teams that are over the salary cap to sign a player for the average league salary once per season. 4 these characteristics of the nba’s soft cap provide teams with advantages that are not present under a hard cap. consequently, this form of cap may do more to harm competitive balance by making the top talent less mobile. 3 for example, most leagues allow a team to pay a signing bonus which is pro-rated over the life of the contract for salary cap purposes. 4 additionally, there are characteristics inherent to the game of basketball that hinder competitive balance. in the nba each player has a larger effect on their team’s outcome than in other sports since only five players are on the court at one time. berri et al. (2005) conclude that the “short of supply of tall people” causes a competitive imbalance in the nba between teams with highly skilled post players and teams without highly skilled post players. 48 journal for economic educators, 11(2), fall 2011 48 there are two supposed benefits associated with salary caps. the first obvious benefit of salary caps is that they reduce costs for owners. owners desire salary caps because minimizing salaries and reducing competition for talent allows for higher profits (sanderson & siegfried, 2003). by imposing a salary cap as an enforcement mechanism that limits what a team can spend on player salaries, team owners effectively minimize salary competition for talent and protect themselves against salary inflation on a league-wide basis. history shows that professional sports leagues introduced salary caps for the purpose of reducing costs for owners. after the nba’s reserve clause was replaced with free agency in 1976, many clubs were not doing well financially because of difficulty in adjusting to higher player salaries that were bid up during free agency. owners wanted financial relief in the form of a salary cap (staudohar, 1998). in their public stance, however, leagues do not emphasize the cost cutting features of salary caps. instead, they often promote salary caps as a way to improve competitive balance, and fans often assume this to be the case (sanderson & siegfried, 2003). team owners publicly claim that salary caps are in place so that each team can be competitive regardless of the characteristics of their home market. owners contend that salary caps prevent richer, largemarket teams from increasing their payrolls to levels that would allow them to accumulate talent far superior to that of small market teams. lower revenue teams could not be profitable with the same payroll as high revenue teams. since a salary cap creates an environment where all teams spend a similar amount on talent, the owners claim, the distribution of talent is similar across teams and this similarity in talent enhances competitive balance (endo et al., 2003). economic theory casts serious doubt on the relationship between salary caps and competitive balance. the seminal work by rottenberg (1956) claims that the distribution of talent across teams within a league will depend only on revenue differences, invariant to other factors. some other factors could include the structure of contracts and whether players or owners have the right to choose where a player will play. rottenberg’s invariance principle is similar to (and actually predates) the well known coase theorem, which hypothesizes more generally that an asset will be put to use by the person or firm that values it the most, independent of the allocation of property rights (coase, 1960). thus, private bargaining will lead to efficient allocation of resources so long as transaction costs are low. according to the coase theorem, as well as rottenberg’s invariance principle, salary caps should not affect competitive balance, if owners are profit maximizers, because the same mechanisms with regard to revenue are present for the team with or without the cap. whether or not a salary cap is in place, teams still generate differing amounts of revenue from individual players, and players will have different levels of outside income available to them due to variation in market size and team characteristics. the salary cap does not fundamentally change these factors. one could argue that every owner would want to maximize wins and not profits if budget constraints were not an issue. in reality, most owners operate as win-maximizers as long as their budget constraints dictate that it is profitable to do so. maximizing wins requires talent, however, and acquiring talent costs money. certain markets simply do not provide enough revenue for an owner to earn profits while taking on the costs of a win-maximizing strategy. the implication is that profits become a binding constraint for the majority of owners. thus, a player will ultimately move to his highest valued use even under a salary cap. the team that places the highest value on a player will still be willing to pay more to acquire that player. economic theory suggests that policies that have a direct impact on equalizing team revenues should have more influence on competitive balance, because they address the 49 journal for economic educators, 11(2), fall 2011 49 fundamental force that dictates the movement of talent. revenue sharing policies within a league are one clear means to address disparities in revenue. free agency is another example which removes limits on the teams a player can join. while it is often assumed that allocating talent to the highest bidder may widen the distribution of talent among teams in a league, free agency also reduces transactions costs that may interfere with efficient coase bargaining. empirical literature prior studies by larsen et al. (2006), endo et al. (2003), késenne (2000), dietl et al. (2009), and vrooman (2009) have looked at salary caps and competitive balance empirically and theoretically. larsen et al. (2006) takes an approach most similar to ours. they use changes in the herfindahl-hirschman index (hhi) (dhhi) and standard deviation measurements to study the effect that various league characteristics have on competitive balance in the nfl using data from the 1970 to 2002 seasons. they find that free agency and salary caps tend to promote competitive balance, although their model using standard deviations found that salary caps have not had a statistically significant effect on competitive balance. endo et al. (2003) use the gini index to measure the distribution of wins in the nba before and after the implementation of the nba’s salary cap using data from the 1974-75 to 2001-02 seasons. noting that conventional wisdom holds that a salary cap improves competitive balance, and that the coefficient for the salary cap should therefore be less than zero, they find that the gini coefficient actually increased in the salary cap era, although the increase is not statistically significant. késenne (2000), dietl et al. (2009), and vrooman (2009) all use a theoretical approach to study the impact of salary caps on competitive balance. the general consensus among these theoretical studies is that salary caps should improve competitive balance. vrooman (2009) notes that revenue sharing also should improve competitive with or without a salary cap. an abundance of research has been conducted on the measurement and analysis of competitive balance in sports. rottenberg (1956) originally measured competitive balance by counting the number of championship that each mlb team had won from 1920 to 1951. the approach of measuring the actual standard deviation of winning percentages in a league and comparing it to the ideal standard deviation was first introduced by noll (1988) and used by scully (1989) and quirk and fort (1992) to measure the effect of the removal of the reserve clause in major league baseball. fort and quirk (1995) use gini coefficients to study the impact of free agency on competitive balance across sports leagues, while schmidt (2001) and schmidt and berri (2001) also used gini coefficients to study the impact of expansion on competitive balance in major league baseball. depken (1999) measured competitive balance using the herfindahl-hirschman index (hhi). he claims that this method is a more appropriate way to measure the effects of free agency, because it can control for other exogenous factors, such as talent distribution and the expansion of new teams. owen et al. (2007), however, note that there are biases in using the hhi method over time. the modified version of depken’s (1999) framework used by larsen et al (2006) serves as the second method for measuring competitive balance used in this study. humphries (2002) introduced another way of measuring competitive balance called the competitive balance ratio (cbr). the cbr is a team’s standard deviation of winning percentages over a number of seasons, divided by the league average standard deviation of winning percentages over the same time period. the ratio will range from 0 to 1, with 1 representing perfect competitive balance. as larsen et al. (2006) explain, this method works best 50 journal for economic educators, 11(2), fall 2011 50 for leagues where the standard deviation of winning percentages has remained relatively constant over time. this is not the case for the leagues analyzed in this study, particularly for the nfl which has seen a steady decline in the standard deviation of winning percentages over time. methodology we collect data on several aspects of competition from each league over time. the data from the nba cover the 1978-79 season through the 2009-2010 season. the nfl data are for the 1978-79 season through the 2009-2010 season, while nhl data span 1979-80 through 200910. competitive balance in our analysis is the variation in wins between the best and worst teams in a league in a given year. when the variation is large a league is unbalanced and when it is small it is balanced. this notion of competitive balance is likely to be the most relevant from the perspective of the league because more of the games (especially late in the season) are important for the final standings in a balanced league. the fans of low performing teams may think of competitive balance in terms of the likelihood that different teams will move up and down the standings over time. in any case, analyzing these sorts of effects over time complicates the isolation of the impact of salary caps with a clear time component. consequently, we construct two measures of competitive balance from historical data. the first method of measuring competitive balance is performed by taking the standard deviation of winning percentages for each team in a given year. this actual level of competitive balance is then divided by the ideal level of competitive balance, which is equal to one-half divided by the square root of the number of games played in a season. this type of measurement has been used in past research on competitive balance (scully, 1989; quirk and fort, 1992; butler, 1995; schmidt and berri, 2002; and zimbalist, 2002). the second method for measuring competitive balance is to take the deviation of the hhi from the ideal distribution of wins (dhhi). this is done by subtracting 1/n, where n is the number of teams in the league, from the hhi of wins for each team in a league for a given season. this method for measuring competitive balance has been used by depken (1999) and larsen et al. (2006). we construct these two measures of competitive balance and then perform linear panel regressions of the following form: sdit/dhhiit = α0 + β1 salary capit + β2 salary floorit,+ β3 revenue sharingit, + β4 free agencyit, + βm zit +µi + εit where i is the league index corresponding to the nba, nhl, and nfl, and t is an index for the year of the observations. zit is a vector of controls, µi is a league specific error term and εit is the residual. the impact of salary caps on competitive balance is the main target of this study. the salary cap variable is a dummy variable that takes a value equal to 1 for seasons in which the league has a salary cap and 0 for the seasons that a league does not have a salary cap. if salary caps improve competitive balance the sign for the coefficient on salary cap, β1, should be negative. in another specification, we consider the effect of the salary cap within each league separately by including a dummy variable for each league. we also include measures for several other factors that may impact competitive balance. dummy variables are included for salary floor, revenue sharing, and free agency. each of 51 journal for economic educators, 11(2), fall 2011 51 these is a dummy variable that takes a value of 1 for seasons in which the league has the policy in place and 0 for the seasons that a league does not have the policy. in each case the sign of the coefficient will be negative if the variable improves competitive balance. the presence of a salary floor may impact competitive balance, as a league with only a salary cap can still have a large gap between the highest spending teams and lowest spending teams. all three of the american professional sports leagues discussed here that use salary caps also currently have salary floors, but these floors have only recently been adopted. revenue sharing is a variable of interest because the concept of sharing revenue among teams could have a large impact on competitive balance as revenue disparities are the cause for variances in player talent across teams (rottenberg, 1956). free agency may affect competitive balance by altering the distribution of talent, since free agents (individual players) have the right to voluntarily change teams. 5 the vector of zit variables includes controls for changing league characteristics as well as player talent. our league characteristics include league expansion, strike shortened seasons, playoff spots, new stadiums, and team relocation. expansion is included because each of the professional sports leagues in this study has seen the addition of several teams over the last few decades. when an expansion team is added, it receives its players from an expansion draft. in an expansion draft, the new team selects players off of each existing team’s roster. league expansion creates an issue with hhi measurements; an increase in teams can cause winning to seem more dispersed, even if actual competitive balance has not changed. using dhhi measurements as the dependent variables eliminates this downward bias of hhi measurements when leagues expand. depken (1999) notes, however, that expansion should still be included as an independent variable. strike dummy variables are included with the variable taking a value equal 1 if the observation is from a strike shortened season and 0 otherwise. the playoff spots variable is defined as the change in the number of playoff spots in one season from the last. the intuition behind this variable is that increasing the number of playoff spots could affect competitive balance by keeping a few teams in playoff contention longer, potentially affecting both player effort and the trading away of top players after a team has been eliminated from playoff contention in order to cut payroll. the new stadiums variable is the number of new stadiums or arenas that have been built in the last five seasons. the potential impact of new stadiums on competitive balance is that new stadiums often bring in more revenue through increased ticket sales and additional luxury suites. this revenue could be used to bring in more talent. relocation is the sum of all relocations in the past five seasons. by relocating to a new city, a team could benefit from increased market size and/or increased revenue from ticket sales. a boost to team morale is another potential factor if the team is now playing in front of much larger crowds. we also include the variables points for and points against to account for distribution of player talent across a league. in keeping with depken (1999) and larsen et. al. (2006), we quantify player talent by measuring points/goals/runs scored and points/goals/runs allowed. in the dhhi model, the variables for points for and points against are defined as the hhi of points for and points against for each team in a given season. in the sd model, the points for and 5 larsen et al. (2006) combine the dummy variables scap and free agency into one variable. the reason for this is that in the nfl the salary cap and free agency came into existence in the same season. our study includes the nba and nhl, which installed salary caps and free agency in separate seasons. 52 journal for economic educators, 11(2), fall 2011 52 points against variables are defined as the standard deviation of points for and points against for each team in a given season. there are of course a number of other variables such as injuries, management, and coaching which may influence competitive balance. to the extent that these are invariant to the presence of a salary cap, their effects are captured in the error term. results we report regression results in table 1 for two measures of competitive balance in professional sports leagues. columns 1 and 2 present results for regressions using standard deviations of winning percentages as the dependent variable and columns 3 and 4 display results using dhhi calculations as the dependent variable. the two formulations produce somewhat different results, leading to different conclusions about the relationship between salary caps and competitive balance. in the specification using standard deviations of winning percents to measure competitive balance, the coefficient for the salary cap in column 1 is positive and statistically significant at the 1% level. since higher standard deviations imply greater disparity in wins and losses, this result suggests that competitive balance has actually decreased as a result of the introduction of salary caps. column 2 separates the effect by league and finds this to be driven by the nba, which is positive and significant at the 1% level. this is consistent with the fact that the nba employs a soft cap and has rules that also allow the team which currently holds a player’s rights to sign that player for a salary that exceeds the cap. in addition to the effect of the salary cap, the influence of salary floors is also positive and statistically significant at the 5% level in both regressions with standard deviations as the outcome. this implies that floors hurt competitive balance as well. revenue sharing appears to be the most beneficial policy to competitive balance as the coefficient on revenue sharing is negative and significant at the 1% level in both columns. free agency has a negative and significant coefficient in column 1, at the 10% level, but the same coefficient is not significant in column 2. none of the controls for strike shortened seasons, playoff spots, new stadiums, expansions, and relocations are statistically significant at conventional levels. controls for player talent indicate that standard deviations for points for are not statistically significant, but points against is significant at the 1% level in column 1 and the 5% level in column 2. using the dhhi measure of competitive balance leads to slightly different conclusions. the sign of the salary cap coefficient in column 3 is again positive, but small in magnitude and not statistically significant. this result suggests that salary caps have no significant impact on competitive balance. column 4 separates the effect by league and indicates a positive and significant effect at the 1% level on the hhi for salary caps in the nhl. again, a positive coefficient indicates a decrease in competitive balance. the coefficient for the salary floor is negative and statistically significant in column 4, suggesting an improvement in competitive balance, but this cancels with the positive impact of the salary cap for the nhl. using the dhhi measures, revenue sharing again appears to generate a statistically significant improvement in competitive balance as this coefficient is negative and significant at the 1% level in column 3 and the 5% level in column 4. the coefficient on free agency is negative and significant at the 5% level in columns 3 and 4. 53 journal for economic educators, 11(2), fall 2011 53 table 1: regression results standard deviation hhi explanatory variables together by league together by league salary cap 0.469*** (0.127) -0.0002 (.0004) - cap nfl -0.096 (0.131) --0.0002 (0.0004) cap nba -0.801*** (0.127) -0.0003 (0.0003) cap nhl -0.174 (0.207) -0.0027*** (0.0007) salary floor 0.259** (0.124) 0.246** (0.124) -0.0006 (0.0004) -0.0016*** (0.0004) revenue sharing -0.807*** (0.088) -0.595*** (0.086) -0.0010*** (0.0003) -0.0007** (0.0003) free agency -0.224* (0.124) -0.153 (0.109) -0.0011** (0.0004) -0.0009** (0.0004) expansion -0.004 (0.100) 0.029 (0.087) -0.0003 (0.0003) -0.0002 (0.0003) points for -0.015 (0.079) -0.062 (0.071) 1.1448*** (0.4006) 0.5266 (0.3991) points against 0.234*** (0.078) 0.182** (0.071) -1.2694*** (0.3950) -0.6939* (0.3909) strike nfl 0.185 (0.242) 0.157 (0.211) -0.0003 (0.0008) -0.0001 (0.0007) strike nba 0.525 (0.337) 0.300 (0.296) -0.0001 (0.0011) -0.0003 (0.0011) strike nhl -0.257 (0.340) -0.116 (0.296) -0.0010 (.0011) -0.0008 (0.0011) playoff spots -0.110 (0.098) -0.044 (0.086) 0.0001 (0.0003) 0.0001 (0.0003) new stadiums 0.015 (0.014) 0.011 (0.012) 0.0001 (.0001) -0.0001 (0.0001) relocations -0.022 (0.033) 0.002 (0.030) 0.0001 (.0001) 0.0001 (0.0001) r-squared 0.7628 0.8262 0.4964 0.5880 observations 94 94 94 94 notes: standard errors are in parentheses. *, **, and *** indicate statistical significance at the ten, five, and one percent levels, respectively. as with the standard deviation measures, none of the controls for strike shortened seasons, playoff spots, new stadiums, expansions, and relocations are statistically significant at conventional levels. controls for player talent indicate that standard deviations for points for are 54 journal for economic educators, 11(2), fall 2011 54 not statistically significant, but points against is significant at the 1% level in column 1 and the 5% level in column 2. these findings are different from larsen, et al. (2006) who found that the introduction of the salary cap in the nfl was associated with an increase in league-wide competitive balance using the dhhi measure and no effect on competitive balance when using the standard deviation method. we prefer the standard deviation measure for wins because owen et al. (2007) indicate some biases in the hhi approach over time. we are reassured in this by the better fit of the regressions in columns 1 and 2 compared to those in columns 3 and 4. in either case, we find no evidence that salary caps improve competitive balance and consistent evidence that revenue sharing does improve competitive balance. this is consistent with economic theory which suggests that talent will move to the location for which it generates the greatest revenue. this movement is independent of the salary cap, but does depend on the nature of revenue sharing in the league. thus, revenue sharing plans are more effective at addressing the primary cause for the disparities in competition across teams, the disparities in revenue generation across teams. summary and conclusions this research seeks to uncover whether salary caps improve competitive balance in professional sports leagues, as team owners claim and many fans seem to believe. we utilize two different measures for competitive balance across the three major professional sports leagues in the united states that have salary caps. we find no evidence to suggest that salary caps have improved competitive balance in a statistically significant manner. in fact, using standard deviations of winning percentages as a measure for competitive balance, we find evidence that salary caps are associated with a statistically significant decrease in competitive balance across leagues. this negative influence is most evident in the nba, likely as a result of exemptions that limit player movement by allowing teams to spend over the salary cap. the finding that salary caps do not improve competitive balance may go against fans’ perceptions and owners’ claims. if owners are profit-maximizers, however, these findings are entirely consistent with the coase theorem and the rottenberg invariance principle. both of these posit that talent will go to the location for which it can raise the most revenue. if a player is worth more to a particular team, that team will be willing to pay a higher salary to that player, or offer more in a trade for that player. these differences in value are determined by the amount of revenue that a player can generate, not by the amount that a team can pay for that player. teams that are located in large markets have the ability to generate more revenue from signing a star player than do those in smaller markets, because large-market teams have more potential fans, more potential merchandise sales, and more local and national media coverage. varying ability to generate revenue is the root cause of competitive imbalance and a salary cap does not change this. by contrast, revenue sharing between teams within a league addresses competitive balance by attempting to minimize differences in revenue. in our analysis, the coefficient on revenue sharing is the only coefficient on a league policy that shows a statistically significant improvement for competitive balance across all specifications. in addition, revenue sharing by the league does not necessarily restrict the amount of money that is distributed in the form of player salaries as does a salary cap. our analysis reveals that salary caps in their current forms have not clearly improved competitive balance. it is another issue entirely as to whether the observed salary cap structure is 55 journal for economic educators, 11(2), fall 2011 55 best suited for promoting competitive balance. one could argue that the salary caps that we see in american professional team sports are neither properly designed, nor properly enforced. nonetheless, we contend that even if salary caps were designed and enforced more effectively, the effect of salary caps on competitive balance would likely still be minimal. the main source of competitive imbalance in professional sports leagues is rooted in the revenue disparities among teams, which a salary cap does not change. references berri, d., s. brook, b. frick, a. fenn, and r. vicente-mayoral. 2005. “the short supply of tall people: competitive imbalance and the national basketball association.” journal of economic issues, 39(4): 1029-1044. butler, m. 1995. “competitive balance in major league baseball.” american economist, 39: 46-52. coase, r. 1960. “the problem of social cost.” journal of law and economics, 3: 1-44. depken, c. 1999. “free-agency and the competitiveness of major league baseball.” review of industrial organization, 14(3): 205-217. dietl, h., m. lang, and a. rathke. 2009. “the effect of salary caps in professional team sports on social welfare.” journal of economic analysis and policy, 9(1). endo, m., k. florio, j. gerber, and p. sommers. 2003. “does a salary cap improve competitive balance?” atlantic economic journal, 388. fort, r., and j. quirk. 1995. “cross-subsidization, incentives, and outcomes in professional team sports leagues.” journal of economic literature, 33(3): 1265-1299. humphreys, b. 2002. “alternative measures of 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applied economic letters, 8(1): 21-26. schmidt, m. and d. berri. 2001. “competitive balance and attendance: the case of major league baseball.” journal of sports economics, 2: 145-167. schmidt, m. and d. berri. 2002. “competitive balance and market size in major league baseball: a response to baseball’s blue ribbon panel.” review of industrial organization, 21: 42-54. scully, g. 1989. the business of major league baseball. chicago: university of chicago press. 56 journal for economic educators, 11(2), fall 2011 56 staudohar, p. 1998. “salary caps in professional team sports.” bureau of labor statistics: compensation and working conditions. rottenberg, s. 1956. “the baseball players' labor market.” journal of political economy, 64: 242-258. vrooman, j. 2009. “theory of the perfect game: competitive balance in monopoly sports leagues.” review of industrial organization, 34(1): 5-44. zimbalist, a. 2002. “competitive balance in sports: an introduction.” journal of sports economics, 3: 111-121. zimbalist, a. 2010. “reflections on salary shares and salary caps.” journal of sports economics, 11(1): 17-28. middle tennessee values middle tennessee values james m. buchanan* i have often been asked how my middle tennessee heritage has affected my way of looking at the world, my weltanshauung, my vision of the inclusive social-economic-political order. adam smith, the patron saint of economics, once said that the task of the philosopher is to observe everything and to do nothing, while nietzsche, the great german skeptic, warned us that the world looks different from different windows. is there something about a "middle tennessee window" on the world that is distinctive enough to warrant attention? i answer this question affirmatively by historical reference. andrew jackson was a middle tennessean who made his mark on history by opening up american democracy. my grandfather john p. buchanan, a rutherford county farmer, was one of six populist state governors elected in 1891 in protest against the dominance of the eastern establishment. cordell hull, also a middle tennessean, whom i heard speak on the courthouse square here in murfreesboro, was an ardent free trader, who was perhaps more responsible than anyone else for breaking up the protectionist coalition that had caused such damage by the smoot-hawley tariffs. he did so by initiating the roosevelt reciprocal trade agreements, which set off a sixty-year period of trade liberalization. i summarize these positions by four words--open markets, open politics. let me say such advocacy exhibits a basic self-confidence in two distinct aspects. to support open markets, it is necessary to believe that we can produce valued goods and services as efficiently as anyone else. in saying this, we are expressing a willingness to work as diligently as anyone else. a strong work ethic goes along with economic self-confidence. advocacy of open politics, by comparison, expresses self-confidence of quite a different sort. such advocacy implies a categorical rejection of any belief that some persons, some outsiders, are better judges of our own well being then we are. an open politics makes no distinction between the ivy leagues and the bush leagues when it comes to telling us what we want our government to do. the people, yes, but * dr. buchanan is the advisory general director, center for study of public choice, george mason university, fairfax, virginia. in 1986, he was awarded the nobel memorial prize in economic science. these remarks were presented at the spring 2000 commencement at middle tennessee state university. 49 all the people, treated as equals, and not some more equal than others. along with this attitude, there is an abiding mistrust in allowing others, no matter whom, to control too many elements of our lives. these are surely some middle tennessee values that are worth stressing at this start of the new century. but how do these values square with the economics and the politics that are observed? what, precisely, do we see? we see the rhetoric of free trade and open markets used as a screen or mask for protectionism that is slipped in under environmental and labor standards rubrics. we see the united states abandoning its decades-long role as leader in opening world markets; we see the cordell hull legacy eroded through strained application of anti-dumping rules. this drift of policy away from open markets should be particularly disturbing to middle tennesseans, who hail from a region that has differentially benefited from economic globalization. imagine how cordell hull would feel today when he sees his own party switch from free trade to protectionism. in politics, we see an upcoming electoral choice between two putative leaders-one, the scion of an eastern establishment family who, as some wag has said, has no last name to call his own, and, two, a career politician who has literally never been weaned from taxpayers' titty, and who participated in the most morally corrupt of all administrations in our history. if andrew jackson could return, he would stand aghast at the emergence of the quasi-permanent political class in washington, whose members feed on the rents offered up by those interests who demand differentially favorable legislation. john mccain's iron triangle remains alive and well. if you do not think so, drive the washington beltway. and both andrew jackson and cordell hull would have found almost inconceivable the range and extent of politicized intrusions into the everyday lives of all of us. surely these times dictate our need for a new andrew jackson to wipe out the crud, and to open, once again, our politics to the people, and a new cordell hull, who does really understand free trade, without qualifying disclaimers, yet the middle tennessee values endure, even as they are disregarded by so many. i trust that you may, as you leave this great institution, carry with you at least a modicum of these values in your own way, and that you will, when, as, and if the occasion warrants, oppose those who would try to close off your opportunities in ideas, in markets, and in politics. 50 1 |journal for economic educators, 20 (1), 2020 locke versus hobbes: political economy of property rights jennis j. biser1 abstract secure property rights and the rule of law are crucial for economic growth, a topic included in every economics principles textbook and many upper division elective courses. scotus decisions regarding property rights provide useful material for discussing these issues. seventeenth century political philosophers thomas hobbes and john locke offered very different views of the role of the state and the rights of man. while also of historical interest, this framework sets the stage for debate regarding the proper role of the state, the judiciary, philosophical influences that determine judicial decisions and the implications for takings under the fifth amendment. this article provides a detailed outline of their views with a focus on their treatment of individual liberty and property rights. to facilitate instructor preparation for classroom discussion, extensive references to the original texts are included. key words: property rights; natural law; political economy; eminent domain; kelo jel classification: b12; h13; k11; p14; p16 introduction2 economists and policymakers widely agree that property rights and adherence to the rule of law are crucial for economic growth.3 without well-defined property rights, secured by an unbiased judicial system, investors and entrepreneurs are hesitant to make the investments necessary that ultimately raise the standard of living. private ownership of property and confidence that the courts will enforce contracts in an impartial manner provide a level of assurance for property owners so that they are willing to incur the risk involved in putting their property or financial capital to productive use, thereby creating value for others and, potentially, a profit for themselves. most economics principles textbooks include a chapter on economic growth.4 private property rights, competitive markets, impartial enforcement of contracts, limited government 1 associate professor of economics, department of accounting, finance and economics, austin peay state university, 601 college st., clarksville, tn 37044. 2 for a more general introduction to locke and hobbes, see rowley 1998b and rowley 1998a. 3 numerous authors have added to the research in this area. for a sample of this literature, see: acemoglu and johnson (2005), acemoglu, johnson and robinson (2005); north (1991); mcmillan, whalley and shu (1989); besley and ghatak (2009); barzel (1989); cooter and schafer (2012); o’driscoll and hoskins (2003); and lo and tian (2002). 4 i usually assign holcomb (1998) to students as it provides a good summary of ideas in this area and economic freedom, an index ranking countries that includes many components considered important for economic growth. 2 |journal for economic educators, 20 (1), 2020 regulation, low levels of corruption, low tax rates, stable currency and financial markets are usually among the listed guidelines for achieving prosperity and growth in per capita real gdp.5 private property rights have been key to economic growth in the united states. the founding fathers included the takings clause, “nor shall private property be taken for public use without just compensation,” of the fifth amendment to the u.s. constitution to protect property rights while carving out a limited exception to facilitate necessary government projects. historically, eminent domain was understood to be the power of the government to force property owners to sell their home, business or other property to the government for some public use such as the construction of a railroad, highway or other large project. today, the power of eminent domain enables government officials to take property from one private owner and transfer it to another private owner under an increasingly wide interpretation of “public use,” including increased tax revenues to the government. regulatory takings involve government regulations that restrict or prohibit use of private property, often without compensation. decisions by the supreme court of the united states (scotus) have shaped property rights in the united states. kelo v. city of new london (2005),6 a landmark case in which these arguments came before the scotus, got a lot of attention in the media and set off a public debate regarding property rights in the united states. the city of new london, connecticut condemned an entire neighborhood, including the home of suzette kelo as part of an economic development plan to revitalize the ailing local economy with the intent of then transferring the property to pfizer pharmaceuticals. mrs. kelo, represented by the institute for justice, challenged the condemnation on the basis that the taking was not for public use.7 the majority opinion in kelo, in favor of the city of new london, represented a dramatic reinterpretation of the fifth amendment. the majority opinion by justice stevens, noting the record of deference to legislative decisions, expanded the interpretation of “public use” language dramatically to include “public purpose,” leaving the determination of property rights in the hands of the legislature. in a concurring opinion, kennedy resists this deference to the legislature. the dissenting opinion written by justice o’connor, joined by chief justice rehnquist and justices scalia and thomas, amounted to a harsh rebuke of the majority opinion for deferring to the legislature and warned that all property is at risk of seizure with the weakest among us at greatest risk. she argued that that such deference reduces the public use clause to “little more than hortatory fluff.” because the majority in kelo relied heavily on her prior opinion in midkiff (1984),8 o’conner’s dissent in kelo attempted to correct her own “errant language” in midkiff that contributed to the error of the majority in kelo. she argued that, “the founders cannot have intended this perverse result.” justice thomas also wrote a dissenting opinion, arguing that the 5 several principles textbooks use the nighttime satellite image of the korean peninsula as an illustration of the impact of different policies and institutions. 6 kelo v. city of new london, connecticut, 125 s.ct. 2655 (2005). 7 a film version of the kelo story, “little pink house”, is available on dvd or streaming services. for more information, visit, http://littlepinkhousemovie.com/. 8 hawaii housing authority v. midkiff, 467 u.s. 229, 104 s.ct. 2321 (1984). http://littlepinkhousemovie.com/ 3 |journal for economic educators, 20 (1), 2020 errors are even more severe and calling for a return to the original meaning of the public use clause. given the divided nature of the court as well as the intense media attention and public outrage, many states attempted to bolster protection for property rights. in the years following the kelo decision, at least 45 states enacted reform legislation, with various protections for private property, though many argue that the reforms are insufficient. sandefur and sandefur (2016) outline much of the relevant history and make recommendations for reforms. the fight for property rights was lost for mrs. kelo and her neighbors. in subsequent years, pfizer abandoned the project and to this date, the land remains vacant.9 the kelo case, with the various minority opinions displaying the debate over deference to the legislature, provides an interesting backdrop for the discussion of property rights, the role of government and the judiciary in the system of checks and balances. as outlined in biser (2017), the writings of john locke and thomas hobbes provide a useful framework for this classroom discussion. these two seventeenth century political philosophers influenced the founding fathers10 and their works set the stage for the united states constitution and the takings clause of the fifth amendment. hobbes and locke approach the topics of natural law and civil society, important in the discussion of property rights and the power of government over private property, in very distinct ways. from their respective starting points, they derived vastly different approaches to the treatment of property rights and individual liberty, ultimately leading to dramatically different conclusions regarding the proper role of the state. locke’s definition of property is vastly broader than the modern notion commonly used, enabling discussion of a wide variety of topics. while we generally think of real estate or perhaps personal items as property, this narrow interpretation was not the manner in which locke used the term. by property, he envisaged all the natural rights of an individual.11 consistent with locke’s broad definition of property, this analysis applies to topics beyond physical taking of real property, including asset forfeiture, adverse possession, regulatory takings, etc. although often overshadowed by the broader context, the dispute over property rights serves to demonstrate the differing notions regarding the very basis of civil society and the proper role of government. this analysis of the tension between hobbes and locke will shed light on important 9 a short video provided by the institute for justice, the law firm representing suzette kelo, outlining the story and some of the media coverage is a very effective way to introduce the kelo story to students in the classroom and is available at https://ij.org/case/kelo/. that website also provides numerous court documents, press releases and other items of interest related to the case that would also be of use in understanding the background of the case. 10 subsequently developed views on property rights, such as those by henry george or karl marx would also merit classroom discussion. for an introduction to george, see hooper (2017). kiandantzis (2007) briefly summarizes the ideas of marx. these articles are brief and useful as student reading assignments to inform the discussion without diverting too much from the main task. 11 “lives, liberties and estates, which i call by the general name property.” (locke 1690, para. 123). https://ij.org/case/kelo/ 4 |journal for economic educators, 20 (1), 2020 issues concerning the role of the judiciary and be of interest in debates regarding the court, institutions, economic growth and numerous other areas of research. this hobbes versus locke framework is particularly useful in the analysis of property rights in the context of court battles over eminent domain abuse.12 judges and justices ascribing to the lockean vision of rights and the role of government would be more likely to decide in favor of property owners while those who lean toward the hobbesian notion of an all-powerful sovereign would be more willing to allow government intrusion into property rights for physical and regulatory takings. the distinctive viewpoints provide a framework for debate;13 however, the original texts require careful study. this can impede debate, particularly in a classroom setting where time is limited. this article provides a detailed outline of the conflicting views of hobbes and locke regarding the state of nature14 and the role of government with particular attention to their treatment of property rights.15 extensive references to the original texts provide the precise language used by locke and hobbes to facilitate the debate. thomas hobbes the writings of hobbes focus on the spectrum between anarchy and order, with attention to the break between the state of nature and civil society. the ideal he seeks is order in pursuit of peace with individual liberty sacrificed to this goal. the move out of the state of nature through the formation of civil society is necessary in the search for order.16 in the hobbesian state of nature, equality of individuals17 and a scarcity of commodities lead to a permanent state of mutual distrust18 where each person has a right to all things provided by nature and may seize all that he can take, or at least as much as he finds useful.19 these 12 see biser (2017) for suggested cases and additional topics for discussion. 13 see biser (2017). 14 simmons (1992) and waldron (1988), each address an additional element of the intellectual debate surrounding locke’s treatment of rights, arguing that many rights derive from a normatively prior duty to obey god’s commands. 15 a substantial literature exists debating the ideas of locke and hobbes, individually and in relation to each other. this article merely attempts to summarize the stark differences between these two philosophers, analyzing property and the implications for the role of the state. 16 bobbio (1993, p29). 17 “nature hath made men so equal in the faculties of body and mind as that, though there be found one man sometimes manifestly stronger in body or of quicker mind than another, yet when all is reckoned together the difference between man and man is not so considerable as that one man can thereupon claim to himself any benefit to which another may not pretend as well as he” (hobbes 1651, xiii p84). 18 “from this equality of ability ariseth equality of hope in the attaining of our ends. and therefore if any two men desire the same thing, which nevertheless they cannot both enjoy, they become enemies; and in the way to their end (which is principally their own conservation, and sometimes their delectation only) endeavour to destroy or subdue one another” (hobbes 1651, xiii p84). 19 “and because the condition of man (as hath been declared in the precedent chapter) is a condition of war of every one against every one, in which case every one is governed by his own 5 |journal for economic educators, 20 (1), 2020 conditions foster fierce competition among individuals with constant threats of violence.20 competition, diffidence and vainglory bring conflict between men21 and give rise to the fundamental problem of power.22 hobbes does not view man in the state of nature in high regard.23 these individuals are driven by their passions, especially for glory24. they become embroiled in competition and hostile to each other.25 man’s pursuit of unconstrained self-interest diverts his attention from productive activities to the predation of others and protection of himself. these conditions leave mankind constantly teetering on the brink of violence with each prepared to bring war against all others.26 brutal conflict is inevitable as each seeks to gain and exert power over the others.27 this desire for power leads to a state of war.28 where civil society exists, this war shreds the tenuous bonds among men and society spirals into anarchy.29 the state of war exists during violent conflict and in the intermediate periods of peace where all stand in fear of death at the hands of others and abstain from violence only for fear of reprisals.30 reason, and there is nothing he can make use of that may not be a help unto him in preserving his life against his enemies; it followeth that in such a condition every man has a right to every thing, even to one another's body” (hobbes 1651, xiv p86). 20 “these conditions generate “a situation of merciless competition, which always threatens to turn into a violent struggle” (bobbio 1993 p39). 21 “so that in the nature of man, we find three principal causes of quarrel. first, competition; secondly, diffidence; thirdly, glory” (hobbes 1651, xiii p85). 22 “so that in the first place, i put for a general inclination of all mankind a perpetual and restless desire of power after power, that ceaseth only in death” (hobbes 1651, xi p76). 23 “they whom necessity or covetousness keepeth attent on their trades and labour; and they, on the other side, whom superfluity or sloth carrieth after their sensual pleasures (which two sorts of men take up the greatest part of mankind)” (hobbes 1651, xxx p155). 24 “glory, or internal gloriation or triumph of the mind … which proceedeth from the imagination or conception of our own power, above the power of him that contendeth with us” (hobbes 1650, 9 1 p28). 25 see note 4. 26 “in such condition there is no place for industry, because the fruit thereof is uncertain: and consequently no culture of the earth; no navigation, nor use of the commodities that may be imported by sea; no commodious building; no instruments of moving and removing such things as require much force; no knowledge of the face of the earth; no account of time; no arts; no letters; no society; and which is worst of all, continual fear, and danger of violent death; and the life of man, solitary, poor, nasty, brutish, and short” (hobbes 1651, xiii p85). 27 see note 8. 28 “hereby it is manifest that during the time men live without a common power to keep them all in awe, they are in that condition which is called war; and such a war as is of every man against every man” (hobbes 1651, xiii p85). 29 “howsoever, it may be perceived what manner of life there would be, where there were no common power to fear, by the manner of life which men that have formerly lived under a peaceful government use to degenerate into a civil war” (hobbes 1651, xiii p86). 30 “for war consisteth not in battle only, or the act of fighting, but in a tract of time, wherein the will to contend by battle is sufficiently known: and therefore the notion of time is to be considered in the nature of war, as it is in the nature of weather. for as the nature of foul weather lieth not in a shower or two of rain, but in an inclination thereto of many days together: so the 6 |journal for economic educators, 20 (1), 2020 the state of nature is characterized by the absence of an effective government or common power over them capable of maintaining peace. without peace, no rights can be protected nor can any duties be enforced,31 thus the state of nature is one of war of all against all.32 to escape the threat of anarchy, whereby mankind returns to the state of nature, hobbes erects an irresistible power, capable of providing security for man against his fellow man.33 hobbes is not a complete cynic about the characteristics of man. according to his notion of natural law, man is unable to escape the struggle against his fellow man because of the insecurity of his position in the state of nature. men are unable to negotiate around the problem by simply joining together, as the inherent distrust for one another cannot be eliminated.34 man’s capacity to reason allows them to escape this horrifying situation.35 right reason prescribes a set of rules, natural laws, to resolve the dilemma.36 adherence to these natural laws is impossible37 without the fundamental rule of seeking peace.38 nature of war consisteth not in actual fighting, but in the known disposition thereto during all the time there is no assurance to the contrary” (hobbes 1651, xiii p85). 31 “the notions of right and wrong, justice and injustice, have there no place. where there is no common power, there is no law; where no law, no injustice” (hobbes 1651, xiii p86). 32 see note 14. 33 “the only way to erect such a common power, as may be able to defend them from the invasion of foreigners, and the injuries of one another, and thereby to secure them in such sort as that by their own industry and by the fruits of the earth they may nourish themselves and live contentedly, is to confer all their power and strength upon one man, or upon one assembly of men, that may reduce all their wills, by plurality of voices, unto one will: which is as much as to say, to appoint one man, or assembly of men, to bear their person; and every one to own and acknowledge himself to be author of whatsoever he that so beareth their person shall act, or cause to be acted, in those things which concern the common peace and safety; and therein to submit their wills, every one to his will, and their judgements to his judgement” (hobbes 1651, xvii p100). 34 “also because there be some that, taking pleasure in contemplating their own power in the acts of conquest, which they pursue farther than their security requires, if others, that otherwise would be glad to be at ease within modest bounds, should not by invasion increase their power, they would not be able, long time, by standing only on their defence, to subsist” (hobbes 1651, xiii p85). 35 “and reason suggesteth convenient articles of peace upon which men may be drawn to agreement” (hobbes 1651, xiii p86). 36 “and therefore, as long as this natural right of every man to every thing endureth, there can be no security to any man, how strong or wise soever he be, of living out the time which nature ordinarily alloweth men to live. and consequently it is a precept, or general rule of reason: that every man ought to endeavour peace, as far as he has hope of obtaining it; and when he cannot obtain it, that he may seek and use all helps and advantages of war” (hobbes 1651, xiv p86). 37 bobbio (1993, p46). 38 “the first branch of which rule containeth the first and fundamental law of nature, which is: to seek peace and follow it” (hobbes 1651, xiv p86). 7 |journal for economic educators, 20 (1), 2020 men are led to enter into a social contract, which is devised to try to eliminate the insecurities man faces in the state of nature.39 though voluntary, this contract to enter civil society is not enough on its own to achieve the necessary peace, as the problem of distrust is still not solved. upon joining together in civil union, the society must hand over all power to the sovereign, leviathan.40 men consent to prostrate themselves before the sovereign. all rights held by man in the state of nature are laid at the feet of the sovereign who has full authority over all members.41 man must transfer all rights except his right to life to a third party, thereby combining the supreme economic and supreme coercive powers in one.42 by voluntarily subjecting to the irresistible power of leviathan, man is obliged to obey his every command43 so long as leviathan succeeds in fulfilling his obligation to protect the life of the subjects.44 necessarily, the power granted to leviathan cannot be revoked or limited45 and all must obey his every command in the interest and purpose of ensuring peace within civil society.46 civil law, though based on natural law, derives 39 “men agree amongst themselves to submit to some man, or assembly of men, voluntarily, on confidence to be protected by him against all others” (hobbes 1651, xvii p101). 40 “for by this authority, given him by every particular man in the commonwealth, he hath the use of so much power and strength conferred on him that, by terror thereof, he is enabled to form the wills of them all, to peace at home, and mutual aid against their enemies abroad. and in him consisteth the essence of the commonwealth; which, to define it, is: one person, of whose acts a great multitude, by mutual covenants one with another, have made themselves every one the author, to the end he may use the strength and means of them all as he shall think expedient for their peace and common defence” (hobbes 1651, xvii p100). 41 “this is more than consent, or concord; it is a real unity of them all in one and the same person, made by covenant of every man with every man, in such manner as if every man should say to every man: i authorise and give up my right of governing myself to this man, or to this assembly of men, on this condition; that thou give up, thy right to him, and authorise all his actions in like manner” (hobbes 1651, xviii p100). 42 “the power handed over to the supreme authority comprises the supreme economic power (dominium) and the supreme coercive power (imperium)” (rowley 1998b, p520). 43 “a commonwealth is said to be instituted when a multitude of men do agree, and covenant, every one with every one, that to whatsoever man, or assembly of men, shall be given by the major part the right to present the person of them all, that is to say, to be their representative; every one, as well he that voted for it as he that voted against it, shall authorize all the actions and judgements of that man, or assembly of men, in the same manner as if they were his own, to the end to live peaceably amongst themselves, and be protected against other men” (hobbes 1651, xviii p101). 44 see note 25. 45 “his power cannot, without his consent, be transferred to another: he cannot forfeit it: he cannot be accused by any of his subjects of injury: he cannot be punished by them: he is judge of what is necessary for peace, and judge of doctrines: he is sole legislator, and supreme judge of controversies, and of the times and occasions of war and peace: to him it belonged to choose magistrates, counsellors, commanders, and all other officers and ministers; and to determine of rewards and punishments, honour and order” (hobbes 1651, xx p109). 46 see note 25. 8 |journal for economic educators, 20 (1), 2020 its legitimacy from the authority of the sovereign;47 thus, all civil law, as passed from leviathan, is just and man is not permitted to question this authority.48 only when the sovereign lacks the power to prevent a return to the state of nature may man be released from the obligation to obey as he seeks out a new guardian.49 disobedience is justified only where this sovereign fails to protect the life of man.50 although the individuals voluntarily offer themselves to be ruled by this absolute authority to achieve peace, which cannot otherwise be gained, liberty is sacrificed in the search for order.51 the will of the sovereign is law and none can question his authority. there can be no abuse of power by the sovereign.52 the powers held have been granted by each member of civil society.53 this sovereign remains in a state of nature relative to civil society, not entering into any contract with any individual or the group.54 hobbes thus defends the absolute power of the sovereign by highlighting the faults of man, who, left to his own devices, would be in a constant state of warfare.55 to achieve order and escape 47 “the law of nature and the civil law contain each other and are of equal extent. for the laws of nature, which consist in equity, justice, gratitude, and other moral virtues on these depending, in the condition of mere nature (as i have said before in the end of the fifteenth chapter), are not properly laws, but qualities that dispose men to peace and to obedience. when a commonwealth is once settled, then are they actually laws, and not before; as being then the commands of the commonwealth; and therefore also civil laws: for it is the sovereign power that obliges men to obey them” (hobbes 1651, xxvi p131). 48 “because every subject is by this institution author of all the actions and judgements of the sovereign instituted, it follows that whatsoever he doth, it can be no injury to any of his subjects; nor ought he to be by any of them accused of injustice” (hobbes 1651, xviii p102). 49 “for he that wants protection may seek it anywhere; and, when he hath it, is obliged (without fraudulent pretence of having submitted himself out of fear) to protect his protection as long as he is able” (hobbes 1651, xxix p152). 50 “the obligation of subjects to the sovereign is understood to last as long, and no longer, than the power lasteth by which he is able to protect them” (hobbes 1651, xxi p116). 51 see note 19. 52 see note 34. 53 see note 29. 54 “that he which is made sovereign maketh no covenant with his subjects before hand is manifest; because either he must make it with the whole multitude, as one party to the covenant, or he must make a several covenant with every man” (hobbes 1651, xviii p101). 55 “so that it appeareth plainly, to my understanding, both from reason and scripture, that the sovereign power, whether placed in one man, as in monarchy, or in one assembly of men, as in popular and aristocratical commonwealths, is as great as possibly men can be imagined to make it. and though of so unlimited a power, men may fancy many evil consequences, yet the consequences of the want of it, which is perpetual war of every man against his neighbour, are much worse” (hobbes 1651, xx p112). 9 |journal for economic educators, 20 (1), 2020 anarchy, man is willing to relinquish his liberty56 and property.57 nothing less than an absolute ruler will suffice; thus, the minimal state or otherwise limited government is infeasible.58 john locke59 john locke writes on the same topics of the state of nature and civil society, but approaches his work from a different perspective, thus painting an alternate picture of the condition of man and constructing a vastly different vision of the state. locke looks at the spectrum from oppression to freedom, favoring freedom as the reason for man to join together in civil society.60 locke did not share hobbes’ pessimistic view of mankind in the state of nature. all men are born into the state of nature without a common judge with authority over them,61 subject only to the laws of nature.62 peace and harmony in this state of perfect freedom63 is subject to possible invasion and uncertainty in the absence of government with the persistent threat of a hobbesian state of war. fear of aggression and the insecurity of the precarious peace through self-defense will lead men to try to resolve the dilemma through reason. transgressions of the law of nature 56 “but the right of nature, that is, the natural liberty of man, may by the civil law be abridged and restrained: nay, the end of making laws is no other but such restraint, without which there cannot possibly be any peace. and law was brought into the world for nothing else but to limit the natural liberty of particular men in such manner as they might not hurt, but assist one another, and join together against a common enemy” (hobbes 1651, xxvi p131). 57 “the propriety which a subject hath in his lands consisteth in a right to exclude all other subjects from the use of them; and not to exclude their sovereign, be it an assembly or a monarch” (hobbes 1651, xxiv p125). 58 see note 31. 59 tully (1980) is a well-known and much-scrutinized alternative interpretation of locke’s account of natural rights, and specifically, how locke’s views on natural rights relate to his religious account of natural law and the implications for property. 60 bobbio (1993, p29). 61 “men living together according to reason, without a common superior on earth, with authority to judge between them, is properly the state of nature” (locke 1690, para. 19). 62 “the state of nature has a law of nature to govern it, which obliges every one, and reason, which is that law, teaches all mankind, who will but consult it, that being all equal and independent, no one ought to harm another in his life, health, liberty, or possessions; for men being all the workmanship of one omnipotent and infinitely wise maker; all the servants of one sovereign master, sent into the world by his order, and about his business; they are his property, whose workmanship they are, made to last during his, not one another’s pleasure. and, being furnished with like faculties, sharing all in one community of nature, there cannot be supposed any such subordination among us that may authorize us to destroy one another, as if we were made for one another’s uses, as the inferior ranks of creatures are for ours” (locke 1690, para. 6). 63 “to understand political power aright, and derive it from its original, we must consider what estate all men are naturally in, and that is, a state of perfect freedom to order their actions, and dispose of their possessions and persons, as they think fit, within the bounds of the law of nature, without asking leave or depending upon the will of any other man” (locke 1690, para. 4). 10 |journal for economic educators, 20 (1), 2020 thus require an impartial arbiter of justice to settle disputes that would otherwise remain unresolved due to partiality and self-love.64 private contracts are possible within the state of nature; however, their existence does not imply that men have joined into civil society.65 contracts enable individuals to rearrange rights and duties in ways that are mutually beneficial,66 though some rights remain inalienable and thus impossible to transfer.67 man, for example, cannot sell himself into slavery, as the rights to life and liberty are inalienable. the right to property is more accurately described as imprescriptible as man can arrange to sell, destroy or give his property away, but it cannot be legitimately taken from him without consent.68 the state of nature and the state of war are among the nonconsensual relationships among individuals, to be replaced by consent with a political relationship upon the formation of civil society and implementation of government.69 man living in the lockean state of nature, defined based on the relationships between men, is strongly moral,70 living under the laws of nature, of which reason is the basis.71 a sufficient number of individuals of hobbesian temperament abound within society to generate uncertainty 64 “if man in the state of nature be so free, as has been said, if he be absolute lord of his own person and possessions, equal to the greatest and subject to nobody, why will he part with his freedom, this empire, and subject himself to the dominion and control of any other power? to which it is obvious to answer, that though in the state of nature he hath such a right, yet the enjoyment of it is very uncertain and constantly exposed to the invasion of others; for all being kings as much as he, every man his equal, and the greater part no strict observers of equity and justice, the enjoyment of the property he has in this state is very unsafe, very unsecure. this makes him willing to quit a condition, which, however free, is full of fears and continual dangers; and it is not without reason that he seeks out, and is willing to join in society with others, who are already united, or have a mind to unite, for the mutual preservation of their lives, liberties and estates, which i call by the general name property” (locke 1690, para. 123). 65 “for it is not every compact that puts an end to the state of nature between men, but only this one of agreeing together mutually to enter into one community, and make one body politic; other promises and compacts men may make one with another, and yet still be in the state of nature” (locke 1690, para. 14). 66 “the promises and bargains for truck, etc., between the two men in soldania, in or between a swiss and an indian, in the woods of america, are binding to them, though they are perfectly in a state of nature in reference to one another for truth, and keeping of faith belongs to men as men, and not as members of society” (locke 1690, para. 14). 67 “for no body can transfer to another more power than he has in himself, and no body has an absolute arbitrary power over himself, or over any other, to destroy his own life, or take away the life or property of another” (locke 1690, para. 135). 68 rowley (1998c, p406-407). 69 simmons (1993, p15). 70 “thus the law of nature stands as an eternal rule to all men, legislators as well as others. the rules that they make for other men’s actions must, as well as their own and other men’s actions, be conformable to the law of nature i.e., to the will of god, of which that is a declaration, and the fundamental law of nature being the preservation of mankind, no human sanction can be good, or valid against it” (locke 1690, para. 135). 71 see note 47. 11 |journal for economic educators, 20 (1), 2020 and fear.72 these individuals make forming a government necessary for the protection of society as a whole.73 the fundamental law of nature is the preservation of mankind.74 as men are all equal and independent, no one man has the right to harm another’s health, liberty or possessions75,76 and, in fact, must protect one another to give efficacy to the fundamental law of nature. thus, certain duties are required of man in the state of nature, namely, the duty to do that which is necessary to preserve himself and his fellow man.77 concomitant to this duty is the right to expect the same protection from your fellow man. thus, the state of nature is not a state of license, rather it is characterized by duties and obligations required of all men.78 man also has the right and duty to punish those who interfere with natural rights79 to the extent necessary to make reparations for the wrongful act and deter future infringements, yet, the precarious state of nature is compounded by the fact that man serves as judge in his own case against those who violate the 72 see note 49. 73 “this makes him willing to quit a condition, which, however free, is full of fears and continual dangers; and it is not without reason that he seeks out, and is willing to join in society with others, who are already united, or have a mind to unite, for the mutual preservation of their lives, liberties and estates, which i call by the general name property” (locke 1690, para. 123). 74 “…and the fundamental law of nature being the preservation of mankind, no human sanction can be good, or valid against it” (locke 1690, para. 135). 75 see note 55. 76 locke’s notion of rights corresponds to the distinction between negative and positive rights (rowley 1998c, p407); however, this is one part of the classroom discussion that tends to get off track as students find the terminology to be confusing. “positive” sounds like a good thing, right? machan (2001) provides a concise description of positive and negative rights in the context of locke’s natural rights while also providing a bit of material to add to classroom debate. i sometimes assign machan (2001) if the class debate needs a boost as it can lead to numerous lines of discussion about various proposed positive rights (healthcare, universal basic income, etc). 77 “every one as he is bound to preserve himself, and not to quit his station wilfully, so by the like reason, when his own preservation comes not in competition, ought he as much as he can to preserve the rest of mankind, and may not unless it be to do justice on an offender, take away or impair the life, or what tends to the preservation of the life, the liberty, health, limb, or goods of another” (locke 1690, para. 6). 78 “but though this be a state of liberty, yet it is not a state of licence; though man in that state have an uncontrollable liberty to dispose of his person or possessions, yet he has not liberty to destroy himself, or so much as any creature in his possession, but where some nobler use than its bare preservation calls for it” (locke 1690, para. 6). 79 “and that all men may be restrained from invading others’ rights, and from doing hurt to one another, and the law of nature be observed, which willeth the peace and preservation of all mankind, the execution of the law of nature is in that state put into every man’s hands, whereby every one has a right to punish the transgressors of that law to such a degree, as may hinder its violation” (locke 1690, para. 7). 12 |journal for economic educators, 20 (1), 2020 law of nature.80 ultimately, those who violate the laws of nature may forfeit all of their natural rights.81 while man in the lockean state of nature faces uncertainty, danger, and the constant risk of falling into a state of war,82 his circumstances and options are much less dire than the state of man within the hobbesian state of nature.83 depending upon the level of development in society, only certain forms of limited government may be preferable to the state of nature.84 locke allows that monarchy may be acceptable for primitive society;85 however, once a need for property rights has been established, civil society must protect itself against abuses of power by government by limiting the roles that government may take in ruling society.86 80 “and thus, in the state of nature, one man comes by a power over another, but yet no absolute or arbitrary power to use a criminal, when he has got him in his hands, according to the passionate heats or boundless extravagancy of his own will, but only to retribute to him, so far as calm reason and conscience dictate, what is proportionate to his transgression, which is so much as may serve for reparation and restraint. for these two are the only reasons why one man may lawfully do harm to another, which is that we call punishment” (locke 1690, para. 8). 81 “that he who has suffered the damage has a right to demand in his own name, and he alone can remit. the damnified person has this power of appropriating to himself the goods or service of the offender by right of self-preservation, as every man has a power to punish the crime to prevent its being committed again, by the right he has of preserving all mankind, and doing all reasonable things he can in order to that end. and thus it is that every man in the state of nature has a power to kill a murderer, both to deter others from doing the like injury (which no reparation can compensate) by the example of the punishment that attends it from everybody, and also to secure men from the attempts of a criminal who, having renounced reason, the common rule and measure god hath given to mankind, hath, by the unjust violence and slaughter he hath committed upon one, declared war against all mankind, and therefore may be destroyed as a lion or a tiger, one of those wild savage beasts with whom men can have no society nor security. and upon this is grounded that great law of nature, ‘whoso sheddeth man’s blood, by man shall his blood be shed’” (locke 1690, para. 11). 82 see note 49. 83 “the life of man, solitary, poor, nasty, brutish, and short” (hobbes 1651, xiii p85). 84 simmons (1993, p26). 85 “monarchy being simple and most obvious to men, whom neither experience had instructed in forms of government, nor the ambition or insolence of empire had taught to beware of the encroachments of prerogative or the inconveniencies of absolute power, which monarchy, in succession, was apt to lay claim to and bring upon them; it was not at all strange that they should not much trouble themselves to think of methods of restraining any exorbitances of those to whom they had given the authority over them, and of balancing the power of government by placing several parts of it in different hands” (locke 1690, para. 107). 86 “but the golden age (though before vain ambition, and amor sceleratus habendi, evil concupiscence, had corrupted men’s minds into a mistake of true power and honour) had more virtue, and consequently better governors, as well as less vicious subjects; and there was then no stretching prerogative on the one side, to oppress the people, nor, consequently, on the other, any dispute about privilege, to lessen or restrain the power of the magistrate; and so no contest betwixt rulers and people about governors or government. yet, when ambition and luxury, in future ages, would retain and increase the power, without doing the business for which it was given, and aided 13 |journal for economic educators, 20 (1), 2020 locke’s contractarian notions of political society and the natural right to property are central to limiting the power that government may exercise. while property is certainly alienable and forfeitable, this right is one which may be described as imprescriptible in that it cannot be taken by government without the owner’s consent.87 the very purpose for which men enter into political society and transfer rights to government being the preservation of property,88 no legitimate government could employ means which are a direct violation of its very end.89 locke’s justification of private property was, in part, an implicit recognition of the tragedy of the commons.90 to find a way around the problems inherent in the lack of property rights, locke laid out his theory of property, founded on the notion that every man has property in his own person91 and whatever he removes from the state of nature by mixing his labor with it becomes his property as by flattery, taught princes to have distinct and separate interests from their people, men found it necessary to examine more carefully the original and rights of government, and to find out ways to restrain the exorbitances and prevent the abuses of that power, which they having entrusted in another’s hands, only for their own good, they found was made use of to hurt them” (locke 1690, para. 111). 87 “the supreme power cannot take from any man any part of his property without his own consent. for the preservation of property being the end of government, and that for which men enter into society, it necessarily supposes and requires that the people should have property, without which they must be supposed to lose that by entering into society, which was the end for which they entered into it; too gross an absurdity for any man to own” (locke 1690, para. 138). 88 “the great and chief end, therefore, of men uniting into commonwealths, and putting themselves under government, is the preservation of their property; to which in the state of nature there are many things wanting” (locke 1690, para. 124). 89 “but though men when they enter into society give up the equality, liberty, and executive power they had in the state of nature into the hands of the society, to be so far disposed of by the legislative as the good of the society shall require, yet it being only with an intention in every one the better to preserve himself, his liberty and property (for no rational creature can be supposed to change his condition with an intention to be worse), the power of the society or legislative constituted by them can never be supposed to extend farther than the common good, but is obliged to secure every one’s property by providing against those three defects above mentioned that made the state of nature so unsafe and uneasy” (locke 1690, para. 131). 90 “and though all the fruits it naturally produces, and beasts it feeds, belong to mankind in common, as they are produced by the spontaneous hand of nature, and nobody has originally a private dominion exclusive of the rest of mankind in any of them, as they are thus in their natural state, yet being given for the use of men, there must of necessity be a means to appropriate them some way or other before they can be of any use, or at all beneficial, to any particular men” (locke 1690, para. 25). 91 “though the earth and all inferior creatures be common to all men, yet every man has a “property” in his own “person.” this nobody has any right to but himself. the labour of his body and the “work” of his hands, we may say, are properly his” (locke 1690, para. 26). 14 |journal for economic educators, 20 (1), 2020 long as there is enough left for others,92 a consideration not binding in early times.93 the limitation on individuals, requiring that one not take more than he can individually make use of, became more important as land became scarce. as society advances, the introduction of money enables man to appropriate more from nature than he is currently able to make use of and store the excess fruits of his labor in non-perishable and non-wasteful form.94 this enables men to hold an unequal share of what god has provided by application of his labor.95 where some men own nothing but their bodies, those who own more than this become their masters. this makes possible a state of nature whereby men enter master-servant relationships consensually.96 the agreement to use money is an implicit consent to an unequal distribution where the commons have been privatized.97 although there are those who are without land, they are not without property as they are still 92 “whatsoever, then, he removes out of the state that nature hath provided and left it in, he hath mixed his labour with it, and joined to it something that is his own, and thereby makes it his property. it being by him removed from the common state nature placed it in, it hath by this labour something annexed to it that excludes the common right of other men. for this “labour” being the unquestionable property of the labourer, no man but he can have a right to what that is once joined to, at least where there is enough, and as good left in common for others” (locke 1690, para. 26). 93 “men at first, for the most part, contented themselves with what unassisted nature offered to their necessities; and though afterwards, in some parts of the world, where the increase of people and stock, with the use of money, had made land scarce, and so of some value, the several communities settled the bounds of their distinct territories” (locke 1690, para. 45). 94 “and thus came in the use of money; some lasting thing that men might keep without spoiling, and that, by mutual consent, men would take in exchange for the truly useful but perishable supports of life” (locke 1690, para. 47). 95 “but, since gold and silver, being little useful to the life of man, in proportion to food, raiment, and carriage, has its value only from the consent of men whereof labour yet makes in great part the measure it is plain that the consent of men have agreed to a disproportionate and unequal possession of the earth – i mean out of bounds of society and compact; for in governments the laws regulate it; they having, by consent, found out and agreed in a way how a man may, rightfully and without injury, possess more than he himself can make use of by receiving gold and silver, which may continue long in a man’s possession without decaying for the overplus, and agreeing those metals should have a value” (locke 1690, para. 50). 96 “master and servant are names as old as history, but given to those of far different condition; for a freeman makes himself a servant to another by selling him for a certain time the service he undertakes to do in exchange for wages he is to receive; and though this commonly puts him into the family of his master, and under the ordinary discipline thereof, yet it gives the master but a temporary power over him, and no greater than what is contained in the contract between them” (locke 1690, para. 85). 97 see note 78. 15 |journal for economic educators, 20 (1), 2020 autonomous individuals with natural rights,98 given locke’s broad definition of property.99 thus, the right to property by self-ownership places a considerable limitation on the powers which man would be willing or able to confer upon government with the formation of civil society.100 from this more benign view of the state of nature, locke then lays out his reasoning for man coming together to form civil society, his notions of the proper role of government and presents the case for civil society rising up against government that oversteps this role. while both hobbes and locke focus on the contract that creates society itself, locke differs in his view of the relationship that is formed between society and the government it implements. the lockean society appoints a fiduciary, which it entrusts to carry out a certain limited role101 aimed at the preservation of their property.102 the government is merely an agent of society, entrusted to carry out certain functions.103 individuals must give their actual personal consent to transfer political 98 “from all which it is evident, that though the things of nature are given in common, man (by being master of himself, and proprietor of his own person, and the actions or labour of it) had still in himself the great foundation of property; and that which made up the great part of what he applied to the support or comfort of his being, when invention and arts had improved the conveniences of life, was perfectly his own, and did not belong in common to others” (locke 1690, para. 44). 99 see note 4. 100 “this freedom from absolute, arbitrary power is so necessary to, and closely joined with, a man’s preservation, that he cannot part with it but by what forfeits his preservation and life together. for a man, not having the power of his own life, cannot by compact or his own consent enslave himself to any one, nor put himself under the absolute, arbitrary power of another to take away his life when he pleases. nobody can give more power than he has himself, and he that cannot take away his own life, cannot give another power over it” (locke 1690, para. 22). 101 “though in a constituted commonwealth standing upon its own basis and acting according to its own nature that is, acting for the preservation of the community, there can be but one supreme power, which is the legislative, to which all the rest are and must be subordinate, yet the legislative being only a fiduciary power to act for certain ends” (locke 1690, para. 149). 102 see note 71. 103 “and so, whoever has the legislative or supreme power of any commonwealth, is bound to govern by established standing laws, promulgated and known to the people, and not by extemporary decrees, by indifferent and upright judges, who are to decide controversies by those laws; and to employ the force of the community at home only in the execution of such laws, or abroad to prevent or redress foreign injuries and secure the community from inroads and invasion. and all this to be directed to no other end but the peace, safety, and public good of the people” (locke 1690, para. 131). 16 |journal for economic educators, 20 (1), 2020 power to this agent.104 by sacrificing some rights, man can better secure his property through the superior protection provided through government.105 the consensual political relationship is ended when the government exceeds this role or otherwise breaches its duty to the people.106 society may then replace the government with another.107 man can be in the state of nature in the presence of an effective government and common judge, if those who rule do so unlawfully.108 conquest by a foreign power109 and 104 “but since the government has a direct jurisdiction only over the land and reaches the possessor of it (before he has actually incorporated himself in the society) only as he dwells upon and enjoys that, the obligation any one is under by virtue of such enjoyment to submit to the government begins and ends with the enjoyment; so that whenever the owner, who has given nothing but such a tacit consent to the government will, by donation, sale or otherwise, quit the said possession, he is at liberty to go and incorporate himself into any other commonwealth, or agree with others to begin a new one in vacuis locis, in any part of the world they can find free and unpossessed; whereas he that has once, by actual agreement, and any express declaration given his consent to be of any commonweal, is, perpetually and indispensibly obliged to be, and remain unalterably a subject to it, and can never be again in the liberty of the state of nature, unless by any calamity the government he was under comes to be dissolved” (locke 1690, para. 121). 105 see note 72. 106 “there remains still in the people a supreme power to remove or alter the legislative, when they find the legislative act contrary to the trust reposed in them. for all power given with trust for the attaining an end being limited by that end, whenever that end is manifestly neglected or opposed, the trust must necessarily be forfeited, and the power devolve into the hands of those that gave it, who may place it anew where they shall think best for their safety and security” (locke 1690, para. 149). 107 “and thus the community perpetually retains a supreme power of saving themselves from the attempts and designs of anybody, even of their legislators, whenever they shall be so foolish or so wicked as to lay and carry on designs against the liberties and properties of the subject. for no man or society of men having a power to deliver up their preservation, or consequently the means of it, to the absolute will and arbitrary dominion of another, whenever any one shall go about to bring them into such a slavish condition, they will always have a right to preserve what they have not a power to part with, and to rid themselves of those who invade this fundamental, sacred, and unalterable law of self-preservation for which they entered into society” (locke 1690, para. 149). 108 “want of a common judge with authority puts all men in a state of nature; force without right upon a man’s person makes a state of war both where there is, and is not, a common judge” (locke 1690, para. 19). 109 “though governments can originally have no other rise than that before mentioned, nor polities be founded on anything but the consent of the people, yet such have been the disorders ambition has filled the world with, that in the noise of war, which makes so great a part of the history of mankind, this consent is little taken notice of; and, therefore, many have mistaken the force of arms for the consent of the people, and reckon conquest as one of the originals of government. but conquest is as far from setting up any government as demolishing a house is from building a new one in the place. indeed, it often makes way for a new frame of a commonwealth by destroying the former; but, without the consent of the people, can never erect a new one” (locke 1690, para. 175). 17 |journal for economic educators, 20 (1), 2020 tyrannical rule110 are examples of forms of illegitimate power. an abuse of power by the government with respect to the rights of an individual places him in a state of nature even though the government is legitimate with respect to others.111 additionally, not all persons living under the rule of a legitimate government are said to have entered civil society. those who do not possess the capacity to contract112 or are mere visitors113 remain in the state of nature. the existence of a common judge is necessary to place men within civil society; however, it is not the only requirement.114 man must give up more than simply the right to punish transgressors.115 an effective government must have the sole right to make, interpret and execute 110 “as usurpation is the exercise of power which another hath a right to, so tyranny is the exercise of power beyond right, which nobody can have a right to; and this is making use of the power any one has in his hands, not for the good of those who are under it, but for his own private, separate advantage. when the governor, however entitled, makes not the law, but his will, the rule, and his commands and actions are not directed to the preservation of the properties of his people, but the satisfaction of his own ambition, revenge, covetousness, or any other irregular passion” (locke 1690, para. 199). 111 “wherever law ends, tyranny begins, if the law be transgressed to another’s harm; and whosoever in authority exceeds the power given him by the law, and makes use of the force he has under his command to compass that upon the subject which the law allows not, ceases in that to be a magistrate, and acting without authority may be opposed, as any other man who by force invades the right of another” (locke 1690, para. 202). 112 “but if through defects that may happen out of the ordinary course of nature, any one comes not to such a degree of reason wherein he might be supposed capable of knowing the law, and so living within the rules of it, he is never capable of being a free man, he is never let loose to the disposure of his own will; because he knows no bounds to it, has not understanding, its proper guide, but is continued under the tuition and government of others all the time his own understanding is incapable of that charge. and so lunatics and idiots are never set free from the government of their parents: “children who are not as yet come unto those years whereat they may have, and innocents which are excluded by a natural defect from ever having.” thirdly: “madmen, which, for the present, cannot possibly have the use of right reason to guide themselves, have, for their guide, the reason that guideth other men which are tutors over them, to seek and procure their good for them,” says hooker, (eccl. pol., lib. i. s. 7). all which seems no more than that duty which god and nature has laid on man, as well as other creatures, to preserve their offspring till they can be able to shift for themselves, and will scarce amount to an instance or proof of parents’ regal authority” (locke 1690, para. 60). 113 “and thus we see that foreigners, by living all their lives under another government, and enjoying the privileges and protection of it, though they are bound, even in conscience, to submit to its administration as far forth as any denizen, yet do not thereby come to be subjects or members of that commonwealth. nothing can make any man so but his actually entering into it by positive engagement and express promise and compact. this is that which, i think, concerning the beginning of political societies, and that consent which makes any one a member of any commonwealth” (locke 1690, para. 122). 114 see note 91. 115 “there, and there only, is political society where every one of the members hath quitted this natural power, resigned it up into the hands of the community in all cases that exclude him not from appealing for protection to the law established by it. and thus all private judgment of every 18 |journal for economic educators, 20 (1), 2020 natural and civil laws.116 the contract that forms civil society requires man to surrender many rights; however, he does not face the bleak picture that man faces in hobbes vision of civil society.117 while hobbes requires man to prostrate himself before the sovereign,118 locke allows man to retain his natural rights, not least the natural right to property.119 in the state of nature, there are three imperfections which trouble man: partial judgments,120 inadequate force to carry out judgments121 and a variety of judgments passed in similar circumstances122. these imperfections require an impartial judiciary, an executive to enforce the judgments and a legislature123 to express the rule of law.124 achieving these requires man to enter into civil society, thereby voluntarily handing over his right to punish those who transgress against his natural rights.125 only by a process of consent particular member being excluded, the community comes to be umpire, and by understanding indifferent rules and men authorized by the community for their execution, decides all the differences that may happen between any members of that society concerning any matter of right, and punishes those offences which any member hath committed against the society with such penalties as the law has established” (locke 1690, para. 87). 116 see note 86. 117 “but as men, for the attaining of peace and conservation of themselves thereby, have made an artificial man, which we call a commonwealth; so also have they made artificial chains, called civil laws, which they themselves, by mutual covenants, have fastened at one end to the lips of that man, or assembly, to whom they have given the sovereign power, and at the other to their own ears. these bonds, in their own nature but weak, may nevertheless be made to hold, by the danger, though not by the difficulty of breaking them” (hobbes 1651, xxi p111). 118 see note 27. 119 see note 49. 120 “secondly, in the state of nature there wants a known and indifferent judge, with authority to determine all differences according to the established law. for every one in that state being both judge and executioner of the law of nature, men being partial to themselves, passion and revenge is very apt to carry them too far, and with too much heat in their own cases, as well as negligence, and unconcernedness, make them too remiss in other men’s” (locke 1690, para. 125). 121 “thirdly, in the state of nature there often wants power to back and support the sentence when right, and to give it due execution. they who by any injustice offended will seldom fail where they are able by force to make good their injustice. such resistance many times makes the punishment dangerous, and frequently destructive to those who attempt it.” (locke 1690, para. 126). 122 “firstly, there wants an established, settled, known law, received and allowed by common consent to be the standard of right and wrong, and the common measure to decide all controversies between them. for though the law of nature be plain and intelligible to all rational creatures, yet men, being biased by their interest, as well as ignorant for want of study of it, are not apt to allow of it as a law binding to them in the application of it to their particular cases” (locke 1690, para. 124). 123 see note 86. 124 barker (1960, p xxi). 125 “it is this makes them so willingly give up every one his single power of punishing to be exercised by such alone as shall be appointed to it amongst them, and by such rules as the community, or those authorized by them to that purpose, shall agree on. and in this we have the 19 |journal for economic educators, 20 (1), 2020 can government gain rights and then only those rights unequivocally passed to it by the express grant of man.126 locke called for a separation of powers among the branches127 with the power of government limited to maintaining the rule of law128 in defense of life, liberty and property.129 the legislature was to be the highest power,130 and although it has the task of laying out the rules by which members of the society should live and be judged, its power was strictly limited procedurally to reduce the risk of arbitrary and absolute power.131 as lockean property rights are assigned initially in each person’s autonomy,132 any property that remains unclaimed is acquired by he who first possesses it by annexing his labor to it.133 this original position forms the basis by which subsequent transfers are judged.134 laws of contract are required to govern voluntary exchange and third parties must be protected from original right and rise of both the legislative and executive power as well as of the governments and societies themselves” (locke 1690, para. 127). 126 “men being, as has been said, by nature all free, equal, and independent, no one can be put out of this estate and subjected to the political power of another without his own consent” (locke 1690, para. 95). 127 “where the legislative and executive power are in distinct hands, as they are in all moderated monarchies and well-framed governments, there the good of the society requires that several things should be left to the discretion of him that has the executive power” (locke 1690, para. 159). 128 see note 86. 129 see note 82. 130 “this legislative is not only the supreme power of the commonwealth, but sacred and unalterable in the hands where the community have once placed it. nor can any edict of anybody else, in what form soever conceived, or by what power soever backed, have the force and obligation of a law which has not its sanction from that legislative which the public has chosen and appointed” (locke 1690, para. 134). 131 “for all the power the government has, being only for the good of the society, as it ought not to be arbitrary and at pleasure, so it ought to be exercised by established and promulgated laws, that both the people may know their duty, and be safe and secure within the limits of the law, and the rulers, too, kept within their due bounds, and not be tempted by the power they have in their hands to employ it to purposes, and by such measures as they would not have known, and own not willingly” (locke 1690, para. 137). 132 see note 74. 133 see note 75. 134 “and thus, i think, it is very easy to conceive, without any difficulty, how labour could at first begin a title of property in the common things of nature, and how the spending it upon our uses bounded it; so that there could then be no reason of quarrelling about title, nor any doubt about the largeness of possession it gave. right and conveniency went together. for as a man had a right to all he could employ his labour upon, so he had no temptation to labour for more than he could make use of. this left no room for controversy about the title, nor for encroachment on the right of others. what portion a man carved to himself was easily seen; and it was useless, as well as dishonest, to carve himself too much, or take more than he needed” (locke 1690, para. 51). 20 |journal for economic educators, 20 (1), 2020 external effects with tort law.135 this government created by the social contract was seen by locke as creating an environment in which man would thrive and prosper.136 as government could only exercise those powers expressly granted to it by society,137 there was little chance for an invasion of the liberty of individuals without entering a state of war.138 however, in the face of an absolute and arbitrary exercise of power, society is justified in rising up in revolution to resist an illegitimate government.139 locke extended two arguments to justify the right to resist a government guilty of abusing the power granted to it.140 first, he posited a state of war arising between the people and the government as would result from a change in the legislature141 or if the legislature were to deliver the people to the subjection of a foreign power.142 also, the government would be rightly dissolved where the executive fails to carry out his duty and society falls into anarchy.143 secondly, the legislature or executive might overstep those powers granted to it as when it takes or destroys the property of the people,144 thereby justifying 135 epstein (1995). 136 see note 72. 137 see note 84. 138 see note 91. 139 see note 90. 140 see note 90. 141 “besides this overturning from without, governments are dissolved from within: first. when the legislative is altered, civil society being a state of peace amongst those who are of it, from whom the state of war is excluded by the umpirage which they have provided in their legislative for the ending all differences that may arise amongst any of them; it is in their legislative that the members of a commonwealth are united and combined together into one coherent living body” (locke 1690, para. 212). 142 “the delivery also of the people into the subjection of a foreign power, either by the prince or by the legislative, is certainly a change of the legislative, and so a dissolution of the government. for the end why people entered into society being to be preserved one entire, free, independent society to be governed by its own laws, this is lost whenever they are given up into the power of another” (locke 1690, para. 217). 143 “there is one way more whereby such a government may be dissolved, and that is: when he who has the supreme executive power neglects and abandons that charge, so that the laws already made can no longer be put in execution; this is demonstratively to reduce all to anarchy, and so effectively to dissolve the government. for laws not being made for themselves, but to be, by their execution, the bonds of the society to keep every part of the body politic in its due place and function. when that totally ceases, the government visibly ceases, and the people become a confused multitude without order or connection. where there is no longer the administration of justice for the securing of men’s rights, nor any remaining power within the community to direct the force, or provide for the necessities of the public, there certainly is no government left. where the laws cannot be executed it is all one as if there were no laws, and a government without laws is, i suppose, a mystery in politics inconceivable to human capacity, and inconsistent with human society” (locke 1690, para. 219). 144 “there is, therefore, secondly, another way whereby governments are dissolved, and that is, when the legislative, or the prince, either of them act contrary to their trust. for the legislative acts against the trust reposed in them when they endeavour to invade the property of the subject, 21 |journal for economic educators, 20 (1), 2020 the people in removing and replacing the legislative body.145 though the community extended a direct grant of trust, the legislature is strictly limited to exercising the powers expressly granted to it to carry out the ends for which it was formed, namely, the preservation of the property of the people.146 when a change of government was necessary, this did not always destroy civil society.147 only foreign invasion148 would destroy civil society. otherwise, the people are free to form a new government without reversion to the state of nature.149 implications for the protection of property rights in civil society implementation of government implies very different consequences for man under the divergent views of hobbes and locke. while using similar terminology to describe the world, the and to make themselves, or any part of the community, masters or arbitrary disposers of the lives, liberties, or fortunes of the people” (locke 1690, para. 221). 145 “in these, and the like cases, when the government is dissolved, the people are at liberty to provide for themselves by erecting a new legislative differing from the other by the change of persons, or form, or both, as they shall find it most for their safety and good. for the society can never, by the fault of another, lose the native and original right it has to preserve itself, which can only be done by a settled legislative and a fair and impartial execution of the laws made by it” (locke 1690, para. 220). 146 “the reason why men enter into society is the preservation of their property; and the end while they choose and authorise a legislative is that there may be laws made, and rules set, as guards and fences to the properties of all the society, to limit the power and moderate the dominion of every part and member of the society. for since it can never be supposed to be the will of the society that the legislative should have a power to destroy that which every one designs to secure by entering into society, and for which the people submitted themselves to legislators of their own making: whenever the legislators endeavour to take away and destroy the property of the people, or to reduce them to slavery under arbitrary power, they put themselves into a state of war with the people, who are thereupon absolved from any farther obedience, and are left to the common refuge which god hath provided for all men against force and violence. whensoever, therefore, the legislative shall transgress this fundamental rule of society, and either by ambition, fear, folly, or corruption, endeavour to grasp themselves, or put into the hands of any other, an absolute power over the lives, liberties, and estates of the people, by this breach of trust they forfeit the power the people had put into their hands for quite contrary ends, and it devolves to the people, who have a right to resume their original liberty, and by the establishment of a new legislative (such as they shall think fit), provide for their own safety and security, which is the end for which they are in society” (locke 1690, para. 222). 147 “he that will, with any clearness, speak of the dissolution of government, ought in the first place to distinguish between the dissolution of the society and the dissolution of the government” (locke 1690, para. 211). 148 “the usual, and almost only way whereby this union is dissolved, is the inroad of foreign force making a conquest upon them. for in that case (not being able to maintain and support themselves as one entire and independent body) the union belonging to that body, which consisted therein, must necessarily cease, and so every one return to the state he was in before, with a liberty to shift for himself and provide for his own safety, as he thinks fit, in some other society” (locke 1690, para. 211). 149 simmons (1993, p163). 22 |journal for economic educators, 20 (1), 2020 status of man relative to the government under these two characterizations of society could not be more different. the hobbesian vision of the world in the state of nature makes it necessary that men form civil society to seek protection150 from hostility and the search for power151 that plots all against all in a state of continual war.152 all men surrender all rights to one absolute power.153 under these circumstances, no social contract with this leviathan is enforceable, as he will shred any agreement as soon as the total rule has passed from the people to his hands.154 and, for hobbes, no less than total submission to government would suffice to control the hostile nature of man.155 to escape the horrors of the state of nature,156 man agrees by social contract157 to accept the total authority of leviathan.158 complete surrender to government is necessary to achieve the desired peace.159 thereafter, all rights exerted by man must come by grant from the government.160 in this environment, man cannot be said to maintain any natural rights.161 any property rights granted are only as certain as the capricious will of the sovereign.162 locke’s view of the state of nature163 and the reasons for men joining together in civil society leave them less willing to relinquish rights held in the state of nature.164 while it is necessary to have government, the powers granted are far narrower and the rights surrendered are limited to those absolutely essential to achieve the ends for which men come together.165 as men wish to seek protection, government is limited to the role of referee.166 those natural rights that are inalienable are retained and, in fact, cannot be surrendered even voluntarily.167 the social contract to create government establishes the government as an agent of society.168 150 see note 25. 151 see note 8. 152 see note 14. 153 see note 19. 154 see note 40. 155 see note 29. 156 see note 12. 157 see note 29. 158 see note 27. 159 see note 26. 160 see note 100. 161 “for seeing there is no commonwealth in the world wherein there be rules enough set down for the regulating of all the actions and words of men (as being a thing impossible): it followeth necessarily that in all kinds of actions, by the laws pretermitted, men have the liberty of doing what their own reasons shall suggest for the most profitable to themselves” (hobbes 1651, xxi p111). 162 see note 43. 163 see note 46. 164 see note 72. 165 see note 71. 166 see note 86. 167 see note 83. 168 see note 84. 23 |journal for economic educators, 20 (1), 2020 as grantor of limited powers for a limited purpose,169 society will not tolerate a larger exercise of power by government than that necessary for the protection of property,170 defined broadly.171 any move beyond the role authorized, places the government in a state of war against the people172 and it may legitimately be overthrown.173 in this minimal state, government has no inherent rights; rather, it has only those rights granted to it174 and which are revocable by society.175 thus, government must not attempt to abridge the natural rights of man, not least the right to property, without the risk of placing itself in a state of war with the people,176 who hold the ultimate power.177 arbitrary exercise of power by government may endanger the life of man, thus running counter to the natural law of preservation.178 man cannot alienate those rights necessary to his own preservation; thus, placing certain limits on the possible range of government action.179 protection of property and man’s natural right to property are fundamental to locke’s political philosophy. the labor theory of property states that man has a natural right to his body, and thus, the fruits of his labor.180 the protection of this property being the reason men voluntarily join together in society and grant rights to government,181 this necessarily implies that no government can take that property from him without his consent.182 property rights are not derived from the sovereign; rather, they are natural rights183 common to all mankind that may be passed between individuals.184 institutional arrangements envisioned by locke allow individuals to leave the uncertainty of the state of nature behind185 while retaining certain rights186 and always exercising control over the government187 formed by their express consent188 for certain ends.189 the lockean form of state organization leaves the net benefits of society with the people.190 key to this structure is 169 see note 71. 170 see note 72. 171 see note 82. 172 see note 129. 173 see note 89. 174 see note 151. 175 see note 156. 176 see note 155. 177 see note 156. 178 see note 90. 179 see note 52. 180 see note 75. 181 see note 71. 182 see note 70. 183 see note 74. 184 see note 51. 185 see note 49. 186 see note 83. 187 see note 156. 188 see note 87. 189 see note 71. 190 see note 72. 24 |journal for economic educators, 20 (1), 2020 representative government191 and the natural right to property,192 safe from government appropriation for arbitrary uses.193 implications for the law of takings the political philosophies of hobbes and locke are important for more than simply their historical significance. these two divergent theories have significant implications for modern views of the role of the state with regard to takings. in fact, the approach to property rights employed serves as the very foundation of the debate regarding the proper role of the judiciary and government more generally. if there is no notion of mine and thine, there can be no notion of the protection of property except that which comes from a sense of noblesse oblige by those who hold the sovereign power. all rights are by grant from the sovereign for as long as he chooses to protect the holder. therefore, the sovereign can do whatever he likes with property and his word is law. under a hobbesian leviathan, there are no property rights because the people have handed all of their rights over to the state194 in the search for order.195 the only rights available are those that the state gives to them.196 the people have no right to judge what rights they are permitted to retain197 as they have prostrated themselves before the sovereign.198 as long as the sovereign preserves their lives, the sovereign can do what he likes with all rights,199 including property rights.200 the way in which a particular sovereign allocates rights to the citizens is dependent on what he wishes to gain from his position. some who hold the sovereign power are roving bandits, quickly taking all they can before moving on to pillage another area. others who rise to be sovereign set themselves up as stationary bandits. to encourage taxable production, the stationary bandit will permit the subjects broader rights, including the right to property in order to extract a lower percentage of the whole for a longer period in exchange for protection and order (olson 2000). in a world governed by a lockean notion of rights, man holds rights that are not derived from the sovereign.201 even though there is an institution of governance, it is a strictly limited 191 “first, it is not, nor can possibly be, absolutely arbitrary over the lives and fortunes of the people. for it being but the joint power of every member of the society given up to that person or assembly which is legislator, it can be no more than those persons had in a state of nature before they entered into society, and gave up to the community. for no body can transfer to another more power than he has in himself, and no body has an absolute arbitrary power over himself, or over any other, to destroy his own life, or take away the life or property of another” (locke 1690, para. 135). 192 see note 165. 193 see note 161. 194 see note 26. 195 bobbio (1993, p29). 196 see note 144. 197 see note 34. 198 see note 27. 199 see note 36. 200 see note 43. 201 see note 58. 25 |journal for economic educators, 20 (1), 2020 government202 with regard to the natural right to property. only if individuals can alienate themselves from it, can they lose their property.203 there are some inalienable rights, specifically, to their lives or liberties.204 man cannot sell or even give these natural rights away. the natural right to property, on the other hand, is an imprescriptible right. mixing one’s labor with the land is the basis of achieving physical property205 and man holds the natural right to this property independent of the sovereign.206 though man can alienate his property, by sale, gift or abandonment, no one can rightly take it away from him. as a fiduciary, appointed for certain limited ends,207 the sovereign cannot invade these rights without man’s consent.208 conclusion locke and hobbes present substantially different views on rights and the role of the sovereign. the court stands as arbiter between the people and government as long as justices do not abdicate the role of decision-maker to the legislature. even reforms that seem to tie the hands of the state legislature are meaningless if the court is willing to grant deference to the state. without secure property rights, the nature of the relationship between citizen and sovereign necessarily changes. the appropriate role of government with respect to property, and the scope of government action more generally, hinge on the philosophical approach taken by justices on the court. landmark cases, including the kelo decision and other scotus decisions, provide material for debate using the locke versus hobbes framework (biser 2017). certainly, the majority opinion and various concurring and dissenting opinions in kelo provide substantial material for a discussion about the views of scotus justices with respect to deference to the legislature. references by justice o’conner to her language used in midkiff (1984) add greatly to the debate. this framework is also useful in discussions of current political events. the political process influences the appointment of justices to the court, as seen during recent nomination proceedings in the senate judiciary committee hearings. although the committee members and media attention during the brett kavanaugh nomination hearings strayed far from his judicial record, voter interest in the scotus is high. an interesting follow-up topic for discussion is whether nominees allow political pressure to influence decisions once they seated on the court. this line of discussion can also facilitate analysis of the philosophical approach of justices under different political climates throughout history. the value of the foregoing discussion is in the clarification of important texts to form a common framework for debate, particularly with respect to property rights. once everyone is on the same page, numerous topics become more accessible for discussion while avoiding many of the pitfalls of open debate in the modern classroom and highly charged political environment. 202 see note 165. 203 see note 161. 204 see note 52. 205 see note 75. 206 see note 165. 207 see note 84. 208 see note 109. 26 |journal for economic educators, 20 (1), 2020 conducted using a locke versus hobbes framework, these debates encourage participation and foster critical thinking and reasoned analysis of important issues. references acemoglu, d. and s. johnson. 2005. “unbundling institutions.” journal of political economy, 113(5): 949‐995. acemoglu, d., s. johnson and j. robinson. 2005. “institutions as the fundamental cause of longrun growth.” in aghion, p. and s. durlauf (eds), handbook of economic growth, 1(a). north holland: elsevier: 385-472. barker, e. 1960. social contract: locke, hume, rousseau. oxford: oxford university press. barzel, y. 1989. economic analysis of property rights. cambridge: cambridge university press. besley, t. and m. ghatak. 2010. “property rights and economic development,” handbook of development economics, 5: 4525-4595. biser, j. 2017. “property rights versus rent-seeking politics: a public choice perspective.” journal for economic educators, 17(2). https://libjournals.mtsu.edu/index.php/jfee/issue/view/159 . accessed 9 september 2019. bobbio, n. 1993. thomas hobbes and the natural law tradition. chicago: university of chicago press. cooter, r.d. and h. schafer. 2012. solomon’s knot: how law can end the poverty of nations. princeton: princeton university press. epstein, r. a. 1995. simple rules for a complex world. cambridge: harvard university press. hobbes, t. 1651. “leviathan.” in hutchins, r.m. (ed), great books of the western world, 1952, vol. 23. chicago: encyclopaedia britannica: 39-283. hobbes, t. 1650. “elements of law”. in molesworth, w. (ed), the english works of thomas hobbes. vol. 4. 1839-45. london: john bohn. holcomb, r.g. 1998. economic freedom and economic growth. https://fee.org/articles/economic-freedom-and-economic-growth/ accessed 31 august 2019. hooper, c.l. 2017. henry george's protection or free trade: a critical review. https://www.econlib.org/library/columns/y2017/hooperprotection.html. accessed 26 may 2019. kelo eminent domain. institute for justice. https://ij.org/case/kelo/ . accessed 9 september 2019. kiandantzis, j.b. 2007. “karl marx: 1818-1883.” in henderson, d.r. (ed), concise encyclopedia of economics, https://www.econlib.org/library/enc/bios/marx.html. accessed 26 may 2019. little pink house. 2018. directed by courtney balaker. samuel goldwyn films. http://littlepinkhousemovie.com/. accessed 9 september 2019. lo, i.v. and x. tian. 2002. “property rights, productivity gains and economic growth: the chinese experience.” post-communist economies, 14(2): 245-258. locke, j. 1690. “two treatises of government. concerning civil government, second essay”. in hutchins, r.m. (ed), great books of the western world vol. 35. chicago: encyclopaedia britannica, 1952. https://libjournals.mtsu.edu/index.php/jfee/issue/view/159 https://fee.org/articles/economic-freedom-and-economic-growth/ https://www.econlib.org/library/columns/y2017/hooperprotection.html https://ij.org/case/kelo/ https://www.econlib.org/library/enc/bios/marx.html http://littlepinkhousemovie.com/ 27 |journal for economic educators, 20 (1), 2020 machan, t.r. 2001. the perils of positive rights. https://fee.org/articles/the-perils-of-positiverights/ . accessed 26 may 2019. mcmillan, j., j. whalley, and l. shu. 1989. “the impact of china’s economic reforms on agricultural productivity growth,” journal of political economy, 97(4): 781-807. north, d.c. 1991. “institutions.” journal of economic perspectives, 5(1): 97-112. o’driscoll jr., g.p. and l. hoskins. 2003. “property rights: the key to economic development.” cato policy analysis, no. 482. https://www.cato.org/sites/cato.org/files/pubs/pdf/pa482.pdf . accessed 9 september 2019. olson, m. 2000. power and prosperity: outgrowing communist and capitalist dictatorships. new york: basic. rowley, c.k. 1998a. “locke, john (1632-1704)”. in newman, p. (ed), the new palgrave dictionary of economics and the law vol. iii. london and new york: macmillan. rowley, c.k. 1998b. “state of nature and civil society”. in newman, p. (ed), the new palgrave dictionary of economics and the law, vol. iii. london and new york: macmillan. rowley, c.k. 1998c. “on the nature of civil society.” the independent review, 2(3): 401-420. sandefur, t. and c. sandefur. 2016. cornerstone of liberty: property rights in 21st century america. washington, dc: cato institute. simmons, a. j. 1993. on the edge of anarchy. princeton: princeton university press. ---------1992. the lockean theory of rights. princeton: princeton university press. tully, j. 1980. a discourse on property: john locke and his adversaries. cambridge: cambridge university press. waldron, j. 1988. the right to private property. new york: oxford university press. cases cited hawaii housing authority v. midkiff, 467 u.s. 229, 104 s.ct. 2321 (1984). kelo v. city of new london, connecticut, 125 s.ct. 2655 (2005). https://fee.org/articles/the-perils-of-positive-rights/ https://fee.org/articles/the-perils-of-positive-rights/ https://www.cato.org/sites/cato.org/files/pubs/pdf/pa482.pdf hodgin.pdf 31 using mathematica as a teaching tool in the undergraduate economics curriculum gary hodgin* abstract in recent years, the quantitative skills required of economics students have increased significantly. students often experience difficulty in making the transition from their mathematics courses to the use of mathematics in their economics courses. symbolic computation programs are mathematical tools that can potentially smooth this transition. this paper illustrates a few ways in which one symbolic computation program, mathematica, has been used in the undergraduate economics curriculum. i. introduction the undergraduate curriculum in economics has become increasingly quantitative. an economics major typically includes college algebra, statistics, and some form of calculus in its degree requirements.1 in addition, mathematical economics and econometrics are now standard courses in many undergraduate programs. moreover, this quantitative emphasis generally extends to other courses across the economics curriculum, particularly the intermediate theory and managerial economics courses. for example, approximately 90 percent of the intermediate microeconomics instructors included in von allmen and brower's survey (1998, 279) use calculus in their courses. although one might question whether too much emphasis is placed on quantitative skills, there appears to be consensus among economics professors that mathematics is an important ingredient in undergraduate economic education. over the past three years, i have used a symbolic computation program entitled mathematica in two of my intermediate microeconomics and three of my managerial economics courses. my observations in these courses suggests that some students experience difficulty in making the transition from their courses in mathematics to their use of mathematics in economics. by smoothing this transition, symbolic computation programs can assist students in learning economics. the objective of this note is to demonstrate a few of mathematica's many features and capabilities that i have found useful. the remainder of this note consists of three sections. the first provides a brief description of symbolic computation programs with a focus upon those features that are most likely to be of interest to instructors of intermediate microeconomics and managerial economics. because of my limited knowledge of other symbolic computation programs, i will refer to those features in mathematica. the second section discusses three ways in which instructors might use a symbolic computation program in their courses. this section includes examples of how i have used mathematica in my classes. the final section concludes with a brief discussion of a few factors potential users should consider before integrating a symbolic computation program into their courses. * associate professor of economics, belmont university, nashville, tn 37212. email: hodging@mail.belmont.edu i would like to express appreciation to sam dennis for introducing me to mathematica and to an anonymous referee for helpful comments on a previous version of this paper. 32 ii. symbolic computation programs symbolic computation programs are computer programs that possess the capability to perform numerical, symbolical, and graphical analysis. five of the more popular programs listed in the appendix with web addresses, telephone numbers, and prices. each of these programs combines built-in features and programming capabilities in much the same way as the econometrics software packages. mathematica consists of a system interface and a notebook interface. the notebook interface is actually a front-end that allows one to use the many built-in functions and packages without having to learn the more difficult system language. thus, a programming novice, such as myself, can effectively use the program without much difficulty. although the use of symbolic computation programs has become commonplace in science and mathematics, their use in economics seems to be largely confined to research (varian 1993, 1996) and graduate courses in mathematical economics (huang and crooke 1997). however, judging from the literature their use is becoming more common in the undergraduate curriculum (boyd 1998; walbert and ostrosky 1997). undoubtedly, the present emphasis on technology in the classroom and the greater availability of computers for classroom use have played a role in their expanded use. as a tool for learning, the capability of symbolic computation programs to combine graphical, numerical, and symbolical capabilities offers advantages in the economics classroom. for example, a commonly stated objective in many economics courses is to teach students to "think like an economist." in microeconomics, this means being able to analyze an event, such as a hypothetical change in the minimum wage, in an appropriate economic model of wage determination that describes the effects of the event on those variables under consideration. at a minimum, students must be able to translate the event from words into diagrams. in some cases, however, diagrams alone are not enough. when a model involves several variables, algebra and elementary calculus are better for tracking the relationships. students learn to apply economic theory by diligently engaging in this practice of model building. symbolic computation programs are excellent tools for assisting in this aspect of learning because they allow students to concentrate more on understanding the economic principles behind their models and less on the computational details of their models. iii. uses of mathematica mathematica is extremely flexible and offers instructors several application options.2 first, it can be used as a sophisticated graphic-numeric-symbolic calculator. the software can create customized examples for lectures, handouts, problem sets, and exams. because of its vast library of built-in functions, one can quickly learn to use mathematica for these purposes. for example, one can easily experiment and generate a cubic function whose corresponding average and marginal functions make sense from an economic perspective. similarly, a specific type of utility function is easily defined and graphically illustrated with a corresponding set of indifference curves. the primary benefit in using mathematica in this way is the reduction in time required to create good examples for classroom use. 33 second, mathematica notebooks can generate in-class presentations or documents for display on the web. notebooks are ideal for presenting material on overhead transparencies and computer presentation systems. notebooks consist of cells, which can contain text, mathematics, graphics (with color and animation options), and sound. these cells can be collapsed and expanded with a simple click of the mouse. thus, one can progress through a multi-stepped procedure in a systematic manner or move back and forth among the various steps by expanding and collapsing cells. in addition, notebooks can be saved in html format and displayed on the web. crooke, froeb, and tschantz (1998) provide an excellent example of mathematica's interactive web capabilities with applications in economics. third, instructors can fully integrate mathematica into their courses. clearly, this is the most costly and time-consuming way to use mathematica because students must purchase the software and learn basic mathematica programming. at prices ranging from approximately $75 to $140, the cost of a symbolic computation program is significant. moreover, the additional time required for instructors to assist students in learning basic programming is substantial and would most likely come at the expense of course content. primarily for these reasons, i have confined my use to that of creating course materials and in-class presentations. nevertheless, as the availability of computers and students' familiarity with symbolic computation programs spread, these concerns may diminish to a point where the use of symbolic computation software will become as commonplace in the undergraduate curriculum as that of econometric software. iv. examples the following five examples are similar to exercises developed for my intermediate microeconomics and managerial economics classes over the past three years. as each example is presented, bear in mind that mathematica is extremely flexible, and there is usually more than one way to achieve the same result. in these examples, the bold statements preceded by "in[.]:=" represent input statements and the statements preceded by "out[.]=" represent output statements. these expressions are generated internally and not by the user. they are included here so that the examples will be more resemblant of the output actually generated in mathematica. example 1 in this example, mathematica graphically illustrates the unit cost functions corresponding to a specific short-run total cost function and then finds the rate of output at which average variable cost and marginal cost are equal. the first set of input statements specifies the total cost and total variable cost functions and defines the corresponding unit cost functions. the semicolon at the end of each input line tells mathematica to refrain from printing the functions. in[1]:= tc = 10 + 5q -2q^2 + .3q^3; tvc = 5q 2q^2 + .3q^3; atc = tc/q; avc = tvc/q; mc = d[tvc, q]; 34 the "plot" and "solve" commands are now used to plot the unit cost curves and solve for the rate of output at which average variable cost and marginal are equal. the plot range is specified as 0 through 10 units and the axes are labeled as "q" and "$". in[2]:= plot[{atc, avc, mc},{q, 0, 10}, axeslabel -> {"q","$"}] solve[mc == avc, q] figure 1: unit cost curves out[2]= -graphics out[3]= { } { }{ }0 , 3.3333q q− > − > mathematica found two solutions for the rate of output at which average variable cost and marginal cost are equal, the trivial solution of 0 and economically useful 3.33 units.3 example 2 this example involves specifying a cobb-douglas production function, 1 2q x x= , and constructing a three-dimensional diagram of the production function along with five isoquants corresponding to the production function. the shading feature has been disabled. in[1]:= f [x1_, x2_] = x1^.5 * x2^.5; plot3d[f [x1, x2], {x1, 0, 20}, {x2, 0, 20}, axeslabel -> {"x1", "x2", "q"}, shading -> false] contourplot[f [x1, x2], {x1, 0, 20}, {x2, 0, 20}, contourshading -> false, contours -> 5] 2 4 6 8 10 q 5 10 15 20 25 30 35 $ 35 figure 2: production function out[1]= surface graphics figure 3: isoquants out[2]= contourgraphics a nice feature of generating production functions and corresponding isoquants in this manner is that one can demonstrate how specific changes in technology affect the shape of the isoquants by using specific numerical values. example 3 in this example, mathematica is used to graphically illustrates revenue and cost functions and solves for the profit-maximizing rate of output and price. first, an inverse demand function is specified with its 0 5 10 15 20 x1 0 5 10 15 20 x2 0 5 10 15 20 q 0 5 10 15 20 x1 0 5 10 15 20 0 5 10 15 20 36 corresponding total and marginal revenue functions. a total cost function is then specified with its corresponding marginal cost function. in[1]:= p = 200 7.5q tr = p*q mr = d[tr, q] tc = 400 + 10q + 4q^2 + .5q^3 mc = d[tc, q] profit = tr tc out[1]= 200 7.5q− out[2]= ( )200 7.5q q− out[3]= 200 15q− out[4]= 2 3400 10 4 0.5q q q+ + + out[5]= 210 8 1.5q q+ + out[6]= ( ) 2 3400 10 200 7.5 4 0.5q q q q q− − + − − − three "plot" commands are now used to generate separate diagrams for the total revenue and total cost functions; the price, marginal revenue (dashed), and marginal cost functions; and the profit function. the plot range is specified as 0 through 13 units. in[7]:= plot[{tr, tc}, {q, 0, 13}, axeslabel -> {"q", "$"}] plot[{p, mr, mc}, {q, 0, 13}, axeslabel -> {"q", "$"}, plotstyle -> {{}, dashing[{.05}], {}}] plot[profit, {q, 0, 13}, axeslabel -> {"q", "$"}] figure 4: total revenue and total cost out[7]= graphics 2 4 6 8 10 12 q 500 1000 1500 2000 $ 37 figure 5: price, marginal revenue, and marginal cost out[8]= graphics figure 6: profit function out[9]= graphics lastly, mathematica solves for the profit-maximizing rate of output and substitutes this solution back into the price and profit equations to obtain the profit-maximizing price and profits. in[10]:= solve[mr == mc, q] out[10]= { } { }{ }21.2845 , 5.95113q q− > − − > in[11]:= p /. q -> 5.95 profit /. q -> 5.95 out[11]= 155.375 out[12]= 218.049 thus, the profit-maximizing rate of output is 5.95 units; price is $155.38, and profits are $218.05. example 4 in this example, the lagrangian multiplier method is used to solve the first order conditions for finding maximum output subject to a cost constraint. the production function is assumed to be 2 4 6 8 10 12 q 50 100 150 200 250 300 350 $ 2 4 6 8 10 12 q -600 -400 -200 200 $ 38 ( ) ( ) ( )1 2 1 2, .5 log .5 logf x x x x= + and the cost constraint is assumed to be ( )1 2 1 2, 2 60.g x x x x= + − the critical values of input x1, input x2 and ,lambda the lagrangian multiplier, are found by setting the derivative of the lagrangian function with respect to each variable equal of zero and solving the three equations simultaneously. in[1]:= f[x1_, x2_] := .5 * log[x1] + .5 * log[x2]; g[x1_, x2_] := 2*x1 + x2 60; l[x1_, x2_ , lambda_] := f[x1, x2] + lambda*g[x1, x2]; foc1 = d[l[x1, x2, lambda], x1] foc2 = d[l[x1, x2, lambda], x2] foc3 = d[l[x1, x2, lambda], lambda] c = solve[{foc1 == 0, foc2 == 0, foc3 ==0}, {x1, x2, lambda}] maxvalue = l[x1, x2, lambda] /. ->c[[1]] out[1]= 0.5 2 * 1 lambda x + out[2]= 0.5 2 lambda x + out[3]= ( )60 2 1 2x x− + + out[4]= { }{ }0.1667, 1 15.0, 2 30.0lambda x x− > − − > − > out[5]= 3.05462 the critical values are given in out[4] and the maximum rate of output that satisfies the constraint is given in out[5]. although not a part of this exercise, it is relatively easy solve problems such as this one using the standard graphical method of isoquants and isocost lines. example 5 this last example is identical to the previous example 4 except the critical values are solved symbolically rather than numerically. the production function is ( ) ( ) ( )1 2 1 1 2 2, log logf x x a x a x= + and the constraint is ( )1 2 1 1 2 2,g x x p x p x c= + − , where 1p is the price per unit of input 1x , 2p is the price per unit of input 2x , and c is total cost. "setattributes" commands mathematica to treat a1, a2, p1, p2, and c as constants. 39 in[1]:= clear[f, g, x1, x2, l, c, lambda]; setattributes[{a1, a2, p1, p2, c}, constant]; f[x1_, x2_] := a1 * log[x1] + a2 * log[x2]; g[x1_, x2_] := p1 * x1 + p2 * x2 c; l[x1_, x2_, lambda_] := f[x1, x2] + lambda * g[x1, x2]; foc1 = d[l[x1, x2, lambda], x1]; foc2 = d[l[x1, x2, lambda], x2]; foc3 = d[l[x1, x2, lambda], lambda]; solve [{foc1 ==0, foc2 == 0, foc3 == 0}, {x1, x2, lambda}] out[1]= ( ) ( ) ( ) ( ) 1 21 2 lambda-> , 1 , 2 1 2 1 1 2 2 a c a ca a x x c a a p a a p   − −  − > − >  + +     the solution in out[1] can be verified by comparing these critical values to those found in the previous example. a major advantage of symbolic computation programs is their ability to solve problems symbolically as well as numerically. v. summary over the past decade, technology has had a pronounced effect on the way economic educators accomplish their mission. used appropriately, symbolic computation programs can assist in accomplishing that mission. although i have never formally surveyed students on their opinions of mathematica, their causal comments have been generally favorable.4 specifically, some were impressed by its graphical capabilities and its ability to reduce computational difficulties. nevertheless, there are a few factors that should be carefully considered before integrating such technology into the classroom. first, there are practical questions surrounding such integration. one must decide on which software is most appropriate and on what level it will be used. obviously, a decision to fully integrate the software into a course is the most costly and time-consuming. such factors as the adequacy of existing computer facilities, the costs of site licenses for the software or student versions of the software, the size of the class, the students' experience with computer software, and the learning objectives of the course, are important considerations. some potential problems can be minimized if decisions are coordinated with other economics and mathematics faculty, but these practical concerns are ultimately the responsibility of the individual instructor. second, there is an issue of pedagogy surrounding the implementation of new technology into the classroom. new technology often influences "what" one does and not simply "how" one does it. moreover, it often does so in abstruse ways. in this case, symbolic computation programs should be used 40 as mathematical tools to assist students in learning economics, not one of limiting "what" economics students learn to that which can be taught using mathematics. notes 1. in a 1995 survey of the american association of collegiate schools of business membership, von allmen and brower (1998, 278) found that 62.8 percent of economics departments required either calculus or applied calculus in their curriculum. 2. see wolfram (1996) for a comprehensive description of mathematica. 3. for classroom use, a shortcoming of mathematica's graphics is that one cannot directly apply text labels to functions, such as the unit cost functions in this example. however, one can insert them with a compatible picture editor. 4. i am not sure how well this generally favorable opinion would hold if students were required to interact directly with mathematica. appendix table a1: software vendors product company web address telephone pricea maple waterloo maple, inc. http://www. maplesoft.com 800-267-6583 $129.95 mathcad mathsoft, inc. http://www. mathsoft.com 800-628-4223 $129.95 mathematica wolfram research, inc. http://www. wolfram.com 800-441-6284 $139.95 matlab the mathworks, inc. http://www. mathworks.com 508-647-7000 $99.00 scientific notebook mackichan software, inc. http://www. mackichan.com 206-780-2799 $74.95 awith the exception of scientific notebook, all prices are for student or academic versions as of july, 1999. there is only one version of scientific notebook. all offer site licenses except mackichan software, which offers quantity discounts. most, if not all, of these vendors provide time-locked versions of their products for review. references boyd, david w. 1998. "on the use of symbolic computation in undergraduate microeconomics instruction." journal of economic education 29 (3): 227-46. crooke, phillip, luke froeb, and steven tschantz. 1998. "pedagogy using mathematica through the web." http://mba.vanderbilt.edu/luke.froeb/mathserv. huang, cliff j. and phillip crooke. 1997. mathematics and mathematica for economics. malden, ma: blackwell publishers, inc. varian, hal, ed. 1993. economic and financial modeling with mathematica. new york: springer-verlag, inc. ———. 1996. computational economics and finance: modeling and analysis with 41 mathematica. new york: springer-verlag, inc. von allmen, peter and george brower. 1998. "calculus and the teaching of intermediate microeconomics: results from a survey." journal of economic education 29 (3): 277-84. walbert, mark s. and anthony l. ostrosky. 1997. "using mathcad to teach undergraduate mathematical economics." journal of economic education 28 (4): 304-15. wolfram, stephen. 1996. the mathematica book. cambridge, uk: cambridge university press. why learning styles matter for student achievement in college economics 16 journal for economic educators, 9(1), summer 2009 why learning styles matter for student achievement in college economics ralph a. terregrossa, fred englander, and zhaobo wang1 abstract this paper explores the link between student achievement and student learning styles in a college microeconomics course, based on the dunn and dunn model of learning styles. the productivity environmental survey (peps) is utilized to measure learning style preferences for twenty elements. factor analysis is applied to reduce the multidimensional preferences to a smaller set of common factors that identify analytic, global or indifferent learning styles. the common factors are used as explanatory variables to measure the correlation between student achievement and their learning styles. the empirical methodology developed in this study also provides a test of the internal validity of the dunn and dunn model, the construct validity of the peps instrument and the predictive validity of the model. the authors explain how the results of the current research could be utilized to more generally enhance student achievement in the instruction of introductory economics and potentially other subject matter. introduction instructors of college economics courses are devoting more of their time to teaching (becker and watts, 2001). this is a positive development in the field of economics if one accepts david colander’s assertion: “teaching is the most important thing that economists do.” (colander 2006, p. vii) but, contrary to other fields of higher education, economics instructors continue to predominantly utilize the chalk-and-talk method of teaching (becker and watts 2001). the chalk-and-talk teaching method utilizes lectures with supporting notes, equations and graphs written on the chalkboard. dunn (2000) hypothesizes that this chalk and talk method of teaching ignores differences in students’ learning styles and the potential increase in student achievement associated with matching instructors’ teaching methods with students’ learning styles. it is ironic that the practitioners of the discipline devoted to the study of efficiency principles are implicitly accused of being inefficient in their approach to teaching that discipline. according to the dunn and dunn learning styles methodology (dunn, 2000), the optimal method of teaching is the method that most closely matches students’ learning styles. learning styles are composed of multidimensional preferences for elements within environmental, emotional, sociological, physiological and psychological strands. this paper tests whether student achievement actually is enhanced, as dunn (2000) argues, depending on the extent to which the method of teaching matches students’ learning styles. through the use of factor analysis to extract students’ learning styles, the methodology developed in this investigation is an improvement over previous research methods (e.g., terregrossa, englander and englander 2008) utilized to identify 1 terregrossa, st. john’s university; englander, fairleigh dickinson university; wang, fairleigh dickinson university. 17 journal for economic educators, 9(1), summer 2009 the relationship between students’ learning styles and their achievement. a high degree of multicollinearity inherently exists among the twenty learning style elements comprising each student’s learning style profile. to ameliorate this problem, factor analysis is used to extract meaningful learning style measures which are devoid of inherent statistical anomalies resulting from the high degree of interrelationships that characterize various learning style preference elements. the dunn and dunn model (dunn 2000) hypothesizes that global, analytic or indifferent (i.e., a combination of the global and analytic) learning styles correlate with inherent preferences for certain discriminating elements within the five strands. in this study, the dunn, dunn and price (2006) productivity environmental survey (peps) is utilized to measure students’ preferences for the twenty elements within the five strands. student achievement, measured by examination scores, is regressed against the learning style factors, in addition to other student characteristics. in this way, the statistical association of students’ learning styles with student achievement is estimated. the empirical methodology developed in this study also provides important insight regarding both the efficacy of the dunn and dunn paradigm and the construct validity of the peps instrument. in this case, construct validity refers to the extent to which the peps instrument measures students’ learning styles in a way that corresponds to the dunn and dunn paradigm. if the peps instrument differentiates between global, analytic and indifferent learners, then factor analysis should identify a distinctive pattern of the discriminating learning style elements for students aligned with each of the alternative learning styles in a way that is consistent with the dunn and dunn model. with respect to the efficaciousness of the dunn and dunn paradigm, if the empirical methodology predicts differences in student achievement attributable to differences in students’ learning styles that are embodied in the extracted factors, then the dunn and dunn paradigm is supported. such an outcome would create an opportunity for instructors to enhance student achievement by using an instrument such as the peps to identify the mix of learning styles of the students in a class and then tailoring teaching methods and strategies accordingly. literature review economists disagree about the importance of utilizing pedagogical principles to enhance student achievement. colander (2006), states, “educationalists focus on the structure of, not the content of, education; i see structure as secondary and content as central…any consideration of teaching that does not put content first…has serious problems”. in contrast, frank (2007) stresses the relative importance of the manner by which economic content is taught: “the form in which ideas are conveyed is important. perhaps because our species evolved as storytellers, the human brain is innately receptive to information in narrative form.” reich (2000) stated, “we’re creating a one-size-fits-all system that needlessly brands many young people as failures, when they might thrive if offered a different education whose progress was measured differently.” implicit in reich’s statement is the notion that if students are instructed in a way that more closely matches their learning styles, rather than in a homogeneous manner, students may be more successful academically and thus better equipped to be successful in a changing economy. 18 journal for economic educators, 9(1), summer 2009 an increase in academic achievement associated with matching teaching styles with learning styles is not new to the field of economics. charkins, o’toole, and wetzel (1985) estimated the impact that the divergence of instructors’ teaching styles and students’ learning styles had on student achievement and attitude in introductory economics courses. the results of their study indicated that students learned more, and had a more positive attitude toward learning, the smaller the divergence between teaching and learning styles. brokaw and merz (2000) examined the effects that both learning styles and student behavior have on student achievement in principles of microeconomics courses. their results indicated that the students whose learning styles matched their instructors’ “chalk and talk” style had significantly higher grades than those students whose learning styles did not match. in general, they found that when a student’s learning style matches the instructor’s teaching style, student achievement improved by half a letter grade. coffield, moseley, hall, and ecclestone’s (2004) comprehensive review of learning styles models emphasizes that an instructor wishing to utilize a learning style approach must decide which of the many different learning style theories or approaches is to be adopted. praise and criticism of each of the learning style models abounds. coffield et al. (2004) examine thirteen of the most influential learning styles models, including the dunn and dunn model, with a particular focus on the validity, reliability and practical application of the alternative models. with regard to the dunn and dunn model, coffield et al. (2004), conclude, “despite a large and evolving research programme, forceful claims made for impact are questionable because of limitations in many of the supporting studies and the lack of independent research on the model.” this assessment echoes earlier criticisms offered by kavale, hishoren, and forness (1998). however, coffield et al. (2004) report that the dunn and dunn model meets one critical criterion: predictive validity--the extent to which a set of scores predicts an expected outcome. milton friedman (1953), stated, “the only relevant test of the validity of a hypothesis (model) is comparison of its prediction with experience.” thus, the fact that coffield et al. (2004) find that the dunn and dunn model exhibits predictive validity seems to lend credence to the dunn and dunn paradigm. hawk and shah (2007) examined five prominent learning style models and instruments, including the dunn and dunn model and peps instrument. hawk and shaw (2007, p.10) report, “there is solid support for instrument validity and reliability for the lsi [kolb (1979) model learning style instrument]…and peps instruments…if cost is not a constraining factor then the lsi and peps …would give the most valid and reliable coverage of student learning styles…”. hawk and shaw (2007, p.11) suggest, “knowledge of the overall learning style profile of classes allows us to make adjustments to our learning approaches as the profile changes from course to course and across semesters. we believe that student performance improves as a result of our use of the learning style instruments, although we have no empirical data of our own to support that belief.” utilization of information regarding the learning style profile of a cohort of students to tailor pedagogy to enhance student achievement is consistent with the dunn and dunn learning styles methodology (dunn 2000). given the impracticality of 19 journal for economic educators, 9(1), summer 2009 designing a teaching strategy that matches each student’s learning style, dunn (2000) suggests an alternative method that allows instructors to capitalize on students’ learning style preferences. the method involves the use of the peps instrument to “identify individual and group patterns among students’ learning style preferences and develop teaching style strategies to respond to those patterns” (dunn 2000, p. x). the dunn and dunn learning styles model an individual’s learning style is determined by a combination of environmental, emotional, sociological, physiological and psychological elements. the environmental elements include noise (background silence versus music or conversation), light (soft or bright lighting), temperature (cool or warm), and design (informal versus formal seating) (dunn, 2000). the emotional elements include motivation (self-directed versus external), persistence, responsible (conformity to societal norms) and structure (preference for internal or external direction). sociological elements reflect with whom each student prefers to learn and the preferred manner in which the material is learned. analytic learners prefer to learn alone, while global learners prefer to learn in pairs, with peers, or as part of a team. the manner in which the material is learned refers to whether students learn with an authoritative adult or with a collegial individual. this element also refers to whether a student likes to learn using a variety of methods or by using established routines. physiological elements include perceptual modalities. some students learn better with print material (visual), with lectures (auditory), by touch (tactual) or by doing (kinesthetic). also included are preferences for intake (snacks), time of day and mobility (moving around while learning as opposed to sitting still.) psychological elements refer to the ways students absorb and process new information. this includes global versus analytic learning approaches. “analytics learn more easily when information is presented step by step in a cumulative sequential pattern that builds toward a conceptual understanding. globals learn more easily when they understand the concept first and then concentrate on the details, or are introduced to the information with, preferably, a humorous story replete with examples and graphics.” (dunn and dunn, 1993). according to the dunn and dunn model (dunn 2000) analytic and global learners have different environmental, emotional, sociological, physiological and psychological preferences. the model hypothesizes that preferences for noise, light, design, persistence, and intake distinguish analytic learners from global learners (dunn, 2000). analytic learners learn best in a quiet, brightly lighted and formal learning environment. they prefer to start and finish one project at a time, and do not snack while learning. global learners learn best with background noise, soft light in a relaxed learning environment. they simultaneously work on several projects, take frequent breaks, and enjoy snacks when learning. global learners prefer new and difficult information to be introduced anecdotally, especially in a way that humorously explains how the lesson relates to them. hence, five of the twenty learning style elements from the peps survey instrument can be utilized as discriminators in order to categorize a student as an analytical learner or a global learner: preference for noise, preference for light, preference for formality of design in the location where the studying/learning takes 20 journal for economic educators, 9(1), summer 2009 place, preference for being persistent (avoiding interruptions while studying), and preference for food or drink intake while studying. the five elements are listed separately in table 1 along with the correlation that each element is hypothesized to have with the ability of analytical and global learners to perform well under the respective conditions. table 1: the discriminating elements to distinguish analytic and global learners and the hypothesized relationship to each category discriminating element analytic learners global learners noise negative positive light positive negative design positive negative persistence positive negative food intake negative positive applying analytical and global teaching methods the following example elucidates alternative pedagogical methods that may be utilized to accommodate analytic and global students in the principles of microeconomics course. say, for example, that the ultimate goal of the lesson is for the students to understand how a market establishes an equilibrium price. method 1. analytic teaching method--at the start of the analysis, the instructor provides a detailed list that includes dates of all reading, written and mathematical assignments, quizzes and tests. the instructor explains that consumer preference theory will be developed to derive a demand curve that represents consumers’ marginal willingness and ability to pay for a good. students are introduced to the abstract theory of indifference curves, budget constraints and constrained optimization techniques. next, the instructor explains that the theory of the firm is utilized to derive a short-run production function from which the total, average and marginal cost curves are derived. the notion of a perfectly competitive market structure is introduced and the supply curve for the typical firm within the industry is derived. the economic profit, break-even, economic loss, and shut-down cases are analyzed. the industry supply and demand curves are derived from the individual firms’ supply curves and individual consumers’ demand curves. finally, the equilibrium price is determined by the intersection of the industry supply and demand curves. at each stage of the analysis, the instructor writes the outline of the lesson on the chalkboard and highlights and defines key words. each principle is reinforced with numerous examples, sidebars, and numerical illustrations. in this way, price theory proceeds from one distinct, easily digestible, sequential segment to another, ultimately leading to a comprehensive understanding of price determination in a market system that is more consistent with the analytic learning style. method 2. global teaching method--at the start of the analysis the instructor explains to the students that, in light of the obama administration’s social commitment to the development and utilization of alternative fuels, increased fuel efficiency and reduced emissions, consumers in the united states have chosen toyota’s prius as the “hybrid 21 journal for economic educators, 9(1), summer 2009 superstar.” it has been predicted that the 2010 model will have a combined city-highway rating of fifty miles per gallon which not only is better than any car sold in the u.s., but, particularly for the wealthier students, is 400 percent better than the lamborghinni murcielago roadster (garrett, 2009). following the informative and perhaps humorous anecdote regarding a current market development in an industry that produces a good for which virtually all students have personal experience, knowledge and interest, the instructor asks the students to divide into teams and asks the teams to predict the market price of the 2010 prius. to begin the analysis, the instructor utilizes the brainstorming method that guides students to list the important factors, i.e., demand and supply, which may determine the price. next, the instructor suggests that the students visit local toyota dealerships, search websites such as toyota.com, edmunds.com or kelly’s blue book (kb.com), search for information from such publications as car and driver magazine, consumer reports, new york times automobile section, the bureau of economic analysis’ survey of current business, utilize websites such as hoovers online and standard & poor’s industry survey. finally, the instructor suggests that each team create a poster board, power-point presentation, conduct a dramatization, or utilize any other creative method to convey and support their analysis and prediction to the class. in this way, price theory is taught in the context of an important current social issue that is meaningful and relevant to the students’ lives, a teaching method that is consistent with the global learning style. empirical analysis data for the 125 students in the study were collected from eight sections of the same introductory microeconomics course that were taught by the same economics instructor over the four semesters from spring 2003 through fall 2005. there were 221 students enrolled in those eight sections of a campus at a university in the northeast.2 the productivity environmental preference survey (peps) (dunn, dunn and price 2006) instrument, based upon the dunn and dunn learning styles methodology (dunn 2000), is used to identify student preferences for the twenty elements comprising five strands of the learning style model. the peps, designed to identify how college students and other adults learn and perform in their academic and occupational pursuits, the introductory microeconomics class in which the subject students were enrolled is the first semester of a two course economics sequence that is required of all business majors. typically, only about five percent of the students in that class are non-business majors. the business program is accredited by aacsb. 2 among the 221 students enrolled in the eight introductory microeconomics sections, there were twelve students who withdrew during the respective semesters and eighty-four non-participants, leaving 125 students who chose to participate in the student and complete the peps survey and consent to allow access to their student records for sat and other data. the eighty-four non participants were comprised of (a) students who were not present on the single class meeting when the peps survey and the consent forms were distributed and (b) a relatively small number of students who chose not to complete the forms (keeping a separate record of even the exact number of students who chose not to complete the forms would have been inconsistent with university institutional review board procedures). nevertheless, a ttest for the comparison of exam score means between the 125 participants and the eighty-four nonparticipants was undertaken and revealed no significant difference between the performances of those two groups. this finding suggests a reasonable comparability between the participant and non-participant groups. 22 journal for economic educators, 9(1), summer 2009 is a self-report composed of 100 questions that can be completed in approximately twenty minutes. each question is designed to identify an individual’s preference regarding each of the environmental, emotional, sociological, physiological, and psychological elements. for example, to determine their preference regarding sound, an environmental element, students are asked to answer whether they strongly disagree, disagree, are uncertain, agree, or strongly agree to a series of statements, such as: 1. i can block out noise or sound when i work. 2. i prefer to work with music playing. 3. noise or extraneous sound usually keeps me from concentrating. 4. i can block out most sound when i work. in a similar manner, preferences regarding all environmental, emotional, sociological, and physiological elements are identified. the preferences that embody each student’s inherent learning style likely are characterized by multicollinearity. in other words, each student’s learning style profile is composed of a unique, interrelated web of preferences for the twenty multidimensional learning style elements. as the dunn and dunn model (dunn 2000) hypothesizes, an individual’s learning style may be characterized by a global thought process, an analytic thought process, or by a combination of the two thought processes, referred to as an indifferent thought process. to the extent that a student’s inherent learning style aligns with one or another thought process, there is a certain interrelated pattern of preferences for at least five of the twenty learning style elements, particularly, but not limited to, preferences for sound, light, design, persistence and intake. moreover, multicollinearity most certainly exists among the separate variables measuring student preferences for three of the physiological elements--time-of-day, late morning and afternoon. if multicollinearity exists among the learning style preference variables, when used as explanatory variables in a linear regression model to estimate their partial correlation with student achievement, the partial correlation coefficients would be unbiased, but their standard errors would be artificially large and the t-statistics would be artificially reduced. as a result, any statistical tests on the partial correlation coefficients would be misleading and unreliable. therefore, in order to utilize the learning style elements as explanatory variables to correctly estimate their statistical relationship with student achievement, it first is necessary to remove the multicollinearity that characterizes students’ learning styles elements. factor analysis is used to transform the learning style elements, which are correlated with one another, into a smaller set of uncorrelated factors that maintain the essence of the each student’s learning style profile. factor analysis decomposes the information contained in student preferences for the numerous learning style elements into smaller set of uncorrelated common factors that maintain and reflect the inherent characteristics of the original learning style elements. each learning style element (x) is assumed to be a linear combination of a set of common factors (f) and a component (u) that is unique to the element as described in the following equation 1: imimjijiii ufbfbfbfbxeq ++⋅⋅⋅++⋅⋅⋅++= 2211:1. , i = 1, 2,…20, representing the 20 learning style elements, where xi is the ith learning style element, fj is the jth common factor, bij is the standardized correlation coefficient 23 journal for economic educators, 9(1), summer 2009 between the learning style element i and the common factor j, referred to as the factor loading, and j = 1, 2, …m, m representing the number of common factors. ui is the component unique to the leaning style element. the total variance for each element is composed of the common-factor component variance, referred to as the communality, and the component variance unique to each variable, referred to as the specific part. in the factor analysis, the number of common factors is determined by the percentage of total variance (eigenvalue) that is explained by the each common factor. a rule of thumb in determining the number of factors is that a factor with an eigenvalue of less than one would not be used because it accounts for less than the variation explained by a single variable. however, there is no generally accepted rule for selecting the number of common factors and the number of factors may also be influenced by the pattern of variables that are subsumed by each factor. it has been further observed that extracting more factors than the number dictated by the above rule of thumb carries less methodological risk than extracting a smaller number of factors (wood, tataryn, and gorsuch 1996). the factors’ eigenvalues, the percentage of variability explained by each factor, and their cumulative explained variability are reported in table 2.3 table 2: eigenvalues of the five extracted learning style factors factors factor 1 factor 2 factor 3 factor 4 factor 5 eigenvalue 2.808 2.048 1.852 1.078 0.876 variability (%) 14.042 10.241 9.258 5.391 4.379 cumulative variability % 14.042 24.283 33.541 38.932 43.311 the five extracted factors cumulatively account for over forty three percent of the variation in the twenty leaning style elements. although the fifth factor accounts for less than the variation explained by a single variable, it is included in the analysis because it aligns with the analytic learning style identified in the second stage of the factor analysis. the factor loadings, which are the standardized correlation coefficients between each learning style element and the five extracted factors, are reported in table 3. 3 the “principal factor analysis” method was employed as the extraction method for the factor analysis. principal factor analysis extracts the factors in such a way that they are independent of one another. this method is distinct from principal component analysis. however, a further rotation of the factors was not undertaken given the satisfactory pattern of the underlying learning style elements within the factors that emerged from that process. 24 journal for economic educators, 9(1), summer 2009 table 3: factor loadings for the five extracted learning style factors variable factor 1 factor 2 factor 3 factor 4 factor 5 motivation -0.651 -0.153 0.583 0.053 -0.232 responsible (conforming) -0.621 -0.355 0.305 0.138 -0.157 persistence -0.615 -0.033 0.505 0.028 -0.055 kinesthetic -0.532 0.544 0.162 0.095 0.264 time of day -0.531 -0.216 -0.393 0.004 -0.007 late morning -0.485 0.093 -0.458 -0.233 -0.155 tactile -0.411 0.503 -0.050 -0.228 -0.141 light -0.337 0.203 0.189 -0.017 0.544 authority figures -0.233 0.576 -0.174 0.326 0.276 intake 0.136 0.575 0.242 -0.133 -0.300 alone/peers 0.096 0.569 -0.292 0.584 -0.063 mobility 0.178 0.464 0.138 -0.242 -0.278 visual -0.100 0.396 -0.024 -0.761 0.096 structure 0.122 0.347 0.086 -0.091 0.184 several ways -0.008 0.296 -0.032 0.282 -0.242 auditory -0.182 0.247 0.059 0.190 -0.193 afternoon 0.669 0.113 0.736 0.056 0.273 noise -0.028 0.075 0.285 0.103 -0.248 temp 0.123 0.002 0.075 -0.098 -0.108 design -0.297 -0.146 -0.017 -0.026 0.553 in order of relative importance, the emotional elements, including motivation, responsible/conforming and persistence, and the physiological elements, including timeof-day, late morning and tactile, align strongly with the first factor (f1). the environmental preference for light also aligns strongly with f1. the physiological elements, including kinesthetic, tactile, intake, mobility and visual, and the sociological elements, including alone/peers and authority figures, and one emotional element, structure, align strongly with the second factor (f2). the physiological elements of afternoon, late-morning and time-of-day, followed by the sociological elements of motivation, persistence and responsible-conforming align strongly with the third factor (f3). the physiological element of visual followed by the sociological elements of alone/peers and authority figure align strongly with the fourth factor (f4). the environment elements of design, light and noise, and the physiological element of intake strongly align with the fifth factor (f5). although many of the learning style elements strongly align with the five extracted factors, the alignments do not necessarily identify alternative learning styles. to determine whether the five extracted factors discern alternative learning styles, it is necessary to focus on the sign and statistical significance of the factor loadings of the learning style elements hypothesized by the dunn and dunn model (dunn 2000) to differentiate global, analytic and indifferent learners. the five discriminating learning style elements include the environmental preferences for noise, light, design, the emotional preference for persistence and the physiological preference for intake. the 25 journal for economic educators, 9(1), summer 2009 factor loadings and their p-statistics of the discriminating learning style elements are reported in table 4. table 4: factor loadings and p-values of the extracted factors for the five discriminating learning style elements element factor 1 factor 2 factor 3 factor 4 factor 5 noise -0.028a (0.756) 0.075g (0.408) 0.285g (0.001)* 0.103g (0.252) -0.248a (0.005)* light -0.337g (0.000)* 0.203a (0.023)* 0.189a (0.035)* -0.017g (0.852) 0.544a (0.000)* design -0.297g (0.001)* -0.148g (0.105) -0.017g (0.849) -0.026g (0.773) 0.553a (0.000)* persistence -0.615g (0.000)* -0.033g (0.715) 0.505a (0.000)* 0.028a (0.761) -0.055g (0.543) intake 0.136g (0.131) 0.575g (0.000)* 0.242g (0.007)* -0.133a (0.140) -0.300a (0.001)* notes: 1. p-values are in parentheses; 2. a starburst (*) denotes statistical significance; 3. an (a) denotes an analytic learning style characteristic and a (g) denotes a global leaning style characteristic. the first factor is strongly indicative of the global learning style. four of the five factor loadings, three of which are statistically significant, have a negative sign which is consistent with the global leaning style. the second factor is weakly indicative of the global learning style. four of the five factor loadings have a negative sign which is consistent with the global learning style, but only one, intake, is significant. the factor loading associated with light, an environmental element, is significant, but the positive sign is consistent with the analytic learning style. the third factor is indicative of the indifferent learning style. three factor loadings, noise, design and intake, have expected signs that are consistent with the global learning style. the factor loadings for the intake and noise elements are significant. the factor loadings for the persistence and light elements have positive signs which are consistent with the analytic learning style and both are significant. therefore, the evidence indicates a combination of the global and analytic learning styles. the fourth factor is weakly indicative of the global learning style. three of the factor loadings have the expected sign consistent with the global learning style, but none are significant. the fifth factor is strongly indicative of the analytic learning style. four of the factor loadings have signs consistent with the analytic learning style, all of which are significant. the alternative learning styles aligned with the extracted factors via factor analysis are summarized in table 5. the factor analysis has identified and differentiated all three learning styles hypothesized by the dunn and dunn model, including the global, analytic and indifferent learning styles. the extracted factors align in distinguishable patterns that are consistent with the learning style elements hypothesized by the dunn and dunn model to differentiate alternative learning styles (i.e., global, analytic and indifferent). these results then directly address the criticisms by coefield (2004) et al. and kavale (1998) regarding the lack of empirical verification of the identification of alternative learning styles made by the dunn and dunn model (dunn 2000). 26 journal for economic educators, 9(1), summer 2009 table 5: alternative learning styles identified by factor analysis factor associated learning style factor 1 strongly global factor 2 weakly global factor 3 indifferent factor 4 weakly global factor 5 strongly analytic in the final stage of factor analysis, the factor loadings are used to generate factor scores for each student. in this way, factor analysis transformed each student’s original, collinear preferences for the multidimensional learning style elements into independently distributed factor scores that embody each student’s inherent learning style. the factor scores subsequently are used as explanatory variables in a multivariate linear regression model to estimate the correlation between student learning style and student achievement. the standardized beta coefficients of this regression model are also estimated to determine the relative importance of the alternative, control variables. the least squares regression model is described by equation 2: iii iiiiiiiii iiiiiiii esdbsdb sdbsdbsdbsdbsdbedbedbsatratiobsatb pletedcreditscombgenderbfbfbfbfbfbbsaeq ++ +++++++++ ++++++++= 76 5432121 54321:2. 1817 1615141312111098 76543221 where student achievement (sai), the dependent variable, is equal to the ith student’s number of correct responses to each of three semester exams. since there are 125 students, there are 375 observations. the learning style extracted factors, f1 to f5, summarized in table 5, represent the students’ alternative learning styles. a dummy variable accounting for gender (set equal to one for female students) is included on the basis of the research of kane and spizman (1999), durden and ellis (2003) and krohn (2005) indicating that males tend to perform better, ceteris paribus, in economics courses than females. the inclusion of credits completed follows from the earlier research of borg and shapiro (1996), durden and ellis (2003) and ballard and johnson (2004) who found a positive and significant relationship between class year or credits completed and student performance in economics courses. the total of each student’s sat math and verbal scores are included in order to account for differences in overall student ability in explaining differences in performance. the issue of the most appropriate measure to account for variations in student ability has been addressed by grove, wasserman and grodner (2006). the ratio of each student’s sat math score to sat verbal score, sat ratio, is included in order to examine whether a student would have an advantage in introductory microeconomics if that student has relatively strong math abilities, as found by durden and ellis (2003) and ballard and johnson (2004). 27 journal for economic educators, 9(1), summer 2009 table 6: least square regression output variable coefficients standard error t-stat p-value beta coefficients intercept 1.722 2.746 0.630 0.531 0.000 ed1 0.240 0.544 0.440 0.659 0.023 ed2* 1.768 0.544 3.250 0.001* 0.166 gender -0.122 0.502 -0.240 0.808 -0.012 credits completed -0.007 0.012 -0.570 0.569 -0.028 sat total* 0.017 0.002 9.240 <.0001* 0.432 sat ratio -0.295 1.290 -0.230 0.820 -0.010 strongly global--factor 1* -0.772 0.243 -3.180 0.002* -0.149 weakly global--factor 2 -0.106 0.256 -0.410 0.679 -0.019 indifferent--factor 3* 0.471 0.236 2.000 0.047* 0.091 weakly global factor 4 -0.273 0.261 -1.050 0.296 -0.048 strongly analytic--factor 5 -0.405 0.284 -1.430 0.155 -0.066 sd1 0.183 0.866 0.210 0.833 0.014 sd2 0.743 0.943 0.790 0.431 0.051 sd3* 2.782 0.984 2.830 0.005* 0.169 sd4 -0.280 1.035 -0.270 0.787 -0.016 sd5* -2.000 0.990 -2.020 0.044* -0.126 sd6 -0.449 0.902 -0.500 0.619 -0.031 sd7 -1.211 0.953 -1.270 0.204 -0.078 notes: 1. a starburst (*) denotes statistical significance, 2. r-squared = 0.3029, adjusted r-squared = 0.2677, 4. standard error of regression = 4.299, 5. f-statistic( 18, 356) = 8.59 and its p-value < 0.0001. dummy variables (ed1 and ed2) are also included to account for the slight differences in the number of questions and possible differences in the difficulty of the questions on the three different exams given in the introductory microeconomics course. the third exam serves as the base. finally, dummy variables (sd1 – sd7) are included to account for differences among the eight alternative class sections in which a student may have been enrolled. the eighth section serves as the base. the residuals, ei, were tested and found to be independently and normally distributed with a constant variance and a mean equal to zero. the regression results are reported in table 6. the adjusted r-squared result indicates that the regression model explains nearly twenty-seven percent of the variation in student exam performance. the f-statistic is significant at the .0001 level of significance with 18 and 356 degrees of freedom, an indication that the model fits the data well. the coefficient for gender is not statistically significant. the coefficients for ed1, credits completed, and sat ratio also are not statistically significant. the partial correlation coefficient associated with the variables ed2, sat total, strongly global learning style, factor1, and indifferent learning style, factor 3, sd3 and sd5 are statistically significant. the coefficient of the ed2 variable represents the marginal difference between the student’s second midterm test grade and 28 journal for economic educators, 9(1), summer 2009 the third midterm test grade. the positive coefficient indicates that students performed significantly better on the second exam relative to the third exam. this result may be attributed to a more challenging final exam or the greater academic demands placed on students at the end of the semester, including, for example, several final exams, term papers and oral presentations. the positive coefficient for the sat total variable, a proxy for academic ability, indicates that students with a relatively higher academic ability attain a higher level of achievement in the principles of microeconomics course. the coefficients for the strongly analytic learning style variable, factor 5, and the weakly global learning style variables, factors 2 and 4, are negative but insignificant. although they are statistically insignificant, the negative coefficients imply that students with weakly global and strongly analytic learning styles were at a disadvantage in taking this microeconomics principles course. the coefficient associated with the strongly global learning style variable, factor 1, is negative and statistically significant, indicating that this presentation of microeconomic principles was not congruent with, and does not enhance achievement for, students with the global learning styles. for the indifferent learning style variable, factor 3, the coefficient is positive and significant, indicating that this presentation of microeconomic principles was congruent with, and enhances achievement for, students with an indifferent learning style. a somewhat surprising result was that two of the section dummy control variables, sd3 representing one of the two spring 2004 sections and sd5 representing one of the fall 2004 sections, were statistically significant—directly related to performance in the former case and inversely linked to performance in the latter case. this result suggests that when all of the other variables of the model, such as sat as a measure of student ability or the learning style profile of the class, are held constant, students in those two sections performed significantly differently than students in the other sections. perhaps this can be explained in terms of a favorable or unfavorable chemistry that may develop over the semester between the students and the instructor. perhaps a given group of students develops its own “personality” or interaction dynamics which may either be conducive to or hinder the overall performance of those students in the class. with regard to the relative importance of the alternative explanatory variables’ contribution to achievement, the configuration of the standardized beta coefficients suggests that the student’s total sat score is ranked first. for every one standard deviation increase in the student’s total sat score, there is a .432 standard deviation increase in student achievement. by comparison, as the alignment of a student with the strongly global learning style increases by one standard deviation, the student’s achievement decreases by .149 standard deviations. and as the alignment of a student with the indifferent learning style increases by one standard deviation, the student’s achievement increases by .091 standard deviations. summary and conclusion according to the dunn and dunn (2000) model of teaching and learning, the optimal method of instruction is that method that matches students’ learning styles. it is hypothesized that students whose learning styles are congruent with the teaching style of the instructor will have a higher level of achievement relative to students whose learning styles are incongruent. the productivity environmental preference survey (peps) 29 journal for economic educators, 9(1), summer 2009 instrument, designed to correspond to the multidimensional dunn and dunn paradigm, is utilized to identify students’ learning styles. the ordinary least squares regression method then is utilized to examine the statistical association between student achievement and their learning styles five common factors were extracted via factor analysis that corresponded to the three leaning styles that characterize the dunn and dunn model. the dunn and dunn model hypothesizes that an individual’s learning style is inherently composed of a unique, interrelated web of multifaceted biological, environmental and psychological elements. if the interrelated learning style elements are used as explanatory variables in regression analysis, then their estimated partial correlation coefficients are unreliable in a hypothesis testing framework. therefore, factor analysis was utilized to untangle the interrelated web of learning style elements and transform each student’s learning style into several complex factors variables that embody the essence of the original learning style but are devoid of multicollinearity. the statistically significant results of the factor analysis indicate that the extracted factors align with the discriminating elements in distinguishing patterns hypothesized by the dunn and dunn model (dunn 2000) to differentiate global, analytic and indifferent learners. this result is important because it supports the construct validity of the peps. in other words, the results of the factor analysis indicate that the peps instrument measures students’ learning styles in a way that corresponds to, and therefore supports, the logical structure of the dunn and dunn paradigm. the learning style factors subsequently were regressed against student achievement to measure the correlation between students’ achievement and their learning styles. student achievement was measured as the number of correct answers for three midterm examinations. the regression model controlled for differences in students’ gender, aptitude, maturity, and for possible differences in the class cohort and the rigor of the examinations. for the extracted factors found to be statistically meaningful in the factor analysis, including the strongly global, strongly analytic and indifferent leaning styles, only two factors were significant--the indifferent learning style factor (directly linked to performance) and the strongly global learning style factor (inversely linked to performance). the negative coefficient for the strongly analytic learning style factor was not significant. these results indicate that the instructor’s teaching method was congruent with, and enhanced achievement for, students with an indifferent learning style, and was incongruent with, and did not enhance achievement for, students with the global learning styles. for students with analytic learning styles, no significant relationship between the instructor’s teaching method and student performance emerged. our results indicate that the learning style characteristics of students do appear to have a significant relationship to the students’ achievement. we believe that a reasonable inference from these findings is that the manner in which economic knowledge is conveyed to students by instructors, particularly the congruence of that manner to the learning style of the students, can be expected to systematically influence the performance of those students in learning the material. that inference is inconsistent with the view of colander (2006), but supports the views of frank (2007) and reich (2000). we also believe that our paper addresses some of the criticisms leveled against the dunn and dunn methodology by kavale et al. (1998) and coffield et al. (2004). 30 journal for economic educators, 9(1), summer 2009 these critics point to a lack of independent, peer-reviewed research aimed at empirical verification. this study has attempted such a verification and offers empirical support of the efficacy of the dunn and dunn methodology. these results suggest a three step process to make productive use of the dunn and dunn model in a college setting. the first step, to be performed very early in the semester, would be to take an inventory the learning style preferences of the students in a class with the use of the peps instrument. a second step would be to interpret those results with the use of factor analysis so that a clearer picture of the student learning style preferences with respect to global, analytic or indifferent learning style patterns can emerge. the final step would be to fashion the appropriate mix of teaching style methods and strategies to address the learning style pattern that is revealed by the process undertaken in steps one and two. our results suggest that such a three step approach should facilitate a meaningful increase in the student learning of economics, and perhaps the material offered in other academic disciplines. in an era when higher real tuition costs are putting greater pressure on administrators and faculty to devise more effective approaches to achieving their educational missions, we believe that this research allows economics (and other) instructors to not only better teach, but also to better practice, the concept of economic efficiency. references ballard, c. l., and m. f. johnson, m. f. 2004. “basic math skills and performance in an introductory economics class.” journal of economic education, 35: 3-23. becker, w. e., and m. watts. 2001. “teaching economics in the 21st century: still calkand-talk.” american economic review, 91: 446-451. borg, m. o., and s. l. shapiro. 1996. “personality type and student performance in principles of economics. journal of economic education, 27: 3-25. brokaw, a. j., and t. e. merz. 2000. “the effects of student behavior and preferred learning style on performance.” journal of business education, 1: 44-53. charkins, r. j., d. m. o’toole, and j. n. wetzel. 1985. “linking teacher and student learning styles with student achievement and attitudes.” journal of economic education, 6: 111-120. coffield, f., d. moseley, e. hall, and k. ecclestone. 2004. learning styles and pedagogy in post-16 learning: a systematic and critical review. london: the learning and skills research center, www.lsda.org.uk/files/ pdf/1543.pdf, (accessed july 12, 2007). colander, d. 2006. the stories economists tell: essays on the art of teaching economics. new york city: mcgraw-hill irwin. dunn, r. 2000. “capitalizing on college students’ learning styles: theory, practice, and research.” in dunn, r. and r. griggs, r. (eds), practical approaches to using learning styles in higher education, (pp.3-18). westport, ct: bergin & garvey. dunn, r., k. dunn, k. 1993. teaching secondary students through their individual learning styles: practical approaches for grades 7-12. boston: allyn and bacon. dunn, r., k. dunn, k., g. e. price, g.e. 2006. productivity environmental proficiency survey. lawrence, ks: price systems, inc. http://www.lsda.org.uk/files/%20pdf/1543.pdf� 31 journal for economic educators, 9(1), summer 2009 durden, g., and l. ellis. 2003. “is class attendance a proxy variable for student motivation in economics classes? an empirical analysis.” international social science review, 78: 42-46. frank, r. h. 2007. “the dismal science, dismally taught.” economic view, sunday business, new york times, august 12: bu 4. friedman, m. 1953. essays in positive economics. chicago: university of chicago press. garrett, j. 2009. “the hybrid superstar now shines brighter” automobiles, behind the wheel, new york times, march 29: au1. grove, w. a., t. wasserman, and a. grodner. 2006. “choosing a proxy for academic aptitude.” journal of economic education, 37: 131-147. hawk, t. f., and a. j. shah. 2007. “using learning style instruments to enhance student learning.” decision sciences journal of innovative education 5: 1-19. kane, j., l. m. spizman. 1999. determinants of student retention of microeconomics principles concepts. suny-oswego economics department working paper 1999-01. kavale, k. a., a. hishoren, and s. r. forness. 1998. “meta-analytic validation of the dunn.” learning disabilities research & practice, 13: 75-80. krohn, g. a., and c. m. o’connor. 2005. “student effort and performance over the semester.” journal of economic education. 36: 3-28. kolb, d. a. 1979. student learning styles and disciplinary learning environment: diverse pathways for growth. san francisco: jossey-bass. reich, r. b. 2000. “one education does not fit all.” oped, new york times, july 11: a25. terregrossa, ralph a., f. englander, and v. englander. 2008. “a production function for teaching microeconomics principles: what categories of learning style variables matter?” international journal of education research. 3: 11-20. wood, j. m., d. j. tataryn, and r. l. gorsuch, r. l. 1996. “effects of underand overextraction on principal axis factor analysis with varimax rotation.” psychological methods, 1: 354-365. why learning styles matter for student achievement in college economics 58 | journal for economic educators, 14(1), summer 2014 58 how economic development affects antibiotic resistance john b. horowitz 1 h. brian moehring 2 abstract initially, economic development increases resistance because migration of people to urban areas in developing countries increases incomes, crowding and the use of antibiotics. also, developing countries often don’t require prescriptions or distribute high quality antibiotics. in developed countries, antibiotic resistance often falls or there is a decline in the rate of growth of resistance because infections decline with improvements in water quality, sanitation, housing and nutrition. however, in developed countries most antibiotics are used to treat food animals rather than humans. the use of antibiotics to treat food animals creates a risk that the effectiveness of antibiotics to treat humans will be reduced. however, evidence seems to indicate that antibiotic use in animals has had little effect on antibiotic resistance in humans. key words: economic development, antibiotic resistance, antimicrobial resistance jel classification: d62, i15, i18, o15, r23 introduction the consequences [of antibiotic resistance] are severe. infections caused by resistant microbes fail to respond to treatment, resulting in prolonged illness and greater risk of death. treatment failures also lead to longer periods of infectivity, which increase the numbers of infected people moving in the community and thus expose the general population to the risk of contracting a resistant strain of infection. (world health organization 2002). this quotation illustrates the potential consequences of antibiotic resistance. students are often interested in staying alive. beyond the potential health consequences, antibiotic resistance is a useful way to teach how positive and negative externalities affect efficiency. also, showing how economic development affects antibiotic resistance illustrates how the demand curve is affected by changes in income, the number of buyers, and insurance. externalities exist when either the benefits or costs of consumption or production spill over onto other people who did not agree to the action. antimicrobial use creates both negative and positive externalities (coast et al. 1998 and horowitz and moehring 2004). it creates a negative externality because antibiotics eliminate the less resistant bacteria while leaving the more resistant bacteria to multiply. these resistant microbes then infect others and reduce the 1 associate professor of economics, department of economics, ball state university, muncie, in 47306. 2 business economist, 56213 n. 333 ln., wickenburg, az 85390 59 | journal for economic educators, 14(1), summer 2014 59 effectiveness of antimicrobials to them. this implies that the marginal costs incurred from a treatment include both the marginal cost of the treatment (mc) itself and the marginal external cost (mec) from the resistant microbes. antimicrobial use creates a positive externality by reducing the number of infected people who in turn are less likely to infect others, thereby improving public health. this implies that the marginal benefit of treatment includes both the marginal benefit of treatment (mb) and the marginal external benefit from improved public health (meb). efficient anti-microbial use occurs when the marginal benefit of treatment equals the marginal costs incurred from the treatment to both the person being treated and to others. excessive antibiotics are used because users don't bear the full cost of treatment in the future. previous articles have explored how the negative externality from antibiotic resistance can be reduced by prevention and improved diagnosis (world bank 1993), substitutes (howard 2004), property rights (horowitz and moehring 2004), taxation (coast et al. 1998), regulation (coast et al. 1998), tradeable permits (coast et al. 1998), surveillance (horan et al. 2008) and treaties (anomaly 2010). these articles, however, do not explore the effect of economic development on antibiotic resistance. economic development has two contradictory effects on microbial resistance to antibiotics: first, economic development may increase resistance, since more people can afford antibiotics. a key determinate in antibiotic resistance is the volume of antibiotic exposure (austin et al. 1999) such that countries that use more antibiotics tend to have more resistant bacteria (bronzwaer et al., 2002 and costelloe et al., 2010). second, economic development may reduce microbial resistance to antibiotics since countries can afford more effective infection control and better public health. the reduction in disease reduces antibiotic use in humans and potentially microbial resistance. as countries develop, however, antibiotic resistance may increase as more antibiotics are used on animals. hence, the effect of economic development on microbial resistance is ambiguous. silbergeld et al. (2008) argue that there are four reasons why antibiotic use in agricultural is a major cause for concern. first, the largest use of antibiotics in the world is in agriculture. second, much of the use of antibiotics in agriculture is sub-therapeutic exposure to antibiotics. third, every important class of antibiotic is used in agriculture. and fourth, humans are exposed to resistant bacteria through consuming animal products and through release into the environment. however, reducing or restricting antibiotic use in agriculture may actually increase antibiotic resistance. this is because healthier animals are less likely to pass on resistant bacteria to humans. singer et al. (2007) list three reasons why diseased animals increase foodborne pathogen levels. first, diseased animals are more likely to spread pathogens. second, diseased parts of diseased animals must be removed in processing plants which increases the risk of contamination and cross contamination. third, diseased animals increase the risk that processing plant mistakes such as gastrointestinal ruptures will contaminate the meat from that animal and other animals. they conclude that small improvements in animal health may result in large improvements in human health. likewise, hurd et al. (2008) conclude that small improvements in animal health greatly reduce the risk of human sickness from foodborne illnesses. alban et al. (2008), hurd et al. (2008) and hurd et al. (2004) conclude that reducing antibiotic use in animals leads to higher risk from illness from animals while the human risks 60 | journal for economic educators, 14(1), summer 2014 60 from antibiotic resistance from animals is very low. cox et al. (2009) find that current penicillin use in food animals in the united states creates almost zero human health risks and cox et al. (2004) find that a ban on virginiamycin (vm) would have almost no benefit for human health. cox et al. (2006) find that stopping animal antibiotic use would probably cause much more human illness than it would prevent. this article examines how economic development affects microbial resistance to antibiotics. because many antimicrobials are used in animal husbandry, developed countries may use more antibiotics than developing countries. however, human antibiotic use is likely to decline as the levels of human sickness decline. for simplicity, the analysis below assumes buyers purchase antibiotics solely for human use. how economic development affects the demand for antibiotics and efficiency suppose that the demand curve for a representative buyer is pi = ai bqi where qi measures the quantity of antibiotic treatments used by each buyer in country i, b is the slope of the demand curve, pi is the price of an antibiotic treatment in country i, and ai is the maximum price that a buyer will spend on a antibiotic treatment in country i. the buyer’s income and the price of substitutes determine ai. an increase in income or an increase in the price of a substitute will cause a parallel shift to the right in the demand curve. since government and private insurance programs pay much of the cost of many antibiotics, let si be the portion of the price paid by the buyer in country i (i.e. the buyer’s out-ofpocket expenditure) so the buyer’s net price is sipi. the demand curve for each individual buyer is: (1) q a s p b i i i i  . let ni be the number of buyers. multiplying qi in equation 1 by ni gives the total quantity of the antimicrobial used in country i (qi) at a given price: (2) q n a s p b i i i i i      . where qi = niqi. solving for pi, the demand for the antimicrobial becomes: (3) p s a bq n i i i i i         1 . mebi is the marginal external benefit. mebi exists because antimicrobial use decreases the risk of infecting others. one argument for a public health system is that users of antimicrobials are unlikely to take into account the external benefits of antimicrobial use since the benefits go to other people. 61 | journal for economic educators, 14(1), summer 2014 61 the marginal social benefit (msbi) is the vertical summation of the mebi and the demand curve: (4) p a bq n meb msb i i i i i i     . when calculating the optimal price and quantity, subsidies and taxes are not included, thus si is not included in equation 4. mci is the marginal cost of an antibiotic treatment in country i. mci includes not only the price of the antibiotic but also the cost of visiting the doctor to get a prescription, the inconvenience and discomfort of complying with the treatment, and the availability and ease of access to health care facilities. when patients can purchase antibiotics without a prescription, the cost of visiting the doctor can be ignored and the marginal cost decreases. the lack of regulation on the quality of drugs and the dispensation of drugs is a major problem especially in developing countries (okeke et al., 1999). also, the marginal cost decreases when there is easy access to nearby health care clinics and pharmacies (walson et al. 2001). a key determinate in antimicrobial resistance is the volume of antibiotic exposure (austin et al. 1999; levin et al. 2000; and arason et al. 1996). countries that use more antibiotics tend to have more resistant bacteria (bronzwaer et al., 2002 and costelloe et al., 2010). this implies that the marginal external cost (meci) increases with antimicrobial exposure. when there is no antibiotic use, mec is zero. as antibiotic use increases, mec also increases. the marginal social cost (msci) is the vertical summation of the marginal cost and the marginal external cost i.e. msci = mci + meci. this is illustrated in figure 1. with no intervention and multiple producers of the antibiotic, a competitive market will produce at point a with a price of p and q treatments. the efficient quantity of antimicrobial treatments is at point b where d+meb=mc+mec and is denoted q* with a price of p*. current concern about antibiotic resistance implies that the mec is much larger than the meb. thus, antibiotic treatments are reduced in figure 1. 3 there are likely to be major disagreements on the optimal level of antibiotic treatment. the economically efficient level of antibiotics is probably greater than the medically efficient level (rubin, 2004-2005). this is because calculations of medical efficiency may ignore the value that patients place on avoiding the costs from additional visits to the doctor when the diagnosis is uncertain. on the other hand, public health officials have an incentive to overstate the effects of resistance to gain access to more resources (best, 2005). 4 if public health officials overestimate the costs of resistance then they may try to reduce the level of treatments too much. 3 though straight lines are used for ease of exposition, the mec curve is likely to start out at fairly low levels and then increase at increasing rates. likewise, the meb instead of being constant probably tends to diminish as more antibiotic treatments are used. 4 best (2005) illustrates how statistics are often inflated or selectively highlighted by usually sincere advocates to gain media attention and resources. this may cause too many resources to be allocated to reduce antibiotic resistance. 62 | journal for economic educators, 14(1), summer 2014 62 how economic development affects communicable diseases looking at diseases for which antibiotics are commonly prescribed, the burden of disease is about 61 times higher in low and middle income countries than in high income countries (mathers et al. 2006). 5 since eighty-five percent of the world’s population lives in low and middle income countries (cia world factbook, 2006), adjusting for population, the burden of disease is about 11 times higher in low and middle income countries than in high income countries. 6 in other words, high income countries have about 9.1% (1/11) of the disease burden that low and middle income countries have. part of the reason for more infections in the developing world is because of crowding in urban areas and lack of sanitation. economic development is normally accompanied by internal migration and increased population density (todaro, 1969). as people migrate to cities, microbial resistance to antibiotics may increase. this is because living in crowded unsanitary living conditions makes it easier to transmit resistant bacteria and people living in urban areas 5 these calculations include tuberculosis (tb), sexually transmitted diseases (stds), diarrheal diseases, pertussis, diphtheria, tetanus, meningitis, leprosy, and respiratory infections. however, some of these diseases such as respiratory infections are caused by viruses. mathers et al (2006) also combine low income and middle income countries into one category and calculate disability-adjusted life years (daly) to quantify the global burden of disease. 6 authors’ calculations using data from mathers et al (2006). d price figure 1 efficient use of the antibiotic quantity mc d+meb q p* q* p b a c p*-mec mc+mec 63 | journal for economic educators, 14(1), summer 2014 63 usually have easier access to antibiotics. nys et al. (2004) found that in eight developing countries, faecal e. coli resistance was higher in urban populations than rural populations. throughout the world, urban areas gain approximately 67 million people per year or about 1.3 million per week (meeting the urban challenge 2002). a major component of this increase is because rural people are attracted to cities in search of higher expected incomes (todaro 1969, meeting the urban challenge 2002). even though the average health of urban residents is higher than that of rural residents, the living conditions of the urban poor are worse than those of the urban non-poor and are often worse than conditions of the rural poor. in 2005, 31.2 percent of the world’s urban population lived in slums (state of the world’s cities 2006/7); this represents more than a billion people. the urban poor who are especially at risk live in crowded conditions, with poor sanitation, and unsafe water. 7 polluted water and inadequate sanitation increase the probability of contracting diseases. 8 this is analogous to nineteenth century america where internal migration caused as much as 50 percent of the increase in measured per capita income in the antebellum era (fogel 2004). internal migration, however, also was a major factor in spreading diseases such as cholera, typhoid, typhus, malaria, and dysentery (smillie 1955 and fogel 2004). increased density also increased the prevalence of malaria, enteric diseases, and diseases of the respiratory system (smillie 1955, may 1958, and fogel 2004). as countries continue to develop, however, the number of microbial diseases falls dramatically. for example, since the 18 th century, there has been a long-term decline in infectious disease mortality in developed countries (mckeown, 1976; kunitz, 1991; woods, 1991; and riley & alter, 1989). reductions in infectious diseases increases the proportion of ingested energy available to work since less energy is used to mobilize the immune system (dasgupta, 1993). the capacity of the gut to absorb nutrients improves especially when there are fewer diarrheal diseases (dasgupta, 1993). the reduction in infectious diseases in developed countries was caused by improvements in nutrition, pasteurization, public hygiene, health care, vaccinations, and draining swamps (mckeown, 1976; kunitz, 1991; woods, 1991; riley & alter, 1989; schofield and reher, 1991; and fogel, 2004). 7 households in developing countries often have limited access to improved sanitation and clean water supplies. fifty-four percent of households in low income countries and 41 percent in middle income countries did not have access to improved sanitation and 24 percent of households in low income countries and 19 percent in middle income countries did not have access to clean water sources in 2000 (world development indicators 2001). in developed countries, almost everyone had access to improved water sources and sanitation. 8 cholera is mainly transmitted through contaminated food and water and is usually limited to developing countries where clean water and adequate sanitation are relatively scarce (sack et al. 2001). shigellosis is primarily a disease of poor and crowded communities that do not have adequate sanitation or safe water (sack et al. 2001). in the developing world, shigellosis primarily infects children, with the urban poor being most affected. fatality rates are highest among children less than five years of age, especially those who are malnourished. most campylobacter infections are through ingestion or handling of raw or inadequately prepared poultry, drinking raw milk, drinking contaminated water, and through fecal contact (sack et al. 2001). there is also strong evidence that campylobacter infections may be a major cause of guillain-barre syndrome (allos, 1998). in the united states, about 40 percent of guillain-barre syndrome cases previously had campylobacter infections (altekruse et al. 1999). in developing countries, some cases of guillain-barre syndrome probably were mis-diagnosed as polio. with the reduction in polio, many more cases of guillian-barre syndrome will probably be diagnosed. though, campylobacter jejuni is the most common cause of diarrheal illness in the united states, campylobacter infections are relatively rare in industrialized countries (sack et al. 2001). 64 | journal for economic educators, 14(1), summer 2014 64 though developing countries have more infectious diseases than developed countries, following the second world war, better nutrition, clean water supplies, improved sanitation, pasteurization, and vaccinations helped reduce infectious disease mortality in many developing countries (world bank, 1993). however, unlike the reduction in infectious diseases in the united states and europe, medical interventions such as oral rehydration therapy, immunizations and antibiotics played a major role in reducing mortality in developing countries (gwatkin, 1980; hill and pebley, 1989; and ruzicka and kane, 1990). still, in less affluent countries that lacked public health infrastructure, increased urbanization led to crowded unsanitary conditions that caused more communicable diseases (mutatkar, 1995). many of these medical interventions were financed by foreign aid. foreign aid may have contradictory results on microbial resistance to antibiotics. programs that increase access to antibiotics either by establishing clinics or subsidizing antibiotic purchases tend to increase resistance. for example, walson et al. (2001) found that people who lived closer to clinics in nepal had more resistant bacteria. on the other hand, programs that reduce microbial infections tend to reduce antibiotic use and thus resistance. gottret and schieber (2006) note that foreign aid is often used to provide medical services to the non-poor even though it was intended to provide medical services to the poor. 9 gottret and schieber (2006) also note that the foreign aid received is too small given the disease burden. also, the amounts they do receive are hard to administer because the country may receive large amounts of foreign aid one year, then a much smaller amount the next year. when donations are reduced, reallocating funds to cover the lost donations is difficult. one of the most effective ways to reduce resistance is to prevent microbial infections. preventing microbial infections reduces ni. equation 3 shows that a reduction in ni rotates the demand curve toward the origin along the quantity axis, but does not change the price intercept. this decrease in ni can be shown in figure 2 as a rotation from d to d’. let d represent low and middle income countries and d’ represent high income countries. since high income countries have about 9.1% of the infectious disease burden per capita that low and middle countries have, then ni=1 for demand curve d and ni=0.091 for demand curve d’. 10 in figure 2, the equilibrium number of antibiotic treatments for demand d is q and the efficient quantity is q*. the equilibrium quantity for demand d’ is q’ and the efficient number of treatments is q’*. for ease of presentation, at q’* the meb=mec so that q’*=q’. 9 foreign aid that is used to provide medical services to the non-poor even though it was intended to provide medical services to the poor is similar to a story told by gordon tullock where a fraudulent charity encourages people to help starving children. after collecting donations, the charity has professional actors pose in “before and after" photos showing the great benefits produced by the donations, and distributes the photos to the donors. this is pareto optimal: the givers benefit, the charity becomes rich, and, assuming the donations were not diverted from a charity that would actually help the starving children, the real starving children are not hurt. when there is deception, tullock argued that pareto optimality can lead to policies that people would not support if they were better informed and exposing the fraud leads to the donors being worse off. 10 this assumes that people only buy antibiotic when they have an infectious disease and the only difference between high income countries and low and middle income countries is the number of buyers (ni). 65 | journal for economic educators, 14(1), summer 2014 65 the demand for an antibiotic can also be reduced by substituting other currently existing antibiotics, newly discovered antibiotics or other substances with antimicrobial properties such as plants like garlic (ankri and mirelman, 1999), phage therapy (mcgrath and van sinderen 2007), sulfa drugs, or even anti-oxidants (galley et al. 1997). 11 however, unlike reducing microbial infections which rotates the demand curve in toward the origin, substitutes reduce ai in equation 3 which causes a parallel decrease in demand. decreasing the demand for the antibiotic decreases the equilibrium quantity of the antibiotic and the equilibrium price. how higher incomes and lower out-of-pocket expenditures affect the demand curve. figure 3 illustrates the effect of higher incomes for low (dl), middle (dm), and high (dh) income countries. income increases dramatically as countries develop. 12 in 1999, gross national income (gni) per capita was $1,870 for poor countries, $5,200 for middle income countries, and $25,690 for high income countries (world development indicators, 2001). 13 11 palaniappan and holley (2010) find that natural antimicrobials may also have a synergistic effect with antibiotics by increasing the antibiotic susceptibility of drug resistant bacteria. 12 in each country, the antibiotic is assumed to be a normal good and b is assumed to equal 1. istúriz and carbon (2000) report that in some low income countries per capita health expenditures are less than $10. however, living standards in the low income country are probably understated because low income countries tend to have more home production, underground markets, and barter transactions. 13 these figures use purchasing power parity. d price quantity mc d+meb qq* p b a c mc+mec d’+meb d’ p* p’* e figure 2 prevention decreases the demand for anti-microbials p’ q’=q’* 66 | journal for economic educators, 14(1), summer 2014 66 income per capita is about 178 percent (($5,200-$1,870)/$1,870) more in middle income countries than low income countries. income per capita in the high income countries is about 394 percent (($25,690-$5,200)/$5,200) higher than in the middle income countries and 1274 percent (($25,690-$1,870)/$1,870) higher than in the low income countries. baye et al. (1997) estimated that the income elasticity for antiinfectives was about 1.331. holding everythin g else constant, the gni figures and the 1.331 income elasticity, imply that middle income countries will use 237 percent (1.78*1.3 31) more antimicrobials than low income countries and high income countries will use 1,696 percent (12.74*1.331) more antimicrobials than low income countries. 14 in the example in figure 3, dm and dl are added to figure 1 to illustrate how large an effect higher incomes along with the income elasticity can have on the demand for antibiotic treatments. 15 with increasing incomes, consumers tend to decrease the percentage of their out-of 14 these gni and the income elasticity numbers may only apply to a specific period of time and thus may not be generalizable to other times or situations. 15 however, improvements in nutrition and physiology were major contributors to economic development. in 1790, people in the bottom 20 percent of caloric consumption in england and france probably did not have enough energy for sustained work and were thereby effectively excluded from the labor force (fogel, 2004). even those in the work force probably had only enough energy for limited amounts of work. since then the number of calories available each day increased by about 50 percent (fogel, 2004). this increase in calories gave the bottom 20 percent enough energy to enter the work force and increased the productivity of people already in the work force. part of this increased productivity is because when people have better clothing and shelter there is less energy lost through the radiation of body heat (dasgupta, 1993) and because the composition of diets shifted from grains and d m dl price figure 3 higher incomes increase the demand for anti-microbials quantity dh price quantity mc d h +meb q p* q* p b a mc+mec 67 | journal for economic educators, 14(1), summer 2014 67 pocket expenditures on health care (gottret & schieber 2006). in low income countries, more than 60 percent of health care expenditures are out-of-pocket. out-of-pocket expenditures fall to 40 percent in middle income countries and 20 percent in high income countries (gottret & schieber 2006). figure 4 shows the effect of lower out-of-pocket expenditures on the demand curve. d1.00 shows the previous demand curve where all expenses are paid by the purchaser of the antibitotic treatment. d0.60 is for patients who pay 60% of the cost of their treatment, d0.40 is for patients who pay 40%, and d0.20 is for patients who pay 20% of their treatment. the original equilibrium point is at a and the efficient output is a point b. now that people are receiving a subsidy to purchase the antibiotic the new equilibrium point is at c where people are willing to pay a higher price since someone else is paying and output is at q’. lower out-of-pocket expenditures give people an incentive to consume more antibiotic treatments. when countries grow from low income to middle income countries, out-of-pocket health expenditures drop by 50 percent ((.4-.8)/.8). when countries grow from middle to high income countries, there is a similar 50 percent ((.2-.4)/.4) drop in out-of-pocket health expenditures. as mentioned above, baye et al (1997) calculated the uncompensated price elasticity of demand for anti-infectives to be about -0.916. everything else constant, given the 50 percent reduction in out-of-pocket expenditures as a low income country develops to a middle income country, other foods with high fiber content to meats and sugars with a higher proportion of ingested energy that could be metabolized (fogel, 2004). fogel (2004) estimates that this “thermodynamic” factor accounts for about 30 percent of the english growth rate since 1790. 68 | journal for economic educators, 14(1), summer 2014 68 there may be nearly a 46 percent (-0.916*0.5) increase in antibiotic purchases and another 46 percent (-0.916*0.5) increase in purchases as countries develop from middle income to high income countries. because of low incomes and high out-of-pocket expenditures, many poor patients in low income countries buy a small amount of an antibiotic and quit using it once symptoms disappear rather than after the treatment is complete (okeke et al. 1999). 16 not completing a treatment may select for more resistant bacteria. on the other hand, treatment guidelines may recommend long durations of treatment when short courses of treatment may not only be effective, but also reduce antibiotic exposure (paul, 2006). in mild to moderately severe cases of community acquired pneumonia, el moussaoui et al. (2006) suggest that the appropriate duration of antibiotic treatment is three days rather than the recommended eight days. though economic development tends to decrease the percentage of people’s incomes spent on antibiotics, the effect of this decrease on microbial resistance to antibiotics is ambiguous. if people in developed countries are more likely to complete antibiotic treatments, then economic development may reduce microbial resistance. on the other hand, if people are more likely to consume antibiotics because the relative price falls, then economic development may increase microbial resistance. the next section discusses how higher incomes, lower outof-pocket spending and fewer communicable diseases affect human antibiotic use. 16 this implies that policies that require patients to buy the full course of the antibiotic rather than by the tablet help reduce the premature stoppage of treatment. d 0 . 2 0 d 0 . 4 0 d 0 . 6 0 figure 4 lower out-of-pocket spending increases the demand for antimicrobials quantity d 1 . 0 0 price mc d1 . 0 0 +meb q p* q* p b a c mc+mec p’ q’ 69 | journal for economic educators, 14(1), summer 2014 69 how higher incomes, lower out-of-pocket spending, and fewer infections affect antibiotic treatments. to estimate the magnitude of the effects of economic growth on the number of antibiotic treatments, consider how infections, out-of-pocket spending, and income affect the number of antibiotic treatments. column 2 in table 1 shows that the high income countries have 9.1% of the infections of low and middle income countries. column 3 shows that out-of-pocket spending is 60% the low income countries, 40% in the middle income countries, and 20% in the high income countries so sl=0.6, sm=0.4, and sh=0.2. table 1 how infections, out-of-pocket spending and income affect the demand for antibiotic treatments country (1) n (2) s (3) a (4) high income 0.091 0.2 16.96 middle income 1 0.4 2.37 low income 1 0.6 1 as shown in column 4, assuming antibiotics are normal goods, increasing income increases the demand for antibiotics. holding everything else constant, higher incomes and the income elasticity of demand may cause middle income countries to demand 2.37 times more antibiotic treatments than low income countries and high income countries to demand 16.96 times more treatments than in low income countries. 17 17 this assumes that the availability and prices of substitutes are equivalent in each country. 70 | journal for economic educators, 14(1), summer 2014 70 figure 5 illustrates the net effects of higher incomes, lower out-of-pocket spending, and fewer people infected with microbial diseases. assuming b=1, dl is the demand curve for the low income country, dm is the demand curve for the middle income country and dh is the demand curve for the high income country. the middle income country has a larger demand (dm) than the low income country (dl), because people can afford to buy more antibiotics, the government has a larger budget to provide antibiotics, and out-of-pocket health expenditures decrease.the net effect on demand of developing from a middle income to a high income country is shown by shifting the demand curve from dm to dh. there are two reasons for this shift. first, the high income country has more than 10 times more income than the middle income country so ah is more than ten times larger than am and second, the high income country has less than a tenth of the infectious diseases of the middle income country so nh is less than a tenth of nm. the increase in ai causes a parallel shift to the right of the demand curve and the decrease in ni causes the demand curve to rotate to the left but did not change the vertical price intercept. in middle income and high income countries, the mc is likely to be lower than in low income countries because of improved storage and transportation systems. however, for simplicity in figure 5, assume that the mc=$1 for each country. these inferred demand curves and the assumed marginal cost curve imply that, at first, economic growth increases microbial treatments (ql to qm) and increases antibiotic resistance. 18 however, further economic growth (qm to qh) reduces antibiotic treatments. 19 18 the speculated increase from ql to qm is because of the number of infectious diseases in developing countries, the higher incomes in middle income countries than in low income countries and the lower out of pocket price quantity dl dh dm mc ql qh qm figure 5 how economic growth affects the demand for anti-microbials 71 | journal for economic educators, 14(1), summer 2014 71 in figure 5, patent protection is likely to reduce antibiotic sales much more in the middle income country than in the high income country. on the other hand, the price for patented antibiotics is likely to be much higher in the developed country than in the middle income country. since patented drugs are likely to be less available in developing countries, they are less likely to increase microbial resistance than generic drugs while microbial resistance against patented drugs is more likely to appear in richer countries. figure 6 compares the optimal level of antibiotic treatments with the quantities of antibiotics people wish to purchase. dl*, dm*, and dh* are the demand curves for the low, middle, and high income countries respectively when all expenditures for the antibiotic are outof-pocket (si=1). the quote at the beginning of this article from the world health organization implies that antibiotic resistance has a significant effect on the optimal level of antibiotic treatments. 20 expenses in the middle income countries. 19 the speculated decrease from qm to qh is mainly because the large decrease in infectious diseases reduces the demand for antibiotics. 20 according to roberts et al. (2008) antibiotic dosing depends not only on the bacteria isolated but also the most resistant bacteria. thus preventing further resistant infections may be achieved by increasing antibiotic exposure to the highest recommended dose. price msc dh d h * q mq h figure 6 how the mec affects the effcient use of antibacterial treatments d l dm * d m d l * q h *ql* qm * ql quantity 72 | journal for economic educators, 14(1), summer 2014 72 msc is chosen as representative of fairly large effects from antibiotic resistance. assuming for simplicity that meb=0, ql*, qm*, and qh* are the optimal treatments for the low, middle and high income countries respectively. the optimal number of treatments is highest for the high income country followed by the middle income country. the low income country has the lowest amount of optimal treatments. figure 6 implies that countries with the greatest burden of disease would require the largest reductions in antibiotic use. however, withholding antibiotics from those most in need creates serious ethical issues. evidence on economic growth and microbial resistance a major issue with respect to microbial resistance is the scarcity of data, particularly from developing countries. 21 the little available data are disease specific and under-represent developing countries. global studies include one or two developing countries or none at all. combining data from different studies is problematic because the methodology is not standardized. a global study that included some developing countries is stelling et. al. (2005). that study integrated escherichia coli antimicrobial susceptibility data from multiple surveillance programs. table 2 shows 2001 non-susceptibility rates of escherichia coli by income level. there are eighteen high income countries, eight upper-middle income countries, three lowermiddle-income economies, and zero low-income economies included in these calculations. 22 as shown in column 1, stelling et al (2005) present non-susceptibility rates for four antimicrobials: ampicillin, trimethoprim/sulfamethoxazole, ceftazidime, and ciprofloxacin. the percentages in column 1 are the non-susceptible rates for each drug. lower percentages mean less microbial resistance. for every drug in table 2, as income increases, there is less microbial resistance. consider resistance rates for ampicillin. in high income economies, 22% have non-susceptibility rates between 20-40%, 56% have non-susceptibility rates between 40-60%, and 22% have nonsusceptibility rates greater than 60%. in upper-middle income economies, half have nonsusceptibility rates for ampicillin between 40-60% and half have non-susceptibility rates greater than 60%, while in lower-middle-income countries, all had non-susceptibility rates greater than 60%. since no low-income countries were included, dashes represent the absence of data. 21 antimicrobial use data are much more unreliable than resistance data because of unofficial supply chains in developing countries that cannot be quantified. 22 income classifications are based on world bank definitions. the high income countries include australia, belgium, canada, czech r., france, germany, greece, hong kong, ireland, israel, italy, japan, singapore, spain, sweden, switzerland, united kingdom, and the united states. high-middle-income countries include argentina, brazil, chile, mexico, poland, south africa, turkey, and venezuela. low-middle-income countries include colombia, philippines, and thailand. taiwan was not included since the world bank income categories don’t include taiwan. the data for thailand only includes the drug ceftazidime. 73 | journal for economic educators, 14(1), summer 2014 73 table 2 non-susceptibility rates of escherichia coli by income level, 2001* drug high-income econo mies (18) upper-middle income economies (8) lower-middle-income economies (3) low-income econo mies (0) ampicillin 20-40% 22% 0% 0% 40-60% 56% 50% 0% >60% 22% 50% 100% trimethorim/ sulfamethoxazole 0-20% 17% 0% 0% 20-40% 56% 38% 0% 40-60% 28% 63% 100% ceftazidime ≤5% 89% 63% 0% >5% 11% 38% 100% ciprofloxacin ≤10% 61% 40% 0% >10% 39% 60% 100% *authors’ calculations from table 3 in stelling et al (2005). conclusion stelling et al. (2005) show that developing countries have more antibiotic resistance than developed countries. three reasons why developing countries tend to have more resistance to antibiotics are: first, poverty and high out-of-pocket health expenditures in developing countries give consumers an incentive to purchase antibiotics in small quantities and stop treatment prematurely when their symptoms stop, thereby eliminating the less resistant bacteria while leaving the more resistant bacteria to multiply. second, poverty and migration to cities increases the number of people living in crowded unsanitary conditions which increases infectious diseases. and third, people living in urban areas have easier access to antibiotics. as economic development continues and incomes increase, infections decline with the advent of clean water supplies, effective sanitation systems, better public health, improved housing, better clothing, improved nutrition, pasteurization, vaccinations, drained swamps and better educated health care workers and consumers. 23 reducing infectious diseases increases the proportion of ingested energy available to work since less energy is used to mobilize the immune system and the capacity of the gut to absorb nutrients improves, especially when there are fewer diarrheal diseases. the decline in infectious diseases creates a benefit to non-infected people since they are less likely to become infected. as infections decline, fewer people use antibiotics and the growth rate of microbial resistance to antibiotics decreases. 23 according to easterlin et al (2011) economic growth causes people at first to migrate to cities because of the better living conditions but as countries continue to develop rural conditions improve. 74 | journal for economic educators, 14(1), summer 2014 74 references alban l, nielsen eo, dahl j.; prev vet med. 2008 feb 1;83(2):115-29. http://www.ncbi.nlm.nih.gov/pubmed/17659797 allos, b. m.1998. “campylobacter jejuni infection as a cause of 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http://www.who.int/mediacentre/factsheets/fs194/en/. d m dl price figure 3 higher incomes increase the demand for anti-microbials quantity dh price quantity mc d h +meb q p* q* p b a mc+mec scholastic aptitude and studying for an exam: scholastic aptitude and studying for an exam: input substitution in grade production steven b. isbell assoc. professor of economics tennessee technological university abstract the score on the first exam in a principles of macroeconomics course is estimated as a function of time spent studying and academic background (as measured by grade point average). results show that academic background is relatively more important than studying, though both inputs are subject to diminishing returns. exam score is also subject to decreasing returns to scale. 1 introduction econ202, principles of macroeconomics, is a three-hour course offered by the college of business at tennessee technological university. the course is required for all students seeking a degree in business (it is part of the “core curriculum”), and is taken as an elective by a large number of other majors. there are no prerequisites for the course, though it is numbered as the second in a two-course sequence of principles of economics. this, and the fact that the course was offered in the spring semester, means that all but one of the students sampled had taken the principles of microeconomics in a previous semester (and that one student was concurrently taking econ201). the course is taught by almost all members of the economics faculty, with two sections offered in the fall semester, six in the spring, and one in the summer term. principles classes had an average enrollment of 54 in the spring of 2000, which is about twice as large as the average class size for the university. one section had an enrollment of 91, and the others 49-53. because of the relatively larger class sizes, and the lack of instructional technology in the classroom, the teaching method is almost exclusively lecture. exams are all multiple choice. 2 sample a questionnaire was given to each student attending class in two sections of econ202 on march 9, 2000. the date is significant because it was two days after the “super tuesday” primary/caucus nomination day for u.s. president, and five days prior to the tennessee presidential primary. although the main purpose of the study was to determine the impact of study hours and academic disposition on grades on the first exam in econ202, additional information was collected on demographics and voting intentions. students were told that responses to the questionnaire would remain anonymous, and for that reason, some potential questions that would reveal the student's identity could not be asked. a total of 83 questionnaires were returned. at the time the questionnaire was given, the students had taken only one exam, about two weeks prior. the material covered on the first exam was introductory material, and general concepts of economic growth. at the time of the questionnaire, the course had not yet begun to cover short-run economic fluctuations (which is to say, they had not been introduced to keynesian economics). 3 descriptive statistics 3.1 demographics of the 83 students who turned in the survey, 61 percent were male, and 39 percent were female. approximately 24 percent were over the age of 21, which is beyond the age of the traditional college student. thirty percent lived on 34 campus, and 58 percent lived off-campus but within a 30 minute commute. twelve percent commuted more than 30 minutes (one way) to the university. 3.2 awareness of events when asked whether the student felt he or she was “well-informed”, only 16 percent indicated they were “very well” informed, while 40 percent considered themselves “uninformed”. they were generally correct in their perceptions of themselves. two questions were asked that provided some indication of just how well informed students were: the identification of john m. keynes and patrick j. buchanan. regarding keynes, only 53 percent of the students correctly identified him as an economist. while this is better than chance, and given that the students had yet covered keynesian economics, it is still disturbing that only half could identify the person who was arguably the most influential economist of the 20th century. as table 1 reveals, as the perception of how well informed the students felt they were increased, the proportion of those who correctly answered the question increased as well. table 1: “who is john m. keynes?” and informed answer to question was “how informed are you?” uninformed informed very informed correct incorrect 14 20 8 18 15 4 42 37 32 35 12 79 the students redeemed themselves in the eyes of their instructor by actually being less informed about the identity of patrick j. buchanan. the exact same students who classified themselves as uninformed or very informed were incorrect in their identity of buchanan as they were keynes. but three of those who were able to correctly identify keynes were incorrect in their identification of buchanan. table 2: “who is patrick j. buchanan?” and informed answer to question was “how informed are you?” uninformed informed very informed correct incorrect 14 17 8 18 18 4 42 37 32 35 12 79 the reason that these students are not well-informed is that they do not read news media. as the table below indicates, there is a strong relationship between how often students read news in newspapers and magazines and how well informed they feel they are. table 3: reading news and informed “how often do you read news? “how informed are you?” uninformed informed very informed < 1 time per week 2-5 times per week > 5 times per week 16 6 2 15 29 6 2 1 5 24 50 8 33 36 13 82 it isn't just news the students don't read, either. when asked how many books they had read in the past year that were not required for a class, 78 percent responded that they had read fewer than 5 books. even more disturbing: 23 percent had read no books at all in the past year. 4 determinants of exam scores 35 the average grade on the first examination was 78.05 (a high c), with a standard deviation of 10.81. faculty are often interested in what determinants affect course performance, and have offered different opinions. some feel that students have too many demands on their time, and/or waste their time. it is often observed that more and more of our students are working, and spend a greater number of hours during the semester in their jobs. students who spend a greater amount of time commuting to campus may be at a disadvantage to others who live on campus. and watching excessive amounts of television is often blamed for poor exam scores. some faculty feel that students are not “wellread”, or are poorly informed. none of these things had a discernible effect on the performance on the first exam. only two things had a statistically significant effect: time spent studying, and grade point average. students answered a question on the questionnaire about the number of hours they studied for the exam. they were also asked what their cumulative grade point average was prior to the beginning of the semester. there are very few studies of the determinants of college gpa1. recent work by betts and morell [1] shows that college gpa depends on 1. the degree program in which students are enrolled (some disciplines are “harder” than others), 2. the student's family background (eg, family income and race), 3. high school resources prior to enrolling in university (teachers' experience was the most important), and 4. the demographic environment in which the student attended high school (levels of education or income in the community). for the purposes of this study, gpa serves as a proxy for “academic background” or “scholastic aptitude”. 4.1 theoretical model2 students can be viewed as “producing” exam scores in much the same way that economic theory views firms producing output. in microeconomics, firms produce output by using combinations of resources (or “inputs”). the production function relates the inputs to the firm's output. in the same manner, students combine study hours and grade point average to produce exam scores. the “production function” that relates exam score to the use of these two resources is ),( lkfy= (1) where y is the score on the first exam, k is grade point average, and l is hours spent studying for the exam. the symbol f in equation (1) represents the functional form. a popular functional form for the empirical estimation of production functions is the cobb-douglas production function, which can be specified as ,βα laky= (2) where a , α , and β are parameters to be statistically estimated. 4.1.1 marginal products an important consideration in the discussion of the production function is the impact on output of changing one resource while holding the other resource constant. in the microeconomic theory of the firm, this is referred to as the marginal product of the input. in the current model, the marginal product of studying is 1−= ∂ ∂ βαβ lak l y (3) and the marginal product of gpa is 1 but there are numerous studies concluding that gpa is an important determinant of future income. 2 consult any good intermediate level microeconomics text, such as nichols [3] for enhanced discussion of the theory in this section. 36 βαα lak k y 1−= ∂ ∂ (4) 4.1.2 input substitution it might be possible for a student to compensate for a poor academic background (a lower gpa) by studying more. that is, a student with a lower scholastic aptitude could score the same as a student with a higher aptitude by studying more. alternatively, one student could have studied much less for the exam than another student, and achieved the same exam score, due to his or her superior academic background. in terms of microeconomic theory, one input can be substituted for another, holding output (or, in this case, grade) constant. the marginal rate of technical substitution shows the rate at which studying can be substituted for gpa, holding the exam score constant. to determine the marginal rate of technical substitution from the production function given in equation (2), first take the total differential, ,dk k y dl l y dy • ∂ ∂ +• ∂ ∂ = (5) which tells us how small changes in l and k affect exam score. holding the exam score constant means that 0=dy , so .dk k y dl l y • ∂ ∂ −=• ∂ ∂ (6) equation (6) says that for a given exam score (call it 0y ), any increase in the score from increasing study time is exactly balanced by the loss in exam score from a suitable decrease in gpa. rearranging the terms in (6) gives the common expression for the marginal rate of technical substitution: ; ofproduct marginal ofproduct marginal 0 k l ky ly dl dk yy = ∂∂ ∂∂ = = (7) that is, the marginal rate of technical substitution is equal to the ratio of marginal products. 4.1.3 factor shares in the theory of the firm, we sometimes measure how much of the output can be attributed to the various inputs; that is, we measure labor and capital's “share” of the output (which in purely competitive markets would equal the factor payments)3. in the present study, we can measure the relative importance of studying and scholastic aptitude. the share of the exam score attributable to studying is β β == ∂∂ y y y ly (8) and gpa's share is .α α == ∂∂ y y y ky (9) this is quite convenient: the measure of the relative importance of each of the inputs is the exponent of the input in the production function. 4.1.4 returns to scale instead of examining the impact of a change in one input in isolation on exam score, we could measure the impact of a proportionate change in both inputs. this is the concept of returns to scale. a production function exhibits constant 3 in macroeconomics, we speak of labor and capital shares of national income. the production function is one of aggregate output instead of a firm. 37 returns to scale if an increase of an equal percentage in all inputs causes an increase in output of the same percentage; ie, .0),,( >∀= zzlzkfy if a proportionate increase in inputs increases output less than proportionately, ),,( zlzkfzy < the function exhibits diminishing returns to scale. and if output increases more than proportionately, ),,( zlzkfzy > there are increasing returns to scale. for a cobb-douglas production function like the one specified in this study, . )()(),( yz lkaz zlzkazlzkf βα βαβα βα + + = = = (10) thus, if 1=+ βα , the function exhibits constant returns to scale. if 1>+ βα , the function exhibits increasing returns to scale, and if 1>+ βα , decreasing returns to scale. 4.1.5 short-run vs. long-run the production function of equation (2) assumes that both l and k can be varied. sometimes when discussing the production function for a firm, the time horizon is divided into the short-run and long-run. in the short-run, some inputs may be fixed (for example, the plant) and some may be variable (labor). output can be increased only by increasing labor. the change in output resulting from the increase in labor is the marginal product of labor. in the long-run, the firm has the opportunity to expand the plant size (or build another, larger plant), so that all resources are variable, and none are fixed. likewise, we can examine exam scores in the same time horizons. for the given class of college students, their academic background (measured as gpa) is fixed. the only way they can increase the grade on a single exam is to study. but if we were to extend the time horizon, we could examine the effect of providing a better academic background to a student, so that all inputs are variable. 4.2 empirical estimates in this section, empirical estimates of the production function are provided. the function as expressed in equation (2) is nonlinear and computationally difficult to estimate. taking the natural logarithm of the function, lkay lnlnlnln βα ++= (11) makes a linear transformation that can be estimated with ordinary least squares regression4. table 4 provides the results of the estimation of equation (11). table 4: regression estimates of production function parameter standard tvariable estimate error statistic prob > |t| a 3.8590 0.081855 47.145 0.0001 ln l 0.0501 0.017735 2.827 0.0061 ln k 0.4163 0.071809 5.797 0.0001 r2=0.3347, f=18.366, n=76 the regression estimate is, then, .ln0501.0ln4163.0859.3lnln lky ++= these estimates have the following interpretations in light of the discussion in section 4.1: 1. students use studying and academic background to “produce” exam scores according to the function 4 this a common estimation procedure that is detailed in any good introductory econometrics text, such as [2]. 38 0501.4163.4179.47 lky= . 2. each additional hour of studying increases the exam score by .3765.2 9499.4163. −lk this is the marginal product of studying. notice that its value depends on the values of5 k and l . at the mean values of k and l (this might be regarded as the “average” student), an additional hour of studying raised the exam score by only 1.0948. (a) exam score is subject to diminishing returns with respect to studying. if we consider the student with the average gpa of 2.925, the marginal product of studying is 9499.7138.3 −l . this means that the first hour of study increased the exam score by 3.7138, but the second hour added only 1.9225. a third hour of study increased the grade by 1.308, while the fourth added slightly less than one point to the exam score. (b) an hour of study is more effective in raising the exam score the better the student's academic background. for a student with a grade point average of 2.0, the first hour of studying increased the exam score by 3.1702. for a student with a gpa of 3.0, the first hour of studying raised the score by 3.75. an alternative way of looking at this is that a student with a poor academic background must study more to achieve the same exam score. 3. the marginal product of k (how much a one unit increase in gpa changes exam score) is 0501.05837.7401.19 lk − . at the mean k and l , the marginal product of k is 11.2538. notice that exam score is also subject to diminishing returns with respect to gpa. 4. the marginal rate of technical substitution (mrts) can be calculated as the ratio of marginal products, as demonstrated in equation (7). at the mean values of k and l , the mrts is 0.0973. this implies that for the average student, an hour reduction in studying can be exchanged for a 0.0973 increase in gpa, and the exam score will remain the same. as is typical in production processes, the mrts is different at different levels of k and l . consider a hypothetical student who studied quite a bit for the exam (say, 5 hours), but had a poor academic background (a gpa of 2.0). the mrts for this student would be 0.0481. this means that it becomes increasingly difficult to trade off an hour of studying for gpa the fewer hours that are studied and the greater the gpa. that is, mrts decreases with increases in study time. 5. it is easy to make too much of the estimate that, for the average student, the marginal product of l is 1.0948 and the marginal product of k is 11.2538, since the size of the coefficients of the regression equation depends on the measurement scales of the independent variables. for example, if gpa had been measured in hundredths of units, the marginal product of k would have been approximately 0.1. a better measure of the relative importance of l and k is the “factor shares” as expressed in equations (8) and (9). given the estimation equation in (11), the values of α and β do not depend on the scale of measurement6. accordingly, the share of the exam score attributable to studying is 5 more accurately, on the ratio of k to l . 6 this is because taking the natural logarithm is, in the limit, equivalent to measuring percentage changes. 39 only 0.0501, while the share attributable to gpa is 0.4163. hence, academic background is much more “important” to the success on an individual exam than studying. 6. it may be somewhat confusing that the “shares” of exam scores attributable to k and l do not sum to one. the reason, as derived in equation (10), is that since 1<+ βα , exam scores are subject to decreasing returns to scale. a ten percent increase in both study time and gpa would increase the exam score by only about 4.5 percent. 5 conclusion studying improves a student's exam score, but academic background is relatively more important. that is, academic background, as measured by prior cumulative grade point average, adds more to exam score than studying. this highlights the importance of pre-university schooling, and diminishes the importance of the individual university professor (at least, the professor of economics). the evidence from this study can be added to the list of arguments calling for more resources to be devoted to secondary education. of course, once a student enrolls at university, academic background is fixed. the only way to increase the score on any individual exam is to increase study time. however, for students with good academic backgrounds, study is more efficient, so that less time must be spent studying to achieve the same exam score than must be spent by students with lower scholastic aptitude. this study is not without problems. there are likely other determinants of exam score, such as class attendance, that were not included since the survey would not have been anonymous. the survey question “how many hours did you study for this exam” might mean different things to different students. for example, does this mean just the time spent the night before the exam, or does it include the time spent the prior week reading the text, or the time spent in class. a refinement in the survey instrument is called for. the most significant problem is the obvious endogeneity of the score on individual exams collectively determining gpa, which the methodology ignores. these are left, as usual, to future research. references [1] julian r. betts and darlene morell. “the determinants of undergraduate grade point average”, journal of human resources, 34(2):268-293, 1998. [2] g. s. maddala. introduction to econometrics, macmillan, 1988. [3] walter nicholson. intermediate microeconomics and its applications. harcourt, 8th edition, 2000. 40 murray.pdf sources of capital for a sino-foreign equity joint venture: a case study of shanghai general motors corporation by martin j. murray, p.e.* abstract sino-foreign equity joint ventures are firms created by contractual agreements between chinese and nonchinese companies. structured like western-style corporations, these joint venture firms represent an important way for non-chinese companies to make inroads into the emerging chinese market. this study of the capital formation of the large joint venture shanghai general motors corporation provides insight into current opportunities and risks facing new joint venture firms in china today. this paper highlights the role that the chinese government plays in the capitalization of sino-foreign joint venture firms. i. introduction a joint venture is an agreement between separate firms to form an independent company through the contribution of resources from each participating firm. joint venture firms are jointly owned and in many cases jointly operated by participating firms. generally, joint venture firms have two dominant “parent” firms with ownership rights based on the initial proportion of investment made to the joint venture company by each parent firm. sino-foreign joint ventures are joint venture firms located and registered in china that are jointly owned by at least one chinese firm and one non-chinese firm. joint venture firms are important because they are a primary vehicle for entry into some international markets. in certain countries like china and russia, the economic and political climates are evolving so rapidly that local “know how” is a prerequisite to conducting successful business in these markets. the time and risk of making direct investments by setting up wholly-owned subsidiaries in these countries is much greater than those required to establish a joint venture company with an indigenous firm. since these developing markets are potentially lucrative to successful new business ventures with “western” products and production techniques, the urgency to enter these markets in a timely fashion is great (dutton 1998). this paper articulates the sources of capital and the underlying relationship to new business prospects for a joint venture firm in china. this knowledge is useful in understanding both the opportunities and obstacles facing future joint venture efforts by foreign firms in china. sources consulted include periodical publications, text books, u.s. government documents, and internet resources. substantial insights were gained from direct assistance from key leaders in the shanghai general motors corporation (sgmc) joint venture firm, including the sgmc treasurer, mr. caijian wu. all money values expressed in this paper are in u.s. dollars unless otherwise indicated. ii. joint venture firms and the chinese automobile market sino-foreign equity joint ventures * graduate student in the mba program at middle tennessee state university. 11 the fifth national people’s congress in july 1979 passed “the law of the people’s republic of china on chinese-foreign equity joint ventures”, commonly known as the joint venture law. the promulgation of new regulations and updates to this law in 1983 and 1990 have addressed many concerns of foreign investors. the basic law defines the legal entity of an equity joint venture in china and spells out several conditions and features of this form of business: • joint ventures must be approved and registered by the chinese government. • joint venture entities are subject to the jurisdiction and protection of chinese law. • equity joint ventures take the form of a limited liability company. • parties to the joint venture are jointly responsible for investment, management, and share risks, gains, and losses. sino-foreign joint ventures are therefore bona fide chinese companies with structures modeled after western corporations (ran, brahn 1996). the rapid and prolonged growth of the chinese national economy has attracted the attention of thousands of non-chinese firms world-wide anxious to sell their wares to the largest potential market on earth. over the past 19 years, the government of the peoples republic of china has allowed a gradual relaxation of strict rules governing business ownership, international trade, and capitalization. the congruence of growth and reform has led to careful scrutiny of the chinese business environment by firms hoping to be on the front line of development of what could grow to be the world’s largest economy (leonard 1997). many firms have determined that the establishment of an equity joint venture in china is the best balance of opportunity and risk compared to the limited opportunities associated with exporting goods to china, or the extensive commitment of developing wholly-owned subsidiaries. equity joint ventures provide an ideal middle road solution to the market entry question (tomlinson 1998). the chinese joint venture law establishes guidelines for both cooperative and equity joint ventures. cooperative joint ventures are the first tier of business organization for parties cooperating in a for-profit enterprise, while equity joint ventures reflect a higher degree of organizational formalization. equity joint ventures are differentiated from cooperative joint ventures based on the contribution of capital by a foreign party to the equity joint venture firm. additionally, many other features in a cooperative joint venture that are contractually determined (structure, liability, management, longevity of agreement) are codified in law for an equity joint venture (ran, brahn 1997). shanghai general motors corporation shanghai general motors corporation is one of the largest joint venture projects yet undertaken in china. this link between the shanghai automotive industrial corporation and the world’s largest company, general motors, is designed to advance the long-term missions of both firms. the shanghai automobile industrial corporation (saic) is in need of design and manufacturing expertise to adequately serve new customers in the chinese and asian marketplace. general motors corporation needs a presence in china to accomplish its long-term goal of being a dominant automobile manufacturer around the globe. together, these companies have formed shanghai general motors corporation (sgmc) to make engines, transmissions, and cars patterned after buick sedans currently designed and built in north america. sgmc was founded on the belief that the market for relatively large and upscale sedans will steadily increase as the chinese economy continues its pattern of growth. it should be noted that sgmc is not a typical sino-foreign joint venture. it’s immense size (approximately $1.5 billion total capital) and the clout of the general motors name have provided opportunities and benefits to sgmc that would not normally be available to smaller organizations. the amount of capital that has been committed to sgmc by all financiers in light of the financial turmoil in asia would not have been possible without high-level prodding by gm officials. the high visibility of sgmc has also been a factor atypical of most sino-foreign firms. 12 the automobile market in china china has indicated that automotive manufacturing is one of six key “strategic industries” that will be the engines for technology growth in the manufacturing sector (clark 1997). expansion of this industry in china through strong domestic and export growth is attractive for several reasons, but sgmc is now focused on the domestic market as production readiness nears early in 1999. because of a weak asian market, strong export demand for sgmc’s relatively large sedan products is not anticipated in the short run. the congruence of the chinese government’s current interest in stimulating domestic consumption and the very poor economic condition of china’s major asian trading partners drives current attention to the domestic market. the domestic market, however, has several deficiencies according to recent analysis. domestic automobile manufacturing capacity has been estimated to be more than double current demand (hanes 1998). volkswagon and its joint venture partners, which currently control more than 50 percent of the sedan market, have cut their sales growth targets for 1998. vw’s martin posth, who pioneered joint venture automobile manufacturing in china 15 years ago, asserts that the total cost of automobile ownership in china is so high that auto sales will stay below projections for years to come. posth says that in ordinary income terms, a chinese citizen must work 230 years to afford a car. combining retail price, license, and more than 20 individual taxes, posth estimates putting a car on the road in china costs around us$200,000 (clark 1997). restrictions on the issuance of license plates reflect the central government’s concerns that increased auto traffic could overload existing infrastructure. new government rules bar lower-level chinese government officials from buying “large displacement” sedans like the sgmc models. this myriad of obstacles in the automobile market in china has caused a drop in auto prices of more than 20 percent in the last two years (hanes 1998). this is not to say that the chinese automobile market is moribund. long-range projections continue to show growth in automobile ownership and use in china, and recent major infrastructure projects should help ease concerns about inadequate roads and bridges (smith 1998). the growing middle class in china should continue to see gains in income and standard of living, especially if the regional export market rebounds. furthermore, general motors corporation in september 1998 reaffirmed its commitment to compete in the global auto business by reorganizing world-wide operations under a single leadership structure. “waiting out” the financial malaise and preparing for eventual growth in the chinese auto market is gm’s strategy to maximize the opportunity of being the largest automotive joint venture project in chinese history. current joint venture environment the current market environment for joint venture firms in china is less positive than in previous years. according to the chinese ministry of finance, 61% of nearly 56,000 foreign invested companies lost money in 1997. the dollar value of accumulated losses by joint venture firms increased 50 percent from 1996 to 1997. during this same time period, foreign investment commitments decreased 35 percent, and government approvals for joint venture initiations decreased 56 percent. actual paid investment still increased 8.3 percent in 1997, but this increase is a marked reduction from government expectations. auto firms are experiencing both growth and divestment; in recent years france-based peugeot citroen and u.s.-based chrysler have left the market, while global veterans ford and honda have entered. overall, joint venture firms in china face a uncertain futures as the chinese economy moves ahead in uncharted waters (hanes 1998). iii. capital role of the chinese government in capital projects economic activity in the last half of 1998 illustrates the behavior of the government relating to efforts to accomplish long-term economic goals. according to the wall street journal, in 1998 the central government instituted a huge public fixed-asset investment plan designed to stimulate local economic growth and arrest the conspicuous decrease in gdp growth rate. influencing the economy through active government intervention is the current policy of the governing communist party (smith 1998). 13 generally, policy makers in beijing have worked for years to control gdp growth while simultaneously moving toward limited “deregulation” of key components of the people’s bank of china and related staterun financial institutions (ran, brauhn 1996). the gdp growth rate has been steadily falling since 1992 (from 14 percent in 1992 to nine percent in 1997). retail prices are showing deflationary trends, and the export trade balance has decreased from the 1997 level. current manufacturer’s inventories are high; production capacity is idle, and debt problems are rampant in chinese state-owned factories. some blame for these conditions can be placed on the financial crisis of major regional trading partners, resulting in severe price competition for manufactured goods in the international market. faltering and uncompetetive state-owned enterprises also contribute to the problem (tomlinson 1998). china’s economic “liberalization” plans retain large roles for the central government in the establishment of macro-economic policy. the key goal of the ruling communist party is to keep growth strong and sustained for an indefinite period. large scale unemployment and falling incomes could trigger political unrest and social instability. china’s chief economic engineer, premier zhu rongji, has indicated his commitment to execute a national “soft landing” from the overheating economy of previous years, and from the turmoil of the asian financial crisis. one key tool used by government economic planners is a capital budget schedule for industrial and infrastructure development. firms planning capital projects in china must apply for approval before commencing capital projects. domestic and foreign-invested firms have limited flexibility in determining their own capital projects and their sources for capital via domestic and international banks. foreign invested firms are generally encouraged to seek expansion capital in the international market. control of capital spending and the effective rationing of domestic capital allow for significant government influence over regional and national economic growth patterns. capital sources for shanghai general motors capital requirements for starting up an automobile manufacturing system are high. the sgmc project involved new facilities for manufacturing engines, transmissions, and vehicles, and each of these facilities is complex and expensive. capital expenditures for fixed equipment, automation, and local infrastructure for this project exceeded $1 billion. since land cannot be purchased by firms in china, land requirements for sgmc were satisfied via a land use grant from the chinese government for a period of 50 years. labor acquisition was originally through the saic organization, but is now managed by a sgmc human resource hiring team that emphasizes personal behavior characteristics over specific job skills. figure 1 illustrates the basic resource flow diagram for the startup of sgmc. inflows for the capital portion of the resource flow are illustrated in figure 2.total capital inflows come from two primary sources: joint venture partners and banks. capital initially put forward by the key stakeholders in sino-foreign joint ventures is referred to as registered capital, and this capital both validates the application and approval process for joint venture operations, as well as defines initial ownership rights between the partners. registered capital for sgmc totaled $700 million from the primary stakeholders general motors and shanghai automotive industrial corporation. a description of each source of funds in summarized below: 14 general motors: $350 million dollars was contributed to sgmc by the general motors-china, inc. corporation. gm-china is a wholly-owned subsidiary of general motors corporation, and is a registered u.s. corporation in delaware. gm-china functions as a link between sgmc and the parent corporation general motors, inc. shanghai automotive industrial corporation: the equivalent of $350 million was contributed to sgmc through saic. these funds came from two sources: saic and the shanghai automotive joint stock company (sajsc). saic directly contributed the equivalent of $217 million (62 percent of the saic total) , while shanghai automotive joint stock company contributed the equivalent of $133 million (38 percent of the saic total). the sajsc is listed on the shanghai stock exchange, and sajsc shares are traded in the chinese stock market. the shanghai automotive joint stock company is a subsidiary of the saic, but is partially “publicly owned” via stock sales. since stock market listing of chinese firms with partial foreign ownership is very difficult, this source of capital funds is not currently available for sgmc. joint venture firms require the approval of the central government via an application process called “registration”. registration of the joint venture firm and the initial capital provided by key stakeholders is the first step in the establishment of a functional operation. in the case of sgmc, considerably more capital would be required beyond the initial $700 million contribution to buy machinery and equipment. for additional needs, sgmc in conjunction with gm headquarters in the u.s., chinese banking officials in shanghai, and key gm financial partners around the globe assembled a $821 million bank loan package to help launch the sgmc product. key information regarding this loan package is summarized below: • 39 chinese and foreign banks are involved in the loan package for sgmc. • the equivalent of $460 million (56% of bank loan total) was contributed by chinese banks in denominations of us$ and renimbi (rmb). • $361 million (44% of bank loan total) was contributed by international banks operating in shanghai, hong kong, and abroad. it should be noted here that the scale, scope, and visibility of this major joint venture project make the capital procurement for sgmc somewhat anomalous. several factors contributed to the success of the capital arrangements with the 39 bank consortium, and these include the size of general motors corporation and the leverage applied by gm’s treasury offices to major banking partners like citicorp, 15 chase, bankamerica, deutsche bank and others. the severe economic turmoil in the asian region worked against the culmination of the bank loan package, but the combination of size, leverage, and political visibility ultimately prevailed. currently, opportunities to raise non-bank capital are limited for foreign-funded firms in china. the use of bonds to raise additional debt capital is restricted by complex government approval requirements, and is essentially limited to state-owned enterprises. the use of equity capital instruments like stock is similarly limited to companies that are licensed to trade on the shanghai stock exchange, and approval for this type of license is effectively limited to chinese-owned firms. generally, long-term loans for sino-foreign joint venture firms come from the international banks conducting business in shanghai or hong kong. working capital loans are typically managed through a combination of domestic and international banks. the emphasis of having foreign companies seek foreign capital sources serves two purposes: 1) preserving limited local capital resources for indigenous firms, and 2) increasing the inflow of foreign capital into the chinese economy. the web of central and local government approvals and licenses effectively supercede the market allocation of capital resources regarding local versus international sources. the size and clout of sgmc overcame some of these bureaucratic obstacles, which explains the unique mix of domestic and international capital sources for the initial long term capital loan. capital risk in china capital allocation in the u.s. is driven by the relationship between the demand for capital at certain risk levels and the related supply of capital for these projects. capital allocation is different (and changing) in china because of controlled approval for capital spending initiatives, and because of imperfect information that exists in this developing market. the development and application of risk premiums to various categories of debt capital are difficult because of the lack of highly developed risk models and historical experience, and because of the large influence of government regulation on potential project cash flows (chang 1998). the rapid evolution of financial rules and policies in china add new dimensions to risk analysis versus firms in western countries (lardy 1996). chinese banks obviously rely less on empirical risk knowledge than do large-scale international banks. typically, domestic chinese banks require collateral or some type of third party guarantee before providing capital loans, whereas international banks can assess risk based on business case analysis and other factors. however, the incomplete and imperfect information in the chinese capital marketplace has had a damping influence on both domestic and international sources of capital, and this influence must be tempered by careful analysis of both the source and application of capital for projects by joint venture firms (euromoney magazine 1997). risks and rewards all indications are that the sgmc joint venture has major components of moderate to high risk coupled with the potential for high return. the sheer size of the operation and its related impact on the industrial environment make the stakes for success of sgmc unusually high for a sino-foreign manufacturing joint venture. weakness in the current chinese domestic and local asia auto market, as well as regional excess capacity lower the short-term prospects of product market success. infrastructure shortcomings, tax consequences, and consumer credit availability add risk to this ambitious project to introduce a new vehicle to china (hanes 1998). however, the clout of the partners involved and visibility of the project support optimism regarding the progress of the sgmc through 1998. general motors has used its size to negotiate an acceptable debt finance package that raises necessary capital without over-extending any one institution, thereby reducing the loan risk to all stakeholders. and when the inevitable rebound in regional economies increases the demand for luxury cars, sgmc may be well positioned to leverage location and experience in satisfying regional demand. 16 the capital procurement for sgmc reflects the state of the business today in china. as economic liberalization moves forward, new opportunities for foreign firms develop as the chinese market becomes assessable to foreign manufacturers and service providers. the government’s goal is to use this enthusiasm and know-how to elevate the state of chinese industry to fuel gdp growth through domestic consumption and export growth. a traditional economic model balancing supply and demand with perfect information available does not explain capital allocation in china. rather, capital allocation is a powerful government tool to tailor industrial investment and overall economic performance of the country (leonard 1997). although banks and foreign firms are allowed, and in many cases encouraged, to put capital funds into productive enterprises, the final cash flow streams and profit-taking opportunities are highly influenced (if not controlled) by government finance and taxation authorities (mufson 1997). as an example, removal of operating profits earned in domestic currency requires government approval for conversion to an international “hard” currency. it is clear that profitable business activity in china requires government support, because the central government. maintains final control of capital resources and conversion of chinese funds. iv. conclusion sgmc is a massive undertaking in a relatively uncertain market. the fact that the project has been fully funded is a testimony to the individuals who have persevered to make the project a reality, and to market reforms in china that allow a much more market-oriented business environment. success of sgmc may have a large impact on new businesses and government rule-makers who must guide china’s transition from a state-planned economy into a capitalistic/socialistic structure. a major factor in the business risk of sgmc is the behavior the chinese government. since the government can either encourage or dissuade the consumption of the company’s products, the success of the enterprise is dependent upon the support of the government. in the same way, the capital sources for sgmc must effectively satisfy government expectations, or the operation of the company will be impossible. the lesson here is that a focus on the market is only one aspect of doing business in china today. a keen awareness of the total business environment, which includes major roles of the central government, is required to generate real returns on capital investments in china. references chang, leslie “chinese crackdown on foreign-exchange deals could hurt returns on infrastructure projects” wall street journal, october 1998, section a. clark, tanya “china’s challenges” industry week, october 20, 1997. dutton, gail “the new face of china” american management association international, june 1998. euromoney “winning the china game,” cover story, september 1997. hanes, kathryn “divorce in china”, global finance, april 1998. lardy, nicholas r. “banking in china’s economic reforms” speech delivered to the committee on banking and financial services, u.s. house of representatives, march 20, 1996. leonard, joseph w. “on the road to the 21st century: the chinese experience” academy of management executive, 1997 vol ii, no. 3. mufson, steven “faithful chinese savers keep banking system afloat” washington post, november 22, 1997 page a01. 17 paenen, louis (cfo shanghai general motors corporation) personal correspondence september 9, 1998. ran, li dao; brahm, laurence j. “the business guide to china”, butterworth-heinemann asia, singapore 1996. smith, craig s. “chinese economy picks up on state spending” wall street journal, october 1998, pg c1. tomlinson, richard “waiting for the barbarians” accountancy, april 1998 pp 60-61. wu, caijian (treasurer, shanghai general motors corporation) personal interviews on september 17th, 1998 and october 20th, 1998. yatsko, pamela “chinese fire sale” far eastern economic review, may 21, 1998 pg 15. microsoft word jeesum03 l.d journal for economic educators ∑ volume 4 ∑ number 1 ∑ summer 2003 advances in technology and global welfare shokoofeh fazel* abstract the real impact of advances in technology on global welfare is an unresolved issue. according to a recent human development report, globalization based on technical advances in information technology has not had a positive impact on economies of developing countries. while advances in technology have helped improve standards of living in industrialized countries, they have caused developing countries to further lag behind. some other studies, however, have concluded that investment in technology is a critical factor in improving economic welfare of all countries. it is important to note that most of the empirical studies in the latter group have treated technology investment as an independent variable explaining growth in economic welfare. in section one of this paper, we present logical reasons why technology in itself fails to create better standards of living in developing countries. in section two, we will use a cross sectional regression model to test the relationship between advances in technology and economic welfare in developing countries. the results of our empirical study confirm our arguments of section one that global technological advances have not helped the economies of developing countries. introduction while some studies provide empirical evidence that advances in technology are critical in improving economic welfare in all countries, a recent human development report suggests that globalization based on technological advances such as internet, mobile phones, and fax machines is not creating a uniform distribution of welfare in the world economy. instead, a narrow group of affluent countries receive the benefits of technological advances, while the majority lags behind. the major implication of this report is that forces of demand and supply do not seem to narrow the gap between these two worlds. * shokoofeh fazel, ph.d., college of business, montana state university-billings. journal for economic educators ∑ volume 4 ∑ number 1 ∑ summer 20032 while many studies have investigated the overall impact of technological advances on economic welfare, to the best of the author’s knowledge, no simple economic reasoning of why global technological advances have failed to improve standards of living in developing countries exists in the literature. furthermore, most of the above studies lack a simple cross-sectional test of the relationship between these variables. this paper focuses on these issues. in the first section, we provide economic reasoning to explain why global advances in technology have not led to higher standards of living in developing countries. in the second section, we will use a cross-sectional regression model to test the relationship between advances in technology and economic welfare in developing countries. the results of our empirical study confirm our arguments of the first section that global technological advances have not helped the economies of developing countries. why have advances in technology failed to improve living standards in developing countries? there is a belief supported by many studies that advances in technology lead to improvements in economic welfare. in addition to empirical analysis, many researchers use logical reasoning to justify the causal relation from investment technology to economic welfare. bugliarello (1984), freeman (1987), stoneman (1983), and pfouts (1995) use the so-called “compensation hypothesis” to support this causal relation. according to these studies, technological advancement enables countries to produce more at lower real cost. the resulting rightward shift in aggregate supply would lead to higher standards of living and economic growth. it is further argued that advances in technology should lead to stronger labor markets, higher corporate profits, and thus higher levels of income. this is because labor-saving technology increases the productivity of labor, which leads to higher wages. higher wages increase the demand for consumer goods, and as a result, the demand for labor increases. with total labor cost falling, profits and thus income level will increase. according to these studies, technological unemployment would be offset by gains in employment that follow the changes in technology. although this argument may hold in industrialized countries, there are several reasons why it may not be applicable in developing countries. first, even in industrialized countries, there is a time interval between the beginning of technological unemployment and the beginning of the offsetting effects. experience shows that the labor-saving equipment will replace workers before the new industries completely develop to create new jobs for the unemployed. especially if the economy is in a recession, the technological unemployment may exist for a long period of time. this could result in lost wages and a reduction in economic growth. the economic forces of supply and demand are more rigid in third world countries due to more government regulations and political interventions. consequently, it takes longer for the labor force to shift from old jobs to new employment that is created by technological advancement. also, the lack of unemployment insurance policies in most developing countries would add to the negative impact of technological advances. this would further deteriorate the purchasing power of the consuming sector and accelerate the decline in gdp and economic welfare. second, in most developing countries, there are not many opportunities for a technologicalunemployed individual to undertake the necessary education or training to win a place in the new technological job market. the lack of sufficient training schools, expert instructors, and usually relatively high costs of education in these countries make it very difficult for transfer of labor force from old jobs to new technical jobs. what usually happens following a technological advancement in third-world countries is that a relatively small number of workers are able to shift to higher paying technological jobs. however, most technological-unemployed individuals will be forced to move from old high-paying jobs to unskilled low-paying work in which they do not need journal for economic educators ∑ volume 4 ∑ number 1 ∑ summer 2003 3 to use advanced technology. this will lead to a class division and a more unequal distribution of income where the majority of the population becomes poorer. the poorer population will not have sufficient purchasing power to create demand for the technological-sector products, which can result in overproduction, more unemployment, and therefore a reduction in economic growth and welfare. third, according to the well-accepted rules of the growth theory, new technologies in themselves do not guarantee increased productivity and economic growth. growth of output and improvements in standard of living require a simultaneous increase in inputs, stock of capital, and skilled workers. in most undeveloped countries, these major factors must be imported from industrialized countries. for example, due to poverty and lack of domestic investment, these countries heavily depend on foreign investment. however, political uncertainties create a strong barrier for foreign investment. uncertain future rates of return and imbalances between risk and return cause foreign investors to walk away from investing in some developing countries. in addition, lack of free trade and existence of economic sanctions imposed on some undeveloped countries would add to the difficulty of obtaining required inputs. skilled labor, another prerequisite for economic growth, is another major issue in these economies. according to undp’s human development report, while in the industrialized countries of europe, north america, and japan there are more than 14 scientists and technicians per every 100 people, in the developing countries there is only one scientist or technician per every 100 people. in addition to the above economic shortfalls, developing countries would also need a deep attitudinal and organizational change and a lengthy process of social learning about the new culture of technological economy. however, struggle for survival in poor economic conditions would make this learning process difficult if not impossible. these barriers and difficulties should further explain why imported technological advances have not led to an enhancement of economic welfare in developing countries. empirical analysis one major conclusion of our discussions in the previous section is that advances in technology cannot explain changes in living standards in developing countries. in this section, we use a cross-sectional regression model to test for the impact of technological advances on living standards in developing countries. our sample consists of countries that the world trade organization (wto) recognizes as “least developed” countries and that the united nations has designated as least developed countries. there are currently 30 least developed countries on the un list which to date have become wto members. these countries are angola, bangladesh, benin, burkina faso, burundi, central african republic, chad, congo, democratic republic of the djibouti, gambia, guinea, guinea bissau, haiti, lesotho, madagascar, malawi, maldives, mali, mauritania, mozambique, myanmar, niger, rwanda, senegal, sierra leone, solomon islands, tanzania, togo, uganda, and zambia. seven additional least developed countries are in the process of accession to the wto. these are cambodia, cape verde, laos, nepal, samoa, sudan, and vanuatu. furthermore, bhutan, ethiopia, and yemen are wto observers. our sample includes cross-sectional data in year 2000 for these 40 countries. we use a multiple regression model in which the dependent variable is the living standard. living standard is measured by real per capita gdp (pcgdp) and the annual growth rate of real per capita gdp (gpcgdp). the first independent variable in our model is technological advances, measured by the number of main line phones (mp) and number of mobile cellular phones (cp). other independent variables include electricity consumption (e) and percentage of gdp in agriculture (ag). we hypothesize that in developing countries, technological advances do not have a positive impact on economic welfare. the slope of the relationship is therefore hypothesized to be journal for economic educators ∑ volume 4 ∑ number 1 ∑ summer 20034 statistically zero or negative. data for all variables in this study are obtained from world fact book 2002 on the internet (www.odci.gov/cia/publications/factbook). tables 1 through 4 present the regression test results. tables 1 and 2 display the results of the regression in which real per capita gdp is the dependent variable. tables 3 and 4 show the results of the regression in which the annual percentage growth rate of real per capita gdp is the dependent variable. with respect to the statistical significance of test results, it is evident that measuring standard of living by per capita gdp produces the same results as measuring it by the growth rate of per capita gdp. also, as is shown in tables 1 and 3 versus tables 2 and 4, the same statistical results are obtained whether mail line phones or cellular phones are used to measure advances in technology. in all four regression tests, the estimated t values for the slopes of number of phone lines and number of mobile cellular phones are significantly below the 5 percent critical t value. this implies that all regression slopes related to advances in technology are statistically zero. the low values of f statistic and adjusted r2 confirm this inference. these test results conform well to our hypothesis that technological advances in themselves can not improve economic welfare in developing countries. lack of current and relevant time series data makes it impossible to conduct a deeper analysis of the long-term relationship between technological advances and economic welfare in developing countries. when such data become available, other statistical analyses can further determine if these variables have a stable and long-term relationship. table 1. pcgdp= a+b1 (mp) +b2 (e) +b3 (ag) b1 b2 b3 adjusted r 2 f -0.0019 0.21 -7.23 0.029 1.72 (-0.19) (.071) (-1.15) table 2. pcgdp= a+b1 (cp) +b2 (e) +b3 (ag) b1 b2 b3 adjusted r 2 f -0.006 0.20 -7.34 -0.05 0.92 (-0.89) (1.35) (-0.92) table 3. gpcgdp= a+b1 (mp) +b2 (e) +b3 (ag) b1 b2 b3 adjusted r 2 f -0.000001 0.00003 -0.005 -0.02 0.92 (-0.63) (1.01) (-0.25) table 4. gpcgdp= a+b1 (cp) +b2 (e) +b3 (ag) b1 b2 b3 adjusted r 2 f 0.000001 0.00004 -0.007 0.08 1.92 (0.58) (1.01) (-0.29) notes: numbers in parentheses are t values for slope coefficients; pcgdp = dollar value of real per capita gdp; gpcgdp = percentage annual growth rate in real per capita gdp; mp = number of main line phones; e = electricity consumption in millions of kwh; ag = percentage of gdp in agriculture; cp = number of mobile phone cellular. journal for economic educators ∑ volume 4 ∑ number 1 ∑ summer 2003 5 concluding remarks globalization based on technological advances such as the internet, mobile phones, and fax machines has not led to improvements in economies of developing countries. instead, it has widened the gap between standards of living in developed and developing countries. in this paper, we attempted to articulate some economic reasons why technological advances in themselves could not improve living standards in developing countries. we also conducted a regression analysis and examined the cross-sectional relationship between economic welfare and technology in 40 least developed countries. our test results supported our hypothesis that no strong and stable relationship exists between these variables. to achieve higher standards of living, developing countries should focus their efforts on educating and training their labor force. advances on technology would become a key factor in raising living standards only if the labor force has the skill and education to use it. in addition to skilled workers, economic growth requires increases in the amount of inputs and stock of capital. finally, developing countries need a deep attitudinal and organizational change and a lengthy process of social learning about the new culture of technological economy. references bugliarello, g. 1984. “technology and economic development.” metroeconomica 36: 111-119. freeman, c. 1987. technology policy and economic performance: lessons from japan. london: pinter publishers. james, j. 1999. globalization, information technology and development. london and basingstoke: macmillan. james, j. 2000. “pro-poor modes of technical integration into the global economy.” development and change 31: 765-783. pfouts, r. 1995. “on the interactions of economics and technology.” atlantic economic journal 23: 248-255. stoneman, p. 1983. the economic analysis of technical change. new york: oxford university press. undp. 1999. human development report. new york: oxford university press. world fact book 2001. www.odci.gov/cia/publications/factbook. 38 journal for economic educators, vol. 8, no. 1, spring 2008 38 cross elasticity of supply: as big a secret in canada as it is in the u. s. anthony j. greco 1 abstract in a prior study, the author determined that cross elasticity of supply is rarely discussed in intermediate microeconomics, and industrial organization textbooks used in u. s. universities. he did, however, find that the american judicial system has increasingly relied upon the concept in defining product markets. in the present paper, the author examines cross elasticity of supply in economics textbooks in canadian universities. similar to his prior study, the author found virtually no mention of the concept in the canadian textbooks. however, unlike the prior study, he found no appreciable reliance upon cross elasticity of supply in defining product markets by canadian courts. though perplexed over its lack of academic discussion, the author is encouraged by the deference paid to cross elasticity of supply by american courts. introduction virtually all students enrolled in intermediate microeconomics classes, and a great many enrolled in principles of microeconomics classes, are exposed to the concept of cross elasticity of demand. they learn that this is a useful indicator of the way goods are related, if related at all, from the consumer’s point of view. specifically, a coefficient of cross elasticity of demand is computed by dividing the percentage change in the quantity demanded of one good by the percentage change in the price of a different good. this coefficient measures the response in the quantity demanded of one good (the dependent variable) to a change in the price of a different good (the independent variable). the sign of the coefficient indicates the particular relationship between the two goods in question, with a positive coefficient suggesting substitutes and a negative coefficient suggesting complements. the establishment of a substitute relationship, in particular, may be useful in the delineation of a market, that is, in the identification of firms that are, in the eyes of consumers, sellers of competitive or substitutable products. surprisingly, however, it seems that few students are exposed to the concept of cross elasticity of supply, a measure of substitutability or interchangeability of products through the eyes of producers or suppliers. this is regrettable, if, for no other reason, that such students are given an incomplete method for determining appropriate market definitions. the regret iseven more pronounced for economics majors who aspire to be professional economists. similar to the cross elasticity of demand coefficient, the sign of the coefficient of cross elasticity of supply, derived by dividing the percentage change in quantity supplied of one good by the percentage change in price of a different good, is suggestive of the relationship between the two goods in question. the interpretation of the respective signs of the coefficient of cross elasticity of supply, however, is exactly the opposite of that for the coefficient of cross elasticity of demand. that is, a positive coefficient of cross elasticity of supply suggests that suppliers of these two goods view them as complements. a negative coefficient of cross elasticity of supply suggests 1 professor, department of economics and finance, university of louisiana at lafayette. 39 journal for economic educators, vol. 8, no. 1, spring 2008 39 that the suppliers of the two goods consider them to be substitutes for one another. the establishment of such a substitute relationship, here again, may be quite helpful in the identification of the sellers, both current and potential, to include within a given market. sole reliance on the cross elasticity of demand coefficient to the exclusion of the cross elasticity of supply coefficient could, in fact, lead to an improper definition of the relevant product market. for example, one would not be inclined to include producers of children’s shoes and producers of adult shoes in the same industry on the basis of the cross elasticity of demand coefficient. clearly buyers (users) of these two types of shoes generally do not consider the shoes to be interchangeable in use. suppliers or prospective suppliers of these different types of shoes, however, may consider themselves in the same industry. they can easily shift resources away from the production of one type of shoes toward the production of their rivals’ type of shoes in response to an increase in the price of the rivals’ shoes. the same could be said, for example, of the producers of right-handed baseball gloves and of left-handed baseball gloves. in a resource market context, the concept of cross elasticity of supply could be applied to determine the participants (suppliers) in the market for terminal finance faculty in academic institutions. on the surface, these suppliers seem to be solely those with terminal degrees in the area of finance, but many individuals with terminal degrees in economics have entered the market for finance faculty as the average remuneration for finance faculty has steadily risen above that for economics faculty. that is, as the price paid to finance faculty rises, the quantity supplied is enhanced by those economics graduate students who take increased financial economics courses or finance courses; those who switch their terminal degree program to finance; and the existing ph. d.’s in economics who redirect their research efforts primarily into the area of finance. these individuals then enter the academic market as suppliers of finance expertise. moving from the hypothetical to an actual example, the ftc ruled in a 1975 case that the relevant antitrust product market included two types of van trailers because of the ease of shifting production facilities. (budd co., 1975). the coefficient of cross elasticity of supply, of course, addresses this issue of supplier substitutability and, therefore, increases the accuracy of the market delineation process for both products and resources. this capability is especially important in antitrust litigation. yet many students of economics are simply not introduced to the concept of cross elasticity of supply. a significant contributing factor to this phenomenon is the fact that the concept is hardly ever mentioned in microeconomic principles texts, intermediate microeconomic texts, or industrial organization and policy texts. perhaps, authors of such texts are trying to “economize” space, in their texts, believing that readers can intuitively infer the concept of cross elasticity of supply from their discussion of cross elasticity of demand. it seems that such authors should, at least, mention cross elasticity of supply in a footnote. most authors do not even deign to do this. this leads one to believe that authors of these texts omit a discussion of or any references to cross elasticity of supply either because they believe that the concept is totally irrelevant or because they have never been exposed to it themselves. any thoughtful person should consider the concept not only relevant, but also crucial to the proper delineation of product markets. hence, one is inclined to believe that authors of the aforementioned texts tend to omit any references to cross elasticity of supply because they are, amazingly, unfamiliar with the concept. greco (2005) examined the coverage of cross elasticity of supply in upper-level economics textbooks in the united states, as well as the reliance on this concept by u. s. courts 40 journal for economic educators, vol. 8, no. 1, spring 2008 40 in defining product markets. this paper seeks to determine the coverage allotted to cross elasticity of supply in economics textbooks used in canadian universities, as well as the reliance on this concept as a criterion for defining product markets in the canadian judicial system. prior review the earlier aforementioned study (greco, 2005) sought to determine the extent of exposure given by past and current economic textbooks commonly used in u. s. institutions of higher learning. this inquiry was confined to upper-level economic texts, both intermediate microeconomics texts and industrial organization and policy texts, because the large number of economic principles texts on the market made the review a rather onerous task, and more importantly, because economics majors are the students most likely to be enrolled in intermediate microeconomics and industrial organizations and policy courses. one would suspect that such majors are the most likely to be exposed to cross elasticity of supply. in the end, 13 contemporary and 17 older intermediate microeconomics texts, as well as three contemporary and 18 older industrial organization and policy textbooks, were examined. although the number of books actually examined is not definitive, it was taken to adequately represented the treatment accorded the cross elasticity of supply concept in upper-level economic textbooks. ten of the 13 contemporary intermediate microeconomics texts discussed cross elasticity of demand, but none of them discussed cross elasticity of supply. only one of the 17 older intermediate microeconomics texts discussed cross elasticity of supply. thirteen of these older texts did, however, discuss cross elasticity of demand. hence, only one of the 30 intermediate microeconomics texts examined by greco (2005) discussed cross elasticity of supply, and that one was published in 1966. only one of three contemporary industrial organization texts examined by greco (2005) discussed cross elasticity of supply as well as cross elasticity of demand. the remaining two such texts discussed only cross elasticity of demand. eleven of the 18 older industrial organization texts discussed cross elasticity of demand only. five of these texts discussed both cross elasticity of demand and of cross elasticity of supply. two of the older industrial organization texts did not discuss either of the cross elasticity concepts. hence, only six of the 21 industrial organization texts discussed cross elasticity of supply, none after 1997. in summary, only one of the 16 contemporary u. s. texts and six of the 35 u. s. older texts discussed cross elasticity of supply; that is, only seven of the 51 total u. s. texts reviewed dealt with this topic. in contrast, 43 of these 51 texts did discuss cross elasticity of demand, while seven of the 51 did not discuss either cross elasticity concept (greco, 2005). review of canadian texts having examined u.s. texts, the author turned to the examination of the coverage of cross elasticity of supply in canadian economic textbooks reported here. initially a letter and/or e-mail message was sent to the economics departments of all canadian universities requesting information on their coverage of cross elasticity of supply in the appropriate economics courses. sadly, the response was nonexistent. therefore, in order to build a representative sample of economics textbooks, the author sought to determine the most-widely used microeconomics principles, intermediate microeconomics, and industrial organization and policy texts across the various canadian universities. 2 an industry source who wished to remain anonymous provided 2 antitrust and government and business texts were not examined per se both because of the difficulty of obtaining them and also because the author believed that an examination of the leading industrial organization and 41 journal for economic educators, vol. 8, no. 1, spring 2008 41 the names of the four most frequently-used microeconomics principles and intermediate microeconomics texts, as well as the names of the two most popularly-used industrial organization and policy texts. the top four microeconomics principles texts had a combined canadian market share of 76 percent. all of these texts discussed cross elasticity of demand, but none discussed cross elasticity of supply. the reader will recall that economic principles texts were not examined in the earlier study and, therefore, these four principles texts were not included in the prior study. the four most predominantly-used intermediate microeconomics texts hold 55 percent of canadian market sales. the american version of three of these four texts were included in the author’s previous study. here again, while all four texts discussed cross elasticity of demand, none of them discussed cross elasticity of supply. finally, both of the two most commonly-used industrial organization and policy texts, which command 70 percent of canadian market sales (with the most commonly used of these two holding a 50 percent share) discussed cross elasticity of demand exclusively. one of these two texts had been included in the author’s earlier work. hence, none of the three categories of textbooks discussed cross elasticity of supply. apparently, students in canadian universities aren’t any more familiar with cross elasticity of supply than their counterparts in u. s. universities. on the one hand, this is due to the use of canadian editions of the same texts used in u. s. universities. nevertheless, the fact that the concept is not covered in a text does not necessarily mean that the concept (cross elasticity of supply in this case) is not being presented within the course. one must suspect that its absence in textbooks probably does mean that its discussion has been minimized, if not virtually eliminated, in classroom settings. table i below lists the canadian textbooks examined. none of the above is to suggest that the cross elasticity of supply used in conjunction with the cross elasticity of demand are definitive criteria for use in the formulation of product market definitions. both of these cross elasticity concepts are subject to certain theoretical and practical difficulties which the author has reviewed elsewhere (greco, 2005). to be sure, these cross elasticity concepts are to be used with other criteria to formulate accurate product market definitions. the point is that cross elasticity of supply is one of the criteria which should not be neglected in such formulations. supply substitutability in the courts interestingly, despite its lack of attention in academic textbooks, the concept of cross elasticity of supply seems to be gaining increasing judicial attention in the u. s. (greco, 2005, 2008). the u. s. supreme court has only rarely acknowledged supply substitutability and has not done so in over 40 years. the court concluded in u. s. v. columbia steel (1948) that the producers of rolled steel products could make other such products interchangeable with the shapes and plates supplied by u. s. steel and its subsidiaries. the court was attempting to determine the relevant product market that might be foreclosed as a result of a proposed acquisition by u. s. steel. fourteen years later in a footnote, the court mentioned that “cross elasticity of production facilities” might be somewhat useful in the delineation of markets (brown shoe co. v. u. s., 1962) then, in the rome cable case of 1964, three justices dissented from the court majority opinion and argued in favor of supply flexibility in the determination of the relevant product market involved (u. s. v. aluminum co. of america, 1964). finally, in the policy texts would suffice to assess the coverage of cross elasticity of supply at the intermediate undergraduate level. 42 journal for economic educators, vol. 8, no. 1, spring 2008 42 table i canadian economics textbooks examined for cross elasticity of supply coverage coverage of cross elasticity of supply i. microeconomics principles texts yes no mankiw, principles of microeconomics, 3 rd canadian edition, 2006, thomson x mcconnell/brue/barbiero, microeconomics, 10 th canadian edition, 2005, mcgraw-hill x cont’d. coverage of cross elasticity of supply i. microeconomics principles texts yes no parkin, microeconomics: canada in the global environment, 6 th edition, 2006, pearson education canada x ragan/lipsey, microeconomics, 11 th canadian edition, 2005, pearson education canada x ii. intermediate microeconomics texts frank, microeconomics & behavior, 3 rd canadian edition, 2007, mcgraw-hill ryerson canada x eaton/eaton, microeconomics, 16 th canadian edition, 2005, prentice hall x pindyck/rubinfeld, microeconomics, 6 th edition, 2005, prentice hall x perloff, microeconomics, 4 th edition, 2007, addison-wesley x iii. industrial organization texts carlton/perloff, modern industrial organization, 4 th edition, 2005, addisonwesley x church/ware, industrial organization: a strategic approach, 2 nd edition, 2008, cambridge university press x 43 journal for economic educators, vol. 8, no. 1, spring 2008 43 grinnell decision of 1966, the court gave recognition to the consideration of supply substitutability in its identification of the relevant product market. therefore, the court has rarely considered, much less endorsed, the use of supply substitutability (cross elasticity of supply). there has been more recognition of and/or reliance upon supply substitutability by the circuit courts of appeals. the number of cases in which this is true, however, is surprisingly small, numbering only ten over the years 1962-1995. in the first of these cases, the circuit court for the district of columbia, in its reynolds metals decision of 1962, rejected supply substitutability as a basis for market definition (reynolds metals co. v. ftc, 1962) in two subsequent circuit court decisions, the use of supply substitutability was also virtually discounted (l. g. balfour v. ftc, 1971; columbia metal culvert v. kaiser aluminum, 1978) the concept began to gain recognition as a market-determining measure in 1972 and was relied upon to some extent in seven cases in the 1972-1995 period. (calnetics corp. v. volkswagon, 1972; twin city sportservice, 1972; telex corp. v. ibm, 1975; yoder bros., 1979; u. s. anchor, 1993; virtual maintenance, 1993; sbc communications, 1995. finally, the author has identified 37 district court decisions in 14 states as well as 6 federal trade commission rulings in which supply substitutability was discussed(greco 2005, 2008). supply substitutability was rejected altogether as a criterion for determining market structure in two of these decisions, while it was disallowed as such a criterion on technical grounds in three other cases. of the remaining 38 cases, a broad market definition was adopted in 18 cases (suggesting a greater acceptance of supply substitutability), whereas, a narrow market definition was adopted in 20 cases. as an example of a broad market definition, an illinois district court ruled in science products co. (1974) that the relevant product market was not merely garden chemicals but also included all products that affect plant or insect life in and around the home. further, an ftc case of 1975 found the relevant product market to include two types of van trailers because of the ease of shifting of production among these two types (budd co., 1975). a more narrow market definition was adopted by the d. c. district court in the southern pacific communication decision. therein, the plaintiffs contended that the relevant product market was all business and government intercity telecommunications services, nationwide in scope. this would have placed such types of services as mts and wats in the same industry as private line services (pls). the court limited the relevant market to private line services. (southern pacific communications co. v. at&t, 1982). then again in u. s. v. ivaco, inc. (1989), the u. s. district court for the western district of michigan, southern district, agreed with the u. s. government’s narrow product market definition of automatic tampers, as opposed to the defendants’ broader product market definition which included manual tampers and the newer high technology continuous action tamper made exclusively by one company. 3 the increased attention that u. s. courts and the u. s. legal profession have paid to cross elasticity of supply suggests that this concept may be taught in u. s. law schools, even if it is not being taught in mainstream undergraduate and graduate curricula. this suggests an investigation of the curricula of u. s. law schools which is beyond the scope of the current study. according to a former member of the canadian competition tribunal, there is apparently little competition litigation in canada. 4 most of the cases under the competition law of canada 3 tampers are machines used to place ballast underneath a railroad tie. 4 letter of july 24, 2007, from larry schwartz, former member of the canadian competition tribunal. 44 journal for economic educators, vol. 8, no. 1, spring 2008 44 are decided by the competition tribunal, not by the canadian courts, but many of these cases are settled privately with the tribunal. little if any discussion of the techniques used for formulating market definitions are available for tribunal cases. therefore, it is very difficult to ascertain the methods employed to formulate these market definitions. other evidence suggests that there is no strong reliance on cross elasticity of supply as a market-defining mechanism in canada. an expert report obtained by the canadian bureau of competition policy in the landmark superior propane merger litigation estimated own – and cross – price demand elasticities of various energy commodities based on a complete demand system, but apparently did not address own – and crossprice supply elasticities. (ryan and plourde, 1999). even the use of cross – elasticities of demand is usually limited by the large amount of data required to compute these or any cross elasticity coefficients. the author was informed that there are cases in which the estimation of own – and cross – price elasticities are facilitated by the use of scanner data but apparently such situations are relatively rare. 5 further, the new canadian merger guidelines focus explicitly on demand-side substitution to define relevant markets. apparently, this approach attempts to avoid the data requirements of cross – price estimation by relying almost exclusively on own – price demand elasticity as a major determinant of product market definitions. while this may be convenient, it is unfortunate in that it may often result in inaccurate definition of product markets. the u. s. department of justice initiated merger enforcement guidelines in 1968. these guidelines were revised in 1982. the most significant of the 1982 revisions was the adoption of the hypothetical monopolist test in defining or delineating markets. essentially the guidelines maintain that a market is the smallest group of products in the smallest geographical area such that a hypothetical monopoly of all those products in the area could significantly raise price (usually by 5 percent) and not induce a significant shift of buyers to substitute goods within a reasonable period of time, usually assumed to be one year. (carlton and perloff, 2005; shepherd, 1997). then in 1992, the u. s. department of justice and the federal trade commission issued revisions to the merger enforcement guidelines which implicitly broadened the approach to market definition by the inclusion of supply substitutability. section 1.3 of the revised guidelines specifically deals with the identification of the firms participating (selling) in a relevant market. current sellers in such a market are discussed in section 1.31 of the guidelines. section 1.32, however, brings in firms that “participate through supply response.” these are referred to as “uncommitted entrants,” essentially defined to be those firms which should be included as suppliers in the relevant market due to their probable supply response. that is, these are the firms who, within one year and without the expenditure of significant costs, would become active sellers in said market in response to a small but significant nontransitory price increase. (horizontal merger guidelines, 1992). with this significant revision to the merger enforcement guidelines, the executive branch of the federal government like the u. s. judicial system, has officially recognized supply substitutability as an important criterion in formulating product market definitions. interestingly, the canadian bureau of competition issued merger guidelines in 1991 patterned on the 1984 u. s. merger guidelines’ hypothetical monopolist paradigm. (werden, 5 ibid. 45 journal for economic educators, vol. 8, no. 1, spring 2008 45 2002). then in september 2004, the canadian bureau of competition released revised merger enforcement guidelines consistent with the 1992 u. s. merger guideline revisions. (hewat and lloyd, 2005) nevertheless, the canadian judicial system does not appear to rely upon supply substitutability as a criterion in defining product markets. summary in an earlier study, the author determined that the concept of cross elasticity of supply is rarely discussed in intermediate microeconomics, and industrial organizations and policy textbooks used in the u. s. the american judicial system, however, has over the years increasingly relied upon cross elasticity of supply in determining appropriate product market definitions. an examination of the coverage given to the concept of cross elasticity of supply in similar economics textbooks used in canadian universities finds virtually no mention of the concept. further, no appreciable reliance on the concept of cross elasticity of supply as a criterion for defining product markets is found in the canadian judicial system. although the neglect of cross elasticity of supply in the academic world is somewhat perplexing, the increasing reliance on the concept of cross elasticity of supply in the u. s. judicial system, as reinforced in the u. s. department of justice/ftc merger guideline revisions of 1992, is both intriguing and encouraging. this may suggest that u. s. law schools are teaching the concept even if academic undergraduate and graduate programs are not. 46 journal for economic educators, vol. 8, no. 1, spring 2008 46 references articles greco, anthony j. 2005. “cross elasticity of supply: seldom heard of and seldom taught,” journal for economics educators 5(1):1-5. greco, anthony j. 2008. “a survey of the status of supply substitutability in the u. s. supreme court and u. s. circuit court of appeals,” clarion business and economic review, forthcoming, spring. greco, anthony j. 2005. “the treatment of supply substitutability in u. s. district court and ftc decisions,” unpublished. hewat, christopher a. and lloyd, jerry r. 2005. “overview of mergers and acquisitions in canada,” overview of merger and acquisition activity in december 2004, blake, cassels and graydon. werden, gregory j., 2002. “the 1982 merger guidelines and the ascent of the hypothetical monopolist paradigm,” www.usdoj.gov. books carlton, dennis w. and perloff, jeffrey m. 2005. modern industrial organization, fourth edition, pearson, addison wesley, boston, mass. shepherd, william g. 1997. the economics of industrial organization, fourth edition, prentice hall, upper saddle river, new jersey. report ryan, david and andre plourde. 1999. affidavit, in the matter between: the commissioner of competition and superior propane, inc. et al, the competition tribunal, file no. ct 9812. court cases brown shoe co. v. united states, 370 u. s. 294 (1962). budd co., 86 ftc 518, 569-72 (1975). calnetics corp. v. volkswagon of america, 348 f. supp. (c. d. cal. 1972). columbia metal culvert co. v. kaiser aluminum and chemical corp., 579 f. 2d 20 (3d cir), cert. denied, 99s. ct. 214 (1978). in the matter of the competition act, r. s. 1985, c. c34, as amended, between: the commission of competition and superior propane, et al, 1999, the competition tribunal, file no. ct 9812; l. g. balfour co. v ftc, 442 f. 2d 1 (7 th cir. 1971). http://www.usdoj.gov/ 47 journal for economic educators, vol. 8, no. 1, spring 2008 47 reynolds metals co. v. ftc, 309 f. 2d 223 (d. c. cir. 1962). sbc communications, inc. v. fcc, 312 u. s. app. d. c. 414, f. 3d (d. c. circuit 1995). science products co. v. chevron chemical co., 384 f. supp. 793 (n. d. il. 1974). southern pac. communications co. v. american tel. & tel. co., civil action no. 78-0545, united states district court for the district of columbia, 556 f. supp. 825; 1982 u. s. dist. telex corp. v. ibm corp., 510 f. 2d 894 (10 th cir.) cert. dismissed, 423 u. s. 802 (1975). twin city sportservice, inc. v. charles o. finley and co., 512 f. 2d (9 th cir. 1975), rev’g and remanding 365 f. supp. 235 (n. d. cal. 1972). u. s. anchor mfg., inc. v. rule industries inc., 7 f. 3d 986 (11 th cir. 1993). u. s. v. aluminum co. of america, 377 u. s. (1964). u. s. v. columbia steel co., 334 u. s. (1948). u. s. v. grinnel corp., 384 u. s. (1966). united states v. ivaco, inc., file no. g89-40032 ca, united states district court for the western district of michigan, southern division, 704 f. supp. 1409; 1989 u. s. dist. virtual maintenance, inc., v. prime computer inc., 957 f. 2d 1318; 995 f. 2d 1324; 11 f. 3d 660 (6 th cir. 1993). yoder brothers v. california – florida plant corp., 537 f. 2d 1347 (5 th cir. 1976), cert. denied, 429 u. s. 1094 (1979). u. s. government publication horizontal merger guidelines of the antitrust division and federal trade commission, washington, d. c. 1992, reprinted in federal regulation reporter (cch): para. 13,104. 64 |journal for economic educators, 20(1), 2020 comic-econ: using amar chitra katha comics to teach economics feler bose1 and brian baugus2 abstract: students are exposed to a variety of sources of information and entertainment during their formative years. while this has certain downsides to academic pursuits, it also presents opportunities since students are interacting with ideas and concepts in different settings. one of those settings is the comic book and the closely related graphic novel. comic books are actually an older entertainment source but seem to have an enduring appeal and even occasional re-births as some get adapted into movies and video games. these relatively short, colorful, entertaining magazines have been popular for decades in many cultures, and some characters are very well known and, as a result, present an educational opportunity. using comics to teach several different topics in economics expands the toolbox for the instructor to use either in schools or undergraduate classes. key words: amar chitra katha, comic books, cross-cultural jel code: a22 introduction numerous people have written how to teach economics to undergraduates in an innovative way. a book edited by becker and watts covers different ways to teach economics using sports, drama, literature, etc., (becker and watts 1998), hall discusses using music to teach undergraduates (hall, lawson, and mateer 2008), and leet and houser explore using movies to teach undergraduates (leet and houser 2003), sexton (2006) uses movie clips to teach economic concepts, and yet another uses great books from western civilization to teach economics to undergraduates (hartley 2001). further, one course had a travel component to teach economic development to undergraduates (bose 2017). some recent work has been done using comics in economics courses, but these comics are from western nations (lawson 2006, o’roark 2017). the lawson (2006) paper provides a number of comic strips with economic content and provides questions for thought that can be used in the classroom. o’roark (2017) use the superhero comics to teach numerous economic concepts such as scarcity, specialization, and opportunity cost. our innovation attempts to address two characteristics: creative teaching and a cross cultural experience. we adapt a popular indian comic book series called amar chitra katha (ack) (translated: immortal picture stories) and highlight the economic activities, concepts and principles contained in the stories ack comics were started in 1967 by anant pai, who is known as the founder of the indian comic industry. the ack comics were a huge success especially in the 1970s and were affordable for the middle and lower middle classes (sreenivas 2010, 14ff). however, they saw a 1 associate professor of economics and finance, school of business and economics, indiana university east, 2325 chester blvd, richmond, in 47374 2 associate professor of economics, department of business, leadership and management, regent university, 1000 regent university drive, virginia beach, va 23464 65 |journal for economic educators, 20(1), 2020 decline with the arrival of television, satellite television, and the internet, but they are now being adapted for television animations (bajaj 2009). as of today, ack has sold over 100 million copies of 400 unique comics in over 20 languages.3 motivation/theory many undergraduate students, primarily due to their age, have limited exposure to nonwestern stories, worldviews and culture. it is natural and frequently the case that students use their experiences as a way to see and understand the rest of the world. with increasing flow of information and ideas, growing workplace diversity in terms of culture, language, and values, being exposed to non-western stories would be a way to help diversify and internationalize the curriculum. in his article “assume anarchy?”, rajan (2004) encourages economists to avoid thinking the world everywhere is like the developed west. he refers to this assumption as the “complete markets model,” or we can think of this as the garden of eden (goe) assumption. in this model, “everyone is fully informed; every eventuality is anticipated by contracts; all contracts enforced by omniscient, incorruptible courts; and governments automatically take care of all the public goods and interfere in none of the private ones.” deviations from this goe have to be justified, and usually only one step deviations are allowed. we see this mindset in western comics and in many other aspects of western culture. everything works well, except for the plans and actions of one evil person who wants to take control of the world, or some part of it, for his own selfish ends (the deviation from goe), which a superhero (the solution) thwarts, and the comic society returns to the goe state. we see this similar general motif in classic american western movies, television crime shows and other pop culture media. what rajan suggests is to assume anarchy instead, a world where “nothing is enforceable, property and individual rights are totally insecure, and the enforcement apparatus for every contract must be derived from first principles” (hobbesian world) (rajan 2004). for many of the poorest countries, it is better to assume anarchy as a starting point. while for india neither the goe nor anarchy is the appropriate starting point in most instances, comics written from a different cultural standpoint can provide valuable insights for students inculcated on goe assumptions. the other aspect of this approach is that people the world over like and remember stories much better than sterile lessons. mccloskey has emphasized the value of storytelling in economics. “there seems to be two ways to understand things; either by way of the metaphor or by way of a story...” (mccloskey 1990). mccloskey makes the point that people like stories and remember them and economists would do well to explain their points in story form, “it is not controversial that an economist is a storyteller when telling the story of the federal reserve board or of the industrial revolution…the applied economist can be viewed as a realistic novelist…the theorist too, may be viewed as a teller of stories though a non-realist, whose plots and characters have the same relation to truth as those in gulliver’s travel or a midsummer night’s dream” (mccloskey 1990). or, we might add as the characters in a comic book. taking mccloskey’s point one step further is certainly not a stretch and does no damage to the point; if economists should and do tell stories, then economics teachers should use stories to illustrate and convey economic ideas and points. 3 https://www.amarchitrakatha.com/us/about (accessed january 26, 2019). https://www.amarchitrakatha.com/us/about 66 |journal for economic educators, 20(1), 2020 application in the classroom of the 400 titles in the ack collection, we reviewed about 25 titles in detail. each title has several illustrated stories. we chose five of these stories we thought illustrated economic concepts in interesting and creative ways and fit into the class in which we intended to use them, which was an economics 101 class at regent university (virginia beach, va, u.s.a.). economics 101 is a general education course for students majoring in a field not related to business or economics. this particular version was a 3-credit hybrid course that met over a compressed 8-week schedule. a hybrid course meets once a week for two hours and has a significant online component, which means that the student is more responsible for taking the initiative for the learning process. this section was taught in the early spring semester (januarymarch) in 2019 and had 42 students enrolled. the primary textbook we used in this class was common sense economics by gwartney et. al. (gwartney et al. 2016), plus other supplemental materials were used. we incorporated the five comics in two ways; four of them were used as the material on which the discussion boards were based, and one was assigned for which a three-page essay was written. the course had a total of 4 discussions and 4 essays; hence all the discussions used comics, and a quarter of the essays used comics. each comic used is briefly described below as well as the associated assignment for the discussion board: the king elephant and the mice4 summary: the king elephant spares the lives of seemingly insignificant mice. when hunters trap the elephants, the mice play a major role in freeing them. week 1 discussion: how does this story illustrate the value of trade? also, some political leaders claim there is no value in trading with countries that are poorer and/or significantly different from ourselves. this story presents a different view. look up america’s trading partners, investigate a smaller one, and describe the value of that trade both in dollar terms and in what those imports add to the product diversity in america. the dhobi’s donkey5 summary: a dhobi (washer man) covers his donkey with a tiger skin to facilitate theft of neighbor’s crops from their fields. the donkey’s ruse is uncovered, and the farmers kill the donkey. note: the dhobi’s donkey also shows a story that starts from non goe assumptions where poorly enforced property rights leads to vigilantism as farmers take matters into their own hands by killing a trespassing donkey instead of taking the owner, the dhobi, to court and seeking restitution. week 3 discussion: in the story the dhobi engages in deception to steal the farmer’s millet, and the donkey gets killed. use this comic and whatever else you think appropriate to explain why good property rights make for a less violent society. 4 pai, anant, editor. stories from the panchatatantra: the brahmin and the goat. amar chitra katha, ltd. east mumbai. 1972. 2010. pp. 6-11 5 pai, anant, editor. stories from the panchatatantra: how the jackal ate the elephant amar chitra katha, ltd. east mumbai. 1972. 2010. pp. 23-26. 67 |journal for economic educators, 20(1), 2020 the mother6 summary: this story revolves around two brothers; the older brother inherits a kingdom, while the younger brother, convinced that he too would be a good king, cheats at a contest and wins the throne of an adjoining kingdom. relations between the two brothers start out friendly, but quest for more land and power leads to hostilities, and war is only averted when their mother intervenes. week 5 discussion: how does this story illustrate the perils of achieving power and office? how does this story illustrate the temptations that come with having power? the dullard7 summary: four brahmins (one being a dullard) set out to make fortune with their (magical) learning. three brahmins, in a useless display of their abilities, resurrect a lion skeleton back into a living lion without thinking about consequences. the dullard, who has no learning but armed with common sense, warns them not to do it and is the only one to survive the encounter. week 7 discussion: in the u.s. there is a significant push both in policy and in culture for as many people to go to college and get a higher education. this is what economists call human capital. what does this story demonstrate about the having the right kind of human capital not just more of it? the following comic was used for students to write an essay. andher nagari8 summary: a wandering guru and two students come upon a town in which every product sells for the same price. later, when a crime has been committed, the ruler just looks for anyone to punish regardless of guilt or evidence. note: andher nagari also illustrates the non-goe assumption where a dysfunctional price system and corrupt justice system result in some very perverse but logically consistent outcomes. this story was used to ask essay questions about a functioning price system and its linkage to a functioning justice system: describe in modern economic terms what is wrong with the town’s price system. what assumptions does it make about everyone’s preferences and budget? does the theory that a dysfunctional price system indicates broader societal dysfunction make sense to you? think about countries (past or present) that were/are known to be very unjust. do they have a strong economy and functioning price system? class profile table 1 presents some of the key characteristics of the first class we introduced to these comics. 6 pai, anant, editor. andher nagari and other stories: the golden sand. amar chitra katha, ltd. east mumbai. 2010. 2017. pp. 13-26 7 pai, anant, editor. stories from the panchatatantra: the dullard. amar chitra katha, ltd. east mumbai. 1972. 2010. pp. 1-4 8 harishchandra, bharatendu. andher nagari.1881. reproduced in andher nagari and other stories, amar chitra katha, ltd. east mumbai. 2010. 2017. pp. 1-20. 68 |journal for economic educators, 20(1), 2020 table 1: key characteristics of regent university introduction to economics course age high: 58 low: 17 mean: 25.4 mode 18 (5); 19 (5) class senior: 6, junior: 10; sophomore: 9, freshman: 4, high school: 1 gender male: 11; female: 25 academic major/discipline education: 5, interdisciplinary studies: 4, cybersecurity/computer related: 3, criminal justice: 3, cinema/t.v.: 3, leadership: 3, communications: 3, psychology/clinical psychology: 3, history: 2, animation: 2, government, english, biblical studies, ministry, political science: 1 each previous economic course work military course: 1 college: 1 high school: 12 none: 22 we incentivized the students to respond to the survey we used to measure the class’ reaction to the comics, but it was optional, and there were some absences on the day we distributed the survey. however, thirty-seven of the forty-two students enrolled filled out the surveys and returned them. results of survey we presented a short survey at the end of the course asking the students about their experience with the comics and ranking eleven different statements on a 1 to 5 likert-type scale with 1 being strongly disagree, 3 being neutral and 5 being strongly agree. while our results are the first of their kind in analyzing the role of international comics in a us classroom, the selfreported data indicate both increased interest and increased understanding. we present the detailed results in table 2 below but the results strongly imply that the comic helped learning both by illustrating the concepts and by being entertaining. overall, 70 percent of respondents either agreed or strongly agreed that the comics had a positive impact on learning the material while less than 12 percent disagreed or strongly disagreed. table 2: survey results of students using likert scale with 5 being strongly agree and 1 strongly disagree. those scored 1 & 2 are added together, as are 4 & 5. statement 1 + 2 3 4 + 5 the comics increased my interest in the course material. 8.1% 24.3% 67.5% the comics piqued my curiosity about economics. 21.6% 21.6% 56.7% i feel the course could be improved with the inclusion of more comics and similar material. 10.8% 21.6% 67.5% i felt motivated to explore where i could see economics principles in other areas such as in other classes, art, entertainment and literature. 10.8% 27.0% 62.1% the comics helped me more clearly understand the 16.2% 16.2% 67.5% 69 |journal for economic educators, 20(1), 2020 economic issues discussed that week when compared to discussions without comics. the comics helped me to be able to explain economic principles in my essays, discussion posts or even in classroom and informal discussions. 8.1% 8.1% 83.8% i feel i will remember more of the material that was illustrated by the comics than i will for material that was not illustrated by a comic. 8.1% 13.5% 78.3% the comics helped me understand fundamental concepts in this class and how they apply beyond the world of business and government. 10.8% 24.3% 64.8% using the comics as the source material for the essay assignment made me think more creatively about my essay than just a stated topic does. 10.8% 8.1% 81.1% the comics helped me apply the knowledge created in this course to my other course work. 21.6% 27.0% 51.3% the comics had a cross-cultural element that i appreciated. 2.7% 5.4% 91.9% while the results across all the questions were very affirming that the comics had significant value to the students, we note a couple of standout responses that over half the class felt motivated to explore and see economic principles in other disciplines and other areas of life. in a class of diverse academic majors, we thought this was a particularly good result. however, we also note that motivation did not immediately translate into helping with other classes as only half said the comics helped them see economic ideas in their other courses. another notable result is that almost 80 percent said they felt the comics will help them remember economic concepts better, and 64 percent said it will help them see the concepts beyond the class and beyond the world of business and government. one result we were particularly pleased to see is the cross-cultural question. regent university has, as part of its educational mission, the following: global context: in this course, we will study economics within a global context. for christians with a global perspective, globalization has the potential to provide sustainable income opportunities for isolated individuals, who can gain new skills and access to broader markets in which to exchange their goods … so, as we read and gain content knowledge we will experience people, places and cultures very different than our own. in seeking to understand and appreciate the expression of their experiences, we will learn to value and appreciate their unique cultural attributes and the dignity of their environment, both of which are essential to interacting in a global context.9 9 this is from the syllabus used for this class. while this goal is applicable to regent university classes, the other coauthor who teaches at indiana university (east), a state school, has also similar statements. for example, under the general education framework, one-point states, “[r]ecognize the extent and impact of diversity among individuals, cultures, or societies in contemporary or historical contexts.” 70 |journal for economic educators, 20(1), 2020 we see in the survey results that 91 percent of the responding students appreciated the crosscultural aspect of these comics. weaving meaningful cross-cultural experiences into a class, especially a compressed class of only 8 weeks presents a challenge and using these comics appears to be a good solution the students appreciated. below are some student comments from the surveys on the cross-cultural aspect of the comics or appreciation for the different perspective the comics provide: • personally, i love learning about different cultures, so that was a plus. also, these comics really did help me compare the comic to real world conflicts and economics. • they were all entertaining and interesting…they brought a perspective to what was learned in class, and by having dialogue, i was able to see them even more differently. i think the curriculum is enhanced with their addition. selected discussion board comments beyond the self-reported results above we looked for evidence of learning by the students. since most of the comics were used to motivate discussion board conversations, we reviewed those for particularly insightful comments and creative applications and provide a few here.10 obviously, we cannot know what these students would have said in another non-comic discussion but as stand-alone comments these seem to indicate some keen understanding: • after reading king elephant and the mice, when asked to consider: "how does this story illustrate the value of trade?" i would say in my opinion trade was essential for the survival of the communities. humans were made to live in community because that is how everyone can thrive and grow. in the comic, both communities needed to help each other in order for them to continue to survive. on a political note, countries who trade together build ties with one another. in the event that one needs assistance, the other is more readily able to be generous to the other to protect trade alliances. currently, our country is "on a tightrope" with our alliances with some of our population believing we should just be self sufficient and be on our own. this is not the way to go. being wired to thrive in community also applies on a more global level. countries that trade and work together with allies are better suited for survival and growth for their own populations. • in the comic the dhobi's donkey, the concept of property rights is discussed. the dhobi couldn't afford to feed his donkey, so he disguised the donkey as a tiger and sent the donkey into a farmer's field. this was the dhobi stealing millet from the farmer. when the villagers see the "tiger", they are all too afraid to do anything. eventually, the donkey makes a braying sound and the villagers are so angry, they kill him. the result is that both the farmer and the dhobi lost property that they needed. this illustrates the idea that both parties lose without strict property laws, sometimes people even lose their lives. people often have their own concepts of property and justice. without an all-encompassing code to live by and consequences of breaking the code, people will take justice into their own hands. this causes violence, vigilantes, and other problematic responses. 10 for additional discussion board comments, please contact the authors. 71 |journal for economic educators, 20(1), 2020 ergo, stricter property laws with clear punishments can bring down violence in societies. it can also reduce the number of vigilantes. this helps to create a better functioning, more peaceful place for people to live and thrive. • in the fable of the mother, we see two sons who love and want power. while one son already holds a higher title of king, the younger brother does not. he makes the decision to cheat the system, put himself in the lead of the race, and won the kingship. both of these sons were not satisfied with their lives or what they had and were willing to do whatever it took to get more. they were greedy. while this story ends with the mother separating them, often situations like this end up very nasty. holding a position of power comes with a lot of temptation. it is easy to start telling little lies, being deceitful, becoming prideful, and especially misusing authority. as this story does show, the kingdoms later combined their towns and the prodigal son eventually came home. while these stories ended well, had they not given in to the temptation of power, they could have been more successful. if we use this society as an example, we can ultimately see (by the flaws of their legal system) that having good property rights is essential to a well functioning economic system, as well as a less violent society as a whole. with a functioning legal system, private ownership, particularly property in this instance, is protected against invasion and infringement upon another's property. this private ownership gives the owner exclusive use to their property as long as they are not invading/infringing upon someone else's (as stated above). while this society did not have a legal system in which the actions of both parties could have been effectively handled, the initial action by the dhobi could have been avoided upon the understanding and implementation of the legal system and well defined property rights. • the dullard accounts of three scholars and a "dullard," who set out for a nearby city to make use of their knowledge. along the way, they discover the bare remains of a lion, and decide to use their know-how to bring the beast to life. the succeed in doing just that, and are promptly eaten by the lion. only the "dullard," who was not a scholar, had the common sense to foresee the outcome of their actions and escape their fate. the fable shows how though higher education allows individuals to perform miraculous things through their intellectual capabilities, that alone is of no use if they are poured into the wrong efforts. rather, it is leadership and common sense that directs these capabilities into rational outlets. measurable success in academics does not always equate to immeasurable success in life. the founders of apple, microsoft, whole foods, uber, facebook and twitter all dropped out of college early (an act that may seem unfavorable in statistics), but all were equipped with the right amount of human capital, as well as business sense and common sense necessary to become entrepreneurs, and found their future multimillion companies. in fact, it is stunningly rare for valedictorians and salutatorians to go on to change the world as these entrepreneurs after graduating, as a research by boston college discovered. they attain these high honors within academia because they learn to work with, live with, and succeed within a fixed system. they learn how to stay within the lines, and churn out work that is deemed commendable by academic superiors. however, outside the academic world, an entrepreneur succeeds through thinking outside the box and challenging the existing system (with a fair amount of common sense of course). a high human capital of college and high education is not always the driving 72 |journal for economic educators, 20(1), 2020 mechanism behind the earth-moving entrepreneurship that found enterprises that benefit the community such as apple and microsoft. it is the right amount of human know-how rather than the amount. compared to other classes at regent university, the economics 101 class is delivered in all three methodologies; traditional, hybrid and online. these are not always offered simultaneously; most offerings are exclusively online classes making cross-class comparisons less robust. we will expand the use of these comics to more classes and have already started the process by introducing the comics to the 15-week traditional version of the econ 101 class. however, the class was offered as an 8week hybrid in the 2017 spring semester, before we introduced the comics to the curriculum. table 3 below shows the comparison between the two classes. our priors were that the 2019 class would be marginally better. table 3: grade comparison between a hybrid class taught in 2019 vs. 2017 measure 2019 class with comics 2017 class without comics mean final grade of class 81.7 77.9 median final grade 85.5 81.0 percent earning a’s 24% 20% percent earning b’s 50% 36% percent earning c’s 17% 27% percent earning less than c 9% 17% these courses were identical except where the comic book material replaced other discussion questions or essay assignments, and the comic class performed marginally better, but these results were not statistically significant and are merely suggestive. further, the introduction of a significant cross-cultural element added an interesting and different way to look at some of the economic issues without harming student performance. we are cautiously optimistic that with more experience we will see more robust results. in addition to these results, we had compared the overall student satisfaction scores of the two classes. the treatment class scored a 4.3 on a 5.0 scale while the untreated class scored a 4.15. again, this is not statistically significant but is consistent with the results in table 3 in suggesting that the comics have a positive effect on student learning. while this data is strongly suggestive that the comics had a positive impact on learning, as of now we do not want to make conclusions we cannot fully support from the data. once we introduce the comics to more classes and have more experience, we expect to have additional results. qualitative results as is always the case the numerical evaluations only tell part of the story, the qualitative open-ended feedback is what vital to completing the picture. below are selected comments from the surveys, and while the vast majority were positive, we present a balanced mix of both here.11 the question we asked on the survey was “is there anything you would like to add or share about your experiences using the comics for teaching economics lessons?” 11 please contact the authors for additional comments from students. 73 |journal for economic educators, 20(1), 2020 positive feedback • the comics helped me have better understanding on what to write about. also, i found them fun to read. • they were all entertaining and interesting …they brought a perspective to what was learned in class, and by having dialogue, i was able to see them even more differently. i think the curriculum is enhanced with their addition. • the comics gave the class more dimension, than just having to read a text. the comics were entertaining to read. • i thought it was an awesome way to learn. • by reading the comics i was able to understand the topics covered in the textbook more and it was easier to write about the topics in the textbook. • the comics breaks down the subject in simpler everyday terms which gives a clearer understanding to the course. i love it. • i loved the comics! i thought they were a great break from just reading text. negative feedback • i wish the comics had a little more detail and were more (clear) thorough with the principles and character traits being emphasized. • there were times where i truly struggled to apply the course work to the comic. you were pushing for creativity, but that didn’t come easily. the mother and the dullard were hard for me, but again creativity was needed. • i really loved the comics themselves, but it was kind of hard to see economics in them. most of the comics, excluding andhr nagar, had no obvious economic qualities. but i looked forward to reading them nonetheless. • it was a fun and interesting conclusion, but the comics themselves were only barely connected to the issues at hand. it was fun dissecting them in relation to economics, but in a fantasy world iy also felt a little ordinary. • some of the comicsspecifically the nagari fable + the mother were difficult for me to elaborate/clearly see the economic lesson. although each comic caused me to really search for the lesson, some were more difficult to find economic relation to the specific week's reading. conclusion the first thing to note is that the students liked the comics themselves. even the negative comments expressed appreciation for and enjoyment from having the comics as part of the class. there was entertainment value, and while not our primary goal, it was a goal, and we were not sure if we would achieve it. this is like our goal of introducing a cross-cultural element to the class, as approximately 90 percent of the class said they did appreciate that aspect of the comics. the second outcome to note is that cross-cultural tools like comics can be introduced to classes without strong negative effects on student’s understanding of economics. self-reported responses on the survey, indicated that for roughly 70 percent of students that the comics helped learning and retention. the third outcome is that while we see the results overall as positive and supportive of further use and research, we do see some areas we need to improve, primarily in making the connection between the comics and the material clearer and more obvious to the student. the students liked comics themselves but enough struggled to see the connections to the concepts and 74 |journal for economic educators, 20(1), 2020 material that we need to address that. we did not directly ask if the comics hindered learning and no one indicated that in the open-ended question, but we do need to make sure we have done all we can to establish the connections. these results open several opportunities for us and others. one, of course, is to improve what we are doing and continue to track and confirm the results we have found in this paper via regression analysis or randomization of students who take a comics-based course vs. non comics course. second is to use ack comics beyond regent university. the conclusions derived from a private christian university might be different than a state university or a liberal arts college. the third would be to apply this to other classes. we plan to introduce the ack comics in several other classes over the next several years including economic development, principles classes, political economy, and others. we will also explore ways to use the comics on a sub-set of students within each class to create true treatment and control groups and hopefully derive some statistically robust results. while we have our plans, we do not pretend to know what creative uses other professors might find for these comics. the fourth possibility is to pull comics from a broader spectrum, incorporating african, latin american, asian, and others to create a truly cross-cultural experience for the student while also demonstrating the universality of economic concepts. students learn in many ways. traditional texts and lectures are not the best way to reach the broad spectrum of students today, if they ever were. the professor has many tools available and can and should use all of them to reach every student. we see using comics as one tool in a growing toolbox which preliminary results show to be effective and appreciated. further, the ack comics helps in diversifying and internationalizing the curriculum in a low-cost manner which provides further benefits to students to expand their education. references bajaj, vikas. 2009. "in india, new life for comic books as tv cartoons." the new york times. becker, william e., and michael watts, eds. 1998. teaching economics to undergraduates: alternatives to chalk and talk. northampton, ma: edward elgar. bose, feler. 2017. " lecture, leisure, learning: teaching economic development abroad in india." journal for economic educators 17 (1):1-13. gwartney, james d., richard l. stroup, dwight r. lee, tawni hunt ferrarini, and joseph calhoun. 2016. common sense economics: what everyone should know about wealth and prosperity. new york: st. martin's press. hall, joshua c., robert a. lawson, and g. dirk mateer. 2008. "from abba to zeppelin, led: using music to teach economics." journal of economic education 39 (1):107. hartley, james e. 2001. "the great books and economics." the journal of economic education 32 (2):147-159. doi: 10.2307/1183490. lawson, robert a. 2006. "teaching economic principles with comic strips." journal of private enterprise xxii (1):168-176. leet, don, and scott houser. 2003. "economics goes to hollywood: using classic films and documentaries to create an undergraduate economics course." journal of economic education 34 (4):326-32. mccloskey, donald n. 1990. "storytelling in economics." in narrative in culture: the uses of storytelling in the sciences, philosophy and literature, edited by christopher nash, 5-22. london: routledge. 75 |journal for economic educators, 20(1), 2020 o'roark, brian. 2017. "super-economics man! using superheroes to teach economics." journal of economics teaching. rajan, raghuram. 2004. "assume anarchy." finance & development:56-57. sexton, robert l. 2006. "using short movie and television clips in the economics principles class." the journal of economic education 37 (4):406-417. doi: 10.3200/jece.37.4.406-417. sreenivas, deepa. 2010. sculpting a middle class: history, masculiinity and the amar chitra katha in india. new delhi: routledge. microsoft word jeemay06c.doc journal for economic educators • volume 6 • number 1 • summer 2006 1 using game theory to teach principles of microeconomics dan friesner and dan axelsen * abstract the use of game theory to illustrate decision-making and competition in oligopolistic industries has become commonplace in economics. however, little attention has been focused on using game theory to teach other areas of economic theory. for example, game theory can be used to teach the economic principles of marginal analysis and opportunity cost, utility maximization, supply and demand analysis, and industry analysis. this paper provides a case study demonstrating how game theory can be used to teach an entire introductory microeconomics course. while one can certainly adapt the mathematical rigor of game theory to meet virtually any educational level, we believe that principles courses are most in need of a new paradigm since this is where most students receive their first (and often their only) exposure to economics. introduction recently, the empirical literature in economics has identified a disturbing trend: (1) economic literacy in the u.s. is very low, and (2) principles of economics courses have only a marginal, if any, impact on economic literacy. for example, walstad and rebeck (2002) found that students completing a high school or college economics course had very low levels of economic literacy. additionally, walstad and algood (1999) found that while college seniors who completed an economics course did have higher levels of economic literacy than those completing a high school economics course or those who have never completed an economics course, the difference was marginal at best. given that approximately 40 percent of all college students take at least one economics course, this implies that introductory economics courses are not only failing to fulfill their mission but that a significant number of students are affected by this failure (siegfried 2000). in response, economic educators have posited new approaches to improve both the appeal and effectiveness of introductory economics courses. one common theme in the economic education literature is to change the way in which economics is taught, that is, a change in pedagogy. becker (2001), for instance, advocates a reduction in the traditional “chalk and talk” method in favor of an “active learning” approach. other studies, including salemi et al. (2001) and siegfried and sanderson (2003), agree with becker. however, siegfried and sanderson also note that factors such as student-to-teacher ratios, course levels (i.e., advanced undergraduate versus introductorylevel courses), and faculty positions with more stringent research expectations may limit the feasibility of this approach. they are also careful to note that the chalk and talk method may actually be a component of a successful active learning approach. another approach, also postulated by becker (2001) and commented on by siegfried and sanderson (2003), is to add “really cool stuff” to supplement course content. 1 essentially, this entails incorporating real world examples into lectures, homework, and other course material to make economic tools and concepts more “applicable to reality” in the eyes of students. * dan friesner, friesner@jepson.gonzaga.edu, school of business, gonzaga university; dan axelsen, research economist, ers group, daxelsen@ersgroup.com. 1 becker (2001) also postulates another approach, which is for administrators to change compensation in a way that causes instructors to give a higher level of effort in the classroom. journal for economic educators • volume 6 • number 1 • summer 2006 2 a third approach is to change the tools and concepts that are taught in economics courses. one example, espoused by the national council on economic education particularly for high school and introductory college-level instructors, is to reduce course content to a set of 20 important tools and concepts, which are defined as the “voluntary national content standards in economics” (ncee 1997). this allows instructors more time and flexibility to cover these core concepts, thereby enhancing student retention, in addition to adding the “really cool stuff” advocated by becker. 2 a potential drawback to each of these approaches is that principles of economics courses embody an increasingly wide range of students, each with different educational needs (salemi and siegfried 1999). introductory economics courses, in particular, satisfy the needs of three different groups of students: (1) students who need an economics course to satisfy the general education requirements for a college degree, (2) business students who need a basic understanding of economics for future coursework in related disciplines, and (3) students intending to major in economics. the first group of students needs a more general understanding of economics than the latter two groups. thus, the approaches espoused by both professor becker and the ncee may be effective ways to teach introductory economics to the first group of students. however, economics and business majors need a more thorough understanding of economics as they will take a number of subsequent economics and/or business courses, most of which employ a traditional approach to convey the subject matter. given budget and accreditation constraints which do not allow for multiple principles of economics course offerings, a new paradigm for effectively teaching economics must also be flexible enough to simultaneously meet the diverse demands of students taking the course. in this paper, we argue that there is a common thread linking these paradigms to a traditional introductory microeconomics course— the use of game theory. 3 if this link exists, then it may be possible to change how instructors teach principles of microeconomics courses (in a manner consistent with those espoused by both becker and the ncee) to ensure that students successfully completing these courses significantly increase their understanding of economics. the remainder of this paper proceeds in three steps. first, we briefly describe why game theory represents a viable paradigm to convey economic content in an effective and efficacious manner. next, we provide some examples to illustrate the numerous pedagogical uses of game theory. we focus our efforts on microeconomic concepts that are not traditionally taught (at the principles level) using game theory, including the concepts of opportunity costs and marginal analysis, utility maximization, supply/demand analysis, and industry analysis. we conclude the paper by summarizing our findings and presenting some suggestions for future work in this area. game theory as a comprehensive microeconomic pedagogical device several factors make game theory a useful, comprehensive tool for teaching principles of microeconomics. first, game theory is generally accepted as a standard microeconomic tool. therefore, most instructors should be familiar with (and comfortable teaching) basic game theory. virtually all principles of economics textbooks devote some space to game theory, usually in the 2 hansen et al. (2002) take these standards and go further by providing specific recommendations about what content should be cut from introductory courses. in principles of microeconomics courses, they advocate limiting the use of graphs and elasticities, eliminating the discussion of cost curves and eliminating comparisons of different types of imperfectly competitive markets. 3 it may also be the case that game theory represents this link in introductory macroeconomics courses. however, we choose to focus on microeconomics because game theory is generally taught in the oligopoly sections of this course. therefore, using game theory to teach an entire micro principles course is both easier to establish and more intuitive to academic economists. we leave establishing this link for principles of macroeconomics as a suggestion for future research. journal for economic educators • volume 6 • number 1 • summer 2006 3 chapters covering oligopoly theory (for example, see mceachern 2006; frank and bernanke 2006; colander 2004; mcconnell and brue 2005). however, a handful of introductory economics textbooks apply game theory to other topics, including information theory (frank and bernanke 2006). second, game theory can be applied to virtually any economic problem in a manner that is accessible to students of different mathematical backgrounds and levels of exposure to economics. as an empirical illustration, one need only look at the variety of different economics textbooks currently available that focus exclusively on game theory. each of these textbooks covers a broad range of economics topics—not just oligopoly theory. mas-colell, whinston and green (1995), myerson (2001), and fudenburg and tirole (1991) are examples of ph.d.-level economics textbooks utilizing game theory. at the masters or advanced undergraduate level, examples include rasmussen (1989), bierman and fernandez (1993), and gardener (2003). at a less technical level (one that requires only basic algebra), examples include mccain (2004) and dixit and skeath (2004). not only do these same textbooks incorporate mathematics at different levels, but they also cater to students with broad ranges of exposure to economics. in particular, introductory texts that are less focused on mathematics and more focused on interdependent economic decision-making can be used to teach courses to students with no prior knowledge of economics. to a lesser extent, more technically advanced game theory texts can efficaciously convey economic concepts to students familiar with mathematics but unfamiliar with economics. third, game theory can be used to teach economics to a broad range of students. for students taking introductory economics courses to satisfy general education requirements, game theory can be used as an interdisciplinary approach to teaching economics. the dixit and skeath (2004) text does exactly this—it uses game theory to blend ideas from economics with other disciplines, including sociology, political science, biology, and history. 4 for economics students who need a thorough understanding of the tools, not only as they should be taught but also as they are taught, game theory can be used as a pedagogical tool to teach the basic ideas and concepts first. in turn, students more thoroughly and critically understand the economic concept, should the instructor also choose to present that same concept in its traditional construct. fourth, game theory is an effective tool for teaching economics to business students as background for future coursework in their subdisciplines (i.e., marketing, operations, or management). each of these business fields places a high level of emphasis on the creation and implementation of strategic decision-making—the fundamental concept of game theory. additionally, creating strategy is based not only on the technical aspects of strategy, such as swot analysis and business planning, but also on the potential ethical and cultural ramifications of taking a particular action (besanko et al. 2004). while this certainly requires an understanding of economics, it also requires students to think critically about how the assumptions behind an economic model influence that model’s outcome. that is, game theory forces students to think about how economic concepts and tools are fundamentally tied to other, related disciplines. perhaps the most important attribute of game theory is that it is grounded in the case study method of teaching. when using game theory to make decisions, one must first “set up the game.” the setup of the game is primarily determined by the assumptions underlying that “case.” more specifically, assumptions about history, culture, and human behavior play a crucial role in determining the structure of a game as well as the relative magnitude of the game’s payoffs, which in turn determine what actions players take. in essence, the case study approach explicitly requires 4 the dixit and skeath book is actually based upon a general-education survey of economic ideas course taught by professor dixit at princeton. this course is geared toward first-year students with no prior knowledge of economics and no mathematics requirements other than college-level algebra. the course does not, however, take the place of traditional principles of economics courses. the premise of our paper is simply that one could use game theory to teach a principles of microeconomics course. journal for economic educators • volume 6 • number 1 • summer 2006 4 the instructor to add “really cool stuff” to course content, because the setup of the game provides a more realistic and relevant context to the tools being studied. some pedagogical illustrations background successfully using game theory as a pedagogical tool for teaching introductory microeconomics necessitates that the course focus on problem solving. 5 problem solving should not only permeate lectures, but students should also be given the opportunity to complete homework assignments containing similar problems allowing them to immediately apply the concepts and tools taught in the lecture. in either case, the initial information is conveyed as a story problem describing some social situation that is interesting and relevant to students. students are then required to use basic game theory to develop and solve an economic model depicting potential outcomes of the decision problem. students should also be asked to explicitly state the assumptions underlying each and every model and to identify how each assumption shapes the outcome of the game. as a result, students are forced to apply critical thinking skills using quantitative reasoning in order to relate the context of the case to the economic decision outcome(s) produced by the game. the role of the instructor in this method of teaching is to ensure that students have developed a complete list of assumptions and to emphasize that each assumption incorporates information about individual and/or social objectives in addition to tastes and preferences. values are not independent of decision-making. maybe most important is to illustrate that when assumptions are altered, more often than not so are conclusions. once a problem is solved, the instructor should subsequently ask students to make recommendations based on the model. that is, when faced with this information, what is a “good choice” to make? a discussion of what defines a “good choice” allows the instructor to illustrate the economic principle(s) underlying the decision problem. the instructor should also illustrate the connection between assumptions and decision-making by altering the assumptions underlying the story problem and asking students to determine whether relaxing those assumptions alters the game’s solution. in essence, students are performing a sensitivity (or comparative static) analysis to deduce how altering the assumptions of the model (which are essentially held constant) impact decision-making. in what follows, we provide some examples of how game theory can be used to motivate economic concepts traditionally taught in an introductory microeconomics course. to be consistent with our previous discussion, we focus on using game theory to teach economic concepts that are not only espoused by the ncee and the related literature but are also not traditionally taught (at the principles level) using game theory. in these examples, we also assume that the reader is familiar with the basic tenants of game theory. we refer the reader to dixit and skeath (2004) or gardener (2003) if this is not the case. a simple game designed to teach the concepts of rational decision-making, marginal analysis, and opportunity costs 6 josh davis is a first-year law school student and has found law school to be quite a change from his undergraduate program because his entire grade in any given course is based solely on his performance on the final exam. knowing his strengths and weaknesses, josh is sure that he cannot cram for an exam. instead, he decides to set up a schedule with a constant allocation of time between studying and other activities. unfortunately, law school is also expensive; to pay for 5 at a more advanced level of instruction, game theory can also by conveyed through the analyses of case studies, which are essentially more detailed story problems. 6 this example takes its genesis from frank and bernanke (2006). journal for economic educators • volume 6 • number 1 • summer 2006 5 school josh works as a tutor at the university’s writing center. it only pays the minimum wage, but jobs around the university are scarce, and this position allows him the flexibility to set the number of hours he works each week. on the first day of classes, each of his professors distributes a course syllabus and explains that the final exam will be graded on a curve. as a result, performance on the final exam will be measured relative to the other students in the class. if josh outperforms most of his peers, he will earn a “good” grade. if he studies about the same amount, he will get an “average” grade, and if he doesn’t study much, he is sure that he will fail the course. josh considers himself about average relative to his peers. as a result, good grades will give him a strong sense of accomplishment and bolster his grade point average. however, josh knows it will take a lot of studying to perform well in the course. on a 0 to 10 scale, josh rates receiving an a in any course as a 10, an average grade as a 5, and a failing grade as a 0. on the other hand, the costs (in terms of lost wages and free time) of studying on the same 0-to-10 scale are 4 for studying a little and 7 for studying a lot. finally, since josh considers himself near the average of his law school class (all of whom are taking the same set of courses), he assumes that the rest of the class (at least on average) faces a similar set of decisions and has similar costs and benefits. if josh’s assumptions are correct and if josh makes his decision without observing the choice of his classmates (and vice versa), how much should he study per week: a lot or a little? analysis the case in normal form is set up as follows: the “average” person in the class study a little study a lot study a little (1; 1) (-4; 3) josh study a lot (3; -4) (-2; -2) there is a single pure strategy nash equilibrium where everyone studies a lot and the payoffs are average grades with a lot of work, yielding net benefits of –2 for everyone. this simple example allows instructors to illustrate several key economic concepts. for example, the concept of rational decision-making can be conveyed by defining the alternatives of each of the decision-makers as well as through the use of net benefit calculations as payoffs. the process of determining the nash equilibrium also requires students to evaluate opportunity costs and utilize marginal analysis. as an example, consider the scenario where the “average” person in the class studies a little, josh must choose the option with the highest marginal benefit, which in this case is to study a lot, since the marginal net benefit of this alternative is 2 (or 3-1). but, by definition, marginal analysis also incorporates opportunity cost. in this scenario the opportunity cost of studying a lot is the net benefit of studying a little, which is 1. using a game theoretic approach to present and discuss rational, marginal analysis has several advantages over the traditional approach. first, to find the nash equilibrium, students must evaluate several scenarios and complete several marginal analyses. this forces students to calculate opportunity costs and apply marginal analysis several times before arriving at a solution, which necessarily increases the likelihood that students understand and master the concept. additionally, in each scenario the opportunity costs and net benefits change. that is, even though josh has a “dominant strategy” to study a lot (i.e., there is a positive marginal net benefit to journal for economic educators • volume 6 • number 1 • summer 2006 6 studying a lot regardless of what the other students do), the magnitude of this marginal net benefit changes across scenarios. this underscores a central tenant of economics, namely that opportunity costs are subjective and vary by time the decision being made and the characteristics of the decision-maker. perhaps the greatest benefit is that instructors can use the setup of the game to actively involve students in the decision-making process to determine whether, indeed, a “good” choice was made. as an example, the instructor might choose to introduce the problem (inclusive of the benefits and costs) to the class. but before actually solving the problem via game theory, the instructor might ask the class, through a formal written vote, an open class discussion, or a combination of the two, what they expect the outcome to be and what their rationale for that conclusion was. in essence, an experiment is conducted to test whether the students in the course are implicitly using rational behavior. some will not vote for the rational decision, which then gives the instructor an opportunity to teach students what role the rationality assumption plays in economics and how it shapes outcomes. for instructors wishing to demonstrate the impact that values, risk tendencies, and other characteristics have on decision-making, one can conduct this same process without explicitly providing the numerical costs. once a general class discussion of the potential outcomes has been completed, it is then possible to show with different sets of numerical costs and benefits (which implicitly characterize the decision-maker’s values) how a variety of different “optimal” decisions can be made, depending on the values of the decision-maker. in essence, the instructor has walked the students through a rudimentary sensitivity (or comparative static) analysis. one example is to reduce the costs of studying a little to 1. in this case, the nash equilibrium is for everyone to study a little. another possibility is to assume that the “average” person in the class has a different set of benefits and costs than does josh. an example to illustrate comparative advantage and specialization atlantia is a large island in a remote part of the south pacific. while all of the island’s inhabitants are culturally similar, the island is divided both politically and geographically. there are two distinct countries (east mojo and west mojo) on the island, each of which covers about half of the island. east mojo’s landscape is very similar to that of california in that it has low lying mountains and a mediterranean climate, while west mojo’s landscape and climate are more like kansas, consisting mostly of rolling plains and open grassland. despite geographic and political differences, the inhabitants share a common culture, including dietary preferences. most atlantians prefer to drink wine and eat pasta. in any given month, east mojo’s inhabitants currently produce and consume 36,000 pounds of pasta and 4,000 flasks of wine, while west mojoans produce and consume 16,000 pounds of pasta and 2,000 flasks of wine. if east mojo devoted all of its resources to producing only one good, it could produce either 60,000 pounds of pasta or 10,000 flasks of wine. similarly, if west mojo produced only one good, it could produce either 24,000 pounds of pasta or 6,000 flasks of wine. in order to stimulate economic growth, both countries’ governments are currently negotiating a trade agreement. under the terms of this agreement, each country would specialize in the production of a particular good. if one or both of the countries fail to adopt the agreement, they maintain the status quo, and each country produces an amount of both wine and pasta that is sufficient to meet its citizens’ current consumption. if both countries adopt the agreement and decide to produce the same good, then no trade takes place, since each country can produce enough of the good to cover domestic consumption and since there is nothing new to trade for in the other country. however, if both countries produce different goods, then after satisfying consumption in the home country, they can trade any excess production at current market prices to the other country. assume the current market price for pasta is one gold coin per pound and the journal for economic educators • volume 6 • number 1 • summer 2006 7 price of wine is five gold coins per flask. would each country agree to trade, and if so, which good would each country produce? assume for simplicity that decisions are made simultaneously and that a country’s welfare can accurately be measured using the monetary value of total production consumed in the country. analysis the normal form of the game is presented below, where all payoffs are measured in gold coins. for simplicity, we have assumed that there are three alternatives facing each country: do not adopt the agreement and keep the status quo, adopt the agreement and produce pasta, or adopt the agreement and produce wine. west mojo keep status quo produce only produce only pasta wine keep the status quo (56,000; 26,000) (56,000; 24,000) (56,000; 30,000) east mojo produce only pasta (60,000; 26,000) (60,000; 24,000) (64,000; 26,000) produce only wine (50,000; 26,000) (48,000; 26,000) (50,000; 30,000) there is a single pure strategy nash equilibrium where both countries agree to specialize and trade. east mojo specializes in pasta production while west mojo specializes in wine production. the payoffs are 64,000 gold coins for east mojo and 26,000 for west mojo. additionally, under this scenario not only do both countries satisfy current consumption but east mojo gains 8,000 additional pounds of pasta. as with the previous example, characterizing a simple trading problem in game theory format can also be a vehicle for discussing comparative and absolute advantage. clearly, the higher payoffs for east mojo over all possible courses of action demonstrate that it is better at producing both types of goods and thus has an absolute advantage in the production of both goods. the nash equilibrium of the game can also be used as a vehicle for motivating the logic behind the concept of comparative advantage. both countries specialize and trade because each country has a dominant strategy to specialize in the production of a single good. the question instructors should pose to students is why each country has a dominant strategy to produce a particular good. this, in turn, allows the instructor to demonstrate (possibly by using traditional opportunity cost calculations) the impact that opportunity cost calculations have in determining efficient production and, hence, the law of comparative advantage. the fact that firms specialize and produce a good for which they have a comparative advantage allows them to capture these efficiency gains, which naturally leads to the dominant strategies discussed above. another attribute of game theory is that it allows instructors to effectively illustrate and address several issues that may (at first) appear counterintuitive to students. the first is that, in order to gain efficiency and act upon one’s comparative advantage, countries, economies and/or firms may be forced to specialize in goods they may not have developed a reputation for producing. for example, one would not expect a country whose landscape and climate resembles california to cease wine production and specialize in the production of products like pasta. similarly, one might not expect a country resembling kansas to stop producing wheat/pasta and instead produce wine. journal for economic educators • volume 6 • number 1 • summer 2006 8 a second, potentially counterintuitive finding clearly depicted by game theory is why west mojo would even agree to specialize and trade at all. in many comparative-advantage examples, specialization and trade allow both trading partners to be made better off. but this is not always the case. in our example, there are clear benefits to specialization and trade on aggregate; however, they are all captured by one country. in such cases, the law of comparative advantage does not effectively demonstrate why west mojo would agree to trade, since it gains nothing from doing so. however, depicting this decision process as a game highlights the logic behind this idea. to illustrate this concept, the instructor can randomly pick any point (other than the nash equilibrium) as a starting point for the analysis. then, by comparing potential payoffs across alternatives, one can see how one country’s pursuit of higher payoffs forces the other country (who may not directly benefit from specialization and trade) to react by specializing and trading, thereby leading to the efficient outcome. for example, suppose both countries start at the status quo. then west mojo has an incentive to switch solely to wine production because it increases its payoff from 26,000 to 30,000. at the same time, this also provides east mojo with an incentive to specialize, because this increases their payoff from 56,000 to 60,000. but, perhaps more important, east mojo’s gain from specialization comes at the expense of west mojo, whose payoffs at the nash equilibrium drop from 30,000 back to 26,000. a third and final benefit of using game theory to discuss comparative advantage is that it allows the instructor an additional tool to perform sensitivity analyses, where changes in the assumptions of the model affect both the decision to specialize and trade and the gains from such trade, if it occurs. one example is to change the market price for each good and see whether and how those changes impact (11) whether trade occurs and (2) if trade does occur, who gains (and how much is gained) from specialization. another possibility is to change the production possibilities for each country, which in turn changes each country’s comparative advantage and, hence, optimal decisions. by repeatedly working through small variations in the original game, students gain a stronger understanding of the logic underlying comparative advantage as well as how cultural and market forces impact that advantage. an example to illustrate utility maximization, profit maximization, and market equilibrium holly is a typical college student living in chico, california. she attends classes during the day and works as a waitress at the local vegetarian restaurant in the evenings. the pay is good, but tuition, room, and board are expensive; after paying all of her other bills, she only has about $200 per month to allocate between clothes and recreation. holly’s favorite pastime is going to the movie theatre. after paying for her ticket and a small serving of popcorn, it usually costs her about $12 to see a movie. in chico, it’s still popular to be a grateful dead fan, and angie’s ty-dy shop is the best place in town to buy the band’s official line of clothing. after looking through her closet, holly decides that she needs to buy a few more shirts. in order to keep prices reasonable for their fans, the band requires that all stores charge the same price for their products. after checking out prices on the band’s website, holly finds that her style of shirt costs $8 each. the real question for holly is how many shirts to buy? with such reasonable prices, she can afford to buy more than one, but the tydy’s selection and availability may limit her choices. on the other hand, angie really enjoys carrying the dead’s clothing line, but her livelihood depends on the store turning a profit. with fixed prices, inventory control is crucial to maintaining profitability. while angie strives to meet her customers’ needs (and she believes that holly is a pretty typical customer), she also does not want to hold inventory that doesn’t sell, because that drives up her costs. suppose that the following normal form game represents the decision process faced by holly and angie. each has an option to buy and/or sell four, six, or eight shirts. holly’s payoffs journal for economic educators • volume 6 • number 1 • summer 2006 9 represent her net benefits (measured in numerical form) from buying a particular quantity of shirts, while angie’s payoffs represent her net monetary gain from selling a particular quantity of shirts. based on this information, how many shirts should holly buy, and how many shirts should angie sell? angie sell 4 shirts sell 6 shirts sell 8 shirts buy 4 shirts (125.05; 15.01) (137.94; -4.74) (150.83; -32.00) holly buy 6 shirts (112.16; 15.01) (132.06; 11.26) (144.95; -16.00) buy 8 shirts ( 99.27; 15.01) (119.17; 11.26) (127.31; 0.00) analysis this game has a single pure strategy nash equilibrium: holly buys four shirts and angie sells four shirts. however, at this point in a game theory/micro principles course, this exercise should be trivial. instead, the main pedagogical advantage of this type of game is that it entices students to ask “where the numbers come from?” and “what is the ‘common sense’ meaning behind each of these numbers?” in doing so, this single, simple game allows instructors a starting point from which to introduce a number of economic concepts and the relationship between economic concepts. this game illustrates the relationship between utility maximization, profit maximization, and a plausible rationale (which applies to perfectly competitive markets, since price is taken as given) for the “invisible hand” that clears the market and equates the quantity supplied with the quantity demanded. 7 in addition, students can visually see how demand and supply are shaped by consumer and producer theory in two dimensions. in this game, holly’s utility function is given by the equation u = 6.576556(qd) – 1.203443(qd) 2 + 2.529045(m) – 0.599033(m) 2 + 6.444935(qs – qd), where m is the quantity of movies, qd is holly’s quantity demanded for shirts, and qs is angie’s quantity supplied. holly arrives at her payoffs by choosing quantities for q and m that exhaust her budget (200 = 12m + 8q). 8 when the instructor identifies this equation and fills in the table with the relevant numbers, it is also possible to illustrate how the signs and magnitudes of the utility function’s coefficients impact holly’s well-being. this, in turn, can facilitate a discussion on the assumptions underlying utility theory, including (but not limited to) the law of diminishing marginal utility. normally, holly’s optimal choice requires her to maximize her utility subject to her budget constraint. a standard principles approach is to demonstrate this numerically by using the utility equation to create and fill in a table with total utility, marginal utility, and marginal utility to price ratios. however, the process of finding the nash equilibrium gives us an additional way to demonstrate this numerical computation, since it inherently involves marginal decision-making. by finding and comparing the numbers in the table to the payoffs of the game and by solving for the nash equilibrium of the game, students are more easily able to see how the process of utility 7 it is important to note that we do not argue that a single game such as this can be used in place of traditional market equilibrium analysis, utility maximization, or profit maximization theory. instead, the benefit of our approach is that it is an additional tool to supplement and clarify certain aspects of the traditional theory. alternatively, if one were intent on teaching all of these concepts using game theory, it would be advisable to present a series of simpler games, where each game emphasizes one of these concepts. 8 see the discussion on the market-clearing mechanism presented below. journal for economic educators • volume 6 • number 1 • summer 2006 10 maximization leads to quantities demanded within a market. this is typically a challenging principle for students to grasp. similarly, an analysis of angie’s payoffs allows instructors a simple framework within which to motive the idea of profit maximization. in our case, total revenue is the price for the product times the number of shirts actually sold, while costs are based on the number of shirts offered for sale. the total cost function is given by tc = 0.493565(qs) 0.938304(qs) 2 . as before, instructors may wish to use these functions to develop tables of quantities, revenues (both total and marginal), and costs (again, both total and marginal) to demonstrate how the payoffs were calculated and how acting on the margin leads to higher profitability for angie. a final advantage of game theory is that it allows for a clearer discussion of how the “invisible hand” acts to clear markets. normally, instructors use simple demand and supply curves to illustrate surpluses or shortages and then show how a change in price clears the market. however, the intuition behind this bargaining process (in terms of the objectives of consumers and producers) is not specifically addressed. in game theory, identifying this mechanism is critical to solving the game. there are several ways to incorporate market-clearing mechanisms into games, depending on the game’s assumptions and setup. because price is fixed in our game, we utilized a market mechanism that adjusted quantities. in particular, we made three assumptions. first, holly can only purchase and consume as many shirts as angie is willing to sell, and angie can only sell as many shirts as holly is willing to buy. thus, if angie is only willing to sell four shirts, holly cannot consume 6 shirts even if she wants to do so. in such cases, she must buy the four shirts and spend the remaining $16 on movies. similarly, if holly only wants to buy four shirts, angie cannot sell her six shirts. second, angie’s revenues are based on the number of shirts actually sold, while costs are based on the number offered for sale. for example, if holly wants to buy four shirts while angie offers six shirts for sale, then angie’s revenues are based on four shirts sold, while costs are based on six shirts offered. in essence, angie has a significant cost of carrying inventory, which erodes profit. last, the final term in holly’s utility function implies that she receives positive utility from having a large available selection of goods (i.e., a market surplus) and a negative utility from a shortage of goods. that is, holly enjoys knowing that she does not have to go to multiple stores to fulfill her shopping needs. it is this conflict of interests that drives the market to equilibrium. angie wants to offer exactly enough shirts to meet holly’s needs without accumulating excess inventory. similarly, holly wants a large enough selection to meet her needs while simultaneously purchasing enough shirts to keep angie in business. a simple cournot example to illustrate the use of economics and game theory as a primer for subsequent business courses two small business owners—ray and alice—each independently own and operate a drive through coffee shop in a small oregon town. based on past experience and the town’s small population, both ray and alice are reasonably sure they don’t have to worry about other firms entering the market. both firms (noncooperatively) compete by producing and selling “lattes.” through a combination of experience and some basic spreadsheet modeling, both individuals know that prices within the market are based on the total number of lattes sold by both firms: p = 4.50 – 0.02*q, where q is the combined output of both firms (qray + qalice) any given morning and p is the market price. total costs can also be expressed in terms of output; ray’s total costs are given by tcray = 50 + 0.25qray, and alice’s total costs are tcalice = 57.5 + 0.20qalice. holding constant all other factors and assuming that both ray and alice are simultaneously and independently interested in maximizing their own profit (and not trying to explicitly drive the journal for economic educators • volume 6 • number 1 • summer 2006 11 other firm out of business regardless of profitability considerations), how much output should each firm produce? how profitable is each firm? analysis there are several equivalent methods of solving this game: through the explicit use of equations (which requires algebra and possibly calculus), graphical analysis using reaction curves, or by constructing a normal form game. to be consistent with our previous discussion, we choose the normal form. however, this method implicitly assumes that students are provided with several possible production levels for each firm, at least one of which represents the algebraic solution. failure to do so will produce a nash equilibrium that only approximates the true algebraic solution. in our case, we allow each firm to choose between three possible output levels, which differ by firm. our normal form game takes the following form: alice produce 70 lattes produce 72.5 lattes produce 75 lattes produce 65 lattes (50.75; 54.5) (47.50; 54.875) (44.25; 55.00) ray produce 70 lattes (51.50; 47.50) (48.00; 47.625) (44.50; 47.50) produce 75 lattes (51.25; 40.50) (47.50; 40.375) (43.75; 40.00) the nash equilibrium of this game is for ray to produce 70 lattes while alice produces 72.5 lattes. as mentioned earlier, the use of game theory (and cournot models in particular) to describe the outcome of oligopolistic competition is standard at every level of economics. however, little attention is paid at the principles level to showing how the outcome of competition is fundamentally tied to the assumptions of the game. these assumptions, in turn, are largely drawn from industry analyses (such as five forces analyses, business plans, and swot analyses commonly taught in strategic management), marketing research, and information within the firm about its cost and production conditions. by discussing how these assumptions impact the outcome of the game, students can gain a better understanding of the relationships between principles of economics and other core business courses such as marketing, operations management, and strategic management. at the simplest level, this can be accomplished by asking students to place an economic meaning behind the relative values of each of the coefficients in the demand and cost curves. this, in turn, can be used to make inferences about consumer valuations for both products as well as the core competencies of each firm. for example, the fact that the slope coefficients of the demand function are the same (-0.02) implies that consumers in the market view the output of both firms as perfect substitutes. concomitantly, different slope values imply imperfect substitutability. the intercept of the demand curve gives the maximum price consumers are willing to pay for a latte. last, the relative magnitudes of the intercepts and slopes of the cost functions imply that ray holds an advantage in fixed costs while alice has a relative advantage in variable costs. instructors can also ask why alice has a higher market share than ray and which of the numbers (competitive advantages or disadvantages) described above contribute to this outcome. clearly, alice has a higher market share because she has an advantage in variable (and marginal) costs. this can also be used to illustrate why fixed costs are generally ignored when deciding how journal for economic educators • volume 6 • number 1 • summer 2006 12 much to produce. principles books usually mention that marginal costs do not include fixed costs, and thus fixed costs are ignored when determining profit-maximizing output levels. our game theory example clearly and concisely illustrates this fact. moreover, principles texts often place less emphasis on the fact that, in the short run, fixed costs do matter. in our game, this concept can be illustrated by illuminating the discrepancy between market share and profitability. in this case, ray has a lower market share but a higher level of profit. by working through the payoff calculations in the normal form of the game, we can see that this is due to alice having higher fixed costs and lower variable costs. thus, while alice may be more successful than ray in the long run by spreading out her fixed costs, in the short run she is actually worse off. third, instructors can illustrate the relationship between economics and other business courses by asking students to pick a particular firm and posit some recommendations about how to improve profitability. one response might be to implement an advertising campaign to differentiate ray’s product from alice’s. class discussion should center on the benefits and costs of advertising. the benefit is that, if the advertising campaign is successful, ray will be able to successfully differentiate his product and increase his revenue compared to alice. depending on the type of advertising campaign implemented, ray may increase the maximum price consumers are willing to pay but not significantly impact consumer perceptions of product substitutability. in this case, ray may be increasing his revenue but may also be helping alice’s as well. on the other hand, advertising is expensive, and implementing the campaign will also increase ray’s costs. whether the campaign is worth doing depends on the relative magnitudes of its costs and benefits, and students should be encouraged to work through a few variations of the game with different cost and demand parameter values. this, in turn, can lead to a discussion of how to most effectively implement the advertising campaign given the benefits and costs, which can also lead to a discussion of the concepts students can expect to learn in their upper-level marketing course(s). questions about how these parameter values are determined could also lead to a brief discussion of the concepts and tools discussed in a marketing research course. another possible response is for ray’s firm to make changes in the production process that reduce variable costs and gain economies of scale. in this case, discussion should focus on what avenues might be available to a firm such as ray’s to reduce variable costs. this allows the instructor to introduce some operations management concepts, including (but not limited to) the basic theories underlying supply-chain management and just-in-time manufacturing systems. conclusions game theory has become a commonly used tool in economics and permeates virtually every level of economic education except the principles level, where it is constrained to the oligopoly sections of microeconomics courses. in this paper, we have argued that game theory can and should become a more pervasive element in principles of microeconomics courses. four elements make game theory a powerful and, as of yet, underutilized teaching tool. first, game theory can be taught at an introductory level, requiring no more mathematical background than basic arithmetic. an additional strength of teaching a game theory based micro course is that the instructor needs to introduce only one set of standardized tools to analyze economic decision-making; thus the course becomes more focused on teaching economic principles and less focused on teaching economic tools. 9 third, because game theory requires instructors to adopt a case-study method of teaching, it is much easier to introduce the “really cool stuff” advocated by becker without sacrificing the rigor of the course. the “really cool stuff” essentially shapes the rules (assumptions) under which the game is played. last, game theory forces students (particularly those majoring in business or social sciences whose content overlaps with 9 in this paper we analyzed micro-oriented topics using only normal form games with pure strategy nash equilibria. the addition of dynamic games, as well as normal games with mixed strategy equilibria, would allow an instructor an even greater amount of flexibility to teach economics using game theory. journal for economic educators • volume 6 • number 1 • summer 2006 13 economics) to think critically in a way that allows them to synthesize material across disciplines. introducing concepts within the construct of a simple game encourages students to look beyond the outcome of the game to the underlying assumptions about consumer preferences, firm goals, market structure, and the interplay between these forces, which are the focus of other business and social science courses. in doing so, the course facilitates a more effective learning environment for students, since they are able to more clearly see the usefulness and importance of learning economics. it is important to note that this research presents only a first step in developing a game theory/micro principles course. future research is necessary to more fully investigate the attributes and detriments of the pedagogical approach. while we have demonstrated several additional pedagogical uses of game theory in micro principles, we have not developed a comprehensive microeconomics curriculum. additionally, there are significant opportunity costs to utilizing this approach. if an instructor wishes to utilize this paradigm in addition to the traditional neoclassical micro tools, time constraints will force the instructor to either cut material from the course or cover existing material in less detail. until a standardized, game theory based micro principles curriculum is developed, it will be difficult to determine the magnitude of these costs. these costs may also vary depending on the needs of students taking the course. it is likely that these costs are lower for business students and students who need to satisfy general education requirements. on the other hand, the costs for economics majors may be higher, since they need a strong background in neoclassical principles in order to take upper-level economics courses. finally, there is also an opportunity cost in that instructors may be loathe to abandon their current pedagogical approach due to the time commitment of redesigning their course materials. further work must be done to demonstrate to faculty that the increase in student learning justifies the additional time commitment. references becker, w. 2001. “how to make economics the sexy social science.” chronicle of higher education (december 7). besanko, d., et al. 2004. economics of strategy. 3rd ed. hoboken, nj: john wiley and sons. bierman, h.s., and fernandez, l. 1993. game theory with economic applications. reading, ma: addison-wesley. colander, d. 2004. economics. 5th ed. new york: mcgraw-hill. dixit, a., and skeath, s. 2004. games of strategy. 2nd ed. new york: w.w. norton and co. frank, r., and bernanke, b. 2006. principles of economics. 3rd ed. new york: mcgraw-hill. fudenberg, d., and tirole, j. 1991. game theory. cambridge: mit press. gardener, r. 2003. games for business and economics. 2nd ed. hoboken, nj: john wiley and sons. hansen, w.l., salemi, m., and siegfried, j. 2002. “promoting economic literacy in the introductory economics course.” american economic review 92(2): 463-472. mas-colell, a., whinston, m., and green, j. 1995. microeconomic theory. new york: oxford university press. mccain, r. 2004. game theory: a non-technical introduction to the analysis of strategy. mason, oh: thomson/southwestern publishers. mcconnell, c., and brue, s. 2005. economics: principles, problems and policies. 16th ed. new york: mc-graw-hill. mceachern, w. 2006. economics: a contemporary introduction. 7th ed. mason, oh: thomson/ southwestern publishers. myerson, r. 2001. game theory: analysis of conflict. cambridge: harvard university press. national council on economic education. 1997. voluntary national content standards in economics new york: ncee. rasmusen, e. 1989. games and information: an introduction to game theory. oxford: basil blackwell. salemi, m., and siegfried, j. 1999. “the state of economic education.” american economic review 89(2): 355-361. journal for economic educators • volume 6 • number 1 • summer 2006 14 salemi, m., siegfried, j., sosin, k., walstad, w. and watts, m. 2001. “research in economic education: five new initiatives.” american economic review 91(2): 440-445. siegfried, j. 2000. “how many college students are exposed to economics.” journal of economic education (spring): 202-204. siegfried, j., and sanderson, a. 2003. “keeping economics from becoming a sexy social science.” southern economic journal 70(1): 209-214. walstad, w., and algood, s. 1999. “what do college seniors know about economics?” american economic review 89(2): 350-354. walstad, w., and rebeck, k. 2002. “assessing the economic knowledge and economic opinions of adults.” quarterly review of economics and finance 42(5): 921-935. chinese_hrm the academic transformation of hrm in china richard l. hannah, ph.d. professor of economics box 27, economics & finance department middle tennessee state university murfreesboro, tennessee 37132 usa tel: 615-898-2228 fax: 615-895-7580 email: rlhannah@mtsu.edu homepage: www.mtsu.edu/~rlhannah/ abstract in the past few years most of the literature about hr in china can be characterized as taking a comparative view of different models—e.g., western, japanese, or asian. this literature can be further subdivided into two categories. one is the broad panorama of the industrial relations view, which tries to explain the dynamic interplay of several disciplines such as law, labor market behavior, and workplace institutions. the other is the practice of hr within chinese establishments, analyzed by organizational form such as joint ventures or direct foreign investments, or by size and location. this paper takes a very different perspective by developing a description of the academic dimension of hr in china. this is important because of the need for a chinese intellectual cadre of sufficient critical mass to perpetuate local research, upgrade teaching content, and compete with other views in putting forth practical solutions. no less is the need to produce competent hr professionals in great numbers. the paper is presented as a cursory description of the status of hr in chinese higher education. in this context it is a work in progress, and hopefully other scholars interested in the topic will contribute to the small body of information presented herein. the author is indebted to the following for continuing commentary on the subject. ms. christine hung, ph.d. candidate in international economics at the university of social sciences (paris, france); dr. cherrie zhu at monash university (melbourne, australia), malcolm warrner, university of cambridge (england), and john shieh, professor, institute for mainland china studies, national dong hwa university (taiwan) and professor of economics emeritus, cal poly (california). 1 the academic transformation of hrm in china* richard l. hannah, ph.d. professor of economics middle tennessee state university introduction this paper describes the status of hrm education in chinese (prc) universities. curiosity about this topic is motivated by the supposition that the dynamically changing chinese economy has decentralized and generated multiple, and compared to western models, somewhat unique paths of evolution of hr practice. this raises the question of how chinese higher education is coping with this change. the question is interesting and valid because without the intellectual glue that holds the field together, there is no core framework of thought that supports the derivation of chinese solutions to unique chinese problems. the importance of the question is obviously related to the flexibility of the chinese intellectual environment. currently, communist party (cp) ideology and pragmatism is controlling. as perceived in the west, most academic fields and sub-fields are not well established in chinese universities and hence there is no intellectual framework to compete with cp ideology. the need for a "localization" of academic thought mirrors a problem in practice. for example, direct management control by foreign investors inhibits the flow of the small proportion of educated chinese nationals into professional ranks, for the obvious reason of the language barrier. hence, localization of production control is one way to widen the gate of access. [doran, ng, and rangan, 1998] chinese management and professional talent are in short supply, and this shortage includes hr professionals, of particular interest because this is the functional area responsible for recruiting the other talent. finally, the need for an educational system to produce these professionals is equally critical. on this last point the development of chinese hr faculty who will contribute at the level of international standards of scholarship and teaching is the obvious starting point. the goal of this paper is to sketch an initial description of the academic context. (for a discussion of practical issues facing hr managers in china, see cheung and yiu, 1998.) recent literature describing hr practices in china in 2001 china will join the world trade organization, further accelerating the economic forces at work that are transforming the practice of hr. still, two things set china apart from other countries in this expanding global trade network. first, unlike other centrally planned and controlled economies such as the ussr or the central europe of the past, china clings to the idea of market socialism. the relevancy to hr is that state owned enterprises (soe's) will likely have very different practices than firms that are directly owned by foreign companies (dfi's), joint ventures (jv's), or even township-village enterprises (tve's). second, despite the progress in china's industrial modernization and initial development of service industries, the nation is still predominantly a labor pool of low skilled and educationally disadvantaged workers. while there is arguably a piecemeal framework of minimum wages, social safety nets, and retraining programs in advanced western economies, even this is probably at best a long-term hope for china. therefore, the size of china's low skilled labor pool would seem to demand a high degree of government activism in hr workplace practices to serve as any viable check on unfettered profit maximizing management. * hrm (or hr) in this paper is not only focused on professional practices, but is also inclusive of such related fields as industrial relations and labor economics. 2 besides the wto and the wide scale of economic restructuring, the broader backdrop for hr includes the flux of chinese labor markets and institutions. this mosaic presents a complicated and rather unique mix of daunting challenges. underemployment, the dissolution of the iron rice bowl, the ambiguous status of the all-china federation of trade unions and the communist party apparatus in the workplace all require a multiplicity of expertise in the hr field that is unfamiliar to the western framework of thought and practice. this broad industrial relations (ir) view is well articulated and need only be noted here. for examples, see levine (1997) and verma, et al (1995). more narrowly focusing on hr practice, very interesting work has been done by ding, goodall, and warner (2000), and by zhu and warner (2000). the first paper explores the variations of hr practice with respect to firm size, location, and ownership. while the second paper essentially concludes that there is certainly no homogeneous model in china, these works do explore the hr templates emerging in china--e.g., the western, japanese, and those of uniquely chinese qualities. this last dimension incorporates the unsettled doctrines of soe perpetuation and the acftu's role, and the chinese social fabric of guanxi (i.e., networking, or connections). the zhu and warner paper also contains very good examples illustrating the difficulty of linguistically articulating hr and related concepts into chinese. the assimilation of foreign concepts into a stable socio-economic system is difficult enough, but in the case of china the struggle to translate the concepts in a dynamically changing system reflects the underlying intellectual conflicts. finally, the zhu and warner paper has a reference to the introduction of hr as an academic concept in china beginning with the joint teaching-arrangements between chinese and foreign universities, alluding to earlier publications on the topic by warner (1992 and 1995). however, neither of these works explored the infrastructure of academic institutions. this serves as a reasonable point of departure for the topic at hand. the chinese higher education system as is characteristic of most chinese developments in the past two decades, the chinese higher education system's past is a poor predictor of the future. under the centrally planned system the curricula in different universities were uninspired with respect to diversification in response to changing economic needs. in major universities many of the disciplines offered were very narrowly defined because these institutions were responsible for the job assignment of graduates, although a broadening of the curricula and phase out of the job assignment system has recently taken root. (surowski, 2001) still, this old system has left a heritage of subject matter minutia taken to the point of absurdity and scholarship and teaching that suffers from lack of originality and diversity. (hin, 2000) while this may be a broadly accurate view of the chinese environment as a whole, this author's experiences in china lead to the conclusion that chinese academics are very eager to learn about western views and communicate with western academics, including sharing these ideas with chinese students. the prospects for information technology being a major force of change in the chinese educational system are slim for the immediate future. there are some publicly accessible academic web pages on chinese hrm, but as yet these do not provide a great deal of detail. (for example, see chinese human resource management.) one might immediately jump to the conclusion that if western scholars would put their academic hr material online (as many have), the problem of content availability would be partially resolved. indeed, there is reason to believe that this would benefit the top tier chinese universities with sufficient internet access, and faculty and students with good english skills. however, the rest of higher education suffers greatly from internet access. furthermore, the more field specific the content, the more subtle the linguistic distinctions and the greater the difficulty of the non-native speaker picking this up. (slay, 2001) for example, consider the difficulty in the u.s. of explaining to our own students the differences among the phrases: industrial relations, employment relations, labormanagement relations, human resource management, personnel relations, and so forth. 3 academic localization--i.e., chinese enrichment of chinese hr--obviously requires freedom with respect to developing relevant curricula and a diversity of pedagogies to fit field specializations. as long as the state (cp) views itself as a monopoly of the intellectual context for this evolution, a competing academic paradigm is at best running on one leg. however, the recent ministry of education’s encouragement of undergraduate hr programs is a positive sign. still, this is an area about which the rest of us in the global hr community have a stake, something to share, and much to learn. in this sense hr evolution in china can be a microcosm of global collaboration. findings personal visits a recent personal perspective may be insightful. during my most recent trip to china in the summer of 2000, i visited kunming normal university, the yunan institute of finance and trade, xi xidian university, beijing normal university, and tsinghua university. this is hardly a scientific sample, but it does reasonably represent the spectrum of university environments in large urban centers. observations are as follows. first, as expected, instructional technology and internet access varied greatly--from basically non-existent in the classroom to a caliber similar to u.s. universities (e.g., tsinghua). second, my inquiries about teaching reinforced other anecdotal evidence and published accounts of the prevalence of the long-lecture format. (indeed, i was invited and did give a two hour lecture on hr, which was something of a struggle given my departures of recent years into other pedagogical approaches.) third, my contacts with chinese students on this trip (and previous trips) reinforce the view that they are extremely disciplined and hungry for skills that will make them successful in china's emergent economy. finally, contacts were made with chinese faculty for follow-up communications, greatly enhanced by the increased faculty access to and use of the internet. internet contacts working from the list of the top 40 ranked chinese universities (asiaweek , 2000), a systematic search for web materials posted by these institutions was conducted. this effort also included extracting faculty contacts from the pages. though this sample is small, the assertion is reasonable that these institutions would represent the most advanced development of the hr field. however, subsequent comments from readers of this paper pointed out the likelihood that many university level hr programs may not be included in this top 40 list, for example the university of international business and economics in beijing. messages were also posted to the internet discussion lists--industrial relations research association (irra), pacific region industrial relations (prir), and the international employment relations network (iern)--asking for help in contacts and for perspectives on the subject of this paper. a brief description of what was learned from the web material and direct email contact with faculty follows. exhibit i provides a more thorough listing of courses. of the ten universities from which information on hr offerings could be obtained, the listing of courses appears quite similar to the western profile. note that many of the courses listed in exhibit i would likely be within the context of an mba program, not specialized hr types of degrees. the variety of courses, which can only be assessed by the title, is encouraging, and at least in these renditions apparently devoid of overt political dogma. if in fact these ten universities capture the core of hr offerings, this is rather miniscule in the scheme of china's needs, but at least a solid foundation. in comparison, there are 82 hr (or ir) degree granting programs in the u.s. listed by the irra (2000). 4 inquiries of north american universities as to cooperative programs in february of 2001 email contacts were initiated with universities in the u.s. and canada that award hr, ir, or related degrees. there were 79 programs with irra listed email contacts. an individual email was sent to each. of 46 responses, none confirmed the existence of cooperative programs with chinese universities. two responded that negotiations were in progress, and two indicated that efforts to establish cooperative relationships had failed. these observations merely suggest the lack of formal program-to-program relationships for hr offerings. however, other levels of learning are clearly present. these include hr as part of mba programs taught in china, comprehensive examples including the presence of western university mba programs, especially in shanghai, and the china europe international business school mba (which includes hr management and hr strategy). in other programs chinese managers are brought to the u.s. for executive development programs (non-credit). finally, individual faculty are often involved in teaching arrangements with chinese universities, usually through consortia arrangements, grant support, or individual arrangements. conclusions in the panorama chinese economic transformation, the big ideas such as the feasibility of market socialism, the growth of free markets, and the attraction of foreign investments have had exotic appeal for practitioners and academics alike. the time has come for more attention to transforming institutions that can develop and sustain the movement of ideas into practice--one being higher education. hr is an example of the need to initiate fields of specialization that are intellectually and practically relevant, and arguably urgent in the context of economic restructuring. one great test of the chinese economic adjustment will be how well labor markets and the employment processes serve the chinese people. a central variable in this economic test is the quality of hr (in the micro and macro sense). this paper has merely reported cursory data and highlighted the current status and critical paths for development of this discipline in china. more research and more collaboration are obviously needed. hopefully the points summarized below will raise both the awareness and the energy to accelerate this evolution. 1. principle of localization. knowledge of competing hr systems is necessary, but is not sufficient for the current chinese economic environment. reason argues that the best solutions to chinese hr issues should be those derived from chinese intellectual leadership, and that the best place for thought to ferment is in academia. 2. utilization of technology. western scholars who are interested in accelerating the academic development of chinese hr can assist from afar by collaborating with chinese scholars through the internet through providing access to teaching materials or joint research. 3. chinese students studying abroad. a systematic collection of information about chinese students studying hr in the u.s. or other countries, and who will be returning to the prc would begin the foundation for a larger network of academics. 4. network of western hr academics with chinese interests. as this author has learned through internet contacts, there are a large number of scholars who have individual contacts, and research and teaching experience in china. electronically networking these scholars could magnify their efforts, both among themselves and to the benefit of chinese scholars. 5 5. formalization of hr program exchanges. as paper has reported, this activity is virtually nonexistent. perhaps all or most of the above points must be realized first. however, an important qualification is that we westerners also have much to learn about the details of the chinese system, and a process of institutionalizing that knowledge is important. scholars and students on both sides of the pacific would benefit from this shared knowledge. 6. the chinese model. perhaps in the 21st century a more unique chinese model of hr will be one of the competing models being examined by other countries. there are dimensions in the evolution of chinese hr that are unique and present us with interesting challenging academic and practical questions. for example, i find quite intriguing the soe problem with respect to hr practices compared to jv’s and other enterprises. the soe dilemma is not unlike the duality of hr systems in the u.s. when one considers the private vs. public employment sectors, and the more ambiguous situation of government corporations. 7. in the context of the march of economic globalization it is to our benefit to have a working knowledge beyond our own national boundaries. this paper has perhaps been excessively speculative already, and the only remaining item to offer is a simple schematic that might better illustrate the complexity of our challenges. this is done in exhibit ii a and b. 6 exhibit i summary of hr courses at chinese universities peking university comments: in the process of setting up an independent hr major. courses: (1) strategic hrm (2) compensation and incentives (3) hr economics (4) leadership (5) organizational behavior (6) organizational culture (7) seminars in hr issues tsinghua university courses: (1) hrm for graduate students (2) organizational behavior (3) hrm for mba students (4) organizational and industrial psychology renmin university of china courses: (1) human resource management (hrm) (2) employee performance appraisal (3) labor economics (4) wage and salary administration (5) organizational behavior lanzhou university courses: (1) hrm (2) tax (3) organizational behavior (4) labor law (5) labor economics (6) performance appraisal (7) public relations (8) leadership (9) financial management (10) insurance nankai university courses (1) macro hrm (course description given) (2) performance appraisal and incentive 7 (3) labor economics (4) wage and salary management (5) organizational behavior (6) management (7) enterprise culture (8) psychology of management (10) leadership shanghai jiao tong university courses (1) human resource development and management (2) organizational behavior (3) development and plan of organization (4) performance appraisal (5) wage and salary management (6) analysis of hr economic action sichuan university courses (1) macroeconomics (2) managerial economics (3) management information systems (4) labor economics (5) organizational behavior (6) hrm (7) theory and measurement of employee appraisal (8) social insurance (9) social psychology nanjing unviersity of science and technology courses: (1) hrm (2) efficacy (3) performance appraisal xiamen university courses: (1) chinese ceo reward system (2) performance appraisal and reward system (3) employee turnover (4) hrm university of international business and economics comments: hr program in development. china europe international business school courses: (1) hr management (2) hr strategy 8 schematics of chinese hr practice and academic complexities exhibit ii a different organizational environments of practice soe = state owned enterprise fdi = foreign direct investment jv = joint venture gvt. sector = employees of government cpe = chinese private enterprises tve = township villege enterprises hr practice soe tve cpe gvt. sector fdi jv 9 exhibit ii b ideologies to be reconciled hr ideology traditional western models acftu communist party hybrid orgs: soe, tve, jv labor economics macro related policies 10 references asiaweek . june 30, 2000. “the best universities in china,” vol. 2 (3): 51. cheung, eleanor, and stephen yiu. may 27-29, 1998. "human resource strategies in the 21st century: a challenge for the international joint ventures in china." china international business symposium (volume ii): shanghai, china: 462-467. chinese human resource management. url: www.cityu.edu.hk/cityu/course/deptcurr/fbcurr/fb6823.htm ding, daniel z., kieth goodall, and malcolm warner. 2000. "the end of the 'iron rice-bowl': whither chinese human resource management? forthcoming in international journal of hrm , vol. 11, no. 2, april 2000. doran, kathleen, robert j. ng, and u. srinivasa rangan. may 27-29, 1998. "sustaining china's growth: the human capital issue." china international business symposium (volume ii): shanghai, china (may 27-29, 1998): 398-405. hin, yang xu. 1998. "chinese higher education, in my eyes." the forum. volume 7 (1) maricopa center for learning and instruction. url: hakatai.mcli.dist.maricopa.edu/lf/fall98/forum4.html levine, marvin j. 1997. worker rights and labor standards in asia's four new tigers: a comparative perspective. plenum press: ny. slay, jill. 1999. higher education online: cross-cultural reflections on the chinese situation. working paper: university of south australia. surowski, david b. 2001. history of the education system of china. an essay commissioned by projects for international education research. url: www-personal.ksu.edu/~dbski/publication/history. verma, anil, thomas a. kochan, and russell d. lansbury (editors). 1995. employment relations in the growing asian economies. routledge: ny. warner, malcolm. 1992. how chinese managers learn. macmillan : london. warner, malcolm. 1995. the management of human resources in chinese industry. macmillan: london. zhu, ying, and malcolm warner. 2000. "an emerging model of employment relations in china: a divergent path from the japanese?" forthcoming in international business review. tips for the job market: 7 journal for economic educators, 8(2), fall 2008 the search for an economics job with a teaching focus mark f. owens * abstract this article provides suggestions for new ph.d. economists relating to the search for an academic job. it provides general information regarding finding job postings, the timing of events, and preparing application materials. it differs from the existing guides by including additional considerations for the teaching-focused, rather than researchoriented segment of the market and by emphasizing what a candidate should do rather than what will happen in the search process. specifically, it outlines helpful suggestions on effectively answering interview questions, delivering a class lecture on campus, meeting with students, and negotiating a better offer at teaching-focused schools which are absent from other guides. introduction this article provides suggestions and information for new economics ph.d.s for finding and obtaining an academic position at a college or university. every school, interviewer and candidate is different but many elements of the job search are universal. this paper provides specific details about the timing of job search events and useful details regarding the preparation required. this guide provides general suggestions which are applicable to the search for all types of academic jobs in economics. it differs from other job search guides in two ways. first, it contains additional advice and considerations for those trying to secure a teaching-focused 1 academic position, which are not found in other job search guides. second, it is designed to function more as a guide for what a candidate should be doing at each step, rather than describing what a candidate will encounter at each step. for instance, suggestions are offered here for how best to answer questions commonly asked in an interview, whereas others provide only a list of the questions. these suggestions are tailored toward landing a job that has teaching as a major component. for the purposes of this article, a teaching-focused job is defined as any job * mark f. owens is assistant professor of economics in the department of economics and finance at middle tennessee state university. he would like to thank robert gitter, rebecca fahy, andrew herr, julide yazar, jeremy dalletezze, robert baumann, kevin bucholtz, peter bohling, belton fleisher, charles baum, and many others for suggestions they provided in informal communications about the academic job search, and also travis minor for editorial assistance. 1 the labels “teaching” and “research” are used throughout, but are in no way meant to imply that quality teaching is not important at “research” schools or that quality research is not important at “teaching” schools. almost every academic position has a mix of both teaching and research responsibilities. these terms are used to emphasize that job characteristics for academic positions can vary substantially and, thus, so can the search process. clearly, there is a different focus in the search for a position that involves a heavy undergraduate teaching load with less emphasis on publication, and one that involves a light load of graduate courses with the expectation of numerous publications in top outlets. 8 journal for economic educators, 8(2), fall 2008 in which teaching comprises a substantial portion of the requirements of the position. 2 this type of job is targeted because i) the existing job search literature is not aimed toward the teaching segment of the academic market and ii) because there are many new ph.d.s who desire a teaching-focused position. other guides focus more on academic jobs at research universities and do not adequately address the details, special constraints and considerations that teaching-focused schools face. 3 thus, they are not as helpful as they could be for new ph.d.s searching in this segment of the market. the supply of and demand for candidates who prefer academic positions where the primary job requirement is teaching are significant. the trend at many institutions has been toward a greater emphasis on quality research output (see bodenhorn, 1997), even at colleges that traditionally have not been research oriented. many colleges and universities, however, continue to seek candidates who are quality teachers first and quality researchers second. in the u.s., there are 947 colleges and universities that are classified as master’s or doctorate-granting institutions and 2,576 colleges classified as bachelors or associate’s-granting institutions. 4 these figures do not indicate the number of jobs available at these institutions, much less those specific to economics ph.d.s, but these classifications serve as rough approximations for the research expectations of faculty at these schools. assuming that many baccalaureate and associate’s colleges are more teaching-focused, searching primarily for candidates who can successfully meet their teaching expectations, these jobs comprise a substantial supply of available jobs. the demand for teaching focused positions is harder to quantify since application statistics are not typically available to the public. nevertheless, smaller schools do receive numerous applications, indicating that a sizable proportion of new ph.d.s are searching in this segment of market. this also suggests that many candidates prefer to land a job that is more teaching-centered than research-centered. even if a candidate prefers a more research-oriented job, it is important for that candidate to understand the teaching-focused segment of the market. since research-oriented jobs comprise a subset of all academic jobs, candidates may find themselves in the teaching-focused segment even if it is not their initial aim. 2 this definition is deliberately inclusive. iit is problematic to define a teaching-focused job in terms of research expectations, teaching load, or requirements for tenure, because these are not always mutually exclusive. for example, many schools target their search to quality teachers, even though they offer light teaching loads with significant research requirements. for interviewing purposes, these are teachingfocused. 3 in addition to published job search guides, some departments (see for example, harvard (goldin and fryer, 2006), berkeley, (levine, 2002), stanford (2006) and wisconsin (conlin and dickert, 2004) have web pages that contain job search tips for their students. as is the case in the published guides, they tend to focus on the “research” end of the academic spectrum and are not as applicable to teaching positions at small schools. the reasons for this gap could be many. first, most of the guides are produced at research-oriented schools with their students in mind. second, many of the faculty at ph. d. granting institutions are more familiar with research institutions than with schools where teaching is primary. a third possibility is that some ph.d. programs prefer to place their graduates at research schools or consulting firms rather than teaching jobs. 4 specifically, the u.s. contains 282 doctorate-granting universities, 665 master’s colleges and universities, 765 baccalaureate colleges, and 1,811 associate’s colleges according to classifications created by the carnegie foundation for the advancement of teaching (2006). these totals are based on 20032004 ipeds data using the 2005 carnegie classifications. 9 journal for economic educators, 8(2), fall 2008 the tips related below were compiled from personal experience as both a job candidate and an interviewer. they were constructed from conversations and inquiries about the academic job search, stories that were shared by people who interviewed me, a review of the existing literature, and advice and insight from discussions with friends and colleagues at institutions across the academic spectrum. these include particularly informative discussions with professors in charge of hiring at small schools regarding the difficulties they encounter. this paper proceeds in chronological order from the perspective of a job candidate. section 2 provides practical advice for the summer before the job search and includes tips for finding job postings, preparing applications, practicing a job talk, and effectively answering interview questions. section 3 relates to initial interviews. section 4 offers advice for after the initial interviews, including tips for campus visits. section 5 discusses offers. section 6 concludes. to the candidate, every step in the search process may seem to take significantly more time and effort than anticipated. it is my hope that these tips will make the process smoother for job candidates. preparation preparing for the job search is by far the most time consuming portion of the process. the key to a smooth search is to think about the requirements of the next phase of the process long before it occurs. this section offers suggestions, in chronological order, for the months leading up to the main interview period. it contains advice for assembling applications, practicing for interviews, and obtaining information about prospective employers. the summer before the search: the decision to go on the job market should not be taken lightly. be sure to consult your advisor about your readiness before dedicating the considerable time and effort required to seek a job. before making your decision, read john cawley’s (2006) paper, “a guide (and advice) for economists on the u.s. junior job market,” posted on the american economic association (aea) job openings for economists (joe) webpage, http://www.aeaweb.org/joe. although cawley’s tips apply more to researchcentered jobs, it is a “must read” for anyone on the academic job market. 5 you may not know where your skills fit, or what kinds of schools will see you as a good match until you start to receive interviews, so it is good to be prepared for every part of the market. the school from which you receive your ph.d. may influence the perceptions formed by readers of your application. 6 for example, a small liberal arts school with a limited budget is not likely to give strong consideration to a candidate from a top ten graduate program. 7 by the same token a highly ranked school is not likely to consider an applicant from a lower program, unless he or she has an exceptional research and 5 the present article extends cawley (2006) by offering suggestions on how to answer common interview questions and providing advice for teaching-focused positions. 6 if you are unsure about the ranking of an economics ph.d. granting department consult the u.s. news & world report best graduate schools rankings (u.s. news, 2008). the most recent rankings, compiled in 2005, assign a rating and ranking to 56 schools. there are an additional 77 schools which grant ph.d.s in economics that are included, but not ranked. 7 in fact, many top programs discourage their students from taking such jobs in favor of more lucrative consulting positions. 10 journal for economic educators, 8(2), fall 2008 teaching record. if you are not sure whether you will be taken seriously for a position or not, it is best to apply for the job and let your potential employers make this decision. the marginal cost of sending an application is small relative to the potential payoff. you do not want to find out that you could have been considered for a job that you did not apply for because you underestimated your chance of landing it. regardless of the type of job you desire, you must have at least one paper of close to publication quality to send to prospective employers by the end of august. it does not have to be perfect, but you will not have much time to work on it during your job search. a decent paper is very important for landing an interview at many schools. this is true even for employers who are more interested in your teaching abilities than your research interests. your job market paper is a signal that you know something about economics, a major consideration for anyone hiring a ph.d. in economics. even if a job does not require a high level of research output, you must demonstrate that you are qualified for the position. your job market paper is the best indicator of this. if possible, schedule a presentation of your job market paper before submitting it as part of an application. this presentation can be done at a conference (such as the southern economic association which is held each year in late november), in a seminar, or informally in your department. the benefit of presenting at a conference is that you are likely to encounter potential employers before the aea annual meeting held early in january. more details on your presentation are provided in the next section, but scheduling is included here, because you need to apply well in advance in order to present your work at a conference. an on-campus seminar presentation will not require as much advance planning, but may still need to be scheduled late in the summer. begin to assemble the “standard” application materials in the summer in order to have them ready for the fall. the majority of academic positions will require a curriculum vita (cv), a cover letter, a job market paper, and three letters of recommendation. many teaching focused schools will request a statement of teaching philosophy, a teaching portfolio, a summary of teaching evaluations, and possibly a statement of research philosophy. once you have started to send applications, it becomes very difficult to find the time to write a new document. also, this allows you to ask your advisor and other committee members for comments. it may take several rounds of revisions before everything is in order. getting ready (august-october): before submitting applications, gather materials and plan ahead for your interviews. three things should be accomplished by october at the latest: (1) make your reservation for the aea annual conference in early january (part of the allied social science associations (assa) conference); (2) request and secure your letters of recommendation; and (3) give your job talk to a knowledgeable audience. register for the assa conference early and reserve a hotel room as soon as you know that you are going on the market. ideally you want to get a room in a hotel that is centrally located among the conference hotels, since your interviews are likely to be in many different places. you can find a map of the hotels when you register for the conference. registering at the student rate will save a few dollars. if air travel is necessary, reserve a flight early in order to arrive and depart at your preferred times (and to take advantage of reduced fares). arrive on the first day of registration in the early 11 journal for economic educators, 8(2), fall 2008 afternoon so that you can get acquainted with the layout of the hotels and the surrounding area. you can check in at the conference registration desk and check for disclosure codes. 8 plan to depart on the evening of the last day of the conference. in addition to making reservations, be sure your letters of recommendation are in order early in the fall. think carefully about who you would like to write letters on your behalf and discuss this with your advisor. try to contact your writers as early as possible; they may have many other priorities and may need a long time to do this. you might have to remind them to complete this letter before your application deadlines approach. as you compile your application materials, be sure to give your job talk to a knowledgeable audience at a conference or seminar. it may seem strange to do this so early, especially if your paper is not quite ready for publication, but this presentation serves several purposes. first, it will provide feedback that you can use to revise your paper. second, it will allow you to remedy any problems before you interview at the aea meetings. third, it will prepare you for a presentation of your research on a campus visit. after getting a campus visit, you will not have much time to work on your presentation. sending applications (september to december): although jobs are posted nearly year-round, the bulk of academic postings start arriving in september and continue until december. most academic jobs are posted on the american economic association (aea) website under job openings for economists (joe: http://www.aeaweb.org/joe). many jobs are also posted on the chronicle of higher education website: http://chronicle.com/jobs. the chronicle is especially useful for finding job openings at smaller schools which may not be posted on joe. 9 the chronicle site is the main source of job postings for most academic disciplines, but you can limit your search to jobs economics. a third site that tends to have more international postings is: http://www.inomics.com/cgi/job. many departments will post openings in multiple locations. the first wave of positions will be posted on joe in september, with the majority posted in october and november. at this point, you need to decide on the type of school, location, and rank of the schools to which you will apply. consulting with your advisor may help. these decisions determine the number of applications that you send. keep in mind 1) that you may not know what jobs employers will think you are qualified for until after your applications are mailed; and 2) that the cost of an additional application is not that large once you have materials in order. once you have compiled your list, you can assemble a spreadsheet with the names of the schools and their due dates to keep the information in one place. double check each application deadline and start preparing materials long before they are due. it will take longer than you think to compile and mail everything. 10 application materials are handled by several people before they reach the hiring committee and sometimes portions 8 more about disclosure codes below. 9 cawley (2006, p. 10) claims that, “most economics departments do not advertise their positions in the chronicle…” this may be true for larger universities but many jobs at smaller schools are posted here and not posted on joe. if the person placing the advertisement is not a faculty member of an economics department chances are the job will only be posted at the chronicle. 10 there are postal holidays for labor day, columbus day, veteran’s day, and thanksgiving day that should be taken into consideration along with application deadlines. 12 journal for economic educators, 8(2), fall 2008 are misplaced. by mailing packets early you will have time to resolve any problems without missing deadlines. since you will be sending multiple applications for several different types of job simultaneously, be sure to check that you put the correct materials in each envelope with the proper address label and that you include all of the requested materials. if you are also sending applications to non-academic jobs, be sure to send your cv to academic jobs and not your resume. you do not want to send the wrong materials for any job. extra steps should be taken as you assemble applications for teaching-focused jobs that may not matter for research positions. make sure that each cover letter and cv matches the specific needs listed in the job posting. for instance, if the posting is for a labor economist, do not write that you would prefer to teach macroeconomics in your cover letter. make sure you explain why you think you are a good fit for the job in the cover letter. check (and double check) the spelling of the college and name of the person to whom you are sending the letter. each job may have over a hundred applicants, so schools will look for easy ways to narrow the list. you do not want to give anyone a reason to throw out your application. personalized cover letters and cvs may not matter at large research schools, but they will to smaller schools. these schools may not have a large budget for the job search and will target their resources to the most interested candidates who appear to be the best matches. you need to convince them that you are serious about wanting the position. the search process works in two directions; candidates and schools both want to find the best possible match. personalizing your letters to address the specific job, and school, is one way to emphasize that you are a good match for the employer. practice interviews (october to december): in a first interview you will typically have 30 minutes to explain your research, teaching experience, job preferences, and to ask questions of your interviewers. doing this effectively is perhaps the most important step in the process. it is never too early to start preparing for interviews. practice for your interviews by explaining your research to peers, faculty, friends, and relatives as often as possible. make sure that you are able to explain it in ways that many different audiences can understand. you want be able to explain the basics to your grandparents and also the details to someone who has spent their entire career researching the topic. some of the interviewers may not be familiar with your field of research. you must make sure that your interviewers are convinced that you know what you are doing even if they do not. smaller departments may only have one faculty member in each field. if they are hiring in your field, it is possible the existing faculty are not familiar with your area of research. it is good to have one minute, three minute, five minute, and ten minute versions of the explanation of your research. you are unlikely to know how long you will have to deliver your explanation. one strategy is to start out with a general description of the main point (the one minute talk), then briefly discuss what you hope to explain in your research, and then give the reason why you think it is important (the three minute talk). next, talk about the specifics of your work in more detail. you should go into enough detail to convince your interviewers that you know your own work well, and that you have a good understanding of other work in the same field. think of your talk as if you 13 journal for economic educators, 8(2), fall 2008 are peeling an onion; you start with the widest ring and move to smaller and smaller rings. 11 as you practice explaining your research, you should practice discussing your teaching experience as well. be able briefly describe the courses you have taught, your duties as the instructor or a teaching assistant, and the way you presented the material. also review the characteristics of the students in your courses: how many students were in the courses, whether the course was introductory taught mostly to freshman, or an upper level course for economics majors. identify what you liked and disliked. above all, for position emphasizing teaching, you must convey your interest in teaching. if you do not have any experience, you should think carefully about how you would teach a course. look at the sample questions in cawley (2006) as well as those listed below with suggested answers. practice answering these questions with others who are on the job market. this is a good way to refine your answers, learn from fellow candidates, and practice in a stress-free setting. your department earns a better reputation when all of its candidates are prepared, and this reputation will help you in the future. after you have worked on your own and with other job candidates, conduct mock interviews with your advisor and anyone else who is willing. this may seem like a burden, but it will be extremely helpful. your advisor may come up with questions that you have never given much thought, and may have suggestions for summarizing your research. a mock interview is by far the best way to prepare for your real interviews. scheduling interviews (december): most departments require a few weeks to assemble and analyze job applications. you may hear from different schools at different times depending on their deadlines. as a rule of thumb, the majority of decisions begin to be made in the week after thanksgiving and calls for interviews are made soon after. in the most common sequence of events, employers contact you to schedule an interview during the assa annual conference. for various reasons, however, some schools may conduct phone interviews or videoconferences instead. 12 do not discount a school solely because it does not conduct interviews at the conference. the scheduling of interviews continues until the end of the fall term and, as a practical matter, up until the start of the conference. the peak occurs around the first or second full week of december. the timing of the calls you receive most likely indicates the speed of the search committee at a school, rather than your likelihood of landing a job. when you receive phone calls or emails about an interview, get as much information as possible regarding the day and date, the start and end times, and who will conduct the interview. conference interviews require more planning so be sure to ask for the hotel, disclosure code, cell phone numbers of the interviewer, and the name of the person who has reserved the room. 11 i thank susan rose for this description. 12 for example, some schools offer classes at the same time as the conference and are unable to send faculty members to the meetings. sometimes the department may not have been granted approval to post a position until after registration for the assa conference and hotel rooms had been closed. others may have decided to conduct interviews but have not yet been approved for reimbursement of travel expenses. 14 journal for economic educators, 8(2), fall 2008 chances are you will not be able to get all of this information. disclosure codes are the easiest way to find the location of an interview, if your interviewers use them. 13 , if you at least have the names of the interviewers, however, and the name and phone number for the hotel, you can place a call to the room as a last resort. you receive a directory when you register for the conference that lists all of the people who are registered, along with the names of the hotels in which they are staying. if you have the names of your interviewers, and they are registered for the conference, the directory will often allow you to contact them. check the conference hotel map while you schedule your interviews. ideally, your schedule should minimize travel and potential time conflicts as much as possible. 14 leave enough time between interviews to write notes about the interview just completed and to review your notes for the next interview, in addition to the travel time required. consider the desirability of a given job along with travel time when scheduling interviews. interviews that are late in the morning tend to go more smoothly for candidates and interviewers, so try not to schedule an interview for one of your top choices late in the day if you can help it. chances are that you, and/or your interviewers will be exhausted by that time. as the conference progresses, both interviewers and candidates will become fatigued, so you may want to schedule your top choices for earlier in the conference. if possible, schedule an interview for the type of job that you want, but not necessarily your top choice, on the first morning of the first main day of interviews. (i.e. if you want a job at a small liberal arts college, schedule a small liberal arts school at one of your less desirable locations as your first interview.) if your first interview goes well, it sets you up for the rest. it is much harder to interview for a job for which you are not a great fit or one for which you have little interest. do your homework to prepare for interviews (mid december): your goal for each interview is to present yourself in the best manner possible. you do not want to leave your interviewers with the impression that you are less qualified for, or less interested in a position, than you actually are. if you are granted an interview, you must have something of interest to the potential employer, and you want to identify what it is and convey that to them. 15 with a little extra preparation you can form a good idea about what each employer desires in a candidate. once you are granted an interview, prepare for it by browsing the department websites of the schools where you are interviewing. you may have little prior knowledge about a school until you go to its website. look at the papers that have been written and the courses that are taught by your interviewers to see how they relate to yours. you may take a look at the faculty members who were hired most recently to give you an idea about the direction and expectations of the department. check the requirements for 13 the name of the hotel and the room number are listed along side the disclosure codes on a bulletin board in the main hotel. one problem with disclosure codes is that you may not have the room information as soon as you would like. this is a problem if your interviewers do not check into their rooms until late in the evening on the first day of registration and you have an interview early the next morning. 14 in the excitement of actually getting an interview this is easy to overlook. it is good to keep the conference map within an arm’s reach of the telephone to avoid being rushed. 15 after your interviews you want to be able to say, “i think the only thing i could have done to improve my chances is to be a better economist, so i guess it went well.” i thank leonard kiefer for this quote. if you leave an interview feeling this way you have done your job. 15 journal for economic educators, 8(2), fall 2008 majors to find out if undergraduates must complete a senior thesis or other research. this check of department web pages will provide a surprisingly accurate idea of the questions that you will receive and give you facts to demonstrate your familiarity with the school. it is necessary to gather background information for each department and school, because the job advertisements themselves are not necessarily informative; almost every job posting will state a desire for excellent teachers and researchers. before the interview, try to determine whether the focus of the employer’s search is mainly for candidates with teaching or research skills. many departments desire a balance between the two and the department’s preference may not be clear. 16 also try to determine how much the interviewers know about your area of research. using this information, you can adjust your answers to tell them what they want to know in a way that they understand. after finding information, make a “cheat sheet” for each school to take to the interviews. make sure it includes the name of the school and a brief description of the position as posted. include the time, date and location of the interview. also record the names of the interviewers, their research interests, and the interests of those with work related to yours who are not going to be in on the interview. work this into the discussion if things start to get slow. list some questions that you have about the job, the department, and the school. you want to be sure to have something to say when asked for your questions. if you do not have any questions, this signals to your interviewers that you are not interested in the job. tips for answering common interview questions: you need to know the school and know the need that the school hopes to address with the hire as much as possible in order to provide the best answers. for instance, in an interview for a teaching focused job where the interviewers are not familiar with your research area, you should explain your research very broadly and make sure you express an interest in teaching. do not spend most your interview for a teaching-focused job talking about your research, unless you are asked direct questions about it. keep in mind that the schools hiring aim is probably motivating every question asked. your interviewers are not going to ask questions that are not relevant to their goals. it is very important answer each question you are asked. if you do not answer questions directly, you will not leave a good impression. cawley (2006) devotes a section to a good description of conference interviews, especially for research leaning jobs. there are some questions that will almost always be asked. the most popular, regardless of the type of institution, are: i) why did you apply for this job? ii) tell us about your research and why it is important in economics. iii) what direction will your research take in the next five years? at teaching focused schools, you are likely to be asked these questions as well: iv) how will you involve undergraduates in your research? v) what do you like most about teaching? vi) what three courses would you most like to teach? vii) how would you teach course x? or what are the most important concepts that you want your students to learn in the course? viii) what is your teaching style or pedagogy? 16 the hiring committee may not agree on what kind of skills they desire in the candidate. 16 journal for economic educators, 8(2), fall 2008 make sure that you have a good answer for all of these questions. while these questions are well known, existing job search guides offer surprisingly little advice on answering them. here are some things to think about as you formulate your answers. why did you decide to apply for this job? what to say: say something about the school and/ or its location that makes it desirable. perhaps the school is similar to the one that you attended in terms of size, student composition, and institutional goals, making it the type of place where you feel comfortable. be sure to mention any geographic preference for the area: you know someone who lives nearby, or you have interests that make the area a good fit. 17 these little things help to convince the interviewers that you are not just applying because the posting matched your fields. if there are many quality applicants for the position, an extra connection to the type of institution, or the area, may be the deciding factor in getting invited for a campus visit. make sure that you have something good to say about the school that makes it a good fit for you. if you cannot think of anything that makes the job desirable, do not bother doing an interview. what not to say: do not say you applied for the job simply because it fit your teaching or research interests. this is likely true for everyone who applied. if you want to stand out, you have to convince your interviewers that you want the job as much as you need to convince them that they want you for the job. tell us about your research and why it is important in economics. what to say: your response depends on your research which you should know well. your advisor would not allow you to earn a ph.d., or interview for an academic job, if you cannot answer this question. knowing the answers and explaining them concisely to others, however, are two different things. review the suggestions for practicing interviews above and practice often. ask your advisor and others if your explanation makes sense. be able to answer questions about your data and methodology. defend them if necessary. it is very important to act excited about your research. this signals that you can bring energy and enthusiasm to the department. if you do not appear to be excited about your research, chances are good that your listeners will not be either. your interviewers listen to dozens of candidates describing their work. a dull description is easily forgotten. what not to say: do not say that your work is unimportant or severely flawed. every paper has deficiencies, so there is no need to draw attention to these unless you are asked. if this happens, it is better to indicate that you have thought about the problem, than to argue that it is not a problem. what direction will your research take in the next five years? what to say: your response should be well thought out enough to convince your listeners that you have more ideas. outline the next two ideas that you plan to pursue. specific ideas for several new papers are helpful, but if you do not have them, be prepared to discuss some general areas that interest you. if research is a priority, 17 for instance, if the school is located in florida, you may want to mention that you do not like the cold. if it is in maine, point out that you like to ski. 17 journal for economic educators, 8(2), fall 2008 interviewers want to make sure that you can start your new projects when you arrive at their school. if you have a good set of ideas and are not asked this question directly, you should volunteer this information when you have an opportunity. what not to say: first and foremost, if you are asked this question you do not want to say that you have not given it much thought. this indicates that you do not have a research agenda. this is likely an important consideration for the interviewers or they would not ask the question. another thing to avoid is an unrealistic research agenda. one may be ambitious, but do not state an agenda that is beyond the resources of the position or beyond your abilities as a researcher. if your agenda cannot possibly be successful due to budgetary, time, or infrastructure limitations, your interviewers will conclude that you are not a good fit. how will you involve undergraduates in your research? what to say: your answer depends on the type of research that you plan to conduct. think carefully about how you could involve undergraduates. answering this question effectively goes a long way toward convincing your interviewers that you have given serious thought to a job with undergraduate teaching as a focus. if the department requires a senior thesis, or research project, for graduation, you may mention ways that you would help students with their research. of greater importance at teaching focused schools is the help that you can give to the students, rather than the help that they can give to you. at the very least, students can assist with data collection, finding references, or proofreading in almost any type of research. another way to involve students is to test new teaching strategies on them. some teaching focused schools encourage pedagogical research, so it may be helpful to have a few ideas in mind to try with your classes. what not to say: do not say that undergraduates cannot help you in your research or that you do not want to work with undergraduates on research projects. teaching focused schools want teachers who interact well with students. this is a signal of a bad match from the prospective of the employer. what do you like most about teaching? what to say: your answer depends on your personal preferences and these may be harder to determine than you think. you may want to say that you enjoy interacting with students; that you enjoy convincing students with a negative view of economics that it is really interesting; or that you like students to leave your class with a greater understanding of the world around them. since many candidates will give these responses, it is best to have a quick story about one of your actual teaching experiences, or one of your experiences as a student, to use as an example. specific examples are more effective, and often more sincere, than broad reasons. what not to say: you maynot have an obvious “favorite” part of teaching, but do not say anything to indicate that you do not like to teach. you would not be asked this question if the interviewers were not concerned about your desire to teach. your response should not appear to be “canned” or insincere; your interviewers will notice this. what three courses would you most like to teach? what to say: you need to provide a good answer here for a teaching focused job, and it should be easy to do so. first mention the courses that you have already taught and are 18 journal for economic educators, 8(2), fall 2008 prepared to teach again. if you have done your homework, mention the courses that you know the department wants the new hire to teach. a good match aligns their needs and your interests. if the posting does not list specific courses, mention topics related to your research fields, and other courses that you would enjoy. some liberal arts schools emphasize interdisciplinary courses, so you may mention one of those, if applicable. what not to say: everyone prefers to teach some courses over others, so do not say that you do not have a preference. try to avoid courses that are already staffed (especially by the most recent hires) by the department. it is unwise to state a course that you do not want to teach; it may well be a course taught by the new hire. how would you teach course x? or, what are the most important concepts that you want your students to learn in the course? what to say: this question is usually asked to determine if you are qualified to teach a course. it may be asked to check your truthfulness in your answer to the previous question. if you have already taught course x or a similar one, then mention what you did. if not, it will pay to have done your homework. think about how you would teach all the courses listed in the job posting before you go to the interview. if you have previously taught any of these courses, you may want to bring a syllabus with you. if you have not taught the courses, find out which textbooks are commonly used in them and which topics are covered. make this into a course outline and distribute it in the interview. this shows that you have given careful thought to the position. what not to say: there may not be a bad answer to this question, as long as your answer is appropriate to the course and demonstrates knowledge of the topics to be covered. what is your teaching style or pedagogy? what to say: above all, indicate that you have given this careful consideration. if you are asked this question, you want to convince your audience that you can offer more than a standard lecture. if you have taught a course using different teaching strategies, discuss two or three ideas that worked. provide some evidence that an activity was successful, such as better scores on exams or greater interest in the course. different students have different learning styles and teachers can effectively conduct their classes in many different ways. be honest about what you do. for example, think about having your students work together in groups, having informal class discussions, doing small market experiments relating to course concepts, conducting student presentations, or using technology in the classroom. the optimal teaching strategy often depends on the type and level of the course. generating a productive class discussion about current economic issues in a principles of economics course populated by freshmen may be difficult; discussion may be may be much easier to generate and more beneficial in upper level courses. offer strategies that are appropriate to the course you would teach. what not to say: do not say that you have not thought about your teaching style, or that you plan only to lecture. be careful not to suggest too many new or novel teaching techniques or your response may appear insincere. academic economists as a group have been somewhat slow to adopt new teaching techniques over the traditional “chalk and talk” lecture format. some view innovations with great skepticism. your interviewers may well be chalk and talk traditionalists, so be sure not to offend them. 19 journal for economic educators, 8(2), fall 2008 general tip: if you are asked a strange question, be especially careful about your answer. for example, you may be asked if you would be willing to teach a course with 600 students, work with low-ability students, teach online courses or at off campus locations, do research without adequate funding, or teach an interdisciplinary course. if you are asked a question like this, chances are that it is an important consideration for the job. answering no likely means no job, so be very careful. during the course of an interview, you may fall into the habit of giving a quick response to each question and your initial thought may well be negative for these questions. one strategy is to always say that you are willing to do whatever is asked. then after the interview, you can decide if the issue really is a problem. on the other hand, being too agreeable to imperfect situations may make a candidate seem insincere. another strategy is to acknowledge the issue in a way that does not indicate that it is an insurmountable obstacle. for instance say, “well, i would prefer to teach a smaller section, but, i am willing and able to teach a course with 600 students.” in either case, you can always change your mind later if you previously said yes. if you say no, you cannot take it back. questions to ask: have some questions to ask in each interview. you may refer to a short list of questions prepared before the interview. it is much easier to ask questions than to answer them as well as important to do so. asking questions signals a genuine interest in a job. if you have a list of questions some, if not most, of them likely will be answered before you have to ask them. in an initial interview, be sure to ask about the course load, number of preparations, number of students in each class, and which courses the new hire is likely to teach. you may also ask about the typical students in economics classes, or if there are sources of funding (such as instructional development or research grants) within the department, college, or university. also ask if these are competitive or if there is a high acceptance rate for new faculty. ask at least one question that is specific to the job. for instance, ask about something that looked interesting on the department’s website. you may also ask about the general atmosphere within the department or if the faculty typically engage in social activities together. there are some questions that should not be asked at this point. most importantly, do not ask about salary until you are offered a job! this signals that you only are concerned with yourself and not the job. in further interviews you may want to ask how summer courses are allocated, but this may not be the best time. some departments have a difficult time finding teachers for summer courses, while others give senior faculty preference. be sure to ask this question in a neutral manner which does not reveal whether or not you would want to teach in the summer. a department may discourage new faculty from teaching in the summer in favor of research, whereas others treat summer teaching as a near a requirement for new faculty. initial interview many different interview methods may be encountered. most schools will set up interviews at the assa conference, but some schools may instead interview by phone or video conference. regardless of the format, your goal is to distinguish yourself from the other job candidates in a positive fashion. the number of interviews granted for each 20 journal for economic educators, 8(2), fall 2008 position is unknown, but the average is probably 25 to 30 candidates per job. if you have done thorough background checks, and have your cheat sheets organized, the interviews themselves are likely to go smoothly. write notes about each interview. do this immediately after the interview or as soon as you have a chance. it is easy to forget important items if you wait too long. include details regarding the school, the position itself, and your general thoughts and impressions about whether it is a good match for you. record the names of those who interviewed you, since they may be different from what you were expecting. send thank-you notes to your interviewers soon after the conference or phone call. mention that you enjoyed talking with everyone and that you feel like the department is a good fit for you. both may be true, but even if the interview did not go well, sending a thank-you leaves a good impression. interviews at the assa conference the assa conference is both exciting and stressful. at the height of the interviews, a lot of economists will be in the area around the conference hotels and it will be extremely hectic. time spent preparing over the past several months will limit the stress so that you can focus on making a good impression. taking a few additional steps at the conference will make things easier for the next part of the process. be courteous and professional for your entire stay. many people in the profession are around. think of the entire conference as one continuous interview. you are likely to encounter some of the people conducting your interviews, so be polite to everyone. it is difficult to act as if you are on an interview for three days, so try to get together with your friends who are on the job market and others you may know at the conference. you might want to go to dinner in the evening to share stories. after a day of interviews, it is a nice change to talk to someone who is not considering you for a job. even though you will be talking to people all day, you will appreciate talking with familiar people. if you arrive early, get acquainted with the area, determine the exact locations for your interviews, and find the fastest route to each interview. this will help your travel between interviews and deflect some nervous energy. try to relax as much as possible before the start of the interviews. phone and video interviews phone or video interviews take various forms. you may receive a brief phone call asking if you are still interested in a position, and if so, to schedule a longer phone interview or video conference. alternatively, you may be asked a full set of questions on the first call. if you are not prepared to give quality answers to questions, and you have the option to reserve time for an interview in a few days, it is in your best interest to do so. just because the phone interview feels less personal does not mean that you should enter one unprepared. your interviewer may have a standard list of questions to ask each candidate or it may be more informal. above all, be courteous and professional. for phone interviews, you have the advantage of being able to refer to notes that you may have made about the school. have the notes ready. if you are not sure who you will be talking to, be sure to record the name as soon as it is given. 21 journal for economic educators, 8(2), fall 2008 campus interviews the hardest part is now over. you have time to rest and wait, but be prepared to make a campus visit with only a few days notice. the key is to be ready before you ever have a scheduled visit. ideally, you have already presented your job talk and are now ready to present it on an unfamiliar campus. when you get a campus visit, it may be helpful to send emails to the other schools where you interviewed and that you think would be a good match. in the email, indicate your preference for the job at their school over the job where you have a campus visit. ask where your application stands in case you receive an offer. if nothing else, this signals that you are still seriously interested in the job. despite your efforts in the interview, you still may need to convince the interviewers that you are willing to take the job. after sending these emails, you may find out that you are no longer under consideration, but at least you will know. schools move at very different speeds after the initial interviews. 18 you do not want to make a decision on an offer before you have a chance to make another campus visit. by letting schools know that you have another visit, they may move a little quicker and help you to avoid these conflicts. mechanics of the visit schools typically bring between two and four candidates to campus for each position. consequently, if you are invited to campus, you are a finalist for the job and are a good fit for the position. now the hiring committee is looking for the best colleague. it is especially important to be polite and friendly to everyone in order to convince them that they would like to work with you. it is beneficial to make a positive impression, but it is even more important to avoid making a negative impression on a campus visit. 19 you must do your homework again before an on-campus interview. fortunately, much of the preparation is the same as for your initial interview, but now you have more information. make sure you know as much as possible about the department and the need(s) they are trying to fill with the new hire. try to find out who will meet with you. print out some information about these people, such as cvs and papers. if you do not know who you will meet beforehand, print at least some information about everyone in the department. if you know the courses you will be asked to teach, make an outline. if you are really ambitious, make a course syllabus. bring several copies to hand to anyone who asks you how you would teach the course. this is easy to do and it shows that you are serious about the position. 18 smaller schools are likely to take longer to schedule campus visits. many of the top tier schools decide on candidates and schedule campus visits before leaving the conference. other schools do not want to waste resources by inviting candidates to campus that are going to take other jobs, so they wait for the top end of the market to clear. schools also have different levels of bureaucracy to go through before inviting candidates to campus. finally, the timing of the conference in early january means that many schools are not in session and the entire hiring committee may not be available to discuss campus visits for a few weeks. 19 avoiding a bad interview is important for many reasons. first, suppose three candidates visit campus for an interview. candidate a gives an excellent interview, candidate b an average interview, and candidate c makes a bad impression. the college first offers the job to a. if a turns down the offer, b is then offered. but even if b declines, c may not get an offer. second, it is possible that the department may be hiring for another position in the near future and may consider you for it if your visit goes well. third, over time faculty may move to different schools, so you may encounter the same people more than once. 22 journal for economic educators, 8(2), fall 2008 be prepared to ask a lot of questions on campus. if you thought it was hard to fill the time with questions in a 30 minute interview, imagine what it will be like over a day or two. after asking about the department and the school, you may resort to questions about the area, the climate, local school system, recreational activities, or other items of interest. this also helps to convince interviewers that you are a “normal” person who will make a good colleague. be sure to have the major details for your visit as to meeting times, dates, and places. find out where you are staying, who you are meeting, and the activities planned for you. most of this will be provided in an itinerary, so be sure to ask for one if you are not given one. if air travel is required, make sure you know who will meet you at the airport and how to get in contact with them if your flight is delayed. you also want to have the small details of your trip worked out. 20 depending on the job, you will be asked to present your research and/or teach a lecture. in either case, before you go to campus you must know: (1) your audience, (2) how long you have to present, and (3) the capabilities of the room that you will be using. someone may neglect to tell you these details unless you ask. in addition to presentations, you are likely to meet individually with faculty and administrators, and to go to dinner. some schools may reserve time for you to meet with students. presentation on campus you will be asked to give a presentation in some form while on campus. departments differ in what they require, but you are likely to be asked to present a class lecture if the job has a large teaching component, and to present your research if the job has a large research component. in some cases, a school may require both of presentations. presenting your research: by the time of your campus visit, you have already presented your research and are prepared to answer most of the questions that may arise. be sure to ask how long you will have to present your research. typically, you will have somewhere between 45 minutes and an hour and a half. you must say everything you want to say in the allotted amount of time. it is unprofessional to have extra time, but, at the same time, you do not want to be rushed. everyone should leave your presentation knowing the main contribution of your research. give an overview of your talk at the very beginning and include your main result right from the start. if your audience has the result in mind, unrelated questions that can consume much of your valuable time may be avoided. make sure you know the audience for the presentation. will the audience include only faculty? undergraduates? graduate students? will they be from the economics department or from other departments as well? the presentation of your research for a teaching focused position may be slightly different than for a research focused position. although there is substantial variation among departments and individuals, your audience for a teaching focused interview may be more concerned with how you present your work, while a research focused audience may be more concerned with what you did for 20 for example, you may have to check out of your hotel room the morning before your interview. if so, make sure that you pack all of your things before going to breakfast. little things can add needless stress if you are not prepared for them. 23 journal for economic educators, 8(2), fall 2008 your research. these important considerations may affect the way you present your work and the questions that you may receive. presenting a class lecture: you may be given a course and lecture that you are to present, or your choice of course and topic. this lecture may be delivered to an actual class, or presented to faculty only. the format depends on the department. ask how long you have to present your class lecture. you may have less than the scheduled class time if, for example, the students are asked to evaluate your lecture at the conclusion. if you are to teach a specific topic to a class, be sure to have a well-prepared and interactive lecture. to aid on both fronts, ask which textbook the instructor uses before assembling your lecture. terminology may differ slightly across textbooks and you do not want the students to be confused. if you are given the choice of a topic, try to pick something that you understand well, but is somewhat difficult for undergraduates at first. the best outcome for interview purposes is for students to ask you questions and for you to provide good answers. if the students do not have any questions, it is difficult to demonstrate your abilities. avoid the temptation to pick an easy topic or to conduct an in-class activity that takes time away from the lecture. your interviewers want to see you teach or they would not have you deliver a lecture. students’ evaluations of your lecture may be a component of the hiring decision, so you must do your best to make the lecture relevant to them. if you have to choose a topic and do not know where to start, try something like elasticity. effectively explaining the different elasticities to undergraduates, bringing in real life examples of price sensitivity, will convince your interviewers of your teaching abilities. meeting with faculty and administrators you will also have the opportunity to meet with faculty members, the department chair, and possibly the dean or provost. the exact protocol is specific to the school. it is helpful to think of these meetings as a series of initial interviews. as such, approach each of them in much the same way as your initial interview. remember that everyone is looking at you as a potential colleague and is trying to gauge how you would fit into the department. ask questions that are relevant to your interviewer’s position. for instance, ask the department chair about the goals for the department, the dean about the goals for the college, and the provost about the goals for the entire institution. the probability that your interviewer has fully read your credentials, and has knowledge in your field, decreases as you move up the administrative ladder. be careful not to make disparaging remarks about other academic disciplines, since you may not know the background of the administrator. meeting with students: in some cases, you will have the opportunity to meet with students. the importance of this interaction may have either a large or a negligible impact on the hiring decision, depending on the school. in either case, student feedback may be the determining factor at the margin. students are more concerned with how approachable you are, than with 24 journal for economic educators, 8(2), fall 2008 your economic knowledge. they can be the harshest critics that you face. 21 if you have time to meet with students, treat them with the same respect as faculty. ask them questions about the student body to show that you value their opinions. this meeting will give you more information about the interests and abilities of the students, and the job in general, so take it as seriously as the other portions of the campus visit. getting all the facts: in the excitement of the campus visit, it is easy to look at every job in the most positive light. you may leave each campus visit feeling that you would accept the job if offered. take some time to fully consider each position before you objectively compare them. you may not be able to return to the campus before you have to make a decision, so be sure to consider all aspects of the job while you are there. keep in mind that the school may be trying just as hard to convince you they are a good fit as you are trying to convince them that you are a good fit for the job. assuming that everyone is lying to you is not wise, but remember the school is putting their best foot forward just as you are. some negative aspects of the job may get left out. look past the nice dinner and hotel room; think carefully about the job itself. try to gather as much information as possible about the true job environment while on your visit. when you get a chance to ask questions, ask about the best aspects of the job. chances are you have already heard all of these things. after listening to the positives, ask about the worst aspects of the job. ask what the goals are for the department in the short and long term, and determine the areas where the department is trying to improve. these are great questions and the answers may give you a good idea of the obstacles that you will encounter. you may be surprised at how willing some faculty members are to volunteer negative job aspects. some of the best information in this area comes from are those who have been with the department for a few years and are either close to getting tenure or recently tenured. you will get more information by asking about the worst parts of the job in small groups. another way to obtain negative information is to say, “everyone that i have talked to so far seems to have great things to say about working here. obviously, the people who are here like it or they wouldn’t stay around. how many people have left the department since you have been here?” then ask why those people left. again, this may give you an indication about the true work environment. after a campus visit, be sure to send a thank-you note as soon as you get home. this courtesy signals that you are still interested in the job. getting an offer once you get an offer, notify the other schools that you visited. if you have not already done so, you may want to contact some of the schools where you did not receive a campus visit, but where you feel you would be a good match. once you have an offer, the other schools may begin to move a little quicker. schools move at different speeds and some may still have more candidates coming to campus. 21 nothing prevents a student from saying, “i just didn’t like that candidate,” whereas faculty may want to base (or at least appear to base) their evaluation on objective criteria. 25 journal for economic educators, 8(2), fall 2008 there are many things to consider when evaluating an offer and comparing it to others. some important factors are the teaching load, research requirements, cost of living, and additional opportunities for funding, such as grants and summer courses. a factor pertaining to salary offers that is often overlooked is the level of autonomy of the department within the college or university. this is especially important at small schools, and those with a union, because the department may not have the authority to make a better offer. for instance if there is a bargaining agreement with the union, it may require that similar starting salaries be offered to every new employee, regardless of field. this may hurt those holding a ph.d. in economics as they are typically in lower supply than most fields. faculty salary information collected by the american association of university professors (aaup) can be found on the chronicle of higher education website at http://chronicle.com/stats/aaup (chronicle of higher education, 2007a). this page provides average salaries for assistant, associate, and full professors at almost every u.s. college and university and is an indication of how salaries at an institution compare to those at other institutions. the aaup reports averages by rank for the entire college or university, however, so the salaries posted may not be a good indicator if there is agreat deal of variation across departments within a university. the average salaries reported by aaup for assistant professors (not just new hires) are much lower than those reported for new economics ph.d.s by cawley (2006) as indicated in table 1. table 1 salaries by institution type: newly hired economics ph.d.s versus assistant professors at the 60 th percentile by university mean newly hired economics ph.d.s (2005–2006) a all assistant professors: 60 th percentile by university mean (2006–2007) b difference associate 48,083 baccalaureate 60,087 49,694 10,393 master’s 70,026 54,799 15,227 doctoral 86,078 66,263 19,815 sources: a cawley (2006), b chronicle of higher education (2007c). for example, average salaries for newly hired assistant professors in economics at baccalaureate institutions for 2005-06 were $60,087 (cawley 2006). by comparison, assistant professors in baccalaureate institutions with mean salaries at the 60 th percentile (by institution mean) earn $49,694 (chronicle of higher education 2007a). 22 these differences may not factor into offers made by economics departments at doctoral 22 in fact the average starting salaries reported for economists fall well above the 80 th percentile of institutional averages for assistant professors for each category. since cawley (2006) reports a small number of responses, the averages for the sample of bachelor’s institutions may not be representative. 26 journal for economic educators, 8(2), fall 2008 institutions, which are more likely to have the ability to adjust salaries. these differences are important to consider at baccalaureate colleges where the department may not have this ability. these colleges are also the most likely to have a teaching focus. when negotiating, you should consider your offer in relation to the averages for economists and also the averages for the college or university as a whole. for small schools, chances are the offer will be low relative to economics, but high relative to the rest of the college. you may find that the economics department knows your market value much better than the administrator who ultimately determines the salary offer. if you get an offer that is far below your market value, you may not want to reject it quickly if you do not have another alternative. it may help the department fight the battle with the administration to mention that the offer is far below average for the position. generally, it does not hurt to ask for things as long as you do it without being rude. when a school cannot do anything else for you they will let you know. cawley (2006) suggests that you get an offer in writing as soon as you can, but that may not be possible. do not be surprised if you receive nothing more official in writing than an email from the dean or department chair. schools may prefer that you make a verbal commitment before they go through the time-consuming process for the official paperwork. if they compose an official contract before you make a decision, they may lose other candidates for the job if you ultimately decline the offer. obviously, it is best if you are able to get an official contract in writing before you must make a decision, but if not, just make sure you have as many facts as possible. save all correspondence that you receive regarding the job, and check the details before you sign the contract. conclusion this article offers suggestions for conducting a successful search on the academic job market to new economics ph.d.s. the general recommendations are applicable to all academic jobs regarding the timing of events, finding job postings, preparing for questions asked in interviews, and preparing a job talk. in addition, it outlines specific suggestions pertaining to schools in the teaching-focused portion of the market that are not found in other job search guides. these include suggestions for personalizing job applications, effectively answering interview questions about teaching, delivering a class lecture on campus, meeting with students, and factors influencing negotiations for a better offer at a small school. these special considerations for the search for more teaching-centered (as opposed to research-centered) academic jobs are important since there is both a large supply of and demand for academic jobs with the emphasis on teaching. the job search is time consuming and stressful, especially for new ph.d.s experiencing it for the first time. by following these suggestions, the reader will be better informed about the process. knowing what to expect at the various stages will save time and minimize stress. being well-prepared makes the search easier and promotes a more favorable outcome. i hope you find these tips useful in your search. 27 journal for economic educators, 8(2), fall 2008 references american economic association. 2007. job openings for economists. http://www.aeaweb.org/joe. bodenhorn, howard. 1997. teachers, and scholars too: economic scholarship at elite liberal arts colleges. journal of economic education. 28(4): 323–35. carnegie foundation for the advancement of teaching. 2006. basic classification tables. http://www.carnegiefoundation.org/classifications. cawley, john. 2006. a guide (and advice) for economists on the u.s. junior academic job market. http://www.aeaweb.org/joe/articles/2006/cawley.pdf. chronicle of higher education. 2007a. aaup faculty salary survey. http://chronicle.com/stats/aaup. chronicle of higher education. 2007b. chronicle careers. http://chronicle.com/jobs. chronicle of higher education. 2007c. faculty salary ratings, spring 2007. http://chronicle.com/stats/aaup/ratingscale/2007aaupratingscale.htm. conlin, michael and stacy dickert. 2004. job market packet. university of wisconsin department of economics http://www.econ.wisc.edu/grad/placement/local/conlin_dickert.html. goldin, claudia and roland fryer. 2006. information for graduate students on the job market. harvard university department of economics. http://www.economics.harvard.edu/graduate/jobmarket/. levine, david. 2002. david levine’s cheap advice: going on the job market. university of california at berkeley department of economics. http://faculty.haas.berkeley.edu/levine/cheap_advice.html#jobmarket. stanford university. 2006. ph.d. placement guide. stanford university department of economics. http://www-econ.stanford.edu/students/phd_placement_guide.pdf. u.s. news & world report. 2008. best graduate schools: economics. http://gradschools.usnews.rankingsandreviews.com/grad/eco/search http://gradschools.usnews.rankingsandreviews.com/grad/eco/search microsoft word sum04.8.10.04b.doc journal for economic educators • volume 4 • number 2 • winter 2004 the impact of college quality on tuition: a hedonic analysis young o. dimkpah, maxwell o. eseonu, and uchenna n. akpom * abstract this paper analyzes the impacts of college quality and location attributes on tuition rates among four-year private institutions in the united states. this study applies hedonic price techniques to estimate the implicit prices of quality attributes of colleges in the united states. the quality attributes of a college appear to be important determinants of tuition in the united states. introduction this study examines the impact of college quality on tuition rates among private four-year colleges in the united states. over the years the demand for higher education has been increasing; so also have tuition rates. many studies have focused on the effects of financial assistance on enrollment and recruiting decisions (parker and summers 1993). other studies emphasize the cost of providing higher educational services and the ways in which tuitions are set (johnson 1976). though most economists would agree that the provision of higher education is multifaceted, studies that have explored the effects of various attributes on the demand and supply of higher education are few. in their 1986 study, hartford and marcus investigated the effect of college features on tuition rates of private colleges using a hedonic approach. their study was limited to sample of colleges with enrollment of four hundred full time students or more. cohn, rhine, and santos (1989) referred to the multi-product features of higher education by stressing that degrees from two colleges may differ not only in teaching output but also in the image and prestige of the institutions. it then posits that when there are differences within educational products due to the differing features of the colleges, one would also expect tuition rates to differ. in a competitive setting, therefore, tuition rates would represent equilibrium between the offer curve of colleges and the marginal willingness of students to pay for college education. the ability of colleges to supply various education characteristics and the willingness of students to pay should determine tuition rates. however, distortions by various subsidies, grants, and financial assistance received by students may affect their marginal willingness to pay. * young o. dimkpah and maxwll o. eseonu, school of business, virginia state university; uchenna n. akpom, synectics associates. journal for economic educators • volume 4 • number 2 • winter 2004 2 in an attempt to keep pace with increases in the cost of providing educational services, private institutions that receive little or no grant money from the government find it necessary to raise tuition occasionally. in this instance, the combination of features each school provides will play a critical role in determining which institutions are hurt more by the increases in tuition. the tool of econometric analysis for this study is a hedonic approach. this approach is more informative in that it focuses on the combinations of attribute each institution should stress in its recruitment exercise to maintain a high level of student enrollment. for instance, if students are willing to pay more to attend an institution with low student/faculty ratio, then the college might do better stressing small class size in its recruitment and designing its offerings to achieve that size. in order to trim the cost of providing higher education, hedonic estimates provide an input into the decision of which attributes the institution should prune. if a low student/faculty ratio is important, then a decision to reduce faculty size given the current student population may not be appropriate. hedonic price theory hedonic price analysis has been used extensively in housing studies. other applications include automobile quality (griliches 1961) and the demand for clean air (murdoch and thayer 1988). it is assumed that the consumer’s utility function depends both on the quantity of the commodity consumed and the attributes offered by the commodity. the consumer seeks the optimal mix of the various attributes given his or her budget constraint. the tuition a student is willing to pay to obtain a college education is assumed to depend not only on the quantity of education desired but also on the characteristics of the particular institution, including the quality, size, age, location, and prestige of the school as well as the students’ characteristics. a harvard university education may therefore be different from a southeastern university education even though both are private colleges. similarly, a mercer university education at the macon campus is different from a mercer university education at its atlanta campus. students, therefore, may be willing to pay a higher tuition in order to obtain a harvard university education and less for a southeastern university education. likewise, students may be willing to pay a higher tuition to attend one campus and less for other campuses of the same college. assuming that tuition depends on the level of characteristics provided by an institution, tuition may then be written as a function of the characteristics determining tuition: ti = ti (zi) (1) where ti is tuition paid and zi are college attributes. a well specified regression function provides estimates of the relationships. holding all other factors constant, the implicit price of any particular attribute can be obtained from a linear relationship by partially differentiating the price function with respect to that attribute; hence: ti/ zi = pzi (2) where pzi is the implicit marginal characteristics price associated with a unit change in the characteristic zi. journal for economic educators • volume 4 • number 2 • winter 2004 3 empirical model in this study, the box-cox (1964) transformation method is used to estimate the impact of school quality, location, and student characteristics on tuition rates. this paper therefore presents an approach to understanding variations in private college tuition in the united states. many studies use linear and log-linear models to estimate statistical relationships in the demand for education; however, the choice of form is not based on much statistical reasoning. the problem with such constraints is that incorrectly specifying the functional form might cause biased estimates to be obtained. the box-cox transformation used in this study is of the form: ti( ) = + izi( ) + e (3) where ti( ), and zi( ) = the box-cox transformation: ti( ) = (ti 1)/ 0 = ln ti = 0 (3) zi( ) = (zi 1)/ 0 = ln zi = 0. is the constant, i are coefficients, and e is the error term, which is assumed to be normally distributed with mean zero and constant variance, 2 . this functional form yields various commonly used functional forms as special cases. regressions were estimated using a range of values for ranging form -2 to 2 in increments of 0.1. the best form on the basis of the maximum likelihood function was used to analyze tuition. the data data for this study are defined in table 1. the data include information about the location quality and student characteristics of more than 600 private four-year institutions accredited by the regional accrediting agencies in 48 states and the district of columbia. specialized institutions such as christian colleges and seminaries, music and art institutions, and culinary schools were excluded from this sample. colleges that do not charge tuition, or that charge a comprehensive charge that includes tuition, room and board, and fees, were also excluded. the major sources of data for this study are barron’s profiles of american colleges (2000) and peterson’s guide to four-year colleges (2000). more than one thousand private four-year institutions are listed in these sources, but only 684 satisfy our requirements. though a huge amount of information is provided by these sources, it should be pointed out that biases could exist since these are self-reported data. a comparison of these guides did not reveal significant differences. the dependent variable for this study is annual tuition and fees for the 1999-2000 academic year. the tuition was used without making adjustments for financial assistance to obtain a net tuition. some other studies have used tuition net of average financial aid for individual schools. the results have not been significantly different from studies using gross tuition. sixteen independent variables were used. the quality variables include gradstu, yearfd, hcomp, mcomp, facdoct, libsize, and stufac. journal for economic educators • volume 4 • number 2 • winter 2004 4 table 1. definition of variables city: 1 if college is located within 50 miles of a city with population of 100,000 or more. gradstu: proportion of graduate students. church: 1 if college is affiliated with a religious group. hcomp: 1 if college is ranked as highly competitive. mcomp: 1 if college is ranked as moderately competitive. libsize: number of books in library in thousands. facdoct: the percentage of faculty with doctorate degrees. stufac: student/faculty ratio. black: percentage of total student population that is black. studsize: total full-time enrollment at the college. landsize: land size in acres. pwomen: proportion of female students. yearfd: year the college was founded. if a result of merger, the year the oldest college was founded. neast: a ct, dc, de, ma, md, me, nh, nj, ny, pa, ri, vt. mdwest: ai, il, in, ks, mi, mn, mo, nd, ne, oh, sd, wi. west: az, ca, co, id, mt, nm, nv, or, ut, wa, wy. south: al, ar, fl, ga, ky, la, ms, nc, ok, sc, tn, tx, va, wv. fees: annual gross tuition. a 1 if college located in listed states, zero otherwise. we expect hcomp, mcomp, facdoct, gradstu, and libsize to have positive effects on tuition, while yearfd and stufac are expected to have negative signs. gradstu is a proxy for research activity taking place at the college. the availability of a graduate school also provides a student an opportunity to continue his or her studies beyond the undergraduate level without the hassles of applying to another school. yearfd is used as a proxy for the longevity of the college. an older college may have built a strong reputation over the years. this is expected to have a positive effect on its tuition. stufac is a measure of access to faculty by the students. this may not be the best measure since it does not necessarily reflect the average class size. we used it, however, because we could not obtain a better measure from our sources. facdoct measures the percentage of full-time faculty with terminal degrees. it is used here as a proxy for the quality of faculty at the institution. faculty experience would have been another good measure of faculty quality, but we were unable to obtain that information. the location variables, neast, mwest, west, and south, are included to measure if regional differences exist in the structure of tuition in the united states. other variables are church, black, studsize, landsize, and pwomen. results the results of the linear, log-linear, and the best functional forms are presented in table 2. the maximum likelihood estimates for the linear, log-linear, and best-functional forms were 6130, -6158, and -4657, respectively. based on a 2 test using the statistic -2ln(lo/la), where lo is the log likelihood for the null hypothesis and la is the log likelihood for the alternative hypothesis, the linear and log-linear functional forms were rejected at the 95 percent level of confidence. journal for economic educators • volume 4 • number 2 • winter 2004 5 table 2. hedonic equations for college tuition and marginal attribute prices variable linear log-linear best ( =0.1) estimates (t-value) city 642.502* 0.06429* 0.01614* (2.181) (2.795) (2.758) landsize 0.124 0.00001 0.000003 (1.248) (1.496) (1.476) facdoct 66.913* 0.00499* 0.00286* (8.954) (8.212) (8.318) mcomp 1194.435* 0.12200* 0.03054* (3.440) (4.511) (4.428) hcomp 4268.295* 0.27000* 0.07065* (7.674) (6.228) (6.395) church -848.471* -0.03460 -0.00960** (2.911) (1.520) (1.659) stufac -158.518* -0.01093* -0.00284* (5.029) (4.444) (4.540) black -40.651* -0.00394* -0.00099* (6.102) (7.572) (7.467) pwomen -11.510 -0.00030 -0.00009 (1.418) (0.468) (0.575) yearfd -5.888* -0.00126* -0.00032* (4.781) (4.858) (4.868) south -3062.486* -0.22900* -0.05897* (9.105) (8.736) (8.827) west 367.436 0.01862 0.00510 (0.730) (0.474) (0.510) mdwst -1656.226* -0.10600* -0.02782* (4.471) (3.676) (3.781) studsize -9.206 -0.00083** -0.00021** (1.544) (1.791) (1.782) gradstu -6.791 0.00014 -0.00004 (0.808) (0.210) (0.266) libsize 0.206 0.00005 0.000002 (1.551) (0.492) (0.596) r 2 0.607 0.566 0.573 f 63.371 53.706 55.159 ln l -6130.150 -6158.280 -4657.990* notes: dependent variable is annual tuition (t values). * significant at the 99 percent level of confidence. **significant at the 95 percent level of confidence. a value less than 0.001 dependent variable is annual tuition (t values). the best functional form for this study was obtained for the values of equal to 0.1, based on the maximum likelihood estimate. the results show variations in colleges attribute prices in the united states since the best functional form is nonlinear. journal for economic educators • volume 4 • number 2 • winter 2004 6 the r 2 for the best form is 0.57. nine of the explanatory variables were significant at the 99 percent confidence level. all significant variables had the expected signs. in addition, the magnitudes of all significant variables were reasonable. out of the seven quality attributes, five (hcomp, ncomp, facdoct, stufac, and yearfd) were significant at the 99 percent level of significance. only the presence of graduate students and library size are were insignificant. the presence of graduate students was assumed to attract a higher-quality faculty and students who plan to further their education beyond the undergraduate level. because of this, it was included as a quality variable. gradstu had a negative sign but did not appear to be a significant determinant of tuition. the variables hcomp and mcomp measure the competitive ranking of colleges by patterson’s guide. four categories were used ranging from most competitive to noncompetitive. the first two were combined to form hcomp, and the second two formed mcomp. the result indicated that improvement from moderately competitive to highly competitive status is associated with an increase in annual tuition. libsize indicates the size of the library in thousands of volumes held. a library is one of the most important academic facilities provided by almost every college. it is usually the center of both learning and research on campus. a college with a relatively large library should therefore be more attractive than one with none. this could explain the positive effect of libsize on tuition. the quality of a college is sometimes measured by the percent of faculty with doctorate degrees. an increase in the number of faculty with doctorate degrees is associated with increases in annual tuition. the effect of facdoct would be expected to vary depending on its current level. hence, there is a statistically significant positive relationship between the proportions of faculty with doctoral degrees and tuition. stufac measures the degree of contact between faculty and students. additional faculty per student means not only smaller classes but increased advisory time per student. the result shows an inverse relationship between student/faculty ratio and annual tuition. this may be a flawed measure because it may not necessarily capture the intended contact. some colleges are known to have average lower-level course class size of more than 50 students, even with low student/faculty ratios. student/faculty ratio is used because adequate information on average class size could not be obtained. the year in which the college was founded is represented by the variable yearfd. it measures the college’s experience in providing educational service. it is sometimes associated with the reputation of a college. the results show that tuition is positively related to the age of the college. this can be explained due to the implicit reputation built over the years. as a result of their age, these institutions have acquired huge experience and attracted huge endowments that supplement and subsidize tuition increases. among the location attributes, midwest and south are negatively significant at the 99 percent level compared to neast. a college located in the midwestern united states is associated with lower annual tuition than a college located in the northeastern region. similarly, colleges in the southern regions are associated with lower annual tuition rates compared to the northeast. this supports the view that regional differences exist in the structure of tuition in the united states. similar results have also been obtained by harford and marcus (1986). black measures the percentage of black students enrolled at the college. black enrollment is negatively associated with annual tuition. this could be interpreted in one of three ways. the first is that tuition is subsidized for black students. hence, they pay lower tuition than other students. the second is that the generally poor conditions of predominantly black colleges make them unable to provide desired attributes. this then forces them to reduce tuition in order to attract more students. the third is that black students face discrimination by some colleges that may use journal for economic educators • volume 4 • number 2 • winter 2004 7 high tuition to keep them out. religious affiliation is negatively related to tuition. this could be a result of higher external funding for church-affiliated institutions, which subsidizes tuition, or those schools’ inability to provide the desired aspects of education. landsize measures the size of a college in acres of land occupied. an increase in size seems to increase tuition. this could be capturing the demand for space and aesthetics of the campus. land size is usually associated with campus features such as parking, stadium, less crowding, and fraternity and sorority housing, which are generally considered desirable. conclusion the study utilizes a hedonic price analysis to estimate the implicit prices of quality attributes of colleges in the united states. the quality attributes of a college appear to be important determinants of tuition in the united states. the study shows that colleges and universities in the united states can compete on the basis of quality attributes. the results could be helpful in making tuition-setting decisions for colleges. it could also be used to design differential tuition policy. for instance, if the quality of one program in a college is significantly higher than for other programs, then tuition for that program could be set higher assuming other attributes are the same. the universities of michigan and virginia charge higher tuition for some of their popular programs than for others. potential students can also incorporate the results in comparing colleges when making their selection decisions. if tuition rates charged by two colleges were the same, the student would select the college that offers the best combination of desired attributes. references barron’s educational series. 2000. barron’s profiles of american colleges. 17th ed. new york: barron’s educational series. box, g.e.p., and cox, d.r. 1964. “an analysis of transformations.” journal of the royal statistical society, series b, 26: 211-252. cohn, e., rhine, s.l.w., and santos, m.c. 1989. “institutions of higher education as multiproduct firms: economics of scale and scope.” the review of economics and statistics: 284290. griliches, z. 1971. “hedonic price indexes for automobiles: an economic analysis of quality change.” in price indexes and quality change, edited by z. griliches. ma: harvard university press (pp. 55-87). hartford, j.d., and marcus, r.d. 1986. “tuition and u.s. private college characteristics: the hedonic approach.” economics of education review 5: 415-430. johnson, j.l. 1976. “setting tuition levels at public institutions: the case of the university of washington.” journal of higher education 47 (march/april): 125-239. murdoch, j.c., and tayer, m.a. 1988. “hedonic price estimation of variable urban air quality.” journal of environmental economics and management 15: 143-146. parker, j., and j. summers. 1993. “tuition and enrollment yield at selective liberal arts colleges.” economics of education review 12: 311-324. patterson’s guide to four-year colleges. 2000. efaw.pdf the role of core texts in history of economic thought by fritz efaw* abstract this paper compares the integration of core texts found in two widely used textbooks on the history of economic thought by examining the treatment of two well-known historical texts. the difference in approach between the two authors has pedagogical implications for the role of a history of thought course in the curriculum; in addition it echoes a much older and deeper debate over the use of core texts from the canon. i. introduction undergraduate degree programs in economics usually offer, and frequently require, a course in the history of economic thought. although instructors typically employ portions of core texts in these courses, the central course text is likely to be a general textbook on the subject in which successive economic thinkers are viewed as (1) comparable to natural scientists who explore previously undiscovered principles about economies and behavior of economic agents; or (2) creators of progressively superior "tools of analysis"; but always (3) best understood from the perspective of current economic theory. core texts are rarely integrated into textbooks except through short passages appearing in inserted boxes. this note compares the integration of core texts in two widely known books that do a better job than most-economic theory in retrospect, by mark blaug (1996), and development of economic analysis, by ingrid rima (1996). both books are lengthy, and perhaps better suited to graduate study, but can also be used in undergraduate courses. they differ in the degree to which they integrate core texts: blaug provides lengthy synopses of some major works, while rima offers multi-page passages from the same works together with brief summaries. i compare these two approaches by examining the treatment of two well-known historical texts. the first, from the eighteenth century, is adam smith’s description of division of labor in the wealth of nations; the second, from the twentieth century, is john maynard keynes'�discussion of uncertainty in an article related to his best known major work, the general theory. rima provides passages from both texts along with comments, while blaug gives a detailed synopsis of each book. both authors go into ideas in greater depth than most textbook writers in history of economic thought, but direct exposure of the reader to original texts varies considerably between the volumes. ii. core text vs. synopsis: a brief comparison book i, chapter 2, of smith's wealth of nations contains a description of a hypothetical pin factory. because the workers specialize in different tasks, they produce more pins together than they would without specialization. smith's story exemplifies a hypothetical but concrete instance of a theme he follows throughout the book. the story also serves as the starting point in a long and circuitous line of reasoning that will encompass an encyclopaedic description of capitalism and an enduring synthesis of economic thought at his time. it is worth reading because it is well known, because the point smith makes is important in his theories, and because it is a fine example of his writing. * associate professor of economics, department of economics university of tennessee at chattanooga 615 mccallie avenue chattanooga, tn 37403. email: fritz_efaw@utc.edu 57 58 rima presents most of this fairly short chapter in her book, followed by a much briefer explanation. blaug, by contrast, tantalizes the reader with a description of specifically this part of wealth of nations as "a beautiful example of eighteenth century prose," (blaug, 1996:35) but fails to reveal its beauty to the reader. when he does quote a section, it is to present a fairly abstract discussion of price determination, illustrated with an even more abstract supply-and-demand diagram, a conceptual device developed more than a century later. the advantage of blaug's approach is that it helps someone trained in twentieth century economics to gain an understanding of an eighteenth century writer in twentieth century terms. the disadvantage is that it fails to communicate the subtlety of smith's eighteenth century notions of market price and natural price. in 1937 john maynard keynes published an article in a leading economics journal, the quarterly journal of economics, summarizing his most important work, the general theory, published the previous year. the article draws on ideas keynes wrote about earlier in his life, and for some economists, it can be taken as a point of departure for understanding much of his work. it also contains some of keynes' best known and most frequently quoted lines. blaug does not conceal his low opinion of keynes' writing in the general theory, calling it "one of the most difficult books in the entire history of economics," full of "crabbed" prose, obscure formulations and digressions upon digressions" (blaug, 1996:651). as with wealth of nations, blaug provides a chapter-by-chapter synopsis of the general theory, followed by comments on how various later writers and schools of thought have adopted one chapter or another for emphasis. rima's treatment of keynes is similar to blaug's insofar as it traces the logic of keynes’ thinking in the general theory and gives attention to the variety of interpretations the work has spawned. her chapter on keynes, however, is anchored by two extended passages, one from near the beginning of the book, and the other from the journal article just cited. in each case the extended passage becomes the starting point for a discussion that follows. this allows the reader to have at least some direct exposure to keynes' writing in the context of the 1930s, if not the context of subsequent developments in economic theory. iii. historical digression: ancient and modern the difference in approach between the two authors considered here has pedagogical implications for the role of a history of thought course in the curriculum, but in addition it echoes a much older and deeper debate over the use of core texts from the canon. the pedagogical issue comes down to the fact that students invariably find core texts from the past difficult to read and understand. instructors and textbooks typically respond by pointing out that when students study these texts they develop skills associated with critical thinking, they become immersed in the tradition of the discipline, and they develop a deeper understanding of principles providing the basis of economic behavior. at the same time a textbook or course may either use core texts to focus the student's attention on historical context, or present the same text as anticipating subsequent developments in economic theory. the deeper debate recalls a divergence of views that took place at the time of the early development of economics as a social science in the seventeenth century, referred to at the time as the quarrel between the ancients and the moderns (see, e.g., swift [1697]). on one side of the debate stood renaissance humanists, who promoted study of ancient greeks and romans, along with an outlook on life that revered thinkers from the past. in the opposing camp were enlightenment modernists, who created new intellectual frameworks emphasizing science, progress, and the future. to proponents of science, knowledge was cumulative, improving over time by absorbing and replacing older ways of thought. scientists like copernicus, galileo, and kepler successfully challenged conventional beliefs in astronomy. harvey, huygens, and newton made new discoveries and applications in physiology and mathematics. whole new ways of thinking were developed by bacon, hobbes, and descartes. classic works were abandoned in favor of new ideas, thus depreciating the value of the humanities. from the opposing traditionalist perspective, the new knowledge of modern science had little to offer beyond mere system building and theorizing. rather than revealing useful insights, science produced only creative confusion. from their point of view, the humanities arrived at truth through works that remain alive over time. homer's portrayal of anger in achilles and sophocles' description of the tragic fall of oedipus showed insights into thoughts and emotions that remain unsurpassed. later writers could only add and elaborate employing modern settings and literary forms like the novel. these stood for the solidity of a longstanding tradition; the changing nature of scientific knowledge simply reveals its unfinished instability. an enduring legacy of the quarrel between the ancients and the moderns is the distinction in academe between the humanities and the sciences. by the nineteenth century the impact of science on the curriculum was clear, but its introduction for the sake of practical applied learning was balanced with preservation of classics, thought to ensure rigor and mental discipline. the problem in drawing this distinction, however, was that not all disciplines could be classified as neatly as astronomy and literature. philosophy, for example, sometimes looked like science, but at other times it more closely resembled literature. ideas about economics were presented in mathematical form by william petty and in literary form by bernard de mandeville. while mathematical reasoning has generally come to dominate economics, this dual character once present in all nascent social sciences continues a subterranean existence periodically brought to light by economists like donald mccloskey (1985) and warren samuels (1990). iv. conclusion if the goal of a course in history of economic thought is to have students learn to understand the development of economic theory as a more-or-less linear progression of ideas, then textbooks that single out particular contributions from past writers at the risk of distorting the overall vision of their authors is efficacious. use of core texts may even hinder this goal. but if other goals are admitted and even allowed to displace this one, then core texts are indispensable. two such alternative goals come to mind immediately--core texts expose students to the rhetorical style of economists, and core texts reveal economists grappling with immediate social and political debates of their times. the power of adam smith’s condemnation of monopoly as well as his detailed historical knowledge of money and trade are best revealed through his writing and not through a gloss from a subsequent author who understands him primarily in terms of later events and theories. the pressing concern that keynes shows for unemployment and the future of entrepreneurial capitalism in the context of the great depression is likewise best demonstrated by reading him as addressing those issues rather than as primarily a writer divorced from a specific historical context. references blaug, mark. 1996. economic theory in retrospect, 5th edition, new york: cambridge univ. press. keynes, john maynard. 1937. the general theory of employment, quarterly journal of economics 51. mccloskey, donald n. 1985. the rhetoric of economics. madison, wi: univ. of wisconsin press. rima, ingrid hahne. 1996. development of economic analysis, 5th edition, london: routledge. samuels, warren. 1990. economics as discourse. boston: kluwer. swift, jonathan. 1984 [1697]. a full and true account of the battle fought last friday between the antient and the modern books in st. james library. reprinted in angus ross and david wooley, eds., jonathan swift. new york: oxford press. 59 microsoft word foreign direct foreign direct investment in transition economies and european union membership: the case of hungary and poland kristin k. howell associate professor department of economics and finance university of north carolina at wilmington 601 south college road wilmington, nc 28403 (910) 962-3606 10 abstract foreign direct investment in transition economies and european union membership: the case of hungary and poland inflows of foreign direct investment (fdi) to the transition economies in central and eastern europe and the baltics have been relatively low since the fall of the iron curtain. this variable is considered one of the most important to international technology transfers and, thus, economic growth. along with other crucial characteristics of a country, such as monetary stability and open trade policies, a ahealthy@ growth rate of real gdp per capita is a prerequisite to membership in the european union. there is now somewhat of an uneasy relationship and even resistence to expansion between the european union and the transition economies. they have been unofficially categorized into several tiers according to their readiness for membership, with the czech republic, estonia, hungary, poland, and slovenia leading the pack. some already have special agreements in place. most of these countries have borrowed heavily in the past from the bank for international settlements, the world bank, the imf, and bilateral and private sources. in theory, these loans were meant to promote monetary and economic stability and eventually, access to private international capital markets and growth. there is some disagreement in the literature as to the effects of bilateral and multilateral aid on foreign direct investment. the goal of this study is to compare the effectiveness of the use these countries, specifically hungary and poland, made of their short and long-term loans from a variety of sources. impacts on fdi will be examined in order to judge the progress that has been made towards free markets, economic recovery, and european union membership. the conclusions are of interest to lenders and policy makers. 11 foreign direct investment in transition economies and european union membership: the case of hungary and poland introduction there have been unprecedented developments in eastern europe and the baltics since the late 1980's and there are now several tiers of transition economies, defined according to their potential as future european union (eu) members. to qualify, they must, as candidates have in the past, meet certain criteria concerning appropriate and stable inflation rates, budget deficits, government debt, interest rates, and exchange rates. the five countries that seem the most likely to have their eu membership applications accepted within two years are the czech republic, estonia, hungary, poland, and slovenia (see table 1). although they are the most economically advanced, many problems remain, such as the slow pace of privatization, inflation, currency devaluations, and low per capita income levels. these countries have also borrowed to varying degrees from multilateral (international monetary fund (imf) and world bank (wb)), bilateral, and private sources, especially after 1989. flows of aid, among other variables, have been found to positively affect inflows of foreign direct investment (fdi) to some degree, which is one of the stimuli of economic growth and, thus, future eu membership. objectives 12 the future success of the eu depends in part on continued and expanded access to capital markets, which hinges on existing debt of members. official and private loans to eu membership applicants over the years were meant to promote monetary and economic stability and the ability to attract international capital and, thus, to support smooth flows of trade and finance. this study considers the potential effects of transition economy borrowing from a variety of sources on foreign direct investment inflows, an indicator of technology transfers, competitive strength, and confidence in a country=s future development and success. other variables that reflect the ability of the countries to enter and benefit the eu, such as interest rates, exchange rates, real gnp per capita, export volume, inflation (cpi), and total debt service, were also included. the human development index (hdi), developed by the united nations, measures the level of poverty of a nation, or its economic well-being. it includes real growth (per capita gdp), education, and longevity and is also considered when making judgements about a country=s prospects as an eu member. the results of the overall study varied, as expected, due to the unique nature of these nations, the use each made of the funds, and the soundness of domestic policy. literature review much has recently been written concerning the benefits and costs of eastward expansion of the eu on both current and potential members (van brabant, 1998). future membership of transition economies depends on the resolution of a variety of economic and political problems (neal and barbezat, 1998). some authors have also questioned whether there are any real prospects of integrating these countries into the eu, due to the possible negative effects on the latter=s average 13 income and growth performance (baldwin, francois and portes, 1997). aid (with appropriate conditionality) is frequently discussed as exerting a positive effect on liberalization, stability, foreign direct investment, and thus, growth (tsikata, 1998). adherence to imf programs, for example, may reflect lower investment risks and inspire confidence in the sustainability of economic policies, often opening the door to other private and public loans (fischer, 1997). positive spillovers of increased fdi may also include increased exports, which improve the ability of the country to repay debts and lower its total external debt (world bank, 1999). external financing has also been viewed though, as a constraint on growth and development, due to increased ability to import (bird and rowlands, 1997). thus, the importance of appropriate conditionality leading to sound domestic economic policies make lender adjustment program reforms an ever more critical issue. if aid can promote fdi, which can successfully be channeled to contribute to competition and international technology transfers that the recipient country can adopt, positive economic effects are possible (gastanaga, nugent, and pashamova, 1998 and olofsdotter, 1998). this success depends on the ability of transition economies to overcome, in many cases, political resentment against foreign investment and slowed privatization efforts and, thus, encourage confidence in host country policies (sinn and weichenrieder, 1997). the model the empirical work in this paper involves afirst tier@ potential eu members chosen based on the availability of consistent data (1980-1997), namely hungary and poland. fdi was chosen as the dependent variable because it is widely regarded as an economic indicator of technology 14 inflows, investment confidence, and thus, growth potential, given aappropriate@ domestic policies. fdi is defined by the wb as ainvestment that is made to acquire a lasting management interest (usually ten percent of voting stock) in an enterprise operating in a country other than that of the investor (by residency), the investor=s purpose being an effective voice in the management of the enterprise. it is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments.@ the independent variables included multilateral lending (imf and wb) with conditions to reform, bilateral loans between the governments, and private sources of funds (usually commercial banks without adjustment programs). other variables were real gnp per capita, exports, exchange rates, interest rates, prices (cpi), population, and the total debt service to exports ratio. all debt represents external obligations of the public sector or private debt that is guaranteed by the public entity. it is in the form of millions of dollar flows or disbursements, or the amount of aid a country received in a given year. imf credit represents repurchase obligations with respect to all uses of imf resources, excluding those resulting from drawings in the reserve tranche. bilateral lending represents loans from governments, including from central banks and direct loans from official export credit agencies. debt from private creditors includes bonds and commercial bank lending, as well as credits from manufacturers, exporters, and other suppliers of goods with no related domestic economic restructuring programs. all data used was from the world bank debt tables and imf international statistics. the coefficients in the following equation were originally estimated for each country using time series processor (tsp) for ordinary least squares (ols) regression analysis: 15 rfdit = _0 + _1imft-1 + _2wbt-1 + _3bilatt-1 + _4privt-1 _5xgst-1 + _6 er + _7 int + _8 cpi + _9pop + _10tds _11rgpct + _t where rfdi = real foreign direct investment, imf = imf lending, wb = world bank lending, bilat = bilateral lending, priv = private lending, xgs = real annual export volume in millions, of dollars, er = the exchange rate (foreign currency per dollar/period average), int = annual demand deposit interest rate, cpi = consumer price index, period average, pop = mid-year population estimate in millions, tds = total debt service to exports ratio (debt service ratio), rgpc = real gnp per capita, and _ = randomly distributed white noise error term. lending variables were initially lagged one year because imf and wb agreements usually take at least a year to negotiate, implement, and exhibit results, while other variables may impact the economy more quickly. the null hypothesis is that there is no significant relationship between the different flows of lending, the other domestic variables, and real foreign direct investment. it was expected that various forms of lending, coupled with aappropriate@ conditionality and domestic reforms would, over an intermediate time period (one to three years), promote capital inflows and, thus, economic strength. a test for autocorrelation properties (error terms not randomly distributed) revealed a nonstationarity problem and the need for first differencing of the dependent variable. these results indicated autoregressive components in the series and, thus, the need for ar terms in the least squares equation to account for the autocorrelation (correct for serial correlation of disturbances) 16 found in the models and to provide efficient estimates. first differencing is also a method for dealing with multicollinearity (explanatory variables related). results the regression results (with computed t-statistics in parentheses below the estimated coefficients and the number of lags for each variable in parentheses beside the estimate) are presented in table ii. the calculated durbin watson statistic was compared to the durbin=s h statistic (required when any form of the dependent variable (ar) is used as an independent) and was found to be nonsignificant at the .05 level, reflecting freedom of the residuals from first order serial correlation. imf lending had a significant and positive effect on real foreign direct investment in hungary. apparently, during this test period (1980-1997) hungary was able to take advantage of imf funds, which increased dramatically between 1991 and 1995, and adjustment programs within a very short time and improve its prospects for development. for poland these results were negative, probably due in part to the fact that poland only borrowed from the imf between 1990 and 1994. it may also be that the one period lag was not enough time for poland to use these funds appropriately or that the amount or the conditionality were inappropriate. wb lending showed mixed results, with positive impacts in poland (loans began only in 1990). the wb effect was nonsignificant in hungary, despite many years of consistent borrowing. bilateral lending also reflected mixed effects (positive in hungary and negative in poland) on real fdi by the first year. private sources of credit proved to have positive effects in hungary and 17 nonsignificant impacts in poland. nonsignificance may indicate inadequate amounts of funds, large debt ratios, and appreciation pressures of increasing inflows of foreign investment on the currency value. the funds may have been channeled into areas other than export promotion and reflect the overregulation of the government of the private sector. other variables showed mixed results depending on the level of development and domestic economic and political policies. conclusions it may be concluded that development financing through the imf, the wb, and bilateral and private sources has affected the growth potential of these central european countries in most cases. in hungary, imf, bilateral, and private lending had positive effects on fdi, an important indicator of the success of aid and the stage of development. only loans from the wb during this period did not impact fdi flows significantly. much of the literature has found positive links between imf stabilization programs, investment flows, and growth. the positive results for bilateral loans may have been due to the small volume of the funds needed, domestic stability, and open trading policies already in existence. the confidence that aid inspired in the private capital markets apparently led to international investment inflows that contribute to technology, competition, and growth. after years of negative or slow growth, hungary showed strong gdp growth of 5.2% in 2000, although absolute gdp was still below its 1989 level. its debt service ratio has been dramatically higher than poland=s for many years, although reduced quite a bit in 1999 (26.6%). in the last few years, 18 hungary has managed to attract more foreign direct investment than any other east european country, due mostly to privatization advances and other economic reforms. in poland, only wb loans produced a positive link to fdi inflows, while imf and bilateral lending actually made negative impacts. the wb focus is usually on structural reforms and on reducing an inward orientation to trade. positive results may reflect that the resources were used efficiently in terms of amounts, timing and for the aappropriate@ development projects, given the country=s state of development. negative imf results suggest too aharsh@ conditionality or negative spillover effects. the negative impact of bilateral lending may support criticisms of bilateral loans lacking any enforcement of domestic reforms and for having political motivations. despite the negative imf relation to fdi, poland was attracting a larger volume of fdi than hungary by 1999. this may be due to great strides in privatization, a relatively stable currency, low debt service, and gdp growth (4% in 2000) encouraging confidence in an open investment climate. poland=s hdi rank (38 out of 174 countries in 1999) is somewhat higher than that of hungary and rose more rapidly in comparison to hungary=s level of improvement (standard of living). other explanatory variables also yielded mixed, and often surprising, results, probably due to the extremely divergent economic and political conditions in the countries. it is therefore not possible, as usual, to conclude that all aid contributes positively to fdi and growth. development impacts of loans and adjustment depend on socio-economic structure and the nature of the stabilization program. the recipient government must be willing and able to put the funds to efficient use and overcome resentment towards foreign direct investment, which slows privatization. varying maturities, timing of disbursements, realistic exchange rates, and types of 19 exports also play a role. it must also be kept in mind that real fdi alone is not an adequate predictor of the country=s progress and success potential as an eu member. in general though, the central and eastern european countries, especially hungary and poland, have shown dynamic progress with potential for continued growth. membership in the eu should prove beneficial to these nations by reducing investment risks and raising real incomes. much of their progress so far has been driven by the prospect of joining and thus, the need to adhere to the eu=s requirements. criteria for joining the eu have been objective and strict, most recently including budget deficits, government debt, inflation rates, long-term interest rates, and exchange rates to be held to specific maximums or margins. it is important to continue efforts to cooperate internationally to achieve long-term reforms, such as those related to open trade policies, export development, debt service reduction, and increased flows of technological know-how. improved financial market access and consistent private investment growth, often linked to multilateral loans, are important for successful transitions to market economies and eu membership. decisions of policy makers and official and private lenders that result in efficient and humane use of funds depend on understanding these effects. 20 t a b l e i – b a s ic c o u n t r y f a c t s – 1997 & 1999 h u n g a r y 1999 1997 p o l a n d 1999 1997 c z e c h r . 1999 1997 e s t o n ia 1999 1997 s l o v e n ia 1999 1997 h d i r a n k * 36 47 38 44 33 36 44 54 29 33 g n p per cap (u s $) 11,430 2,372 8,450 1,926 13.018 3,329 8,355 2,984 15,977 4,350 d e b t s e r v ic e r a t io * * 26.6 29.7 20.4 6.1 10.3 14.1 13.2 1.4 5.8 3.9 u n e m p l o y m e n t r a t e 7.1 8.7 13.9 11.5 8.8 4.7 12.3 10.0 9.2 7.1 e x p o r t s (% o f g d p ) 53.0 45.0 26.0 26.0 64.0 58.0 77.0 77.0 53.0 57.0 n e t f d i (m il. o f $) as % g d p 4 4.7 9.6 5.8 .9 * u .n . h um an d evelopm ent index (h d i) rank out of 174 countries – all im provem ents over previous years ** d e b t s e r v ic e r a t io (debt service as % of exports of goods and services) s o u r c e s : u .n . h um an d evelopm ent r eport 2001 21 table ii ols regression results dependent variable: real fdi, 1980-1997 indep. var. hungary poland constant -45.49 (-8.01) 13.05 (3.52) imf .11 (2.17)** -1.38(-1) (-2.68)** wb na 1.58(-1) (1.58)* bilat .24 (4.92)*** -.003(-1) (-3.65)*** priv .05(-1) (5.61)*** na xgs na .005 (3.58)*** er na -.001 (-2.83)*** int 1.33 (8.06)*** na gnp na -.001(-1) (-2.60)*** ar (1) ma(1) -.85 -.94 -.68 r2 .88 .68 f 18.67 5.64 t stats: *** = signif. at 1%, ** = at 5%, * = at 10% na = nonsignificant variable 22 references baldwin, richard e., joseph f. francois, and richard portes, aeu enlargement small costs for the west, big gains for the east,@ economic policy, vol. 24, april 1997, pp. 127-176. bird, graham and dane rowlands, athe catalytic effect of lending by the international financial institutions,@ world economy, vol. 20, no. 7, november 1997, pp. 1937-1948. bjork, james, athe uses of conditionality: poland and the imf,@ east european quarterly, vol. xxxix, no. 1, march 1995, pp. 89-119. business week, apiling into central europe,@ july 1, 1996, pp. 42-44. economist, the, aeurope=s mid-life crisis,@ may 31, 1997, pp. 3-18. federal reserve bank of new york. atreasury and federal reserve foreign exchange operations.@ federal reserve bulletin, monthly and quarterly reviews, 1970-1999. fischer, stanley, aapplied economics in action: imf programs,@ aea papers and proceedings, vol. 87, #2, may 1997, pp. 23-27. gastanaga, victor m., jeffrey b. nugent, and bistra pashamova, ahost country reforms and fdi inflows: how much difference do they make?,@ world development, vol. 26, no. 7, july 1998, pp. 1299-1314. harrigan, jane, areview article-the bretton woods institutions in developing countries: betes noires or toothless tigers?,@ world economy, vol. 19, no. 6, november 1996. international monetary fund, international financial statistics (washington, dc: international monetary fund, 1970-1999). 23 mussa, michael, aimf surveillance,@ aea papers and proceedings, vol. 87, no. 2, may 1997, p p . 28-31. neal, larry and daniel barbezat, the economics of the european union and the economies of europe (ny: oxford university press, 1998). olofsdotter, karin, aforeign direct investment, country capabilities and economic growth,@ weltwirtschaftliches archiv, vol. 134, no. 3, 1998, pp. 534-547. sinn, hans-werner and alfons j. weichenrieder, aforeign direct investment, political resentment and the privatization process in eastern europe,@ economic politics a european forum, vol. 24, april 1997, pp. 179-210. taylor, lance, aeditorial: the revival of the liberal creed -the imf and the world bank in a globalized economy,@ world development, vol. 25, no. 2, 1997, pp. 145-152. tsikata, t.m., aaid effectiveness: a survey of the recent empirical literature,@ imf working papers (washington, dc: imf, 1998). united nations development programme. human development report 1999 (new york: oxford university press, 2001). united states embassy, u.s. department of commerce, central and eastern european information center, acountry commercial guides for hungary, poland, czech republic, estonia, and slovenia,@ 1996-1999. van brabant, jozef m., athe implications of widening for third countries,@ comparative economic studies, xxxx, no. 3, fall 1998, pp. 104-132. van brabant, jozef m., aintegrating the transition economies into the eu framework,@ 24 comparative economic studies, vol. 30, issue 3, fall 1998, pp. 1-5. world bank. world development reports (new york: oxford university press, 1970-1999). 25 25 | journal for economic educators, 14(1), summer 2014 25 measuring up: assessment in microeconomics jill k. hayter1 and carolyn f. rochelle2 abstract appropriate assessment is of major importance for universities today. many faculty perceive assessment as already occurring through grade assignment. this paper investigates grades versus knowledge of learning objectives as forms of assessment. by analyzing the relationship between examination questions and post-test comprehension of learning objectives in principles of microeconomics, this study tests differences in proportions of correct responses from the two evaluation methods. for some learning objectives there are statistical differences between the two proportions but insignificant differences for the others. these mixed results demonstrate exam questions and learning objective post-test questions are not necessarily equal measures of student learning. keywords: grades versus assessment, learning objectives, economic education jel classification: a20, a22, i21 introduction assessment of learning is of major importance for universities today. for example, business schools seeking aacsb accreditation or reaffirmation must implement the assurance of learning standards, often referred to as assessment. in the past, grades and academic performance have been used as the accepted measure of student success in various disciplines including economics (elzinga and melaugh 2009), accounting (jones and fields 2001), and business statistics (rochelle and dotterweich 2007). recently, however, administrators have challenged whether a student’s course grade is an adequate measure of learning. as part of the assessment process, institutions have developed learning objectives for individual courses as well as learning objectives at the program level. while faculty members often contend that course grades are an adequate measure of learning, recent views of assessment emphasize that grades, while potentially correlated to learning objectives, are not measures of learning objectives themselves (carnegie mellon 2012). 1 assistant professor of economics, department of economics and finance, east tennessee state university, johnson city, tn 37614 2 lecturer of economics, department of economics and finance, east tennessee state university, johnson city, tn 37614 26 | journal for economic educators, 14(1), summer 2014 26 advocates for assessment have several arguments against using grades as a measure of achievement. gloria rogers (2003) states that grades merely represent how well a student met the course expectations and requirements. grades can vary by differences in course content and grading policies among professors teaching the same course. rogers’ argument that course content is not the same across faculty members, however, fails to consider a program that has common course learning objectives already in place. while different methods professors use in calculating a student’s final grade may be a concern for studies that only use final grades as a measure of achievement, professors can tell a great deal about the level of student understanding from looking at a raw exam, quiz, or homework grades. despite the recent emphasis on using learning assessments as measures of achievement, some faculty members have recognized the grading process as a potential assessment tool. walvoord and anderson refer to grading as “…the process by which a teacher assesses student learning through classroom tests and assignments, the context in which good teachers establish that process, and the dialogue that surrounds grades and defines their meaning to various audiences” (1998, 1). walvoord and anderson provide practical ways for teachers to evaluate learning outcomes in their classrooms through the grading process and state that when faculty use the grading process as a means of assessment, they “…maintain maximum faculty control over curricular content; over the teaching, learning, and grading process in classrooms; and over the tests, assignment, criteria, and standards by which faculty assess student learning” (1998, 154). this study contributes to the economic education and assessment literature by analyzing the relationship between performance on examination questions and knowledge of learning objectives as measured by a post-test of course learning objectives in principles of microeconomics at a regional university with an enrollment of approximately 15,000 students. the course learning objectives were related to specific exam questions covering a unique learning objective. to the authors’ knowledge this is the first study that seeks to provide empirical evidence on the assessment versus grades debate by examining knowledge of learning objectives. previous literature a number of studies have examined student performance in economics courses. marburger (2001, 2006) used exam scores to analyze performance. browne et. al. (1991) examined performance by utilizing student scores from a test of understanding college economics (tuce). elzinga and melaugh (2009) used final letter grade in the course to examine performance. these studies provide a foundation for analyzing student performance in economics and include several different ways of measuring performance. however, there is a paucity of literature on the best measurement(s) of that performance. over recent years, faculty members have increasingly gathered assessment data in their classrooms, but have failed to see any significant improvement in student learning (marchese 1999). faculty are often concerned with the time it takes to conduct learning assessments. often assessment is performed through the use of rubrics that are lengthy and wordy. baryla et. al. (2012) examined the costs and data quality associated with complex, lengthy rubrics. using 27 | journal for economic educators, 14(1), summer 2014 27 factor analysis and data from more than 1,400 oral communications student rubrics with a total of 49 criteria, they investigated whether numerous criteria assessed the same item. results indicated that at most seven of the 49 evaluation criteria were significant. these findings suggest that the assessment process is already more complex and time consuming for faculty members than is necessary. this paper extends the economic education and assessment literature to investigate the relationship between examination questions and comprehension of learning objectives in principles of microeconomics courses at a mid-sized regional university. using data on specific exam questions and knowledge of learning objectives as measured by a post-test given at the end of the semester, this study seeks to provide empirical evidence towards resolving the grades versus assessment debate. while student grades are not directly analyzed, grading is examined in by considering a subset of examination questions related to each learning objective. by matching the learning objectives to specific exam questions, the authors compare the proportion of correct responses on examination questions for a specific learning objective to the proportion of correct responses on the learning objective post-test for the same learning objective. as significant resources are allocated each year to assessment, the findings of this study may be of particular interest to faculty members and college administrators in search of a more efficient means to conduct assessment of learning objectives in the classroom. data the data set was constructed from two principles of microeconomics courses, one from spring 2011 and one from fall 2011, taught by the same professor. the students enrolled in these courses were primarily freshman and sophomore pre-business majors. all business majors (accounting, economics, finance, management and marketing) at this university are required to take principles of microeconomics and earn a grade of a c or better. there are no prerequisites for taking the principles of microeconomics course although most students choose to take principles of macroeconomics before taking principles of microeconomics. the two classes met twice a week for eighty minute class meetings and were similar in size. students enrolled in either the spring or fall principles of microeconomics course were evaluated on a combination of exams (75% of final grade) and quizzes (25% of final grade). although quiz grades were used in calculating the student’s final grade, this study only includes exam and learning objective posttest questions in the analysis. the economics department has five common learning objectives in place for principles of microeconomics. learning objectives are defined as concepts that students should know upon completion of the course. the five learning objectives for principles of microeconomics are described below.  learning objective 1: use the marginal cost-benefit model for decision-making.  learning objective 2: use the supply-demand model to demonstrate the effect of various events on market price and quantity traded.  learning objective 3: understand, measure, and apply the various elasticity concepts. 28 | journal for economic educators, 14(1), summer 2014 28  learning objective 4: define, recognize the causes of, and provide potential solutions to the market failures associated with externalities, common resources, and public goods.  learning objective 5: use economic models of costs and revenues to make optimal business decisions in various market structures. at the end of each semester, students were given a ten question learning objective posttest related to the five learning objectives. according to bloom’s taxonomy of cognitive skills, each learning objective had one question that was classified as using lower-order thinking skills and one question that was classified as using higher-order thinking skills (anderson et. al. 2001). students were informed that they would receive extra credit, the only such opportunity for the semester, for each question answered correctly on the learning objective post-test. with the university plus/minus grading system, many students were at the margin for a specific grade, making extra credit especially attractive. three forty question examinations were given each semester. utilizing information from all three exams allowed the mapping of 240 exam questions (120 questions per semester) to the corresponding learning objective. in the instance that exam questions required knowledge of more than one learning objective, the exam question was mapped to the most recently covered learning objective. for this reason, very few exam questions were mapped to the first learning objective, “use the marginal cost-benefit model for decision-making,” since this concept is incorporated into most topics in microeconomics. exam questions and the corresponding learning objective questions were all multiple choice and were similar in level of difficulty according to bloom’s taxonomy (anderson et. al. 2001). the final data set includes only those students who had taken all three exams and the learning objective post-test: 182 total students with 89 students from spring 2011 and 93 students from fall 2011. table 1 provides a breakdown of the aggregated number of questions per exam that correspond to each learning objective. table 1: aggregated number of exam questions mapped to learning objectives exam1 exam 2 exam 3 learning objective 1 3 learning objective 2 42 learning objective 3 32 learning objective 4 6 61 learning objective 5 16 80 n 80 80 80 differences in student competency based on exams versus the learning objective posttest were measured by aggregating all students’ responses on exam questions for each specific learning objective and by aggregating all students’ responses on the learning objective post-test for each specific learning objective. then, responses for all exam and learning objective post-test 29 | journal for economic educators, 14(1), summer 2014 29 questions were divided into correct and incorrect answers. finally, the proportions of correct answers for exam questions and learning objective post-test questions were calculated. table 2 shows the aggregated responses that were obtained for each learning objective. table 2: aggregated responses for exam and assessment questions exam questions assessment questions total responses # correct proportion correct total responses # correct proportion correct learning objective 1 271 203 0.749 364 269 0.739 learning objective 2 3826 2833 0.740 364 229 0.629 learning objective 3 2920 1976 0.677 364 269 0.739 learning objective 4 6119 4724 0.772 364 266 0.731 learning objective 5 8704 6331 0.727 364 236 0.648 methodology and empirical results in order to determine if significant differences exist in the proportions of correct responses from the two evaluation methods, a z test for the difference between the two proportions was performed for each learning objective. a z test was chosen because the procedure readily identifies any significant differences, including the direction of the differences. the following hypothesis was tested for each of the five learning objectives: h0: pcorrect exam questions = pcorrect assessment questions h1: pcorrect exam questions ≠ pcorrect assessment questions table 3 presents the results from the z tests. as can be seen from table 3, the results of the z tests are mixed. whether a difference in proportions exists depends on the individual learning objective tested. where significant differences are found, the direction of the differences varies with the specific learning objective. table 3: results of z test for the difference between two proportions exam proportion correct assessment proportion correct difference in proportions z score learning objective 1 0.749 0.739 0.010 0.287 (.7739) learning objective 2 0.740 0.629 0.111 4.576*** (.00001) learning objective 3 0.677 0.739 -0.062 -2.41* (.0160) 30 | journal for economic educators, 14(1), summer 2014 30 learning objective 4 0.772 0.731 0.041 1.816 (.0694) learning objective 5 0.727 0.648 0.079 3.305** (.0010) notes. numbers in parentheses are p values. *p < .05; **p < .01; ***p < .001 learning objectives with no significant difference at a significance level of .05, both learning objectives one and four show no evidence of a difference in proportions between correct student responses from exam questions for that learning objective and the two learning objective post-test questions pertaining to the same learning objective. learning objective one is unique in that there were few exam questions mapped to this objective. as mentioned previously, this is because of the nature of learning objective one. the learning objective post-test questions and exam questions used to evaluate learning objective one were very similar, and the conclusion of no significant difference is quite possibly indicative of this and not a surprising finding. alternatively, the much larger number of exam questions for learning objective four allows for a more thorough evaluation of the students’ knowledge of the course material related to this learning objective. some questions tested very basic understanding while others required more advanced knowledge as well as higher order application. it is encouraging that there is no significant difference in proportions of correct responses with the two learning objective post-test questions and the more numerous exam questions for learning objective four. learning objectives with significant differences at a significance level of .01, both learning objectives two and five find that students have a significantly higher proportion of correct exam questions than learning objective post-test questions. the remaining objective, learning objective three, shows the reverse sign for the difference in proportions. at a significance level of .05, students have a significantly lower proportion of correct exam questions than correct learning objective post-test questions. these mixed results suggest exam questions and the learning objective post-test questions are not equal measures of knowledge on course content. one potential explanation for the difference in proportion of correct exam questions and proportion of correct learning objective post-test questions is the deterioration of learning. if deterioration of learning is occurring, then we should see no difference in proportions between correct student responses from exam questions and the two learning objective post-test questions pertaining to learning objective five. this is because exam three consisted only of questions related to learning objective five, and the learning objective post-test was given on the same day. additionally, one would expect differences in the proportions of correct exam questions and the proportion of correct learning objective post-test questions for all other learning objectives since students were tested over those learning objectives in exam one and exam two. our findings show significant differences with respect to learning objective five; although for two of the learning objectives where we would expect differences to exist there are none. these findings do not support the deterioration of learning hypothesis. 31 | journal for economic educators, 14(1), summer 2014 31 conclusion this study seeks to provide empirical evidence for the assessment versus grades debate by analyzing the relationship between performance on examinations and knowledge of learning objectives as measured by a learning objective post-test in principles of microeconomics courses. results from the statistical analysis are mixed. for learning objectives one and four, there is no evidence of a difference in proportion of correct answers of learning objective versus exam questions. additionally, for learning objectives two and five, the proportion of correct answers is higher for exam questions than the corresponding learning objective post-test questions. finally, for learning objective three, the proportion of correct answers is higher on the learning objective post-test questions than the exam questions. further empirical research is needed in the grades versus assessment arena. had results consistently shown no significant differences in the proportion of correct exam questions and the proportion of correct learning objective post-test questions, it would appear that assessment could be taking place through examinations. however, since there are significant differences for three of the five learning objectives, there is no evidence that exam questions and learning objective post-test questions are equal measures of student learning of course content. these mixed results suggest a need for caution when developing assessment instruments and suggest that additional research is needed. additional research includes tracking individual student responses on exam questions and post-test questions. future research also includes additional analysis of deterioration of learning and analyzing student paired data to examine if students who had not grasped some of the more difficult concepts in the beginning stages of the course had gained further understanding of them by the end of the course. references anderson, l. w., krathwohl, d. r., airasian, p.w., cruikshank, k. a., mayer, r. e., pintrich, p. r., raths, j. and wittrock, m.c. (eds.). 2001. a taxonomy for learning, teaching, and assessing: a revision of bloom’s taxonomy of educational objectives. abridged ed. addison wesley longman, inc.: 31. baryla, ed, gary shelley, and william trainor. 2012. “transforming rubrics using factor analysis.” practical assessment, research & evaluation 17(4). http://pareonline.net/getvn.asp?v=17&n=4. browne, neil m., john hoag, mark wheeler, and nancy boudreau. 1991. “the impact of teachers in economic classrooms.” journal of economics 17: 25-30. carnegie mellon faculty. 2012. “assessment examples and tools.” enhancing education. http://www.cmu.edu/teaching/assessment/index.html. elzinga, kenneth, and daniel o. melaugh. 2009. “35,000 principles of economics students: some lessons learned.” southern economics journal 76(1): 32-46. jones, jefferson p. and kent t. fields. 2001. “the role of supplemental instruction in the first accounting course.” issues in accounting education 16(4): 531-547. marburger, daniel r. 2001. “absenteeism and undergraduate exam performance.” journal of economic education 32(spring): 99-109. http://pareonline.net/getvn.asp?v=17&n=4 http://www.cmu.edu/teaching/assessment/index.html 32 | journal for economic educators, 14(1), summer 2014 32 ———. 2006. “does mandatory attendance improve student performance?” journal of economic education 37(spring): 148-155. marchese, t. 1999. “assessment today – and tomorrow.” change 31.5 (september): 4. rochelle, carolyn f., and douglas dotterweich. 2007. “student success in business statistics.” journal of economics and finance education 6(1), summer. rogers, gloria. 2003. “do grades make the grade for program assessment? assessment tips with gloria rogers.” communications link fall/winter: 8-9. walvoord, barbara e., and virginia j. anderson. (1998) 2010. effective grading: a tool for learning and assessment. san francisco: jossey-bass. microsoft word jeewin05k.doc journal for economic educators • volume 5 • number 1 • winter 2005 1 cross elasticity of supply: seldom heard of and seldom taught anthony j. greco * abstract this paper focuses on the cross elasticity of supply concept and incidentally on the cross elasticity of demand concept. the author reviews a body of contemporaneous and older textbooks in intermediate microeconomics and industrial organization/public policy and finds that cross elasticity of supply is and has been seldom discussed in such textbooks, while cross elasticity of demand tends to be discussed much more frequently. the author summarizes the discussion afforded to both cross elasticity of demand and cross elasticity of supply in intermediate microeconomics and industrial organization texts, pointing out the difficulties and limitations relative to these concepts in an attempt to ascertain why so much more coverage is given to cross elasticity of demand. although some plausible explanations for the neglect of cross elasticity of supply are uncovered, future research may offer additional explanations. introduction nearly all students enrolled in intermediate microeconomics classes and many enrolled in principles of microeconomics classes are exposed to the concept of the cross elasticity of demand. they learn that the coefficient of the cross elasticity of demand is equal to the percentage change in quantity demanded of one good divided by the percentage change in the price of another good. that is, they learn that the coefficient of cross elasticity of demand measures the response in the quantity demanded of one good to a change in the price of a different good. they learn further that the sign of this coefficient indicates a certain possible relationship between these two goods, a positive coefficient suggesting a substitute relationship and a negative coefficient a complementary relationship. the establishment of a substitute relationship in this manner can be helpful, students are taught, in the delineation of a market—that is, in the identification of firms that are competitive sellers within a given market. however, not all of the above students will necessarily be exposed to the concept of cross elasticity of supply. while the aforementioned cross elasticity of demand concept measures substitutability or interchangeability through the eyes of consumers or purchasers, the cross elasticity of supply measures the same through the eyes of producers or suppliers. here again, the sign of the derived coefficient of cross elasticity of supply, found by dividing the percentage change in quantity supplied of one good by the percentage change in the price of a different good, is suggestive of a given type of relationship between the two goods in question. however, the respective signs of the coefficient of cross elasticity of supply are interpreted exactly the opposite as are the signs of the coefficients of cross elasticity of demand. specifically, a positive coefficient of elasticity of supply suggests that the two goods are complementary in supply—that is, through the eyes of the suppliers of the two distinct goods. on the other hand, a negative coefficient of elasticity of supply suggests a substitute relationship between the two goods in the eyes of the suppliers of these two goods. the establishment here of a substitute relationship again can be helpful in the delineation of the true sellers within a given market. * anthony j. greco, department of economics and finance, university of louisiana – lafayette, lafayette, louisiana 70504-4570, ajg1979@louisiana.edu. journal for economic educators • volume 5 • number 1 • winter 2005 2 in fact, exclusive reliance on the cross elasticity of demand coefficient to the exclusion of the cross elasticity of supply coefficient may result in an improper delineation of the relevant product market. for example, one would not be inclined to include producers of right-handed baseball gloves and producers of left-handed baseball gloves in the same industry on the basis of the cross elasticity of demand coefficient. clearly, buyers of these two types of gloves would not consider the gloves to be interchangeable in use. however, respective suppliers of these different types of gloves may consider themselves to be in the same industry because they could easily shift resources away from the production of their type of glove toward the production of their rivals’ type of glove in response to an increase in the price of the latter type of glove. the coefficient of cross elasticity of supply, of course, addresses this issue of producer substitutability and, hence, makes the delineation of markets a somewhat more accurate process. yet, as mentioned above, many undergraduate students of economics are unaware of the cross elasticity of supply concept simply because it is not being taught to them. further, it is hardly ever mentioned in current industrial organization and public policy texts or in intermediate microeconomics texts. perhaps this is true because authors of such texts believe that their readers can infer the concept of cross elasticity of supply from the authors’ discussion of cross elasticity of demand. that is, perhaps the authors are trying to “economize” on space within their texts. this seems rather unlikely since most of these same authors do not even mention the cross elasticity of supply concept in even as much as a footnote. this would lead one to believe that authors of these texts omit a discussion of the cross elasticity of supply either because they feel that the concept is totally irrelevant or because they have never been exposed to it themselves. in all likelihood, the former of these two alternatives applies. granted that the whole idea of elasticity in economics is, well, a rather “elastic” or flexible concept in and of itself, capable of being applied to a whole host of pairs of related variables, the cross elasticity of supply would seem to be one of the most useful and conventional of such elasticity concepts, one that at least is worthy of mention in an industrial organization or intermediate microeconomics text. it has, after all, been used rather extensively, although not consistently, by the courts and antitrust agencies as one of the criteria on which to delineate appropriate product markets in the application of antitrust law. more will be said of this subsequently. this article reviews the exposure given to the concept of cross elasticity of supply in industrial organization and intermediate microeconomics texts, as well in other academic discussion, over an extended period of time. further, the paper briefly alludes to the use of the concept of cross elasticity of supply in the application of antitrust law by the courts and the antitrust agencies over the years in an attempt to understand the seemingly general neglect of this concept. review of current textbooks in an attempt to determine the extent of exposure given by current upper-level economic textbooks to the concept of cross elasticity of supply, the author examined 13 contemporary intermediate microeconomics texts and 17 older intermediate microeconomics texts as well as three contemporaneous and 18 older industrial organization/governmental policy textbooks. although this grouping of textbooks does not represent the totality of texts of these types, the author did make an attempt to examine all such texts by contacting all publishers of economics textbooks through phone calls or direct mail or by checking appropriate websites. the number of books actually examined by the author, though not definitive, is, he feels, adequately representative of the treatment accorded the cross elasticity of supply concept in upper-level economic textbooks. a listing of all the texts reviewed can be obtained from the author. as the reader is, no doubt, aware, the number of intermediate microeconomics texts examined exceeds that of the industrial organization texts because more of the former have been written. the journal for economic educators • volume 5 • number 1 • winter 2005 3 contemporary intermediate micro texts reviewed were published between 1995 and 2004. none of these texts addressed the cross elasticity of supply concept. ten of these same texts did, however, discuss the cross elasticity of demand concept, and three did not discuss either of these cross elasticity concepts. the older intermediate micro texts reviewed dated from 1949 to 1994. only one of these texts, economic analysis, vol. 1 – microeconomics, fourth edition, by kenneth e. boulding, discussed cross elasticity of supply. thirteen of the older texts, including boulding’s, discussed cross elasticity of demand, and two did not discuss either cross elasticity concept. hence, only one of 30 intermediate microeconomics texts discussed cross elasticity of supply, and that one was published in 1966. the three contemporary industrial organization texts ranged from 1997 to 2002 in publication dates. of these, only one, the economics of industrial organization, fourth edition, by william shepherd, discussed the cross elasticity of supply as well as the cross elasticity of demand concepts. the remaining two texts discussed only the latter of these concepts. of the 18 older industrial organization texts, which were published from 1968 to 1992, 11 discussed the cross elasticity of demand concept only, five discussed both cross elasticity of demand and supply, and two did not discuss either cross elasticity concept. therefore, only six of the 21 industrial organization texts discussed cross elasticity of supply, none after 1997. in all, only one of the 16 contemporaneous texts and six of the 35 older texts reviewed discussed cross elasticity of supply; that is, only seven of the 51 total texts reviewed dealt with this topic. in contrast, 43 of the 51 texts reviewed did discuss cross elasticity of demand, and seven of the 51 did not discuss either cross elasticity concept. cross elasticities in the literature and in the courts cross elasticity concepts have been the focus of at least two essentially unrelated streams of research in economic literature. the first of these centered exclusively on the use of cross elasticities of demand to define various types of market structure from competition to monopoly as well as the various forms of imperfect competition. this stream of research apparently originated in the 1930s and is quite voluminous. 1 the second stream of economic thought involving cross elasticities deals with the use of such concepts in the delineation of a given product market. this stream of thought apparently originated with the articulation of the cross elasticity of demand concept as a test for market delineation by bain, as well as machlup, in 1952 (bain 1952; machlup 1952). however, gregory werden has contended that the basic idea of cross elasticity of demand had been conceived before its use as a test market delineation by either bain or machlup (werden 1992). coincident with his work and that of bain relative to the use of the cross elasticity of demand as a market delineating factor, machlup introduced the cross elasticity of supply in 1952 as an additional factor in the delineation of market boundaries. soon after their introduction by bain and machlup in the economic literature as indicators of market boundaries, the cross elasticities of demand and supply came to be mentioned and considered as market delineating factors in antitrust cases by the u.s. supreme court and other courts. in fact, the first mention of cross elasticity of demand relative to market delineation in a reported federal antitrust case was in the supreme court’s opinion in times-picayune in 1953 (times-picayune v. u.s., 1953). in its decision, the supreme court for the first time offered some principles of market delineation. in a relatively terse statement, the court noted that close substitutes should be identified through the use of cross elasticities of demand and that markets 1 as suggested by koch in his text, industrial organization and prices, second edition, the reader may minimize his/her effort in reviewing this literature by referring to mancur olson and david mcfarland, “the restoration of pure monopoly and the concept of the industry,” quarterly journal of economics 76 (november 1962), 613-631. journal for economic educators • volume 5 • number 1 • winter 2005 4 should be narrowly delineated (times-picayune v. u.s., 1953). since then, the supreme court has acknowledged the use of cross elasticity of demand in a number of other cases. 2 actually, the supreme court recognized the substance of the cross elasticity of supply prior to times-picayune. although the court did not use the term cross elasticity of supply as such in the united states v. columbia steel co. decision of 1948, it did rely on the idea of supply substitutability in ruling that the proper product market in this case was all rolled steel products (plates, shapes, sheets, bars, and other unfinished steel products) as opposed to only plates or shapes (united states v. columbia steel, 1948). however, the only other acknowledgment of supply substitutability by the supreme court was found in a footnote in its brown shoe co. v. united states decision of 1962 (brown shoe v. u.s., 1962). nevertheless, the concept of supply substitutability, and specifically the cross elasticity of supply, has been acknowledged in a larger number of federal district court and appeals court decisions over the years. in fact, since 1975 there has been a discernibly greater acceptance of supply substitutability as a standard for market delineation in at least the federal appeals courts. further, cross elasticity of supply, along with the cross elasticity of demand, continues to be discussed in scholarly legal literature to the present. 3 that is, it remains a relevant concept in the consideration of market delineation criteria. despite this, cross elasticity of supply, as noted above, remains largely ignored or, at least, emphasized to a much lesser degree than cross elasticity of demand as a topic of discussion in intermediate microeconomics and industrial organization and policy textbooks. again many students in such courses are never introduced to the concept of cross elasticity of supply. the question is, why is this concept so routinely ignored? as one would suspect, cross elasticity concepts are not without certain theoretical and practical difficulties. to begin, as needham pointed out long ago, products can be defined as substitutes or complements, either in demand or in supply, only after empirical information has been gathered concerning the responses of quantities demanded or supplied to changes in the prices of other products. further, the “all other things remaining the same” assumption must be applied to cross elasticities of demand or supply. that is, there can be no change in the prices or in the nonprice variables, such as advertising expenditures of firms, in response to changes in the prices of the other products. obviously, all other things cannot be held constant in reality, and this forces economists to employ statistical techniques to measure cross elasticity relationships. such techniques, of course, can only yield estimates of a probabilistic nature (needham 1969; shepherd 1997; stocking 1957). further, even if the requisite empirical information could be obtained to allow the calculation of precise cross elasticities of demand and/or supply and if these elasticities were ranked, the larger values of which would indicate closer substitute relationships between any two goods, a crucial problem remains. that is, where would one draw the line between successive cross elasticity values to determine which pairs of goods are viewed as the same (and hence in the same industry) and which pairs of goods are to be considered different (and hence not in the same industry)? for example, as indicated previously, a negative coefficient of cross elasticity of supply suggests a substitutable or interchangeable relationship between two goods. however, the question remains as to what level of negativity the coefficient of cross elasticity of supply between two goods must achieve to justify classifying them as both being in the same industry (clarkson and miller 1982; needham 1969). in addition, shepherd has pointed out that responsiveness exists in a 2 see, for example, u.s. v. du pont (cellophane), 351 u.s. (1956); u.s. v. general dynamics corp., 415 u.s. (1974); and eastman kodak co. v. image technical services, 504 u.s. (1992). 3 see, for example, irston r. barnes, “markets, competition, and monopolistic tendencies in merger cases,” marquette law review 40 (1956); mark s. massel, competition and monopoly: legal and economic issues (1962); robert pitofsky, “new definitions of relevant market and the assault on antitrust,” columbia law review 90 (1990); and gregory j. werden, “the history of antitrust market delineation,” marquette law review 76 (1992). journal for economic educators • volume 5 • number 1 • winter 2005 5 time dimension and that the shorter the period of time examined, the smaller the responsiveness will be. also, while the time period chosen is important, it is usually arbitrary (sherpherd 1997). given these difficulties in measuring and interpreting cross elasticity coefficients, can one conclude that the whole idea of substitutability is an inferior device in attempting to define industry boundaries, one that should be abandoned in favor of other criteria, such as similarity of physical characteristics? needham concluded in the negative after reflecting on why substitutability is stressed in economics. as we know, economic theory is concerned with the behavior of firms as individual decision-making entities. such behavior, however, is influenced by, among other things, which firms a firm considers in making its decisions. although all firms may be affected by the actions of others, any one firm will focus only on those other firms that significantly influence their decision making (needham 1969). the use of cross elasticity coefficients is a way of discerning the extent to which firms are influenced by the pricing decisions of other firms (clarkson and miller 1982). despite this, it has been pointed out that the identification of high cross elasticity coefficients does not reveal anything relative to how a firm will react to another firm’s changes in quality, advertising, service, warranty, and other factors that might be considered of importance by potential customers. that is, selling price is not the only relevant variable considered by such customers. therefore, cross elasticity coefficients, in their implicit neglect of nonprice competitive factors that are nonconstant and used to various degrees by firms, view competition as one-dimensional. in this light, cross elasticity coefficients cannot be viewed as singular and definitive indicators with which to delineate product markets (armentano 1990; bishop 1961). nevertheless, cross elasticity coefficients are, as noted above, somewhat helpful in the market delineation process and continue to be used in the courts as viable tools in this process. yet, as noted above, cross elasticity of supply, in particular, is still largely ignored in intermediate microeconomics and industrial organization/public policy texts. this may seem somewhat puzzling since the aforementioned limitations of cross elasticity apply at least as much, if not more, to cross elasticity of demand as they do to cross elasticity of supply. machlup himself may have provided a reasonable explanation for the relative neglect of the cross elasticity of supply in the aforementioned textbooks. specifically, machlup suggested that the simultaneous consideration of cross elasticities of demand and supply created a larger perception of the industry than one would like to consider. therefore, machlup suggested that it would be preferable to focus on either demand relationships or cost (supply) relationships than to intertwine them even though the industry groups delineated through the use of each separate relationship would differ from each other. since he chose to deal more with the sales aspect than with the cost aspect of production in his own immediate discussion, he confined himself therein to product (demand) relationships (machlup 1952). nearly a half-century later, shepherd notes that some analysts were attributing a major role to cross supply elasticity of supply in the market delineation process. he noted that such analysts were considering various firms outside a specific market as “uncommitted entrants,” basically viewing these firms as somehow already part of the market under consideration. he cast discredit on such a view by noting that supply conditions deal with entry into the market and that it is confusing to mix the definition of the market with the possible entry of other firms into such a market (shepherd 1997). he asserted that it was logical to define the market initially on the basis of consumer choice (demand) after which relevant entry conditions could be considered. despite the fact that production facilities can often be shifted quickly and efficiently from one product to another, he insists that such potential entry should not be equated with current market participation (shepherd 1997). the aforementioned, then, may provide plausible explanations for the preference of the economics texts for discussing cross elasticity of demand over cross elasticity of supply. journal for economic educators • volume 5 • number 1 • winter 2005 6 alternately, this preference may simply, as suggested earlier, be due to the intention of these texts’ authors to economize on their discussion of cross elasticity of supply. or it may be due, as also suggested above, to these authors’ unawareness of the concept or role of cross elasticity of supply. it still seems to this author, however, that this latter explanation is rather unlikely. therefore, in light of the role the cross elasticity of supply continues to play in the market delineation process in the courts, it would seem that this concept warrants more discussion than it has traditionally received in the textbook literature. perhaps further research will suggest other reasons as to why the cross elasticity of supply concept has continued to be so neglected in that literature. references armentano, dominick t. 1990. antitrust and monopoly. 2nd ed. oakland, ca: the independent institute. bain, joe s. 1952. price theory. new york: holt. barnes, irston r. 1956. “markets competition and monopolistic tendencies in merger cases.” marquette law journal 40: 141-166. bishop, robert l. 1961. “market classification again.” southern economic journal 28: 83-90. boulding, kenneth e. 1966. economic analysis, microeconomics. vol. i. 4th ed. new york: harper & row, publishers. clarkson, kenneth w., and miller, roger l. 1982. industrial organization: theory, evidence, and public policy. new york: mcgraw-hill book co. eastman kodak co. v. image technical services, 504 u.s. 1992. massel, mark s. 1962. competition and monopoly: legal and economic issues. washington, d.c. brookings institute. machlup, fritz. 1952. the economics of sellers’ competition. baltimore: the johns hopkins press. needham, douglas. 1969. economic analysis and industrial structure. new york: holt, rinehart and winston, inc. olson, mancur, and mcfarland, david 1962. “the restoration of pure monopoly and the concept of the industry.” quarterly journal of economics 76: 613-631. pitofsky, robert. 1990. “new definitions of relevant market and the assault in antitrust.” columbia law review 90: 1805-1864. shepherd, william g. 1997. the economics of industrial organization. 4th ed. upper saddle river, new jersey: prentice hall. stocking, george w. 1957. “economic tests of monopoly and the concept of the relevant market.” antitrust bulletin ii: 479-493. times-picayune publishing co. v. united states, 345 u.s. (1953). u.s. v. du pont (cellophane), 351 u.s. 1956. u.s. v. general dynamics corp., 415 u.s. 1974. werden, gregory j. 1992. “the history of antitrust market delineation.” marquette law review 76: 123-215. debt-for-nature swaps and the coase theorem debt-for –nature swaps and the coase theorem bradley k. hobbs, ph.d.* associate professor of economics and finance abstract: debt-for-nature swaps have emerged as one method for debt burdened nations to retire their foreign debt through international markets. in a typical debt-for-nature swap, conservation groups buy some portion of a nation's debt, usually in secondary markets at discounted prices, in return for long-term commitments from the country to preserve domestic ecological zones. the first debt-for-nature swap occurred in bolivia in 1987. since then these programs have been used by a variety of least developed countries (ldcs) as a means of reducing debt loads. while an extensive literature exists on the practical workings of these programs and on the level of their usage, there exists a dearth of theoretical explanations for the development of debt-for-nature swaps. the premise of this paper is that debt-for-nature swaps can be interpreted as an application of the coase theorem to the problem of environmental degradation. in 1960, ronald coase published "the problem of social cost". this work has had tremendous influence on the way that the legal system and many economists view the problem of externalities or third-party costs. as coase stated in his 1991 nobel prize acceptance speech: "i explained in ‘the problem of social cost’ that what are traded on the market are not, as is often supposed by economists, physical entities, but the rights to perform certain actions..." the coase theorem, in simple terms, posits that in the presence of low transaction costs and competitive markets, solutions aimed at maximizing societal welfare will present themselves. coase presented an alternative to the widely accepted pigouvian solution for * florida gulf coast university, college of business19501 fgcu boulevard south, fort myers, fl 33965-6565 phone: (941) 590-7162 -email: bhobbs@fgcu.edu 109 externalities. in the pigouvian framework, direct taxation can be used as a means of reducing the social costs associated with externalities. the coasean solution becomes especially pertinent when the influence of international institutions is limited. the ability to institute pigouvian solutions on an inter-country basis is severely limited because it involves taxation across national boundaries. i hypothesize that debt-for-nature swaps exhibit secondary markets for debt which are relatively competitive combined with three institutional entities willing to propose nontraditional solutions to the dual problems of debt and the environment nations, environmental groups, and financial institutions. this paper investigates the current state of debt-for-nature swaps, though the major theme is to develop the theoretical ties between the coase theorem and these swaps. in his acceptance speech, coase stated that it was his belief that the full impacts of his writings have yet to be determined in the arena of economic analysis. this paper attempts to contribute to that progression. 110 i. introduction this paper investigates the relationship between debt-for-nature swaps and the institutional arrangements surrounding them. economist ronald coase has addressed a number of theoretical issues, which are relevant to the origins of debt-for-nature swaps and their potential to preserve the environment. debt-for-nature swaps exhibit aspects relevant to coase’s work regarding the existence of the firm, the role of transaction costs, and the treatment of externalities. the paper posits that the weakness of international legal institutions, especially with regards to enforcement issues, has led to coaseian bargaining in debt-for-nature swaps. these swaps can be interpreted as a response by economic institutions to the realities that exist in international legal institutions. (namely, that these legal institutions are far more adept at assigning property rights ex ante than they are at assigning economic damages ex post.) the paper is comprised of the following sections: a brief review of the coase theorem, an introduction to debt-for-nature swaps, the hypothesis that debt-for-nature swaps originated as a form of coaseian bargaining, and a concluding summary. ii. the coase theorem in a 1959 article, "the federal communications commission," ronald h. coase introduced an alternative theoretical model that addressed the process of input allocation in competitive markets. in this article, coase addresses what he refers to as the "reciprocal nature" of market transactions that has subsequently become known as the coase theorem. a more explicit development of the thesis was published in his 1960 article titled, "the problem of social cost." "the problem of social cost" develops two basic theoretical themes: 1) the reasons why firms are formed in a competitive economy and 2) the role of the legal system, and in particular the assignment of property rights, in cases where production externalities exist. the first theme 111 of “why firms exist" represents an extension of his 1937 work "the nature of the firm." the later theme dominates and can be found in its nascent form in his federal communications commission article. the tie that binds these theoretical themes is transaction costs. coase maintains that the modern firm owes its existence to transaction costs. these are the costs associated with the discovery and announcement of trading positions, negotiation, contracting, and ensuring of contract compliance. these costs are inherent to the price system and they can play an important role in production decisions. if transaction costs become large relative to price, they can prevent potential trades from being realized. in the case of direct allocation by individuals through competitive market prices, the costs of obtaining, securing, and protecting the property rights to resources (i.e., transaction costs) must be subtracted from the gains that normally accrue to competitive market trades. professor coase reasons that if firms exist then it must be because the costs of factor allocation within the firm is efficient relative to the costs of direct factor allocation for individuals confronting the transactions costs of competitive market prices. where negotiations are complex and/or where affected parties are numerous, the likelihood is that firms will emerge as an alternative agent for decision-making increases. firms coexist with direct allocation by individuals because they provide a more efficient institutional arrangement for minimizing transaction costs. the second major theme represents a decisive rejection of the then universally accepted (at least by neoclassical economists) method of correcting for negative externalities. specifically, coase rejects the pigouvian solution, which is to internalize the damage costs to the producer of the externality through government intervention. coase argues that the pigouvian solution requires the legal system to assign damage in a capricious way. suppose neighbors a and b share a duplex basement, and that neighbor a decides to produce beer in his basement and the fumes from the brewing cause headaches for neighbor b. under a pigouvian solution, neighbor a will be held accountable for the headaches of neighbor b, and the legal system will typically award damages to neighbor b or require the cessation of brewing in the basement by 112 neighbor a. but what of the harm which comes from the cessation of beer brewing to neighbor a? does the activity of brewing have no value? if not, then why did neighbor a begin brewing initially? coase makes the point that damages are of a "reciprocal nature" and that economic activity is attenuated under the pigouvian solution. drawing upon a legal case where a doctor built an examination room adjacent to a confectioners candy-mixing machine, coase comes to this conclusion... ... there is no analytical difference between the right to use a resource without direct harm to others and the right to conduct operations in such a way as to produce direct harm to others. in each case something is denied to others: in one case, use of a resource; in the other, use of a mode of operation...[this example] also brings out the reciprocal nature of the relationship which tends to be ignored by economists who, following pigou, approach the problem in terms of a difference between private and social products but fail to make clear that the suppression of the harm which a inflicts on b inevitably inflicts harm on a. the problem is to avoid the more serious harm.i coase notes that his ideas fundamentally alter the relationship between economic and legal systems. under the pigouvian solution for externalities, a suit is brought before the court and the court is asked to assign liability and set compensatory economic payment. the critical input from the economic system is an ex post input; it occurs after the harm is done. the coaseian solution for externalities is an ex ante solution. here, the critical economic decisions rely upon the initial assignment of property rights by the legal system before the harm is done. according to coase, the initial assignment of property rights is, under conditions of low transaction costs, irrelevant -the economically optimal allocation of resources will prevail under any initial assignment. as coase puts it ”...the delineation of property rights is an essential prelude to market transactions; but the ultimate result (which maximizes the value of production) is independent of the legal decision.ii once legal rights are established, negotiated modifications to the contract can and will occur where benefits exceed costs. while university of chicago economists initially rejected these ideas, the chicago brand of free-market, neoclassicism fits well within coase’s work. the role of government is minimized if one accepts coaseian solutions for externalities. as noted above, coase views the 113 firm as an alternative to the market in allocating resources when the costs of using the market to allocate are high relative to the administrative costs associated with the operation of a firm. in turn, and following the same reasoning, if the costs of establishing or extending a firm are high relative to government regulation then coase cedes that "...direct government regulation" remains as an alternative means of allocation. he states that government regulation is most likely to emerge as the allocation device of choice "...[when] a large number of people are involved and in which therefore the costs of handling the problem through the market or the firm are high."iii the use of direct regulation by the government introduces an entirely new set of problems and coase warns the reader that this agency creates costs. he is particularly concerned about two issues: 1) the subversive role that rent seeking is likely to play in allocations, and 2) the complete absence of competitive restraint. furthermore, neither of these is viewed as a significant problem under either direct allocation in markets or agency allocation through the firm.iv the government is, in a sense, a super-firm since it is able to influence not only the factors of production but also the institutional rules surrounding it. any firm operating in nonmonopolistic markets is subject to the competition of other firms. competitors might administer the same activities at a lower cost and there is always the alternative of market transactions if the internal administrative costs become too great. the government is able, if it wishes, to avoid the market altogether, which a firm can never do.v coase deplores the fact that many turn to government regulation with too much zeal and too little caution. "it is my belief that economists, and policy-makers generally, have tended to overestimate the advantages which come from government regulation."vi regardless, coase clearly leaves open the possibility that we could turn to the government as an agency of allocation if market and firm failure are evident and persistent. 114 iii. debt-for-nature swaps debt-for-nature swaps have arisen as a partial solution to the dual problems of less developed country (ldc) debt and environmental degradation. environmental groups or other governments purchase outstanding debt issues of a ldc in secondary markets in exchange for the ldc government's commitment to preserve a defined ecosystem. this has been enabled by two related factors: many of the remaining large and unique ecosystems are found in ldcs, which also have substantial international debt. as environmental awareness has grown, appeals from environmental groups and the governments of developed countries have yielded little real progress in preserving ecosystems in ldcs. ldc governments have pointed out that the higher-income countries developed their frontiers with few restraints; so moral or ethical appeals to preserve the environment appear selfserving. some arguments for preservation based upon enlightened self-interest have emerged. eco-tourism has been touted as one potentially valuable use of preserved areas. there are also arguments concerning the potential economic value from drugs and medicines that can be realized in these unique ecosystems. the contributions of these areas to the preservation of biodiversity generally are also an important consideration. unfortunately, allusions to future prospects in countries confronting immediate problems with the simple sustenance of human life may hold little political and moral weight. concern for the environment is linked to national income levels, and low-wage countries are less likely to embrace preservation as a result.vii the alternative is to convince governments that the preservation of such land is in their best interest. this path involves the use of substantial political capital, an explicit or implicit framework of taxation for raising the funds needed and tradeoffs with other national priorities. in order to preserve ecosystems, those interested in habitat preservation must establish legitimate claims to property rights through the purchase or lease of the land in question. in north america, numerous examples of such claims exist including the purchase of wetlands by ducks unlimited in the u.s. and canada and land acquisition programs of the nature conservancy. at the international level, environmental groups which have funded international 115 debt-for-nature swaps include: the nature conservancy, the world wildlife fund, the puerto rico conservation trust, the missouri botanical garden, the national park foundation of costa rica, conservation international, and the rain forest alliance.viii the concept also has the support of a number of additional environmental groups.ix the appeal of debt-for-nature swaps is multifaceted; ldc governments, international banks, and environmental groups do not view these swaps as a zero sum game. for ldc governments, debt-for-nature swaps can reduce extant debt load and provide expert guidance in the management, maintenance, and preservation of domestic ecosystems. another appealing aspect for ldc governments is that both domestic and international political benefits can be realized. for instance, in the case of a bolivian debt-for-nature swap, the agreement included provisions for the maintenance of indigenous indian peoples. where the extraction activities of native human populations are biologically and historically sustainable, native patterns of logging, hunting, and fishing can be maintained. additionally, title and deed to the lands remain in the hands of nationals. internationally, ldc governments can point to the swaps as a measure of cooperation in global environmental policies. ldcs gain to the extent that this cooperation accrues political capital with foreign governments and international agencies. for lending institutions, debt-for-nature swaps can provide reductions in liabilities. where the likelihood of debt payback is low, the lending institution can recoup at least some of the debt obligation. while it is true that the debt is typically sold at discount, discounting of bad debt is hardly confined to debt-for-nature swaps. what is added to the secondary market for international debt is a demand that did not exist in the market prior to debt-for-nature swaps. price effects on debt will depend upon the magnitude of the swap purchases relative to other purchases and the relative elasticity’s of the demand and supply curves. for environmental groups, debt-for-nature swaps represent an extension of direct land acquisition programs that have existed for a number of years in north america (as noted on the previous page.) debt-for-natures swaps provide direct habitat preservation and often include some level of input into land, forest, and wildlife management practices. additionally, debt-for116 nature swaps provide leverage for the limited funds available within these organizations for the direct purchase of environmentally sensitive lands. the degree of leverage depends upon the spread between the face value of outstanding debt liabilities and the discounted prices in secondary markets. the first facilitated debt-for-nature swap was between bolivia and conservation international in 1987. this swap involved the purchase of $650,000 of outstanding debt. the debt was discounted to approximately $100,000 and a swiss bank purchased it through citibank investment bank. in return, the government of bolivia agreed to preserve approximately 3,700,000 acres surrounding the pre-existing 334,000 acre beni biosphere reservex. the initial bolivian conservation international swap has served as a model for subsequent swaps in costa rica, the dominican republic, ecuador, madagascar, mexico, peru, the philippines, poland, tanzania, and zambia. as of late 1991, approximately $101,726,000 worth of ldc debt had been retired at a cost of approximately $18,495,000. the average discount in the secondary debt markets over all of these exchanges has been 82%.xi it seems unlikely that debt-for-nature swaps will serve as anything other than one method among a host of debt relief measures, though the potential for them to play an increased role exists. the "enterprise for the americas initiatives" contains provisions that are likely to make these trades more attractive to all parties. the provisions are also likely to extend debt-fornature swaps beyond agreements to halt the destruction of unique ecosystems. alternative agreements that have been put forward are generally aimed at linking debt-for-nature swaps to the economic and environmental sustainability of more traditional development projects such as potable water and sanitation infrastructure. iv. debt-for-nature swaps as an application of coaseian bargaining there are a number of characteristics inherent to debt-for-nature swaps that imply the existence and efficacy of coaseian bargaining. among those aspects of debt-for-nature swaps which have coaseian qualities one would include: the mutuality of harm, the clear lack of legal 117 guidance concerning ex post restitution, the competitive aspects of the markets in which they take place, and particulars concerning transaction costs. the first of these characteristics is the mutuality of harm. in "the problem of social cost" ,coase outlined bryant vs. lefever where the externality involved smoke back-drafting through a chimney into the house of the plaintiff. the back draft resulted when the defendant raised a wall adjacent to the chimney. at the initial trial the case was treated by the court as a traditional externality problem -damages were awarded to the plaintiff. the court determined that the newly built wall caused the chimney to become inappropriately drafted. the subsequent appeals court disagreed, placing the blame on the plaintiff. "it is the plaintiff who causes the nuisance by lighting a coal fire in a place so near the defendants' wall, that the smoke does not escape, but comes into his house. let the plaintiff cease to light his fire, let him move his chimney, let him carry it higher, and there would be no nuisance."xii this case presents a mutual harm, and the courts clearly identify the ambiguity in assigning blame. for coase, any legal outcome is arbitrary. quoting coase, “who caused the smoke nuisance? …the answer seems fairly clear. the smoke nuisance was caused by the defendant who built the wall and the man who lit the fires. given the fires, there would be no smoke nuisance without the wall; given the wall, there would be no smoke nuisance without the fires. eliminate the wall or the fires and the smoke nuisance would disappear."xiii the parallel notion in debt-for-nature swaps is this: environmental groups view the action of destruction of forested areas by ldcs as harmful; simultaneously, the ldcs view external restraints on development policies as intrusive and paternalistic. mutuality among the affected parties increases the potential for debt-for-nature swaps. for example, biologists agree that forests process the carbons emitted through the large scale burning of fossil fuels. ldcs can make the argument that their maintenance of global carbon sinks represent an uncompensated positive externality, which benefits high income countries. research shows that per capita emissions of carbon dioxide are negligible until levels of around $8,000 per capita income and that emissions then increase at rapid rates.xiv one view of this is 118 that ldcs should be compensated for their provision of large-scale carbon sinks that offset the relatively high carbon dioxide emissions of high-income countries. a second aspect of debt-for-nature swaps, which favors the development of coaseian solutions, is the nearly complete absence of effective legal institutions at the world level. the development of world legal institutions is in its nascent stages and the abilities of existing "global" legal institutions, such as the international court of justice, to judge and assign damages where sovereign nations are involved are weak. even if the institutions were able to judge and assign damages, the enforcement of ex post damage judgments would remain a problem. under the coase theorem, the role of legal institutions is shifted from an ex post delineation of judgment and damages to an ex ante definition of property rights. clearly defined property rights are required for coaseian bargaining to be successful. in the case of debt-fornature swaps, the lands that are offered are likely to embody clearly defined property rights. a majority of the lands involved in debt-for-nature swaps are "public" lands and the initial assignment is likely to be void of domestic ambiguity they are those of the bargaining nation.xv where boundaries are in dispute, it is likely that the dispute has been a long-standing one.xvi if boundary disputes exist, the likelihood of the lands being acceptable to the debt-purchasing parties involved in swaps would fall dramatically. thus, it seems that in the case of debt-fornature swaps, one ex ante stumbling block to coaseian bargaining -the initial assignment of property rights -is removed. property rights could cause problems for debt-for-nature swaps due to incomplete contracting. the contract represents an agreement to set aside lands under certain conditions and terms and the initial agreement must be clearly understood by both parties. the problems of addressing the temporal and spatial conditions of the contract seem minor compared to the conditions set for acceptable use. it would be particularly important for the bargaining institutions to more completely define acceptable use including agreements on sustainability in resource extraction. 119 a third aspect of debt-for-nature swaps that mark them as coaseian bargains is competitiveness. as noted earlier, a number of nations have been involved in offering lands for debt service. in addition to environmental groups, nations have been active participants in debtfor-nature swaps.xvii ldc governments have cooperated enthusiastically because these lands have often already been set aside and the debt-for-nature swap includes provisions for assistance in the management of the lands. the swaps also represent a method of extracting unrealized rents from those who believe that the preservation and maintenance of the lands provides positive benefits that accrue to non-domestic parties. for ldc governments the risks associated with debt-for-nature swaps are minimal. if the ldc government violates the conditions of the swap, then it is unlikely to galvanize international political pressure given the weakness of international legal institutions. a final aspect is the role of transaction costs, which are incurred at specific junctures of the trade. discovery, announcements, negotiations, and contracting are ex ante activities whereas monitoring and compliance are ex post activities. for coaseian bargaining to work, transaction costs must be low. in the case of debt-for-nature swaps, ex ante transaction costs will likely vary with the number of parties and the complexity of the particular transaction. in addition, the ability to guarantee ex post enforcement of the agreement will affect the complexity of the ex ante negotiations. the competitiveness of the secondary debt market is also important. historically, demanders of debt in these swaps have been able to obtain deep discounts ranging from 40% to 88%.xviii in turn, banks holding the bad debt may look upon the swap as a terminal option for recovering some portion of their investment. each of these factors drive the parties towards trade and may help to reduce the perceived ex ante transactions costs. the problems of ex post costs of monitoring and ensuring contract compliance are difficult ones. the potential for effective legal remedies is limited. it has been noted that international legal institutions have great difficulty in enforcing cross country rules and agreements. if they cannot effectively assign judgment and damage or enforce claims, then ex 120 post costs of compliance become high -perhaps even prohibitive. without specific information regarding the costs of monitoring compliance, parties may have assumed that the costs are small and until other information is made available they will not act as a deterrent to future swaps. perhaps, knowing that effective legal action is unlikely, each party incorporates this pre-existing knowledge into the agreed upon price in the swap agreement. certainly, the sustainability of debt-for-nature swaps hinges on market participants to have faith that contractual conditions will be honored. if this is not the case, then the ex post costs of monitoring and compliance represent a major threat to the continued use of debt-for-nature swaps. while successfully negotiated swaps are the product of solid ex ante coaseian bargaining, the weak ex post conditions may make them short-lived phenomena. future research into the actual transaction costs associated with these swaps is needed. though ex ante costs may be more clearly discernible, ex post costs may not be. v. summary ldc governments face a range of problems that accompany low per capita incomes and the issues of environment degradation simultaneously. when these governments need a means of increasing domestic income, resource extraction is often a substantial, direct, and immediately available source. the positive relationship between increasing national per capita income and concern for the environment is well established and for many ldcs the former takes precedent. ldcs are leery of external regulations that hinder their development. environmentalists, usually from the more developed countries, are pushing for limits that can impede economic growth in ldcs. programs which require "sustainable" development, yet offer no quid pro quo, can be viewed as essentially free-rider claims on domestic resources from nations who have historically treated their frontier boundaries differently than is being currently proposed. within the arenas of domestic and international politics, charges of paternalism/imperialism on the part of the more developed countries may be given credence. additionally, ldc governments can make an 121 effective argument that the continued provision of unique ecosystems represents an uncompensated positive externality to the rest of the world. perhaps a consensus can be reached that demarcates the appropriate role for government in these swaps. most economists agree that the primary role of government is to define and enforce property rights. though coase did note the potential role of domestic governmental institutions to intervene in cases of market failure, he did so with trepidation, and he did not address the workings of international institutions that were in their infancy when the coase theorem was first introduced. perhaps one appropriate role for these international institutions is to broker the swaps and thus minimize the transaction costs that accrue to the swap participants. if debt-for-nature swaps are to survive, minimizing ex ante transaction costs and ex post costs of monitoring and compliance is crucial. it seems within the purview of international agencies to act as brokers by coordinating the swaps and in doing so providing a more efficient vehicle for minimizing the ex ante transaction costs of announcement, discovery, and negotiation. 122 end notes i coase restates this argument in the beginning of section ii of "the problem of social cost." he wrote [that] "the traditional approach has tended to obscure the nature of the choice that has to be made. the question is commonly thought of as one in which a inflicts harm on b and what has to be decided is: how should we restrain a? but this is wrong. we are dealing with a problem of reciprocal nature. to avoid the harm to b would inflict harm on a. the real question that has to be decided is: should a be allowed to harm b or should b be allowed to harm a? the problem is to avoid the more serious harm." ii see "the federal communications commission," pp. 26-27. iii see "the problem of social cost," p. 30. iv it is not clear to the author how coase incorporates the costs to firms in their attempts to influence political bodies. v see "the problem of social cost," p. 29. vi see "the problem of social cost," p. 30. vii concern over environmental problems within a given populus and the relationship between types of environmental problems and per capita gdp are given full discussion in the world development report, 1992, p. 11, figure 4. viii see "debt-for-nature swaps: a new agenda." p. 36. ix other environmental groups which have endorsed the swaps include: rainforest action network (san francisco, ca), cultural survival, greenpeace usa (new york, n.y.), earth island institute (san francisco, ca), the environmental defense fund (washington, d.c.), the frank weeden foundation and the national wildlife foundation. see "debt-for-nature swaps: effective but not enforceable, " p. 142. x additional details of the swap and the agreement concerning the legal status of the lands involved can be found in "debt-for-nature swaps: effective but not enforceable." pp. 1425. xi see "debt-for-nature swaps: a new agenda," p. 36. xii see "the problem of social cost," pp. 23-24. xiii see "the problem of social cost," p. 25. xiv see the world development report development and the environment, 1992, p. 11. xv for the purposes of this paper, domestic legal disputes preclude participation in debt-fornature swaps and clear title is not an issue. again, it seems reasonable that lands under any type of legal action would be unlikely to be acceptable to all parties involved in the debt-fornature swap. xvi lands in dispute among nations are often in dispute because they are perceived to have some economic value. given that the effect of debt-for-nature swaps is to provide more explicit recognition of the value of unique ecosystems future border disputes may be exasperated. xvii holland and sweden are responsible for the two largest single swaps, both of which were with costa rica. xviii see "debt-for-nature swaps: a new agenda," p. 36. 123 references amelung, torsten. 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"three essays on optimal borrowing, debt for nature swaps, and the impact of distortions on country risk of the developing countries." kansas state university, ph.d. dissertation, 1991. posner, richard. economic analysis of the law, 3rd edition, little, brown, & co., boston, massachusetts, 1986. 125 microsoft word volpe11.30.04.doc journal for economic educators • volume 4 • number 4 • fall 2004 6 a review of literature on how professional speculators view their role in financial markets and the capital formation process by ronald p. volpe and lisa l. dickson * abstract this paper examines how professional speculators view their role in financial markets and the capital formation process. though they are often vilified by the public and media as greedy parasites wreaking havoc on financial markets and economies, an examination of their views reveals they perceive their endeavors as more noble. they view themselves as an essential element in the capital formation process by providing liquidity and efficiency to financial markets. through the art of balancing supply and demand, they regulate financial asset prices, keep financial markets efficient, and facilitate the process of capital formation and economic growth. periodically, professional speculators experience large financial losses when complex highly leveraged trades do not turn out as planned. professional speculators, who claim to be regulators of fair pricing, have a responsibility to monitor their actions and to be extra vigilant not to cause irreparable financial damage to themselves and other members of society. (jel g20) introduction for centuries the speculator has been associated with the misfortunes of countless markets and blamed for the financial ills of many due to the huge profits the speculator enjoys. in gregory millman’s book the vandal’s crown (1995), speculators are accused of currency manipulation and the destruction of the economies of many countries. investors accuse speculators of being reckless gamblers that are the cause of their misfortune when investments go bad. are speculators evildoers that cause destruction and swindle many out of millions of dollars? in the speculators’ view, the answer is no. speculators or “professional traders” are not gamblers. gambling involves elements of chance and haphazard guesses as to the direction in which the chips may ultimately fall. speculation involves decisions based on precise calculations and sound reason. many times throughout history it has been governmental intervention that has caused the downfall of markets and chaos in society, but the speculator took the fall. to legendary speculator george soros, “when speculators profit, the authorities have failed in some way or another. but they don’t like to admit failure; they would rather call for speculators to be hung from lampposts than to engage in a little bit of soul-searching to see what they did wrong” (soros 1995, p. 84). examples of regulation gone awry, resulting in the disgrace of speculators, dates back thousands of years. in rome the emperor diocletian in 300 a.d. tried to punish speculators for withholding goods from the public to receive higher prices as demand grew. diocletian created a law that anyone trying to sell goods higher than prices he set himself would be killed. suppliers refused to bring their goods to a market that did not supply reasonable prices, and the result was famine and the deaths of many. the law was eventually repealed (niederhoffer 1989, p. a10). * ronald p. volpe, cfp, professor of finance, williamson college of business administration, youngstown state university, youngstown, ohio 44555, ronvolpe@comcast.net; lisa l. dickson, staff appraiser, smith evans carrier, one east state street, p.o. box 651, sharon, pennsylvania 16146. journal for economic educators • volume 4 • number 4 • fall 2004 7 another example of governmental intervention in the markets resulting in societal chaos was in antwerp, belgium, in 1858 when the spanish seized the city’s port. the spanish blockaded the port hoping for surrender when supplies ran out. bakers and farmers produced large quantities of bread, and smugglers helped to provide needed supplies. speculators assumed bread would be scarce and drove up prices as did the manufacturers and smugglers. the government perceived the profits of the speculators as an injustice and imposed laws with price caps and strict penalties. the smugglers ceased to bring supplies due to the lack of reward for the risk. eventually supplies ran out, and antwerp had to surrender (niederhoffer 1989, p. a10). it is human nature to accuse others of causing one’s misfortunes, and speculators are often accused due to the nature of the business. speculators provide the other side of the bet in the game of supply and demand. if the majority believes that the outcome will be heads, it is the speculator who takes the bet that it will be tails. speculators are essential in providing liquidity and efficiency to financial markets by regulating prices through the art of balancing demand and supply and thus facilitate the capital formation process. speculation defined speculation is often associated with gambling. however, there is a clear distinction between gambling and speculation. dickson g. watts, the author of speculation as a fine art and thoughts on life, distinguishes gambling from speculation. he states, “speculation is a venture based upon calculation. gambling a venture without calculation” (watts 1965, p. 7). watts further remarks that gambling involves blind chance but speculation presupposes intellectual effort. he claims that the law distinguishes between the two by condemning gambling and permitting speculation (watts, p. 7). merriam-webster’s dictionary defines speculate as (1) “to think or wonder about a subject”; (2) “to take a business risk in hope of a gain” (“speculate”). however, investor icon philip carret, author of the art of speculation, defines speculation as “the purchase or sale of securities or commodities in expectation of profiting by fluctuations in their prices” (carret 1997). speculation is not just gambling; it is a calculated, planned business risk with the expectation of profits through the volatility of prices. speculators are often vilified in the press and associated with scandals. whenever the financial markets have huge declines, the blame is placed on the speculator. however, when the markets are moving upward and everyone is making money, no attention is drawn to the speculator. the speculator by nature is bearish, always betting against the majority. this is unpopular in a society focused on optimism. because speculators reap financial gains when betting against the majority, the average investor feels that speculators do not contribute to the welfare of the world but only to their own pockets. this continual condemnation has even confused some professional traders, resulting in the shame felt by some speculators regarding their chosen profession. andy krieger, whose illustrious career is chronicled by partnoy in his book titled “infectious greed,” quit a job in 1987 because he could not answer for his young son the question of what good his job does (niederhoffer 1989). however, victor niederhoffer, a leading hedge-fund manager in the 1980s and 1990s, defines speculation in his book the education of a speculator as follows: i am a speculator, and my daily bread depends on reversing big moves. in economic terms, my function is to balance supply and demand. i sell when prices are high and buy when prices are low. when prices are too high and consumers want to exchange cash for goods, i take their cash and let them have their goods. i prevent shortages by pushing prices down so consumers don’t have to pay up. conversely, when prices are down and producers want cash badly for their goods, i give them the cash and take their goods. in these bad times, i keep producers from going broke, and prevent waste and spoilage by bringing prices up. journal for economic educators • volume 4 • number 4 • fall 2004 8 i’m like a dynamic refrigerator, or a captain rationing food on an unexpectedly long voyage (neiderhoffer 1997, p. vii-viii). dr. niederhoffer realizes that speculators are not right all of the time, which can lead to shortages or gluts in supply, causing panic such as the dutch tulipomania in the 1630s, the south sea bubble in london in 1720, and various other market crashes over the centuries. however, he feels that because speculators are specialists in the field of prices relating to supply and demand, it is the speculator who is best at keeping markets in balance instead of lawmakers. speculators pay out of their own pockets when making a mistake, as opposed to the politicians and lawmakers who are not held personally liable. who is more likely to learn from the mistake? this is why speculators are necessary in the marketplace, left to do what they do best. niederhoffer states “man cannot live on bread alone, but without speculators there would be no bread” (niederhoffer 1989). the speculator’s role in the capital formation process the capital formation process involves the transfer of savings to investment through the movement of dollars from a surplus economic unit to a deficit economic unit. this process occurs in the financial markets, and these markets provide businesses with the ability to expand and grow, creating economic growth for society. by assuming risk, the speculator provides liquidity and helps the markets to function more efficiently. in many respects, all investors and businessmen are speculators. by definition speculation is a business risk with the hopes of a gain or profit. the person who runs a business and assumes the risk to be in business is essentially a speculator because the outcome is uncertain. the investor that provides capital to businesses or the government in exchange for a return above inflation is also a speculator. the businessman, the investor, and the professional trader are all speculators who facilitate economic expansion. the capital formation process could not occur without speculation, but it is the professional trader, through the assumption of risk, who provides the balance of supply and demand as well as liquidity and efficiency in the markets that move capital. the balance of supply and demand is best explained by niederhoffer: i try to predict the prices of common goods a day or two or a few months in the future. if i think the price of an item will go up, i buy today and sell later. if i think the price is going down, i’ll sell at today’s higher price. the miracle is that in taking care of ourselves, we speculators somehow ensure that producers all over the world will provide the right quantity and quality of goods at the proper time, without undue waste, and that this meshes with what people want and the money they have available (niederhoffer 1989). speculators provide liquidity in the secondary markets because so many of them are willing to buy and sell what the market has to offer. the more buyers and sellers there are for a commodity or security, the easier it is to convert the investment to cash. liquidity reduces risk and encourages investment, thus promoting the capital formation process. according to austrian economist murray rothbard, author of man, economy, and state, speculators help to achieve market efficiency and price stability. he states, “the market tends inexorably toward the establishment of the genuine market-clearing price. speculation reduces the gap between the high prices and the low prices. far from causing greater fluctuations, the speculator tightens the band around which prices may fluctuate and provides stability” (mayer 1999). carret further explains that market efficiency is achieved by speculators who best allocate resources to their highest uses through buying and selling. speculators accomplish this by “opening reservoirs of capital to the growing enterprise, shutting off the supply of capital from enterprises which have not profitably used that journal for economic educators • volume 4 • number 4 • fall 2004 9 which they already possess” (mayer 1999). according to this view, it is the speculator who directs capital to its best uses and regulates the capital formation process. hedging is another important factor in the capital formation process. speculative trading promotes economic well-being in the market by allowing hedging and risk transference. hedging provides companies the ability to reduce and manage their exposure to the risks associated with interest rate, commodity price, and exchange rate fluctuations. the ability to manage risk reduces the probability of financial distress that firms face. the speculator takes the other side of the hedge, providing liquidity in the futures market. it is the speculator that gives firms the opportunity to hedge against risk and guard against market volatility. this provides a more stable environment for firms to create jobs. by allowing firms to hedge away risk, the speculator helps to lower the cost of capital to a firm, which facilitates economic growth and enhances the capital formation process. speculator’s impact on world markets the world’s financial markets were once separate entities. however, technology over the past 20 years, including the implementation of derivatives, has closed the gap between markets. all markets are now connected in some way, with geography and regulation no longer separating the boundaries of markets. trader paul tudor jones, in the documentary video titled trader: the documentary, describes the world marketplace by stating, “currencies, crude, stocks and bonds are all interrelated. the whole world is simply nothing but a big flow chart for capital” (trader: the documentary 1987). the interrelation of all of these markets provides a large playground for speculators. currency traders move trillions of dollars around the world daily. this high volume can make or break an emerging market economy in the blink of an eye. speculators have often taken the fall for the collapse of currencies in emerging markets such as the peso in mexico and the japanese government’s inability to stop the collapse of the tokyo stock market in the 1990s. in 1992 george soros earned $1 billion in a few days while pushing great britain out of the european monetary system’s exchange rate mechanism (erm). soros’s fund shorted sterling, causing the bank of england to raise interest rates, which forced great britain out of the erm. the tabloids dubbed soros “the man who broke the bank of england” (millman 1995). gregory millman suggests that traders have the ability to render economic justice through the use of an efficient mechanism: things sell for a true, free-market price. he further states, “traders now have an unprecedented degree of power to sweep the financial foundation out from under poorly managed, politically unstable, or uneconomic governments before the bureaucrats even know what has happened” (millman 1995, p.ix-xiv). the ludwig von mises institute, which is the research and educational center for the austrian school of economics, disagrees. an article published on the institute’s website states: “speculation reveals quickly the underlying weaknesses in a market and affirm the buying public’s approval or disapproval. the currency collapse of many asian nations in 1998 revealed concrete weaknesses in the economic and political environment and were not caused by speculation” (mayer 1999). it is the speculator that warns investors of the weaknesses in markets and provides financial discipline throughout the world by forcing financial law and order through pricing. governmental influences on speculation speculators are often blamed for market crashes and large investor losses. whenever a market crashes and the majority of investors lose money, there is always a public outcry to hold someone accountable. the politicians make the public happy, capitalizing on these events by trading votes for policy changes. unfortunately, it is often the speculator who pays the price for these actions. journal for economic educators • volume 4 • number 4 • fall 2004 10 an article by phred dvorak explains that japanese financial regulators are trying to ensure that the country’s weak stock market operates properly. in doing so they are planning to, among other things, limit proprietary trading (dvorak 2003). on august 15, 2000, the securities and exchange commission adopted regulation fd, which gave a 10-share owner the same rights to company information as a million-share holder, taking away the advantage the speculator has in knowing information about the companies in which they hold investments. a hedge-fund manager at greatspeculations.com writes, “the sec’s attempt to bring the liberal democratic elite view of ‘democracy’ to the equity markets has in fact reduced liquidity, driven down both the value and the numbers of new equity raised via ipo (initial public offerings) and increased the breakeven costs for new ventures: this by driving down previous high valuation multiples…now 50% lower than before the sec action.” the author further writes, “american speculators, and indeed world speculators, have given america great markets to raise capital for innovation and economic growth. but liquidity isn’t a given—and no one has the right to ask any trader to lose money for some harebrained idea of fairness or political correctness or multiculturalism” (mr. e. 2001). government regulation often is at the expense of the speculator. however, it is speculators that regulate the markets, and despite bureaucratic attempts to put reigns on them traders have been able to continue to dictate prices. in a paper titled “volatile financial markets and the speculator” presented at the economic issues lecture to the royal economic society annual conference in 1998, paul davidson discusses the keynesian view of economics and whether a transaction tax should be imposed by the government on speculators to decrease volatility and better protect the financial markets from crisis. the argument for the tax is based on the concept that, through statistical probability, calculations of future conditions can be estimated (davidson 1998). however, the long term capital management debacle in 1998 showed that the brightest nobel prize winners in economics could not accurately determine future financial market conditions with statistical precision. financial markets are greatly influenced by investor sentiment, making accurate and consistent prediction difficult if not impossible. in the film trillion dollar bet, which chronicles the downfall of long-term capital management, phillip fisher says it best: “math doesn’t drive financial markets; people drive financial markets, and people are not predictable” (trillion dollar bet 1999). governmental regulation of speculation would only provide less liquidity in the markets. when bureaucrats and politicians attempt to regulate an intricate network of markets that they do not fully understand, speculators are quick to react. an example of this is the october 19, 1987, stock market crash of 22.6 percent. the weekend prior to the crash, treasury secretary james baker threatened west germany that he would let the dollar drop. dr. niederhoffer describes the traders’ response to baker’s attempt at ruling the markets: “traders sent such a signal on october 19, 1987, when they dropped the wealth of the non-japanese speaking world by 10% in one day when a modern-day king tried to interfere with the natural order by driving the dollar down one last 5% or so” (niederhoffer 1989). in the same article niederhoffer also explains that the most positive impact speculators have on the capital formation process is the ability to place checks on governmental policy that can lead to high inflation through the trading of bonds, thus controlling interest rates. the liquidity of the global financial markets should be left to those who understand the art of balancing demand and supply—the speculators. dangers of speculation speculators play an important role in the capital formation process by regulating prices and controlling demand and supply. however, traders are human, and humans make mistakes. corporations and institutions utilize proprietary trading to hedge risks and to create earnings in down economies. the traders for these firms can make mistakes, and when left unchecked have led to bankruptcy. it is the shareholders and individual investors who pay the price of these journal for economic educators • volume 4 • number 4 • fall 2004 11 mistakes. in the case of nicholas leeson, a trader for barings plc, an investment bank in the united kingdom, leeson managed to conceal losses of more than $1 billion before barings discovered his trail of deceit. by the time the mess was sorted out, barings owed losses more than double its equity, rendering the firm insolvent (madura 2003, p. 397). even a division of the prestigious j.p. morgan involved in currency trading was shut down in 2003 due to disappointing returns (zuckerman 2003). further, hedge-fund managers and proprietary traders with large sums of capital to move in the markets can intertwine trades so complex that it is possible to bring down whole economies. in the case of long-term capital management, the bets were so big and backed by so little capital that when tides turned against the fund it had to fold on nearly $1.25 trillion in positions. this amount was so enormous that a global economic meltdown was a possibility. the federal reserve had to call financial regulators around the globe to bail out the fund (trillion dollar bet 1999). speculation can be a dangerous game when the bets are not properly hedged to reduce risk. hedge-fund mangers risk not only the money of their investors but their own wealth as well. there have been numerous examples of professional traders who have lost their clients’ money and much of their own personal wealth. professional speculator victor niederhoffer, who reigned as a top-rated hedge-fund manager for nearly 20 years, was forced to close down his $130 million hedge fund in 1997 after he could not meet margin calls (jereski and luchette 1997, p. c2). when egos enter into the speculative game, the results can be disastrous. in an article titled “the continuing education of a speculator” by mark etzkorn (2003) in active trader magazine, niederhoffer explains his fall from grace. victor claims it was his ego that led to the collapse of his company and his personal wealth as well. after being the best in the business for so many years and participating in a heated competition with a canadian fund, victor took huge risks to remain on top and did not heed his own advice about risk control from his book the education of a speculator. the game of speculation involves high rewards, but with those come high risks. therefore, it is the responsibility of the professional trader to proceed with caution because in the vast ocean of financial markets there are no life preservers. summary and conclusion speculation is a calculated business risk with the expectation of profit through the exploitation of price volatility. professional speculators are essential in providing liquidity and efficiency to financial markets. they help allocate economic resources to their best uses through the art of buying and selling financial assets and, by their volume of trade, provide liquidity to the markets. this allows firms to hedge away risk and helps to lower the cost of capital, thereby facilitating economic growth and improving the capital formation process. it is the speculator who warns investors of weaknesses in markets and provides financial discipline throughout the world by forcing financial law and order through pricing. perhaps the most positive impact speculators have on the capital formation process is the ability to place checks on governmental policy through the buying and selling of currencies and bonds, thus preventing inflationary excesses. speculation does not come without dangers. proprietary traders with large sums of capital can engage in trades so complex that it is possible to bring down entire economies as well as their own empires. therefore, it is the responsibility of professional speculators, who claim to be regulators of fair pricing, to monitor their actions and be cautious not to wreak havoc on themselves and other members of society. journal for economic educators • volume 4 • number 4 • fall 2004 12 references carret, philip l. 1997. the art of speculation. new york: wiley: 1-14. (originally published 1930) davidson, paul. 1998. “volatile financial markets and the speculator.” retrieved from http://econ.bus.utk.edu/davidsonextra/res8fnl.html. dvorak, phred. 2003 (march 13).“japanese regulators take steps to stem recent stock selloff.” the wall street journal. retrieved from: http://www.online.wsj.com/article/ 0,,sb1047545745249565840search,00.html?collection=wsjie%2f30day&v. etzkorn, mark. 2003 (may). “the continuing education of a speculator.” active trader: 71-83. jereski, laura, and aaron lucchette. 1997 (october 30). “niederhoffer is sunk by market maelstrom.” the wall street journal: c2. madura, jeff. 2003. financial markets and institutions. 6 th ed. united states: south-western: 397398. mayer, christopher. 1999 (october 25). “speculation.” retrieved from http://www.mises.org/ fullarticle.asp?printfriendly =yes&control=320&month=13&title=speculation&id=14. millman, gregory j. 1995. the vandals’ crown. new york: the free press: ix-xiv. mr. e. 2001 (march 11). “re: role of speculator in the capital formation process.” e-mail to speculators list. niederhoffer, victor. 1997. the education of a speculator. new york: wiley: vii-viii. niederhoffer, victor. 1989 (february 10). “the speculator as hero.” the wall street journal: a12. partnoy, frank. 2003. infectious greed. new york: henry holt and company. raghavan, anita, and mitchell pacelle. 1998 (september 24). “to the rescue? a hedge fund falters, so the fed beseeches big banks to ante up.” the wall street journal: a1, a8. soros, george, byron wien, and krisztina koenen. 1995. soros on soros: staying ahead of the curve. wiley: 84. “speculation.” 1997 ed. the merriam-webster dictionary. trader: the documentary. 1987. glyn/net, inc. videocassette. v home video. trillion dollar bet. 1999. written and produced by malcolm clark. videocassette. bbc/wgbh boston video. watts, dickson g. 1965. speculation as a fine art and thoughts on life. new york: traders press: 7. zuckerman, gregory. 2003 (june 3). “j.p. morgan cashes in on risky trading bets: with its own money on the line, bank wagers on currencies, rates.” the wall street journal. retrieved from http://online.wsj.com/article/0,,sb104976663313276100,00.html. table 1 murder versus music: giving students a choice in introductory economics cynthia lay harter* jel classification: a2 *director, center for economic education, department of economics, eastern kentucky university, richmond, ky 40475 36 37 abstract this paper describes a writing assignment used in introductory economics where students chose to write one longer essay based on an economics murder mystery or four shorter essays based on popular music, and they chose whether or not to work with a partner. students also answered a survey constructed to identify whether their preferred learning styles were visual, auditory, or kinetic. cross tabulations were computed between the choice of assignment variables and learning styles, student gender, and course grade in order to identify which variables were related. the results suggest that learning styles and performance in the course are not strongly related to the choice of assignment, but gender is. this finding supports earlier findings that females learn and understand economics differently than males. anecdotal evidence is also provided to support the use of these types of writing assignments to promote interest and, possibly, long-term learning in economics. *director, center for economic education, department of economics, eastern kentucky university, richmond, ky 40475 38 murder versus music: giving students a choice in introductory economics writing assignments are often used in introductory economics or economics survey courses to give students practice communicating basic economic principles. these assignments are commonly structured as essay questions about the material or are based on current events. however, during the spring semester of 1999, students in two sections of an economics survey course were allowed to choose between a writing assignment based on an economics murder mystery and a writing assignment based on popular music. these subjects were chosen so that the material would specifically apply to students’ lives and interests in order to highlight the relevance of economics in their daily lives.1 the students also answered questionnaires designed to characterize their learning styles—kinetic, auditory, or visual—in order to test whether there is a relationship between choice of assignment and learning style. the hypothesis is that students who are primarily auditory learners will choose the music assignment while students who are primarily visual learners will choose the reading assignment. cross tabulations are computed to investigate this relationship. because the issue of gender has been widely studied in economic education with several findings that females do worse in introductory economics than males (dynan and rouse, 1997; anderson, benjamin, and fuss, 1994; and, tay, 1994), this paper also addresses the relationship between student gender and choice of assignment. the hypothesis is that females will choose different assignments than males because females learn and understand economics differently than males. again, cross tabulations are 39 computed to investigate this relationship between choice of assignment and student gender. for these assignments, students were given the opportunity to work with a partner because both assignments (but the music assignment, in particular) involved creativity on the part of the students, and discussing their ideas with a partner could spark creativity as well as verify the accuracy of their economic explanations. allowing students to work cooperatively also may help some students learn better (felder, 1996) and foster lifelong learning (millis and cottell, 1998). giving them the option to work with partners also reduced the instructor’s costs of grading the assignments. learning styles and gender while there are several systems for classification of learning styles, the focus here is on the classification according to kinetic, auditory, or visual learning. kinetic learners use sensation and motion to make connections while auditory learners rely on sound and visual learners rely on sight (when learning and…, 2000). while instructors have different teaching styles, students have different learning styles—that is, different strengths and preferences in the ways they process information. this writing assignment was designed to allow students the opportunity to choose an assignment that more closely matched their preferred learning styles than a more traditional assignment based only on the subject matter. studies show that a mismatch between teacher and student learning styles can result in students learning less and being less interested in the subject (bartlett, 1996; borg and shapiro, 1996). bartlett recommends using a variety of techniques so that the instructor will reach the different learning styles of the students. most instructors tend to 40 use teaching styles that match their own learning styles (kolb, 1981), and this paper suggests that giving students a choice in assignments is one way to incorporate variety without greatly increasing costs to the instructor. if alternative assignments are offered, a student may be able to choose one that matches his preferred learning style, and this may promote long-term learning of economics. there have been several studies analyzing gender effects in teaching and learning economics. extending research findings that female students perform relatively worse on multiple-choice tests and relatively better on essay tests (ferber, et al., 1983; lumsden and scott, 1987), walstad and robson, 1997, found that male and female students perform differently on certain items in a multiple-choice test, even after controlling for factors such as differences in economic ability. they suggest that factors such as differential reasoning, socialization, or instructional practices may contribute to gender differences in economic understanding. sandler, silverberg, and hall (1996) suggest that males and females learn differently from different types of assignments and argue that women prefer opportunities to relate material to their own lives. harter, et al., 1999, found that there is a gender difference in teaching methods among college instructors as well. they suggest that differences in the ways males and females learn and understand economics may translate into differences in teaching methodologies where females are more likely to use cooperative learning activities while males are more likely to use a traditional lecture format. although this paper does not specifically analyze differences in student learning between genders, the relationship between gender and students’ choices is investigated. 41 assignments and data these alternative writing assignments were used in a one-semester economics survey course where basic microeconomic and macroeconomic concepts were covered.2 the students were not economics or business majors but were generally taking the course because it was required for their major programs of study.3 a majority of the students (80-90%) were 19to 20-year-old, caucasian sophomores in a pharmacy or physician assistant program.4 these programs of study are highly competitive at the private, catholic, four-year university where the course was taught, and the students were generally highly motivated to do well.5 the grade on the writing assignment represented 15% of each student’s final grade in the course. for the music assignment, students (working individually or in pairs) were to find a minimum of three economic concepts in four different songs. there were no restrictions on the type of music to be used, but students could not choose more than two songs by the same artist.6 then, they had to write an essay for each song which included the lyrics of the song, a description of the message of the song, and an exhaustive list of economic concepts, ideas, definitions, theories, etc. that were either directly or indirectly referred to in the song. for each, they were instructed to define the concept and explain specifically how it was part of the song. they were advised to include references to material covered in class, in the textbook, and even additional library research if applicable. they also were required to record the songs on either a cassette tape or a compact disc and submit this with the written assignment. for the murder mystery assignment, students (working individually or in pairs) were to read the novel murder in the margin (jevons, 1978) and write an essay that 42 included a summary of the basic plot with an explanation about who committed the murder and how the murderer was discovered (which involved economic analysis), and a description of a minimum of 12 economic concepts, ideas, definitions, theories, etc. that were either directly or indirectly referred to in the story. for each, they were instructed to define the concept and explain specifically how it was part of the story. they were advised to include references to material covered in class, in the textbook, and even additional library research if applicable. then, in order to make the assignment more personally relevant, the students who chose the murder mystery assignment were instructed to describe a personal example from their own lives where economics applied, including an explanation of the relevant economic concept or theory.7 in order to get feedback from the students about the project, they were also asked to comment on the assignment (either the music or the book) and what they learned from it. besides providing this anecdotal evidence describing their reactions to the assignment, students were also asked to complete a questionnaire designed to identify their preferred learning styles. the first section on the survey requested information about which assignment was chosen, and the second section contained 36 questions to identify whether students preferred a visual, auditory, or kinetic style of learning. there were 12 questions related to each learning style, and they were arranged in random order.8 the survey was administered during the last week of class, and it was optional. it was not part of the writing assignment or the students’ final grades. students were told that the results would not be looked at until after the semester was over and would be used in a paper describing student learning and alternative writing assignments. they were given the option to provide social security numbers as a way to link grades to survey 43 responses. there were 82 students who submitted writing assignments and received grades, and 77 of them (94%) answered the learning styles survey. there were two who chose not to include social security numbers on the survey forms. the descriptive statistics for the data are presented in table 1. students made two choices about the assignment—music vs. murder and partner vs. no partner. thus, the set of possible alternatives contains four options—music alone, music with a partner, murder alone, murder with a partner. the mean values in table 1 illustrate that there was variety among the students in their choices of assignment. interestingly, if the choices are divided into “music” or “murder,” regardless of whether there were partners, approximately one-half of the students chose each assignment—54% chose “music,” and 46% chose “murder.” almost one-half (43%) of the students chose to work with a partner. the most popular choice was the music with a partner choice, with 40% of students choosing this. the second most popular option was the murder mystery assignment without working with a partner, with 29% choosing it. a possible explanation for this may be that students perceived that it was easier to divide the labor in the music assignment than in the murder mystery assignment. in the music assignment, each person might find two songs and write those essays, and the students could confer afterwards when putting the project together to turn in. however, each student would have to read the whole book in order to be familiar enough with the story to write about the economic concepts, even if the students divided the murder assignment. it is also possible that, since the music assignment involved more creativity, students who chose 44 that assignment might be more creative which might correspond to being more likely to work with a partner. in table 1, the variable “change” denotes that 17% of the students initially decided to do one of the options and then changed to the other one. interestingly, approximately half of these students started with the music assignment and switched to the murder mystery while the other half made the other switch.9 table 1 also shows that 60% of the students in the two sections of introductory economics were female. the variables visual, auditory, and kinetic are dummy variables that were constructed to identify a student’s preferred style of learning. for example, the variable “visual” equals 1 if the student responded “i agree” to more of the visually-oriented questions on the learning styles survey than to questions identifying auditory or kinetic learning styles. “auditory” and “kinetic” were constructed similarly. table 1 shows that the most commonly preferred learning style was auditory. forty-four percent of the students are characterized as primarily auditory in learning style while 23% are characterized as primarily visual, and 8% are characterized as primarily kinetic.10 the remaining 25% of the students did not have a dominant learning style preference. data analysis cross tabulations were computed to investigate the relationships between the choice of assignment and the learning styles variables, student gender, and course grade. pearson’s chi-squared statistics were computed to gauge the statistical significance of the relationships. if the chi-squared statistic is significant, this suggests that there is a difference in the distribution of choice of assignment among those students who have a specific characteristic such as a preferred style of learning and those students who do not 45 have that same characteristic. the results showed that there was no statistically significant relationship between choice of assignment and preferred learning styles or course grades.11 therefore, the hypotheses linking learning styles to choice of assignment are rejected, and the conclusion is that there is no relationship between a student’s primary learning style and which assignment he chooses. also, students who performed better in the course did not choose certain assignments that differed from the choices made by students who performed worse in the course. the only cross tabulation that was significant was between choice of assignment and student gender. the value of pearson’s chi-squared statistic with three degrees of freedom is 7.31 with a p-value of 0.063. these cross tabulations are presented in table 2. the absolute frequencies are provided with the column percentages in parentheses. the percentages provide a clearer illustration of how the distribution of choice of assignment differs between males and females. the choices made by the males were more evenly distributed than the choices made by the females. in fact, much higher percentages of the males, as compared to the females, chose to do the music assignment without a partner or the murder mystery assignment with a partner. the females more often chose the music assignment with a partner or the murder mystery assignment without a partner. this finding could suggest that males and females may have differences in preferred learning styles. however, cross tabulations between gender and learning style variables did not yield statistically significant results. the possible explanations provided earlier about why students might choose to work with a partner on the music assignment but not on the murder mystery assignment apparently would apply only to females, although it is not clear why. 46 in order to investigate further the gender differences, cross tabulations were constructed between gender and learning styles, course grade, and working with a partner. gender was not strongly related to any of the variables.12 the results lead us to fail to reject the hypothesis that gender is related to choice of assignment. this finding that males and females make different choices about economics assignments supports the findings of earlier research that there may be gender differences in learning and understanding economics. anecdotal evidence the anecdotal evidence that students provided in their assessments of these assignments provides a glimpse of the impacts of the alternative writing assignments on students’ evaluations of their learning. in reading the students’ comments, it seemed that the assignments may have fostered long-term learning. whether students did the music assignment or the murder mystery assignment, the most common comments offered can be divided into the following three main topics: 1. economics is everywhere. 2. the assignment was enjoyable. 3. i understand the concepts better. the largest number of comments were in the first category. a representative sample of the specific comments made by students (both males and females) are presented in table 3.13 the evidence of possible long-term learning is found in the fact that, through this assignment, students were able to make a connection between the schoolwork and their lives outside the classroom, and they commented that they will remember the concepts longer because of the association with a particular song or a specific scene from the 47 novel. because they associated the material with their own lives, they also believed that the course content was more relevant. one student wrote that “…things learned in this course are far more applicable than simply remembering them for the next exam or quiz.” the students also said that, now that they are aware of the presence of economics in their lives, they are more likely to use the reasoning tools learned in the class. one student even related a personal example where, when faced with the choice of whether or not to buy a cd, she found herself asking which selection would give her greater satisfaction. one student summed it up by writing that “…economics is not just a required class that i have to take in college, it is part of everyday life.” this anecdotal evidence suggests that the students may have internalized economic concepts as a result of these writing assignments. conclusion this paper describes alternative writing assignments that were constructed so that the material would specifically apply to students’ lives and interests in order to highlight the relevance of economics in daily life and motivate students to become involved in their own learning. anecdotal evidence suggests that the assignments may have fostered longterm learning where students internalized the economic concepts. having students reflect on what they learned from the assignments may contribute to this learning as well, although many of the students described how these specific assignments—visual images from the novel or lyrics from the songs—will help them remember economic concepts in the future. this is an important finding given that much of the learning that occurs in introductory economics is probably short-term learning geared toward passing a specific exam or course. 48 even though the sample described in this paper is small, there is variety in the data set regarding learning styles, student gender, course grade, and choice of assignment. the statistical results suggest that, for some reason, there are gender differences in students’ choices of assignments. this finding indicates that offering a choice of assignments in an economics course may be a good idea since males and females make different choices and may have disparities in the ways they learn and understand economics. in their assessments of the assignments, students commonly stated that they liked the assignment. although an instructor’s first priority is to teach the material, providing assignments that students “like” may help them remember economic concepts better, may help them use the concepts more in their lives outside the classroom, and may make them want to take more economics courses. in other words, giving students a choice and providing a variety of assignments may increase their comfort level and willingness to learn. as one student stated, this assignment…“provided a comfortable association with the field of economics.” since the study of economics is often challenging to students, combining the economic way of thinking and solving problems (with which many students are not familiar) with comfortable associations may better prepare them to be economically literate members of society in the future. it is important to note that the costs to the instructor of using this assignment are not significantly larger than the costs of using any writing assignment. there are some added costs associated with listening to the music and reading the novel; however, the instructor could minimize some of these costs by making group assignments or giving students a list of songs from which to choose for the music assignment.14 the benefits of 49 possible long-term learning and favorable attitudes toward the subject matter should outweigh the additional costs to the instructor who already uses writing assignments in her courses. 50 endnotes 1 the idea for the music assignment came from a presentation at the 1998 assa conference describing the use of music to teach economics. see tinari and khandke, 2000, for further discussion of benefits and costs of using music in economics. 2 this course differs from traditional microeconomics and macroeconomics principles courses in that fewer topics are covered and some of those that are included are covered in less depth. because this course is an introduction to microeconomics and macroeconomics, it is necessary to limit content as compared to traditional principles courses. the primary topics covered are opportunity cost, comparative advantage, supply and demand in output and input markets, perfect competition, monopoly, business cycles, gdp, and inflation. 3 although the instructor used the assignments in a survey course where the students are not economics majors, the assignment could easily be modified for use in an introductory principles course. in fact, it could be an important addition to a principles course since this is where many students experience economics for the first time. requiring them to apply economics to their own life experiences would be an important addition in terms of increasing student learning and interest in economics and could possibly help to increase the number of students majoring in economics. according to fry and kolb, 1979, students are more likely to major in a field where teaching and learning styles match, and giving them choices in assignments that relate to their personal lives could provide more of these matches in economics. in order to use this assignment in principles, where specific content must be covered because it will be used in upper-level courses, the instructor could provide students with a list of concepts from which they must choose. the assignment could be done completely outside of class and, when due at the end of the semester, could serve as a review of relevant concepts for students. this instructor might also require the use of graphs or specific models in the explanations. 4 the economics requirement was added to these programs of study four years before these students were in the class in an effort to add more critical thinking and economic analysis to the students’ studies. 5 when comparing these students with students in a traditional microeconomics course at the same institution, it was found that the students in the survey course had statistically significantly higher average sat scores and grade-point-averages than students in the principles course. because the students are different in these respects, it is possible that they would behave differently when completing course assignments such as the essay described in this paper. however, since the “murder versus music” assignment was not used in the principles course, no comparison can be made at this time. 6 instructors who do not wish to be “shocked” by students’ music choices might want to impose some restrictions. leaving the choice completely open led to submission of graphic lyrics in some cases. 7 students who chose the music assignment were not asked to do this because they were already relating the content to their own lives by choosing the songs to analyze. the songs that were chosen reflected their personal music preferences. 8 the learning styles questions were from a learning style inventory constructed by wyman (1999) and used by various corporations and universities such as motorola, nasa, and penn state university. a copy of the 36 questions can be obtained from http://www.howtolearn.com/. 9 six students switched from the music assignment to the murder mystery assignment while seven students switched from the murder mystery assignment to the music assignment. 10 these findings are somewhat different from the population at large. visual learners make up about 65 percent of the population while auditory learners make up about 30 percent of the population and kinetic 51 learners make up about 5 percent of the population (sherow, 2000). this difference from the general population is not surprising since auditory learners “…learn best with lectures, records, audiotapes, oral presentations, …” it is likely that more auditory learners have self-selected into this group of highachieving college students. 11 the cross tabulations for visual and auditory with choice of assignment were not significant. the results for kinetic and choice of assignment were statistically significant, but they are not presented or discussed here because only 6 students had a preferred learning style of kinetic. with such a small sample of kinetic learners, conclusions would be not meaningful. 12 gender was strongly related to “kinetic” because 5 of the 6 students with a preferred learning style of kinetic were male. however, these results are not discussed here because the number of kinetic learners is too small to draw meaningful conclusions. 13 although all of the comments provided in table 3 are positive, three or four students did make negative comments about the assignment. the negative comments about the music assignment were complaints about the assignment being too time-consuming. a couple of students said that searching for “the right songs” took a lot of time. the negative comments about the murder mystery assignment were generally complaints that the end of the story was too contrived. 14 see tinari and khandke, 2000, for more suggestions about reducing the costs of the music assignment and specific music recommendations. 52 references anderson, g., d. benjamin, and m. a. fuss. the determinants of success in university introductory economics courses. journal of economic education, spring 1994, 99-119. bartlett, r. discovering diversity in introductory economics. journal of economic perspectives, 10 (2): 141-53. borg, m. o. and s. l. shapiro. personality types and student performance in principles of economics. journal of economic education, winter 1996, 3-25. dynan, k. e. and c. e. rouse. the underrepresentation of women in economics: a study of undergraduate economics students. journal of economic education, fall 1997, 350-68. felder, richard m. matters of style. asee prism, december 1996, 6(4), 18-23. ferber, m. a., birnbaum, b. g., and green, c. a. gender differences in economic knowledge: a reevaluation of the evidence. journal of economic education, spring 1983, 24-37. fry, r. and d. kolb, experiential learning theory and learning experience in liberal arts education. in new direction for experiential learning: enriching the liberal arts through experiential learning, eds. s. e. brooks, j. e. althof, et al., san francisco: jossey-bass, 1979, 79-92. harter, c. l., becker, w. e., and watts, m. who teaches with more than chalk and talk? eastern economic journal, summer 1999, 25(3), 343-356. jevons, marshall. murder at the margin, princeton, nj: princeton university press, 1978. kolb, d. a. learning styles and disciplinary differences. in the modern american college, eds. chickering and associates, san francisco: jossey-bass, 1981, 232-55. lumsden, k. g., and scott, a. the economics student re-examined: male-female differences in comprehension. journal of economic education, fall 1987, 365-75. millis, barbara j. and philip g. cottell, jr. cooperative learning for higher education faculty, phoenix, az: oryx press, 1998. sandler, b. r., l. a. silverberg, and r. m. hall. the chilly classroom climate: a guide to improve the education of women, washington, dc: national association for women in education, 1996. sherow, s. “adult learning theory and practice index” 53 pennsylvania literacy corps institute for the study of adult literacy sheila sherow penn state college of education, 2000 http://www.ed.psu.edu/paliteracycorps/hied/course_materials/adult_learning_theory_a nd_practice.pdf accessed september 9, 2002 statacorp. stata statistical software: release 5.0, college station, tx: stata press, 1997. tay, r. s. students’ performance in economics: does the norm hold across cultural and institutional settings? journal of economic education, fall 1994, 291-301. tinari, frank d., and khandke, kailash. from rhythm and blues to broadway: using music to teach economics. journal of economic education, summer 2000, 253-70. the triad model—teaching learning process: learning styles, http://instruction.elgin.cc.il.us/classes/preceptortraining/thetriadmodel/thetriadmodel teachniglearningprocesslearningstyles.htm health professions department elgin community college 1700 spartan drive elgin, il 60123 elgin community college's home page at http://www.elgin.cc.il.us last modified december 14, 1999 jp walstad, w. b., and robson, d. differential item functioning and male-female differences on multiple-choice tests in economics. journal of economic education spring 1997, 155-171. when learning and testing styles don’t match. school smart kids, vol. 1, no. 4, new discoveries in learning. retrieved july, 2000, from the world wide web: http://www.howtolearn.com/schoolsmartkids.html wyman, pat. personal learning styles inventory, windsor, ca: the center for new discoveries in learning, 1999. http://www.ed.psu.edu/paliteracycorps/hied/course_materials/adult_learning_theory_and_practice.pdf http://www.ed.psu.edu/paliteracycorps/hied/course_materials/adult_learning_theory_and_practice.pdf http://www.elgin.cc.il.us/ 54 table 1 descriptive statistics variable n mean music alone 77 0.14 music with partner 77 0.40 murder alone 77 0.29 murder with partner 77 0.17 change 77 0.17 female 77 0.60 visual 77 0.23 auditory 77 0.44 kinetic 77 0.08 table 2 cross tabulation choice of assignment and gender choice of assignment male female total music alone 7 (22.58)* 4 (8.70) 11 (14.29) music with partner 10 (32.26) 21 (45.65) 31 (40.26) murder alone 6 (19.35) 16 (34.78) 22 (28.57) murder with partner 8 (25.81) 5 (10.87) 13 (16.88) total 31 (100.00) 46 (100.00) 77 (100.00) *values in parentheses are column percentages. 55 table 3 representative sample of students’ comments economics is everywhere, and it will affect our lives no matter what we choose to do in life. this project helped me to see that economic concepts can be found almost anywhere. we sometimes fail to realize how our schoolwork connects to our real life. this assignment allowed us to make that connection. economics practically surrounds every aspect of our lives. through examining these songs and their economic themes, i gained a better understanding of the concepts themselves, and also have come to realize that the things learned in this course are far more applicable than simply remembering them for the next exam or quiz. i never thought that the songs i sing every day were actually applicable to my economics class! i learned some things about economics that i will remember for as long as i remember the song lyrics!!! this assignment has increased my awareness of economics in everyday life, and has provided a comfortable association with the field of economics. this assignment has taught me that economics is so integrated in our lives, it can touch us without our awareness of it. in this assignment, i learned that economics is not just a required class that i have to take in college, it is part of everyday life. until reading the book i never really knew that economics could be applied to real life situations. i think that i have learned a lot more about economic concepts. because i can think of them and how they were described in the book, i also think i will probably remember these concepts. this assignment has taught me many things but perhaps most importantly it made me realize that economics is all around me and i use the laws every day whether or not i know it. i went to sam goody yesterday and i could not help but thinking of “what would give me greater satisfaction, the $15 or the cd?” it will be difficult not to think of the laws in the book when i decide to spend some money. i really did not realize the way economic reasoning could be used to solve any type of problem. i feel that the novel was very helpful to further enhance and personalize my economic understanding. i now realize that economics is part of my daily life, whether i am aware of it or not. now throughout my daily routine i can recognize economics. economics, therefore, is not just learned in a classroom, but everywhere in life. the novel was better than any textbook that i have ever read, and i think the principles displayed in the book will remain in my head longer than if i had just memorized them for a test. i can now apply economics to everyday life and use it to figure out why certain things happen the way they do. i will now notice that many of my unconscious decisions can be explained by economics. by relating economics to the songs that i listen to, it made me look at them in a whole new way. in the process, i understood the economics terms by relating them to real life situations instead of just reading the notes and writing a paper. murder versus music: giving students a choice in introductory economics learning styles and gender assignments and data data analysis anecdotal evidence conclusion descriptive statistics variable cross tabulation choice of assignment and gender female total representative sample of students’ comments teaplummeretal 31 the implementation of higher education web classes; technological issues, concerns and potential problems by jerry plummer, vicky langston and tommy meadows austin peay state university what exactly are higher education web classes? in higher education, internet based course offerings are a hot current topic. what are these classes, and what do they mean to higher education? much like e-commerce, web-based learning involves the internet and interactiveness between the web site and the student (consumer). the professor often places the lessons and usually tests on the selected web site for students. group discussions are usually allowed between students and the professor, much like chat rooms. this interactiveness allows for a more realistic, class-like environment. as in e-commerce (where customer order requests are logged into the database for further processing), requests or responses from the student are logged into the class database for grading, interpretation, or professor response. web-based higher education classes are expanding in number, although to a lesser degree than e-commerce from the private (for-profit) sector, probably due to lack of profit motive on the part of higher education. drexel university, for example, recently announced the first ‘techo-mba’ program where all classes are taught online.1 several major universities are considering offering internet degrees, and many universities and colleges are experimenting with offering selected types of courses currently. what are (if any) areas of concern for higher education in this burgeoning ‘market’? is everything an opportunity, or should we continuously look at this new ‘gift’ of technology prior to becoming involved? what items are of concern to higher education, and what are the possible outcomes, both positive and negative? this paper will explore areas of potential concern to higher education in the arena of internet based course offerings from a technological standpoint, and attempt to offer a basic set of conclusions that will require further research. technological areas of concern from a computer hardware standpoint, it is clear that security measures must be present in order to reduce the possibility of hacking or intruder intervention to the course. these intruders, or ‘hackers’, in essence, spend time ‘surfing’ on the web attempting (often successfully) to enter a site and its server (the computer housing the site data-in this case, for the proposed higher education course offering) for a variety of purposes. one such group, defcon,2 is known internationally for successful endeavors of this nature, mostly on ecommerce sites as well as government sites. many remember when president clinton’s site was hacked to send internet visitors to a well known pornographic site, rather than the president’s actual site. another hacker group, cult of the dead cow,3 has members that are suspected of hacking the d.a.r.e. site, as well as amazon.com and/or e-bay. there are many ‘shadow groups’ of hackers worldwide who successfully enter sites without anyone knowing. accurate data on the number of hacked sites does not exist currently. interestingly, many hackers are late high school to early college age--a fact that should not be missed in the academic community regarding existent and/or proposed web courses. the hackers are generally not interested in damage, simply that they can ‘get in and out’, although there are hackers who write code for viruses with the intent of causing damage to the server contents. recent viruses that attack email comes to mind. it can be seen that the hacker interests could also involve acquisition of test data, test grades, and passing university classes. unfortunately, many universities are ill-equipped to combat hackers or intruders of a similar nature. most large 1nashville tennessean, february 10, 2000; ‘online mba program offered.’ 2nashville tennessean, march 12, 2000, ‘what’s in a name.’ 3nashville tenness,2000, ibid. 32 e-commerce firms, such as e-bay,4 employ several high-paid technicians simply to monitor and reroute attempted intrusions. many universities simply do not have the required funds available for this purpose. this leads to the implementation of hardware services, such as ‘firewalls’5--to try to close the door to the site/server from intruder attacks, or hacking. so, the next concern, from a hardware standpoint as well as course content, relates to the ‘housing’ of the database for the class. a good web class is dynamic, or interactive, allowing for the student to access the class information from the site, as well as return data to the site. this includes tests for the class, since essay testing is not applicable for classes. the interactive database must be fully protected in order to reduce or dismiss any possibility of the test answers (for example) being accessed by the student. most of the available web classes are packaged and sold by firms like blackboard,6 webct 7 , ecollege8 or universityaccess9. these are ‘canned’ packages, allowing for some modification by the professor, but still (generally speaking) pre-built to an existing ‘standard’, traditionally developed concurrently by the course manufacturer along with an established member of the academic community. this is similar in some ways to the selection of a particular text for a course, but the text can be added to at will. modification of some of these canned programs is tenuous, and tends to limit the professor’s freedom in class topics and usage. course manufacturers are (generally speaking) not members of higher education, but for-profit members of the private sector. clearly, the opportunity for profits is tremendous, and in a competitively arrayed market system profit becomes the primary motive. the implications to higher education here are obvious and should not be swept aside in the euphoria to join the groundswell for internet courses. potential solutions and questions one recent approach to ‘fixing’ the above hardware issues or concerns has been by the course manufacturers (blackboard, webct, ecollege or universityaccess, for example) to maintain the course on its server and proxy the course to students by the distribution of passwords to students, thereby reducing the universities liabilities from a hardware protection standpoint. professor involvement is by the same means of passwords, both for course modification and student progress analysis. the university is (possibly; theoretically) absolved of all computer-related issues, since the manufacturer maintains the entire site on its own server for all courses and all members of higher education using the courses. (this would be transparent to the students, who would still access their higher education site, and then be transported via an ‘alias’ to the manufacturer site.) as with many things in life, the simple answer often provides a new group of questions. questions now arising include the following: * who is the ‘school’, the manufacturer or the university? * who is responsible if the site is hacked? * what does the university do about grades if the test data is ‘out there’? * what happens if the professor wants to change course content beyond the scope of the manufacturer’s desires? 4nashville tennessean, february 11, 2000, ‘web sites race to bolster defenses.’ 5http://www.zeuros.co.uk/firewall 6http://www.blackboard.com 7http://www.realeducation.com 8http://www.webct.com 9http://www.universityaccess.com 33 * does the university receive any renumeration for course modifications or enhancements? * does the university stand a chance of losing its individuality if it uses canned manufacturer courses * are there market ‘niches’ for universities, and what is to stop smaller schools from losing enrollment to larger ‘name’ schools? although it is true that answering any or all of these questions is beyond the scope of this paper and is a topic for further research, we can still arrive at three general conclusions: (1) the area of ownership of the course should be closely inspected by higher education prior to any type of binding commitment. (2) the placement of the course from a hardware standpoint relates to two major areas: (a) security considerations must be a top requirement (b) higher education should require full access to the site, wherever it is placed, and retain the ability to change or modify the class in accordance with university or professor requests. (3) higher education must retain its own individuality in the course content, rather than have a generation of ‘cookie-cutter’ degrees, based on course manufacturer’s (potential) desire to increase profits due to the synergistic concept of developing one course and having it used by all universities and colleges. these three points and sub-points all appear to be candidates for ‘major risk’ to higher education if not clearly considered prior to course acceptance and implementation or with any type of agreement with course manufacturers. closing remarks in the area of combining higher education courses with the new technology of the internet, it is clearly true that tremendous potential is evident and that higher education should become involved. however, as with many ‘new’ things, one should consider both the positive and the negative prior to implementation of the course to the internet. this paper is not written to attempt to state that the internet class offerings should not be considered, nor to state that higher education and course manufacturers should not consider a partnership. possible synergy is clearly possible and certainly should be pursued by members of the higher education community. the paper simply states that there are possible negative connotations that could be involved, and prior to implementation, all areas should be considered in order to ensure that the learning process is cognitive and in line with existent higher education standards and procedures. further research will be done by the authors in these areas to delineate further areas of opportunities and concerns. 1 | journal for economic educators, 15(1), 2015 1 on teaching production theory: integrating short-run and long-run analyses will c. heath and rand w. ressler1 abstract the microeconomic theory of production is typically presented to undergraduates in a way that leaves many students with a disjointed view of the subject. the short run is described as one kind of world, in which the firm pursues one set of objectives, commonly identified as “optimal factor employment.” the long run, on the other hand, is depicted as a very different kind of world, in which the firm pursues a different set of objectives, known as “optimal factor combination.” the purpose of this essay is to bring together familiar diagrammatic tools in a way that allows instructors to integrate short-run and long-run principles of factor employment. jel classification: a20, a22, a23, d21, d24 dis-integration microeconomics textbooks define the short run as the time period in which at least one factor of production (usually capital) is fixed, and the long run as the time necessary for all factors to be variable. the standard presentation discusses the short run in terms of optimal factor employment, in which the firm employs some variable factor (usually labor) to the level at which the factor’s marginal revenue product is equal to its marginal factor cost (mrp = mfc). the long-run analysis, on the other hand, assumes that all factors are variable, and the firm pursues the optimal factor combination, which is achieved when the ratio of factor prices equals the ratio of marginal products (mfca/mfcb = mpa/mpb). textbooks often offer little discussion of how the short-run and long-run optimality conditions are related – and even less about how the firm gets from one “run” to the other. 2 a more integrative analysis would describe the process by which the firm adjusts employment, through time, in accordance with both factor employment and factor combination criteria. the purpose of this essay is to develop such an analysis, using familiar diagrammatic tools which are left unconnected in the typical pedagogical approach. first, we review the optimal factor employment and factor combination conditions, with emphasis on the logical relationships between these conditions in the context of profit maximization. next, we consider the ways in which different inputs interact in the production process – specifically, issues of 1 will c heath, phd, professor of economics, department of economics and finance, b.i. moody iii college of business administration, university of louisiana at lafayette, lafayette, louisiana, 70504, (337) 482-5728, fax: (337) 235-7078, carywheath@me.com rand w. ressler, phd, professor of economics, department of finance and economics, georgia southern university, statesboro, ga 30460-8152, (912) 478-0086, fax: (912) 4780710, rressler@georgiasouthern.edu 2 we examined numerous intermediate level microeconomics and managerial economics textbooks. we do not identify them, since we are not attempting to textbooks, nor do we wish to imply any qualitative judgments concerning the books in our sample. mailto:carywheath@me.com mailto:rressler@georgiasouthern.edu 2 | journal for economic educators, 15(1), 2015 2 substitutability and complementarity. we then present an integrated analysis using familiar diagrammatic tools. optimum conditions of factor employment and factor combination we may describe a production process generally as q = f(l, k) where l is labor and k is capital. to simplify the analysis, assume the firm is a price taker in both input and output markets, so that marginal revenue is the same as product price (p), and marginal factor costs are identical to the wage (w) and the rental fee (r) for labor and capital, respectively. assume also that the firm is operating where factor marginal products are positive but declining. the marginal products of labor and capital are: mpk = ∂q/∂k (labor held constant) mpl = ∂q/∂l (capital held constant) and the firm is operating such that: ∂q/∂k > 0 ∂(∂q/∂k)∂k < 0 ∂q/∂l > 0 ∂(∂q/∂l)∂l < 0 the value of marginal product (vmp) of each factor is: vmpk = p(mpk) vmpl = p(mpl) total cost is defined as: c = rk(q) + wl(q) and the marginal cost associated with each factor 3 is: mcl = w/mpl marginal costs (1) mck = r/mpk the familiar optimal factor employment condition states that a factor should be employed up to the point at which the value of its marginal product is equal to its own marginal cost: vmpl = w optimal factor employment (2) vmpk = r as a short-run condition, the optimal factor employment of each factor is meaningful on its own terms without reference to the other factor, assumed to be fixed. 3 for labor: mcl = = w/mpl. likewise, mck = r/mpk. 3 | journal for economic educators, 15(1), 2015 3 the long run is commonly defined as the time frame within which all factors are variable. the optimal combination of factors when both factors are variable is achieved when the marginal product per dollar spent is the same for the two inputs: mpl/w = mpk/r optimal factor combination (3) the short run and long run conditions bear a relationship that is seldom made explicit in intermediate-level microeconomics textbook presentations. in the context of profit maximization (p = mc), condition (2) is equivalent to: w = p(mpl) and r = p(mpk). thus w/mpl = p and r/mpk = p. if mc = p, then w = mc(mpl) and r = mc(mpk). therefore, when the firm is maximizing profit, (2) implies: w/mpl = mc = r/mpk (4) when the firm is maximizing profit, the marginal cost of increasing output must be the same, whether the increase comes from employing more capital, or more labor. thus the two marginal costs defined in (1) are equal to each other. it follows from (4) that mpl/w = 1/mc = mpk/r. multiplying through by p yields vmpl/w = p/mc = vmpk/r. and if p = mc, then vmpl/w = 1 = vmpk/r. this is equivalent to the optimal factor combination condition (3). furthermore, when (4) pertains, condition (2) is achieved for both factors simultaneously. if (2) were not met for both, then the firm could increase profit by expanding employment of either factor with a marginal cost lower than price, and reducing employment of the factor with a marginal cost greater than price. if, for instance, r < vmpk then r < p(mpk) and mck = r/mpk < p. likewise, if w > vmpl then w > p(mpl) and mcl = w/mpl > p. in the first instance, the firm should increase employment of capital (because p>mck,) and in the second instance, reduce employment of labor (p<mcl). the upshot is that when short-run optimality conditions (2) are met simultaneously for both factors, the long-run condition (3) must obtain as well. note that in the integrative processoriented analysis developed here, successive short-run factor adjustments are seen as yielding the long-run optimum factor combination. this relationship between short-run and long-run conditions is represented diagrammatically in figure 1. the top half of the figure illustrates optimal factor employment conditions, while the bottom half depicts the optimal factor combination. this “full equilibrium” condition, i.e., the condition in which both short-run and long-run equlibria obtain, will serve as the starting point for analyses that follow. of course, it is unlikely in the real world that an optimal short-run equilibrium would coincide with long-run equilibrium; if so, it is a happy coincidence. the purpose in presenting simultaneous equilibria in both the short run and the long run is to establish an analytical starting point for discussion. the discussion proceeds by assuming general equilibrium, introducing a disequilibrating disturbance, and following the firm’s decisions, which lead – analytically speaking – to a new equilibrium. this approach (from equilibrium to disequilibrium to a new 4 | journal for economic educators, 15(1), 2015 4 equilibrium) is the standard analytic model in much of microeconomic and macroeconomic exposition. substitutability, complementarity and the shape of the isoquant: a necessary digression the vmpk and vmpl curves in figure 1 are both downward sloping due to diminishing marginal product, and the isoquant is convex to the origin in part for the same reason. but employment of both factors varies along an isoquant, which raises the question of complementarity, i.e., the possibility that the level of employment of one factor might affect the marginal product of the other. complementarity can be defined generally as: ∂(∂q/∂k)∂l = ∂∂q/(∂l∂k) = ∂(∂q/∂l)∂k (5) and the possible values of (5) define the following relationships: ∂∂q/(∂l∂k) > 0 complementarity (6) ∂∂q/(∂l∂k) < 0 anti-complementarity (7) ∂∂q/(∂l∂k) = 0 independence (8) 5 | journal for economic educators, 15(1), 2015 5 diminishing marginal product alone implies a convex isoquant for inputs, but complementarity (6) augments the effect of diminishing marginal returns – the marginal rate of technical substitution (mrts) changes more pronouncedly as factors are substituted along an isoquant. figure 2 illustrates the effect of complementarity. we may assume, as a practical matter, that complementarity between labor and capital exists as described in (6). for this reason, and in the interest of space, we limit subsequent analysis to this case. 4 we have discussed complementarity in the long run context of the isoquant, but it is necessary for our purposes to depict complementarity in the short run context of optimal factor employment. figure 3 presents the case where labor and capital are complementary: additional 4 anti-complementarity (7) has the opposite effect on mrts, and a concave isoquant would result if anti-complementarity were the dominant effect. a straight-line isoquant would result if neither factor exhibited diminishing marginal product, or if diminishing marginal product and anti-complementarity exactly offset each other. production with fixed-input proportions is an example of extreme complementarity: the marginal product of one input is zero without a proportionate increase in employment of the other input. both concave and straight-line isoquant curves imply corner solutions; factor substitution at the margin is technologically possible, but economically meaningless. with fixed-input production, neither technological nor economic substitution is meaningful. independence between input factors (8) does not mean that factor substitution is economically meaningless, only that diminishing marginal returns associated with one factor is neither enhanced nor offset by changes in the level of employment of the other factor. 6 | journal for economic educators, 15(1), 2015 6 labor makes additional capital more productive, and vice-versa. diagrammatically, a shift in the vmpk curve occurs in figure 3(a) when additional labor is employed, and vice-versa in figure 3(b). discussion we now illustrate how the integrative diagrammatic approach can be used to analyze the firm’s response to changes in factor prices (wages or rental fees), a change in technology, and a change in product price. these exercises can be incorporated into the usual textbook treatment of production theory with minimal additional space or discussion. in each case, the analysis begins with the firm in equilibrium with respect to factor employment. then we introduce some disequilibrating change – an improvement in technology, a change in wages, an increase or decrease in the market price of the product. the firm then undertakes a series of adjustments in factor employment, arriving finally at a new equilibrium, where no further adjustments are motivated.5 while the short run is often defined as the time frame in which at least one variable is fixed (and the long run as the time frame sufficiently lengthy for all variables to change), another option, however, is to alter the number of factors that may be allowed to vary, irrespective of time frame considerations. the short run is then defined as limiting the number of variable factors and the long run as allowing more (or all) factors to vary. the first option defines the length of the run in terms of a specified time frame, while the second defines the length of the run in terms of a specified analytical framework. in fact, the first approach is equivalent to the second if lengthening the time frame serves merely to bring more variables into play. however, 5 fritz machlup [2, 4] describes a standard analytic model of economics as follows. step 1. initial position: “equilibrium,” i.e., “everything could go on as it is.” step 2. disequilibrating change: “new datum,” i.e., “something happens.” step 3. adjusting changes: “reactions,” i.e., “things must adjust themselves.” step 4. final position: “new equilibrium,” i.e., “the situation calls for no further adjustments.” the exercises discussed here proceed along the lines described by machlup. 7 | journal for economic educators, 15(1), 2015 7 the second option does not necessarily imply a longer time frame for adjustment. as machlup [2, 4] points out, the opposite could be the case, because the firm has greater flexibility, the more factors it can vary. the analysis here limits the list of factors to labor and capital, and allows both to vary symmetrically with regard to time. by this we mean that neither factor is assumed to be necessarily any more or less “fixed” than the other in time. specifically, we do not assume that only labor varies in the short run, while capital adjustments occur later on.6 our approach recognizes that the firm is likely to find it practical to vary employment of some factors, but not others, at any given point in time – for any number of reasons, both technical and contractual. the firm thus undertakes a series of steps by which the employment level of one factor changes, then the employment level of the other, and so on, until no further adjustments are motivated. this process is sequential in a sense, but does not include a formal time variable. while the firm proceeds through a series of adjustments that takes it from disequilibrium, at some point in time, to a new equilibrium at a later point in time, we do not partition the process into distinct short-run and long-run temporal phases. the long-run equilibrium condition, as described in equation (3), is the result of this process, not a different goal appropriate to a different temporal realm. example a: a decrease in labor cost a decrease in the wage, w, motivates the firm to hire more labor, to employment level l2 in figure 4. the isocost line becomes less steep to reflect the change in the relative prices of capital and labor, and shifts out to pass through point b, the new optimal level of labor employment.7 employment of capital remains unchanged at first; but as labor employment increases, the marginal product of capital is enhanced due to complementarity: the vmpk, shifts upward to vmpk (l=l2). thus (2) is no longer satisfied for both factors, because vmpk > r after labor is added. employment of capital increases to k2 and the firm moves to point c. but this increase in capital subsequently increases the marginal product of labor (again due to complementarity). the vmpl curve shifts upward, employment increases to level l3, and the firm reaches point d. additional labor further strengthens the marginal product of capital, and so on. 6 this development is “symmetrical” in that either variable, labor or capital, might be variable in a shorter period of time 7 note that the isocost line is not exactly analogous to the budget constraint of utility maximization theory. the firm chooses the level of total spending; it is not constrained in the way that the consumer’s budget is constrained by income. at point b, total spending might be greater or less than before, depending on total expenditures on labor at this point. 8 | journal for economic educators, 15(1), 2015 8 this process cannot go on forever, of course. to better see how the process plays itself out (and converges on long-run equilibrium), consider figure 5, which presents the factor employment condition for labor. when wages fall, labor employment increases, and the firm moves down along the initial vmpl curve. if there were no complementarity with capital, the initial adjustment to (a) would be the full adjustment. but with complementarity, the firm is motivated to hire additional capital, which, in turn, causes the marginal product of labor to increase, thus shifting the vmpl to the right. the firm moves from (a) to (b) then to (c). as labor employment expands further, this “reverberation”8 process continues until the firm arrives at some point (e), where (2) is met for both labor and capital. 8 we borrow the term from hershleifer and glazer [1, 305]. 9 | journal for economic educators, 15(1), 2015 9 there emerges a “long-run” vmpl curve (lvmpl) which is downward sloping, but less steep than any given short-run vmpl curve, due to the influence of complementarity. the process eventually establishes an equilibrium level of factor employment – given that the lvmpl is downward sloping. in other words, the effect of complementarity cannot be so strong as to overcompensate for diminishing returns. thus point (b) cannot exceed the original point at which vmpl = w1. if complementarity were of such overwhelming magnitude, the lvmpl would diverge from w2; the process would not lead to a determinate level of factor employment. a similar process occurs with capital: the lvpmk converges on r to establish an equilibrium level of capital employment. to summarize, points (b), (c) and (d) in figure 5 are positions to which the firm is driven by the optimal factor employment condition. but each adjustment of one factor throws the condition out of equilibrium for the other factor. only when the firm reaches point (e) are both labor and capital in equilibrium. here the lvmpl and lvmpk curves have converged on w2 and r, respectively, to determine equilibrium employment levels, and (2) is satisfied for both factors. the factor combination condition (3) must also be met, and the process of adjustment reaches its completion, i.e., simultaneous short-run and long-run equlibria. 10 | journal for economic educators, 15(1), 2015 10 example b: an improvement in technology consider an improvement in technology that increases the marginal product of capital. the vmpk shifts, and the factor employment condition motivates an increase in capital employment to k2 in figure 6. the firm moves first to point b. with the increase in capital employed, the marginal product of labor is enhanced. thus the vmpl shifts, labor employment goes to l2, and the firm reaches point c. at employment level l2, the marginal product of capital is enhanced, and capital employment goes to k3. this reverberation process continues until (2) and (4) are simultaneously satisfied (point d). that is, the process brings the firm along the lvmpl and lvmpk curves, as depicted for labor in figure 5, to points which satisfy (2) and (3). example c: an increase in product price as a final exercise, consider the effects of an increase in product price. both the vmpk and vmpl increase, leading to greater levels of employment of each. in figure 7, employment levels go to k2 and l2, and the firm is taken to point b. 11 | journal for economic educators, 15(1), 2015 11 complementarity further lifts the vmpk and vmpl curves, and the process described above leads to point c and eventually to point d. summary and conclusions students of microeconomics are typically presented a theory of production that is disjointed with regard to the firm’s behavior in the short run as compared with the long run. the short run is described as one kind of world, in which the firm pursues one set of objectives, commonly identified as “optimal factor employment.” the long run, on the other hand, is depicted as a very different kind of world, in which the firm pursues a different set of objectives, identified as “optimal factor combination.” students may be forgiven if they fail to see how one world relates to the other; textbooks should not model the long run and the short run as different worlds. this essay is an attempt to develop an alternative, more integrated, approach. the fact is that firms operate in the present with an eye to the future. in the real world of time and circumstance, firms pursue a series of adjustments in an attempt to be efficient and earn profits. these adjustments are adequately described as pursuing optimal factor employment, 12 | journal for economic educators, 15(1), 2015 12 inasmuch as the firm will ordinarily find it feasible to vary some inputs, but not others, at any given point in time. what, then, of the long run optimal combination of factors? in the approach taken here, it emerges as the product of actions taken in pursuit of optimal factor employment. these actions play out over time, of course, but it causes confusion among students to partition the firm’s actions into separate, and ultimately artificial, temporal realms. unfortunately, the typical microeconomics textbook treatment of production theory does both: it partitions and it confuses. we hope this discussion will help to change that. references 1. hirshleifer, jack and amihai glazer. price theory and applications. englewood cliffs: prentice-hall, 1992. 2. malchup, fritz, “misplaced concreteness and disguised politics.” the economic journal, vol. lxviii, march 1958, 1-24. abstract-southern industrial relations and human resource conference the dunlop commission: missed opportunity or failed hegemonic project james earhart* abstract the clinton administration has initiated reforms in industrial relations to assure current and future economic competitiveness. toward this goal, the commission on the future of worker management relations (the dunlop commission) was called to order. this paper draws from these transcripts on workplace cooperation and explores the claims and policy assertions elaborated by each side. i concluded that insurmountable differences exist between capital and labor in their interpretation of cooperation. further, i contend that capital utilized the hearings to develop a hegemonic project whose final goal was the exclusion of labor from future policy discussions. introduction it is assumed by a number of scholars of industrial relations policy that the proliferation of cooperative workplaces will contribute to the present and future economic competitiveness of the american economy. further, it is argued by proponents of increased worker-management cooperation that when workers are allowed additional influence in organizational decision-making processes, this contributes to the productivity of the employer. eventually, a good portion of this windfall reaches the workers, which will contribute to the alleviation of economic inequality in america. the clinton administration has embraced and attempted to apply this philosophy. much of the administration’s interest in tackling the task of reforming labor relations can be traced to clinton’ s reading of bluestone and bluestone’s text, negotiating the future, where, the authors argue, the nation’s present and future economic interest will be secured when cooperative, less adversarial workplaces are encouraged to develop over the traditional hierarchical, tayloristic, system of work organization. however, in a subsequent and thought-provoking paper, bluestone has warned that institutional reforms are necessary if we are serious about advancing the cause of workplace cooperation. he suggested the reforms are necessary to purge asymmetries from the cooperative context, thus facilitating and encouraging meaningful dialogue between labor and management. bluestone envisioned the dunlop hearings to be an excellent opportunity to pursue the prerequisite reforms.1 clinton’s inclusion of robert reich as secretary of labor, perhaps the lone cabinet member within the administration to possess the credentials of a progressive policy advocate, can also be interpreted to be additional evidence the administration was ready to embark on a path towards progressive labor relations reforms. reich has devoted a good part of his career to the development and assertion of the position that a key to the economic revitalization of the nation lies in the pursuit and implementation of organizational and labor market reforms, which would contribute to the creation of more “flexible” work systems. in his memoirs, reich confides that he chose to join the clinton administration because he believed clinton to be motivated by a progressive, activist, policy orientation. in this he recognized perhaps his last, best chance to initiate his own brand of progressive policy reform2. to this end, the administration has initiated the commission on the future of the worker management relations for the purpose of advancing towards these stated goals. referring to the work of bob jessop, such effort might be visualized as an effort on the part of the state to construct hegemonic projects. to what degree this initiative will be successful depends to some extent upon the administration’s ability, through the dunlop commission, to bring labor and capital together on some kind of agreement as to what cooperation entails. to pursue this question, we turn to an analysis of the proceedings of the dunlop hearings. * labor education program, university of missouri. 21 22 the managerial perspective on workplace cooperation steven darien of merck pharmaceuticals testifies that the current labor relations framework is not conducive to the proliferation of cooperative workplaces. darien begins by noting his displeasure over a number of recent nlrb rulings, which in his opinion have worked to discourage the proliferation of cooperative workplaces. darien asserts that the effort to expand cooperative workplaces can be facilitated only “if the effort (to create cooperative workplaces) expands beyond the narrow confines of a single program or process and if human resource practices such as compensation, training, employment systems, and managerial reward systems are modified to support these efforts”. darien focused his critique on a number of recent rulings, which he asserted, represent examples of recent overly conservative interpretations of cooperation. these are nlrb opinions concerning the electromation, dupont, webcore, and vons grocery rulings. through these rulings, darien observes that the nlrb has sent out a message which has resonated through the managerial community, and this message is that “employee involvement is permissible only as it has no impact on improving workplace policies…. when employee involvement does become effective and the nlrb finds out about it, the board is quick to strike it down.” speaking on behalf of the national association of manufacturers, rosemary collyer extends the critique further when she asserts that section 8 (a) (2) has served its purpose and is no longer worthy of defense. besides, collyer reminds the commission, section nine of the nlra allows individuals or groups of employees the right at any time to present grievances to the employer and pursue an adjustment. she concludes by suggesting the failure to move towards more cooperative workplaces would have a detrimental impact on the nation’s economy. continued progress toward this model should not be hindered by concerns that this may lead to an infringement on the “employees’ exercise of free choice…freedom to choose is the watchword, not representation per se” collyer concludes. an assessment of capital’s position this is truly a dilemma. if darien’s point is correct, the likelihood of cooperative workplace efforts to proliferate across the industrial landscape is doomed. however, upon reviewing the 8 (a) (2) cases referred to by darien, such as the recent electromation, and du pont rulings, concludes that this is not true. for example, in electromation, management unilaterally set up what they termed “action committees”. these action committees were in response to increasing worker disgust regarding a number of recent policy changes that impacted worker compensation rates. once the “action committees” were formed, management decided the nature and scope of the topics to be discussed, which solutions or options were feasible, and how many employees could participate on the committee. soon after the action committees were up and running, a worker organization effort ensued. the teamsters union filed a suit against electromation, alleging that the action committees were operating in violation of sections 8 (a) (2) and 2 (5) of the wagner act. the nlrb sided with the teamsters. who can blame the teamsters? with little difficulty, one can begin to see how the action committee can work to obstruct worker progress towards meaningful and independent representation before the employer. under the dupont ruling, which concerns a union plant, management purposely set up a cooperative program independent of the union. from this, what occurred is that concessions the union could not gain through negotiation with management were suddenly gained through the cooperative program with ease. after a series of victories were secured through the cooperative program, management chided the workers for staying with their union after it seemed obvious that the cooperative effort was more effective in winning concessions from management. one example occurred when employees convinced management to place picnic tables in the external break area. this victory came after years of workers attempting to achieve the same results through their labor union and the collective bargaining process3. clearly, in the example of the dupont case, the cooperative program was being utilized primarily to undermine worker support for the union. this case demonstrates that the protection of 8 (a) (2) is necessary to prevent employers from attempting to undermine already established unions. referring to the webcore ruling in particular, darien contends the cooperative program had to be dismantled not because it was anti-union, but because “it committed the sin of establishing a plant council in which hourly employees dealt employment-related issues.” the cooperative programs at webcore, according to darien, were operating beyond the scope of what is allowed by current labor law. and in a 23 sense, darien is correct. in their ruling on the case, the board found that mr. sibilsky, the owner of webcore manufacturing, had unilaterally created and disbanded the participative structure. sibilsky determined the structure and function of the program, as well as the topics deemed eligible for discussion. employees were allowed to elect representatives to meet with management in part as an effort to create and perpetuate the illusion that the participatory program was bilateral. the board concluded that plant management had ultimate authority over the program, and, further, no provisions were provided for its existence independent of managerial fiat4. once again, an analysis of recent 8 (a) (2) cases leaves us with a better understanding of management’s conception of workplace “cooperation”. after reviewing the cases referred to by darien, it seems the management contingent is protesting the ability of the board to strike down unilaterally directed cooperative programs. what is revealing is the fact that in these cases the board was alerted of what was occurring by the workers themselves, further indicating that the workers were not pleased with the form and the function of these unilateral cooperative efforts. further evidence indicates that the board is not indiscriminately disbanding cooperative programs, as darien would have us believe. in his review of nlrb rulings against cooperative programs, research conducted by james r. rundle5 discovered that of the 58 participative programs disbanded by the nlrb over a twenty-three year period extending from 1972 to 1993, only five were disbanded on the basis of an 8 (a) (2) violation alone. all other cases involved at least one if not numerous unfair labor practices as a precipitating factor leading to the disbanding of the cooperative programs. this is further evidence that the nlrb is not on a vendetta against cooperative programs. on a more disturbing note, this indicates that the employer for the purpose of undermining previously established worker rights occasionally utilizes cooperative programs. from darien’s perspective, the perceived folly of webcore can be corrected only through the nlrb’s adoption of a more liberal interpretation and application of section 8 (a) (2) of the wagner act. darien suggests that 8(a) (2) should be revised in such a way to allow employers to “deal with” employees in a non-union setting. returning to the webcore ruling, the board defines “dealing with” as entailing a “bilateral mechanism involving proposals from the employee committee concerning subjects listed in 2 (5)”. so, applying this to darien and assuming he understands the concept of “dealing with” in the same way the board does, the question is, what provisions would be present in darien’s plan to assure the creation of the necessary bilateral system? none are offered. further, at no time throughout the hearings did management appear receptive to the proposition that workers elect those workers who would represent them via the cooperative program. in fact, the managerial panelist seem to be hostile to the concept. is a compromise possible? as a brief digression, the exchange between douglas fraser and the management panel elucidates the point. at the conclusion of the presentation of the management panelists, fraser posits an open question to any member of the panel willing to respond. he asks whether the panel would be willing to agree to a stipulation that employees be allowed to vote for representatives in the participative program if the commission was willing to endorse the liberalization of 8 (a) (2). in response to his question, fraser encounters double talk. mary harrington, director of human relations at eastman kodak, argues that since workers are put into their positions within the labor process on the basis of merit, rather than by selection, it is difficult to understand why this same system should not be used to appoint employee participants. harrington ads further that the logistics and topography of the manufacturing plant itself make it difficult to embark on such a process: “…if you can picture a factory like ours where we have 20 square miles, several buildings and thousands of processes going on, to expect a few people elected to a committee to try to understand that and try to make any meaningful contribution to safety doesn’t work.” besides, darien ads, workers have the right to quit or to not participate in a cooperative program if they are not satisfied with what is occurring. the exit vs. voice dichotomy emerges from darien’s response. and, this seems to be an underlying theme in the management presentation; they would rather workers exercise the exit option than to create provisions which would encourage a working out of differences. is this a good basis for labor policy? this, i propose, is a distinguishing characteristic of the unilateral system of “cooperation”. witnessing this exchange, tom kochan remarked that he agreed with a statement made by charles nelson of texas instruments that a “window of opportunity” was quickly closing. kochan openly wonders “how are we going to expand this process in a sensible way?” rosemary collyer responds by 24 asserting that there are a number of provisions in the nlra that allow employees avenues to recourse should they sense management has violated their rights. kochan seems to feel this is little consultation when considering the broader anti-worker animus which may play a role in motivating employers toward the acceptance of a cooperation model: “what do you do about the reality of the situation? we all get… fliers from law firms and business consultants saying we’re putting on a seminar on how to stay union free, and, by the way, the best way to remain union free is to establish an employee participation program…now, how do you separate out the motivation in that kind of situation where there may be a multiple of motives going on, one of which is to avoid unionization?” darien suggests that the more liberal interpretation of 8 (a) (2) must be reinforced by the creation of stipulations which allow employees access to pertinent information and participation in selecting who will represent them in the cooperative programs. additionally, steps must be taken to prevent employer reprisals against employees. darien does not offer suggestions as to how these goals should be pursued or enforced. i would assume darien would advocate some method of self-monitoring as a means to enforce this goal. perhaps this is a strategy the panelists should have developed and pursued. this strategy might have a chance, especially since the administration’s “reinventing government” initiative does place a great emphasis on corporate self monitoring while allowing workers the tools, not necessarily through unions, to monitor the monitors. capital endorses the passage of the team act darien concludes that if the nlrb continues to interpret section 8 (a) (2) in its current stringent manner then “we do not see this as a viable alternative.” as part of the effort to reform 8 (a) (2), darien and his sponsor, the labor policy association, have strenuously endorsed the passage of the team act. essentially, the team act would abolish section 8 (a) (5) of the wagner act, thus allowing management the freedom to create, direct, and support the cooperative effort. management would be allowed to determine the array and scope of topics to be discussed within the context of the cooperative context. management could freely select or reject solutions to issues bought up to the forum for consideration. rundle and greenfield point out that the team act would go so far as to allow management to choose the workers who would in turn represent their fellow workers6. it should then come as no surprise that darien’s testimony would lead to this. both the democratic party and chairman of the nlrb, william j. gould iv, have not totally dismissed the possibility of the enactment of a modified team act bill. gould, in particular, has suggested that if provisions are included in the bill that would allow the workers a free and autonomous choice of participants representing them in the cooperative program, the bill would then be purged of its disagreeable aspects, thus making it easier for critics to support. however, the business community has proven unwilling to compromise. the republican party, as well as the labor policy association, has responded to this proposition by labeling it to be blatantly “pro-labor” and therefore unacceptable7. this reveals, once again, an ulterior motive behind management’s apparent willingness to cooperate with labor. darien asserts his belief that the government cannot force workers and managers to cooperate. in addition, an overarching definition of cooperation would not be productive because each work situation must be allowed the freedom to tailor the cooperative system to its particular needs. instead, the role of government should be relegated “to provide(ing) the soil in which the seeds of cooperative relationships can sprout and to provide nutrients and the conditions in which the plant can flourish”. from darien’s perspective, a role for organized labor does not exist in the cooperative workplace. unions only disrupt the potential for harmony that exists between employers and workers: “...tensions between employees and employers are often exacerbated by the presence of the union.” darien summarizes. the review of the recent 8 (a) (2) cases indicates these tensions may actually be exacerbated with the imposition of unilateral cooperative programs. perhaps to darien, industrial peace occurs when managerial control of the workplace is in no way questioned or challenged. is this the basis of good labor policy? capital elaborates the nuances of a functioning cooperative program from the perspective of business, what would the cooperative programs look like? what would the role of the employee look like? dan rainville offers testimony that sheds light on this. rainville states that the cooperative program at his firm, universal dynamics, has received numerous awards and 25 accolades. he states that, currently, the program is not in operation, but “the structure is still there if something comes up”. rainville does not indicate why the program was discontinued or what event would trigger its resurrection. rainville notes that when he initially arrived at universal dynamics, workermanagement strife was rampant. perhaps this gives clue as to why the program was initiated to begin with. rainville points out that perhaps the largest impediment to be overcome was the workforce’s aversion to change. he does not specify as to whether any specific group within the organization resisted the transition. rainville also points out that employees need to be properly “educated” to assure their optimal contribution to the program. some idea of what this education might entail is to be found in rainville’s discussion of the process. “in the past, we had a philosophy that people couldn’t understand things like profits, especially since they (profits) were more than maybe their annual salary in maybe a month, and we found that once we disclosed all the information instead of selecting the information that we disclosed or didn’t disclose we built trust”. part of this education also includes an introduction to trickle-down economics, where employees are informed that firm survivability and profitability are perquisite to the workers receiving a paycheck; “we have to pay our shareholders” rainville reminds his workers, as well as the commission. “you may be surprised at that but our people understand that our shareholders are investors in our company and that they are entitled a return on their investment and that we are here because they are investing in us…every decision i make is based on improving the quality of their lives.” confusion remains as to whether he is referring to the lives of the shareholders or of the workers. “when i go to the company picnic and look at the families i realize i have a tremendous responsibility towards them.” rainville appears to be elaborating upon a problem identified by edward lawler and susan mohrman8. lawler and mohrman argue that cooperative programs quickly encounter and surpass a “honeymoon” stage of development, primarily, because employees, and sometimes management, possess unrealistic expectations of what the cooperative program will do for them. as a result, the program tends to fade prematurely. lawler and mohrman observe that to avoid this situation, and preferably before the cooperative system is fully implemented, workers need to be informed by management of the limitations of the program. boundaries need to be established that indicate clearly to the employees what can and cannot be expected from the cooperative effort. although lawler and mohrman offer some important observations, this, like rainville’s information delivery system, seems to operate in a top down fashion. neither of these scenarios offers indication that the expectations and the limitation of the system should be decided in a collaborative manner. from this point rainville focuses on universal dynamic’s “empowerment” program, which is apparently the backbone of the cooperative effort. first, the empowerment program consisted of a steering committee, which was composed of representative from both the employer as well as the employees. rainville does not go into any detail of what this employee “empowerment” process entails. however, this is potentially problematic because “power”if it can still be called that is something granted to the employee by the employer. is this a good foundation on which to build labor policy? labor’s interpretation of workplace cooperation charles silberman, legal counsel of the afl-cio, begins by distinguishing between two forms of cooperative programs that can be pursued and developed. the first is unilateral in nature. under unilaterally directed cooperation, or participative management, some authority is granted to the workers by management for the purpose of participating in the cooperative system. under participative management, management decides which workers will be selected to participate and what topics will be discussed within the parameters of the cooperative system, and management determines the rules, regulations, and procedures of the cooperative system. the second model is bilateral in application. a truly democratic process emerges because both sides, labor and management, are encouraged to participate as equals in creating and perpetuating the cooperative system. issues are resolved on a consensual basis. workers are free to choose their own representatives. these refinements are likely to establish and institutionalize themselves only in a work environment where the collective bargaining apparatus and the obligations associated with it is present. 26 a distinction between unilateral and bilateral cooperation is made citing freedman and medoff’s text, what do unions do?, silberman argues that worker organization is essential to successful cooperative efforts because, once the cooperative effort becomes institutionalized, the relationship between workers and managers changes from “that of a casual dating game in which people look elsewhere at the first serious problem permanent marriage in which they resolve disputes through discussion and negotiation.” citing the work of william c. cooke, silberman argues that union-based participation programs are more productive than non-union participative programs. “a union which is favorable to employee involvement and works effectively to produce the conditions which supports employee involvement can indeed contribute to a successful effort …the key determinants are conditions which unions help to create.” sixty years ago, silberman reminds the panel, congress recognized the value of encouraging workers to organize and collectively bargain with the employer. today, litigation increases as the percentage of workers organized in union’s declines. silberman suggests the fact that these events are correlated is not coincidental. if the employers are truly interested in keeping the government out of the workplace, then why are they not more supportive of collective bargaining, which actually discourages government involvement? this is an interesting observation. the labor panelists defend the wagner act like the managerial panelists before, silberman grapples with the 8 (a) (2) issue. the future of 8 (a) (2) seems to be a matter of crucial importance to the issue at hand from the perspective of both labor and management. silberman contends that 8 (a) (2) is of really of little significance in the context of the present discussion. silberman argues this is so because the wagner act permits the creation and proliferation of cooperative programs so long as they are concerned with issues of workplace productivity and efficiency rather than with the terms and conditions of employment. recalling the earlier testimony of edward miller, a former nlrb board member appointed under the bush administration, silberman asserts that the cooperative/participative programs are well within the parameters of 8 (a) (2), and, most certainly, if 8(a) (2) were rolled back, employers would take advantage of this by introducing company unions into the workplace. silberman’s observations coincide with conclusions derived at the end result of 8 (a) (2) cases that occurred earlier in this paper. silberman points out that the wagner act is not detrimental to genuine cooperative efforts so long as the cooperative effort does not extend into negotiations covering the conditions of employment. further, silberman is concerned that the abolition of 8 (a) (2) would deter the proliferation of autonomous worker organization efforts. power asymmetries must be removed to assure an optimal cooperative effort next, labor develops the position that cooperative efforts, which are established in workplaces where acute power asymmetries exist, are actually self-defeating. they are self-defeating because management is allowed to freely dominate workplace culture. this smothers and eventually undermines the capacity for the autonomous development of worker culture and, the argument continues, a kind of cultural perversion results where workers are turned against each other in the name of “self monitoring”. a culture of animosity and paranoia then sets in, making it difficult for the workers to make meaningful and substantial contributions to the betterment of the work situation. richard bensinger, who was at the time the afl-cio’s chief organizer, develops this argument. he notes that this situation is exacerbated by the employers’ penchant to resist worker organization efforts, even to such an extent that illegal methods are utilized towards this end. the manipulation of employee culture is also a means toward this end. bensinger argues that trendy terms like "total quality management" and "quality of work life" and similar programs are no more than exercises in “psycho-babble” that are intended to obfuscate management’s true desire to establish non-union and anti-union workplaces. to support his assertion, bensinger recalls his own personal experiences as a supervisor trainee in the southwest. bensinger and his colleagues were encouraged by the hr staff to take steps to make the employees feel they are empowered to give them the impression that management was listening to them 27 and that management was ready to act on their concerns. to supplement this effort, teams were created. bensinger reports that the leaders were chosen not only on the basis of their ability to lead the workers in the way that management desired but also on the basis of their anti-union sentiment. later, in a facility where bensinger was attempting to organize the workforce in the early eighties, it became clear to bensinger that cooperative programs were being utilized to undermine a worker organization drive: “with orwelian deliberance, managers became facilitators, discipline became enforced by a team of peers and an atmosphere of peer pressure was being used to maintain total control of the workforce.” bensinger’s description of what occurs within a cooperative system varies considerably from that depicted by the managerial contingent. bensinger seems to be questioning managerial motives behind the implementation of cooperative workplaces. evoking guillermo j. graneir’s text, inhuman relations, bensinger asserts that his experiences and those of the author coincide, therefore suggesting these are in all likelihood not isolated and disconnected events. bensinger concludes the discussion of these events by noting that labor law, as it is currently interpreted, allows employers to embark on these and similar programs with impunity, and often times, these efforts are directed towards the discouragement of worker organization activity: “under current law, any employer who expends maximum and not even so maximum efforts to defeat a union campaign can win any time, anywhere, without breaking the law, with maximum force and aggressiveness.” bensinger concludes by asking, with these asymmetries in place, how can productive cooperative efforts be attempted? cooperative efforts will not work, he continues, until considerable effort is devoted to restoring the dignity of the worker. from his own experience, bensinger concludes that employers are not willing to accept the prerogative of the workers to organize. labor law reforms are needed to create the balance deemed necessary to encourage healthy, bilateral, cooperative efforts. discussion clearly, management’s interpretation of cooperation is one sided. it seems that management would like to use the cooperation issue to gain greater control over the workplace. first, it has been adequately demonstrated that management’s claim that labor laws, as they have been recently interpreted, prevent the creation of cooperative ventures is a red herring. this is further reinforced by an analysis of the transcripts of the team act hearings conducted by rundle and greenfield. basically, the purpose of the team act was to liberalize section 8 (a) (2) to allow employers the ability to “deal” with employees even when a union is not present. rundle and greenfield found that, in the course of the senate hearings regarding the bill, many of the managerial personnel offering testimony had actually contradicted themselves when they stated they already had cooperative programs in place, and were reportedly quite satisfied with them.9 if this is the case then, why the sudden desire to liberalize 8 (a)(2)? this leads one to believe that management doesn’t really want cooperation with labor per se. it seems that what is really desired is the unbridled ability to unilaterally define the definition of cooperation, and the circumstances under which cooperation takes place. in addition, a clear anti-worker animus emerges in the panelists condemnation of 8 (a) (2) and all that it stands for. this represents an affront to the spirit of the wagner act. the wagner act was created, in part, as an effort to level asymmetries that exist between employee and employer and to facilitate meaningful cooperation between the two parties. more importantly, the wagner act was the first boa fide attempt since the time of wilson’s ill-fated industrial relations board to create a system of national labor policy10. although these were worthy goals, it is understood that the stabilization of the capitalist economic system was clearly its primary goal11. dan rainville’s description of the cooperative program further indicates management’s desire to control or manipulate the cooperative process. this much is indicated when rainville indicates that universal dynamics unilaterally set up and disassembled the cooperative program. as noted earlier we are given no clue as to what motivates these actions. further, the discussion of the “education” process is troubling because this presents an opportunity for management to manipulate worker culture to the employer’s advantage. for example, according to rainville’s testimony, the education program is clearly utilized for the purpose of introducing workers to a corporate perspective of economics and business obligations. according to fones-wolfe’s study of corporate welfare practices, the education of the worker has from an early stage been identified as an essential ingredient to the creation of a docile and compliant workforce12. many of these practices were pioneered and refined by the national association of 28 manufacturers, of which rainville is a member. do opportunities exist for the workers to be exposed to alternative viewpoints? what results is anti-policy. participative programs, according to management’s interpretation, should not be commonly defined. instead, from management’s perspective, they are to be interpreted and applied on an arbitrary, case-by-case basis and not guided by an overarching goal, logic or direction. in a sense, this coincides with the current social context’s rejection of institution building as a solution to issues of national concern. this coincides with the conclusion forwarded by james a. gross. gross has observed that throughout the post-war era, we have witnessed a continuing disintegration of labor policy13. what has occurred here represents a continuation of the trend. some have argued further that the lack of a coherent and productive labor policy has contributed to our increasing inability to economically compete with other advanced industrialized nations while detracting from the standard of living of the nation’s workers14. from this perspective, it seems that prerogatives offered by management would only contribute to the exacerbation of the current situation. essentially, labor has taken this opportunity to develop the position that the new deal labor relations institutions are worthy of defense and extension. the labor panelists extended and reinforced this position by arguing that the weakening of this edifice would likely lead to the proliferation of unilaterally imposed cooperative programs which, in the end, would prove counterproductive to the stated purpose of the cooperative effort. within the last couple of decades, an increasing volume of literature from the flexibility perspective has effectively challenged the new deal edifice15. the flexibility theorists contend that rigidities within the new deal system are detrimental to the industrial competitiveness of the nation. unfortunately, as the hearings have revealed, it is apparent that, for all its work, proponents of the flexibility perspective have yet to offer a coherent vision of what the post new deal system of labor relations would entail. in fact, after analyzing the corpus of the flexibility literature one is left with the conclusion that the true purpose of this literature is to advance the cause of “organizational learning” rather than workplace cooperation. this conclusion is only reinforced as a result of the analysis of the testimony of the managerial contingent, which are, and always have been, the audience to which the flexibility message is most directed.16 implications to labor policy: the building of hegemonic projects the proceedings of the future of worker-management relations can be envisaged as an attempt by the state to develop what jessop refers to as a “hegemonic project.” 17 the purpose of the hegemonic project is to nullify class conflict either between factions within capital or between capital and labor. this is done in such a way that capitalist domination of the economic system is maintained and preferably, from the perspective of capital, reinforced. the need to revise or rebuild hegemonic projects is linked to the contradictory nature of the capitalist economic system. thus, over time, systems of accumulation lose their ability to maintain labor peace and capitalist profitability simultaneously. towards this end, programs or policy options are introduced into the political sphere for the purpose of re-imposing stability. the programs are portrayed as beneficial to the national interest. thus, the goals of the hegemonic project must be articulated in such a fashion that they encompass the goals and interests of all potential, significant participants. incentives and rewards are offered as part of the effort to enlist these interests into the project. however, this does not mean that participating factions cannot attempt to co-opt the process and turn it to their advantage. for example, capitalists attempted to sell its version of increased cooperation to the state by promising future increased economic productivity and viability. nothing was offered to labor in return for their cooperation. this, in part, explains the inability to reach a compromise. further, this indicates that capital has not yet abandoned the post-world war ii project, which commenced with the creation and the eventual initiation of taft-hartley, of pushing organized labor completely out of the labor relations arena, thus successfully defending, and expanding, its so-called “right to manage” 18. perhaps if the republican “revolution” had not lost its momentum or if the advocate had taken advantage of william j. gould and the “new democrats’” offer to revise the team act in such a way that workers would be allowed the freedom to elect team participants, the outcome might have been much different indeed19. so, at least for the time being, labor has by default preserved the national labor relations act. the question remaining for labor is, is the wagner act worthy of defense and possible expansion, or has it become an iron cage which has, either inadvertently or by design, detracted from the full potential of the promise of worker organization? if the latter is concluded, should defense of wagner be jettisoned for a 29 new strategy? what should this new strategy be? the dunlop hearings indicate that labor is faced with an uphill battle regardless of how this question is answered. under the conditions created by a positive class compromise, all parties benefit.20 workers play a (larger) role in influencing the nature of the production process. in addition, labor gains a position to better negotiate a larger return for its productive efforts. in exchange, capital is promised a more compliant workforce. wage increases assure future increased consumer activity. however, one consequence of the positive class compromise is the increased strength of labor to levels that are defined to be intolerable to capital. capitalists are likely to shun cooperation with labor for fear that this will threaten its ability to exercise the prerogative of private property ownership. to compensate for this risk, capital will likely avoid a positive class compromise unless the cooperation of labor is deemed necessary to assist in solving a production problem it cannot otherwise solve alone. this implies that a delicate balance exists between the balance of institutional power and the propensity to cooperate. and, this is with little doubt historically conditioned. for example, in the present situation, the elaboration of the global economy detracts from the likelihood that labor will be seen as a potential partner for solving production problems. ironically, the clinton administration’s belief in “free markets” and subsequent activities to nurse this vision to fruition, such as the passage of the nafta trade bill, have likely done little to advance the goal of workplace cooperation. unfortunately, reich (1991), among others, consistently fails to visualize a connection between these events and workplace cooperation. in a sense, capital has attempted to exploit this advantage through its advocacy of the team act. theoretically, if passed, the team act would certainly have narrowed the institutional parameters of worker power, thus making future, meaningful discussions of workplace cooperation nearly impossible. institutional frameworks must be developed to encourage the development of a situation leading to the positive class compromise. the current context, with its emphasis on ending the so-called era of “big government” and “empowering” people as “individuals”, will certainly carry us further from this stated goal. in conclusion, the dunlop hearings resulted in little more than a “negative class compromise.” by this it is maintained that within the context of the hearings both sides have attempt to either maintain their turf, as labor had through its defense of the new deal edifice, or to attempt to extend their institutional domination over the opponent, as capital had attempted to do through its continued pushing of a free market ideology. at this point in time, neither side possesses sufficient social power or momentum to overwhelm the opponent. little if anything positive emerges from a negative compromise situation and, subsequently, much remains to be accomplished. endnotes 1 irving bluestone, 1995. public policy and the evolution of change in workplace policy, pp.353-362 in steve babson, ed. lean work: empowerment and exploitation in the global auto industry. wayne state university press, detroit. 2 robert reich, 1997. out of the cabinet. simon and schuster. 3 a discussion of the implications of both of these cases can be found in, robert b. moberly, 1994. worker participation after electromation and dupont in friedman, hurd, oswald, seeber, eds. restoring the promise of american labor law. ilr press 4 webcore packaging, inc. v. local 332 international brotherhood of teamsters 319 nlrb no. 142. 5 james r. rundle, 1994. the debate over the ban on employer dominated labor organizations: what is the evidence? chapter 11 in friedman, hurd, oswald, seeber, eds. restoring the promise of american labor law. ilr press. 6 james r. rundle and patricia a. greenfield, 1997. worker representation without worker consent. working usa. july/august. 7 steve jordan, 1996. labor board chief urges change in law on teams. the omaha world herald. june 8th, business, p. 43. 8 edward lawler iii and susan mohrman, 1987. after the honeymoon….. 9 james r. rundle and patricia a. greenfield, 1997. worker participation without representation. working usa. july/august, p.62. 30 10 see g. william domhoff, 1990. the power elite and the state. aldine de gruyter for a discussion of the halting, on and off again attempts to create labor policy. like domhoff, i do not believe this was the result of a pluralistic process. 11 james b. atleson, 1983. values and assumptions of american labor law. ch 2, the wagner act and the new deal. university of massachusetts press. 12 elizabeth fones-wolfe, 1994. selling free enterprise. university of illinois press. 13 james a. gross, 1995. broken promises: the subversion of u.s. labor policy, 1945-1994. ilr press 14 barry bluestone and irving bluestone, 1992. negotiating the future. basic books. also, harry katz, 2000. converging divergences. ilr press. 15 for example, see piore and sabel, 1984. the second industrial divide. mit press. womack jones and roos, 1992. the machine that changed the world. kochan katz, mckersie, 1994. the transformation of american industrial relations. ilr press. 16 james rinehart, 1999. the international motor vehicle’s lean production benchmark: a critique. monthly review, january. 17 bob jessop, 1991. the value form, the capitalist state, and hegemonic projects: from state forms and functions to the state as strategy in jessop, state theory: putting the capitalist state in its place. pennsylvania. 18 see howell john harris, 1983. the right to manage. wisconsin. 19 for example, gould gave a speech to the nebraska bar indicating he would be supportive of the team act had a stipulation encouraging workers to vote for team participants be included. a similar effort was initiated by representative james traficant (d. oh.) through the introduction of house amendment 824 to the team act. no action to date has been taken on this bill. 20 the following discussion draws heavily from eric olin wright, 2000. working class power, capitalist class interest, and class compromise. american journal of sociology. (january)105:1. the dunlop commission: missed opportunity or failed hegemonic project introduction the managerial perspective on workplace cooperation an assessment of capital’s position is a compromise possible? capital endorses the passage of the team act capital elaborates the nuances of a functioning cooperative program labor’s interpretation of workplace cooperation a distinction between unilateral and bilateral cooperation is made power asymmetries must be removed to assure an optimal cooperative effort discussion implications to labor policy: the building of hegemonic projects 17 cognitive flexibility hypertext as a learning environment in economics: a pedagogical note duane b. graddy, john t. lee, and j. douglas timmons middle tennessee state university abstract instructional design in complex subjects requires the application of a sophisticated theory of cognition. * instructional techniques and strategies that work at the knowledge and comprehension stages of cognitive development may actually inhibit learning at more advanced levels. evaluation and synthesis require a different cognitive paradigm. the theory of cognitive flexibility is a case-based approach for the development of upper-level cognitive skills, particularly the ability to transfer knowledge to novel situations. this paper applies the theory of cognitive flexibility to instructional design in economics. an example from monetary economics illustrates the adaptation of cognitive flexibility hypertext to a knowledge management interface. ** * ”simplification of complex subject matter makes it easier for teachers to teach, for students to take notes and prepare for tests, for test-givers to construct and grade tests, and for authors to write texts. the result is a massive “conspiracy of convenience”. spiro, et al, 1987, p.180. ** the url for the interface is http://brainserver.thebrain.com/get.asp?i=a3f95 18 cognitive flexibility hypertext as a learning environment in economics: a pedagogical note duane b. graddy, john t. lee, and j. douglas timmons middle tennessee state university i. introduction bridging the knowledge gap between experts in economics analysis and novices through the economics curriculum requires innovative approaches to the construction of learning environments. the ultimate aim, of course, is to train learners to think like experts in the field of economics. bransford,et al (john d. bransford, ann l. brown, and rodney r. cocking, 2000) list the following characteristics of experts’ knowledge. � experts notice relationships and patterns of information that are not evident to novices. � experts have acquired a base of content knowledge that reflects deep understanding of the subject matter. � experts have knowledge that is conditionalized by specific circumstances � experts are able to retrieve relevant aspects of knowledge with little attentional effort. � experts know their discipline thoroughly. � experts have varying levels of flexibility in approaching new situations or scenarios. but how do we approach the daunting questions of creating learning environments that impart economic knowledge, fosters deeper understanding of the discipline, and enhances the learners’ ability to transfer economic principles to novel situations? the theory of cognitive flexibility (r. spiro, p. feltovich, m. jacobson, and r. coulson, 1995, r. spiro, w. vispoel, and j. schmitz, 1987) provides a conceptual framework for developing a case-based approach to addressing these issues. instructional strategies flowing from the theory of cognitive flexibility reflect two areas of educational research: 1. studies devoted to understanding the cognitive processes of experts and novices and 2. analyses of the learning experiences that enhance knowledge transfer. 19 investigations of the differences between the problem-solving capabilities of experts and novices conclude that the disparity between the two groups is not due to just memory and intelligence. the extensive experience of experts affects what they notice and how they organize, represent, and interpret information in their area of expertise. the knowledge of experts appears conditionalized by the contextual circumstances of an issue. on the other hand, studies find that novices focus on memorizing, recalling, and rote manipulation of formulas and symbols (john d. bransford, ann l. brown, and rodney r. cocking, 2000). knowledge transfer is the ability to apply economic principles to novel circumstances and scenarios. research in the general area of knowledge transfer by spiro, et al finds that learners are able to comprehend the relevant features of important concepts and ideas better when they are taught in multiple contexts. exposure to many contextual situations increases the learner’s capacity to think flexibly about complex problems and issues.1 ii. cognitive flexibility and case-based learning according to spiro, et al (r. spiro, p. feltovich, m. jacobson, and r. coulson, 1995), cognitive flexibility is the “ability to spontaneously restructure one’s knowledge in many ways, in adaptive response to radically changing situational demands.” that is, in complex environments, learners generally cannot retrieve an intact learning structure from memory; instead the mind combines, recombines, and reinvents structural components to meet the requirements of each particular situation. thus, knowledge becomes context dependent. cognitive flexibility theory focuses on learning processes in illstructured, context-dependent learning environments. ill-structured environments are characterized by two properties. 1. knowledge applications involve interactive, multiple concept structures each of which is individually complex. 2. across-case irregularities are prevalent; cases or outcomes that appear similar have different conceptual incidence and casual nexuses. 1 viewed in the context of bloom’s cognitive pyramid, the issue is how to most effectively achieve level six, evaluation. the verbs or actions associated with this level are use, appraise, judge, recommend, critique, justify, defend and transfer. 20 for example, fundamental economic principles that are orderly and regular in the abstract and within the confines of textbook applications may be difficult to apply across varying actual economic scenarios. the present value model used to explain the valuation of financial goods, for instance, is well structured but many of its applications drawn from reality are ill-structured and complex. securities that appear similar to novices when applying the present value formula may be quite different in underlying fundamentals. to the expert economic analyst these securities would look quite different. subject matter ill-structuredness presents serious impediments to mastering conceptual complexity and the ability to transfer knowledge to new situations that are different from the ones posed in lower level economics courses. spiro, et al contend that these impediments can be overcome by moving from a learning process that emphasizes the retrieval from memory of intact preceding knowledge to a system that stresses the flexible reassembly of preexisting knowledge to fit the needs of various situations. the oversimplifications and polar cases used to introduce and emphasize points at the lower levels of the cognitive domain, principles of economics, are impediments to developing higher-level skills. for instance, in well-structured domains compartmentalization of the subject matter can be an important and effective tool. however, in complex environments where interconnectedness permeates the knowledge set, no single analogy or situation will characterize the possible outcomes. this issue seems particularly important for students when dealing with, say, the short-run versus long-run impact of economic variables. ask your students what the impact of an increase in the money supply is on the level of interest rates. automatically they will say that rates will fall and in a majority of the cases that is the end of it. this answer represents the analogy or simplification from the basic courses. focusing on short-run economic events in the early stages of the learning process, while an important mnemonic, seems to produce an oversimplification bias that remains with students as they advance to higher-level domains. ask your first year graduate students the same question. economics is not alone in this respect, coulson, et al (r.l. coulson, p.j. feltovich and r.j. spiro, 1997) discovered this reduction bias in studies of medical students.2 diagnosis of hypertension was 2 reduction bias encompasses seven different types of instructional oversimplification (see spiro, et al, 1988). jacobson (1991, pp. 20-21) summarizes these oversimplifications as: � oversimplifying complex and irregular structures and concepts. 21 characterized by a centralized mind set (m. resnick, 1996) that produced common remedial action across different patients even though it was later found that the sources of the hypertension were different and other complications existed. applying an approach derived from the theory of cognitive flexibility led to different diagnoses among the patients. two of the patients received the same treatment, one received fewer medicines because the primary problem was addressed directly, and the other patient was treated for a different disorder. instruction based on the theory of cognitive flexibility avoids these impediments to learning by stressing the conceptual interrelatedness and partial overlap of concepts among actual cases and experiences. jonassen, et al (d. jonassen, d. dyer, k. peters, t. robinson, d. harvey, m. king, and p. loughner, 1997) express the application of cognitive flexibility in instruction as reflecting the complexity faced by practitioners in a field rather than focusing on practical, professional problems as mere linear sequences of decisions. the following four points summarize the cognitive flexibility approach to learning. 1. learning activities must provide multiple representations of content. 2. instructional materials should avoid oversimplifying the content domain and support context-dependent knowledge. 3. instruction should be case-based and emphasize knowledge construction, not transmission of information. 4. knowledge sources should be highly interconnected rather than compartmentalized. the theory of cognitive flexibility leads to case-based learning. however, it goes beyond the prototype case as an illustration of an abstract concept. learners must be exposed to many case experiences in order to emphasize the multifaceted nature of complex environments, such as those that arise in the analysis of economic scenarios. but the process really goes beyond just case presentations. the core element of random access instruction is the decomposition of cases into mini-cases in order to highlight their partially overlapping � emphasis on a single basis for mental representation. � centering on hierarchical processing of material. � context-independent conceptual explanations. � reliance on cookbook knowledge structures. � rigid compartmentalization of knowledge components. � passive conveyance of knowledge. 22 dimensions. that is, the same information or insight can be represented in actual situations or events in lots of different ways. for example, the impact of rising interest rates or taxes on a company’s cash flow position can occur in many different contexts. firms can be highly leveraged, all equity, highly liquid, illiquid, etc. federal and state environmental policies criss-cross various industrial sectors differently. considering various aspects of cases (mini-cases) helps the learner to connect common elements of dissimilar situations and to improve the possibility of transferring knowledge to new circumstances or conditions. iii. cognitive flexibility hypertext the cognitive flexibility approach to learning seems particularly adaptable to a hypertext design that emphasizes the interrelatedness and interconnectedness of thoughts and ideas. a hypertext approach allows the learner to transverse the multiple themes and perspectives which characterize complex knowledge domains. cognitive flexibility theory suggests that learners grasp the nature of complexity more readily by being presented with multiple representations of the same information in different contexts. by see multiple representations of the same phenomenon learners develop the mental scaffolding necessary for considering novel applications within the knowledge domain. they begin to think about how they recognize and analyze a new situation. for example, increases in the money supply impact the economy differently depending, on among other things, the stage of the business cycle, elasticity of the demand for money, elasticity of aggregate spending, consumer confidence, short-term and long-term expectations about inflation, and conditions in the foreign exchange market. these are some of the factors an expert in economics would consider in explaining the potential impact of an increase in the money supply on the economy. experts have considered many cases where an increase in the money supply, a unitary event so to speak, has had a disparate impact on the economy. experts have thought about these factors but they have also done their metacognitive homework as well. that is, they the have considered how to approach novel situations given the multifarious factors that can impact the final results of an increase in the money supply. cognitive flexibility hypertext fosters the development of metacognitive skills by confronting the learner with multiple 23 representations of case-events.3 various thematic elements can crisscross numerous scenarios (cases) that seem quite dissimilar in an overt context but add to the learner’s cognitive and metacognitive development. the figure below lists the four structural components identified by cognitive flexibility theory as being important to instructional design. themes for money supply growth scenario state of economy elasticity of demand for money elasticity of investment spending state of expectations level of federal deficit foreign exchange mark et le ve l of cons ume r de bt cases case 1 case 2 case 3 case 4 case 5 mini-case 1 persp ective persp ective mini-case 2 persp ective persp ective cases or scenarios the heart of cognitive flexibility is the comprehensive case or scenario. not one prototypical situation but many wide-ranging cases. as expressed by spiro et al(r. spiro, w. vispoel, and j. schmitz, 1987), “[i]n ill-structured domains, crucial information tends to be uniquely contained in individual cases – examples are not just nice, they are necessary.” as agglomerations of thematic dimensions, cases illustrate the multifarious nature of real life experiences. however, no one case 3 consider another example of multiple representations, product pipelines. understandably product pipelines appear different to the novice than to the expert analyst. the novice sees pharmaceutical companies with drug pipelines, auto manufacturers with new car and truck models in the pipeline, and commercial real estate firms with new office buildings and malls in the pipeline. the diversity of the pipelines may cloud the fundamental relationship between a firm’s product pipeline and its valuation in the mind of the novice. that is, these situations may seem totally different to the novice when in fact there is a fundamental connection between the product pipeline and the market value of a company. the point is that the novicelearner needs to be exposed to many cases (mini-cases) encompassing firms’ product pipelines. in this way, the learner can approach new scenarios involving the valuation of an on-going business in a cognitively flexible way. 24 applies to all situations. learners must confront many cases in an effort to understand the complexity of say, monetary acceleration or deceleration, on the economy. fragments of different cases (experiences) combine to form the basis of a reconstructive reasoning process. the adaptive reassembly of information is important to developing advanced cognitive skills. two principles guide the disassemble/ reassemble instructional strategy. 1. the individual cases must be decomposed into their component dimensions or themes. 2. the interconnectedness of the case themes and perspectives must be emphasized so learners can develop pattern recognitions and analogies that are adaptable to new cases. focusing on the linkages among the seemingly dissimilar aspects of various cases facilitates the transfer of knowledge to new and unexpected circumstances. themes themes are ideas expressed by subject experts as possible schema for understanding the complex scenarios being studied by a learner. constructing a hypertext interface based on cognitive flexibility theory requires the use of multiple themes with the widest possible scope or coverage. in complex, ill-structured domains, no one theme will be the correct answer or capture all of the dimensions of the situation. therefore, the focus is on developing a comprehensive set of themes that reflect the best understandings of content experts. undoubtedly, thematic dimensions will overlap, however, adding themes increases instructional value as long as the themes are not coincidental. the diagram above lists seven themes that might be used by experts to explain the impact of a change in the rate of money supply growth on the economy. for example, the initial state of the economy influences the impact of acceleration in monetary growth on other economic factors. experts would predict different outcomes for monetary growth during an inflation period than in a period of general economic slow down. other aspects experts might consider are the velocity of money, elasticity of aggregate spending, state of expectations, level of federal deficits, foreign exchange markets, and level of consumer debt. unquestionably there are other themes that can be added to the list. however, this list illustrates the complex 25 dimensions that would be considered by an expert in viewing a money supply growth scenario. mini-cases the disassembled units of a case are referred to as mini-cases. minicases are text selections from complete cases or scenarios that encompass particular themes in the cases. the starting point for all instruction in cognitive flexibility hypertext is the mini-case. learners can focus more ready on the overlapping themes in the various cases by analyzing the mini-cases draw from the primary case material. mini-cases are short statements but rich enough in content to allow recognition of a major theme(s) and its relationship to the case. for example, statements about the consumer confidence or the foreign exchange market from different factual monetary growth scenarios represent mini-cases. mini-cases might be thought of as flash cards, although much richer in content, that reveal themes that are common across the different cases. within each mini-case learners confront concepts, definitions, methodologies, and issues unique to monetary economics. perspectives conceptual and semantic elements within a mini-case are referred to as perspectives. as hyperlinks, perspectives provide constant access to the fundamental ideas, concepts, and definitions of monetary economics. hot words and phrases within a perspective can link to relevant points in other perspectives thus leading to multiple representations of important ideas and concepts. jacobson and archodidou (m. jacobson and a. archodidou, 2000) describe this link structure as the intra-case and inter-case dimensions of knowledge interconnectedness. intra-case hyperlinks connect basic or surface elements within the individual cases to the abstract or conceptual ideas that provide the learner with deeper understanding of these features. in a sense, intra-case hyperlinks pull the learner into the material. there is a tendency for learners to read and react to the surface elements of a case. intra-case hyperlinks overcome this tendency to some degree by providing the learner with immediate access to deeper explanations of concepts or issues. inter-case hyperlinks connect the different cases and their mini-case components. each case has its own textual and linguistic representations and issue scenario. inter-case hyperlinks tie these elements together across the cases or scenarios. that is, how the 26 basic concepts and ideas of monetary economics are connected across actual monetary scenarios. iv. web interface the web interface that best facilitates the implementation of cognitive flexibility hypertext is one emphasizing theme paths rather than a purely hierarchical structure. hierarchical course structures are useful and improve on unstructured environments, particularly for students just beginning a subject. however, hierarchical menu structures are incapable of expressing the web of associative links that combine to form the subject matter of a course. the idea is to have clusters of information but not necessarily in a hierarchical structure; perhaps a structure more along the lines of the cognitive process of the content developer. an interface structure meeting these requirements is a knowledge management product, the brain, produced by natrificial llc. the brain interface is called the plex. the plex houses the brain’s thoughts. in this context, thoughts include the information that is the course or topic being considered. thoughts can be active or inactive at varying points or positions in the plex. within this structure any piece of information can be associated with and visually linked to any other piece of information. what this means in terms of course or topic design is that the content structure can follow the cognitive framework or associative path of its designer and that the students can visualize the course or topic in its entirety. in the context of the cognitive flexibility approach to learning, the case themes become parent thoughts and minicases become child thoughts. perspectives can be categorized as jump thoughts and hyperlinks. each thought is linked through three gates. the gates are symbolized as circles. there is one circle for each 27 of the thought categories: parent, child, and jump. hollow gates have no links to other thoughts. solid gates reveal linkages. the center of the brain’s plex is the “active thought”. within the plex, active thoughts are surrounded by other thoughts that are important in the cognitive process of the instructor/designer. clicking on a thought reconfigures the plex to make the thought active and the focal point of the plex. for example, the plex shown below is centered on money growth and its concomitant themes. case 1: 1997q3: 1998 and case 2: 1999 2000 are the parent thoughts and the themes represent the child thoughts under the active thought “money growth”. groups of child thoughts (themes) include sibling thoughts that move to the right center of the plex when a specific child thought becomes active. in this example, the cases are composed of the total text of the humphrey-hawkins reports4 for the designated periods. each case is decomposed into mini-cases based on the particular theme it addresses. mini-case perspectives provide the vehicle for explaining and illustrating abstract concepts within the context of the specific case details. interest rates, monetary aggregate 1, and monetary 4 the actual report dates included july 22, 1997, february 24, 1998, july 21, 1998, july 22, 1999, february 17, 2000, and july 20, 2000. 28 aggregate 2 are jump thoughts connected to money growth. to illustrate the development of the themes, click on consumer debt. the parent thoughts of consumer debt are interest rates (cost) and money growth (availability). sibling thoughts of consumer debt are the 29 other themes now listed and accessible on the far right of the screen. the links show the cognitive linkages among consumer debt, money growth and the other themes. the theme consumer debt houses the mini-cases from the humphrey-hawkins reports that discuss household sector net worth, indebtedness, and delinquencies. they are chronological chunks of the cases. with consumer debt as still the active thought, suppose the student wants to quickly view the connection between interest rates and the other themes. by moving the cursor to the thought “interest rates” the student will highlight the linkages and see a quick view of the interest rates notes; a term used in the brain for the blank browser screen above the plex. the notes screen includes graphs showing interest rate movements during the case periods and mini-cases relating to interest rate developments. the first mini-case discusses the interrelationships among several of the themes. for example, rate movements are related to the robust state of economic activity. this discussion could trigger the learner to activate this particular theme. in addition, the mini-case focuses on the state of expectation in two different contexts. the first has to do with the markets anticipation of tighter monetary policy and the muted response of market interest rates. explaining that the market had already discounted the announcement of a more 30 restrictive policy. the other aspect was a reduction in inflationary expectations that tended to reduce nominal rates even in the face of a more restrictive monetary policy. downward pressure on yields also occurred because of a reduced supply of treasury debt. clicking on the state of the economy the student see another minicase for this period that provides insights into growth of aggregate output and why actual and expected inflation remained low. in this period 31 modest monetary tightening was associated with constant or declining market yields even in the face rapid economic growth.5 from the state of the economy thought move to the velocity of money by activating its thought at the bottom right of the sibling list. the first mini-case discusses the return of stability to the m2 velocity of money and the reasons for its instability in the early years of the decade. the mini-case highlights the relationship between the opportunity cost of holding money and its velocity. at this point the learner may want more information about the relationship between velocity and other aggregate economic variables. the learner could click on the equation of exchange. in this case the icon embedded in the thought means that there is a hyperlink to an external web page discussing the topic of the thought. double click the icon and a page appears that provides a detailed review of the various versions of the equation of exchange. modern quantity theories is another perspective that discusses the relationship between velocity and the opportunity cost of money in the cambridge cash balance equation and friedman’s approach to the demand for money. the 5 the mini-cases are more than just statements of fact because each has a context of its own plus being part of the larger case. 32 learner is led into the theory through the perspectives in the minicases. the point is that the theory is brought into the context of the discussion through the actual monetary scenarios. 33 currency market expectations are highlighted in the first mini-case in the “foreign currency market thought”. during the period covered by the mini-case the u.s. dollar appreciated against most major currencies. the source of this appreciation was an unexpected strengthening of u.s. economy that surprised market participants, leading them to anticipate some tightening of u.s. monetary policy, and contributing to upward pressure on the dollar. click on aggregate spending to view its components. the parent thought, “aggregate spending”, is separated into four child thoughts: consumption spending, investment spending, government spending, and net exports. each of these thoughts has its own child thoughts that are evident when they are activated. for example, if the “investment spending thought” is activated then its components, business investment and residential construction, appear as child thoughts in the plex. activating business investment reveals the minicases for this thought. 34 35 transferability involves the reconfiguration of knowledge by the learner in response to being confronted with novel facts or a new situation.6 [jacobson, 1991] the primary goal of the cognitive flexibility approach is to enhance the learners capability to flexibly reassemble the thematic dimensions in novel situations. moreover, measurement of this result provides a basis for a transfer-oriented assessment of learning. as an example, three transfer scenarios are included under the theme, state of expectations. each of these scenarios was taken from a humphrey-hawkins report other than the ones included as the basic cases in this example. each transfer scenario is connected to the other scenarios as a jump thought for ease of moving between the multiple representations in these exercises. the situation illustrated in transfer scenario 4b brings up the concept of core inflation and its implications for monetary policy decisions. a conceptual perspective on the definition of core inflation is included in this thought as an external link. for this scenario the actual decision of the fomc is included as a child thought. 6 jacobson distinguishes between learning – the ability to repeat previously performed task – and transfer – the performance of a task that differs from one’s previous experience. in the context of this paper learning would involve a discussion of the thematic dimensions of the mini-cases derived from the two primary cases. transfer is discovering and relating the thematic dimensions of a new mini-case; that is, a mini-case from humphrey-hawkins reports for a different time periods. 36 37 v. conclusions cognitive flexibility theory highlights case analysis. however, the focus is really on experiences in analyzing the particular thematic dimensions that define the topic being discussed; in this case one aspect of monetary economics. cognitive flexibility theory emphasizes multiple representations of thematic dimensions and connectivity among important case elements. these aspects lend themselves well to a hypertext instructional environment. this type of interface allows the learner to proceed through different levels of the material by starting or moving to any point in the thought process. flexibility is enhanced over the hierarchical structure that forces the learner to proceed in a linear fashion. the brain interface facilitates random access instructional design, a hallmark of cognitive flexibility theory. random access in this context means using knowledge flexibly; that is, developing understandings without having to proceed through a sequential retrieval process from its inception. vi. references becker, william e. "teaching economics to undergraduates." journal of economic literature, 1997, 87, pp. 1347-73. 38 becker, william and michael watts. “chalk and talk: a national survey on teaching undergraduate economics.” american economic review,1996, 86, 2, pp. 448-453. bransford, john d. , ann l. brown, and rodney r. cocking. how people learn: brain, mind, experience and school. washington, d.c.: national academy press, 2000. coulson, r.l., p.j. feltovich and r.j. spiro. "cognitive flexibility in medicine: an application to the recognition and understanding of hypertension." advances in health sciences education, 1997, 2, pp. 141-61. jacobson, m. "knowledge acquisition, cognitive flexibility, and the instructional application of hypertext: a comparison of contrasting designs for computer-enhanced learning environments," university of illinois, 1991. jacobson, m and a. archodidou. " the design of hypermedia tools for learning: fostering conceptual change and transfer of complex scientific." the journal of learning sciences, 2000,9, pp.149-199. jonassen, d., d. dyer, k. peters, t. robinson, d. harvey, m. king, and p. loughner. "cognitive flexibility hypertext on the web: engaging learners in meaning making," b. khan, web-based instruction. englewood, cliffs, n.j.: educational technology publishing, 1997, kolodner, j. and m. guzdial. "theory and practice of case-based learning aids," d. a. s. l. jonassen, theoretical foundations of learning environments. mahwah, n.j.: lawerence erlbaum associates, publishers, 2000, 215-42. resnick, m. "beyond the centralized mindset." journal of the learning sciences, 1996, pp. 1-22. rouet, j. f. and j. j. levonen. "studying and learning with hypertext: empirical studies and their implications," j.-f. rouet, levonen j.j., dillon, a., and spiro, r.j., hypertext and cognition. mahwah, n.j.: lawrence erlbaum associates, publishers, 1996, 9-23. spiro, r., p. feltovich, m. jacobson, and r. coulson. "cognitive flexibilty, constructivism, and hypertext: random assess instruction for advanced knowledge acquisition in ill-structured domains." 1995. spiro, r., w. vispoel, and j. schmitz. "knowledge acquisition for application: cognitive flexibility and transfer in complex content domains," b. b. a. s. glynn, executive control processes in reading. hillsdale, n.j: lawrence erlbaum associates, publishers, 1987. 39 appendix identification of case themes themes identification of themes initial state of economy income effect; reverse-causation; stage of business cycle. velocity of money stability of demand for money; interest elasticity of money demand. aggregate spending consumption, investment, government, and net export spending; components of spending categories: e.g., business investment, residential construction, durable and nondurable goods, exports, imports; discretionary and mandatory. state of expectations short-run and long-run expectations about inflation, profitability of capital; government policies. federal deficit level of federal deficit; expected growth rate of deficit. consumer debt household sector financing; level of indebtness; delinquencies; mortgage debt; credit card debt. foreign currency market expected exchange movements; market volatility; foreign real interest rates. 40 mini-case content and thematic commentaries the excerpt below illustrates the crisscrossing of themes within a minicase. case 1: 1997 – q3 1998 mini-case february 24, 1998 even though the committee kept the nominal federal funds rate unchanged, it saw the rise in the real funds rate resulting from declining inflation expectations, together with the increase in the exchange value of the dollar, as providing some measure of additional restraint against the possible emergence of greater inflation pressures. these decreases were due in part to an international flight to the safe haven of dollar assets, but they also reflected expectations that these difficulties would exert a moderating influence on the growth of aggregate demand and inflation in the united states perhaps most important, as the low level of inflation that has prevailed in recent years gets built into wage agreements, other contracts, and individuals' inflation expectations, it will provide an inertial force helping sustain the favorable price performance for a time. survey data on inflation expectations mostly showed moderate reductions during 1997 in respondents' views of the future rate of price increase, and some of the survey data for early 1998 have shown a more noticeable downward shift in inflation expectations. a lowering of inflation expectations has long been viewed as an essential ingredient in the pursuit of price stability, and the recent data are a sign that progress is still being made in that regard. survey measures of expectations for longer-horizon inflation generally did move lower last year, but by less than the drop in nominal yields. as a result, estimates of the real longer-term interest rate calculated by subtracting these measures of expected inflation from nominal yields indicate a slight decline in real rates over the year. valuations seemed already to have incorporated very robust earnings growth, and in october, deepening difficulties in asia evidently led investors to lower their expectations for the earnings of some u.s. firms, particularly high-technology firms and money center banks. 41 despite the strong performance of earnings and the slower rise of stock prices since last summer, valuations seem to reflect a combination of expectations of quite rapid future earnings growth and a historically small risk premium on equities survey estimates of stock analysts' expectations of long-term nominal earnings growth are, in fact, the highest observed in the fifteen years for which these data are available. because inflation has trended down over the past fifteen years, the implicit forecast of the growth in real earnings departs even further from past forecasts. german long-term rates have also fallen about 80 basis points as expectations of tightening by the bundesbank diminished, especially toward the end of the year downward adjustment of expectations of inflation in the industrial countries in general may have added to the selling pressure on gold. thematic commentaries 1. state of expectations a. declining short-run inflationary expectations [2a and 3a] 1) selling pressure on gold b. declining long-run inflationary expectations [2a and 3a] 1) lower expectations built in to wage contracts 2) lower individual expectations 3) meeting the goal of price stability c. lower earnings expectations [2a] 2. aggregate spending a. moderation in the growth aggregate spending [1a and 1b] 1) international crisis 2) lowering earnings (profit) expectations [1a, 1b and 3a] 3. currency markets a. appreciation of the u.s. dollar 1) international crisis [2a1] b. lower german interest rates [3a] 42 appendix identification of case themes themes identification of themes initial state of economy income effect; reverse-causation; stage of business cycle. velocity of money stability of demand for money; interest elasticity of money demand. aggregate spending consumption, investment, government, and net export spending; components of spending categories: e.g., business investment, residential construction, durable and nondurable goods, exports, imports; discretionary and mandatory. state of expectations short-run and long-run expectations about inflation, profitability of capital; government policies. federal deficit level of federal deficit; expected growth rate of deficit. consumer debt household sector financing; level of indebtness; delinquencies; mortgage debt; credit card debt. foreign currency market expected exchange movements; market volatility; foreign real interest rates. 43 mini-case content and thematic commentaries the excerpt below illustrates the crisscrossing of themes within a minicase. case 1: 1997 – q3 1998 mini-case february 24, 1998 even though the committee kept the nominal federal funds rate unchanged, it saw the rise in the real funds rate resulting from declining inflation expectations, together with the increase in the exchange value of the dollar, as providing some measure of additional restraint against the possible emergence of greater inflation pressures. these decreases were due in part to an international flight to the safe haven of dollar assets, but they also reflected expectations that these difficulties would exert a moderating influence on the growth of aggregate demand and inflation in the united states perhaps most important, as the low level of inflation that has prevailed in recent years gets built into wage agreements, other contracts, and individuals' inflation expectations, it will provide an inertial force helping sustain the favorable price performance for a time. survey data on inflation expectations mostly showed moderate reductions during 1997 in respondents' views of the future rate of price increase, and some of the survey data for early 1998 have shown a more noticeable downward shift in inflation expectations. a lowering of inflation expectations has long been viewed as an essential ingredient in the pursuit of price stability, and the recent data are a sign that progress is still being made in that regard. survey measures of expectations for longer-horizon inflation generally did move lower last year, but by less than the drop in nominal yields. as a result, estimates of the real longer-term interest rate calculated by subtracting these measures of expected inflation from nominal yields indicate a slight decline in real rates over the year. valuations seemed already to have incorporated very robust earnings growth, and in october, deepening difficulties in asia evidently led investors to lower their expectations for the earnings of some u.s. firms, particularly high-technology firms and money center banks. 44 despite the strong performance of earnings and the slower rise of stock prices since last summer, valuations seem to reflect a combination of expectations of quite rapid future earnings growth and a historically small risk premium on equities survey estimates of stock analysts' expectations of long-term nominal earnings growth are, in fact, the highest observed in the fifteen years for which these data are available. because inflation has trended down over the past fifteen years, the implicit forecast of the growth in real earnings departs even further from past forecasts. german long-term rates have also fallen about 80 basis points as expectations of tightening by the bundesbank diminished, especially toward the end of the year downward adjustment of expectations of inflation in the industrial countries in general may have added to the selling pressure on gold. thematic commentaries 1. state of expectations d. declining short-run inflationary expectations [2a and 3a] 1) selling pressure on gold e. declining long-run inflationary expectations [2a and 3a] 1) lower expectations built in to wage contracts 2) lower individual expectations 3) meeting the goal of price stability f. lower earnings expectations [2a] 2. aggregate spending b. moderation in the growth aggregate spending [1a and 1b] 1) international crisis 2) lowering earnings (profit) expectations [1a, 1b and 3a] 3. currency markets b. appreciation of the u.s. dollar 1) international crisis [2a1] b. lower german interest rates [3a] pretest.pdf 18 pre-testing and post-testing in money and banking by h. bruce throckmorton* abstract this paper summarizes the results of a 65-question pre-test and post-test administered to students enrolled in economics 332, money and banking, at tennessee technological university during summer and fall terms of 1998. total scores are compared as well as scores by male and female students and traditional and nontraditional students. i. the course economics 332, money and banking, is a core curriculum course in the college of business administration. all students enrolled in a business major are required to take the course during their junior or senior year. others students enrolled would include economics majors from the college of arts and sciences and secondary education majors from the college of education. the latter are seeking certification to teach economics at the high school level. on rare occasions a student may take this course as an elective. non-business majors represent an insignificant portion of total enrollees. the only prerequisite for the course is economics 202, principles of macroeconomics. three sections of money and banking are offered in both fall and spring semesters. one section is offered during the first summer semester. i teach two sections in fall and spring as well as the summer course. an another faculty member teaches one section each in fall and spring. ii. the test the 65 question test was administered to my sections during summer and fall. the pre-test was given on the second class day and the post-test on the next to last class day. the summer class met for 120 minutes each morning for 21 consecutive class days. one fall class met for 50 minutes on monday, wednesday, and friday mornings. the other met for 75 minutes on monday and wednesday afternoons. the latter class was excluded from the study based on poor attendance and a small response. the test questions are primarily factual questions over material covered in the course. the questions are categorized by subject. it was not necessary to use a calculator to answer any of the questions. a copy of the test is available from the author. students were allowed 60 minutes to complete the test. they were asked not to omit any question. they were also asked to designate their sex and their birth date. the latter was to determine distinctions between traditional and nontraditional students. a nontraditional student was defined as one whose birth date was prior to 1974. only students who took both the pre-test and the post-test and answered all questions on both occasions are included in the summary results. iii. summer results there were 37 usable responses from the summer session. the sample included 17 men and 20 women. eleven of the students were nontraditional and 26 were traditional. everyone in the sample scored higher on the post-test than on the pre-test. the increase in the number of questions answered correctly ranged from 5 to 29 with an average increase of 15.3. there was no evidence of significant * professor of economics, tennessee technological university, cookeville, tn 38505. email: bthrockmort@tntech.edu 19 differences between groups. however, the primary goal was to determine if students could significantly increase their test scores by completing the course. all groups showed significant gains from pre-test to post-test. summer total (n = 37) pre test post test pre test post test arithmetic mean 33.9 49.2 standard deviation 5.2 6.5 range 20 45 27 61 standard error of difference = 1.37 number of standard errors difference = 11.17 summer male (n = 17) pre test post test arithmetic mean 35.0 48.5 standard deviation 5.85 7.15 range 20 45 27 58 standard error of difference = 2.2 number of standard errors difference = 6.14 summer female (n = 20) pre test post test arithmetic mean 32.9 49.9 standard deviation 3.25 5.2 range 26 41 39 61 standard error of difference = 1.88 number of standard errors difference = 9.04 summer traditional ( n = 26) pre test post test arithmetic mean 33.2 49.1 standard deviation 5.2 6.5 range 20 44 27 57 20 standard error of difference = 1.63 number of standard errors difference = 9.75 summer nontraditional (n = 11) pre test post test arithmetic mean 35.5 49.6 standard deviation 4.55 5.85 range 29 45 39 61 standard error of difference = 2.23 number of standard errors difference = 6.32 there are no apparent significant differences between male and female students or between traditional and nontraditional students. however, post test scores are significantly greater than pre test scores for all groups at an alpha level of .001. women had lower pre-test scores than men, but had higher post-test scores. men gained an average of 13.5 correctly answered questions while women gained 17. traditional students gained 15.9 and nontraditional students gained 14.6. the data suggest that women learned more than men during the course. iv. fall results there were 35 usable responses from the one fall section that is summarized below. this sample included 22 men and 13 women. there were only five nontraditional students in this sample so there was no comparison of traditional and nontraditional students. one student actually scored lower on the post test than on the pretest. that individual answered three fewer questions correctly on the post-test. the largest gain was 25 questions answered correctly. fall total (n = 35) pre test post test arithmetic mean 29.1 41.8 standard deviation 5.6 7.9 range 20 42 29 59 standard error of the difference = 1.64 number of standard errors difference = 7.74 fall male ( n = 22) pre test post test arithmetic mean 29.5 41.4 standard deviation 5.3 8.0 range 21 39 31 59 standard error of the difference = 2.05 number of standard errors difference = 7.85 fall female (n = 13) pre test post test arithmetic mean 28.5 42.5 standard deviation 5.9 7.65 range 20 42 29 55 standard error of difference = 2.68 number of standard errors difference = 5.22 again post-test scores are significantly higher than pre-test scores for all groups considered. there are no apparent significant differences between male and female students, but female students gained an average of 14 correct questions as opposed to the male students' average gain of 11.9. the overall average increase was 12.7. there has been no attempt to explain why fall scores are lower than summer scores. v. conclusions there are no significant differences between male and female students on the pre-test or the post test in either summer or fall. there are no significant differences between traditional and nontraditional students on either the pre-test or post-test during summer term. post-test scores were significantly higher than pre-test scores for all groups examined. female students had lower pre-test scores than male students, but higher post-test scores. this suggests that female students learned more from the course than male students did. fall scores were somewhat lower than summer scores, but no explanation has been sought for for this difference. vi. suggestions for additional research this study shows correct response by question. further analysis of pre-test and post-test response would be helpful in identifying strengths and weaknesses of the course. this will be the subject of a future paper. 21 22 appendix econ 332 pre test & post test functions and definitions of money 1. u. s. currency is printed by a. each individual federal reserve bank b. the bureau of the mint c. the bureau of engraving and printing d. private printing firms under contract 2. the life-expectancy of a one-dollar bill is a. 1.5 years b. 2 years c. 4 years d. 10 years 3. the largest payments system in the country is a. the u. s. treasury b. the automated clearing house (ach) system c. the federal reserve bank of new york d. none of the above 4. which of the following is a necessary prerequisite for money? a. it must be convertible into a precious metal b. it must have intrinsic value c. it must be generally acceptable as a means of payment d. it must not have intrinsic value 5. checking accounts are money because a. they are generally acceptable in exchange for goods and services b. they were declared as money by the u.s. government c. they are legal tender d. they have intrinsic value 6. which measure of the money stock is composed exclusively of transaction items? a. m1 b. m2 c. m3 d. l 7. savings deposits are included in a. m1 b. m2 c. m3 d. m2 & m3 23 money and capital markets 8. treasury bill auctions are held a. weekly b. monthly c. quarterly d. annually 9. financial instruments that mature in less than one year are known as a. capital market instruments b. money market instruments c. primary market instruments d. debentures 10. which of the following is a capital market instrument? a. corporate bonds b. negotiable cds c. bankers acceptances d. treasury bills 11. the most important (and most liquid) money market instrument is a. commercial paper b. eurodollars c. treasury bills d. federal funds 12. the federal funds market is a. monies spent and received by the u. s. government b. receipts from the sale of savings bonds c. an interbank market 13. treasury bills generally have lower yields than corporate issues of comparable maturities because a. there is no market for commercial paper b. treasury bills are free of default risk c. there is an active secondary market for treasury bills d. none of the above 14. when it is stated that municipal securities are tax-exempt, it means a. that the issuer pays no taxes b. that the interest earned is not subject to federal income taxes c. that the interest earned is subject to no taxes of any kind d. that the buyer pays no taxes at time of purchase financial institutions 15. the largest and most important financial intermediaries are a. federal reserve banks b. commercial banks c. pension funds d. life insurance companies 24 16. credit unions differ from other financial intermediaries because a. they require a membership fee b. they are non-profit corporations c. they lend only to their members d. all of the above 17.the largest earning asset of commercial banks is a. federal funds b. deposits c. government securities d. loans 18. the largest liability of commercial banks is a. loans b. deposits c. borrowings d. government securities 19. which financial intermediaries traditionally specialized in first mortgage loans? a. credit unions b. commercial banks c. savings and loan associations d. federal reserve banks 20. today, the largest mortgage lenders, by volume, are a. credit unions b. commercial banks c. savings and loan associations d. life insurance companies 21. what was the initial reason for the formation of credit unions? a. to offer home equity loans b. to offer demand deposits c. to offer consumer loans d. to offer business loans banking history 22. the first bank of the united states a. had a 20-year charter b. was a joint private-public enterprise c. did not have its charter renewed d. all of the above 23. the president who was primarily responsible for the dissolution of the second bank of the united states was a. thomas jefferson b. andrew jackson c. woodrow wilson d. richard nixon 24. the free banking system ended 25 a. it has not ended b. with creation of the federal reserve system c. with passage of national banking laws in the 1860s d. when they all failed 25. banks may be chartered by their state or by an agency of the federal government. this gives rise to the term a. bilateral banking b. dual banking c. duplex banking d. inverse ratio banking regulation 26. the federal deposit insurance corporation (fdic) has insured bank deposits against bank failure since the 1930s. what is the current limit of coverage? a. $5000 per account b. $50,000 per account c. $100,000 per account d. coverage is unlimited 27. the fdic was created as a permanent agency by a. banking act of 1933 b. banking act of 1935 c. federal reserve act d. bank holding company act 28. the banking act of 1935 a. repealed the glass-steagall act b. altered the structure of the federal reserve system c. is the glass-steagall act d. none of the above 29. didmca made changes in reserve requirements. since 1980, reserve requirements a. are determined by geographic location of the bank b. are uniform and universal c. are determined by net demand deposit size of the bank d. none of the above 30. money market deposit accounts (mmdas) were authorized by a. banking act of 1933 b. firrea c. garn-st. germain act d. didmca 31. the federal agency that supervises thrift institutions is a. fdic b. rtc c. ots d. fhhb 32. didmca was passed in a. 1913 b. 1933 26 c. 1956 d. 1980 33. the two bank deregulation acts are a. fdicia and firrea b. didmca and firrea c. didmca and garn-st. germain d. garn-st. germain and fdicia 34. which act calls for an annual on-site examination of all insured banks? a. banking act of 1935 b. firrea c. fdicia d. didmca deposit expansion 35. assume a bank has zero excess reserves and the required reserve ratio is 10%. if the bank receives a new deposit of $5000, what is the maximum amount it can loan out? a. $500 b. $4000 c. $4500 d. $5000 36. if nobody holds cash and the only type of deposit is a demand deposit for which the required reserve ratio is 25%, what is the value of the money multiplier? a. .25 b. 1 c. 4 d. 5 federal reserve system and monetary policy 37. the chairman of the federal reserve board of governors a. is the president of the federal reserve bank of new york b. is the secretary of the treasury c. is appointed by the senate and approved by congress d. is appointed by the president and approved by the senate 38. the federal open market committee is composed of a. the board of governors b. the 12 presidents of federal reserve banks c. the board of governors and five federal reserve bank presidents d. seven federal reserve bank presidents 39. required reserves are held a. as vault cash b. on deposit with the fed c. as vault cash and on deposit with the fed d. as demand deposits 40. reserves held by banks above the minimum amount required are known as 27 a. required reserves b. excess reserves c. vault cash d. legal reserves 41. the rate charged by the fed on loans made to its borrowers is known as a. prime rate b. discount rate c. federal funds rate d. market rate 42. the purchase and sale by the fed of securities is known as a. monetary policy b. fiscal policy c. open market operations d. discount window activity 43. the actual buying and selling of securities for the fed is done by a. federal reserve bank of new york b. fomc c. fdic d. federal reserve board of governors 44. a commercial bank that belongs to the federal reserve system is known as a. federal bank b. national bank c. member bank d. chartered bank 45. how many federal reserve banks are there? a. 1 b. 2 c. 7 d. 12 46. what is the length of a term on the federal reserve board of governors? a. 2 years b. 4 years c. 10 years d. 14 years 47. the largest liability of the fed is a. reserve deposits b. u. s. treasury deposits c. federal reserve notes d. special drawing rights 28 48. the largest asset of the fed is a. special drawing rights b. government securities c. federal reserve notes d. loans 49. about how often does the federal reserve conduct an open-market purchase or sale? a. daily b. weekly c. biweekly d. monthly 50. the chairman of the board of governors of the federal reserve system is a. burns b. martin c. greenspan d. volcker 51. federal reserve banks are considered "lenders of last resort." this means a. potential borrowers must exhaust other sources of funding before turning to the federal res. banks b. potential borrowers must form borrowing pools in order to turn to the federal reserve banks c. potential borrowers must attempt to sell bonds before turning to the federal reserve banks d. none of the above 52. a prime purpose of the federal reserve system is to a. issue currency b. actively control the money supply c. serve as a lender of last resort to the government d. harness overzealous bankers quantity theory 53. what is the fisher equation of the quantity theory of money? a. mv = pq b. m = kpq c. mp = vq d. mk = pq 54. what is the cambridge equation of exchange? a. mv = pq b. m = kpq c. mp = vq d. mk = pq 55. the rate at which money turns over in an economy is known as a. quantity theory of money b. velocity of money c. money supply d. real money supply 29 56. the transactions demand for money mainly depends on a. bond yield b. demand deposits c. interest rates d. the level of income 57. velocity may be measured by a. v = mp b. v = gdp/m c. v = m/gdp d. velocity is always 2.0 international finance 58. the foreign exchange rate, from the viewpoint of the u. s., is the a. exchange of u. s. goods for foreign goods b. currency of other countries c. amount of exports we send to other countries d. amount of foreign currency we get in exchange for one u. s. dollar 59. the international monetary fund was established a. at the bretton woods meeting following the end of world war i (1918) b. by an international delegation toward the end of world war ii (1944) c. to buy and sell gold in order to fix its price at $35 per ounce d. in order to facilitate the conversion of all currencies into gold on demand 60. the current system of foreign exchange is a. a fixed-exchange rate system b. a gold-convertibility system c. a totally flexible exchange rate system d. a managed floating exchange rate system 61. the difference between a nation's exports of goods and services and its imports of goods and services is called its a. balance of trade b. balance on current account c. balance of payments d. net capital flow 62. the most important trading partner of the u. s. in terms of the volume of exports is a. canada b. japan c. china d. germany 63. under the bretton woods agreement of 1945, all major trading nations agreed to a. allow their currencies to float freely against both the u. s. dollar and gold b. maintain their exchange rates versus gold or the u. s. dollar within a narrow range c. allow their currencies to float within wide ranges determined by the imf d. allow their currencies to float freely against gold but to peg them to a specific u. s. dollar value 30 64. if the dollar depreciates a. it buys less gold b. it buys more gold c. it buys fewer units of another currency d. it buys more units of another currency 65. the official price of gold in the u. s., that is, the price the treasury stands ready to pay is a. $35/ounce b. $38/ounce c. $42.22/ounce d. the market price on the comex hannah99.pdf 42 industrial relations and human resources instructional opportunities in the electronic media environment by richard l. hannah* abstract instructional applications of the internet in the 1990's have been a driving force for infusion of information technology into the academic environment. however, the glitz of the internet has tended to obscure the full range of potential media applications, such as multi-media product development, and cable tv and satellite delivery. for the professorate to enrich their instructional capabilities through different media requires a clear vision of how specific academic disciplines can best benefit from the available media options. media facilities and access have reached a stage of development at universities that requires discipline specific thought about their potential contribution to learning. this article describes these possibilities in the context of the related fields of industrial relations and human resource management. strategic considerations, practical applications, and implications for professional associations are presented. the broader objective is to alert readers in other academic disciplines to the possibilities of exploring media opportunities, and conversely generate some thinking as to the consequences of not exploring those opportunities. i. introduction this paper describes emerging instructional opportunities in electronic media that are readily adaptable to discipline specific applications, in this case for industrial relations (ir) and human resources (hr) learning objectives. successful outcomes from these opportunities require well-conceived resource allocation strategies to achieve teaching objectives that extend far beyond the traditional classroom, course, or curriculum confines. this is the direction toward which this document nudges thought and action. the sections following the introduction include: (1) commentary about the convenience factor in education, (2) a description of the media spectrum, (3) an in-depth focus on the cable tv example, (4) topical research and online inquiry results, (5) strategies for consideration, and (6) conclusion. assessment of the quality of teaching and learning through different media, and the troublesome issue of intellectual property rights, are separate areas of inquiry and are not addressed herein. (for an example, see "distance education and intellectual property," 1999.) the potential (perhaps necessity) of projecting academic programming through electronic media is considerable, and we academics must expand our role in knowledge sharing in this context. for outreach (or marketing) purposes a more public professorate is important in the increasingly competitive education industry, and media projection of ir or hr academic expertise as a public service is consistent with this emerging criterion for success of higher education institutions. with the right package, discipline specific substance can have a sustained appeal to the public. finally, academics whose primary intellectual alignment is with ir may discover an additional philosophic interest in teaching in the evolving environment of information technologies. the prospects for electronic media as a catalyst fusing ir and educational restructuring to accommodate lifelong learning are conceptually intriguing. a globally diffused information environment intricately integrated with economic activity already has attracted the interest of much scholarship examining how work and employee-employer relations have been altered by information technologies. the integrated view of labor markets, socio-economic forces, and institutions within the field of ir (vis-à-vis hr) enables a more inclusive perspective of the environmental factors involved when examining the relationships arising from work. this capacity for the big picture is important for adjusting our teaching frame of reference to incorporate teacher-student collaborations in the design of incremental acquisition of ___________________________ * richard l. hannah, ph.d. economics & finance dept., box 27 middle tennessee state university murfreesboro, tennessee 37132 email: rlhannah@frank.mtsu.edu tel: 615-898-2228 fax: 615-895-7580 43 education which is implicit in lifelong learning. in other words, our collective wisdom about collaborative (or cooperative, or conflict driven) ir should be turned inward to examine the prospects of forging new learning models with the student collective. ii. the convenience factor while some faculty still teach students who are enrolled full-time and who do not have to accommodate competing life-cycle priorities, those of us with students who work full-time (or nearly so), have family obligations, and spend significant time commuting, have learned that convenience sells. in the education industry, electronic media are increasingly relied upon for this potential. furthermore, information and instructional technologies are now inseparable from everyday life's work, leisure, and the ambiguous areas between the two. academic relevance demands that these technologies should be infused into ir and hr curricula, either as an alternative delivery system, or with specific ir or hr courses that focus on the technology developments and applications directly related to the discipline. teaching has now reached another turning point within the context of information technologies and this has special relevance to the organization and transformation of the work of higher education faculty. for example, the dichotomy between academic and administrative matters in the networked medium has become very fuzzy in several areas. many if not most institutions have online registration for classes, and some now have systems allowing faculty to access student enrollment and email addresses as the start of the semester approaches. this facilitates early contact with students to inform them of course web pages or other items the instructor may want to convey. this is perhaps more than faculty could have hoped (or cared) for, but better synchronized electronic integration of academic and administrative information flow is a convenient development. in such an environment the default action when the student registers can be automatic notification of the instructor's email, course web page, texts required and cost, and student evaluations of the faculty member. this suggests how "electronic relations" have changed our work environment in ways that supplement but are not directly related to instruction. this convenience of information offers numerous ways to save time and/or to improve the quality of instruction. (for additional discussion about these prospects, see hannah, 1998a.) in short, the confluence of shifting student demographics, advances in information technologies, and the government, corporate, and educational "buy-in" to the continuous learning philosophy have made convenience of scheduling, contact time, and location pivotal in instructional content and delivery. in this context, media alternatives have become more relevant. boldly plying optimism does clarify the need for an academic agenda to seize these opportunities, if not as a part of an educational renaissance, at least as a discipline driven one. iii. the media spectrum distance leaning is an umbrella phrase that captures the application of numerous technologies, but the mix is richer than those dedicated to bridging space and time by recording and transmission variations. these technologies have different infrastructures, designed for different applications. examples are given below. internet--email master classrooms internet--discussion lists integrated digital services network (isdn) internet--web cable tv--public access, government, educational internet--a/v streaming satellite internet--document messaging desktop conferencing multimedia--cd, dvd networked library resources adding to the above list the intriguing teaching/learning conceptual frameworks, such as ubiquitous computing philosophies of universities (complete portability and standardization of hardware, software, and telecommunications infrastructure) and custom publishing, presents a far more complex array of choices than most academics experienced or perhaps even recognized. a tolerable length of this paper precludes a thorough 44 description of each of the above, and indeed, there is no need for such attentiveness because many items in the list are now commonly used. an in-depth example suffices to illustrate the prospects for academics in general, and for ir and hr in particular. iv. the expanded cable tv access example any academic discipline with an objective of reaching k-12 educators, students, or administrators must understand the pervasive and sustained effort to provide cable tv and internet access at the classroom level. mass popularity has been achieved by programs available from such channels as discovery/learning, pbs, a&e, cnn, the weather channel, the history channel, and c-span. [see dirr, 1997.] are there prospects for more specialized niches for k-12 or higher education? if so, this may come from local level programming, or the networking of locally developed programs to a wider audience via adoption by associated local cable franchises. the telecommunications acts of 1992 and 1996 created as yet under-appreciated opportunities for academic programming. essentially, local governments that grant a local cable franchise can include provisions for dedicated channels (or bandwidth) to three types of programming: public access, government meetings, and education. there appears no systematic data on the types of channel proliferation and program content at the local level. however, anecdotal evidence indicates that while the public access category has proven problematic because it literally requires open access to virtually any interest group, including those with deviant agendas, government and educational channels have expanded considerably. at my own mid-sized state university, there are two educational channels carried by the local franchise that reaches 40,000 to 50,000 subscribers. however, there is no "master plan" for media based or networked academic programming. a few credit courses have been telecast, but most programs are simply time slot fillers derived from other sources or athletic shows. oftentimes, there are only announcements posted on the tv screen. very few faculty have begun to experiment in this context. what does all this have to do with ir or hr? quite simply the emergence of local cable access through universities could be seen as an unprecedented opportunity to educate the public about the subject matter of our disciplines. while this may not be considered strictly in the teaching vein, the modification and projection of what we teach as a public service are essential to generating interest in our subject matter. cable programming can also be directly integrated with traditional teaching. for example, in credit courses, special lectures that garner public interest can be given in the production studio and telecast at a later time. students can be required to develop tv programs based on research papers or projects. current employment issues can be addressed in a variety of formats, and controversial topics presented in a learned manner (such as international influences on local labor markets or electronic privacy issues in the workplace). implicit in the scenarios above is a thought process that incorporates a more public projection of knowledge by academic disciplines. the means have arrived; the requisite actions to seize the opportunities are yet to materialize. if we do not carve out a substantive part of the available programming in these emerging media, then academics will have failed to sustain a learned, credible core in the part of teaching that finds its way into the mainstream of public service media production. like the internet, these windows of opportunity may be only briefly open before commercialization pushes academic intent and content aside. v. document research and online inquiry results dozens of journals from a variety of disciplines were scanned in a literature search, but only a few references describing higher education programming were identified, such as the higher education channel (hec-tv) [klotzer, 1997], and the economic development network (ed>net) [california, 1995-96]. there was nothing akin to ir or hr. for the u.s. the dearth of higher education related literature is particularly surprising given the potential for programming, especially for rapidly growing k-12 access. at least in concept, the europeans have moved ahead with the idea of the european educational television channel, a multilingual satellite channel for schools and colleges across the continent [coughlan, 1995]. 45 another effort to gather information was the posting of inquiries on four internet discussion lists that service employment related academic and practitioner subscribers. the lists and estimated subscriber counts (taken between september 1998 and may 1999) are given below. note that this selection of lists was one of expediency and the number of subscribers represents only a small fraction of employment related lists. (see hannah, 1998b). • irra: industrial relations research association list (us) 255 subscribers • prir-l: pacific rim industrial relations (nz) 693 subscribers • industrial-relations-research list (uk) 605 subscribers • benefits-l: employee benefits list (us) 550 subscribers the inquiry was whether list participants had produced ir/hr related instructional programming for cable tv, isdn, satellite, or cd/dvd--as credit, non-credit, or public service educational activities. of the ten replies only four fit any of these categories. one was the uaw-ford university (root, 1999). the second reported on european developments (coates, 1999). in this latter case, the european trade union college (etuco) and association for european training of workers on the impact of new technologies (afett) have begun initial exploration of online information delivery. (see etuco and afett, 1999). these programs include works councils training and information technology modules. the third response (hunter, 1999) described real time internet connections for a hr course in an executive education program. the fourth reply described videos about negotiation and workplace language use (fells, 1999). a third information search was a direct email inquiry of the 66 serviceable addresses identified as ir or hr degree programs in the u.s., canada, and australia (irra, 1998). the technologies referenced in the email were the same as those posted to the discussion lists. there were 20 responses (as of 6/14/99) ranging from a preference not to go beyond the technology of colored chalk to cd and video tape development. only one response indicated any activity with dvd technology. two were actively employing interactive satellite delivery and two had examined the prospect but not yet implemented this service because of prohibitive costs or technical coordination difficulties. while these kinds of inquiries are not scientific and likely underestimate the activity level, the dearth of responses from a sample of 2000 discussion list subscribers and 66 ir or hr degree granting programs would appear indicative of the lack of discipline specific movement toward the identified technology applications. this does not bode well for a profession that is grounded in the relations of people to work in an emergent knowledge based economy that is increasingly dependent on information technologies. vi. strategic considerations integrating technologies. figure 1 provides a visualization of the primary strategic integration options for academic programming. synchronizing these options in a way that works best for the institution, the faculty, and the students is a matter of identifying the best niches (or more formally stated, comparative advantages in the competitive educational industry). an example drawn from experimentation and anecdotal evidence collected from the literature and personal contacts via the internet is given in figure 2. this particular logic is very simplistic--replication of the instructional program in different media for different purposes. the integration options have been re-arranged into four categories, and the figure 2 centerpiece of academic programming is replaced with ir/hr programming. the description of activities to date is given below. practical applications. the top portion of figure 2 is perhaps the most familiar. the publication of web pages dedicated to employment relations is well known. for academic purposes, these pages generally fall into two categories. one is government. the continuing evolution of online data and documents, especially via the u.s. department of labor and state agencies, will likely have profound impacts on the textbook publishing. why pay the publisher for data or documents that can be freely and easily extracted from the internet? the lack of many widely used ir, hr, and labor related texts to reflect the electronic media reality is disappointing. the second category of web pages is derived from academic or professional association development. for academics, pages may serve as a topical resource or reflect specific course content, which is a useful reference for courses in response to pre-enrollment inquiries. essentially, these web pages also serve as a passive marketing tool in brochure development or other promotional activity. 46 the right side of figure 2 identifies an early but still useful telecommunications technology, integrated digital services network. specific to ir programming, the most interesting application to date by this author was a live international program feed to caen university in france, with which middle tennessee state university has a partnership. students there asked for a presentation on u.s. labor markets and employment related benefits. this was the first such connection for our university and has spawned requests for several additional interactive programs in the 1999-2000 academic year. the bottom portion of figure 2 describes the newest addition for the author's campus, a direct digital satellite link to seven local school systems. a variety of live programs have been telecast through this medium. (taping and taped telecast capability is also possible.) one recent program, in the fall of 1999, introduced k-12 teachers, students, and interested public participants to online resources useful for career choices. the "credit" designation is included here only as an ordering convenience for figure 2. an ir or hr credit course in this format has not been telecast to date because a target market has yet to be identified. however, with a digital satellite link, a course can be telecast anywhere with compatible downlink equipment. specialty courses in short supply, such as employee benefits, are good candidates to market in such a medium, particularly if the credit is accepted in other academic programs. referring to the left side of figure 2, during the spring of 1999 fifteen half-hour programs were videotaped. while many of these were not specific to employment relations, the following eight were directly or indirectly related to the ir/hr instructional program or ir/hr subject matter. • program changes in the ir concentration within the economics m.a. • discussion of the mission and activities of mtsu's labor-management center • u.s.-chinese economic relations • european union • instructional technology evolution • formal lecture on the history of pension systems • formal lecture on quasi-property rights in pensions • three student presentations on research projects in employee benefits class these presentations were primarily conceived as a public service. however, the last three were directly integrated into a formal course. the next step is to modify an entire course to fit within this taping format. the objectives are to begin development of a video archive of formal lectures, to encourage student collaboration with the program/teaching design in this format, and to give the public viewers insights into the inner workings of the course and a glimpse of the subject matter. finally, keep in mind that the categorizations described above are for illustrative purposes only. different combinations may be more logical for a given institution. the intent here has been only to facilitate more orderly thought about the possibilities. curriculum changes. we are all driven to some degree to infuse media technologies into courses, either in terms of electronic delivery or skills acquisition by our students, or because we are curious about new possibilities. the examples above illustrate the range of possibilities; however, going to the edge of the teaching frontier now requires consideration of curriculum changes to accommodate the new possibilities for skills upgrading or acquisition. some are familiar. these include pre/post masters certifications, more international content, collaborative relationships among institutions for greater flexibility of credit transfer, and invited specialist commentary so that scarce knowledge can be more widely shared. if our teaching future in part depends on student centered learning, then we should speed up our deliberations about best ways to maintain a high quality of learning. this may encompass new pedagogies and evaluative mechanisms that in no way resemble the examinations of centuries past. for example, online learning architectures are at best still in their infancy, and i know of no ir or hr programs that require learning portfolios, which at a minimum would serve as an objective presentation of the continuity of learning. also, models in which students and faculty collaborate to devise the optimal learning methods for different media technologies are in order. a specific course requiring the projection of learned content through media alternatives is one possibility. there is nothing like the idea of a public viewing of one's presentation to encourage the mastery of content and clarity of delivery. having 47 observed many students excel in this environment, i believe faculty should see the wisdom of developing their own professional agenda for alternative media delivery. an example of such a course is the following catalog description. while this course was not designed exclusively for ir and hr students, the author specifically crafted it with the possibilities of those fields in mind. econ 649 special media projects. three credits. this course is for learning experiences that are either non-traditional or not defined as an option elsewhere in formal programs of study. the conditions for approval include faculty advisor and student written mutual consent and conformance to departmental standards for independent study. this course is an option only for students who demonstrate competency by testing in courses for which a requirement to enroll in the course would be a redundant learning experience. examples of special projects include the production of ir related cd's, dvd's, cable tv programming, internet projects, internships that clearly add non-redundant learning experiences to the ir program of study, or highly applied projects that demonstrate the integration of ir into mainstream business or other organization decision making. a role for the irra? i specifically address the industrial relations research association (irra) because this is the professional association with which i am most familiar. while we justifiably pride ourselves in inclusive and interdisciplinary membership, a more extroverted public agenda has waxed and waned. the possibilities of greater public projection have been described in this paper. if these media outlets are worthy of strategic attention within the profession, then the irra is the logical instrument of leadership. thus, a short review of where the association is and where it might go is in order. the most visible electronic presence of the association is the irra discussion list and the irra web site. next is the educational video tapes such as a changing world of work. third, president tom kochan has appointed an irra technology committee, chaired by charles heckscher, to advise about ways to enhance the online presence of the irra. ir teaching conferences sponsored by georgia state university have been a rich forum of ideas and experiences reflecting the current state of media applications to ir teaching. fifth, there are other forums that are broadening the discourse on information technologies in the field. these include the irra annual meeting in boston (2000), which included a working group session on information technologies and industrial relations, and the ir regional association meetings, at least one of which (southern region) has for several years included technology oriented sessions. finally, more direct discourse among ir/hr academics and publishers in an irra sponsored forum would facilitate a broader understanding of the possibilities with custom publishing and infusion of electronic media devises into instructional materials--a possible item for the irra 2001 meetings. as this paper has pointed out, the range and reach of media now available require thinking beyond the immediate profession--and if not mass media, at least "mini-media" strategies. what to do? use the resources at hand. we don't have to reinvent the wheel in order to progress in this context. an electronic network is in place and the subscribers can be polled to test the demand for media products and foster collaborations for the development and improvement of such products. the association's web page invites experimentation with audio/video streaming. many of us have educational cable access, through which we can either develop our own programs or encourage the airing of irra sponsored programs. vii. conclusions a sketch of media developments and suggestions for practical applications has been put forth in this paper. no doubt, the collective wisdom of academics can produce a much longer list. the motivation to do so should have a deeper connection to our professional roots. if we believe in the doctrine of lifelong learning, then work and education require a unified pattern of thought and practice. media alternatives are only tools, and expanded media use will not produce new methodologies or pedagogies. however, a strategic pattern of application of these technologies may lower the traditional boundaries of thought and enable a very different vision of what the study and practice of industrial relations and human resources can be in the next few years. my original title of this paper contained the verbiage of "instructional adjustments," implying that academics should accommodate technology. as i have re-thought and re-wrote this article, i gradually concluded that "adjustment" was far too timid a descriptor for an intellectual shift to media thinking. we should simply seize the opportunities before us. they were put in place for the public good and should be exploited as a public service. 48 references california community colleges, office of the chancellor. 1995-96. economic development network (ed>net): report to the governor and the legislature. coates, chris. may 13, 1999. librarian tuc collections, university of north london learning centre. coughlan, sean. june 30, 1995. lessons from on high. times educational supplement, n4122, ps23(1). dirr, peter j. 1997. the use of cable and the internet/world wide web in elementary and secondary classrooms. a field study for cable in the classroom by public service telecommunications corporation. "distance education and intellectual property." may-june 1999. academe, vol. 85(3): 41-45. etuco and afett. internet extraction, may 13, 1999. http://www.etuc.org/etuco/default.cfm fells, ray. may 17, 1999. department of organizational and labor studies, university of western australia. hannah, richard l. 1998a. "merging the intellectual and technical infrastructures in higher education: the internet example," the internet and higher education, vol. 1(1): pp. 7-20 (february 1998). hannah, richard l. 1998b. employment related discussion lists. http://www.mtsu.edu/~rlhannah/erlists.html. hunter, chip. may 13, 1999. university of pennsylvania, the wharton school. irra survey. may 1998. industrial relations and human resource degree programs in the us, canada, and australia. klotzer, charles l. july-august 1997. there. st. louis journalism review, v. 27 (198): p. 4(1). root, lawrence s. may 13, 1999. school of social work and institute of labor and industrial relations, university of michigan. 49 50 microsoft word jeesum03n.doc journal for economic educators • volume 4 • number 1 • summer 2003 19 teaching money and banking online: a comparison with the traditional approach alejandro gallegos* abstract money and banking is a junior level course offered at most higher education institutions as part of an economics or business related curriculum. in 1999, the author prepared the course to be delivered over the internet in an asynchronous manner, during a summer session. the course was offered again with this format during the fall of 2000, and a third time during the spring of 2001. in this paper the author compares the web-based classes with the classes offered in the traditional classroom format in terms of student performance and students’ perception of the course. in general he finds no significant differences, but the evidence seems to indicate that students preferred the online format during the period under analysis. (jel a22) introduction the use of technology in higher education has increased tremendously in the past few years. college instructors who traditionally concerned themselves only with course content now have the additional challenge of having to familiarize themselves with an ever-increasing number of technological innovations that threaten to revolutionize delivery modes. among these innovations, the internet, with its immense potential, has a special place. according to a recent survey, 42.7 percent of college courses now use web resources as a component of the syllabus, as compared with 10.9 percent in 1995, and almost one-third of all college courses have a web page, up from 9.2 percent in 1996 (green, 2001, p.3). the purpose of this paper is to present the author's experience with the online delivery of an upper level economics course. it will start with some background information dealing with institutional and curricular issues, and then it will present the results obtained by two groups of students that enrolled in the course in two different time frames; then it will compare those results with the ones obtained by students enrolled in the same course when it was offered with the traditional classroom delivery mode. some preliminary conclusions will be presented at the end of the paper. * alejandro gallegos, profesor of economics, winona state university, winona, mn 55987, agallegos@winona.edu. the author thanks two anonymous referees for helpful comments. the author wishes to thank prof. marvin wolfmeyer of the business administration department, winona state university for assistance with the statistical analysis. journal for economic educators • volume 4 • number 1 • summer 200320 background money and banking is a junior level course offered by the department of economics and finance of winona state university, one of the four-year institutions in the minnesota state colleges and universities system. it is a required course for economics majors and minors and an elective course for other business related majors and for a few other majors outside of the college of business. one section of this course is offered every term, and that section has been part of the author’s teaching load for the past five years. winona state is very interested in the use of technology in higher education. in the fall of 2000, it became a “laptop university.” after running pilot programs in different academic departments, the decision was made to ask every student to lease a laptop computer, through an agreement first with ibm and currently with gateway. each faculty member is provided with a similar machine and with appropriate software. besides, a number of grants are offered to faculty to discover ways to enhance course delivery with the use of technology. one such grant is offered in the form of “summer venture funds” that faculty members can use to design new courses or introduce innovations in the way courses are delivered. summer venture funds were awarded to the author in 1999 to develop a web-based money and banking course, to be delivered during the summer that year. money and banking was in fact offered with this format during the second summer session of 1999, which ran from july 12 to august 13 and was offered again during the fall semester of 2000 and a third time during the spring semester of 2001. the experiment the idea that the traditional lecture delivery is rapidly becoming a thing of the past has been repeatedly mentioned on our campus for some time now. one of the main purposes of this experiment, then, was to see if internet-based delivery would be a viable alternative to the traditional delivery in terms of students’ acceptance and performance. there were other reasons to offer the class with this format of practical importance to some students, such as time and space flexibility. individuals interested in taking the class would not have to be on campus and would not have to log on to the course site at a certain time. during the summer offering, six students out of 26 were not residing in winona. five of them were in other cities in minnesota, and one of them was in milwaukee, wisconsin. during the fall semester, most students were on campus taking other courses; only two of them resided in rochester, where winona state has a satellite campus. during the spring semester of 2001, all enrolled students were residents of winona. by design, the course was to have the same content as the classroom version, the same textbook would be used, and course policies would be essentially the same. communication would take place mainly through e-mail, although students could stop by the instructor’s office during announced office hours. assignments would be submitted through e-mail, unless they involved graphics. if graphics were involved, students could submit assignments through e-mail attachments, fax, or regular mail or could drop them at the instructor’s office. since no classroom instruction was to take place, course materials were developed to take the place of lectures and were posted on the web. the course would use asynchronous instruction, which is the primary mode of instructional delivery for distance education courses (boettcher, 2000, p. 37). students were allowed to ask questions any time, by any means. evaluation was done on the basis of assignments, exams, and a team project. a calendar that students were to strictly follow was posted at the beginning of the semester. the first time the course was offered with this format, all exams, three “midterms” and the final, were the “take home” type. they would be posted in the morning of the announced date, and students had to turn in their answers by midnight the same day. when the course was offered during the fall semester journal for economic educators • volume 4 • number 1 • summer 2003 21 of 2000, the first and final exams were given as in-class exams. all exams were given in the classroom during the spring semester of 2001. the gradual shift from online to in-class format was done to eliminate perceptions of difference in evaluation standards. the team project required students to submit a proposal, an initial outline and literature review, a final outline with specific bibliographic sources for each point of the outline, a first draft, and a final draft. the instructor provided timely feedback in all cases, except in the case of the final draft, which was graded following posted guidelines. class statistics table 1 shows the number of students, grade distribution, and gpa of four money and banking classes taught during summer sessions between 1997 and 2000. they were all taught in a five-week period, during the second session (ss2) of those summers. three of those courses were delivered in the traditional way, and one was delivered over the internet during the 1999 second summer session. the three courses delivered traditionally were similar in terms of content, textbook, evaluation, and number of hours of classroom contact. the online course had the same content and textbook, but there was no classroom contact. evaluation was done through assignments, exams, and a term paper as well. assignments and exams were submitted through email and other means, and students had to submit a hard copy of the term paper at the end of the session. table 1. grade comparison: three traditional, and one online (99) money and banking classes offered during summer terms grades 97 ss2 98 ss2 99 ss2 00 ss2 # % # % # % # % a b c d f 2 16.67 5 41.67 5 41.66 0 0.00 0 0.00 4 30.77 4 30.77 5 38.46 0 0.00 0 0.00 6 23.08 12 46.15 6 23.08 2 7.69 0 0.00 2 28.57 1 14.29 2 28.57 2 28.57 0 0.00 totals gpa st. dev. 12 100.00 2.75 0.75 13 100.00 2.92 0.86 26 100.00 2.85 0.88 7 100.00 2.43 1.27 the grade point average (gpa) fluctuated between 2.43 and 2.92. the average gpa for the three traditional classes was 2.70, and the gpa of the online class was 2.85. no students in the four classes failed, and only two online students and two traditional students earned ds during the summer of 1999 and the summer of 2000. the percentage of ds seems to be unusually high for the “00 ss2” class. this may be related to the small number of students (seven) taking the class during that period. the grade dispersion, as measured by the standard deviation, was also high for this particular class. the percentage of students getting “good” grades (bs and as) is higher in the case of the online class. additionally, this class was, by far, the largest of all the summer classes included in this analysis. journal for economic educators • volume 4 • number 1 • summer 200322 although the time framework is supposed to be the same during the summer than during a regular semester in terms of hours of classroom contact, during the fall and spring semester students take a class over a 15-week period, as compared with a five-week period during the summer. it is clear that from a student’s perspective the summer session appears to be “too short.” very likely, this is not only a matter of perception. during the summer there is less time to prepare for exams and less time to turn in assignments, proposals, and paper drafts. the differences between the two terms are even more pronounced in the case of courses offered online. table 2. grade comparison: three traditional, and two online (00 and 01) money and banking classes offered during regular semester terms grades fall 98 spring 99 fall 99 fall 00 spring 01 # % # % # % # % # % a b c d f 4 22.23 8 44.44 6 33.33 0 0.00 0 0.00 2 15.39 3 23.08 6 46.15 2 15.38 0 0.00 2 18.18 3 27.27 4 36.36 1 9.10 1 9.09 3 10.00 13 43.33 10 33.33 4 13.33 0 0.00 9 32.14 8 28.57 9 32.14 1 3.57 1 3.57 totals gpa st. dev. 18 100.00 2.89 0.76 13 100.00 2.38 0.96 11 100.00 2.36 1.21 30 100.00 2.50 0.86 28 100.00 2.82 1.06 to avoid the comparison between courses offered in periods of different lengths, table 2 presents statistics for five classes that took money and banking during regular 15-week semesters. two of those classes took the course online, and the other three took it with the regular format. the “blackboard” course management system was used in all classes. grade point averages fluctuated between 2.36 and 2.89. both the lowest and highest averages were obtained by classes taking the course with the traditional format. the average obtained by the classes that took the course online fell between those two values. a higher percentage of students got as in one of the courses offered with the online format. the percentage of students getting low grades (d and f) was consistently low. failing grades were given only on one occasion, and, on the other hand, there was a traditional class in which all grades given were c or above. as in the case of the courses offered during the summer, the number of students enrolled in the online classes was substantially higher. a final grade comparison between all students who took the course in the classroom format and all the students who took the course online is done in table 3. the results of all the classes mentioned before, six traditional and three online, are included in this table. the main difference between the two grade distributions seems to be the higher frequency of good grades, as and bs, among students in the online classes. in the traditional classes cs are more frequent. low grades (d or less) were obtained by a higher percentage of students who took the class online as well (9.52 vs. 8.11). however, no failing grades were given to students taking the class online. remarkably, the grade point averages of both groups of students turned out to be very close (2.71 for the online students and 2.66 for the traditional ones), and the grade dispersion very similar. as the online course was developed, the author proposed to offer students two advantages: one, the explanations normally given during the course of a lecture would be available to students, and they would have repeated access to them; and two, students would not have to log on to the journal for economic educators • volume 4 • number 1 • summer 2003 23 class site at any particular time, but whenever their schedules allowed them to do it. it was assumed that the possibility of asking questions using e-mail or the telephone was a good substitute for the possibility of asking questions during a lecture delivery. the evaluation scheme was considered absolutely neutral in the case of assignments and the research paper, which accounted for 60 percent of the grade. in the case of exams, though, a case could be made for the non-neutrality of this evaluation instrument. traditional students had to take in-class closed-book exams, after listening to classroom lectures and explanations. students enrolled in the online classes took all take-home exams the first time the class was offered with this format during the summer of 1999, two take-home exams out of four during the fall of 2000, and all in-class exams during the spring of 2001. on the other hand, online students did not have the benefit of “live” explanations by the instructor. as mentioned before, the shift to in-class exams was implemented to avoid the perception of differences in evaluation standards. table 3. grade comparison: six traditional, and three online money and banking classes grades traditional online # % # % a b c d f 16 21.62 24 32.43 28 37.83 5 6.76 1 1.35 18 21.43 33 39.28 25 29.76 7 8.76 1 1.19 totals gpa st. dev. 74 100.00 2.66 0.94 84 100.00 2.71 0.94 analysis non-neutrality of exams would have been reflected in significantly higher grades for the advantaged group of students, whichever that might have been. the previous analysis seems to reveal a higher dispersion of grades in the online classes. even though the standard deviations of the two grade distributions are virtually identical, as indicated in table 3, there is a higher percentage of both high grades (as and bs) and low grades (ds and fs) among online students. to investigate the possibility of significant differences between the two grade distributions, a formal comparison of the two populations, traditional students and online students, was done using three statistical tests. the first one was a z-test to test the difference in population means. the central limit theorem states that the difference in two sample means is normally distributed for large sample sizes (n ≥ 30) regardless of the shape of the populations. the null hypothesis for this case would be: h0 : µ1 µ2 = 0 and the alternative hypothesis, h1 : µ1 µ2 ≠ 0, journal for economic educators • volume 4 • number 1 • summer 200324 where µ1 and µ2 are the means of the respective populations. traditional students are considered to be a sample from population one, and online students from population two. for α.= 0.05, the critical value for this two-tailed test is zα/2 = ± 1.96. on the other hand, the calculated z value is -0.35, and therefore the null hypothesis cannot be rejected. there seems to be no difference between the means of the two populations. further details on this test and other tests are given in appendix a. the chi-square goodness-of-fit test compares the expected or theoretical frequencies of categories from a population distribution to the observed or actual frequencies from a distribution to determine if there is a difference between what was expected and what was observed. this nonparametric test was applied to the grade distributions under analysis considering the traditional grade frequencies as the expected frequencies and the online grade distribution frequencies as the observed ones. the hypotheses in this case are: h0: the observed distribution is the same as the expected distribution. h1: the observed distribution is not the same as the expected distribution. for α = 0.05 and 4 degrees of freedom, the critical chi-square value is χ2.05,4 = 9.49, whereas the observed value is 2.99. since this value falls outside the rejection region, h0 cannot be rejected. see appendix a for a more detailed description of this test. another test performed was the mann-whitney u test. this test is used when the assumption of a normally distributed population is invalid or if the data are only ordinal in measurement and can further support the results of the previous tests. the two-tailed hypotheses being tested with the mann-whitney u are: h0: the two populations are identical. h1: the two populations are not identical. for α = 0.05 the critical value z is ± 1.96. the observed value of z is -1.44, which is outside the rejection region, and therefore h0 cannot be rejected. (see appendix a.) the results of the three statistical tests indicate, then, that the two populations, traditional and online students, are probably similar in terms of the grades obtained in money and banking. however, there is still the possibility that exam results might not be comparable. as indicated above, online students took half of their exams as take home exams, whereas the traditional students had to take all in-class closed book exams. table 4 presents the grade distribution after exam scores have been eliminated. the grades in the table represent 60 percent of the total grade. the same statistical tests were run for these grade distributions, but similar results were obtained: the null hypothesis could not be rejected at the 95 percent confidence level in any case. no significant disparities in grades were found. journal for economic educators • volume 4 • number 1 • summer 2003 25 table 4. grade comparison: six traditional and three online money and banking classes.test scores excluded. grades traditional online # % # % a b c d f 13 17.57 25 33.78 24 32.43 12 16.22 0 0.00 19 22.62 26 30.95 19 22.62 13 15.48 7 8.33 totals gpa st. dev. 74 100.00 2.53 0.97 84 100.00 2.44 1.24 at this point, then, it seems that there is no significant difference in the performance of traditional students as compared with online students. a pertinent question is: was this result to be expected? to be able to answer this question, we need to consider the background of both types of students. if both groups of students have similar background in terms of nationality, gender, ethnic group, age, and, especially, cumulative grade point average, then a similar performance would support the neutrality of the delivery mode. exhibit 1 contains information on nationality, gender, ethnic group, age, and cumulative grade point average for both groups of students. the percentage of foreign students enrolled in the online classes is almost twice as large as the percentage enrolled in traditional classes. online classes attracted almost the same number of male and female students, whereas the traditional classes have a clear majority of male students. the percentage of minority students is similar in both traditional and online classes, and the online classes seem to attract older students: approximately 13 percent of the online students were 31 or older. however, the percentage of students 25 and older is not that different, 17.57 percent in the traditional classes and 20.23 percent in the online classes. have these differences had an impact on academic performance? a comparison of the distribution of cumulative grade point averages of traditional students right before they took money and banking with that of online students, in terms of the same statistical tests, reveals no significant difference between the two grade distributions. again, the reader is referred to appendix a for a more detailed description of the tests. journal for economic educators • volume 4 • number 1 • summer 200326 exhibit 1. students’ background nationality traditional online number percentage number percentage american 69 93 73 87 foreign 5 7 11 13 total 74 100.00 84 100.00 grade point average traditional online grades number percentage number percentage a 1 1.35 0 0.00 b 34 45.95 43 51.19 c 38 51.35 38 45.24 d 1 1.35 3 3.57 f 0 0.00 0 0.00 total 74 100.00 84 100.00 gpa 2.47 2.48 st. dev. 0.55 0.57 age traditional online age number percentage number percentage 20 7 9.46 6 7.14 21 16 21.62 19 22.62 22 25 33.78 22 26.19 23 11 14.86 16 19.05 24 2 2.70 4 4.76 25-30 13 17.57 6 7.14 31-40 0 0.00 8 9.52 41-50 0 0.00 3 3.57 total 74 100.00 84 100.00 gpa 22.74 24.52 st. dev. 2.34 6.30 gender traditional online number percentage number percentage male 47 64 42 50 female 26 35 41 49 na 1 1 1 1 total 74 100.00 84 100.00 ethnic group traditional online number percentage number percentage caucasian 55 74.32 63 75.00 african american 1 1.35 3 3.57 asian american 11 14.86 8 9.52 hispanic american 1 1.35 1 1.19 na 6 8.11 9 10.71 total 74 100.00 84 100.00 students’ opinions the students who took the online version of the course were asked at the end of the term what they liked and disliked about the class. the summer class was asked to e-mail answers to the department’s secretary. the other two classes received a questionnaire that was administered in such a way that student privacy was insured. students did not have to identify themselves in either journal for economic educators • volume 4 • number 1 • summer 2003 27 case, and they understood that the instructor would read their answers after final grades were given. the answers to a few key questions are highlighted below. eleven students from the summer class (out of 26) and all students from the other classes answered the question “what did you especially like about this experience?” here is a summary of their answers: time flexibility 28 location flexibility 12 availability of materials 10 variety of assignments 6 new learning style 4 using the web 4 instructor availability 3 instructor invisibility 1 no answer 1 the most common answer related to the time flexibility the online format allowed them to have. another feature students liked was the fact that they did not have to be on campus for instruction. other answers given were the possibility of going over the materials as many times as needed, the variety of assignments, the new learning style, the web class design, using web searches and email, how helpful the instructor was in answering questions, and not having to see the instructor so often. a related question asked was: “was this course what you expected it to be?” all 69 students answered this question in the negative. the question “what did you especially dislike about this experience?” was also asked. eleven students that were part of the summer class and all students that were part of the regular semester classes answered this question. out of 84 students who took the online class, 69 gave the following responses: excessive work 22 no classroom explanations 10 no effective communication 5 team projects 4 unclear exams/assignments 1 unclear expectations 1 instructor’s attitude 1 instructor’s time commitment 1 insufficient feedback 1 no answer 23 on a scale of 1 to 5, worst to best, the instructor received a 3.8 “grade” from the online students. the traditional students gave the instructor a grade of 4. even though no questions were asked concerning specific topics within the course, it was obvious that students found topics with institutional content easier to handle. students never asked the instructor questions about the nature or measurement of monetary aggregates or about the role of financial institutions and the central bank. the majority of the questions posed to the instructor related to the analytical content of the course. issues related to macroeconomic analysis using the is-lm model and the conceptual and computational aspects of the money supply process seem to have been more challenging to online students. classroom explanations might be better for these types of topics. journal for economic educators • volume 4 • number 1 • summer 200328 conclusion although the experience with online delivery of the money and banking class is rather limited, there are some indications that it can be an acceptable alternative to the traditional classroom approach. the performance of students enrolled in three online classes, as measured by final grades, is not significantly different from the performance of students who took the class in the traditional format, during the period analyzed. in fact, the grade point average of the online classes is close to that of the classes offered with the traditional format, and the grade dispersion is nearly identical. formal statistical tests reveal no significant difference in the grades obtained by the two student populations. additionally, the two groups of students have similar cumulative gpa distributions. grade point averages were computed and analyzed right before students enrolled in money and banking. from the students’ perspective, the most attractive feature of the online delivery mode is the time flexibility that an asynchronous web-based class allows them to have. the possibility of not having to be on campus is also attractive to some students. on the other hand, a small number of students missed the classroom explanations or lectures and an even smaller number of them complained of the lack of effective communication. it is clear, then, that not every student will readily embrace online delivery. at the same time, the average class size increased substantially when money and banking was offered online. it is too early to say if this will become a trend indicative of the preferences of the student body at large. references bagwell c. and polichar v. e. 2000. “pedagogical principles of learning in the online environment.” syllabus 13-9 (may ): 52. boettcher, j. v. 2000. “the state of distance education in the u.s.: surprising realities.” syllabus 13-7 (march): 36. burgstahler, s. 1997. “teaching on the net: what’s the difference?” technological horizons in education journal 24-9 (april): 61. cooper, l. 2000. “online courses: tips for making them work.” technological horizons in education journal 27-8 (march): 86. green, k. c. “the 2000 national survey of information technology in the u.s. higher education.” www.campuscomputing.net goodwin, b. n. et al. 1993. “perceptions and attitudes of faculty and students in two distance learning modes of delivery: online computer and telecourse.” paper presented at the symposium for the marketing of higher education, orlando, fl. mahone, b. b. 1998. “digital classroom: some myths about developing new educational programs using the internet.” technological horizons in education journal, 26-5 (december): 56. schutte, j. g. 1997. virtual teaching in higher education. the california state universitynorthridge, northridge, ca. spennemann, d. 1997. “use of electronic mail among park management students at charles sturt university.” occasional papers in open and distance learning, no. 21. american center for the study of distance education, university park, pa. the institute for higher education policy. 1999. “what’s the difference? a review of contemporary research on the effectiveness of distance learning in higher education.” washington, april. journal for economic educators • volume 4 • number 1 • summer 2003 29 appendix a 1. test of hypothesis about the difference in two population means using data for large samples. according to the central limit theorem, the difference in two sample means (m1 – m2) normally distributed for large sample sizes n ≥ 30, regardless of the shape of the populations. it can also be shown that µm1 – m2 = µ1 µ2 σ m1 – m2 = sqrt (σ 2 1/n1 + σ 2 2/n2) where the µs are the means of the respective populations and σ, σ 2 are the standard deviation, variance of the respective populations as well. these expressions lead to a z formula for the difference in two sample means: z = (m1 – m2) – (µ1 µ2)/ sqrt (σ 2 1/n1 + σ 2 2/n2). z, of course, is a score from a normal distribution with a mean of 0 and a standard deviation of 1. the hypotheses to be tested are h0 : µ1 µ2 = 0 and h1 : µ1 µ2 ≠ 0. the decision rule is: if -zα/2 > zc > zα/2, reject h0. if -zα/2 < zc < zα/2, do not reject h0 zc is the score computed from the data and zα/2 is the critical value for a two-tailed with a level of significance α. the level of significance is the probability of committing a socalled type i error, i.e., the probability of rejecting a true null hypothesis. 1.1 comparison between the money and banking grades of traditional students and online students in terms of the means (gpas). zc = [(2.66-2.71) – 0]/sqrt (0.88/74 + 0.88/84) = -0.347. for α = 0.05, zα/2 = ± 1.96, non-rejection region is between -1.96 and +1.96. therefore, the null hypothesis cannot be rejected. 1.2 comparison between the money and banking grades of traditional students and online students in terms of the means (gpas) excluding test scores. zc = [(2.58 – 2.44) – 0]/sqrt (0.94/74 + 1.53/84) = 0.493 journal for economic educators • volume 4 • number 1 • summer 200330 again, the computed z score falls in the non-rejection region and h0 cannot be rejected. 1.3 comparison between cumulative grades of traditional students and online students in terms of the means (gpas) zc = [(2.47 – 2.48) – 0]/sqrt (0.31/74 + 0.32/84) = -0.036 the calculated z score falls once more in the non-rejection region. 2. the chi-square goodness-of-fit test. this test compares the expected, or theoretical frequencies of categories from a population distribution to the observed or actual frequencies of a distribution to determine if there is a difference between what was expected and what was observed. the statistic used is: χ 2 = σ [(fa – fe)/ fe] df = k – 1 – c where: fa = frequency of observed values fe = frequency of expected values df = degrees of freedom k = number of categories c = number of parameters being estimated from the sample data the hypotheses to be tested are: h0: the observed distribution is the same as the expected distribution h1: the observed distribution is not the same as the expected distribution this is a one-tailed test in which the decision rule is: if χ2α,df < χ 2 c, reject h0 if χ 2α,df > χ 2 c, h0 cannot be rejected. 2.1 comparison between the money and banking grade distribution of traditional and online students. since traditional students are the norm, their grade frequencies are considered the theoretical or expected frequencies. the value of the statistic can be computed from the data as follows: e[proportion] fa fe (fa-fe) 2/fe grades traditional online a .2162 18 18.161 0.001 b .3243 33 27.241 1.217 c .3783 25 31.777 1.445 d .0676 7 5.678 0.307 f .0135 1 1.134 0.016 2.986 journal for economic educators • volume 4 • number 1 • summer 2003 31 on the other hand, with α = 0.05 and 4 degrees of freedom, since there are five categories, from a to f, χ2.05,4 = 9.488 > 2.986, and the null hypothesis cannot be rejected. 2.2 comparison between the money and banking grade distribution of traditional and online students, excluding exam scores. for this case, the computations are: e[proportion] fa fe (fa-fe) 2/fe grades traditional online a .1757 19 14.757 1.220 b .3378 26 28.378 0.199 c .3243 19 27.243 2.494 d .1622 13 13.622 0.028 f .0000 7 0.000 3.942 the critical value is again greater than the calculated value and the null hypothesis cannot be rejected. 2.3 comparison between the cumulative grade distribution before money and banking of traditional and online students. in this case the computations are: e[proportion] fa fe (fa-fe) 2/fe grades traditional online a 0.0135 0 1.135 1.135 b 0.4595 43 38.595 0.503 c 0.5135 38 43.135 0.611 d 0.0135 3 1.135 3.064 5.313 once more the critical value is greater than the calculated score and the null hypothesis cannot be rejected. 3. the mann-whitney u test. this test is a non-parametric test used to compare the means of two independent populations. two assumptions underlie the use of the mann-whitney u test: 1) the samples are independent; and 2) the level of data is at least ordinal. the two-tailed hypotheses that can be tested with this test are: h0: the two populations are identical. h1: the two populations are not identical. the u statistics is computed by first arbitrarily designating the two samples as group 1 and group 2. then the data from the two groups are combined into one group, with each data value retaining an identifier of its original group. the pooled values are next ranked journal for economic educators • volume 4 • number 1 • summer 200332 from 1 to n, with the smallest value being assigned a rank 1. in case of values that are the same, an average rank is assigned to each of them. the sum of the ranks of values from group 1 is computed and designated as w1 and the sum of the ranks of values from group 2 is designated as w2. the u is computed as follows: u =(n1)(n2) +[n1(n1 + 1)/2] – w1, and µu = (n1)(n2)/2, σu = sqrt{[n1.n2(n1 + n2 + 1)]/12} z = (u µu)/ σu. for a given α the decision rule is: if -zα/2 > zc > zα/2, reject h0. if -zα/2 < zc < zα/2, do not reject h0. 3.1 comparison between the money and banking grades of traditional students and online students in terms of the means (gpas). considering traditional students group 1, the sum of the ranks of values (grades) is w1 = 5928 and u = (74)(84) +[74(74 + 1)/2] – 5928 = 3063 µu = (74)(84)/2 = 3038 σu = sqrt{[74.84(74 + 84 + 1)]/12}= 31.313 zc = (3063 3108)/31.313 = -1.437. for α = 0.05, the critical value of this two-tailed test is zα/2 = ± 1.96, and therefore the null hypothesis cannot be rejected. 3.2 comparison between the money and banking grade distribution of traditional and online students, excluding exam scores. again, considering traditional students group 1, the sum of the ranks of values (grades) is w1 = 5913 and u = (74)(84) +[74(74 + 1)/2] – 5913 = 3078 µu = (74)(84)/2 = 3038 σu = sqrt{[74.84(74 + 84 + 1)]/12}= 286.99 zc = (3063 3108)/31.313 = -0.105. the null hypothesis cannot be rejected. 3.3 comparison between the cumulative grade distribution before money and banking of traditional and online students. the sum of the ranks of values from group 1(traditional) is journal for economic educators • volume 4 • number 1 • summer 2003 33 w1 = 5822 and u = (74)(84) +[74(74 + 1)/2] – 5822 = 3169 µu = (74)(84)/2 = 3108 σu = sqrt{[74.84(74 + 84 + 1)]/12}= 286.99 zc = (3222 3108)/31.313 = 0.213 for α = 0.05, the critical value of this two-tailed test is zα/2 = ± 1.96, and therefore the null hypothesis cannot be rejected. << /ascii85encodepages false /allowtransparency false /autopositionepsfiles true /autorotatepages /none /binding /left /calgrayprofile (dot gain 20%) /calrgbprofile (srgb iec61966-2.1) /calcmykprofile (u.s. web 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setdistillerparams << /hwresolution [2400 2400] /pagesize [612.000 792.000] >> setpagedevice 100minwg the minimum wage once again by walter block* there is a great cognitive dissonance between what is commonly taught in economics and what passes for sound public policy analysis within the beltway of washington d.c. nowhere is a more stark example of this to be found than in the case of the minimum wage law. many students know that a minimum wage law exacerbates unemployment, particularly for low-skilled, youthful, and minority males. card and krueger (1994, p. 792) even characterize this claim as "the central prediction of the textbook model of the minimum wage," but attempt to undermine it their article. in what might be called "the political economy" of minimum wage legislation, we must take note of the fact that instead of following the received wisdom of the economics profession in this case1, the clinton administration’s recent legislative proposals have seen fit to follow the lead of card and krueger (ck). why? although this can only be speculative, one reason for president clinton's support of the ck study may be that it is consonant with the position of organized labor. unions favor minimum wages since they are always in competition with low wage labor; when unskilled labor costs are legislatively increased, this factor of production becomes less competitive with union’s own supply of labor to the market. that is, suppose a union were to demand an increase in their wage from $17 to $20 per hour. the natural reaction of the employer would be to decrease its demand for this now more expensive factor of production, skilled union labor, and to replace it with a substitute factor, unskilled labor.2 and, without a minimum wage law, this would always be a potent threat, limiting the demands for wage increases on the part of unions. however, with a hefty minimum wage level, particularly an increasing one, this potential danger to organized labor is eliminated. for example, a firm mat easily substitute away from skilled labor if it can hire unskilled workers at $4 per hour. at $6 per hour, the competitive advantage of resorting to the lesser skilled sector of the labor market may be entirely dissipated.3 * walter block, harold e. wirth eminent scholar chair in economics, college of business administration, loyola university new orleans, new orleans, la 70118. http://www.cba.loyno.edu 1see frey, et. al. (1984) and block and walker (1988) in this regard. 2this substitution, of course, could not take place on anything like a one for one basis. by definition, no one unskilled laborer can do the job of a skilled one. but two or three or four unskilled workers, could, at the margin, provide enough labor power so that total production need not be compromised. 3no one, not even the most rabid advocates of minimum wages, urges that their level be raised without limit. for example, were the law to make it illegal to pay less than $1000.00 per hour, there is no economist who would deny that this would wildly exacerbate unemployment, as there are very few market participants with a productivity at or above this level. state card and krueger (1999, p. 2): "our analysis of this new policy intervention is consistent with the conclusion that modest changes in the minimum wage have little systematic effect on unemployment (emphasis added by present author)." but if a minimum wage law mandating $1000.00 per hour would devastate unemployment prospects since few people can produce at this level, it would appear to follow logically that a more modest minimum wage law of, say, $5.00 per hour would ravage the employment prospects for people with productivity in or especially below this range precisely the contention of most economists. see also card and krueger (1995). the one possible exception to this general rule might be galbraith (2000), who characterizes as fallacious five contentions he attributes to mainstream economics, including the claim that "rising minimum wages cause unemployment." stated in so stark a manner, without the ck qualifier as to "modest changes," galbraith might well be interpreted as claiming that any rise in the minimum wage is economically harmless. he continues: "a furious fight on this issue ensued as recently as 1995 when two distinguished researchers, alan krueger of princeton and david card of the university of california, berkeley, broke ranks to declare that the evidence contradicted this thesis. since then, the minimum wage has gone up twice, and unemployment has continued to decline. card and krueger were right--and so was their fundamental criticism of basic labor market theory." the point is , card and krueger cannot reasonably be interpreted as making a fundamental criticism of basic labor market theory. for them to do so, they would have to claim that any increase in the minimum wage, no matter how large, would not have deleterious effects on employment. instead, as i read ck, they are making the far more modest and thus less radical or fundamental claim that this is true only for modest increases. 41 what is the case in behalf of minimum wages offered by ck? new jersey raised its minimum wage floor from $4.25 to $5.05 per hour on 1 april 1992. card and krueger attempt to assess the unemployment effects of this change as of 5 november 31 december 1992, roughly seven and a half months later, and were unable to find any.4 so, they conclude that there were none. in response, i discuss several errors of omission and commission, on theoretical and empirical grounds; i maintain, as a result, that their dismissal of conventional economic theory was premature. ck's sample is the employment and wage experience of the employees of 399 fast-food restaurants in new jersey and pennsylvania -321 in the former state that were subject to the new wage minimum and 78 in the latter state that were not affected by the increase. they make several comparisons. • one is between the pay and unemployment patterns in their new jersey sample versus their pennsylvania control group. • another contrasts the state of affairs prevailing in new jersey before and after the imposition of the new minimum wage level ($5.05) on 1 april 1992. their first wave of interviews took place during the period 15 february and 4 march 1992. their second set occurred between november 5 to december 31, 1992. • a third comparison was between lowand high-wage employers in new jersey, the latter presumed not to be affected by the increase in the mandated wage level. what did ck find? no matter which of the three ways the experiment was conducted, there was no reduction in employment in the affected restaurants in new jersey. on the contrary, there was a small but statistically significant increase in jobs in these cases. ck attempt to eliminate other alternative explanations for this phenomenon. these deserve scrutiny. reliability . first, and most obvious, is data reliability. ck (1994, p. 778) base their case for reliability on the ground that there was a high correlation between the two sets of answers, ranging from .70 to .98, between the "responses of 11 stores that were inadvertently interviewed twice." but this is disquieting on several grounds. for one thing, it shows that they were so confident about the accuracy of their data that they didn't even purposefully plan to test for the possibility of erroneous response or bias, or other sources of data incompatibility. for another, these correlations are merely between two sets of answers to the same questions. even if they were both wildly inaccurate as measured against reality, they would still be expected not to diverge too much from each other. third, the higher correlation, .98, was for the price of a meal, a mere control variable; the lower one of .7 was for the number of employees. but the latter variable is absolutely crucial to their analysis, while the former is of relatively less interest.5 furthermore, this correlation attests, at best, only to the accuracy of the first wave of interviews. of far greater importance is the second wave, from which the actual employment experience after the legislated boost in compensation is derived. ck may have confidence in the accuracy of their data, but the data are suspect, if only on the grounds that they buttress a counterintuitive finding, namely, that minimum wage increases have positive employment effects. 6 4addison and blackburn (1999. p. 393) reach a similar conclusion, albeit through a different "reduced form" methodology. their analysis focuses not directly upon the employment effects of minimum wages, but rather on the implications of this law for poverty rates. they maintain that "a 25% increase in the minimum wage should lower the 1996 poverty rate ... by 9%..." for further support of this enactment see quigley (1996, p. 513) who concludes: "reforming the minimum wage by raising it and indexing it for inflation is a critical step toward attaining franklin delano roosevelt's goal of assisting the nation's working poor by providing 'a fair day's pay for a fair day's work.'" for views critical of minimum wages, see hutchison (1997), berman (1995), and deere, murphy and welch (1995), block (1996), almeida and block (forthcoming), ritchie, mcgee and block (forthcoming), mcinerney (1997), and mccormick and block (forthcoming). 5this does not mean of no interest at all. surely, in the words of an anonymous referee, if "one or ... all producers (can) raise price to compensate for increased labor cost (this) would be of considerable interest." i agree. but if this occurs, then employers need not much reduce the size of their labor force in the face of a mandated wage increase. however, it is the latter phenomenon which is the major issue of debate; the former is only important, insofar as it impacts on the latter. further, there is reason to believe that the ability of producers to raise price in reaction to an increase in the minimum wage level is rather limited. for, if they could increase final goods prices, now, without any sharp negative repercussions, why was this option not available to them before this change in the law? 6this, despite the recognized unreliability of survey data, particularly unpaid (that is, the respondents were not compensated for their labor and thus it may be expected to be of lower quality), and by telephone. 42 choice of subjects . the second difficulty concerns their choice of subjects: fast-food employees. to be sure, there may be some advantages in this choice; such establishments, after all, are a leading employer of unskilled labor, and data are easy to collect. but while the "products of fast food restaurants are relatively homogeneous" (1994, p. 774), a relatively peripheral issue, this does not really apply to job requirements, an issue crucial to their findings. that is to say, while the typical consumer cannot readily tell one mcdonalds' burger from another, this is not true of the ability of the manager to distinguish one employee of such an establishment from another. how does heterogeneity enter into such low-skill occupations? in many ways: employees must come to work on time and stay on for their full tour of duty, otherwise staffing decisions are rendered more difficult; those who deal with the public must attain a "the customer is always right" outlook, and a demeanor consistent with this thought; even those behind the scenes (e.g., the cooks) must cooperate with one another. the last thing management wants is intrastaff fights or altercations between employees and customers. employees, moreover, must take direction from management without resentment, even though this often occurs across racial, ethnic, and gender lines. in addition to reliability, cheerfulness, and docility, there is of course enthusiasm, a hard work ethic, cleanliness, etc. workers can and do differ in all of these dimensions. if ck were seeking homogeneity of job specifications, they might far better have looked at factory work.7 there are, to be sure, heterogeneity "problems" there too. there is no field of human endeavor where heterogeneity is completely absent. but heterogeneity is likely to be of less importance on an assembly line. nor can we ignore the fact that heterogeneity is very important: employers will fire their least productive workers in response to an artificially mandated wage increase and substitute better ones in their places. (the reason better ones were not originally hired is that poorer ones could be had at lower wages. but now, with the advent of the increase in the minimum wage, the latter option is no longer available, and the former seems preferable.) narrowness of sample. a third problem arises with the narrowness of ck's choice of subjects. coerced rises in wage minima will have adverse employment effects on all those with productivity below stipulated levels. by excluding all but some 8,000+ workers in total (some 400 stores with an average of just above 20 employees each) from their purview, ck look at a small cohort of the total economies of new jersey and pennsylvania. this buy-oneticket-in-a-lottery strategy is practically guaranteed to fail to take into account widespread unemployment effects. suppose, for example, that ck had concentrated only on low-skilled gas station attendants before the advent of self service. the unemployment effects of a similar wage increase might have been equally nonidentifiable, spilling over to other industries more able to adjust quickly than this one. temporal adjustment. a fourth drawback to their analysis concerns timing; ck confine themselves to the relatively short run. and not unrelated to this, there is also a difficulty with the percentage change (18 percent) in the required wage rate. they gave this industry a scant seven months to respond to the new mandate.8 had they dealt in similar fashion with the operators of manual elevators when the minimum wage rose from $.40 to $.75 per hour when few were yet automated, they undoubtedly would have found almost zero negative employment impact. and yet within a few years of this experiment, virtually all of these jobs were obliterated by minimum-wage-inspired automation. what, then, is the relevant lag effect in this particular case? i expect that this is far longer than a mere seven months, since technological innovations in the fast-food industry will probably take far longer than in vertical transportation. it is exceedingly speculative to try to anticipate the possible course of future inventiveness in this field that will be engendered by this minimum wage increase. it is an entrepreneurial, not an economic, task. but as ck do not vouchsafe us with even a discussion of lags, this oversight must be made good somehow. how, then, will entrepreneurs substitute out the suddenly more expensive factors of production, unskilled labor, which has now been priced out of the market? one possibility, of course, is robotics or artificial intelligence. but this, unlike automatic elevators in an earlier epoch, seems decades away. another insight might be garnered by borrowing a leaf from grocers, pharmacists, and other retail merchants, who utilize universal product codes. yet another unskilled-labor-saving device might be to copy the trend in filling stations and make more use of self service. 7 deere, murphy and welch (1995, p. 52) use the homogeneity assumption to shine a spotlight on the economics of minimum wages: "if the world were simple, then the implications of increases in the minimum wage would also be simple. for example, if wages were the only form of compensation, if there were no fringe benefits or job amenities, and if all workers were of uniform quality, then everyone would get the same wage. a minimum that attempted to raise the wage would reduce employment." 8comparing 1 april with 3 december the midpoint of their second wave interviews yields 7.1 months, not the 8 they report on page 775. 43 this has already been done, in some fast food cases, with regard to drinks. how long will it take for this phenomenon to significantly reduce the demand for unskilled labor? this is extremely difficult to say. but judging from the results reported by ck, seven months would appear to be too short a time span to capture all of the forthcoming unemployment effects of this law. ck do not attribute their findings to flawed statistics, an insufficient time lag, a relatively modest increase in the minimum wage level, or an exceedingly narrow coverage of industries, but rather to the presence of monopsony. on the face of it, this is not compelling. say what you will about new jersey, no one has yet seen fit to characterize it as a one company state. even on the heroic assumption that monopsony is itself a logically coherent analytic construct, it strains all credulity to apply it to this case.9 what are the problems? outsiders will enter the market to take advantage of the profits earned by the monopsonist; in the absence of entry barriers, monopsony, even if it could become established in the first instance, cannot long endure. workers, too, are mobile, even if not perfectly so. were their wages pushed below levels established by marginal revenue product, they would seek higher wages in areas less dominated by monopsony. most important, even in the absence of these other considerations, the neoclassical monopsony analysis admits of only a very narrow window of opportunity for "ameliorative" legislation such as the minimum wage. this is because each monopsonist faces slightly different cost and demand schedules. and yet minimum wages can only have positive employment effects if their rise is between points wm and wc in figure 1.10 but if every monopsonist confronts different cost and demand schedules, in order not to generate negative employment effects a different minimum wage range must be mandated for each.11 but this is clearly a manifest impossibility, something never even contemplated by advocates of government intervention into labor markets, such as ck. figure 1. pp then, too, there is the issue of general vs. specific training (becker, 1964). in the former case, marginal revenue product is the same whether working for the present employer or for any other. in the latter case, if the employee migrates to another firm, his productivity is lower. this, in effect, "ties" the worker to his present employer, since skills are in part firm specific. it is readily apparent that if there is any scope for monopsony, it is with regard to specific, not general, training. but this is very damaging for the ck analysis. for specific training is positively correlated with high skill; 9for a critical view, see armentano (1972, 1982), armstrong (1982), block (1977, 1994) rothbard (1962). 10s is the supply curve of labor, d is the demand curve (equal to the value of the marginal product of labor), and mfc is marginal factor cost to the monopsonist. the perfectly competitive industry in the factor market would locate at c, paying wages of wc and hiring qc of labor. the monopsonist would locate at m, and hire qm workers at a wage of wm. 11 the range is depicted in figure 1 by the distance wm-wx. this is because at a minimum wage lower than wm the monopsonist will not be forced to increase his pay offer, and if it is higher than wx, there will be unemployment effects even for the monopsonist. p q d = vmp mfc s c m qm qc wx wc wm 44 those with general training tend to be less skilled. thus, ck are attempting to apply the monopsonistic model to a sector of the labor market where it patently does not apply: to unskilled, generally-trained workers, who are free to take on other jobs, at least as far as the fear of diminution of productivity elsewhere is concerned. ck would have had a better case for linking highly-skilled workers to monopsony, but their wages usually far exceed mandated minimum wages.12 a further critique of the ck thesis has been articulated by gary becker. in his view, ceteris was not paribus in the research undertaken by ck. states becker (1995, p. 10): "the higher federal minimum in 1990 and 1991 caused a much larger drop in new jersey's teenage employment than pennsylvania's, which could explain why employment did not fall more in new jersey when that state increased its own minimum in 1992. new jersey employers presumably anticipated the increase in their state's minimum when they sharply cut employment in responding to the earlier wage hike." as well, there is a wealth of pertinent empirical evidence on this topic amassed by the economics profession over many decades. it shows the deleterious effects on employment for the unskilled; this applies to the minimum wage law in general, and to raising it to any given level in particular. this empirical record, alone, should have given ck pause for thought. even more daunting is the fact that their findings are contrary to economic law. it is a matter of basic theory that in equilibrium, wages tend to equal marginal revenue product.13 if wages are above this level, losses and eventual bankruptcy may result.14 if wages are below marginal revenue product, there is a proclivity for the employer to lose his labor force: either the quit rate will rise as employees seek better opportunities, or other employers will bid for the underpaid workers in an attempt to profit from them. 15 it is only when wages equal productivity that there is no internal impetus for further change. this being the case, an elevation in the minimum wage level is bound to exceed the marginal revenue product of at least some additional workers. these people, then, are primary candidates for unemployment. a finding that the minimum wage level rose, and that employment did not fall but actually increased, is therefore highly anomalous. it cries out for explanation. on the level of pure theory, then, it must count against ck that -apart from the economically dubious monopsony argument -they felt no need to account for their anomalous findings. one last issue overlooked by ck concerns non-monetary compensation: it is possible that the negative impact of minimum wages on unemployment may be masked by the phenomenon of fringe benefits and working conditions (see wessel and mckenzie). in response to the mandation of a higher minimum wage, the employer can reduce the fringe benefits enjoyed by his workers and the amount of money he invests in their working conditions (e.g., air 12 there are, perhaps, no more highly skilled workers than professional athletes. their feats of derring-do, the required natural ability and years of intensive practice serve as a natural entry barrier. if anyone ought to be victimized by monopsony, according to neo-classical theory, it would be these workers. but even here, as shown by the continual rise of foreign and other competing leagues, these laborers, supposedly helpless in the face of the monopsonistic threat, are not at all victimized. 13 i have reservations about the neoclassical model of industrial organization, which makes much of the distinction between monopoly (or monopsony) and perfect competition, based, mainly, on the number of firms in an industry and the concentration ratios of the leading four or eight firms, e.g., the herfindahl index. on this see armentano (1972, 1982, 1991), armstrong (1982), block (1977, 1982, 1994), dilorenzo (1997), boudreaux and dilorenzo (1992), high (1984-1985), mcchesney (1991), rothbard (1970a), shugart (1987), smith (1983). but for purposes of the present paper, i adopt this model, and assume that the firm depicted in figure 1 is either perfectly competitive or monopsonistic (i am comparing the two) in the labor market, while perfectly competitive in the product market it faces. 14labor, of course, is only one factor of production. where it comprises a small proportion of total costs, the firm may well survive by substituting now relatively cheaper factors for the now more expensive labor. however, in (service) industries where labor comprises a very high proportion of the total, losses and eventual bankruptcy are rendered more probable. 15 we assume, here, that information is readily available to either the employer or employee or both. 45 conditioning, level of cleanliness, decor, music, etc.) if so, then the total money expenditure made in behalf of employees need not rise, even in the face of a legal requirement than money wages increase. total wages equal money wages plus non-pay packet expenditures, and if the money wages rise while the non-monetary spending in behalf of employees falls, then total compensation need not rise. if so, there will be a minimum wage unaccompanied by additional unemployment in a context where traditional theory need not be jettisoned to any degree, neither that implied by ck (1994) nor even the more extreme version of this offered by galbraith (2000). but let it not be thought that the failure of the minimum wage raise to increase unemployment due to this phenomenon is an argument in behalf of this public policy. for there will be losses in utility, even if unemployment does not increase. why? this is because we must assume that the previous allocation of total compensation over money wages, fringe benefits, and working conditions tended to be optimal. certainly, the employer has every incentive to provide equally expensive non-monetary compensation to his employees when they prefer this, and not, when they do not. specifically, better fringes and improved working conditions are supplied to workers only when they cost less for the firm to provide than they are worth to the worker. but when the minimum wage law forces the business to increase money compensation at the cost of more highly valued fringe benefits and better working conditions, this renders the total pay less attractive. these jobs may pay more, due to the minimum wage law, but since the higher monetary compensation comes at the expense of the even more highly valued non monetary aspects of compensation, it cannot be said that even the worker not unemployed by this law is a beneficiary of it. in conclusion, we ask a question. which is more reasonable? that economic law somehow has been repealed in new jersey, or that ck's methodology is wanting in one or more of the ways indicated above?16 the answer, at least from this quarter, is clear. 16 two public opinion surveys of economists asked 27 different questions about public policy issues, in an attempt to gauge the level consensus within the profession (frey, et. al. 1984; block and walker, 1988). a statement which garnered amongst the highest degree of agreement of all these questions read as follows: "a minimum wage increases unemployment among young and unskilled workers." 46 bibliography addison, john t., and mckinley l. blackburn, "minimum wages and poverty," 52 industrial and labor relations review, 393 (1999). almeida, michael and walter block, "higher minimum wages advance poverty," commentaries on law and economics, forthcoming. armentano, dominick t., the myths of antitrust, new rochelle, n.y.: arlington house, 1972. armentano, dominick t., antitrust and monopoly: anatomy of a policy failure, new york: wiley, 1982. armentano, dominick t., antitrust policy: the case for repeal, washington, d.c.: the cato institute, 1991. armstrong, donald, competition vs. monopoly, vancouver: the fraser institute, 1982. becker, gary, human capital, new york: the national bureau of economic research, 1964. becker, gary, "it's simple: hike the minimum wage, and you put people out of work," business week magazine, 6 march 1995. berman, richard b., "new evidence on the minimum wage: the crippling flaws in the new jersey fast food study," washington d.c.: employment policies institute, 1995. block, walter, "austrian monopoly theory -a critique," the journal of libertarian studies, vol. i, no. 4, fall 1977, pp. 271-279. block, walter, amending the combines investigation act, vancouver: the fraser institute, 1982. block, walter, "total repeal of anti-trust legislation: a critique of bork, brozen and posner, review of austrian economics, vol. 8, no. 1, 1994, pp. 35-70. block, walter, "labor market disputes: a comment on albert rees' 'fairness in wage distribution,'" journal of interdisciplinary economics, 1996, vol. 7, no. 3, pp. 217-230. block, walter, and walker, michael, "entropy in the canadian economics profession: sampling consensus on the major issues," canadian public policy, vol. xiv. no. 2, june 1988, pp. 137-150. boudreaux, donald j., and dilorenzo, thomas j., "the protectionist roots of antitrust," review of austrian economics, vol. 6, no. 2, 1992, pp. 81-96. card, david, and krueger, alan b., "minimum wages and employment: a case study of the fast-food industry in new jersey and pennsylvania," american economic review, vol 84, no. 4, september 1994, pp.772-793. card, david, and krueger, alan b., 1995. myth and measurement: the new economics of the minimum wage, princeton, nj: princeton university press. card, david, and krueger, alan b., "a reanalysis of the effect of the new jersey minimum wage increase on the fast-food industry with representative payroll data," working paper #393, princeton university industrial relations section, december 1997, revised january 1999. deere, donald, kevin m. murphy and finis welch, "sense and nonsense on the minimum wage," regulation, no. 1, 1995. 47 dilorenzo, thomas j., 1997, "the myth of natural monopoly," review of austrian economics, vol. 9, no. 2, pp. 4358. frey, bruno s., werner w. pommerehne, friedrich schneider and guy gilbert (1984) "consensus and dissension among economists: an empirical inquiry, american economic review, december, 74:5:986-94. galbraith, james k., "how the economists got it wrong" on the web at: http://www.prospect.org/archives/v117/galbraith-j.html (2/17/00). high, jack, " bork's paradox: static vs dynamic efficiency in antitrust analysis," contemporary policy issues, vol. 3, 1984-1985, pp. 21-34. hutchison, harry, "toward a critical race reformist conception of minimum wage regimes: exploding the power of myth, fantasy and hierarchy," 34 harvard journal on legislation 93, 1997. mcchesney, fred, "antitrust and regulation: chicago's contradictory views," cato journal, vol. 10, 1991. mccormick, paul, and block, walter, "the minimum wage: does it really help workers," southern connecticut state university business journal, forthcoming. mcinerney, matthew, (1997), "why the 'living wage' is hurting those trying to make a living: a critique of the minimum wage law," discourse no. 15, pp. 36-38. quigley, william p., "a fair day's pay for a fair day's work: time to raise and index the minimum wage," 27 st. mary's law journal 513, 1996. ritchie, r. j., mcgee, robert w., and block, walter, "the minimum wage: misguided altruism,"commentaries on law and economics, forthcoming. rothbard, murray n., man, economy and state, los angeles, nash, 1962. shugart ii, william f., "don't revise the clayton act, scrap it !," 6 cato journal, 925, 1987. smith, jr., fred l., "why not abolish antitrust?," regulation, jan-feb 1983, 23. wessel and mckenzie, "to be supplied". 48 during the 2001 legislative session most southern states face significant deficits a case for multifaceted reforms in public higher education using performance based incentives vicky c. langston, austin peay state university introduction during the 2001 legislative session most southern states faced significant reductions in projected revenues due to an economic slowdown. because higher education expenditures are a significant portion of state budgets, there has been a wide spread call to reduce state funding and cutback higher education expenditures. unfortunately, people living in the south are not in a competitive position to make cuts in higher education. in order to generate higher incomes and world-class economies, southern states need more baccalaureate-educated people. quotes from administrators typically express frustration, concern over lack of support for university agendas, and threats of program cutbacks. quotes from students typically express concern over the increases in their direct costs and possible debt. yet average student debt remains well below the cost of a new car and earnings paybacks are typically well within five years for most public tuition. however, on average only about 40% of students graduate in a timely manner and tuition at public southern universities has accounted for much less than 40% of the costs spent at these institutions. on average private institutions are much more successful at graduating students. perhaps private institutions are more focused on the education mission because students realize more of the full costs; but students also may be more focused because more of their own resources are at risk. while any institution can become more productive by reassessing priorities and eliminating programs and types of activities, the production process of higher education is complicated. to date most of the discussions of higher education reforms have focused on program delivery, more intensive workloads on the part of faculty and administrators, or ways to increase the number of students by focusing on students as customers demanding anytime, anywhere service. the later is not a hallmark characteristic of a public good. less attention is paid to the fact that students play a role in determining successful outcomes in the human capital formation process of higher education. because of this precarious customer/input role of the student in higher education, increasing tuition can be a positive incentive. policy makers, particularly those in the south, need to rethink reform strategies for higher education. this paper contends that reforms in higher education need to recognize four critical factors: 1) higher education has become the financial responsibility of the people living in a particular state; 2) completion rates at some institutions are appalling low from a taxpayer/donor perspective; 3) multiple student populations have been created because of past performance and labor market conditions, and 4) higher education is a private good, albeit, with significant externalities. 50 literature in 1998, the journal of economic perspectives sponsored a symposium on the economics of higher education. the symposium papers summarize the issues and relevant literature of interest. winston (1999) identifies four key features of higher education that affect our interpretation of economic factors of supply and demand. these include the role and sources of donations, the student as both customer and input factor, higher education as an investment and process with varying opportunity costs, and branding and segmentation strategies used in the market. kane and rouse (1999) review the history of “community colleges” and outcomes. community colleges are the most racially and gender balanced institutions. they provide a similar return per year of education compared to baccalaureate programs for technical/science and professional programs usually at significantly less cost. however, there are two significant weaknesses: limited student financing options and poor success rates. the students are primarily part-time and unlikely to complete a baccalaureate degree. longitudinal studies have all found that students starting at community college are less likely to complete a baccalaureate degree compared to students starting at a baccalaureate granting institution. the 1982 longitudinal study indicates that about 15% of community college students had attained a baccalaureate degree after 10 years compared to almost 60% of 4-year students. [kane and rouse 1999] the 1991 longitudinal study indicates that after 6 years less than 6% of community college students had attained a baccalaureate degree. [horn and carroll 1998]. the longevity studies at the national level indicate that students who drop out more likely have grade point averages below 2.0, are art-time students trying to work full-time and go to school, delay college enrollment upon finishing high school, and have less parental support in terms of supplemental income or education encouragement.1 several studies of occupational wage data indicate the increased value of higher education attainment, particularly a baccalaureate degree. census data indicate that 90% of households making over $100,000 in gross income have a head of household with a baccalaureate degree. for tennessee, particularly, ukpolo (1998) and hipple (2001) indicate both positive private and public benefit-cost ratios. hipple (2001) suggests that private gains may be as high as $1.0 million in current dollars. data and methodology this research compares aggregate data across nine southern states (alabama, florida, georgia, kentucky, mississippi, north carolina, south carolina, tennessee and virginia) collected by the us census and us department of education. in addition, a cross-section sample of 153 institutions out of 298 institutions in these states that focus on baccalaureate education (with some master’s level programs) is constructed using data on various quality and performance measures collected by us news and world reports, faculty salary data collected by american association of university professors (aaup), and institutional descriptions and statistics published in the 1999 college blue book. this sample represents about 20% of all students enrolled in higher education in these states and over 50% of the nondoctoral/specialty 4-year institutions across the states. us news and world reports describes these institutions as regional colleges and universities or small national liberal arts colleges. by eliminating the “flag-ship” 51 institutions that include large graduate, research, and athletic programs, the research is able to focus on the funding and institutional practices for baccalaureate education. institutions are omitted only because of missing data for several key variables. occasionally, an institution is included in some analysis and not others because of missing data. unfortunately, the sample under represents students and institutions in two states: florida and georgia. the purpose of considering both state level and institution level data is to be able to consider both state level patterns and institutional practices in the research questions. this cross-section database is constructed using data from a variety of points in time during the mid to late 1990s in order to have the widest possible analysis. every attempt has been made to collate data for the 1995-96 period and most recently available data. this research is limited to published data and does not include original data collection. the bulk of the data were collected in 2000; however, each of the above sources annually updates and adds to their respective databases. the data collected for each institution are listed below. the performance indicator of interest is graduation rate because that indicates the successful completion of a baccalaureate degree within a given time frame of no more than six years. freshmen retention is an intermediate indicator that is currently reported by most institutions. average incoming test scores or average high school gpa measures student quality. because some institutions use act tests and some use sat tests, the institutions are grouped and ranked into five groups based on the average scores accepted for the bottom 25% of students. tuition indicates the student’s funding responsibility. institution practices that are measured include acceptance rate, student faculty ratio, use of full-time faculty, average salaries, extent of student diversity and living arrangements. these indicators are manageable by institutions and measure the quality of academic life available to students. performance indicators graduation rate intermediate indicator freshman retention rate student quality average gpa incoming freshmenonly public institutions rank 1-5 lowest-highest test scores of bottom 25% of students student funding responsibility tuition % receiving 100% of financial assistance % receiving performance-based assistance institution practices acceptance rate student faculty ratio percent of full-time faculty average salaryfull professor diversity indicator 0,1 % of students living off campus 52 findings current financial responsibility and incentives as indicated in table 1, during the academic year 1995-96, over $25 billion was spent on higher education on almost two million students in the nine states. public sector institutions accounted for about 73% of the expenditures and 76% of the students. across the states, public institution average per student expenditures ranged between $10,000-$12,500 compared to private institution expenditures ranging between $11,000 and $26,000. national data indicate that the significant differences in public and private expenditures are among research and doctoral institutions, not institutions focusing primarily on baccalaureate education. 2 table 1 higher education educational and general expenditures 1995-1996 per student costs ($1,000s) ($1,000s) public private public private public e&g private e&g students students alabama $1,880,788 $287,587 158,753 19,983 $11,847 $14,392 florida $3,390,561 $1,320,668 336,863 85,424 $10,065 $15,460 georgia $2,366,561 $1,205,439 188,954 59,311 $12,525 $20,324 kentucky $1,419,040 $287,055 115,001 25,326 $12,339 $11,334 mississippi $1,111,120 $122,699 92,945 10,122 $11,955 $12,122 north carolina $2,881,827 $1,592,275 224,055 61,653 $12,862 $25,826 south carolina $1,369,352 $294,984 109,459 22,894 $12,510 $12,885 tennessee $1,627,212 $1,017,011 142,785 47,921 $11,396 $21,223 virginia $2,282,078 $756,700 204,704 51,008 $11,148 $14,835 $18,328,539 $6,884,418 1,573,519 383,642 $11,648 $17,945 source: u.s. departm ent of education, national center for education statistics, higher education general inform ation survey (hegis), "financial statistics of institutions of higher education" surveys; and integrated postsecondary education data system (i although the numbers differ slightly between tables 1 and 2 because of accounting years and funding sources for technical schools and community colleges, the consolidated state government financial reports in table 2 allow us to compare higher education financing compared to other state obligations. higher education is the most significant component of state budgets other than the management of federally funded welfare programs and highway construction. with the exception of florida, which uses local funding for community college systems, higher education expenditures account for 10-15% of state budgets. 53 table 2 state level financing of higher education 1996 us avg al fl ga ky ms nc sc tn va total state expenditures $859.6 $12.1 $36.5 $20.0 $11.8 $8.2 $21.2 $12.4 $13.7 $17.8 higher education $85.3 $1.9 $2.4 $2.4 $1.4 $0.8 $2.7 $1.5 $1.9 $2.6 fees& revenues: hi ed $37.1 $0.8 $0.8 $0.7 $0.7 $0.3 $1.1 $0.6 $0.6 $1.3 fees/revenues as a % of hi ed expenditures 43% 41% 33% 31% 47% 41% 41% 41% 32% 51% hi ed expenditures % of all state expenditures 10% 15% 7% 12% 12% 10% 13% 12% 14% 15% state income tax as % of total state taxes 32% 30% 0% 41% 32% 19% 41% 35% 2% 48% source: us census the states vary in who is financially responsible. however, the burden generally falls to taxpayers and institutions. currently private tuition covers between 50-75% of costs. public tuition represents between 15-35% of costs. georgia, tennessee, and florida place most of the financial responsibility on taxpayers. virginia places much more financial responsibility on students and other institution generated revenues, a funding model that more closely matches private sector practices. combining the information from tables 1, 2, and 3 suggests that north carolina with the lowest average public tuition (table 3) and highest average costs per student (table 1) has a fairly unique system that shifts financial responsibility to other university revenues and taxpayer income. the result is that 89% of incoming freshmen students stay in-state (table 4) compared to a national average of 74%. institution specific data (figure 4) indicate that north carolina public universities graduation rates are second behind virginia; but over all baccalaureate attainment and high school graduate conversion rates are below tennessee (table 6) table 3 indicates the extent of the private tuitionpublic tuition gap by state and recent tuition increases. public tuition averages only 15-35% of private tuition. private sector increases across the states are slightly more consistent. at the national level, private sector tuition rose slightly more than public sector tuition. the southern states were split. tennessee and mississippi experienced significant increases in public sector tuition compared to the private sector. over the last two years, tennessee has experienced significant state budget problems requiring additional tuition increases, and has announced a 15% increase in tuition for academic year 2001-2002 in response to a no new taxes state budget. the hebel (2001) reported in the chronicle of higher education that alabama has raised tuition up to 16.8% and mississippi has raised tuition 15% at public institutions. with these increases current average tuitions remain at or below the us average in 1998-99. 54 table 3 average tuition at 4-year public or private institutions public private 1997-98 1998-99 1997-98 1998-99 state in-state in-state increase tuition tuition increase united states .. $3,110 $3,226 4% $13,344 $14,003 5% alabama 2,488 2,621 5% 8,241 8,487 3% florida 1,911 2,022 6% 11,525 12,210 6% georgia 2,356 2,442 4% 11,241 11,861 6% kentucky 2,327 2,516 8% 8,600 9,082 6% mississippi 2,571 2,859 11% 7,784 8,303 7% north carolina 1,895 1,958 3% 12,307 12,927 5% south carolina 3,414 3,520 3% 10,660 11,237 5% tennessee 2,296 2,495 9% 11,090 11,604 5% virginia 4,052 4,160 3% 11,811 12,281 4% source: u.s. department of education, national center for education statistics "fall enrollment" and "institutional characteristics" surveys. september 1999 note.--data are for the entire academic year and are average charges. tuition and fees were weighted by the number of full-time-equivalent undergraduates in 1997, but are not adjusted to reflect student residency. room and board are not included. in addition to the direct financial responsibility associated with user fees, virginia also collects the highest percentage of total state taxes from personal state income taxes. as indicated in the literature review, studies directly link higher income and education. therefore the use of income taxes is a benefit related funding mechanism, much like an implied mortgage. on the other hand, tennessee and florida rely on sales taxes. in addition to an income tax, georgia now relies on a lottery. these sales tax and lottery systems are all notably regressive systems. that is lower income people pay relatively more of their income than higher income taxpayers. consequently, state funding of higher education based on sales taxes and lotteries is using neither the beneficiary nor the ability to pay principles common in public finance literature for determining financial responsibility. the data in table 4 confirm why higher education is a state level responsibility. seventy five to eighty-nine percent of incoming freshmen remain in-state. with few exceptions, southerners are more likely to stay in their home state for a college education than students in other states. . at the national level 4year institutions, traditional students (under age 24) represent 60-65% of the population at non-doctoral granting institutions and 70-75% at doctoral granting institutions.3 if incoming freshmen are more likely state residents, it is even truer for working adults returning to complete degrees. at baccalaureate-focused institutions 35-40% of students are likely to be working adults living in the area and attending the institution whether public or private. therefore these institutions are often serving a bimodal student population requiring more flexibility. 55 table 4 freshmen selection of 4-yr higher education in-state or out ofstate1996 total student residents of a state enrollment attending attending state in college in college in in-state the state any state home state share united states 1,015,534 996,330 737,654 0.74 alabama 16,164 13,174 10,960 0.83 florida 29,148 28,947 20,721 0.72 georgia 26,849 26,094 20,329 0.78 kentucky 16,085 15,127 12,619 0.83 mississippi 8,452 6,979 5,632 0.81 north carolina 32,526 25,111 22,309 0.89 south carolina 16,152 13,732 11,185 0.81 tennessee 21,110 18,475 14,414 0.78 virginia 30,941 26,928 20,002 0.74 note.--data are for 4-year and 2-year degree-granting higher education institutions that were eligible to participate in title iv federal financial aid programs in the 1996-97 academic year. source: u.s. department of education, national center for education statistics, integrated postsecondary education data system (ipeds), "residence of first-time students" survey, 1996. january 1998. the data in table 5, although based on the old 1990 census, illustrate the magnitude of the value of higher education in the south over a working lifetime even before the information age and service economy shift of the 1990s. the cross section data for tennessee and virginia indicate that males between age 25 and 65 would likely earn in 1989 dollars over $450-475,000 more with a baccalaureate degree than a high school degree and over $300,000 more than dropping out of college or only completing an associate degree. while the results are less for women, the data indicate a greater variance, which speaks more about the capacities of local economies to utilize educated women. the data also indicate that it may be even more economically valuable for women to pursue higher education immediately after high school rather than wait. 56 table 5 earnings differences based on education and sex 1990 census tennessee virginia male female male female 25 to 29 years:............................ bachelor's degree-high school diff $41,280 $39,475 $45,850 $48,490 bachelor's degree-some college diff $28,270 $26,305 $31,570 $33,430 30 to 34 years:............................ bachelor's degree-high school diff $71,410 $50,980 $66,675 $62,970 bachelor's degree-some college diff $48,250 $33,050 $44,985 $40,145 35 to 44 years:............................ bachelor's degree-high school diff $99,605 $55,510 $95,375 $65,680 bachelor's degree-some college diff $70,325 $33,435 $66,180 $41,440 45 to 54 years:............................ bachelor's degree-high school diff $139,845 $45,925 $130,070 $67,540 bachelor's degree-some college diff $96,820 $26,755 $91,285 $40,775 55 to 64 years:............................ bachelor's degree-high school diff $117,500 $45,275 $136,415 $55,115 bachelor's degree-some college diff $68,910 $25,880 $93,175 $30,175 cumulative working age difference bachelor's degree-high school diff $469,640 $237,165 $474,385 $299,795 bachelor's degree-some college diff $312,575 $145,425 $327,195 $185,965 source: based on data from the us census 1990 from the student’s perspective the out-of-pocket education costs are paid back in less than five years. the issue then is the opportunity costs of not working immediately after high school and having the resources to pay living expenses. the 1990 census data indicated that high school graduates age 18-24 earned about $10,000.4 a current minimum wage job would earn about the same. this would suggest a cumulative opportunity cost of around $40,000-50,000 for the four-five years as full-time student. in inflated dollars, this would be roughly comparable to the total direct costs (student and taxpayer portions) of a baccalaureate degree. us news and world reports indicates that room and board costs at the public institutions are between $2000 and $5500 per year. these costs are very likely cheaper than “living on the economy” considering a $500/month apartment would be $6000 except perhaps remaining with parents.5 these rough estimates indicate that students could realize a payback period for all costs, direct and indirect, somewhere around 10 years. this suggests an investment and funding horizon suitable for 10-15 year loan programs. based on the wage differentials above taxpayers and students lose 33-40% of their potential return when the baccalaureate degree is not completed. however because the payback period for direct student expenditures is about the same, it is the taxpayer portion of the investment that is most at risk. based on recent tax collection estimates that compare tennessee and virginia, it is not clear that a student in either state ever pays back the entire taxpayer portion of the cost of higher education as a future taxpayer. only the very highest income groups are likely to pay enough differential taxes to cover the taxpayer portion. for example, a tennessee taxpayer in the $100-200,000 income group pays about $5300 in state and 57 local taxes compared to $2500 for the taxpayer in the $30-50,000 income group, the income group including the average manufacturing worker in the state. even in virginia where the tax range is $10,900 to $3200. regardless of the subsidy implied in the data, the 2000 census data in table 6 indicate that only virginia has a truly world class educated workforce among southern states with almost 38% of young adults having a baccalaureate degree or higheralmost 10 percentage points higher than the next states, tennessee and north carolina. another difference is evident in the 1990 census data in table 5. virginia employers have valued college educated women in the workforce. table 6 education attainment estimates in 2000 degree completed population characteristics hs ba or more ba conversion state percent percent rate alabama 25 to 44 years 1,243 83.4 21 25.2% florida 25 to 44 years 4,353 88.1 24.2 27.5% georgia 25 to 44 years 2,664 89.7 25.3 28.2% kentucky 25 to 44 years 1,098 89.1 24.3 27.3% north carolina 25 to 44 years 2,325 87.2 27.9 32.0% tennessee 25 to 44 years 1,659 87.1 28.1 32.3% virginia 25 to 44 years 2,115 92.3 37.6 40.7% source: us census 200025 largest states only institutional practices and student responsibility if baccalaureate education is a primary means to achieve higher incomes, then private sector institutions and those students have better achieved their mission. at the national level about two-thirds of private students achieve a baccalaureate degree compared to 47% of public students.6 using the sample of southern institutions, students at private institutions are also more likely to graduate, albeit, lower than national estimates.7 for the 101 private institutions, the mean graduation rate is 50% and the median is 49%. for the sample of 52 public institutions, the mean is 42% and the median is 40%. only 20% of the sample public institutions achieve the 50% average graduation rate of the private sample. completion rates are appalling low from a taxpayer/donor perspective. among the target age group (age 25-44) for higher education over the last ten years, southern education institutions, state legislatures, taxpayers, and students have left a difficult economic and education gap to bridge despite low tuition and monetary incentives. the current subsidy system is not working. consequently, reforms need to consider increasing incentives both for students and institutions. why are public institution students more likely to drop out? with low tuition relative to cost and financial incentives why is education attainment in the south so low? clearly reforms are needed to secure the return on the taxpayer’s investment and begin to make up for past performance. the first research question examines significant factors in determining graduation rates. the second question examines whether public institutions should continue as the dominant higher education resource. 58 there are exemplary institutions among the sample of public institutions. figure 1 suggests that freshman retention is a key determinant in higher graduation rates. however on average, based on the samples, both public and private institutions retain on average 72% of freshmen. consequently, while freshmen retention is an important factor, accounting for a loss of over 25% of potential graduates, it is does not seem to define the difference between overall private and public success rates. possibly, sophomore retention is a more defining measure, but that information is not reported. figure 1 what do private institutions possibly do differently after freshmen year? three things are readily apparent. private institutions charge students more, are significantly smaller and segment the student market at least for the best-qualified students. figure 2 indicates that among private institutions in the sample there is a positive relationship between graduation rates and the tuition level that students pay. figure 3 indicates that there is some relationship between student quality based on test score rankings of the bottom 25% of students at the institution and tuition. however, there is at least one “high-priced” institution that accepts lower quality students. but as figure 2 indicates that institution has difficulty in graduating students. consequently, both student quality and tuition incentives are a part of the graduation success formula. 59 figure 2 figure 3 among the public institutions in figure 4, virginia institutions have the highest graduation rates at more public institutions than other southern states. north carolina, south carolina and mississippi all have some institutions achieving the mean private sector graduation rate. most of the state systems have also developed some segmentation based on student quality. tennessee, appearing to have one of the more balanced systems, unfortunately has graduation rates well below 50%. 60 figure 4 if we look at student quality based on the test score rankings in figure 5, student quality and graduation rates follow a pattern similar to the private sector. however, the variances across institutions are significant. figure 5 in 2001, us news and world report began reporting average high school gpa of incoming students at an institution in addition to the average test scores of the top and bottom 25% of students. this sample, however, is smaller than that in figure 5 because 61 of missing data. figure 6 stresses again the significant role of students themselves in the human capital formation process. using average gpas rather than grouped rankings gives us a more continuous relationship between student quality and graduation success rates. what we see is that institutions that attract a students graduate 50% or better. whereas schools that attract b/c+ students are unlikely to achieve 50% graduation rates. again there is enough variance to indicate institutional or social factors at play. consequently, student quality is not the sole factor and institutions are in part accountable for successful outcomes. figure 6 therefore, we need to explore some possible factors that may provide incentives or disincentives to improving degree completion rates in a timely manner. one factor to consider is race. southern states have struggled over the last 10 years to provide equal access to higher education. with large minority populations, it is essential that minorities are successful in higher education for the aggregate population to achieve world-class status. figures 7 and 8 are somewhat disturbing. beginning in 2001, us news and world reports categorizes whether an institution is diverse or not based on the percentage of minority students compared to the national average (17%). the data indicate that institutions that have strived for diversity are likely to have lower graduation rates and on average lower quality students. 62 figure 7 figure 8 another factor is the degree to which students live on campus. figure 9 indicates that graduation rates are negatively associated with the share of students not residing on campus. this suggests that emersion in the campus environment is another significant factor for successful outcomes. how diversity is developed and managed and how a campus environment is fostered are institutional responsibilities. 63 figure 9 the model results using simple multiple linear regression analysis, we test the significance of the relationship between select factors and graduation rates among the public sector institutions. the multiple regression technique allows us to account for interdependencies. we use two samples of the fifty-two public institutions. for the regression analysis only 48 observations have complete enough data and to consider gpa only 38 observations are available. models 1 and 3 consider student gpa for the student quality factor. this series is a more continuous series than the test score rankings. results are in table 7. in model 1 the significant variables related to graduation rate are freshmen retention, off-campus living, and tuition. diversity and student gpa have the expected signs but are less significant. in model 2, confirms the orders of magnitude for the other coefficients using the larger dataset by excluding student gpa. because freshmen retention is an intermediate outcome, model 3 considers other factors. student gpa and the percentage of full-time faculty, replace freshmen retention as significant variables and diversity becomes insignificant. acceptance rate and student faculty ratios were tested in the models and proved to be insignificant in all three models. table 7 regression models for graduation rates model 1 model 2 model 3 r2 adjusted 0.91 0.84 0.72 f stat 79.2 41.9 19.89 observations 38 48 38 intercept -0.72 6.07 -0.47 -2.22 -0.99 -2.66 student gpa 0.06 1.48 0.33 5.94 tuition 3.00e-05 3.04 2.00e-05 2.13 3.60e-05 1.98 off campus -0.17 -3.35 -0.18 2.98 -0.26 -2.8 fr. retention 1.41 9.38 1.4 10.15 diversity -0.02 -1.34 -0.03 -1.93 -0.017 -0.71 full-time faculty 0.002 0.01 0.54 2.2 t statistics in italics 64 the statistical analysis provides an indication that the most significant performance factors to improve graduation rates include increased student financial responsibility, attraction of quality students, and an improved campus lifestyle including additional living quarters and full-time faculty. these findings are similar to earlier research that included data on private institutions as well. that research found that significant factors in explaining graduation rates were freshmen retention, bottom quartile student quality rank and student-faculty ratios. freshmen retention significant factors included bottom quartile student quality rank, student faculty ratio, percent of full-time faculty and faculty salaries. the student faculty ratio was significant in the earlier work because of the differences between private and public institutions. the second issue is given the performance as measured by graduation rates, should the public sector continue to be the dominant provider of higher education? because the public sector is the largest provider of higher education, many people consider higher education a public good. however, this is not a correct perception. the definition of a public good accepted by economists is a good or service for which consumers cannot be excluded and additional users do not detract from the benefit of current users. almost every higher education institution rejects applicants. the average acceptance rate among the sample public institutions is 71-72%. however, rather than performance, most state funding formulas have been based primarily on headcount suggesting that economies of scale are not recognized or realized. in fact, the data indicate that many smaller private institutions spend only slightly more per student than public institutions. despite the weaknesses in the public sector and the private sector has a sound record of performance in the south; private institutions have not grown in many states comparable to national performance. private enrollments have actually declined in mississippi and south carolina and have grown at only 58% of the public institution enrollment in tennessee. georgia and florida have experienced the most significant increases in both sectors. the very nature of the private sector allows institutions to pick markets and student populations. while the private sector could be called upon to play a more significant role in higher education, there are potential consequences resulting from the segmentation strategies used including religion, ethnicity and academic background that can result in significant externalities. therefore reforming the public sector may be the taxpayers’ and student’s best option. 65 table 8 full-time-equivalent enrollment in institutions of higher education public private 1990 1997 %ch 1990 1997 %ch united states 7,557,982 7,839,374 4% 2,425,454 2,645,352 9% alabama 154,343 154,360 0% 20,267 20,913 3% florida 302,579 344,129 14% 80,806 92,266 14% georgia 149,115 193,499 30% 49,434 61,963 25% kentucky 111,858 114,305 2% 25,793 26,197 2% mississippi 92,269 98,900 7% 11,688 9,804 -16% north carolina 208,321 219,946 6% 60,704 64,588 6% south carolina 101,918 110,955 9% 25,307 24,779 -2% tennessee 130,184 145,833 12% 45,777 49,021 7% virginia 202,285 210,229 4% 49,423 51,441 4% note: based on fall data source: u.s. department of education, national center for education statistics, integrated postsecondary education data system (ipeds), "fall enrollment" surveys. july 1999. recommendations and strategies to improve graduation rates as a private good, it is the value of the private good and associated externalities that should be considered in pricing and subsidy schemes for higher education. benefits appear to be at least one-third more for degree completion. without degree completion, income potential with a community college education is virtually the same while state expenditures per student are considerably less. therefore public institutions should consider the following three strategies: 1) raise public institution tuition and institute a performance-based financing system for students, 2) design funding formulas that reward institution performance by recognizing the nature of student quality, ethnic diversity and faculty availability as factors important for successful outcomes, and 3) develop new on or near campus housing options for traditional and non-traditional students and other activities that sustain student and faculty connectedness. raising public institution tuition to the point that students begin to understand the total cost and financial responsibility is a sound strategy that will likely lead to positive results. to counter the loss of students responding to price increases, a subsidy system could and should be revamped around increased loans, which are a call on almost certain future income increases, or tuition or loan forgiveness programs based on student academic performance. this type of incentive program prevents institutions or students from simply encouraging graduation with very low grades that reduce the earnings potential of a degree. also expanding financial assistance options will help students, who are focused on their education but have less financial resources, complete a degree. this type of program would require the state to develop a new loan program and finance an initial loan fund. this type of program more closely parallels the private sector model holding students financially accountable for performance and rewarding scholarship not attendance. because much of student quality is determined by the k-12 experience as indicated by test scores and incoming student gpa’s, part of the reform effort and 66 incentive programs must be directed to k-12 program student performance. k-12 systems should be rewarded for student higher education performance. because many public institutions are regional in nature, it will be difficult to implement the kinds of segmentation strategies that private institutions use to augment performance and target donors. furthermore, higher education incentive systems must recognize student quality as a factor and reward institutions that take below average students and successfully graduate those students. when institutions serve less academically qualified students, they require more not less resources to achieve quality results. if not, the public sector will perpetuate and further exacerbate the externalities created by the student quality segmentation strategies. public institutions should also pursue increased on-campus or near campus housing for students. increased exposure to the campus lifestyle apparently helps students to focus their priorities. in addition, it may help defray living costs and reduce significant opportunity costs. institutions should explore with local housing authorities and possibly hud new multifamily housing initiatives. this strategy is similar to the movement after world war ii when married student housing was developed for gi bill veterans. the data strongly suggest that the commuter school model is flawed. the third set of strategies, however, must recognize two very distinct student groups: the new high school graduate and the backlog of students who did not complete their degree the first time. the data suggest that there is much less value in the baccalaureate degree if completion is prolonged. this has been especially true for women, who make up the majority of the non-traditional aged students. consequently, developing lifelong learning opportunities for the working public should not be confused with the focused attention needed to generate a sufficient workforce with a timely and high quality baccalaureate education. the south is behind and this should be the paramount economic development strategy for southern states. 1 horn and carroll 1999. p 25-26. 2 us department of education… 3 us department of education (1998). profile of undergraduates in us post secondary education institutions: 1995-96. p 87. 4 us census 1990. 5 us news and world report college rankings 2001. 6 horn and carroll 1999. p 16. 7 in various graphics, observations may be missing due to missing data for a particular variable. references “2001 college rankings” us news and world report . http://www.usnews.com/usnews/edu/college/corank.htm “2002 college rankings” us news and world report . http://www.usnews.com/usnews/edu/college/corank.htm chronicle of higher education 2000-2001. http://www.chronicle.com/stats/ clotfelter, charles t. 1999. "the familiar but curious economics of higher education: introduction to a symposium." journal of economic perspectives vol. 13 no. 1 winter pp 3-12. 67 http://www.usnews.com/usnews/edu/college/corank.htm http://www.usnews.com/usnews/edu/college/corank.htm http://www.chronicle.com/ hebel, sara 2001. “ public colleges feel impact of the economic downturn.” chronicle of higher education. july 20, 2001. p a21. hipple, steb. 2001. “ a cost-benefit analysis of higher education in tennessee.” presentation the east tennessee state university college of business advisory board, johnson city, tn. february 2001 and tennessee economics association annual meeting cookville, tn april 2001. horn, laura and c. dennis carroll. 1998. 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"higher education in tennessee: an economic analysis from a student, society and state perspective. tennessee board of regents. march 1998. us census.1990. “educational attainment of people 18 years and over.” http://www.census.gov us census. 2000. “educational attainment of people 18 years and over, by age, sex, race, and hispanic origin, for the 25 largest states." march. http://www.census.gov/population/socdemo/education/p20536/tab14.txt us department of education. 1999. “the digest of education statistics 1999.” http://nces.ed.gov/pubs2000/digest99/ us department of education. 2000. “the condition of education 2000. ” http://nces.ed.gov/pubs2000/coe2000/section5/index.html u.s. department of education, national center for education statistics, integrated postsecondary education data system (ipeds). 1998. “residence of first-time students” survey, 1996. january. u.s. department of education, national center for education statistics, integrated postsecondary education data system(ipeds). 1998. "fall enrollment" and "finance" surveys 1995-1996. november. u.s. department of education, national center for education statistics, integrated postsecondary education data system (ipeds). 1999. "institutional characteristics, 1997-98" survey. july. u.s. department of education, national center for education statistics, integrated postsecondary education data system (ipeds). 1999. "fall enrollment" surveys. july. 68 http://www.census.gov/population/socdemo/education/p20-536/tab14.txt http://www.census.gov/population/socdemo/education/p20-536/tab14.txt http://nces.ed.gov/pubs2000/digest99/ http://nces.ed.gov/pubs2000/coe2000/section5/index.html u.s. department of education, national center for education statistics, integrated postsecondary education data system (ipeds). 1999. "fall enrollment" and “institutional characteristics” surveys. september. winston, gordon c. 1999. "subsidies, hierarchy and peers: the awkward economics of higher education." journal of economic perspectives vol. 13 no. 1 winter pp 13-36. 69 literature data and methodology performance indicators student funding responsibility findings current financial responsibility and incentives recommendations and strategies to improve graduation rates microsoft word jeefall04.doc journal for economic educators • volume 4 • number 4 • fall 2004 1 the relationship between dividends and earnings farzad farsio, amanda geary, and justin moser * abstract the relationship between dividends and earnings has long been a controversy to analysts and investors. some studies on the subject provide evidence in support of a positive and significant causal relation from dividends to earnings. theses studies support the view that higher dividend payouts signal an increase in future earnings. in this paper, we provide a critique of these studies and hypothesize that no significant relationship between earnings and dividend holds in the long run. we provide logical and empirical evidence in support of our hypothesis. we argue that empirical studies that conclude a causal relationship exists between earnings and dividends are based on short periods of time and are therefore misleading to potential investors. our empirical analysis is based on quarterly data for the s&p 500 index over the 1988-2002 period and includes the dickey-fuller test, a simple regression test, and the granger causality test. introduction the relationship between dividends and earnings remains an unresolved issue. according to some studies in the finance literature, dividends can predict future earnings. the objective of this paper is to present logical and empirical evidence regarding this proposition. our hypothesis is as follows: dividends have no explanatory power to predict future earnings. we present four cases for possible effects of earnings on future dividends and illustrate that there is no significant relationship between dividends and future earnings in the long run. applying regression analysis and the granger causality test to quarterly earnings and dividends of s&p 500 index data over 1988-2002, we find strong support for our hypothesis. the contribution of this study is that it provides financial managers and investors with evidence that it is a mistake to base investment decisions on inferences about dividend/earnings relationships that rely on data from short-term periods. we recommend that investors analyze different possible relations between dividends and future earnings as illustrated in cases 1 through 4 in this paper before making their investment decisions. background miller and modigliani (1961) used logical analysis to explain firms’ dividend policy. they asserted that in a perfect market, the value of a firm would be independent of its dividend policy and that a change in dividend policy would indicate a change in the management’s view of future earnings. benartzi, michaely, and thaler (1997) found limited support for the view that dividend changes have information content about future earnings of a firm. using a linear regression model and data for 1025 firms, they found no evidence that dividends contain information about changes in earnings. they stated that “while there is a strong past and concurrent link between earnings and dividend changes, the predictive value of changes in dividends seems minimal.” they * farzad farsio, ffarsio@msubillings.edu, amanda geary, amandamgeary@yahoo.com, and justin moser, jayrem10@yahoo.com, montana state university-billings. journal for economic educators • volume 4 • number 3 • fall 20042 concluded that if there was any information content at all, it was that dividends paid out were adjusted to reflect earnings increases in the previous years. mozes and rapaccioli (1998) utilized data for 681 firms during the time period 1980-1990 and examined the relationship between dividends and corporate earnings. regressing earnings on lagged dividends, they provided evidence that large dividend increases lead to a decline in future earnings and small dividend increases lead to an increase in future earnings. they further argued that if a firm reported a loss, a decrease in dividends would have to reach a certain amount before it provided enough information that the firm would continue to report a loss. mozes and rapaccioli suggested that the relationship between the dividend decrease and future earnings would not be positive and linear. kao and wu (1994) used a time series regression analysis of 454 firms over the 1965-1986 period and showed that there was a positive relationship between unexpected dividends and earnings. they further concluded that the effectiveness of dividend signaling depends upon firmspecific characteristics. carroll (1995) used quarterly data of 854 firms over the 1975-1984 period and examined whether quarterly dividend changes predicted future earnings. he found a significant positive relationship between earnings forecast revisions and dividend changes. more specifically, his results suggest that dividend increases were followed by an increase in future earnings and dividend decreases were followed by a decline in future earnings. nissim and ziv (2001) used annual data over the 1963-1998 period for firms that were listed on either the nyse or the amex. they showed that dividend increases were directly related to future increases in earnings in each of the two years after the dividend change. however, their findings indicated that dividend decreases did not lead to future earnings decreases due to “accounting conservatism.” in this paper, we provide a critique of the above studies that conclude a relationship exists between current dividends and future earnings. we hypothesize that there is no long-term relationship between dividends and earnings. we present empirical evidence in support of our hypothesis. we conclude that empirical studies that suggest any causal relations between earnings and dividends are based on observations in some certain short periods of time and are therefore misleading to potential investors. empirical analysis the causal relationship from dividends to earnings suggested by some studies reviewed in this paper does not hold in the long run. in practice, while during some periods an increase in dividend payout may be followed by an increase in future earnings, during other periods such an increase may well be associated with declines in future earnings. as a result, no significant relationship between dividends and earnings is expected in the long run. the following cases should clarify this view. case 1: an increase in dividends in a certain quarter may be the result of good performance of a firm in previous quarters, which may well continue into future quarters. this is a case in support of a positive causal relationship between current dividends and future earnings that is suggested by the studies reviewed in this paper. case 2: an increase in dividends in a quarter may be the result of the management’s policy to keep investors satisfied and prevent them from selling the stock at times when future earnings are expected to decline or current losses are expected to continue. a good example for this case is ibm’s management decision to increase dividends when the company was continuously losing money in the 1990s. such a decision was proven to be successful since most of ibm’s journal for economic educators • volume 4 • number 3 • fall 2004 3 stockholders continued to hold the stock during difficult times. this is a clear case of rising dividends followed by declining earnings. case 3: an increase in dividends in a quarter may be the result of higher earnings in previous quarters that may not necessarily continue into future quarters. frequently, corporations announce increases in dividend payouts as a result of abnormal and one-shot increases in earnings. these increased earnings may move back to lower equilibrium levels in future quarters. in this case, higher dividends would be associated with lower earnings. case 4: an increase in dividend payout in a quarter may lead to a decline in the funds that are to be reinvested by the firm and thus cause a decline in future earnings. indeed, this is the main reason why many firms follow the residual dividend policy in which they pay dividends only after all their needs for reinvestment are met. in contrast, firms that pay high dividends without considering investment needs may experience lower future earnings. this would be a case in support of a negative causal relation from dividends to earnings. in sum, a positive causal relationship from dividends to earnings in some periods (case 1) and a negative relation in other periods (cases 2, 3, and 4) would lead us to hypothesize that the overall long-term relationship should be insignificant. to test our hypothesis, we first perform the dickeyfuller test to determine if the time series data used for earnings and dividends are nonstationary. next, we employ a simple regression test of current earnings on lagged dividends. finally, we perform the granger causality test of earnings and dividends. our empirical analysis is based on quarterly earnings and dividends for the s&p 500 index over 1988-2002. the source of our data is: http://www.standardandpoors.com. table 1. yt = a + byt-1, 1988-2002 y b b’s t-stat earnings per share 0.97 31.25 dividends per share 0.89 17.70 to perform the dickey-fuller test, we ran two simple regressions of earnings and dividends on their lagged values. table 1 displays the results. the t-statistics for slopes of lagged earnings and dividends (31.25 and 17.70, respectively) are significantly larger than the critical t value at the 95 percent confidence level, implying that both series are nonstationary. as a result, the regression tests will be applied to the first differences of these variables instead of their levels. table 2. et = a + b dt-i, i=1,2,6,8,10, 1988-2002 lag b b’s t-stat r-squared f-statistic durbin-watson lag -1 -0.14 -0.33 0.002 0.11 1.63 lag -2 0.14 0.32 0.002 0.10 1.65 lag -6 .09 .13 .0004 .10 1.60 lag -8 .09 .07 .0003 .01 1.64 lag -10 .03 .001 .0001 .007 1.61 journal for economic educators • volume 4 • number 3 • fall 20044 next, we tested a regression model of current earnings on lagged dividends over the 19882002 period. to capture the short-term as well as long-term effects of dividends on future earnings, we carried out the tests to 1, 2, 6, 8, and 10 lags (3, 6, 18, 24, and 30 months). table 2 displays the regression test results. the absolute values of the t-statistics for the estimated slope coefficients of all lags are significantly lower than the critical value of t at the 95 percent confidence level. furthermore, these values become smaller (less significant) for longer lags. this implies that dividends have no explanatory power to predict future earnings in the short term or the long term over the 1988-2002 period. the observed low values of the f statistic and r 2 confirm this inference. these results support our hypothesis and provide evidence against the studies reviewed in this paper that conclude a causal relationship from dividends to future earnings. table 3. granger causality test, 1988-2000 question f answer does dps granger cause eps 3.28 no does eps granger cause dps 0.67 no finally, we applied the granger causality test to our data. the summary of the test results is displayed in table 3. the small values of calculated f statistics (3.28 and .67) conform well to our hypothesis that no significant relationship exists between dividends and earnings. based on our empirical results, we believe studies that conclude significant positive or negative relationships between dividends and earnings are based on observations in some certain short periods of time and are therefore misleading to potential investors. we recommend that investors analyze different possible relations between dividends and future earnings as illustrated in cases 1 through 4 in this paper before basing their investment decisions on certain short-term relations between dividends and earnings. conclusion some studies that have been reviewed in this paper suggest that dividends can predict future earnings. the objective of this paper was to present logical and empirical evidence against these suggestions. our hypothesis is that dividends have no explanatory power to predict future earnings. we presented four cases for possible effects of earnings on future dividends and illustrate that there should be no significant relationship between dividends and future earnings in the long run. applying regression analysis and the granger causality test to quarterly earnings and dividends of s&p 500 index data over 1988-2002, we found strong support for our hypothesis. the contribution of this study is that it provides financial managers and investors with evidence that it would be a mistake to base investment decisions on inferences about dividend/earnings relationships that rely on some certain short-term periods. we recommend that investors analyze different possible relations between dividends and future earnings as illustrated in cases 1 through 4 in this paper before making their investment decisions. references benartzi, shlomo, roni michaely, and richard thaler. 1997. “do changes in dividends signal the future or the past?” journal of finance 3: 1007-1033. journal for economic educators • volume 4 • number 3 • fall 2004 5 carroll, thomas j. 1995. “the information content of quarterly dividend changes.” journal of accounting, auditing and finance 10: 293-320. kao, chihwa, and chunchi wu. 1994. “tests of dividend signaling using the marshmerton model: a generalized friction approach.” journal of business 67: 45-68. miller, merton h., and franco modigliani. 1961. “dividend policy, growth, and the valuation of shares.” journal of business 4: 411-433. mozes, haim a., and donna c. rapaccioli. 1998. “the link between dividend changes and future earnings.” journal of financial statement analysis 3: 29-40. nissim ,doron ,and amir ziv. 2001. “dividend changes and future profitability.” journal of finance 56: 2111-2134 http://www.standardandpoors.com 28 |journal for economic educators, 20 (1), 2020 modeling conditional volatility in r omid sabbaghi1 abstract many economic and financial time-series exhibit time-varying volatility. in particular, volatility is an important input for pricing models and portfolio management decisions. this article demonstrates how to estimate volatility using the garch (1,1) model through the r analytics software. in addition, this study demonstrates how to employ garch-based estimates for the purposes of forecasting volatility. key words: financial econometrics, garch, volatility, forecasting jel classifications: c58, g12, c22 introduction time-varying volatility is an important phenomenon in the economics and finance literature. in financial applications, the variance of the return on an asset represents the risk level of those returns, and it is documented that the volatility, or amplitude, of financial returns is time-varying as there are periods of market tranquility as well as periods of market turbulence. in addition to individual stocks and stock market indices, other examples of observed time-varying volatility in our global markets include changes in exchange rates and absolute deviations of the inflation rate from its mean. that is, financial markets data exhibit volatility clustering in that there are periods of high volatility and periods of low volatility. precise estimates of volatility are an input for numerous real-world applications in economics and finance. for example, volatility is an important input for forecasting confidence intervals since time-varying volatility translates into time-varying widths for confidence intervals. in addition, precise estimates of volatility enable precise value-at-risk (var) estimates for portfolios, thereby allowing banks to better estimate the risk of loss for investments. moreover, volatility is an input variable for the black-scholes formula, and thus precise estimates of volatility are important for valuing options. importantly, the estimation of returns and conditional volatilities is important in identifying investment opportunities that increase returns since expected returns depend on volatility (french et al. 1987). thus, for these reasons, among others, it is important to obtain robust estimates of volatility through garch models. this paper provides several important lessons in volatility for the undergraduate student studying economics and finance. first, this study provides an introduction to the estimation of time-varying volatility, through the garch model of bollerslev (1986), in the r analytics environment. r is an open source statistical programming language in which it is estimated that nearly 250,000 people work with r on a regular basis, and is considered the second language for individuals emerging from graduate school (vance 2009). as li (2019) points out, r is a valuable aspect of an introductory research methods course when taught appropriately. this 1 associate professor of finance, college of business administration, university of detroit mercy, 4001 w. mcnichols road, commerce and finance 245, detroit, mi 48221 29 |journal for economic educators, 20 (1), 2020 study demonstrates how to estimate time-varying volatility for a well-known barometer of the u.s. stock market, namely the s&p500 market index. in particular, this article shows how garch effects are significant and persistent throughout time. after estimating the garch model in r, this study demonstrates how to extract the time-series of the conditional volatilities, also referred to as the conditional standard deviations, using r analytics. in addition, this paper demonstrates how to construct plots that provide visual confirmation of time-varying volatility. spikes in the plot convey time periods in which volatility is high. finally, this study demonstrates how to produce time-varying confidence intervals for the s&p500 daily returns using the conditional volatilities obtained by the garch model. the r environment provides rich graphic plots in the construction of such time-varying intervals. goodness-of-fit statistics are also discussed when interpreting the statistical output. that is, this study demonstrates how to gauge the adequacy of a fitted garch model in r. in addition, this paper concludes with the interpretation of the information criteria as a means of performing model comparison. figures and tables are in the appendix. r the r environment is open-source software, and its capabilities are extended via packages. the base r software, as well as additional packages, may be downloaded freely from the comprehensive r archive network (cran) via the internet at https://cran.r-project.org/. the fgarch package deals specifically with volatility modeling and is the object of interest for the present study. upon starting r, entering the following command in the r console enables the fgarch package, and any necessary related packages, to be installed: if(!require(fgarch)){ install.packages("fgarch") } once the fgarch package is installed, it must be loaded upon initialization of an r working session to ensure that the garch model can be estimated in r, either via the packages submenu, or through entering the following command in the r console: library(fgarch) sample data & empirical methodology this study applies the garch framework in estimating the conditional volatility for the s&p500 market index. daily closing levels for the s&p500 index, adjusted for dividends and splits, are extracted from the yahoo! finance database. the data ranges from january 1950 through december 2019. the closing price level for the s&p500 at time t is denoted tp .the daily rate of return for the s&p500 on day t, denoted tr , is defined as the continuously compounded return in eqn. (1): 𝑟𝑡 = 𝑙𝑜𝑔( 𝑝𝑡 ) − 𝑙𝑜𝑔( 𝑝𝑡−1) (1) https://cran.r-project.org/ 30 |journal for economic educators, 20 (1), 2020 the garch model, first introduced by bollerslev (1986), describes the conditional return volatility of a financial asset over time. garch generalizes the arch model which was proposed by engle (1982) to model the uncertainty of inflation in the united kingdom. the present study adopts a garch(1,1) model in understanding the time-varying volatility for the s&p 500 index. research has shown that the garch(1,1) model is the most important case for practical applications. for example, tsay (2010) and hansen and lunde (2005) argue that higher-order garch models fail to outperform the garch(1, 1) model. engle (2001) states that the garch(1,1) model is the most robust of the family of volatility models. formally the garch (1,1) model is given by eqns. (2) and (3): 𝑟𝑡 = √ℎ𝑡 𝑧𝑡 𝑧𝑡 iid 𝑁(0,1) (2) ℎ𝑡 = 𝜔 + 𝛼𝑟𝑡−1 2 + 𝛽ℎ𝑡−1 (3) in the garch model, the conditional return variance ℎ𝑡 is itself a serially correlated time series process. in addition, tomorrow’s return variance ℎ𝑡 is predicted to be a weighted average of today’s variance forecast ℎ𝑡−1 and the new information in this period as captured by today’s squared return 𝑟𝑡−1 2 . conditional return volatility, or also known as conditional standard deviation, is denoted √ℎ𝑡. the errors, 𝑧𝑡, is a sequence of independent and identically distributed (iid) random variables with zero mean and unit variance, and are assumed to be normal in eqn. (2). the realized errors, also referred to as the standardized returns, are important in diagnostic checking since the standardized returns should no longer show significant volatility clustering. the economic magnitudes of the  and  coefficient estimates are important. first, in the context of the garch(1,1) model, the long-run average variance is given by 𝜔 1−𝛼−𝛽 , and thus 𝛼 + 𝛽 < 1 as well as 𝛼 > 0 , 𝛽 > 0, and 𝜔 > 0 (engle 2001). it is required that 𝛼 + 𝛽 < 1 so as to ensure that the volatility is mean-reverting. the conditional mean represents the average return, and in the pure garch(1,1) model of eqns. (2) and (3), conditional mean return dynamics are negligible. that is, the average daily returns are zero. in the event that daily average returns are statistically distinguishable from zero, tsay (2010) suggests demeaning the daily returns prior to the garch estimation. as a means of gauging the importance of conditional volatility for the s&p 500 index, this study estimates the garch(1,1) model over seven non-overlapping time periods. since trading volume data for the s&p 500 begins in 1950 based on our data source, this study examines the following non-overlapping time periods: january 1950 – december 1959; january 1960 – december 1969; january 1970 – december 1979; january 1980 – december 1989; january 1990 – december 1999; january 2000 – december 2009; and january 2010 – december 2019. the aforementioned time periods are henceforth referred to as periods 1, 2, 3, 4, 5, 6, and 7, respectively. r and the garch(1,1) model the first step in our analysis consists of inputting the daily returns data. to illustrate the estimation of the garch(1,1) model in r, this study considers the s&p 500 returns data for the most recent decade, spanning from january 2010 through december 2019, namely period 7. in r, we define the period 7 data with the following commands in the r console: 31 |journal for economic educators, 20 (1), 2020 period7data <read.delim("c:\\data\\period7data.txt",header=t) period7return <period7data[,1] in the first command above, note that we are reading in the tab-delimited text data file from its corresponding location via the read.delim command. the header=t argument is allowing r to read the first row of the data matrix as column names. by applying the read.delim command, we are defining the data matrix period7data which contains the returns timeseries data. the second command above is defining period7return as the first column of the period7data matrix, namely the returns. figure 1, panel a presents a time-series plot of the daily squared returns over the january 2010 – december 2019 time period.2 such a plot is constructed in the r environment via the following command in the r console: ts.plot(period7return^2, main="panel a: s&p500 daily squared returns: 2010-2019", ylab="daily squared return")) in the r command above, the ts.plot command is being applied to the daily squared returns for period 7. the main= subargument is allowing for us to provide a title for the plot, while the ylab= argument allows for the labeling of the y-axis. figure 1 panel a presents evidence of clustering in return volatility over time. that is, large changes in the daily squared returns are followed by large changes, and small changes in the daily squared returns are followed by small changes. panel b plots the sample autocorrelation function for the s&p500 daily squared returns over the identical time period, and visually confirms the presence of volatility clustering. the autocorrelation function for the period 7 squared returns data is constructed in the r environment via the following acf command in the r console: acf(period7return^2,lag.max=40,main="panel b: acf of s&p500 daily squared returns: 2010-2019") in the above command, the number of lags utilized for the autocorrelation plot is provided by the lag.max= subargument. similarly, the main= subargument allows for the title of the plot. statistically, the return autocorrelations through the 40th lag are statistically distinguishable from zero since the autocorrelations lie outside the dotted lines which represent the significance bounds. that is, the statistically significant autocorrelations suggest that the s&p500 return volatility is serially correlated throughout time.3 the fgarch package in r estimates a garch(1,1) model for the s&p 500 daily returns. for classroom illustrative purposes, we assume that the conditional mean dynamics for returns are negligible and that the standardized returns t t r h are normally distributed, thereby justifying the estimation of a pure garch(1,1) model with normal innovations zt. the conditional normality assumption may sometimes be violated. however, bollerslev and woolridge (1992) show that garch parameters are consistently estimated by gaussian maximum likelihood even when the normality assumption is incorrect. 2 daily squared returns for periods 1 through 6 are similar in appearance. 3 autocorrelation functions for the s&p500 daily squared returns in periods 1 through 6 are similar in appearance. 32 |journal for economic educators, 20 (1), 2020 we estimate the garch(1,1) model for the january 2010 through december 2019 time period. such a model is defined and estimated in r using the following garchfit command in the r console: garch11.model <garchfit(~garch(1,1),data=period7return, cond.dist = c("norm"), include.mean=false) in the above syntax, the r environment is defining garch11.model as an object in its working memory. however, the garchfit command requires several inputs. first and foremost, the order of the garch model is specified: the ~garch(1,1) substring conveys the estimation of a garch(1,1) model. higher-order garch models may be estimated by inputting different values for this substring. second, the garchfit command requires the vector of daily returns via the data= substring. in the above example command, period7return is referring to the vector of s&p500 daily returns that reside in period 7, namely the january 2010 – december 2019 time period. the cond.dist substring is referring to the conditional distribution of the standardized returns. in the present study, we assume conditional normality for the standardized returns. in the event that we wish to impose a studentt conditional distribution, we would alter the substring to cond.dist = c("std"). this is especially important for the case of high-frequency intra-day data, in that the conditional density is leptokurtic. in bollerslev’s (1987) conditionally student’s t-garch model, the conditional density is assumed to be student’s t, with the degrees of freedom treated as another parameter to be estimated. finally, the include.mean binary substring is set to false so that the r environment ignores the estimation of conditional mean dynamics, in particular arima effects. following the estimation of the garch(1,1) model, a concise summary output of the coefficient estimates and their corresponding significance levels is made possible through the summary command. the following command line illustrates the application of the summary command to the garch11.model object defined within r: summary(garch11.model) following the application of the summary command in the r console, the r environment will produce summary output comprising of coefficient estimates, statistical significance levels, model information criteria, and goodness-of-fit statistics. for the period 7 data, the summary command outputs the following information: error analysis: estimate std. error t value pr(>|t|) omega 3.661e-06 5.491e-07 6.667 2.61e-11 *** alpha1 1.585e-01 1.704e-02 9.303 < 2e-16 *** beta1 8.005e-01 1.824e-02 43.886 < 2e-16 *** -- signif. codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1 log likelihood: 8560.509 normalized: 3.403781 33 |journal for economic educators, 20 (1), 2020 standardised residuals tests: statistic p-value jarque-bera test r chi^2 616.843 0 shapiro-wilk test r w 0.9720951 0 ljung-box test r q(10) 11.2828 0.3359141 ljung-box test r q(15) 18.31018 0.24671 ljung-box test r q(20) 26.78719 0.1413581 ljung-box test r^2 q(10) 9.867153 0.4522248 ljung-box test r^2 q(15) 16.51333 0.3487793 ljung-box test r^2 q(20) 17.58753 0.6145591 lm arch test r tr^2 11.76193 0.4649839 information criterion statistics: aic bic sic hqic -6.805176 -6.798222 -6.805179 -6.802652 in the r output above, the garch(1,1) results are given. the three coefficients in the variance equation are listed as the intercept omega (𝜔); the first lag of the squared return alpha1 (𝛼); and the first lag of the conditional variance beta1 (𝛽). in particular, the coefficient estimates are listed underneath the estimate column, and we observe that the coefficient estimates are ω =3.661e-06, α = 0.1585, and β = 0.8005. thus, the garchfit command has estimated the following garch(1,1) model: ℎ𝑡 = 3.66𝑒 − 06 + 0.1585𝑟𝑡−1 2 + 0.8005ℎ𝑡−1 (4) in eqn. (4), we discern that the process is mean-reverting since the sum of the coefficients is less than 1. as engle and patton (2001) point out, mean reversion in volatility conveys that there is a normal level of volatility to which the volatility process will return. having estimated the intercept , 𝛼 , and 𝛽, we can employ the coefficient estimates for our garch(1,1) model to construct volatility forecasts, since the forecast for tomorrow’s volatility √ℎ𝑡+1, can be calculated using eqn. (5): ℎ𝑡+1 = 𝜔 + 𝛼𝑟𝑡 2 + 𝛽ℎ𝑡 (5) to illustrate, consider a trader who thinks that the long-run average daily return standard deviation √ 𝜔 1−𝛼−𝛽 for the s&p 500 is 1 percent. in addition, suppose today’s observed unexpected return (𝑟𝑡 ) is 4 percent, and that yesterday, the trader made a forecast of 3 percent for today’s volatility (√ℎ𝑡 ). thus, based on the estimated garch(1,1) model in eqn. (4), our forecast for tomorrow’s volatility is: √ℎ𝑡+1 = √𝜔 + 𝛼𝑟𝑡 2 + 𝛽ℎ𝑡 = √[(1 − 𝛼 − 𝛽) ∗ 1] + (𝛼 ∗ 4 2) + (𝛽 ∗ 32) = √[(1 − 0.1585 − 0.8005) ∗ 1] + (0.1585 ∗ 42) + (0.8005 ∗ 32) √ℎ𝑡+1= 3.1275 percent 34 |journal for economic educators, 20 (1), 2020 hence, r is useful for estimating the garch model and predicting future volatility based on the above output. the r output from above also presents standard errors under the std. error column, t-values under the t value column, and corresponding p-values under the pr(>|t|)column. the t-values are the ratio of the estimated coefficients and standard errors, and convey the degree of statistical significance for the coefficient estimates. based on the summary output, we find that all of the coefficient estimates are highly significant at the 1 percent level. the adequacy of a fitted garch model warrants attention. for the case of the estimated garch(1,1) model above, the output also presents examination of the standardized residuals for serial correlation. if the evidence suggests that serial correlation, or autocorrelation, exists for the standardized residuals, then the garch(1,1) model has not captured all of the return volatility dynamics. from the garch summary output above, we find that the statistics for the ljungbox test for the squared standardized residuals are presented in the rows beginning with ljung-box test. evidently, the ljung-box test of interest has a p-value near 0.61 when testing correlation up through the 20th lag. thus, the estimated garch model captures volatility in the returns and there are no more garch effects in the residuals since we fail to reject the null hypothesis of no serial correlation for the squared standardized residuals. the summary output provides several goodness-of-fit metrics. for example, the summary output presents a log-likelihood value of 8560.5 for our estimated garch(1,1) model. the log-likelihood is a goodness-of-fit metric since garch models that achieve higher log-likelihood values are preferred in practice. in addition, the r summary output also presents the normalized log-likelihood value of 3.40, which is the log-likelihood divided by n. the r summary output also provides the akaike information criterion (aic), the bayesian information criterion (bic), the schwarz information criterion (sic), and the hannan-quinn information criterion value (hqic). the aforementioned information criteria values are helpful for model selection purposes in assessing higher-order garch models, such as garch(2,2) models. in practice, smaller values of the information criteria reflect preferred models. as engle and patton (2001) point out, persistence in volatility reflects the extent to which today’s return exhibits a large impact on future volatility forecasts, and furthermore, present a measure of persistence known as the ‘half-life’ of volatility: the ‘half-life’ of volatility is defined as the time taken for the volatility to move halfway back towards its unconditional mean following a deviation from it. based on data from 2010-2019, this study finds that the half-life of volatility for the s&p500 index is 16.56 days. a time series plot of the s&p500’s in-sample sequence of conditional volatilities may be extracted within the r environment. in particular, the plot command provides a rich array of graphical options for the rmetrics user. for the period 7 data, the associated garch(1,1) conditional volatilities are plotted using the following r command: plot(garch11.model,which=2) in the above example command, the which substring is directing the r environment to the relevant plot of interest. for a list of the possible different plots that can be generated by the fgarch package, one would enter the following command in the r console: plot(garch11.model) 35 |journal for economic educators, 20 (1), 2020 the upper panel in figure 2 plots the resulting time-series of the s&p500 conditional volatility for the january 2010 through december 2019 time period when adopting a garch(1,1) model with normal innovations. the conditional volatilities in figure 2 are important when constructing dynamic confidence intervals for the s&p500 daily returns. for a given day, a 95% confidence interval for the s&p500 daily return on day t is given by eq. (5): 2 t t r h (5) since conditional mean dynamics are negligible in the pure garch(1,1) model of eqs. (2) and (3), the daily forecasted return for day t, tr , is zero. thus, the 95% confidence interval for the s&p500 daily return on day t is subsequently given by eq. (6): 0 2 t h (6) in eq. (6), it is evident that the conditional volatilities determine the confidence interval over time. in the r environment, the 95% confidence interval for the s&p500 daily returns is plotted via the appropriate plot command. specifically, the which substring must be set to 3: plot(garch11.model,which=3) the lower panel in figure 2 plots 95% confidence intervals for the s&p500 daily returns, superimposed on the daily realized returns for the january 2010 through december 2019 time period. this figure highlights the importance of garch volatilities in predicting future returns since the confidence interval captures, to a great extent, the dynamic behavior of the daily s&p500 returns. that is, nearly 95 percent of the realized s&p500 daily returns lie within the upper and lower limits of the confidence bands. table 1 presents the results of the estimated garch(1,1) model across the different time periods. in table 1, we observe that all of the garch coefficient estimates are highly significant at the 1 percent level across time, further underlining the robustness of the garch(1,1) model. in addition, table 1 reports the long-run average daily return standard deviation as well as the half-life of the s&p500 index over different time periods. in table 1, we find that the 2000 – 2009 time period exhibits the highest long-run average daily return standard deviation while the 1990 – 1999 time period exhibits the highest half-life of volatility. specifically, the half-life of volatility for the s&p500 index was 125.68 days for the 1990 – 1999 time period, underlining high persistence during this time period. thus, in the most recent decade spanning 2010 2019, volatility was less persistent relative to earlier decades. in addition, when examining the ljung-box test statistics, we find that the garch(1,1) model is adequate in capturing the volatility dynamics for all of the remaining time periods. concluding remarks this study illustrates how to estimate garch models for the purpose of modeling volatility using the r analytics platform. in particular, the present study demonstrates the necessary commands and use of the fgarch package for r in estimating and forecasting conditional volatility. the r environment is open source software that is flexible, user-friendly, and allows for the estimation of higher order garch models with different distributional assumptions. 36 |journal for economic educators, 20 (1), 2020 in an application to the s&p500 returns, this study estimates a garch(1,1) model and provides interpretations of the summary output provided by r. in addition, this study demonstrates how to forecast future volatility based on the estimated parameters and, moreover, demonstrates how to extract the time-series of conditional volatility through r’s rich graphical capabilities. the present study also underlines the importance of the garch(1,1) model in constructing dynamic confidence intervals, and how to assess the adequacy of a fitted garch model. finally, this article presents results on the half-life of volatility for the s&p500 index as a measure of volatility persistence. several directions lie ahead for future research in the economics and financial education literature. firstly, the garch model estimates provided by r are useful for conducting dynamic portfolio allocation exercises in university trading rooms and classrooms. for example, a meanvariance investment strategy could be specified for an investor exhibiting quadratic utility preferences. that is, conditional utility would depend on the time-varying return variances. for specific risk aversion levels, the student can then solve for optimal portfolio weights that vary over time on the basis of optimizing the investor’s conditional utility. the actual utility obtained by the dynamic portfolio strategy could then be compared to the actual utility of an investor who selects fixed portfolio weights that do not vary over time. such an exercise allows the student to conduct market timing strategies on the basis of the observed time-varying volatility. another avenue for future research surrounds forecasting in the context of the garch model. for example, the student may be interested in a 2-day ahead forecast given today’s realization of conditional volatility. thus, a detailed examination of conducting multi-day ahead volatility forecasts is essential. third, it is of interest to relate garch volatility forecasts to how banks assess future portfolio losses through volatility-based value-at-risk (var) measures. in particular, out-ofsample forecasts for the conditional volatility, in conjunction with the probability distribution of returns, provide a higher degree of accuracy when estimating potential portfolio losses. in addition, it would be interesting to compare var forecasts across different distributional assumptions of the standardized returns. finally, the asymmetric class of garch models, proposed by engle and ng (1993) and nelson (1991), suggest that volatility tends to be higher on days in which negative returns are realized. that is, asymmetric volatility models allow for good news and bad news to exhibit different predictability for realized volatility. given the downside risks observed in 2008 through 2010, and in 2018, it would be interesting to explore the estimation of such models in the r environment. these topics are left for future research. references bollerslev, t. 1986. “generalized autoregressive conditional heteroskedasticity.” journal of econometrics, 31(3): 307-327. bollerslev, t. 1987. “a conditional heteroskedastic time series model for speculative prices and rates of return.” review of economics and statistics, 69(3): 542-547. bollerslev, t., and j.m. woolridge. 1992. “quasi-maximum likelihood estimation and inference in dynamics models with time-varying covariances.” econometric reviews, 11(2): 143-179. engle, r.f. 1982. “autoregressive conditional heteroskedasticity with estimates of the variance of u.k. inflation.” econometrica, 50(4): 987-1008. engle, r.f. 2001. “garch 101: the use of arch/garch models in applied econometrics.” 37 |journal for economic educators, 20 (1), 2020 journal of economic perspectives, 15(4): 157 – 168. engle, r.f., and a.j. patton. 2001. “what good is a volatility model?” quantitative finance, 1: 237-245. engle, r.f., and v.k. ng. 1993. “measuring and testing the impact of news on volatility.” journal of finance, 48(5): 1749-1778. french, k., schwert, g., and r. stambaugh. 1987. “expected stock returns and volatility.” journal of financial economics, 19(1): 3-29. hansen, p. r., and a. lunde. 2005. “a forecast comparison of volatility models: does anything beat a garch(1,1)?” journal of applied econometrics, 20(7): 873-889. li, r. 2019. “teaching undergraduates r in an introductory research methods course: a step by-step approach.” journal of political science education. nelson, d.b. 1991. “conditional heteroskedasticity in asset returns: a new approach.” econometrica, 59(2): 347-370. tsay, r.s. 2010. analysis of financial time series. 3rd edition. new york: john wiley & sons. vance, a. 2009. “data analysts captivated by r’s power.” new york times, january 6. 38 |journal for economic educators, 20 (1), 2020 appendix figure 1 panel a plots the time-series of daily squared returns for the s&p500 index over the january 2010 – december 2019 time period. panel b plots the autocorrelation function (acf) for the s&p500 daily squared returns over the identical time period. 39 |journal for economic educators, 20 (1), 2020 figure 2 the upper panel plots the conditional volatilities for the s&p500 index over the january 2010 through december 2019 time period. the lower panel plots the realized s&p500 daily returns and the associated 95% confidence bands over the identical time period. the conditional volatilities are estimated using a garch(1,1) model with normal innovations. 40 |journal for economic educators, 20 (1), 2020 table 1 this table reports the results of fitting a garch(1,1) model with normal innovations for the s&p500 daily returns using r’s fgarch package. quasimaximum likelihood parameter estimates, the associated t-ratios, log likelihood, akaike information criterion (aic), and bayesian information criterion (bic) are reported. this table reports the long-run average daily return standard deviation (sd), persistence, and half-life of volatility for the s&p500 index based on the estimated garch(1,1) models across the different time periods. the ljung-box test for autocorrelation through the 20th lag for the squared standardized residuals, denoted by q(20), is presented. the sample period is january 1950 through december 2019. seven non-overlapping time-periods are examined. period 1 extends from january 1950 through december 1959. period 2 extends from january 1960 through december 1969. period 3 extends from january 1970 through december 1979. period 4 extends from january 1980 through december 1989. period 5 extends from january 1990 through december 1999. period 6 extends from january 2000 through december 2009. period 7 extends from january 2010 through december 2019. adjusted closing p rice data is obtained from yahoo! finance. the garch(1,1) model is of the form: 2 1 1 , ~ (0,1) iid t t t t t t t r h z h r h z n   − − = = + + period 1 2 3 4 5 6 7 coefficient 𝜔 1.668e-06 1.596e-06 7.515e-07 4.886e-06 4.855e-07 1.065e-06 3.661e-06 (2.42)** (4.06)*** (3.23)*** (4.20)*** (2.75)*** (3.83)*** (6.67)*** 𝛼 0.0594 0.1649 0.0631 0.0927 0.0481 0.0737 0.1585 (3.91)*** (7.90)*** (3.23)*** (8.20)*** (5.85)*** (8.18)*** (9.30)*** 𝛽 0.9103 0.8012 0.9260 0.8632 0.9464 0.9196 0.8005 (35.05)*** (30.96)*** (94.18)*** (44.41)*** (103.20)*** (99.42)*** (43.89)*** long-run average daily return sd 0.12 0.11 0.13 0.17 0.15 0.20 0.15 persistence 0.91 0.80 0.93 0.86 0.95 0.92 0.80 half-life 22.53 20.10 63.24 15.37 125.68 103.11 16.56 log-likelihood 8914.1 9382.1 8705.9 8170.4 8597.6 7789.4 8560.5 aic -7.10 -7.54 -6.89 -6.46 -6.80 -6.19 -6.81 bic -7.09 -7.53 -6.89 -6.46 -6.80 -6.19 -6.80 q(20) 5.33 21.38 14.99 7.30 10.87 19.18 17.59 ***,** indicate statistical significance at the 0.01 and 0.05 level, respectively what is an economics major 2 | journal for economic educators, 14(1), summer 20014 what is an economics major? a multi-state analysis melanie marks1 and david lehr2 abstract: by evaluating a new data set on colleges and universities across six states, this paper characterizes the state of the economics major and identifies institutional characteristics that may influence key features of an economics major. although majors are similar in terms of credit hour requirements and choice, there are significant differences in course requirements. variations in requiring calculus, econometrics, international economics, and a capstone course are analyzed. phd granting public institutions are more likely to require quantitative coursework such as calculus and econometrics, whereas economics departments in the business school are more likely to require international economics. further, more selective institutions offer a greater share of quantitative and international courses, but relatively fewer microeconomics electives. keywords: general economics, undergraduate major jel classification: a11, a22 introduction most colleges and universities have a requirement that departments conduct an assessment of their programs, which often includes assessing learning outcomes. for example, standardized tests such as the gre subject test or ets major field test can be used to see how students’ knowledge stacks up against the national cohort. and a capstone course might also be used to evaluate analytical thinking, research skills, and strength of oral and written communication. however, another important type of assessment is a curriculum review. this requires faculty to evaluate their economics program to determine if it is meeting the needs of their stakeholders and how it is tied to the institution’s mission. it might also address how the curriculum compares to the economics degrees offered at competing schools. unfortunately, this type of investigation is likely to be limited in scope since any such comparison requires departments to collect extensive amounts of data from college websites and catalogs. even if it is of interest to departments, there is, unfortunately, no simple way that programs can be compared with those at their peer institutions. this paper seeks to address a major shortcoming in the assessment process by offering the profession an analysis of what constitutes an “economics major.” for example, what are the required courses in economics, what quantitative methods are incorporated, how is the focus divided between macroeconomics and microeconomics, are there international components, how much attention is on economics relative to the total number of hours in the program, what degree of choice are students given in terms of designing their own program, is there a capstone experience, are internships required, etc.? 1 professor of economics, college of business & economics, longwood university, 201 high street, farmville, va 23909. 2 associate professor of economics, college of business & economics, longwood university, 201 high street, farmville, va 23909. 3 | journal for economic educators, 14(1), summer 20014 an analysis of all economics majors offered in a 6-state region is presented in this paper. the goal is to describe the “average” economics majors, as well as highlight key differences found between private and public schools, smaller and larger schools, more exclusive and less exclusive schools, institutions with and without a business major, and programs housed or not housed in a business school. in addition to aiding economics departments with the task of assessment, this research creates a baseline whereby the evolution of the economics major over time can be measured. the paper offers a literature review, discusses the data set and descriptive statistics, addresses econometric results, and formulates conclusions. literature review sigfried (2010) tracked the number of undergraduate economics degrees awarded at american institutions and reports a decrease in the 1990s followed by growth between 2000 and 2008. sigfried (2012) reported positive growth between 2008 and 2011 ranging from 2.6% to 6.2%. growth was much higher at public institutions (11%) than private institutions (4%). economics departments operate in a competitive market where the large variety of academic majors offers students a lot of choice. so, the quality of the “product” is relevant. surveys reported in jones, et al. (2008) indicate that over 78% of students were satisfied with the major. however, satisfaction levels were higher at liberal arts colleges than at state colleges. they were highest where there was open access to the business program and lowest when admission to business was restricted, suggesting that students who were denied admission to business may be choosing the economics major as the next best alternative. only 28% of students indicated that they felt the information learned was relevant to their career with 59% indicating it was somewhat relevant. almost two-third (63%) of respondents wanted increased emphasis on real world issues. cleary the field of economic education has seen many contributions aimed at exploring questions important to economists and faculty members who teach economics. for example, how can we teach economics more effectively, what impacts students’ success in economics, and how does economics prepare students for postgraduate education or the start of a career? more recently the conversation has taken a more “macroeconomic” approach. colander and mcgoldrick (2009) suggested that liberal orientation is at risk as programs increase the focus on specialized training and graduate school preparation. they point to the widening gap between the graduate and undergraduate training, suggesting that newly minted phds might be ill-trained for undergraduate teaching. the authors offered potential changes to the economics curriculum, from offering different tracks that target “economic science” and “economic policy” separately to revising introductory classes, improving integration of skills and content across the different classes, and increasing focus on best practices. in response, hill (2009) suggested that a move in the direction of interdisciplinary/multidisciplinary majors can result in too much breadth. the author suggested that depth is a requirement for there to be a value to greater breadth, since it is tied to a student’s ability to reason logically and to approach an issue with “intellectual discipline. breneman (2009) supported the idea of differentiated economics programs and suggested that it is up to faculty members to create such differentiation. daly (2009) suggested that the classes taken outside of the economics major can comprise the majority of an economics degree, and these will help promote a liberal focus. the starting point for any continued conversation likely requires in-depth knowledge of what the economics major actually looks like—what courses are students asked to take, what prerequisites are required, how is the focus divided between the broad areas of economics 4 | journal for economic educators, 14(1), summer 20014 (microeconomics, macroeconomics, international economics, quantitative economics), how much flexibility do students have in designing their programs, what proportion of their credits are devoted to economics, what are the quantitative requirements, is an internships and/or capstone experience incorporated, etc.? however, there are only limited studies that collect school and departmental level data. mcgoldrick (2008) investigated the writing activities and research opportunities open to economics students. almost three-fourths (70%) of departments had writing requirements, some in the form of writing-intensive courses or capstone courses. in almost all departments, students had term paper requirements. only 40% of departments required econometrics and less than 10% had a research methods course requirement. liberal arts colleges/universities were more likely to have a capstone experience in the curriculum (64%) than masters-granting institutions (38%) and national universities (31%). myers, nelson, and stratton (2011) investigated assessment practices of economics programs. only 63.8% of the 202 schools surveyed had an assessment plan for their undergraduate majors. course embedded assignments, followed by a senior surveys, were the most popular assessment instruments. around 47% of departments with a formal assessment plan use a capstone course. more common instruments include assessments embedded into key courses and senior surveys. use of specific assessment instruments did vary by location of the department (business school or not). for example, senior projects are used far less and standardized exams far more for programs located in a business school. johnson, perry, and petkus (2012) investigated the econometrics requirement at the 807 institutions in the u.s. news & world report rankings that have an economics major. they found that these 807 schools offer a total of 1,642 different programs for majoring in economics. just over 40% require econometrics, with 2% of these programs requiring more than one course. more than half of the “national universities” require econometrics. the frequency is lower for mastersgranting and undergraduate-only institutions. when looking at “top 10” schools, econometrics is much more frequently required—90% for schools in the “national” ranking and 80% in the “liberal arts” ranking. the frequency drops dramatically below the “top 10.” there is still the need for more information about what constitutes an “economics major.” for that reason, this paper fills an important gap in information and is the first in a series of that aims at characterizing what is meant by the term “economics major” and how the answers differ in relation to size of the institution, its liberal arts orientation, and its degree of selectivity. this information will help guide departments as they review their own curriculum. the dataset information was collected on all 4-year comprehensive institutions in a 6-state geographical region to determine where students could pursue an undergraduate degree in economics. our work was not designed to be a random sample of universities, but rather a focused study of a specific six-state region (our state plus those in close proximity). we found that, in this region, 97 institutions offered a major in economics (53.9%) and 83 did not (46.1%). what resulted is a dataset containing every 4-year college or university that offers a major in economics in kentucky (16), maryland (14), north carolina (20), tennessee (12), virginia (28), and washington dc (7). (please note that schools that are not comprehensive 4-year institutions— for example, beauty schools, divinity schools, and technical schools—do not appear in the data set in any way. they are not included as schools without economics.) 5 | journal for economic educators, 14(1), summer 20014 table 1 offers descriptive statistics for schools with and without an economics major. the data suggest that for schools with economics majors, over half are private institutions (59.8%). however, for schools without an economics major, four-fifths are private schools (80%). on average, schools without an economics major are smaller than those that have one (2708 v. 6578 noting that two extreme outliers bid up the mean school size for institutions without economics majors from 2117 to 2708). also, schools without an economics major are, on average, less selective. the mean sat score at the 75th percentile is much lower for schools without economics majors (1063) than for those with economics majors (1218). (note that some schools required the act, so those scores were converted to the comparable sat scores. and there were 10 open admissions institutions so sat scores were not available.) table 1. descriptive statistics for institutional variables private institutions number of undergraduates total enrollment sat (75th percentile) schools with economics major mean .60 6,578 8,866 1218 std. dev. .49 6,462 8,994 136.3 min 0 649 656 940 max 1 24,145 31,802 1540 count 97 97 97 97 schools without economics major mean .80 2708 3,515 1063 std. dev. .41 4,249 6,523 130.7 min 0 409 469 770 max 1 28,986 46,312 1450 count 83 83 83 83 to further investigate schools with an economics major, information was collected on:  program variables (describe where the economics program is housed and what degrees are offered at the graduate and undergraduate levels)  major variables (describe the undergraduate degrees in economics based on requirements)  course offerings (describe the breakdown of courses offered into the primary areas of economics and looks at prerequisites) in some cases, an institution offered more than one version of a major in economics. for example, a university might offer tracks with a focus on general economics, business economics, international economics, mathematical economics, and occasionally there was a pre-law or public policy-oriented option. the dataset specifically included all of the descriptors for only the general economics track available at each institution (although the data was collected on the total number of tracks offered in a department). we found that the economics requirements differed very little when looking at the other tracks—often the differences between tracks were limited to classes outside of economics (history, political science, math, etc.). also, in more than one instance, a liberal arts college offered what essentially looked like a business degree under the heading of 6 | journal for economic educators, 14(1), summer 20014 economics major. the decision was made to exclude these from the dataset. table 2 details the particular variables that are present in the dataset. table 2. variables included in dataset program variables dummy if school offers a degree in business dummy if school offering a degree in business has a concentration in economics dummy if school has a school or college of business (not just a department) dummy if business and economics are housed together (in business school or dept.) dummy if program offers a minor in economics number of credits required to complete the minor in economics dummy if program offers a master’s in economics dummy if program offers a doctorate in economics major variables number of different tracks students can choose from in the major dummy if a bachelor of arts is offered dummy if a bachelor of science is offered number of total hours required to complete the major number of hours required in economics to complete the major number of economics hours that student gets to choose dummy if degree incorporates international economics requirement dummy if degree incorporates econometrics requirement dummy if degree incorporates calculus requirement dummy if degree incorporates statistics requirement dummy if degree incorporates capstone requirement dummy if degree incorporates internship requirement course offerings number of courses beyond principles in catalog (ignores rotating special topics designation, independent studies, and capstone) number of courses beyond principles with micro orientation number of courses beyond principles with macro orientation number of courses beyond principles with international orientation number of courses beyond principles with quantitative orientation dummy if there exist intermediate theory prerequisite as seen in table 3, of the 97 schools offering a major in economics, 73% have an identifiable school of business (as opposed to simply a department of business). however, 90% offer a degree in business and 29% offer a business degree with a concentration in economics, a possible substitute for the major in economics. (note that the schools offering a business concentration in economics reflects 32% of schools offering a business degree). interestingly, economics and business are housed together 62% of the time. only 26% of schools offer a masters in economics and only 18% offer a doctorate. as mentioned above, many schools had multiple “tracks” for studying economics. the average was 1.58 tracks per school with a minimum of 1 and 7 | journal for economic educators, 14(1), summer 20014 a maximum of 5. almost all schools that offer a major in economics also offer a minor (91%), with the number of required hours in economics ranging from 12 to 24 (with an average of 18.3). table 3. descriptive statistics for program variables business school bsba offered bsba in econ bus/econ together master’s granting phd granting # of tracks minor offered minor hours mean .71 .90 .29 .62 .26 .18 1.59 .91 18.3 std. dev. .46 .31 .46 .49 .44 .38 .85 .29 2.5 min 0 0 0 0 0 0 1 0 12 max 1 1 1 1 1 1 5 1 24 count 97 97 97 97 97 97 97 97 97 as indicated in table 4, the bachelor of arts is offered more frequently than a bachelor of science (73% of schools versus 45% of schools), although 20% of the schools offer both options. economics courses comprise between 15% and 38% of the total credits required for a degree in economics (with a mean of 26%). departments offer students different degrees of flexibility with respect to choice of classes. for example, in most cases, students were free to choose some number of economics electives from a list of acceptable options. the average economics track allows 41% of all economics coursework to be chosen by the student, although the minimum is 0 (students have no choice) and the maximum is 75%. table 4. descriptive statistics for major variables bachelor of science bachelor of arts econ as % of total hrs % of econ credits chosen by student mean .41 .77 .26 .41 std. dev. .49 .42 .04 .16 min 0 0 .15 0 max 1 1 .38 .75 count 97 97 97 97 table 5 details information about particular requirements of the economics major. just over half of the economics tracks (54%) require a calculus course (generally a business or engineering calculus class—precalculus did not meet this requirement for purposes of the dataset), and almost all tracks (95%) require statistics. interestingly, econometrics is required in less than half of the tracks (45%). just over one-fourth of the tracks (27%) have an international requirement, slightly more than half of the tracks (53%) have a capstone requirement (a senior seminar that incorporates some kind of research methods), and only a handful require an internship (2%). 8 | journal for economic educators, 14(1), summer 20014 table 5. descriptive statistics for major variables (course requirements) calculus required statistics required econometrics required international required capstone required internship required mean .54 .95 .45 .27 .53 .02 stnd. dev. .50 .22 .50 .45 .50 .14 min 0 0 0 0 0 0 max 1 1 1 1 1 1 count 97 97 97 97 97 97 catalogs were reviewed to understand the basket of courses offered (beyond principles, independent studies, generic special topic designations, and the capstone course) with the results summarized in table 6. on average, there are 22.2 course offerings, with a minimum of 7 and a maximum of 99. on average, just under half of all course offerings (45%) are micro-oriented, compared to 23% for macroeconomics, 19% for international economics, and only 11% quantitative courses. (note that a very small number of classes could not be divided into a category, for example, an issues class that incorporate macroeconomics, microeconomics, and international issues.) it should be noted that there is a growing number of macroeconomics courses with an international theme, for example, international monetary policy. these generally were coded as international offerings, meaning that the percentage of courses that are macroeconomics may be understated. courses labeled as quantitative include econometrics, mathematical economics, game theory, experimental economics, research methods, and modeling. interestingly, only about one-third of schools (35%) indicate intermediate theory as being a prerequisite for upper level electives courses. and while the actual number of courses with this prerequisite was not recorded in the dataset, it was surprisingly small (generally limited to only a small number of courses and often just one course). table 6. descriptive statistics for course offerings total course offerings % micro % macro % international % quantitative intermediate prerequisite mean 22.2 .45 .23 .19 .11 .35 std. dev. 14.9 .09 .09 .08 .07 .48 min 7 .25 .04 0 0 0 max 99 .71 .63 .4 .27 1 count 97 97 97 97 97 97 our empirical analysis contains two sections. initially we partition the sample into categories and, using sample t-tests, examine mean differences. we focus our analysis on differences in specific major requirements as well as broad economic course requirements. we examine how these features vary based on the following institutional factors: whether the college is public or private, undergraduate economics degree only or master’s granting, economics either housed in the business school or not, schools with sat scores either above or below the median sat score of the data set, and schools with total enrollments either above or below the data median. although interesting, we recognize that establishing causation is difficult with such 9 | journal for economic educators, 14(1), summer 20014 analysis. therefore, in the second portion of the empirical investigation, we report the results of regression analyses. for dummy dependent variables, we estimate maximum likelihood probit models to get partial effects on response probabilities (see madalla 1986). for all other dependent variables, we use ordinary least squares. all estimates use heteroskedastic robust standard errors. comparison of means our data allow us to examine mean differences of various required economic courses as well as the percentage of total graduating credit hours from economic courses and the percentage of economic coursework that is from electives. for comparisons involving binary variables, a chisquare test was performed. all other mean comparisons relied on a t-test. table 7 indicates that economics majors at private colleges are more likely to require a capstone course, but there is no significant difference when looking at calculus, econometrics, and international economics. in contrast, public institutions require more economics as a percent of total credits and provide them with a greater choice over which economics courses to take (measured as a % of total economics credits). table 7: public (n=38) vs. private (n=59) variable public mean private mean p-value calculus requirement .55 .51 .93 econometrics requirement .42 .44 .56 international requirement .24 .29 .51 capstone requirement .42 .61 .02** econ hours as % of total credits .27 .25 .07* % of econ credits that students choose .46 .39 .04** ***=significant at 1%; **=significant at 5%; *=significant at 10%* table 8 examines mean differences between universities that only grant undergraduate degrees in economics and those institutions that also have a master’s program in economics. significant differences indicate that a capstone course is more typical at undergraduate-only universities. in addition, master’s institutions offer students more opportunity to choose which economics classes to take. there was no difference in the proportion of schools that required calculus, econometrics, or international economics. there was also no difference in the mean number of hours in economics as a percent of total hours in the degree. table 8: undergraduate (n=73) vs. master’s institutions (n=24) variable undergrad mean master’s mean p-value calculus requirement .49 .63 .13 econometrics requirement .44 .42 .84 international requirement .29 .21 .16 capstone requirement .60 .33 .01** econ hours as % of total credits .26 .26 .62 % of econ credits that students choose .40 .47 .04** ***=significant at 1%; **=significant at 5%; *=significant at 10% 10 | journal for economic educators, 14(1), summer 20014 interesting mean differences appear when comparing universities where economics is or is not housed in the business school. (note that for this comparison we included all institutions, even those that did not have a business school.) table 9 shows that economics departments within the business school are more likely to require international economics, but they are less likely to require calculus. economics programs housed in a business school offer students less choice over the economics courses that they take. table 9: economics not in b-school (n=38) vs. economics in b-school (n=59) variable not in b-school mean in b-school mean p-value calculus requirement .63 .46 .10* econometrics requirement .47 .41 .52 international requirement .05 .41 .00*** capstone requirement .53 .54 .88 econ hours as % of total credits .26 .26 .80 % of econ credits that students choose .46 .38 .01*** ***=significant at 1%; **=significant at 5%; *=significant at 10% partitioning the sample into “low” and “high” sat score schools using the median sat score of 1210 also yields insights. as shown in table 10, below median sat scoring institutions are more likely to require international economics, but they provide economics majors with less opportunity to choose which economics courses are taken to meet degree requirements. surprisingly, there are no differences related to calculus, econometrics, a capstone experience, or percentage of total degree hours that must be taken in economics. table 10: below median sat (n=49) vs. above median sat (n=48) variable low sat mean high sat mean p-value calculus requirement .49 .56 .02 econometrics requirement .47 .40 .62 international requirement .43 .10 .00*** capstone requirement .51 .56 .94 econ hours as % of total credits .26 .26 .46 % of econ credits that students choose .35 .48 .00*** ***=significant at 1%; **=significant at 5%; *=significant at 10% the data were also separated at the median enrollment size. in table 11 we see that larger schools are no more likely to require calculus and econometrics than smaller schools. however, smaller schools are more likely to require international economics and a capstone course. larger schools are more likely to give students more choice over which economics courses are taken to meet economics requirements. this may be because large schools typically have greater course offerings, which would naturally encourage them to allow students greater course flexibility in their major. 11 | journal for economic educators, 14(1), summer 20014 table 11: below median size (n-50) vs. above median size (n=47) variable small school mean large school mean p-value calculus requirement .50 .55 .17 econometrics requirement .40 .47 .76 international requirement .34 .19 .01* capstone requirement .74 .32 .00*** econ hours as % of total credits .26 .26 .31 % of econ credits that students choose .37 .47 .00*** ***=significant at 1%; **=significant at 5%; *=significant at 10% overall, our comparison of sample means reveals several significant differences. calculus is more likely to be required in economics tracks from economics departments not housed in the business school. however, exclusivity (as measured by sat), size, and whether the institution is masters granting do not yield any significant differences in the calculus requirements. we were also surprised that we did not see any differences in means related to the econometrics requirements. international economics is more likely to be required for departments within the business school at smaller, less selective (based on sat scores) colleges and universities. a capstone course is more prevalent at small, private institutions that only offer economics degrees at the undergraduate level. there were no significant differences in the economics credits as a percentage of the total credits required for the degree. however, there were many significant differences related to the percent of the economics requirements that gets to be chosen by students. this percentage was higher for larger, more selective, public, masters-granting schools where economics is not in the business school. regression analysis the first set of regression results utilizes a probit approach using robust standard errors in order to see what variables impact the probability of an economics degree program requiring calculus, econometrics, international economics, or a capstone course. in all four cases, the probability of a specific course being required is a function of a set of core variables, the state dummy variables, and any relevant interaction variables as follows: prob (course x) = f{core variables, state dummies, interaction variables} the set of core variables includes: whether the school is private, sat scores, if business and economics are housed together, if the department offers a doctorate, if the department offers a bachelor of science, the number of tracks offered in the economics major, and economics as a % of the total credits required for graduation. coefficients for state dummy variables are suppressed and available upon request. the results presented in table 12 suggest that the probability of calculus being required in the general economics curriculum increases if the department offers a doctorate in economics. the probability of requiring calculus decreases as more tracks are offered in the program. it is possible that schools with multiple tracks in economics add calculus to a different track that has a greater quantitative focus. the probability of requiring calculus also decreases as economics comprises a larger share of the total credits required for graduation, since there would be fewer degrees of freedom. whether a school is private, its level of selectivity as measured by sat scores, if 12 | journal for economic educators, 14(1), summer 20014 economics and business are housed together, and if a b.s. degree is offered do not appear to be determining factors. table 12: calculus requirement variable coefficient standard error p>|z| private -.1528 .1291 .244 sat .0004 .0005 .498 bus and econ together -.1290 .1227 .300 phd .5087 .0844 .000*** bachelor of science -.1598 .1173 .177 number of tracks -.1219 .0667 .068* econ hrs as % of total credits -4.336 1.8841 .021*** n=97; r2=.23; ***=significant at 1%; **=significant at 5%; *=significant at 10% as indicated in table 13, the probability of a general economics degree including econometrics decreases when a school is private but increases when economics takes up a greater share of total credits (since there would be more opportunity to offer additional economics courses). the interaction term suggests that for private institutions, the higher the sat score then the more likely econometrics will be required. table 13: econometrics requirement variable coefficient standard error p>|z| private -.9950 .0171 .028** sat -.0009 .0007 .187 bus and econ together -.0114 .1180 .923 phd -.0260 .1896 .891 bachelor of science .1474 .1247 .241 number of tracks .0254 .0594 .669 econ hrs as % of total credits 5.4614 1.7647 .002*** sat x private .0021 .0009 .025** n=97; r2=.21; ***=significant at 1%; **=significant at 5%; *=significant at 10% as seen in table 14, the probability of requiring international economics in the general economics track decreases as sat increases and as number of tracks available to choose from decreases. again, this latter result may be driven by the presence of a specialized track focusing on international issues. however, it increases when business and economics are housed together in a school or department. this, perhaps, reflects a service objective of economics departments housed in business schools where international economics/issues may be emphasized or required. 13 | journal for economic educators, 14(1), summer 20014 table 14: international requirement variable coefficient standard error p>|z| private .0860 .0706 .234 sat -.0011 .0003 .001*** bus and econ together .2447 .0628 .001*** phd -.0412 .0949 .700 bachelor of science .0036 .0637 .955 number of tracks -.1036 .0525 .044** econ hrs as % of total credits .0015 .8174 .999 n=97; r2=.27; ***=significant at 1%; **=significant at 5%; *=significant at 10% as the results in table 15 suggest, the probability of a capstone course being included in the general economic curriculum increases if there is a phd program in economics at the institution. however, this impact appears to be lower for institutions with sat scores above the median. thus, the results indicate that the negative impact of being a private institution on the likelihood of offering a capstone class is lower for more selective colleges and universities. table 15: capstone requirement variable coefficient standard error p>|z| private .1636 .1219 .186 sat .0005 .0005 .357 bus and econ together -.0573 .1264 .651 phd .9743 .0470 .007*** bachelor of science -.0930 .1210 .444 number of tracks .0808 .0663 .223 econ hrs as % of total credits -1.3514 1.5161 .373 sat x phd -.0041 .0014 .003*** n=97; r2=.19; ***=significant at 1%; **=significant at 5%; *=significant at 10% a second set of regression analyses were performed to determine what variables influence the course offerings found in the catalog. courses were divided into 4 categories (microeconomics, macroeconomics, international, quantitative) with the goal of determining how institutional variables impacted the percentages of courses falling into each category. the following ols specification was employed for each of the 4 groups: percent (orientation) = f{private, sat, bus/econ together, masters, total enrollment, state dummies} data reported in table 16 indicates that the percent of courses that are microeconomic in orientation range from 25 to 71% for the 97 institutions in the dataset. regression results reported in table 16 indicate that selectivity (measured by sat) has a small, negative impact on the proportion of course offerings that have a microeconomic orientation, meaning schools that are more selective have a larger proportion of courses that are not considered to be microeconomics. 14 | journal for economic educators, 14(1), summer 20014 in addition, the size of the school, as measured by total enrollment, has a small but positive impact on the proportion of courses that are microeconomic in orientation. table 16: % of courses with microeconomic orientation variable coefficient standard error p>|z| private .0069 .0276 .805 sat -.0002 .0001 .034** bus and econ together -.0102 .0205 .621 masters -.0292 .0269 .281 total enrollment 4.54e-06 1.55e-06 .004*** n=97; r2=.15; ***=significant at 1%; **=significant at 5%; *=significant at 10% the percent of macroeconomics courses offered in the catalog range from 4 to 63% across institutions. regression results reported in table 17 suggest that, while sat is not a factor, a larger total enrollment results in a smaller proportion of courses that fall into the category of macroeconomics. given that macroeconomics and microeconomics courses generally comprise the bulk of an economics curriculum, it is not surprising that if one increases the other will decrease. table 17: % of courses with macroeconomic orientation variable coefficient standard error p>|z| private .0087 .0231 .707 sat -.0000 .0001 .723 bus and econ together .0006 .0194 .977 masters -.0087 .0216 .688 total enrollment -2.86e-06 1.22e-06 .021** n=97; r2=.27; ***=significant at 1%; **=significant at 5%; *=significant at 10% at the suggestion of a reviewer, we investigated whether number (as opposed to proportion) of courses in microeconomics/macroeconomics varies with enrollment, with the speculation that as programs grow in enrollment, the growth in classes is more oriented toward microeconomics. to do this, number of courses was used at the dependent variable. for both microeconomics and macroeconomics, enrollment has the expected sign (positive for micro and negative for macro). however, neither result was statistically significant. as presented earlier, the percent of courses that are considered to be international in focus ranges from 0 to 40% across institutions. regression results in table 18 suggest that selectivity and having a masters program (significant only at the 10% level) increases the proportion of course offerings that are international in orientation. total enrollment has a small but negative impact. based on our probit analysis, we anticipated that economics being housed with business might increase the proportion of international-themed course offerings. although the sign of the coefficient supports this, the result is not statistically significant. 15 | journal for economic educators, 14(1), summer 20014 table 18: % of courses with international orientation variable coefficient standard error p>|z| private -.0372 .0236 .119 sat .0001 .0001 .013** bus and econ together .0148 .0160 .356 masters .0379 .0228 .100* total enrollment -3.22e-06 1.34e-06 .019** n=97; r2=.18; ***=significant at 1%; **=significant at 5%; *=significant at 10% finally, regression analysis was used to investigate what variables impact the share of course offerings that were quantitative in orientation. data previously reported indicate that the proportion ranged from 0 to 27% (with the caveat that these courses did not include basic mathematics and statistics and captured instead subjects like econometrics, mathematical economics, game theory, etc.). results in table 19 indicate that the proportion of courses with a quantitative orientation increase the more selective is the institution (as measured by sat). table 19: % of courses with quantitative orientation variable coefficient standard error p>|z| private -.0003 .0155 .985 sat .0001 .0000 .042** bus and econ together -.0066 .0135 .626 masters -.0026 .0162 .873 total enrollment 1.56e-06 9.47e-07 .103 n=97; r2=.18; ***=significant at 1%; **=significant at 5%; *=significant at 10% conclusion using a unique set of data, this paper describes the similarities and differences in economics majors across academic institutions in a six state region. although majors are broadly similar in terms of credit hour requirements and, to a lesser degree, choice, there are significant differences in specific course requirements. large variations in requiring calculus, econometrics, international economics, and a capstone course are documented and analyzed. overall, it appears that phd granting public institutions are more likely to require quantitative coursework such as calculus and econometrics, whereas economics departments housed in the business school are more likely to require international economics. in terms of elective offerings, more selective institutions (sat scores higher than the sample median) offer a greater share of quantitative and international courses, but relatively fewer microeconomics courses. in the future, regular updates of this data set will provide insight into the evolution of the economics major over time. 16 | journal for economic educators, 14(1), summer 20014 references breneman, d. 2009. “the economics major as part of a liberal education: the teagle report: comment.” american economic review, 99(2): 620-621. colander, d. and k. mcgoldrick. 2009. “the economics major as part of a liberal education: the teagle report: comment.” american economic review, 99(2): 611-618. daly, g. 2009. “the economics major as part of a liberal education: the teagle report: comment.” american economic review, 99(2): 621-623. hill, c. 2009. “the economics major as part of a liberal education: the teagle report: comment.” american economic review, 99(2): 618-620. jones, s., hoest, e., fuld, r., and d. colander. 2008. “what economics students think of the economics major.” middlebury college economics discussion paper no. 08-10. maddala, g.s. 1983. limited-dependent and qualitative variables in econometrics. cambridge university press: 22-28. mcgoldrick, k. 2008. “writing requirements and economics research opportunities in the undergraduate curriculum: results from a survey of department practices.” journal of economic education, 39(3): 287-296. myers, s., nelson, m., and r. stratton. 2011. “assessment of the undergraduate economics major: a national survey.” journal of economic education, 42(2): 195-199. sigfried, j. 2010. “trends in undergraduate economics degrees, 1991-2009.” the journal of economic education, 41 (3): 326-330. sigfried, j. 2012. “two decades of trends in undergraduate economics degrees, 1991-2011.” the journal of economic education, 43 (3): 334-338. 30 | journal for economic educators, 17(1), 2017 30 when mergers fail: a pedagogical case study of the proposed merger of staples and office depot bob carbaugh1 and toni sipic2 abstract major corporate mergers in the office supplies retail industry have been blocked by the us government on two occasions in the last 20 years. this article presents a pedagogical treatment of the recently proposed, and ultimately failed, merger of staples and office depot. the williamson economic model of horizontal mergers is discussed and the 2015 and 1996 merger proposals of staples and office depot are compared. we develop classroom materials for economics instructors who teach introductory and intermediate applied microeconomics courses. key words: mergers, williamson model, antitrust laws, office supplies jel classification: a20, a22, g34, l41, l44 introduction staples inc. opened the first office supply superstore in 1986 when founder thomas stemberg filled a previously unexploited market niche for a one-stop supermarket for office products (staples inc., 2015). his business strategy relied on selling a wide array of discounted office supplies to small businesses and it soon evolved into a high volume chain passing down cost savings to consumers. by selling office supplies at 30 to 60 percent off list price, staples operated as a catalyst to force the rest of the industry to reduce prices (970 f. supp. 1066 [d.d.c. 1997]). following the opening of staples, other office supply superstores soon arose, including office depot (1986) and officemax (1988). staples and office depot grew to be the number one and two sellers of office supplies. by 2015, staples had 3,800 stores worldwide and sales revenues of $25 billion (staples inc., 2015) while office depot had 1,900 stores worldwide and sales revenues of $14.5 billion (office depot inc., 2015). however, sales and profits of both firms were declining at this time due to a sluggish market for office equipment and strong competition from other retail firms and online dealers. as a result, staples and office depot attempted to reduce costs through closure of some retail outlets as well as consolidation via merger. in 2015, staples announced plans to acquire office depot, which itself had acquired officemax in 2013 in an attempt to compete against staples. in justifying the merger, staples and office depot emphasized how it would lead to efficiencies that would result in cost reductions and lower prices for office-supply consumers. however, the federal trade commission (ftc) filed a lawsuit to halt the merger, arguing that it would significantly reduce competition in the office supply market. in may 2016, the united states district court for the district of columbia granted the ftc a preliminary injunction against the merger. as a result, staples and office depot announced the termination of their proposed merger. this case is similar to the proposed merger of staples and office depot that was turned down by the court in 1997. 1 professor of economics, department of economics, central washington university, 400 east university way, ellensburg, wa 98926, carbaugh@cwu.edu. 2 assistant professor of economics, department of economics, central washington university, 400 east university way, ellensburg, wa 98926, sipict@cwu.edu. 31 | journal for economic educators, 17(1), 2017 31 the purpose of this article is to apply the williamson model of market power and economic efficiency to the proposed merger of staples and office depot, and to guide the reader through the ftc's decision-making process regarding this merger (williamson, 1968). this pedagogical piece is intended as a case study and method of instruction that we wish to share with college professors for use in their classrooms when discussing horizontal mergers. the williamson model has also been the basis for some of our publications that have been used in our classrooms for a variety of courses (carbaugh 2015; 2014; 2010; 1993; sipic and carbaugh, 2014). to facilitate faculty instruction, we provide suggested video links in the appendix regarding the proposed merger of staples and office depot for the instructor to use when lecturing about mergers. williamson horizontal merger model the williamson model proposes a method of analyzing a welfare trade-off in a merger of two competing firms (williamson, 1968). the welfare benefits arise from cost reductions due to economies of scale, while the welfare losses derive from increases in market power by the merged firm and the associated deadweight losses. the model compares economic welfare gains for two scenarios: when the two firms are direct competitors and when they merge into a monopoly. in the latter case, the price is expected to be higher and quantity lower than in the former case. this result will occur as long as the marginal cost curve for the newly merged firm is identical to the horizontal sum of the marginal cost curves of the individual competitors. in the case of the staples-office depot merger, whether or not net economic welfare increases or decreases because of the merger depends on the sizes of these two opposing forces. in figure 1, we illustrate the welfare effects of a merger between two perfectly competitive suppliers of office supplies, staples and office depot. assume that each firm charges a price equal to marginal cost and realizes constant long run costs. thus, average cost equals marginal cost at each level of output, so that mc1=ac1. market equilibrium occurs at point a, associated with a price of p1 per unit of office supplies and a quantity of q1. the consumer surplus is the triangle p3ap1, and producer surplus is non-existent due to the constant structure of costs (sipic and carbaugh, 2014). suppose that the two suppliers merge into a new firm, called staples-office depot, thus becoming a monopoly in the office supplies market. the new supplier decreases costs by exploiting newly found economies of scale, shown by mc2=ac2. staples-office depot maximizes profit by equating marginal revenue and marginal cost, resulting in a new market equilibrium at point b; price rises to p2 per unit and a quantity falls to q2. the decrease in the cost from mc1 to mc2 results in efficiency related welfare gains of p1cdp0. the increase in equilibrium price from p1 to p2 decreases the consumer surplus by the area of the trapezoid p2bap1, whereby area bac is the deadweight loss and area p2bcp1 is lost to the producer surplus. the ftc should (all else being equal) approve the merger if the efficiency gains (area p1cdp0) are larger than the deadweight loss (area bac). it has been assumed that staples-office depot achieves cost reductions that are unavailable to either staples or office depot as stand-alone companies. whether the cost reductions benefit the overall economy depends on their source. if they result from productivity improvements (for example, new work rules leading to higher output per worker), a welfare gain exists for the economy because fewer resources are needed to produce a given amount of output and the excess resources can be shifted to other industries. however, the cost reductions resulting from the formation of staples-office depot may be monetary in nature. being a newly formed company, staples-office depot may be able to negotiate wage concessions from workers that could not be 32 | journal for economic educators, 17(1), 2017 32 achieved by staples or office depot as stand-alone companies. such a cost reduction represents a transfer of dollars from workers to staples-office depot's profits and does not represent an overall welfare gain for the economy (sipic and carbaugh, 2014). in order to evaluate the welfare gains or losses of a merger between staples and office depot in the context of the williamson model, we would need to estimate the efficiency gains and deadweight losses of figure 1 that is, area p1cdp0 and area bac respectively. in practice, projected efficiency gains are often provided by the merging companies, while the deadweight losses may be inferred from the potential price increases as a result of the increased market power of the newly merged company. lack of data does not allow these estimates to be provided in this paper (sipic and carbaugh, 2014). it should be noted that if the cost savings from a merger are large enough, it is possible that the price could decrease after the merger, even if market power is being exercised. thus, there is no trade-off in that case (kwoka and white, 2014). figure 1: the welfare effects of the proposed merger of staples and office depot the williamson model has become a work-horse model in undergraduate economics courses focusing on the costs and benefits of increased industry concentration such as introductory and intermediate microeconomics, industrial organization, and managerial economics. we utilize this model in our courses when teaching about historic mergers (such as aol and time warner, exxon corp and mobil corp, and citicorp and travelers group inc.) as well as more recent cases (such as american airlines and us airways, canadian pacific and norfolk southern, and pfizer and allergan). we present several videos to the students upon completion of the discussion of monopoly (including bloomberg’s ‘staples-office depot merger collapses after block by judge’; boston herald’s ‘staples/office depot ceos defend merger’; and cnn’s ‘staples and office depot abandon merger’). see appendix a for links to videos on the failed merger. the students saw these videos, which introduced the concepts of market power and economic efficiency in the office supplies industry, prior to learning about the williamson model and the $ p2 p1 p0 p3 b a q2 q1 office supplies mc1=ac1 (staples, office depot) mc2 = ac2 (merged staples-office depot) demand mr c d 33 | journal for economic educators, 17(1), 2017 33 department of justice's horizontal merger guidelines. carbaugh and sipic felt that this technique worked quite well in that students were initially exposed to a real-world example of a horizontal merger, before learning about the underlying theory and antitrust principles. students appreciated seeing how economic principles can be applied to a real-world merger of two familiar office supplies retailers. the merger proposal of staples and office depot in 2015 was not the first time that the two companies attempted to merge. they also announced plans to merge in 1996 that was denied by the court in 1997. let us consider these two cases. staples-office depot merger proposal of 1996 staples and office depot are firms which sell office products--including office supplies, business machines, computers, and furniture--through retail stores (known as office supply superstores) and through direct mail delivery and contract operations. in 1996, staples was the second largest office superstore in the united states with about 550 retail stores located in 28 states; the firm's revenues were about $4 billion. office depot was the largest office superstore chain; it operated about 500 retail office supply superstores in the united states and generated $6.1 billion of revenue in 1996. (united states district court for the district of columbia, 1997) staples first announced plans to purchase its rival in september 1996. the firms said the deal would create a chain with more than 1,000 stores in the united states and canada and annual sales of more than $10 billion. however, the ftc decided that the merger of the two superstores would unfairly increase office supply prices despite competition from officemax, which did not have stores in any of the local markets that the merger would affect. although staples argued that chains such as circuit city stores and wal-mart provided adequate competition, this argument did little to sway the ftc or u.s. district court judge thomas hogan who ruled against the merger. let us elaborate in several key points regarding this merger decision. (dalkir and warren-boulton, 1997)  section 7 of the clayton act of 1914 makes it illegal for two companies to merge when in the line of commerce the effect of the acquisition may be substantially to lessen competition, or to tend to create a monopoly. in merger cases, the ftc must show the court that there is a strong likelihood that a merger will lessen competition or create a monopoly, if the court is to rule against the merger.  both the ftc and the defendants (staples and office depot) agreed that metropolitan areas were the appropriate geographic markets for analyzing the competitive effects of the proposed merger. according to the ftc, the proposed merger would have an anti-competitive effect in 42 metropolitan areas, ranging from los angeles, california to detroit, michigan.  in contrast to the parties' agreement regarding the relevant geographic market, the ftc and the defendants sharply disagreed with respect to the appropriate definition of the relevant product market, which was crucial to judge hogan's decision. the ftc defined the relevant product market as the sales of office supplies through office superstores; this narrow definition resulted in the ftc's claiming that the defendants controlled about 75% of the market, a dominant high market share (as elaborated on below). however, the defendants argued that the relevant product market should be more broadly defined to include the overall sale of office products which implied competition from chains such as wal-mart, circuit city, and other mail order retailers. in this situation, the combined market share of the defendants was only 5.5%, hardly a statistic that would support the denial of the merger. after considering arguments on both 34 | journal for economic educators, 17(1), 2017 34 sides, judge hogan decided that the appropriate relevant product market was the narrow definition of the ftc--that is, sales of office supplies through office supply superstores.  after accepting the ftc's definition of the relevant product market, judge hogan next considered the probable effects of a merger between staples and office depot in the 42 geographic markets (metropolitan areas) previously identified. it was found that, if the proposed merger took place, the herfindahl-hirschman index (hhi) index would range from 5,003 in the least concentrated metropolitan area (kalamazoo-battle creek, michigan) to many metropolitan areas with hhis of 10,000. this implies that the merger would result in highly concentrated markets--an hhi of over 1,800 qualified as "highly concentrated" according to the 1982 merger guidelines of the u.s. department of justice (doj) and the ftc. in 2010, the doj and the ftc revised its merger guidelines such that a highly concentrated market required an hhi of over 2,500. this classification was relevant to the 2015 merger proposal of office depot and staples, as discussed below.  in this case, the ftc staff had access to scanner data, including actual transactions prices at staples stores. analysis of the price data suggested that prices were significantly higher in markets where only two of the three “office superstores” operated compared to markets with all three. prices were higher still in markets where only one of the competitors operated. in addition to supporting the narrow definition of the market, these data also suggested that prices would rise an average of 7.3 percent after the merger in markets where both staples and office depot competed prior to the merger (kwoka and white, 2014). this was arguably more convincing to the court than the relatively high hhi numbers alone.  moreover, the concentration statistics showed that a merged staples-office depot would have a dominant market share in 42 metropolitan areas throughout the united states. in 15 metropolitan areas, the combined market shares of staples and office depot in the office superstore market would be 100%. in 27 other metropolitan areas, where the number of office superstore competitors would drop from three to two, the post-merger market shares would range from 45% to 94%. therefore, judge hogan accepted the ftc's argument that there was a high probability that the proposed merger would give the merged company near-monopoly pricing power, resulting in a significant anticompetitive effect. the merger guidelines of the justice department and ftc allow for an efficiencies defense to show that the intended merger creates significant efficiencies in the relevant market, thus offsetting any anti-competitive effects. (u.s. department of justice and the federal trade commission, 2010). these guidelines recognize that mergers have the potential to generate significant efficiencies by permitting a better utilization of existing assets, enabling the combined firm to achieve lower costs in producing a given quantity that either firm could have achieved without the proposed merger. moreover, the guidelines mandate that the efficiencies must be specific to the merger and they are relevant only if they result in a lower price to consumers. in practice, although efficiencies are easy to promise before a merger occurs, they tend to be more difficult to achieve after the fact, realizing the difficulties of the post-merger firm’s attempt to integrate equipment, operating systems, personnel, and cultures from the two firms prior to the merger. (kwoka and white, 2014) staples and office depot submitted their efficiencies estimates to the court. these estimates predicted that the combined company would achieve savings of $4.9-$6.5 billion over the next five years. also, the defendants argued that the merger would generate dynamic efficiencies, such as office suppliers becoming more efficient due to their increased sales volume to the combined staples-office depot. moreover, the defendants argued that two-thirds of the 35 | journal for economic educators, 17(1), 2017 35 savings realized by the combined company would be passed along to consumers. however, judge hogan ruled that the efficiency estimates of staples and office depot were unreliable, noting that they were substantially greater than those represented in previous documents prepared by staples and office depot. (united states district court for the district of columbia, 1997) in a final effort to avoid the denial of the proposed merger, and based on a recommendation by the staff of the ftc, staples and office depot proposed to sell 63 of their stores to officemax, at a bargain price, to maintain two-superstore competition in markets that, after the merger, would otherwise have only one superstore. also, both companies made a public commitment to reducing prices after the merger. yet the ftc argued that the combined company's prices would be 5% to 10% higher. upon evaluating all arguments, judge hogan ruled against the proposed merger. following the denial of the merger, an intense rivalry developed between staples and office depot in the market for office supplies. staples-office depot merger proposal of 2015 fast forward to 2016, and history was repeating itself. again, staples and office depot were attempting to merge and the ftc was able to block the merger on antitrust grounds. but in this case, the proposed merger was part of a larger trend of consolidation in a weakening market. competition has been fierce and both companies have turned to downsizing to boost profits. office suppliers have struggled as consumers and businesses reined in spending and governments cut budgets. almost everything sold in a staples or office depot store, from ink to filing cabinets to staples, is tied to the consumption of paper. and while the paperless office is rare, the less-paper office is ubiquitous. also, the already slim profit margins of office supplies stores have been compressed by price cutting. staples and office depot have compared themselves to "penguins on a melting iceberg," struggling to survive in an increasingly competitive and digitalized world. staples had a good run from 2003 to 2009, when its after tax profits grew by about 15 percent per year. yet from 2009 to 2015, its profits decreased by about 9 percent per year. office depot has been in a similar situation. the decline in the profits of these companies reflects the pricing pressure from online giant amazon and brick-and-mortar behemoth walmart as well as the commoditized nature of the office supply business. profits have fallen as the result of strong growth in lower margin categories like tablets and a decline in sales of higher margin categories such as office supplies, as well as pressure in core categories such as paper and ink and toner. as a result, staples and office depot were under pressure to consolidate their operations via merger in order to reduce costs and become a stronger business. therefore, the two firms announced their intention to merge in february 2015. staples was to acquire all of the outstanding shares of office depot, worth $6.3 billion. according to staples and office depot, their merger would allow the combined company to more effectively perform in a rapidly evolving competitive environment. the combined firm would achieve at least $1 billion of cost savings as it aggressively reduced global expenses and optimized its retail footprint. the majority of these savings were to be realized through headcount and general and administrative expense reductions, efficiencies in purchasing, marketing, supply chain, and retail store network optimization, as well as sharing of best practices, according to staples and office depot. these savings would help the combined firm to increase its profitability and position the company to serve its customers and grow over the long term (office depotofficemax, 2015). 36 | journal for economic educators, 17(1), 2017 36 moreover, staples and office depot noted that in 2013 the ftc allowed the merger of office depot and officemax based on the evidence that these office supply superstores faced competition from other sources. by accepting a broad definition of the relevant market, the ftc established a precedent for the proposed merger of staples and office depot in 2015, according to the two companies. however, critics noted that in 2013, office depot and officemax were each less than half the size of staples and struggling to stay profitable. without a merger, one or both may have eventually folded. this argument is consistent with the “failing firm” defense of a merger as recognized by the guidelines of the doj and the ftc: if one or both of the merging firms are unlikely to survive in the absence of a merger, then the merger may not be challenged, even though other aspects of the merger support a challenge. the rationale here is that it is no worse, and likely better, to lose one competitor through merger than to lose one or more competitors by blocking the merger. simply put, the circumstances surrounding the merger of office depot and officemax were much different from those of the proposed merger of staples and office depot, according to the critics. thus, the merger of office depot and office max was not a precedent for a merger of staples and office depot. in december 2015 the ftc filed a complaint with u.s. district judge emmet sullivan, charging that staples proposed acquisition of office depot would violate the antitrust laws by significantly reducing competition nationwide in the market for consumable office supplies sold to large businesses that buy office supplies in bulk for their own use. the ftc's complaint noted that staples and office depot are often the top two bidders for large business customers (federal trade commission, 2015). the complaint of the ftc included several provisions:  the complaint noted that many large business customers buy consumable office supplies (pens, pencils, notepads, sticky notes, and so on) for their own use under a contract. in addition to a wide range of office supplies at competitive prices, the vendor provides them with fast and reliable nationwide delivery, dedicated customer service, customized online catalogs, integration of procurement systems, and detailed utilization reports. thus, the business-to-business market is distinct from the more competitive retail markets for office supplies sold to consumers.  the ftc's complaint alleged that, in competing for business contracts, both staples and office depot had the scale to provide the low prices, nationwide distribution, and combination of services and features that many large business customers require.  the complaint alleged that by eliminating the competition between staples and office depot, the merger would lead to higher prices and reduced quality. it also asserts that entry or expansion into the market by other office supplies vendors, manufacturers, wholesalers, or online retailers would not be timely, likely, or sufficient to counteract the anticompetitive effects of the merger. finally, the complaint asserted that the purported merger efficiencies would not be large enough to offset the competitive harm. (federal trade commission, 2015). in the context of the williamson merger model of figure 1, the ftc maintained that the proposed merger's deadweight welfare-loss triangle would be much larger than the economic efficiencies rectangle. after hearing all arguments about the proposed merger, on may 10, 2016 judge sullivan blocked the planned merger of staples and office depot. he noted that there was little doubt that 37 | journal for economic educators, 17(1), 2017 37 the acquisition of the second largest firm in the market (office depot) by the largest firm in the market (staples) would lessen competition in the sale and distribution of office supplies to large businesses in the united states. in his ruling, judge sullivan emphasized two critical issues in the merger case. first, he accepted the ftc's narrower definition of the relevant product market and market share analysis that staples captured 47.3 percent and office depot captured 31.6 percent of the business-tobusiness market, for a total of 79 percent market share, and that the post-merger hhi would be 6,265, suggesting that the market would be highly concentrated. in other words, the merger would result in a market structure of one dominant firm with a competitive fringe. second, judge sullivan noted that staples and home depot were unable to demonstrate that other online retailers or vendors would replace any competition lost because of the merger. as the result of judge sullivan's rejection of the proposed merger, staples and office depot abandoned the $6.3 billion deal. staples and office depot publicized their disappointment to their customers. in an open letter, they claimed that the court was wrong for blocking the proposed deal. the competitive landscape had been changing with more business functions now being done online and there was a declining demand for paper-based office supplies. they claimed that staples and office depot faced increasing competition from retail giants such as amazon, wal-mart, and others, that the court did not seem to appreciate. conclusion in the last several years, the ftc and doj have increased scrutiny of mergers and consequently blocked several in the railroad ($30 billion deal between canadian pacific and norfolk southern), oilfield services ($28 billion deal between halliburton and baker hughes), and pharmaceutical industries ($160 billion pfizer takeover of allergan). more recently, the federal government elected to prevent another merger, this time between staples and office depot. this is the second time in 20 years that these companies tried and failed at joining forces. both companies consequently saw steep declines in their stock valuations, and staples ceo ron sargent stepped down. this article proposes a pedagogical approach to analyzing this latest staples-office depot merger attempt, by way of the williamson model of horizontal mergers, followed by the description and discussion of the 1996 and 2015 merger proposals. the williamson horizontal merger model helps students understand how the federal government makes decisions when approving or rejecting corporate mergers. specifically, it considers two main factors: cost savings arising from economies of scale and deadweight losses arising from increased concentration due to the merger. the general rule of thumb, as presented in figure 1 of the paper, is that the merger merits approval if the cost savings exceed the deadweight losses and rejection if the deadweight losses are greater than the cost savings. one of the main determinants of both values is the definition of the service and geographic markets in which the merged company operates. in the 2015 case, the ftc’s concern was the office supply market for large business customers, while in the 1996-97 case the consumer market was the focus of the case. this is likely due to the decline in demand for some office supplies and the increased competition from online vendors in the 20 years since the first case, but not in the market for large business customers. the ftc and doj determine the geographic and service scopes after hearing arguments from both sides in the case. thus, the staples-office depot merger failed primarily due to the courts accepting a narrow definition of the market, whose principal proponent was the ftc, in both the 1996 and 2015 cases. specifically, the ftc defined the relevant market from the total market for office supplies to the market served only by the office-supply superstores. in the former case, the 38 | journal for economic educators, 17(1), 2017 38 merged company would have a market share of less than 10% and in the latter case almost 90%. the companies argued for a total market definition to include office supply sales by companies such as target, wal-mart, and amazon. but the court rejected this argument as speculative due to a lack of evidence that these companies competed with staples and office depot since the 1996 case. references carbaugh, robert. 2015. international economics. 15th edition. cincinnati, oh: cengage learning. carbaugh, robert. 1993. "bank mergers: effects on national welfare." business and economic review, 7(2): 87-96. carbaugh, robert and koushik ghosh. 2010. "united-continental merger." journal of industrial organization education, 5(1): 1-12. carbaugh, robert and toni sipic. 2014. "teaching horizontal mergers to undergraduates: the case of american airlines and us airways." journal of economics and finance education, 13(2): 112-125. dalkir, serdar and frederick warren-boulton, 1997. “prices, market definition, and the effects of merger: staples-office depot, 1997.” in kwoka, john and lawrence white. (eds.), the antitrust revolution: economics, competition, and policy. new york: oxford university press. 2014. office depot-officemax. 2015. "staples, inc. announces acquisition of office depot, inc.", corporate financial news, february 4. federal trade commission. 2015. ftc challenges proposed merger of staples, inc. and office depot, inc. december 7. kwoka, john and lawrence white. 2014. the antitrust revolution: economics, competition and policy. new york: oxford university press. office depot inc. 2015. annual report. boca raton, fl. staples inc. 2015. annual report. framingham, ma. staples inc. 2015. our story: how it all began, framingham, ma. united states district court for the district of columbia. 2016. memorandum opinion: federal trade commission versus staples, inc. and office depot, inc. may 10. united states district court for the district of columbia. 1997. staples-office depot acquisition enjoined by ftc: the decision set forth in full below. june 30. u.s. department of justice and the federal trade commission. 2010. horizontal merger guidelines. august 19. washington, d.c. williamson, oliver. 1968. "economies as an antitrust defense: the welfare tradeoffs," american economic review, 58(1): 18-36. appendix a bloomberg: staples-office depot merger collapses after block by judge http://www.bloomberg.com/news/articles/2016-05-10/staples-office-depot-merger-blocked-asanticompetitive boston herald: staples/office depot ceos defend merger http://www.bostonherald.com/business/business_markets/2016/03/staplesoffice_depot_ceos_def end_merger http://www.bloomberg.com/news/articles/2016-05-10/staples-office-depot-merger-blocked-as-anticompetitive http://www.bloomberg.com/news/articles/2016-05-10/staples-office-depot-merger-blocked-as-anticompetitive http://www.bostonherald.com/business/business_markets/2016/03/staplesoffice_depot_ceos_defend_merger http://www.bostonherald.com/business/business_markets/2016/03/staplesoffice_depot_ceos_defend_merger 39 | journal for economic educators, 17(1), 2017 39 boston herald: staples scraps $6.3b office depot merger http://www.bostonherald.com/business/business_markets/2016/05/staples_scraps_63b_office_de pot_merger cnbc: staples, office depot tank on failed merger http://www.cnbc.com/2016/05/11/staples-office-depot-tank-on-failed-merger.html cnn: staples and office depot abandon merger http://money.cnn.com/video/news/2016/05/11/office-depot-staples-merger.cnnmoney/ the street: staples ceo ron sargent to step down after failed office depot merger https://www.thestreet.com/video/13592703/staples-ceo-ron-sargent-to-step-down-after-failedoffice-depot-merger.html http://www.bostonherald.com/business/business_markets/2016/05/staples_scraps_63b_office_depot_merger http://www.bostonherald.com/business/business_markets/2016/05/staples_scraps_63b_office_depot_merger http://www.cnbc.com/2016/05/11/staples-office-depot-tank-on-failed-merger.html http://money.cnn.com/video/news/2016/05/11/office-depot-staples-merger.cnnmoney/ https://www.thestreet.com/video/13592703/staples-ceo-ron-sargent-to-step-down-after-failed-office-depot-merger.html https://www.thestreet.com/video/13592703/staples-ceo-ron-sargent-to-step-down-after-failed-office-depot-merger.html 1 |journal for economic educators, 16(1), 2016 a cost analysis of amazon prime air (drone delivery) adrienne welch sudbury1 and e. bruce hutchinson2 abstract this paper estimates the costs of the prime air delivery system proposed by amazon.com, inc. that uses drone technology to deliver packages to customers’ doorsteps. the paper sets forth a benefit-cost analytical framework to examine the labor-saving technology of the drone system by modeling the prime air system in chattanooga, tn. the model addresses faa regulations, drone design, logistics, and related factors to predict how amazon might set up and operate the drone system. cost savings per package delivered of one-third or more relative to ground delivery, exclusive of r & d costs, seem feasible. key words: cost-benefit framework, drone delivery system, new technology jel classification: d29, l62, o18 introduction in december of 2013, amazon president jeff bezos proposed that in a few years amazon would use drones, or octocopters, to deliver packages to a customer’s doorstep. critics of bezos and skeptics expressed concerns. no one besides bezos himself and perhaps others within amazon knew details regarding the proposed drone delivery system. commercial drone operation in the us was and is illegal! certainly, drone technology would provide amazon the opportunity to expand transportation and delivery service in a way previously only imagined. as paul misener, amazon vice president of global public policy, commented, “one day, seeing amazon prime air will be as normal as seeing mail trucks on the road today, resulting in enormous benefits for consumers across the nation” (amazon.com, 2014). a key advantage amazon claims over other online retailers is the speed at which it sends out a package for delivery. the company created and held this advantage with massive investment in fulfillment centers across the country. amazon now operates a fulfillment center within five miles of most metropolitan areas (davis, 2013). in 2013, amazon had over 10 million amazon prime members loyal customers that buy frequently from the online retailer and for a yearly fee receive free shipping and other benefits. this number is projected to increase to 25 million by 2017 (mccorvey, 2013). how has amazon created such a customer base? fast delivery. within 2.5 hours of an order being placed, the package has been shipped. amazon accomplishes this 1 adapted from undergraduate honor’s thesis, university of tennessee at chattanooga, currently a graduate economics student at: department of economics, 507 stokely management center, university of tennessee at knoxville, knoxville, tn 37966. 2 professor of economics, department of economics, university of tennessee at chattanooga, dept. 7006, 615 mccallie avenue, chattanooga, tn 37403 2 |journal for economic educators, 16(1), 2016 speed through an efficient packaging process enhanced by the close proximity of its fulfillment centers to consumers. these fulfillment centers are equipped with kiva robotics systems which are programmed to retrieve and move items around the warehouse (wohlsen, 2014). over the last few years, with delivery costs rising as a result of rising gas prices, amazon’s profit margins have shrunk. amazon currently relies on fedex, ups, and the postal service to deliver its packages. by switching to drone delivery, amazon cuts out this delivery-service middle man to complete an order all the way to the customer’s doorstep. this will replace the cost, including profit, in current ups and fedex charges for delivery. amazon gains the opportunity for additional profit or to lower a customer’s cost. drones also reduce labor costs by replacing much of labor’s role in ground delivery. the only human labor required will be for operational management and drone maintenance. literature review little written literature exists regarding the commercial use of drones for package pick-up and delivery. instead, most published research regarding drones focuses on aerial surveillance: to survey for oil fields, to take aerial views of properties, for mapping and general surveying, and to search for missing persons (laing, 2014). kharchenko and prusov (2012) divide the various uses for drones into three groups: safety control, scientific-research, and commercial. they highlight commercial photography and surveillance uses, but do not consider cargo delivery. they also identify specific requirements needed in the structure of an unmanned aviation complex (uac) or drone station: the unmanned aircraft itself, control stations (management) of unmanned aircraft and the antennae system, software and systems for monitoring of the unmanned aircraft, communication means (earth/air and air/earth) for air-traffic control and unmanned-aircraft payload, terminals of data processing, landing system, launch system and systems for re-charging, maintenance equipment and the support of the unmanned aircraft and its systems, and systems of storage and transportation of unmanned-aircraft. kharchenko and prusov note that as drone usage becomes more popular, problems may arise in the use of airspace and the “allocation of frequency range for unmanned aircraft control and data transfer from the [aircraft] to the earth and vice versa.” peter tatham (2009) addresses the uses of drones (uavs) in providing aerial surveillance and reconnaissance.3 he emphasizes the importance of timeliness of delivery in disasters, concluding that drones can lead to earlier and better quality aid to areas suddenly struck by a disaster. tatham writes that “the [drone] cost/hour is similar to a manned aircraft, and less than a helicopter; [uavs] require less launching/landing area; can operate at low levels in cloud(s) and medium precipitation conditions that would not be allowed or safe for manned aircraft” and have greater endurance levels (tatham, p. 65). he has no doubt that in the coming years, the cost of uavs will decrease. in his analysis, tatham compares the costs of operating a fixed-wing light aircraft, helicopters, and uavs and finds that uavs are less expensive to obtain and operate considering capital cost, operating speed, and mission cost. 3 throughout this paper various acronyms are used in reference to drones: uav (unmanned aerial vehicle), uas (unmanned aircraft systems), and suas (small unmanned aircraft systems). 3 |journal for economic educators, 16(1), 2016 history and regulations the federal aviation administration (faa), under operational control of the department of transportation, maintains legal authority over all us airspace (faa.gov, history). though the use of drones for private use has not been regulated, the faa has restricted their commercial use – drones must be flown below 400 feet and may not enter airspace within a mile of airports. in 2012 congress passed legislation that required the faa to open us airspace to the use of commercial drones in the next five years by “develop[ing] a comprehensive plan to accelerate the integration of civil unmanned aircraft systems into the national airspace system” no later than september 20, 2015 (faa modernization and reform act of 2012, section 332). the faa may grant companies permission to operate drones in us airspace prior to this completion date (sec. 333). therefore, each us business that wishes to use drones for commercial purposes must submit an application for exception to the faa and be granted special permission. a business seeking exception must provide drone specifications (such as size, weight, flight speed, etc.) so that the entity’s drone model may be approved to fly. as of august 4, 2015, the faa has granted 1,008 exemptions under section 333 (faa.gov, news and updates). restrictions placed on a drone operator include obtaining “a regular pilot's license, pass an aviation medical check, be assisted by a spotter, request permission two days in advance, and limit flights to less than 35 mph and below 300 feet” (cooper, 2015). amazon wants to begin testing drones in seattle, wa, near its headquarters and existing facilities. since washington is not one of the six approved test sites (alaska, nevada, new york, north dakota, texas, and virginia), the company must seek special faa permission (walker, 2014). indeed, to comply with current regulations, amazon shot its demo video required for faa permission outside the united states where permission to fly was not required. on february 15, 2015, the faa released proposed rules for integrating small, commercial uass into us airspace. the proposed parameters for commercial drones include: • uass must weigh less than 55 lbs. and fly at a maximum speed of 100 mph and a maximum altitude of 500 ft. above ground level. • uass must remain in sight of operator, in daylight hours only, and not over a person (cannot fly over people). • uass cannot operate near airports. • pilots/operators of uass would be required to: pass an initial aeronautical knowledge test at an faa-approved knowledge testing center as well as a recurrent test every 24 months, be vetted by the transportation security administration, obtain an unmanned aircraft operator certificate with small uas rating, and be at least 17 years old. the full extent of the rules and regulations may be found in a 195-page document on the faa’s website. of particular importance are the requirements of operational sight and flight occurrence only during daylight hours. if these rules are approved, amazon will have to modify its system to operate within line of sight (a maximum of 3 miles), use individual operators, and fly drones only during daylight hours. in march 2015, the faa approved amazon’s first exemption request for drone testing, but by that time, the drone amazon was proposing to test had become obsolete (janson, 2015). with these latest drone requirements and the lag in approvals, critics say that the faa is causing drone development in the us to lag behind countries such as china, canada, and australia. these three countries are among the first to allow the use of commercial drones (canada has only granted experimental permits). zookal, a textbook rental company based in australia, has 4 |journal for economic educators, 16(1), 2016 partnered with flirtey (a startup tech company) to develop a drone system to deliver textbooks. using an app to deliver within a 2-kilometer (1.24 mile) radius, zookal hopes to begin solving the problem of delivery logistics and saving time and money just as amazon proposes to do in the us (mckenzie, 2013). flirtey’s chief executive, matt sweeney, claims that, as the program realizes with economies of scale “we expect to see long term reduction of costs in delivery and a strong environmental benefit with the reduction of vans on the roads doing deliveries.” (susa news, 2014). just recently flirtey made drone-delivery history. partnering with virginia polytechnic institute (vpi) and the faa, flirtey performed the first officially-approved us drone delivery on july 17, 2015. the drone delivered much needed medical supplies to a free clinic in rural virginia (ackerman, 2015). flirtey is also working with new zealand to implement airshare, “a hub for uav information, which will allow commercial operators to log their flights to ensure maximum safety” (lim, 2014). china is working on a drone based postal system and dominos in europe is testing the use of their “domicopters” to delivery pizzas to a customer’s door (smith, 2013). theory and operation amazon will set up its drone system only in cities where it will be expected to increase efficiency and profitability. for example, the drone system would be costlier and less profitable in a low density/low population city versus a high density/high population city. urban areas with denser and larger populations of customers are expected to provide scale economies not available in a city such as chattanooga, tn. if amazon succeeds in its venture to use drones for commercial delivery in the us, it may gain a research and development (r&d) advantage as well as reductions in future developmental miss-steps through learning by doing while gaining consumer favor as an innovator. though these advantages may fade over time giving way to competition, amazon will have gained in technological leadership, preemption of assets, and buyer switching costs (lieberman, 1988). amazon’s fulfilment centers serve as a median location where the cost of transporting many packages to the fulfillment center is traded-off against the cost of individual package delivery. the general location of fulfillment centers located on the outskirts of a city works well with the use of a few drone stations located strategically around the city. we use details about 8th and 9th generation drones revealed in amazon’s letter to the faa in the model. each drone will weigh less than 55 pounds, fly at speeds of up to 50 miles per hour, carry packages of 5 pounds or less, and carry packages within a ten-mile radius of a drone station. traveling at 50 miles per hour, this radius is travelled in 12 minutes: 50 miles 1 hour = 50 miles 60 minutes = 10 miles 12 minutes thus, a drone flies a maximum round trip in 24 minutes. allowing an additional 6 minutes for flight acceleration and deceleration, loading and unloading of packages, and flight ascent and descent, a drone delivers a package to a maximum distance and returns in 30 minutes (24 minutes of flight time + 6 minutes of extra time). assuming the average flight radius is 7.5 miles, the elapsed time is 24 minutes (9 minute flights to and from the delivery site plus 6 minutes). the drone is pre-programmed for each flight, giving it the capability to fly to a customer and back without a human operator. a series of computer codes transmitted from the drone station 5 |journal for economic educators, 16(1), 2016 to the drone direct it to its destination.4 human labor will monitor flights and perform maintenance tasks. one employee should be able to monitor multiple flights at once just as an air-traffic controller does with commercial passenger planes. amazon has petitioned the faa to run test flights at heights up to 400 feet (approximately the height of a 40 story building). drone expert missy cummings (gross, 2012) estimates that the drones will have to fly at 300 feet or higher to prevent human interference. in our model, the drone first ascends to an altitude of 400 feet. it then flies at altitude on a set path. upon reaching the destination coordinates, the drone descends, lands and releases its package, and then retraces the flight pattern back to the drone station. various extraneous factors, for instance, poor weather conditions such as snow, rain, and sleet, may have an effect on the system’s efficiency. missy cummings theorizes that drones will be equipped to fly in light rain or snow, but nothing heavier, because precipitation obscures the sensors (gross, 2013). of course, if precipitation is too heavy for drone flights, it would slow or render ground delivery unsafe. either way, weather may cause flight delays during periods of heavy precipitation. drones could increase operational hours of delivery by enough to make up for weather delays. fedex and ups deliver 11 hours daily, typically 8 am to 7pm, monday through friday. with the necessary legislation in place, amazon could go to 24 hours a day drone operations or, more realistically, operate 12 hours per day and monday through saturday (or even sunday). a drone of course flies above road delays such as construction, detours, accidents, traffic, etc. we model drone delivery to chattanooga, tennessee. this facilitates identification and inclusion of various factors. chattanooga is a relatively “average” size with population of 171,279 and over 470,000 living in the chattanooga metropolitan statistical area, a population density of 1,267 people per square mile (city-data.com, cec-icmc 2007). the altitude of the area ranges from 1,800 feet in the valley where the downtown area sits to 2,300 feet on suburban signal mountain. parts of the metropolitan area (east ridge) cross into georgia with density that ranges from 149.88 to 3,134.06 people per square mile. see figure 1. because the metropolitan area spills into georgia, legal permission to fly drones is needed from both tennessee and georgia. chattanooga averages of 120 days of rainfall per year. the likelihood of a thunderstorm or moderate rain occurring on a day with precipitation is 61% (weatherspark.com). because drones have trouble operating in moderate rain or thunderstorm conditions, the drones are likely to experience flight delays 73 (120 times 0.61) days per year. on its peak delivery day (november 26, 2012), amazon centers worldwide shipped over 306 items per minute (cheredar, 2012). assuming that just 1/4 of those packages were shipped in the us, then more than 3.9 million of the packages were shipped in the us for an average of 0.0122295 packages per person.5 if this average is applied to the chattanooga area population of 470,000, then approximately 5,748 packages were shipped that day in chattanooga. 4 drones are commonly referred to as small unmanned aircraft systems or “suas”. the suas are equipped with additional programming such as anti-collision technology to prevent the drone from flying into obstructions. the drones are also programmed with basic safety protocols. should communication be lost between the drone station and the drone, the drones are programed to return to a secure location (amazon.com). 5 the number of packages delivered by amazon on an average day is not available. 6 |journal for economic educators, 16(1), 2016 figure 1: a map of the population density of chattanooga (map and data from zipatlas.com) on the busiest day of the year, 4,943 packages (= 5,748 packages x 86% representing the % of total packages of 5 lbs. or less (cheredar, 2012)) are potentially delivered by drones to the chattanooga area. amazon drones operating round-the-clock (three 8-hour shifts) would need to deliver 205 packages hourly to achieve this total. with the average of 2.5 trips per hour (= 60 minutes divided by 24 minutes/trip), 82 drones are needed every hour. so each of the three drone stations needs 28 drones in constant operation, while another 28 drones are charging for the next shift. to provide a reserve against the risk of running short on drones, each station needs 7 reserve drones (estimated 25% of drones in operation) to be available on its busiest day and for backup during repairs or malfunctions. hence, each of the three stations requires 63 drones for amazon’s busiest package day of the year or a total of 189 drones for the chattanooga area. if stations operate 12 hours per day instead of 24, which better accommodates business and residential hours to accept delivery, then the numbers for the busiest day become: 412 deliveries per hour require 165 drones in operation. per station, this is 55 operating, another 55 charging, and 7 |journal for economic educators, 16(1), 2016 18 (25% of 55 drones) in reserve. thus, 128 drones are needed per station for a total of 384 drones in chattanooga. this is the maximum for peak periods. during non-peak periods, deliveries can be accomplished by operating fewer drones or fewer hours. how will a drone “know” exactly where to land? the idea of having “helipads” for the drones to land and drop their package has been put forth. other ideas such as an app with gps locating ability would “call” the drone to the person’s phone. either way, amazon must find a way to program specific coordinates that are deemed “safe landing spots”. these could be strategically located throughout the city where a drone will land, drop off the package, and resume flight (gross). customers then pick up their packages from this specific location rather than at their door. delivery to a customer’s doorstep raises the legal issue of permission for amazon drones to land in public areas. costs and benefits drones range in cost from a few hundred dollars to millions of dollars. we assume that a drone costs between $3,000 to $5,000 ($1,000 to $3,000 for the drone and $2,000 for software and maintenance) with an average cost of $4,000 per drone (keeney, 2015). this mandates an initial capital investment of $756,000 (189 drones) for 24 hours per day operation, or for 12 hours per day operation, $1,536,000 (384 drones). we assume that operating costs for personnel, loading, and monitoring will be approximately the same per package for truck as for drone delivery. amazon's drone technology is a labor-saving/capital-using technology as drones replace labor and trucks with more specialized capital and labor in the production delivery services. see figure 1. introduction of drone technology switches production from isoquant q1 to isoquant q2, replacing labor with capital and increasing the capital to labor ratio. figure 1 shows the new technology (isoquant q2) changing the input mix from labor intensive to capital intensive. amazon’s application of drones to package delivery accomplishes by substituting drones for trucks. each truck requires a driver whereas the drone is guided by transmitted computer codes plus labor for flight monitoring. one drone operator will monitor multiple drones. john swope (2015) analyzes ups delivery cost. he assumes that a ups driver makes $25 an hour delivering packages, 10 hours a day. after factoring gas and tolls, though not truck capital or maintenance cost, the cost of delivery-by-truck comes to around $30 an hour. swope also found that, according to a ups driver forum, a driver delivers up to 250 packages per day. the average delivery cost per package equals: cost of driver # of packages delivered = $30 hour x 10 hours day 250 packages day = $1.20 package this excludes amazon’s cost of getting packages to the ups center, fuel and other transport costs, and fringe benefits or any other contractual costs. 8 |journal for economic educators, 16(1), 2016 figure 1: labor-saving innovation alternatively, swope estimates that maintenance and other costs will average $4,000 over the five-year lifespan of a drone. using this information, the cost per package delivered with 24 hours per day service can be calculated. first, the total packages delivered over five years is 4943 packages day x 6 days week x 51 weeks year x 5 years = 7,562,790 packages. 6 total cost for drone delivery 24 hours per day with 3 shifts equals: capital cost ∗ # drones + delivery cost ∗ # drones 7,562,790 packages = cost package $4,000 ∗ 189 + $4,000 ∗ 189 7,562,790 packages = $0.200 package for 12 hours per day operation the cost per package delivered is: 6 these numbers allow for no sunday operations and operating 51 weeks per year to account for major holidays. 9 |journal for economic educators, 16(1), 2016 $4,000 ∗ 384 + $4,000 ∗ 384 7,562,790 packages = $0.406 package or, allowing for some reduction to $3,000 of maintenance and other cost per drone per 5 years as a result of a drone delivering fewer packages on average: $4,000 ∗ 384 + $3,000 ∗ 384 7,562,790 packages = $0.355 package these costs per package are for the busiest or “most efficient day” delivery. still the drone cost per package delivered is one-third or less of the ups delivery cost. and that $1.20 cost excludes vehicle cost. the future price of a drone is likely to decrease due to economies of scale in drone production as their commercial use expands. on the other hand, the drone costs per package delivered increase on less busy days. nevertheless, delivery of one-half as many packages per day, only increases the 12 hour per day operation cost to about $0.80 – still a one-third cost saving of $0.40 per package before any concurrent reduction in maintenance or other operating costs. there are additional drone costs such as: setting-up and running the drone delivery stations, the investment in research and development, and lobbying the faa. other costs include: buildings and land associated with the drone stations, computers and monitoring software systems for drone flights, computer technicians and drone monitors on site, robotics engineers for maintenance and upgrades to drones on site, utility costs of running the building, logistics management team to oversee operations, potential insurance and legal fees associated with drones, and potential air and/or radio frequency rights for drones, etc. there is also the potential for legal costs in some of the following situations: drones are found operating in unauthorized airspace, drones are shot down by civilians, a drone lands in an unauthorized space, etc. drone delivery itself is a novelty. many persons within range of drone delivery are likely to be excited by the very idea of receiving a package delivered by drone. another advantage will be shorter delivery response time. the time required for drone delivery will almost certainly average less time than driving. currently, customers are faced with a decision between driving to a store to buy the product and waiting several days for delivery to their door. with drone delivery, the customer receives the product without the drive and just a minimal wait. it is also possible – perhaps likely – that longer range drones flying from a metropolitan station will reduce delivery cost to rural areas. table 1 compares drone versus truck issues and costs. we have considered drone-delivery as changing comparative labor and capital costs. the table clarifies that other proprietary costs exist some of which are “historically” fixed for trucks. conclusion amazon has much to gain if the drone project becomes operational. amazon stands to gain a strong competitive advantage over both online and physical retailers. the quick delivery and initial novelty of drone delivery should increase business. although the logistics of the drone delivery system remain a mystery to those outside of the inner workings of amazon, our analysis demonstrates that it has a cost advantage of one-third or more per package over ground delivery. 10 |journal for economic educators, 16(1), 2016 cause/issue: truck drone operating hours/week 55 72 "traffic" delivery delays roadway construction, none use anti traffic accidents air-collision techno. weather delays snow, very heavy moderate rain rain to thunderstorms legal comm. driver's pilot's license (faa) license (cdl) other faa regs. cost factors: labor/delivered package $1.20 ? (excludes fringe benefits) capital & maintenance 1 ? $0.36 fuel/package ? ? city station (building & land) ? ? drone sub-stations roadway provided ? (building & land) by government research & development none/previously ? computers, software & none/previously ? technicians for drones drone/truck insurance & ? ? related legal fees table 1: comparison of amazon truck vs. drone delivery references ackerman, e. (2015). first faa-approved drone delivery is a success, but does it matter? spectrum, 20(july). amazon.com (2014). letter to the faa: amazon petition for exemption. 9(july) ts. bowman, r. 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(2013). the economics behind amazon’s drone delivery service. john swope, december 4. web. february 21, 2015. <http://www.johnswope.com/?p=83>. tatham, p. (2009). an investigation into the suitability of the use of unmanned aerial vehicle systems (uavs) to support the initial needs assessment process in rapid onset humanitarian disasters. international journal of risk assessment and management, 13.1, 60-78. united states (2012). congress. house. faa modernization and reform act of 2012: conference report to accompany h.r. 658. 112th congress, 2nd sess. report 112-381. washington: gpo. weatherspark.com (2015). average weather for chattanooga, tennessee, usa. march 3. https://weatherspark.com/averages/29897/chattanooga-tennessee-united-states>. wohlsen, m. (2014). a rare peek inside amazon's massive wish-fulfilling machine |wired. conde nast digital, june 16 2014. web. april 2, 2015. zipatlas.com. (2015). population density in chattanooga, tn by zip code. february 7. web. february 7, 2015. <http://zipatlas.com/us/tn/chattanooga/zip-code-comparison/ population-density.htm>. http://www.fastcompany/ http://www.suasnews.com/2014/09/%2031079/us-businesses-make-noise-about-drones/ http://www.suasnews.com/2014/09/%2031079/us-businesses-make-noise-about-drones/ 44 | journal for economic educators, 14(1), summer 2014 major league baseball: dynamic ticket pricing and measurement costs tim dittmer and bob carbaugh 1 abstract this paper discusses dynamic ticket pricing by major league baseball and how it applies to the measurement or transaction explanation of pricing. key reductions in the cost of measuring margins that vary in value, such as the win/loss record of the opposing team, are identified, and these reductions in measurement cost help explain the switch from static to variable to dynamic pricing of tickets. instructors of intermediate microeconomics and managerial economics that wish to discuss dynamic pricing may find this example interesting to sports oriented students. key words: major league baseball, dynamic ticket pricing, measurement costs jel classifications: a2, d4, m2 introduction several decades ago, major league baseball (mlb) teams set prices for their stadium seats at the beginning of the season and did not adjust these prices as the season progressed. in the last decade, some teams have adopted dynamic pricing for some of their tickets. this system has been used for years in the airlines and hotel industries and on websites such as ebay and amazon.com (bitran and mondschein, 1995; kines, 2010; demmert, 1973). with dynamic pricing, the price of tickets is adjusted on a daily or hourly basis, right up to the time of a game, in accordance with changing patterns of demand. by responding to market fluctuations, dynamic pricing allows firms to adjust prices to correspond with buyers’ changing willingness to pay. the airline industry is often characterized as a success story in dynamic pricing. indeed, it utilizes this technique so skillfully that most of the passengers on any given plane have paid different ticket prices for the same flight. with the advent of improving information technologies and forecasting software, dynamic ticket pricing spread to the sports business in 2008 when the san francisco giants became the first major league baseball (mlb) team to use this technique in the pricing of single-game tickets. moreover, dynamic ticket pricing is now being used across major league soccer, the national basketball association, the national hockey league, nascar, and college football. the purpose of this paper is to analyze and describe the introduction of dynamic pricing to mlb. while undergraduate textbooks in intermediate microeconomics and managerial economics include extensive discussions on pricing strategies, they do not generally discuss dynamic pricing. for example in intermediate microeconomics, neither pindyck & rubinfeld nor goolsbee, levitt & syverson discuss which margins to price, nor how frequently to change prices. in managerial textbooks, mcguigan, moyers & harris do mention dynamic pricing, but 1 associate professor of economics and professor of economics respectively, department of economics, central washington university, ellensburg wa 98926. 45 | journal for economic educators, 14(1), summer 2014 only in a complicated business to business internet sales context. boyes mentions peak load pricing in an example related to electricity markets, but does not describe the circumstances under which it becomes optimal to change prices. since the adoption of dynamic pricing by mlb, several papers have been published dealing with this topic (drayer, shapiro, and lee, 2012; kobritz and palmer, 2011). as with this paper, the advantages and disadvantages of dynamic pricing are addressed in the context of the professional sports industry (kyle and sibdari, 2009). what this paper contributes is an explanation of change; if dynamic pricing works so well, why was it adopted decades ago in the airline and hotel industries yet not introduced to mlb until 2008? drayer et al suggest rising costs created a “need” for more revenue. this paper claims that mlb teams have always “needed” revenue, and that what has changed is the cost of measuring and pricing different factors that change the value of a particular ticket, such as the win/loss record of the opposing team. measurement cost theory helps explain the introduction of dynamic pricing to mlb. a primer on measurement costs measurement or transaction cost theory was developed in the 1980s (barzel, 1982, 1989) to address limitations of the perfect information assumption of neoclassical economics. starting with most of the assumptions of neoclassical theory, including many maximizing buyers and sellers, rising marginal costs, and diminishing marginal value, measurement cost theory added the assumption of positive transaction costs. these are real costs associated with buyers and sellers protecting property rights when engaging in economic transactions. below is an example to make these abstract concepts clear. suppose the product is fresh tomatoes, and start with all of the neoclassical assumptions including homogeneous goods. each tomato is identical to any other tomato, and the market price acts to equate the supply of tomatoes with the demand for tomatoes. the price may be in either dollars per tomato, or dollars per pound of tomato. these units of measurement are interchangeable and irrelevant, for each tomato is identical, so a pound of tomatoes always contains the same number of tomatoes. this is the theory that is taught as supply and demand in introductory economics courses. but now drop the assumption of homogeneous tomatoes; let them vary by size. add a cost for both counting and weighing tomatoes, with the cost of weighing greater than the cost of counting. suppose initially sellers choose to market their tomatoes with a price per tomato in order to economize on the cost of weighing. what will happen? if tomatoes are priced on a per unit basis, yet the units vary in size, maximizing consumers will compete to acquire the larger tomatoes; they will spend resources sorting to find the larger tomatoes. each consumer will evaluate tomatoes until the expected value of finding another large tomato has decreased to the cost of searching for one more tomato – the standard marginal condition of utility maximization. the cost of sorting is a transaction costs, which may be defined as the costs buyers and sellers incur to ensure that they are receiving the maximum value from a transaction (barzel, 1989). when a margin of value such as the size of the tomato is not priced, and bu yers compete for the more valuable items by spending resources (in this case sorting), the un-priced value is considered common property or left in the public domain. while each consumer may be maximizing, competition by means of sorting does not maximize the aggregate value of all tomato transactions. this is because the same smaller tomato is repeatedly evaluated (and rejected) by consumers. the cost of sorting the same small tomato again and again is a 46 | journal for economic educators, 14(1), summer 2014 deadweight loss – no one receives it. the aggregate value of tomato sales would be higher if tomatoes were only sorted once. the cost of excess sorting is born by both buyers and sellers. since consumers anticipate incurring sorting (transaction) costs when purchasing tomatoes, their willingness to pay is reduced by this expected costs. this results in deadweight loss analogous to the deadweight loss of a tax, and in the same way as a tax, the loss in value is divided between buyers and sellers. sellers may decide to reduce multiple sorting costs (and therefore increase consumers’ willingness to pay) by performing the sorting themselves. perhaps they sort tomatoes into two categories, large and small, and price each accordingly. this reduces the value to customers from sorting the tomatoes, and since there is less to be gained by sorting within the presorted category, consumers will do less of it. sorting by consumers could be eliminated entirely if sellers perform sorting to a fine enough scale – not two categories, but a continuum of categories. of course this is the same as weighing each tomato. what drove the sorting equilibrium was the assumption that weighing is more expensive than counting. however, technological changes have reduced the cost of weighing tomatoes. the inclusion of automatic scales integrated into the cash register have eliminated the role of a separate produce clerk. sellers responded to this reduction in the cost of weighing by switching pricing from dollars per tomato to dollars per pound. this eliminated the benefit from customers sorting tomatoes for size, and therefore reduced the transaction costs of buying and selling tomatoes. sellers captured some of this lower cost by charging a higher price based on consumers greater willingness to pay. this example may be summarized as follows. goods have many attributes or margins that vary in value. consumers spend resources trying to find units that are of the maximum value net of the price paid. these resources are one form of transaction costs, and they may be reduced by selecting a pricing mechanism that applies a price per unit of value to the margins with the greatest variability in value. measurement cost theory predicts that maximizing sellers will select the pricing mechanism that creates the greatest value net of transaction costs. this general result will be extended and applied to the introduction of dynamic pricing to mlb. margins of value in baseball pricing the item sold at a mlb event, a ticket to a seat, has many margins that vary in value. the seat may be located close to or far from the field. all locations near the field are not of the same value. if the particular location is to be priced separately from other locations, the seller must determine which seats command a higher price. the seller must also enforce seat assignments, or buyers may move from low cost seats to unsold high cost seats. there are many other sources that contribute to the variability of the value of a seat. factors that will cause this variation include how far in advance the ticket is purchased, the win/loss record of the team as the season progresses, the opposition team, the win/loss record of the opposing team as the season progresses, the weather forecast, and other entertainment events scheduled on the same date. each of these factors may change the value of a seat, and each may have a differential impact on the change in value of different seats. for example, a competin g event such as a rock concert may reduce the value of bleacher seats more than seats near the field. in the absence of measuring costs, teams would price each of these margins correctly, resulting in no greater consumer surplus for one seat or game than any other seat or game. since seats would not vary in value net of price, consumers would not spend any time competing for 47 | journal for economic educators, 14(1), summer 2014 seats. there would never, for example, be lines for tickets or the need to make advanced purchases (barzel, 1974). of course the margins described are expensive to measure, so teams leave some unmeasured and un-priced, resulting in search costs on the part of consumers. it should be noted that this conclusion assumes that consumers’ utility functions are identical. however, individual consumers might value these characteristics differently and thus different seats might provide different levels of consumer surplus. thus, there would still be transactions costs. in the example of tomatoes described in section two, the transaction costs were excessive search costs. competition for items of above average value reduced the net gains from transacting. in the case of mlb these costs took the form of purchasing tickets too far in advance, and waiting too long in line for same day purchases (barzel, 1974). another pricing complication, and deadweight loss from mispricing, occurs from the capacity constraints of stadiums, which is the topic of section four. pricing with capacity constraints an important element in the technology of some industries, such as mlb and airline flights, is capacity constraints (feng and xiao, 2001; oren, 1985). in order to illustrate how these constraints impact pricing, we begin with an example of a parking lot. the lot has 80 spaces, and there are other parking lots nearby, but not on the same block. some customers prefer this parking lot, but they are willing to select a different lot if there are not any spaces available or if the price is too high. given imperfect substitutes, the monopoly model helps clarify pricing decisions to maximize profit (badinelli, 2000). figures 1a and 1b. in 1a the profit maximizing price of $5 and quantity of 50 is not affected by the capacity constraint of 80. in 1b marginal revenue is positive at the capacity constraint of 80. additional sales would increase revenue if the constraint were not binding. figure 1a illustrates the case where the demand for parking is relatively low, and it does not make sense to fill the lot every day. the marginal cost of servicing another customer is zero up to the point where all the spaces are in use. beyond that point it is not possible to add another 0 2 4 6 8 10 12 0 20 40 60 80 100 120 140 p ri ce quantity 1a low demand 0 2 4 6 8 10 12 -20 20 60 100 140 180 220 p ri ce quantity 1b high demand 48 | journal for economic educators, 14(1), summer 2014 customer, so the marginal cost curve becomes vertical at 80 spaces. the parking lot owner's total profit is maximized where the marginal revenue obtained from renting parking spaces equals the marginal cost of providing them (which in this case is zero), at 50 parking spaces. to rent 50 spaces, the parking lot operator sets a price of $5 per space. note that the capacity constraint of 80 spaces does not influence the price or quantity – 30 spaces are normally left empty. and since marginal cost is zero, profit maximization is equivalent to revenue maximization (dana, 1999). contrast this low demand situation with the relatively high demand situation of figure 1b. in this figure, profit maximization again occurs where the marginal revenue curve intersects the marginal cost curve--that is, at 80 parking spaces. but in this case, marginal revenue is above zero at this output. while the parking lot operator could increase revenue by renting more than 80 spaces, this is not possible since there are only 80 spaces to rent. the best choice for the parking lot operator is to fill the lot by charging a price of $6 per space. the previous example addressed monopoly pricing in a world where demand is known with certainty, but price discrimination is not possible. the focus of this analysis is the change in pricing that occurs when measurement of willingness to pay is expensive, and therefore demand is not known with certainty. what is the effect of misestimating demand and therefore overpricing or underpricing a product (borland and macdonald, 2003)? figure 2a illustrates the effect of parking-space overpricing. suppose the parking lot operator believes demand is high, and sets a price of $6, when demand is in fact low, so that the optimal price is $5. at the $6 price, only 40 customers will rent spaces instead of the 50 customers that would rent spaces if the price was $5. this reduction in quantity (the "quantity effect") leads to a $50 loss in revenue--10 parking spaces times $5, or $50. but the 40 customers who do rent parking spaces pay a price of $6 instead of $5, resulting in $40 of additional revenue (the "price effect"). therefore, the overpricing of parking spaces causes a net loss of revenue to the operator equal to $10 -$40 in gain and $50 in loss. figure 2b illustrates the effects of parking-space underpricing. suppose the parking lot operator believes demand is low, and sets a price of $5, while in fact demand is high, so that the optimal price is $6. this mis-estimation reduces the operator's revenue by $80--the $1 lower price times the 80 units rented. there are also 20 additional customers who would like to rent a space at $5, but are unable to do so (mcafee and velde, 2004) . there does not exist any offsetting quantity effect. the lot operator must put out a “lot full” sign. comparing figures 2a and 2b, the revenue losses from “overpricing” ($10) are smaller than the revenue losses from “underpricing” ($80). one way to think about this is to compare revenue changes for small pricing errors both when the capacity constraint is not binding (figures 1a and 2a) and when it is binding (figures 1b and 2b). in figure 2a, at the point of profit maximization, the quantity effect of another sale (the dark gray area) is offset by the price effect (the light gray area) of lowering the price to make the additional sale. since these two effects offset each other at the point of maximization, small errors in pricing yield very small changes in profitability whether the price is too high or too low. in the case of figure 2b, underpricing results in a negative pricing effect (the light gray area), but there is no offsetting positive quantity effect (the dark gray area) --because the parking lot is full. if the error had been too high a price in 2b, there would exist a quantity effect, for sales would have been reduced. but the price effect would have (partially) offset the quantity effect, resulting in only a small change in revenue and profits. given a binding capacity constraint, the effects of overpricing and underpricing are therefore not symmetric. losses are 49 | journal for economic educators, 14(1), summer 2014 figures 2a and 2b. in 2a the dark gray area represents the quantity effect – the change in revenue from additional sales. the light grey area represents the price effect – the additional revenue from a higher price. in 2b the dark gray quantity effect – the additional revenue from additional sales at a lower price – does not exist because of the capacity constraint. therefore the net change in revenue from a lower price is composed only of the negative price effect without an offsetting positive quantity effect. greater from underpricing, and firms will therefore err on the side of overpricing and leaving empty parking spaces (or baseball stadium seats). combining these ideas leads to the conclusion that it is generally better to overprice, and make the capacity constraint non-binding. if in fact demand is lower than anticipated, the price effect somewhat offsets the quantity effect whether or not the capacity constraint was anticipated to be binding. but if demand is higher than anticipated, if the constraint was binding, there is not an offsetting quantity effect. the historical development of baseball pricing – static and variable pricing mlb baseball pricing reflects technology with fixed capacity constraints as described in section four, and variation in willingness to pay based on seat location and the ever changing demand determinants described in section three. the history of ticket pricing in mlb can be divided into two parts—static pricing and dynamic pricing. section five describes how static pricing evolved into what may be called variable pricing. section seven describes the introduction of dynamic pricing. traditionally, baseball teams charged a single price for a particular seat for all home games played throughout the season. such prices were set months before the season began. with this pricing scheme, only one margin was priced – the location of the seat – leaving all other variability in value in the public domain. in microeconomics terms, this pricing system can be viewed as being akin to “menu cost,” the cost to a firm resulting from changing its prices. 0 2 4 6 8 10 12 0 20 40 60 80 100 120 140 p ri ce quantity 2a over priced price quantity 0 2 4 6 8 10 12 0 40 80 120 160 200 p ri ce quantity 2b under priced price quantity 50 | journal for economic educators, 14(1), summer 2014 menu costs include updating computer systems, hiring consultants to develop new pricing strategies, as well as the literal costs of printing price quotations (menus) and communicating new prices to customers. because of this expense, firms sometimes do not always change their prices with every change in supply and demand, leading to price rigidity. in the past, repricing an entire baseball stadium was an arduous, time consuming, and expensive endeavor, thus contributing to a team's desire to maintain a static pricing policy. however, recent improvements in computer technologies and the fact that most tickets are now sold electronically appear to have detracted from the menu cost argument. why did firm using static pricing only price one margin of value, the location of the seat? drayer, shapiro and lee suggest that teams did not price other margins of value because of low organizational costs such as low player salaries, and the switch to pricing these margins resulted from increases in organizational costs. but this explanation is inconsistent with profit maximization. from the perspective of which margins to price, team salaries are a fixed cost, and a standard result of profit maximization is that fixed costs do not determine the extent (how much) of any activity. the explanation of this paper is that the variability in value of these margins was lower than the cost of measuring and pricing them. the profit maximizing mlb teams left these margins in the public domain because any gains in revenue from pricing them were less than the cost of pricing them. for example, during some seasons the red sox may find games against the yankees might command a premium over games against other teams. but if the costs of determining this premium for thousands of different seats exceeded the additional revenue from creating these special prices and tickets, the red sox would elect to choose not to create special prices for yankee games. this attribute of value would be left in the public domain, and fans would gain access to it by standing in line for tickets against the yankees. what made the location of the seat worth pricing, while all other attributes were unpriced? variations in seat location – nearer or farther from the field – is a margin that does not change over time, since of course the seats do not move. and since it only has to be measured once, it is a relatively low cost margin to price. in an era of non-computerized printing of tickets, determining different prices for seat location and creating tickets with different prices was an expensive process. by using static pricing, that cost only had to be incurred once, at the beginning of the season. mlb ticket pricing therefore included variations in price for only one inexpensive –tomeasure variation in value – seat location. it did not account for changing demand conditions that were known at the beginning of the season, such as the identity of the opposing team, or demand conditions unknown at the beginning of the season, such as the win/loss record of the opposing team or the weather forecast (rascher, d., mcevoy, c., nagel, m., and brown, m., 2007). given the expense of measuring the variation in value from both sources of variability, and the cost of re-pricing thousands of tickets manually, it is not surprising teams found it more efficient to set prices at the beginning of the season. by the early 2000s, static ticket pricing evolved into a variable pricing system for many teams, in which tickets for some games were priced higher than tickets for other games. this was still a form of static pricing, for prices were set at the beginning of the season, and would not change in reaction to changing determinants of demand. teams charged higher ticket prices for those games that were perceived to be more alluring (or more valuable) to fans and thus entailed stronger fan demand. for example, during 2008-2011, the seattle mariners priced about half of their games on a variable basis. when the highly popular boston red sox or the san francisco 51 | journal for economic educators, 14(1), summer 2014 giants came to seattle, tickets included a premium charge of $5 in addition to the regular price; if these teams came to town on a summer weekend, the premium charge was increased to $7 per ticket. the mariners found that by charging higher prices when demand was anticipated to be more inelastic and lower prices when demand is more elastic, the team's total revenue increased compared to the total revenue that was generated by pricing tickets at a fixed price for all games played throughout the season. yet under this variable pricing system, ticket prices for prime games, weekend games, and value games were locked in for the entire season; they were static and thus did not change as the season evolved. varying ticket prices in this way occurred because the cost of measuring and pricing these margins all based on the schedule at the beginning of the season – decreased. how did the cost of measuring these margins change? the most obvious change was the development of computerized information systems. these systems automatically recorded whether or not a given seat was sold, and the price and date at which it sold. these computer information systems were adopted by increasing numbers of us businesses throughout the 1980s and 1990s. not surprisingly, measurement and pricing of additional margins followed. the automated recording of prices reduced the cost of measuring past sales at different prices. and automated systems dramatically reduced the cost of applying premiums to some tickets and not others. in 2012, the seattle mariners followed the lead of other teams and switched to a dynamic ticket pricing strategy. the development of a secondary market: stubhub prior to the development of the internet, the resale or secondary market for tickets was dominated by individuals selling tickets on the date of the game in face-to-face transactions with purchasers. sellers would be a combination of fans wanting to sell unwanted tickets (such as season ticket holders) and professional “scalpers” engaging in arbitrage. mlb made concerted efforts to suppress the secondary market; however this became increasingly difficult with the development of online markets such as ebay (courty, 2003). eventually mlb, in cooperation with ebay, formed stubhub, an online secondary market for tickets. teams get a commission from stubhub as well as the ability to keep tabs on what fans are paying for their product on the open market. stubhub takes a 25 percent commission after the sale occurs (10 percent from the buyer, 15 percent from the seller). sellers range from season ticket holders to holders of single-game tickets who want to sell tickets that would otherwise go unused. because of the large number of buyers and sellers, no individual has pricing power, which leads to a competitive market for resold tickets. in this market ticket prices change constantly – dynamic pricing in the extreme. stubhub was important in the development of dynamic pricing. it developed a market, with clearly posted prices, in which prices changed in response to changing demand conditions. while “scalpers” have historically provided a secondary market, in informal secondary markets price information is expensive to acquire. how does a potential buyer standing outside a stadium know if the price the seller requests is competitive? stubhub reduced the cost of price information, facilitating trade. since the market was approved and owned by mlb, buyers became more confident that the product they received – tickets – would be honored by teams. simply put, stubhub has turned the sometimes murky world of ticket reselling into an open and transparent process. fans can easily purchase and sell tickets online without lurking outside a stadium prior to a game, warily looking around to make sure authorities don’t see the financial transaction. however, stubhub has become so popular that fans often shop at the 52 | journal for economic educators, 14(1), summer 2014 online reseller for tickets before checking with a baseball team’s box office. that leaves teams with an unsold inventory of tickets. therefore, dynamic pricing has come to be viewed as a way that teams could fight back to capture ticket sales lost to stubhub. by monitoring ticket prices on stubhub, and incorporating that information into their dynamic pricing algorithm, teams can adjust their ticket prices to better reflect real-time demand and supply. therefore, when the secondary market has tickets available for, say, $8 on a wednesday night game in september, a team with hundreds or thousands of tickets available can compete by reducing its ticket prices and offering other benefits, like food coupons or vouchers for future game tickets. as a result, the baseball team receives added income rather than the secondary-ticket vendor or the scalper. dynamic pricing and mlb with the development of stubhub, fans gained access to a market for mlb tickets that used dynamic pricing. but the benefits of the market went mostly to individuals who purchased tickets at low prices from the teams, then resold them at higher prices when conditions permitted. consider a team that has an unexpectedly good season. the team’s owners based ticket prices on an “average” season, but since the team started to perform above expectations, willingness to pay for tickets was above expectation. scalpers would purchase additional seats at the low fixed price posted by the team, and then sell them at higher prices as the team’s tickets became sold out. the team would not receive the full value of the increased demand for its tickets, since the team would not raise the price of unsold seats (happel and jennings, 2002; hansen and gauthier, 1989). switching to dynamic pricing allowed the teams to raise prices when demand increased unexpectedly, and lower prices when demand declined unexpectedly. with the development of changing prices on the secondary market, fans became more familiar with dynamic pricing. but for dynamic pricing to work, the team has to estimate changes in demand before sellers on the secondary market. otherwise, scalpers could purchase underpriced tickets before they were repriced, eliminating gains to the teams. this requires the ability for the teams to first forecast demand changes, then re-price potentially hundreds of thousands of unsold tickets (muret, 2010). adoption of dynamic pricing required another decrease in the cost of measuring variation in value. the implementation of this type of forecasting and re-pricing is similar to the topic of “moneyball,” michael lewis’ popular book and movie on baseball analytics. in this story, a student of the game overturned decades of ingrained thinking and persuaded a team (the oakland athletics) it could win by sophisticated data analysis. in the dynamic pricing case, the person challenging the system was not a former baseball player, but instead a 26 year old baseball fan completing a ph.d. in economics at the university of texas. in 2007, barry kahn founded qcue inc. to market his dynamic pricing model. kahn was able to persuade the san francisco giants to try dynamic pricing in about 2,000 of its worst bleacher seats for the 2009 season. by the end of the season, san francisco had a 20 percent attendance increase in its test seats and an extra $500,000 in ticket revenue. the success of this experiment resulted in the giants using dynamic pricing for all single-game tickets in 2010, and all seasons since that time, armed with computer-program assistance of qcue inc., based in austin, texas. by 2013, 20 mlb teams were practicing dynamic ticket pricing. qcue is the market leader, accounting for more than 95 percent of all dynamically priced baseball tickets. digonex technologies inc. also offers dynamic ticket pricing services to mlb. 53 | journal for economic educators, 14(1), summer 2014 concerning the giants, although dynamic pricing has led to higher ticket prices for some of its games, the giants to date have not attempted to match prices on the secondary market. for example, when the team was selling tickets to a boston red sox game for $90 in august, 2013, similar locations for the same game were priced at $350 per ticket on stubhub. therefore, the giants were attempting to increase ticket revenue by using dynamic pricing, but they were not trying to maximize ticket revenue. in effect, the giants were “leaving money on the table,” probably to avoid being accused of price gouging by unhappy fans. also, the giants have used dynamic pricing to charge a lower price for tickets to less attractive games in an attempt to increase sales. not only has this been a good public relations policy for the team, but lowering ticket prices has increased attendance and ancillary revenue such as parking, concessions, and merchandise that would be limited if tickets are priced too high. since its adoption in 2009, dynamic ticket pricing has helped the giants fill its at&t park with fans. in 2013, for example, the team’s home-game attendance averaged 41,584, with 99.2 percent of the park’s seats sold, the highest in mlb. this strong performance occurred in spite of the giants having a losing season (76 wins and 86 losses) and not making the playoffs. so why did it take so long for dynamic pricing to penetrate the sports industry? according to barry kahn, , accurately pricing tickets is very difficult. in its initial stages, qcue had both emotional and technical barriers to overcome. the company was changing the way things had been done for so many years, moving from pricing tickets 9 months out and keeping them static, to allowing the price to change right up until the first pitch. that required educating those in charge of ticketing operations and also the fans. teams were hesitant to embrace this idea over fears of turning off fans; some viewed it as institutional price gouging without realizing that it’s a lesson in economics 101. also, technical challenges were substantial. it used to take 3 days to make a price change within a ticketing system. that’s 72 hours and countless steps to make a single change, let alone changing prices across every section of the stadium, across up to 81 home games a year. but with the advent of dynamic-pricing technologies, teams can now change thousands of prices with a single click (rishe, 2012). the sophisticated forecasting models of qcue and diogonex include dozens of variables that affect the demand for their clients’ tickets. once a program has placed a value on such variables, which differ from team to team, the program projects the value of future games and gives recommendations on how prices should be determined for each seat in the stadium. thus, the forecasting model becomes a software overlay to a team's ticket system. it remains up to a team’s management to decide whether or not to revise prices, and by how much. although most team managements meet about once a week throughout the season to make pricing decisions, more frequent price changes are possible. for example, the management of the san francisco giants meets three to four times a week to revise prices. the dynamic model of qcue has t he potential to allow price revisions every five minutes. while dynamic pricing allows teams to change prices, teams still face constraints in how low prices may fall. for example, if the price of a season ticket package is $20 per game, and the price of a single-game purchase is $25, the cost under dynamic pricing could increase above the $25 amount or decrease to $20, but never fall below $20. otherwise, the season-ticket holders would likely switch to buying single game tickets. thus, the season-ticket price places a floor under the dynamic price. this is also consistent with the benefits of overpricing, as described in section four. consider the seattle mariners who currently use dynamic pricing for all of their singlegame tickets. subscribing to the services of qcue, the mariners’ pricing strategy takes into 54 | journal for economic educators, 14(1), summer 2014 account pitching matchups, injuries to key players, team performance, fireworks displays at particular games, the weather, day of the week, and so on. these factors affect how much mariners fans perceive the value of a game to be. ticket prices are based on how much, or how little, fans are willing to pay, right up to game-time. each day, the calculation changes as starting pitchers are announced, team records change, and tickets are sold, prompting the team to recalibrate prices. with qcue's technology, thousands of price changes take just a few minutes. table 1 provides examples of the mariners’ prices for bleacher seats, seats behind first base, and seats behind home plate for games against the boston red sox, texas rangers, los angelesanaheim angels, kansas city royals, oakland athletics, and cleveland indians as quoted on july 7, 2013 (subject to change as demand conditions change). notice the discrepancy in the prices of an identical category of seats, depending on the mariners' opponent, day of week, and so on. of all of the professional sports, mlb provides the best opportunity for dynamic ticket pricing. compared to other sports such as professional basketball and hockey, baseball teams play twice as many games, their stadiums are twice as large, and the percentage of season ticket holders represents a smaller fraction of total sales. other factors include an exclusive playoff system where only a limited number of teams advance, and outdoor stadiums where weather often plays a role. has dynamic pricing been a success? qcue estimates that its clients have increased revenue by an average of about 30 percent in high demand situations and about 5-10 percent in low demand situations (rishe, 2012). table 1: dynamic ticket pricing and the seattle mariners, 2013 lower deck, upper deck, center behind first behind home field base plate bleachers boston red sox monday, july 8 $72 $34 $19 thursday, july 11 73 35 24 los angeles angels friday, july 12 61 29 18 cleveland indians monday, july 22 61 12 14 texas rangers tuesday, august 27 61 28 14 kansas city royals tuesday, september 24 46 19 6 oakland a’s friday september 27 53 24 9 source: seattle.mariners.mlb.com 55 | journal for economic educators, 14(1), summer 2014 conclusion the use of dynamic ticket pricing by mlb teams is in its infancy, and thus, there remain many unanswered questions regarding its usefulness. however, a number of teams have adopted this strategy and it appears that it will become increasingly popular in the years ahead not only in baseball, but in other sports. by providing a primer on dynamic ticket pricing as applied to mlb, our paper hopefully makes a contribution to pricing topics that are currently taught in intermediate microeconomics and managerial economics courses. mlb teams sell seats at games that are fundamentally non-homogenous. customers’ willingness to pay is influenced by such variables as seat location, game date, the opposing team, the win/loss record of each team, and the weather. setting homogenous prices nine months ahead of time leaves much of the customer’s variability in willingness to pay un -captured by the teams. historically these potential profits were retained by fans purchasing underpriced seats, or scalpers engaging in arbitrage, or competed away by excess standing in lines or expensive to operate “scalper” markets. variable pricing, in which teams selected different prices for seats at games with predictably higher or lower value, transferred some of these gains from fans and scalpers to the teams, and decreased transaction costs. the switch to variable pricing followed the introduction of business information systems, which reduced the cost of measuring and pricing these margins of value. but other sources of variability in value could not be predicted nine months in advance. by switching to dynamic pricing, where the price of a seat varied over time based on changing demand conditions, teams have been able to capture more of the value of the services they provide. this switch required decreases in the cost of measuring the variability in value, and decreases in the cost of re-pricing tickets to match this changing value. the development of specialized forecasting software by firms such as qcue created this decrease in measurement cost, and resulted in the introduction of dynamic pricing to mlb. traditional, static ticket pricing requires relatively long-range planning. it is grounded in knowing what fans consider value and organizing to anticipate how they might react to a team’s performance throughout a season. now, with dynamic ticket pricing, the planning has switched to the short term; the only real long-term consideration is which forecasting formula will be used in the season’s pricing strategy. but even if teams did not have a sophisticated computer model for forecasting the demand for tickets, and they could not precisely measure all the factors that fans care about, they could still have a general idea about which games would sell better in advance. therefore, they could increase the price of unsold tickets to those games even if they didn’t know the optimal, profit-maximizing amount by which to change the price. the point is that the pricing of tickets does not have to be between no dynamic pricing and optimal dynamic pricing—there seems to be some middle ground that could increase team profits. although dynamic pricing strives to help teams recoup some of the ticket revenue that is lost due to the mispricing of tickets, challenges remain for this strategy. a first concern is that dynamic pricing may give fans too many choices. if fans are confronted with a broad array of confusing prices, they may decide to buy their tickets elsewhere or decide not to purchase tickets at all. as psychologists have explained, choosing between a multitude of salad dressings tends to paralyze a person's decision making and leave that person dissatisfied. can the same be said for ticket sales, especially when they include daily (sometimes hourly) fluctuations in price? also, what should a team do if a game is rained out? to avoid the risk of offending fans, should a team provide fans with a ticket to another game even if the ticket to the subsequent game is priced higher than the ticket to the rained out game? charging an additional fee for a ticket to a 56 | journal for economic educators, 14(1), summer 2014 subsequent game might offend fans. the general point 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"effect of resale on optimal ticket pricing: evidence from major league baseball tickets," job market paper, november 20. http://vita.mcafee.cc/pdf/dynamicpricediscrimination.pdf http://mjperry.blogspot.com/2008/06/victimless-crime-of-ticket-scalping-now.html http://www.forbes.com/sites/prishe/2012/01/06/dynamic-pricing-the-future-of-ticket-pricing-in-sports/ http://www.forbes.com/sites/prishe/2012/01/06/dynamic-pricing-the-future-of-ticket-pricing-in-sports/ 22 |journal for economic educators, 16(1), 2016 the perceptions and attitudes of oklahoma college students about free markets and government regulations mariya burdina1, james davenport2, and sue lynn sasser3 abstract this study explores the potential impact that gender and family behaviors may have on student attitudes toward the role of free markets and government regulation in economic growth and the well-being of our society. the findings suggest that students from our sample are somewhat similar to students in other states in their overall views of economic principles. we also find that differences in attitudes about economic issues were related to gender, college major, discussions with parents, and timing of students’ first job. other factors, such as receiving an allowance, were not associated with any significant differences in perceptions of the selected economic issues. key words: economic education, attitudes, economic growth, markets, government regulations jel classification: a2 introduction every generation can easily testify to differences in its views and values relative to those of younger or older generations. several recent studies have explored the changing values of generations, focusing specifically on the millennials. winograd and hais (2014) noted that millennial’s “distinctive culture and approach to life” are much different from previous generations and are shaping the future of american society. in general, millennials are creating a greater need for corporations to “pay attention to their corporate social responsibilities” while using quality of life issues to measure corporate and individual success. millennials also tend to favor more regulations and government involvement in market activities to ensure greater equity and fairness for everyone. winograd and hais conclude that millennials will encourage the u.s. to “advance the welfare of the group and be less concerned with individual success.” similar findings were reported by the pew research center in 2012 in a report on millennials in adulthood. pew reported that 83% of the millennials surveyed agreed with the statement “there is too much power concentrated in the hands of a few big companies,” and twothirds agreed that “businesses make too much profit.” both of those attitudes are a departure from opinions expressed by older generations. according to another pew study released in november 2011, younger voters tend to show a greater preference in supporting democratic presidential candidates than some of the previous generations. this was especially true among millennials who tend to prefer bigger government providing more services than their older cohorts. millennials were also less likely to identify 1assistant professor of economics, department of economics, university of central oklahoma, campus box 103, edmond, ok 73034 2professor of political science, social sciences division, rose state college, midwest city, ok 73110 3professor of economics, department of economics, university of central oklahoma, campus box 103, edmond, ok 73034 23 |journal for economic educators, 16(1), 2016 themselves as conservatives compared to the other generations. the study found that these generational changes could be traced to three trends: the growing racial and ethnic diversity of the u.s., the political environment of each administration, and the societal changes in generations. the study concluded the societal changes have the greatest impact on the political views of young voters. their findings suggest that these societal issues may have the greatest impact on current students’ attitudes and perceptions of economic issues as well. as a continuation of research into the impact of various socio-economic factors on individual perspectives about the role of government in our society, the purpose of this article is to provide some answers to the following questions:  what socioeconomic factors, if any, shape students’ perceptions and attitudes toward economic issues?  how do family behaviors affect students’ opinions of public and private entities toward economic growth?  how do students view the role of government and private enterprise in economic growth? do students’ views differ across states? to address these questions, we developed and administered a survey in two oklahoma city metro colleges. the questions were designed to determine if familial dynamics and characteristics played a role in shaping students’ views of economics-related issues. the participants included business and non-business majors. students who were pursuing business degrees were quite possibly exposed to economics through formal classroom instruction as part of their major. thus, the data allow us to observe potential differences in those who had formal economic education and those who did not. we present preliminary analysis of the survey results here. literature review a broad literature has examined the effects of various factors on students’ behaviors and attitudes toward economic issues. these studies can be separated into two distinct groups: studies focused on the link between economic knowledge and attitudes toward economic issues, and studies measuring the link between demographic and socio-economic factors and attitudes. we review both approaches below. walstad and allgood (1999) found that economic knowledge has a “direct and substantive” impact on students’ opinions of economic issues. additionally, they discovered that classroom instruction in economics made a statistically significant difference in students’ economic knowledge: students who took an economics course scored 14 percentage points higher than those who did not. nevertheless, even college seniors who took an economics course showed only a limited knowledge of basic economics. to put this score in perspective, it was “equivalent to a d on a standard grading scale.” other studies examining the link between attitudes and economic knowledge show that an increase in economic and business education affects students’ attitudes (jackstadt and brennan, 1983; walstad and soper, 1983; walstad, 2001; and marcis, deck, and bauer, 2012). walstad and buckles (2008), for example, find that an economics course “likely influences” student perceptions and increases student understanding of current events and public policy. from these studies, it seems evident that economic knowledge (or lack thereof) is one factor influencing attitudes toward economic-related issues and that economic learning may result in some change in attitude. when examining student knowledge of specific topics, marcis, deck, and bauer (2012) concluded that the differences in the views of free markets and the federal government may affect 24 |journal for economic educators, 16(1), 2016 the selection of a major by a student. students who major in a business discipline may inherently believe that markets work well and choose their major to obtain higher economic benefits for their future. at the same time, those who major in other disciplines may feel that markets yield unfair salaries, benefits, and distribution of income such that the role of the federal government should make up for this deficit by providing a sense of equality to all individuals. they also found male students generally had a more favorable view of markets than female students, but that this difference was not particularly strong. the study by shanahan and meyer (2001) noted that students arrive at college with varying perceptions about economics, which may have been influenced by taking a high school economics course. as of 2014, all 50 states in the united states included economics in their k-12 standards and 24 states required students to complete a high school course in personal finance (survey of the states, 2014). while oklahoma does not mandate high school courses in either economics or personal finance, it does require students to have specific instruction in both areas. oklahoma has integrated economic concepts into social studies for several years and some economic questions are included on the state end-of-instruction exam. instruction in personal finance is mandated for all seniors graduating from high school as of 2014, and some basic economic principles are embedded in the state standards, but no formal testing or tracking of students is currently in place. as a result, the quality and quantity of economics taught in oklahoma high schools is somewhat sporadic and fragmented. given the limited nature of economic education available to oklahoma students in public schools, we believe that other demographic and socio-economic factors may influence their views of economic principles and their attitudes toward the role of government. additionally, these factors may influence their selected majors and their ability to learn “textbook” economics. walstad and buckles (2008) examined national assessment of educational progress (naep) in economics data and found that males scored significantly higher than females, students with parents who had a college education scored higher than students whose parents did not, and students who qualified for free lunch programs had lower scores than students who did not qualify. similar gender differences were also found in older studies (siegfried and strand, 1977; watts, 1987), but those differences diminished after students received formal economics training in high school. watts (1987) concluded that these differences may be related to family experiences or socialization processes that encourage males to complete more courses involving quantitative measures than their female counterparts. as noted by jorgensen and savla (2010), there is very little research on the influence of parents on college students’ financial knowledge, attitudes, and behaviors as the majority of research has focused on young children. the same seems to hold true for parental influence on college students’ knowledge, attitudes, and perceptions about economics. even so, jorgenson and savla found that parents had a direct and moderately significant influence on financial matters, an indirect and moderately significant influence on financial behaviors, but little or no effect on financial knowledge. webley and nyhus (2005) found that parental behaviors had a weak but clear impact on children’s economic behavior that carried into their adult years, indicating that such behaviors were transferred from one generation to another. several studies display mixed results from attempts to link the understanding of economic principles with receiving an allowance. mandell (2013) concluded that giving children an allowance can have a negative impact on their financial literacy and work habits later in life, especially if that allowance was given unconditionally or requiring nothing in return. he also 25 |journal for economic educators, 16(1), 2016 noted that having a job while still under parent supervision is positively related to financial literacy and self-sufficiency later in life. a previous study by mortimer, denney, lee and finch (1994) supported mandell’s conclusions, showing that students who received allowances were less likely to value the intrinsic values related to work and more likely to have their attention diverted from the importance of work. however, their study also showed that both males and females benefitted from receiving an allowance for the performance of household chores and may have increased their ability to make better decisions about consumer purchases. on the other hand, marshall (1964), found that an allowance has little or no impact on the financial literacy skills of 9th grade students, which suggests the impact is less while the child is still at home. our study expands on previous research by providing an additional examination of the link between allowance and student perceptions of economic issues. some recent studies indicate that student employment has limited impact on academic performance in high school or college (walstad and buckles, 2008, lee, and orazem, 2010, and alfano and edujee, 2013). these studies show that the number of hours worked while attending school is more critical than simply being employed. for example, walstad and buckles (2008) reported that working in a family business less than 20 hours a week had no impact on students’ test scores. our study takes a different approach by examining whether having a job while in school, or the start of a first job, had any impact on economic attitudes of students in our sample. methodology the data for this study are generated from a survey of students at two institutions of higher education in the metropolitan oklahoma city area. the survey was conducted during the fall semester of 2014 in various freshman and sophomore level courses. participants from the university of central oklahoma (uco) were enrolled in economics courses, while participants from rose state college (rsc) were enrolled in general education courses (american government, u.s. history, intro to psychology, and personal finance). these two institutions were selected because they provide a representative sample of students graduating from the 15 school districts in the metro area. rsc is a two-year community college located in a metro suburb in close proximity to tinker field, one of the largest air force bases in the u.s. rsc provides free tuition and open enrollment to all students graduating from high school in either midwest city or del city. current enrollment is over 6,000 fte with almost 100% of their students from the metro area. uco, on the other hand, is a regional four-year (plus masters) university with an enrollment of almost 17,000 fte at the time of the survey. about 70 percent of students enrolled at uco graduated from high schools in the okc metro area encompassing approximately 40 different independent school districts plus numerous private and charter schools as well as home schooled students. table 1 provides an overview of the student populations at both schools. the questionnaire was developed by the investigators and distributed during regular class time. participation in the survey was completely voluntary and respondents received no compensation for their input. a total of 504 students participated, but students who identified themselves as international were excluded from the final analysis, while the number of other out of state students was negligible. a final sample of 443 responses was used for the analysis. of these students, 209 (47.5%) were male, 227 (52%) were female and 6 (1.5%) did not designate gender. additionally, 149 students (34%) identified themselves as freshmen, 130 (30%) identified 26 |journal for economic educators, 16(1), 2016 themselves as sophomores, and the remainder were either juniors or seniors. complete descriptive statistics of the survey responses are presented in appendix a. table 1. student population comparison at uco and rsc university of central oklahoma rose state college fte (2014-2015) 16,840 6,354 gender 60% female; 40% male 62% female; 38% male average age 25 25 oklahoma residents 88% 99% okc metro 70% of the ok residents 98% of all students business majors 18% 14% the survey asked questions regarding family socio-economic status while growing up; whether or not personal finance and economic issues were discussed with parents while growing up; whether or not an allowance was received, and if the amount and length of the allowance was tied to other factors. additionally, questions regarding participant’s views on economic principles, free markets, and government regulations were included.4 the analysis uses t-tests to compare the mean responses between each of the following pairs of categories: business and non-business majors; males and females; those who started their first job earlier rather than later; those whose parents discussed economic and financial issues and those who did not; those whose parents owned businesses and those that did not; and finally, those that received an allowance and those that did not. while these results need to be interpreted with caution due to high correlation between some of the variables, they provide some insight into our students’ view of the role of government and private entities in establishing economic growth. results business vs non-business majors business majors were more likely to identify the correct definition of economics compared to non-business majors (62.4% vs. 27.4% respectively) and more favorably viewed free markets and free trade as causes of economic growth. business majors also had a more negative view of “the poor” with most indicating this resulted from choices rather than circumstances beyond control. the non-business majors were more likely to respond that the majority of poor people are in that situation due to circumstances beyond their control. non-business majors were also more likely to respond that government should guarantee a minimum wage, adequate housing, healthcare, and post-secondary education. table 2 lists all the questions for which significant differences in the responses of business and non-business majors were found. 4 full list of questions included in the survey is available upon request. 27 |journal for economic educators, 16(1), 2016 table 2. summary of significantly different responses of business and non-business majors. % of business majors who agree with the statement (n=173) % of nonbusiness majors who agree (n=270) h1: μx − μy ≠ 0 pr > | t | mean st. dev mean st. dev economics is the study of how scarce resources are allocated within a society 0.624 0.486 0.274 0.447 >0.0001*** economic growth tends to benefit the most people when there are few restrictions on the operations of businesses or on the voluntary exchanges between individuals. 0.624 0.486 0.485 0.501 0.0043*** private property is an essential element of economic growth and the creation of wealth 0.647 0.479 0.507 0.501 0.0039*** foreign trade benefits american businesses and workers 0.347 0.477 0.244 0.431 0.0202** the free market is the most powerful force for widespread wealth creation and economic growth and should be interfered with as little as possible 0.306 0.462 0.230 0.421 0.0730* the free market has been an overall positive force for economic growth and widespread wealth creation but should be regulated to ensure an equitable distribution of its benefits 0.509 0.501 0.419 0.494 0.0637* the majority of poor people are in that situation due to their own choices 0.538 0.500 0.422 0.495 0.0180** the majority of poor people are in that situation due to circumstances beyond their control 0.283 0.452 0.381 0.487 0.0341** the current public assistance program in which households must qualify for various benefits based on income, household size, and other factors and in which benefits are limited in how they can be used 0.954 0.211 0.889 0.315 0.0177** government should guarantee each of the following: living wage, adequate housing, health care, and postsecondary education 0.246 0.432 0.338 0.474 0.0397** * significant at p<0.1; ** significant at p<0.05; *** significant at p<0.01 28 |journal for economic educators, 16(1), 2016 male vs female there were a few differences in the answers of males and females, but caution is advised in interpreting these results, because more males than females reported to be business majors and were enrolled at uco. see table 3. table 3. summary of significantly different responses by males and females. % of males who agree (n=209) % of females who agree (n=227) 𝐻1: 𝜇𝑥 − 𝜇𝑦 ≠ 0 𝑃𝑟 > | 𝑡 | mean st. dev mean st. dev economics is the study of how scarce resources are allocated within a society 0.464 0.500 0.370 0.484 0.0470** economic growth tends to benefit the most people when there are few restrictions on the operations of businesses or on the voluntary exchanges between individuals. 0.656 0.476 0.432 0.496 0.0001*** economic growth benefits the most people when governments actively regulate businesses and limit the types of exchanges that can occur between individuals. 0.263 0.441 0.344 0.476 0.06899* the free market is the most powerful force for widespread wealth creation and economic growth and should be interfered with as little as possible 0.349 0.478 0.181 0.386 0.0001*** public assistance programs would be successful in reducing poverty if they were funded at appropriate levels 0.282 0.451 0.458 0.499 0.0001*** the majority of poor people are in that situation due to their own choices 0.545 0.499 0.396 0.490 0.0001*** the majority of poor people are in that situation due to circumstances beyond their control 0.273 0.446 0.405 0.492 0.0001*** government should guarantee each of the following: living wage, adequate housing, health care, and postsecondary education 0.178 0.383 0.409 0.493 0.0001*** government should not guarantee any of the following: living wage, adequate housing, health care, and postsecondary education 0.298 0.459 0.138 0.345 0.0001*** * significant at p<0.1; ** significant at p<0.05; *** significant at p<0.01 29 |journal for economic educators, 16(1), 2016 males were more likely to identify the correct definition of economics than females, echoing the result for business compared to non-business majors. in addition, males are more likely to positively view free markets and less restrictions while females were more supportive of government assistance. however, this difference could be related to having more females enrolled at rsc than at uco, or to the major chosen by the students rather than to gender. even though caution is required in interpreting these results, our findings are generally consistent with previous research showing males have a greater preference for market outcomes than do females. the responses of males and females who were business majors differed less than in the full sample. yet, business major males compared to their female counterparts were more likely to support markets with less regulations, were less likely to believe that a minimum wage is necessary to assure a decent income for those who work, and were slightly more supportive of the current qualification system for welfare recipients. parents discussed economic issues vs not see table 4. students who reported discussions with parents regarding economic issues had a more positive view of free markets and the importance of private property than those who did not. students who talked to their parents about economic issues were less likely to view table 4. summary of significantly different responses of students who reported parents discussed economic issues and those who did not % of those discussing issues with parents who agree (n=328) % of those not discussing issues with parents who agree (n=112) 𝐻1: 𝜇𝑥 − 𝜇𝑦 ≠ 0 𝑃𝑟 > | 𝑡 | mean st. dev mean st. dev private property is an important but not essential element of economic growth and the creation of wealth 0.235 0.424 0.330 0.472 0.0467** the free market has been an overall positive force for economic growth and widespread wealth creation but should be regulated to ensure an equitable distribution of its benefits 0.482 0.500 0.375 0.486 0.0508* the minimum wage reduces employment opportunities for the least experienced and least educated members of society 0.152 0.360 0.232 0.424 0.0550* government should not guarantee any of the following: living wage, adequate housing, health care, and post-secondary education 0.240 0.428 0.143 0.351 0.0340** *significant at p<0.1; ** significant at p<0.05; *** significant at p<0.01 30 |journal for economic educators, 16(1), 2016 minimum wage laws as factors in reducing employment for unskilled labor. yet, at the same time, they were less likely to support government assistance in any of the mentioned areas. worked vs. did not work during high school in our sample, 337 (76.1%) worked during high school and 106 (23.9%) did not. the primary difference between these two groups was their view of free markets: 49% of those working during high school had a positive view of free markets for economic growth and wealth creation, but not for income distribution, versus 33% of those who did not have a job during high school. we also found that those who worked during high school were slightly more likely to do chores regardless of allowance, and they were also more likely to have discussions with their parents regarding economic issues. refer to table 5 for details. table 5. summary of significantly different responses by those working during high school and those not working during high school % of those who worked during high school who agree (n=337) % of those who did not worked during high school who agree (n=106) 𝐻1: 𝜇𝑥 − 𝜇𝑦 ≠ 0 𝑃𝑟 > | 𝑡 | mean st. dev mean st. dev the free market has been an overall positive force for economic growth and widespread wealth creation but should be regulated to ensure an equitable distribution of its benefits 0.492 0.500 0.330 0.472 0.0036*** regardless of whether you received an allowance or not, did you have specific chores or responsibilities while growing up? 0.961 0.192 0.913 0.282 0.0506* parents/guardians/caregivers discussed issues relating to personal finances or economics 0.773 0.418 0.653 0.478 0.0146** * significant at p<0.1; ** significant at p<0.05; *** significant at p<0.01 first job earlier vs later we also looked at the differences in responses of those who started their first job between ages 13 and 16 and those who started their first job in later years. those that started working earlier were more likely to believe that fewer restrictions on markets leads to economic growth and that private property is an essential element of economic growth. they were less likely to view rent controls positively and free markets as harmful to some groups. in addition, those that started working earlier were less likely to believe that government should guarantee any of the listed benefits. this result is one of the most interesting as it may indicate that those starting work earlier have a lower sense of “entitlement.” nevertheless, it is 31 |journal for economic educators, 16(1), 2016 difficult to conclude that these outcomes truly represent a sense of entitlement or are related to a preference for capitalism versus a more socialistic form of government. refer to table 6. table 6. summary of significantly different responses by those starting their first job earlier and those starting their first job later. % of those who started first job earlier who agree (n=269) % of those who started first job later who agree (n=165) 𝐻1: 𝜇𝑥 − 𝜇𝑦 ≠ 0 𝑃𝑟 > | 𝑡 | mean st. dev mean st. dev economic growth tends to benefit the most people when there are few restrictions on the operations of businesses or on the voluntary exchanges between individuals. 0.572 0.496 0.491 0.501 0.0980** private property is an important but not essential element of economic growth and the creation of wealth 0.230 0.422 0.315 0.466 0.0522** private property is an essential element of economic growth and the creation of wealth 0.610 0.489 0.479 0.501 0.0078** rent control laws ensure available housing for all income levels 0.353 0.479 0.461 0.500 0.0266** the free market tends to result in a large disparity in wealth with the majority of people not benefiting from it, and therefore it needs extensive regulation and correction 0.160 0.367 0.224 0.418 0.0938** public assistance programs are unsuccessful in reducing poverty because they create disincentives for beneficiaries to become employed 0.428 0.496 0.339 0.475 0.0688** * significant at p<0.1; ** significant at p<0.05; *** significant at p<0.01 received vs. did not receive allowance the most surprising result was that we found only one significant difference in perceptions of economics or finance based on whether or not students received an allowance. in our sample, 224 (50.6%) responded that they received an allowance growing up and 219 (49.4%) responded that they did not. the only significant difference between the two groups was on foreign trade: 33% of those who received an allowance chose “foreign trade benefits american businesses and workers” compared to 23% of those who did not receive an allowance. there were no differences in the way these two groups viewed the role of government in guaranteeing a minimum wage, in the health care market, or in providing housing. there were also no differences in their views on free markets, public assistance programs, or the poor. 32 |journal for economic educators, 16(1), 2016 conclusions student perceptions and attitudes toward economic issues may play a role in learning. most research in this area centers on misconceptions that students bring to class, rather than parental influence or other similar factors. misconceptions can create great challenges to advance student knowledge. if similar barriers arise for overcoming student attitudes and perceptions, then similar challenges to learning may occur. being aware of student attitudes and perceptions and finding ways to address them in class could increase student engagement and promote learning. “it is not effective for a teacher to simply insist that the learner dismiss preconceived notions and ingrained …. beliefs.” (cirtl network). by exploring student attitudes, values, beliefs, and perceptions about economic issues, classrooms can become a learning environment where students can openly discuss and process their own ideas about economic principles. doing so may allow students to “not only be more equipped with knowledge and skills, but also connect their academic learning with a greater sense of self and meaning” (emmanuel and delaney 2014). our study attempted to determine the roots of differences in students’ attitudes and perceptions toward selected economic issues. specifically, we examined whether differences in family behaviors, gender, and college major had any effect on students’ perceptions of the role of free markets and government regulations in economic growth and well-being of our society. our findings are consistent with previous research indicating that college majors vary in their perceptions of economic issues. considering that oklahoma is a rather conservative state, we expected to find that regardless of the major, the majority of students in our sample would have more favorable views of free markets and less government intervention. nevertheless, we found several differences between business and non-business majors. students with a business major were more supportive of free markets and less supportive of government regulations than students majoring in other areas. these differences lead us to two possible scenarios. first, students who choose a business major are inherently more conservative than those who choose other majors as noted by marcis, deck, and bauer (2012). second, students who are exposed to economics courses tend to have a more favorable view of free markets than students with no background in economics. the findings of walstad and allgood (1999) may provide some insight. they suggest that student knowledge is directly affected by classroom instruction; thus, students are generally exposed to the benefits of free markets and the trade-offs associated with government regulations when taking most economics courses. fuller and geide-stevenson (2003) conducted a survey among the members of the american economic association and found that there is a strong consensus on the benefits of free trade among economists. the authors concluded that a large majority of economists support the market approach toward society’s production and distribution problems. whaples (2006) reaches a similar conclusion, adding that economists tend to agree on the reduction of subsidies in the agricultural sector and increasing competition in the education and mail delivery markets. therefore, it is not at all surprising that the views of students taking economics courses are more aligned with the views of the majority of economists when compared to the views of students who have not taken one or more economics course. the differences between males and females that we find were somewhat consistent with previous studies in that males have a more favorable view of free markets than females do. while we are somewhat cautious about drawing specific conclusions because of the potential bias caused by more male business majors than female business majors in our sample, we do believe our findings provide sufficient information to warrant further examination. for example, would the differences disappear if we had a more balanced sample of males and female business majors? 33 |journal for economic educators, 16(1), 2016 our results also indicate that parental involvement could be a factor in predicting student perceptions, which again is consistent with previous studies. we found that students who reported parental discussions on economic and personal finance issues had a more favorable view of free markets than their counterparts. while receiving an allowance or having a job tended to have little or no impact on student perceptions, students who started working earlier had different perceptions than those who started working later. it is not clear at this point if those differences were based on socioeconomics or other factors. it is our hope that additional analysis of the data will provide more information on this preliminary finding. even though our study aligns with previous research on related topics, it helps to substantiate the importance of economic education and provides support for addressing specific content issues in our principles’ courses. it also raises new questions that could be addressed to get a better understanding of how attitudes and behaviors about economic issues are developed. additionally, the findings provide an opportunity to further explore the popular opinion that today’s youth have a greater sense of “entitlement” than older generations, as well as current discussions about a potential ideological shift of opinions on the role of government. recognizing that parental involvement seems to play a role in the attitudes and behaviors toward economic issues, further study is needed to determine which parental or socioeconomic factors have the greatest impact. references alfano, hailey and nina edujee. 2013. “differences in work, levels of involvement and academic performance between residential and commuter students”. college student journa,l 47(2): 334-342. center for integration of research, teaching and learning (cirtl). “overcoming misconceptions: misconceptions as barriers to understanding science”. accessed on march 17, 2016. http://www.cirtl.net/node/2628. emmanuel, glory and harold delaney. 2003. “professors’ influence on students’ beliefs, values, and attitudes in the classroom”. journal of college and character, 15(4): 245-257. fuller, dan and geide-stevenson, doris. 2003. “consensus among economists revised”. the journal of economic education, 34(4): 369-387. jackstadt, stephen and jerry brennan. 1983. “economic knowledge and high school student attitudes toward the american economic system, business, and labor unions”. theory and research in social education, 11(3): 1-15. jorgensen, bryce and jerry brennan. 2010. “financial literacy of young adults: the importance of parental socialization”. journal of family relations, 59(4): 465-478. lee, chanyoung and peter orazem. 2010. “high school employment, school performance, and college entry”. economics of education review, 29(1): 29-39. mandel, lewis. “child allowances: beneficial or harmful”. 2013. accessed on june 29, 2015. http://lewismandell.com/child_allowances_-_beneficial_or_harmful. marcis, john, alan deck, and daniel bauer. 2012. “a study of differences in students’ perceptions of the market system and the role of the federal government”. journal of economics and economic education research, 14(2): 137-145. marshall, helen. 1964. “the relationship of giving children an allowance to children’s money knowledge and responsibility and to other practices of parents”. the journal of genetic psychology, 104 (1): 35-51. http://www.cirtl.net/node/2628 http://lewismandell.com/child_allowances_-_beneficial_or_harmful 34 |journal for economic educators, 16(1), 2016 mortimer, jeylan, katherine dennehy, chaimun lee, and michael finch. 1994. “the prevalence, distribution, and consequences of allowance arrangements”. family relations, 43(1): 23-29. pew research center. “the generation gap and the 2012 election”. accessed on february 9, 2015. http://www.people-press.org/2011/11/03/section-1-how-generations-havechanged/. pew research center. “millennials in adulthood”. accessed on february 9. 2015. http://www.pewsocialtrends.org/2014/03/07/millennials-in-adulthood/. shanahan, martin and jan meyer. 2001. “a student learning inventory for economics based on the students' experience of learning: a preliminary study”. the journal of economic education, 32(3): 259-267. siegfried, john and stephen strand. 1977. “sex and the economics student”. the review of economics and statistics, 59(2): 247-249. “survey of the states: economic and personal finance education in our nation’s schools 2014.” 2014. council for economic education. walstad, william. “attitudes, opinions and economic understanding”. 2001. theory into practice, 36(3): 223-240. walstad, william and sam allgood. 1999. “what do college seniors know about economics?” the american economic review, 89(2): 350-354. walstad, william and stephen buckles. “the national assessment of educational progress in economics: findings for general economics”. 2008. the american economic review, 98(2): 541-546. walstad, william and john soper. 1983. “measuring economic attitudes in high school”. theory and research in social education, 11(1): 41-54. watts, michael. 1987. “student gender and school district differences affecting the stock and flow of economic knowledge”. the review of economics and statistics, 69 (3): 561-566. webley, paul and ellen nyhus. 2006. “parents’ influence on children’s future orientation and saving”. journal of economic psychology, 27(1): 140–164. whaples, robert. 2006. “do economists agree on anything? yes!” economists’ voice. winograd, morley and michael hais. 2014. “how millennials could upend wall street and corporate america”. governance studies at brookings. accessed on february 9, 2016. http://www.brookings.edu/~/media/research/files/papers/2014/05/millennials%20wall%2 0st/brookings_winogradv5.pdf. http://www.people-press.org/2011/11/03/section-1-how-generations-have-changed/ http://www.people-press.org/2011/11/03/section-1-how-generations-have-changed/ http://www.pewsocialtrends.org/2014/03/07/millennials-in-adulthood/ http://www.brookings.edu/~/media/research/files/papers/2014/05/millennials%20wall%20st/brookings_winogradv5.pdf http://www.brookings.edu/~/media/research/files/papers/2014/05/millennials%20wall%20st/brookings_winogradv5.pdf 35 |journal for economic educators, 16(1), 2016 appendix a. summary of all responses. survey question total responses mean std. dev. did you receive allowance growing up? (=1 if yes) 443 0.506 0.501 was this allowance tied to the performance of specific chores or other responsibilities? (=1 if yes) 222 0.856 0.352 did certain chores earn a larger allowance than others (=1 if yes) 211 0.313 0.465 did it imply any certain obligations for its receipt (=1 if yes) 142 0.585 0.622 did the amount of your allowance change as you grew older (=1 if yes) 236 0.801 0.400 did you work (part-time or full-time) while in high school? (=1 if yes) 443 0.761 0.427 if yes, did you continue receiving allowance while working? (=1 if yes) 197 0.244 0.496 regardless of whether you received an allowance or not, did you have specific chores or responsibilities you were expected to do while growing up? (=1 if yes) 441 0.950 0.218 did your parents/guardians/caregivers discuss issues relating to personal finances or economics with you while you were growing up? (=1 if yes) 440 0.745 0.436 did they discuss money management (balancing a checkbook, budgeting, spending decisions, etc.) (=1 if yes) 440 0.668 0.471 did they discuss investing (=1 if yes) 440 0.234 0.424 did they discuss saving (=1 if yes) 440 0.707 0.456 did they discuss personal debt (=1 if yes) 440 0.398 0.490 did they discuss relationship of skills development and/or education to potential earnings (=1 if yes) 440 0.330 0.471 did they discuss government spending (=1 if yes) 440 0.120 0.326 did they discuss national debt (=1 if yes) 440 0.114 0.318 did they discuss taxes (=1 if yes) 440 0.416 0.493 did they discuss foreign trade (=1 if yes) 440 0.034 0.182 did they discuss economic regulations (=1 if yes) 440 0.211 0.409 while you were growing up, did a parent/guardian/caregiver own a business? (=1 if yes) 438 0.358 0.480 if own a business, did you ever work at that business? (=1 if yes) 157 0.567 0.497 do your parents still own that business? (=1 if yes) 178 0.562 0.672 did you ever accompany a parent/guardian/caregiver to their place of employment to observe what they did at work? (=1 if yes) 412 0.697 0.460 do you currently have debt that you owe personally? (=1 if yes) 443 0.481 0.500 age (=1 if between 18 and 25) 442 0.839 0.367 student status (=1 if full time student) 443 0.830 0.357 employment status (=1 if full time employed) 443 0.270 0.444 employment status (=1 if part time employed) 443 0.449 0.497 gender (=1 if male) 436 0.479 0.500 race (=1 if white) 437 0.643 0.479 college (=1 if studies at uco) 443 0.406 0.492 major (=1 if business major) 443 0.391 0.488 48 |journal for economic educators, 21(1), 2021 undergraduate research suicide, climate, and economy: a county-level analysis elshadai s. hailu and nathanael d. peach1,2 abstract this study analyzes the impact of income, unemployment, and climate on county level suicide rates in the united states. in order to ensure a robust measure of climate is applied, average temperature and average maximum temperature are analyzed. the data set used in the investigation includes observations from 1999 to 2018 for 2,892 counties. our results show that increases in income lower the rate of suicide while increases in unemployment raise it. higher mean and max temperatures are predicted to lower the rate of suicide. key words: climate, income, unemployment, suicide jel classification: i00, i12, q55 introduction according to the center for disease control and prevention (cdc) (2020), from 1999 to 2018 the united states saw a 65% increase in suicide deaths, from approximately 29,100 in 1999 to 48,300 in 2018. the cdc reports that suicide is the 10th leading cause of death in the united states and is a growing epidemic. there is no one cause for the increase in suicide rates. declining mental health and economic adversity are two of the widely proposed reasons for the increase in suicide rates. as such, many public health efforts are addressed at these two potential causes. an area of increasing interest is the impact of climate on suicide. in light of potential drastic changes to climate in the future, the role of climate in suicide has begun to draw attention from researchers and policymakers alike. in this paper we analyze the impact of climate, income, and unemployment on the county level rate of suicide in the united states. data analyzed are from 1999 to 2018 for 2,892 counties. using regression analysis we find that higher rates of income lead to a decrease in rates of suicide and so do higher mean and maximum temperatures. higher rates of unemployment are predicted to lead to increases in the rate of suicide. (a full discussion of the data analyzed can be found in the data section of the paper.) the paper proceeds as follows. a brief literature review highlights a selection of important research on suicide in the united states. next the estimation strategy and data are presented. results follow this presentation. the paper concludes by placing our results in the broader literature and discussing potential implications of our findings. 49 |journal for economic educators, 21(1), 2021 literature review case and deaton (2017, 2020) present one of the most alarming recent trends in the united states, a steady decrease in life expectancy over the past 30 years. this decrease is due to what case and deaton refer to as an increase in “deaths of despair.” deaths of despair are deaths attributed to drug overdose, suicide, and alcohol-related liver mortality. the decline in life expectancy is largely due to increased deaths of despair among middle-aged white males. this trend raises many important questions because middle-aged males are not typically a group defined by lower socioeconomic status or poor mental health. one of the key properties of this trend is the correlation between education and suicide for various levels of educational attainment. case and deaton show that white males with lower levels of education are much more likely to commit suicide than those with a bachelor’s degree or higher. this is particularly true for individuals with less than a high school diploma. case and deaton are unsure of the causal mechanism between education and suicide, they speculate that education could serve as a proxy for material resources, higher rates of employment, and more access to physical and mental health care. putnam (2020) argues that declines in social capital, and the sense of belonging and strong social support it represents, is also contributing to the increase in deaths of despair. people who have higher levels of social capital are more likely to experience a sense of belonging and support from their community reducing the likelihood to resort to suicide. case and deaton (2017, 2020) agree with putnam, for instance they speculate that declining religious affiliation may be contributing to rising rates of suicide. when analyzing suicide at the county level important geographic and community level factors are identified. steelesmith et al. (2019) find that rural communities are likely to have high rates of suicide because less of their populations have medical insurance and there is typically easier access to gun shops. rossen et al. (2018) also find that rural counties have higher rates of suicide than urban counties. additionally, rossen et al. find the suicide rate in rural counties is increasing faster than in urban counties. burke et al. (2018) explore the impact climate may have on suicide. their study considers both the united states and mexico. using an extensive data set that begins in 1968 for the united states and 1990 in mexico they find that higher temperatures lead to higher rates of suicide. because of the extensive time series applied in their analysis, burke et al. speculate that this effect will be persistent over time as global mean temperatures rise due to climate change. their analysis suggests that climate’s impact on suicide rates is comparable to “economic recessions, suicide prevention programs or gun restriction laws” (p. 723). as will be shown, our results do not match burke et al., but as they note the relationship between climate and mental health is still not completely understood. estimation strategy in developing our estimation strategy we follow stock and watson’s (2015) treatment of levine, beck, and loayza (2000). levine, beck, and loayza investigate the sources of economic growth over the long run. we use their framework to understand which long run factors may be behind county level suicide rates. we believe the county level rate of suicide is a function of economic and climate factors: suicide rate = b0 + b1(avg per capita income) + b2(avg unemployment) + b3(climate) + u 50 |journal for economic educators, 21(1), 2021 the cdc publishes the suicide rate as a county measure of suicides per 100,000 residents from 1999 to 2018, thus it is a total over this time period. the measurement of the dependent variable compels us to represent the independent variables in a novel manner. specifically, averages of the independent variables are applied. this allows us to increase the cross-sectional variation in our sample at the expense of time-series variation. this decision was made so that small counties would be included in the sample. in the future, replicating the study with panel or time-series data would be a prudent way to investigate the robustness of these results. the independent variables we chose to use were per capita income, unemployment, and two different measures of climate: annual mean and average maximum temperatures. b1: average per capita income. this variable is calculated as the average per capita income for each county from 1999 to 2018. we predict that the income coefficient will be negative. a higher income will lead to lower rates of suicide. individuals with higher incomes are more likely to be able to have access to and afford mental health resources and health care. b2: average unemployment rate. for this variable we apply the average annual unemployment rate for each county over the years 1999 to 2018. we predict that the coefficient on unemployment will be positive. a higher rate of unemployment will lead to a higher rate of suicide. when people are able to work they are likely to have a sense of purpose and belonging. b3: climate. this variable is measured in two different ways from 1999 to 2018. average temperature is the average monthly temperature across the time frame analyzed. average maximum temperature is the average monthly maximum temperature. because the measures are highly correlated, only one measure is applied in an each estimation. climate is measured in two ways as a way to ensure results are robust. based upon burke et al. (2018) we expected the coefficients to have a negative sign, as will be shown in the results section, our hypothesis was not borne out in the data. it is worth highlighting the unique role of climate in the study, it acts as both an explanatory and control variable. in the short run, policy makers are not able to alter the climate, but that does not mean they should not be aware of its relationship with the rate of suicide. additionally, while it is possible for climate to directly impact mortality (e.g. extreme heat waves) it likely only indirectly impacts suicide. it is plausible that changes in the climate can produce adverse living conditions which diminish mental well-being and in turn impact the rate of suicide. data the following table presents each variable’s source (also provided in the references). all data are for the years 1999 to 2018 for 2,892 different counties in the united states. some counties were not included in the data set due to not having measures of suicide rates. the appendix includes scatterplots of the suicide rate versus the explanatory variables. 51 |journal for economic educators, 21(1), 2021 variable source suicide rates per 100,000 the cdc wonder database (a total number of suicides between 1999-2018) income per capita u.s bureau of economic analysis (measured annually between 1999-2018) unemployment rate u.s bureau of labor statistics (measured annually between 1999-2000) maximum and mean temperatures national oceanic and atmospheric administration (measured monthly between 1999-2018) table 1 summary statistics of variables variable mean median std deviation minimum maximum avg. income 32,920 31,581 8,310 16,493 148,200 avg. unemployment 6.159 5.970 1.871 2.420 21.21 avg. mean temperature 55.09 55.20 8.245 16.57 76.51 avg. max temperature 66.15 66.23 8.585 23.35 88.35 suicide rates 15.44 14.70 5.360 4.900 75.20 results in our analysis we considered the possibility of there being a linear and nonlinear relationship between the variables. in preliminary analysis both a log-log and log-linear function were considered as ways to capture a potential nonlinear relationship. both specifications yielded the same qualitative results, so for the sake of brevity only the log-log is presented. in each of our regressions, ordinary least squares (ols) is applied with heteroskedastic robust standard errors. in model 1, we analyze average income, average unemployment, average mean temperatures, and suicide rates. results are presented in column 1 of table 2. this model has an r2 of 0.115 (adjusted r2 = 0.114) and the f-statistic (49.012) is significant at the 1% level. while average income is statistically significant, it is not economically significant. our results suggest that a $1,000 increase in average income would not alter the suicide rate. indeed, the estimated coefficient is so small that even an increase of $10,000 would not yield a full one-unit https://wonder.cdc.gov/ucd-icd10.html https://apps.bea.gov/itable/itable.cfm?reqid=70&step=1 https://www.bls.gov/lau/#cntyaa https://www1.ncdc.noaa.gov/pub/data/cirs/climdiv/ https://www1.ncdc.noaa.gov/pub/data/cirs/climdiv/ 52 |journal for economic educators, 21(1), 2021 change. average unemployment is significant at the 5% level, a one point increase in unemployment is expected to cause a 0.2708 increase in the rate of suicide. the average of mean temperature in this model was significant at the 1% level and indicated that a one degree increase in the mean temperature would cause a 0.1812 decrease in the rate of suicide. table 2 – dependent variable: suicide rate (per 100,000) variable (1) (2) intercept 28.431*** (1.293) 28.220*** (1.426) average income -0.000*** (0.000) -0.000*** (0.000) average unemployment 0.271** (0.111) 0.244** (0.111) average of mean temperature -0.181*** (0.020) average maximum temperature -0.146*** (0.020) 𝑅2 0.115 0.092 �̅�2 0.114 0.091 n 2,649 2,649 note: standard errors are given in parentheses under the coefficients. the number of observations is denoted n. *** significance at the 1% level, ** significance at the 5% level, and * significance at the 1% level. in our second model average income, average unemployment, average maximum temperatures, and suicide rates are analyzed. results are presented in column 2 of table 2. this model had an r2 of 0.092 (adjusted r2 = 0.091) and the f-statistic (40.000) is significant at the 1% level. as in model 1, all the independent variables are significant at the 5% level. similar to our first model, average income is statistically significant at the 1% level but not economically significant. the average unemployment was significant at the 5% level and indicates that a one point increase in unemployment would cause the suicide rate to increase by 0.2448. the average max temperature was significant at the 1% level, a one degree increase in maximum temperatures would lead to a decrease by 0.1462 in the suicide rate. before turning to the nonlinear estimations we will discuss the economic significance, i.e. the practical impacts of a change in an independent variable on the suicide rate. in absolute value, unemployment has the largest impact. this suggests that a marginal change in the unemployment rate, more than a change in income or climate, has important impacts on individual’s decision to end their lives. while none of the estimated coefficients are notably large in absolute terms, it is important to remember that the dependent variable being analyzed 53 |journal for economic educators, 21(1), 2021 corresponds to loss of life. suicide is a tragedy and any reasonable attempt to lower the suicide rate ought to be considered. in our third model we investigated the possibility of a nonlinear relationship between income, unemployment, climate, and suicide by taking the natural log of each variable. results are presented in column 1 of table 3. this model had an r2 of 0.127 (adjusted r2 = 0.126) and fstatistic (82.11) that is significant at the 1% level. contrary to the linear models estimated unemployment is no longer statistically significant. the reader is reminded that in a log-log model the estimated coefficients represent the impact of a one percentage point change in the independent variable. for example, if income increase by one percentage point, a county’s suicide rate is expected to decrease by approximately 0.446 percentage points. the impact of an increase in average temperatures is slightly higher, an approximate decline of 0.566 percentage points. table 3 – dependent variable: logarithm of suicide rate (per 100,000) variable (1) (2) intercept 9.584*** (0.507) 9.586*** (0.546) ln(average income) -0.446*** (0.039) -0.444*** (0.039) ln(average unemployment) 0.000 (0.030) -0.014 (0.030) ln(average of mean temperature) -0.566*** (0.049) ln(average maximum temperature) -0.542*** (0.058) 𝑅2 0.127 0.103 �̅�2 0.126 0.102 n 2,649 2,649 note: standard errors are given in parentheses under the coefficients. the number of observations is denoted n. *** significance at the 1% level, ** significance at the 5% level, and * significance at the 1% level. the fourth and final model presented modifies model 3 by replacing the natural log of the average temperature with the natural log of the maximum temperature. results are presented in column 2 of table 3. this model had an r2 of 0.103 (adjusted r2 = 0.102) and the f-statistic (66.678) is significant at the 1% level. the results are similar to model 3. one puzzling difference between the linear and nonlinear specifications is unemployment’s statistical significance in the latter. the simplest explanation is that unemployment may only have a linear relationship with the suicide rate. case and deaton (2015) 54 |journal for economic educators, 21(1), 2021 offer another explanation, that unemployment does not impact the suicide rate. regardless, more work is needed to understand the relationship between labor markets and the suicide rate. conclusion in this study we investigate potential causal relationships between suicide and the climate, along with economic factors such as unemployment rates and income. our results suggest that economic factors and climate impact suicide rates. more adverse economic conditions, whether in the form of lower income or higher unemployment, are predicted to increase the suicide rate. a result worth investing in is why there appears to be a linear relationship between unemployment and the rate of suicide but not a nonlinear relationship. counter to our initial expectations, a warmer climate is expected to decrease the suicide rate. while this result is counter to studies like burke et al. (2018), the relationship between climate and suicide rates is far from completely understood. our study represents simply an exploratory analysis on the matter. more research is needed. while our results are robust, the relatively low values of r2 and high values of regressions’ intercepts suggest there are important causal channels that have not been accounted for in our analysis. further research could seek to incorporate more county level factors such as social capital, educational attainment, and access to health care. suicide has no one single cause. references beck, t., levine, r., & loayza, n. 2000. “finance and the sources of growth.” journal of financial economics, 58(1-2), 261-300. burke, m., gonzález, f., baylis, p., heft-neal, s., baysan, c., basu, s., & hsiang, s. 2018. “higher temperatures increase suicide rates in the united states and mexico.” nature climate change, 8, 723 – 729. <https://doi.org/10.1038/s41558-018-0222-x>. case, a., & deaton, a. 2017. “mortality and morbidity in the 21st century.” brookings papers on economic activity, 397–476. <https://data.nber.org/mortality-and-morbidity-in-the21st-century/casetextsp17bpea.pdf>. case, a., & deaton, a. 2020, january 4. “deaths of despair and the future of capitalism [lecture].” american economic association. <https://www.aeaweb.org/webcasts/2020/deaths-of-despair-future-of-capitalism.> centers for disease control and prevention. 2020. “underlying cause of death, 1999 – 2018. [data set].” national center for health statistics. <http://wonder.cdc.gov/ucd-icd10.html.> national oceanic and atmospheric administration. 2020. “climate [data set].” u.s. department of commerce. <https://www1.ncdc.noaa.gov/pub/data/cirs/climdiv/>. putnam, r. d. 2020, january 4. “deaths of despair and the future of capitalism [lecture].” american economic association. <https://www.aeaweb.org/webcasts/2020/deaths-of-despair-future-of-capitalism>. rossen, l. m., hedegaard, h., khan, d., & warner, m. 2018. “county-level trends in suicide rates in the u.s., 2005–2015.” american journal of preventive medicine, 55(1), 72–79. doi: 10.1016/j.amepre.2018.03.020 steelesmith, d.l., fontanella, c. a., campo, j.v., bridge, j. a., warren, k. l., & root, e. d. 2019. “contextual factors associated with county-level suicide rates in the united states, 1999 to 2016.” jama netw open. 2019;2(9):e1910936.doi:10.1001/jamanetworkopen.2019.10936. 55 |journal for economic educators, 21(1), 2021 stock, j. h., & watson, m. w. 2015. introduction to econometrics: third edition update. hoboken: pearson education. u.s. bureau of labor statistics. 2020. “local area unemployment statistics [data set].” united states department of labor. <https://www.bls.gov/lau/#cntyaa>. u.s. bureau of economic analysis. 2020. “personal income [data set].” united states department of commerce. <https://apps.bea.gov/itable/itable.cfm?reqid=70&step=1>. 56 |journal for economic educators, 21(1), 2021 appendix scatterplot of suicide rate versus independent variables suicide rate and average income suicide rate and average unemployment 0 10 20 30 40 50 60 70 80 20000 40000 60000 80000 100000 120000 140000 s u ic id e r a te avg income 0 10 20 30 40 50 60 70 80 2 4 6 8 10 12 14 16 18 20 s u ic id e r a te avg unempolyment 57 |journal for economic educators, 21(1), 2021 suicide rate and average mean temperature suicide rate and average maximum temperature 0 10 20 30 40 50 60 70 80 20 30 40 50 60 70 s u ic id e r a te avg mean temperature 0 10 20 30 40 50 60 70 80 30 40 50 60 70 80 s u ic id e r a te avg max temperature major issues in employment and labor relations in foreign corporations 1 employment, labor relations, and the union situation in china by yajing wang abstract china's continuing evolution toward a market economy has generated ripple effects that are changing most of its economic institutions. one interesting institution cast adrift in this sea of change is the union. while formerly an instrument of the state, the certainty of this role is no more. issues arise at to how the chinese union will now evolve, and to what degree it will resemble the western model, or perhaps reflect a uniquely chinese model. by describing the current status and articulating the issues, this article provides a framework for thought about this topic. i. introduction in the third plenary session of the 11th central committee of the communist party of china held in december 1978, deng xiaoping brought out an innovative plan of chinese economic reform. from then on, a country with one fifth of the world’s population opened itself to the outside world, joined the world economic order and brought tremendous change both to herself and to the world. since the inception of the economic reforms in 1979, china's economic performance has been nothing short of spectacular. during the past 20 years, china has seen tremendous progress in a variety of fields. agriculture has been de-collectivized and advanced technologically, the management of state-controlled firms has been decentralized and deregulated, and the further establishment of property rights has facilitated an explosion of businesses outside central government control. goods and factor markets have been liberalized to a significant extent with market price allocations. state control of the labor market has been reduced, and capital markets have experienced rapid, if uneven, development (noland, 1995). the timing of chinese economic reform is coincident with the recent era of economic globalization and china’s active participation in the world economy has proven the best way to develop her domestic economy, raise living standards, and secure a key position in the world. economically, an obvious change experienced by china since her open door policy is a trend towards increased foreign direct investment (fdi) and the establishment of foreign businesses in china. china now is the leading developing country designation for foreign direct investment (fdi) (bassolino, 1998). in 1997, china received the largest influx of fdi in her economic history, $45.177 billion, second only to the fdi in the u.s. ii. changing employment context much of china’s economic growth is derived from fdi, half of which is in the form of joint ventures (cheung & yiu, 1998). in the international joint ventures, the minority of the management staffs are western expatriates while the rest are local chinese. by the end of 1996, there were more than 140,000 foreign-funded projects employing more than 116 million people (bassolino, 1998). the employment of millions of chinese by foreign corporations required more accommodating policies. china's previous unresponsive labor market and the inefficient labor-management relations policies put heavy constraints on her pace to integrate into the global economy. facing the quickly increased number of people being employed by foreign corporations in china, the chinese government has been adjusting policies to accommodate the tension brought by the shifting pattern of employment relations from a single and predictable model fitting the centrally planned economy to a more diverse and complex pattern fitting the market driven economy. before the economic reform, china's employment structure was quite rigid and simple. people were assigned to different work units and an employee had little or no choice of assignments. entering into ____________________________ * graduate student in sociology, middle tennessee state university, murfreesboro, tn 37132 2 an employment arrangement meant that housing, children's education, healthcare and even food would be supplied in total by the employer. university graduates were required to accept positions that the state selected for them according to the needs of the state, not the employees (gross & dyson, 1997). the labor market lacked the dynamics of mobility and competitiveness. there were no formal labor laws governing labor practices because they served no purpose in a centrally planned economy compared to a market economy. the employment environment has undergone a vast change since china opened to outside investment and development in the early 1980s. labor allocation has moved from state control towards a combination of state agencies and independent recruitment by enterprises. job candidates are now able to seek their own jobs and to negotiate their salary and benefits (gross & dyson, 1997). global competition conditions labor markets to produce competitive wage levels and labor practices, and regulation of industrial conflicts that are acceptable to employers, employees, investors and governments. labor must be employed more efficiently through increasing flexibility. the previous inefficient "iron rice bowl" that characterized chinese labor policy with a cradle-to-grave welfare system is no longer feasible in the era of globalization. the old employment and labor structures yielded low efficiency, and thus were unsuitable for a competitive environment. iii. evolving law context to begin the reformation of the chinese labor market to a more economically competitive environment, in july 1980, the chinese government promulgated provisions of the people's republic of china for labor management in chinese-foreign joint ventures (china business relations). for the first time china introduced laws governing the practices of foreign investment in china. the sixteen articles in this law stipulated the basic rights of both employers and employees with regards to employment, dismissal, wages and awards, work schedules, paid leave of absence, labor insurance and welfare benefits, labor protection, labor discipline and the signing of the contracts and trade union formation. though these stipulations are somewhat general and embryonic when viewed in retrospect, they did provide legal reference for early investors and laid the groundwork for further modification. a chronology of chinese labor laws can be found in table 1. with china's opening-up policy furthered in practice, the ripening of the business environment for investment, the establishment of more favorable terms of trade, and the incentives by the chinese government, more diversified forms of investment emerged in addition to joint ventures. these included wholly owned foreign enterprises and contractual joint ventures. the chinese government subsequently laid out the wholly foreign owned enterprise law of the people's republic of china in april 1986 and sino-foreign contractual joint venture law of the people's republic of china in april 1988 (chinaweb). though these two sets of laws were not intended for labor practice, they did reiterate that terms concerning employment, dismissal, remuneration, welfare, labor protection and labor insurance shall be clearly prescribed in the contracts. workers and staff of enterprises with foreign capital may organize trade unions in accordance with the law and the enterprises shall provide the necessary conditions for the activities of the trade union in their respective enterprises. the year 1994 was a prolific year in china's history of lawmaking. the chinese government formulated and promulgated three laws to accommodate the dynamic changes in the field of employment relations. in january 1994, the chinese government for the first time introduced regulations concerning minimum wages in enterprises (ilo). this law set up minimum wage level, established supervision system and created legal procedures for punishment with an aim to ensure the basic needs of workers and their families in chinese economic transition. in july 1994, china announced its first labor law (china labor law, effective januay 1, 1995), that applies to all enterprises and individual economic organizations within the boundary of the people's republic of china, and laborers who form a labor relationship therewith (ilo). this is a very comprehensive and complete set of regulations containing thirteen chapters and covering issues regarding promotion, contract and collective agreements, working hours, rest and vacations, wages, occupational safety and health, protection for females and juveniles, training, insurance and welfare, labor disputes, supervision and inspection, and legal responsibilities. this is the first comprehensive legal document governing employment and labor relations fitting the quickening pace of chinese political and economic reform. 3 subsequently the chinese government promulgated an exclusive set of stipulations governing labor issues in foreign investment in china: regulations on labor management in foreign funded enterprises (ilo). compared with the provisions of the people's republic of china for labor management in chinese-foreign joint ventures announced in 1980, this is a more extensive, more sophisticated and more complete set of laws having a broader coverage and applying to sino-foreign equity joint ventures, sino-contractual joint ventures, foreign-funded enterprises, and sino-foreign joint-stock limited companies set up in the people's republic of china. these regulations came after the accumulation of past lessons and experiences gained from the initial stage of reform, and amendments and revisions followed from regulatory prototype. for example, rules of pay raises, terms of payment for workers and the forms of punishment of malpractice were added. enterprise obligations for fringe benefits, amounts for overtime pay, procedures of dismissal and rights and obligations incurred were being specified, and vocational training of workers was adjusted from an option to an obligation. the foreign enterprise law better protected the rights of foreign enterprise employees, promoted the establishment of sound legal environment for foreign investment in china, provided legal references to guard the interests of investors in china, and prohibited the occurrence of malpractice and human rights abuse. this set of laws also helped foreign investors understand their liabilities and responsibilities in their business dealings in china. iv. sensitive issues failure of labor law observance though china is making tremendous progress with regards to employment and labor relations and labor protection, there have been frequent reports of human rights abuses occurring in foreign owned companies and joint ventures. as market liberalization proceeds, sweatshop operations are apparently increasing. multinational corporations in china, such as nike, disney and reebok are being closely monitored for workplace conditions and treatment of workers. most of these large foreign corporations organized their production in china by contracting and subcontracting and employed local low wage labor. research by two hong kong based human rights groups, the asia monitor resource center and the hong kong christian industrial committee, exposed the sweatshop conditions of nike and rebook subcontractors and the malpractice of the subcontractors toward local laborers. four factories producing footwear for nike and reebok were examined and research showed that none of them observed either the mother company’s code of conduct or relevant stipulations in chinese labor law. it was reported that workers were being forced to pay deposit before their commencement of work and they were forced to work eleven hours a day and received wages below minimum wage level stipulated by law. they were not aware of the dangerous chemicals in their working environment and were not even provided with protective clothing. they could be dismissed without any cause, and children between 13-15 were being employed (asia monitor resource center & hong kong industrial committee, 1997). another research report, entitled "mulan's sisters," shows that subcontractors of walt disney company are failing many of their workers. the report revealed that disney’s code of conduct is not seriously respected by many of disney’s suppliers in china. most of the suppliers covered in the study are violating workers’ basic rights and the chinese labor law. some workers are forced to work more than fourteen hours a day, seven days a week. some are paid less than the minimum wages. their wages are often paid as much as three months in arrears and they have no insurance coverage. very few are even aware that a code of conduct exists (hong kong christian industrial committee, 1999). the above examples of the failure of the observance of the chinese labor law by foreign investment merits further investigation of why they are not being respected and even being violated constantly. role of the union in china, the all china federation trade union (acftu) is the only recognized and legitimate trade union and its subordinate branches are deemed as a mass organization of the working class. the acftu was first set up in 1925 in canton and was not legitimized and consolidated until the chinese communist party (ccp) came to power in 1949. the role of acftu was defined after soviet model as "transmission belt" for the ruling party according to the top-down principle of "democratic centralism". the 4 acftu was regarded as "pillar of the party", which in practice denoted the subordinate position of the union to the party. on the one hand, the acftu’s responsibility was to transmit the party's ideological line and policies to the working class and to secure their support and compliance. on the other hand, the acftu’s goals were to unite all workers and protect their interests and promote the welfare of workers. the dual tasks of the union preclude accomplishing the latter goal effectively without bringing conflict with the former one. the acftu has been engaging in the promotion of workers’ interests, such as the negotiation of collective contracts with employers to supplement the individual contracts. at the national level there is tripartite consultation of top federation officials with counterparts in government and management. however, the acftu has not subsequently improved the labor rights and labor conditions. the explanation lies in the inherent affiliated status with the state. since the union is established and supported by the government, the goal is always in conformity with that of the state. hence, there has not been an intense confrontation between the union and management, since, in theory, the ultimate interests of both have been determined by the state. according to china’s trade union law, the chinese employees in overseas-funded enterprises are entitled to establish trade union organizations (hong and warner, 1998). the requirement to set up trade unions in all overseas-funded enterprises in the coastal provinces has been set high on acftu’s agenda. in may 1994, the acftu announced a new campaign to establish unions in all those enterprises, in economic development zones and coastal cities, and to strengthen the power of workers for collective bargaining and rights protection (chan & senser, 1997). however, the scope of unionization in the foreign-funded enterprises has remained low. by the end of 1995, just over two million employees in such enterprises were unionized (white, 1996). the reasons are as follows. first, most foreign investors are reluctant to establish trade unions in their enterprises because of the fear that unionization will challenge their managerial authority. second, the ambassadorial role of unions in foreign enterprises serves the party, and is cooperative rather than conflictual. this poses difficulty for the union in asserting bargaining power for the employees. the position of mutual understanding set by unions lent foreign investors more bargaining power over labor issues such as wages, insurance, and fringe benefits. (hong and warner, 1998). there is another reason worth mentioning as well. though the trade union law stipulated the necessity for unions to set up a consultative and negotiating system with the administration, participate in the democratic management, represent and defend the rights and interests of employees according to law, there is no supervising organism in place for implementation. in the cases of labor rights and labor law violations previously cited, none of the factories had a workers’ trade union in place and none of the workers demanded the establishment of unions to protect their interests. this has put workers in a most vulnerable situation where they are almost always deprived of any bargaining power and subject to the conflicting interests of employers and unions. people regard unions as part of the government or the state mechanism. they never see the union as an important means to bargain for their rights and guard their interests. this is even happening in state owned enterprises whose population accounts for the primary representation of the union. for example, gordon white’s (1996) study of chinese trade unions presented survey results from workers in shenyang and naotong. those results suggest that the primary method of resolving differences with superiors was to raise the matter with enterprise management rather than trade unions (23% relative to 10.6%). the trade union was seen as relatively ineffectual. when workers were asked to assess the union activities in the enterprises, 46.2% did not offer opinion, indicating a high degree of indifference. among those who identified a task, 22.1% regarded union's task as making workers obey and work rather than taking care of welfare of workers (12.7%) and representing workers’ views and interests (6.9%). in the survey of the method of selection of trade union chairperson, 60% of the workers responded that union chairpersons were appointed by other agencies whether they are higher-level trade unions or the party branch/management of the unit. the above survey indicates the union's goal failed to be recognized by the mass working class, and this discrepancy is increasing in the face of the challenges posed by the current economic reforms. dramatic structural changes in the overall industrial economy brought diversified forms of economic activity. private and new collective and foreign invested sectors expanded dramatically, creating new forms of ownership and new forms of employment. unions have been slow to evolve in the context of these newly emerging enterprises. 5 in state owned enterprises, unions are in an awkward situation given the fact that party reformers expect unions to help them to implement the very enterprise reforms that are causing unemployment and threatening pensions (white, 1996). facing the faster pace of economic reform and the more and more problems posed by the industrial structural adjustment, a new trade union law was promulgated in 1992 in order to meet the demands of economic and social development. this is a set of more comprehensive stipulations specifying union’s goals and the role in china’s socialist development, thus, consolidating the union’s position and expanding the union’s membership scope. yet the most fundamental issue, the union’s continued lack of institutional autonomy and dependent relationship with the party, was not addressed. the most obvious problem generated by a government controlled union is the abuse of the law and vagueness of representation. though unionization in industrial sectors is compulsory, the union role and management role are not commonly separated. workplace union officials could have a role in workplace management, but more commonly, they hold positions in the party. a more common practice is to have the enterprise managers double as party secretary, thereby acquiring the authority of the party in the trade union. v. union structure a schematic of the union structure as entwined with the government, the party, and the enterprise is given in figure 1. at the national level, acftu is accountable to the ministry of labor, which is one of the nine functioning core ministries under national council. at the local level, there is no separate treasury or account system in the enterprise unions. union expenditures are under the supervision of enterprise management. the main reason is that a large portion of union activity fee is appropriated by the enterprise or appropriated by higher level union institutions within the enterprise. a central conflict originating in the above context is the nature of chinese unions’ relationship with the party. the autonomy of unions and independence from the state politics are crucial to fulfill the role of representing workers. the current close relationship makes it difficult for the union to develop a distinctive identity. in cases of conflict between the interests of employees and the interests of the state, union leaders are not in a position to vigorously defend the interests of the union members. without autonomy and separation from the party, management, and the state, there can be no effective representation of workers by unions and no meaningful collective bargaining. different union models for china china is in urgent need for true autonomous trade unions to protect labor rights in the context of present day reforms toward a market economy. labor is most vulnerable in a market place driven primarily by profits. as noted earlier, globalization encourages management rationalization in order to compete more effectively. in china, this means privatizing the state sectors gradually and selectively, placing more emphasis on costs and quality, and removing “iron-rice-bowl” work permanence. these tendencies have increased management control. to prevent abuse of power and the abuse of labor rights, the state is trying to promote collective bargaining across industries. in general, there are four systems of national labor market governance of employment and labor relations (frenkel & peetz, 1998). • state unilateralism: the government is responsible for creating and maintaining the framework for relationships between management and workers. • state-employer bipartism: the state and employers form a coalition that determines this framework. • state-union bipartism: a coalition is formed between the state and union to regulate employment • national tripartism: governments, employers, and unions are the responsible institutions. labor governance relationships in china are moving from state unilateralism at the national level towards state-union bipartism (frenkel & peetz, 1998). yet the primary difficulty is that the union in china is comparatively weak and does not assert much influence on the state’s legitimacy in speaking on behalf of labor. compliance with international standards the separation of rights of workers’ association from the public authority is clearly stipulated in the international labor standard under freedom of association and protection of the rights to organize convention, 1948, no. 87, (ilo). article four stipulates that organizations shall be free from interference 6 by the public authorities when drawing up their constitutions and rules, electing their representatives, organizing their administration and activities, and formulating their programs. though china requires the establishment of a union and conforms with the international labor standards in this regard, there is still a lack of independence that is essential for viable and credible unions. vi. conclusion history demonstrates that simply following the soviet union model won’t fit china’s current market oriented economic reforms. the dual role of china’s acftu as a “pillar of the party” and “speaker for the workers” limits autonomy and makes the union representation of neither the workers nor the party complete and effectual. market economies require strong and independent unions to represent the interests of workers and only with a strong trade union can the conflicting interests of employers be counteracted. however, socialism requires the existence of communist party to provide macroguidance for development. the only flexible variable is the role of party and whether the party will give up more administrative power and consequently yield more independence and autonomy to unions. alternatively, the party could follow the current trend and work out a new form of corporatism with acftu, which bears unique chinese characteristics. though the lack of autonomy in acftu is a major issue contributing to the malpractice and labor abuse by foreign corporations, it is not the only factor. lack of legal institutions regulating china’s labor-management relations has created a very favorable environment for foreign investors to conduct business without the countervailing power of organized labor. the large supply of inexpensive labor also inhibits union economic power. some foreign investors do take advantage of the loopholes in chinese legal system during china’s economic transitional period when rules governing employment and labor relations are not yet fully in place. when we examine nike’s, reebok’s and disney’s offshore factories in light of international labor standards for multinational enterprises, none of them are living up to the international standards with regards to the use of forced labor, wages, benefits, conditions of work, safety and health, and collective bargaining. in order for china’s economy to be smoothly integrated into the globalization process, the internationalization of her current laws and regulations and the functioning of social and legal mechanisms, such as the establishment of independent trade unions, must be forthcoming. finally, the chinese economy cannot be smoothly integrated into the globalization process without cooperating with and inspection authorities from the international community. 7 table 1 chronology of labor laws and regulations of the prc ______________________________________________________ 1980 provisions on labor management in sino-foreign equity joint ventures 1992 trade union law 1993 regulations on the placement of surplus staff and workers of state-owned enterprises 1993 regulations concerning minimum wages in enterprises 1993 regulations on unemployment insurance for staff and workers of state-owned enterprises 1994 labor law 1994 regulations on the administration of labor in foreign invested enterprises 1996 rules for the administration of employment of foreigners 1997 notice regarding further improvement of the work of poverty relief and the re employment of workers 1997 notice on establishing re-employment service centers at experimental cities with enterprises of "optimized capital structure" 1997 notice regarding the printing and distribution of the "investigative report shanghai's experiences in carrying out re-employment projects and establishing re-employment service centers for staff and workers" sources: quantum internet services http://www.qis.net/chinalaw & international labor organization http://natlex.ilo.org. http://www.qis.net/chinalaw http://natlex.ilo.org/ 8 figure 1 national levelnational levelnational levelnational level soe fdi enterprise level city, country and town union level provincial union level acftu national level ministry of labor local levellocal levellocal levellocal level propaganda dept. union members organizational dept. life issues dept. vice president union local president 9 references asia monitor resource center & hong kong christian industrial committee. 1997. working conditions in sports shoe factories in china making shoes for nike and rebook. publications listing at: www.freeway.org/hk/~amrc/. bassolino, deloitte. 1998. “ china opens its door.” china economic review, october 1998 v8 n10 pp. 1,5. chan, anita & senser, robert. a. 1997. "china’s troubled workers." foreign affairs, march-april 1997 v76 n2 pp. 104, 118. cheung eleanor & yiu stephen. 1998. “human resources strategies in the 21 century: a challenge for the international joint venture in china.” china international business symposium (shanghai proceedings) vol. 2. china business relations. provisions of the people’s republic of china for labor management in chinese-foreign joint ventures. http://www.c-b-r.com/english/law chinaweb. wholly foreign owned enterprise law of the people’s republic of china. (quantum internet services (qis)). http://www.qis.net/chinalaw. frenkel, stephen j. & peetz, david. 1998. “globalization and industrial relations in east asia: a threecountry comparison.” industrial relations, july 1998 v37 n3 pp. 282,310. gross, ames. & dyson, patricia. february 1997. "china: managing the culture gap." hr focus, v74 n2 pp.15, 16. hong kong christian industrial committee. 1999. mulan’s sisters: working conditions in chinese factories making disney products. http://globalexchange.org/economy/china/finalbriefingii.html. hong, ng s. & warner, malcolm. (1998). china’s trade unions and management. st. martin's press inc. n.y. international labor organization at: http://natlex.ilo.org. china labor law regulations concerning minimum wages in enterprises regulations on labor management in foreign funded enterprises noland, marcus. 1995. “china and the international economic system.” working paper no.6, institute for international economics. quantum internet services (qis). sino-foreign contractual joint venture law of the people’s republic of china. http://www.qis.net/chinalaw white, gordon. 1996. “chinese trade unions in the transition from socialism: towards corporatism or civil society?” british journal of industrial relations, september 1996 pp. 433-457. http://www.freeway.org/hk/~amrc/ http://www.c-b-r.com/english/law http://www.qis.net/chinalaw http://globalexchange.org/economy/china/finalbriefingii.html http://natlex.ilo.org/ http://www.qis.net/chinalaw employment, labor relations, and the iv. sensitive issues first, most foreign investors are reluctant to establish trade unions in their enterprises because of the fear that unionization will challenge their managerial authority. second, the ambassadorial role of unions in foreign enterprises serves the party, a schematic of the union structure as entwined with the government, the party, and the enterprise is given in figure 1. at the national level, acftu is accountable to the ministry of labor, which is one of the nine functioning core ministries under nati different union models for china compliance with international standards examining the credibility of inflation forecasts: examining the credibility of inflation forecasts: an application of cointegration techniques dipak ghosh department of accounting and computer information systems box 4057 school of business emporia state university emporia, ks 66801 usa and swarna d. dutt * department of economics richards college of business state university of west georgia carrollton, ga 30135 usa * corresponding author 56 abstract in this study we examine the credibility of us inflation forecasts using the asa-nber survey data. a standard theoretical model of efficient/unbiased expectations is tested using actual and one year ahead inflation forecasts. our nonstationarity tests confirm the presence of a single unit root in the levels of the series under consideration, paving the way for an application of cointegration techniques. the efficiency model is divided into weak form (cointegration) and strong from (cointegration and parameter restriction) tests. we use the “null of cointegration” approach to test for the presence of cointegration. our results indicate that inflation expectations at the one year horizon are weak and strong form efficient. 57 1. introduction an integral part of formulating policy is accurate, credible and reliable forecasts of the major macroeconomic variables, and inflation forecasts rank at the top in terms of practical importance. inflation expectations are an important part of the economic decision making process in the labor, product and financial markets. “labor unions need inflation forecasts to help refine their wage demands, and firms planning for future expenses and expected revenues need to account for expected inflation. government budget-making has perhaps an even greater need for accurate forecasts of inflation, given that social security payments are directly linked with the inflation rate measured by the cpi.”1 expected inflation will have an impact on the real interest rate and therefore on business investment. it will also have an impact on international capital investment (whether to invest at home or abroad) and therefore on exchange rates. it is an integral part of capital accumulation and savings decisions by households. forecasts of inflation (and any macroeconomic variable) can be obtained using a variety of methods. econometric models, both structural and time-series, are widely used. in addition, survey data may also be used as a method of forecasting inflation. since survey data involves the use of professional judgement (by the survey participants), one major criticism of surveys is the incentive to give accurate information, since the professional who is being surveyed does not have anything at stake. particular surveys like the “survey of professional forecasters” (whose data we use in this paper) do address this issue to some extent, though not entirely. even with the drawback of surveys, they are, perhaps, the best way of directly measuring the forecasts of professionals (individuals who forecast for a living), and therefore provide an alternative to complex econometric models which may be time consuming and resource intensive. 58 given the importance of forecasts, it is important to test the information contained in the forecasts. an examination of the credibility of major macroeconomic forecasts seems justified before they are actually put to use. over the last two decades considerable research has been done on the reliability of the different inflation expectation surveys like the decision makers poll, blue chip consensus, michigan household survey, livingstone survey, money market survey, asa-nber survey etc., but the results are far from unanimous.2 thomas and grant (2000) have found that survey forecasts are approximately as good as structural models in forecasting inflation. baghestani (1992) rejects the rational expectations hypothesis using survey data. englander and stone (1989, pg 22) find that “surveys of inflation expectations contain useful information about future inflation on average, but they have proved to be unreliable in recent years, with substantial errors in all the surveys and especially in the dmp survey. even if expectations are not realized, however, the surveys contain important information.” cheung and chinn (1999, pg 1) point out that “….given the weight placed by professional traders and policy makers on such judgement-based forecasts, it is important to know exactly what information is contained within these forecasts.” thus, given the widespread use and the increasing popularity of surveys of macroeconomic variables, we feel that a study of the accuracy and credibility of these surveys is essential, and that is what we propose to do in this paper. we will use data from the asa-nber survey. cheung and chinn (1999) also test for rationality in survey data, but they use the johansen cointegration methodology to do so. our single equation hansen (1992) methodology not only allows us to test for cointegration, but also makes it easier for us to test for parameter restrictions, and also allows us to test for structural breaks in the model.3 we test for efficiency 59 through a sequential application of weak and strong form tests of unbiasedness, the former being a precondition to the latter. this study is divided into six sections. in section two we briefly discuss the asa-nber data set, and in section three we outline the theoretical model. section four discusses the unit root tests of the series under consideration, and section five is the application of the “null of cointegration” procedure to our data set. section 6 contains our concluding remarks. 2. the asa-nber data set the use of survey data such as the asa-nber data set is particularly suitable for examining market expectations since it provides us with a method of quantitatively estimating the market’s expectations. it includes a large number of major macroeconomic variables and has been continuously collected from 1968 (4th quarter) till date. it includes professional forecasts from business, finance, government and academics. we use quarterly data for actual inflation next year (st+1) and one year (set+1) ahead forecasts of expected inflation from 1981 (3rd quarter) 2001 (4th quarter).(4) for example, the actual inflation for 1st quarter of 1990 is matched with the forecast for inflation in the 1st quarter of 1990 which was made in the 1st quarter of 1989 (hence the use of the term “one year ahead forecast”). this data set is subject to the same criticism as all other survey data sets, i.e., since the forecasters do not have anything at stake, they have no incentive to make accurate forecasts. however, this survey is anonymous, and this would increase the probability that they would express their true forecasts, since they will not be penalized for any mistakes. the anonymity also ensures that individuals do not necessarily have to agree with the official forecasts of their 60 employers. there is less pressure on individuals to go along with the market consensus due to the anonymity, and they can express their true opinions. even though these factors will not necessarily outweigh the drawback of the absence of any consequences for poor forecasts, they do suggest that we cannot necessarily conclude, a priori, that survey forecasts are inaccurate. this should be judged based on econometric tests, which we perform in the following sections. 3. weak and strong form tests of efficient expectations in this section we will examine the unbiasedness and efficiency of the experts’ expectations formation process. this is weaker than rationality since it does not require the expectation process to match the stochastic process generating the actual series. it only requires the spot rate series to be cointegrated with the year ahead forecast and for the cointegrating regression to obey the necessary parameter restrictions and explained below. a standard expectation efficiency test consists of first estimating the model: st+k = β0 + β1set+k + ut+k 1 where st+k and set+k are the actual and expected inflation series k years ahead. in our data set k=1, which means that we consider the actual inflation one year from today (in period t+1) and the current expectation of inflation one year from today (inflation forecast for period t+1 made in period t). we assume that the error term ut has mean 0, then a test of efficiency would first involve estimating equation (1), and then testing the error term for stationarity. a stationary error structure would imply that the actual spot rate and the experts’ expectations move together over time. this is a necessary condition (weak form test) of efficient expectations. it is also a pre-condition to the strong form test of efficiency which is a test of the joint hypothesis of 61 coefficient restrictions (β0, β1) = (0,1). mcfarland et al. (1994) have tested for the market efficiency / unbiasedness hypothesis in foreign exchange markets using a similar set up. cointegration was upheld for their entire sample of currencies, but the coefficient restrictions (the strong form model) was valid for less than half of the currencies. we use the null of cointegration approach to testing for the weak form of efficiency, as this is a necessary condition for the existence of the strong form of efficiency 4. tests of nonstationarity a necessary condition for cointegration is the presence of nonstationarity (unit roots) in the variables. the augmented dickey-fuller (df 1979, 1981), and the phillips-perron (pp 1988) tests are the most widely used in the literature. however, both these tests use the null hypothesis of unit roots (and the alternate hypothesis of stationarity). as kwiatkowski et. al. (kpss 1992) point out, the null hypothesis will not be rejected unless there is strong evidence against it. even when the roots are near unity (but not exactly equal to one), the augmented dickey-fuller and the phillips-perron tests would indicate the presence of unit roots, even though in reality the roots are less than one. therefore kpss point out that a more appropriate procedure would be to formulate a test with a null hypothesis of stationarity (and an alternate hypothesis of an unit root). the alternate hypothesis of an unit root would not be accepted unless there is strong evidence against the null hypothesis of stationarity, and this procedure would also result in the acceptance of the null hypothesis of stationarity when the roots are near unity (which is an appropriate conclusion). therefore, we use the kpss (1992) procedure to test for the presence of unit roots in our 62 data. the test statistic ητ and ηµ in table 1 is the null of stationarity with and without a time trend respectively. since in each case the test statistic is greater than the critical value, we reject the null of stationarity in favor of the alternative of unit roots for all the spot and forecasts series. (5) table 1: unit root tests kpss test current inflation one year ahead forecast critical value nt 0.1545 0.1723 0.146 nu 0.5635 2.9655 0.463 5. weak and strong form tests: null of cointegration approach (6) instead of using a var method for testing for cointegration, we propose to use the single equation method described in hansen (1992). while the johansen-juselius var method has been widely used in the literature, a single equation method allows us to test for cointegration and parameter restrictions, and also for model stability over time. cheung and chinn (1999) examine the asa-nber data set also for cointegration, but they use the johansen-juselius method, and they do not examine the issue of stability of the model over time. this is an important issue due to the various changes and external shocks that have occurred during our sample period. the hansen (1992) procedure involves the estimation of equation 1 using the ph (1990) fm-ols procedure, and then testing the residuals for nonstationarity using a null hypothesis of stationarity. stationary residuals would imply that the actual inflation and the expected inflation 63 series are cointegrated. as explained in section 3, testing a series for stationarity yields more powerful results when we use a null hypothesis of stationarity. this therefore implies that we are using a null hypothesis of cointegration.. the test has a further advantage of allowing us to test for parameter stability over time. the hansen (1992) procedure is briefly described below: yt = atχt +φt (2) the null hypothesis here is that a1 in eq. (2) which is similar to eq. (1) is constant. the three test statistics specified here are sup f, mean f and lc. the sup f and the mean f, statistics test the stability of the model over time. lc is a test of cointegration of the two nonstationary variables. for cointegration to be present the model must be stable (supf and meanf must be insignificant) and lc must also be insignificant. the results are in table 2. hansen test actual & f1y test statistic critical value lc 0.1602 (0.2000) p < 0.05 mean f 2.1609 (0.2000) p < 0.05 sup f 8.6994 (0.2000) p < 0.05 notes: tabulated p-values in parentheses. since all p-values are greater than 0.05, the model is stable. for lc, p<0.05, thus spot rate (sr) and one year ahead forecast (f1y) series are not cointegrated. sr and f1y: is the cointegration regression between the spot and 1 year orecast series. f 64 since p > 0.05 for the mean f and sup f statistics, the model is stable over time. since the lc statistic is also insignificant (p > 0.05), the null hypothesis of series cointegration is accepted, and so is weak form efficiency. a test of strong form efficiency would involve estimating the parameters from the cointegrating regression (equation 1) and testing the restriction that (β0, β1) is equal to (0,1). the parameter estimates from the hansen procedure are given in table 3. parameter value t-statistic β0 -0.7409 0.2188 β1 1.0518 -0.7924 chi-square statistic 3.7942 β0 is the constant and β1 is the slope coefficient in equation 1. the t-statistic for β0 tests whether β0 is significantly different from 0, and the t-statistic for β1 tests whether β1 is significantly different from 1. the chi-square statistic tests whether (β0, β1) is jointly equal to (0,1). the 5% critical value for the chi-square statistic is 5.99, and the 1% critical value is 9.21. the t-statistic for β0 indicates that the constant term is insignificantly different from zero, and, and the t-statistic for β1 indicates that β1 is insignificantly different from 1. the chi-square statistic tests whether (β0, β1) is jointly equal to (0,1). since the chi-square statistic is insignificant, we cannot reject the joint hypothesis that (β0, β1) is jointly equal to (0,1). as a result of both individual and joint tests, we may conclude that (β0, β1) are equal to (0,1). since the actual value of the one-year ahead inflation and the expected value are cointegrated and follow the necessary parameter restrictions, we can conclude that the expected future inflation rate is an unbiased and therefore efficient estimator of the actual inflation rate. this is also referred to as a “consistent” estimator by cheung and chinn (1999, pg 1) who also get 65 results similar to ours from the same data set. the fact that the expected inflation is an unbiased and efficient estimator of the actual inflation indicates that new information is assimilated rapidly by financial markets. this is not surprising since the development of technology has made it possible for information to spread rapidly, and also for traders in various financial markets to react rapidly to any new information. this would imply, for instance, that bond traders with superior models would not be able to make abnormal profits.7 our finding that inflation expectations are unbiased and efficient estimators of the future inflation rate does have some important implications. the first one is that the asa-nber survey does indeed provide credible forecast of the future inflation rate. this means that this survey data can be used for formulating policy. labor unions can determine what the appropriate wage demand would be, indexed for inflation. the government can get an accurate estimate of future social security payments, since these payments are indexed for inflation. this is particularly important right now, given the concern over the viability of the social security trust fund. an accurate forecast of inflation will allow firms to calculate the cost of borrowings (by giving them an accurate estimate of the real interest rate). moreover, the asa-nber data set contains forecasts of other macroeconomic variables too. our result that the forecasts of inflation are credible, along with the results of cheung and chinn (1999) that the forecasts of other macroeconomic variables are credible would imply that business and the government could consider these survey forecasts in planning for the future. the impact of programs like the tax cut plan approved by congress last year, and signed into legislation by president bush, could be analyzed with a reasonable degree of accuracy. 66 6. conclusion expected inflation is an important input in economic decision making, starting from savings and investment to production and resource allocation. the asa-nber quarterly surveys are used here to examine the efficiency of inflation forecasts. they are conclusively weak and strong form efficient since the spot and the one year ahead forecasts are cointegrated and also obey the necessary parameter restrictions. this is in line with the results of cheung and chinn (1999) and baghestani (1992). this implies that surveys of professionals do yield accurate forecasts of macroeconomic variables, which can be used by businesses and governments to formulate economic policy. an implication of this result is that policy makers may not have to spend the time and resources to come up with a complex econometric model to forecast inflation (and probably other macroeconomic variables). use of surveys of professionals will yield reasonably accurate forecasts, which can be used by businesses and governments to formulate economic policy.8 67 references baghestani, hamid, (1992), “survey evidence on the muthian rationality of the inflation forecasts of us consumers,” oxford bulletin of economics and statistics, 54, 2, 173186. cheung, yin-wong, and chinn, menzie d., (1999) “are macroeconomic forecasts informative? cointegration evidence from the asa-nber surveys,” nber working paper series, working paper 6926, 1-24. dickey, d.a. and fuller, w.a. (1979) “distribution of the estimators for autoregressive time series with a unit root,” journal of american statistical association 74, 427-31. --------------------, (1981) “likelihood ratio statistics for autoregressive time series with a unit root,” econometrica, 49, 1057-1072. englander, steven, and stone, gary, (1989) “inflation expectations surveys as predictors of inflation and behavior in financial markets,” federal reserve bank of new york research paper no. 8918. hansen, b. (1992), “tests for the parameter instability in regressions with i(1) processes,” journal of business and economic statistics, 10, 321-35. johansen, soren, and juselius, k. (1990), “maximum likelihood estimation and inference on cointegration with applications to the demand for money,” oxford bulletin of economics and statistics 52, 169-210. kwiatkowski, d., phillips, p.c.b., schmidt, p and shin, y. (1992), “ testing the null hypothesis of stationarity against the alternative of a unit root, journal of econometrics, 54, 159-78. mcfarland, j.w., mcmahon, p.c. and ngama, y. (1995), “forward exchange rates and expectations during the 1920's: a reexamination of the evidence,” journal of international money and finance, 13, 627-36. phillips, p.c.b. and hansen, b.e. (1990), “statistical inference in instrumental variables regression with i(1) processes,” the review of economic studies, 57, 99-125. ----, and perron, p. (1988), “testing for a unit root in time series regression,” biometrica, 75, 33546. tallman, ellis w., (1995), “inflation and inflation forecasting: an introduction,” federal reserve bank of atlanta economic review, 80, 2, 13-27. thomas, lloyd b, and grant, alan p., (2000), “forecasting inflation --surveys versus other forecasts,” business economics, 35, 3, 9-18. 68 notes 1) tallman (1995), pg 13-14. 2) the work done in this area includes thomas and grant (2000), cheung and chinn (1999), baghestani (1992), englander and stone (1989). 3) this was suggested by an anonymous referee. 4) though most forecasts of macoreconomic variables are available from 1968 onwards, the cpi series was collected from 1981. the quarterly forecasts were obtained from the survey of professional forecasters data set available on the web-site of the federal reserve bank of philadelphia. this survey was started in 1968 by the american statistical association and the national bureau of economic research (asa-nber), and continued by the federal reserve bank of philadelphia from 1990.the actual inflation rate was obtained from the website of the bureau of economic analysis. 5) we do not detail the tests since they are quite commonplace today. the results from the augmented dickey-fuller and phillips-perron tests are available from the authors on request. these results are not mentioned in the paper due to reasons given in section 3. 6) we do not detail any of the empirical tests as they are publicly available. 7) the authors would like to thank an anonymous referee for pointing this out. 8) an anonymous referee pointed out that we cannot be sure that the professionals are not influenced by the government’s model-based forecasts, and therefore if the government stopped forecasting with the intention of using the survey forecast, this action might have an impact on the forecasts. there is perhaps no way we can be absolutely certain exactly what factors the professionals consider in coming up with their forecasts (the professionals cannot be asked since the surveys are anonymous). even if the professionals are influenced by the government’s forecasts, the surveys will still be useful to private industry. 69 and table 1: unit root tests baghestani, hamid, \(1992\), “survey evidence � forecasts of us consumers,” oxford bulletin of ec cheung, yin-wong, and chinn, menzie d., \(1999\� cointegration evidence from the asa-nber surveys,� dickey, d.a. and fuller, w.a. \(1979\) “distri� --------------------, \(1981\) “likelihood rat� englander, steven, and stone, gary, \(1989\) “� hansen, b. \(1992\), “tests for the parameter � notes 28 |journal for economic educators, 18(1), 2018 28 tragedy or treat? halloween and the trick-or-treating commons franklin g. mixon, jr.1 and cody b. ward2 abstract the “tragedy of the commons” is typically a central topic in high school and college-level economics courses. this note provides a vignette for economics instructors that relates to the tragedy of the commons that, owing to the universality of the experience, may appeal to a wider audience than the traditional examples appearing in many textbooks. the vignette relates to the ages-old halloween activity of trick-or-treating, particularly when some neighborhood residents choose to avoid the hassle of the activity by providing a “common-pool” candy bowl whose contents are distributed to trick-or-treating kids on an honor system. key words: tragedy of the commons, common pool resources, economic education jel codes: a20, a21, a22 introduction and background3 the “tragedy of the commons” is typically a central topic in high school and college-level economics courses. as the popular microeconomics principles text by mateer and coppock (2018: 232-233) points out, common ownership of resources that are rival in consumption and non-excludable often become depleted through overuse or overexploitation. traditional examples include depletion of fishing grounds in territorial waters, deforestation, and degradation of the environment (i.e., global warming). mateer and coppock (2018: 236) add the interesting case of tailgating at football games and music concerts that leads to littered parking lots and stadiums. this example may be especially compelling to students enrolled in major universities or who have the freedom and occasion to attend major concert events. others may like the more traditional examples. this note provides a vignette relating to the tragedy of the commons that, owing to the greater universality of the experience, can appeal to a wider audience.4 the vignette relates to the ages-old halloween activity of trick-or-treating, particularly when some neighborhood residents choose to avoid the hassle of the activity by providing a “commonpool” candy bowl, whose contents are distributed to trick-or-treating kids on an honor 1 professor of economics, center for economic education, columbus state university, 4225 university avenue, columbus, ga 31907 2 captain, united states army, fort benning, fort benning, ga 31905 3 the authors are grateful to an anonymous referee for helpful comments on a previous version of this note. the usual caveat applies. 4 a search through the detailed table of contents and/or text of recent editions of arnold (2019), boyes and melvin (2015), case, fair and oster (2017), chiang (2016), frank, bernanke, antonovics and heffetz (2017), hubbard and o’brien (2017), mankiw (2018), mateer and coppock (2018) and o’sullivan, sheffrin and perez (2017) failed to produce the vignette provided in this pedagogical note. 29 |journal for economic educators, 18(1), 2018 29 system basis.5 the sign depicted at the left of figure 1 indicates the type of instructions provided by those neighborhood residents who choose to be more passive halloween participants than their counterparts who actively distribute candy (treats) to the neighborhood’s kids. figure 1. common pool trick-or-treating signage examples the other images in figure 1 are real world examples of the types of candy (treats) displays left unattended on the front porches and stoops of the u.s. on the last night in october each year. in the sections that follow, this phenomenon is developed into a simple vignette for presentation at the high school and college levels. before turning to the vignette, we provide a brief review of the recent literature describing advancements in the classroom presentation of topics related to market inefficiencies. following presentation of the vignette, we offer some concluding remarks. market inefficiencies and econ ed: recent literature a number of recent studies discuss market inefficiencies in economics principles courses using examples and methods that are likely to be more appealing to students than traditional textbook examples.6 caudill and mixon (2013), for example, introduce the phenomenon in american culture referred to as the wardrobe malfunction. largely built around the well-known wardrobe mishap involving justin timberlake and janet jackson during halftime of the 2004 super bowl, students are introduced to the concepts of economic efficiency, property rights assignments, regulation, and liability arrangements. relatedly, hammock and carden (2014) extend the recent trend of integrating movie scenes into classroom discussion by using the 1980s movie classic trading places to focus on property rights and markets for natural resources. in the same volume of economic education essays containing hammock and carden (2014), beaulier, mixon and caudill (2014) recount a story about oracle ceo larry ellison as a vehicle for in-class presentation of the coase theorem. from 2004 through 2011, ellison attempted to purchase a neighbor’s home, because it obstructed his view of san francisco bay. more recently, klein (2015) capitalizes on the popularity of digital music files to help students develop an understanding of important intellectual 5 for another example, involving the use of isoquants in describing the production of social order, of how the american tradition of halloween provides a useful backdrop for economic education, see mixon, loftus and keene (2005). 6 this note uses the phrase “market inefficiencies,” which is used in the title of the chapter in mateer and coppock (2018) that covers externalities, property rights, the coase theorem, private goods, public goods, club goods, communal or common-property resources, and the tragedy of the commons, for convenience. 30 |journal for economic educators, 18(1), 2018 30 property rights issues in the modern music industry, such as optimal copyright policy and illegal file sharing (piracy). lastly, mixon, asarta and caudill (2017) revisit consumer music markets in their examination of patreon, an internet-based service that allows music fans to financially support their favorite independent artists. the artists then provide their music creations to fans via the open access format offered by youtube. even though the music available on the youtube platform exhibits the hallmarks of a public good, fans of the music display a willingness to contribute financially to the creators’ livelihoods. the tragedy of the halloween commons: a simple vignette our story begins when some of a neighborhood’s residents choose to take a passive approach to trick-or-treating by placing a bowl of candy on their front porch or stoop, creating a common-pool as described in mateer and coppock (2018). first, the candy in the bowl is rival in consumption given that candy taken from the bowl by lucy, for example, is no longer available for charlie to take and enjoy. the same goes for the pieces of candy taken by charlie. second, the resource represented by the bowl of candy is also non-excludable in the sense that neither lucy nor charlie can exclude (legally) the other (or others) from accessing the candy in the bowl. thus, the criteria for a communal good are met. figure 2. the tragedy of the trick-or-treating commons this halloween vignette differs from traditional examples in that the homeowners may want the contents of the bowl to be “depleted” by the end of the evening. in this case, the tragedy of the commons relates to how much of the candy is taken and enjoyed by a given trick-or-treating kid and how quickly (i.e., at what point in the evening) the contents of the candy bowl are depleted by the collective group of trick-or-treating kids.7 to explore these aspects of the story, consider the satisfaction lucy obtains from consumption of the candy from such a communal bowl. suppose lucy receives a marginal benefit (mb) of 10¢ from the first piece of candy she takes from the bowl, 8¢ from the second, 6¢ from the third, and so on. thus, when lucy arrives on the porch or stoop, she will continue to take candy from the communal bowl until the mb to her of the last piece she takes is equal to 0¢. in our example, this occurs after she takes six pieces of candy. if other neighborhood kids follow suit, the bowl will be depleted at some point much earlier in the evening than would have occurred if lucy and the other neighborhood kids followed the residents’ 7 the vignette describing how quickly a shared milkshake is consumed in frank et al. (2017) is most similar to that presented here. 31 |journal for economic educators, 18(1), 2018 31 instruction to “take just one.”8 after this point, those neighborhood kids who venture onto the porch or stoop will find that the communal bowl empty. this is depicted in figure 2. next consider charlie, one of the neighborhood kids who arrives after the bowl has been emptied by lucy and the others. he will be unable to collect any candy from this particular home. if we assume his preferences are identical to lucy’s, we can see how lucy’s (and the others’) actions are not socially optimal. that is, had lucy left a piece of candy for charlie to collect, lucy’s satisfaction would have been diminished by 2¢. in doing so, however, charlie would have collected a piece of candy yielding a mb to him of 10¢. this process, repeated over other units of candy and across more of the children in the neighborhood, creates more social welfare than was produced in the tragedy of the commons case. had the homeowner in this vignette not been away from home on halloween, or, if home, had chosen to participate, a similar outcome could have been facilitated by limiting the access of each child to only a single piece of the candy. although not a feature of the vignette presented here, this potential conclusion to the story highlights the difference between the “market” outcome of quick depletion and dissipation of net benefits and the socially optimal outcome of maximizing total net benefits by limiting access. concluding comments this note provides a vignette of the tragedy of the commons related to the halloween activity of trick-or-treating. we described how some of a neighborhood’s residents choose to avoid what they view as the hassle of the activity by providing a “common-pool” candy bowl. distributing the contents to trick-or-treating kids on an honor system basis depletes the candy bowl more rapidly than would be realized in a traditional trick-or-treating context. we argue that the universality of the experience described in our vignette appeals to a wider audience of economics principles students than traditional examples that appear in common principles texts. references arnold, r.a. 2019. economics. boston, ma: cengage. beaulier, s.a., f.g. mixon, jr. and r.j. cebula 2014. “can’t see the tacking for the trees? try a coasian solution.” new developments in economic education. edited by f.g. mixon, jr. and r.j. cebula. northampton, ma: edward elgar, pp. 126-132. boyes, w. and m. melvin 2015. economics. boston, ma: south-western. case, k.e., r.c. fair and s.m. oster 2017. principles of economics. boston, ma: pearson. caudill, s.b. and f.g. mixon, jr. 2013. “celebrity wardrobe malfunctions: economic efficiency, property rights assignment, and liability in popular culture.” journal of economics and economic education research 14(2): 37-48. chiang, e.p. 2016. economics. new york, ny: worth publishers. frank, r.h., b.s. bernanke, k. antonovics and o. heffetz 2017. principles of economics. new york, ny: mcgraw-hill. hammock, m.r. and a. carden 2014. “bo knows property rights and futures markets: economics in trading places.” innew developments in economic education. edited by f.g. mixon, jr. and r.j. cebula. northampton, ma: edward elgar, pp. 46-132. 8 again, either occurrence likely leads to depletion in this particular vignette. 32 |journal for economic educators, 18(1), 2018 32 hubbard, r.g. and a.p. o’brien 2017. economics. london, u.k.: pearson. klein, c.c. 2015. “the music industry as a vehicle for economic analysis.” journal of economic education 46(4): 403-411. mankiw, n.g. 2018. principle of economics. boston, ma: cengage. mateer, d. and l. coppock 2017. principles of microeconomics (2nd edition). new york, ny: w.w. norton. mixon, f.g., jr., c.j. asarta and s.b. caudill 2017. “patreonomics: public goods pedagogy for economics principles.” international review of economics education 25(1): 1-7. mixon, f.g., jr., j.s. loftus and w.s. keene 2005. “the decay of norms and the production of social order: conceptual and empirical models.” applied economics letters 12(1): 725-730. o’sullivan, a., s.m. sheffrin and s.j. perez 2017 economics. boston, ma: pearson. 14 | journal for economic educators, 17(1), 2017 accounting for asymmetric information and screening in market models of the loanable funds and labor markets s. kirk elwood1 abstract the loanable funds and labor markets are two important markets in macroeconomics where asymmetric information is inherent and, in response, effective forms of screening have developed and become established. but many macroeconomic textbooks rely on the standard market model to characterize these markets despite its weakness at accounting for their information issues. this article suggests a simple modification to the usual market approach that acknowledges the sophisticated screening that has arisen in response to the asymmetric information of these markets. the resulting model improves upon the standard model by capturing clearly observed forms of credit rationing in the loanable funds market and unemployment in the labor market. key words: asymmetric information, screening, credit rationing, unemployment jel classification: a22, d82, e00, g21, j64 introduction the standard market model is not equipped to capture the complications that arise when a market’s buyers and sellers possess asymmetric information regarding the good or service to be exchanged. but there are some important markets – for example, the loanable funds and labor markets – where asymmetric information issues have given rise to extensive screening to address the asymmetric information problems. although signaling also takes place, it is neither as institutionalized nor as effective as the screening that occurs in these two particular markets. the asymmetric information and corresponding screening in the lending market produce what is recognized as a form of credit rationing, while the information issues in the labor market are a source of unemployment (whether that unemployment is viewed as voluntary or involuntary is a matter of interpretation, as will be addressed below). accordingly, the information issues are relevant to macroeconomists given that both credit rationing and unemployment are widely accepted as key indicators of macroeconomic performance. since asymmetric information and screening are normally considered part of the microeconomic curriculum and under the domain of microeconomic textbooks, macroeconomic textbooks that introduce the loanable funds and labor markets are confronted with a choice. do they step back and quickly introduce the topics of asymmetric information and screening so as to prepare students for a more comprehensive discussion of these two critical markets, or, do they ignore the concepts and do the best they can without them? some textbooks seem to implicitly (although not explicitly) concede that the information issues render the market model inappropriate by not presenting the market diagrams of either the loanable funds or the labor market (e.g., macroeconomic textbooks that do not include either a loanable funds or labor market diagram include blanchard, 2013; case and fair, 2014; and shiller, 1 professor of economics, department of economics, james madison university, msc 0204, harrisonburg, va 22807 15 2016). of the rest that depict one or both of the important markets – however imperfectly – in the standard market model, any discussion of how asymmetric information and screening influences the important markets is not common (textbooks that present the loanable funds market as well as those that introduce the labor market this way are noted below). the decision to present the loanable funds and labor markets using the market model without mentioning the effects of screening reflects a willingness to overlook credit rationing and unemployment. what is the source of this willingness? is it simple practicality, i.e., are the benefits of having basic market model analysis when introducing these two important markets worth the costs of overlooking the effect of their asymmetric information issues and the screening that ensues? does the willingness come from a belief that the asymmetric information is sufficiently countered by the associated screening (and signaling) to confirm the standard market approach? perhaps confidence in the standard market analysis at the root of much of economic thinking leads many economists to discount the asymmetric information problems since they are not captured by the standard market model. or, is it more accurate to say that all three of these explanations apply to some extent and have even been mutually-reinforcing? interestingly, the same screening that identifies quality trading partners in both the loanable funds and labor markets necessarily distinguishes those who are viewed as less reliable and, therefore, unable to take part in a trade. anyone misperceiving these latter folk as viable participants in the market will likely misinterpret their lack of success as evidence of a market failure where none exists. of course, whether or not a market failure is perceived influences most economists’ recommended government policies for that market, and especially so for markets as important to the economy as the loanable funds and labor markets. this paper presents a modified market model that provides more comprehensive and cogent depictions of the loanable funds and labor markets by accommodating the asymmetric information and, importantly, the screening that exists in each market. granted, the dependable screening in these markets is so expected and commonplace that it can seem strange to conceptually separate it from the other forces that shape the markets. but benefits to the approach include a helpful and remarkably accurate characterization of much of the credit rationing observed in the lending markets as well as of unemployment in the labor markets. the loanable funds market many macroeconomic textbooks present the loanable funds market in which the downward sloping demand captures the behavior of would-be borrowers and the upward sloping supply represents lenders’ behavior (this includes textbooks by hubbard and o’brien, 2015; krugman and wells, 2012; and mankiw, 2015). the model implicitly assumes away the presence of screening that counters asymmetric information, thus allowing the simple market analysis to identify an equilibrium interest rate and equilibrium loan volume. there is no mention of asymmetric information or screening in the accompanying text (nor of the possibility that the outcome would frustrate some attempting to participate in the market as with credit rationing). other textbooks – particularly intermediate macroeconomic texts – present the same underlying theory using the saving and investment schedules in the context of a closed economy (e.g., abel, bernanke, and croushore, 2014; mankiw, 2013; and mishkin, 2015; with frank and bernanke, 2012; being an example of an introductory textbook). the determination of the interest rate and 16 the quantity of saving and investment is theoretically equivalent to that of the loanable funds approach and, again, there is no accompanying mention of screening or credit rationing.2 however, lending is complicated by asymmetric information as lenders do not necessarily take borrowers’ promises to repay at their word. instead, they screen prospective borrowers to better ascertain whether they are trustworthy. this screening takes the form of interviewing would-be borrowers, investigating their credit and work histories, and verifying their financial conditions, all of which have proven to be very effective and have become standard practice by lenders. given the overall demand for loanable funds by willing borrowers (d), the screening allows lenders to discern a subset of d that they deem to represent the trustworthy borrowers, referred to here as the verified demand (dv). the horizontal distance between d and dv represents the willing borrowers who are not deemed reliable to pay back loans. figure 1 depicts the loanable funds market in which d and dv are both shown. note that while there is no explicit recognition of the screening costs absorbed by lenders in figure 1, the specified supply curve (s) is assumed to represent those costs. thus, the modified market model assumes that lenders routinely incur screening costs and that the screening only informs lenders – as opposed to convincing many would-be borrowers – as to the unreliability of those would-be borrowers. accordingly, changes in screening costs shift s, e.g., an increase in screening costs causes a decrease in s. also, an increase in the efficacy of screening for a given screening cost has no effect on d, but could shift the dv curve either in or out depending on whether the improved screening identified fewer or more trustworthy borrowers, respectively. it is true that hopeful borrowers realize that they need to be seen as trustworthy by lenders to secure a loan and will try to signal their reliability. any information they convey to lenders beyond what lenders have ascertained by their screening will affect the lenders perception of dv. furthermore, borrowers can often screen lenders and lenders can signal the quality of their service (e.g., through advertising), both of which could cause borrowers to differentiate between lenders who can be expected to perform up to a certain standard and lenders who cannot. this would call for specifying a verified supply of loanable funds in addition to the declared supply of loanable 2 whereas borrowing for either consumption or government purchases adds to the demand for loanable funds and constitutes dissaving in the saving/investment framework (for example, government deficits increase the demand for loanable funds whereas they shift the saving schedule to the left), their theoretical impact on the interest rate and level of investment is identical under both approaches. similarly, although investment financed from investors’ own savings would not show up in the loanable funds market, the demand and supply of loanable funds would differ from the investment and saving schedules (respectively) by the exact same amount, so that both approaches identify the same equilibrium interest rate. 17 funds in a way comparable to what is done for the demand. but it is assumed here that the asymmetric information and the effects of these forms of screening and signaling are negligible relative to the impact of screening by the lenders in the loanable funds market, so that figure 1 only presents the supply of loanable funds (s) without distinguishing any different supply that has been verified by prospective borrowers. assuming that there are many lenders with the same screening abilities and costs, as well as many verified borrowers, means the competitive equilibrium interest rate (r*) is determined by the intersection of the supply of loanable funds (s) and dv (as shown in figure 1). these are the relevant curves because those supplying funds and those qualifying to borrow constitute the market participants that agree on the item that is exchanged and, through their actions, bring about market clearing.3 however, unlike the traditional loanable funds diagram that does not distinguish between dv and d, figure 1 reveals the amount of loanable funds at the equilibrium interest rate that borrowers who lack the confidence of potential lenders would like to borrow.4 lenders turning down willing borrowers at the going interest rate meets one simple definition of the economic phenomenon known as credit rationing, where the volume of credit rationing is shown by the horizontal distance between the dv and d curves at the equilibrium rate. 5 note that this modified loanable funds market model maintains the usual analysis available from the traditional model, plus it captures the effects of shocks that affect dv and d differently. for example, an increase in the risk perceived by lenders, or a reduced appetite for risk by lenders, causes them to be more reluctant to validate loan requests, shifting dv in without moving d. 6 the concept of credit rationing has received the most attention in the macroeconomic literature due to its role in the credit channel of monetary policy. following bernanke’s (1983) influential paper on how the destruction of “information capital” and the “malfunctioning of the financial institutions of the early 1930’s” were significant contributors to the great depression, the means by which monetary shocks disrupt the provision of credit and influence macroeconomic 3 because the supply curve represents the lenders’ behavior and the dv curve represents the perceptions of those same lenders (regarding the trustworthiness of the borrowers), one might suspect that the model specifies lenders with market power that is not present in the traditional representation of the loanable funds market. but this is not the case. the assumption that there are many lenders of equal screening abilities as well as many verified borrowers assures that the lenders operate in a competitive environment. to corroborate this claim, consider lenders who – believing they have market power – try charging an interest rate above the competitive rate identified in figure 1. the presence of many lenders competing with each other would lead to an excess supply of loanable funds, and market forces would return the interest rate to the competitive equilibrium that is shown. 4 the flatter slope of the verified demand curve relative to the demand curve in figure 1 depicts the case in which the number of willing borrowers who do not qualify for loans rises with the interest rate. 5 there are more precise definitions of credit rationing. in stiglitz and weiss’s (1981) seminal paper, “credit rationing” occurs due to asymmetric information that is unresolvable by screening or signaling, i.e., it assumes away the issue of unreliable borrowers who are precisely the credit rationed identified in the modified market model introduced here. they assume that all borrowers are equally dependable, yet show that some would be denied credit at the going interest rate (and, therefore, credit rationed) due to lenders’ responses to the asymmetric information. it is important to be clear that the credit rationing investigated by stiglitz and weiss of dependable prospective borrowers is not captured by the model presented here which, instead, depicts the credit rationing of those who have been shown to be unreliable prospective borrowers by successful screening (which is not a concern of stiglitz and weiss). it is also important to recognize that these two types of credit rationing are not mutually exclusive. both could be present in an economy. 6 an alternative perspective on dv is that it captures lenders’ behavior in reaction to their expectations – e.g., their perceived mean and standard deviations – regarding the borrowers honoring their debt obligations. in this case a greater standard deviation would cause the (presumably risk averse) lenders’ dv to shift to the left in a similar way to that just discussed. the assumption of risk averse lenders assures that their operational dv will not be outside (i.e., to the right) of the d curve. 18 performance was identified as the “credit channel of monetary policy” (bernanke and gertler, 1995). the credit channel of monetary policy actually consists of two component channels, both of which depend on credit rationing: 1) the bank lending channel in which monetary policy alters the relationships between potential debtors and creditors and, in so doing, alters the success of screening at alleviating asymmetric information problems. for example, small borrowers who have developed relationships with particular lenders over the years (i.e., the lenders have gathered sufficient information regarding the reliability of the borrowers to willingly lend to them) can be stranded when their usual lender is short of available funds due to a contractionary monetary policy. whereas the large borrowers may have sufficient reputations to be quickly considered creditworthy by multiple lending institutions, small borrowers often look too risky for creditors not already familiar with them. accordingly, contractionary monetary policy creates conditions where potential borrowers, because they must ultimately rely on other creditors that do not know them well, are effectively transformed from verified demanders of loanable funds to unverified demanders. 2) the balance sheet channel in which monetary policy changes the price of assets and, therefore, the balance sheets and perceived creditworthiness of potential borrowers. for example, contractionary monetary policy raises interest rates, thereby reducing asset values including those assets owned by potential borrowers. the resulting harm to the potential borrowers’ net worth reduces their overall creditworthiness in the eyes of possible lenders, not just because of the fall in the value of assets that could serve as collateral, but because less healthy balance sheets increase the likelihood of default and bankruptcy. thus, while contractionary monetary policy is correctly represented as a decrease in the supply of loanable funds that raises interest rates, both the bank lending and balance sheet channels explain how contractionary monetary policy also causes dv (as in figure 1) to shift to the left without necessarily altering d. the shift in dv counters the effect of the decrease in supply of loanable funds (from the contraction in the money supply) on the interest rate, however, it reinforces the decrease in supply’s effect on the equilibrium quantity of lending and it increases the amount of credit rationing. another important type of shock to dv that is adeptly captured by the modified model is a change in risk aversion by banks. the model predicts that a negative shock to “bank confidence” (perhaps brought on by a recession) will shift dv in causing low interest rates, less lending, and increased credit rationing. this explains the coexistence of these conditions, sometimes viewed as a puzzle since low interest rates are normally thought to promote more borrowing and since interest rates are expected to be bid up by the apparent excess demand for funds reflected by the many credit rationed would-be borrowers. it is particularly noteworthy that the modified model significantly improves upon the standard model in capturing events in the private loanable funds market during the recent great recession. the volume of borrowing/lending plummeted which, per the traditional model, would only happen with a decrease in demand and/or a decrease in supply of loanable funds. reports from the financial sector during this period strongly attributed the cause of the low lending to a decrease in creditor participation as they commonly referred to credit markets as “frozen” or “dried up” or suffering from a “credit crunch.” (many macroeconomic textbooks discuss the credit problems of this period: able, bernanke, and croushore, 2014, pg. 564-5; dornbusch, fischer and 19 startz, 2014, pg. 422; and mankiw, 2016, pg. 334.) but the suggested decrease in supply of loanable funds rather than a decrease in would-be borrowers demanding them would have caused higher interest rates, and that was not observed. alternatively, the increase in risk during this period decreased the supply of funds in private markets (and caused increases in the spreads between private rates and the government risk free rate), but this decrease in supply was overpowered by the increase in supply from ample monetary expansion that lowered the government rate (increasing the supply of funds in the private lending markets as lenders turned to them for the relatively higher returns). the resulting net increase in supply of private loanable funds leads conventional financial market analysis to predict the low interest rates that were observed, but it also predicts greater loan volumes as opposed to the contraction in lending that took place. in contrast, the new model presented here can incorporate the increase in credit rationing that occurred. in the aftermath of the popping of the housing and bond bubbles creditors became more risk averse and, accordingly, adopted higher standards for validating prospective borrowers, causing dv to shift left. this not only explains the drop in lending that occurred and is consistent with the narrative that creditors were not showing up, but it is also consistent with the low interest rates that accompanied the low lending. the labor market another very important market presented in macroeconomic textbooks with the help of a market diagram is the labor market (abel, bernanke, and croushore, 2014; frank and bernanke, 2012; hubbard, o’brien and rafferty, 2012; mishkin, 2015; and williamson, 2014).7 this market is also subject to asymmetric information issues that have given rise to well-established screening activities, rarely acknowledged in the discussion accompanying the market model. specifically, since the quality of labor that a particular job applicant would deliver is not immediately apparent to those who demand labor, prospective employers rely on interviews, recommendations, proof of experiences, internships, and other forms of screening to provide confidence in the quality of the labor offered. successful signaling by those hoping to be hired will provide better information to employers. accordingly, figure 2 shows the labor market where the supply of labor (s) is distinguished from the supply of labor that has been verified as acceptable in the eyes of the employers who demand it (sv). 7 interestingly, some textbooks limit their use of labor market diagrams to the examination of the effects of minimum wage laws (colander, 2013; frank and bernanke, 2012; hubbard and o’brien, 2015; krugman and wells, 2012; and mankiw, 2015), presumably because the unemployment caused by the price floor (when binding) is easily depicted, in contrast to unemployment stemming from other factors. 20 as with the previous discussion on the loanable funds market, the model in figure 2 might seem to overlook issues such as the employers’ screening costs and any asymmetric information regarding the employers’ behavior. but the screening costs experienced by employers can be thought of as reflected in the employers’ demand (so that, for example, greater screening costs would shift the demand curve for labor in). and while screening by potential employees (e.g., checking out the reputations or safety records of employers) and signaling by employers (e.g., advertising their working conditions) certainly exist, these efforts are relatively ineffective at reducing asymmetric information compared to the common screening undertaken by employers. this means that the difference between dv and d is relatively small compared to that of sv and s. the model presented in figure 2 accentuates that relative difference by not differentiating between dv and d at all, although specifying a small difference is straightforward and does not alter the analysis below in any significant way. figure 2 illustrates the market clearing quantity of employment and competitive equilibrium wage as determined by the demand and verified supply of labor, which are the relevant forces in this market.8 as shown by figure 2, the number of people wanting to work at the equilibrium wage exceeds the number hired, giving rise to unemployment.9 a major debate in economics regarding unemployment is whether unemployed people are involuntarily unemployed or voluntarily unemployed. keynesian theory argues that cyclical unemployment (which it distinguishes from the natural rate of unemployment) is largely involuntary and caused by sticky wages. this is depicted easily in a labor market diagram by a wage remaining stubbornly too high to clear the labor market and, thus, causing an excess supply of labor that constitutes involuntary unemployment. explanations of such sticky wages include minimum wage laws, unions, and explicit and implicit labor contracts. other explanations of why wages exceed a market clearing level and generate involuntary unemployment come under the category of efficiency wage theories. whereas efficiency wage theories explain unemployment as a consequence of asymmetric information, they do so without considering the impact of any screening. therefore, the unemployment identified here is very different because it completely depends on successful screening in the labor market.10 notably, the focus on this latter type of unemployment below should not be inferred as a denial that the unemployment due to efficiency wages can and does occur concurrently. in contrast, classical theory views unemployment more simply as the result of potential workers not yet finding and accepting employment opportunities. this includes those who do not accept available jobs believing – correctly or not – that there is a better employment fit with better compensation yet to be found. this latter form of unemployment is explained by search theory, 8 a comparable issue to one addressed in the loanable funds market arises in that those demanding labor in this market and those validating the worthy component of the supply are the same agents, which naturally causes concern about the possibility that those agents (i.e., the employers in this case) possess market power. but a similar screening process by employers does not give any one of them market power as long as there are many of them. again, a thought experiment is helpful: if employers were to offer a lower than market-clearing wage, then there would be a shortage of qualified workers and market forces would drive the wage up to its equilibrium. 9 it is important to note that there are other markets with asymmetric information regarding the quality of the good being supplied where the unverified supply is discounted promptly enough to prevent it from being interpreted as an excess supply – such as the used car market. in this case, used (unverified) cars are better cast as imperfect substitutes for the verified cars in the same way that risky bonds are imperfect substitutes for risk-free bonds. thus, the unverified cars, like the risky bonds, sell at a lower price than the more certain alternatives. 10 efficiency wage theories are at least mentioned in most intermediate macroeconomic texts (abel, et al. 2014; and mankiw, 2016). also, see shapiro and stiglitz (1984) and summers (1988). 21 which examines the decision of potential employees to either accept or deny job offers. of the few undergraduate macroeconomic (as opposed to labor economics) textbooks that include some search theory, it normally doesn’t extend past assuming a “reservation wage” required by a worker before accepting a position. actual search models are presented even more rarely, and then it is the reservation wage, the duration of the job search, or the unemployment rate that is specified as endogenous as opposed to the quantity of unemployed as in the market model.11 it is not surprising that people searching to find more desirable jobs (as opposed to settling for lesser jobs) see themselves as involuntarily unemployed, yet classical thinking considers them to be voluntarily unemployed and, therefore, not an excess supply of labor. search theory is incorporated into the standard market model for labor through its effect on the labor supply curve. for example, an increase in people’s reservation wages is represented as a decrease in labor supply (i.e., a shift left of the labor supply curve). accordingly, including the assumptions of search theory does not alter the interpretation of the labor market model as long as one then notes that those people still searching for employment who think they are unemployed – and who may be reported on the evening news as being so –are unemployed voluntarily. the supply curve specified by the modified market model in figure 2 (s) effectively captures the same classical thinking regarding the supply response of potential workers to wage offers by employers, so that the self-proclaimed involuntarily unemployed people searching for satisfactory jobs form the labor supply just as they do with the standard model. but only those who have been identified and validated by employers to offer the required quality of labor constitute the verified labor supply (sv). note that the unemployment associated with search – which is not visible in either model but is acknowledged in the construction of their supply curves – is independent from the unemployment caused by the employer screening that distinguishes the verified labor supply. in other words, those who are unemployed because they have not yet accepted employment at the going wage are different from those who would be offered and accept work at that wage if an employer would validate them as fit to be hired. whereas classical thinking clearly identifies those who do not accept employment as voluntarily unemployed, its perspective on the unemployment associated with employer screening is less definitive. one could reasonably argue that those who would be competent workers without yet having their abilities validated are involuntarily unemployed and, simultaneously, maintain that those who offer their labor thinking – incorrectly – that they are able to provide the quality of labor demanded by employers should be considered delusional as opposed to involuntarily unemployed. more practically, whether labeled involuntary or not, both sources of unemployment are evident in the economy and the modified model’s ability to capture that observed phenomenon is a strength when compared with the standard model.12 in addition to recognizing unemployment regardless of whether it is voluntary or involuntary, the modified model improves upon the standard model of the labor market by being able to examine the effects of structural shocks that affect s and sv differently. as one example, laws that make it more difficult to fire employees (for example, as found in france) increase the costs of hiring poor performing employees and, accordingly, increase the degree to which job 11 blanchard (2013) is an intermediate macroeconomic textbook and colander (2013) and frank and bernanke (2013) are introductory macroeconomic textbooks that distinguish themselves from most other textbooks by introducing the notion of a reservation wage. dornbusch, fischer, and startz (2014) is an even greater exception among intermediate macroeconomics textbooks in that it mentions search theory, while williamson (2014) develops it more formally. although matching theory – which can be seen as an extension of search theory – could be applied to the labor market as well, no undergraduate macroeconomic textbooks that did so were found. 12 this does not exclude the possibility that sticky wages also affect the labor market. 22 applicants’ labor services need to be screened and verified in order to satisfy employers. the desire for more thorough screening shifts sv in without moving s, causing lower employment and greater unemployment, although those who secure jobs make higher wages. this is consistent with the french experience where the difficulty in firing workers is often blamed for france’s high unemployment rate, yet france’s worker productivity is one of the highest among oecd countries.13 notice that figure 2 depicts a supply curve that becomes more inelastic as the quantity of labor supplied becomes greater. this captures the decreasing effect that a higher wage has on the quantity of labor supplied as additional potential laborers become more scarce. the figure also depicts a narrowing of the distance between sv and s as the quantity supplied increases. this would be the case if – as labor becomes more scarce – employers become less picky about those they hire. this predicts the observed result that an increase in labor demand due to economic expansion causes unemployment (seen as the distance between sv and s at the equilibrium wage) to fall.14 the relative value of the modified model since the modified model presented here is only meaningful when a market experiences significant screening, its only potential value is in analyzing those markets. although such markets may be few, the two discussed here are critically important to basic macroeconomics, and their importance would seem to make room for the modified model to be valued. still, the decision of whether to employ the modified model to assess those two markets depends on the perceived benefits and costs associated with the new model. those will likely be weighted differently by different economists. both the standard model and the modified model capture the determination of equilibrium prices and quantities of the markets they are investigating. but the standard model is oblivious to the screening done in the loanable funds market and, therefore, doesn’t even hint at the existence of credit rationing. the standard market model of the labor market that ignores screening can illustrate unemployment due to either a binding minimum wage or sticky wages by assuming a wage above the equilibrium wage. but it doesn’t divulge any unemployment resulting from asymmetric information and the associated screening in the labor market. thus, one’s valuation of the modified model presented in this paper greatly depends on its perceived advantages in conveying the phenomena of credit rationing and unemployment. it would not be surprising for some to find the complete independence of credit rationing from the loanable funds market (as under the standard model) unsatisfactory.15 for example, they might be concerned that the model’s implicit denial of something as evident as credit rationing could generate doubts about the model more generally. others could reasonably prefer to use the standard model to present the equilibrium price and quantity of credit, and feel comfortable admitting that credit rationing is a complication not captured by the standard market analysis. similarly, some may feel that the standard labor market diagram misses (or even hides) a type of unemployment that they believe is commonly observed in the economy and, therefore, important to acknowledge. rather than try to explain the unemployment outside of the standard labor market 13 of course, french after-tax wages are not as impressive due to high french taxes. 14 even if the horizontal distance between sv and s was constant across wages, then an increase in the demand for labor that increased employment would reduce the unemployment rate. 15 as pointed out in the introduction, it is not uncommon for undergraduate macroeconomic textbooks to forego the standard market model of the loanable funds or the labor markets in their presentations of those markets. 23 analysis and possibly face questions about how the analysis overlooks it, one could find it worthwhile to specify the modified model, because it recognizes and depicts that unemployment. others could choose to continue presenting the unemployment generated by screening as something outside of what the standard labor market diagram portrays. perhaps it is most important to note that the two models are not mutually exclusive and that both could be used effectively in presentations of the loanable funds or labor markets, i.e., it is quite possible to first present either market with the standard market model and then introduce the effect of screening with the modified model. conclusion this paper suggests very simple alterations to the traditional market model to capture effective and widespread screening in two critically important markets where asymmetric information is a complicating factor: the loanable funds market and the labor market. in each case, the modified model presents market clearing and, in addition, some evident and important features of the market that the traditional market model fails to take into account. specifically, the new model’s depiction of the loanable funds market captures a commonly recognized form of credit rationing, while its version of the labor market clearly shows unemployment distinct from any unemployment attributed to sticky wages. references abel, andrew, ben bernanke, and dean croushore. 2014. macroeconomics. 8th ed. boston: pearson. bernanke, ben. 1983. “nonmonetary effects of the financial crisis in the propagation of the great depression.” american economic review, 73: 257-276. bernanke, ben, and mark gertler. 1995. “inside the black box: the credit channel of monetary policy transmission.” journal of economic perspectives, 9: 27-48. blanchard, olivier. 2013. macroeconomics. 6th ed. boston: pearson. case, karl e., ray c. fair and sharon m. oster. 2014. principles of macroeconomics. 11th ed. boston: pearson. colander, david c. 2013. macroeconomics. 9th ed. new york: mcgraw-hill irwin. dornbusch, rudiger, stanley fischer and richard startz. 2014. macroeconomics. 12th ed. new york: mcgraw-hill. hubbard, r. glenn, anthony o’brien, and matthew rafferty. 2012. macroeconomics. boston: pearson. frank, robert, and ben bernanke. 2012. principles of macroeconomics. 5th ed. new york: mcgraw-hill. hubbard, r. glenn, and anthony o’brien. 2015. macroeconomics. 5th ed. boston: pearson. krugman, paul, and robin wells. 2012. macroeconomics. 3rd ed. new york: worth. mankiw, n. gregory. 2016. macroeconomics. 9th ed. new york: worth. mankiw, n. gregory. 2015. principles of macroeconomics. 7th ed. mason, united states: southwestern. mishkin, frederick s. 2015. macroeconomics: policy and practice. 2nd ed. boston: pearson. shapiro, carl, and joseph e. stiglitz. 1984. “equilibrium unemployment as a worker discipline device.” american economic review, 74: 433-444. shiller, bradley r. 2016. the macro economy today. 14th ed. new york: mcgraw-hill. 24 stiglitz, joseph e., and andrew weiss. 1981. “credit rationing in markets with imperfect information.” american economic review, 71: 393-410. summers, lawerence h. 1988. “relative wages, efficiency wages, and keynesian unemployment.” american economic review, 78: 383-388. williamson, stephen d. 2014. macroeconomics. 5th ed. boston: pearson 19 | journal for economic educators, 15(1), 2015 the impact of question order on multiple choice exams on student performance in an unconventional introductory economics course paul kagundu and glenwood ross1 abstract we investigate the effect of question order on multiple-choice exams on students’ performance in an unconventional introductory economics course. the course is an introduction to the global economy and comprises elements of principles of economics, introductory international trade and introductory international finance. the tests in two sections of the course were administered in four versions. on one of the versions, multiple-choice questions are ordered according to the order in which course material was offered, while questions on the other versions are randomly scrambled. our empirical analysis reveals no statistically significant effect of question order on students’ grades. key words: question order, multiple-choice exams, students’ performance, unconventional economics course jel classification: a22 introduction in an effort to reduce cheating on multiple-choice tests, instructors often use several different versions of the same test. in many cases, a sequenced version of the test is accompanied by several randomly scrambled versions of the test. the questions on the sequenced test are presented in a logical fashion, based on the order in which the course material was offered. as a result, students may glean cues and prompts from a prior question or set of questions in a logical sequence to lead them to a correct response. if this is the case, an unintended consequence of this effort to minimize cheating could be the introduction of a bias in favor of those students who receive the sequenced version of the test versus those who receive the scrambled versions. a number of studies have taken a look at the importance of question order on multiplechoice tests in introductory economics courses. the courses examined in these studies have typically been principles of economics, principles of macroeconomics, and principles of microeconomics courses in which material is generally presented in a logical building block manner. this study attempts to extend the work of previous studies by examining the impact of 1 p. kagundu, senior lecturer of economics, department of economics, penn state university; g. ross, clinical associate professor of economics, department of economics, georgia state university. 19 20 | journal for economic educators, 15(1), 2015 question order on multiple-choice tests in a global economy course, an unconventional introductory economics class.2 the class is unconventional in the sense that (1) it is a hybrid course comprised of roughly equal elements of economic principles, introductory international trade, and introductory international finance; and (2) not all the material is presented in a typical building block sequential manner of most introductory economics courses. the content in the first third of the course consists of standalone topics whose understanding is not dependent on the mastery of any other topic in the section. this is where a select group of basic economic concepts that are needed in the remainder of the course are introduced. these concepts include definitions of economics, marginal analysis, opportunity cost, supply and demand, gross domestic product (gdp), inflation, and the production possibilities frontier (ppf). each of these topics is independent of the others and can be presented in any order. the remainder of the course is much more structured in that the topics covered in international trade and international finance build upon each other. one can conceive of the first part of the course as a collection of random topics, while the last two-thirds of the course is more logically sequenced. this dichotomy allows us to relate the importance of question order to the nature of course content. a priori, it would seem that question order on multiple-choice tests should matter more for logically ordered and related course content than for course content that is randomly ordered and unconnected. the next section presents a brief review of the literature on question order and student performance on multiple-choice tests, highlighting our contribution to this literature. this is followed by the empirical framework, the data and a discussion of simple inferences. then we present and discuss the regression results for the impact of question order on student performance, followed by a conclusion. literature review several studies examine the impact of the question order of multiple-choice exams on student performance in introductory economics courses. to date, however, no general consensus has emerged. some studies conclude that question order may indeed matter. in one of the first studies to investigate this topic, taub & bell (1975) developed a regression model that included a dummy variable to indicate whether a multiple-choice test was randomly ordered or sequentially ordered. this variable proved to be significant, indicating that students who completed randomly ordered tests scored about 1.4 points lower than students who completed tests on which the questions followed the order of topics in the textbook and lectures. carlson & ostrosky (1992) also concluded that question order might matter. they analyzed four exams in a large microeconomics principles class in which each exam was administered in two versions — one in sequential content-order and one in random order. when each exam was analyzed individually, carlson and ostrosky (1992) were unable to reject the null hypothesis that the means and the variances on the sequenced and random versions of the exam were equal. when the data were pooled, however, the null was rejected. this, combined with 2 the global economy course is part of the core curriculum at the university. it is designed for the economic novice and, as such, has no prerequisites. most students who elect to take the global economy course are not economics majors. since this class serves as a “gateway course” to the discipline, however, a number of students subsequently decide to become economics majors. 20 21 | journal for economic educators, 15(1), 2015 the fact that the mean score of the content-ordered exam exceeded the mean score of the scrambled exam in three of the four cases, led them to conclude that the mean level of performance may be higher on the content-ordered exam than the scrambled exam. doerner & calhoun (2009) found mixed results. they conducted an experiment on three large introductory economics classes—one principles of microeconomics class and two principles of macroeconomics classes. the data were stratified between male and female students and three versions of a multiple-choice final exam were administered. one version was randomly ordered, a second was sequentially ordered, and the third version had questions that were ordered in a reverse sequential format. their results indicated that females benefited from both sequentially ordered and reverse sequentially ordered exams. question order did not matter for males. still other studies claim that question order doesn’t matter. bresnock, graves & white (1989) examined the results of three multiple-choice tests given to a large section of undergraduate principles of economics class. they concluded that question order didn’t matter, but that the pattern or distribution of correct answer responses on the multiple-choice tests did impact the degree of test difficulty. gohmann & spector (1989) randomly distributed sequenced and randomly ordered multiple-choice final exams to a large principles of macroeconomics class. in several specifications of linear regressions to determine whether exam performance could be attributed to the scrambling of exam questions, they found that question order had no significant effect on exam scores. more recently, sue (2009) focused her analysis on a small class setting. heretofore, most of the other studies that investigated the role of question order on multiple-choice exams in economics courses focused on large classes. she analyzed data for three sections of principles of microeconomics and three sections of principles of macroeconomics. the average class size was less than 30 students. in regression analysis she was unable to reject the null hypothesis that “scrambling the content order of questions in a multiple choice test does not affect student performance on the test.” we contribute to this literature by examining the impact of question order on student’s performance in an unconventional introductory economics course on the global economy. empirical framework to estimate the effect of question order on multiple-choice tests on students’ grades we compare the average performance of a random group of students who took a version of the test with questions ordered in the order in which the course content was covered in class to that of a control group with scrambled versions of the test. we refer to the version of the test that is ordered consistent with the lecture coverage of the course content as the “sequenced” version. the other versions of the test are, together, referred to as the “scrambled” version. students taking the “sequenced” version of the test are our treatment group, while those taking the “scrambled” version are our control group. as such, we estimate a linear regression equation of the following form. 𝐺𝐺𝑖𝑖𝑖𝑖 = 𝛼𝛼0 + 𝛼𝛼1𝑉𝑉𝑖𝑖𝑖𝑖 + 𝛼𝛼2𝑋𝑋𝑖𝑖𝑖𝑖 + 𝜀𝜀𝑖𝑖𝑖𝑖 (1) the left-hand side variable, gij, represents student i’s grade on the multiple-choice section of test j (j = 1, 2, 3, 4). the variable vij represents the version of the test (sequenced or scrambled) and xij represents a number of control variables including proxies for the student’s academic ability and/or prior knowledge of the subject. the last term in equation (1) denotes the idiosyncratic random error term. the major variable of interest is vij, defined as a binary dummy variable 21 22 | journal for economic educators, 15(1), 2015 equal to 1 if student i took the sequenced version on test j, and 0 otherwise. therefore, a positive and statistically significant estimate of 𝛼𝛼1 suggests a bias in favor of students taking the sequenced version. in other words, student performance benefits from ordering questions consistent with class coverage of the course material. the data the data were collected in two sections of an introductory course on the global economy at a large public university in the southeastern united states. the data were collected in the fall 2011 semester. the two sections (015 and 035) were taught by the same instructor. table 1 presents descriptive statistics of key variables by section, test, and version. students in each section took a total of four tests during the course of the school semester. the last of the four tests is the comprehensive final exam. table 1: descriptive statistics by course section, exam, and test version section test test version obs mean standard deviation econ2100-015 1 1 sequenced scrambled 16 46 77.06 69.09 11.23 12.64 2 2 sequenced scrambled 16 46 81.31 76.65 16.37 16.62 3 3 sequenced scrambled 15 44 62.20 69.50 10.88 15.09 4 (final) 4 (final) sequenced scrambled 14 46 67.21 70.54 9.96 13.07 econ2100-035 1 1 sequenced scrambled 17 54 70.94 71.11 14.36 13.63 2 2 sequenced scrambled 17 52 79.88 77.40 13.66 14.31 3 3 sequenced scrambled 19 46 68.58 65.35 12.30 16.09 4 (final) 4 (final) sequenced scrambled 18 49 65.39 69.90 12.61 12.65 tests consisted of a multiple-choice section and a problem-type question. only students’ scores on the multiple-choice part of the test are used in our estimations. each test was composed of four versions, one “sequenced” and three “scrambled”. on each test, about one-quarter of students taking the test had the “sequenced” version. in table 1, there does not seem to be a statistically significant difference in average scores between those students who took the “sequenced” version and those that took the “scrambled” versions. 22 23 | journal for economic educators, 15(1), 2015 in fact, average scores are higher for the “scrambled” versions in two of the four tests. formal tests for the difference in mean scores for the two sub-samples are presented below. note that the distribution of test versions in the two classes was random. that is, the test version taken by student i depended entirely on where in the classroom the student sat. if students maintained their seating positions in the classroom throughout the semester, it is conceivable that the same students received the “sequenced” version of the test in all or most of the 4 tests. this does not bias our estimates if students initially randomly self-selected their seating positions. but, if students’ self-selected seating positions are correlated with ability, assignment of test versions based on seating positions biases our results. to exclude this possibility, table 2 presents sample probabilities associated with student i receiving a “sequenced” version of the test on more than one test. these probabilities are compared with joint probabilities under a purely random assignment. for example, only 5 students (row 1, columns 1 & 2) had the “sequenced” version of the test on both the first two tests. this translates into a probability of 0.0189 (row 1, column 4) that student i had the sequenced version on both test 1 and test 2 compared to the joint probability of the same event of 0.0352 (row 1, column 5). going down to the bottom of the table, we show the probabilities are even small that student i got the “sequenced” version on more than two exams. we are, therefore, confident that our regression estimates are not biased by the assignment of the test versions to students. table 2: distribution of test versions (sequenced versus scrambled) tests number of students with sequenced version total number of students probability joint probability (purely random distribution of exams) 1 and 2 only 5 264 0.0189 0.0352 1 and 3 only 7 257 0.0272 0.0352 1 and 4 only 10 257 0.0389 0.0352 2 and 3 only 8 255 0.0314 0.0352 2 and 4 only 9 255 0.0353 0.0352 3 and 4 only 9 248 0.0363 0.0352 1, 2 and 3 only 1 388 0.0026 0.0117 2, 3, and 4 only 2 379 0.0053 0.0117 1, 3, and 4 only 2 381 0.0052 0.0117 1, 2, 3, and 4 1 515 0.0020 0.0039 simple inference here we use sample statistics to test for possible differences in population parameters between the “sequenced” and the “scrambled” versions of the tests. in particular, we conduct an f-test for differences in variances as well as a t-test for differences in mean scores. these tests assume that the two samples (“sequenced” and “scrambled”) are independent and drawn from normally distributed populations with equal variances. we begin with a simple visual test in the 23 24 | journal for economic educators, 15(1), 2015 form of a boxplot for grades in the two samples. the boxplot provides an informal test of the independent samples assumption. figure 1: grade on the multiple choice portions of the tests from figure 1, the two samples do not seem to differ much in regard to students’ grades. further, the distributions for both groups seem symmetric enough to justify a t-test for difference in mean scores between the two populations. nevertheless, we check for normality using the normal quantile plot of residuals of “grade” (gij). the appropriate residuals here are computed as the difference between the observed grade on the multiple-choice portion of the tests (gij) and the group-specific mean grade (group ≡ “sequenced”, “scrambled”). the normality assumption is satisfied if the quantiles of the residuals are linearly related to the quantiles of the normal distribution. figure 2 below presents the normal quantile plots for the “sequenced” sub-sample, and the “scrambled” sub-sample. figure 2: normal quantile plots 20 40 60 80 10 0 0 1 g ra de o n th e m ul tip le c ho ice p or tio n of th e te st graphs by question sequencing (1=sequenced, 0=scrambled) -4 0 -2 0 0 20 40 r es id ua ls o f t -t es t f or g ra de -40 -20 0 20 40 inverse normal normal q-q plot sequenced (non-scrambled) version -4 0 -2 0 0 2 0 4 0 r e si d u a ls o f tte st f o r g ra d e -40 -20 0 20 40 inverse normal normal q-q plot scrambled versions 24 25 | journal for economic educators, 15(1), 2015 from figure 2, we conclude that the points on the normal quantile plots (representing residuals of “grade”) are very close to the straight line. therefore, it is very plausible that both samples (“sequenced” and “scrambled”) are from normally distributed populations. we now proceed to conduct f-tests for differences in variances and independent samples t-tests. difference in variances we test the null hypothesis that the two samples are drawn from populations with equal variances against the alternative that population variances are not equal. that is, 𝜎𝜎12 − 𝜎𝜎22 = 0 table 3: f-tests for difference in variances (sequenced versus scrambled) by course section and test (a) section 015 version n f df f-critical value pr(f>f) test1 scrambled 46 1.2668 45, 15 2.5650 0.6357 sequenced 16 test 2 scrambled 46 1.0312 45, 15 2.5650 0.9989 sequenced 16 test 3 scrambled 44 1.9253 43, 14 2.6618 0.1835 sequenced 15 final scrambled 46 1.7242 45, 13 2.7601 0.2861 sequenced 14 (b) section 035 version n f df f-critical value pr(f>f) test 1 scrambled 54 0.9 53, 16 2.4635 0.7386 sequenced 17 test 2 scrambled 52 1.0986 51, 16 2.3995 0.8751 sequenced 17 test 3 scrambled 46 1.7104 45, 18 2.3635 0.216 sequenced 19 final scrambled 49 1.0067 48, 17 2.4115 0.9623 sequenced 18 25 26 | journal for economic educators, 15(1), 2015 against the alternative that 𝜎𝜎12 − 𝜎𝜎22 ≠ 0.3 in this case, 𝜎𝜎12 and 𝜎𝜎22 are the population variances for the “scrambled” versions of the tests and the “sequenced” version of the tests respectively. in all the tests reported in table 3, we fail to reject the null of equal population variances. next, we proceed to test for differences in population means based on the assumption of normality and equal population variance. difference in means the test results presented in table 4 show no statistical evidence of a bias in favor of students who took the “sequenced” version. the null hypothesis for the t-test is that there is no statistical difference in mean scores across versions: 𝜇𝜇1 − 𝜇𝜇2 = 0, where 𝜇𝜇1 and 𝜇𝜇2 denote population means for the “scrambled” and the “sequenced” versions respectively. on the other hand, the alternative hypothesis is that mean scores on the “sequenced” version are higher than those on the scrambled versions (𝜇𝜇1 − 𝜇𝜇2 < 0). the t-tests fail to reject the null hypothesis in all cases except one – test 1 in section 015. overall, the t-tests suggest that students that took the scrambled versions of the tests performed at least as well as those that took the “sequenced” version. regression analysis tests based on mean scores and sample variances may not fully exclude the likelihood that the order of questions on the test has an effect on students’ performance. a linear regression analysis that controls for other possible determinants of students’ performance is a more effective way to tease out the impact of any given factor on students’ grades while holding other factors constant. we estimate several regression specifications based on equation (1). our baseline specification takes the following form: 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝑖𝑖𝑖𝑖 = 𝛼𝛼0 + 𝛼𝛼1𝐴𝐴𝐴𝐴𝐴𝐴𝐺𝐺𝐴𝐴𝐺𝐺𝑖𝑖𝑖𝑖 + 𝛼𝛼2𝑆𝑆𝐺𝐺𝑆𝑆𝑖𝑖𝑖𝑖 + 𝛼𝛼3𝑃𝑃𝐺𝐺𝑃𝑃𝑃𝑃𝐺𝐺𝐺𝐺𝑃𝑃𝑃𝑃𝐴𝐴𝑖𝑖 + 𝛼𝛼4𝑆𝑆𝐺𝐺𝑃𝑃𝐴𝐴𝑃𝑃𝑃𝑃𝐴𝐴015𝑖𝑖 + 𝜀𝜀𝑖𝑖𝑖𝑖 (2) again, gradeij denotes student i’s grade on the multiple choice section of test j. attendij denotes the proportion of class sessions attended by student i in which material covered on test j was covered in class lectures. in other words, student i’s attendance during the first weeks of the semester (before test 1) is matched with the student’s grade on the multiple-choice section of test 1.4 seqij is a dummy variable equal to 1 if student i took the “sequenced” version of test j, and 0 elsewhere. this is our variable of interest. equation (2) also includes a dummy variable, prioreconi, to control for the effect of prior knowledge of the subject on performance. this dummy variable is equal to 1 if student i had taken any college-level economics courses before enrolling for the global economy course. 3 the test statistic is given by the ratio of the two sample variances �𝑆𝑆1 2 𝑆𝑆2 2�. s1 2 and s22 are the sample variances. we reject the null hypothesis if 𝑆𝑆1 2 𝑆𝑆2 2 ≥ 𝑓𝑓0.05,𝑛𝑛1−1,𝑛𝑛2−1. 4 to further clarify on the attendance variable, we should emphasize that this variable is constructed separately for each test. for example, if a student missed the first 2 weeks of the semester but attended the rest of the class sessions during the semester, her attendance corresponding to test 1 would be about 0.5 (50 percent) while her attendance corresponding to the other three tests would be 1 (100 percent). please also see the variable description in the appendix. 26 27 | journal for economic educators, 15(1), 2015 table 4: t-tests for difference in means (sequenced versus scrambled) by course section and test5 (a) section 015 version n mean t df t-critical value pr(t<t) test1 scrambled 46 69.09 -2.2329 60 1.6706 0.0146 sequenced 16 77.06 test 2 scrambled 46 76.65 -0.9699 60 1.6706 0.168 sequenced 16 81.31 test 3 scrambled 44 69.5 1.7226 57 1.672 0.9548 sequenced 15 62.2 final scrambled 46 70.54 0.8767 58 1.6715 0.8079 sequenced 14 67.21 (b) section 035 version n mean t df t-critical value pr(t<t) test 1 scrambled 54 71.11 0.0443 69 1.6673 0.5176 sequenced 17 70.94 test 2 scrambled 52 77.4 -0.6265 67 1.6679 0.2665 sequenced 17 79.88 test 3 scrambled 46 65.35 -0.7844 63 1.6694 0.2179 sequenced 19 68.58 final scrambled 49 69.9 1.2939 65 1.6686 0.8999 sequenced 18 65.39 data for the study were collected from two sections of the course, such that we control for possible section effects on students’ performance that may arise from a difference in the class size, the time class meets, etc. the binary dummy variable, section015i, is equal to 1 if student i 5 the t-statistic is given by: 𝐴𝐴 = 𝑥𝑥1����−𝑥𝑥2 ���� 𝑆𝑆𝑝𝑝� 1 𝑛𝑛1 + 1 𝑛𝑛2 ; 𝑆𝑆𝑝𝑝2 = (𝑛𝑛1−1)𝑠𝑠1 2+(𝑛𝑛2−1)𝑠𝑠2 2 𝑛𝑛1+𝑛𝑛2−2 ; where, 𝑥𝑥1��� 𝐺𝐺𝐴𝐴𝐺𝐺 𝑥𝑥2 ���� are the sample means for the “scrambled” and “sequenced” samples respectively; n1 and n2 are the sample sizes; and 𝑠𝑠12 and 𝑠𝑠22 are the sample variances. we reject the null hypothesis if: 𝐴𝐴 − 𝑠𝑠𝐴𝐴𝐺𝐺𝐴𝐴𝑃𝑃𝑠𝑠𝐴𝐴𝑃𝑃𝑃𝑃 ≤ −𝐴𝐴0.05,𝑛𝑛1+𝑛𝑛2−2. 27 28 | journal for economic educators, 15(1), 2015 was enrolled in section 015 of the course, and is equal to 0 elsewhere. as is typical, the last term on the left-hand side of equation (2) denotes the usual idiosyncratic error term to capture the effect of purely random unobservable factors. we also run additional specifications of equation (2) that include various proxies for the students’ academic ability as well as student classification (freshman, sophomore, junior, and senior). measures of students’ academic ability prior to enrolling for the course include grade point average (gpa) prior to enrolling for the course and sat scores. regression results the first set of results, presented in table 5, consists of ols estimates by test. given the structure of the course as described earlier in the paper, test 1 covered an overview of key economic concepts – defining economics, marginal analysis, opportunity cost, demand and supply, gdp, and inflation. since these topics may not appear to the novice to be connected, we postulated that the benefit of a “sequenced” version of the test would be smaller or nonexistent on test 1. on subsequent tests where lecture topics were covered in a more logical sequence – we expect question sequencing to affect students’ performance. we therefore run four specifications of regression equation (2) by test (test1, test2, test 3, and the final exam). table 5: linear regression estimates by exam test 1 grade test 2 grade test 3 grade final exam grade covariates attendance 12.197 7.720 8.657 -0.841 (8.768) (6.602) (7.012) (3.465) sequenced 3.679 1.011 -2.152 -2.698 (3.003) (2.797) (2.900) (1.990) section015 3.132 -1.048 -0.882 -1.060 (2.742) (2.422) (2.633) (1.783) prior college econ 7.090** -0.104 -1.479 3.469* (2.877) (2.647) (2.864) (1.890) prior tests average6 0.769*** 0.614*** 0.700*** (0.095) (0.106) (0.077) constant 56.562*** 10.812 16.451* 20.637*** (8.592) (6.902) (9.075) (4.743) r-squared 0.10 0.46 0.34 0.57 no. of observations 90 90 86 84 standard errors in parenthesis; ***: significant at 1 percent; **: significant at 5 percent; *: significant at 10 percent. 6 “prior tests average” represents the student’s average grade on previous tests during the semester. for test 2, prior tests average is simply the student’s grade on test 1. for test 3, it is the student’s average grade on test 1 and test 2. for the final exam, it’s the student’s average grade on test 1, test 2, and test 3. 28 29 | journal for economic educators, 15(1), 2015 in column 2 of table 5, we present estimates of equation (2) only for test 1. based on our estimates, the order of questions on the test does not have a statistically significant influence on the students’ performance on the multiple-choice section of the test. among all the explanatory variables in column 1, only “prior college econ” (equal to 1 if a student had taken any collegelevel economics prior to enrolling for the global economy, and 0 elsewhere) had a significant impact on performance. on average, a student with prior college-level economics classes scored 7 percentage points higher on the multiple choice section of test 1 than those who had not taken a college-level economics course prior to enrollment in this class. estimates for the subsequent tests (tests 2, 3 and the final exam) show similar results. common to all is the finding that the order of questions on tests (sequenced versus scrambled) does not influence students’ performance. in specifications for tests 2, 3, and the final exam, we include previous test average grades in the course as a proxy for ability. we see some consistency in performance. students test 1 scores are a good predictor of their performance on test 2. we find similar results for test 3 and the final exam. in table 6, we present estimates of equation (2) with a pooled sample as opposed to testspecific subsamples. also included are a number of proxies for ability that were not included in table 5. first, our estimates from the pooled sample show no statistically significant impact of test question order (sequenced versus scrambled) on performance. although class attendance seems to be highly correlated with student’s performance, we cannot immediately infer causation based on our results reported in table 6. in three of five regression specifications reported in table 6, the coefficient on attendance is positive and statistically significant. it’s important to note that when all the proxy variables for students’ ability are added to the model (model 6), the attendance variable is no longer statistically significant. this may suggest that attendance is correlated with ability and/or motivation. specifically, attendance is likely positively correlated with ability in the sense that more able students tend to be more motivated to attend class relative to less able students. in this case, students who regularly attend class may perform better not just because of attendance but also because they are more able students. therefore, the regression coefficients on the attendance variable reported in tables 5 & 6 should be interpreted as a correlation rather than a causal effect. our results in table 6 notwithstanding, prior studies with varying degrees of statistical rigor have found a small to moderate positive effect of class attendance (thatcher, et al. (2007); romer (1993); rodgers (2001)) our proxies for students’ academic ability are, for the most part, statistically correlated with students’ performance. we include six such variables in the six specifications shown in table 6. the data on these variables are self-reported by students on surveys administered by the authors. the first one is “below 2.5 gpa”. this is a dummy variable equal to 1 if a student’s cumulative grade point average at the end of the previous school semester prior to taking the global economy class was less or equal to 2.5. the second variable, “above 3.5 gpa” is defined similarly and is equal to 1 for students whose cumulative grade point average going into the global economy class was 3.5 or more. the reference group is the middle group – those with a cumulative gpa higher than 2.5 but less than 3.5. as expected, students coming into the class with lower gpa (2.5 or below) performed poorly relative to the reference group (2.5<gpa<3.5). on average, students with a gpa of 2.5 or below coming into the global economy class scored about 10 percentage points lower than the reference group. in contrast, students coming into the global economy class with a 3.5 or better gpa scored about 8 percentage points higher than the reference group (students with 2.5<gpa<3.5). 29 30 | journal for economic educators, 15(1), 2015 table 6: pooled ols estimates. the dependent variable is “grade on the multiple choice section of the test”. model 1 model 2 model 3 model 4 model 5 model 6 covariates attendance 9.000*** 8.556** 5.806 8.622** 8.282** 4.431 (2.327) (3.628) (3.704) (3.648) (3.560) (4.032) section015 0.708 1.157 1.502 1.126 1.168 2.236 (1.218) (1.462) (1.464) (1.472) (1.434) (1.512) test1 0.044 0.060 0.018 0.053 0.125 1.352 (1.779) (2.046) (2.033) (2.049) (2.007) (1.993) test2 6.952*** 6.920*** 7.124*** 6.913*** 6.990*** 8.552*** (1.779) (2.051) (2.038) (2.054) (2.012) (2.004) test3 -3.367* -2.768 -2.678 -2.771 -2.793 -3.839* (1.765) (2.058) (2.046) (2.061) (2.019) (2.026) sequenced -0.103 -0.859 -1.056 -0.843 -0.748 1.078 (1.400) (1.615) (1.608) (1.619) (1.585) (1.563) freshman 3.631 4.814* 3.579 5.567** 4.111 (2.735) (2.729) (2.751) (2.731) (2.735) sophomore 5.028* 5.575** 4.934* 7.060*** 5.313** (2.672) (2.650) (2.717) (2.676) (2.625) junior 2.187 2.649 2.240 3.815 4.237 (2.849) (2.823) (2.865) (2.827) (2.822) gpa<2.5 -9.636*** -10.806** (3.305) (4.475) gpa>3.5 8.524*** (1.797) high school econ 0.421 3.027 (2.088) (2.366) prior college econ 5.833*** 7.191*** (1.535) (1.658) sat<1200 2.561 (2.422) sat>1600 7.914*** (1.804) constant 62.794*** 60.812*** 63.039*** 60.457*** 57.353*** 52.935*** (2.092) (4.256) (4.272) (4.611) (4.273) (4.990) r-squared 0.10 0.10 0.10 0.10 0.14 0.41 no. of observations 515 354 350 354 354 246 notes: standard errors in parenthesis; ***: significant at 1 percent; **: significant at 5 percent; *: significant at 10 percent. 30 31 | journal for economic educators, 15(1), 2015 the next pair of control variables captures prior exposure to economics. the first of these two variables, “high school econ”, is a binary dummy variable equal to 1 if the student took any economics classes in high school and 0 elsewhere. the second of the two variables, “prior college econ” is as defined earlier in the paper. model 4, 5, and 6 in table 6 presents estimates of these variables’ effect on students’ performance. exposure to economics in high school had no statistically significant effect on students’ performance. however, students with prior collegelevel exposure to economics performed better, on average, by 5 – 7 percentage points. finally, we added students’ self-reported sat scores as proxies for ability. the variable labeled “below 1200 sat” is a dummy variable equal to 1 if a student reported a total sat score of 1200 or below and 0 elsewhere. similarly, “above 1600 sat” is a dummy variable equal to 1 if a student reported a total sat score of 1600 or higher. the reference group in this case includes students who reported sat total scores between 1200 and 1600. estimates of model 6 reported in table 6 suggest no statistically significant difference in performance between those reporting a total sat score of 1200 or less and the reference group (1200<sat score<1600). however, those reporting a total sat score of 1600 or higher outperformed the rest by an average of about 8 percentage points, all else constant. this result is not unexpected. further, we test if the regression coefficient estimates based on the “sequenced” portion of the sample are the same as those based on the “scrambled” portion of the sample. this is done using an f-test commonly referred to as the “chow test”. in each of the regression specifications reported in table 6, each explanatory variable is interacted with the “sequenced” variable. the interaction variables are then included in the respective regression specifications as additional explanatory variables. a joint f-test is then performed on the interaction variables. the null hypothesis for the test is that the coefficients from the two subsamples are the same, which suggests that coefficients on the interaction variables are, jointly, not statistically different from zero. the alternative hypothesis suggests different regression coefficients from the two subsamples. the regression results and the corresponding joint test results are reported in table 7 below. 31 32 | journal for economic educators, 15(1), 2015 table 7: regression results with interaction variables and joint f-tests (1) (2) (3) (4) (5) (6) variables attendance 8.876** 8.735* 6.374 6.413 5.708 4.995 (2.596) (4.123) (4.173) (4.177) (4.063) (4.767) section 015 0.543 1.555 2.100 2.088 2.174 3.062+ (1.410) (1.702) (1.714) (1.716) (1.669) (1.770) test 1 -2.088 -2.507 -2.553 -2.549 -2.223 0.462 (2.063) (2.417) (2.401) (2.407) (2.344) (2.370) test 2 4.827* 4.610+ 5.160* 5.162* 5.692* 8.169** (2.069) (2.400) (2.387) (2.393) (2.333) (2.368) test 3 -4.118* -4.357+ -3.831 -3.825 -3.052 -1.595 (2.060) (2.454) (2.441) (2.450) (2.390) (2.440) sequenced -7.474 6.190 8.820 9.687 13.362 15.616 (5.434) (10.192) (10.667) (10.76) (10.090) (10.729) freshman 7.033* 8.158** 8.14** 10.716** 8.730** (3.094) (3.088) (3.111) (3.079) (3.137) sophomore 6.646* 7.223* 7.191* 10.291** 8.567** (3.026) (3.003) (3.062) (3.028) (3.010) junior 5.421 6.096+ 6.105+ 8.828** 8.517* (3.303) (3.280) (3.307) (3.272) (3.390) gpa<2.5 -10.11** -9.99** -11.45** -14.793* (3.581) (3.341) (3.262) (5.745) gpa>3.5 8.717** (2.091) high school econ 0.113 2.029 (2.592) (2.968) prior college econ 7.221** 8.319** (1.803) (1.931) sat<1200 3.377 (2.791) sat>1600 8.436** (2.097) sequenced × attendance 2.684 -0.197 -2.061 -2.572 -2.329 -0.189 (5.872) (8.686) (9.321) (8.770) (8.470) (8.938) sequenced × section 015 0.329 -1.988 -2.627 -2.436 -2.575 -4.612 (2.790) (3.293) (3.288) (3.382) (3.205) (3.435) sequenced × test 1 8.247* 9.249* 9.444* 9.592* 9.050* 4.747 (4.053) (4.503) (4.509) (4.533) (4.384) (4.497) sequenced × test 2 8.218* 7.886+ 6.663 6.816 5.367 1.580 (4.039) (4.632) (4.634) (4.701) (4.552) (4.723) sequenced × test 3 3.068 5.179 3.834 3.962 1.936 -5.727 (3.978) (4.469) (4.486) (4.539) (4.444) (4.597) sequenced × freshman -15.631* -15.714* -15.53* -17.30** -18.58** (6.562) (6.562) (6.553) (6.420) (6.413) 32 33 | journal for economic educators, 15(1), 2015 sequenced × sophomore -8.641 -8.943 -8.654 -11.636+ -13.109* (6.520) (6.462) (6.579) (6.349) (6.410) sequenced × junior -13.747* -14.692* -14.71* -17.52** -17.10** (6.697) (6.637) (6.658) (6.513) (6.574) sequenced × (gpa<2.5) 0.693 9.094 (9.553) (9.662) sequenced × (gpa>3.5) -0.567 (4.075) sequenced × high school econ -0.919 4.181 (4.466) (5.195) sequenced × prior college econ -3.558 -2.760 (3.466) (3.912) sequenced × (sat<1200) -0.039 (5.735) sequenced × (sat>1600) -1.617 (4.100) constant 64.248** 59.762** 61.352** 61.2** 56.601** 48.647** (2.302) (4.807) (4.794) (5.315) (4.819) (6.114) observations 515 354 350 350 350 246 r-squared 0.120 0.131 0.153 0.153 0.196 0.461 f(k’, n-k) 1.43 1.52 1.38 1.38 1.62 1.46 prob>f 0.211 0.148 0.197 0.197 0.11 0.127 standard errors in parentheses; ** p<0.01, * p<0.05, + p<0.1 k’ denotes the number of restrictions under the null; k denotes the number of explanatory variables in the model (including the constant); n is the number of observations. in all the regression specifications reported in table 7, we fail to reject the null of equal coefficients at conventional confidence levels. in simple terms, the results presented in table 7 do not suggest any differences in the behavior of the two groups in the sample (those that took the sequenced version of the tests versus those that took the scrambled versions of the tests). conclusions we examined the impact of question order on multiple-choice tests on student performance in an unconventional introductory economics course. our empirical estimates indicate that question order does not influence student performance. therefore, instructors of introductory economic courses need not be concerned about introducing bias in multiple-choice exams by using scrambled and unscrambled tests. this finding reinforces the conclusions of earlier studies by bresnock, graves and white (1989), gohmann and spector (1989), and sue (2009). we also found no evidence that the structure of the course content influences the impact of question order on student performance. no systematic bias was found either when the course content consisted of unrelated standalone topics or when the course content was presented in a building block sequential manner. 33 34 | journal for economic educators, 15(1), 2015 not surprisingly, our results show that academic ability does matter. for example, a student with a gpa of 2.5 or lower coming into the class will typically score about 11 percentage points below the course averages for those with gpas between 2.5 and 3.5, and roughly 19 percentage points several letter grades below those of students with gpas greater than 3.5, all else constant.7 attendance is also positively correlated with performance. however, teasing out the causal effect of attendance requires dealing with potential endogeneity, since attendance may be driven by students’ ability and motivation. although we cannot conclusively confirm it, prior studies that focus on the role of attendance suggest a positive causal effect on academic performance. encouraging students to attend class by providing incentives whenever possible is a likely worthwhile effort. references bresnock, anne e, philip e graves, and nancy white. 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"the effect of scrambling test questions on student performance in a small class setting." journal for economic educators, 2009: 32-41. taub, allan j, and edwaed b bell. "a bias in scores on multiple-form exams." journal of economic education, 1975: 58-59. thatcher, andrew, peter fridjhon, and kate cockcroft. the relationship between lecture attendance and academic performance in an undergraduate psychology class. vol. 37. 3 vols. south africa journal of psychology, 2007. 7 the university’s grade scale is one with “pluses” and “minuses”. we consider the “pluses” and “minuses” to be different letter grades. for example, a+, a, and aare distinct letter grades. 34 35 | journal for economic educators, 15(1), 2015 data appendix table a1: variable description and sources variable label variable description source grade (dependent variable) grade (out of 100) on the multiple choice section of the tests. instructor’s grade book attendance the proportion of classes attended before each test. for instance, if a student missed 2 of 8 class sessions before test1, attendance corresponding to the student’s first test grade would be 0.75 (6/8). attendance corresponding to the test 2 is based on class sessions after test1 and before test2. attendance for test3 and test4 are similarly computed. instructor’s attendance records. section015 this is a binary variable equal to 1 if a student was enrolled in course section 015, 0 elsewhere students’ enrolment records. test 1 this is a binary variable equal to 1 for observations corresponding to test1, 0 elsewhere. instructor’s grade book test 2 this is a binary variable equal to 1 for observations corresponding to test2 grades, 0 elsewhere. instructor’s grade book test 3 this is a binary variable equal to 1 for observations corresponding to test3 grades, 0 elsewhere. instructor’s grade book sequenced this is a binary variable equal to 1 if student took the sequenced version of the test, 0 elsewhere. instructor’s grade book freshman this is a binary variable equal to 1 if the student is a freshman, 0 elsewhere. student selfreported information sophomore this is a binary variable equal to 1 if the student is a sophomore, 0 elsewhere. student selfreported information junior this is a binary variable equal to 1 if the student is a junior, 0 elsewhere. student selfreported information below 2.5 gpa this is a binary variable equal to 1 if the student’s gpa is 2.5 (out of 4) or below, 0 elsewhere. student selfreported information 35 36 | journal for economic educators, 15(1), 2015 above 3.5 gpa this is a binary variable equal to 1 if the student’s gpa is 3.5 (out of 4) or above, 0 elsewhere. student selfreported information high school econ this is a binary variable equal to 1 if the student took any economics courses in high school, 0 elsewhere. student selfreported information prior college econ this is a binary variable equal to 1 if the student took college-level economics course prior to the current course, 0 elsewhere. student selfreported information below 1200 sat this is a binary variable equal to 1 if the student reported sat total score of 1200 or below. student selfreported information above 1600 sat this is a binary variable equal to 1 if the student reported sat total score of 1600 or higher. student selfreported information table a2: descriptive statistics variable name obs mean std. dev. min max grade 515 71.369 14.516 27 100 attendance 560 0.761 0.324 0 1 section 015 560 0.464 0.499 0 1 section 035 560 0.536 0.499 0 1 sequenced test version 515 0.256 0.437 0 1 freshman 360 0.311 0.464 0 1 sophomore 360 0.367 0.483 0 1 junior 360 0.233 0.424 0 1 senior 360 0.089 0.285 0 1 gpa 2.5 or below 356 0.056 0.231 0 1 gpa between 2.5 & 3.5 356 0.539 0.402 0 1 gpa 3.5 or higher 356 0.236 0.425 0 1 had economics in hs 360 0.833 0.373 0 1 had economics in college 360 0.322 0.468 0 1 sat score 1200 or below 256 0.172 0.378 0 1 sat score between 1200 & 1600 256 0.438 0.497 0 1 sat score 1600 or higher 256 0.391 0.489 0 1 36 21 |journal for economic educators, 21(2), 2021 learning about the economic impact of a sports arena john f.r. harter1,2 abstract this paper presents a method of teaching about the economic impact of building a professional sports arena in a metropolitan area. designed for an upper-division, undergraduate course in sports economics, this teaching method is an application of the context-rich teaching strategy. it also uses a jigsaw cooperative learning technique in preparation for an individual assignment actually performing a simple economic analysis in a plausible situation. the students must decide what is and what is not important to consider, what relevant information is missing, and then use that information to advise an elected official on a proposal to use tax money to help build the sports arena. key words: context-rich, cooperative learning, economic impact, sports economics, jigsaw jel classifications: a22, z23, r53 introduction there have long been calls for teachers of economics to move from the traditional chalkand-talk method in the classroom to more interactive strategies. there is growing evidence that active strategies are effective at teaching economics (freeman et al., 2014; allgood, walstad, and siegfried, 2015), though these findings are not universal (zanca, 2017). mcconnell and lamphear (1969) argue that active learning over passive learning might still be better in the long run in promoting life-long learning. the increase in interactive and cooperative learning methods has been slow (watts and becker, 2008; asarta, chambers, and harter, 2020), however. while instructors often resist interactive strategies due to various costs (goffe and kauper, 2014), a mixture of teaching strategies that include active learning might be best (salemi, 2002). to help reduce those costs, this paper offers a flexible application of the context-rich teaching strategy. this application is an examination of the economic impact of a professional sports arena to a metropolitan area. it also uses a jigsaw cooperative learning technique in preparation for an individual assignment actually performing a simple economic analysis in a plausible situation. in my undergraduate, upper-division sports economics course, a portion of the course is devoted to learning about the public subsidies given to professional sports teams. one of the 1 professor of economics, college of business, btc 108, eastern kentucky university, 521 lancaster avenue, richmond, ky, 40475 2 i developed this approach in the assa’s teaching innovations program (tip), phase ii, with much valuable help from mark maier, whose guidance is greatly appreciated. thanks also go to an anonymous referee who provided feedback on an earlier version of the paper. 22 |journal for economic educators, 21(2), 2021 common rationales behind these subsidies is the economic impact expected to arise from them. however, there are many thorny issues involved in measuring the economic impact, such as the opportunity cost of spending on sports, whether to count the spending of local residents as a benefit arising from the team, and how big the multiplier might be. this teaching strategy is a way of addressing those issues in a way that seems to be more effective for the students than the traditional chalk-and-talk method. procedure and justification about two-thirds of the way through the semester, we begin discussing public policy towards sports franchises. in particular, we look at the claims by teams of their economic impact and discuss whether metropolitan areas should subsidize the teams. the students generally find this very interesting because they’ve long heard the teams’ side of the story about the huge economic impact of sports but not the various reasons why that impact is probably much smaller. this exercise introduces the section on public policy, though the writing assignment is not due until after this section of the course. the premise of the exercise is that a state politician is trying to decide if it is useful to spend public money on building a large arena in one of the state’s metropolitan areas, and she asks the student for advice. to begin, each student is given a fact sheet (handout 1, appendices) containing information of some expected outcomes of building the arena such as the estimated number of tickets sold, the fan cost index, the location of the arena, and so on. the fact sheet is specifically written to bring up several of the usual flaws and complications in economic impact studies. for example, one of the facts concerns spending from visitors who would already be in the area for work-related visits. however, in-class discussions highlight that only new spending should be counted. local spending and spending from visitors who are in the area anyway would mostly substitute for spending elsewhere in the city and not be new. similarly, expenditures by visitors for lodging, gas, and so on are mentioned, but any leakages are not. these leakages might include payments made outside of the area from, say, a hotel to the franchising corporation. other information is intentionally omitted. there is no discussion at all of any multiplier effect. part of the benefits of the context-rich learning strategy is that it forces students to consider information that is not right in front of them. it is more realistic to have a problem with some information but not all of it. a key feature of context-rich problems is the need to consider what is and is not included (maier and simpkins, 2008). this forces students to utilize a process more in line with how an expert in the field would attack the problem (bangs, 2012) and is an important part of the critical-thinking push at many colleges and universities. the students are placed in groups of two to three. groups have been shown to be more effective than individual efforts to solve context-rich problems (heller, keith, and anderson, 1992). i let them choose the groups for themselves, though the groups could be assigned. each student is then randomly assigned one of three individual tasks: 1) decide which of the items on the fact sheet are relevant and important for determining the economic impact of the sports arena, 2) decide which of the items on the fact sheet are irrelevant, and 3) decide what other relevant bits of information the student would like to know. while the first two tasks serve the same function, framing them as opposed to each other increases the engagement when the groups 23 |journal for economic educators, 21(2), 2021 come together and may give the students more ownership of their respective tasks. i usually give them 10-15 minutes to look over the sheet, but it might be useful to assign this part as homework for the next class period. after this, each group gets together to compare their answers. this is a version of the jigsaw learning method since each group member is required to bring their answers to one of the three tasks and work together with the rest of the group to complete the picture of what is relevant and desirable to know. i give each group as much time as they need, which is usually about 15-20 minutes. each group writes their answers (handout 2, appendices) to all three questions, and i collect them. the main purpose of collecting the handout is to allow me to copy the answers so that each group member has it in front of them in the follow-up assignment. however, this also gives me the opportunity to guide them if i see fit. one of the dangers of setting up the assignment this way is that errors at this stage can become calcified. if the whole group feels it is important to include local spending, for example, then the students are less likely to question that when doing the individual assignment later. following this, the students are given an individual writing assignment (handout 3, appendices) to advise the state senator on whether she should vote for providing state funding for the arena project. they are to write a oneto two-page memo with their advice, attaching their justifications. the student is informed that their economic expertise is the reason for being selected to advise the legislator, so the memo must address the economic impact. the student is free to add additional concerns, however. this method of examining the issue of government subsidies of sports teams forces the students to grapple with the material in a way that is more realistic than the traditional method of studying the issue. students are forced to consider for themselves how to address the issue, and they must decide what is important to consider. additionally, the information is incomplete – they must recognize that they can make rough estimates of team revenue from some of the data, but they must also quantify what isn’t there. the students should recognize that a multiplier would be necessary, but also what magnitude of multiplier would be appropriate. this allows the students to develop the ability to transfer their learning to new situations (bangs, 2007) and also helps them become more discriminating consumers of these types of economic impact studies. discussion and conclusions i have used this strategy a total of five times. there have been minor tweaks during the years. for example, the fact sheet originally posited an arena in louisville, but the location was changed to northern kentucky (south of cincinnati) when the city of louisville actually built a basketball arena. the essential elements of the method remained the same, however. while i have used this activity and assignment in my course on the economics of sports, it is also applicable to a course in urban economics or public economics. this activity is particularly flexible in the assessment portion. the graded part of the assignment is the memo with an accompanying appendix containing the justifications. for my class, the appendix is the meat of the assessment. i look for a solid economic impact argument using the topics discussed in class. in particular, after the cooperative learning (jigsaw) portion of the exercise, the class critiques other economic impact studies, and i look for the students to take into account the substitution effects of entertainment spending, leakages as team revenues leave 24 |journal for economic educators, 21(2), 2021 the local area, and the lower multiplier due to revenues accruing to persons with relatively high wealth and, thus, low marginal propensities to consume. i expect a simple calculation of the economic impact that reflects other class homework, but other classes would have different expectations. though my classes do not emphasize the issue, a more complete response would look at the expected lifespan of an arena and the present discounted value of the benefits. also, there is less discussion of the payment mechanism than i would use in a public economics course. for my students, the numbers provided usually produce an economic impact that is smaller than the requested government spending, but different assumptions about the arena lifespan and bond payments could yield a positive net economic benefit. in addition, the student’s actual recommendation does not have to be based solely on the economic impact numbers. the student’s justification could bring in discussions of how these government expenditures tend to benefit higher-income residents, how certain political philosophies think this type of expenditure is inappropriate for the role of governments, or how the location of the benefits within the state compares to the location of the tax burden. before, during, or after the assignment, class discussions can highlight any particular aspect of economic impact studies. coates and humphreys (2008) and wassmer, omg, and propheter (2016) give an overview of the various important features. for specific aspects, siegfried and zimbalist (2002), matheson (2009), and crompton (1995) point out that the multiplier is lower for sports than for many other industries, and agha and taks (2018) discuss whether spending on professional sports essentially substitutes for other local spending and is, therefore, not new. debriefing this activity at a more-basic level, the opportunity cost for the public and for the government would be relevant, as well as demonstrating to students the messiness of information in real-life decisions. alternatively, discussions could focus on normative issues, such as the distributional effects of this type of government expenditures (swindell and rosentraub, 1998). since cincinnati has the closest major professional sports teams to our university, i have the students read a story about when the cincinnati reds and bengals were trying to get new stadiums (blair and swindell, 1997). this article contains a critique of an economic impact study done during that process which points to some of the common issues such as the relevant geographic area to be studied, how the use of public money to build a stadium might crowd out other uses of public funds, or the temporary nature of construction jobs and demand increases. to assess the effectiveness of the method, i surveyed the students to see how relatively effective they felt the approach is. this unscientific poll of students indicated that 73% felt that this assignment was better (or much better) than a typical assignment for understanding economic impact studies, and 82% felt that it was better (or much better) for applying these topics to real life. this coincides with others who have documented an improvement in knowledge and skills (heller and hollabaugh, 1992) and that student interest and enjoyment increases with the use of context-rich problems (jonsson, gustafsson, and enghag, 2007, and albanese and dast, 2014). 25 |journal for economic educators, 21(2), 2021 references agha, n., and m. taks. “modeling resident spending behavior during sporting events: do residents contribute to economic impact?” journal of sport management, 32(5): 47385. https://doi.org/10.1123/jsm.2017-0207 albanese, m.a., and l. dast. 2014. “problem-based learning: outcomes 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presence of professional sports teams? the implications for public funding of stadiums and arenas.” public administration review, 58(1): 11-20. https://doi.org/10.2307/976884 wassmer, r.w., r.s. ong, and g. propheter. 2016. “suggestions for needed standardization of determining the local economic impact of professional sport.” economic development quarterly, 30(3): 1-15. https://doi.org/10.1177/0891242416636685 watts, m., and w.e. becker. 2008. “a little more than chalk and talk: results from a third national survey of teaching methods in undergraduate economics courses.” journal of economic education. 39(3): 273-86. https://doi.org/10.3200/jece.39.3.273-286 zanca, n.a. 2017. “lecture vs. lecture-less: a meta-analysis from journal of economic education (1969-2016).” journal of economic insight. 43(2): 69-93. http://ssrn.com/abstract=1151430 https://doi.org/10.2307/1182432 https://doi.org/10.2307/1061730 https://doi.org/10.1177/152700202237501 https://doi.org/10.2307/976884 https://doi.org/10.1177/0891242416636685 https://doi.org/10.3200/jece.39.3.273-286 27 |journal for economic educators, 21(2), 2021 appendices handout 1 learning about the economic impact of a sports arena class group-work assignment you are invited to an end-of-the-year banquet for outstanding students. you find your seat and realize that you are sitting next to your local state senator. when she hears that you are taking a course in sports economics, she is delighted. there is a bill working its way through the legislature that will pay $450 million for a new basketball arena in northern kentucky (“the southern side of cincinnati”). the idea is to lure an nba team. she has seen an economic impact study indicating that the team will create $900 million worth of economic activity for the area, but she isn’t so sure. she asks for your advice on how to vote. she decides to hire you as a consultant. she sends you a fact-sheet about the bill with the following information: • there is an interested team that would likely move to northern kentucky if the arena is approved. (the team doesn’t want its identity known, though, so you will have to take her word for it.) • the team would expect to sell 800,000 tickets. • the fan cost index, which figures the average expenditure for a family of four to attend a single game, comes to $390. • the average ticket price is $70. • ten percent of those fans are from out of town and would need hotels, gas, etc. the average expenditures per visitor per day are estimated to be $100. • the team would get to keep all of the parking, concessions, etc. as part of the package to lure them from its current city. • the arena would be located in newport, near the aquarium. • the team could draw about 15,000 people per year who are in town for work-related visits. schwan’s food company, in particular, brings in a large number of people to its offices. • there is, of course, a 6% sales tax. that number is already included in the dollar amounts above, but that part of it will end up in frankfort. 28 |journal for economic educators, 21(2), 2021 handout 2 class group-work worksheet group members:_______________________________________________________________ on handout 1, you are given a set of facts. decide which of the facts are important and which are not for determining the economic impact of the new basketball arena. (why or why not?) 1. important: 2. not important: 3. what other information would you want or need to know? 29 |journal for economic educators, 21(2), 2021 handout 3 learning about the economic impact of a sports arena context-rich paper assignment you are invited to an end-of-the-year banquet for outstanding students. you find your seat and realize that you are sitting next to your local state senator. when she hears that you are taking a course in sports economics, she is delighted. there is a bill working its way through the legislature that will pay $450 million for a new basketball arena in northern kentucky (“the southern side of cincinnati”). the idea is to lure an nba team. she has seen an economic impact study indicating that the team will create $900 million worth of economic activity for the area, but she isn’t so sure. she asks for your advice on how to vote. she decides to hire you as a consultant. she sends you a fact-sheet about the bill with the following information: • there is an interested team that would likely move to northern kentucky if the arena is approved. (the team doesn’t want its identity known, though, so you will have to take her word for it.) • the team would expect to sell 800,000 tickets. • the fan cost index, which figures the average expenditure for a family of four to attend a single game, comes to $390. • the average ticket price is $70. • ten percent of those fans are from out of town and would need hotels, gas, etc. the average expenditures per visitor per day are estimated to be $100. • the team would get to keep all of the parking, concessions, etc. as part of the package to lure them from its current city. • the arena would be located in newport, near the aquarium. • the team could draw about 15,000 people per year who are in town for work-related visits. schwan’s food company, in particular, brings in a large number of people to its offices. • there is, of course, a 6% sales tax. that number is already included in the dollar amounts above, but that part of it will end up in frankfort. • write a memo to the state senator recommending how she should vote. remember, a yes vote is to agree to pay $450 million for a new basketball arena in northern kentucky. even though this is a vote in frankfort, assume the relevant area for your analysis is comprised of boone and kenton counties (or, at least, the kentucky part of the metropolitan area). in class, you and your group identified some items that you were not given, but that you thought were important. you will have to estimate these items. the state senator is a busy woman, so do not take too much of her time. write a two-page memo giving advice on how she should vote on the proposal. you do not have to base your advice solely on the expected economic impact of the arena, but you should include that in your argument. be 30 |journal for economic educators, 21(2), 2021 persuasive – do not simply give your opinion, but argue it. the senator is intelligent but has only studied economics at a principles level. make sure the memo clearly states your recommendation and is professionally written. you should use proper grammar, and the memo should be typed. to the back of your memo, staple an appendix with your calculations of the economic impact of the arena. make sure you refer to the calculations in your memo. if you used any other sources besides the professor or the course textbook, you need to cite them and add a list of references. this format (a memo with attached details) is a common way of bringing a busy decision-maker up to date on a topic. this is an individual assignment, and not a group assignment. make sure you have your memo printed out and ready to turn in at the beginning of class on the due date. on line courses: universities and servers: a fragile consortium on line courses: universities and servers: a fragile consortium dr. jerry plummer dr. roger w. clark dr. vicky langston dr. tommy meadows austin peay state university info@docplummer.com introduction higher education administrators are feeling a great deal of pressure to offer internet courses. accordingly, faculty are being pushed to generate, build and maintain these internet offerings, usually without sufficient experience or resources (computer user, august, 2000). individual faculty “assigned” to develop these courses typically face major decisions to develop a self-sufficient on-line course, or work with publishers rapidly linking textbooks with both cd resources and online resources. however controversial this choice process may seem to the individual faculty member and administrators trying to organize online offerings, a major issue looms: who actually owns the content of the courses published (chronicle of higher education, july 21, 2000). in times past, this disagreement has usually been between the professor teaching the course and the university administration. given the explosion of the internet, there are other players in this game of who have the right to course content: the third-party firm that houses the server and sells and maintains its content to universities and colleges (computer user, september, 2000). . in the past couple of years, several companies on the internet have arisen that offer the uses of their servers and software to publish these courses. software vendors and publishers are offering enticing packages including web space and course maintenance for both students and faculty, easy access to publisher copyrighted materials, and research tools for students. software vendors are primarily marketing to administrators a common image and standardization. publishers are typically marketing to faculty, who select textbooks, and offering a wide array of options to aid faculty members in integrating a textbook and online environment for students. college presidents are being advised to support and encourage collaborations of this nature. (chronicle of higher education, june 22, 2001.) unfortunately, this licensing arrangement that initially appears to be a perfect marriage of private business and higher education can be fraught with ‘gray areas’. an example is the $25-million "strategic alliance" between the plant-biology department at the university of california campus and a multinational life-sciences company based in switzerland (the chronicle of higher education, june 22, 2001). an examination of the license agreements of each of these third party groups shows a wide disparity in the rights of ownership of these materials when they are uploaded to the servers. it appears true that some of these internet providers may have the rights to use of the materials published in other courses not originally contemplated by the professors 70 publishing the content. professors, who believe they have worked out ownership of a course, may find that a provider can begin offering its own courses, using the best of the courses uploaded to the site from various schools or professors. this paper examines the rights of the original providers of content and the sight owners under contract and copyright law (ko and rosson, 2001) to develop some clarification of this as yet unresolved area of law. we must stress that due to the legal nature of the issue, court decrees may alter our assumptions or presumptions. legal background the right of an author to the exclusive use of his/her work stems from the united states constitution, which states that congress shall have the power: “to promote the progress of science and the useful arts, by securing for limited time to authors and inventors the exclusive rights to their respective writings and discoveries.” (u. s. constitution, article i, section 8) under the laws of the united states an author may copyright any original work. an author is “he to whom anything owes its origin: originator, maker.” (burrow-giles lithographic co. vs. sarong, 111 u.s. 53, 58 (1884)) one issue is what is original and may be copyrighted. first, it must be a tangible work containing some original creativity. (gracen vs. bradford exchange, 698 f 2d 300, 304, (7th cir, 1983) (posner, j)) however, originality and creativity are very broad and are not the same as the accepted definitions of artistic originality. one court went so far as to hold that the page paginations of a company reporting court decisions was entitled to copyright protection. this decision, however, has been criticized as being too extreme (nimmer, melville and david nimmer, nimmer on copyright, 1996 ed.). it can be a derivative work, which is “a work based upon one or more preexisting works, such as a translation, fictionalization, motion picture version,… abridgment, condensation or any other form in which a work may be recast, transformed or adopted. a work consisting of editorial revisions, annotations, elaborations, or other modifications which, as a whole, represent an original work of authorship…” (17 u.s. code section 101) another type of work that is entitled to protection is a compilation. here the creator takes the works of other authors and compiles them in some new form or order (theoretically, with the express permission of the copyright holders of the original works). the copyright attaches to the compilation and the creative order of it. the authors of the underlying articles in a compilation must give their consent to the compiler or they may sue for copyright violation. before 1988, the rights of the author of a course were largely controlled by a patchwork of state and federal copyright laws. someone who developed an original work such as a book, course, etc. had what is known as a state common law copyright until its 71 first publication. upon its first publication by the author it had to be registered in the federal copyright office for its protection to remain valid. any publication had to have the copyright © stamp on it along with the words “all rights reserved” to protect both the united states and international rights to the work. (17 u.s. code section 410 (c)) in 1988, congress amended the copyright act to bring it into line with international standards as set forth in the berne convention. these amendments totally preempted state laws of copyright. currently the federal copyright law protects the author from the moment he writes his work until seventy years after his death, and for anonymous works the presumption is that the author died twenty-five years after the first publication. the author no longer has to register his work with the government for the copyright to hold, nor does one have to place the copyright logo on the paper. should there be an infringement the copyright holder must then register the work to be able to sue the infringer. in a lawsuit for copyright violation, the holder is entitled to actual damages. this means one must show the actual amount of monetary damages resulting from the wrongful copying. many times this is difficult and the holder receives nominal damages. should the holder have registered his work with the copyright office before the infringement and displayed the copyright logo on the document she might be entitled to statutory damages up to one hundred thousand dollars and attorney fees. statutory damages are amounts that the law awards without the plaintiff having to prove an actual economic damage. hypothetical situations let’s apply the above to a professor with an online course using a self-sufficient website. in the course the professor has uploaded his class notes, a group of readings by other authors, which will be read on specified days and in specified order, streaming videos of class lectures, tests, and a chat room. the professor will have a copyright to his own material, including notes, videos, articles by him, the arrangement of the readings and tests, and any software he develops to present the materials. later, an outside company downloads the course from his site. the company downloading the course does not have permission to use the course and it is not under the fair use doctrine. however, registration is required before any suit for infringement can be brought. because the professor is working for a non-profit educational institution there are no lost profits from the infringement. if the company doing the copying is also not making a profit, there are no true damages. if the course had been previously registered, the professor could at least sue for statutory damages and attorney fees. another possibility is the professor uploads the course to a server and has in the course a particularly good article on a subject such as france in the middle ages. the company owning the server does not directly copy his article. instead, as the article is on the company's server and in the company's format it simply links to the article in question along with articles from other courses and incorporates them into its own course on the middle ages. this new course has as its materials a series of links rather than the direct copying of materials. here the law is not as clear-cut. as another (reverse) example, imagine that “an architecture professor distributes to his distance-education students digitized photographs of the palace at versailles, warns the students about the images' poor quality – and then gets hit with a lawsuit from the 72 software company that provided the pictures. the company accuses the professor of violating the terms of the license agreement, which prohibits customers from publicly criticizing the product. a judge rules in favor of the company, citing ucita, a new law that makes ubiquitous software-licensing agreements readily enforceable. the scenario is only imaginary, but it could easily become reality in any states that adopt ucita, the uniform computer information transactions act, which was drafted by a legal group that seeks to make state laws consistent nationwide.” (chronicle of higher education, august 11, 2000.) this law is currently only valid in two states. one case on copyright may give more support to the author of an article published in electronic form. in tasini vs. the new york times (2d cir. 97-9181, sept. 1999) the plaintiff was an independent writer who had written an article for the defendant. the defendant had published his article in the ny times with plaintiff’s consent. the defendant later placed the article, along with all other articles, in the nexus database, where it could be called up with a search engine. plaintiff sued for copyright infringement, claiming he had given permission only for placing the original article in the defendant's magazine. defendant claimed he had simply recompiled the article in an anthology form on the database and needed no further permission from the author. the court held that the database did not have the qualities needed to qualify it as an anthology and further permission was necessary before the defendant could republish the article. this case is currently on appeal to the united states supreme court. standard copyright agreements at this time, when a course is uploaded to a third-party server, the professor presumably gives the third-party the implied right to publish it on the internet. there are several companies that supply software for the academic community as well as free server space for publication on the internet. a review of three software companies suggests that agreements with the person or institution uploading the copyright materials vary considerably and the full extent of agreements should be carefully read. for example, blackboard.com states that the person or institution uploading the content has the sole right to the copyright of the materials, however, it also has the following in its use agreement: by uploading or otherwise making available any user content, you automatically grant and/or warrant that the owner of such user content has granted blackboard, for the sole purpose of displaying publishing, distributing and/or otherwise transmitting the user content through blackboard.comsm, the perpetual royalty-free, non-exclusive right and license to use, reproduce, modify, publish, distribute, perform and display the user content through blackboard.comsm. you also permit any other user of blackboard.comsm, subject to your restrictions, to access, view, store and reproduce the user content to the same extent permitted herein. thus, the original copyright holder apparently still holds the copyright, but has relinguished actual control to blackboard. when licensing its software for use on university servers, blackboard has a much more restrictive clauses governing how a university (the licensee) can use blackboard’s software: 73 1.1 license. subject to terms and conditions herein, blackboard grants licensee a non-excusive, nontransferable license to load and/or operate and use a single copy of the software entitled courseinfotm (the “software”)… on the server(s) indicated in exhibit a attached hereto,… 1.3 restrictions. except as otherwise expressly provided, licensee may not copy courseinfotm in whole or in part except to a server in accordance with section 1.1. … in contrast, ecollege.com has this rather straightforward statement on content uploaded to its server: any material, communications, text, graphics, audio, video, links, art, animations, photos, or other information (collectively the "course content") that you upload to or otherwise make available to ecollege.com is and remains your property or the property of your licensors. webct has no agreement online for the professor to accept or reject. upon inquiry to them concerning copyright ownership authors received the following e-mail: copyrights have not been an issue with us, webct owns the copyright on the application, and the course creator owns the rights to the content. we do not take responsibility for content uploaded to our servers, we merely maintain the server and webct interface. we have not in the past had an issue with copyrights, nor do we anticipate that there will be any problems with this. pending legislation there is pending legislation that may attempt to clear these differences. the pending technology, education, and copyright harmonization act follows the recommendations of a report issued in 1999 by the u.s. copyright office, calling on congress to expand copyright law's so-called fair-use exemption to include distance education. (chronicle of higher education, march 30, 2001.) both upon the first review of the proposal (chronicle of higher education, june 18, 1999) and the latest revision, the vendors were quick to point out that the proposed law is unclear, and could easily direct the law into a newer, more narrowly defined lane. administrators, legislators and private parties alike agree that the proposed changes are a step in the right direction, but not ‘what the doctor ordered’. as of this writing, the law had not been passed, and was undergoing some changes to its construct. cursory inspection of the law does not indicate that it would answer the above questions clearly. 74 summary there still is a long way to go for clarification of the contractual responsibilities of each party with respective to the copyright laws applying to on-line courses. the long standing concerns of faculty, that the university would become the owner of materials prepared in conjunction with classes without proper remuneration, have been complicated with the rise of the on-line third party server organizations. both faculty and university administration should consider these ‘uncharted waters’ closely prior to agreement with any party-for any reason. many administrators face increased pressure to improve their ‘own-line presence’ based on headcount funding formulas. however with only limited technology resources the result could be devastating long term competitive consequences through rapid loss of any “monopoly” rents accruing to faculty intellectual property that is effectively unprotected. after all, students seek university acknowledgement of their education in order to gain faculty knowledge and support in a structured higher education process. to date the university model has been built on the mentorship roles developed between faculty and students. otherwise, students could buy textbooks and surf the web on their own. to wit, universities could simply become testing agencies, and professors hired programmers for the ‘one-shot’ generation of the text of the courses. references 1. computer user, august, 2000. 2. the chronicle of higher education, when professors create software, do they own it,or do their colleges?, july 21, 2000. 3. private conversation at aef meeting in biloxi, ms, february, 2001. 4. computer user, september, 2000. 5. the chronicle of higher education, college presidents urged to nurture relationships with businesses, june 22, 2001. 6. the chronicle of higher education, a vilified corporate partnership produces little change (except better facilities) june 22, 2001. 7. u. s. constitution, article i, section 8 8. burrow-giles lithographic co. vs. sarong, 111 u.s. 53, 58 (1884) 9. gracen vs. bradford exchange, 698 f 2d 300, 304, (7th cir, 1983) (posner, j) 10. nimmer, melville and david nimmer, nimmer on copyright, 1996 ed 11. 17 u.s. code section 101 12. 17 u.s. code section 410 (c) 13. the chronicle of higher education, new software-licensing legislation said to imperil 14. academic freedom, august 11, 2000. 15. http://www.blackboard.com 16. http://www.ecollege.com 17. http://www.webct.com 18. the chronicle of higher education, educators praise bill to ease copyright 75 restrictions, march 30, 2001. 19. the chronicle of higher education, copyright office releases proposal for on-line distance education, june 18, 1999 20. ko, susan and steve rossen, teaching online a practical guide. houghton mifflin boston 2001. 76 introduction legal background hypothetical situations standard copyright agreements microsoft word stockgamer.doc stock trading in class: a multimedia game nancy j. burnett* department of economics 800 algoma blvd. university of wisconsin-oshkosh oshkosh, wi 54901 (920) 424-1471 (920) 424-1734 [fax] burnett@uwosh.edu abstract the opportunity to teach high school students about the intricacies of the stock market provided the motivation to prepare a one hour, interactive, multimedia lesson that excited students and dramatically increased student understanding of market trading and how new information is incorporated into stock prices. student handouts and a teacher instruction set are attached and a microsoft excel worksheet for classroom presentations is available from the author. * i would like to thank several instructors at the local high schools and professor l.vanscyoc for allowing me to present this material to their classes. all errors and opinions, however, are the sole responsibility of the author. 1 introduction stock markets, as an academic topic, seem to either elicit excitement or yawns from students. those who are excited tend to have had long term interest in stocks and have a pretty firm idea, at least, of how money is made by market participants. those who exhibit yawns tend to be difficult to reach and motivate to understand this most fundamental of markets. over the course of the past year, this stock market experiment has been used successfully several times for groups of students at both junior high and high school levels. furthermore, students become so involved with the interactive nature of this presentation that boredom is no longer a problem. groups of approximately 20 students had the opportunity to participate in this multiround, interactive game to enhance their understanding of how the stock market works and how money can be made (and lost) by participants in this market. the original presentation of this material occurred during the course of our local high schools’ interdisciplinary celebration of the 1920's. therefore, the game was designed to show quick run-ups of price with the use of margin buying and at least the possibility of a stock crash. the remainder of this paper contains a discussion of the game, a description of the mechanics of running the game, and a brief mention of the results obtained by the author from several exercises of the game. appendices contain a copy of the participant handout and a set of teacher instructions for running the game. a copy of the microsoft excel worksheet for overhead presentation will be cheerfully provided by the author upon request. the game the game itself consists of sequential rounds of stock trading with brief presentations by the teacher before and after each round. the market is represented by an overhead projection of a microsoft excel worksheet that shows the outstanding price for the single stock that students are allowed to buy. each buy (regardless of the number of shares of stock in the transaction) causes the price to rise by 1 and each sell causes the stock price to fall by 1. students may trade as many times as they wish each round in order to take advantage of the fluctuating prices. depending upon trading activity, the teacher may need to close each round of trading by using an egg timer set for 5-7 minutes. at the end of the round something new occurs in the market that participants respond to during the next round of trading. the first round occurs after student have received their assigned starting wealth and listened to a brief discussion about the mechanics of trading stock. if the teacher wishes to incorporate a lesson on the 1920's, for example, or just to use the opportunity to highlight wealth distribution, different levels of starting wealth can be assigned along with occupations. this works particularly well as a session in a meta-lesson on a time period or on other sociological issues for high schoolers. for younger students, assigning a uniform level of starting wealth and not distinguishing occupations simplifies the lesson. at the end of the first round, stock holders receive cash dividends. depending on the class level and time constraints, running another round with no other changes might be appropriate. after paying dividends, students are more likely to see a motivation for buying stock, so that more students will participate in the trading in the next round. 2 at the end of the round (or rounds) where dividends were paid, the teacher demonstrates a calculation of net worth and announces another payment of cash dividends in order to provide continuing motivation for stock purchases. then, the teacher gives a presentation on borrowing money to purchase stocks (simplified margin trading).1 students calculate maximum purchases for the subsequent round. stock purchases during the following round demonstrate market volatility quite nicely. at the end of that round, large increases in net worth are quite likely. however, it is at this point that students will calculate their margin call trigger price (the price at which they must sell off their stock, because the price has become too low to support the loan they got to buy the stock). as the teacher makes rounds to determine that participants have calculated this correctly, he or she notes a common trigger price for many students. just before trading is to begin again, the teacher describes a sudden price decline for the stock based, perhaps, on current events or on something pertinent to the time period under study (black thursday or “the babson break,” in the case of the 1920's for instance). another way to precipitate a sell off is to force a subset of the participants to sell because of outside influence (say, weather conditions, like the dust bowl for farmers, or opec price hikes for those in transportation or petroleum industries). a slightly different approach to causing a market price decline is to announce what the company actually does, this brings students to the notion of what is generally referred to as ‘market fundamentals.’ in the game for junior high students, we used els, inc. and used this opportunity to explain that els stands for “eric’s lemonade stand” (eric being the name of my oldest son). then, explaining that my son had limited the hours of operation of his stand for some reason, we lowered the stock price. whatever the case, prices begin several points lower than they ended in the previous round.2 generally, a mass sell off ensues that may even bring the price to zero. there may, however, be market participants who did not margin that step in to buy at low prices preventing a general market rout. at the end of the game, determine the final net worth and a winner (or two) can be brought to the front of the classroom. presenting the winner with a nominal prize (say, gift certificates at a fast food restaurant or foreign currency with minimal value) is a dramatic way to end the hour. using the following lesson (either the next day, or in the case of extra time at the end of the period) to focus on the stock market game results and reinforce the learning objectives. a review of the learned vocabulary (stock, margin, trigger price, net worth, dividends, etc) and discussing market volatility drives home the lesson’s impact. the opportunity to integrate the market game with a “meta lesson” regarding a time period such as the 1920's or 1980's or to explore the ramifications of wealth dispersion can be profitably explored in a follow up as well. game mechanics the game requires the use of an overhead projection set up using microsoft excel, the 1 in the actual market, the federal reserve board's regulation t regulates the amount actual market participants can borrow. currently, this rate is 50% of the stock's purchase price (for eligible securities selling at $10 per share or more the same initial margin is required for selling short) with a minimum of $2,000 maintained in a margin account and a 30% maintenance margin. 2 more than one game trial had prices topping $60 per share at this point. 3 availability of calculators for student participants, and student handouts copied in advance. the presenter (teacher) should also have a small timer with an audible alarm (an egg timer that can be set for 5 10 minutes works nicely). students should be prepared with pencils, erasers, and hand held calculators. before the lesson begins, the teacher needs to prepare the student handouts for each participant. at this point, the decision needs to be made whether a “meta lesson” will be taught in tandem with the stock trading game. if not, assign each student the same starting wealth and omit mention of different occupations. appendix a contains a sample student handout. the starting price for our stock is $20 per share, so an appropriate level of initial wealth is no more than an average of $100.3 the computer software and projection set up needs to be available and functioning. open microsoft excel, load the worksheet “stockgame”, go to view and click on full screen. what appears on the screen (overhead) is the opening price of the stock in large print and a small spreadsheet on the lower part of the screen.4 to enter a buy transaction, type the number of shares desired in the buy column and hit the down arrow key. the column labeled total will calculate the transaction total and the price value will increment appropriately. appendix b contains a teacher ‘cheat sheet,’ or outline, for the lesson discussion. the initial presentation before the first round introduces the game, and explains that students will be trading in a single stock (els, inc. perhaps) with cash from their initial level of wealth. a careful description of stocks as actual shares of ownership in a particular company and how such ownership confers both opportunities (such as increases in the stock price usually reflecting the underlying company’s valueand an actual say in the company’s operations such at annual meetings) and risks (decreases in the underlying company’s value) is necessary. using this time to recount the stock price history of a local and/or well known company may further enhance these ideas. an example might be the coca cola company (ko on the new york stock exchange nyse); it was trading at $20 per share in 1992, $85 per share in 1998, and currently trades around $50 (10/01). the teacher should also describe how stocks are traded in the ‘real world.’ there are two distinct types of stock trading: those with physical places where trading occurs such as the nyse on wall street in new york, and those with non-centrally located computerized trading like the nasdaq exchange. most students will be familiar with scenes from the pits of the famous markets like the nyse where trading is occurring amidst semi-mystical hand signals and yelling. a very brief discussion about what supply and demand do to prices may be appropriate as well. note to students that when there are more shares offered for sale than the number of shares buyers wish to purchase, stock prices will fall and vice versa. in this game, every buy (no matter how many shares are transacted) causes prices to rise by $1 and every sell causes prices to fall by $1. before the first round begins, the teacher needs to stress that students must figure out exactly 3 for the 1920's related game, i used wealth levels of $60 for farmers, $80 for laborers, $100 for merchants and $150 for ‘barons of industry.’ the number of expected participants was broken down into occupations according to the rough percentages of such occupations during the actual time period: for a class of 20, 2 barons, 7 farmers, 3 merchants and 8 laborers. the handout can be color coded for each occupation if so desired. 4 you may safely ignore the rest of the columns on the lower part of the screen, but if you wish to change the starting price, change cell i7 (labeled in the adjacent cell ‘base price’). 4 how many shares they wish to purchase/sell and that trading is strictly ‘first come, first serve’ (this creates the scramble to trade seen so often in news footage of the trading floors of actual stock markets). a note that prices rise with each purchase so that someone with $100 will be able to buy 5 shares only if they are first to get to the market maker will further enhance the excitement of the trading session. students should also be aware that trading time will be limited for each round (5 minutes for the first round should be sufficient subsequent rounds may need 7 minutes or more at the teacher’s discretion). the first round commences with the teacher sitting at the computer, starting the session clock and accepting bids. the teacher enters the quantity of the first trader in the appropriate buy or sell column and notes the total in the adjacent column. that amount is then written on the student’s sheet under the first round stock with (say) “buy 5" and under cash “-100". use the next line in the table for the next transaction. the stock price shown will increment by one for every buy and decrease by one for every sell, and the total column will show the amount for the transaction. when the bell rings (or when trading dwindles), the round is over. the teacher next defines and discusses, briefly, dividends. these are payments to stock owners from the company out of company profits. it is nice to mention that, in the real world, some companies always pay dividends and some never do. furthermore, dividends can be in the form of more stock shares instead of cash. in this game however, cash dividends are paid; students get $10 for every share of stock they own. a student with 4 shares, therefore, gets to add +$40 to the cash total they currently have. students then calculate their net worth. this is done by taking their cash total and adding it to the current price of the stock (shown on the overhead) times the number of shares of stock they hold at the end of the round. these calculations are shown in the handout, but the teacher should demonstrate them and spot check some student handouts as well. the next round may be identical to the first if time permits (as shown on the handout in appendix a) or students may move on to margin trading. using a second round of trading after dividends are paid entices more students into the market and will usually still fit within a one hour time constraint. at the end of that round, dividends are again paid and net worth again calculated. a verbal comparison of what current student net worth’s looks like gives motivation to those students that have not yet taken the market plunge. at the end of that round, dividends are not paid. the teacher then discusses how to margin stock purchases: margin buying is using borrowed money as well as your own to purchase stocks. there are rather complicated limits on such transactions (see footnote 1, above). in this game, however, we will use a very simple margin of 25%. this means that students can borrow up to 25% of the stock’s value at purchase: to buy $100 worth of stock, students can borrow only up to $25 and must put in $75 of their own cash. the calculations are shown on the handout. care in checking student calculations at this point is vital. also, the teacher needs to make clear that this amount is not the amount of net worth a student has, only the maximum amount of stock that can be purchased using borrowed money, with the student’s current amount of cash on hand. point out that students may want to sell a few shares of stock, take the proceeds and rerun the calculation to obtain the amount that they could borrow to purchase more stock. this next round requires a little more time than the previous rounds, because of the additional calculation required by the students. i recommend, however, no more than 10 minutes. having an assistant to aid students with these calculations can be helpful. this round may see students purchasing $400 worth of stock (for those who had not yet purchased any 5 stock, for example). if students take advantage of this opportunity, prices can go over $100 a share quite easily. at the end of this round, the teacher needs to show not only the net worth calculation (demonstrated on the board, perhaps) but also to discuss what a trigger price is. a trigger price is the value of the stock that means the owner must sell stock to pay off the loan made to purchase it (trigger price = loan÷ (.75*number of shares of stock you own)=_______). for instance, if a student has a cash total that reads ‘-100' this means the student has a loan of 100. if this same student has 10 shares of stock, the trigger price will be 100/(.75*10) or $13.33 per share. make sure that students know that if the stock price on the screen is at, or below, $13, this student must sell all of his/her stock. teachers need to keep a careful eye on the trigger price calculations. many students will have very low trigger prices, though some may have trigger prices fairly close to the prevailing price. at this point, when the teacher is satisfied that students have correctly calculated their trigger prices, that a discussion about the underlying value of the stock (els being a lemonade stand, for instance) or the time period under discussion is done. at any rate, the teacher drops the outstanding price of the stock several points (to a point below several students’ trigger prices, if possible). trading in this last round may prove to be brisk. depending on the ‘mob’ behavior, the price may even drop to zero (at which point, trading must cease) or it may just fluctuate as ‘profit takers’ buy when the price falls. at any rate, the end of this round is the end of the game. have students calculate their final net worth and showcase the winner. do not be surprised if the winner is not from among the group of students who had thought they would surely be the top profit maker. 6 appendix a name: _________________________ occupation:_____________________ wealth and the stock market we will be simulating the stock market. at first you will be assigned a level of wealth (in cash) and an occupation. this cash value is your beginning net worth. net worth is the total of your cash and any stock shares you own (valued at the current price on the overhead screen). the object of the game is to increase your net worth by as much as possible. for instance, if you buy 1 share of stock at 20 and its price goes up to 60, net worth goes up by 40! this game will be played in successive rounds. during each round, you will be allowed to buy or sell shares of stock (els, inc.) at the current market price shown on the overhead screen. every time there is a trade of 5 or fewer shares of stock the price will change by 1 (up if the trade is a buy, down if it is a sell). for more than 5 shares, the price will change by 2.if you want to trade at 20, for instance, you had better get to the trader as soon as possible, before the price rises! good luck! round 1 cash stock (shares) dividends are paid!! you get 10 in cash for every share you own. add this to your cash total and bring down the totals of cash and stock to round 2. round 2 you may only buy stock with cash in this round. cash total: stock (shares)total: cash from round 1+ dividends bring down total from round 1 [dividends=10*number of shares you own] dividends are paid!! you get 10 in cash for every share you own. add this to your cash total and bring down the totals of cash and stock to round 3. next we are going to allow trading on credit (a ‘margin’ of 25%) 7 maximum purchase = 4* (remaining cash) = ___________ note 1: this is the maximum you may purchase, not your current net worth. note 2: you may sell stock to get cash in order to ‘buy on margin.’ round 3 cash stock (shares) loan cash remaining after round 2 stock shares (total share purchases from round 1+round 2) margin requirements: trigger price = loan÷ (.75*number of shares of stock you own)=_______ note: if the stock drops below your trigger price, you must sell stock to cover your loan. round 4 cash stock (shares) loan remaining cash from round 3 total of shares from round 3 loan total from round 3 final net worth = cash + (shares of stock)*(current stock price) loan: appendix b 8 stock market simulation game before round 1: how stock markets work (shares of ownership) and how stocks are traded after round 1: what are dividends? repayment of some portion of profits to ‘owners.’ why do companies pay them? what does newly available information (such as the payment of dividends) do to stock prices? think about how much you are worth now: cash + #shares of stock*current value = net worth after round 2: what is margin? borrowing money from a bank (or brokerage house) to buy stock using the stock as collateral for the loan. figure margin (max purchase= current cash * 4) we’re using 25% = 1/4 for max margin. (in 1929, it was common to be at 90%, the current law is 50% of purchase value with a 30% call margin. ) you may want to sell a few shares of stock to get cash in order to buy on credit. after round 3: how to calculate the trigger price. take the total loan and divide by number of shares of stock you hold. then divide by .75 (this is what guarantees a 25% margin). if the stock price falls below this level, you must sell all of your stock (in the real world, the broker generally does this for you, but only sells the stock you bought on margin–we need to get the game moving along). no new dividends. prices drop maybe because of ‘rumors’ about ‘softness’ in technology stocks or profit taking by a few wealthy individuals. keep tabs on prices!! remember you must sell if the stock price falls below your ‘trigger price.’ in this game, lets say you have to sell everything you have (in the real world you only have to sell enough to make margin). after round 4: calculate net worth. cash + current stock price * number of shares you own loan. game over. winner gets what? 9 17 | journal for economic educators, 14(1), summer 2014 forecasting first-term collegiate success from pre-enrollment information donald i. price1 and gregory b. marsh2 abstract admissions officials are asked to make decisions about individual students based upon the information that can be known prior to enrollment. in the present study we show that first-term success of previous students from a given high school can be a significant predictor of first-term success of individual students after accounting for other variables; such as standardized test scores and class standing; that are also known prior to initial enrollment. keywords: student retention, first-term gpa, high school quality, success adjusted student percentile jel classification: i2, education introduction in an era of tight budgets, when legislatures are using retention and graduation rates to make funding decisions, it is critically important for institutions of higher education (ihes) to identify first-year students who are well matched to the institution and, therefore, likely to succeed. however, admissions officers at ihes are forced to make decisions when they possess incomplete information. student class percentiles, secondary school grades, and standardized test scores are known prior to enrollment but many institutions still find that a substantial proportion of their first-time students do not remain at the institution beyond the first year. many admissions officers contend that the percentile standing of a student is more meaningful when they know something about quality of the student’s high school. it is, therefore, a potentially a useful exercise to combine information from the past first-time-in-college performance of various high schools with the individual student’s percentile in high school. when doing this for a single ihe it is important to remember that the ihe’s calculation of student success by high school may not reflect the overall quality of the high school. an ihe such as the study institution may receive the better students from one high school and not be seriously considered by the better students of another high school. what is important from the standpoint of retention and eventual graduation is the quality of students who are actually choosing the institution. literature in education suggests that one measure, first grade point average, is the singular most important predictor of student retention. admissions decisions, of course, must be made without knowledge of first grade point average. we propose to combine an aggregate of past 1 professor of economics, department of economics and finance, lamar university, box 10045, beaumont, tx 77710. 2 director, office of institutional research and reporting, lamar university, box 10073, beaumont, tx 77710. 18 | journal for economic educators, 14(1), summer 2014 first-term success of students from each high school with the class percentile ranking of the student to better evaluate potential first-term success after we first correct for the effects of other variables that can be known prior to initial enrollment at the ihe. we approach problem in two ways. first, we use the standard rank percentile of the student and past first time gpa by high school as separate independent variables. second, at the suggestion of an anonymous referee, we create a variable called success-adjusted student percentile (sasp) which adjusts student percentiles for past student success at the ihe. these values are measured, as are the other independent variables used in the study, using data that are available prior to the student’s initial enrollment. because our objective is to identify students, prior to admission, who are likely to be successful measureable post-enrollment variables are not considered as part of the models. the study is limited to the first-time-in-college students at a single institution, lamar university. the confinement of the study to a single institution’s market has the advantage of limiting the variations in supply and demand among college markets that are characterized by a variety of instructional missions. the use of single institution limits any generalizations from the results but it is useful in that it provides a methodology that can be applied by other ihes to their specific situations. the paper begins with examination of retention literature. we will then present a model to explain student first year success measured by first-term gpa and analyze the results. finally, we will summarize and discuss the results and suggest areas of future study. literature review the quality of the product of our public school systems is known to vary considerably from one school to next. measurement of output quality has focused on student test scores and earnings. in the present study, we look at one aspect of quality, the first-term success of past students from each high school, as a predictor of individual student success at a single ihe. the measurement links high school quality with what education literature finds to be a key factor in student retention and graduation. retention studies in education suggest that initial grade point average (gpa) is the single most important factor whether students return for their second year in college. if pre-enrollment factors can be identified which explain first gpa of individual students then it may be possible to better predict initial success at institutions of higher learning. support for the importance of first-gpa as measure of success can be found frequently in the literature. mcgrath and braunstein (1997) discovered that of more than 20 academic, demographic, and financial variables studied, the single most important variable in predicting retention was first semester gpa. allen (1999) observed that among both minorities and nonminorities, freshman gpa was the strongest predictor of retention behavior. desjardins, kim and rzonca (2003) confirmed the importance of first semester gpa, finding that as the gpa increases, the chances of student attrition decreased. ishitani and desjardins (2002) concurred, as did kiser and price (2007) who found that a student’s chance of leaving decreased as their first-year gpa increased. murtaugh, et. al. (1999) further confirmed the importance of college gpa, finding that freshmen with a first quarter gpa between 0.0 and 2.0 had a probability of returning of 57.2%, while those at the highest gpa range between 3.3 and 4.0 had a 90.7% probability of being retained. 19 | journal for economic educators, 14(1), summer 2014 in this paper, we show that a variable measuring the prior first-term performance of a student’s high school is one of several significant pre-enrollment variables explaining the entering student’s first-term gpa. specifically, we calculate an aggregate gpa for each individual high school in the study based upon the past first-year performances of their students in a single market, that of the study institution and use it as one predictor of the expected initial student success of students from each of those high schools. we also use the first-time gpa of each student’s high school to adjust the individual student percentile in a measure we describe as success-adjusted student percentile (sasp). sasp reflects both the student’s standing in his or her high school and that high school’s past success at the study institution. materials and methods the model used is an ols estimate of the factors thought to influence first semester gpa of full-time, first-time-in-college students. the explanatory variables measure data values that are known prior to the student’s entry to the study institution. the model employs variables specific to each student, specific to the high school from which the student graduated, and a measure of economic conditions in the areas from which the students come. data were collected for fall ftic students who first enrolled at the study institution between the fall of 2004 and the fall of 2009. the model is specified below. gpa100 = f (stuper, gpabyhs, test score, logmiles, hhinc, classsize) gpa100=f (sasp, gpabyhs , test score, logmiles, hhinc, classsize) table 1: variables variable variable description gpa100 individual student first semester gpa times 100 sasp student percentile multiplied by the ratio of a high schools overall 1st gpa to overall gpa of most successful high school gpabyhs combined ftic gpa for previous students from a particular high school times 100 stuper individual student percentile in graduating class sat individual student sat verbal plus sat quantitative actcomp individual student act comprehensive score logmiles natural log of distance in miles from student's high school to study institution hhinc median household income in zip code where student's high school in located (in thousands of $) classsize number of graduates in student's senior class 20 | journal for economic educators, 14(1), summer 2014 the study institution prefers sat scores in the admissions process but will also accept act scores. the model was estimated using data sets that include either sat or act scores. the data set for students submitting sat scores is several times the size of the one for students submitting act scores. because some students submit both, some students are included in both data sets. variables used in the study are described in table 1. each of the independent variables measure characteristics of a student’s background that can be known at the point of the student’s initial enrollment. student percentiles, class size and test scores are collected as part of the admissions process and were obtained from the study institution’s records. distances between high schools and the study institution were calculated as distances between the zip code addresses. the income level data are measured by the median household income for the high school zip code and were collected from ersi’s community sourcebook america. the data to calculate sasp, the student-adjusted student percentile, were collected from the records of the study institution. first-term gpas by high school of the entering students were calculated for each of the high schools in the study. the study was limited to high schools that contributed the largest number of semester credit hours by ftic students. the ratio of a high school’s gpa to the gpa of the most successful high school was used as an index to adjust student percentiles based on past success of student from that school. the variable sasp was calculated as: sasp = (gpahs/gpaths) x stuper where gpahs is a the average first-term gpa for students from a particular high school in the past, gpaths is the average first-term gpa of students from the high school with the highest average first-term gpa in the past, and stuper is the student’s percentile at his or her high school. values of sasp may vary from 100, for the valedictorian of the high school which has the highest first-term gpa, to values approaching zero when students who have low percentiles and/or are from poorer performing high schools. the adjustments create a measure that is specific to the ihe and should be understood as such. sasp is not a measure of the overall quality of any high school. instead we are solely interested in measuring the quality of product directed to a single market; i.e., the study institution. for example, the sasp measure could be significantly different for two similar schools if one typically sends its better students to the study institution and the other does not. it is a measure of student success for those entering the particular ihs and cannot be generalized beyond that. it can, nonetheless, be a valuable piece of information for the study institution and is a measurement that can be replicated and used by other institutions in evaluating the likely success of their first-time students. it is generally expected that ftic students from high schools that have had previous success at the study institution will be more successful than those who enter from high schools whose previous first-time students have had less success. standardized test scores are expected to be positively associated with first-term success and the alternative measures student percentiles are both expected to be positively associated with student first-term gpa. a positive relationship is also expected between first-term gpa and the measure of economic background, median household income. individual student data were not available for household income so the median incomes for zip codes where their high schools are located were 21 | journal for economic educators, 14(1), summer 2014 used. the distance from home variable, logmiles, was used to capture the impact of ‘freshman homesickness’ and, as such, was expected to have a negative relationship with gpa. to capture effects of high school size on first term success, we added the size of the student’s high school class. no particular relationship was hypothesized. positive, negative and even bellshaped relationships were considered possibilities. descriptive statistics for the data sets appear in tables 2 and 3. gpa100 is the dependent variable in all equations. table 2: sat descriptives variable n minimum maximum mean std. dev. gpa100* 3568 0 400 261.43 99.04 sasp 3658 1.9513 100 56.92 19.41 gpabyhs 3658 141.99 371.60 258.30 40.03 stuper 3568 2 100 69.22 20.49 sat 3568 480 1540 947.17 161.84 logmiles 3568 1.6094 5.79 3.42 0.94 hhinc 3568 20.93 124.68 52.71 15.85 classsize 3568 12 2885 356.44 210.89 *dependent variable table 3: act descriptives variable n minimum maximum mean std. dev. gpa100* 936 0 400 252.14 103.99 sasp 936 0.8922 99 53.92 19.15 gpabyhs 936 134.76 371.60 234.66 36.32 stuper 936 1 100 68.63 21.05 actcomp 936 8 33 18.96 4.32 logmiles 936 1.6094 5.79 3.81 0.93 hhinc 936 20.93 124.68 50.79 17.96 classsize 936 16 1135 361.34 233.28 *dependent variable results and conclusions four versions of the model were tested, two each with the sat and act data bases. each of the data bases was analyzed using alternative ways of evaluating previous success of students by high school. each was first analyzed using standard student percentiles and the gpabyhs variables. each data base was then analyzed using the sasp measure along with the gpabyhs. since gpabyhs is used in the calculation of sasp there was some concern that this could lead to multicollinearity. however, tests for multicollinearity did not indicate that it was a problem. 22 | journal for economic educators, 14(1), summer 2014 the results of the regression estimates appear in table 4. the percentile measures, standardized test scores, high school class sizes and the first-time-in-college gpas by high schools are positively related to the individual students’ first-time gpas across all four models. household incomes exhibited a positive relationship in the sat models but not the act models and the homesickness variable was significant in only one of the equations and then with a positive rather than the predicted negative relationship. the results clearly support the positive influence of student percentiles, whether adjusted for past success or not, on first-time term student performance. the overall explanatory value of the models differed very little according to which of the percentile measure was used. it is also clear the past first-term success of students from his or her high school is a significant predictor of an individual student’s first-term gpa. the results support earlier findings indicating that standardized test scores are good predictors of initial success in college. both sat and act show strong positive relationships. the classsize variable also clearly supports the notion that students from larger high schools are more successful initially. table 4: regression results models sat1 sat2 act1 act2 sasp 2.170 2.600 (.092)** (.191)** gpabyhs .793 .308 .813 .221 (.045)** (.046)** (.095)** (.098)* stuper 1.873 2.200 (.077)** (.154)** sat 0.078 0.077 (.010)** (.011)** actcomp 2.685 2.652 (.811)** (.825)** logmiles 3.595 2.636 1.704 1.358 (1.654)* (1.660) (3.325) (3.354) hhinc 0.492 0.447 0.332 0.270 (.111)** (.111)** (.197) (.198) classsize 0.018 0.017 0.031 0.030 (.008)* (.008)* (.015)* (.015)* constant -191.741 -52.954 -175.029 -19.944 (15.204)** (14.5)** (30.17)** (28.428) r2 0.324 0.318 0.330 0.318 n 3568 3568 936 936 standard errors in parentheses **significant at the .01 level, *significant at the .05 level. 23 | journal for economic educators, 14(1), summer 2014 it is not clear why the household income variable was significant for only the sat models. the variable was the median household of the zip code containing the student’s high school. it may be that the smaller act data base contained too few high schools to exhibit the same variation that the sat data base did but we are not sure why the data bases show a different result. the most surprising result was from the logmiles variable, the ‘homesickness factor.’ we had expected a negative relationship but the variable was only significant in the one model and was positively related to first-term gpa in that case. this result may be associated with a characteristic of the study institution. the study institution was historically a commuter school which had only about 15% of the student population living on campus during the study period. it may be that in a school where so few students are from out of the area that there simply is little measurable homesickness effect. overall, the models were able to consistently explain about one-third of the variation in first-term gpa. the analysis consciously excluded variables that could not be measured until after initial enrollment. the objective of the study was to identify pre-enrollment variables that would allow the ihe to make better admissions decisions. a more complete explanation of firstyear success would include factors that reveal themselves only after the student is enrolled. obviously, some portion of the explanation of success is eliminated when measurement is limited to pre-enrollment factors. there is room for future analysis using post-enrollment factors that can provide a more complete model first term gpa. certain useful data that were unavailable at the study institution may be available at other ihes. for example, while the study institution does use individual secondary school gpas in the admissions decision, those data are not entered into student records and were, therefore, not available to the authors. where these data are available they may provide a stronger explanation even when restricting the study to pre-enrollment data. another potential data limitation is our measure of household income. data for household income of individual students were not available. we used the median household income for the zip code of the students’ high schools to measure income level. individual data are available for students who apply for financial aid but not for other students. it would be an interesting study to determine whether the financial aid group would produce results similar to those of the larger group studied here and to observe whether greater variation associated with individual students could produce higher coefficients of determination for the equations used in the model. references allen, d. 1999. “desire to finish college: an empirical link between motivation and persistence.” research in higher education, 40, 461-485. akin, john s., and irwin garfinkel. 1997. “school expenditures and the economic returns to schooling.” journal of human resources, 12(4), 460-81. community sourcebook america, 2007 edition, esri. desjardins, s. l., d. kim and, c. s. rzonca. 2003. “a nested analysis of factors affecting bachelor’s degree completion,” journal of college student retention, 4, 407-435. heckman, james j. 1995. “lessons from the bell curve.” journal of political economy, 103(5), 1091-1120. ishitani, t. t. and s. l. desjardins. 2002. “a longitudinal investigation of dropout from college in the united states,” journal of college student retention,4, 173-201 24 | journal for economic educators, 14(1), summer 2014 johnson, george and frank p. stafford. 1973. “social returns to quantity and quality of schooling,” journal of human resources, 8(2), 139-55. kiser, a. i. t. and l. price. 2007. “the persistence of college students from their freshman to sophomore year,” journal of college student retention,9, 421-436. lotkowski, v. a., s. b. robbins, and r. j. north. “the role of academic and non-academic factors in improving college retention. washington, dc: act policy report (eric document reproduction service no. ed485476). mcgrath, m. and a. braunstein. 1997. “the prediction of freshmen attrition: an examination of the importance of certain demographic, academic, financial, and social factors,” college student journal,31, 396-408. minor, jacob. 1970. “the distribution of labor incomes: a survey with special reference to human capital approach,” journal of economic literature, 8(1),1-26. murnane, frank, , john b. willett, and frank levy. 1995. “the growing importance of cognitive skills in wage determination,” review of economics and statistics, 77(2), 251-266. murtaugh, p. a., l. d. burns, and j. schuster. 1999. “predicting the retention of university students,” research in higher education, 40, 355-371. ribich, thomas i. and james l. murphy. 1975. “the economic returns to increased educational spending,” journal of human resources, 10(1), 56-77. rosen, sherwin. 1977. “human capital: a survey of empirical research,” in research in labor economics. vol. i. ed.: ronald g. ehrenbert. greenwich, ct: jai press, 3-39. saito, yoshie and christopher s. mcintosh. 2003. “monitoring inefficiency in public education,” journal of agricultural and applied economics 35(3), 611-623. watchel, paul. 1976. “the effect on earnings of school and college investment expenditures,” review of economics and statistics, 58(3), 326-31. microsoft word two asset port markowitz portfolio analysis: the demonstration portfolio problem gary m. richardson ph.d., cfa department of business administration central washington university ellensburg, wa 98926 richard@cwu.edu 509-963-3082 26 27 markowitz portfolio analysis: the demonstration portfolio problem abstract when introducing students to modern portfolio analysis, the most impressive example of diversification benefits comes when the portfolio standard deviation and coefficient of variation are lower than those of either of the two equally weighted assets contained in the portfolio. randomly selected values for portfolio inputs will not always result in the most impressive portfolio outcome. this article derives the correlation coefficient necessary to produce an equally weighted two-asset portfolio that dominates either of the two individual assets in terms of standard deviation and coefficient of variation. spreadsheet models based on these derivations are provided to assist finance educators in setting the necessary portfolio input values. the information in this article is most useful for educators who generate their own homework/quiz/test problems. introduction in the early 1950’s, harry markowitz, a noble prizewinner, founded modern portfolio analysis when he demonstrated the nature of portfolio risk and how that risk can be minimized (markowitz, 1952). modern portfolio analysis is now a mainstream finance topic that is included in virtually every entry-level finance text and course. when introducing students to portfolio diversification, authors and instructors typically take a two-step approach. the first step is to calculate the expected return and standard deviation for two individual assets. the second step is to demonstrate that combining the two equally weighted assets into a portfolio, results in a portfolio standard deviation and coefficient of variation that is lower than the standard deviation and coefficient of variation for either of the two assets held in isolation. see for example (weston, besley, & brigham, 1996; gallagher & andrew, 1997; brigham & gapenski, 1999). i refer to this result as "demonstration portfolio benefits." unfortunately, this demonstration doesn’t always work! the demonstration portfolio problem the key factors in calculating portfolio standard deviation are the weights, standard deviations, and correlation coefficients of the assets held in the portfolio. depending on the correlation between the assets, combining two equally weighted assets into a portfolio does not always result in a portfolio standard deviation that is lower than either of the individual assets (i.e., no "demonstration portfolio benefits"). depending on the asset weights and the difference in the standard deviations between the two assets, even a correlation coefficient of –1.0 won’t necessarily cause portfolio standard deviation and coefficient of variation to be below the standard deviation and coefficient of variation for the lower risk asset held in isolation. i generate my own homework/quiz/test problems for my students. to encourage "independent efforts," i change the setup numbers each quarter. for portfolio problems, i have the students calculate the returns, standard deviations, and coefficients of variation for two individual assets and then the returns, standard deviations, and coefficients of variation for a portfolio containing those two individual assets. once completed, i ask them to choose, based on the risk/return tradeoff, asset 1, asset 2, or the portfolio. i want the problem inputs to result in the students selecting the portfolio over either of the two individual assets. the following discussion develops a spreadsheet model that simplifies the process of setting up the portfolio problem. 28 background equations the solution to the “demonstration portfolio problem” involves the use of several standard equations for calculating returns, standard deviations, and correlation coefficients. for convenience, these equations are presented below. in these equations; x and y represent individual assets, k indicates returns, w indicates weighting, i identifies an individual observation, and n is the total number of observations. individual asset average return over n periods: n k k n 1i x x i â = = standard deviation for the individual asset return over n periods: .5 2 n )k(k ó n 1i xix x ˙ ˙ ˙ ˙ ˚ ˘ í í í í î è â = = the covariance between the returns of two assets over n periods: n )y)(yx(x cov n 1i ii yx, â -= = the correlation coefficient for the returns of two assets: yx yx, yx, óó cov ñ = the return for a two asset portfolio over n periods: n kwkw k̂ n 1i iyyxx p i â + = = portfolio standard deviation solution assume a two-asset portfolio, comprising assets 1 and 2. given the asset weights and standard deviations and assuming that asset 1 has the lower standard deviation of the two assets in the portfolio (i.e., s1< s2) it's possible to derive the correlation coefficient necessary to cause the portfolio standard deviation to equal the standard deviation of asset 1. setting the correlation coefficient to a value less than the solution value will give a portfolio standard deviation that is lower than the standard deviation of either of the individual assets. to find the benchmark correlation, set the portfolio standard deviation equal to that of asset 1 and solve for the correlation coefficient. start from the equation for the standard deviation of a two-asset portfolio: sportfolio = (w1 2s21 + w2 2s22 + 2w1w2_1,2s1s2) .5 29 where: w1,2 = asset weights s21,s 2 2 = asset variations _1,2 = correlation between returns for assets 1 and 2 below is a brief derivation of the benchmark correlation coefficient required to make the portfolio variance equal to the variance of asset 1 (the asset with lower variance.) 1,2 ñ 2 ó 1 ó 2 w 1 2w 2 2 ó2 2 w2 1 ó2 1 w2 1 ó = -(1) in equation (1), _1,2 is the correlation coefficient that will result in a portfolio variance equal to the lower variance of the two assets in the portfolio. setting the correlation coefficient to a value lower than the solution value will result in "demonstration portfolio benefits" where the standard deviation of the portfolio is lower than the standard deviation of either of the two assets contained in the portfolio. consider the following numerical example. return1 = 11.39% s1 = 1.7000% return2 = 14.91% s2 = 2.4500% correlation1,2 = .4000 weight1 = .weight2 = .5000 the portfolio standard deviation resulting from these inputs is equal to 1.7482%, which is greater than the standard deviation of asset 1 held in isolation. solving for the benchmark correlation coefficient gives a value of .3202. using this value for correlation1,2 will result in a portfolio standard deviation of 1.7000%. setting the correlation to any value less than .3202 will give the desired result, a portfolio standard deviation less than 1.7000%. setting the correlation to any value greater than .3202 will generate a portfolio standard deviation greater than that of asset 1. under the current scenario, portfolio return is the simple average of the returns of assets 1 and 2, or 13.15%. the excel spreadsheet model shown in figure 1does the necessary calculations. in cell c2 of the spreadsheet the necessary formula is: (b1^2-b4^2*b1^2-b5^2*b3^2)/(2*b4*b5*b1*b2) setting the correlation coefficient to a value less than .3202, say .2500, results in a portfolio standard deviation of 1.6564%, which is lower than either of the two individual assets. portfolio coefficient of variation solution the coefficient of variation (cv), defined as the standard deviation divided by the expected return, may provide a more complete assessment of the risk/return aspects of individual assets or of portfolios of assets. the coefficient of variation is often referred to as a “relative” measure; it represents the variability in returns relative to the expected return. this characteristic is especially beneficial if the numerical values for assets being compared are significantly different in size. further, students are easily able to grasp the concept of “units of risk per units of return.” 2 ó 1 ó 1,2 ñ 2 w 1 2w2 2 ó2 2 w2 1 ó2 1 w2 1 ó 2 ó 1 ó 1,2 ñ 2 w 1 2w2 2 ó2 2 w2 1 ó2 1 w2 1 ó =-++= 30 consider the following numerical example. expected return1 = 5.0% expected return2 = 15.0% s1 = 10.0% s2 = 25.0% cv1 = 2.0 cv2 = 1.67 in this example, asset 2 clearly has greater total risk as measured by its standard deviation of expected return. this may lead a risk-averse investor (or introductory student) to select asset 1 which has a much lower standard deviation of expected return. however, evaluating the coefficients of variation for the two assets indicates that asset 1, with 2.0 units of risk for each unit of return is clearly inferior, on a risk/return basis, to asset 2 with only 1.67 units of risk for each unit of return. continuing with the first numerical example and including the coefficients of variation we have: return1 = 11.39% s1 = 1.7000% return2 = 14.91% s2 = 2.4500% returnportfolio = 13.15% sportfolio = 1.7482% correlation1,2 = .4000 weight1 = weight2 = .5000 cv1 = .1493 cv2 = .1643 cvportfolio = .1329 the risk/return tradeoff for the portfolio (as measured by its cv) is superior to that of either of the individual assets, however, the standard deviation of asset 1 (1.7000%) is lower than the standard deviation of the portfolio (1.7482%). this situation is less than optimal for the demonstration of portfolio benefits to the first time finance student. consider the extreme situation in which the correlation coefficient for assets 1 and 2 is equal to +1.0000. in this case, the coefficient of variation for the portfolio would be .1578, which is greater than the coefficient of variation for asset 1 held in isolation. in such a case, an investor would be better off to put 100% of his or her funds into asset 1. this is not the desired result in an introductory lecture or homework assignment. following the same approach that was used to find the greatest correlation coefficient that would result in a portfolio standard deviation less than or equal to that of the lower of the two assets, it's also possible to find a benchmark correlation coefficient that will give a portfolio coefficient of variation that is lower than either of the individual assets. again assuming a two-asset portfolio comprising assets 1 and 2 and assuming the coefficient of variation for asset 1 is the lower of the two assets, we can find the benchmark correlation coefficient by setting the portfolio coefficient of variation equal to the coefficient of variation for asset 1 and then solving the equation for the correlation coefficient. ( )portfolio 1 1.5 1,221212 2 2 2 1 2 1 2 1 1 portfolio .5 1,221212 2 2 2 1 2 1 2 k k ó )ñóów2wówó(w k ó k )ñóów2wówó(w ˜̄̃ ˆ áá ë ê =++ = ++ ( ) 2ó1ó2w12w 2 2ó2 2w1 2ó1 2w 2 portfoliok 1k 1ó 1,2ñ -˙ ˙ ˚ ˘ í í î è ˜ ˜ ¯ ˆ á á ë ê = (2) 31 in equation (2), _1,2 is the correlation coefficient that will result in a portfolio coefficient of variation equal to that of the lower of the two assets in the portfolio. consider the earlier numerical example where: return1 = 11.39% s1 = 1.7000% return2 = 14.91% s2 = 2.4500% weight1 = weight2 = .5000 solving the equation (2) indicates that the portfolio coefficient of variation will equal the coefficient of variation for asset 1 when the correlation between assets 1 and 2 is set to a value of .7822. the recommendation for any correlation coefficient greater than .7822 would be to invest 100% of available funds into asset 1. the excel spreadsheet model shown in figure 2 does the necessary calculations. in cell 2 of the spreadsheet the necessary formula is: ((((b1/b6)*b8^2)-(b4^2*b1^2)-(b5^2*b3^2))/(2*b4*b5*b1*b3) the impact of portfolio weights there is no quick and easy solution to the demonstration portfolio problem if the unknown component is the required weights. typically, this isn't a problem because most introductory examples use equal weights. although finding optimal portfolio weights is almost certainly beyond the scope of an introductory finance lecture, it may be useful to demonstrate the performance impact resulting from changing individual asset weights in the portfolio. continuing with the first numerical example, but changing the asset weights we have: return1 = 11.39% s1 = 1.7000% return2 = 14.91% s2 = 2.4500% cv1 = .1493 cv2 = .1643 correlation1,2 = .4000 weight1 = .6000, weight2 = .4000 returnportfolio = 12.80% sportfolio = 1.6735% cvportfolio = .1308 changing asset weights has resulted in the desired “demonstration portfolio” outcome; a portfolio return that is a weighted average of the returns of the individual assets in the portfolio, but a portfolio standard deviation and coefficient of variation that are each lower than either of the individual assets in the portfolio. summary when introducing students to modern portfolio analysis, the most impressive example of diversification benefits comes when the portfolio standard deviation and coefficient of variation are lower than those of either of the two equally weighted assets contained in the portfolio. i refer to this result as "demonstration portfolio benefits." the “demonstration portfolio problem” is that randomly selecting values for portfolio inputs does not always produce a portfolio that dominates both of the individual assets in terms of standard deviation and coefficient of variation. sub-optimal portfolio outcomes potentially lead to a sub-optimal learning experience for introductory students. the principal objective of this paper is to provide solutions for the “demonstration portfolio problem.” to reach that objective, this paper provides numerical examples of the “demonstration portfolio problem,” derivations leading to solutions for the problem, and also presents simple excel spreadsheet models which implement these solutions. using the models provided in this paper, it is an easy matter to select input values for class demonstrations, quiz, test, or homework problems that will provide the desired end result a portfolio risk/return 32 tradeoff that is superior to that of either of the two individual assets held in isolation. ultimately, use of the models developed in this paper allow the finance educator to provide the most effective teaching examples of modern portfolio theory and to do so with a reasonable time commitment. 33 references brigham, eugene f. and gapenski, louis c., financial management theory and practice, 9th ed., the dryden press, harcourt brace college publishers, 1999 gallagher, timothy j. and andrew, joseph d, jr., financial management principles and practice, prentice-hall inc., new jersey, 1997 markowits, harry m., "portfolio selection," journal of finance, march 1952 weston, j. fred, besley, scott and brigham, eugene f., essentials of managerial finance, 12th ed., the dryden press, harcourt brace college publishers, 1996 34 figures a b c 1 std dev asset 1 1.7000% benchmark correlation 2 correlation 1,2 0.4000 .3202 3 std dev asset 2 2.4500% 4 weight asset 1 0.5000 5 weight asset 2 0.5000 6 return for asset 1 11.39% 7 return for asset 2 14.91% figure 1, excel spreadsheet for calculating benchmark correlation necessary for portfolio standard deviation a b c 1 std dev asset 1 1.7000% benchmark correlation 2 correlation 1,2 0.4000 .7822 3 std dev asset 2 2.4500% 4 weight asset 1 0.5000 5 weight asset 2 0.5000 6 return for asset 1 11.39% 7 return for asset 2 14.91% 8 portfolio return 13.15% figure 2, excel spreadsheet for calculating benchmark correlation necessary for portfolio coefficient of variation returns period asset #1 asset #2 portfolio 1 13.26 16.31 14.78 2 10.42 11.92 11.17 3 9.26 17.17 13.22 4 10.47 11.95 11.21 5 13.54 17.19 15.37 figure 3, data set used in the calculation of returns, standard deviations, and correlation coefficient used in the preceding discussion. the data in this figure is rounded to two decimal places. 35 microsoft word wilsonzietz11.29.04d.doc journal for economic educators • volume 4 • number 4 • fall 2004 13 systematic bias in student self-reported data by mark l. wilson and joachim zietz* abstract the study analyzes the extent to which student self-reported data are biased and what variables can predict the degree of the bias. a variable that students feel more sensitive about is compared in terms of reporting bias to other less sensitive variables. the reporting bias is significant only for the sensitive variable. the study explains the reporting bias for the sensitive variable on the basis of student characteristics. the study uses a data set that consists of about 450 individual college student records. the study’s results have implications for the analysis of survey data outside of economic education. (jel a22, c81) introduction data collected by questionnaire used to be rather infrequently employed in economics. over the last decade or two, however, the use of survey data has risen significantly in economics (boulier and goldfarb 1998). one possible explanation for this trend is the many advances in econometric technique related to survey data, such as qualitative and limited dependent variable models (maddala 1986) and panel data models (hsiao 2003). unfortunately, survey data raise issues beyond those that can be resolved by the appropriate choice of econometric technique, such as how to convert qualitative responses into numerical form (nardo 2003) or how to assess the accuracy of survey responses (bound et al. 2001; bertrand and mullainathan 2001). this paper is concerned with data validity—in particular, systematic differences between true and self-reported data for a key variable, grade point average (gpa), commonly used to estimate educational production functions. several studies in (economic) education have noted problems with self-reported grades (e.g., sawyer et al. 1989). some have examined this issue further. for example, maxwell and lopus (1994) suggest that the survey respondent’s type of school, by carnegie classification, is a statistically significant predictor of inaccurate self-reports. in the related educational psychology literature, cassady (2001) finds that low-performing students overreport performance measures, such as gpa, more than high-performing students. this result supports earlier evidence uncovered by dobbins et al. (1993) that students tend to inflate their past performance scores to a level that they consider socially acceptable or desirable. 1 while informative, the previous work in this area does not typically use regression analysis to identify the key determinants of the reporting bias or use variables that are commonly available in studies on economic education. hence, there is little practical guidance researchers in economic education can derive from the results on reporting bias in applied work. * mark l. wilson, west virginia insurance commission, mark.wilson@wvinsurance.gov; joachim zietz, middle tennessee state university, jzietz@mtsu.edu. 1 according to prior work in applied psychology (e.g., greenwald 1980), such behavior is motivated by the desire of low performers to protect their self-esteem. by contrast, the newly developing literature within economics on social interaction models would see in such behavior an example of a local norm of behavior that can evolve in optimizing models of choice behavior with direct social interactions among agents (glaeser and scheinkman 2002). journal for economic educators • volume 4 • number 4 • fall 2004 14 this paper extends the earlier work on bias in the self-reporting of gpa in a number of directions. first, the self-reporting bias in gpa is compared to that in other variables that students may feel less sensitive about, such as age. second, the paper identifies with the help of regression analysis some key determinants of the systematic reporting bias in gpa in terms of student characteristics that are typically available in studies in economic education. knowledge of these determinants could provide researchers in economic education with valuable information on adjusting the data to obtain more reliable estimation results. third, the paper predicts the reporting bias and thereby provides some simple guidance on when to expect a significant self-reporting bias. the paper is organized as follows. the following section briefly discusses the data. the next section reports the estimation results. the paper ends with a brief summary of the results and some conclusions. data the data are derived from an end-of-semester student evaluation instrument given to a group of principles of economics students at a large, public, comprehensive university. the survey solicited information about the students’ evaluation of the instructor and several pieces of biographical information. although students identified themselves, they were assured that the instrument was “to be used for research purposes only.” a total of about 450 students completed the survey. because the data were collected in the context of a student evaluation of the teacher, there was no reason for students to expect their biographical information would be tested for credibility. the survey results were matched with the administrative records of each student. for the purpose of this study it is assumed that the administrative records are accurate. grade point average is the sensitive variable that is being analyzed. this variable is widely used to identify student aptitude (e.g., lopus and maxwell 1995) and effort (e.g., stratton et al. 1994). age and gender are two presumably less sensitive variables with which gpa is compared. the age variable has been shown to influence student learning (e.g., marlin and niss 1980; seiver 1983). the gender variable has been widely employed in the estimation of student performance (e.g., watts and bosshardt 1991). empirical analysis the first stage of the empirical analysis consists of simple correlations of actual and self-reported data for the three variables age, gender, and gpa. the results are provided in table 1. the small discrepancy in the age data is consistent with the widespread tendency to understate one’s age. but the understatement is very slight, and the self-reports are almost perfectly correlated with the actual values. with regard to gender, every student answered correctly, which suggests that all participants took the survey seriously. one can conclude that there does not appear to be a noteworthy reporting bias for the two less sensitive variables. however, the results for the more sensitive grade point data are materially different. gpa values are overstated by a substantial margin, and the correlation between reported and actual values is much less than unity. the results of table 1 confirm earlier studies that the reporting bias for the more sensitive variable warrants further analysis. first, matched pairs are used to test the hypothesis that the self-reported gpa is equal to the administrative value. the result of this test confirms that there is a systematic overstatement of self-reported grades (t-value = 11.3; p-value = 0.000). second, in a regression of selfreported gpa on both a constant and actual gpa, the joint null hypothesis of the constant being equal to zero and the slope coefficient being equal to unity, which is what we would expect under the null hypothesis of no bias, is rejected at very high levels of statistical significance (f-value (2,447) = 109.4, p-value = 0.000). hence, one may conclude that there is a systematic tendency to overstate journal for economic educators • volume 4 • number 4 • fall 2004 15 gpa values, which is consistent with the results of previous studies (goldman et al. 1990; dobbins et al. 1993; maxwell and lopus 1994; cassady 2001). table 1. means and correlation coefficients (449 observations) self-report administrative record correlation coefficient age 22.3 22.5 0.99 male = 1 0.55 0.55 1.0 gpa 2.92 2.73 0.85 the follow-up question, which appears not to have been addressed in the literature, is whether one can predict the reporting bias for such sensitive data as gpa with variables that are commonly available in economic education studies. if one could indeed predict the reporting bias, it may be possible to reduce the measurement problem in quantitative studies that utilize these kinds of data. based on earlier work (dobbins et al. 1993; cassady 2001), it appears that the gpa reporting bias is the highest for students with the lowest grades. this would suggest that a student’s actual gpa, or some other similar measure of academic achievement, is a key explanatory variable for gpa overstatement. figure 1 illustrates the negative relationship between gpa overstatement and gpa. it is apparent from this scatter plot that gpa overstatements far outnumber gpa understatements. there is also an obvious negative relationship between gpa overstatement and gpa. hence, the difference between self-reported gpa and actual gpa does not appear to be the result of a random process, but it looks to be systematic in nature. journal for economic educators • volume 4 • number 4 • fall 2004 16 table 2: regression results explaining the difference between self-reported and actual gpa (overreport) variables model 1 model 2 model 3 model 4 model 5 constant 1.044 3.334 3.213 3.322 3.537 (12.8) (10.4) (10.5) (10.5) (10.9) gpa -.313 -2.818 -2.824 -2.915 -3.269 (-11.6) (-6.6) (-7.1) (-7.2) (-7.8) gpa 2 .844 .857 .889 1.047 (4.7) (5.1) (5.2) (5.9) gpa 3 -.089 -.092 -.095 -.116 (-3.7) (-4.1) (-4.2) (-4.9) age .002 .002 .001 (0.8) (0.6) (0.4) male -.056 -.054 -.065 (-2.3) (-2.3) (-2.9) expected .074 .069 .056 grade (4.1) (3.8) (3.4) actual -.038 -.039 -.024 grade (-1.8) (-1.8) (-1.2) freshman -.074 -.071 (-2.1) (-2.1) r 2 .3474 .4441 .4698 .4742 .4715 p-values: lm-het .000 .137 .163 .156 white-het .000 .000 .000 .001 jb .000 .000 .000 .000 reset .000 .533 .301 .120 notes: t-values are in parentheses. for models 1 to 4, they are based on white’s heteroskedasticity consistent variancecovariance matrix. probability values (p-values) below 0.05 indicate a statistical problem. lm-het and white-het refer to a lagrange multiplier and white’s test for heteroskedasticity, respectively. jb is jarque-bera’s test for normality, and reset is ramsey’s test for functional form. regression analysis provides a more comprehensive assessment of the determinants of gpa overstatement because it allows one to look at more than just one determining variable of gpa overstatement. in addition, statistical significance can be established. a first regression model specifies the difference between self-reported and actual gpa (overreport) as a linear function of gpa. the results of this regression are presented as model 1 of table 2. the estimated slope journal for economic educators • volume 4 • number 4 • fall 2004 17 coefficient verifies the negative relationship between gpa overstatement and gpa. from a statistical point of view, however, the equation is unsatisfactory. there is evidence of significant heteroskedasticity and non-normal residuals, and the reset test identifies a problem with functional form. the functional form problem is resolved if gpa is allowed to enter the regression with higherorder terms. this is evident from the results of model 2 in table 2. the reset test is no longer significant. however, heteroskedasticity is still a significant problem based on white’s heteroskedasticity test. 2 next, a number of determining variables in addition to gpa are added to the regression model (model 3). these include the age of the student (age), the student’s gender (male), 3 the student’s expected course grade (expected grade), and the student’s actual end-of-semester course grade (actual grade). if low-performing students inflate their reported levels of past performance to what they consider socially acceptable levels, they are likely to do the same with expected levels of future performance. if this reasoning is correct, the coefficient of the variable expected grade should be statistically significant and positive. in the same vein, one would expect the end-of-semester grade to be negatively related to inflated self-reports on gpa because good students do not need to inflate their self-reports to protect their self-esteem or to achieve a level of academic achievement that they deem socially desirable or acceptable. the estimation results for this expanded set of variables are collected in the column labeled model 3 in table 2. the results confirm that the degree of gpa overstatement is not only dependent on gpa but also on other student characteristics. in particular, male students tend to overstate their gpa slightly less on average than female students, a result that contrasts with some earlier work by goldman et al. (1990), which identifies males as inflating their gpa more than females. as suggested above, a higher expected grade induces a more significant gpa overstatement, whereas a higher actual course grade is associated with a less pronounced gpa overstatement on average. a student’s age, by contrast, appears to have no statistically significant influence on gpa overstatement. model 4 adds one more explanatory variable to model 3, the student’s semester standing in terms of being freshman or not. 4 goldman et al. (1990) report that freshmen tend to inflate their grades less than students with more advanced standing. this result is replicated in model 4 as the coefficient of the variable freshman is negative and statistically significant. model 5 addresses the problem of heteroskedasticity that appears to affect models 1 through 4. to accomplish this, model 4 is re-estimated using a weighted least squares technique based on maximum likelihood principles. the resulting model allows the variance of the error term [var (ut)] to be a function of an arbitrary value. after some experimentation, the best-fitting model turned out to make the variance of the error term a linear function of the dependent variable (overreport): var (ui) = .057 + .029 overreport, (9.1) (4.4) where the numbers in parentheses are t-values. the estimated regression coefficients for the weighted least squares specification are given as model 5 of table 2. they differ only slightly from the ordinary least squares estimates of model 4, which suggests that the estimates are rather robust not only with respect to the inclusion/exclusion of variables but also with respect to the estimation method. 2 the t-values reported in table 2 are based on white’s heteroskedasticity-consistent variance-covariance matrix. 3 male students are coded as 1, females as 0. 4 the variable is coded 1 for freshman and 0 for all other students. journal for economic educators • volume 4 • number 4 • fall 2004 18 since actual gpa is by far the most important determinant of gpa overstatement, the relationship between gpa and gpa overstatement is depicted in figure 2. the graph is constructed from the estimates of model 4 by setting the variables age, expected grade, and actual grade equal to their sample averages. the indicator variables male and freshman are set at unity, which means that the graph depicts the relationship between gpa overstatement and gpa for male freshman students. for female students past their freshman year, gpa tends to be overstated more, and the corresponding curve would be above that depicted in figure 2. figure 2 not only confirms the nonlinear and negative relationship between gpa overstatement and gpa but also suggests that, on average, students misrepresent their gpa enough to ensure that their selfreported gpas do not fall much below 2.25. this would suggest that self-reported gpa data below 2.25 are significantly biased and possibly not very useful for statistical work that assumes the absence of measurement error, such as ordinary least squares regression. in the given sample, about a third of the data points fall below this threshold. summary and conclusions this paper has verified with data collected for the purpose of students’ evaluations of teachers that more sensitive data, such as grade point average, are self-reported with a greater bias than less sensitive data, such as age and gender. also, an attempt has been made to predict the reporting bias for the sensitive variable. regression analysis reveals a number of variables that can explain the reporting bias for grade point average, among them a polynomial in grade point average, gender, and expected grade. the results confirm earlier work by other authors that grade point average overstatement is inversely related to actual grade point average. students with grade point averages below about 2.3 appear on average to inflate their gpa in self-reports to at least this level. this result should be useful for empirical studies in economic education that utilize self-reported grade point average as a variable. journal for economic educators • volume 4 • number 4 • fall 2004 19 in particular, it suggests that self-reports of grade point averages for students below about 2.3 are likely to be significantly biased and should probably not be utilized without modification. the methodology employed in this paper to identify the determinants of self-reporting bias and the point at which the reporting bias may become a major concern for statistical analyses should also be of interest to studies in other areas of economics where survey data are utilized and where there is a need to reduce measurement error in essential variables. references bertrand, marianne, and sendhil mullainathan. 2001. “do people mean what they say? implications for subjective survey data.” american economic review (may): 67-72. boulier, bryan l., and robert s. goldfarb. 1998. “on the use and nonuse of surveys in economics.” journal of economic methodology (june): 1-21. bound, john, charles brown, and nancy mathiowetz. 2001. “measurement error in survey data.” in handbook of econometrics, vol. 5, edited by james j. heckman and edward leamer. northholland: 3705-3843. cassady, jerrell c. 2001. “self-reported gpa and sat: a methodological note,” practical assessment, research & evaluation 7(12). available online at: http://pareonline.net/ getvn.asp?v=7&n=12. dobbins, gregory h., jiing-lih farh, and james d. werbel. 1993. “the influence of self-monitoring and inflation of grade-point averages for research and selection purposes.” journal of applied social psychology: 321-334. glaeser, edward l., and jose a. scheinkman. 2002. “non-market interactions.” in: advances in economics and econometrics: theory and applications: eighth world congress, edited by m. dewatripont, l.p. hansen, and s. turnovsky. cambridge: cambridge university press. goldman, bert a., wesley l. flake, and m.b. matheson. 1990. “accuracy of college students’ perceptions of their sat scores, high school and college grade point averages relative to their ability.” perceptual and motor skills: 514. greenwald, anthony g. 1980. “the totalitarian ego: fabrication and revision of personal history.” american psychologist: 603-618. hsiao, cheng. 2003. analysis of panel data. cambridge university press. lopus, jane s., and nan l. maxwell. 1995. “teaching tools: should we teach microeconomic principles before macroeconomic principles?” economic inquiry (april): 336-350. marlin, james w., and james f. niss. 1980. “end of course evaluations as indicators of student learning and instructor effectiveness.” journal of economic education (spring): 16-27. maddala, g.s. 1986. limited-dependent and qualitative variables in econometrics. cambridge university press. maxwell, nan l., and jane s. lopus. 1994. “the lake wobegon effect in student self-reported data.” american economic review (may): 201-206. nardo, michela. 2003. “the quantification of qualitative survey data: a critical assessment,” journal of economic surveys (december): 645-668. sawyer, richard, joan laing, and walter houston. 1989. “accuracy of self-reported high school courses and grades of college-bound students.” college and university (spring): 288-299. seiver, daniel. 1983. “evaluations and grades: a simultaneous framework.” journal of economic education.” (summer): 32-38. stratton, richard w., stephen c. myers, and randall h. king. 1994. “faculty behavior, grades, and student evaluations.” journal of economic education (winter): 5-15. watts, michael, and william bosshardt. 1991. “how instructors make a difference: panel data estimates from principles of economics courses.” review of economics and statistics (may): 336-340. 1 | journal for economic educators, 14(1), summer 2014 editor’s note due to a large number of accepted submissions and a relatively small backlog of submissions pending review, volume 14 of the journal will consist of only the current issue, number 1. this issue, however, contains nine articles on a wide range of topics. i hope that you will find several of them of interest. if you are considering submitting your work to the journal, this is an excellent time to do so. the number of submissions pending review is relatively low. this means that review times will likely be short and the probability of acceptance will likely be high. the acceptance rate for the past four years has been approximately 58%. i am also taking this opportunity to thank all those who have served as referees/reviewers over the period 2010-2014. they are listed below in alphabetical order. i also wish to thank sally govan of the jones college of business at middle tennessee state university for her assistance with the online publishing of the journal. christopher c. klein august 12, 2014 referees charles baum howard cochran mamit deme albert deprince maria edlin e. anthon eff bichaka fayissa stuart fowler michael hammock richard hannah gary hodgin bruce hutchinson reuben kyle frank michello karen mulligan mark owens david penn adam rennhoff michael roach millicent taylor 29 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 29 economics and finance in the mba core: sequence of core course completion and student performance e. anthon eff and christopher c. klein 1 abstract does the order in which mba students complete the core courses for the degree affect their performance in the program? there is little literature on this topic. to gain insight into this question, we examine 5,822 student/course records from a large public university for the years 2008-2012, encompassing part of the academic history of 1,384 mba students. standardized grades are our measure of performance in each of nine core courses. for each core course, both t-tests of differences in mean grade across different combinations of prior courses and fixedeffects ols regressions indicate that the sequence of completing courses affects student performance. the economics core course informs accounting and marketing, for example, while the core finance course interacts with management courses. while the data limit the strength of any conclusions, we find good indications for placing information systems and quantitative methods courses earlier in the core sequence. key words: mba core, course sequencing, student performance jel: a12, a23, m10 introduction to determine the effect of mba core course sequencing on mba student performance, we examine 5,822 records of student performance in each of nine mba core courses at middle tennessee state university, a large aacsb accredited regional university, during the spring 2008 to spring 2012 period. this includes partial performance records of over 1,384 individual mba students. student performance is defined as the standardized grade a student earns in a course, where the raw grade is standardized by subtracting from the mean grade given by that student’s instructor in all sections of that particular core course. two different methods are employed to test for the effect of course sequence. the first uses t-tests to compare the mean grade earned in course b when course a is taken first against the mean grade earned in course b when course b is taken first. the second runs ols regressions of course b grades against dummy variables indicating the other core courses taken prior to course b. the second method allows for control of other student characteristics, so that the effect on course b’s grade is more likely due to course sequence than to differences in the kinds of students that choose a particular sequence. the composite results of the two methods reveal some surprises. information systems management is a valuable precursor to five other core courses directly, and indirectly to two more, while there are no core courses that positively affect it. the courses that benefit the most from other core courses are managerial economics (five) and financial analysis (four), followed 1 professors of economics, economics and finance department, middle tennessee state university, murfreesboro, tn. anthon.eff@mtsu.edu, chris.klein@mtsu.edu. this research was supported by a summer research grant from the jones college of business at middle tennessee state university. mailto:anthon.eff@mtsu.edu mailto:chris.klein@mtsu.edu 30 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 30 by marketing management and accounting for business decisions (three each). oddly, the capstone strategic management course benefits from only two other core courses, one course directly and another indirectly. we present both our recommendations for sequencing as well as a comparison of the optimal sequence to the actual sequences in which students took courses during the period. the paper is organized as follows. a literature review follows the introduction, then the data collection is discussed. a detailed discussion of the methodology and results is followed by a summary and conclusion. literature little literature relates mba course sequencing to student performance in mba programs. several articles address the effect of prerequisites on performance in individual courses (macmillan-capehart and adeyemi-bello, 2008), the determinants of student success in individual courses (krausz, et al. 2002), and the need for individual courses and their prerequisites in mba programs (kolluri and singamsett, 2007). others examine mba admission elements and find (christensen, nance and white, 2012; malik, 2011; sulaiman and mohezar, 2006; truell, zhao, alexander and hill, 2006) that undergraduate grade point average (gpa) is the best predictor of a student’s mba gpa, while gmat quantitative score, performance in undergraduate composition courses, and certain undergraduate majors (especially economics and business statistics) positively influence mba performance. the issue of overall sequencing of the mba core courses and any possible effects on student performance due to differences in sequencing has not been addressed previously. nevertheless, dailey (2011) points out that flexibility in mba course sequencing – interpreted as lack of prerequisites or other sequencing requirements in the core can be a marketing advantage for mba programs, especially part-time programs. an examination of websites for competing mba programs in tennessee reveals a range of sequencing requirements from minimal prerequisites (mtsu, university of memphis) to limited prerequisites (etsu, belmont and lipscomb universities) to strict sequencing (ut-knoxville, vanderbilt university). this is mirrored in mba programs at institutions in neighboring states such as the university of alabama – tuscaloosa (minimal) and the university of kentucky (strict sequencing). thus, the degree to which core courses are required to be completed in sequence appears to be one component of an mba program’s product niche. all of this taken together suggests that mba core sequencing requirements should not be adopted solely on the basis of student performance as measured below. sequencing requirements are part of an mba program’s product niche and should be adopted to serve consumers to whom the chosen product niche appeals. any choice of sequencing requirements is likely to involve trade-offs among attraction of students to the program, student performance in specific courses, and the ability of students to complete the program. data we obtained data comprising all students taking courses in the jones college of business at middle tennessee state university from spring 2008 to spring 2012. each record contains an instructor id, days and times at which the course met, basic demographic information on the student (birthdate, ethnicity, sex), information on previous college and high schools attended (including gpa), and test scores (act, sat, gmat, gre). 31 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 31 not all of the data were usable. among the problems were students with several different assignments of ethnicity or sex, birthdates after 2011, or extreme outliers for high school gpas or test scores. we deleted all records for students with obviously bad data. we concluded that the most reliable variables were those that appear on student transcripts: semester, course, and grade. our final dataset contains 124,840 records, with each record containing the grade for a specific course taken by a specific student in a specific semester. we extracted all records in which the course taken was one of nine core mba courses. since our main interest is in course sequencing, we dropped all students who took a particular course more than once. the result was 5,506 records that represent a portion of the academic history of 1,350 students. this dataset contains relatively few complete mba student histories: only 40 students took all nine core courses during the sample period. another 235 students took eight core classes, but many of these may be students with accounting or information systems undergraduate degrees who are required to take only eight of the nine core classes. most of the students either began taking courses before our sample period, or were still unfinished at the end. the short span of the sample period limits our analysis to semester-to-semester comparisons. table 1: frequency of core courses in dataset course description incidents actg.6910 accounting and business decisions 207 actg.6920 financial statement analysis 366 buad.6980 strategic management 550 econ.6000 managerial economics 706 fin.6710 financial analysis 594 infs.6610 information systems management and applications 660 mgmt.6600 study of organizations 765 mgmt.6650 operations management 672 mkt.6800 marketing management 763 qm.6770 computer-based decision modeling 223 total 5506 table 1 shows the frequency with which each core course occurs in the dataset. there are ten courses listed, because students can take either of the two accounting courses. the low frequency for the qm 6770 course is due to its relatively recent addition in the core. methods our objective is to determine whether taking course a before course b will improve student performance in course b. we define student performance as the grade a student earns in course b, where that grade is standardized by subtracting from it the mean grade given by that student’s instructor in all sections of that particular core course in that particular semester. this controls for differences in grades across instructors. we use two different methods to investigate this question. the first employs t-tests to compare the mean grade earned in course b when course a is taken first with the mean grade earned in course b when course b is taken first or when a and b are taken at the same time. the second method uses ols to estimate a model with course b grades as the dependent variable and dummy variables indicating which other core courses were taken prior to course b. the advantage of the second method is that it allows us to control for other characteristics of students, so that we can be more certain that the effect on course b’s grade is due to course 32 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 32 sequence, and not simply to differences in the kinds of students that choose a particular course sequence. table 2 reports the information used to calculate the t-statistics that underlie figure 1. the top matrix gives the number of incidents in which a student takes the row course before the column course. the second matrix reports the mean grade in the column course for those taking the row course first, minus the mean grade in the column course for those not taking the row course first. the third matrix presents a p-value for a t-test applied to each group, with the null hypothesis that taking the row course before the column course will result in the same grade in the column course as not taking the row course first. we use the welch t-statistic, for comparing two means with different variances (welch 1947), which requires degrees of freedom produced using the welch-satterthwaite equation (satterthwaite 1946). the last matrix is an adjacency matrix, where the non-zero entries represent cells for which the p-values are less than 0.1: “1” indicates that taking the row course first improves the column course grade; “-1” indicates that taking the row course first lowers the column course grade. 33 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 33 table 2: data and results for t-tests course description actg.6910 actg.6920 econ.6000 fin.6710 infs.6610 mgmt.6600 mgmt.6650 mkt.6800 qm.6770 buad.6980 number of incidents of students taking row course before column course actg.6910 accounting and business decisions 0 4 70 98 71 63 86 78 13 111 actg.6920 financial statement analysis 1 0 112 160 97 100 137 97 49 229 econ.6000 managerial economics 44 130 0 257 192 179 264 199 66 393 fin.6710 financial analysis 30 76 135 0 122 128 177 127 52 382 infs.6610 information systems management and applications 31 88 146 168 0 147 188 145 51 330 mgmt.6600 study of organizations 59 133 242 271 229 0 317 217 70 405 mgmt.6650 operations management 42 82 164 200 150 123 0 134 57 382 mkt.6800 marketing management 56 134 241 287 226 204 303 0 79 388 qm.6770 computer-based decision modeling 10 14 33 28 11 27 32 28 0 46 buad.6980 strategic management 3 2 4 3 1 1 2 0 1 0 difference in mean standardized grades (those taking row course first minus all others) actg.6910 accounting and business decisions 0.0132 0.0614 0.0159 -0.0445 0.0445 0.0591 -0.0503 0.1252 0.3701 actg.6920 financial statement analysis 1.7607 -0.0149 0.0057 -0.1582 -0.1047 -0.0070 0.0352 -0.0721 -0.1003 econ.6000 managerial economics 0.3232 0.0176 0.0061 -0.0229 -0.0089 -0.0326 0.0585 -0.0050 0.1730 fin.6710 financial analysis 0.1442 0.0470 0.0587 0.0556 0.0777 0.0993 0.0016 0.1019 0.1073 infs.6610 information systems management and applications 0.2985 0.0918 0.0983 0.0354 0.0525 -0.0284 0.0913 -0.1554 0.1344 mgmt.6600 study of organizations -0.0939 0.0312 -0.0827 -0.0348 -0.0005 -0.0014 0.0755 -0.0461 0.0366 mgmt.6650 operations management 0.1827 0.0023 -0.0119 0.1467 -0.0711 0.0045 0.0631 -0.1800 -0.1083 mkt.6800 marketing management 0.1171 -0.0016 0.0021 0.0520 -0.0624 -0.0837 0.0249 0.1367 -0.1071 qm.6770 computer-based decision modeling -0.0323 0.0731 0.0716 0.0136 0.0487 -0.0892 0.1477 -0.0007 0.0585 buad.6980 strategic management -0.5989 -0.2013 -0.2740 -0.1465 -0.7048 -0.8730 -0.4352 0.0720 p-values for welch’s t-test (h0: mean of row before column no different from all others) actg.6910 accounting and business decisions 0.4847 0.2445 0.4452 0.2828 0.3116 0.2081 0.2271 0.2792 0.0098 actg.6920 financial statement analysis 0.4122 0.4681 0.0088 0.0716 0.4481 0.2823 0.3588 0.2317 econ.6000 managerial economics 0.0089 0.3399 0.4492 0.3290 0.4206 0.1720 0.0449 0.4840 0.0402 fin.6710 financial analysis 0.1370 0.1755 0.1273 0.1736 0.0498 0.0060 0.4851 0.2306 0.0610 infs.6610 information systems management and applications 0.0160 0.0261 0.0430 0.2440 0.1531 0.2339 0.0146 0.1328 0.0955 mgmt.6600 study of organizations 0.2438 0.2826 0.0420 0.2540 0.4954 0.4880 0.0362 0.3630 0.3522 mgmt.6650 operations management 0.0863 0.4793 0.4120 0.0036 0.1037 0.4626 0.0741 0.0726 0.0530 mkt.6800 marketing management 0.1947 0.4873 0.4836 0.1749 0.1011 0.0560 0.2789 0.1514 0.1007 qm.6770 computer-based decision modeling 0.4709 0.2567 0.2984 0.4546 0.3440 0.2764 0.0141 0.4969 0.3241 buad.6980 strategic management 0.0356 0.3445 0.0464 0.3276 0.2185 adjacency matrix (1==first taking row course improves grade in column course; -1=first taking row course harms grade in column course) actg.6910 accounting and business decisions 0 0 0 0 0 0 0 0 0 1 actg.6920 financial statement analysis 0 0 0 0 -1 -1 0 0 0 0 econ.6000 managerial economics 1 0 0 0 0 0 0 1 0 1 fin.6710 financial analysis 0 0 0 0 0 1 1 0 0 1 infs.6610 information systems management and applications 1 1 1 0 0 0 0 1 0 1 mgmt.6600 study of organizations 0 0 -1 0 0 0 0 1 0 0 mgmt.6650 operations management 1 0 0 1 0 0 0 1 -1 -1 mkt.6800 marketing management 0 0 0 0 0 -1 0 0 0 0 qm.6770 computer-based decision modeling 0 0 0 0 0 0 1 0 0 0 buad.6980 strategic management -1 0 -1 0 0 0 0 0 0 0 34 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 34 notes to table 2: standardized grades are grades received by students minus the mean grade given by that particular instructor in that particular course in that particular semester. the t-test is the welch t-test for comparing two means with different variances (welch 1947). the adjacency matrix takes on values of 1 when the row course, taken first, significantly improves the grade in the column course; it takes on values of -1 when it significantly lowers the column course grade. this adjacency matrix is presented graphically in figure 1, considering only the positive values that represent grade improvement. figure 1. graph derived from t-test adjacency matrix (table 2). arrows point from the course occurring first to course receiving the grade improvement. larger vertices are more “reachable”, while smaller vertices do more “reaching”. table 3 reports descriptive statistics for variables used in regressions. we used the demographic controls age, sex, and ethnicity, despite our awareness that these data may not be accurate. the test score variable (“verbal” and its square) were constructed by standardizing (subtract mean, divide by standard deviation) each verbal test score across the entire sample of students (including undergraduates) and then taking the mean of the verbal and quantitative scores for each student. this procedure allowed us to avoid the problem of missing values in the gmat scores. we also introduced a variable to capture whether students perform better in courses more aligned with their interests (“ownmaj”), as well as a dummy to indicate an online course. the variables of interest are the dummy variables indicating whether a specific core course was taken prior to the course represented in the observation. 35 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 35 table 3: variables used in ols variable description n mean sd min max grnorm standardized course grade 5506 0.009 -3.846 1.567 0.589 ea asian 5506 0.092 0 1 0.288 eb black 5506 0.128 0 1 0.334 ew white 5506 0.679 0 1 0.467 male male 5506 0.609 0 1 0.488 age age 5506 27.477 20 60 5.984 age2 age squared 5506 790.809 400 3600 399.498 verbal composite verbal score 5197 -0.009 -2.084 2.721 0.959 verbal2 composite verbal score squared 5197 0.92 0 7.403 1.115 ownmaj course is in students major 5506 0.109 0 1 0.312 online online course 5506 0.173 0 1 0.378 actg.6910 accounting and business decisions 5506 0.108 0 1 0.31 econ.6000 managerial economics 5506 0.313 0 1 0.464 fin.6710 financial analysis 5506 0.223 0 1 0.416 infs.6610 information systems management and applications 5506 0.235 0 1 0.424 mgmt.6600 study of organizations 5506 0.353 0 1 0.478 mgmt.6650 operations management 5506 0.242 0 1 0.429 mkt.6800 marketing management 5506 0.348 0 1 0.476 qm.6770 computer-based decision modeling 5506 0.042 0 1 0.2 buad.6980 strategic management 5506 0.003 0 1 0.055 table 4 reports the regression results underlying figure 2. for each regression, the dependent variable is the grade earned in a particular course. in the top part of table 4, columns give the names of the courses providing the dependent variable. the rows represent independent variables and cells show the standardized coefficients of independent variables that survived a stepwise procedure. standardization allows comparison of effect sizes across variables, since the coefficient represents the number of standard deviations the dependent variable will change in response to a one standard deviation chance in the independent variable. standard errors were obtained via bootstrapping (500 repetitions). the second panel in table 4 partitions r2 (chevan and sutherland 1991; gromping 2006) across four different groups of independent variables. the variables composing each group are identified in the first column of the first panel. course sequence accounts for a respectable share of variation in the dependent variable, sometimes exceeding the variation attributed to individual demographic or academic characteristics. two of the models (actg.6920 and infs.6610) had relatively poor fits with the existing data, but the others performed well on the diagnostics (shown in the third panel of table 4). note that in all cases except for course infs 6610, we can reject the null hypothesis that taking preceding courses has no effect on course grade. at the bottom of table 4 is an adjacency matrix giving the signs for significant (p-value ≤ 0.10) coefficients for preceding courses. note that in six cases, taking course a before course b actually did damage, leading to a lower grade. figure 2 shows a graphical representation of the adjacency matrix, omitting the negative entries. the two methods provide slightly different results, so we take the intersection of the adjacency matrices in tables 2 and 4 to create a composite adjacency matrix, dropping the negative entries. this provides a relatively robust view of sequencing effects. figure 3 shows a graphical representation of the composite adjacency matrix. 36 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 36 table 4: results for regression on grades for each of the core courses dependent variables: standardized grades for the course group variable description actg.6910 actg.6920 econ.6000 fin.6710 infs.6610 mgmt.6600 mgmt.6650 mkt.6800 qm.6770 buad.6980 idc ea asian 0.1394*** -0.0707 idc eb black -0.2380*** -0.0930** -0.0910** -0.1329*** -0.1656*** -0.1755*** -0.1637*** idc ew white 0.1627** -0.1277** idc male male 0.0907 0.0548 -0.0783* -0.0531 -0.0833* idc age age 0.3404 -0.3692 0.0069 -0.2992 0.0410 -0.0517 -0.2149 0.1508 -0.0638 -0.0469 idc age2 age squared -0.1423 0.4272 0.0180 0.3254 0.0586 0.0522 0.2219 -0.1427 -0.065 0.0598 iac verbal composite verbal score 0.2202*** -0.0167 0.1666*** 0.0482 0.1213*** 0.0077 0.0037 0.1221*** 0.2072*** 0.1795*** iac verbal2 composite verbal score squared 0.0213 -0.0683 0.1351*** 0.0861** -0.0445 0.0185 0.0197 -0.0546* 0.04 -0.0176 occ ownmaj course is in students major 0.1169*** occ online online course -0.1296 s actg.6910 accounting and business decisions -0.0591* s econ.6000 magerial economics 0.1278* 0.0796** s fin.6710 fincial alysis 0.0674** 0.0890*** 0.1154*** s infs.6610 information systems magement and applications 0.1825** 0.1101** 0.0571 0.0693** -0.1365* -0.0748 s mgmt.6600 study of organizations -0.1834** 0.0782* s mgmt.6650 operations magement 0.1066*** -0.0688 -0.1374* s mkt.6800 marketing magement -0.0947** 0.2371*** s qm.6770 computer-based decision modeling 0.1143 0.0635** 0.0767*** 0.0542* s buad.6980 strategic magement -0.0580*** decomposition of r2 actg.6910 actg.6920 econ.6000 fin.6710 infs.6610 mgmt.6600 mgmt.6650 mkt.6800 qm.6770 buad.6980 s sequencing 0.0717 0.0111 0.0077 0.0114 0.0044 0.0175 0.0190 0.0198 0.0463 0.0067 occ other course characteristics 0.0000 0.0000 0.0121 0.0000 0.0000 0.0000 0.0000 0.0000 0.0139 0.0000 iac individual academic characteristics 0.0615 0.0039 0.0511 0.0131 0.0184 0.0008 0.0008 0.0183 0.0404 0.0336 idc individual demographic characteristics 0.0873 0.0122 0.0441 0.0358 0.0253 0.0193 0.0285 0.0323 0.0150 0.0311 model diagnostics actg.6910 actg.6920 econ.6000 fin.6710 infs.6610 mgmt.6600 mgmt.6650 mkt.6800 qm.6770 buad.6980 n number of observations 197 345 657 560 633 725 634 720 207 519 r2 model r2 0.2200 0.0270 0.1150 0.0600 0.0480 0.0380 0.0480 0.0700 0.1150 0.0710 reset pval h0: model correct functional form 0.8812 0.2976 0.0649 0.2186 0.0287 0.1676 0.4900 0.5230 0.4067 0.1957 model f pval h0: none of the independent variables significant 0.0000 0.1537 0.0000 0.0000 0.0001 0.0021 0.0001 0.0000 0.0018 0.0000 restr f pval h0: dropped variables not significant 0.7912 0.9972 0.5235 0.6078 0.0003 0.5449 0.5606 0.6541 0.7231 0.9985 seqdummies f pval h0: course sequence not significant 0.0042 0.0308 0.0074 0.0059 0.1215 0.0000 0.0000 0.0000 0.0081 0.1366 adjacency matrix actg.6910 actg.6920 econ.6000 fin.6710 infs.6610 mgmt.6600 mgmt.6650 mkt.6800 qm.6770 buad.6980 actg.6910 accounting and business decisions 0 0 0 0 0 0 0 -1 0 0 actg.6920 financial statement analysis 0 0 0 0 0 0 0 0 0 0 econ.6000 managerial economics 1 0 0 0 0 0 0 1 0 0 fin.6710 financial analysis 0 0 1 0 0 1 1 0 0 0 infs.6610 information systems management and applications 1 1 0 0 0 0 0 1 -1 0 mgmt.6600 study of organizations -1 0 0 0 0 0 0 0 0 1 mgmt.6650 operations management 0 0 0 1 0 0 0 0 -1 0 mkt.6800 marketing management 0 0 0 0 0 -1 0 0 1 0 qm.6770 computer-based decision modeling 0 0 1 0 0 0 1 1 0 0 buad.6980 strategic management 0 0 0 0 0 -1 0 0 0 0 37 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 37 notes to table 4: stepwise regression, showing standardized coefficient for final restricted model. bootstrapping used to produce standard errors (* p-value≤ 0.1; ** p-value≤ 0.05; *** p-value≤ 0.01). adjacency matrix shows sign of all course dummy coefficients with p-value≤ 0.1. figure 2. adjacency matrix from dummies in regressions. arrows point from the course occurring first to course receiving the grade improvement. larger vertices are more “reachable”, while smaller vertices do more “reaching”. figure 3: composite optimal sequences, based on the intersection of graphs in figure 1 and figure 2. larger vertices are more “reachable”, while smaller vertices do more “reaching”. table 5 shows the shortest path lengths between vertices in figure 3. some courses are clearly more co nnected than others: mgmt 6600, for example, receives links directly from 1 course and indirectly from two others. 38 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 38 table 5: shortest path length between vertices in composite graph shown in figure 3. course description actg.6910 actg.6920 econ.6000 fin.6710 infs.6610 mgmt.6600 mgmt.6650 mkt.6800 qm.6770 buad.6980 actg.6910 accounting and business decisions 0 0 0 0 0 0 0 0 0 0 actg.6920 financial statement analysis 0 0 0 0 0 0 0 0 0 0 econ.6000 managerial economics 1 0 0 0 0 0 0 1 0 0 fin.6710 financial analysis 0 0 0 0 0 1 1 0 0 0 infs.6610 information systems management and applications 1 1 0 0 0 0 0 1 0 0 mgmt.6600 study of organizations 0 0 0 0 0 0 0 0 0 0 mgmt.6650 operations management 0 0 0 1 0 2 0 0 0 0 mkt.6800 marketing management 0 0 0 0 0 0 0 0 0 0 qm.6770 computer-based decision modeling 0 0 0 2 0 3 1 0 0 0 buad.6980 strategic management 0 0 0 0 0 0 0 0 0 0 in the jargon of graph theory, mgmt 6600 is reachable by 3 other courses. since we interpret each directed edge as indicating knowledge from the origin course is important for learning in the destination course, then a vertex that is highly reachable is one which builds on much prerequisite knowledge. other courses are not reachable, but themselves reach, as for example infs 6610, which sends links directly to 3 courses. reachability provides one way to think about optimal course sequencing: highly reachable courses, which don’t reach much or at all, should come last in the course sequence. one way to operationalize this is the following: reachratio = ∑j xij ∑i xij (1) where x is a square matrix, where xij =1 indicates that a path connects vertex i to vertex j, and xij =0 indicates that vertex i cannot reach vertex j. in other words, reachratio is simply the column sums minus the row sums. figure 3 shows that, in this most robust version, no courses reach the capstone course buad 6980. it is odd that material from earlier courses provides no advantage to students taking the capstone. there are two possible reasons for this missing connection: first, the course content of the capstone might fail to utilize material from earlier courses; second, the earlier courses might fail to provide students with the tools needed to suceed in the capstone. both explanations suggest a failure of mba faculty to interact each other in integrating their courses into a coherent cumulative learning process. actual course sequencing there is no single course sequence adhered to by most students at this institution, but some course sequences are more common than others. the first complication is that students take multiple courses each semester, so that a precise sequence from one course to an other is never possible. table 6 shows that about one out of three faces in an mba class belongs to a student who is taking at least three core courses simultaneously in the same semester. 39 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 39 table 6: number of core courses taken in same semester number of core courses taken in semester number of occurances number of course seats percent of course seats 1 1960 1960 36% 2 1105 2210 40% 3 359 1077 20% 4 61 244 4% 5 3 15 0% total 3488 5506 100% table 7 lists the courses most commonly taken together—all dyads and the most common triads. the lists are sorted, so that the most frequently associated courses are at the top. when at least two of the associated courses are linked in figure 3, the columns labeled “opt” indicate that relationship with the numeral “1”. one can see that many of the courses taken together are identified as courses where improvement in one can be achieved by taking the other in an earlier semester. a rough view of actual course sequences can be produced using the top matrix in table 2 (“number of incidents of students taking row course before column course”). a course with a high column sum is preceded by many other courses; if it has a high row sum it precedes many other courses. we use the same calculation expressed in equation 1 above, subtracting the row sum from the column sum. courses with high values come later in the sequence. table 8 presents the sequences calculated from equation 1, both actual (using the top matrix in table 2), and three versions of an optimal sequence, based on figures 1 through 3. table 8 presents the ranks, rather than raw values, for each of these with some ties for the optimal sequences. if one were to make recommendations based on table 8, the most defensible are to push infs 6610 and qm 6770 earlier in the course sequence. looking at economics and finance specifically, managerial economics has been taken at about the right place in the sequence, while financial analysis is shown to have been taken a little too late. the first three courses generally taken by students (actg 6910, mgmt 6600, and mkt 6800) appear to be better placed near the end of the sequence. 40 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 40 table 7: courses taken in the same semester all dyads most frequent triads course a course b occu rren ces opt course a course b course c occu rren ces opt mgmt.6600 mkt.6800 187 0 econ.6000 mgmt.6600 mkt.6800 24 0 mgmt.6650 mkt.6800 137 0 mgmt.6600 mgmt.6650 mkt.6800 24 0 econ.6000 mgmt.6600 120 0 fin.6710 infs.6610 mgmt.6650 23 0 mgmt.6600 mgmt.6650 117 0 econ.6000 fin.6710 infs.6610 21 0 econ.6000 mkt.6800 116 1 actg.6920 mgmt.6600 mkt.6800 20 0 fin.6710 infs.6610 107 0 actg.6920 infs.6610 mgmt.6650 17 1 econ.6000 fin.6710 102 0 actg.6920 mgmt.6650 mkt.6800 16 0 econ.6000 mgmt.6650 101 0 econ.6000 fin.6710 mgmt.6600 16 1 fin.6710 mgmt.6650 97 1 econ.6000 infs.6610 mkt.6800 16 1 fin.6710 mgmt.6650 97 1 econ.6000 mgmt.6650 mkt.6800 16 0 infs.6610 mgmt.6650 97 0 fin.6710 infs.6610 mgmt.6600 16 0 actg.6920 mgmt.6650 91 0 econ.6000 fin.6710 mkt.6800 15 0 fin.6710 mgmt.6600 90 1 fin.6710 mgmt.6600 mgmt.6650 15 1 econ.6000 infs.6610 87 0 fin.6710 mgmt.6600 mkt.6800 15 1 infs.6610 mgmt.6600 82 0 infs.6610 mgmt.6600 mkt.6800 15 0 actg.6920 mkt.6800 80 0 actg.6920 mgmt.6600 mgmt.6650 14 0 actg.6920 mgmt.6600 72 0 actg.6920 econ.6000 mgmt.6650 13 0 fin.6710 mkt.6800 70 0 actg.6920 econ.6000 mkt.6800 13 1 infs.6610 mkt.6800 70 1 econ.6000 fin.6710 mgmt.6650 11 1 buad.6980 fin.6710 64 0 econ.6000 fin.6710 mgmt.6650 11 1 actg.6920 econ.6000 60 0 econ.6000 infs.6610 mgmt.6600 11 0 buad.6980 mgmt.6650 60 0 econ.6000 infs.6610 mgmt.6650 11 0 actg.6920 infs.6610 50 1 econ.6000 mgmt.6600 mgmt.6650 11 0 actg.6910 econ.6000 45 1 actg.6920 infs.6610 mkt.6800 10 1 actg.6910 mgmt.6600 39 0 fin.6710 mgmt.6650 mkt.6800 10 1 actg.6920 fin.6710 39 0 fin.6710 mgmt.6650 mkt.6800 10 1 buad.6980 mkt.6800 38 0 infs.6610 mgmt.6650 mkt.6800 10 0 buad.6980 mgmt.6600 37 0 buad.6980 fin.6710 mgmt.6650 9 1 actg.6910 mkt.6800 33 0 buad.6980 fin.6710 mgmt.6650 9 1 buad.6980 econ.6000 31 0 actg.6910 econ.6000 mgmt.6600 8 1 buad.6980 infs.6610 31 0 actg.6910 mgmt.6600 mkt.6800 8 0 mgmt.6650 qm.6770 26 1 actg.6920 econ.6000 infs.6610 8 0 buad.6980 qm.6770 23 0 actg.6920 econ.6000 mgmt.6600 8 0 actg.6910 mgmt.6650 22 0 buad.6980 mgmt.6650 mkt.6800 8 0 actg.6910 infs.6610 21 1 actg.6910 mgmt.6650 mkt.6800 7 0 infs.6610 qm.6770 19 0 buad.6980 fin.6710 infs.6610 7 0 actg.6910 fin.6710 18 0 buad.6980 infs.6610 mgmt.6650 7 0 actg.6920 buad.6980 18 0 buad.6980 mgmt.6600 mgmt.6650 7 0 fin.6710 qm.6770 17 0 fin.6710 infs.6610 mkt.6800 7 1 econ.6000 qm.6770 16 0 actg.6910 infs.6610 mgmt.6600 6 1 mgmt.6600 qm.6770 12 0 actg.6920 econ.6000 fin.6710 6 0 actg.6910 buad.6980 10 0 actg.6920 fin.6710 mgmt.6600 6 1 actg.6910 qm.6770 9 0 actg.6920 fin.6710 infs.6610 6 0 mkt.6800 qm.6770 9 0 actg.6920 fin.6710 mgmt.6650 6 1 actg.6920 qm.6770 6 0 actg.6920 fin.6710 mgmt.6650 6 1 actg.6910 actg.6920 2 0 actg.6920 fin.6710 mkt.6800 6 0 notes: frequency of course association from all students taking two or more courses in a semester. where the value in the column titled “opt” equals 1, two of the courses are directly linked in figure 3. 41 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 41 table 8: actual and optimal course sequences. course description t-test regression composite actual actg.6910 accounting and business decisions 8 9 8.5 1 mgmt.6600 study of organizations 7 8 10 2 mkt.6800 marketing management 9.5 4 8.5 3 econ.6000 managerial economics 5 4 3 4 actg.6920 financial statement analysis 6 7 7 5 infs.6610 information systems management and applications 2 1 1.5 6 mgmt.6650 operations management 3.5 4 5 7 fin.6710 financial analysis 3.5 4 5 8 qm.6770 computer-based decision modeling 1 4 1.5 9 buad.6980 strategic management 9.5 10 5 10 notes: ranks calculated from equation 1. actual based on the top matrix in table 2. summary and conclusion the point of this exercise was to seek insight into the effect of course sequencing on student performance. we used two different methods—t-tests and fixed-effects ols models—to identify course-pairs for which taking a prior course led to a significant improvement in student performance in a subsequent course. we constructed graphical representations of the results and produced a proposed course sequence based on those graphical representations. we also tried to provide some insight into the actual sequences in which courses have been taken. figure 3 and table 8 summarize our findings. these show that some courses, both directly and indirectly, draw on student knowledge obtained in earlier courses, whereas other courses function primarily to provide that knowledge. hence, they provide a basis for developing a course sequence. courses such as infs 6610 and qm 6770 clearly belong at the beginning, even though students have tended to take them in the latter half of the sequence. courses that students often take first (and benefit from economics and finance), such as actg 6910, mgmt 6600, and mkt 6800, actually belong near the end. surprisingly, the capstone course buad 6980 appears not to draw heavily on knowledge obtained in earlier courses. this may indicate insufficient integration of courses into a cumulative learning process. references chevan, a., sutherland, j. (1991). hierarchical partitioning. the american statistician, 45, 9096. christensen, gene donald, william r. nance and darin w. white (2012) “academic performance in mba programs: do prerequisites really matter?” journal of education for business, 87: 42-47. dailey, lynn c. (2011) “marketing part-time mba programs: understanding the need for and dimensions of flexibility,” journal of marketing development and competitiveness, 5(2):122-129. grömping, ulrike (2006). relative importance for linear regression in r: the package relaimpo. journal of statistical software, 17(1), 1--27. kolluri, bharat and rao singamsett (2007), “teaching managerial economics in mba programs: a survey of aacsb colleges,” journal of college teaching and learning, 4(9): 47-54. 42 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 42 krausz, joshua, allen schiff, jonathan schiff, and joan van hise (2002) “predicting success in graduate financial statement analysis courses – do traditional predictors of accounting success apply?” accounting educators’ journal, 14: 1-8. malik, ali asghar (2011) “students’ prior degree performance as predictor of their performance at mba level,” pakistan business review, october, 459-487. macmillan-capehart, amy and tope adeyemi-bello (2008) “prerequisite coursework as a predictor of performance in a graduate management course,” journal of college teaching and learning, 5(7): 11-16. satterthwaite, f. e. (1946), "an approximate distribution of estimates of variance components.", biometrics bulletin 2: 110–114, doi:10.2307/3002019 sulaiman, ainin and suhana muhezar (2006) “student success factors: identifying key predictors,” journal of education for business, july/august, 328-333. truell, allen d., jensen j. zhao, melody w. alexander, and inga b. hill. (2006) “predicting final student performance in a graduate business program: the mba,” the delta pi epsilon journal, 48(3):144-152. welch, b. l. (1947), "the generalization of "student's" problem when several different population variances are involved." biometrika 34: 28–35, doi:10.1093/biomet/34.1-2.28 http://en.wikipedia.org/wiki/digital_object_identifier http://dx.doi.org/10.2307%2f3002019 http://en.wikipedia.org/wiki/digital_object_identifier http://dx.doi.org/10.1093%2fbiomet%2f34.1-2.28 a cost-benefit analysis of higher education in tennessee f. steb hipple, ph.d. professor of economics east tennessee state university abstract in 1993, professor barry bluestone published his innovative cost-benefit study on the economic impact of the university of massachusetts at boston. his benefit calculations were based on the additional income earned and taxes paid by college graduates. in 1998 the tennessee board of regents conducted a similar study on higher education in tennessee. the present paper uses the bluestone methodology to estimate the benefits of higher education, and with the main focus on the financial return to the state government. the study finds that every dollar invested by tennessee in higher education returns nearly two dollars in additional tax revenue. at a time of structural deficits in the state budget, it is important to understand that higher education can best be considered an investment of scarce state resources rather than a spending category with no discernable return to state coffers. 11 introduction in 1993, professor barry bluestone of the mccormack institute of public affairs, university of massachusetts at boston, conducted an innovative economic impact analysis of his institution. previously, such studies had focused solely on the impact of current spending by the institution and students. bluestone argued that college graduates, over their lifetime, earn additional income and subsequently pay higher taxes. rather than use the published national statistics on the monetary benefits of a college education, bluestone developed estimates for the new england region which he used in his cost-benefit calculations for umass/boston. the statistics on educational attainment and income are found in the "income and poverty" survey conducted each march by the u.s. census bureau and the u.s. bureau of labor statistics. this special survey "piggybacks" on the current population survey (cps) which is conducted each month by the bls to produce statistics on employment and unemployment. the cps consists of 50,000 households selected at random in the united states. bluestone used the raw cps data of the "income and poverty" survey to develop estimates of education and income for the new england states for 1988. this required working with the 50,000 individual observation sets (the "microdata") in the survey -not an easy thing to do at the time! today, the "income and poverty" survey is published on cd-rom and is bundled with powerful software to do any type of desired sorting and collating of the microdata files. the reason that bluestone undertook this impact analysis is a familiar one to state-supported higher education -state budget problems. bluestone's results showed that graduates of umass/boston, over their lifetime, paid more in additional taxes than the cost of their higher education to the state of massachusetts. these results were presented in an article in the chronicle of higher education. there he suggested that every tax dollar used to support higher education at the state level returned more than a dollar to the state in additional tax revenues. in 1997, with a looming state budget problem, the tennessee board of regents requested victor ukpolo and thomas dernberg, both of austin peay state university, to conduct a "bluestone" type analysis on the costs and benefits of higher education in tennessee. the results were released in march 1998 and were based on "income and poverty" data from 1992. the study was very technical in its approach. the budget problem that was on the horizon in 1997 is now here in 2001. last fall, the board of advisors of the college of business, east tennessee state university, requested the author to conduct a cost-benefit analysis of higher education in tennessee. the intent was to create a study that could be shared with business, community, and political leaders. this study uses the "bluestone" methodology, and is written with the lay reader in mind. when the study was prepared, the most recent "income and poverty" data was for 1997 and was based on the cps survey conducted in march 1998. the 2000 decennial census will provide far more authoritative and detailed data, even for small geographic areas. additional data for 1997 was taken from the southern regional education board (sreb) and the u.s. census bureau. these sources are listed at the end of the paper. the challenge in tennessee table 1 shows the educational attainment in 1997 for the united states, tennessee, virginia, and north carolina. these data are taken from "income and poverty 1997". the levels of educational attainment are divided into six categories. 12 table 1: educational attainment in 1997 (percent shares) usa tn va nc 1. children and students 22.2% 22.2% 21.5% 21.4% 2. less than high school 17.4 21.6 16.6 17.4 3. high school 24.6 28.6 22.9 25.8 4. less than bachelors degree 19.4 16.4 17.7 19.2 5. bachelors degree 11.2 7.7 14.3 11.8 6. graduate degree 5.1 3.4 7.0 4.4 total 100.0 100.0 100.0 100.0 no higher education (2+3) 42.0 50.2 39.5 43.2 higher education (4+5+6) 35.7 27.5 39.0 35.4 bach. degree or higher (5+6) 16.3 11.1 21.3 16.2 according to these data, nearly 36% of the u.s. population has had at least some exposure to college, while over 16% has attained a bachelors degree or better. as we know, tennessee educational attainment is significantly below national levels -about 20% lower in "higher education" and about 33% lower in "bachelors degree or higher". from the perspective of tennessee, we must increase our number of four-year college graduates by 50% just to achieve national averages. both virginia and north carolina have higher levels of educational attainment than tennessee. virginia is well over the national averages, while north carolina is very similar to national patterns. table 2 shows income levels and educational attainment in 1997 for the united states, tennessee, virginia, and north carolina. table 2: average income levels in 1997 (thousands of dollars) usa tn va nc 1. less than high school $13.3 $13.6 $13.3 $13.5 2. high school 27.3 26.1 25.7 25.6 3. less than bachelors degree 33.3 33.1 33.2 30.6 4. bachelors degree 53.6 59.2 47.6 48.6 5. graduate degree 85.9 85.6 85.4 82.6 average per-capita income 33.3 30.0 34.1 30.8 the table clearly shows that additional education can lead to substantial growth in income levels. in the nation as a whole, college graduates can expect to double their income compared to high school graduates. in tennessee, the ratio is even higher. (the lower per-capita income level for tennessee reflects the lower number of college graduates in the state.) the average income levels shown in the table vary from state to state and when compared to the national profile. these differences reflect the economic structure of each state and the composition of the education attainment group. the income level in tennessee of the "bachelors degree" category is well above national levels, while it is lower in virginia and north carolina. 13 these figures have been compared to earlier "income and poverty" surveys and are accurate. the income gains from higher education can be looked at on an annual basis or over a lifetime. table 3 shows these figures. the lifetime figures assume longer work lives for high school graduates. table 3. bachelors degree versus high school (thousands of dollars) usa tn va nc annual gain $ 26 $ 33 $ 22 $ 23 lifetime gain 1,024 1,319 838 885 the annual gain for a college graduate in the united states is $26,000 per year. in tennessee, the income increase is $33,000 per year, and is around $22,000 or more in virginia and north carolina. this comparison becomes more interesting when we look at lifetime gains. in the united states, a college graduate can expect to make a million dollars more than a high school graduate over a lifetime. in tennessee, the figure is over $1.3 million, while the income gains in virginia and north carolina are around $800,000 to $900,000. these income gains are in line with the levels of educational attainment -a higher number of college graduates in a state will actually reduce the average level of income for the group. this pattern is consistent across all three states. the opportunity in tennessee higher education results in much higher income for the individual, and is a very good investment of time and money. but is it a good investment for public money? do the public funds invested in higher education provide a net return to the public coffers? do the public benefits exceed the public costs?. we will approach this question from the perspective of an individual student and for higher education as a whole. the figures on the cost of education are taken from the southern regional education board (sreb) database and the tax collections are taken from the u.s. bureau of the census database on state government finances. higher income leads to increased spending and increased tax collections. in the following analysis, the increased tax receipts are the sum of increases in general sales taxes, selective sales taxes, and personal income taxes. these are census bureau categories, and in tennessee correspond to the state general sales tax, local option sales tax, and the "hall" income tax. other types of taxes, such as property taxes, are not included. table 4 shows the cost-benefit calculations for an individual student. there are two different figures on the annual cost to the state for a full time student. the first figure is $6,083 which is calculated by dividing total state spending on higher education by the number of full time equivalent (fte) students. the second figure of $4,571 comes from sreb and represents the operating budgets of higher education institutions divided by the number of fte students. it is assumed that the typical student requires five years to complete a bachelors degree program. table 4. analysis for an individual student, combined tax receipts (tennessee 1997) 14 total operating budget budget cost of bachelors degree per year $ 6,083 $ 4,571 cost for five years 30,416 22,853 increased lifetime tax receipts 56,232 56,232 cost-benefit ratio 1.849 2.461 these figures show that over a lifetime, a student will pay more in taxes than the cost to the state for the bachelors degree. if we look at operating budgets alone, the c-b ratio is a payback of $2.46 for each state dollar. even under the total higher education budget, the payback is still a $1.84 for each state dollar. the "increased lifetime tax receipts" in table 4 are the sum of higher state general sales taxes, local option sales taxes, and the "hall" income tax. local option sales taxes go to local governments (counties and cities) and the "hall" income tax is small. in table 5, we have limited the increased tax receipts to the state general sales tax alone. table 5. analysis for an individual student, general sales tax receipts (tennessee 1997) total operating budget budget cost of bachelors degree per year $ 6,083 $ 4,571 cost for five years 30,416 22,853 increased lifetime tax receipts 41,360 41,360 cost-benefit ratio 1.360 1.810 from the perspective of the tennessee state government (as opposed to "local" government), the payback in the form of just increased state general sales tax receipts is still very large. the return on a state dollar invested in the higher education operating budget is $1.81 and for the total higher education budget is $1.36. a second way of looking at the costs and benefits of higher education spending is to look at higher education as a whole. table 6 shows the cost-benefit calculations for tennessee in 1997. the spending on higher education is the total higher education budget based on sreb data. the increased tax revenues for 1997 are the sum of higher general sales taxes, local option sales taxes, and the hall income tax. table 6. analysis for higher education spending combined tax receipts (tennessee 1997) annual tn spending on higher education $ 970,357,500 increased annual tax receipts 1,654,113,791 cost-benefit ratio for tennessee 1.705 the table shows that the higher income levels of tennesseans who had some higher education resulted in increased tax receipts of $1.65 billion for the year 1997. these enhanced revenues are the 1997 dividend on investments the state has made in higher education in past years. when compared to the 1997 state spending on higher education, the payback is $1.70 for each new dollar invested. 15 the equivalent payback figure for virginia is $3.20 and for north carolina is $1.84. these higher ratios represent both a larger college educated population and a higher and different tax structure. for comparison, let us assume that the higher education group in tennessee (27.5%) is the same as virginia (39.0%) or as north carolina (35.4%). if 39.0% of the population of tennessee had some higher education as in virginia, then the tennessee tax structure would generate an additional $1.84 billion in tax receipts, compared to the actual figure of $1.65 billion. the payback ratio would be 1.901 compared to the actual 1.705. if tennessee had made the same investment in higher education in the past as virginia, our tax revenues would be higher by around $200 million per year. if 35.4% of the population of tennessee had some higher education as in north carolina, then the tennessee tax structure would generate an additional $1.78 billion in tax receipts, compared to the actual figure of $1.65 billion. the payback ratio would be 1.839 compared to the actual 1.705. if tennessee had made the same investment in higher education in the past as north carolina, our tax revenues would be higher by some $130 million per year. conclusion from the perspective of the individual student, or from the perspective of higher education as a whole, state support of higher education is a very good use of public money. at a time of growing structural deficits in the state budget, it is important to understand that higher education can best be considered as an investment of scarce state resources, rather than a spending category with no discernable financial return to the state. sources bluestone, barry. "states may be making a healthy profit on their public colleges and universities", the chronicle of higher education (october 6, 1993). bluestone, barry. umass/boston: an economic impact analysis. boston, ma: john w. mccormack institute of public affairs, university of massachusetts at boston (january 1993). "higher education statistics (1996, 1997, 1998)", sreb internet site. atlanta, ga: southern regional education board. "income and poverty 1997", current population survey 1997. washington, dc: u.s. census bureau and u.s. bureau of labor statistics (1998). [cd-rom] "state and local government finances (1996, 1997, 1998)", census bureau internet site. washington, dc: u.s. census bureau. ukpolo, victor, and dernberg, thomas f. returns on investment in higher education in tennessee. clarksville, tn: austin peay state university (march 1998). 16 microsoft word jeesum03 l.d journal for economic educators ∑ volume 4 ∑ number 1 ∑ summer 20036 student evaluations of teaching: does pedagogy matter? howard h. cochran, jr., gary l. hodgin, and joachim zietz * abstract the object of this study is to determine the extent to which the pedagogical choice of an instructor may influence the student evaluation of teaching effectiveness in principles of economics. estimates of an educational production function are made using a large national data set (tuce iii) available from the national council on economic education. significant gains in student satisfaction are brought about by intensive use of homework, comprehensive final exams, class discussions, and frequent feedback. additionally, instructor enthusiasm, class preparation, communication style, and grading standards contribute to the formation of student perceptions. introduction student evaluations of teaching (sets) are widely used as a measure of teaching effectiveness in higher education across the united states. in a survey of 114 economics departments in 1992, white (1995, 81-82) found that sets were by far the most common instrument for measuring teaching effectiveness with 75 of 76 respondents using sets and the other planning to use them in the future. in contrast, only about 40 percent of the institutions in higher education used sets in 1960 according to stechlein (1960) while wilson (1998) reports that only 30 percent of institutions asked students to evaluate professors in 1973. sets are now the single most important ingredient in formal assessment strategies imposed on faculty.1 this is not surprising, as accreditation agencies require the evaluation and documentation of instructional effectiveness.2 braskamp and ory (1994) are rather typical in their belief that sets are valid measures of instructor effectiveness when they are administered and interpreted properly. proper interpretation, however, requires an understanding of what causes set scores to vary and by how much. over the * howard h. cochran, jr., cochranh@mail.belmont.edu, and gary l. hodgin, hodging@mail.belmont.edu, department of economics and finance, belmont university, 1900 belmont boulevard, nashville, tn 37212; and joachim zietz, department of economics and finance, middle tennessee state university, murfreesboro, tn 37132, jzietz@mtsu.edu. 1 becker and watts (1999) find that sets dominate the evaluation of teaching although institutions are exploring other methods such as peer evaluation, classroom observation, grade distribution, and longitudinal student surveys. 2 for example, the aacsb standards for accreditation (aacsb international, 1999, fd.3.b, page 12) require a formal process to evaluate teaching effectiveness. similarly, the sacs criteria for accreditation (southern association of colleges and schools, 1996, 4.2.4 page 31) mandate the survey of student opinion to evaluate instructional programs. journal for economic educators ∑ volume 4 ∑ number 1 ∑ summer 2003 7 past 30 years, there have been numerous empirical studies on the determinants of set scores.3 however, one shortcoming of most of these studies is that little or nothing is said about how the variation in set scores is attributed to pedagogy. a few studies have empirically identified how pedagogical choices made by the teacher influence set scores. leeds et al. (1998) find that only two pedagogical variables have a significant impact on set scores, the traditional lecture method and stopping the lecture to check for understanding. both variables have a positive influence on set scores for college economics classes. morgan and vasche (1978) and bejar and doyle (1978) find traditional lectures and class discussions to have a positive impact as well. using a more comprehensive group of pedagogy variables, boex (2000) finds that presentation ability, organization and clarity, grading, and assignments have positive influences on set scores.4 however, the extent to which the above findings can be generalized is questionable because these studies are institutionally specific and use class averages rather than individual student data. with the exception of boex (2000), only carefully selected pedagogical variables are typically analyzed. these limitations may be one factor contributing to faculty apprehensions about using sets in evaluating faculty (gomez-mejia and balkin 1992). this study uses a richer data set than previous studies to analyze the impact of pedagogy on set scores. a large cross-sectional data set covering many different institutions is employed along with individual student and instructor data rather than class averages. this study also contributes to the literature on the scholarship of teaching economics by testing the effectiveness of several pedagogical choices. some of these choices are unique to this study, and the results obtained can be more easily generalized than from previous inquiries. this paper is organized as follows. the following section discusses the data set and the methodological approach. next, the estimation results are discussed and compared to those found in the literature. the paper ends with a summary of main points and suggestions for further study. data and methodology the tuce iii data set (saunders 1994) includes set scores from 93 principles of macroeconomic classes and 96 principles of microeconomics classes. the evaluations were administered at the end of the semester. fifty-three separate institutions from four carnegie classifications are represented within the data. the total data set contains 9,679 observations with information compiled from faculty questionnaires, student questionnaires, and student test scores along with the student evaluations of teaching. each observation represents an individual student. since answering the questionnaires was voluntary, missing values exist for some students. eliminating all observations with missing values for the selected variables leads to a data set of 3,322 observations. the independent variables (table 1) are organized into two broad groups: pedagogy and nonpedagogy variables. the non-pedagogy variables can be separated into several distinct groups: (a) variables describing the institutional characteristics in general terms, such as private versus public institutions; (b) variables on class characteristics not under the control of the instructor, such as class meetings per week; (c) instructor characteristics, such as years of teaching experience, and; (d) student characteristics, such as grade point average. 3 see brashkamp and ory (1994, 173-191) for a survey of the literature in education. in addition, there are several specific studies in economics, mostly from the introductory courses. becker (1997, 1368-1369) and boex (2000, 211-227) provide a brief summary of this literature. 4 the terms “instructional effectiveness” and “student satisfaction” are used interchangeably throughout this paper. our objective is to investigate the relationship between set scores and instructors’ choices of pedagogy. whether students’ responses to questions about pedagogy reflect satisfaction or teaching effectiveness is not addressed in this paper. journal for economic educators ∑ volume 4 ∑ number 1 ∑ summer 20038 table 1. variable definitions and basic statistics (3,322 observations, except where noted) variable definition mean standard deviation min. max. dependent variable student evaluation of teaching effectiveness 40.364 8.47 3 50 doctoral institut. 1 = doctoral institution 0.254 0.44 0 1 comprehen. inst. 1 = comprehensive institution 0.478 0.50 0 1 liberal arts inst. 1 = liberal arts institution 0.122 0.33 0 1 private inst. 1 = private institution 0.207 0.41 0 1 macroeconomics 1 = macroeconomics class 0.478 0.50 0 1 class per week class meetings per week 2.723 0.65 1 5 class size number of students in class 70.508 44.05 10 232 native english 1 = english is native language of instructor 0.965 0.18 0 1 regular faculty 1 = regular faculty 0.745 0.44 0 1 adjunct faculty 1 = adjunct faculty 0.063 0.24 0 1 grad. stud. fac. 1 = graduate student faculty 0.091 0.29 0 1 tenured 0.678 0.47 0 1 course per term instructor courses per term 2.034 0.79 1 4 article published 1 = article published in last five years 0.336 0.47 0 1 doctoral degree 1 = highest degree earned is a doctorate 0.586 0.49 0 1 years teaching number of years teaching 13.933 8.86 1 34 yrs teach course number of years teaching course 11.562 8.72 1 32 male1 1 = student gender is male 0.549 0.50 0 1 gpa2 student grade point average 2.950 0.66 0 6 college calculus 1 = student had college calculus 0.464 0.50 0 1 college econ. 1 = student had college economics 0.529 0.50 0 1 high school econ.3 1 = student had high school economics 0.477 0.53 0 2 load part time 1 = student course load is part-time 0.126 0.33 0 1 load above avg. 1 = student course load is above average 0.131 0.34 0 1 job 1 = student has a job 0.561 0.50 0 1 pctteach percent of time in teaching 62.440 23.56 5 99 pctrsch percent of time in research 19.656 20.34 0 80 pctadm percent of time in administration 10.371 15.46 0 95 pctcons percent of time in consulting 1.931 5.51 0 50 sametext 1 = same text used as last year 0.722 0.45 0 1 stdguide 1 = study guide used intensively 0.191 0.39 0 1 homewrk 1 = home work used intensively 0.330 0.47 0 1 readhand 1 = reading and handouts used intensively 0.143 0.35 0 1 computer 1 = computers used intensively 0.029 0.17 0 1 videos 1 = videos used intensively 0.043 0.20 0 1 pctgrdqz percent of grade for quizzes 11.023 14.94 0 72 pctgrdhom percent of grade for home work 3.662 7.00 0 40 pctgrdmt percent of grade for mid-terms 55.144 17.98 0 99 pctgrdpap percent of grade for papers 0.614 2.73 0 20 pctfincomp percent of final exam that is comprehensive 58.458 41.73 0 99 pcttffingrd true-false percent as percent of final grade 4.548 10.45 0 60 pctmcfingrd multiple choice percent of final grade 73.261 27.92 0 99 pctessay written answers as percent of final grade 19.451 25.46 0 100 pctlect percent of time spent on lecturing 77.641 12.71 33 99 pctdialog percent spent on instructor-student dialogue 21.493 13.02 0 66 expgrade4 student expected course grade 28.245 8.09 0 54 notes: 1 3299 obs., 2 2856 obs., 3 3314 obs., 4 3231 obs. journal for economic educators ∑ volume 4 ∑ number 1 ∑ summer 2003 9 the estimation approach follows a production function framework similar to hanushek (1979), manahan (1983), and becker and walstad (1987). our application of this approach can be summarized as follows. first, student evaluations of teaching are regressed on a set of nonpedagogy variables. this set of variables is selected from all available variables in the tuce iii on the basis of (a) the findings of earlier studies and (b) the effort to keep the number of observations reasonably large.5 hence, variables that are typically not statistically significant or have very few observations are not included in the set of independent variables. next, we test to what extent this base model can be simplified by dropping non-significant variables. second, a full complement of pedagogy variables is added to the reduced variable set that is left after dropping insignificant variables from the base model. again, insignificant variables are dropped to increase the efficiency of the statistical estimates. third, we examine to what extent the regression results are sensitive to the inclusion or exclusion of the variable “expected grade.” previous studies (boex 2000; greenwald and gillmore 1997; mason, steagall, and fabritius 1995; nelson and lynch 1984) find that expected grade exerts a positive influence on set scores. however, the controversy surrounding this finding is in its interpretation. what is at issue is whether or not instructors are buying higher evaluations by awarding higher grades, or if more effective instructors receive higher evaluations because their students learn more, or if learning and satisfaction result form high student motivation (cashin 1995). thus, “expected grade” is added to the reduced variable set from the second step in order to avoid misspecification of the model. fourth and finally, set scores are regressed separately on student and on instructor evaluations of four broad categories of instructor behavior: enthusiasm, class preparation, communication, and grading. the regression results allow one to examine whether instructors and students have broadly similar views on what is important for overall teaching excellence as it is manifested in student evaluations. estimation results and interpretation the estimation results are provided in tables 2 through 4. table 2 reports the results of regressions in which set is regressed on non-pedagogy variables. the first three variables in table 2 are institutional variables. since the base institutional category is the two-year college, the coefficients for doctoral, comprehensive, and liberal arts institutions measure the difference between these institutions and the two-year college. the results indicate that instructors at doctoral and comprehensive institutions receive significantly lower student evaluations. perhaps students at these institutions feel a greater distance between themselves and their instructors and consequently evaluate them more harshly. there appears to be no difference in set scores between private and public institutions; nor does there appear to be any difference between liberal arts and two-year institutions. each of the course variables is statistically significant. since “microeconomics” is the base variable in the regression equation, the negative coefficient on macroeconomics indicates that macroeconomics instructors receive lower evaluations than microeconomics instructors. similarly, instructors of larger classes and classes meeting less frequently score higher on the student evaluations. interestingly, institution size and class size have offsetting influences on set scores. the higher scores in larger classes may result from more effective teachers being assigned to these sections, a finding that is consistent with boex (2000). alternatively, it may be that lectures are the preferred learning style for principles of economics and are predominantly found in large classes. 5 the danger of small data sets is that the estimates pick up the characteristics of individual classes that may play a significant role in smaller data sets but that may not be very representative. large swings in coefficient estimates and even signs can easily occur in small samples. journal for economic educators ∑ volume 4 ∑ number 1 ∑ summer 200310 while braskamp and ory (1994) cite studies that contradict this finding, none of these studies discuss the preferred learning method of students in the classes that are evaluated nor do they use regression analysis to determine the individual influence of variables. similar to leeds et al. (1998), there is a negative relationship between set scores and the number of class meetings per week. table 2. regressions with all but pedagogy variables all variables included zero restrictions imposed zero restrictions imposed for the same observations for more observations variables coefficient t-value p-value coefficient t-value p-value coefficient t-value p-value constant 43.404 36.32 0.00 43.403 43.04 0.00 43.807 47.44 0.00 doctoral institut. -1.498 -2.21 0.03 -1.766 -2.76 0.01 -1.852 -3.20 0.00 comprehen. inst. -1.328 -2.37 0.02 -1.447 -2.61 0.01 -1.535 -3.08 0.00 liberal arts inst. 0.439 0.62 0.54 0.065 0.10 0.92 0.107 0.18 0.85 private inst. -0.470 -1.19 0.24 macroeconomics -0.816 -2.83 0.01 -0.828 -2.89 0.00 -0.908 -3.48 0.00 class per week -0.692 -2.97 0.00 -0.699 -3.00 0.00 -0.782 -3.62 0.00 class size 0.011 2.92 0.00 0.011 3.16 0.00 0.013 3.93 0.00 native english 4.430 7.44 0.00 4.412 7.47 0.00 3.856 7.52 0.00 regular faculty 1.824 2.84 0.01 1.829 2.86 0.00 1.938 3.40 0.00 adjunct faculty -0.592 -0.91 0.36 -0.551 -0.85 0.40 -0.597 -1.00 0.32 grad. stud. fac. -2.239 -2.66 0.01 -1.952 -2.44 0.02 -1.344 -1.90 0.06 tenured -2.521 -4.08 0.00 -2.529 -4.12 0.00 -2.673 -4.86 0.00 course per term -1.292 -5.51 0.00 -1.327 -5.72 0.00 -1.177 -5.63 0.00 article published 0.909 2.10 0.04 0.910 2.10 0.04 0.742 1.88 0.06 doctoral degree -1.263 -2.74 0.01 -1.212 -2.65 0.01 -1.120 -2.76 0.01 years teaching -0.095 -2.72 0.01 -0.096 -2.80 0.01 -0.077 -2.40 0.02 yrs teach course 0.053 1.42 0.16 0.058 1.60 0.11 0.054 1.62 0.11 male 0.237 0.86 0.39 gpa -0.071 -0.34 0.74 college calculus -0.195 -0.65 0.51 -0.259 -0.90 0.37 -0.380 -1.43 0.15 college econ. 0.425 1.40 0.16 0.433 1.43 0.15 0.367 1.34 0.18 high school econ 0.111 0.44 0.66 load part time -1.019 -2.22 0.03 -0.998 -2.20 0.03 -1.026 -2.49 0.01 load above avg. -0.236 -0.58 0.56 -0.237 -0.59 0.56 -0.304 -0.82 0.41 job -0.469 -1.67 0.10 -0.445 -1.59 0.11 -0.579 -2.23 0.03 number of obs. 3982 3982 4627 r2 0.0451 0.0446 0.0436 notes: see table 1 for variable definitions. instructor-specific variables that positively contribute to student satisfaction include english as the first language of the professor, being a full-time faculty member, and engaging in research. english as a first language may allow for better communication between instructors and students, a finding consistent with that of leeds et al. (1998) and anderson and seigfried (1997). however, the relative size of english as a first language is reduced when pedagogical choices are included. a full-time regular faculty member presumably allows students to have better access to the professor, which raises student satisfaction. engaging in research may make instructors more active in their discipline and as a result more knowledgeable and interesting in the classroom. journal for economic educators ∑ volume 4 ∑ number 1 ∑ summer 2003 11 tenure tends to reduce student evaluations. perhaps the tenure process at many universities underemphasizes the importance of teaching effectiveness or post-tenure reviews may not provide adequate incentives to maintain teaching effectiveness. tenured faculty may tend to rest on their laurels and may not be willing to go the extra mile in their teaching endeavors. as johnston, mcdonald, and williams (2001) suggest, incentive structures encouraging faculty to devote more time to teaching improvement have been historically absent. however, becker and watts (1999) report a recent trend to weight personnel decisions regarding tenure, promotion, and salary increases more heavily in favor of teaching performance. thus, a realignment of the incentive structure may eventually nudge tenured faculty to enhance future teaching performance (gomezmeija and balkin 1992). why does a doctoral degree reduce evaluations? faculty members that hold doctoral degrees may prefer to teach courses in their area of specialization. for them, teaching principles of economics places them at a comparative disadvantage. as anderson and siegfried (1997) found with respect to principles of macroeconomics, we also find a negative relationship between “years teaching” and set (feldman 1983). this may indicate that instructors with a long teaching career may be less responsive to students because of burnout or worn-down sensitivities. additionally, as the number of course preparations increases per semester, student satisfaction declines. faculty members having to allocate their time among several preparations are probably less likely to deliver any one course as well. by contrast, fewer preparations taught multiple times allows for continuous improvement during the term. a similar argument explains why set scores are positively related to the variable “years teaching course.” there is nothing remarkable to report with regard to the student variables. only one variable (part-time course load) is statistically significant. grade point average is negative but not significant, a finding confirmed, inter alia, by leeds et al. (1998) and feldman (1976). gender does not influence the overall evaluation of instructors, which confirms the findings of basow and silberg (1987) along with feldman (1993). part-time students appear to give lower student evaluations. this may be because the opportunity cost of their time may be higher than for fulltime students. they cannot devote enough time to studying to fully understand what is going on and, as a consequence, they take their frustration out on the instructor. a similar argument applies to students with a regular job. needham (1978) argues that students allocate their time to course work in an attempt to maximize their grade point average. the more time instructors require of students, the less satisfaction the student receives from the course because of the higher opportunity costs for a given grade, a prediction consistent with utility maximizing models of student achievement versus leisure (mckenzie and staaf 1974; kelley 1975). if studying economics takes more time and effort, satisfaction will decline. one should note that there is little variation in the estimated coefficients reported in table 2 as one restricts some variable coefficients to zero. the restrictions are supported by simple f-tests at very high levels of statistical significance. eliminating variables from the regression equation means that the potential number of observations goes up because observations containing missing values were omitted from the initial regression. in the case of the regression of table 2, removing the variables male and gpa adds about 650 observations. however, the additional observations have little effect on the estimated coefficients or their statistical significance. consequently, the explanatory power of the model is maintained even with fewer independent variables.6 the restricted model of table 2 with 4,627 observations becomes the base model for table 3. 6 we note that the relatively low r2 in our study is similar to other studies within the same genre. while the results of our study are not deterministic, they are indicative of tendencies toward effective pedagogical clues. clearly, more research could potentially enhance our understanding of variations in student evaluation scores. journal for economic educators ∑ volume 4 ∑ number 1 ∑ summer 200312 table 3. regressions with all variables including pedagogy variables all variables included zero restrictions imposed expected grade added without expected grade for same observations to restricted model for same observations variables coef. t-value p-value coef. t-value p-value coef. t-value p-value coef. t-value p-value constant 53.052 8.39 0.00 52.331 24.96 0.00 45.478 20.80 0.00 51.967 24.68 0.00 doctoral inst. -2.191 -2.30 0.02 -2.440 -2.92 0.00 -2.278 -2.74 0.01 -2.627 -3.11 0.00 comprehen. inst. -1.785 -2.44 0.02 -1.951 -2.85 0.00 -1.813 -2.67 0.01 -2.066 -2.99 0.00 liberal arts inst. -0.286 -0.27 0.78 -0.435 -0.53 0.60 -0.316 -0.38 0.70 -0.478 -0.57 0.57 macroeconomics 0.431 1.22 0.22 0.344 1.01 0.31 0.643 1.90 0.06 0.497 1.44 0.15 class per week -0.697 -2.13 0.03 -0.645 -2.33 0.02 -0.515 -1.84 0.07 -0.680 -2.42 0.02 class size 0.018 4.06 0.00 0.020 4.76 0.00 0.022 5.29 0.00 0.020 4.91 0.00 native english 1.754 1.79 0.07 1.767 1.99 0.05 1.927 2.20 0.03 1.900 2.12 0.03 regular faculty 1.644 1.39 0.17 1.284 1.33 0.18 1.293 1.35 0.18 1.246 1.27 0.20 adjunct faculty -2.398 -2.22 0.03 -2.196 -2.46 0.01 -1.795 -1.99 0.05 -2.228 -2.46 0.01 grad. stud. fac. -3.513 -3.25 0.00 -3.776 -4.00 0.00 -3.980 -4.20 0.00 -3.799 -3.97 0.00 tenured -2.764 -2.48 0.01 -2.456 -2.54 0.01 -1.690 -1.76 0.08 -2.321 -2.37 0.02 course per term -1.639 -5.73 0.00 -1.820 -7.24 0.00 -1.977 -7.77 0.00 -1.883 -7.38 0.00 article published 1.574 2.45 0.01 1.698 2.93 0.00 1.539 2.62 0.01 1.532 2.58 0.01 doctoral degree -1.991 -2.98 0.00 -1.728 -3.05 0.00 -1.603 -2.84 0.00 -1.593 -2.78 0.01 years teaching -0.017 -0.32 0.75 -0.033 -0.67 0.51 -0.032 -0.64 0.52 -0.039 -0.77 0.44 yrs. teach course 0.047 0.94 0.35 0.058 1.20 0.23 0.058 1.21 0.23 0.064 1.29 0.20 college calculus -0.522 -1.63 0.10 -0.515 -1.64 0.10 -1.136 -3.57 0.00 -0.501 -1.58 0.12 college econ. 0.014 0.04 0.97 -0.021 -0.06 0.95 -0.067 -0.20 0.84 -0.018 -0.05 0.96 load part time -0.903 -1.85 0.06 -0.948 -1.97 0.05 -0.768 -1.61 0.11 -0.762 -1.56 0.12 load above avg. -0.635 -1.43 0.15 -0.624 -1.41 0.16 -0.818 -1.84 0.07 -0.613 -1.36 0.18 job -0.540 -1.78 0.08 -0.547 -1.81 0.07 -0.486 -1.60 0.11 -0.585 -1.90 0.06 pctteach -0.005 -0.34 0.74 pctrsch 0.000 0.02 0.98 pctadm 0.014 0.85 0.40 pctcons -0.089 -2.33 0.02 -0.093 -2.66 0.01 -0.089 -2.49 0.01 -0.090 -2.52 0.01 sametext -1.833 -3.71 0.00 -2.060 -4.83 0.00 -2.127 -5.07 0.00 -2.165 -5.02 0.00 stdguide 0.542 0.91 0.36 0.427 0.78 0.44 0.547 1.00 0.32 0.402 0.72 0.47 homewrk 1.765 3.86 0.00 1.732 3.97 0.00 1.894 4.39 0.00 1.838 4.18 0.00 readhand 0.881 1.60 0.11 0.767 1.50 0.13 0.459 0.89 0.37 0.565 1.09 0.28 computer 0.928 0.54 0.59 0.807 0.49 0.62 1.540 0.95 0.34 1.297 0.77 0.44 videos -1.941 -1.90 0.06 -1.721 -1.82 0.07 -2.924 -3.10 0.00 -1.998 -2.07 0.04 pctgrdqz -0.107 -3.65 0.00 -0.110 -4.09 0.00 -0.102 -3.85 0.00 -0.104 -3.83 0.00 pctgrdhom -0.122 -3.19 0.00 -0.127 -4.19 0.00 -0.124 -4.13 0.00 -0.124 -4.07 0.00 pctgrdmt -0.099 -4.07 0.00 -0.104 -4.60 0.00 -0.098 -4.42 0.00 -0.098 -4.27 0.00 pctgrdpap -0.035 -0.41 0.68 -0.034 -0.46 0.64 -0.029 -0.40 0.69 -0.012 -0.17 0.87 pctfincomp 0.011 2.02 0.04 0.013 2.60 0.01 0.014 2.82 0.01 0.014 2.77 0.01 pcttffingrd 0.008 0.29 0.77 pctmcfingrd 0.007 0.39 0.69 pctessay 0.007 0.38 0.70 pctlect -0.019 -0.34 0.73 pctdialog 0.055 1.08 0.28 0.078 5.36 0.00 0.079 5.44 0.00 0.074 5.04 0.00 expgrade 0.194 9.98 0.00 number of obs. 3322 3322 3231 3231 r2 0.0948 0.0942 0.1267 0.0960 notes: see table 1 for variable definitions and basic statistics. journal for economic educators ∑ volume 4 ∑ number 1 ∑ summer 2003 13 table 3 gets to the heart of the paper as the pedagogy variables are added to the variables examined in table 2. in particular, the first regression of table 3 includes the variables from the restricted regression of table 2 and all pedagogy variables that are considered. it is apparent that these variables, taken jointly, have significant explanatory power. the coefficient of determination (adjusted r2) more than doubles with their inclusion. the available number of observations declines somewhat due to missing values for some of the new variables. both the change in the number of variables and the change in the set of observations affects some of the variables that are examined by the regressions of table 2. the most dramatic change occurs for the variable “macroeconomics.” its sign reverses from negative to positive and is no longer statistically significant, a finding that is consistent with leeds et al. (1998). hence, if one accounts for pedagogy, then macroeconomics classes are not less liked by students than microeconomics classes. why macroeconomics classes reduce set scores in table 2 but not in table 3 can be understood if one considers the following: siegfried et al. (1996) report that microeconomic courses heavily use homework and macroeconomic courses are more likely to use videos. homework positively contributes to course satisfaction, while videos reduce student affinity. the negative sign for macroeconomics in table 2 therefore reflects the influence of a pedagogy that students prefer and also one that they do not particularly like. some variables that create positive feelings among students are reduced in magnitude in table 3 relative to table 2. among these variables is the english language variable, the fact that the instructor is regular faculty as opposed to “other,” the time the instructor has been teaching the course, or whether students have taken previous college economics courses. academic research demonstrates a stronger contribution to set when accounting for pedagogy, a noteworthy difference from studies that do not account for instructional choices (yunker and marlin 1984; feldman 1987). other variables turn out to exert more of a negative influence on student satisfaction than previously measured: institutional type, adjunct faculty status, tenure, courses taught per term, terminal qualifications, college calculus, and student allocations of time to either full-time employment or above-average course loads. part-time enrollment has now less of a negative impact on set scores. years teaching experience and regular faculty status are now statistically insignificant, perhaps a result of more experienced instructors adopting more effective pedagogies. class size remains relatively unchanged. the added pedagogy variables contribute to set in four dimensions: professor allocation of time, selection of pedagogical instruments, course organization, and the degree of in-class dialogue. the first four variables of the pedagogy set relate to the way an instructor allocates time among competing uses. all other use of professorial time serves as the base variable. teaching, research, administration, and consulting do not appear to contribute to student satisfaction as much as alternative uses of time such as mentoring individual students, giving personal attention, or providing frequent feedback on performance. the category “other” is the base category in this case. hence, the four estimated coefficients provide the difference relative to the “other” category. spending a greater percentage of time in teaching, research, or administrative endeavors does not contribute to improving set (yunker and marlin 1984). as long as students have access to professors, students may not have ill feelings toward how a professor spends non-class time (tang 1997). it is apparent that time spent on consulting affects teaching evaluations negatively. this may be because consulting reduces a professor’s access to students or takes the instructor’s mind off the teaching process more so than other activities. the insignificance of time allocated to research and the significance of having had an article published are not necessarily contradictory. what matters to students is a professor’s contemporary engagement in the discipline, regardless of the amount of time that is required to reach that level of inquiry. some pedagogical instruments are more effective than others at providing greater course satisfaction. intensive use of homework assignments yields significant gains while intensive use of journal for economic educators ∑ volume 4 ∑ number 1 ∑ summer 200314 non-text readings and handouts shows much less importance. mehdizadeh (1990) attributes this to the value that students place on supplementary materials. the fact that the use of the same text as in the last semester affects teaching evaluations negatively is not easily explained. one possible explanation is that instructors tend to be less careful in their class preparation. quite apparently, students notice that, as this variable is one of the most significant ones among the pedagogy variables. aigner and thum (1986) find that preparation and set scores are positively related. another explanation could be a negative halo effect that causes students to rate a course lower in the current term because of their dislike of a textbook they used in a previous semester. interestingly, students give videos a negative vote as a pedagogy device. this is not all that surprising given the fact that today’s students tend to be oversaturated with tv. also, most video programs tend to be rather simplistic and unresponsive to students’ particular interests and questions. as no interaction is taking place, students tend to get bored and turn off. the use of computers does not show up to be significant in its impact on student evaluations. however, this is likely the result of the fact that computer use was still in its infancy at the time the tuce data were collected. not only did very few classes get exposed to computers in the classroom, but the computer material was in all likelihood rather primitive compared to today. students find intensive use of study guides detracting, but as previously mentioned enjoy the intensive use of homework problems. these results are not inconsistent because study guides are standardized while homework is tailored by the professor to the class and is indicative of preparation. customization allows for higher satisfaction and possibly higher grades since the material over which a student is tested is more likely to come directly from the professor rather than the publisher. the elements of course organization are primarily concerned with how the final grade is determined by the instructor. the coefficients of the four variables following “videos” must be interpreted as differences relative to the base category, which is made up of the percentage by which the final grade is determined by a category identified as “other” that is primarily inclusive of final exams. it is apparent that students consider the grading issue to be very important for their student evaluations, a finding that is common in the literature (boex 2000; tang 1997). by identifying various methods of assigning grades, this paper adds to our understanding of the connection between specific grading practices and student satisfaction. three of the four grading variables are highly significant statistically. the negative coefficients suggest that students do not like grades being determined by quizzes, mid-terms or homework assignments relative to finals. this may be because many students feel that methods are extrinsic motivators designed to monitor one’s learning progress while the outcome of the learning process can only be determined at the end of the course through either exams or other written assignments. extrinsic motivators, while inducing a desired behavior, are less satisfying than intrinsic motivators (herzberg 1987). course organization should also consider how a final exam is structured with respect to the four variables following “pctgrdpap.” in general, students are indifferent to using either more multiple choice or more essay questions on a final exam. perhaps the perceived fairness in the grading of a final exam is more important than the selection of a particular type of question used in the determination of a final grade. students tend to approve of exams that are more comprehensive. this appears to be consistent with the preference for final exams as a means to arrive at the course grade. but it may also be the case that the best and best-liked teachers are using comprehensive final exams because comprehensive finals are known to raise student learning (zietz and cochran 1998). consequently, student satisfaction improves with the perception that comprehensive finals are a better reflection of the gain in knowledge (bosshardt and watts 2001; watts and lynch 1989; leeds et al. 1998). the degree of instructor-student dialogue in a course appears to be inconsequential. both the percentage of class time spent in lecture and the percentage of class time spent in either students responding to instructor questions or the instructor responding to student questions will not journal for economic educators ∑ volume 4 ∑ number 1 ∑ summer 2003 15 improve teaching evaluations. lecture and dialogue appear to be no more satisfying to students than other communication techniques. perhaps this may shed light on the lack of enthusiasm for adopting active learning pedagogies along with the continuing predominance of the “chalk and talk” method of instruction (becker and watts 2001). the second regression reported in table 3 eliminates a number of statistically insignificant variables while forcing the set of observations to be identical to the one used for the first regression. there is no significant change in any of the coefficients or in the r2, which is what one would expect from the deletion of jointly insignificant variables. the third regression reported in table 3 adds the variable “expected grade” to the reduced variable set of the second regression. expected grade is a highly significant variable in all previous work on student evaluations and also turns out highly significant for this data set (gramlich and greenlee 1993; aigner and thum 1986; stratton et al. 1994). the statistical significance of “expected grade” translates into a much higher r2. as previously noted, the interpretation of coefficient on “expected grade” is ambiguous and goes beyond the scope of this analysis. few variables are much affected by the inclusion of “expected grade.” the variable for tenure is somewhat less significant with “expected grade” included in the regression, and the variables “college calculus,” “pctdialog,” and “videos” gain in statistical significance although they do not change in sign. in sum, this study confirms the finding of previous research that higher expected grades positively contribute to course evaluations. table 3 adds to this the knowledge that the contribution of pedagogy to course satisfaction is largely unaffected by student grade expectations. table 4. perceived determinants of overall teaching evaluation instructor perceptions student perceptions variable coefficient t-value p-value coefficient t-value p-value constant 2.390 4.90 0.00 -5.488 -7.58 0.00 enthusiasm 0.440 47.91 0.00 0.413 22.22 0.00 preparation 0.182 25.82 0.00 0.375 16.98 0.00 communication 0.216 24.73 0.00 0.121 6.80 0.00 grading 0.063 6.57 0.00 0.168 9.47 0.00 number of obs. 5824 5824 r2 0.5555 0.5286 notes: for instructor perceptions, instructor=s own overall evaluation of teaching effectiveness is regressed on instructor=s own evaluations of enthusiasm, preparation, etc. for student perceptions, students’ overall evaluation of teaching is regressed on students’ evaluation of instructor enthusiasm, preparation, etc. the first regression reported in table 4 explains self-assessment of teaching in terms of the instructors’ self-assessment of enthusiasm, class preparation, communication ability, and grading. these categories of assessment are significant determinants of student satisfaction (lumsden 1974; lumsden and scott 1983; boex 2000; bosshardt and watts 2001). the second reported regression does the same but for student evaluations of all categories. for both instructors and students, overall teaching evaluations are mainly driven by the enthusiasm that the instructor has for the subject matter. whereas communication ability is ranking second in the minds of journal for economic educators ∑ volume 4 ∑ number 1 ∑ summer 200316 instructors, instructor class preparation ranks higher, in fact much higher, for students. it is also obvious that grading is much more on students’ minds than communication ability. these results of table 4 offer some interesting insight into the sign and significance of some variables in table 3. according to table 4, instructor preparation is paramount to receiving higher evaluations. use of videos and the same text may be perceived as substitutes for preparation. by contrast, intensive use of homework reflects greater preparation and as such improves satisfaction. similarly, adjunct faculty and graduate student faculty may spend less time in preparation along with those faculty members who devote more time to consulting. again, student satisfaction declines. summary and conclusions the purpose of this paper is to determine to what extent pedagogy affects student satisfaction as measured by student evaluations of teaching in principles of economics. the results suggest that pedagogy matters. instructors do retain some control over their course evaluations. increasing evaluation scores is possible through intensive use of homework, a more comprehensive final exam, and a higher percentage of class time devoted to instructor-student dialogue. however, use of the same text as the previous semester, increased efforts spent in consulting endeavors, intensive use of videos, and higher percentages of the final grade being determined by quizzes, homework, and midterm exams, will lead to lower ratings. other choices, such as intensive use of a study guide, computer exercises, and non-text readings, prove to be inconsequential for student satisfaction, as does the percentage of the final grade being determined by written assignments. students are indifferent as to the type of questions used in assessing their understanding. professors who allocate more time to teaching, research, or administrative responsibilities do not seem to be placing themselves at a greater disadvantage. while the findings of this study do suggest that pedagogy matters, they do not lend conclusive support to advocates of pedagogy changes, such as movements away from lecture and multiplechoice exams in introductory economics courses (becker and watts 2001). however, as mentioned previously with respect to the integration of computers into the classroom, some nonlecture forms of pedagogy (e.g., service learning, write-to-learn, experimental methods) either were in their infancy or not used at all at the time of tuce iii. later research may reveal these forms of pedagogy to be effective means of improving set scores. finally, we note that in addition to student satisfaction, pedagogical choices may influence cognitive outcomes, may be more or less well matched to student learning styles, or could have consequences for economic efficiency in their adoption. clearly, effective teaching requires careful consideration of a variety of dimensions. it would be interesting to know to what extent pedagogy matters for these other aspects of classroom instruction. references american association of colleges and schools of business international. 1999. achieving quality and continuous improvement through self-evaluation and peer review: standards for accreditation (reprinted january 20). st. louis. aigner, dennis j., and frederick d. thum. 1986. “on student evaluation of teaching ability.” journal of economic education 17 (fall): 243-265. anderson, kathryn h., and john j. siegfried. 1997. “gender differences in rating the teaching of economics.” eastern economic journal 23 (summer): 347-357. basow, s. a., and n. t. silberg. 1987. “student evaluations of college professors: are female and male professors rated differently?” journal of educational psychology (79): 308-314. journal for economic educators ∑ volume 4 ∑ number 1 ∑ summer 2003 17 becker, william e. 1997. “teaching economics to undergraduates.” journal of economic literature 35 (september): 1347-1373. becker, william e., and walstad, walter b. 1987. “statistical methods in economic education research.” in econometric modeling in economic education research, edited by w. e. becker, and w. b. walstad. boston, ma: kluwer-nijhoff. becker, william e., and michael watts. 2001. “teaching methods in u.s. undergraduate economics courses.” journal of economic education (summer): 269-279. ________. 1999. “how departments of economics evaluate teaching.” american economic review 89 (may): 344-349. bejar, l. l., and k. o. doyle. 1978. “relationship of curriculum area and course format with students’ ratings of instruction.” american educational research journal15: 483-487. boex, jameson, l. f. 2000. “attributes of effective economics instructors: an analysis of student evaluations.” journal of economic education summer 31: 211-227. bosshardt, william, and michael watts. 2001. “comparing student and instructor evaluations of teaching.” journal of economic education 32 (winter): 3-17. braskamp, larry a., and john c. ory. 1994. assessing faculty work: enhancing individual and institutional performance. san francisco: jossey-bass. feldman, k. a. 1993. „college students’ views of male and female college teachers: part ii— evidence from students’ evaluations of their classroom teacher.” research in higher education 34: 151-211. ________. 1983. “seniority and experience of college teachers as related to evaluations they receive from students.” research in higher education 18: 3-124. ________. 1976. “grades and college students’ evaluations of their courses and teacher.” research in higher education 4: 69-111. ________. “research productivity and scholarly accomplishments of college teachers as related to their institutional effectiveness: a review and exploration,” research in higher education, 1987, 26, 227-291. gomez-mejia, l., and balkin, d. 1992. “the determinants of faculty pay: an agency theory perspective.” academy of management journal 35: 921-955 gramlich, edward m., and glen a. greenlee. 1993. “measuring teaching performance.” journal of economic education 24 (winter): 3-13. greenwald, a. g., and g. m. gillmore. 1997. “no pain, no gain? the importance of measuring course workload in student ratings of instruction.” journal of educational psychology 89: 743-751. hanushek, e. a. 1979. “conceptual and empirical issues in the estimation of educational production functions.” journal of human resources 14: 351-388. herzberg, frederick. 1987. “one more time: how do you motivate employees?” harvard business review (september/october) 65: 109-120. johnston, c., i. mcdonald, and r. williams. 2001. “the scholarship of teaching economics.” journal of economic education 32 (summer): 195-201. kelley, a. c. 1975. “the student as a utility maximizer.” journal of economic education 6 (spring): 82-92. leeds, michael, william stull, and jilleen westbrook. 1998. “do changes in classroom techniques matter? teaching strategies and their effects on teaching evaluations.” journal of education for business 74 (november/december): 75-78. lumsden, k. g. 1974. “the information content of student evaluation of faculty and courses.” in efficiency in universities: the lapaz papers, edited by k. lumsden. amsterdam and new york: elsevier scientific: 175-204. journal for economic educators ∑ volume 4 ∑ number 1 ∑ summer 200318 lumsden, k. g., and scott, a. 1983. “the efficacy of innovative teaching techniques in economics: the u.k. experience.” american economic review (may): 13-17. manahan, j. 1983. “an educational production function for principles of economics.” journal of economic education 14 (spring): 11-16. mason, p. m., j. w. steagall, and m. m. fabritus. 1995. “student evaluations of faculty: a new procedure for aggregate measures of performance.” economics of education review 14: 403-416. mckenzie, r. b., and r. j. staff. 1974. an economic theory of learning: student sovereignty and academic freedom. blacksburg, va: university publications. mehdizadeh, m. 1990. “loglinear models and student course evaluations.” journal of economic education 21 (winter): 7-21. morgan, w. d., and j. d. vasche. 1978. “an educational production function approach to teaching effectiveness and evaluation.” journal of economic education 9 (spring): 123-126. needham, douglas. 1978. “student effort, learning and course evaluation.” journal of economic education 9 (fall): 35-43. nelson, j. p., and k. a. lynch. 1984. “grade inflation, real income, simultaneity, and teaching evaluations.” journal of economic education 15 (winter): 21-37. saunders, phillip. 1994. the tuce iii data set: background information and file codes. new york: national council on economic education. siegfried, john j., phillip saunders, ethan stinar, and hao zhang. 1996. “teaching tools: how is introductory economics taught in america?” economic inquiry 34 (january): 182-186. southern association of colleges and schools. 1996. criteria for accreditation. commission on colleges. stechlein, j. f. 1960. encyclopedia of educational research, edited by c. harris. new york: macmillian publishing company: 286-287. stratton, richard w., steven c. myers, and randall h. king. 1994. “faculty behavior, grades, and student evaluations.” journal of economic education 25 (winter): 5-15. tang, thomas li-ping. “teaching evaluation at a public institution of higher education: factors related to the overall teaching effectiveness.” public personnel management 25: 379-384. watts, m. and g. lynch. 1989. “the principles course revisited.” american economic review 79 (may): 236-241. white, lawrence j. “efforts by departments of economics to assess teaching effectiveness.” journal of economic education (winter) 26: 81-85. wilson, robin. 1998. “new research casts doubt on value of student evaluations of professors.” chronicle of higher education 44 (january 16): a12. yunker, j. a., and marlin, j. w. 1984. “performance evaluation of college and university faculty: an economic perspective.” education administration quarterly 20: 9-37. zietz, j., and howard h. cochran, jr. 1998. “how much does teaching methodology matter for learning principles of economics?” the kentucky journal of economics and business 17: 39-54. money tricks notes and anecdotes for economic education the following three anecdotes are taken from experiences in bolivia during the years 1979 – 1982. these stories concern monetary phenomena and can be used to illustrate the effects of money on everyday economic life in a developing economy. the first story is an illustration of gresham’s law. sir thomas gresham was born in 1519 and died in 1579. he was educated at cambridge and, in 1551, he became the agent for the king of england in antwerp. he negotiated royal loans with flemish merchants, bought arms and military stores, and smuggled bullion into england. upon the death of queen mary and the accession of elizabeth, gresham advised the new queen to restore the previously debased money supply. it was following the great recoinage that gresham is said to have pronounced his famous dictum; “bad money drives out good.”1 gresham observed that after the minting of new coins with full metal value that only the old worn coins were circulating, and the new coins were not appearing. in this case, the undervalued money was circulating and the full-valued money was being hoarded. although this principle had been observed earlier (one author quoting aristophanes as to this truth) sir thomas gresham’s name has been attached to this phenomenon until this day. the usual cases of gresham’s law concern two metallic standards circulating simultaneously, or a metal standard circulating with an inconvertible paper standard. 1 the new palgrave, a dictionary of economics, vol. 2, ed. eatwell, milgate, and newman, the macmillan press limited, london, 1988, p.564. 45 there is a case of an inconvertible paper standard exhibiting characteristics of gresham’s law simply due to the wearing out of the paper money. in the far-away year of 1979, i lived in the nation of bolivia while working for a mission agency. the monetary unit in bolivia was the peso boliviano. these pesos circulated mainly as paper notes with some metal coins. it was interesting to observe that the thomas larue company of london printed these notes. so the national government of bolivia was buying its new currency from london. due to the expense involved, the currency was made to serve the needs of commerce as long as possible. the result was that one could see some pretty sad looking currency. some bills were terribly worn and held together with tape in several places. some currency was so old that it looked as if it would tear apart with the slightest use. i was then made aware that occasionally a merchant would accept a worn bill only at a discount. this fact made gresham’s law operative even among units of the same currency. the logic of the situation is this: if a worker received a bad bill in the pay envelope, it was possible that a merchant might accept the bill only at a discount. for instance, an individual might try to spend a 10 peso note, and find that the merchant would give only 7 pesos credit for the note. so the person is faced with a situation of holding “bad” money. now, when a person receives currency, she must go through the currency and select all the bad bills and try to spend them first, in the hope of receiving full credit for them. if she doesn’t receive full credit, she can try another merchant. the “bad” money is spent first and so achieves a higher velocity of circulation than the good bills. this is gresham’s law with inconvertible paper currency. 46 the second bolivian monetary phenomenon that i experienced during 1979 was a devaluation of the peso. bolivia had a pegged exchange rate against the u.s. dollar, and due to continued trade imbalances the government announced several weeks in advance that a devaluation of the peso was at hand. my salary was paid in dollars which were deposited monthly in an american bank. i would write checks on that bank and exchange that check for pesos. i don’t remember the magnitude of the exchange rate or the size of the devaluation. however, i knew enough economics to know that if the peso was devalued i would receive many more pesos for each dollar that i exchanged. in effect, i would be rich! the great day of the devaluation arrived, and truly, i received more pesos for each dollar that i exchanged. on the day of the devaluation another phenomenon occurred. the prices for all goods had risen at about the same percentage as the devaluation. my standard of living remained about the same. i was paying more pesos for all the goods. but what about the bolivians? how were they to make ends meet? it was here that i learned about the reality of weak governments and strong labor unions. labor groups simply bargained for an appropriate percentage wage increase to meet the increase in prices. teachers unions followed suit. basically all workers followed suit and wages were moved up by about the same percentage as the increase in prices. “textbook” devaluations are not supposed to work like that. an official devaluation is done to weaken the nation’s currency. this should make the nation’s exports more attractive to the rest of the world, and make it more difficult for its citizens to buy imports. this action is taken to ameliorate trade deficit problems. 47 economic theory indicates that the prices of exports and imports should rise with a devaluation. americans receive more pesos for dollars, so bolivian products should be more attractive to americans. increasing demand for bolivian exports should cause the peso price of exports to rise. bolivians receive fewer dollars for each peso, so american products become more expensive to bolivians in terms of pesos.2 however, economic theory suggests a gradual process, and certainly not a lock-step increase in purely domestic goods. how did this immediate adjustment phenomenon occur? bolivia is dependent on the rest of the world for imports of all kinds. the average city dweller is buying imports of all kinds. the citizenry knows by experience that this kind of devaluation will immediately make the price of all imports more expensive to them. in order to maintain standards of living, wage bargaining immediately begins. the prices of all goods at the retail level go up because of retailers’ need to buy imports for their daily consumption and inventory requirements. of course all this price movement requires a larger money supply. the government immediately accomodated the country’s need for more money by increasing the money supply by an appropriate amount. the result was a general and almost automatic inflation in which standards of living and purchasing power remained about the same. the devaluation had almost no effect on reducing imports that i could see. i have observed that weak governments respond in this way. they are not strong enough to stand against special interest groups and the threatened general strikes that could occur, which cause paralysis in the normal business operation of the country. 2 dominick salvatore, international economics, 6th ed., (upper saddle river, new jersey: prentice-hall, 1998), 533-536. 48 the third monetary note concerns the bolivian hyperinflation of 1984-85. this case has been widely reported in the financial and academic press. estimates of the inflation rate range from 35,000% to 116,000% per year.3 it is unclear what the actual inflation rate was. i was in bolivia in 1985 and saw businessmen struggling down the street with huge stacks of paper notes bound together by rubber bands trying to make a payment to the bank. i also had in my possession for many years a one million peso note which i proudly used to prove to everyone that i was a bona fide millionaire. it also cost about a million pesos to buy a cup of coffee at that time. so, in effect, everyone in bolivia was a millionaire in 1984-85. this points up the fallacy of curing unemployment and investment problems by simply printing money. hyperinflations, such as the one in bolivia, obviously can’t happen without the monetary authority printing money at an enormous rate. the causes of this situation have been discussed in many other articles. however, let me add one more factor to the picture. the country was led by a weak president named hernan siles-suazo who was a socialistic, labor-oriented president. the resulting scenario was that as inflation began to heat up, the public unions asked for even higher percentage wage increases. public unions in bolivia include miners and oil and gas workers. president siles granted these requests without blinking an eye. the question was, how to pay for this increased public payroll from the bolivian treasury. the answer was simply to print the money. this wage-demand, money-printing scenario continued for some time, along with many other factors which eventually resulted in the spectacular bolivian hyperinflation of 1984-85. 3 irvin b. tucker, economics for today, 2nd ed., (cincinnati, ohio: south-western college publishing, 2000), 418-419. rudiger dornbusch, fischer, startz, macroeconomics, 8th ed., (new york: mcgraw-hill, 2001), 428-429. 49 8 |journal for economic educators, 18(1), 2018 the ad-as model with the shadow economy gaetano lisi1 abstract this theoretical paper includes the shadow economy in the popular ad-as model and derives the main economic results for both the short-run and the long-run. this accounts for the presence of the shadow economy in countries around the world, as well its persistence over time. precisely, if the shadow economy is capable of absorbing unemployment, then in the short-run there will be a supply-side positive shock on output (the “shadow shock”). the “shadow shock” is, however, temporary; in the long-run the effect of the shadow economy on potential output is negative. key words: economic education, teaching of economics, general aggregative models, shadow economy. jel classification: a2, e10, e26, o17 introduction the aggregate demand-aggregate supply (hereinafter, ad-as) model is one of the fundamental tools in economics. it is probably the most popular and the most studied at the undergraduate level, because it allows economists to analyse – in a straightforward graphical representation – the effects of economic shocks and economic policies on three key macroeconomic variables: growth, inflation, and unemployment. also, the ad-as model is a very general and flexible framework, since it accommodates both the keynesian view (that focuses on aggregate demand over the short-run) and the classical approach (that focuses on aggregate supply over the long-run). however, while the factors which determine economic growth (such as technological progress and human capital) indirectly appear in the ad-as model (in determining the potential output), another important economic phenomenon, the shadow economy, finds no place in this very widespread and well-studied economic model. the shadow economy (also known as hidden economy, black economy, underground economy, and informal economy) refers to all economic activities that are hidden to official authorities for various reasons (such as avoiding paying taxes and social security contributions, or escaping governmental bureaucracy and regulatory burdens). the shadow economy is, by definition, a phenomenon that is difficult to measure, since it includes different types of activities: legal productive activities, illegal and criminal activities, do-it-yourself and household activities. furthermore, in macroeconomic estimates, it is often difficult to distinguish between legal 1 lecturer in economics. department of economics and law, university of cassino and southern lazio, via s. angelo, campus folcara, i-03043 cassino, fr, italy. e-mail: gaetano.lisi@unicas.it. the author wishes to thank the editor and an anonymous referee for invaluable remarks that significantly improved the paper. mailto:gaetano.lisi@unicas.it 9 |journal for economic educators, 18(1), 2018 and illegal activities.2 this is a very important shortcoming, since only legal activities contribute (if recorded) to the national wealth, thereby, increasing taxable income. figure 1. shadow economy over time and by region (average, percent of gross domestic product. source: medina and schneider, 2017) figure 1 reports recent estimates of the shadow economy for 158 countries over time for 1991-2015. two clear results emerge from figure 1. first, the shadow economy is a widespread phenomenon around the world, albeit to varying extents. second, the shadow economy is a phenomenon that persists over time. this topic, therefore, deserves to be included in the most popular and most studied macroeconomic model. indeed, the main aim of this theoretical paper is to incorporate the shadow economy into the ad-as model and to derive the main economic results, in both the short-run and the long-run, thus making this popular but “old” framework more alive. aggregate demand with tax evasion the ad-as model aims at explaining one of the most important topics in macroeconomics: short-run fluctuations over the so-called business cycle. these are the deviations of the actual 2 the size of a shadow economy has many causes, including tax burden, corruption, organised crime, government instability, low quality of political institutions, and weak rule of law (see, e.g. medina and schneider, 2017). 10 |journal for economic educators, 18(1), 2018 (real) gross domestic product (gdp) from its potential or long-run level.3 mathematically, the ad-as model consists of two functions: aggregate demand and aggregate supply. the aggregate demand function (hereinafter, ad) represents the aggregate expenditure of an economic system, namely, the sum of households’ consumption (𝐶), firms’ investment (𝐼) and public spending (𝐺):4 𝐴𝐷 = 𝐶 + 𝐼 + 𝐺 (1) the ad is a relationship between changes in a price index p (such as the consumer price index or the gdp deflator) and the amount of real gdp when the goods market and the financial markets are in equilibrium, namely, when aggregate expenditure is equal to real output (gdp), denoted by y. at a lower price level, the same nominal amount of total spending will purchase more real gdp and vice versa. therefore, the slope of the ad curve must be negative, in the tautological sense. in order to highlight the key role of the shadow economy in equation (1), as well as the strong link between the shadow economy and tax evasion (𝐸), i.e. the illegal non-payment or underpayment of tax, a simple government budget constraint is introduced into the ad-as model (in the textbooks, g is treated as an exogenous variable): 𝐺 = 𝑇 (2) 𝑇 = 𝑡 ∙ (1 − 𝜑) ∙ 𝑌 = 𝑡 ∙ 𝑌 − 𝐸 (3) 𝐸 = 𝑡 ∙ 𝜑 ∙ 𝑌 (4) where t is state revenue, 0 < 𝑡 < 1 is the flat tax rate on output y, and 0 < 𝜑 < 1 is the share of the shadow economy in total output. of course, as highlighted by equation (4), there is a positive relation between the shadow economy and tax evasion. as the shadow economy cannot be taxed, an increase in 𝜑 (and thus in e) reduces state revenues and, consequently, the quality and quantity of the supply of public goods and services (torgler, 2007). thus, public expenditure (g) falls. the government budget constraint used in this model is very standard and is identical to that of mazhar and méon (2017), except for the presence of seigniorage. mazhar and méon (2017), in fact, assume that a government has two instruments with which to finance a given level of public spending: a flat tax on output and seigniorage. this leads to a positive relation between the shadow economy and inflation. however, their budget constraint relies on the unrealistic possibility that a government can control monetary policy. that is, there is no independent central bank. in our case, therefore, the government finances a given level of public spending, especially with respect to taxes.5 when 𝜑 increases, 𝑡 should increase to preserve the existing level of public spending. hence, the shadow economy can also increase taxation, thus reducing 3 for more details about the ad-as model, see, e.g. mankiw (2015). 4 for the sake of simplicity, we consider an economy that is closed to foreign trade or, alternatively, an open economy where net exports (namely, exports minus imports) are always zero. actually, the shadow economy is primarily a “domestic phenomenon”, since in the case of foreign trade the possibility of being detected should increase. 5 a realistic hypothesis, as in some countries such as italy, where the shadow economy is a widespread phenomenon, the tax burden is heavy. 11 |journal for economic educators, 18(1), 2018 consumption. nevertheless, aggregate consumption cannot increase, since the main beneficiaries of tax evasion are the tax evaders themselves (alm and finlay, 2013). that is, individuals with higher income and ceteris paribus lower marginal propensity to consumption. finally, investment can also decrease in the presence of the shadow economy. this is usually associated with corruption, organised crime, government instability, low quality of political institutions, and weak rule of law which can discourage investors or lead to a waste of resources (through bribes, for example). figure 2. the ad with the shadow economy and tax evasion in short, all the main determinants of aggregate demand are negatively affected by the shadow economy. hence, the ad with the shadow economy – which we call ads – is lower than the standard ad (see figure 2), since ceteris paribus and for a given price index (𝑃 = 𝑃0), the aggregate expenditure of an economy with (a larger share of) the shadow economy is lower. aggregate supply with shadow employment the aggregate supply function (hereinafter, as) shows the quantity of goods and services supplied by an economy when there is equilibrium in the labour market. a simple equation is often used to describe the aggregate supply function: 𝐴𝑆 = 𝑌𝑝 + 𝛽 ∙ (𝑃 − 𝑃 𝐸) (5) where 𝛽 is a positive parameter (𝛽 > 0), 𝑌𝑝 is the level of potential gdp, and 𝑃 𝐸 is price expectations. in the short-run, when price expectations are not correct (𝑃 ≠ 𝑃𝐸), the as is upward sloping in the p-y space, meaning that when aggregate demand changes, firms adjust both price and quantity. for example, when aggregate demand increases, firms increase both price and quantity. in the long run, when price expectations are correct (𝑃 = 𝑃𝐸), the aggregate supply function is a vertical straight line at 𝑌 = 𝑌𝑝, the quantity of goods and services supplied by an economy coincides with the level of potential gdp. in the long-run, economic theory agrees that the actual (real) gdp always coincides with the potential output of the economy (𝑌 = 𝑌𝑝). hence, economic policy has no real effects and an increase in aggregate demand only increases prices. in the short-run, however, there is a potential active role for economic policy: both government and the central bank can increase 12 |journal for economic educators, 18(1), 2018 the actual level of gdp (by means of expansive economic policies that move the aggregate demand curve to the right) at the cost of higher inflation (an increase in the percentage change in the price index p). in the ad-as model, by definition, a higher level of potential gdp implies a lower natural unemployment rate. this is consistent with the empirical finding that (at least in advanced countries) productivity growth is strongly negatively correlated with unemployment in the long-run (see pissarides and vallanti, 2007). in the shadow economy, firms employ mostly unskilled labour and adopt backward technology (see, e.g., albrecht et al., 2009; la porta and shleifer, 2008). indeed, the shadow sector is very large in the poorest economies (see la porta and shleifer, 2008). economic growth is, in fact, an essential element in reducing the shadow sector, although in some cases informality can persist, in spite of economic growth (see figure 3). figure 3. gdp per capita and informal employment (source: ilo 2011) finally, the general finding of growth theory is that economic growth requires improvements in social infrastructure, a key component of which is government fiscal policy (hall and jones, 1999; romer, 2006).6 thus, an economy with more tax evasion and a shadow economy is merely a society with poor social infrastructure. therefore, long-run growth and, thus, potential output should be higher in an economy without (or with a lower share of) a shadow economy, namely 𝑌𝑝 > 𝑌𝑝 𝑆, where 𝑌𝑝 𝑆 denote the potential gdp of a society with (a larger share of) the shadow economy. 6 according to the popular definition by hall and jones (1999), social infrastructures are “institutions and policies that align private and social returns.” in short, this would correctly or otherwise infer that in countries with good social infrastructure, negative phenomena (such as corruption and crime) are uncommon. 13 |journal for economic educators, 18(1), 2018 for the sake of simplicity, assume that the slope of the short-run as curve (namely, the 𝛽 parameter) does not change for a society with a shadow economy. thus, the long-run equilibrium of the ad-as model with a shadow economy can be portrayed as in figure 4. figure 4. the ad-as model with the shadow economy in the long-run in figure 4, point a (the intersection of ad and as) characterises the long-run equilibrium of the standard version of the model; whereas, point b (the intersection of ads and as) characterises the long-run equilibrium of the model with the shadow economy. by definition, in fact, the long-run equilibrium requires that actual gdp coincide with potential gdp. as previously stated, in the long-run the shadow economy has negative effects on potential gdp. in spite of that, the presence (in countries around the world) and the persistence (over time) of the shadow economy should involve the existence of (potential) positive effects on output, at least in the short-run. it is noteworthy that unemployment may be absorbed by shadow employment (see, e.g. boeri and garibaldi, 2002, 2005; la porta and shleifer, 2008). shadow employment (or undeclared work) refers to the use of labour without an official work contract. note that, registered (official) firms can also make use of shadow employment. firms that operate simultaneously both in the regular and in the shadow economy (by using undeclared work) are termed “moonlighting firms” (busato et al., 2005; ciccarone et al., 2012). in this context, if firms (for fiscal and economic reasons) increase the use of undeclared work and, thus, shadow employment is capable of absorbing unemployment, there could be a positive effect on both employment and output, thereby engendering a kind of supply-side positive shock, or “shadow shock”. if this happens, the short-run as curve in the presence of the shadow economy moves downward in the p-y space and, thus, 𝑌 > 𝑌𝑝 𝑆 . considering equation (5), therefore, the “shadow shock” is associated with a decrease in 𝑃𝐸. by using shadow employment, indeed, firms expect to reduce their labor cost. this completes the extension of the ad-as model. now, the main economic results are derived for both the short-run and the long-run. 14 |journal for economic educators, 18(1), 2018 the ad-as model with or without the shadow economy: a comparison we compare two equilibria that only differ with respect to the share of the shadow economy, since the comparative statics of the model (the effect of changes in exogenous variables) do not change with respect to the standard version of the ad-as model. figure 5. the ad-as model with and without the shadow economy: short-run and long-run for the sake of comparison, there are no other economic shocks aside from the shadow economy. thus, in an economy without a shadow economy (𝜑 = 0), the long-run equilibrium coincides with the short-run equilibrium (point a in figure 5). as mentioned above, in an economy with tax evasion and shadow employment (0 < 𝜑 < 1) there could be a positive economic shock on the supply side (the “shadow shock”). this “shadow shock” is, by definition, temporary, since there is no change in the potential level of gdp. thus, point c in figure 5 identifies the short-run equilibrium of the ad-as model with the shadow economy (the short-run as curve in the presence of the shadow economy – the dotted line in figure 5 – moves downward). in the short-run, therefore, in the presence of tax evasion and shadow employment (point c in figure 5), the effect on output is positive. of course, the size of this positive effect on output depends on the changes in both the ads and the as. precisely, if the positive effect of shadow employment on the actual level of gdp is significant (as falls considerably in the presence of the shadow economy),7 then point c could potentially be a better situation than point a, since the cost of living is lower and purchasing power is higher. instead, in the long-run (compare points a and b in figures 4 and 5), as suggested by empirical evidence (see, e.g. la porta and shleifer, 2008), in the presence of the shadow economy, the potential output is lower, since unproductive shadow firms use unskilled labour and adopt backward technology. therefore, an intertemporal socioeconomic dilemma emerges for policymakers: (1) if the main goal of policymakers is economic growth, they should devote their greatest efforts to fighting against the shadow economy (tax evasion and corruption, first of all). also, 7 according to pyle (1989), the supply-side effects generated by the existence of a shadow sector may be more substantial than the aggregate demand effects. 15 |journal for economic educators, 18(1), 2018 policymakers should adopt other economic policies that are compatible with this purpose, such as reducing both the tax burden and inefficient public expenditure, improving governance and the quality of political institutions, and strengthening the rule of law. finally, policymakers should devote more economic resources to investing in both human capital and research and development. of course, the achievement of these goals would require a lot of effort and a very long time. (2) instead, if the policymakers look especially at the present, the shadow economy could be tolerated to some extent. in some countries, this seems to happen. in the short-run, in fact, shadow employment could increase both employment and output. this simple extension of the ad-as model is capable of explaining the presence of the shadow economy in countries around the world, as well its persistence over time. conclusion empirically, the shadow economy is a widespread phenomenon around the world that persists over time. thus, the effects of a shadow economy deserve study at the basic level of introductory courses in economics. more precisely, the benefit of including the shadow economy in one of the most studied macroeconomic models at the undergraduate level, the ad-as model, is twofold. from a theoretical point of view, the inclusion of tax evasion and shadow employment in the ad-as model is straightforward, but the results are non-trivial. from an economic point of view, this paper makes this popular but “old” framework more alive. this simple extension of the ad-as model is able to account for the presence and persistence of the shadow economy, despite its negative effects on economic growth. references albrecht, j., navarro, l., and vroman, s. (2009). the effects of labour market policies in an economy with an informal sector, economic journal, 119, 1105–29. alm, j., and finlay, k. (2013). who benefits from tax evasion? economic analysis and policy, 43(2), 139–154. boeri t., and garibaldi p. (2002) shadow activity and unemployment in a depressed labour market, cepr discussion papers, 3433, june. boeri t., and garibaldi p. (2005) shadow sorting, nber chapters, in: frankel j., pissarides c. (eds) nber international seminar on macroeconomics. mit press, 125–163. busato, f., chiarini, b., de angelis, p. and marzano, e. (2005). capital subsidies and the underground economy, economics working paper no. 2005-10 (aarhus university). ciccarone, g., giuli, f., and marchetti, e. (2012). underground labor, search frictions and macroeconomic fluctuations, working papers of economics no. 2012-0159 (university of roma tre). hall, r.e., and jones, c.i. (1999). why do some countries produce so much more output per worker than others? quarterly journal of economics, 114 (1), 83–116. international labour organization, ilo (2011). statistical update on employment in the informal economy. la porta, r., and shleifer, a. (2008) the unofficial economy and economic development, brookings papers on economic activity, 39(2), 275–363. 16 |journal for economic educators, 18(1), 2018 mankiw, n. g. (2015). essentials of economics, 7th edition, cengage learning emea. mazhar, u., and méon, p.-g. (2017). taxing the unobservable: the impact of the shadow economy on inflation and taxation, world development, 90, february, 89-103. medina, l., and schneider, f. (2017). shadow economies around the world: new results for 158 countries over 1991-2015, cesifo working papers, number 6430. pissarides, c. a., and g. vallanti (2007). the impact of tfp growth on steady-state unemployment, international economic review 48(2), 607–40. pyle, d.j. (1989). tax evasion and the black economy, palgrave macmillan. romer, d. (2006). advanced macroeconomics, third edition. mcgraw-hill. torgler, b. (2007). tax compliance and tax morale: a theoretical and empirical analysis, edward elgar publishing. microsoft word jeewin04f.doc journal for economic educators • volume 4 • number 2 • winter 2004 a course on economic justice: the intersection of philosophy and economics james l. barbour and nim t. batchelor* abstract the process of teaching a topic that inhabits the upper reaches of both philosophy and economic theory, while swooping as near the earth as political policy, is both exhilarating and terrifying. to do it well is indeed are.1 we present our approach, some of the characteristics and thoughts from our students, and some of the insights that we developed along the way. introduction twice in the past five years we arranged to jointly teach a course in economic justice: colleagues from the philosophy and economics departments. we believe that our experiences in preparing and teaching this course together led to insights that we believe others will find valuable. this paper will describe our approach, some of the characteristics and thoughts from our students, and some of the insights that we developed along the way. the majority of our students come to us with a set of unorganized intuitions, emotions, attitudes, prejudices, and sentiments. some of these are vaguely organized either in harmony with or in opposition to the political persuasion of their parents. there is a strong presumption in favor of capitalism. for the most part, our students are simply parroting the rhetoric of their contemporary economic/political culture. of course we understand that the particular beliefs and * james l. barbour, department of economics, martha and spencer love school of business, campus box 2075, elon university, elon, nc 27244, barbour@elon.edu; nim t. batchelor, department of philosophy, elon college of arts and sciences, campus box 2110, elon university, elon, nc 27244. 1 apologies are probably appropriate for this unabashed lifting of j. m. keynes’s famous “rare bird” quotation. the full text, delivered as an homage to alfred marshall in keynes’s eulogy, is “in another respect the diversity of his nature was pure advantage. the study of economics does not seem to require any specialised gifts of an unusually high order. is it not, intellectually regarded, a very easy subject compared with the higher branches of philosophy and pure science? yet good, or even competent, economists are the rarest of birds. an easy subject, at which few excel! the paradox finds its explanation, perhaps, in that the master-economist must possess a rare combination of gifts. he must reach a high standard in several different directions and must combine talents not often found together. he must be mathematician, historian, statesman, philosopher—in some degree. he must understand symbols and speak in words. he must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought. he must study the present in the light of the past for the purposes of the future. no part of man’s nature or his institutions must lie entirely outside his regard. he must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician.” (keynes, pp. 32122) journal for economic educators • volume 4 • number 2 • winter 20042 attitudes of our students are primarily a manifestation of contemporary american culture and that students in other parts of the world (or perhaps even in other parts of the united states) would have a different set of “dogmatisms.” however, we suspect that the basic nature of the 18-year-old is fairly consistent across cultures. it is likely that a similar set of attitudes would arise in any class, manifesting themselves quite differently from place to place. when it comes to the source or content of their moral commitments, our students are mostly inarticulate. they lack either the vocabulary or the habit of articulating the basis for their beliefs regarding economic policy or substantive questions of economic justice. they want prosperity—first and foremost for themselves. they favor equality of opportunity only in the sense of prospective nondiscrimination. they are deeply resistant to the suggestion that there is any structural bias that operates to the advantage of the wealthy. they deny that differences distributed by the natural lottery are features that require institutional amelioration. they deeply hold that they are entitled to or deserve the advantages acquired as a result of being born into privilege or with superior natural assets. they adopt an attitude something like destiny or fate regarding the de facto current situation. their most deeply held moral intuition is that people deserve what they have worked to achieve and that to deprive them of it, to tax it, or to redistribute it is unjust. approach to teaching we understand that we are dealing with enduring philosophical problems. we did not fall into the trap of believing that we have the answers or that there is a deductive argument that establishes one view over all others. our aim was not to establish one perspective or another as true. rather, we sought to deepen our student’s understanding of their antecedent intuitions and to develop their capacity to appreciate fresh considerations. in perry’s (1970) framework, we get them when they are somewhere between dogmatic and entirely relativistic. in short, they have truth. we see it as our task to disabuse them of the notion that truth is so easy or so facile as they assume. we began by laying out several positions in the abstract. we thought that if we left our students with a thorough knowledge of theorists and little else, then we would have failed. it is critical that the students come away with an appreciation for, and the ability to engage meaningfully with, policy and real-world issues of justice and distribution. our responsibility was to create conditions in which students could move well beyond current social discourse and toward a deeper appreciation of the foundational principles that support various approaches to today’s problems. we sought to mildly destabilize everyone’s capacity to be dogmatic about anything. we sought to help them see in multiple shades of gray. to accomplish this required a familiarity with the literature; a genuine engagement with the issues; a nondogmatic attitude; focus on the students’ development and learning; and the courage to expose our own confusions, doubts, worries, and ambivalences. our approach was to think of ourselves as “master students.” we have more training, we have read more broadly, and we have years of experience coping with these issues, but we most assuredly do not have the answers. from there, we simply invited students to join us in the struggle of engaging meaningfully with policy and real-world issues of justice and distribution. our assumption was that, as professors, our struggles would simply be a more articulate and slightly more systematic example of the kinds of intellectual struggles that our students would or should be enduring as they read, thought through, and discussed the various texts we placed before them. courses in economic justice must, by their nature, deal with broad and various issues of the human condition. the specific topics will vary course by course. in our course, we chose as journal for economic educators • volume 4 • number 2 • winter 2004 3 paramount: income and wealth, efficiency, natural lottery, inheritance, desert (?), positive and negative externalities, public and private goods, determination of the role of government, and how human nature manifests itself in economic activity. to approach these topics, we adopted some texts and techniques that we want to briefly describe. we selected bellamy’s novel looking backward for two main reasons. first, it introduced many of the above listed considerations. second, it compelled most of our students to question their culturally acquired dogmatic acceptance of unfettered capitalism and individualism. it reveals capitalism as a system based on seeing individuals as engaged in cutthroat competition against one another. this vision is contrasted with a conception of individuals relating to one another on the basis of brotherhood and cooperation. this vivid description of an alternative social structure was important because it enabled our students to step into that world and then to see our society with new eyes. this imaginative exercise engaged our students both theoretically and emotionally. it was a very powerful and effective introduction to the themes and aims of our course. we chose friedman’s capitalism and freedom to articulate the other pole in the individualist/communitarian spectrum. friedman lays out fundamental arguments for competitive free-market capitalism. additionally he provides students with smith’s minimalist state— government as the enforcer of contracts, provider of the common defense, and guarantor of individual liberties (including private property). friedman’s individualism stands in stark contrast to bellamy’s communitarian framework where government plays a much larger role. friedman allows students to see competition as the best way to achieve liberty and the general welfare. finally we used a standard anthology, justice and economic distribution, to introduce our students to abbreviated versions of rawls’ a theory of justice and nozick’s anarchy, state and utopia. we felt that any study of economic justice after the middle of the 20th century must include the rawls-nozick debate. these readings were selected because (beyond the obvious issue of completeness) they provide the philosophical framework within which the issue of justice must be placed. from these two we were able to draw the philosophical underpinnings of both bellamy and friedman. we did not focus on rawls and nozick in the typical theoretical manner. rather, we used their work to entice our students into thinking much more systematically and coherently about the foundations of their initial intuitions. rawls and nozick provided students with a richer conceptualization of issues and thus greater refinement in the formulation and expression of their own, now more subtle, thoughts. we supplemented these texts with short readings on utilitarianism and various simulations, speakers, and other assorted articles. the class was conducted in an informal conversational style—both of us present at all times. we would present an issue or an article taking divergent positions and encouraging students to think carefully while joining in the debate we had orchestrated. noteworthy among the supplementary materials were the case of slavery reparation and the rawls game simulation. the essential argument in the slavery reparation case is that many years ago the federal and state governments, public corporations, and private individuals were the direct beneficiaries of slave labor. there is an outstanding moral debt. the responsible parties are identifiable. the country as a whole was enriched on the backs of slaves. the question of slavery reparations is especially fruitful because it involves so many important elements of the course. in particular, students are compelled to confront the legacy of structural injustice. that is, they must begin to come to grips with the notion that the current economic distribution is not the result solely of desert and effort, but also involves history and accidents of birth. we also employed an active simulation. we chose the rawls game. we integrated two variations of this game—one from green, the other from moulder. this simulation was especially journal for economic educators • volume 4 • number 2 • winter 20044 helpful in assisting students to understand rawls’ notion of a veil of ignorance and that a hypothetical social contract is a way of uncovering foundational principles of justice. lessons learned we want to briefly share a few insights that we acquired as a result of having taught this course. everyone has, we presume, from time to time come to insights that strike one as novel or that help one to a larger than usual feeling of intellectual progress. it is always difficult to know whether others will share this sense of novelty. however—following our practice of revealing our half-baked ideas in the hopes that others might gain thereby—in this section, we will describe two types of insights. first, we will describe some observations concerning our students, their beliefs, and our teaching. second, we will share some insights concerning our personal intellectual advances and our collaborative quest. • students have a tendency to radically discount the contributions of others to their achievements. they take too much credit for their successes and too little blame for the failures. this connects to rawls’s discussion of the natural lottery. this question reveals an inability to see the historical conceptualization of contemporary issues and relations—in particular, whether capitalism is a neutral and fair system that rewards those who work hard to achieve the rewards that they receive. • social construction, especially when driven by tastes, also creates relative poverty. some years back, in an address to the annual meetings of the american economic association, lester thurow related the hypothetical experience of classical musicians in two separate societies. in the first the general public had no taste for classical music and the musicians were poor. in the second the general public had great love for classical music and the musicians were, consequently, rich. their circumstance had nothing to do with their ability or with their merit – their well-being was purely the consequence of the tastedriven social conception they happened to call home. • the saying attributed to winston churchill2—“if you are not a liberal until you are thirty, you do not have a heart, and if you are not a conservative after thirty, you don’t have a brain”—compels us to ask, “what ever happened to the radicalism of youth?” we find that our students are more conservative than their parents. this is seen, for example, in the fact that our students were much more receptive to friedman than to bellamy. • our students showed absolutely no awareness of the risks of unrestrained capitalism. the desire for balance and rich debate constantly led us to detail these limits. • our students struggled in their attempt to provide systemic organization to their views. consistency and the interrelatedness of views constituted an especially difficult challenge. • our students were deeply opposed to affirmative action policies. according to them, any policy that attempts to adjust for past discrimination or to account for prior disparity is unjust. 2 the source and the actual quote elude us. it is variously attributed to churchill, clemenceau, and g. b. shaw, but most frequently to churchill. the text varies quite a bit, from “anyone who is not a socialist until 30 has no heart; anyone who is not a conservative after 40 has no brain,” to “any man who is not a liberal at 21 has no heart and any man who is not a conservative at 40 has no brain.” the sentiment, however, is clear, whoever said it and however it was said. journal for economic educators • volume 4 • number 2 • winter 2004 5 turning now to personal tidbits. the conceptualization of “liberty” and “property” and their interrelation is near to the core of many of the most foundational issues. • it is important to appreciate that there is a linkage between your conception of human nature and your economic paradigm. some prefer individualism and competition, and that leads them to libertarianism. others prefer brotherhood and cooperation/love, and this leads them to communitarianism. • one of our students pointed to something that we feel deserves more exploration. the christian professor tended to favor libertarianism while the atheist tended to favor the communitarian conception of brotherly love. • we were particularly pleased with the bellamy novel and slightly disappointed with friedman’s book. the next time we teach this course, we will be considering the writings of ayn rand, due to the more nearly accessible nature of the material. • although we used rawls to provide philosophical depth to bellamy’s novel and nozick to provide additional depth to friedman, thus covering both poles of a spectrum, we were somewhat disappointed with our efforts to provide students with the practical ability to apply their acquired insights to current real policy statements or issues. • we feel that the concept of “charity” is a notion that deserves additional exploration and would likely connect to many of the central aspects of our course. • there is a growth imperative in practical and theoretical economic thought. but if growth entails larger population, environmental degradation, the depletion of non-renewable natural resources, and increased pollution, then we have a real problem as we look to the future. the environmental movement raises serious issues. it is unclear whether “sustainable development” is a viable response to this concern. it is also debatable whether this is a genuine dilemma. whatever the case may be, this is a topic that we need to explore in greater depth in the future. some final thoughts: of course it would be helpful to actually survey the students to see if our intuitions and hunches about their initial positions and attitudes are, in fact, correct. it is our intention to do so at some point in the future. however, this overview is just that: an overview from which we will gain a better perspective so that we might proceed along a more fruitful path in the future. additionally there is validity to the point that we should have our students analyze and criticize the works of economists and philosophers like marx, russell, tawney, and keynes. this exercise would help them to categorize their thoughts and, perhaps, lend depth to their positions. we have discussed this at some length and are of the opinion that working with a more varied reader than the one we have used is likely to be a good idea. we will pursue this as well as the questions of position and growth noted above. all in all this has been a very fruitful activity, both for our students and for us. of the former we are hopeful, and of the latter we are certain. references arthur, john, and william h. shaw. 1991. justice and economic distribution. 2nd ed. englewood cliffs: prentice hall. bellamy, edward. 1966. looking backward: 2000-1887. new york: penguin books. friedman, milton. 1962. capitalism and freedom. chicago, university of chicago press. green, ronald m. 1986. “the rawls game: an introduction to ethical theory.” teaching philosophy 9 (1): 51-60. journal for economic educators • volume 4 • number 2 • winter 20046 keynes, j. m. 1924. “alfred marshall, 1842-1924.” economic journal 34 (135, september): 311372. lamont, julian. 1979. “distributive justice.” stanford encyclopedia of philosophy (http://plato. stanford.edu/entries/justice-distributive). moulder, james. 1987. “playing with justice: an introduction to rawls.” teaching philosophy 10 (4, december): 339-344. perry, w. g. 1970. forms of intellectual and ethical development in the college years: a scheme. new york: holt, rinehart & winston. 25 | journal for economic educators, 17(1), 2017 25 the importance of emphasizing the intertemporal consumption model in intermediate microeconomics stephen norman douglas wills1 abstract we show that emphasizing the intertemporal consumption (ic) model in intermediate microeconomics can help connect the content to intermediate macroeconomics, econometrics, and finance. this also helps the instructor relate modern macroeconomic theory to topics discussed, typically incorrectly, in the media. key words: intertemporal consumption model; microeconomics teaching; macroeconomics teaching jel classification: a22, d90 introduction regardless of one’s views on modern macroeconomics, few would dispute that the subject as is now taught in graduate schools is consistent with microeconomic theory. indeed, one could argue that the hallmark of all modern economics is the primacy of the forward-looking utility maximizing individual. decades ago the impact of this approach overhauled the finance curriculum. while graduate macroeconomics programs have long reflected micro-foundations, it has taken considerably longer for that impact to be felt in undergraduate macroeconomics content. however, with the advent of barro (2000), mankiw (2013), williamson (2013), jones (2014), and many others, undergraduate macroeconomics is now much more consistent with that taught in graduate schools. in this paper, we argue it is time for intermediate microeconomic textbook authors to support this change and put more emphasis on the one model that explicitly models the forwardlooking part of macroeconomics, finance, and econometrics: the intertemporal consumption (ic) model. in other areas, intermediate-level microeconomic text authors have done a good job of incorporating changes in graduate school curriculums. insights from game theory are now often incorporated throughout the text versus the traditional treatment of including an optional separate chapter. however, nearly all textbooks still present indifference curve analysis in terms of a choice of goods at a single point in time. yet many of the new insights in macroeconomics involve rational choice across time, and for finance, it is always choice across time.2 1 stephen norman, associate professor, university of washington – tacoma. douglas wills (corresponding author), associate professor, university of washington – tacoma. 1900 commerce street, tacoma, wa 98402 2 our argument implies that intermediate microeconomic theory should be a pre-requisite for intermediate macroeconomic theory. this reflects the development of economic theory from the days when microeconomics and macroeconomics were not as consistent as they are today. we thank a referee for raising this important point. 26 | journal for economic educators, 17(1), 2017 26 to be clear, many textbooks, although far from all, cover the intertemporal consumption model. however, most introduce the model in later chapters, often combined with subjects such as risk or other “optional” topics. wetzstein’s comprehensive microeconomic economic theory: concepts and connections (2013) doesn’t introduce the ic model until page 792 in chapter 19. in the excellent mathematical approach to intermediate microeconomics, mathis and koscianski’s (2002) microeconomic theory: an integrated approach, the model isn’t introduced until page 586 as part of chapter 22, the third from the last chapter in the text. also in the third to last chapter is landsburg’s (2014) treatment in price theory and applications 9th ed. bernheim and whinston (2008) move the model up to chapter 10, while perloff (2008) microeconomics: theory and applications with calculus doesn’t discuss the ic model at all nor does the popular pindyck and rubinfeld (2009). the model is also completely absent from the recently released and highly rigorous intermediate microeconomics: a tool-building approach written by samiran banejee (2015). it is also not found in most managerial economics textbooks (e.g. wilkerson, 2005). two textbooks that have given the model prominence are varian (2014), intermediate microeconomics a modern approach, and browning & zupan (2004) (formerly browning & browning) microeconomic theory and applications.3 the former dedicates a chapter to intertemporal consumption while the latter includes it in the applications chapter immediately following the introduction of indifference curve analysis. we argue that, because of its importance in so many economic fields and topics, the ic model should be a core topic of all intermediate microeconomics courses. further, it should be presented and emphasized when indifference curve analysis is introduced. given that so many students who take intermediate microeconomics are finance majors, to ignore this model misses an opportunity to directly relate economic theory to core models in finance.4 adding the ic model to a standard intermediate microeconomics text is a relatively trivial addition, both in terms of content and level of difficulty, as it is a rather straightforward extension of the two-good same period model. the strength of the argument is how it enhances an intermediate macroeconomic class and how many topics it helps students understand once they are familiar with the model. we provide those examples below after we lay out the standard ic model. intertemporal consumption model5 as mentioned, once students are introduced to indifference curve analysis with consumers maximizing utility across goods at a point in time, it is a relatively simple to extend the utility maximization approach to choice across time. with the simplifying assumptions of a two-period world (allowing graphical depiction) and the ability to borrow or lend at the same rate (allowing for a linear budget constraint), the analogy of a choice of goods at a point in time is complete. the model can easily be extended to include an endowment, different interest rates, and more time periods.6 none of these augmentations is essential for deriving several important core concepts. suppose an individual maximizes utility, 𝑈(𝐶1, 𝐶2), with 𝐶1 being consumption in the first period and 𝐶2 being consumption in the second and last period. incomes in both periods, 𝑌1 and 𝑌2, are known, as is the interest rate, 𝑖. figure 1 shows that the slope of the budget constraint, – (1 + 𝑖), is the relative price of 𝐶1 and 𝐶2 (analogous to 𝑃𝑥 /𝑃𝑦 in the two-good model). the 3 the authors thank a referee for the varian reference. 4 for an example of how it can be applied to finance see norman, schlaudraff, white, and wills (2012). 5 for a more complete derivation of the model see norman, schlaudraff, white, and wills (2012). 6 the range of interest rates can be extended to negative rates, relating the model to current monetary policies. the authors thank a referee for this point. 27 | journal for economic educators, 17(1), 2017 27 optimal consumption in each year, given income and the interest rate, is 𝐶1 ∗ and 𝐶2 ∗. from this point, one could perform the typical comparative-statics exercises common in any intermediate microeconomics course. figure 1: intertemporal consumption model relevance to intermediate macroeconomics a challenge for all economics’ instructors is to make the course they teach relevant to the real world. this is particularly true for those teaching modern intermediate macroeconomics where economics fallacies are common in the popular press and the subject itself is often criticized for being too abstract and unrealistic.7 this is particularly true in finance.8 as such, it is important that the core of modern macroeconomic theory be grounded in concepts that students already understand. william becker (2000) writes that “the primary goal of undergraduate courses in economics is to enable students to think like economists … but even college-educated high school teachers of economics have beliefs about economics that are more highly correlated with those of journalists than with those of economists…” a truly successful course is one that offers students the preparation they need to identify errors in economic analysis in the popular press. we argue that the more familiar a student is with the ic model the more intuitive and relevant modern macroeconomics becomes. many core macroeconomic concepts such as the consumption function, the permanent income hypothesis, ricardian equivalence, and the euler equation, can be quickly and intuitively derived using the ic model. by doing so, the model puts these concepts within the familiar and powerful constrained utility maximizing framework developed in intermediate microeconomics. 7 see romer (2016), trouble with macroeconomics, https://paulromer.net/the-trouble-with-macro/ 8 the popular finance writer james grant describes macroeconomics as “ideology disguised with differential calculus” (http://www.powerlineblog.com/archives/2016/09/economic-macroaggression.php) * * 28 | journal for economic educators, 17(1), 2017 28 to demonstrate the core idea of a consumption function, we use the basic ic setup. suppose an individual has the following intertemporal utility function, 𝑈 = 𝐶1𝐶2 𝛽 , with 𝛽 < 1. when presented in a lecture it could be pointed out that 𝛽 depicts fisher’s impatience hypothesis. the equation for the budget line is easily derived as 𝐶2 = 𝑌2 + (𝑌1– 𝐶1)(1 + 𝑖). the constrained optimization point is the simultaneous solution of the tangency condition with the budget constraint.9 the tangency condition is 𝑀𝑈1 𝑀𝑈2 = 𝐶2 𝛽𝐶1 = 1 + 𝑖. (1) solving for 𝐶2 and substituting into the budget constraint implies that 𝐶1 ∗ = ( 1 1+𝛽 ) (𝑌1 + 𝑌2 1+𝑖 ) (2) is the optimal consumption in period one. as can be seen from equation (2), optimal consumption is a function of current income, future income, and the interest rate (plus the extent to which you prefer current consumption over future consumption, 𝛽). since optimal savings is simply 𝑆1 ∗ = 𝑌1 − 𝐶1 ∗ , (3) this implies that optimal saving, at any given point in time, is a function of current and future income plus interest rates. as such, a specific savings rate cannot be reported as being “too little” or “too much” when compared to some other time period, as is the common practice in the media. this also lays the foundations for the role of expectations (of future income) in determining current consumption and provides a key insight on why central bank officials often focus on interest rates to affect behavior today. the second important macroeconomic concept that can easily be understood from equation (2) is the permanent income hypothesis. by the time students are taking intermediate macroeconomics they have likely been exposed to the concept of present value at least once. as such, the second term, 𝑌1 + 𝑌2 1+𝑖 , will be instantly recognizable as the present value of lifetime income. as jones (2014, pg. 448) articulates, this makes the concept of permanent income precise and in terms of something a typical student understands. a third concept, ricardian equivalence, becomes a much more plausible and powerful concept when derived within the optimizing intertemporal consumption framework. the typical introduction of the concept in which increases in deficit financed government spending (or tax reduction) will not have any effect on current consumption, sounds wildly implausible. few students believe that individuals will increase savings to offset future tax increases. however, when put into the two period optimizing model, the ineffectiveness of such policies is obvious as the budget constraint does not shift.10 as such, it lays out the necessary conditions for these policies to be effective. the fourth concept that immediately falls out of this model, and one that lays the foundations for more advanced macroeconomics, is the euler equation. from equation (1), rearranging the components of the optimal choice gives: 𝐶2 𝐶1 = 𝛽(1 + 𝑖). (4) the growth rate in consumption is related to one’s degree of impatience and interest rates. as clearly discussed by jones (2014, pg. 446), this explains why interest rates and an economy’s 9 this can be solved either through substitution or standard lagrangian techniques. 10 any increase in income, t, in the current period must reduce income in the future period by (1+i)t. as such, the intertemporal budget line does not change. 29 | journal for economic educators, 17(1), 2017 29 growth rates are similar. while the euler equation implications are beyond the scope of this paper, this demonstrates how many macroeconomic concepts can be developed both intuitively and rigorously from the ic model. conclusion including the ic model in intermediate microeconomics offers many benefits at a very low cost. first, by linking the material to the content of a wide range of future courses, it demonstrates the internal consistency of economic theory. secondly, it helps motivate many important concepts of modern macroeconomic theory such as the development of the consumption function, the permanent income hypothesis, ricardian equivalence, and the euler equation. third, it can be used as the basis for applied examples that can help students identify errors in the macroeconomic analysis made by the popular media. fourth, it directly demonstrates how modern finance is based on economic theory. references banerjee, samiran. 2015. intermediate microeconomics a tool-building approach. routledge. barro, robert j. 2010. intermediate macro. south-western cengage learning. becker, w. 2000. “teaching economics in the 21st century.” journal of economic perspectives, 14: 109-119. bernheim, b. douglas and michael d. whinston 2005. microeconomics. mcgraw-hill/irwin. browning, edgar k. and mark zupa. 2004. microeconomic theory and applications. 8th ed. wiley. jones, charles i. 2014. macroeconomics. 3rd ed. w.w. norton & co. landsburg, steven e. 2014. price theory and applications 9th ed. cengage learning. mankiw, n. gregory. 2013. macroeconomics 8th ed. worth publishing. mathis, stephen a. and janet koscianski. 2002. microeconomic theory: an integrated approach. prentice-hall. norman, s., wills, d., schlaudraff, j., and white, k. 2013. "deriving the dividend discount model in the intermediate microeconomics class." journal of economic education. 44: 58-63. perloff, jeffrey m. 2008. microeconomics: theory and applications with calculus. pearson/addison-wesley. pindyck, robert s. and daniel l. rubinfeld. 2009. microeconomics 7th ed. pearson prentice hall. varian, hal r. 2014. intermediate microeconomics a modern approach 9th ed. w.w. norton & co. wetzstein, michael e. 2013. microeconomic theory: concepts and connections. 2nd ed. routledge. williamson, stephen d. 2013. macroeconomics. 5th ed. prentice hall. 16 |journal for economic educators, 22(2), 2022 inventories in gdp: a classroom learning strategy julien picault1 abstract the gross domestic product (gdp) is a component of macroeconomics courses that is widely used by economists and the society alike. however, many students find it difficult to understand what gdp encompasses. the understanding of the concept can be facilitated by a tool that explains the specific spending categories in the gdp identity. this study presents a teaching strategy and tool to facilitate students' learning of the role of inventories in the gdp and how inventories can be used concurrently with other spending categories, that is, consumption (c), investment (i), government expenditure (g), and net exports (nx). it presents four scenarios in which inventories are used as a corrective mechanism to solve the temporal problem that the good produced in one year and sold in another create. by using this tool, the students can quickly and fully understand the role of inventories in gdp calculations. key words: gdp, inventories, spending, teaching strategy jel classification: a2, a20, a21, a22 introduction the gross domestic product (gdp) is a key concept in a macroeconomics course. it is widely used by economists and the society at large. it is typically presented using the expenditure approach: y = c + i + g + nx. although gdp is a widely used concept, students find it challenging to understand what it encompasses. for instance, wolla (2018) discusses typical misconceptions about net exports (nx) and, more specifically, the interpretation of subtracting imports from the gdp identity. while subtracting imports is a corrective tool to remove the influence of imports from other spending categories, i.e., consumption (c), investment (i), and government expenditure (g), it is often misinterpreted by students as imports reducing the total value of gdp. to overcome this problem, wolla (2018) presents an effective teaching strategy that aims at rectifying this misinterpretation and presenting students with the correct interpretation of the (non-)influence of imports on gdp, as implied in its definition. although i could not find studies that clarify the role of inventories for students, other examples of such clarifications of economic concepts include those by dupont & durham (2021) and picault (2016, 2021). imports are not the only aspect of the gdp identity that can be misinterpreted by students. the role of inventories in investment expenditure is another source of confusion. in gdp calculations, inventories are a tool used to resolve the temporal problem that the goods produced in a year and sold in another create. for instance, all the other expenditure categories in the gdp identity must be considered for a specific period, typically a year. however, inventories require considering at least two periods, which can confuse the students. the inventories 1 professor of teaching, department of economics, philosophy & political science, the university of british columbia, okanagan campus, 3333 university way, kelowna, bc, v1v 1v7, canada. julien.picault@ubc.ca mailto:julien.picault@ubc.ca 17 |journal for economic educators, 22(2), 2022 subcategory is necessary because the gdp measures the current production, not sales (pritzker et al., 2018). goods produced in a year but not sold in the same year cannot be directly observed in the market transactions during a production year that is considered for gdp calculations. instead, these transactions will be recorded in the following year when these goods are sold. like the imports subcategory described by wolla (2018), the inventories subcategory can be interpreted as a corrective mechanism allowing goods to appear in the gdp of their production year instead of their consumption year, which is another cause of confusion. this study presents a teaching strategy to clarify this confusion. it proposes an activity using a table that the students can complete when presented with a problem involving inventories. it offers students a tool that will help them understand how inventories work, and thus, gain conceptual clarity. the activity also shows that inventories can be used for consumption as well as investment, whether purchased by domestic or foreign consumers, companies, and the government. the paper is organized as follows. the table section explains the tool (a table) that is used for the purpose, its contents, and an illustration of how it should be completed. the activity section explains how to prepare the activity for a lesson either online or in the classroom, and the various scenarios for which the tool should be used. the conclusion section details the time taken for the activity and the results of the activity. the table presentation table 1 was designed to analyze how and when inventories affect various spending categories in the gdp.2 table 1: gdp table gdp = c + i + g + nx +e im year 1 gdp year 2 when a good is produced in one year and sold in another, its value is reflected in the gdp of the year of its production (year 1), and not in the year when it was sold (year 2). however, the sales transaction in year 2 implies that some spending categories are affected. therefore, the table represents both the years. the columns represent the spending categories where students can record any change occurring in both years. for instance, in year 1, when 2 this table is useful to analyze various scenarios that affect the spending categories in the gdp. i developed this tool specifically to show the effect of inventories, but noticed that students used it for other scenarios not requiring the use of inventories. 18 |journal for economic educators, 22(2), 2022 goods are placed in inventory, both the gdp and investment will show an increase. in year 2, the investment is negatively affected because the goods leave the inventories. depending on who purchased those goods and what they purchased them for, at least one spending category from consumption, government expenditure, and exports will show a corresponding increase. therefore, students can observe that these two records compensate for each other and thus, the gdp remains unchanged in year 2. an illustration you purchase this year at your local supermarket a good that was domestically produced last year. its value is $1000. table 2 shows how this scenario can be analyzed and easily depicted by following the representation in table 1. table 2: example gdp = c + i + g + nx +e im year 1 – gdp $1000 $1000 year 2 $0 $1000 $1000 in the first year, the good is produced but not sold. therefore, the investment increased by $1000 as the good is placed in inventory. no other spending category is affected by this, implying that the gdp increases by $1000. in year 2, the good is sold. therefore, it is removed from the inventories, subtracting its value from the investment category. the transaction is now recorded in the consumption category as the good is sold to a consumer. therefore, when the two effects are added up, the gdp shows no change in year 2. while analyzing year 1 and 2 simultaneously, the table shows that gdp has increased only in year 1 (production year), the consumption has increased in year 2 (consumption year), and the inventories were only used as a corrective mechanism for consumption and production values, with no net effect on the investment category. an additional benefit of breaking the gdp into columns is that students can observe and learn that there are circumstances where the components of gdp can change, even if gdp doesn't. the activity preparation after explaining the definition of inventories, table 1 shall be presented to students with the above example. the students shall then be invited to complete the table using different scenarios. if the course is in-person, the simplest way is to prepare a template that the students can use to analyze a scenario involving inventories and distribute its printed copies to students 19 |journal for economic educators, 22(2), 2022 for direct practice on the tables provided in them.3 to conduct this activity online, i usually email the slides before the lecture; the students can print them at home or use their electronic devices to complete the tables directly on the screen. scenarios the four scenarios explained below allow students to use inventories in the four spending categories, i.e., consumption (c), investment (i), government expenditure (g), and net exports (nx). using the same method four times helps students develop familiarity with the method, and clarify the concept of inventories completely. i suggest discussing each scenario independently. for each scenario, i usually give students 3 minutes to work alone or in a group of two to analyze the scenario and complete the table. after this, we discuss the scenario to ensure everybody understands how the gdp and spending categories are affected in both years. the four scenarios were developed with canada as the domestic country. however, they can be easily adapted to analyze any other country. • scenario 1: consumption (c) jade spends $25000 on a car produced in ontario. she got last year's model. to calculate gdp in this scenario, students must present the car as an inventory as it was produced last year and bought this year. figure 1 shows how the template should be filled to represent scenario 1 accurately. figure 1: inventories and consumption • scenario 2: investment (i) air canada spends $30 million on bombardier aircraft produced last year in canada. here, the aircraft were produced last year, which requires presenting them as inventories. as aircraft purchase is included in investment, the changes in year 2 occur within the investment category, as the filled template shows. 3 the template of the slide is provided in appendix. 20 |journal for economic educators, 22(2), 2022 figure 2: inventories and investment • scenario 3: government expenditure (g) the government of canada spends $300,000 to purchase desks produced in a canadian factory with canadian wood. the desks were produced last year. the scenario allows students to apply the inventories to a purchase by the government that should be assigned to the government expenditure spending category of the gdp. once again, the production occurred in the year before that of the purchase. figure 3: inventories and government expenditure • scenario 4: net exports (nx) ford us purchases $1 billion worth of aluminum from rio tinto alcan factories in quebec. the aluminum was produced at the end of 2021 and sold at the beginning of 2022. as the aluminum was produced last year, students should present it as an inventory. as the buyer is a foreign company, the sale is considered an export in the second year. this scenario also illustrates that intermediate goods are also placed in inventories when produced in a year different from when the final good is produced. 21 |journal for economic educators, 22(2), 2022 figure 4: inventories and net exports conclusion this study presents a simple tool to help students understand how inventories are used in gdp calculations. practicing this tool takes 20 minutes of class time. in this method, the instructor first presents the template to students to make them familiar with the template and the workings of inventories through four different scenarios. the scenarios involve using inventories with all four spending categories, i.e., consumption (c), investment (i), government expenditure (g), and net exports (nx). by showing inventories across these categories for the years under consideration, the students will be able to understand how the four categories and in turn the gdp change because of the presence of inventories. references dupont, b., & durham, y. (2021). adam smith and the not so invisible hand: a revision for the undergraduate classroom. international review of economics education, 36(c) doi: 10.1016/j.iree.2020.100205 picault, j. (2016). inconsistencies in textbook presentation of substitution and income effects. international journal of teaching and education, 4(3), 7-15 doi: 10.52950/te.2016.4.3.002 picault, j. (2021). looking for innovative pedagogy? an online economics instructor's toolbox. the journal of economic education, 52(2), 174 doi: https://doi.org/10.1080/00220485.2021.1887024 pritzker, p. s., arnold, k., & moyer, b. c. (2015). measuring the economy: a primer on gdp and the national income and product accounts. washington: bureau of economic analysis (bea) url: https://www.bea.gov/resources/methodologies/measuring-theeconomy wolla, s. (2018). the textbook treatment of net exports: will the uninformed reader understand? journal of economics teaching, 3(2), 232-253. doi: https://econpapers.repec.org/repec:jtc:journl:v:3:y:2018:i:2:p:232-253 https://doi.org/10.1080/00220485.2021.1887024 https://www.bea.gov/resources/methodologies/measuring-the-economy https://www.bea.gov/resources/methodologies/measuring-the-economy https://econpapers.repec.org/repec:jtc:journl:v:3:y:2018:i:2:p:232-253 38 |journal for economic educators, 21(2), 2021 undergraduate research the potency of envy lillian brink, sarah finley,1 david gillette2, and datha damron-martinez3 abstract economists and other scholars have long explored the role of envy in personal and social decision-making processes. the construct envy functions both as a motivator and deterrent in a variety of disciplines including sociology, psychology, politics, economics, and business. while many studies indicate that envy plays a role in individual and societal behavior, its extent and exact definition remain a source of debate in academic literature. additionally, most research studies the construct in baby boomer and generation x populations. using exploratory and descriptive research methods, we investigate current college-aged students’ perceptions of envy to discern its pervasiveness and influence on personal, social, and political values. key words: envy, jealousy, sociocultural, consumer behavior, public economics jel classification codes: a1, h8, z1 introduction economics is the science of decision-making: how does envy affect everyday decisions? what role does envy play in consumer behavior and marketing, specifically in the lives of college students? the studies on envy that exist have involved older generations, generations that prioritize different values and face different challenges than college students. this study explores the behaviors and perspectives of current college students regarding the role of envy in their lives – to what degree it is present and how it affects their view of themselves and others. literature review as a multifaceted aspect of human nature, envy invites an interdisciplinary approach to define, measure, and explore its role in decision-making. literature from the disciplines of sociology, economics, psychology, political science, and business all address various aspects of envy. to understand envy’s nature for the context of our study, we first explored the definition of envy and distinguished it from jealousy within the context of common values held by recent generations. defining envy when people think of envy they typically think of its semantic cousin, jealousy. though the definition of envy among scholars remains unresolved definitively, the literature suggests common themes when distinguishing between jealousy and envy. smith and kim (2007) and 1 students of truman state university, bachelor of arts in economics 2 professor of economics, truman state university, 100 e. normal ave., kirksville, mo 63501 3 associate professor of business administration, truman state university, 100 e. normal ave., kirksville, mo 63501 39 |journal for economic educators, 21(2), 2021 vecchio (2000) posit that jealousy involves three people—two people who desire the attention of the third—and envy typically involves only two—one who desires the possessions or situation of the second. another distinction lies in how jealousy and envy alter the perceptions of a desired possession. smith and kim as well as nussbaum (2017) assert that the fear of losing someone or something largely drives jealous feelings. while jealousy derives from the fear of losing a possession, envy is the desire for something that is not and may never be reasonably within grasp. in his comprehensive work on envy, schoeck (1987) argues that jealous people believe they have the right to what they are protecting because of real or perceived ownership whereas an envious person desires the object, even if it is completely out of reach. additionally, the jealous person typically withholds or desires something out of spite (p. 18). vecchio (2000) asserts that these two emotions exist at different levels of ill will: jealousy corresponds to the shallower feeling of anger while envy corresponds to the more intense feeling of hostility. consequently, jealousy is a more satiable and socially acceptable feeling. kets de vries’ (1988) work on the motivating role of envy provided our initial working definition. he describes 4 major components of envy: a desire for emulation because of perceived excellence, a sense of lacking something followed by injured self-esteem, a longing for the desired possession, and a feeling of anger at the possessor. envious people attribute the success of others to possessions or situations and believe that, given the same possessions or situations, they would be successful as well. kets de vries’ definition highlights the inherent comparative nature of envy. envy in the modern political climate contemporary contentious political issues such as redistribution exemplify envy’s ability to influence individuals’ policy preferences. sznycer et al. (2017) studied support for redistribution across political parties in the u.s., u.k., and india by presenting participants with two hypothetical situations. they found that respondents are more likely to choose a scenario where the rich are taxed more and the poor receive less money than a situation where the rich are taxed less, even if the poor receive more money. thus, sznycer et al. argued that envy of the rich, not compassion for the poor, predicts the desire for redistributive measures. these findings suggest the potency of the sociological theory of relative deprivation, i.e., the idea that when evaluating their own satisfaction, people compare themselves to various reference groups and subsets of society, rather than the whole of society. the feelings of inferiority caused by relative deprivation often evolve into envy for the object the individual lacks. assuming social comparison (a key component of envy) affects policy preferences, yitzhaki’s (1979) work on the gini coefficient and relative deprivation theory provides further insight. his work suggests that societies with slight levels of inequality induce more envy than societies with high degrees of inequality. ishida et al. (2014) also applied relative deprivation theory when analyzing the china puzzle, the ironic simultaneous increase in unhappiness levels and economic growth in china. ishida et al. use yitzhaki’s calculations to determine that higher incomes do tend to have higher amounts of satisfaction; however individual marginal satisfaction does not increase with income. relative deprivation and envy’s emphasis on relational comparison help explain why the china puzzle exhibits diminishing marginal satisfaction. generational context past scholars focused on envy’s influence on society, yet limited literature on specific generational effects exists. our study focused on college-aged students and their perceptions of 40 |journal for economic educators, 21(2), 2021 envy. we first established common values and beliefs held by college-aged students (generation z and millennials). we emphasized these generations because of their relative power in the workforce. according to fry’s (2018) report in pew research center, millennials have now become the largest generation in the labor force, replacing preceding baby boomers. familiarity with these generations’ values and envy’s motivating role will offer insight into modern consumption, employment, and political behavior. recent literature on millennials differs in its definition of the generation, arguing that birth years range from 1988-1994 (jones et. al 2012) or 1981 to 1996 (dimock 2019). despite these range differences, scholars recognize similar trends in millennial values and beliefs. jones et. al conclude that characteristics of younger millennials include: a concern for job security and unemployment, higher rates of religion affiliation, a concern about the gap between the rich and the poor (and consequently a desire for economic reform), and a loss of faith in the american dream that hard work pays off (jones et al. 2012, p. 2). pew’s social trends survey (2010) reflects pessimism among millennials, reporting that millennials tend to be unhappier with their earnings compared to past generations and less trustful in people than past generations. yet despite their dissatisfaction with the present, millennials remain largely optimistic towards the future. generation z (those born since 1997), like millennials, are characterized by their diversity, open-mindedness, and technological immersion (dimock 2019). fry and parker (2018) observe that not only is generation z likely to be the most diverse generation yet, the data also suggest that they will be more educated and slower to join the workforce than their predecessors. the deloitte global millennial survey 2020 found that close to half of both generations are stressed all or most of the time and that long-term finances are a top cause of stress. additionally, job loyalty is increasing, with more millennials responding that they would like to stay at their employers for five years rather than two. parker, graf, and igielnik (2019) argue that both millennials and generation z hold similar political and social values. specifically, they point out that two thirds of generation z and millennials believe the government should resolve more issues, while only 49% of baby boomers believe this. differing values aid in explaining the variation in political preferences (such as redistribution) as well as social comparisons (how and what people envy). methodology our research included two studies: first, a qualitative pilot questionnaire exploring perceptions of and terminology used when describing the construct of envy; and second, a survey exploring students’ feelings of envy and definitions of success and accomplishment. using language intended to appeal and relate to college-aged students, we administered the surveys at a medium-sized midwest liberal arts and sciences university. both surveys were conducted to ensure anonymity and met irb requirements. the pilot questionnaire listed seven open-ended questions. we coded the responses of 178 anonymous respondents across various courses, majors, and extracurricular activities and found several themes, including positive relationships involving family, friends, love, etc. and negative connotations of envy. inter-rater reliability practices allowed us to control for error throughout the process. our survey consisted of 37 questions based on the responses from the pilot questionnaire. the first 28 questions used a 5-point likert scale from strongly disagree (1) and strongly agree (5). the cronbach’s alphas for questions that addressed the construct of envy measured between 41 |journal for economic educators, 21(2), 2021 0.62 and 0.81, with an average scale of 0.73. our overall cronbach’s alpha was 0.80. to avoid priming, the word “envy” did not appear until page 5 of an 8-page survey. to ensure validity and truthful responses, only later pages asked respondents how envy affects their daily life. nine questions asked about demographics. our survey was open to all undergraduate and graduate students with incentives provided, resulting in 282 complete responses. the male to female breakdown of the respondents mirrored that of the university with about a 40:60 male to female ratio. complete demographic statistics are below in table 1. table 1: survey demographics statistics *students were given the following demographic options and asked to self-identify. gender percent male 38% female 62% socioeconomic status percent lower-lower class 1.4% middle-lower class 5.4% upper-lower class 3.6% lower-middle class 15.1% middle-middle class 34.1% upper-middle class 24.7% lower-upper class 3.6% middle-upper class 11.5% upper-upper class 0.7% year in school percent first year 6.1% sophomore 24.7% junior 28.3% senior 36.9% graduate school 3.9% social views percent social liberal 55.2% moderate 14.3% social conservative 21.8% prefer not to answer 8.6% fiscal views percent fiscally liberal 21.5% moderate 21.1% fiscally conservative 45.2% prefer not to answer 12.2% major percent arts and letters 12.4% school of business 40.3% science and math 12.7% 42 |journal for economic educators, 21(2), 2021 health sciences 13.1% social and cultural studies 21.4% discussion preliminary analysis the preliminary questionnaire provided several observations. first, many college students consider envy and jealousy to be synonymous. when asked what they think when hearing the word envy, 30% responded with the word jealousy. overall, 62% viewed envy negatively; many of their responses to the questions included such words as: malicious, sad, hate, greed, anger, sin, and unhealthy behavior. another recurrent theme was “happiness.” in response to “i will consider myself successful in five years if,” the second most frequent response, after “i have a job i enjoy,” was “i am happy.” to the prompt “i want what others have because,” students wrote, “i want to be happy like them.” when asked, “others want what i have because,” they replied, “they think i am happy.” however, when asked what they envied, students answered with things like relationships or money – happiness was seventh on the list. these students want happiness and when they see people who seem happy, they attribute that happiness to whatever “thing” those people have, transferring their envy from the person to that “thing.” lastly, people tend to focus on the possession they do not have. sometimes in response to “when i think of things for which i am envious, they include,” students answered with “i envy people who have…,” shifting the focus from the object to the person and demonstrating the comparative nature of envy that other research suggests (see ishida et al., 2014; kets de vries, 1988; schoeck 1987; vecchio, 2000; and yitzhaki, 1979). cross tabulation analysis although we explored cross tabulation for all the demographics, the most noteworthy findings came from the following three areas. significant tabulations are in the text; additional tabulations are presented in the appendix. socioeconomic background cross tabulating socioeconomic classes with income category, political leaning, and class standing, our data uncovered differing attitudes toward career aspirations and motivations. seventy percent or more of the respondents in all the income categories agreed with the statement “i will consider myself successful five years after graduation if i have a job that i enjoy” (see appendix figure 1). the statement “i want what others have so i can be happy like them” yielded contrasting results with 100% of the highest income class in strong agreement and 75% of the lowest income class in strong disagreement (see figure 2). 43 |journal for economic educators, 21(2), 2021 figure 2: i want what others have so i can be happy like them chi-square value4: 54.645 p-value: 0.008 the other statement relating to perceived happiness shows a similar pattern. the percent of respondents who agree with the statement, “other people want what i have because they think i’m happy” increases as income increases. when the groups are combined into the larger socioeconomic categories (lower, middle, and upper), the average increases by 20% as the wealth increases. these two statements relating to happiness had statistically significant chisquares with p-values of 0.008 and less than 0.001 (see figures 2 and 3). in both figures 2 and 3, note that the largest response differences are driven by the socioeconomic extremes. figure 3: other people want what i have because they think i’m happy chi-square value: 78.751 p-value: 0.000 lastly, as hypothesized, more respondents agreed with the statement, “i envy those with money” than disagreed in all income categories except the highest two (see appendix figure 4). 4 chi-square statistics are reported for contingency table tests. 25% 67% 50% 38% 38% 32% 60% 22% 100% 75% 20% 40% 33% 43% 36% 30% 59% 0% 0% 20% 40% 60% 80% 100% sa/a sd/d 0% 13% 60% 45% 41% 45% 50% 44% 100% 50% 27% 10% 17% 14% 16% 10% 6% 0% 0% 20% 40% 60% 80% 100% sa/a sd/d 44 |journal for economic educators, 21(2), 2021 fiscal ideologies when discussing both fiscal ideologies and social ideologies, we averaged the percentages for the two liberal categories and for the two conservative categories and reported the average as “liberal” or “conservative” respectively. combining the categories shows the trends more clearly and increases readability. the cross tabulation for the statement “feelings of envy bother me constantly” showed agreement across ideologies– when combining moderate conservatives and conservatives, 83% agreed, as did 77% of moderate liberals and liberals (see appendix figure 5). high levels of disagreement and low levels of agreement (ranging from 3 to 13%) support the idea that envy has a negative connotation and baggage associated with it. respondents in each of the ideologies agreed with the statement, “the internal drive to be the best that i can be drives my ambition,” with combined conservatives agreeing more frequently (87%) than combined liberals (75%) (see appendix figure 6). in response to “when i envy others, i focus on how i can become equally successful in the future,” we found slightly more consistent results across all ideological categories. conservative was the only category exceeding 50% (see appendix figure 8). this agrees with earlier findings about an internal drive to do one’s best. more than 40% of respondents in each ideological category disagreed with the statement, “i can’t have what i want because of factors outside of my control,” consistent with the idea of an internal locus of control (see figure 9). strong and moderate conservatives show the highest levels of disagreement at 69% and 55% respectively. our findings suggest, then, that more conservatives believe they have control over the opportunity for personal/individual improvement than liberals. this statement had a statistically significant chi-square with a p-value of 0.090. figure 9: i can't have what i want because of factors outside of my control chi-square value: 28.905 p-value: 0.090 social ideologies liberals (54%) were the most likely to agree with the statement, “i am troubled by feelings of my own inadequacy,” followed by moderates (45%), and then, conservatives (38%) (see figure 10). similarly, in responding to “when i envy others, i focus on becoming equally successful in the future,” liberal respondents agreed most strongly (53%), and conservative respondents disagreed most strongly (44%) (see figure 11). additionally, conservatives agree 26% 34% 19% 27% 6% 42% 44% 42% 55% 69% 0% 20% 40% 60% 80% 100% liberal moderate liberal moderate moderate conservative conservative sa/a sd/d 45 |journal for economic educators, 21(2), 2021 the most (31%) and liberals the least (12%) with the statement, “i am not the type of person who often compares myself with others” (see figure 12). “i envy those with high academic standing” yielded similar responses across social ideologies (see figure 13). liberals had slightly higher agreement (48%), followed by moderates (43%) and then conservatives (36%), but in no category did 50% of the respondents agree. fifty percent of moderates expressed disagreement, higher than any other social ideology by at least 7 percentage points. regression analysis given integer valued variables, we performed our analysis using ordered logit regressions. though there were a variety of interesting relationships to analyze, we chose the following themes to discuss because of their possible associations with envy. money the statements significantly correlated with “i envy those with money” display a moneycentered definition of success. the statements “i pay a lot of attention to my success compared to others’ success” and “i will consider myself successful five years after graduation if i am financially independent” positively correlate with the idea of success and money. the focus on high academic standing likely comes from the assumption that those who do well in school will have a higher income when they graduate. the statements “i always pay a lot of attention to my success compared to others’ success” and “other people want what i have because they think i am in a good situation” demonstrate the comparative nature of envy. while respondents compare themselves with others, they do not see other people looking at them in the same way. respondents envy, but do not see themselves as enviable. the negative correlation with “other people want what i have because they think i am in a good situation” demonstrates that the respondents link money with being in a good situation. they do not feel like they are in a good situation and they envy money because it can make their situation better. “i envy those with money” is also negatively correlated with “i can’t have what i want because i have not put in the work it requires.” a possible reason for the respondents not having what they want, even given the presence of money, suggests the influence of an outside factor instead of just the need to work harder or longer. while respondents feel like they have worked hard, they still lack the money, and the success, they seek. the statements regarding how frequently respondents report feelings of envy correlate differently with the “i envy those with money” statement. “feelings of envy bother me constantly” has a significant positive correlation whereas “feelings of envy bother me daily” has a significant negative correlation. this difference in coefficient signs could be the result of respondents conceptualizing constantly and daily as two separate time intervals, suggesting these relationships warrant further research. 46 |journal for economic educators, 21(2), 2021 table 2: money regression table statement: i envy those with money coef. st. err. t-value p-value sig. i envy those with high academic standing 0.675 0.129 5.22 0.000 *** i can’t have what i want because i don’t have the money to attain it 0.619 0.129 4.81 0.000 *** i always pay a lot of attention to my success compared to others’ success 0.379 0.152 2.49 0.013 ** feelings of envy bother me constantly 0.376 0.203 1.85 0.065 * i will consider myself successful five years after graduation if i am financially independent. 0.337 0.177 1.90 0.057 * i envy those with a strong romantic relationship 0.227 0.113 2.01 0.044 ** feelings of envy bother me daily -0.418 0.216 -1.93 0.053 * other people want what i have because they think i am in a good situation -0.353 0.184 -1.92 0.055 * i do not want what others have -0.334 0.175 -1.90 0.057 * i can’t have what i want because i have not put in the work it requires -0.215 0.118 -1.82 0.069 * *** p<.01, ** p<.05, * p<.1; pseudo r-squared, 0.244; chi-square, 206.164 feelings of inferiority further statistical analysis supports the hypothesis that envy is comparison-based. when run with the statement, “the truth is that i generally feel inferior to others,” statements demonstrating feelings of inequality and unfairness surfaced with high statistical significance and positive correlations: “i am troubled by feelings of my own inadequacy.” “compared to my own success, it is so frustrating to see people succeed so easily.” “i want what others have so i can be happy like they are.” these correlations demonstrate the more negative side of envy in both personal behavior and the perception of others. “the truth is that i generally feel inferior to others” was also significantly correlated with “i want what others have so i can be happy like they are.” this assumes that the person attributes the other person’s happiness to something they have. because the respondent does not have the object, they feel unhappy. these correlations suggest that college-aged students feel inferior when they lack what others have. the respondents viewed those possessions as means to the end of happiness, success, and fitting in. the students seem focused on an external locus of control – they do not have what others have, so they cannot be like others and are therefore inferior. unsurprisingly, “other people want what i have because they admire me” and “i am not the type of person who often compares myself with others” are negatively correlated with “the 47 |journal for economic educators, 21(2), 2021 truth is that i generally feel inferior to others.” once again, the negative, comparative nature of envy rears its head. table 3: feelings of inferiority regression table statement: the truth is that i generally feel inferior to others coef. st. err. t-value p-value sig. i am troubled by feelings of my own inadequacy 1.08 0.16 6.75 0.000 *** compared to my own successes, it is so frustrating to see some people succeed so easily 0.554 0.154 3.60 0.000 *** i want what others have so i can be happy like they are 0.477 0.17 2.80 0.005 *** i do not want what others have 0.335 0.2 1.68 0.093 * i will consider myself successful five years after graduation if i am financially independent 0.324 0.194 1.67 0.095 * other people want what i have because they admire me -0.516 0.207 -2.49 0.013 ** i am not the type of person who often compares myself with others -0.296 0.154 -1.92 0.055 * *** p<.01, ** p<.05, * p<.1; pseudo r-squared, 0.34; chi-square, 266.643 sources of happiness vs. sources of success as demonstrated in the following tables, success and happiness are viewed as closely related. many of the sources of happiness have to do with succeeding, avoiding failure, and becoming equally successful as others in the future. while the statement, “i want what others have so i can fit in with them,” is included, the respondents’ recipe for happiness is surprisingly not relationship-oriented. of the four relationship-oriented statements, only “i envy those with a strong romantic relationship” is significantly correlated. for respondents, happiness is measured by how they are perceived and the desire for it driven by feeling less than others. they are less concerned about having friendships than they are about “fitting in.” an interesting note is that, while “i want what others have so i can succeed as well” is positively correlated, “when i envy others, i focus on how i can become equally successful in the future” is negatively correlated. potentially, this difference is because the latter statement is more action-based. being successful because you have the things successful people have sounds better than waiting and working to become successful in the future. this is further corroborated by the negative correlation with “i can’t have what i want because i have not put in the work it requires.” the positive correlation with the statement “the truth is that i generally feel inferior to others” and the negative correlation with the statement “i am troubled by feelings of my own inadequacy” seem contradictory. it is possible that respondents differentiated between the definitions of inferior and inadequate; inferior is a reflection of inherent self-worth but inadequate is more linked to lacking skills. another potential explanation is that people react differently to the “i am troubled” part of the inadequacy statement. perhaps people see 48 |journal for economic educators, 21(2), 2021 themselves as inferior and inadequate, but accept it rather than being troubled, especially given the younger generations’ proclivity to self-deprecation. table 4: sources of happiness regression table statement: i want what others have so i can be happy like them coef. st. err. t-value p-value sig. i want what others have so i can succeed as well 0.770 0.166 4.63 0.000 *** feelings of envy bother me daily 0.757 0.228 3.32 0.001 *** i want what others have so i can fit in with them 0.532 0.145 3.67 0.000 *** the fear of failure drives my ambition 0.494 0.135 3.66 0.000 *** the truth is that i generally feel inferior to others 0.481 0.175 2.75 0.006 *** when i hear the word “envy” i think of jealousy 0.359 0.179 2.01 0.044 ** i envy those with a strong romantic relationship 0.282 0.122 2.31 0.021 ** i do not want what others have -0.479 0.187 -2.57 0.010 ** i am troubled by feelings of my own inadequacy -0.457 0.155 -2.94 0.003 *** when i envy others, i focus on how i can become equally successful in the future -0.335 0.141 -2.38 0.017 ** i can’t have what i want because i have not put in the work it requires -0.284 0.127 -2.23 0.026 ** *** p<.01, ** p<.05, * p<.1; pseudo r-squared, 0.3; chi-square, 232.989 further solidifying the relationship between happiness and success, the statement “i want what others have so i can succeed as well” is significantly correlated with many of the same statements as “i want what others have so i can be happy like they are.” despite the strong connection between happiness and success, they are not synonymous. while “when i envy others, i focus on how i can become equally successful in the future” is negatively correlated with the happiness statement, it is positively correlated with the success statement (see table 5). perhaps happiness is viewed as a present state, while success is more long-term. another difference is the presence of “i envy those with romantic relationships” on the sources of happiness table, but “i envy those with high academic standing” on the sources of success table. earlier tables have corroborated the correlation between success and high academic standing, but, despite the correlation between success and happiness, high academic standing is not strongly correlated with happiness. instead, romantic relationships are. 49 |journal for economic educators, 21(2), 2021 table 5: sources of success regression table statement: i want what others have so i can succeed as well coef. st. err. t-value p-value sig. i want what others have so i can be happy like they are 0.808 0.174 4.63 0.000 *** i want what others have so i can fit in with them 0.443 0.149 2.96 0.003 *** when i envy others, i focus on how i can become equally successful in the future 0.428 0.139 3.07 0.002 *** i can’t have what i want because of factors out of my control 0.264 0.148 1.79 0.074 * i envy those with high academic standing 0.257 0.145 1.78 0.076 * i do not want what others have -0.38 0.186 -2.04 0.041 ** *** p<.01, ** p<.05, * p<.1; pseudo r-squared, 0.25; chi-square, 180.352 sense of frustration when looking at the group of statements related to a sense of frustration – either with oneself or with others – envy is a strong underlying theme. the statement “i am troubled by feelings of my own inadequacy” asks respondents to consider their frustration with themselves. the corresponding statistically significant relationships listed below follow a foreseeable negative path. respondents who expressed concern about feelings of inadequacy were more likely to feel inferior to others, experience feelings of envy daily, and be driven by a fear of failure. the high negative correlation found with “i want what others have so i can be happy like they are,” however, suggests that those who feel inadequate are not necessarily seeking out happiness to alleviate these feelings of inadequacy. furthermore, any statements that pinpoint the source of this inadequacy (such as needing to work harder, have more money, or for factors out of the respondents’ control) are not statistically significant. this helps to explain why these regressions imply such a negative and unproductive manifestation of envy; as the respondents cannot identify the specific obstacles they need to overcome in order to mitigate these feelings of inadequacy. 50 |journal for economic educators, 21(2), 2021 table 6: feelings of inadequacy regression table statement: i am troubled by feelings of my own inadequacy coef. st. err. t-value p-value sig. the truth is that i generally feel inferior to others 1.188 0.175 6.8 0.000 *** feelings of envy bother me daily 0.845 0.226 3.74 0.000 *** a fear of failure drives my ambition 0.342 0.133 2.58 0.010 *** feelings of envy bother me infrequently 0.299 0.118 2.53 0.011 ** i often consider my situation in life relative to that of other people 0.284 0.155 1.82 0.068 * i want what others have so i can be happy like they are -0.509 0.167 -3.04 0.002 *** other people want what i have because they admire me -0.455 0.197 -2.31 0.021 ** i do not want what others have -0.395 0.185 -2.14 0.033 ** *** p<.01, ** p<.05, * p<.1; pseudo r-squared, 0.291; chi-square, 235.416 shifting away from personal feelings of frustration, the statement “compared to my own successes, it is so frustrating to see some people succeed so easily” looks at how respondents perceive their frustrations with others. yet again, negative associations permeate this regression. feelings of unfairness, inferiority, and constant envy are all positively correlated with this sense of frustration. the negative correlation with the statement “i want what others have so i can fit in with them” suggests that once this feeling of frustration about others’ success overwhelms a respondent, they no longer care as much about the relational aspect of success (as demonstrated by table 5). instead, they appear to focus more on the unattainable individual talent that these successful people have. table 7: sense of frustration regression table statement: compared to my own successes, it is so frustrating to see some people succeed so easily coef. st. err. t-value p-value sig. it somehow doesn’t seem fair that some people seem to have all the talent 0.823 0.142 5.8 0.000 *** the truth is that i generally feel inferior to others 0.620 0.168 3.68 0.000 *** other people don’t want what i have 0.603 0.193 3.12 0.002 *** other people want what i have because they think i’m happy 0.487 0.186 2.62 0.009 *** feelings of envy bother me constantly 0.452 0.202 2.24 0.025 ** i will consider myself successful five years after graduation if i have a job that i enjoy 0.326 0.159 2.05 0.040 ** i want what others have so i can fit in with them -0.321 0.139 -2.31 0.021 ** *** p<.01, ** p<.05, * p<.1; pseudo r-squared, 0.244; chi-square, 195.754 51 |journal for economic educators, 21(2), 2021 consequently, the statement “it doesn’t seem fair that some people have all the talent” has the highest positive correlation with “compared to my own successes, it is so frustrating to see some people succeed so easily”. this regression also illustrates the more material-based side of success, as respondents envy those with high academic standing and see money as a means to attaining what they want. table 8: sense of fairness regression table statement: it doesn’t seem fair that some people have all the talent coef. st. err. t-value p-value sig. compared to my own successes, it is so frustrating to see some people succeed so easily 0.871 0.143 6.1 0.000 *** i want what others have so i can fit in with them 0.564 0.138 4.09 0.000 *** i envy those with high academic standing 0.287 0.134 2.15 0.032 ** i can’t have what i want because i don’t have the money to attain it 0.268 0.132 2.03 0.042 ** when i hear the word “envy” i think of an unhealthy, negative behavior -0.348 0.156 -2.23 0.026 ** other people want what i have because they think i’m happy -0.313 0.183 -1.71 0.087 * *** p<.01, ** p<.05, * p<.1; pseudo r-squared, 0.215; chi-square, 172.475 limitations although our study gives insight into the role of envy in college students’ lives, it is limited, particularly in scope. our study focused on college-aged students, instead of the full age range of millennials and generation z. we studied specifically those at a traditional 4-year liberal arts university, which limits the generalizability of the work we have done. future work will address this concern with a subsequent survey from the same student body, and the administration of that same survey at a different university with a high rate of non-traditional students. the nature of the study also constrains the implications of the regression results. our data allow regressions to measure the correlation between certain attitudes and beliefs held by respondents but lack measures to adequately address causality between them. for this reason, coupled with simultaneity problems, we could not include regressions analyzing demographic variables such as those explored in the crosstabulation analysis. conclusion and future research the role of envy in the behavior of college-aged students is under-researched and holds great potential to explain student motivations and decisions. because envy colors people’s responses to their social position compared to others, it influences their desire for happiness, the possessions they consider important, and the policy measures they support. although our literature review posited envy’s potential as a positive motivator, our respondents largely associated envy with negative connotations. 52 |journal for economic educators, 21(2), 2021 this research contributes to the understanding of individual motivation and to the role that the construct envy plays in this motivation. additionally, it contributes 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https://escholarship.org/uc/item/8kd4d0p4 http://www.econtalk.org/martha-nussbaum-on-alexander-hamilton/ http://www.econtalk.org/martha-nussbaum-on-alexander-hamilton/ https://www.pewsocialtrends.org/2019/01/17/generation-z-looks-a-lot-like-millennials-on-key-social-and-political-issues/ https://www.pewsocialtrends.org/2019/01/17/generation-z-looks-a-lot-like-millennials-on-key-social-and-political-issues/ https://www.pewresearch.org/wp-content/uploads/sites/3/2010/10/millennials-confident-connected-open-to-change.pdf https://www.pewresearch.org/wp-content/uploads/sites/3/2010/10/millennials-confident-connected-open-to-change.pdf 54 |journal for economic educators, 21(2), 2021 appendix figure 1: i will consider myself successful five years after graduation if i have a job that i enjoy chi-square value: 33.595 p-value: 0.390 figure 4: i envy those with money chi-square value: 31.662 p-value: 0.484 55 |journal for economic educators, 21(2), 2021 figure 5: feelings of envy bother me constantly chi-square value: 21.907 p-value: 0.346 figure 6: the internal drive to be the best that i can be drives my ambition chi-square value: 22.923 p-value: 0.293 figure 7: i will consider myself successful in five years if i am financially independent chi-square value: 17.183 p-value: 0.308 56 |journal for economic educators, 21(2), 2021 figure 8: when i envy others, i focus on how i can become equally successful in the future chi-square value: 24.610 p-value: 0.217 figure 10: i am troubled by feelings of my own inadequacy chi-square value: 26.869 p-value: 0.139 57 |journal for economic educators, 21(2), 2021 figure 11: when i envy others, i focus on becoming equally successful in the future chi-square value: 20.437 p-value: 0.431 figure 12: i am not the type of person who often compares myself with others chi-square value: 21.778 p-value:0.353 figure 13: i envy those with high academic standing chi-square value: 27.464 p-value: 0.123 description of methodology 36 | journal for economic educators, 16(1), 2016 36 the short-term and long-term trade-offs of sustainable entrepreneurship hilde patron and william j. smith 1 abstract we use game theory concepts and tools to model the technology choices of firms that face a trade-off between the short-term profits from “dirty” technologies and the long-term benefits of a clean environment. when the nominal costs from adopting environmentally friendly technologies are “high enough,” then choosing “dirty” technologies is a dominant strategy. however, when firms’ objectives change due to taxes, subsidies, or demand shifts, the optimal strategies of firms can lead to a socially desirable sustainable equilibrium. a simple version of the model is adapted into a classroom activity that allows students to discover the main results of the model via simulations of corporate decision making. key words: game theory, sustainability, classroom experiment jel classification: a20, c70, q55 introduction one of the hottest topics on today’s college campuses, in media, and in politics is sustainability. ironically, many different definitions of “sustainable” are currently circulating in the ongoing evolution of a more ethical, humane, and environmentally-friendly way of conducting business. we focus on a single definition from the world commission on the environment and development (wced) 1987: economic development is sustainable if it fulfills the present-generation’s needs without jeopardizing the quality of life and economy of future generations. sustainability is a complex, multi-faceted concept that encompasses ecological, economic, and social dimensions. it requires the efficient use of the environment and natural resources as well as socially responsible decision-makers. some sustainable practices involve improvements in efficiency or elimination of waste that may have previously been unrecognized. as in the use of more efficient lighting technologies, these changes likely entail up-front cost, but lower resource consumption and costs over time. more recently, improving technologies and productive efficiency have been re-cast as a sustainability issue, these choices are part and parcel of every business, regardless of its management’s view of sustainability as a guiding business principle. since environmentally friendly and/or socially conscious production processes may be more limiting than the alternatives, the adoption of some sustainable technologies may be more costly to firms in both the short-term and long-term. for example, a manager of a restaurant may use inputs that are produced locally to reduce the carbon emissions released as a result of added transport. however, in opting for locally produced inputs, the manager is providing a 1 professors, department of economics, university of west georgia, carrollton, ga 30118. 37 | journal for economic educators, 16(1), 2016 37 differentiated product that may be attractive to customers willing to pay extra for dishes produced with a lower carbon cost. in either case, whether efficiency-improving or society-improving, sustainable business practices have the potential to increase a firm’s profits and long-term viability. as a result of the growing awareness of sustainable practices, their impact on costs, and the potential for improving a company’s reputation among its customers, many business owners are incorporating sustainability considerations into their decision-making processes. in effect, as firms commit to sustainable business practices they move from a competitive market with negative externalities to a monopolistically competitive market where sustainable practices become an embedded characteristic of firms product lines, differentiating them from other similar (or even otherwise identical) products. if successfully marketed, the firm can convert the benefits that would otherwise accrue to society into private profits. if production process characteristics are viewed as components of a good, then “green” can be marketed as a normal-good characteristic, whereas, “brown” would become an inferior characteristic. the existence of otherwise identical products differentiated by production processes alone is an indication of the potential profitability of green over brown technologies. an example of this can be found in green energy. some publically traded energy providers have added power generation and fuel sources that are more environmentally friendly than those based on fossil fuels. according to the company’s website, georgia power offers a “green energy” program on a voluntary basis, allowing interested customers to purchase renewable energy, but at an increased price. keep in mind that, to the end user, the sources used for electricity generation are indistinguishable from each other, but in selling green energy, georgia power is guaranteeing the buyer that the purchased amount of green energy is generated and supplied using solar, wind, or some other source generally regarded as green. this option has been available from georgia power since 2003. green energy can, in turn, be used in the production of other sustainable goods and services. it should be noted that the regulatory environment (i.e., governmental and industry-wide policies) that a business faces will likely influence the adoption of sustainable practices as well. legislation, tax policy, and industry standards can have the effect of changing the costs and benefits of sustainable business practices, and the timing of related decisions. we model the short-term and long-term trade-offs that businesses face when choosing between sustainable and unsustainable technologies. using game theory, we identify firms’ dominant strategies both with and without government regulation. we describe an adaptation of the model that college instructors can use to demonstrate to students the inherent trade-offs managers face when trying to balance their various stakeholders’ interests. finally, we develop a game that can effectively engage students and guide them to discover the results of the model via first-hand experiences. the classroom presentation and experiment are appropriate for introductory business and economics courses. the rest of the paper is organized as follows: in the next section we review the relevant literature, followed by a couple of examples that instructors can use to introduce the model in class. we then describe a simple version of the model for use in the classroom, followed by a classroom experiment and suggested classroom discussion questions. a more general version of the model is presented in the appendix. at last we conclude. 38 | journal for economic educators, 16(1), 2016 38 literature heyes (2000), lawn (2003), harris and codur (2004), and razmi (2012), incorporate sustainability elements into well-known economic theories. heyes (2000) and lawn (2003) add an environmental equilibrium curve to the traditional is-lm model, while razmi (2012) models emission permits as a short-run stabilization policy tool. harris and codur (2004) develop a teaching module that introduces the environment to traditional macroeconomic models. for instance, they include the biosphere in the circular flow diagram and discuss the role of pollution, natural resources, and recycling in the macroeconomy. they also discuss the limitations of gdp as a measure of well-being and add an alternative measure called environmentally-adjusted gdp. these papers all use traditional macroeconomic models. unlike them, we use game theory to model the microeconomic strategies of firms and the effect that economic policies can have on them. moreover, unlike the previous papers, we develop a classroom activity that instructors can use to guide students to discover the potential impact on the environment of different policy tools. holt and mcdaniel (1998) develop a classroom game that can be adapted to teach sustainability to students. they use red and black playing cards to demonstrate the prisoner’s dilemma in large classrooms. the advantages of this game are that it can be played in any size classroom, students can play individually, and it requires little effort from the instructor as students are asked to keep track of their moves and payoffs themselves. the activity that we present here requires the instructor to develop an excel spreadsheet, to communicate with students, and to keep track of moves and payoffs of all players. although more demanding on the instructor, our activity incorporates an added level of realism, the effect of government intervention on the players’ decisions, and, it encourages interaction among students by making them work in a group setting. interactive classroom methods, including games and experiments, are valuable because they increase student engagement and learning, and they facilitate the realization of abstract, theoretical models in a practical, intuitive way (holt 1999 and 2003). moreover, emerson and taylor (2004), ball, eckel and rojas (2006), dickie (2006), and durham, mckinnon and schulman (2007), indicate that the use of interactive teaching techniques can improve student performance and grades. other real-world examples of green profits green energy is only one example of a more sustainable product leveraged for additional profits. improvements in lighting technologies have made their way onto the showroom floors of the retail auto industry. although light emitting diodes (led) have been used in auto head-lights, tail-lights and interior displays for several years, led lighting for building interiors, because of its comparatively high initial cost, has taken longer to gain a foothold. a recent auto industry article (treece, 2016) states that auto dealerships are moving toward lighting their lots with the more sustainable led lighting. apparently, there is a “small but growing group of dealers switching to led lights, particularly for outdoor lighting, because of their low operating costs and natural-looking light.” traditional exterior and interior lighting technologies consume significantly larger amounts of electricity and require more frequent maintenance. furthermore, leds are directional and can be used to “feature” specific units on the lot. the following is an actual cost example taken from the article: 39 | journal for economic educators, 16(1), 2016 39 “reed lallier chevrolet, which sold about 1,200 new and 1,000 used vehicles last year at its eight-acre site, installed the new lights at the end of last year. for the 100 light poles, the total installation cost -including fixtures, controls, labor and taxes -came to about $120,000. utility-bill savings so far are about $2,000 a month. lallier expects to save another $3,000 a year on maintenance.” (treece 2016). a similar cost-oriented approach has been adopted in segments of the agricultural sector. organic farm products have gained market share and become more widely available over the past 25-year period. haanaes, et al (2013) identified an egyptian cotton producer as an example of a sustainable farmer who was able to lower farming costs, improve average yields and produce a better, more desirable product by adopting organic and sustainable farming practices. from 2006 until 2011, the year of turmoil known as the “arab spring,” his business grew at an average rate of 14% annually. this farm and other similar sustainability-focused businesses, like the auto dealers above, have adopted a longer-range view of investing in which initially moreexpensive technologies eventually lead to substantially lower short-run costs of production and/or higher productivity per unit of input. furthermore, the agricultural industry is an example of sustainable practices arising from a broader view of the production process. rather than attempting to maximize the profits from each agricultural product in a vacuum, the sustainable farmer must understand the potential links and benefits among the various products he or she could potentially produce. in the same way that crop rotation requires a multi-period, multi-crop approach to avoid environmentally costly and chemically-intensive soil maintenance, the pursuit of sustainable business requires an upfront search for system-wide efficiencies which pay off over multiple periods of business activity. a simple model for the classroom consider a two-period model with two firms, a and b. the two periods can be thought of as the present (period 1) and the future (period 2). at the beginning of the first period, firms simultaneously invest in a production technology. technology choices last for two periods. for simplicity, we assume that there are only two technologies (or production functions) available: green and brown. the green technology is environmentally friendly whereas the brown technology is not. we assume that period 1 payoffs are higher if the brown technology is used, and we let p > 0 denote the premium short-term profits earned by producing with the brown technology. however, future payoffs increase if at least one firm decides to adopt the green technology. that is, we assume that profits grow by a factor 0 <  < 1 over time, which can be attributed to experience, learning by doing, and to the quality of the environment. finally, whenever a firm produces using the brown technology it depletes the environment introducing additional costs in period 2. formally, we assume that if both firms choose the green technology, their profits grow by a factor 0 < αg < 1; if both firms invest in the brown technology, their profits grow by 0 < αb < 1; and if one firm chooses green and one brown, profits in period 2 grow by 0 < αm < 1. to capture the benefits of green technologies in the environment, we assume that αg > αm > αb. we denote the time discount parameter as 0 < , the tax rate as 0 < t < 1, and subsidies as 0 < s < 1. 40 | journal for economic educators, 16(1), 2016 40 to find the equilibrium of the game we compare the payoffs of each firm taking the strategy of the other firm as given. the appendix develops the general model and solution. in this section, we present a simple model assuming specific values for αg, αm, αb., t, s, and p. moreover, we develop a microsoft excel spreadsheet to facilitate the classroom presentation. drop boxes are used to restrict parameter selection to satisfy the assumptions of the model: when the user clicks on an empty cell to choose a parameter (e.g., cell b1 in figure 1), a drop box with a series of options appears; the drop boxes restrict parameter choices to satisfy the inequalities αg > αm > αb > 0.  figure 1: parameter choice the spreadsheet includes a matrix with color-coded payoffs. the payoffs in figure 2 correspond to an example in which =0.8, αg =0.4, αm =0.3, αb =0.2, t=0 and s =0. whenever a figure 2: payoff matrix for =0.8, αg =0.4, αm =0.3, αb =0.2, t=0 and s =0 firm b green brown technology technology f ir m a g r e e n t e c h n o lo g y firm a’s payoffs: firm a’s payoffs: 1.32 1.24 firm b’s payoffs: firm b’s payoffs: 1.32 1.61 b r o w n t e c h n o lo g y firm a’s payoffs: firm a’s payoffs: 1.61 1.51 firm b’s payoffs: firm b’s payoffs: 1.24 1.51 firm chooses the green technology, its payoffs are highlighted in green; when a firm chooses the brown technology, its payoffs are highlighted in brown. for instance, when both firms choose the green technology, their payoffs are 1.32. if firm a chooses green while firm b chooses 41 | journal for economic educators, 16(1), 2016 41 brown, a’s payoffs are 1.24 while b’s payoffs are 1.61. instructors can change parameters, one at a time, to show students how payoffs change with , αg, αm, αb, t and s. figure 3: firm a’s payoffs for different tax rates figure 4: tax rates that incentivize the adoption of green technologies 42 | journal for economic educators, 16(1), 2016 42 we also develop graphs that show how payoffs and strategies change with parameter values. figures 3 and 4 show the payoffs of firm a for =0.8, αg =0.4, αm =0.3, αb =0.2, s =0 and t between 0 and 1. figure 4 highlights the areas for which choosing green is a dominant strategy and identifies the minimum tax rate needed to induce the socially desirable equilibrium in which both firms choose green. although these graphs show the dependence of payoffs and strategies on taxes, similar graphs can be made to highlight the impact of subsidies. classroom activity instead of presenting the model in class in a lecture format, instructors can allow students to “discover” the results of the model with a classroom experiment. instructors can carry out the experiment in a computer lab or in a classroom with wi-fi access. if the instructor chooses the latter option, he should let students know in advance to bring a computer or tablet to class. prior to the day of the experiment, the instructor creates an excel spreadsheet that allows students to estimate their payoffs. a summary of such a spreadsheet is shown in figure 5. the first two columns in the spreadsheet show the parameter values and the next few columns show the payoffs. 2 figure 5: experiment spreadsheet on the day of the experiment, instructors assign students to groups of two or three. instructors must choose an even number of groups in order to pair them up to play against each other. once groups are chosen, the instructor distributes the excel file to the students by email or by uploading to a course management website. students are not told who they are matched against, but the instructor keeps track of group pairings and choices. finally, instructors must 2 the payoffs are entered as formulas. for example, the payoff when both firms choose green is (1+ αg)(1+s), which using the appropriate excel cells can be written as =(1+(b3*b4))*(1+b8). the payoff when the student playing the game chooses green and his opponent chooses brown is ( 1 + αm )(1+s), which is equivalent to =(1+(b3*b4))*(1+b8) using excel formulas, etc. 43 | journal for economic educators, 16(1), 2016 43 choose a way to communicate with students during the activity. we prefer two-way online chats between each group and the instructor, but note cards could be used. at the beginning of every round, students communicate their choices to the instructor. the instructor tabulates all responses and sends a message to each group showing its payoff. the round ends when students learn their payoffs. during the activity, the instructor has an excel document open with a list of the groups and pairings. for example, suppose there are four groups in the class, labeled a, b, c, and d. (for an added touch of fun, instructors can allow students to choose group names). the instructor keeps track of choices using a file like the one shown in figure 6. ideally, the game is played multiple times so that students can discover their optimal strategies. in the example in figure 6, in round 1 group a plays against group b, and group c against group d. in round 2, group a plays against c, and b against d. the instructor may choose to reassign the pairs randomly after every round. students, however, never find out who their “opponent” is. to facilitate the calculation of payoffs, the instructor’s tracking table (figure 6) can be embedded with formulas that use if and and statements that automatically calculate the payoffs. 3 figure 6: instructor’s tracking table group pairs choices payoffs round 1 a b c d round 2 a c b d round 3 a d b c round 4 a b c d round 5 b d a d round 6 a b c d initially, we recommend setting taxes and subsidies equal to zero, but after a few rounds instructors can announce policy changes and instruct students modify the parameter values in their spreadsheets. for example, the first four or five rounds can be played using the parameter values =0.8, αg =0.4, αm =0.3, αb =0.2, t=0, and s =0. once strategies converge to the dominant strategies, students have discovered the correct solution and the instructor can modify the game. instructors can ask students to modify taxes by clicking on the appropriate drop box (cell b9 in figure 5 in our case) and make them 1% or 0.01, for example. after two or three rounds, instructors can change t again, and so on. 3 an example of an if statement with multiple conditions can be the following: =if(and(f3="g",g3="g"),(1+(b3*b4))*(1+b8),if(and(f3="g",g3="b"),(1+(b3*b5))*(1+b8),if(and(f3="b ",g3="g"),(1+(b3*b5))*(1+b7)*(1-b9),if(and(f3="b",g3="b"),(1+(b3*b6))*(1+b7)*(1-b9),0)))) 44 | journal for economic educators, 16(1), 2016 44 talking points after several rounds of the game, the instructor can end the activity and begin a classroom discussion. based on our experience, we have developed talking points for the discussion: how did your group decide on which technology to choose? did your choice change from round to round? why or why not? surprisingly, while most students play the game to maximize their payoffs, there are some students who disregard the highest paying strategies and attach intangible utility to choosing the environmentally friendly technology. that is, even when the initial parameters and payoffs are those depicted in figure 5, some students still choose the green technology knowing that their profits would be higher if they chose brown. some of them claim to be environmentally conscious such that profits are not the only goal; others attach a probability to the instructor changing the rules midway through the game to punish students who choose the brown technology and try to prevent these losses. did your strategy change when we introduced taxes/subsidies? why or why not? for the profit-minded students, taxes/subsidies are always effective in inducing the socially desirable outcome. in our experience, students are very quick at calculating the point at which their strategies change. how high do taxes need to be to induce a socially desirable (green-green) outcome? are taxes better or worse than subsidies? when students are provided with the excel spreadsheet, they can calculate the exact value of the taxes that will induce the correct strategy. during classroom discussions, they can debate among themselves about what tax is “too high” to pay and whether or not governments should really regulate the environmental choices of firms. in addition to the classroom discussion, instructors can follow up with a take-home assignment by asking students to research the actual regulations that different countries have put in place to deal with environmental concerns. conclusion using game theory matrices and the concepts of dominant strategies and nash equilibrium, we model the decisions of firms faced with the option of depleting the environment for the sake of profits. our model shows that if environmentally friendly technologies are very expensive, then firms choose “dirty” technologies. however, if the long-term benefits of green technologies are “large enough” firms can be persuaded to abandon “dirty” technologies in favor of sustainable processes. persuasion can come in the form of government regulation, taxes, or pressure from consumers. we develop a simplified version of the model, excel spreadsheets, and a classroom activity that allow students to discover these results by simulating corporate decision making. we plan to develop an interface version of the activity that allows students to play against the computer. 45 | journal for economic educators, 16(1), 2016 45 references ball, s.b., c. eckel and c. rojas. 2006. “technology improves learning in large principles of economics classes: using our wits.” american economic review, 96(2): 442-446. dickie, m. 2006. “do classroom experiments increase leaning in introductory microeconomics?” journal of economics education, 37(3): 267-288. durham, y., t. mckinnon and c. schulman. 2007. “classroom experiments: not just fun and games.” economic inquiry, 45(1): 162-178. emerson, t.l.n. and b.a. taylor. 2004. “comparing student achievement across experimental and lecture-oriented sections of a principles of microeconomics course.” southern economic journal, 70(3): 672-693. haanaes, k., michael, d., jurgens, j., and rangan, s., “making sustainability profitable,“ harvard business review, march 2013 https://hbr.org/2013/03/making-sustainabilityprofitable harris, j.m. and a.m. codur. 2004. “macroeconomics and the environment”. teaching module. tufts university global development and environment institute. http://www.ase.tufts.edu/gdae/education_materials/modules/macroeconomics_and_the_e nvironment.pdf heyes, a. 2000. a proposal for the greening of the textbook macro: ‘is-lm-ee’. royal holloway, university london: discussion papers in economics, no 99/7. holt, c.a. 1999. “teaching economics with classroom experiments.” southern economic journal, 65(3): 603-610. holt, c.a. 2003. “economic science: an experiment approach for teaching and research”. southern economic journal, 69(4): 755-711. holt, c. and t. mcdaniel. 1998. experimental economics in the classroom. in teaching undergraduate economics: a handbook for instructors, ed. by w. walstad and p. saunders. toronto: irwin/mcgraw-hill. lawn, philip a. 2003. environmental macroeconomics: extending the is-lm model to include an 'environmental equilibrium' curve. australian economic papers, vol. 42, pp. 118134. razmi, arslan, "environmental macroeconomics: simple stylized frameworks for short-run analysis" (2013). economics department working paper series. paper 153. http://scholarworks.umass.edu/econ_workingpaper/153 treece, j., “more dealers choose leds for outdoor lighting,” automotive news, april 8, 2016. http://www.autonews.com/article/20130318/retail07/303189985/more-dealerschoose-leds-for-outdoor-lighting world commission on the environment and development (1987). https://hbr.org/2013/03/making-sustainability-profitable https://hbr.org/2013/03/making-sustainability-profitable http://www.ase.tufts.edu/gdae/education_materials/modules/macroeconomics_and_the_environment.pdf http://www.ase.tufts.edu/gdae/education_materials/modules/macroeconomics_and_the_environment.pdf http://scholarworks.umass.edu/econ_workingpaper/153 http://www.autonews.com/article/20130318/retail07/303189985/more-dealers-choose-leds-for-outdoor-lighting http://www.autonews.com/article/20130318/retail07/303189985/more-dealers-choose-leds-for-outdoor-lighting 46 | journal for economic educators, 16(1), 2016 46 appendix in this appendix we generalize the simple model presented in the paper. basic set-up: a model without government we assume two profit maximizing firms, a and b. at the beginning of the first period, firms choose (simultaneously) between two technologies: green (environmentally friendly) and brown. we assume that profits grow by a factor  over time, which can be attributed to experience, learning by doing, or to the quality of the environment. moreover, whenever a firm produces using the brown technology it depletes the environment introducing additional costs in period 2. formally, we assume that if both firms choose the green technology, their profits grow by a factor αg; if both firms invest in the brown technology, their profits grow by αb; and if one firm chooses green and one brown, profits in period 2 grow by αm. to capture the benefits of green technologies in the environment, we assume that αg > αm > αb > 0. letting  denote the time discount parameter, then the two-period discounted payoffs of firms a and b can be summarized in the matrix depicted in table 1. if both firms choose the green technology, they each earn profits g in period 1 and αg g in period 2. if both firms choose the brown technology, they both earn (1 + p)g in period 1 and αb (1+ p)g in period 2, where p denotes the short term savings from using the brown technology. if one firm chooses the green technology and the other the brown technology, the firm that chooses green receives g in period 1 and αm g in period 2, while the firm that chooses the brown technology receives (1+ p)g in period 1 and αm (1+ p)g in period 2. to find the equilibrium of the game we compare the payoffs of each firm taking the strategy of the other firm as given. we find that for certain values of the parameters, choosing the brown technology is always optimal, no matter what the other firm does; for other values, choosing the green technology is always optimal. we summarize these conditions in proposition 1. proposition 1:  if p > (αm – αb )/ (1 + αb) and p > (αg – αm )/ (1 + αm), then the unique nash equilibrium of the game is for both firms to choose the brown technology.  if p < (αm – αb )/ (1 + αb) and p < (αg – αm )/ (1 + αm), then the unique nash equilibrium of the game is for both firms to choose the green technology. table 1: payoff matrix firm b green technology brown technology f ir m a g r e e n t e c h n o lo g y firm a’s payoffs: ( 1 + αg) g firm b’s payoffs: ( 1 + αg) g firm a’s payoffs: ( 1 + αm ) g firm b’s payoffs: ( 1 + αm )(1+p) g b r o w n t e c h n o lo g y firm a’s payoffs: ( 1 + αm )(1+p) g firm b’s payoffs: ( 1 + αm ) g firm a’s payoffs: ( 1 + αb) (1+ p) g firm b’s payoffs: ( 1 + αb) (1+ p) g 47 | journal for economic educators, 16(1), 2016 47 according to proposition 1, if the monetary costs from adopting green technologies are “high enough,” then firms are better off choosing brown technologies. in the next section we investigate the alternatives of governments or regulatory agencies to change these choices. regulations assume that p is “large enough” and thus that the unique nash equilibrium of the game is for both firms to choose the brown technology. in this section we modify the payoffs of firms by assuming that governments levy a tax, t, on firms that choose the brown technology. the modified two-period discounted payoffs of firms can be summarized in table 2. a comparison of payoffs leads to the conclusion that if taxes t are “large enough,” the green technology becomes a dominant strategy and the unique nash equilibrium of the game occurs when both firms choose the green technology. we summarize this in proposition 2. proposition 2: if t >((αm – αb )-(1+αb)p)/αbp) and t >((αg – αm )(1+αm)p)/αmp), then the unique nash equilibrium of the game is for both firms to choose the green technology. table 2: payoffs with taxes firm b green technology brown technology f ir m a g r e e n t e c h n o lo g y firm a’s payoffs: ( 1 + αg ) g firm b’s payoffs: ( 1 + αg ) g firm a’s payoffs: ( 1 + αm ) g firm b’s payoffs: ( 1 + αm )(1+p)(1-t) g b r o w n t e c h n o lo g y firm a’s payoffs: ( 1 + αm )(1+p)(1-t) g firm b’s payoffs: ( 1 + αm ) g firm a’s payoffs: ( 1 + αb) (1+ p)(1-t) g firm b’s payoffs: ( 1 + αb )(1+ p)(1-t) g in addition to levying a tax, governments may offer subsidies to firms that choose green technologies, or a combination of subsidies and taxes. a subsidy s increases the payoffs of green firms and leaves the payoffs of brown firms unchanged. table 3 summarizes the payoffs when both subsidies and taxes are imposed, while proposition 3 summarizes the conditions under which (green, green) is the unique nash equilibrium. proposition 3: if (1+s)/(1-t) > (1 + αb)(1+p)/αb and (1+s)/(1-t ) > (1 + αm)(1+p)/αm, then the unique nash equilibrium of the game is for both firms to choose the green technology. changing firms’ objectives via taxes or subsidies can lead to a socially desirable outcome: a sustainable equilibrium. although the model assumes that the variations in payoffs come from government regulations, the payoffs can be interpreted as imposed by consumers. for example, if many consumers decide to patronize only the firms that use sustainable technologies, 48 | journal for economic educators, 16(1), 2016 48 demand for the products of the firms using brown technologies decreases. this is akin to a tax on firms using cheaper, yet “dirtier”, technologies. table 3: payoffs with taxes and subsidies firm b green technology brown technology f ir m a g r e e n t e c h n o lo g y firm a’s payoffs: (1 + αg )(1+s) g firm b’s payoffs: (1 + αg )(1+s) g firm a’s payoffs: (1 + αm )(1+s) g firm b’s payoffs: (1 + αm )(1+p)(1-t) g b r o w n t e c h n o lo g y firm a’s payoffs: (1 + αm )(1+p)(1-t) g firm b’s payoffs: ( 1 + αm )(1+s) g firm a’s payoffs: (1 + αb )(1+ p)(1-t) g firm b’s payoffs: (1 + αb )(1+ p)(1-t) g 81 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 81 factors that impact compensation of ncaa head basketball coaches leila j. pratt1, e. bruce hutchinson2, catherine middleton3 abstract to show junior, senior, and graduate economics students that topics for course projects can arise in their every-day reading, this study examines the compensation of relatively successful coaches: division i men’s basketball coaches whose teams appeared in the 2011, ’12, or ‘13 ncaa tournaments. salary is hypothesized as a function of coach specific characteristics as well as the college’s conference affiliation. head coaching characteristics include: experience measured as years at current school; the winning percentage at current school, previous college head-coach experience, ncaa tournament winning percentage, and ncaa championships won. other characteristics considered are the coach’s race and his current school’s bcs or non-bcs conference affiliation. the regression results verify that experience at both current and previous school(s), plus ncaa winning percentage and ncaa championships won, measure job performance and are positively related to compensation. key words: compensation, ncaa basketball tournament, bcs conference, race jel classification: j33, l83 introduction this paper focuses on regression analysis to explain a college basketball head coach’s compensation in order to show junior, senior, and graduate economics students that topics for course projects occur through their every-day reading. dr. leila pratt, a co-author of this project, discovered the basic data set used while reading usa today.4 daily reading such as usa today, other newspapers, and casual and professional reading can regularly provide data for course studies. by using basic descriptive statistics (see table 1 and related discussion), which are covered for most economics majors in their sophomore statistics course, or regression analysis (table 2 and thereafter), likely covered in a junior or senior course, a student can posit and test interesting business and economic relationships for any data set. we use basic data to consider factors impacting a college head-basketball coach’s compensation. college coaches preach the importance and values of competition, asserting that playing and playing time are rewards for productivity. few people question this. so, we ask the related question: is a head-basketball coach rewarded based on his coaching productivity? 1 professor emeritus, department of finance and economics, college of business, university of tennessee at chattanooga, 3104 ozark road, chattanooga, tn 37415. 2 professor emeritus, department of economics, college of business, university of tennessee at chattanooga, 403 tennessee avenue, signal mountain, tn 37377. 3 lecturer, department of finance and economics, college of business, university of tennessee at chattanooga, 615 mccallie avenue, chattanooga, tn 37403. 4 usa today continues to publish this data each spring for head college basketball coaches and now likewise for head and assistant college football coaches. 82 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 82 each college basketball season concludes with the annual ncaa (national collegiate athletic association) men’s basketball tournament. this spectacle depends on both players and coaches, among others. though the players earn no explicit income, each receives a scholarship that covers tuition, room, board and other school related expenses plus the free coaching, training, and use of the school’s facilities. each also gains the value of a four-year college degree, provided he graduates, or for a few, the value of a master’s degree.5 these benefits taken together are likely worth $200,000 or more. on the other hand, the coaches of teams invited to the 2011 though 2013 tournaments earned an average annual salary of $1,375,270 with a range of $85,000 to $7,500,000. their average pay (salary plus bonus) was $1,678,710 with a range of $94,792 to $8,075,000 (see table 1). the financial arrangements underlying these compensation figures are not considered here. our focus is to determine the statistical linkage between easily quantified performance factors and compensation for the head coaches included in our data set. the head coach (hereafter, coach) manages, plans, recruits, organizes, and coordinates ingame as well as overall strategy. like kahn (1993) and humphreys (2000), we focus on a coach’s human capital as a determinant of a team’s success under his tutelage and thus a determinant of his compensation. the present study uses cross-section and time-series data published by usa today for men’s basketball coaches whose teams appeared in the 2011, 2012, or 2013 ncaa tournaments.6 in particular, a coach’s compensation is hypothesized as a function of a set of individual characteristics, mostly based on competitive success, plus the conference affiliation of his school. brook and foster (2010) examined several variables related to the salaries of ncaa basketball coaches. while their focus was on gender differences in salaries, they also evaluated coaching salaries of men’s teams. they concluded that a coach’s career winning percentage was a statistically significant factor (at the 99% level) in predicting salary. in addition, the team’s strength of schedule and whether the team played in a bcs or power-five (hereafter, bcs) conference were also found to be important. we include the coach’s winning percentage at his current school and a dummy for bcs conference affiliation in our analysis. we expect to find similar results. brook and foster also examined different revenue sources (ticket sales, contributions, concessions, etc.). while this is outside the scope of our research, it is interesting to note that they also found that contributions and ticket sales were statistically significant for men’s basketball teams, although not for women’s teams. this would seem to place a premium on a team’s winning record, particularly for men’s teams, as winning stimulates ticket sales and alumni contributions. thus, we expect a positive relationship between a coach’s winning percentage and his compensation. kahn (2006) specifically examined the effect of race on a coach’s salary, but limited his scope to the nba. still, as many nba coaches either played or coached in the ncaa (both variables kahn included), we find his results to be relevant to our analysis of ncaa coaches with respect to the race variable. while many of the human capital variables are similar for nba coaches and ncaa coaches, we cannot overlook the fact that nba teams are comprised of paid players. kahn controls for differences in expected player quality by including the log of the teams’ 5according to the institute for diversity and ethics in sport, the 68 teams invited in 2012 had a 67% graduation rate versus a 66% rate for teams invited in 2011. 6 the tournament concludes each college basketball season with a team earning a bid (invitation) based on winning its conference or conference tournament or being invited based on its winning record, strength of schedule and other factors. 83 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 83 payroll as compared to the league average. as that is not possible in the ncaa – by regulation college players may not be paid we attempt to control for this by including a dummy variable related to the school’s conference affiliation. our expectation is that bcs level schools have advantages in recruiting more talented players than do lower level schools. ultimately, kahn finds that while white coaches in the nba have higher average salaries than black coaches, he also finds that they have more previous coaching experience at either the ncaa or nba level, and that teams with white coaches have better records and a relatively higher payroll than nba teams with black coaches. still, when the human capital variables are controlled for, he finds no significant difference in pay between black and white coaches. we hope to find similar results at the ncaa level. data & results data on a coach’s compensation, the year he was hired at his present school, his record at his present school, career record, ncaa record and the school’s conference affiliation were obtained from usa today for each team that participated in the 2011-2013 ncaa tournaments (schnaars & deramus, 2012).7 a coach and team are in the data set only in the year(s) invited into the tournament. specifically, 52 coaches appear in our data once; 35 appear twice (35 x 2 = 70); and 20 appear all three years (20 x 3 = 60) for a total of 182 observations. similarly, 53 schools appear in the data once; 30 appear twice (30 x 2 = 60); and 23 appear three times (23 x 3 = 69).8 thus, our results apply only to proven high-performing coaches.9 whether or not a coach has won a ncaa championship as head coach was obtained from division i men’s basketball championship history at ncaa.com. data reported by usa today include salary, bonus, and outside earnings. because the institution has little or no control over outside income, our estimations use salary (salary) or salary plus bonus (pay).10 several variables that measure a coach’s human capital or might otherwise explain differences in salary or earnings are constructed from the data. for the explanatory variables to represent a coach’s competitive history and human capital entering a given basketball season, each variable is constructed annually for a coach, hence, the variable values change for a coach who appears multiple times in the data. explanatory variables included are: pswins: the coach’s winning percentage as head coach at his present school. this variable is calculated as present school wins divided by present school wins plus losses.11 pnwins: the coach’s career head coaching ncaa tournament games winning percentage – calculated in the same manner as pswins. 7 compensation data is absent for 18 of the schools: boston university, byu, creighton, hampton, harvard, iona, lehigh, long island, miami, princeton, st. john’s, saint louis, saint peter’s, southern california, southern university, valparaiso, wofford, and xavier – all private institutions which maintain confidentiality. we give special thanks to the dedicated data gathering by holly higgins and ernest retzer. 8 the 23 coaches included in each year of the data provide too few observations to model and expect statistically significant results. 9 indeed, 10 coaches in our data account for 22 of the 30 ncaa tournament championships beginning with 1989. the authors have failed to find a similar extensive data set for college basketball coaches – we did find salary data for one conference for one year. 10 earlier versions of this paper included the variable earnings, salary plus bonus plus additional compensation. given that the ease or difficulty as well as criteria for earning the additional compensation are unknown, we have ceased using it. 11 it should be noted that the percentage data means (table 1) for pncaaw, pswins, and pcwins are calculated as the average of the coaches’ winning percentages; for example, a coach such as duke’s mike krzyzewski ncaa tournament record (88-26), 77%, when averaged with a coach who appeared once and lost, 0%, is 39%. 84 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 84 dncaac: a dummy variable that equals 1 if the coach has won one or more ncaa tournament championships or 0 otherwise. so few coaches have won this tournament more than once that just winning the championship seems a more appropriate statistical distinction than is the number of times a championship was won. care should be taken with this variable. its correct interpretation is the percentage of coaches appearing in the data who have won an ncaa tournament – recognize that a coach such as mike krzyzewski who has won the tournament and others appear in the data set multiple times and therefore are counted multiple times. only two coaches with a tenure of between 0 and 6 years at their current school have won ncaa championships: uniquely both won it at the university of kentucky; they are john calipari who currently is the university of kentucky coach, and tubby smith who coached at the kentucky and at the university of minnesota during the 2011 – 2013 seasons. bcs: a dummy variable for a bcs conference schools. these conferences include: atlantic coast conference (acc), big 12 conference (big12), big east conference (bigeast), big 10 conference (big10), pacific athletic conference (pac12), and southeastern conference (sec).12 bcs conferences schools are the heavyweights of ncaa division-i schools. they hold large television contracts for both football and men’s basketball, are perceived to compete at a higher level, and have better training facilities. mid: a dummy variable for high mid-major conference schools. these conferences include: conference usa, mid-american athletic conference, mountain west athletic conference and sun belt athletic conference. these conferences are generally included in this group because they have a significant number of teams that usually qualify for the ncaa tournament or teams from these conferences have generally been successful in the ncaa tournament. of these conferences, the mountain west has historically been the most successful.13 the previous variables should measure a coach’s success in competition and the quality of his human capital. in addition, several dummy variables to control for the race of the head coach and for inter-year effects are included: race: a dummy variable that equals 1 if the head coach is black; 0 if otherwise. as with the variable dncaac the correct interpretation of this variable is the percentage of coaches in the data set who are black. this variable and its coefficient likely are affected by a combination of: the relatively few black head coach observations in the data set (18 out of 182 observations but only 13 different individuals) and the tenure distribution among these coaches in the data set. among the 18 counted black coaches in the data set, 13 are at bcs schools and 5 at non-bcs schools. tenure at their current institutions ranges from 0 to 9 years. this group of coaches had previous head coaching experience ranging from 0 to 22 years. the two longest tenured coaches, 12 schools participating in at least one of the 2011-13 ncaa basketball tournaments according to bcs conference affiliation are: acc: clemson, duke, florida state, north carolina state, unc, virginia; big 12: baylor, iowa state, kansas state, kansas, missouri, oklahoma, oklahoma state, texas, texas a & m; big east: cincinnati, georgetown, louisville, marquette, notre dame, pittsburgh, south florida, syracuse, villanova, west virginia; big 10: illinois, indiana, michigan, michigan state, minnesota, ohio state, penn state, purdue, wisconsin; pacific 12: arizona, california, colorado, oregon, ucla, washington; and sec: alabama, florida, georgia, kentucky, mississippi, missouri, tennessee, vanderbilt. again, earlier versions of this paper identified schools by conference affiliation; however, that showed a similarity of result among bcs schools versus non-bcs schools hence the use herein of bcs versus mid-major conference schools versus all others. 13 schools from mid-level conferences that participated in at least one of the 2011-13 ncaa basketball tournaments include: cusa: university of alabama birmingham, university of southern mississippi, university of memphis; mac: akron; mwc: san diego state, university of nevada las vegas, colorado state university, university of new mexico, boise state university; sun belt: western kentucky university, middle tennessee state university, university of arkansas little rock. 85 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 85 cy alexander and tubby smith, followed vastly different career paths over roughly the same period. alexander began his head-coaching career in 1987 at south carolina state university, moved to tennessee state university in 2003, and is currently a head coach at north carolina a & t. these schools are historically black colleges in conferences ranked near the bottom of all ncca division i schools and typically compensate faculty and staff well below the perceived market rate. smith began his head-coaching career at tulsa in 1991 and then moved to bcs schools university of georgia (1995-1997), university of kentucky (1997-2007) and university of minnesota (2007-2013). tenure: number of years as head coach at current school.14 sq tenure: tenure squared. yroth: the number of years of head-coaching experience an individual had prior to taking his current job.15 yr2011: 1 for observations from the 2010-2011 season; 0 otherwise. yr2012: 1 for observations from the 2011-2012 season; 0 otherwise. in2: 1 for a coach who went to the tournament two of the three years; 0 otherwise. in3: 1 for a coach who went to the tournament each of the three years; 0 otherwise. the dummy variable coefficients yr11 and yr12 should be interpreted as the percentage increase or decrease in compensation from the 2010-2011 (yr2011) or from the 2011-2012 (yr2012) season compared to the 2012-2013 -not from the 2012-2013 season back to 2011-2012 and then back to 2010-2011. the expectation is that each of the above explanatory variables will show a positive relationship with salary or pay, except race which is expected to have a negative relationship with salary or pay. in a performance-focused environment, wins measures, including dncaa, ought to be positive; conference hierarchy should drive the bcs and mid variables positive, with bcs having a substantially higher impact than mid. only the dummy year variables ought to be negative due to being backward measures of compensation inflation. the same logic implies that yr11 will be a larger negative than yr12. 14 we expect that the importance and value of previous head coaching performance wanes relative to current school performance, especially following the initial contract. a chow test between the 104 observations for coaches with 0 – 6 years of tenure and the 78 observations for those with more years of tenure yields for salary an f (9,164) = 3.3716 with p-value = 0.0008, and for pay f (9, 164) = 4.1317 with p-value = 0.0001. thus, the null hypothesis that the wage equation is the same for the two tenure groups is rejected at the 1% significance level. the classical method of handling experience at the current school is inclusion of variables for years of experience at the school and its square. 15 other variables such as the coach’s winning percentage at previous schools and dummy variables for 1-3, 47, 8-14 and 15 plus years head-coaching experience prior to taking his current job similar to yroth were tried. additionally, two other variables considered were rpi (rating percentage index), and sos (strength of schedule). sos measures the difficulty of a team’s schedule based on the won/loss record of it opponents. rpi is a measurement used to rank a team. it is based on a team’s won/loss record and its sos; it is a tool used in the ncaa tournament selection process. although both were considered, either for the previous season (lagged one year) or for the current season, neither was statistically significant in any of the regressions. none of the regressions with these explanatory variables explained more than an additional 2% of the variance and these variables were generally statistically insignificant. hence, we focus on regression results using the yroth variable to account for prior head-coaching experience. these other regression results are available upon request. 86 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 86 statistical analysis table 1 summary statistics total sample (n = 182) variable mean std. dev. minimum maximum salary $1,375,270 $1,239,300 $85,000 $7,500,000 pay $1,678,710 $1,384,010 $94,792 $8,075,000 pswins 58.47% 20.36% 0.00% 92.11% pnwins 38.47% 28.05% 0.00% 83.33% race 0.10 0.31 0.00 1.00 tenure 7.25 6.95 0.00 36.00 dncaa 0.15 0.36 0.00 1.00 bcs 0.52 0.50 0.00 1.00 mid 0.12 0.33 0.00 1.00 race 0.10 0.31 0.00 1.00 in2 0.33 0.47 0.00 1.00 in3 0.38 0.49 0.00 1.00 yroth 6.50 7.18 0.00 26.00 table 1 provides summary statistics for the dataset. for an individual coach, some of these variables have minimum values of zero indicating one of the following: the coach was in his initial season as a head coach at that school, had no previous school head-coach experience, had no prior ncaa tournament record, had no ncaa tournament championship, or was not at a bcs or mid school. the information presented in table 1 leads to several observations:  a head coach who maintains a seasonal record of winning 75% or more of all games played is exceptional.  a head coach’s tenure at a school averages just over seven years and to remain at a school more than 15 years is exceptional. the dataset includes 104 coaches who were at their current school six years or less versus 78 whose tenure exceeded six years.  13% of coaches with less than seven years tenure are black, versus 6% of coaches with more than seven years tenure. this may reflect an increase in opportunities for blacks to become head-coaches.  longer tenure (7+ years) increases the likelihood of winning an ncaa basketball championship. only two of the coaches with less than six years as the head coach at a school have won an ncaa basketball championship, while 32% of coaches with seven-plus years 87 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 87 have won a championship.16 this general result suggests the importance of the coach recruiting ‘his players’ and instilling ‘his style of play’ or of coaching highly rated players. two coaches, mike krzyzewski (duke university: 1991, 1992, 2001 and 2010) and roy williams (university of north carolina: 2005 and 2009), in the data set have won multiple ncaa championships.  the ncaa tournament winning percentage for coaches who remain at a school longer than six years is 49%, versus a ncaa tournament winning percentage of 30% for those with a tenure of less than six years. that the longer-term record approaches 50% is expected; the tournament is single elimination (winner continues to next game and loser is out of the tournament) so that every win is matched by a defeat. single elimination also accounts for the variable pnwins being less than 50%. following standard techniques, we estimate the semi-log regression equation: ln (sal or pay) = b0 + b1x1j + b2x2j … bnxnj. the results for these regressions are presented in table 2.17 the number of asterisks following the coefficient estimate indicates the one-tailed level of statistical significance: one asterisk represents the 10% significance, two asterisks represent the 5% level, and three asterisks represent the 1% level.18 a perusal of table 2 shows similar results for the coefficient estimates including their sign, standard errors, and statistical significance. each coefficient sign is as expected except for the minus sign on tenure. the exceptions for significance are dncaa which is insignificant for salary but significant at the 5% level for pay; tenure which is significant for salary at the 10% level but significant for pay at the 1% level; and sq. tenure which is significant for pay at the 5% level and not significant for salary. a possible explanation for these differences is that a head coach’s initial compensation includes performance incentives as bonuses captured by pay (salary plus bonus) and not by salary alone. the negative sign on tenure may reflect that once a coach attains a position at a bcs school there is no higher level in college basketball leaving only the few head-coach positions in the nba with equal or higher compensation, so he remains at the school long term. note that race is negative and insignificant for both salary and pay. we doubt that this negative sign is due to a “traditional” view of race; rather, after reviewing the black coaches in the data, we believe the negative sign is likely due to the presence of several quite successful black coaches such as cy alexander who have remained at traditional black colleges where compensation is low. 16 the two are john calipari currently at the university of kentucky, who previous to winning the tournament had been head coach for eight years at the university of massachusetts, nine years at the university of memphis, and three years at the university of kentucky; and tubby smith, who won the championship in his first season as head coach at the university of kentucky, previously head coach for four years at the university of tulsa and for two years at the university of georgia. 17 the regression coefficients multiplied by 100 measure the percentage change in the dependent variable, sal or pay, from a unit change in xij holding all other variables constant. for example, the coefficient for pswins (table 2 [salary all]) equals 0.011; this indicates that a one percent increase in a coach’s school winning percentage will increase his pay by 1.10%. 18 students should again note that our regression analysis relies solely upon tools learned in a first semester regression course. 88 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 88 table 2 regression results for ncaa tournaments 2011-2013 dependent variable: salary dependent variable: pay variable coef. std. error tratio signif. coef. std. error tratio signif. constant 12.00 0.14 86.03 *** 12.46 0.14 86.85 *** pswins 1.19 0.23 5.26 *** 1.10 0.23 4.72 *** pnwins 0.66 0.19 3.54 *** 0.67 0.19 3.48 *** dncaa 0.22 0.14 1.56 0.31 0.14 2.17 ** race -0.19 0.12 -1.57 -0.12 0.13 -0.93 bcs 1.14 0.10 11.81 *** 1.19 0.10 11.69 *** mid 0.29 0.13 2.29 ** 0.49 0.13 3.77 *** tenure -0.03 0.02 -1.72 * -0.05 0.02 -3.36 *** sq. tenure 0.00 0.00 1.19 0.00 0.00 2.08 ** yr11 -0.22 0.09 -2.46 ** -0.26 0.09 -2.86 *** yr12 -0.01 0.09 -0.10 -0.08 0.09 -0.87 in2 0.11 0.10 1.05 0.16 0.10 1.57 in3 0.37 0.11 3.50 *** 0.30 0.11 2.75 *** yroth 0.02 0.01 3.35 *** 0.01 0.01 2.27 ** r-squared 0.80 0.77 adj. r-squared 0.78 0.75 f (13, 168) 50.81 43.52 critical t-values: 1.27 at 10% 1.65 at 5% 2.35 at 1% wins at current school, pswins, and being the head coach at a bcs conference school have the largest coefficient impact on a head coach’s compensation, while also significant at the 1% level. indeed, together these two coefficients have a larger impact than that of the other variables combined. in magnitude of importance (coefficient estimate), these are followed by success in the tournament itself, pnwins, continuous success measured by being in the tournament all three years, in3, and mid – if you are not at a bcs school your next best option is to be at a mid school. of course, this latter factor plays prominently in moving up from a mid school to head coach at a bcs school. that in3 is, and in2 is not, highly significant reflects the difficulty of taking a school annually, even for three years, to the tournament – good fortune or good to outstanding players recruited and developed under the previous head coach may work for one or two tournament appearances in three years; but, not for being invited annually for three years. mid shows the largest difference in coefficient estimates between the regressions among the statistically significant variables with the pay coefficient almost twice that for salary. a possible explanation may be that mid schools use bonuses to reward and retain a coach who has an exceptionally good year or two from moving up to a bcs school. there were two coaches, john pastner at memphis and steve fisher at san diego state, from mid schools that took a school all three years to the tournament. 89 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 89 though the variables tenure, sq. tenured (except for salary), and yroth are significant, their coefficients are quite small, providing little impact on compensation dollars. for both salary and pay the dummy variables yr11 and yr12, which represent, respectively, two years and one year prior to the 2012-13 season, show negative coefficients as should be expected with the expected larger coefficient for yr11, statistically significant at the 5% level for salary and 1% level for pay. however, the relative magnitude of the coefficients – yr11 ranging between 0.22 and 0.26 versus yr12 ranging between 0.01 and 0.08 seems off, since the coefficients should reflect annual compensation inflation. the explanation for the different significance results may be the presence and non-presence of coaches among the years. lastly, the r-squared and adjusted r-squared results show that production-focused measures explain 75% to 80%, a substantial proportion, of the variation in compensation for highly successful college basketball coaches. conclusion a human capital model for ncaa head-basketball coaches explains 75% to 80% of the variation in salary or pay among coaches participating in the ncaa basketball tournament during the three seasons ending 2011-2013. since 55 of the coaches appear in the data for two or three of the three years of data, the data represent successful coaches more so than all coaches. the results also show that the move to head coach at a bcs school is rewarded with an approximate doubling of compensation from a non-bcs or non-mid level conference school; the compensation boost for moving up to a mid-level conference school is 30% or more. having won an ncaa tournament championship provides approximately a 20% to 30% boost to salary or pay; of course, only one coach per season does so, making this more a hope for good fortune from a one-time boost. our results suggest that a coach can raise his compensation by increasing his long-term winning percentage at his current school or in the ncaa tournament, but achieving either of these becomes increasingly difficult with more years at a school. lastly, students are reminded that their daily reading can provide useful data upon which to base an economics or statistics course paper relying solely upon analysis learned in their first statistics course or first econometrics course. references: brook, stacey and foster, sarah. 2010. “does gender affect compensation among ncaa basketball coaches?” international journal of sport finance, 5: 96-106. humphreys, brad r. 2000. “equal pay on the hardwood: the earnings gap between male and female ncaa division i basketball coaches.” journal of sports economics, 1(3): 299-307. lapchick, richard (director) 2012. “keeping score when it counts.” institute for diversity and ethics in sport. kahn, lawrence m. 1993. “managerial quality, team success and individual player performance in major league baseball.” industrial & labor relations review, 46(3): 531-547. kahn, lawrence m. 2006. “race, performance, pay, and retention among national basketball association head coaches.” journal of sports economics, 7(2): 119-149. ncaa.com. division i men’s basketball championship history. schnaars, christopher and deramus, kristin. 2012. “college basketball coaches’ salaries, 20112012.” usa today. harper, shaun r., 2015. “black college football and basketball players are the most powerful people of color on campus.” the washington post, november 11. 90 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 90 ryan, shannon. 2016. “with the number of black head coaches down, ncaa needs its own rooney rule.” chicago tribune, january 18. 13 | journal for economic educators, 15(1), 2015 supply locus: a note on the supply decisions of monopolistic firms john roufagalas1 abstract this note introduces the concept of the supply locus to describe the systematic supply responses of monopolistic firms to changes in demand. while in general the supply locus is not unique, it is shown that it is unique in the empirically interesting cases of a) a linear demand that shifts in a parallel fashion, and b) a constant elasticity exponential demand that shifts in a way that preserves its elasticity. key words: supply locus, monopolistic competition, monopoly. jel classification: a22, d40 introduction the marshallian demand and supply model has been the workhorse of economics for more than a century now. while the demand side of the model has received considerable attention over the years, the supply side is problematic. it is generally claimed that the individual supply curve (and consequently the market supply curve) does not exist when the firm is not a price taker, i.e. when the firm does not face a horizontal demand curve, or equivalently, when the firm is not perfectly competitive.2 since perfect competition is an ideal state, rather rare in reality, then in theory, the supply curve should also be rather rare. nevertheless, considerable empirical effort has been devoted to estimate supply curves and supply elasticities.3 it seems a waste of intellectual energy to attempt to estimate something that theoretically (and presumably in reality) rarely exists. this note claims that when a firm is not a price taker, i.e. it faces a downward sloping demand curve and determines its optimal output by equating marginal cost to marginal revenue, it responds systematically to changes in demand. these systematic responses can be used to derive 1 professor of economics, division of economics and finance, troy university montgomery, p.o. drawer 4419, montgomery, al 36103. i would like to thank drs. jennings byrd, alexei orlov and henry thompson as well as an anonymous referee for helpful comments. the usual disclaimer applies. 2 for example, the leading principles of economics textbook these days, mankiw (2015), devotes a separate box in page 308 to the claim that “…monopoly does not have a supply curve.” 3 for example, askari and cummings (1977) report hundreds of supply elasticity estimates for agricultural products. some of these estimates refer to categories like: “vegetables” or “soft fruits” that definitely do not satisfy the “uniform product” assumption of perfect competition. traesupap, matsuda and shima (1999) study the demand and supply for japanese shrimp defined as 7 different types, including lobsters, that is not uniform as perfect competition requires. kenny (1999) estimates supply and demand for housing, even though it is difficult to argue that housing is a perfectly competitive market. 14 | journal for economic educators, 15(1), 2015 a “supply locus” that can take the place of the missing supply curve. thus, the empirical work estimating supply curves, as well as public policy using these estimates, are actually estimating “supply loci.” it will be shown that the position and slope (and hence, elasticity) of the supply locus depends not only on the marginal cost determinants that affect the traditional supply curves, but also on demand characteristics. that these demand characteristics are ignored in the empirical work implies that empirical estimates of supply slopes and elasticities may be biased due to missing variables.4 in what follows a quick reference is made to the argument for the non-existence of the supply curve when the firm has market power. then, the “supply locus” for a monopolistic firm is derived.5 the non-existence of the supply curve for non-perfectly competitive firms according to pindyck and rubinfeld (2013): “a monopolistic market has no supply curve. in other words, there is no one-to-one relationship between price and quantity produced. the reason is that the monopolist’s output decision depends not only on marginal cost, but also on the shape of the demand curve. as a result, shifts in the demand do not trace out a series of prices and quantities as happens with a competitive supply curve. instead, shifts in demand can lead to changes in price with no change in output, changes in output with no change in price, or changes in both.” (365) thus it appears that the non-existence of monopolistic supply is based on a non-uniqueness argument. that the pindyck and rubinfeld argument does not hold for “parallel shifts” of a linear demand and for constant elasticity demand curves is shown below. in other words, there is a oneto-one relationship between price and quantity supplies in two cases: 1) when the demand is linear and only shifts in a parallel way, i.e. it does not change slope; and 2) when the price elasticity of demand is constant and does not change as demand shifts. non-uniqueness occurs when demand changes either location and slope both, or price elasticity. hence, if we restrict attention to either linear (for shifts not caused by the own price coefficient) or constant elasticity demand curves, then non-uniqueness does not apply. deriving a supply locus let the following be the demand (d), total revenue (tr) and marginal revenue (mr) functions: 𝐷 = 𝑃(𝑄), 𝑃′(𝑄) < 0 𝑇𝑅 = 𝑄 ∙ 𝑃(𝑄) 4 while direct evidence for this claim requires extensive empirical testing, some indirect evidence can be gleaned from the existing literature. just (1993) indicates that “…the estimated parameters from these simple models seem to be unstable over time so that forward-looking prediction and policy analysis are not well supported.” it is argued here that the instability may partially derive from ignoring demand characteristics. 5 in the case of oligopoly, the cournot model exogenously assumes a vertical supply relation (i.e. fixed quantities) and the bertrand model exogenously assumes a vertical one (i.e. fixed prices). models by klemperer and meyer (1989), grossman (1981), vives (2011) assume a “strategic supply curve” that allows both quantity and price adjustments, i.e. they assume a positively sloping supply. 15 | journal for economic educators, 15(1), 2015 𝑀𝑅 = ( 𝜕𝑃 𝜕𝑄 ) ∙ 𝑄 + 𝑃 = 𝑃 ∙ (1 + 1 𝑒 ) , 𝑤ℎ𝑒𝑟𝑒 𝑒 = 𝜕𝑃 𝜕𝑄 ∙ 𝑄 𝑃 also let the following total cost (tc) and marginal cost (mc) functions be: 𝑇𝐶 = 𝐶(𝑄) 𝑀𝐶 = 𝐶′(𝑄) > 0 primes denote derivatives and e stands for the price elasticity of demand. standard monopolistic profit maximization, mc = mr, determines the optimal quantity q* supplied by the monopolist: 𝑀𝐶 = 𝑀𝑅 => 𝐶′(𝑄∗) = 𝑃(𝑄∗) ∙ (1 + 1 𝑒 ) given the optimal quantity, the monopolistic price can be determined by adding the profit margin (p-mr) to the marginal cost (mc). this allows the derivation of the supply locus: 𝑃(𝑄) = 𝑀𝐶 + (𝑃(𝑄) − 𝑀𝑅) = 𝐶′(𝑄) − ( 1 𝑒 ) 𝑃(𝑄) or 𝑃(𝑄) = 𝐶′(𝑄)( 𝑒 𝑒 + 1 ) this is a version of the well-known “markup” equation. for a perfectly competitive firm, as the elasticity of demand is (minus) infinity, the elasticity term equals one and the supply locus coincides with the supply curve. for e < -1, the elasticity term is positive and larger than one, indicating that the supply locus will lie above the marginal cost function. for inelastic price elasticities of demand larger than or equal to minus one, there is no interior monopolistic profit maximization solution, i.e. corner solutions apply. the supply locus equation makes clear that its shape and location depend not only on the factors that affect marginal costs (i.e. the traditional supply factors,) but also on the factors that affect the price elasticity of demand. obviously, when the elasticity of the demand is constant and does not change when the demand shifts, the supply locus is unique and its slope is proportional to that of marginal cost: 𝑃′(𝑄) = 𝐶′′(𝑄)( 𝑒 𝑒 + 1 ) alternatively, when demand shifts result in changes in price elasticity, as when demand is linear, then the supply locus also shifts. then it is possible for demand to intersect the supply locus at the same price or the same quantity as before the shift. that is, there is non-uniqueness. now consider the linear demand specification of the model. a linear-quadratic specification the supply locus for a model with linear demand and a quadratic total cost function is derived below. this specification is interesting, because almost all textbooks draw a linear downward-sloping demand and a linear upward-sloping marginal cost. in addition, a large segment of the empirical work focuses on linear demand and supply curves. suppose the following demand, marginal revenue, total cost and marginal cost functions: 𝑃 = 𝑎 + ( 𝑏 2 ) 𝑄, 𝑎 > 0; 𝑏 < 0 𝑀𝑅 = 𝑎 + 𝑏 𝑄 𝑇𝐶 = 𝑐0 + 𝑐1𝑄 + ( 𝑐2 2 ) 𝑄2 , 𝑐1, 𝑐2 > 0 𝑀𝐶 = 𝑐1 + 𝑐2𝑄 16 | journal for economic educators, 15(1), 2015 equating mc to mr, and subsequently using the demand function yields the following optimal price/quantity combination: 𝑄𝑀 = ( 𝑎 − 𝑐1 𝑐2 − 𝑏 ) 𝑃𝑀 = ( 2𝑎(𝑐2 − 𝑏) + 𝑏 (𝑎 − 𝑐1) 2(𝑐2 − 𝑏) ) the margin p-mr equals (− 𝑏 2 )q. hence the supply locus is: 𝑃𝑀 𝑆𝐿 = 𝑀𝐶 + (𝑃 − 𝑀𝑅) = 𝑐1 + ( 𝑐2 − 𝑏 2 ) 𝑄 inspection of the supply locus function reveals that a) if b=0, i.e. the demand is horizontal as in perfect competition, the supply locus coincides with the supply curve/marginal cost; b) the slope of the supply locus is the sum of the slopes of the marginal cost curve and the demand curve; and c) as long as demand shifts derive from changes in the demand intercept without changing its slope, the supply locus is unique and the equilibrium price-quantity combination will be at the intersection of the demand curve and the supply locus. figure 1 the significance of this result for empirical work is that observed market equilibria in nonperfectly competitive markets are, most likely, points at the intersection of the demand with the supply locus, not at the intersection of the demand with the marginal cost curve. assuming that 17 | journal for economic educators, 15(1), 2015 the estimated system is linear with a stable own price coefficient on the demand side (i.e. a constant demand curve slope), it is obvious that on the supply side, the correct estimation is that of the supply locus and not of the marginal cost/supply curve. ignoring the effect of the slope of the demand on the supply locus leads to systematic bias on the estimated supply coefficients (missing variables bias.) incorporating the supply locus in economics textbooks the central goal of this discussion has been to demonstrate that, under some conditions, a version of the supply and demand model can be used in non-perfectly competitive markets. in other words, the model’s insights about price determination and price changes apply in a much wider range of markets. given that short run analysis is identical for a pure monopoly and a monopolistically competitive firm, and given that pure, unregulated, monopolies are rather rare, the model is most relevant to monopolistically competitive market structures.6 there are various ways to refer to the supply locus in a textbook. in a principles textbook, a short section or a box could be added to the supply and demand chapter, claiming that under some conditions, i.e. linear demand and parallel shifts, the demand and supply model (with an adjustment on the supply side) has much more general applicability than the perfect competition assumptions suggest. another option is to derive the supply locus in the monopolistic competition or the monopoly chapter, adding the claim that while the monopolistic firm has no supply curve, it does have a supply locus which, under some circumstances, is unique. in an intermediate microeconomics textbook, a geometric and/or algebraic derivation can be added in the monopoly or monopolistic competition chapter.7 conclusion this note derived the optimal supply responses of a monopolistic firm and dubbed them a “supply locus.” the analysis showed that when demand is linear or exponential and, over time, demand shifts preserve the demand slope or elasticity respectively, the supply locus is unique. if, 6 shepherd (1982) presents data that show what he calls “effective competition” (made up of perfect competition, monopolistic competition and loose oligopoly) accounted for about 76.7% of the national income, while pure monopoly accounted for 2.5% of national income in 1980. 7 if added in the monopolistic competition chapter it offers the intriguing possibility of providing a connection to product differentiation and hedonic estimation. combining the demand for product attributes introduced by lancaster (1966) with the hedonic estimation of the underlying prices for these attributes introduced by rosen (1974), one could show how the demand and supply locus for a particular product could be disaggregated to demands and supply loci for individual attributes. adding all demands and supply loci for each individual attribute (i.e. over all the differentiated products in the market) one can derive the market for that attribute and determine its price (which hedonic models try to estimate). using these market prices and the composition of each product, one can then derive the equilibrium price for each differentiated product, which should be consistent with the price obtained at the intersection of the demand and supply locus for that product. 18 | journal for economic educators, 15(1), 2015 however, demand shifts entail simultaneous intercept and slope changes in the linear case, or elasticity changes in the exponential case, then the supply locus is non-unique. in empirical work using linear or logarithmic specifications, where a stable slope or elasticity parameter is estimated, the corresponding supply estimation suffers no major econometric problems.8 the estimated relationship is simply the supply locus instead of the supply/marginal cost function. problems arise when non-linear, non-logarithmic functions are used to estimate supply and demand systems. in such cases the supply locus is not unique and the supply equation should include demand elasticity determinants to be fully identified. another problem is that it is not appropriate to use estimated supply locus parameters to make inferences about the parameters of the marginal cost function in the absence of the adjustments that follow from the above analysis. references: askari, h. and j.t. cummings.1977. "estimating agricultural supply response with the nerlove model: a survey," international economic review 18, 257-292. grossman, s. 1981. "nash equilibrium and the industrial organization of markets with large fixed costs," econométrica, 49, 1149-1172. just, r. e. 1993. “discovering production and supply relationships: present status and future opportunities.” review of marketing and agricultural economics. 61, 11-40. kenny g. 1999. “modelling the demand and supply sides of the housing market: evidence from ireland” economic modelling. 16, 389-409. klemperer, p., and m. meyer. 1989. "supply function equilibria in oligopoly under uncertainty," econométrica, 57, 1243-1277. lancaster, k. j. 1966. “a new approach to consumer theory.” the journal of political economy, 132-157. mankiw, n. g. 2015. principles of economics, 7th ed., cengage learning: stamford, ct. usa pindyck, r. and rubinfeld, d. 2013. microeconomics, 8th ed., prentice hall: new jersey. rosen, s. 1974. “hedonic prices and implicit markets: product differentiation in pure competition.” the journal of political economy, 34-55. shepherd, w. g. 1982. “causes of increased competition in the us economy, 1939-1980.” the review of economics and statistics, 613-626. traesupap, s., matsuda, y., and h. shima. 1999. “an econometric estimation of japanese shrimp supply and demand in the 1990’s.” aquaculture economics and management, 3, 215-221 vives, x. 2011. "strategic supply function competition with private information," econométrica, vol. 79, 1919-1966. 8 interestingly, just (1993, section 4.6) argues that log-linear (cobb-douglas) supply estimations are sometimes more reasonable that more general functional forms such as the translog. 1 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 1 property rights versus rent-seeking politics: a public choice perspective jennis j. biser 1 abstract: classroom discussion of political topics, if done in a way that encourages lively but healthy debate, can encourage student participation and critical thinking. this paper outlines several insights from public choice research as applied to the federal government set up by the u.s. constitution and the protection of property rights. using a hobbes versus locke framework, this discussion also encourages debate about the role of government generally. the interdisciplinary nature of the discussion encourages input from students majoring in various fields, making this framework particularly well suited to use in an upper division elective with limited pre-requisite courses. key words: property rights, takings, eminent domain, public choice, us constitution jel classification: h130; k1; n41 introduction the writings of two 17 th century political philosophers, thomas hobbes and john locke, offer a useful framework for classroom discussion of the role of government, especially as it applies to property rights. hobbes (1651) and locke (1689) differ greatly in their approach to rights and the proper role of government. the current u.s. federal system is a mixture of the lockean and hobbesian approaches with an increasing shift toward a hobbesian based system. this paper analyzes the structure of the u.s. government within that framework. public choice 2 pressures on various players in the three branches of government and legal cases provide material for engaging classroom discussions. 3 under the lockean approach to rights, all rights precede government. the people voluntarily join together to emerge from the uncertainty of the state of nature into civil society. by consenting to grant certain rights to a government restricted to specific functions, man is better able to protect his property. property, for locke, is defined broadly to include all the natural rights of an individual. locke’s theory of property is founded on the notion that every man has property in his own person and whatever he removes from the state of nature by mixing his labor with it becomes his property as long as there is enough left for others, a consideration not binding in early times. the nature of the grant of rights requires that the 1 associate professor of economics, department of accounting, finance & economics, austin peay state university, p.o. box 4416, clarksville, tn 37044. 2 public choice: the study of “the economics of politics … to understand and to predict the behavior of political markets by utilizing the analytical techniques of economics, most notably the rational choice postulate, in the modeling of non-market decision-making behavior.” (rowley 2004, p3) 3 founding contributions to the public choice literature that are of particular relevance to this discussion include black (1948), arrow (1950), downs (1957), and buchanan and tullock (1962). olson (1965) extended the analysis of interest group behavior by using the rational choice model. 2 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 2 government, as fiduciary, serve and protect the people. property is safe from arbitrary seizure by government. the existence of a common judge is necessary to place men within civil society; however, men must give up more than simply the right to punish transgressors. an effective government must have the sole right to interpret and execute civil laws. man retains his natural rights, not least the natural right to property, though the common judge may adjudicate disputes over rights. the hobbesian approach to rights gives deference to the sovereign. to escape the state of nature and achieve peace, man must subject himself to the unlimited power of leviathan and holds no rights, except the right to life, which are independent of him. the sovereign is established through a social contract and can be a political system, not necessarily one individual. competing uses of resources drive demands for the establishment of rights. the hobbesian notion that individuals must hand over all rights to leviathan implies that rights derive by grant from the sovereign. when there are no property rights that are independent of government, man relies on the whim of leviathan for the security of his property and has no assurances against arbitrary interferences. the implications of the hobbesian approach differ markedly from the lockean civil society. when property rights derive from the sovereign, as in the hobbesian approach, it is not necessary to gain the consent of the property owner to infringe on those rights. instead of negotiating to achieve contractual solutions, the battle is played out in the political system. those who wish to achieve a redistribution of rights in their favor must seek the approval and assistance of those in power. rent seeking 4 tends to drive property rights allocations, and those with greater political influence win the prize. economic decisions regarding the best uses of resources are based on political influence instead of the demands of producers and consumers. 5 lobbying by companies, special interests and other well-organized groups aims to gain the benefits of the exertion of government power at the expense of those who are less organized (olson 1965). 6 in addition to physical takings of property, well-organized groups lobby for special treatment or protection from competition. for example, rent-seeking sugar producers in the united states enjoy special protection from foreign competition through tariffs. the american consumer and industries using sugar to produce candy and other products must pay more for sugar (riley and andel 2014). sugar industry supporters claim the program benefits american consumers and taxpayers (sanchez 2017). most americans are 4 rent seeking: the socially costly pursuit of wealth transfers through government. 5 a substantial literature exists; however, a few authors serve as the foundation of research in this area. tullock (1967) introduced the concept of rent seeking. krueger (1974) coined the term and provided an early theoretical analysis and estimates of the costs of rent seeking. posner (1975) provided the first empirical paper on rent seeking. buchanan (1980) and rowley, et al. (1988) influenced research in the area. 6 olson’s views and the resulting implications have been challenged by the chicago school, especially becker (1983) and wittman (1989, 1995). 3 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 3 unaware of programs such as the us policy on sugar 7 and the calls for protection of other industries, such as the steel industry. 8 outright transfers of property and regulatory limitations on the use of property work similarly to interfere with the owner’s rights and alter economic decisions. in addition to the resources diverted to lobbying efforts, productivity is further hampered by the reduction of incentives that result from a world without secure property rights. 9 those who wind up bearing the burden will not work as hard when they cannot be certain that they will be able to keep the fruits of their effort. within the framework of limited government envisioned by locke, judicial deference to the legislature or the executive undermines the role of the judiciary and alters the nature of competition. although this proposition was at least mildly controversial among antifederalists and followers of jefferson, many of the framers wanted the judiciary to impede attempts by other branches of government to overstep the role authorized by the social contract. jefferson and his followers wanted interpretations of the limits of constitutional power to be determined by congress in the way that such matters were resolved in the parliament of the united kingdom. protections against factions and other barriers included by the framers of the constitution have proven insufficient to protect property rights in the united states. decisions regarding the use of resources are often based on political influence rather than the market. judicial solutions have given way to rent-seeking politics. justices of the supreme court of the united states, scotus, often decide cases regarding physical and regulatory takings with deference to the other branches of government (wagner 1987). the public choice approach provides insight into the process by which this transition has occurred. united states constitution the actual text of the united states constitution and the framework of government that it sets out are entirely consistent with lockean notions of individual rights and representative government. while the ultimate power rests with the people, numerous safeguards are embedded in the structure of the government and private property garners special protection. 7 presenting both sides of the issue using non-academic articles such as the two cited above is an especially effective way to stimulate healthy debate in the classroom. students who feel strongly about either side can gather additional information and data from government sources, think tanks, or news agencies. though most students will first consider the impact on consumers, it is also helpful to steer the conversation to the candy industry and other users of sugar. 8 steel industry arguments for protection include national defense justifications (gibson 2017) and serve to further the discussion. for the argument against protections, see whiting and zissimos (2017). 9 discussion of these ideas may be enhanced by a review of the research on freedom. various indices, often including a measure of property rights, exist in the literature. measures of economic freedom, political freedom, and civil liberties permit comparison and ranking of countries or states. three of the most widely cited indices are produced by the fraser institute, freedom house and the heritage foundation. berggren (2003) provides a brief description of economic freedom and the implications of policies restricting freedom. 4 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 4 protections against factions madison warned of factions in the federalist no. 10 and argued for safeguards against the damage they might cause. various protections were included in the framework of government set out in the new united states constitution to insure against dominance by selfinterested political actors. this new structure set up a government where power was to be shared among three separate branches: executive, legislative and judicial. each branch was designed to carry out certain functions, yet relied on the others in various ways. the complex system of checks and balances assured that no branch could act unilaterally to take full control of the sovereign power. where the branches could not come to agreement on particular issues, the inability to act preserves the status quo, further protecting the rights of the people. to protect the politically weak minority, the framers included several non-democratic elements to reduce the power wielded by the majority. the bicameral design of the legislative branch, with representatives in the house and senators serving different terms in office, assured that some lawmakers would face greater pressure from the electorate. senators, elected indirectly through the state legislatures 10 , would be more insulated and thus able to take a longer-term view. the president is also elected indirectly; the framers set up the electoral college system to diminish the power of the majority. the separation of powers and system of checks and balances further protect the rights of the minority from being trampled by restraining the power of the majority to create new laws. as both houses of congress must agree on a bill before it goes before the president, 51 senators can stop a bill from becoming law. once a bill gains the approval of congress, the president then decides whether the executive will also approve the bill. the presidential veto allows one man to obstruct the will of the majority. congress can then override the president’s veto upon a two-thirds vote in each house. supremacy clause though madison and/or hamilton 11 argued in the federalist no. 51 that the separation of powers was essential, the judicial branch was permitted a greater degree of independence so that it could curb abuses by the other branches of government. hamilton, in the federalist no. 78 argued that the judiciary must have the power to review legislation because such review serves to uphold constitutional limitations on legislative power. limitations of this kind can be preserved in practice no other way than through the medium of the courts of justice; whose duty it must be to declare all acts contrary to the manifest tenor of the constitution void. without this, all the reservations of particular rights or privileges would amount to nothing (230). the constitution lacks explicit provisions stating that judges are authorized to review legislation. yet, support for judicial review of legislation can be found in article vi, paragraph 2 of the united states constitution, a section known as the supremacy clause: this constitution, and the laws of the united states which shall be made in pursuance thereof; and all treaties made, or which shall be made, under the authority of the united states, shall be the supreme law of the land; and the judges in every state shall be bound thereby, any thing in the constitution or laws of any state to the contrary notwithstanding. 10 since adoption of the seventeenth amendment to the united states constitution in 1913, senators have been directly elected by the voters. 11 authorship of various federalist papers has been debated because madison, hamilton and jay signed the papers as publius. 5 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 5 hamilton, in the federalist no. 78 reasoned that the legislature cannot be presumed to serve as judge of its own actions. judicial review as a check on legislative power necessarily follows from the logic of the framework of government laid out in the constitution. it is far more rational to suppose that the courts were designed to be an intermediate body between the people and the legislature, in order, among other things, to keep the latter within the limits assigned to their authority. the interpretation of the laws is the proper and peculiar province of the courts (231). the issue of judicial review came before the scotus in marbury v. madison (1803). the court found that the constitution, by its very structure, permitted the court to declare acts of congress to be unconstitutional. chief justice marshall pointed to the consequences of an alternate finding. the distinction between a government with limited and unlimited power is abolished, if those limits do not confine the persons on whom they are imposed, and if acts prohibited and acts allowed, are of equal obligation. the takings clause the fifth amendment, including the takings clause, was added after ratification of the constitution in the bill of rights. this simple proviso, “nor shall private property be taken for public use without just compensation,” clearly indicates that property rights are vested but can be removed under certain circumstances, such as situations with high transaction costs. 12 the ambiguity of the circumstances has fostered most of the subsequent debate. in circumstances where the existing structure of rights does not fit a new situation, rights must be established to assure efficient resource allocation. this allows for the provision of typical lockean public goods by specifying the limits of government seizure of private property. for example, when the state attempts to assemble a contiguous tract of land to build a highway, a single holdout property owner may freeze negotiations, jeopardizing the entire project. takings are generally accepted as necessary to avoid the holdout problem, essentially a problem of high transaction costs. the work of ronald coase 13 stimulated extensive research on the topic of transaction costs. while he generally favored market solutions, 14 his critics open the door for government intervention in markets. coase (1960) began with the assumption of zero transaction costs, analyzing the outcome where a cattle rancher is fully liable for damage to a neighbor’s crops, and then comparing this result to the alternative legal rule of no liability for damage. in the absence of transaction costs, negotiations between the farmer and the cattle rancher lead to the same allocation of resources regardless of the liability rule, because each is led to incorporate the costs and benefits of the proposed bargain into the decision-making process. later dubbed the coase theorem, this proposition states that with zero transaction costs, the initial 12 transaction costs are all of the costs of carrying out transactions using the pricing mechanism of the market. setting prices, engaging in negotiations, drawing up contracts, policing those agreements and settling disputes are costs of transacting in the market. 13 coase (1937) provides his first analysis of transaction costs. coase (1959) provides a more systematic treatment of the issue. coase (1960) answered critics of his earlier work, including many chicago economists. in the problem of social cost, coase provided the widely-known cattle example and advocated a program of research, inspiring many in the field of law and economics. 14 note that coase is not a lockean. he does not imply, as locke does, that first possession rights are crucial. rather, he argues that property rights must be determined. 6 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 6 assignment of property rights will not alter the final allocation of resources, although the distribution of income and wealth will differ. coase then demonstrated the central importance of property rights and the pervasive nature of transaction costs. contractual solutions require clearly defined property rights and transaction costs that are lower than expected gains; thus, parties may fail to reach an agreement when transaction costs are high or benefits are low. in these instances, the initial allocation of property rights does matter. the decision of the court may very well be the final word in deciding how resources will be used. 15 most criticisms of coase’s research 16 relate to three basic points: 1) inter-industrial long-term effects; 2) distributional effects; and 3) the assumption of zero transaction costs (parisi, 153). the legal debate goes further into the details of what constitutes a taking and what compensation, if any, is required. numerous supreme court decisions 17 have wrestled with the meaning of “public use” and “just compensation” as well as the subtler questions of partial takings and regulatory takings. the judiciary has been called upon to determine the extent of property rights under the takings clause. given this pivotal role, the independence of the judicial branch is vital to upholding the guarantees in the bill of rights. if the independence of the judicial branch is compromised, the question becomes: will the protection of property rights be litigated entirely in the court system or will political pressures determine rights? rent-seeking will prevail where political influence 15 an interesting case to discuss with students is bryant v. lefever (1879) in which the plaintiff brought a nuisance claim after the defendant stacked timber on the roof of his house. the plaintiff argued that the timber interfered with the airflow over his house and caused smoke to back up in his chimney whenever he lit a fire. the opinion of the court of appeals discussed the reciprocal nature of the problem and found in favor of the defendant. according to the coasean perspective, the activities of both parties combined to cause the damage. in the absence of transaction costs, the judicial assignment of rights will not determine the final allocation of resources. through negotiations, the man who lit the fire can pay the man who stacked the timber on his roof to move the timber. the value of the property rights and the negotiated side payments alter the wealth of the two parties. in this case, the defendant becomes wealthier; however, if the judgment had been in favor of the plaintiff, he would have been wealthier as a result of negotiations subsequent to the judges’ decision. the critical point to remember is that in the absence of transaction costs the assignment of rights will not alter the allocation of resources, but will alter the distribution of income and wealth between the parties. 16 research critical of coase includes calabresi and melamed (1972), cooter (1982) and holmes and sunstein (1999). coase (1988) responded to the critics. 17 some cases of interest include: hadacheck v. las vegas (1915); pennsylvania coal co. v. mahon (1922); village of euclid, ohio v. ambler realty co. (1926); miller v. shoene (1929); berman v. parker (1954); penn central transportation company et. al. v. city of new york et. al. (1978); agins v. tiburon (1980); hawaii housing v. midkiff (1984); first english evangelical church v. county of los angeles, california (1987); nollan v. california coastal commission (1987); hodel v. irving (1987); keystone bituminous coal association v. debenedictis (1987); lucas v. south carolina coastal commission (1992); dolan v. city of tigard (1994); casino reinvestment dev. auth. v. banin (1998); palazzolo v. rhode island (r.i. 2000); palazzolo v. rhode island (2001); tahoe-sierra preservation council, inc. v. tahoe regional planning agency (2002); and kelo v. city of new london, connecticut (2005). 7 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 7 controls the allocation of rights. the shift of emphasis in the federal legal system from a lockean vision to a hobbesian vision has occurred in many small steps within the various branches of the federal government. “it is seldom that liberty of any kind is lost all at once. slavery has so frightful an aspect to men accustomed to freedom that it must steal upon them by degrees and must disguise itself in a thousand shapes in order to be received.” (hume, 118) the executive branch the framers of the constitution envisioned the executive branch to function as a controlling device through the veto power. they intended that the president enforce the constitution and laws enacted by congress. the framers included several checks on the power of the executive, though the protections they bestowed have been reduced over time, making the executive branch a much more activist force. article ii of the constitution lays out the qualifications, election proceedings, powers and impeachment measures for the executive branch of the federal government. the president, vice president, and a variety of departments and officers make up the executive branch. ratified in 1804, the twelfth amendment changed the election process so that candidates clearly run for the office of president or vice president. otherwise, the constitutional basis for the power of the executive has remained unaltered. as originally conceived by the framers, the president operates as a check on the legislative power. the president can veto acts of congress, though congress may override the veto with a two-thirds vote in both the house and senate. the power to veto acts of congress permits the president to assert his political will, counter to the intentions of the framers. president andrew jackson was the first president to use the veto power extensively, and many presidents who followed him have used the veto power to set the nation’s legislative agenda. several checks on the power of the executive are included in the constitution. the president, vice president and federal judges may be impeached and, if convicted, removed from office. the senate holds the exclusive power to try impeached officials, including the president, though only the house of representatives may vote to file charges of impeachment. the senate must confirm all presidential appointees and ratify treaties. pressures on the executive branch the key relevance of the executive branch to this study is the power of the president to appoint justices to the supreme court. this important power is checked by the requirement that all nominees undergo a process of advice and consent by the senate. these powers and the declining effectiveness of the constitutional checks leave the executive branch open to various pressures. all elected officials face vote pressures, though this pressure is tempered by the realities of representative democracy. since the probability of casting the deciding vote is tiny, individual voters do not gather the necessary information about the candidates to make an informed decision. many realize that their vote will not decide the election and rationally choose to abstain from the costly act of voting at all. those who do show up at the polls, perhaps out of a sense of civic duty, are ignorant of much of the information necessary to make a truly informed decision. the constitution specifies that voters do not elect the president directly; rather, the president is elected indirectly through the electoral college. the presidential election is a very high profile election and voters are more likely to gather information about presidential candidates. still, the indirect nature of the vote for president and the minuscule chance of casting the decisive vote in a national election combine to reduce the effort of voters in gathering information. 8 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 8 the vacuum created by rational ignorance and rational abstention is filled by wellorganized interest groups who lobby the candidates (olson 1965). these groups pressure politicians to support policy changes that will favor the members of the interest group. campaign contributions and endorsements are traded for promises. while the benefits of policy are concentrated to serve a select few among the members of the interest group, the costs of providing those benefits will be spread among the broader electorate, who remain rationally ignorant. the most effective interest groups will be those small groups that are able to avoid the free rider problems associated with political benefits that often have public characteristics (ekelund and tollison 2001). once elected, the president can make good on his promises by filling vacancies on the supreme court with justices who support the ideological and political goals of his political supporters. within the federal court system, the appointments process is an inherently political process. interest groups will exert direct pressure on the executive branch in an attempt to influence supreme court nominations. as sitting members resign, retire or die, vacancies on the bench must be filled by the president. the president nominates judges to fill the positions of justices or chief justice. the chief justice of the supreme court presides over meetings and assigns the writing of opinions. this position carries with it the ability to significantly shape the direction of the court. for example, the marshall court, 1801-1835, under chief justice john marshall greatly enhanced federal power at the expense of states’ rights. thus, elevating a sitting justice or appointing a chief justice enables the president to have a substantial impact on the court. although no qualifications for justices are laid out in the constitution, one would expect nomination based on competence and ethics; however, it is clear that ideology, political support, and political activism also play a role. if the president is popular and the senate is controlled by his party, the president enjoys great leeway in his selection of nominees for the bench. when circumstances are less favorable, the president may opt to nominate those who appear harmless to the political constituencies of the majority party. the american bar association weighs in on the suitability of the president’s nominees. the aba tends to favor judicial activism on civil rights issues and restraint on issues involving economic rights, positions that cause some writers to perceive the aba as left-leaning. the legislative branch article i of the constitution sets out the framework, powers and many of the procedures of the legislative branch. consisting of a bicameral congress, the legislature is the law-making branch of the federal government. the house of representatives holds the sole power to propose bills for raising revenue and can vote on charges of impeachment. the senate exclusively has the power to ratify treaties, try impeached officials, and confirm presidential appointees. various amendments to the constitution have directly impacted the legislative branch. the fourteenth amendment established rules for the apportioning of representatives in congress to states. the sixteenth amendment authorized congress to levy federal taxes on income. the seventeenth amendment established direct election of senators and the twentieth amendment changed the day congress convenes. the system of checks and balances works to rein in the legislature as well as the other branches of the federal government. congress may impeach federal officers, including the president, vice president, and federal judges. the chief justice of the supreme court presides 9 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 9 over the trial and a conviction requires a two-thirds vote in the senate. 18 the president can veto any legislation passed by both houses of congress; however, congress can override the president’s veto with a two-thirds vote. pressures on the legislative branch the key relevance of the legislative branch to this study lies in its powers to make law and the role of the senate in the appointment of justices to the supreme court. statutes enacted by congress could be within or outside the confines of the constitution. the house plays no role in the appointment process. the appointment process for presidential nominees to the supreme court gives the senate great sway over the makeup of the court. these opportunities to play politics leave the legislative branch open to many pressures. members of congress face pressure to satisfy voters to ensure reelection; however, rational ignorance moderates the effect of direct elections. house representatives face election every two years while one-third of all senators are elected every two years for six-year terms. while most voters know the names of the presidential candidates, fewer know the names, let alone the policy positions, of the various men and women who run for congress. various interest groups step in to pressure candidates to adopt policy positions favorable to the members of the group. campaign contributions and direct advertising on behalf of candidates help to ensure that the candidate will win the election. once elected, the politician repays the group by supporting policies that favor the members of the interest group. by directly influencing some of the major players in the senate confirmation proceedings, interest groups are able to indirectly influence the members of the court and other presidential appointments. the judicial branch article iii of the constitution suggests a simple framework for the judiciary by providing that “(t)he judicial power of the united states shall be vested in one supreme court, and in such inferior courts as the congress may from time to time ordain and establish.” the constitution also contains several provisions intended to protect the independence of the judiciary. supreme court justices are nominated by the president and confirmed by the senate. once confirmed by the senate, justices serve for life, barring resignation or impeachment. also, the salary of a justice cannot be reduced during his or her time in office to prevent the legislature from imposing financial penalties on individual justices. the role of justices the structure of the judicial branch, as originally incorporated into the constitution, was designed by many of the framers to protect the constitution from the executive and 18 to date, the house has initiated impeachment proceedings 62 times, though only seventeen federal officers have been impeached. only two presidents, andrew johnson and william jefferson clinton, have been impeached and both were acquitted by the senate. one cabinet officer, william w. belknap, the secretary of war, resigned before his trial. senator william blount was impeached even though the senate had already expelled him. associate justice samuel chase was acquitted. twelve other federal judges have been impeached, including alcee hastings who was convicted for taking a bribe and later won election to the house of representatives. the house judiciary committee approved articles of impeachment against president richard nixon, but he resigned prior to house consideration of the impeachment resolution. 10 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 10 legislative branches. judicial deference to the legislative or executive branches of government weakens the system of checks and balances. decisions handed down by the scotus increasingly depend on the identity of justices appointed to the supreme court and their judicial philosophy regarding the role of justices. aside from general provisions regarding jurisdiction, the text of the constitution is silent regarding the practical functioning of the supreme court. specifically, the text of the constitution is ambiguous regarding the role of justices, leaving this decision to be made, at least in part, by the justices themselves. some assistance with this difficult question can be found, however, in the federalist no. 78. there, hamilton provided specific guidance for judicial review of legislation. a constitution is in fact, and must be, regarded by the judges as a fundamental law. it therefore belongs to them to ascertain its meaning as well as the meaning of any particular act proceeding from the legislative body. if there should happen to be an irreconcilable variance between the two, that which has the superior obligation and validity ought of course to be preferred; or in other words, the constitution ought to be preferred to the statute, the intention of the people to the intention of their agents (231). thus, the framers firmly advocated the lockean notion that the supreme power rests with the people and the constitution should be favored over other inferior sources of law. the independence of the judiciary was to be protected to ensure that the rights of the people were protected from the other branches of government. in practice, the ambiguity of the constitution with regard to the functioning of the court and the independence it provides the court may serve to increase political activism. justices must decide their own stance as regards the meaning of their sworn oath to uphold the constitution and the means by which they will implement that pledge. though legislators initiate and enact legislation, the court can review that legislation and strike it down if they find that it violates the constitution. justices on the court have a range of alternatives. at one extreme is unconstrained activism where justices make whatever rules they wish. absolute judicial restraint, at the other extreme, leads justices to always accede to the legislature. under the doctrine of judicial review, justices have taken varied approaches generally and many have taken different approaches on the many issues that they are asked to consider. some argue that the courts should actively monitor the legislature to discover and strike down infringements on the constitution by the legislature. this judicial activism is justified as necessary to protect the rights of individuals. others favor judicial restraint, arguing that the courts should show deference to the legislature as the representative of the people. judicial pragmatism suggests that there should be no general presumption in favor of the courts or the legislature; rather, a pragmatic decision regarding the specific circumstances should allow justices to determine the best way to achieve principled objectives. each of these approaches has significant weaknesses. unconstrained activist justices are likely to be guided by their personal political agendas and spurred on by the dominant special interest groups. on the other hand, absolute judicial restraint leaves individual rights vulnerable because of the rational ignorance of the electorate, ideological pressures within the legislature, vote trading and logrolling by minority factions. the ad hoc middle ground approach employed by judicial pragmatists leaves the courts and the legislature open to being used to achieve objectives that the other could not accomplish. the two sides of this debate differ greatly in their views of the constitutional text and the implications for judicial review of legislation. on one side of the debate are those who argue that several of the words used in the constitution, in practice, have no fixed meaning. they contend that, as circumstances change within society, the meanings of words change. 11 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 11 this skepticism forms the basis of the notion that words must be reinterpreted by each successive generation in an effort to determine the meaning of the “living constitution”. on the other side of the dispute are those who call for a strict constructionist approach to the text of the constitution and judicial review. strict construction, in general, requires that justices base their decisions on the actual wording of the constitution and the notes and interpretations surrounding it. and, justices are not bound by precedent which derives from judgments based on judicial activism, restraint or pragmatism. justices are permitted to make law from the bench only where the constitution is silent regarding a particular issue and even then, in cases of particular importance, amending the constitution is preferable. there is a fundamental tension between the two competing notions that underlie these different approaches. the notion that the constitution leaves the ultimate sovereign authority with the people, and their representatives by proxy, is in direct opposition to the notion that the courts make the final determination under the doctrine of judicial review. proponents of the doctrine of judicial review argue that the independence of justices allows them to better interpret the law because they are insulated from normal political pressures. this allows justices to protect the constitution in times of strife, such as war and economic disaster. the opponents of judicial review argue that the hands of legislators in office should not be tied by the framers. also, they contend that judicial review separates principles from politics and leads to a decline in the sense of moral responsibility among the public. they fear that justices, left free to question legislators, will impose their own views about the proper ordering of society, on the pretense that they are consistent with the views of the framers. these views are most at odds where the constitution is particularly vague or silent. the unavoidable discretion necessary in these situations opens the door for justices to force society to conform to their preferred social ideals. the crux of the debate on this topic centers on whether judicial discretion in the review of legislation should be constrained by current views of justice, the framers’ intent, or even the constitution itself. interpretation of the united states constitution is a source of heated debate even among those who call for strict construction. an attempt to apply the precise wording of the constitution leads to an endless play on words. strict construction by a precise reading of words is actually quite difficult because words have changed meaning. it would be necessary to go back to the eighteenth century meaning of individual terms, a prospect that may only increase the debate rather than resolve it. an alternative approach to strict construction calls for justices to construe the constitution in accordance with the original spirit of the constitution. it is clear in madison’s later papers that the text of the constitution is preferred as having authority over even the debates of the framers; yet, remaining doubt must be resolved by looking to meaning attached to it by the people. as a guide in expounding and applying the provisions of the constitution, the debates and incidental decisions of the convention can have no authoritative character. however desirable it be that they should be preserved as a gratification to the laudable curiosity felt by every people to trace the origin and progress of their political institutions, & as a source perhaps of some lights on the science of govt. the legitimate meaning of the instrument must be derived from the text itself; or if a key is to be sought elsewhere, it must be not in the opinions or intentions of the body which planned & proposed the constitution, but in the sense attached to it by the people in their respective state conventions where it recd. all the authority which it possesses (madison 1821). madison, together with hamilton, greatly influenced the debate over the ratification of the constitution in the federalist papers and that debate sheds light on the ideas and 12 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 12 understanding of the people at the time of ratification. in the shadow of the american revolution, the people wished to protect their rights, not least the right to property, against a despotic government. madison, in his earlier papers, had provided his understanding of the proper role of government with respect to the people in general and their property in particular. “government is instituted to protect property of every sort; as well that which lies in the various rights of individuals, as that which the term particularly expresses. this being the end of government, that alone is a just government, which impartially secures to every man, whatever is his own (madison 1792)”. if the constitution is to be meaningful, it must be strictly construed to comply with the spirit in which it was ratified. in the context of the takings debate, epstein (1985) rejects calls for linguistic skepticism and advocates the ordinary usage definition of “private property” as necessary not only to protect property, but also to maintain the rule of law (20-24). epstein supports his argument by pointing to the definition employed by blackstone, for whom “the right of property (is) that sole and despotic dominion which one man claims and exercises over the external things of the world, in total exclusion of the right of any other individual in the universe” (22). blackstone and locke, each who deemed the protection of private property as crucial, had a strong influence on the framers and the understanding of the people at the time of ratification. thus, epstein argues that “greater progress will be made by assuming that the clause is designed to do what it says, namely to ensure that private property is not taken for public use without just compensation,”(26) in accordance with the spirit in which it was ratified by the people. pressures on the judicial branch the key relevance of the judicial branch to this discussion lies in its ability to check the power of the other branches of government as it carries out its duty to uphold the constitution. while the judicial philosophy of an individual justice may impede or promote political activism, justices face additional pressure from a variety of sources. the efficacy of the constitutional provisions aimed at reining in the power of the judiciary has eroded in the face of these pressures. the constitution includes several checks on judicial power; however, some have only limited practical significance. the possible exertion of judicial power alters the incentives faced during nomination by the executive and the process of senatorial advice and consent. once in office, justices are protected from retribution by the other branches of government, though not perfectly. the court faces pressure because of the ambiguity of the constitution regarding the structure of the federal courts. for example, the number of justices on the supreme court has varied over time. established in 1789, the supreme court originally consisted of six justices; however, at one point after the civil war, there were ten justices on the court. since 1869, there have been nine justices on the court, though president franklin d. roosevelt made an attempt to increase the number in 1937. the roosevelt administration made an overt attempt to pressure the court to support the new deal. the majority leader of the senate, joseph robinson, apparently gathered enough votes to pass a court packing bill, despite the disapproval of the senate judiciary committee, but he died before the bill came up for a vote, and the bill died also. within the political system, the separation of powers and the role of the legislature vis à-vis the judiciary becomes a political factor. to reduce the power of the court, congress could attempt to restrict the jurisdiction of the court or adopt constitutional amendments. congress and the president, working together, could attempt to reconstitute the court as seats 13 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 13 come open. while all supreme court hopefuls face substantial inquiry during confirmation hearings, for some nominees the media circus surrounding the hearings can be staggering. while the attention is politically motivated, the life tenure of the position and range of issues that may come before the nominee justify the level of scrutiny and rigor of the proceedings. congressional pressure can also be exerted through financial appropriations. although congress is unable to reduce the nominal salaries of justices, its failure to raise salaries during inflationary times operates as a real wage decrease. in fact, salaries have not kept up with inflation and certainly do not compete with the opportunities available for highly skilled attorneys in private practice. congress also holds the purse strings for funding of perks associated with office and even support services. in one simple way, the power of the judiciary is constrained procedurally. supreme court justices are restricted to deciding the cases that come before the court, thus limiting justices to a reactive role with limited ability to establish an agenda for political activism. although they are a small portion of the cases heard by the court, class action lawsuits brought by interest groups provide opportunities for willing justices to render decisions on politically charged issues. as the number of cases increases, so does the degree of judicial activism. the sheer numbers of lawsuits provide many occasions for justices to rule on their issues of choice. to compensate for the increasing caseload, justices rely more heavily on staff in the selection of cases and the preparation of documents they will draw upon to reach a decision. interest group pressures are another important factor. interest groups will attempt to influence nominations and confirmations, often indirectly as these groups impact elections for the president and senators, which make up the key players in the process. interest groups may also attempt to intimidate justices through media attention on the deliberations of the court or implicit threats of civil disobedience in the event of decisions unfavorable to their cause. these tactics should not sway an independent judiciary, though they are effective in some instances. the desire for respect and a quiet life can be a powerful influence on the decisions of individual justices. these majoritarian pressures are precisely the danger warned against by madison in the federalist no. 10. epstein (1985) recommends a principled solution: if the power of the judges is to be legitimated, they cannot be just another political organ of government. as they cannot appeal to popular will, they must be able to provide authoritative interpretations of the constitutional text that are not simply manifestations of their own private beliefs about what legislation should accomplish. in order for judges to make principled interpretations, the language of the constitution must be precise enough to bind even those who disagree with what it says, for the mission of constitutional government must soon founder if judges can decide cases as freely with the constitution in place as without it (1920). conclusion this paper has outlined a way for instructors to lead discussion of property rights and the public choice pressures on the various players in the u.s. federal system within the hobbes versus locke framework. currently, the u.s. federal system is a mixture of these approaches and there is an increasing shift toward a hobbesian based system. the constitutional provisions designed to protect property rights have proven insufficient to protect property rights in the united states. property owners have been stripped of rights through physical and regulatory takings decisions handed down by the scotus. public choice pressures on the various players in the us federal system provide insight into the process by which this has occurred. property rights increasingly derive from the sovereign as justices of the scotus decide cases regarding physical and regulatory takings with deference to the 14 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 14 other branches of government. decisions regarding the use of resources are based on political influence rather than the market as judicial solutions have given way to rent-seeking politics. this transition provides substantial material for classroom debate. further class discussions or a term paper assignment could require students to analyze landmark cases that have impacted property rights, specific laws or policies that restrict property rights or historical instances of direct political pressure on the court, such as fdr’s attempt to pack the court. the interdisciplinary nature of the discussion encourages input from students with a broad range of backgrounds and interests. students majoring in economics, as well as political science, history, general business, pre-law and philosophy respond well to this line of discussion, making this framework especially well-suited to use in an upper division elective with limited pre-requisites. takings remains a controversial issue analyzed by many scholars, including several public 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(1879). casino reinvestment dev. auth. v. banin, 320 n.j. super 342 (1998). dolan v. city of tigard, 114 s.ct. 2309 (1994). first english evangelical church v. county of los angeles, california, 482 u.s. 304, 107 s. ct. 2378 (1987). hadacheck v. las vegas, 239 u.s. 394 (1915). hawaii housing authority v. midkiff, 467 u.s. 229, 104 s.ct. 2321 (1984). hodel v. irving, 481 u.s. 704, 107 s. ct. 2076 (may 1987) kelo v. city of new london, connecticut, 125 s.ct. 2655 (2005). keystone bituminous coal association v. debenedictis, 480 u.s. 470, 107 s.ct. 1232 (march 1987). lucas v. south carolina coastal commission, 505 u.s. 1003, 112 s.ct. 2886 (1992). marbury v. madison, 1 cranch 137 (1803). miller v. shoene, 276 u.s. 272 (1928) nollan v. california coastal commission, 483 u.s. 825, 107 s.ct. 3141 (1987). palazzolo v. rhode island, 746 a.2d 707 (r.i. 2000). palazzolo v. rhode island, 533 u.s. 606 (2001). penn central transportation company et. al. v. city of new york et. al., 438 u.s. 104, 98 s. ct. 2646 (1978). 17 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 17 pennsylvania coal co. v. mahon, 260 u.s. 393, 43 s. ct 158 (1922). tahoe-sierra preservation council, inc. v. tahoe regional planning agency, 535 u.s. 302, 122 s.ct. 1465 (2002). village of euclid, ohio v. ambler realty co., 272 u.s. 365, 47 s.ct. 114 (1926). 31 |journal for economic educators, 21(2), 2021 teaching economics with scenes from moneyball jadrian wooten1 and dustin r. white2 abstract the award-winning film moneyball is considered one of economic educators’ top movies for teaching economics, but resources to teach with the film are scant. we summarize eight key scenes in the movie that are closely tied with economics topics, many of which can be used in a principles-level course. for each scene we provide the corresponding topic, a brief summary, and a follow-up question to ask students. key words: economics education, teaching methods, undergraduate economics, moneyball jel codes: a21, a22, z29 introduction michael lewis’ (2004) publication of moneyball tells the true story of the oakland a’s process of assembling a winning team with a limited budget. from the premise alone, the concept neatly describes how many economic educators begin their course. in mankiw’s (2020) principles of economics textbook, he defines economics as “the study of how society manages its scarce resources.” billy beane, the oakland a’s general manager at the time, was tasked with making decisions about player personnel given one of the lowest payrolls in major league baseball (associated press 2003). moneyball would eventually result in a feature-film starring brad pitt as billy beane and result in educators being able to integrate clips into their classroom. the simpsons would dedicate an episode to the moneyball concept as lisa coaches bart’s little league team using sabermetrics. in brooklyn 99, captain holt shares his love of the film moneyball because of how beautifully the statistical analysis is portrayed.3 the movie has also found its way to the heart of economics educators and is considered one of the best movies for teaching economics (mateer, o’roark, and holder 2016). given time constraints in the classroom, it is unlikely that educators would be able to show the entire movie to their students. we have identified eight key scenes in the movie that can be used to teach various concepts in the principles curriculum. by isolating these scenes, instructors can more easily integrate the clips into their current lesson plans. the clips are available for streaming online, but educators can create an account with critical commons if they are interested in downloading the scenes. for each clip, we provide a summary of the scene, its application to the curriculum, and a follow-up question that can be assigned to students. 1 associate teaching professor of economics, department of economics, the pennsylvania state university, 303 kern building, university park, pa 16802 2 assistant professor of economics, college of business administration, university of nebraska at omaha, 300 mammel hall, 6708 pine street, omaha, ne 68182 3 both of these scenes can be found on economics media library (wooten 2018). 32 |journal for economic educators, 21(2), 2021 literature review the number of educators using media in the classroom has doubled over the past decade, likely due in large part to instructor comfort with powerpoint and other computer-generated presentation technology. traditional lectures are still the predominant form of teaching, but educators have increased the variety of activities they assign to students (asarta, chambers, and harter 2020). goffe and kauper (2014) find that lecture remains prevalent among educators because it’s cost effective in the sense that it takes time to develop resources for class. the response from economics educators has been an increase in the number of resources that can be used to teach economics, effectively lowering the cost of implementation (wooten et al. 2020). one challenge of teaching principles courses is that students may believe the material is irrelevant or uninteresting. adjusting a student’s mindset could involve highlighting the importance of the course for students’ majors or career ambitions, but using content and material relevant to their interests could be beneficial as well (chew and cerbin 2020). baseball and moneyball have already been demonstrated as effective topics for teaching courses in statistics (wang 2007) and human resource management (mchugh 2009), or as the basis for a project on marginal revenue product (wooten and white 2018). references to sports during lectures are not uncommon among economics educators, occurring just as frequently as references to diversity, inclusion, and gender issues, and marginally more often than references to literature, drama, or music (asarta, chambers, and harter 2020). given the global nature of the game, interest in baseball will likely be high among undergraduates from the united states, korea, japan, and central america, and so referencing moneyball as a tool for economic analysis may enhance student learning by addressing an area of student interest. media use as a pedagogical tool has received growing attention following prominent work of cognitive scientists. small changes to the way material is presented or how assessments are framed can have large impacts on student learning (lang 2016). the most common integration of media focuses on classroom response systems (calhoun and mateer 2011; wooten, acchiardo, and mateer 2020) or cooperative learning techniques like think-pair-share (buckles, hoyt, and imazeki 2011). for out-of-class assessment, students could be assigned questions related to the readings and educators could use online programs to randomly assign such questions (wooten and smith 2018). the moneyball story4 in a sport dominated by big spending teams like the new york yankees, boston red sox, and los angeles dodgers, the oakland a’s were able to identify skilled players at low salaries and compete with higher paying teams. the success of the oakland a’s was credited to general manager billy beane and his assistant, paul depodesta (known as peter brand in the film). beane was a highly regarded player out of high school but never met the expectations of major league scouts. a first round draft pick by the new york mets, beane was touted as a fivetool player by scouts who were employed primarily by professional teams as the initial evaluators of amateur players. after his mediocre playing career, beane would go on to become general manager of the oakland a’s. beane and depodesta’s strategy of identifying players relied heavily on statistical performance indicators that were discovered to be highly correlated with team success, despite the advice of team scouts and managers. 4 stefani and albert (2011) provide a brief introduction to moneyball as a film review. 33 |journal for economic educators, 21(2), 2021 moneyball scenes each scene identified below includes topic, length, scene summary, and an assessment question that could be asked following the scene.5 we have bolded the answer to the assessment question. these questions were designed for use with a classroom response system, but they could be modified to account for other active learning assessment types. clip #1: stanford vs. major league baseball topic: opportunity cost & tradeoffs length: 1 minute and 42 seconds summary: billy beane was considered one of the best baseball prospects in the country (fivetool guy), but he needed to make an important decision in high school. he was offered a full scholarship to play baseball at stanford, but the new york mets were also interested in signing him professionally after graduation. billy can't do both, and if he picks major league baseball, he loses the opportunity to ever play college baseball again. if he signs with stanford, he risks an injury that could keep him out of major league baseball forever. follow-up question: which of the following statements about opportunity costs are true for the high school version of billy beane? i. the opportunity cost of signing with the mets is equal to the sum of every scholarship offers he received to play baseball. ii. billy’s opportunity costs with the mets only measure the direct out of pocket expenditures he’ll pay when he starts as a minor league player. iii. in order to calculate the opportunity cost of signing with the mets, we need to know how much value billy earns from playing baseball at stanford. a. i and iii only. b. ii only. c. iii only. d. none of these statements are true. clip #2: moving on topic: sunk costs length: 1 minute and 57 seconds summary: when making decisions, there will often be situations where a lot of time and money have been spent but can't be recovered. in the case of young billy beane, professional teams spent a lot of money training and paying billy, but he just doesn't seem to be productive. an irrational manager would keep beane around because of all the money they've spent. if things don't go the way you anticipate, it's important to move on if that's the best choice. decisionmakers shouldn’t fixate on the past. follow-up question: which of the following statements about sunk costs is false? i. the time and money teams have spent helping billy develop cannot be recovered, no matter what future action is taken. 5 all of the scenes are available online at www.moneyballsimulator.info. http://www.moneyballsimulator.info/ 34 |journal for economic educators, 21(2), 2021 ii. because the time and money teams have invested in billy cannot be recovered, they shouldn’t be considered when determining whether to re-sign him to the team. iii. if the amount of sunk costs are large enough, general managers should take this into account when making future decisions about billy. a. ii only. b. iii only. c. i and iii only. d. ii and ii only. clip #3: playing first base topic: comparative advantage length: 3 minutes and 7 seconds summary: the a’s need to replace some of their star players who they have lost to other teams. they decide to recruit scott hatteberg to play first base, but he’s only ever played catcher. when they try to explain the situation, scott seems confused at first because he believes his comparative advantage is in playing catcher. because he hurt his elbow, he’s not as good of a catcher as he was before. billy beane believes scott’s comparative advantage is actually in getting on base, and billy believes that the a’s can teach scott how to play first base. follow-up question: applying the theory of comparative advantage to the oakland a’s leads to which of the following? a. increased specialization of players and other factors of production. b. decreased specialization of players. c. a team where everyone can play at every position. d. fewer wins at the end of the season clip #4: epidemic failure in the game topic: derived demand length: 2 minutes and 7 seconds summary: firms tend to emphasize the role of hiring players, but this bias is what peter brand hopes to overcome. he believes the focus should be on the production of output (runs), not on the input (labor). derived demand implies that firms demand inputs as a result of demand for the final product. because teams want to see wins and runs, firms should focus on hiring workers who produce those, not on particular workers themselves. follow-up question: which of the following quotes from the scene best describes the concept of derived demand? a. your goal shouldn’t be to buy players. your goal should be to buy wins. b. people who run major league baseball teams misjudge their players and mismanage their team. c. people who run ball clubs think in terms of buying players. 35 |journal for economic educators, 21(2), 2021 clip #5: identifying players topic: statistical discrimination & labor length: 2 minutes and 16 seconds summary: discrimination occurs when people are treated differently despite having the same productivity as others. statistical discrimination is a special example of discrimination that requires the firm to consider observable characteristics (like having a goofy throw) and assign values to that characteristic. workers who are different than average are the ones most often harmed from statistical discrimination while firms can be profitable by lowering their costs of hiring. follow-up question: which of the following most closely demonstrates statistical discrimination among baseball players? a. using performance statistics to judge the average characteristics of a group of players. b. judging one player according to a group to which they belong. c. using statistics to determine which player to hire. d. trading players due to below average performance. clip #6: managing on a one-year contract topic: principal-agent problem length: 2 minutes and 10 seconds summary: the general manager (billy beane) decides which players are on the team, but it's up to the coach (art howe) to set the lineup. wins and losses are often associated with the coach, even though they don't get to pick the players on the team. the problem for the a's? the general manager has a different incentive structure than the coach. the coach is working in his own best interest, which doesn’t align with the general manager’s plan of using sabermetrics to set lineups. follow-up questions: which of the following is not a component of the principal-agent problem? a. equilibrium conditions. b. conflict of interest between principal (gm) and agent (coach). c. asymmetric information. d. available economic surplus. clip #7: i hate losing topic: loss aversion & prospect theory length: 11 seconds summary: beane is talking with a player in the weight room and expresses how his desire to win is dwarfed by his hatred of losing. he keenly tells his player that there is a difference between the two. this attitude is the mindset of prospect theory and loss aversion. people respond more strongly to losses than they would to an equivalently sized gain. follow-up question: from a loss aversion perspective, it may be more attractive to: a. pay less attention to losses. b. reduce the frequency of evaluations. 36 |journal for economic educators, 21(2), 2021 c. increase the attractiveness of success. d. emphasize more consistency. clip #8: we need more money topic: constrained optimization length: 2 minutes and 7 seconds summary: the a’s have lost in the playoff and billy beane heads to the owner’s office to ask for more money. the a’s operate in a small market, so revenues are smaller than they are in places like new york and boston. the a’s owner, though, isn’t interested in spending more money on the team and tells billy that he needs to work within the budget he’s been given. constrained optimization is the mathematical approach of balancing the tradeoff between what people want (like billy beane wanting a championship team) and the budget they have to spend on their wants (like the owner limiting spending). follow-up question: to maximize the beane’s utility, he should choose a consumption bundle where: a. his indifference curves are equal to each other. b. the marginal utility of each player is equal. c. the slope of his highest indifference curve is equal to the slope of the budget constraint he’s been given. d. he wins a championship, even if it means going over budget. concluding thoughts moneyball provides an opportunity for educators to bring economics into the classroom in a way that many students find engaging. these scenes allow instructors to integrate the movie into their lessons and demonstrate how the concepts covered in the textbook are actually used outside of the classroom. by connecting the content with real-life scenarios, instructors may be able to overcome the student mindset that economics isn’t relevant. for an educator who is new to using media in the classroom, our hope is that this guide will provide an easy entry into the opportunities that exist with other movies and television shows. references asarta, c., r. chambers, and c. harter. 2020. “teaching methods in undergraduate introductory economics courses: results from a sixth national quinquennial survey.” the american economist, 66(1): 18-28. https://doi.org/10.1177/0569434520974658. associated press. 2003. “2003 baseball payrolls.” retrieved form: <https://www.espn.com/espn/print?id=1583823>/. accessed march 19, 2021. buckles, s., g. hoyt and j. imazeki. 2011. “making the large-enrollment course interactive and engaging.” in g. hoyt and k. mcgoldrick (eds), international handbook on teaching and learning economics (pp. 118-128). cheltenham: edward elgar publishing. calhoun, j., and g.d. mateer. 2011. “incorporating media and response systems in the economics classroom.” in g. hoyt and k. mcgoldrick (eds), international handbook on teaching and learning economics (pp. 149-159). cheltenham: edward elgar publishing. chew, s., and w. cerbin. 2021. “the cognitive challenges of effective teaching.” the journal of economic education, 52(1): 1-24. https://doi.org/10.1080/00220485.2020.1845266 37 |journal for economic educators, 21(2), 2021 goffe, w., and d. kauper. 2014. “a survey of principles instructors: why lecture prevails.” the journal of economic education, 45(4): 360-375. https://doi.org/10.1080/00220485.2014.946547 lang, j. 2016. small teaching: everyday lessons from the science of learning. hoboken: john wiley & sons. lewis, m. 2004. moneyball: the art of winning an unfair game. new york: ww norton & company. mankiw, n. 2020. principles of economics. boston: cengage. mateer, g., b. o’roark, and k. holder. 2016. “the 10 greatest films for teaching economics.” the american economist, 61(2): 204-216. https://doi.org/10.1177%2f0569434516653749 mchugh, p. 2009. “‘batter up, student on deck’ the utility of moneyball in management education.” journal of management education, 33(2): 219-238. https://doi.org/10.1177%2f1052562908321712 stefani, r., and j. albert. 2011. “moneyball: brad pitt, the statistician and the movie.” significance, 8(4): 185-186. https://doi.org/10.1111/j.1740-9713.2011.00529.x wang, s. 2007. “teaching statistical thinking using the baseball hall of fame.” chance, 20(1): 25-31. https://doi.org/10.1080/09332480.2007.10722829 wooten, j. 2018. “economics media library.” the journal of economic education, 49(4): 364365. https://doi.org/10.1080/00220485.2018.1500962 wooten, j., c. acchiardo, and g.d. mateer. 2020. “economics is a kahoot!” the journal of economic education, 51(3-4): 380. https://doi.org/10.1080/00220485.2020.1804499 wooten, j., a. al-bahrani, k. holder, and d. patel. 2021. “the role of relevance in economics education: a survey.” journal for economics educators, 21(1): 11-34. wooten, j., and b. smith. 2018. “create random assignments: a cloud-based tool to help implement alternative teaching materials.” the journal of economic education, 49(3): 297. https://doi.org/10.1080/00220485.2018.1464983 wooten, j., and d. white. 2018. “an in-class experiment to teach marginal revenue product using the baseball labor market and moneyball.” journal of economics teaching, 3(1): 115-133. 13 | journal for economic educators, 16(1), 2016 the impact of grade expectations on academic performance in college economics courses doris bennett, shawn carter, and cynthia mccarty 1 abstract we find that student grade expectations are positively and significantly related to academic performance in college economics courses. expectations concerning grades differed for different ethnic groups. we examined the characteristics for minority and non-minority students where differences in expectations were highly significant. then we used regression to determine which of those factors were most important in determining expectations. improvement in the factors that negatively affect expectations may improve students’ expectations and contribute to better academic performance and increased knowledge of economics. key words: factors impacting college academic performance, expectations and grades in college economics courses, student characteristics and grades jel classification: a2, c2 introduction and literature review students that expect to do well in a course may be more likely to work harder since they anticipate being rewarded with a high grade for the effort. in addition, high expectations may reflect confidence in one’s ability to succeed, and confidence is likely to enable students to have a calm, thoughtful approach to problem solving. a student’s confidence in their ability to succeed academically may prompt the student to seek available academic resources, such as tutoring sessions, meetings with professors, and study materials, all likely to enhance the probability of academic success. bennett et al. (2015) found that performance in economics often differs according to student gender, ethnicity, financial stress, major, parental education, and employment status. research in psychology (chemers, et al., 2001) has also shown that expectations about academic performance can be a determinant of actual grades since expectations are often self-fulfilling. limited research has been done on the correlation between the expectations of business students and academic achievement. arquero et al. (2009) analyzed the characteristics and outcomes for students taking accounting courses. as expected, entrance exam scores were positively related to student performance. interestingly, their study found that academic self-confidence also positively affected grades. they also measured expectations of study time, finding that females expected to study almost 18 hours a week, while males expected to study only about 13 hours. smith and wertlieb (2005) found that a relatively small sample of incoming pre-business students’ academic expectations did not align with their first year experiences. ____________________ 1 professors of economics, department of finance, economics, and accounting, jacksonville state university, jacksonville, al 36265. 14 | journal for economic educators, 16(1), 2016 students with unrealistically high academic expectations earned lower first-year gpas than students with average, more realistic expectations. students with more realistic expectations exerted more effort, studied more and came to class more. geiger and cooper’s (1995) study of students enrolled in their first college-level business course, found that the student’s motivation to achieve future outcomes and the likelihood that the student’s actions would lead to this outcome were the best predictors of gpa. other research has been done on expectations outside the college business arena. in a study of 134 mostly female psychology students, nicholson, putwain, connors, and hornbyatkinson (2013) used regression analysis to show that student expectations explained 16% of the variance in grades at year-end. students confident in achieving high grades would usually do so, but students’ realistic expectation of undergraduate outcomes often included taking personal responsibility for learning the material. nicholson et al. (2013) concluded that to help improve academic outcomes, realistic expectations of undergraduate study should be encouraged and academic confidence should be developed. in a similar fashion, charlton, barrow and hornbyatkinson (2006) concluded that college students who entered higher education with low expectations of independent study commitments were most likely to withdraw early. vollmer (1986) found that after controlling for a student’s perceived ability, study effort, and past grades, a college student’s expectation of academic success positively affected subsequent grades for both men and women. building on vollmer (1986), gigliotti and secrest (1988) sought to explain females’ lower expectations for success relative to males in achievement contexts. in this study of almost 400 entering sociology students, male and female, the results showed that success expectancy and grades increased for all genders when students gave high ratings to course meaning (the relevance of the course, the expected stimulation and the expected communication) and familiarity (what can be expected in the class). a study of urban, commuter college students found a positive correlation between a first semester student’s expected grades on college tests and that student’s high school grade average, but a negative correlation between expected and actual grades (weissberg et al, 2003). the suggested explanation for this paradox was that unrealistically elevated high school grades (rampant grade inflation) often communicate false information to students, who may expect that the habits of high school will earn the same results in college. analyzing the impact that student expectations have on college retention, braxton, vesper, and hossler (1995) surveyed almost 300 students when they were in high school and again in their freshmen year at a four-year college. the survey included questions on the expectations students had for meaningful learning, small classes, getting into good graduate schools, and other academic concerns, while also considering their expectations for a collegiate atmosphere and career development. they found a significant relationship between the fulfillment of students’ expectations and student retention. methodology and results the college of commerce and business administration (ccba) is one of six colleges at jacksonville state university, a public regional university in northeast alabama with approximately 9000 students. for fall 2012, the ccba had 906 students enrolled, of which 86 were graduate students. the average act score of first time freshmen was 21. sixty-three percent entered unconditionally with an act score of 20 or higher, while 37% were required to take at least one remedial course. slightly more than half of ccba students transfer in after 15 | journal for economic educators, 16(1), 2016 their freshmen year, mostly from local community colleges. the retention rate from first-to-third semester was 69%, while the retention rate from first-to-fifth semester was 44%. the ethnic breakdown was 37% african american; fifty-three percent, caucasian; and 10% other. almost 95% of jsu freshmen apply for financial aid. the average award per semester during this time was $4315, while in-state tuition was $4245 per semester. the sample for this study consisted of 187 students in principles of microeconomics and principles of macroeconomics, sophomore level courses in the ccba, during the fall and spring semesters of the 2012-2013 academic year. at the beginning of the semester, students answered a survey that included questions about the grade expected in the course, how many hours they planned to study, how many hours they planned to work at outside employment, whether their parents attended college, their level of financial stress measured as having difficulty paying tuition and not purchasing required class materials because of financial constraints and whether financial stress had affected their academic performance during their college career. additional information on students’ gender, ethnicity, gpa in jsu courses, and act scores were obtained from university student records. academic performance was measured by the student’s final grade in the course. table 1 summarizes the characteristics of the 187 students in the study sample. almost 53% of the students were women, while approximately 47% were men. almost 35% were minority students, which included primarily african american students and a very small number of asian and hispanic students. the average grade received in the course was 75.1, while the expected grade of 86.4 was more than 10 points higher than the actual. the difference was highly significant with a p-value of 1.62e-34. the average gpa was 2.85, and the average act score was 21.24. students expected to study 4.44 hours per week on average for this course. slightly more than 26% of the students were first-generation college students, with neither parent having attended college. almost 60% of the students were employed and worked an average of 23.8 hours per week. almost 57%, were business majors. finally, 42.6% of the students felt that financial stress, which is defined as having difficulty paying tuition and not having funds to purchase the textbook and other course materials, had affected their academic performance during their college career. the literature reports that expectations are often self-fulfilling, and therefore, are important predictors of academic performance this was the case in our sample in which the correlation coefficient between the actual and expected grade was 0.687, highly significant with a p-value of 1.52e-8. in tables 2-6, we compare actual and expected grades according to different student characteristics. actual and expected grades for women were slightly higher than actual and expected grades for men, but the differences between the two groups were not significant. there were slight, but not statistically significant, differences between actual and expected grades for first-generation college students compared to students with at least one parent who had attended college. the differences in actual and expected grades were small and insignificant for business majors compared to non-business majors. significant differences in both actual and expected grades did occur for different ethnic groups as well as for students who were financially stressed versus those who were not financially stressed. the average grade for non-minority students (79.15) was more than 11 points higher than the average grade for minority students (67.7). non-minority students’ expected grade averaged 88.74, while minority students expected grade averaged 82.10. the differences for both were highly significant with p-values of 4.1e-09 and 1.2e-09, respectively. for students that were financially stressed, the average grade was 71.45 versus 77.84 for students 16 | journal for economic educators, 16(1), 2016 that reported no financial stress. financially stressed students had lower expectations, with an average expected grade of 84.78 compared to 87.6 for non-stressed students. these differences were significant, having p-values of 0.0014 and 0.01, respectively. table 1: student characteristics gender female 52.9% male 47.1% ethnicity african american 30.5% asian 3.2% hispanic 1.6% caucasian 64.7% average grade 75.1 (13.7) average expected grade 86.4 (7.53) average gpa 2.85 (0.65) average act 21.24 (4.16) average expected hours studied 4.44 (3.01) parental education neither parent attended college 26.2% father only attended college 10.7% mother only attended college 26.2% both parents attended college 36.9% student work hours not employed 39.6% < 20 hours per week 20.9% >20 hours per week 39.6% average hours worked 23.8 (11.33) n=113 major business 56.7% non-business 43.3% financially stressed 42.6% values in parentheses are standard deviations. n=187 17 | journal for economic educators, 16(1), 2016 table 2: average grades and expected grades by gender men n=88 women n= 99 significance grade 74.87 (15.29) 75.32 (12.23) p = 0.41 expected grade 86.11 ( 8.21) 86.64 ( 6.91) p = 0.336 values in parentheses are standard deviations. table 3: average grades and expected grades by parental education neither parent attended college n=49 at least one parent attended college n=138 significance grade 77.41 (12.73) 74.26 (14.0) p = .15 expected grade 86.14 ( 8.47) 86.48 ( 7.21) p = .81 values in parentheses are standard deviations. table 4: average grades and expected grades by major business major n = 106 non-business major n = 81 significance grade 75.81 (13.29) 74.19 (14.29) p = .429 expected grade 86.57 (7.29) 86.16 (7.89) p = .719 values in parentheses are standard deviations. table 5: average grades and expected grades by ethnicity non-minority n=121 minority n=66 significance grade 79.15 (13.03) 67.70 (11.78) p = 4.1e-09 expected grade 88.74 ( 6.90) 82.10 ( 6.74) p = 1.2e-09 values in parentheses are standard deviations. table 6: average grades and expected grades by level of financial stress stressed n=80 not stressed n=107 significance grade 71.45 (13.55) 77.84 (13.21) p = .0014 expected grade 84.78 (7.28) 87.6 (7.48) p = .01 values in parentheses are standard deviations. since the largest and most significant differences occurred between minority and nonminority students, we compared the characteristics of those groups in table 7. for non-minority students, average act and gpa were both significantly higher, while the number of hours worked and time planned for study were both significantly lower. a significantly higher 18 | journal for economic educators, 16(1), 2016 percentage of minority students felt that financial stress had affected their academic performance. table 7: characteristics of minority versus non-minority students minority non-minority significance gpa 2.46 (0.52) 3.07 (0.62) p = 8.22e-12 act 18.35 (2.45) 22.82 (4.07) p = 1.33e-17 work hours/week 26.43 (9.46) 22.57 (11.96) p = .067 study hours/week 5.68 (3.87) 3.77 (2.15) p = .0004 financially stressed 53.0% 37.2% p = .036 values in parentheses are standard deviations. in order to determine the impact of these factors on expected grades, we regressed gender, ethnicity, gpa, act, major, expected hours working at outside employment, planned study hours, parental education, and financial stress on expected grades as the independent variable. see table 8. table 8: regression results for all variables on expected grades entire sample non-minority minority gender 0=female; 1=male -0.7570 (0.397) 0.511 (0.625) -3.632 (0.032) ethnicity 0=non-minority 1=minority -1.9290 (0.080) gpa 4.6448 (0.000) 5.924 (0.000) 2.136 (0.228) act 0.4753 (0.000) 0.3689 (0.011) 0.8696 (0.014) major 0=non-business 1=business 0.2823 (0.750) -0.391 (0.708) 1.672 (0.307) hours worked -0.0627 (0.043) -0.0292 (0.426) -0.1187 (0.046) hours studied 0.0631 (0.687) 0.3312 (0.191) -0.0713 (0.738) parents’ college 0=at least one attended 1=neither attended -0.1772 (0.857) -0.509 (0.676) 0.616 (0.716) financial stress level 0=not stressed 1=stressed 0.7928 (0.401) -0.348 (0.761) 2.580 (0.123) number observations 187 121 66 r2 0.438 0.411 0.283 p-values are in parentheses. for the entire sample of 187 students, gpa and act had significant positive effects, while the dummy variable for minority students and the number of hours worked had significant negative effects. when the sample was divided into minority and non-minority students, the 19 | journal for economic educators, 16(1), 2016 only significant variables for the non-minority students were act and gpa. for the minority students1, gpa was not significant, but there were significant negative effects for number of hours worked and for male students. numerous stepwise regressions with various combinations of independent variables regressed on the expected grade as the dependent variable were performed to determine the final regression results in table 9. for the entire sample, act and gpa had significant positive effects on expected grades, while being a minority student and number of hours worked had significant negative effects. for the sample of non-minority students, only act and gpa were significant. for the minority students, act had a significant positive impact, while being male and hours worked had a significant negative impact. table 9: final regression entire sample non-minority minority gender 0=female; 1=male -0.8194 (0.347) 0.537 (0.600) -3.553 (0.032) ethnicity 0=non-minority 1=minority -1.804 (0.089) gpa 4.4182 (0.000) 5.8943 (0.000) 2.283 (0.171) act 0.4759 (0.000) 0.3684 (0.009) 0.867 (0.013) major 0=non-business 1=business 1.684 (0.295) hours worked -0.0550 (0.061) -0.0348 (0.319) -0.1215 (0.032) hours studied 0.3021 (0.217) financial stress level 0=not stressed 1=stressed 2.609 (0.107) number observations 187 121 66 r2 0.435 0.409 0.279 values in parentheses are p-values. summary and conclusions our results indicate that expectations are positively and significantly correlated with academic performance in economics principles classes. students that expected higher grades usually had higher ending averages than those whose initial expectations were lower. we found that actual and expected grades of minority students were significantly lower than those of nonminority students. minority students had significantly lower gpas and act scores than nonminority students, worked significantly more hours per week, and a significantly higher percentage of minority students felt that financial stress had negatively affected their academic performance. 1 athough research has shown differences in act and high school gpa for asian and african-american students, both groups are included in minority students. a chow test to determine if it was appropriate to combine the two groups showed no difference in those students in our sample. 20 | journal for economic educators, 16(1), 2016 addressing the factors that negatively influence expectations may result in higher expectations, and since expectations are often self-fulfilling, may lead to improved academic performance and increased knowledge of economics. since hours worked and financial stress both had significant negative impacts on expectations, guidance in forming a financial strategy to reduce the number of student work hours by developing a reasonable budget and taking advantage of available scholarships and co-op programs may be helpful. in addition, college counselors could mentor students to develop specific academic and work plans designed to help them formulate and achieve their long-term goals. effective study tips, including college academic support systems, and methods to enhance the student’s expectations and confidence could be introduced. for further research, we suggest studying the effectiveness of the various retention strategies in use. for example, some community colleges in alabama have embraced the concept of “advisors on steroids,” where the advisor serves as a mentor, counselor, and motivator on-call 24 hours a day. while extreme, this innovative method has shown success. references arquero, jose, byrne, marann, flood, barbara, and jose maria gonzalez. 2009. “motive, expectations, preparedness and academic performance: a study of students of accounting at a spanish university.” revista de contabilidad—spanish accounting review, vol. 12, no. 2. bennett, doris, mccarty, cynthia, and shawn carter. 2016. “the impact of financial stress on academic performance in college economics courses.” academy of educational leadership journal. publication forthcoming. boser, ulrich, wilhelm, megan, and robert hanna. 2014. “student expectations have a deep influence on academic performance.” empower magazine, 10-14. braxton, john, vesper, nick, and don hossler. 1995. “expectations for college and student persistence.” research in higher education, vol. 36, no. 5. charlton, john, barrow, corinne, and pat hornby-atkinson. 2006. “attempting to predict withdrawal from higher education using demographic, psychological and educational measures.” journal of research in post-compulsory education, vol. 11,issue 1. chemers, martin m., li-tze hu, and ben f. garcia. 2001. “academic self-efficacy and first year college student performance and adjustment,” journal of educational psychology, vol.93, no. 1. pp 55-64. geiger, marshall and elizabeth cooper. 1995. “predicting academic performance: the impact of expectancy and needs theory.” journal of experimental education, vol 63, no. 3. gigliotti, richard and susan secrest. 1988. “academic success expectancy: the interplay of gender, situation, and meaning.” research in higher education, vol. 29, issue 4. murphy, james l. introductory econometrics. richard d, irwin, 1973. nicholson, laura, putwain, david, connors, liz and pat hornby-atkinson. 2013. “the key to successful achievement as an undergraduate student: confidence and realistic expectations?” studies in higher education, vol. 38, no. 2. smith, joshua and ellen wertlieb. 2005. “do first-year college students’ expectations align with their first-year experiences?” naspa journal, vol. 42, no. 2. vollmer, fred. 1986. “the relationship between expectancy and academic achievement— how can it be explained?” british journal of educational psychology, vol. 56, issue 1. 21 | journal for economic educators, 16(1), 2016 weissberg, norman, owen, david, jenkins, adelbert, and ernest harburg. 2003. genetic, social and general psychology monographs, vol 129, no. 2. 13 |journal for economic educators, 23(1), 2023 four comparative steady-state exercises using the diamond-mortensen-pissarides model: empirical and policy-driven applications for first-year graduate students in macroeconomics michael b. loewy1 abstract the diamond-mortensen-pissarides (dmp) model of two-sided labor market search is now a common topic in first-year graduate courses in macroeconomics. following pissarides (2011), alogoskoufis (2019) derives a two-equation in two unknowns solution to the dmp model that is useful for teaching this topic. i discuss four comparative steady-state exercises that he does not consider: (i) a direct change in the posting price of a vacancy; (ii) a change in labor-market matching efficiency; (iii) financing unemployment benefits that are proportional to the real wage with a labor income tax; and (iv) the addition of a minimum wage. the first two exercises are empirically motivated, and the second two exercises are policy motivated. keywords: two-sided labor market search; comparative steady-state exercises; graduate teaching jel codes: a23, e24 introduction dynamic labor-market search models with frictions such as the diamond-mortensenpissarides (dmp) model are now a common topic in first-year graduate macroeconomics courses.2, 3 while there are several treatments of this model that one can use as a basis of instruction, i find the approach that alogoskoufis (2019, ch. 18) takes, which is based upon pissarides (2011), to be particularly useful. i use alogoskoufis’s solution as a starting point for analyzing four comparative steady state exercises that his discussion of the dmp model does not cover. i begin with a brief description of the pissarides-alogoskoufis solution of the dmp model. i then present my four comparative steady-state equilibrium exercises and briefly discuss why they are of empirical and/or policy interest. the paper concludes with a brief summary. the pissarides-alogoskoufis solution to the dmp model following pissarides (2011), alogoskoufis (2019) starts with bellman equations for an employed and an unemployed consumer, for a firm with a filled position and with a vacancy, as 1 associate professor, department of economics, university of south florida, 4202 e. fowler ave, cmc 342, tampa, fl 33620-5700, usa. i thank brad kamp for his comments on an earlier draft of the paper. i thank as well the many students in my macroeconomics i course at the university of south florida to whom i have subjected these exercises in varying forms over the past 13 years. 2 as an example, i have taught this subject in a class comprised of both first-year ma and phd students, with differing levels of preparation in calculus, for the past 13 years. 3 key early contributions include diamond (1982), pissarides (1985), mortensen (1986), and mortensen and pissarides (1994). for a historical overview of the dmp model, see pissarides (2011). 14 |journal for economic educators, 23(1), 2023 well as the nash bargaining game and its first-order condition that the real wage must solve. from these five equations, alogoskoufis derives two equations for the real wage, w, as a function of labor-market tightness, v u θ = , where u is the unemployment rate and v is the vacancy rate. specifically, letting ( , )m u v be the usual constant returns to scale matching function, he shows that these two relationships satisfy: ( ) (1 / ,1) k w p r m δ θ = − + (1) (1 )w p z kβ β β θ= + − + (2) where i have maintained alogoskoufis’s notation save for denoting the posting price of a vacancy with k, rather than his pc, and the probability of a filled vacancy, ( ), /m u v v , with ( )1 / ,1m θ , rather than his ( )q θ .4 i opt to make these two changes in notation for the following reasons. first, in my view it is not a priori obvious that the posting price is necessarily proportional to labor productivity so assuming instead that it equals a constant takes a more neutral stand on any such relationship. second, i also believe that by writing ( )1 / ,1m θ and ( )1,m θ for the probabilities of a firm filling a vacancy and a searching consumer being hired makes the relationship between each of these functions and labor-market tightness more apparent than does writing them as ( )q θ and ( ).qθ θ pissarides (2011) and alogoskoufis (2019) refer to equation (1) as the job creation condition and to equation (2) as the wage determination equation. the former is a decreasing function and the latter is an increasing function of labor-market tightness. note that the equilibrium is unique and strictly positive for both θ and w if ( ) ( )1p r p zδ β β− + > + − which is assumed. to close the model, with the equilibrium values of the real wage and labor-market tightness now determined, it follows that the steady-state unemployment and vacancy rates are constant over time. focusing on the unemployment rate, it follows that the flows of consumers into and out of employment must be equal: ( )* * *(1, ) 1u m uθ λ= − (3) solving this for u* yields ( ) * *1, u m λ λ θ = + and from the definition of θ we obtain ( ) * * * . 1, v m θ λ λ θ = + in my view, one of the primary advantages of presenting the dmp model using the pissarides-alogoskoufis approach is that the model directly solves for the equilibrium real wage, a variable that is of particular interest when considering the effects of changes in the parameters on the model’s steady-state equilibrium. alogoskoufis (2019) considers several such exercises including (i) an increase in marginal product of labor, p, which necessarily implies an increase in the posting price of a vacancy as the latter equals pc; (ii) an increase in the unemployment benefit, z; (iii) an increase in the relative bargaining power of consumers, β; (iv) an increase in the real interest rate, r; and (v) an increase in the separation rate, λ. with regards to (ii), he also considers the case where the unemployment benefit is the share ρ (the replacement rate) of the real wage so that z wρ= . 4 specifically, p is the constant marginal product of labor; z is the unemployment benefit; λ is the separation rate; β is the relative bargaining power of the consumer in the nash bargaining game; and r is the real rate of interest. 15 |journal for economic educators, 23(1), 2023 four steady-state equilibrium exercises when i teach the dmp model, besides discussing the aforementioned exercises, i also include four others that alogoskoufis (2019) does not discuss. the first exercise that i present, and one that is a relatively simple starting place, is a change in the posting price, k. innovations in the technology for the posting of vacancies such as the online job sites that employers provide or more general online job sites such as indeed have substantially reduced the cost to firms of doing so. as expected, when the posting price decreases, the job creation condition increases causing both labor-market tightness and the real wage to increase. the lower posting price increases the number of posted positions and this in turn increases the probability that a searching consumer is matched. thus, the unemployment rate decreases and the vacancy rate increases. second, following williamson (2018), i modify the matching function to include a term that captures the efficiency of the matching process. thus, i write the matching function as ( ),em u v where e measures the efficiency of the labor-market matching process. since only equation (1) includes the parameter e through what is now the ( )1 / ,1em θ term, it is straightforward to determine the impact of a change in labor-market matching efficiency on the equilibrium values of w* and θ* and hence on u* and v*. assuming, as seemingly occurred during the great recession, that e decreased, then it follows that equation (1) decreases so that both w* and θ* decline. the decrease in labor-market tightness and the decrease in matching efficiency both serve to increase the unemployment rate since we now have that ( ) * *1, u em λ λ θ = + . as for the vacancy rate, the decrease in matching efficiency can cause it to increase rather to decrease. specifically, this is the case if the absolute value of the elasticity of the unemployment rate with respect to labor-market matching efficiency is sufficiently small.5 this result provides a possible (and plausible) explanation for the rightward shift in the us beveridge curve observed during and after the great recession. moreover, it is also consistent with the second rightward shift in the curve observed during and after the covid-19 recession. third, while alogoskoufis (2019) considers the effects from a change in unemployment benefits, be they exogenous or endogenous, he does not consider the general equilibrium question of how to finance these benefits. my approach is to assume that employed consumers face a proportional tax on their wage income and that this revenue finances unemployment benefits that are proportional to the real wage. thus, the wage determination equation now reads: (1 ) (1 )w p w kτ β β ρ β θ− = + − + (4) where τ is the laborincome tax rate and ρ. is the replacement rate. since the measure of employed consumers equals ( ),m u v , each of whom is taxed wτ , and the measure of unemployed consumers equals u, each of whom receives an unemployment benefit of z wρ= , it follows that the government budget constraint in each period satisfies ( , )m u v w u wτ ρ= (5) 5 recall that * * *v uθ= so that * * * 0 dv du d u de de de θ θ= + > if and only if , , 0e u eθε ε> − > where ,x eε is the elasticity of x with respect to e. 16 |journal for economic educators, 23(1), 2023 dividing both sides by w and then by u implies that (1, )m θ τ ρ= . substituting this expression into equation (4) and rearranging yields the wage determination equation for this version of the model: ( ) 1 [1 (1 ) (1, )] p k w m β θ τ β θ + = − + − (6) notice that equation (6) continues to be an increasing function of labor-market tightness. combining this expression with the job creation condition allows one to solve the model in the usual way. in doing so, we can now study, for example, the impact of a change in the tax rate on the steady-state equilibrium. an increase in the labor-income tax rate increases equation (6) which in turn causes the before-tax real wage to increase and labor-market tightness to decrease as firms are now less willing to post vacancies. hence, the unemployment rate increases, and the vacancy rate decreases. as for the replacement rate, ( )1,mρ τ θ= , it can either increase or decrease depending upon the usual laffer curve tradeoff between the tax rate, τ, and the effective tax base, ( )1,m θ . for values of τ near zero, we would expect that an increase in the tax rate would reduce the probability of employment by a smaller proportion thereby causing the replacement rate to increase.6 the fourth exercise that i cover is the introduction of a minimum wage. the international labour organization (ilo) reports that 92% of its 186 member states (as of 2015) have a minimum wage in place and so such laws are quite common in practice (ilo 2017, ch 1.2). consequently, analyzing the dmp model in the presence of a minimum wage is of interest in and of itself as are analyzing the effects of a change in the minimum wage or how changes in other parameters affect the steady state when a minimum wage exists. the presence of a minimum wages adds a constraint to the nash bargaining game such that now we have: ( ) ( )1* arg max ( ) ( ) subject tow w w u j p w v w wβ β−= − − − ≥ (7) where w is the minimum wage and w, u, j, and v are the value functions for an employed consumer, an unemployed consumer, a firm with a filled position, and a firm with a vacancy. since nash bargaining does not enter into the derivation of the job creation condition, equation (1) is unchanged. however, because the nash bargaining solution does enter into the derivation of the wage determination equation, we have to adjust it to allow for the case where the minimum wage is binding. therefore, we replace equation (2) with: * * (1 ) (1 ) w p z k w w w p z k w w β β β θ β β β θ = + − + > > + − + = (8) if the minimum wage is non-binding in equilibrium, then equation (8) corresponds to equation (2) and so is increasing in θ as usual. if the minimum wage is binding in equilibrium, then the wage 6 alternatively, one can use equation (5) to solve for τ in term of ρ and then consider the general equilibrium effects of a change in the replacement rate on the labor-income tax rate. 17 |journal for economic educators, 23(1), 2023 determination equation is constant at *w w= and exceeds the section of the wage determination equation that would otherwise apply for *θ θ< . figures 1 and 2 illustrate the two cases, nonbinding and binding, respectively. figure 1: the case of an equilibrium with a non-binding minimum real wage. w ( )p r kλ− + w* w (1 )p zβ β+ − 0 θ* θ figure 2: the case of an equilibrium with a binding minimum real wage. w ( )p r kλ− + *w w= (1 )p zβ β+ − 0 *θ θ one can use this extension to investigate the impact of an increase in the minimum wage when the minimum wage is currently non-binding versus is currently binding. at the margin, while the former is irrelevant, the latter necessarily implies that labor-market tightness decreases. the higher binding real wage reduces the incentive for firms to post vacancies and raises the incentive 18 |journal for economic educators, 23(1), 2023 for consumers to search for positions. therefore, the vacancy rate decreases, and the unemployment rate increases. another line of inquiry is to illustrate how changes in the other parameters of the model have the potential to move the steady-state equilibrium from one that is non-binding to one that is binding. for example, a decrease in the relative bargaining power of consumers, β, causes the wage determination equation to decrease (both its vertical intercept and its slope decrease) which in turn increases the level of labor-market tightness at which the minimum wage binds. when the decrease is sufficiently large, in the new steady state, firms prefer to reduce the real wage below ,w but cannot do so. however, with the real wage now lower than it was in the initial steady state, firms are more willing to post vacancies causing labor-market tightness to increase, albeit not as much as it would have increased were there no minimum wage. with more firms posting vacancies, the vacancy rate increases, but by less than without the minimum wage constraint. similarly, the unemployment rate decreases, but by less than without the constraint. figure 3 illustrates this example wherein the consumer’s relative bargaining power decreases from 1β to 2β and labor-market tightness increases from * 1θ to * 2θ , a smaller increase than would have occurred in the absence of the minimum wage, a level denoted by *3θ . figure 3: a decrease in the relative bargaining power of consumers from 1β to 2β causes the equilibrium real wage to decline from *1w to * 2w w= , the minimum wage, and labor-market tightness to increase from *1θ to * 2θ . in the absence of the minimum wage, labor-market tightness would increase further to *3θ and the equilibrium real wage would fall to * 3w w< . w ( )p r kλ− + *1w *2w w= *3w 1 1(1 )p zβ β+ − 2 2(1 )p zβ β+ − 0 *1θ * 2θ * 3θ θ conclusion given that teaching the dmp model in first-year graduate courses in macroeconomics is now quite common, from an instructional viewpoint it is desirable to have a relatively simple version of the model that one can present to students, especially master’s-level students who may 19 |journal for economic educators, 23(1), 2023 not have more than a semester of calculus in their background. pissarides (2011) and alogoskoufis (2019) present such a version of the dmp model. while alogoskoufis provides several interesting comparative steady state examples, in my first-year graduate macroeconomics class i also discuss the four exercises considered above. in my view, these exercises provide theoretical insights into certain empirical results (falling costs to post vacancies; the shift in the us beveridge curve) and certain questions of macroeconomic policy (changes in the funding of unemployment benefits; changes in the minimum wage). i believe that these four exercises provide interesting theoretical applications of the dmp model, each of which is grounded in either empirics or policy. i offer them in the hope that they will be of interest to instructors of a first-year graduate macroeconomics course who cover the dmp model. references alogoskoufis, george. 2019. dynamic macroeconomics. cambridge, ma: mit press. diamond, peter. 1982. “wage determination and efficiency in search equilibrium.” review of economic studies, 49(2): 217-227. international labour organization. 2017. minimum wage policy guide. geneva: international labour organization. mortensen, dale t. 1986. “job search and labor market analysis.” in ashenfelter, o. and p.r.g. layard (eds), handbook of labor economics. amsterdam: elsevier: 849-919. mortensen, dale t., and christopher a. pissarides. 1994. “job creation and destruction in the theory of unemployment.” review of economic studies, 61(3): 397-416. pissarides, christopher a. 1985. “short run dynamics of unemployment, vacancies, and real wages.” american economic review, 75(4): 676-690. pissarides, christopher a. 2011. “equilibrium in the labor market with search frictions.” american economic review, 101(4):1092-1105. williamson, stephen. 2018. macroeconomics. 6th edition. boston, ma: pearson. 46 |journal for economic educators, 20(2), 2020 the economics of cupcakes: a class activity on the law of diminishing marginal product christine l. storrie1 abstract economics courses are typically lecture-based. this paper provides an alternative to the traditional chalk and talk method of classroom instruction by outlining a class activity that illustrates the concept of diminishing marginal productivity. the activity incorporates an experiment-based learning approach with minimal direction from the instructor and offers an alternative or complement to traditional lecture-based instruction methods. although the main lesson is the law of diminishing marginal productivity, other economic concepts can also be incorporated and learned from this experiment. variations of the experiment and possible outcomes are also discussed. keywords: economic education, law of diminishing marginal product, undergraduate economics, classroom activities jel classification: a20, a22 introduction educators often struggle to find effective ways to deliver information that will enable students to not only understand, but also to retain the material being taught. even if students are engaged, paying attention in class, and understanding the concepts, conventional methods of instruction only allow for information to be coded in the short-term memory. therefore, these methods typically only lead to short-term retention. in order for something to be encoded into longterm memory, a deeper encoding process is necessary. according to the levels of processing model, only deeper processing will lead to an improvement in memory (craik & lockhart, 1972). craik and lockhart (1972) contend that elaborative rehearsal is needed to encode information for long-term storage. by merely repeating information or even trying to memorize concepts as they study, students are typically only encoding the information for short-term retrieval. elaborative rehearsal requires the brain to process the information in a more in-depth way. elaborative rehearsal allows for the use of prior knowledge to encode the information already in long-term storage by using what is already known and incorporating it with what is being learned. this paper provides an alternative to the traditional chalk and talk method of classroom instruction by outlining a class activity that illustrates the concept of diminishing marginal productivity. the activity incorporates an experiment-based learning approach with minimal direction from the instructor. this experiment is effective because it allows students to make a connection to the new information by linking it to information that they already know. even if students do not know how to bake, they will at least understand the process involved in the experiment and be able to apply this prior knowledge to the new information. the experiment also 1 assistant professor of economics, department of economics, finance and accounting, suny oneonta, 108 ravine parkway, oneonta ny 13820 47 |journal for economic educators, 20(2), 2020 allows them to create a visual in their mind which helps them develop a way to retrieve the information long term. much of the literature in classroom experiments discuss the benefits of applying theory into hands-on learning to help improve comprehension of the material. inverting the classroom changes the focus in the classroom for delivery of concepts through lectures to learning concepts through experiments, hands on exercises, and group work. this experiment presents an innovative class experiment to be used as a classroom exercise by creating a means for a visual memory as well as a way to connect the new information to previously known information facilitating longterm retention of the concept. the seven different learning styles, according to the perceptual learning styles theory, are: print, aural, interactive, visual, haptic, kinesthetic, and olfactory (davis, 2007). delivering traditional classroom lectures, writing notes on the board, and assigning readings address the print, and aural style of learners. unfortunately, that leaves the visual, haptic, kinesthetic, and olfactory learners to find other ways to learn the material since the traditional chalk and talk methods do not allow for their learning styles to be utilized. visual learners benefit from seeing and hearing demonstrations. interactive learners learn best through verbalization and benefit from small group discussions. haptic learners learn by doing and benefit from a hands-on approach to learning. olfactory learners learn best when they can incorporate their sense of smell and taste into the learning process and kinesthetic learners learn best when they are able to move during the learning process. this paper describes an experiment that incorporates at least five of the seven different learning styles to engage the classroom and enhance the learning process. this can be used as a substitute or a complement to traditional educational delivery methods. this experiment is unique because no other experiment to my knowledge provides methods to enhance the olfactory learners’ preferred learning style. the purpose of this experiment is for students to learn the law of diminishing marginal productivity. the law of diminishing marginal productivity posits that as more and more units of one factor are added while holding all other factors constant, eventually output will begin to increase at a decreasing rate. the experiment is to create a “cupcake factory” in the classroom. the input that will be increased is units of labor. the factors that will be held constant are capital and time. the remainder of the paper outlines the details of the experiment first by providing a list of the necessary resources followed by an overview of the classroom exercise including suggestions for adjustments for larger classes. i also include a post-experiment discussion, followed by some concluding remarks. resources • cupcakes (enough for the entire class)23 • icing • sprinkles or similar to decorate the cupcakes • knife(s) for icing the cupcakes or alternatively, a cake decorating tool and piping bags can be used. • napkins (or plates) 2 to be sensitive to allergy restrictions of some of the students an ingredient list should be available upon request. 3 for larger sections, mini cupcakes can be used. 48 |journal for economic educators, 20(2), 2020 • a timer • other items: disposable or latex gloves and disposable table cloth to cover surface area for the production process, disposable wipes or other cleaning products for clean up this experiment requires some pre-class preparations. i have conducted the experiment using home-made cupcakes, which is the preferred method, but i have also used store-made cupcakes. the difference would be that the store-made cupcakes would most likely have already been iced (and even decorated) so the students would then need to add a decorative element instead of just icing the cupcake. one possibility would be adding icing gel on top of the icing and adding sprinkles on top. another alternative would be applying whipped cream which could be added to the cupcake and students could add the sprinkles to the whipped cream. some local bakeries or grocery stores may also be willing to sell cupcakes that are not iced. this experiment allows for flexibility and creativity based on the preferences of the instructor and the constraints of the class. it is helpful to have the area(s) where the experiments will be conducted cleaned and prepped before class begins. thoroughly clean surface area prior to setup or cover with tablecloth. arrange napkins, icing, icing tool, sprinkles or other decorating items, disposable gloves, and cupcakes on the table. do not place them in any particular order, as it is important for the students to determine the best production method. the experiment the instructor serves as the “manager” who hires the new workers. initially, three student volunteers are “hired.” one student will be the time-keeper. most students bring cell phones to class nowadays and can time the experiment directly on their phone. alternatively, a timer can be provided. one student is selected as the scorekeeper to track the output for the rounds of the experiment. the scorekeeper can either record the data on a chalkboard or whiteboard. otherwise, a template can be created and the student can input data into a spreadsheet that is projected on a screen for larger classrooms where reading from a board may be difficult. using a board is preferable to the spreadsheet for several reasons. first, it increases student engagement because not only does the student have to input data, but the student would also need to create and manage the table. fellow students can and often do help with this. second, it is easier to draw inferences, add columns (such as total, variable and fixed costs for example) after the experiment ends or highlight specific rounds for discussion, although this is still possible to do so on a spreadsheet. the scorekeeper should create three columns on the board to track the output. the table should include columns for number of workers, total output, and marginal output. sample tables are provided in the appendix. hiring two student workers to handle these “jobs” maximizes student involvement in the experiment. the third student will work as a cupcake decorator. the task is for the student cupcake decorator to ice the cupcake, decorate the cupcake with sprinkles (or similar) and place it on a paper plate or napkin. the number of plated and decorated cupcakes is recorded for each round. the time allotted for each round can be altered depending on the class time but should be consistent for all rounds of the experiment. generally, forty-five seconds is an adequate amount of time for each round. only finished products should be recorded in the total output column (i.e. no partially finished cupcakes). it is important to have some sort of quality control aspect in the experiment. this will ensure that the finished cupcakes all have a similar amount of icing and sprinkles on the finished product. the “manager” can serve as the quality control inspector and reject any unsatisfactory cupcakes if necessary. 49 |journal for economic educators, 20(2), 2020 additional students are hired in subsequent rounds and the output, as well as the marginal product of adding the additional worker are recorded. rounds continue and one additional worker is “hired” each round until either all cupcakes are decorated or until marginal output (product) starts to decline. since the workers are not homogenous, the possibility of better skilled workers being hired resulting in marginal product increasing during that round exists. continue for several more rounds in case diminishing marginal product at this point is an aberration due to special effort by workers or rounding to whole cakes completed. due to the restraints in capital and time, however, any increases in marginal product should be minimal and as more workers are hired with fixed amounts of time and capital, diminishing marginal product will eventually set in. post-experiment classroom discussion minimal motivation is given before the experiment is performed. the key for the experiment is for students to observe the outcome of what will occur when more and more of one factor of production (labor) is added, while holding all other factors of production (capital and time) constant. without telling the class what will happen, students are able to discover that after a certain number of workers is added with a fixed amount of capital, diminishing marginal returns will set in. they will not use this terminology when they observe the results, however. they will observe that when capital (knife, sprinkles, table etc.) is fixed, the number of finished cupcakes increases as more workers (students) are hired. but at some point, the number of finished cupcakes in the round will begin to increase at a decreasing rate and could eventually decrease in subsequent rounds. this experiment increases student engagement in several ways. first, instead of experiments that use playing cards or dice or other props that do not necessarily promote student engagement on their own, this experiment involves the use of food. students will get to eat the “output” of the experiment. think back to a time when you had to sit through a long staff meeting. if someone happened to bring in donuts for the group, moods improved, and attention increased. this works in the classroom too. second, this experiment is effective because any number of things can go wrong during the experiment, but these mishaps can oftentimes be humorous. using humor in the classroom increases student engagement. studies have shown that humor also correlates to significantly higher scores on examinations (hackathorn, garczynski, blankmeyer, tennial, & solomon, 2011; ziv, 1988). another outcome of the experiment is that students often begin to specialize. typically, as more and more “workers” are added, they all tend to take on a particular task. students can take on the job of placing the napkins or plates, decorating the cupcakes or icing them. depending upon the size of the class, either one or two icing knives can be used. after the experiment ends, i ask the students to reflect on the experiment and give suggestions about what could be done to increase output. after they see that marginal returns sets in after a certain number of workers is added. marginal product of labor is based on a fixed amount of capital so discussing how adding more capital (the knife, the table, the container that holds the sprinkles) could increase output but only to a certain point until marginal product sets in again. this is another benefit to the experiment as other experiments for diminishing marginal product do not have a capital component imbedded in the experiment. having two workers that perform duties other than producing output is a great way to incorporate a discussion on fixed vs. variable costs. during the experiment, they will be able to see that the output for workers one and two is zero. it is not until the third worker is added, that there is any output. this can be helpful to refer back to when discussing shutdown decisions. 50 |journal for economic educators, 20(2), 2020 the experiment can have many possible outcomes, but this is one of the reasons why the experiment is so effective. one semester, i had students icing the cupcakes using an icing bag with an attached decorating tip. this worked well until the bag had to be refilled with frosting. refilling the icing bag took a significant amount of time and all production was “shut down” while the capital was being serviced or repaired. this opened up discussion on production process and the consequences of a breakdown in production. lastly, students appreciate a less formal approach in instructional delivery and feel more connected to the course and instructor. pollio and humphreys (1996) find connection between the instructor and the student is paramount to effective teaching. conclusion the purpose of this paper is to offer an alternative approach to traditional methods of teaching the law of diminishing returns. i provide a self-contained exercise that can be adjusted for larger or smaller sized classrooms. in my experience, students retain the concept of diminishing marginal productivity long after the semester. they are able to recall both the experiment in detail and although they do not retain what the concept is called, they recall the main idea and outcome of the experiment even years after taking the course. the implication is that by incorporating a number of learning styles into the classroom and providing a means to allow for elaborative rehearsal and therefore long-term retention of the concept. although the main lesson is the law of diminishing marginal returns, other concepts that can also be incorporated and learned from this experiment are: marginal product of labor, fixed and variable resources, short-run production, the production function, costs and specialization. these topics can be incorporated at the discretion of the instructor. references craik, f. i. m., & lockhart, r. s. (1972). levels of processing: a framework for memory research. journal of verbal learning and verbal behavior. davis, s. e. (2007). learning styles and memory. institute for learning styles journal. hackathorn, j., garczynski, a. m., blankmeyer, k., tennial, r. d., & solomon, e. d. (2011). all kidding aside : humor increases learning at knowledge and comprehension levels. journal of the scholarship of teaching and learning. pollio, h. r., & humphreys, w. l. (1996). what award-winning lecturers say about their teaching: it’s all about connection. college teaching, 44(3), 101–106. ziv, a. (1988). teaching and learning with humor: experiment and replication. journal of experimental education. 51 |journal for economic educators, 20(2), 2020 appendix table a1. sample table and initial results round number of workers total number of cupcakes iced difference from previous round 1 3 2 2 4 4 2 3 5 8 4 4 6 11 3 5 7 11 0 table a2. sample table and final results round quantity of labor total output marginal output output per worker 1 3 2 0.68 2 4 4 2 1 3 5 8 4 1.6 4 6 11 3 1.83 5 7 11 0 1.57 16 |journal for economic educators, 20 (2), 2020 a spreadsheet-based active learning model to teach the shutdown decision satyajit ghosh1 abstract teaching economics in undergraduate classes, particularly at the introductory level, while keeping the students engaged and interested in the subject matter is a challenging task. “chalk and talk” is still the dominant teaching method in undergraduate economics. however, in such traditional lecture settings, students often lose interest in the subject matter particularly when the emphasis is on graphical exposition. active learning strategies where students are engaged in their own learning are regarded as more effective in generating and retaining student interest. in this paper, i demonstrate how to develop and use an active learning model using the visual interface of excel that students themselves can control. the model in this paper shows how to teach a competitive firm’s shutdown decision. the technique of developing such a spreadsheet-based model is discussed in detail. using this methodology, active learning models can be used to teach other topics in both microeconomics and macroeconomics, such as tax incidence, deadweight loss or effectiveness of macroeconomic policies among others. since both professors and students are familiar with excel, these active learning models create a familiar teaching-learning environment. key words: shutdown decision, active learning, excel, interactive graphs jel classification: a22, d21, d41 introduction the benefits of active learning that “involves students in doing things and thinking about the things that they are doing”2 cannot be overstated. in higher education, the importance of active learning has long been recognized. chickering and gamson (1987) included “active learning techniques” as an integral part of their widely cited “seven principles for good practice in undergraduate education.” cross (1987) went a step further and argued that “when students are actively involved in the learning task, they learn more than when they are passive recipients of instruction.” however, in the fourth national survey of teaching and assessment methods in undergraduate economics, watts and schaur (2011) reported, “there is still relatively little use of these practices in undergraduate economics courses. classroom experiments are now used by a small share of instructors in introductory courses, but overall, games, simulations, and experiments are almost never used…” undergraduate instruction in economics has remained largely passive. watts and schaur further found, “the median amount of time devoted to the use of the chalkboard for writing text and graphs during class is also 83 percent in all types of classes, except for upperlevel field courses…..” 1 professor and alperin teaching fellow, department of economics and finance, kania school of management, university of scranton, brennan hall, scranton, pa 18510. the author’s research was partially supported by the henry george research fund, department of economics and finance, university of scranton. 2 bonwell and eison (1991) 17 |journal for economic educators, 20 (2), 2020 the reasons for such reluctance to use active learning strategies can be traced back to what bonwell and eison (1991) identified nearly thirty years back as “barriers to the use of active learning.” faculty members often refrain from using active learning strategies, they argued, because they feel that incorporation of active learning strategies may reduce coverage of content and because it is too time-consuming to develop appropriate active learning strategies. bonwell and eison argued that perhaps the biggest obstacle to the use of active learning is the perception of two types of risks associated with such learning strategies. the first type of risk is that students may not participate in the “activities” and consequently, instead of taking charge of their own learning, they will be more disengaged. the second type of risk that the faculty often fear is that they may not be able to integrate active learning strategies with their existing teaching strategy, and as a result, students will not learn as much. in a passive learning environment, where students are not actively engaged but observe the graphs or tables on the board or on powerpoint slides, they quickly lose interest and often fail to understand what the graphs and tables are meant to explain. this is particularly important in introductory classes when most students try to learn the logic of economics for the first time. there can be many methods of classroom teaching that ensure active involvement on the part of the students. in my class, i use the visual interface of spreadsheet modelling to create active learning models. in this paper, i discuss how to develop and use one such excel-based active learning model. the model shows how to discuss the shutdown decision for a competitive firm and determine the shutdown price as the minimum of the average variable cost for a firm. i am focusing on a very simple yet important concept to build a suitable active learning model so that we can concentrate on the mechanics of building the model and using it to enhance student learning. this paper demonstrates how i use an active learning framework by using spreadsheetbased interactive graphs that students can control with the help of scrollbars embedded in the graphs. this enables them to observe the direct effect of their actions through their choice of changes in values of a parameter and its effect on the diagram. thus, this tool provides them with a hands-on experiment where they are in control of the situation, a clear example of learning by doing. as it will be clear from the model, it is not restricted only to this specific topic. the procedure can be used to create models for various topics in microeconomics and macroeconomics. there are two other reasons to use excel to create an active learning model. most instructors of introductory economics have witnessed a sharp decline in mathematical skills of high school students. introductory economics texts reflect this reality. they rarely use any algebraic derivations. most intermediate microeconomics texts also do not use calculus in the main body of the text. however, for more than twenty years there has been growing emphasis on computer education in both high school and undergraduate curriculum. while the active learning model described in this paper does not require any complicated excel manipulations for students, their familiarity with excel provides a degree of comfort in carrying out the active learning activities. since the graphs and calculations of the model are based on an excel spreadsheet, they do not appear to be result of some calculations based on some unfamiliar computer programming, and they can focus on the economic content of the subject matter. finally, since faculty are usually very familiar with excel, the navigation of the spreadsheet and the minimal programming that is needed to make the spreadsheets interactive are not likely to pose any great difficulty for the faculty to develop these models and use them in their courses. the plan of the paper is as follows. in section 2, i present an active learning model that is used to teach a competitive firm’s shutdown decision. i explain all the steps that are needed to 18 |journal for economic educators, 20 (2), 2020 develop such a model and discuss how the model can be used in the classroom. section 3 contains the concluding remarks. a spreadsheet based interactive model: the shutdown decision the shutdown decision for a competitive firm is taught after students are introduced to the two fundamental decision rules that explain that in order to maximize profit a competitive firm should produce the level of output where price equals marginal cost (dr1), and the marginal cost curve is upward sloping (dr2). principles of microeconomics texts such as krugman and wells (2018) or mankiw (2018) discuss these rules graphically. intermediate microeconomics texts such as besanko and braeutigam (2014) or goolsbee, levitt and syversion (2016) supplement the graphical analysis, often with some algebraic examples. to develop an interactive spreadsheet-based model of the shutdown decision i start with the following total cost function: 3 2 16 100 120tc q q q= − + + (1) where q is the level of output produced by the firm. the average total cost (atc), the average variable cost (avc) and the marginal cost (mc) are given by, 2 120 16 100atc q q q = − + + (2) 2 16 100avc q q= − + (3) 2 3 32 100mc q q= − + (4) it can be easily verified that the shutdown price or the minimum of the average variable cost is $36. as the first step to develop an interactive spreadsheet-based graphical model, i plot the graphs of the atc, avc and mc curves on a worksheet using excel’s chart option (see figure 1).3 to graphically determine the profit-maximizing output for the price-taking firm, i need the horizontal demand curve given by a price level. however, my goal is to make the graph interactive, so that the price line can be moved to different levels thereby creating different profit-maximizing outputs. to accomplish this, i insert in cells j4:l4 of the worksheet a “scrollbar” from excel’s toolbar (accessible from excel’s developer tab). the details of the steps to insert a scrollbar are provided in the appendix. the position of the slider of the scrollbar is reflected in the value in cell i4, which i call the adjust value. (see figure 1). the purpose is to move the demand curve by moving the slider of the scrollbar. in order to accomplish this, i need to link the price level, p, to the movement of the slider (i.e., the value in cell i4). in this model i vary the value of p between the range of 20 (min) and 100 (max), which are entered in cells f4 and g4. next, i simulate the value of p using the equation: p = min + (max –min)*0.003125*adjust and enter the formula for p in cell b6 as =f4+(g4-f4)*0.003125*i4. now, as the slider of the scrollbar moves to the right (left), the adjust value in cell i4 increases (decreases) and the market price level in cell b6 increases (decreases).the coefficient 0.003125 used in the simulation equation simply controls the rate of adjustment of the price level. to insert the graph of the changeable demand curve on the worksheet, i plot the following points: (0, b6), (18, b6). now as the slider of the scrollbar is moved to the right (left) the demand curve (or the price line) moves up or down along with the value of the price level shown in the cell b6. 3 for convenience of drawing the graphs, i use the range of q from 2.5 to 18. 19 |journal for economic educators, 20 (2), 2020 to use this graphical model to demonstrate the firm’s shutdown decision, i need to incorporate in the worksheet the calculations for profit-maximizing output and the resulting profit level. assuming that 0q  , the optimizing rule, p = mc, yields the following solution for the output level4: 2 32 32 12(100 ) 6 p q + − − = (5) the formula for the output is entered in cell b8 as = ((32)+sqrt(32^2-12*(100-$b$6)))/6. next, using the total cost equation from (1), i enter the formula for profit in cell b10 as =$b$6*$b$8-(($b$8)^3-16*($b$8)^2+100*$b$8+120). also, for future reference i enter the value of total fixed cost (tfc), 120, in cell b12. the structure of the interactive graphical model is now complete. students can move the slider of the scrollbar and observe on the graph how the demand curve moves up and down. along with the price level, the profit maximizing output level is also shown on the graph. the price level, output level and the resulting profit level are shown in cells b6, b8 and b10 on the worksheet. in order to demonstrate the shutdown decision, i first emphasize that even if a competitive firm follows the rule of p =mc and picks the output where the marginal cost is rising, it may not earn a positive profit. if a firm earns a negative profit (i.e., incurs a loss), its goal is to minimize its loss. however, instead of producing some output, in the short run a firm always has the option of shutting down and incurs a loss equal to the total fixed cost. for the purpose of this demonstration, at first students are asked to pick any price above $55.5 students can choose any appropriate price level by moving the slider of the scrollbar. figure 1 shows the price level of $80 (when the adjust value in cell i4 that shows the position of the slider is 240) with the corresponding output level of 10 units. the profit level in cell b10 is shown as $280. students can easily observe that the firm follows the two decision rules for profit maximization and earns a positive profit. 4 it can be readily verified that given the chosen range of the price level, the solution for output that is based on the positive square root of the discriminant, satisfies the second order condition for profit maximization, which requires that at the optimal output level the slope of the mc curve must be positive. 5 the goal is to ensure that at the beginning the price level is such that the firm is seen to make positive profit. since the minimum of atc is $50.28, any price higher than that is sufficient. price above $55 is just a convenient choice. 20 |journal for economic educators, 20 (2), 2020 figure 1 firm earns a positive profit: p =$80 next students are instructed to lower the price level by moving the slider to the left and stop when demand curve is somewhere in between the atc and the avc curves. figure 2 shows the price level at $45 (when the adjust value in cell i4 is 100). at this price level, the level of output is determined to be 8.51 and the profit level is calculated as -$45.62. in other words, the firm now incurs a loss of $45.62. the firm’s other alternative of shutting down and produce no output at all, yields a loss of $120—the amount of the fixed cost. in order to maximize profit or equivalently minimize its loss, the firm should continue to produce the output of 8.21 and incur the loss of $45.62. figure 2 firm incurs a loss but continues to produce: p=$45 next, the students are instructed to lower the market price further and stop when the demand curve falls below the avc curve. students select their price by moving the slider of the scrollbar further to the left. figure 3 shows the price level at $23 (when the adjust value in cell i4 is 12). the output level that is determined by following the two decision rules is 7.00 units when the profit level is calculated in cell b10 as -$218.00. however, since the firm incurs the loss of $120 when the firm shuts down, to minimize loss the firm now decides to shut down and produce zero output instead of producing 7.00 units of output and limits the loss to $120. 21 |journal for economic educators, 20 (2), 2020 figure 3 firm shuts down: p =$23 at this point, i introduce the concept of the “shutdown price” as the (highest) price below which the firm shuts down and incurs the loss equaling the total fixed cost. at the shutdown price, the firm is indifferent between producing and shutting down and we assume that the firm continues to produce. students now search for the shutdown price by moving the slider of the scrollbar to the right, raising the price level and observe the output level (determined by dr1 and dr2) and the consequent profit level in cell b10. they continue to raise the price level as long as the amount of loss (negative profit) exceeds $120, the fixed cost. they stop when the amount of negative profit in cell b10 reaches the level -$120. as figure 4 shows, this occurs when the price level reaches $36 (when the adjust value in cell i4 is 64), which is the minimum of the average variable cost (avcmin), where average variable cost equals marginal cost. the price line or the demand curve is tangent to the avc curve at that price level. thus, given this cost structure the shutdown price is determined to be $36. figure 4 shutdown price: p = avcmin =$36 22 |journal for economic educators, 20 (2), 2020 the two decision rules (dr1) and (dr2) stated above now can be supplemented by a third decision rule, (dr3) which states that the firm produces a positive amount of output following dr1 and dr2 , as long as p  avcmin, the shutdown price. the firm shuts down and produces 0q = , if p<avcmin. since numerous data points for price and output can be generated by moving the slider, students can also use those data points to draw the short-run supply curve on the worksheet. in this entire activity, students can select any price level that they choose and observe the resulting output and profit levels. however, they ultimately determine the shutdown price is the minimum of the average variable cost. the advantage of using this simple model is that students engage in changing the price level, observe its impact on output and profit levels instead of listening to a lecture, and observe the graphs drawn on the board or the powerpoint slides. this simple active learning model provides them the opportunity to be active participants in their learning rather than being passive observers. since the students themselves engage in manipulating the graphs and search for the shutdown price, the activity opens up the opportunity for more discussions in the classroom. i have experienced that students become more engaged in their learning process, they become more interested in the topic, and they retain the material better than when it is presented in traditional lectures. conclusion in this paper, i have demonstrated how to develop and use a spreadsheet-based active learning model to teach the shutdown decision of a competitive firm. the strength of this approach lies in its simplicity. although the navigation of the model does not require any deeper knowledge of excel, the excel worksheets provide a familiar set up for the students. in my class, i always have students actively participating in manipulating the graph and generating their own data to analyze. in addition, since students are engaged in working with the model, we can focus on the economic reasoning and can cover the topic efficiently. since faculty are usually very familiar with excel, as the paper has illustrated, it is not too time-consuming to develop and use the model in class. there is of course no single approach to teach undergraduate economics. however, the model can be easily integrated with any method of teaching and can be used in classes of different levels of rigor. this particular model can be used in a principles class as the main vehicle for presenting the topic. in an intermediate microeconomics class, this model can be used to review the topic and it can be supplemented by algebraic derivation or calculus as warranted. for example, in an intermediate microeconomics class, the use of this model can be supplemented by derivation of optimal output and the profit levels. it should be noted that the spreadsheet-based model can be used to discuss many topics besides the shutdown decision this paper illustrates. following the steps shown in the paper, i have developed several other models to discuss both microeconomic and macroeconomic topics, such as tax incidence, deadweight loss of an excise tax, entry-exit decisions in a competitive market, the long run supply, is-lm model, macro policy effectiveness, and aggregate demand – aggregate supply model, among others. references besanko, d. and r.r. braeutigam. 2018. microeconomics, 5th. edition. hoboken: wiley. 23 |journal for economic educators, 20 (2), 2020 bonwell, c.c. and j.a. eison. 1991. active learning: creating excitement in the classroom. eric clearinghouse on higher education. the george washington university, washington d.c. chickering, a.w. and z.f. gamson. 1987. seven principles for good practice. aahe bulletin, 39( march): 2-6. cross, p.k. 1987. teaching for learning. aahe bulletin, 39(april): 2-6. goolsbee,a., s.levitt, and c. syverson. 2016. microeconomics, 2nd. edition. new york: worth publishers. krugman, p. and r. wells. 2018. microeconomics, 5th. edition. new york: worth publishers. mankiw, g. 2018. principles of economics. 8th. edition. boston: cengage publishing. watts, m. and g. schaur. 2011. teaching and assessment methods in undergraduate economics: a fourth national quinquennial survey. the journal of economic education, 42(3): 294309. 24 |journal for economic educators, 20 (2), 2020 appendix: using scrollbar in excel worksheet click on the developer tab on the ribbon (if the developer tab does not appear on the ribbon, then go to, file>options>customize ribbon. under the main tabs, click developer). then click on design mode to turn it on. the next step is to insert a scrollbar on the excel worksheet. click on insert (next to design mode) to access the list of form controls (and active x controls). click on scrollbar from the list and insert it in cells j4-l4. we will now link the scrollbar to the values in the worksheet to create animated graphs that can be controlled by the movement of the scrollbar. to accomplish this first right click on the slider of the scrollbar to open a window. click on format control at the bottom of the window. a format control dialog box opens up. under the control tab, enter the following values: 0 for minimum value, 320 for maximum value and 1 for incremental change. finally enter the address cell i4 ($i$4) for cell link. click ok. now the slider of the scrollbar can be adjusted from a value of 0 to 320 with an increment of 1 and its positional value is shown in the cell i4 on the worksheet under the heading adjust. in any attempt to estimate a demand function, one must suspect the possibility of an endogeneity problem with regard to price universal service in tennessee: a pre-competition, pre-lifeline assessment by joseph gerald cessna, jr. abstract a multiple regression model is used to assess the determinants of penetration rates in local exchange telephone service areas in tennessee. the penetration rate is the percentage of households with telephone subscriptions in a given area. since this study uses 1990 data, it is called a pre-competition, prelifeline assessment. in 1992, tennessee was certified for participation in the lifeline, a program to provide assistance for local telephone service to low income households. the telecommunications act of 1996 allowed local telephone service competition. the study finds that education level, lack of home ownership, rural residency, poverty among certain age groups, and service connection fees have a significant relationship with the penetration rate. acknowledgements this study is an extension of previous work by dr. christopher c. klein and mr. david b. sapper of the tennessee regulatory authority. i would like to express appreciation to these gentlemen for allowing me the opportunity to continue this research. i would like to express gratitude to mr. aster rutibabalira for providing appropriate guidance and supervision. although dr. anthon e. eff of middle tennessee state university was not directly involved in this research, he was very helpful in answering some of my questions concerning econometric techniques. i thank dr. ruben kyle of middle tennessee state university for his contact with the tennessee regulatory authority that allowed me this opportunity. those who have come before me in order to provide research assistance are also recognized. they include sophie chou, j. ransom gustafson, wanragchada rassameethes and soibuppha sartmool. the views expressed here are solely those of the author and do not necessarily reflect those of the tennessee regulatory authority, its directors, or staff. 1 history and background what is universal service with respect to telephony? this is not an easy question to answer. the definition has changed considerably over time and continues to change. moreover, there is lack of consensus over what the term means today. to understand the term, it is best to look at the history of universal service. much of the literature on the subject cites theodore vail, president of at&t in 1907, as first using the term “universal service” for telephony. he used the term to express his belief in a need for a standardized system of connectivity throughout the country. he argued against competition since this would mean a lack of interconnection among competing networks. (preston and flynn 1999:91-92) the meaning of the term has changed considerably since then. the federal communications act of 1934 led to joint regulation of the telephone industry by the federal communications commission and state agencies. its preamble stated a goal “to make available, so far as possible, to all people of the united states, a rapid, efficient, nation-wide, and world-wide, wire and radio communication service with adequate facilities at a reasonable charge.” this goal is subject to interpretation. a paper by dinc, haynes, stough and yilmaz see this statement as a “provision for affordable telephone service for everybody, everywhere.” (dinc, et.al. 1998:541) preston and flynn do not interpret this language to mean a goal of a phone in everybody’s home, but rather a goal to insure that every subscriber, through rate averaging, would receive the same treatment. (preston and flynn 1999: 91-92) during the post world war ii era, technology was changing so that the cost of long distance was decreasing relative to the cost of the more labor-intensive local service. a “separations system” was devised. regulation dictated long distance service to be priced high relative to its cost in order to keep prices for local service low. in effect, there was an implicit subsidy for local phone service. this was seen as necessary to maintain a high penetration rate. the penetration rate is the percentage of households that subscribe to phone service. economists are not in agreement concerning whether or not such subsidies actually encourage a high penetration rate. the penetration rate grew substantially through the 1970s. preston and flynn argue that this was not a result of universal service policy but rather a result of declines in real costs and increases in demand. (preston and flynn 1999:91-92) 2 in the 1980s there were two major policy changes that in turn prompted policy initiatives in universal service. first, the end-user access charge plan was instituted in january 1984. this was designed to bring local and long distance prices closer to their economic costs through a subscriber line charge. since this charge was added to the flat rate charged for local service, concerns were raised about policy makers’ commitment to universal service. second, the divestiture of at&t on january 1, 1984 gave rise to concerns that the introduction of competition in long distance service would end cross subsidization through the separations system. three programs were devised as a result of these changes: lifeline, link-up, and high cost assistance. (eriksson, et. al. 1998:481-482) more recently, the telecommunications act of 1996 has had two major types of influences on universal policy. first, it enlarged the scope of universal services to the fields of education, public library services, healthcare, and access to various information services. second, it allowed competitors to enter local markets. implicit cost subsidies through the separations system as described above are no longer sustainable in a competitive environment. such subsidies must be made explicit. this has caused universal service programs to come under closer public scrutiny as these subsidies are exposed. (rousston and wimmer 2000:2-3) universal service programs in 1984, the fcc in conjunction with states and local telephone companies, established the lifeline program in an effort to help low income families afford the cost of telephone service. this program went through some revisions in 1985. the fcc agreed to waive the subscriber line charge for approved low-income subscribers provided that the state match the federal reduction. the link-up program was implemented in 1987. this program provides subsidies to low-income families for one-time expenses associated with subscription for local service. it provides up to one-half of the installation charge, up to a maximum of $30, whichever is less. also, federal assistance is provided to defer interest expenses associated with subscription for up to 12 months. states determine the criteria for eligibility subject to approval by the fcc. lifeline and link-up programs are financed from charges imposed on interexchange companies based on their market shares of presubscribed callers. (eriksson, et. al. 1998:481-482) tennessee was certified for participation in the link-up program on november 3, 1988. it was certified for participation in lifeline on january 8, 1992. (fcc 1997 monitoring report, table 2.1) 3 the high cost assistance program differs substantially from the lifeline and link-up programs in that it is not specifically targeted at low-income subscribers. instead, it subsidizes local exchange companies serving mainly rural areas where costs are considerably higher than the national average. long distance companies sell their services across local access transport areas (lata). the fcc supervises these companies. it charges and collects monies that go into the universal service fund. these funds are allocated to local intrastate (intra lata) telephone service providers to support universal service objectives. (dinc, et.al. 1998:541) tennessee local exchange companies receive little funding from the universal service fund. in 1991, only 4 tennessee companies received subsidies totaling $2,215,794. (fcc 1991 monitoring report, table 3-6) recently, the name of the universal service fund was changed to high cost loop support to avoid confusion with other universal service programs. since this is a very recent development, fcc rules still refer to the universal service fund. (fcc monitoring report, september 2000) background study concerning determinants of the penetration rate this study focuses on determinants of the penetration rate in tennessee in 1990. in that year, the penetration rate for the state was 92.9%. this is a high rate compared to many other states. several studies have examined the penetration rate at the state level. this study, by contrast, examines penetration rates by telephone service exchanges. this reveals that there are areas where the penetration rate is dramatically lower than the average. for example, the lowest penetration rate for an exchange was only 76.6%. since we are concerned about the determinants of low penetration rates, we now turn to a discussion of recent literature on this subject. schement and forbes identify three dimensions to the problem of low penetration that seem to be fairly consistent in various studies: demographics, ethnicity, and geography. demographic factors include income, housing characteristics, gender of head of household, age of head of household, and unemployment. several studies point to income at low levels as the most relevant factor. edward renshaw cites a 1980 study of new york counties that finds that the best predictor of the penetration rate was not the median household income but rather the proportion of households below the poverty line. (renshaw 1985:517) renters usually have lower penetration rates than homeowners. families with women heads of household are more likely to be phoneless. younger households have lower 4 penetration rates than older ones. schement and forbes find that penetration rate is especially low among minority households with householders from 15 to 24. unemployment is highly correlated with the penetration rate, with unemployed blacks affected to a greater extent than unemployed whites. minority households consistently rank 8% to 10% below their white counterparts. differentials exist between the minority groups. hispanics and native american households usually rank below blacks. this may be in part associated with a language barrier. camp and tsang point out that low penetration rates have been found among those who speak english as a second language. (camp and tsang 1999:2) state data on the penetration rate reveal significant variation among the states. in 1998 nebraska and pennsylvania had the highest penetration rates of 97.1% while new mexico had the lowest of 88.1%. analyzing the penetration rate based upon smaller geographic regions as in this study poses some problems. there are few data available that tabulate the penetration rate by demographic factors. (schement and forbes 2000:120-121) for example, the census data summary provides us with the number of black heads of household in any census block group. it also provides us with the number of housing units with telephones in that census block group. however, it does not inform us as to how many black householders have telephones. an often-cited study of the penetration rate from 1996 involved using ethnographic methods and geographic information systems to investigate telephone disconnection in camden, new jersey. according to that study, the most extensive pockets of low penetration rates were found in the inner city and were associated with the young, the transient, and ethnic minorities. it further demonstrates that many of those that do not have phones subscribe to a cable tv service, arguing that the perceived priorities of policy makers are at odds with the priorities of many phoneless households. the study also points to the effect of credit worthiness on the penetration rate. the article concerning the study is editorial in nature, going beyond mere findings of fact. the following is a quote from the abstract of that study: given prevailing consumption patterns… “electronic redlining” seems less of a threat than that poor americans will, upon exposure to the advanced features of the national information infrastructure (nii), buy services that they cannot afford….in reformulating universal service policy, we must…keep in mind the importance of credit risk as a factor… (mueller and schement 1996:abstract) an article by camp and tsang focuses on telephone disconnections. the number one reason given for a loss of telephone service is a high long distance bill. other common reasons are high calling 5 card or collect call charges. furthermore, camp and tsang state, “the poor use more expensive telecommunications services per dollar of income than users in any other quintile.” they see a main problem as a delay in feedback with regard to these services. households are not aware of what the price of services will be until they receive the bill. also, telephone services often escape the control of the party responsible for the bill due to the actions of adolescents, irresponsible guests, and relatives. without going into detail here, suffice it to say that camp and tsang advocate various innovative measures to provide quicker feedback concerning price and to put control of service in the hands of the phone owner. such steps may also reduce the need for deposits to obtain service, thereby minimizing another obstacle to achieving a higher penetration rate. (camp and tsang 1999:5) claire milne observes the concept of universal service from an international perspective. milne points out that industrialized countries have a mass market that has already been connected: “…the residual market is dominated by minority segments, typically remote residents, low-income groups and disabled people.” it is interesting that milne sees the problem as being one that affects “remote” residents whereas mueller and schement see the problem as mainly one of the inner city. milne asserts that since a residual market is the concern of universal service for industrialized nations, mass-market approaches are ineffective. consumer research is vital. (milne 1998:780) empirical model basic demand function of model and aggregation of data the basic function of the model proposed is expressed with the following equation: ),,,,( εzlcpfpen = where pen is the penetration rate, p is the price of single line residential service, c is the connection fee associated with subscription, l is the effect of link-up subsidies, z is a vector of demographic characteristics, and ε is the random error term. values for the demographic variables are obtained by census block group from the census of population and housing 1990: summary tape file 3 on cd-rom. these values are matched to local exchange areas through the use of common language location identifier data (clli). why choose the telephone exchange as the level of aggregation? a smaller level of aggregation such as the census block group would allow a greater sample size and allow us pinpoint small concentrated 6 areas of low penetration. the answer to this question lies in the variables used that are not from the census. namely, in addition to demographic variables, this study examines the effects of monthly prices for residential service, connection fees, and link-up subsidies. the monthly rate for local service does not vary within an exchange. this price variable cannot possibly explain any variation within an exchange. thus, a linear regression model that examines smaller areas would tend to understate the effect of this price variable. only company-wide data are available for connection fees and link-up subsidies. since there are 25 companies in the state of tennessee, company areas are larger than exchanges. thus, aggregating at a level smaller than an exchange would tend to understate the significance of these variables to an even greater extent. to study these variables effectively with a linear regression model, one would need to be able to aggregate at the company level. with only 25 companies, we are not able to do this. indeed, this is a shortcoming of this study. it might be interesting to conduct a nation-wide study of the penetration rate by local exchange company. another reason to aggregate by exchange is that this may provide better policy guidelines. although it may be interesting to pinpoint very small areas of low penetration rates, there is some doubt that this would produce feasible policy implications. while schement and forbes advocate examination of penetration rates at small levels of aggregation, they admit problems with this approach with regard to policy: “yet countyor town-specific universal policies are not currently feasible.” (schement and forbes 2000:124) why 1990 information is used it is hoped that this study can be used as a benchmark to compare the effects of changes regarding the introduction of competition, the introduction of lifeline, and the expansion of link-up. this is the “before” study. supposedly, there will be one or more “after” studies that will allow comparison. why is only one year used? after all, information from the current population survey concerning the penetration rate is published three times a year. would a time-series or panel-data study be more appropriate? gorbacz and thompson provide an answer. they performed rigorous tests comparing differences between decennial census data and the data from the current population survey. they demonstrate that the cps data contain significant sampling errors. this problem is related to the small range in variation of the data and small sample size. the range in the penetration rate across states varies only by 11.6% from 7 the highest to the lowest state in march 1998 data. the sample consists of only 0.05% of the estimated number of total households. (gorbacz and thompson 2000:1-3) these findings suggest that the best approach for this study is to limit analysis to the 1990 census data. variables chosen table 1 contains definitions and descriptive statistics for the variables included in the penetration rate model. the dependent variable for this analysis is pen, the percentage of occupied housing units with a telephone. this is computed by dividing the number of occupied housing units with a telephone by the total number of occupied housing units. a telephone must be inside the house or apartment for the unit to be classified as having a phone. it is interesting to note that the census does not inquire as to whether the phone is connected. penetration rates may in fact be overstated considering that some households with disconnected phones may answer this question in the affirmative. the demographic variables discussed in this paragraph are expected to have a negative effect on the penetration rate. to measure the effect of education level, pueduc, the proportion of adults age 25 or older with less than a high school diploma, is used. the effects of ethnicity and language barriers are examined by the use of (1) pblack, the proportion of black householders, (2) pothrace, the proportion of householders other than white or black, and (3) plingiso, the proportion of households with linguistic isolation.∗ the effects of lack of home ownership are analyzed with prent, the proportion of rented occupied housing units. the combined effects of age and poverty are to be assessed with the use of the variables ppov1824 through ppov75up. these variables examine age groups of persons below the poverty level as a proportion of the adult population. the variable medhhi, median household income is expected to have a positive impact on the penetration rate but to be less significant than the ppov variables. the effects of population densities are examined by the variables prural, the proportion of rural housing units, househld, the number of households, and housesqr, the number of households squared. since prural and househld are almost certainly negatively correlated with each other, their ∗ a household with linguistic isolation is defined as one in which no person age 14 years or over speaks only english and no person age 14 years or over who speaks a language other than english speaks english "very well." 8 table 1: variable definitions and descriptive statistics dependent variable: pen number of observations: 249 exp. variable definition sign mean std dev pen percentage of occupied housing units with phone* 91.080 3.970 puneduc proportion of persons age 25 without high 0.407 0.098 school diploma pblack proportion of black heads of household 0.068 0.101 pothrace proportion of heads of household who are other 0.005 0.006 than white or black plingiso proportion of households with linguistic 0.004 0.002 isolation** prent proportion of rented occupied housing units 0.226 0.075 prural proportion of rural housing units*** 0.766 0.294 househld number of households in hundreds + 70.361 240.970 housesqr househld squared ? 6.278 x 104 5.794 x 105 medhhi median household income in thousands + 28.058 6.211 ppov1824 proportion of adult population 0.020 0.010 age 18 to 24 below poverty level.**** ppov2534 proportion of adult population 0.027 0.013 age 25 to 34 below poverty level. ppov3544 proportion of adult population 0.021 0.011 age 35 to 44 below poverty level. ppov4554 proportion of adult population 0.015 0.009 age 45 to 54 below poverty level. ppov5564 proportion of adult population 0.018 0.009 age 55 to 64 below poverty level. ppov6574 proportion of adult population 0.021 0.010 age 65 to 74 below poverty level. ppov75up proportion of adult population 0.023 0.011 age 75 and over below poverty level. pprice predicted price from price regression 10.272 1.457 linkpov link-up dollars by company / adults + 0.163 0.275 below the poverty level in company area connect connection charge for residential service 27.400 8.778 *some variables are defined in terms of households, others by household units. the census uses the term household for 100% tabulations. the term housing units is used in sample tabulations. the numbers may differ as a result of the weighting process. **a household with linguistic isolation is defined as one in which no person age 14 years or over speaks only english and no person age 14 years or over who speaks a language other than english speaks english "very well." ***rural areas are those areas other than: (1) places of 2,500 persons incorporated as cities, vilages, and burroughs, (2) census designated places of 2500 or more persons, and (3) some other territories included by the census in urbanized areas. ****the adult population is defined as those persons 18 years of age and over. "below poverty level" in this table refers to persons for whom poverty status has been determined. 9 signs should be opposites. there are a number of factors that could influence these variables in one direction or another. mueller and schement see the penetration problem as one that affects mainly the inner city. this would imply that prural would have a positive affect on the penetration rate if penetration problems in the inner city were great enough. however, milne sees the problem as one that affects mostly remote areas. in this study, the “remote” effect would probably outweigh the “inner city” effect. exchanges for major cities will include rich and poor alike, thus the “inner city” effect will be diluted. there are other effects that could come into play. if access to more local subscribers has a significant influence on demand, househld is expected to have a positive affect. however, households in rural areas could be more dependent on local phone service since substitutes such as pay phones and other households’ phones are less available. these two effects may cancel each other out, leaving the “remote effect” as predominant. therefore, this study expects a negative sign for prural and a positive sign for househld. the variable housesqr is added to capture possible nonlinear effects of the househld variable. from background research and common sense, it is easy to see that the price faced by a nonsubscriber may be much more than the monthly residential fee for service. a new subscriber must pay a connection fee. some companies charge two fees: service order charges and central office wiring charges. other companies combine these as one charge. if there has been a credit problem with previous phone service, a household may be required to pay a connection fee, a deposit, and back charges from a past due bill. also, the effects of the link-up program should be taken into account. data for the link-up program were obtained from the fcc federal-state joint board monitoring report. (fcc monitoring report 1997, table 2.10). this report contains the total subsidy amount for link-up per company. the total dollar amounts for link-up assistance alone are of little value to us. however, when combined with census data, they may be useful. for each company, the total assistance amount per company is divided by the number of adults below the poverty level in that company’s service area. the term adult is defined as a person age 18 years or older. the term poverty level is used in this study to mean persons for whom poverty status has been determined. this ratio should give us the amount of assistance per impoverished adult for each company. this variable is designated as linkpov. if linkup programs were successful, we would expect linkpov to have a positive relationship to the penetration 10 rate. (a variable for lifeline is not included because tennessee was not participating in this program in 1990.) there are some difficulties in including variables for connection fees and deposits. due to the passage of time, it is not an easy matter to obtain comprehensive data. in order to obtain data concerning connection fees and deposits, a simple survey of phone companies was conducted. representatives from telecommunications companies were asked to examine their records in order to supply the amounts of their service order charges, central office line connection charges, and deposit requirements in 1990. responses were received from 16 out of the 25 companies. fortunately, most of the companies for which the data are missing cover a small number of exchanges. we have designated connection charges for residential service as the variable connect. for companies that separately charge service order charges and central office wiring charges, these two amounts have been added together to form connect. a negative relationship is expected between connect and the penetration rate. adding the variable connect generates missing values for our observations, reducing the sample size from 316 to 249 observations. nonetheless, connect is likely to be significant, so it is included in the model. a variable for deposits cannot be quantified due to the differences in credit policies of the companies. the maximum amounts that companies were allowed to charge was regulated by the tennessee public service commission, but the amounts actually charged may have been considerably less than the maximum allowed. some companies had simple policies that were sometimes fairly subjective: “we would usually charge $75, but if the customer’s credit history was really bad, we might charge up to 2 ½ times their estimated monthly bill.” other companies spelled out the terms of their credit policy with greater precision. the variable pprice, the predicted price, is also included as a variable. it is expected to have a negative relationship with the penetration rate. this variable is discussed in the following section. a possible identification problem in any attempt to estimate a demand function when price and quantity demand vary across observations, one must suspect the possibility of an identification problem with regard to price. therefore, a two-stage approach for estimating the penetration rate is considered. before constructing the penetration rate model, an equation to predict the monthly price of residential service, price, is considered. the 11 predicted values from this regression are then used in the regression for pen. the equation below is an expression of the specification used: iikk iii company k pruralbhousesqrbhousehldprice φβ ββ ++ +++= ∑ )( )()()( 3210 descriptive statistics for this regression are shown in table 2. the values for the dependent variable, price, were taken from public information supplied by the tennessee regulatory authority. the chosen regression reflects the traditional “value of service” approach in setting telephone rates. for exchanges with a larger number of households, there is a greater value in local phone service, ceteris paribus, because a larger number of households can be reached through local phone service. therefore, we expect higher prices for exchanges with more households. the household-squared term is included in order to reflect possible nonlinear effects. the prural variable is expected to have a negative impact on price. for exchanges with a large percentage of rural households, we expect a lower price reflecting a lower value due to the lower population served. a dummy variable for each company (companyk) is used, with the exception of south central bell, in order to reflect differences per company that are not easily quantifiable. south central bell is omitted such that the estimated coefficients reflect the effect of company k relative to south central bell. digression concerning descriptive statistics in examining the descriptive statistics, it is easy to see that they vary considerably from statistics for tennessee as a whole. a few examples serve to make this point. the 1990 penetration rate for tennessee was 92.9%. however, our sample mean is 91.1%. for the state, the percentage of persons age 25 or older with an education level of less than a high school diploma was 32.9%. our sample mean is 40.7%. the percentage of households served by south central bell in 1990 was 78.3%. our sample mean is 47.5%. these differences are due to the aggregation of the data. less populated exchanges are given the same weight as the more populated ones. though it would be preferable to have an aggregation that would line up closely with the state statistics, such differences would most likely be apparent using any area boundaries. 12 table 2: definitions and descriptive statistics dependent variable: price number of observations: 316 variable definition exp. sign mean std dev price monthly price of local residential service dependent variable 10.387 2.013 aard ardmore telephone co., inc. ? 0.006 0.079 blrt ben lomand rural telephone cooperative, inc. ? 0.047 0.213 bled bledsoe telephone cooperative ? 0.016 0.125 cena century telephone of adamsville ? 0.009 0.097 cenc century telephone of claiborne ? 0.006 0.079 ceno century telephone of ooltewah – collegedale ? 0.009 0.097 citt citizens telecomm. co. of tennessee ? 0.041 0.199 ctvs citizens telecomm. co. of the volunteer state ? 0.016 0.125 conc concord telephone exchange, inc. ? 0.003 0.056 croc crockett telephone co., inc. ? 0.006 0.079 deka dekalb telephone cooperative ? 0.032 0.175 high highland telephone cooperative, inc. ? 0.025 0.157 hump humphreys county telephone co. ? 0.003 0.056 lore loretto telephone co., inc. ? 0.016 0.125 mill millington telephone co., inc. ? 0.022 0.147 noce north central telephone cooperative, inc. ? 0.025 0.157 peop peoples telephone co., inc. ? 0.009 0.097 (omitted) south central bell (omitted) 0.475 0.499 tellico tellico telephone co., inc. ? 0.022 0.147 tentelco tennessee telephone co. ? 0.044 0.206 twla twin lakes telephone cooperative corp. ? 0.047 0.213 unimt united inter-mountain telephone ? 0.066 0.249 unitel united telephone co., inc. ? 0.025 0.157 westco west tennessee telephone co., inc. ? 0.013 0.112 york yorkville telephone cooperative ? 0.013 0.112 househld number of households in hundreds + 58.181 215.159 housesqr househld squared ? 49,532.000 514,769.080 prural proportion of rural housing units 0.809 0.278 testing for an identification problem before proceeding with the price regression, a hausman specification test is used to determine if this is a proper approach. (pindyk and rubinfeld 1998:197-198) this procedure involves two regressions. in the regression displayed in table 3, price is used as the dependent variable. independent variables from both proposed stages are included as independent variables in this regression. the variables linkpov and 13 hausman specification test table 3 price regression dependent variable: price variable coeff. t-stat p-value intercep 6.82 4.11 0.00 puneduc -0.77 -0.44 0.66 pblack -2.07 -1.89 0.06 plingiso -7.37 -0.16 0.88 table 4 prent -3.19 -1.82 0.07 results of hausman test prural 0.00 0.00 1.00 dependent variable: pen househld 0.00 2.46 0.01 variable coeff. t-stat p-value housesqr 0.00 -1.72 0.09 intercep 102.57 33.36 0.00 medhhi 0.13 4.44 0.00 puneduc -10.89 -3.332 0.00 ppov1824 12.99 1.34 0.18 pblack -0.87 -0.424 0.67 ppov2534 6.63 0.85 0.40 pothrace 23.62 0.73 0.47 ppov3544 6.23 0.65 0.52 plingiso 138.20 1.584 0.11 ppov4554 10.77 1.00 0.32 prent -12.17 -3.664 0.00 ppov5564 4.41 0.41 0.68 prural -1.04 -1.225 0.22 ppov6574 -3.50 -0.37 0.71 househld 4.21 x 10-3 1.563 0.12 ppov75up -18.40 -2.24 0.03 housesqr -9.36 x 10-7 -0.899 0.37 aard 0.23 0.25 0.80 medhhi 0.10 1.778 0.08 blrt 0.12 0.31 0.76 ppov1824 -26.38 -1.424 0.16 bled 2.79 4.57 0.00 ppov2534 -54.27 -3.641 0.00 cena 3.51 4.47 0.00 ppov3544 -8.77 -0.503 0.62 cenc 4.75 4.84 0.00 ppov4554 -108.46 -5.257 0.00 ceno 0.97 1.20 0.23 ppov5564 -40.42 -1.927 0.05 citt 0.62 1.55 0.12 ppov6574 15.93 0.868 0.39 ctvs 0.75 1.22 0.22 ppov75up 0.34 0.021 0.98 conc -2.21 -1.58 0.11 price -0.29 -2.56 0.01 croc 1.18 1.24 0.22 resid 0.30 1.814 0.07 deka 3.47 7.68 0.00 r-square 0.6382 high 0.04 0.09 0.93 white's hetereroskedasticity test hump -5.24 -3.92 0.00 chi-square 157.50 p-value 0.75 lore 4.01 6.18 0.00 resid is the residual value computed mill 3.32 5.83 0.00 in the regression to the left. noce 2.54 4.99 0.00 peop -2.53 -3.25 0.00 tellico 2.92 5.17 0.00 tentelco 2.67 6.95 0.00 twla 1.28 3.26 0.00 unimt 1.52 4.70 0.00 unitel 0.97 1.92 0.06 westco -2.85 -4.15 0.00 york 1.54 2.21 0.03 r-square 0.6328 white's heteroskedasticity test chi-square 269.62 p-value 0.92 14 connect are not included because this would create an equation of less than full rank. the values of these two variables are determined by the company and are therefore exactly correlated with the company dummies. the residual from the regression in table 3 is then used as an independent variable in table 4 regression for the penetration rate. if it is found to be significant, an identification problem is determined to exist. in examining the results of this test, we find a p-value for this residual of 0.07. this correlation falls within a “gray” area. it is hard to know whether to use a predicted price in the model for the penetration rate or to use a one-stage regression with the actual price as an independent variable. this study uses the predicted price since this approach more closely follows conventional economic theory. the price regression table 5 displays the results of the price regression. a white’s test reveals that there is a problem with heteroskedasticity in this model. several attempts to respecify the model were unsuccessful in producing a superior model to this one.∗ therefore, the model is left as it stands. rather than using the usual t-statistics in order to assess significance of variables, chi-square tests are performed using a consistent covariance matrix as suggested by white. (sas technical support 2000; and white 1980: 820821) the predicted values for price are designated as pprice. see table 1 for the univariate statistics associated with this variable. interpretations of results: models for the penetration rate table 6 displays the results of the regressions for the penetration rate. for the variables determined to be significant, the coefficients have the expected signs. it is also important to notice that all of the predicted values for pen fall between the range of 0-100%. similar studies have made use of models other than linear ones because predicted values have extended outside of this range. however, there does not seem to be such a problem with the models of this study. race and linguistic isolation variables do not appear to be significant. of course, one must be cautious in interpreting such results. due to the level of aggregation, the effects of these variables ∗ attempted respecifications of the price model included using various cost figures for the companies in place of the dummy variables, converting variables to their logs, use of interaction terms, and weighting the model by the either the square root of the pprice, househld, or housesqr. these methods were all inferior because they either did not remove the heteroskedasticity problem or they produced an r-squared value that was very low. 15 may be “washed out.” minorities may be concentrated in exchanges where the overall penetration rate is mitigated by other variables. for races other than white or black, the mean is only 0.5%; for those with linguistic isolation, the mean is only 0.4%. therefore, it is understandable that these minorities would have little influence on the penetration rate. it is interesting that prural has a significant negative effect and that househld appears as table 5 dependent variable: price number of observations: 316 variable coefficient chi-square* p-value intercep 9.94 530.41 0.00 aard 0.38 3.90 0.05 blrt 0.44 5.21 0.02 bled 2.58 176.88 0.00 cena 3.40 304.81 0.00 cenc 5.08 123.03 0.00 ceno 2.22 82.80 0.00 citt 0.29 2.34 0.13 ctvs 1.26 9.19 0.00 conc 1.75 39.77 0.00 croc 1.29 44.27 0.00 deka 3.48 332.60 0.00 high 0.18 0.92 0.34 hump -3.99 425.79 0.00 lore 4.11 425.79 0.00 mill 3.37 62.95 0.00 noce 2.61 187.93 0.00 peop -2.58 177.47 0.00 tellico 2.85 157.39 0.00 tentelco 2.81 56.08 0.00 twla 1.21 41.02 0.00 unimt 1.71 34.63 0.00 unitel 2.11 10.04 0.00 westco -3.38 305.60 0.00 york 1.62 70.27 0.00 househld 3.94e-03 10.51 0.00 housesqr -1.17e-06 7.57 0.01 prural -0.73 2.37 0.12 r-square 0.4964 white's heteroskedasticity test: chi-squrare 183.34 p-value 0.00 *chi-sqare test of parameters using consistent covariance matrix as suggested by white. 16 table 6: models for penetration rate dependent variable: pen number of observations: 249 model a model b model b coefficient coefficient variable (t-stat ) (t-stat) elasticities intercept 106.66 106.93 ( 31.09) ( -93.68) puneduc -9.94 -11.65 -0.052 ( -2.69) ( -5.06) pothrace 0.30 ( 0.01) pblack -2.19 ( -1.11) plingiso 101.14 ( 1.13) prent -13.87 -13.61 -0.034 ( -3.97) ( -5.10) prural -1.89 -2.22 -0.019 ( -2.27) ( -2.96) househld 3.27 x 10-3 ( 1.32) housesqr -5.94 x 10-7 ( -0.62) medhhi 0.01 ( 0.12) ppov1824 -12.89 ( -0.58) ppov2534 -43.98 -49.35 -0.015 ( -2.65) ( -3.38) ppov3544 0.47 ( 0.02) ppov4554 -135.48 -139.61 -0.023 ( -5.66) ( -6.52) ppov5564 -70.94 -74.99 -0.015 ( -3.15) ( -3.54) ppov6574 -11.84 ( -0.53) ppov75up 7.82 ( 0.43) (table 6 continued on next page) 17 table 6 continued linkpov -0.58 ( -0.92) connect -0.05 -0.06 -0.018 ( -2.25) ( -3.30) pprice -0.14 ( -1.06) r-square 0.6720 0.6561 white's heterosk test: chi-square 202.26 41.16 (p-value) ( 0.60) ( 0.22) predicted value of pen mean 91.08 91.08 std. dev. 3.26 3.22 min. 79.28 80.14 max. 99.61 99.69 f-test, h0: coefficients of variables omitted from model a to form model b are jointly zero: 0.093 < critical value 1.75 at .05 significance level elasticities are computed using sample means of independent variables. predicted value of pen for model b computed with this point = 90.99. elasticity ≈ coeff x (mean of independent variable) / (predited value of pen) insignificant. this may be due to factors that work against each other as explained in the ex ante discussion. it is actually not very surprising that median household income appears as insignificant. since low penetration rates are exceptional, median household income should be a factor only when it is exceptionally low. the poverty variables yield some surprising results. attempts to explain them are very speculative. the younger groups were expected to be the most significant. however, the youngest group, ppov1824, appears as insignificant. this group may see a telephone as being very important. as people mature into their late twenties and early thirties, budgetary constraints for impoverished persons are learned “in the school of hard knocks.” thus, ppov2534 would be significant. the gap of apparent insignificance in ppov3544 is indeed strange. from our background study, it is not surprising that groups 65 and older appear as insignificant. it is not surprising that linkpov shows up as insignificant. in 1990, the link-up program had only been in place for two years. eight companies were not participating and have total dollar amounts 18 factored in at $0. other companies had very small figures. this variable had little chance of being influential. connection fees, as expected, show up as significant. there is a good chance that they are even more significant than the model would suggest. as noted, there are only 16 values for this variable. these 16 values are applied to 249 exchanges. the same figure for connect may apply to many contiguous exchanges. connect cannot possibly explain variation in the penetration rate within a company’s service area. if, for example, we were studying observations by company across the united states, a variable such as connect would have the opportunity to be more significant. caution is advised in interpreting the significance of pprice. with this variable, there is a similar problem to that of connect. across the sample there were 43 rates for monthly residential service. the same figure for the price may apply to many contiguous exchanges. for example, there were 48 exchanges that had a price of $7.55. the predicted price, pprice, from the price regression, is a unique value for each observation. however, the fundamentals behind pprice are suspect. the r-square value for the price regression is only 0.4964. the existence of heteroskedasticity in the model also points to a possible problem with specification. all of the significant variables have small point elasticities when using the means of the independent variables. this is to be expected since low penetration rates are exceptional. small variations around the mean values would be expected to have little impact. it may be of greater interest to consider an extreme value for a particular independent variable while keeping the other independent variables constant at their means. for example, the model predicts that raising connect from its mean of $27.40 by two standard deviations to $44.96 reduces the penetration rate by about 1 percentage point. for an average exchange of 7,036 households, this would mean that about 74 households would be priced out of the market. the variable that produces the greatest difference is ppov4554. elevating this variable by 2 standard deviations takes about 2.5 percentage points off of the penetration rate. for the average exchange of 7,036 households, this translates into about 177 households. concluding remarks this study sheds some light on the demographic aspects of the penetration rate. this may be helpful in determining how to best target lifeline and link-up promotional efforts. although such efforts 19 should consider all for whom these programs are eligible, this study suggests promotional emphasis for those people below the poverty level who fall between the ages of 25 to 34 and 45 to 64. the significance of the education level in the study underscores the need for public information concerning lifeline and link-up to be written in easy-to-read language. furthermore, promotional efforts should be more heavily emphasized in rural areas and in those areas where there are a large proportion of renters. connection fees vary widely from one company to another. this study indicates that connection fees are an important factor in the penetration rate. this study suggests that the tennessee regulatory authority place emphasis on this factor with regard to universal service objectives. although this study was unable to assess the impact of credit policies on the penetration rate, the survey points to a potentially troubling aspect of these policies. as stated, some of the companies appear to have very subjective credit policies. although flexibility is important, policies that are highly subjective are more prone to conscious or unconscious discrimination of one form or another. although it would clearly not be in the state’s interest for a regulatory agency to micro-manage the credit policies of telephone companies, perhaps credit policies need to be more closely examined to assure fair standards. of course, companies should not be exposed to undue credit risk in order to meet any particular goal for the penetration rate. finally, this study may serve as a benchmark to use for comparison to the present situation. there have been several potentially significant changes in telephony since 1990. in 1992, tennessee was certified for the lifeline program. since 1990, participation in the link-up program has increased. this study may help to evaluate effectiveness of these programs. local calling areas have changed since 1990. for example, tennessee now has countywide toll-free calling. competition in local markets has begun as allowed by the telecommunications act of 1996. long distance rates have also come down as competition has intensified. this study may help to evaluate changes in the penetration rate in conjunction with these developments. 20 references belinfante, alexander. “telephone penetration by income by state (data through 1999).” federal communications commission, march 2000. camp, l. jean & rose tsang. “universal service in a ubiquitous digital network.” inet99, accepted by journal of ethics and information technology. dinc, mustafa, kingsley e. haynes, roger r. stough, and serdar yilmaz. “regional universal service provisions in the us.” telecommunications policy, vol. 22, no. 6, 1998. erikkson, ross c., david l. kaserman, and john w. mayo. “targeted and untargeted subsidy schemes: evidence from postdivestiture efforts to promote universal telephone service.” journal of law and economics. vol. 41, no. 2, part 1, 1998. federal communications commission. 1991 monitoring report. released 1/92. federal communications commission. 1997 monitoring report. mr 97-2, released 5/97. federal communications commission. september 2000 monitoring report. released 11/00. garbacz, christopher and herbert g. thompson. “fcc telephone penetration rate data: a caveat.” telecommunications policy (forthcoming: 2000) milne, claire. “stages of universal service policy.” telecommunications policy, vol. 22, no.9, 1998. mueller, milton l. and jorge reina schement. “universal service from the bottom up: a study of telephone penetration in camden, new jersey," the information society, vol. 12, no. 3, 1996. pindyk , robert s. and daniel l. rubinfeld. econometric models and econometric analysis. (4th ed.). irwin mcgraw-hill: boston (1998). preston, paschal and roderick flynn. “rethinking universal service: citizenship, consumption norms, and the telephone.” the information society, vol. 16, 2000. renshaw, edward. “a note on the equity and efficiency in the pricing of local telephone services.” american economic review, v75, no. 3, 1985. rousston, gregory l. and bradley s. wimmer. “the 'state' of universal service.” information economics and policy, sept. 2000. sas technical support. www.sas.com > service and support > technical support. faq #1009. (2000) schement, jorge reina and scott c. forbes. “identifying temporary and permanent gaps in universal service.” the information society, vol. 16, 2000. united states census bureau. census of population and housing 1990: summary tape file 3 on cd-rom. white, hal. “a heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity.” econometrica, vol. 48, 1980. http://www.sas.com > service/ digression concerning descriptive statistics testing for an identification problem hausman specification test interpretations of results: models for the penetration rate number of observations: 316 variable 33 | journal for economic educators, 14(1), summer 2014 33 learning by doing: formulating macroeconomic policy under various forms of capitalism charles l. vehorn1 and craig a. waggaman2 abstract the purpose of this paper is to describe two different pedagogical experiments employed in a course on global capitalism. first, the course incorporated interdisciplinary team teaching (an economist and a political scientist). second, the course created a team project, which allowed the students to actively address the varieties of capitalism in a policy setting. specifically, students experienced the political and economic role played by the international monetary fund (imf) on the world stage by participating in a simulated imf executive board meeting. the course was unique in the sense that it had dual (student and faculty) teams. we found that team teaching offered us the opportunity to go beyond our specific disciplines and present to students a world that is more complex than any one discipline can capture. students told us that this active learning experience gave them an engaging opportunity to think about the perspective of others.3 key words: macroeconomic policy, team teaching, interdisciplinary course jel classification: a22, e60 introduction comparative political economists have been studying the various forms of capitalism for many years (hall and thelen, 2009). while these researchers identify and examine the institutional nuances that differentiate capitalism in one country from that of another country, most undergraduate students view capitalism as one homogeneous system of economic organization. how can teachers engage students in a way that dispels this misconception of capitalism’s uniformity? showing students how different capitalistic countries address similar economic problems in different ways could enhance students’ global perspective and provide them with an understanding that certain economic problems have more than one solution. these problems may even require an understanding of more than one discipline and an ability to go beyond one’s preconceived intellectual boundaries of possible solutions. the purpose of this paper is to describe a team-taught interdisciplinary course on global capitalism that included a student team project to foster an active learning environment. specifically, students experienced the political and economic role played by the international 1 associate professor of economics, department of economics, radford university, p.o. box 6952, radford, virginia, 24142. 2 associate professor of political science, department of political science, radford university, p.o. box 6945, radford, virginia, 24142. 3 this research was partially supported by a grant from bb&t to enhance the study of global capitalism universitywide through course development, a speakers’ series, and other activities that encourage students to think about the dynamic nature of a global economy. we would like to thank colleagues who provided comments when this paper was presented at the 23rd annual conference, teaching economics: instruction and classroom based research, robert morris university, february 16-18, 2012, moon township, pa. 34 | journal for economic educators, 14(1), summer 2014 34 monetary fund (imf) on the international stage by engaging in a simulated imf executive board meeting. as suggested by wingfeld and black (2005), active as opposed to passive learning can enhance students’ perception on the usefulness of a course. students in this course responded favorably to the team-teaching aspect of the course as well as the executive board meeting. the idea of a simulated executive board meeting came from the economist on the team who had worked at the imf for 16 years as a senior economist in the fiscal area, and had attended many executive board meetings. the political scientist on the team, a political philosopher, was intrigued with the idea because he had taught students about the imf from an international relations perspective, but was on the outside looking in. it was hoped that this “learning by doing” project would give students a deeper perspective of the imf and its role on the international stage. the course itself was an upper-level special topics class, cross-listed in economics and political science, so that both economics and political science students received credit in their respective majors. there were no prerequisites, but most of the students had been exposed to principles of economics. the first week of the class was spent refreshing students to relevant concepts related to capitalism and the global economy. (see appendix i for a list of readings, topics covered, and grading.) blending instructional experiments two different pedagogical experiments were combined in this course. first, the course incorporated interdisciplinary team teaching (an economist and a political scientist). both participated in the classes, with one assuming the lead role (depending on the topic) and the other asking questions. kohler and trice (2009) found that students are more engaged with two teachers in the classroom. letterman and dugan (2004) noted that student outcomes are improved in terms of achievement levels in analysis and judgment. second, the course created a team project, which allowed the students to actively address the varieties of capitalism in a policy setting. so the course was unique in the sense that it had dual (student and faculty) teams. literature on interdisciplinary team teaching eisen (2000) noted that team teaching is slowly gaining more attention, spurred on by students with more diverse learning styles, advances in learning technologies, and growth of the teamwork concept in business and elsewhere as a way to stimulate better product design and to solve problems creatively. one way that education can respond to these new demands of students is to provide them with more diverse teaching through teams. while a team-taught course can take many different forms, davis (1995) pointed out that such courses depend heavily on collaboration. his four assessment criteria are: planning, content integration, teaching, and evaluation of students’ performance. the extent of collaboration in any team-taught course can be determined by ranking each criterion from low to high, in what davis called the “continua of collaboration.” equal weight should not be given to each criterion, however. shibley (2006) argued that planning was the most important in achieving success in the case studies he analyzed. in his view, a well-planned course can help resolve teaching issues and prevent them from occurring in front of the students. the successful courses in his case studies all incorporated ways to resolve conflicts. while the instructors may want to spend most of their time on the content of the course, the success of the course was more highly correlated with planning. murata (2002), who 35 | journal for economic educators, 14(1), summer 2014 35 studied team teaching at the high school level, also found that planning was a crucial factor in team effectiveness. of course there are many ways to plan a team teaching endeavor. hatch and rich (2005) noted that at one end of the continuum a course could be designed by a faculty team, but delivered in serial segments by individual instructors; at the other end of the continuum a course could be designed by a faculty team and delivered by that same team. they favor courses designed and taught by the same faculty, as well as favoring the alignment model of teaching effectiveness proposed by wuff (2005), which integrates professor, student, and content into an alignment strategy that includes effective communication through rapport, structure, engagement, and interaction. two examples of interdisciplinary team teaching in economics are given in cavigliaharris (2003) and wade and stone (2010). caviglia-harris taught the economics component in a course on environmental perspectives that combined economics, ecology, and philosophy. she noted that students found economics interesting to learn when it was directly applied to the other components of the course, e.g., the linkage of prices (high gas prices), markets (reduced demand for gas guzzlers), and environmental policy (curbing green house gasses). wade and stone taught a course entitled health – sociological and economic perspectives. they found that the students were able to integrate the two perspectives cogently into research papers. both studies also discussed institutional constraints to interdisciplinary team teaching. it has been found that one constraint is the compartmentalization of disciplines, which makes it harder to find faculty willing to be open to another discipline’s approach. also, it is difficult for college administrators to give sufficient support to multiple teachers in a classroom when resources are constrained. in general, the literature on team teaching focuses on what the team members should do to make the team effort a successful learning experience for their students and how that learning experience can be captured from the students to demonstrate effectiveness. literature on student engagement through a team project many researchers (hansen, 2006; rassuli and manzer, 2005; and wingfield and black, 2005) believe that student engagement is enhanced by moving from the passive learning model, where the instructor lectures and students take notes, to more active learning. an active learning model could include classroom debate, real-world simulations, games, formation of teams, or even participation in planning the course. creating teams that enable students to work together in a learning project generates more active student engagement. as oakley, et al, 2004 pointed out, collaborative learning has many benefits. but to realize those benefits teams need to be coached because students do not initially possess the necessary skills, such as project management, time management, and conflict resolution, as well as how to communicate in a team setting. rassuli and manzer (2005) found that students perceived improvements in their learning (problem solving, understanding, and communicating) through a team experience. students also believe that active learning enhances their preparation for future careers (wingfield and black, 2005). this belief appears sound because a team environment is employed in many work situations. nearly 80 percent of organizations employ some type of workplace teams (hansen, 2006). the team model, however, can become overly complex. in their mba course, leon and tai (2004) implemented a team approach on projects for business clients. the students quickly learned that they would be held accountable for the common goals of faculty and the clients. this approach aligned the students’ incentive structure and produced output of a high quality. 36 | journal for economic educators, 14(1), summer 2014 36 the major drawback was the cost associated with implementing this structure (in terms of soliciting clients, time demands of faculty, information technology requirements for sophisticated business modeling, etc.). coordination of the teaching team while we were “learning by doing” at the time, it appears that we touched on the four elements discussed in davis (1995) as well as the major components of the alignment model for effective teaching. we began by devoting a whole summer to planning for the course. the planning process included developing the content and sequence; determining the set of readings; drafting a detailed syllabus with topics to be covered for every class; and deciding on who would take the lead in presenting the various topics (roughly switching every week). thus we knew before the course began who would be playing the lead role, the “sage on the stage,” as described by press and stephenson (2009); and who would be playing the supporting role by asking questions or briefly highlighting the material with a different perspective. the students in class also asked questions and raised issues. sometimes there were disagreements among students, but not to the extent of a major controversy. for example, some students thought the industrial countries should be doing much more to alleviate world poverty; others though that the industrial countries were doing enough by providing assistance to implement the “washington consensus.” we found that even though our two disciplines may have different approaches, we were both dealing with the fundamental issue of how we live. in addition to detailed planning, content integration, and determination of teaching roles, we also created an assessment tool to obtain student feedback, discussed subsequently. the imf executive board project the imf plays a key role in global capitalism by (i) monitoring the economies of its 187 member countries (called surveillance), (ii) lending to countries in economic difficulty (but with conditions attached to ensure a high probability of repayment), and (iii) providing technical assistance to member countries in three main areas – monetary, fiscal, and economic statistics. this technical assistance is often requested by countries to help fulfill the conditions of a loan program. a team of imf staff economists visit each country every 12-18 months to conduct an article iv consultation, also referred to as a surveillance mission. based on their field work, a staff report is prepared on the country’s current macroeconomic policies (monetary, fiscal, and international trade) and submitted to the executive board. the executive board discusses the report and issues a consensus view on the country’s current economic strengths and weaknesses. we selected india as a country with good growth prospects, but some underlying issues that, in the imf’s view, should be addressed. eight teams were created and each class member was given a copy of the staff report on india (found at imf.org under the country info tab). the teams included the imf staff and executive directors representing various countries that had different approaches to capitalism – from liberal market economies to more highly coordinated economies. discussion of the varieties of capitalism in the context of global capitalism was a main component of the course, which included both political and economic dimensions. (e.g., frieden, 2006, and hall and thelen, 2009). selecting teams representing countries with different approaches to global capitalism was an attempt to tease out the interplay between politics and economics. while imf staff members are primarily economists, the executive board combines economics with political issues as the board members interact to represent their respective constituencies. 37 | journal for economic educators, 14(1), summer 2014 37 students’ assessment of the project the teams met six times during the last 10-15 minutes of class to discuss the imf staff report (summarized in appendix ii) and how their team would respond to the report, based on the view of capitalism in the countries representing their constituency. in each meeting a specific topic was addressed (also detailed in appendix ii) as stepping stones toward full preparation for the executive board meeting. the two instructors acted as coaches during these team meetings to help students see the position of the country or group of countries that they represented. we were not going to hold the executive board meeting until each team understood their role and was prepared to articulate it. the meeting was held in a separate room around a large conference table with each executive director sitting at the table and the rest of the team sitting behind the executive director. the imf staff began by presenting their main findings of their report and then each executive director responded to the report. the staff then responded to the questions and criticisms of the executive directors and then the floor was open for discussion. the imf staff’s presentation was based on their own view of india’s situation, but several of their recommendations were similar to the recommendations present in the actual imf staff report. many students raised interesting points that indicated their level of engagement with the issues had risen from the first team meeting. the imf staff responded well to the pressure of defending their report, and the executive directors, for the most part, accurately followed the positions of their respective countries (see the list of countries in appendix ii). at the next class students were given an assessment form which asked them to explain the two most important things they learned from the group project, which they did not know prior to working on the project. analysis of their assessment revealed four distinct themes of learning: how the imf works; gaining different perspectives; political versus economic reasons for decisions; and working in groups. from table 1 (which presents a summary of students’ comments in these four themes), it is clear that some students learned certain institutional aspects of the imf. but more importantly, some learned to think about the perspective of others; and they considered it to be one of the most important things that they learned from the simulated executive board meeting. table 1 student responses to simulated executive board meeting (main themes and summarized comments) viewing how the imf works students learned: how the imf conducts business, about the imf from a good hands on experience, about the influence of imf on world politics and economics, that the imf can be an intruding organization in the affairs of a country, how countries form coalitions to prevent imf intrusion, that the imf had round table discussions and called countries out, the importance of group work within an organization like the imf, that the less developed countries, unfortunately, have the smallest vote shares, how countries can disagree when the imf recommends liberal market policies that may not work in that country (african countries for example), how the washington consensus affects the imf. 38 | journal for economic educators, 14(1), summer 2014 38 gaining different perspectives students learned: what works for industrial countries does not always work for third world countries, how prior views can change during an informed discussion, about different concerns based on a country's perspective, about third world and first world conflicts, about the variety of country perspectives (including political views), how each country has its own culture and solutions to problems within that culture, how certain countries feel certain ways, how countries could view the same economic conditions differently based on their own experiences, that the exercise was a good opportunity to learn different views at one time, how hard it is to reach a consensus among nations with different perspectives. contrasting political versus economic reasons for decisions students learned: that the decisions often ended up being formulated based on political influence, that political agendas and beliefs sometimes get in the way of economic issues, that it is important to not only look at the economics, but the politics and culture too. working in groups students experienced: a team atmosphere that really engaged everyone in both political and economic issues, the role played by various countries favoring different varieties of capitalism, how much time, preparation, and competence is needed to have a board meeting, the importance of being fully ready to defend your position, ways to anticipate possible questions or oppositions rather than just preparing a statement, that some groups did not get 100% participation. conclusions team taught interdisciplinary courses offer potential relief from two problems that affect contemporary undergraduate education. the first is the increasing compartmentalization of disciplines and its contribution to the erosion of liberal arts education. the second is the tendency to replace the search for the truth about the whole of existence with reductionist ideological thinking that closes students to the intellectual and moral complexity of contemporary life. political economy historically was a field of study that combined politics, economics, philosophy and history. while there are good reasons for separating these disciplines in the modern university, there are also good reasons for occasionally bringing them back into sometimes uncomfortable contact with each other. beyond the vocational requirements of a discipline-based education, it is important that undergraduate students understand that there are universal questions and assumptions about human beings that lie beneath the surface of the methodologies of their major fields. political theorists and economists have different approaches and emphases, to be sure. yet in the final analysis, we each study how human beings live with 39 | journal for economic educators, 14(1), summer 2014 39 one another in order to secure those things which make their lives full and happy. team teaching asks one to return to important basic questions of their disciplines that sometimes get lost as we become more and more “professional” in outlook and research interests. compartmentalization of disciplines adds to the temptation to provide answers perhaps too quickly to many of those basic questions that undergraduates should be asking seriously, sometimes for the first time in their lives. embracing answers to difficult questions too dogmatically leaves the social scientist or policy-maker unable to confront the complexity and constant changes that are part of the human experience. they refuse to accept creative solutions to problems that seem to run contrary to the “sacred texts” of their ideology. in our class, for example, we had a number of lively discussions which revolved around the idea of the “washington consensus” and whether that idea was applied too rigidly by the imf in its policy recommendations to large numbers of very diverse countries. a rational person always accepts new evidence and is willing to change hypotheses based on a more complete understanding of the reality they are dealing with. in conclusion, we would suggest that team-taught interdisciplinary classes are not a silver bullet. the professors should bring different perspectives into the classroom, but also open minds. they need to show vulnerability to each others’ expertise and opinions. they need to choose texts and assignments that broaden and challenge the boundaries that they may be used to in their regular classes. in our case, students were asked to read economic history, political philosophy, “varieties of capitalism” literature, and participate in a final exercise where they had to make decisions based on evidence that was provided them in an imf case study. the course was designed to show students that intelligent political economy and effective public policy requires both an understanding of permanent questions faced by human communities at all times and a sensitivity to the particular problems and cultural contexts faced by individual countries at specific points in their histories. references caviglia-harris, jill l. 2003. “introducing undergraduates to economics in an interdisciplinary setting.” journal of economic education, summer: 195-203. davis, james r. 1995. interdisciplinary courses and team teaching: new arrangements for learning. phoenix, arizona: american council on education and oryx press. eisen, mary-jane. 2000. “the many faces of team teaching and learning: an overview.” new directions for adult and continuing education, 87: 5-14. frieden, jeffry a. 2006. global capitalism: its fall and rise in the twentieth century. new york: w.w. norton & company hall, peter a. and kathleenthelen. 2009. “institutional change in varieties of capitalism.” socio-economic review, 7: 7-34. hansen, randall s. 2006. benefits and problems with student teams: suggestions for improving team projects.” journal of education for business, 82: 11-19. hatch, deborah h. and susan rich. 2005. “aligning in team teaching.” in donald h. wuff, (ed.), aligning for learning: strategies for teaching effectiveness boston: anker publishing company. pp. 95-105. kohler, patty and john trice. 2009. “twice as nice: using co-teaching as an instructional strategy.” the teaching professor, august/september: 6. leon, linda a. and lawrence s. tai. 2004. “implementing cooperative learning in a teamteaching environment.” journal of education for business, may/june: 287-293. 40 | journal for economic educators, 14(1), summer 2014 40 letterman, margaret r. and kimberly b. dugan. 2004. “team teaching a cross-disciplinary honors course: preparation and development.” college teaching, 52: 76-79. murata, roberta. 2002. “what does team teaching mean? a case study of interdisciplinary teaming.” the journal of educational research, 96: 67-77. oakley, barbara, richard m. felder, rebecca brent, and imad elhaii. 2004. “turning student groups into effective teams.” journal of student centered learning, 2: 9-34. preves, sharon and denise stephenson. 2009. “the classroom as stage: impression management in collaborative teaching.” teaching sociology, 37: 245-256. rassuli, ali and john p. manzer. 2005. “teach us to learn: multivariate analysis of perception of success in team learning.” journal of education for business, 81: 21-27. shibley, ivan a. 2006. ”interdisciplinary team teaching: negotiating pedagogical differences.” college teaching, summer: 271-274. wade, bruce h. and jack h. stone. 2010. “overcoming disciplinary and institutional barriers: an interdisciplinary course in economic and sociological perspectives on health issues.” the journal of economic education, 41: 71-84. wingfeld, sue s. and gregory s. black. 2005. “active versus passive course design: the impact on student outcomes.” journal of education for business, 81: 119-125. wulff, donald, h. 2005. “using the alignment model of teaching effectiveness,” in donald h. wuff, ed. aligning for learning: strategies for teaching effectiveness, anker publishing company, boston. pp. 3-15. appendix i list of course readings baumol, w. j. and blinder, a. s. (2009). macroeconomics: principles and policy. (macroeconomic update – the economic crisis. 1-3. mason oh: south western cengage learning. blanchard, o. (2009). “the perfect storm.” finance & development, june, 37-39. crowe, c. and meade, e. e. (2007). “the evolution of central bank governance around the world.” journal of economic perspectives, 21: 69-90. deaton, a. (2008). “income, health, and well-being around the world: evidence from the gallup world poll.” journal of economic perspectives, 22: 53-72. eichengreen, b. (2000). “the crisis of (confidence in) global capitalism.” critical review, 14: 69-85. frieden, j. a. (2006). global capitalism: its fall and rise in the twentieth century. new york. w.w. norton & company. goodfriend, m. (2007). “how the world achieved consensus in monetary policy.” journal of economic perspectives, 21: 47-68. haggard, s. (2003). varieties of capitalism: the institutional foundations of comparative advantage. edited by peter hall and david soskice. book review. business history review. hall, p. a. and thelen, t. (2009). “institutional changes in varieties of capitalism.” socioeconomic review, 7: 7-34. 41 | journal for economic educators, 14(1), summer 2014 41 hall, p. a. and gingerich, d. w. (2004). “varieties of capitalism and institutional complementarities in the macroeconomy.” discussion paper 04/5. max planck institute for the study of societies. islam, s. (2004). “russia’s rough road to capitalism.” foreign affairs, 57-66. knell, m. and srholec, m. (2007). diverging pathways in central and eastern europe. in d. lane and m. myatt (eds.), varieties of capitalism in post-communist countries. new york: palgrave macmillan: 40-62 lane, d. (2007). post-state socialism: a diversity of capitalisms? in d. lane and m. myatt (eds.), varieties of capitalism in post-communist countries. new york: palgrave macmillan: 13-39. o’hara, p. a. (2004). “cultural contradictions of global capitalism.” journal of economic issues, 38(2): 413-420. polany, k. (1944). the great transformation: the political and economic origins of our time. boston: beacon press. roemer, j. e. (2009). “changing the social ethos is the key.” the economists’ voice, july. rossini, g. (2003). robert gilpin (2002) the challenge of global capitalism. the world economy in the 21st century. book review. economic notes, 32: 105-106. stiglitz, j. e. et al. (2006). “taming global capitalism anew. the nation, april 17, 1-12. vehorn, c. l. and hashemzadeh, n. (2009). “the international monetary fund: part of the problem or part of the solution?” journal of global business issues, 3: 137-145. vehorn, c. l. and kasturi, p. (2008). the global meltdown: prospects for india’s economy. the india economy review, v, december, 52-63. vogel, s. k. (2006). japan remodeled: how government and industry are reforming japanese capitalism. ithaca: cornell university press. topics covered • how has global capitalism evolved? • causes of the global capitalism meltdown • issues and concerns with global capitalism • can global capitalism be managed? • should global capitalism be managed? • asian models of capitalism • capitalism in post-communist countries • poverty, inequality, and globalization • international financial (governing) institutions (ifis) • objectivism note: j. a. frieden’s book, global capitalism: its fall and rise in the twentieth century, served as the textbook for the course and provided the underlying organizational structure to the sequence of topics covered (see above for reference details). grading students’ course grade was based on four elements: a mid-term exam (25%), a comprehensive final exam (45%), the simulated imf board meeting (15%), and class participation (15%). both the mid-term and final were take-home essay exams, graded by both instructors. when the two 42 | journal for economic educators, 14(1), summer 2014 42 instructors had a different view of a student’s exam, they met to resolve the differences and agree on the grade to be given. appendix ii imf board meeting india’s macroeconomic policies (article iv consultation) a brief summary of the current economic situation in india (as described in the imf staff report) is the following: ► after an average growth of 8.75 percent over the past five years, india gdp is projected to grow only 6.25 percent this year (2008/2009) and further decelerating to 5.25 percent next year (2009/2010). ► inflation is expected to rise to from 6.2 percent to 7.8 percent this year (2008/2009), but drop off next year. ► the general government deficit is expected to increase from 5.8 percent of gdp to 9.9 percent of gdp this year (2008/2009). next year’s projection is a slight decline to 8.8 percent of gdp. ► the money supply grew by 20.8 percent last year (2007/2008). based on the above trends and the article iv staff report, each team meets for the last 10-15 minutes of class over several class periods to prepare its remarks for the executive board meeting. the meeting begins with the imf staff presenting [3-5 minutes] to the executive board: (i). an analysis of the current situation, and (ii). a set of possible policy options. each executive director then responds [3 minutes] to the staff report based on the perspective of the region that he or she represents. the imf staff representative will respond to executive director comments; and then the floor is open to a general discussion. note: it is up to each executive director to specify any other relevant information (e.g., quantitative) with regard to current economic activity. team meetings: issues to address first meeting get to know the other members of the team talk about the project in general terms. second meeting do you understand the situation in india and the necessity to review current macroeconomic policies? 43 | journal for economic educators, 14(1), summer 2014 43 third meeting talk about the role of your country (or region) in general terms is it sympathetic to the washington consensus? how does your country (or region) view the influence of global capitalism? fourth meeting talk about the role of your country (or region) in specific terms do you agree with the imf staff assessment? start to prepare your comments on the imf staff assessment. think about questions to ask about the staff report. who will be your executive director (the one that sits at the table)? fifth meeting we will discuss how the actual board meeting will unfold. finish preparing your comments on the imf staff assessment. formulate your questions to ask about the staff report. sixth meeting prepare an outline of your comments and questions. settle any last minute issues so that the whole team is prepared for the board meeting. countries or constituencies represented – in addition to the team representing the imf staff, the other teams represented the following countries or groups of countries: china, india, united kingdom, united states, east african countries, small european countries, southern latin american countries. there were 5-6 students in each team. 78 | journal for economic educators, 14(1), summer 2014 marketing during a recession: an illustration of how economic principles guide marketing approaches melanie marks, 1 scott wentland, 2 and abbey o’connor 3 abstract this article offers a practical way for economic educators to integrate marketing into economics principles courses by connecting economic principles and data to advertisements used during the “great recession.” while most business students are required to take economic principles courses, few appreciate how economic theory applies to different disciplines. to help economic educators integrate material across disciplines, we provide specific connections to marketing for topics commonly taught in economics principles courses, which we believe is a step toward creating a richer, more integrated business curriculum. key words: economic principles, marketing, recession, advertisements jel classification: a20, e32, m31, m37 introduction as economic educators who teach principles courses, we are often serving two populations—the students who are exploring economics as a major and the students taking the core classes required of a business major. for economics majors, we try to make economics practical and show connections to the real world in order to enliven classroom discussion and generate interest. we might talk about congestion pricing of highways, the price controls of the 1970s that led to shortages, or the recent fiscal stimulus package’s effect on the macroeconomy. yet, for most business majors, our usual examples may not be quite as relevant to their interests. in order to connect with a wider audience, principles instructors might also try to illustrate that economics is essential to understanding the bigger picture in which firms and decision-makers operate. the goal of this article is to provide specific connections to marketing for topics commonly taught in an economics principles course, which we believe will help create a richer, more integrated business curriculum. our personal experience as economic educators suggests that our economics majors do not always appreciate the connections between economics and other business disciplines (even when their major is housed in a business school). and, conversely, many business students do not appreciate the value of economics—they see it as a necessary evil in their curriculum. as faculty members who teach both economics and business, we believe this article will be helpful to both students and educators alike, taking a step toward a more integrated curriculum by exploring the connections between economics and marketing as illustrated through marketing approaches employed during the most recent recession. 1 professor of economics, college of business and economics, longwood university. 2 assistant professor of economics, college of business and economics, longwood university. 3 senior lecturer of marketing and assistant dean, college of economics, longwood university. 79 | journal for economic educators, 14(1), summer 2014 our own observations reveal that there have been noticeable changes in advertising/promotion tactics employed during the great recession which began in 2007, and the application of basic economic theory helps explain this phenomenon. this paper is organized to provide faculty a specific, current events context for integrating disciplines while reinforcing economic principles (like the law of demand and elasticity theory). we intended to write at a level suitable for either professors or students, offering professors the option of assigning this article to students directly. for that reason, some content may be elementary for professors but necessary to include when communicating with students. the paper proceeds as follows. first, we provide some context for discipline integration, followed by a brief overview of the role of marketing during a recession. second, we provide the reader with key economic information related to a recession, focusing on how it impacts different industries. third, we reference actual advertisements and promotions used during the recession to highlight key connections to basic economic theories. integrating the business curriculum while students of business tend to concentrate in one specific discipline—economics, marketing, accounting, management, etc. — real world business often does not operate in these silos. company divisions must interact with each other in order to create a successful operation. the same is true for an organization’s employees—they need to understand and apply knowledge from many disciplines to their work in order to function effectively. despite this, business students tend to compartmentalize their learning and often the curriculum does not do enough to offset this. given that principles of economics is usually taken early in the business school curriculum, very limited integration generally appears in the course. hence, steps toward such integration would not only benefit business majors, but our own economics majors (most of whom do not go on to graduate school to become professional economists), giving them an edge in the business world by approaching a business education with an integrated mindset from the outset. research shows that a business curriculum that includes the integration of economics provides numerous benefits to students, faculty, and the college (see kerr and oana (1984), miller (2000), and lorange (2005)). this sentiment is echoed by crittenden (2009) who argued that business schools must focus on a cross-functional curriculum if they are going to produce innovative graduates, something critical to business success. moreover, when surveyed, deans at association to advance collegiate schools of business international (aacsb) schools agreed that curriculum integration remains an important issue for today’s business schools (athavale, davis, and myring 2008). since economics is usually at the core business school curriculums, economic educators are in a good position for influencing students to consider business as an integrated discipline (where economics plays an important role). at the same time, our own economics majors benefit by seeing applications of elementary principles to practical settings in business. marketing during recessions: an overview to effectively implement the right marketing strategy during a recession, not only does a business need to know that it should market during this period, but it also needs to understand how it should advertise during a recession when it is not simply business as usual. one key factor to consider is how the recession has impacted the consumer. how has the consumer’s decisionmaking process been impacted and what motivates them to buy now? are consumers conducting 80 | journal for economic educators, 14(1), summer 2014 more research before they purchase? what features and benefits are now most important to them? (quelch 2008) strategies employed during the great recession ran the gamut. it will not be surprising to students of economics that many companies focused their advertising on discounts, as consumers became more price-sensitive and spent their money more carefully. as we emphasize later in the paper, making price concessions should be done only when armed with good economic information about consumers and proper context within the market. the success of walmart during the great recession (as their bottom line in 2008 increased by 5.9%) suggests that continuing to emphasize price first and product second can be a successful strategy for motivating consumer spending (gentry 2009). on the other hand, gucci marketed its “new jackie” handbag not as an accessory, but as an investment (matlack 2009) given that recessions and the resulting changes in income can result in less consumption on high ticket items. understanding the macro and microeconomic connections of a recession is important for any marketing agent. the next two sections lay out key economic information and basic theories that marketing students should understand so that they may be better decision makers in both prosperous and tough economic times. key connections to economic theory and concepts are made so that students of economics can see the economic underpinnings that guide marketing decisions. macroeconomic data and understanding the microeconomics of a recession with the use of data, economic educators can effectively show economics and business students that business cycles have important microeconomic implications, given that not all industries are impacted the same by fluctuations in the macroeconomy. this section highlights how understanding basic economic data and economic principles can guide marketing strategies and promotional campaigns during a recession, using specific examples from the great recession in particular. a number of examples will be cross-referenced with microeconomics theory in the second half of the paper, allowing students to see both the macro and microeconomic connections. introducing aggregate data and the great recession according to the national bureau of economic research (nber), what is now called the “great recession” began with an acute decline in the us economy in december 2007, as the key economic indicators show. figure 1 depicts the decline in real gross domestic product beginning in late 2007, which was officially dated by the nber as ending in june 2009 (see nber’s website for the dates of all us recessions since 1854: http://www.nber.org/cycles.html). the timeframe for the great recession is shaded in grey. the nber business cycle dating committee looks at a host of data to determine the precise peaks and troughs of recessions, from macroeconomic measures like real gdp to unemployment to other indicators. students may view us unemployment data here: http://research.stlouisfed.org/fred2/series/unrate. in addition to the more high profile indicators like real gdp and unemployment, a key economic indicator that marketers should keep in mind is consumer sentiment—a measure of how consumers view the prospects for the general economy and their own financial well being. the university of michigan’s index shows a declining trend beginning in the middle part of the decade, as consumer sentiment began to fall well before gdp began its decline in 2007 (see http://research.stlouisfed.org/fred2/series/umcsent). for many sectors, consumer sentiment is crucial. consumers may have the spending resources to purchase goods and services, but as http://www.nber.org/cycles.html http://research.stlouisfed.org/fred2/series/unrate http://research.stlouisfed.org/fred2/series/umcsent 81 | journal for economic educators, 14(1), summer 2014 sentiment dips, consumers become more likely to postpone purchases of non-essential items, or items that may have a longer product life. figure 1. quarterly real gdp (seasonally adjusted, 2005 chained – billions of dollars) data from bureau of national economic analysis http://www.bea.gov/national/index.htm#gdp. so, what caused the fluctuations in gdp, unemployment, and consumer sentiment at the onset of this great recession? economists generally believe a variety of factors may have contributed to these macroeconomic fluctuations, but one of the more high profile contributors stood out for the great recession in particular: changes in household wealth, particularly home equity. during the middle of the decade, the us economy experienced a real estate boom and bust, where high property prices gave way to plunging prices in markets around the country, adversely affecting individuals’ wealth in many markets nationally. for most homeowners, the equity in their home (i.e. the difference between value of their home and the remaining mortgage balance) is one of their largest financial assets. if housing prices fall then home equity falls as well. figure 2 depicts the great recession real estate bust, as measured by the case-shiller 20 city home price index, a commonly cited home price index composed of major markets around the country. the unexpected decline in home prices is quite clear, and there were a host of other inter-related precursors and consequences, including turmoil in the financial/banking sector as well as a decline in the stock market and nominal income more generally. figure 2. case-shiller 20 city home price index data available from the federal reserve bank of st. louis: http://research.stlouisfed.org/fred2/series/spcs20rsa 12,200 12,400 12,600 12,800 13,000 13,200 13,400 13,600 ja n -0 6 a p r0 6 ju l0 6 o ct -0 6 ja n -0 7 a p r0 7 ju l0 7 o ct -0 7 ja n -0 8 a p r0 8 ju l0 8 o ct -0 8 ja n -0 9 a p r0 9 ju l0 9 o ct -0 9 ja n -1 0 a p r1 0 ju l1 0 o ct -1 0 ja n -1 1 a p r1 1 ju l1 1 o ct -1 1 ja n -1 2 80.0 100.0 120.0 140.0 160.0 180.0 200.0 220.0 ja n -0 6 ju n -0 6 n o v0 6 a p r0 7 s e p -0 7 f e b -0 8 ju l0 8 d e c0 8 m a y0 9 o ct -0 9 m a r1 0 a u g -1 0 ja n -1 1 ju n -1 1 n o v1 1 http://www.bea.gov/national/index.htm#gdp 82 | journal for economic educators, 14(1), summer 2014 recession-specific marketing guided by economic principles and data given the fall in income and wealth at the onset of the recession, economic educators can show students that economic principles have consistent predictions about the microeconomic behavior of consumers, which can be utilized by marketers to formulate a more appropriate response to macroeconomic pressures. for example, economic principles predict that an unexpected or abrupt fall in income/wealth will generally lead to a fall in demand for normal goods and particularly durables. in fact, we see precisely this in the data as consumers delay purchases of big ticket items in a weak economy. data on us personal consumption expenditures (see http://research.stlouisfed.org/fred2/series/pcedg) shows the sharp drop in expenditure on consumer durable in the us economy at the onset of the great recession. it is also not surprising that new automobile sales had a significant decline since 2006 as well, as seen in aggregate vehicle sales data (see http://research.stlouisfed.org/fred2/series/altsales). with the weak economy in mind, automotive companies and dealerships marketed ways to soften the pain of such large purchases and perhaps lure borderline customers. these included creative strategies to effectively lower prices for customers, besides simply knocking off dollars from the sticker. examples that will be tied to microeconomic theory below include ford, gm, chrysler, and suzuki who used a range of strategies from “employee pricing” to free gas to encourage automobile sales. absent these promotions, motor vehicle sales (along with sales of other durable goods) would likely drop even further, jeopardizing the financial health of auto producers even more. like automotive sales and durables, purchases of luxury items are also scaled back for similar reasons. for example, american travel abroad sharply declined during the great recession, as seen in aggregate travel data for the united states (see http://research.stlouisfed.org/fred2/series/bomtvlm133s). in an economic downturn, consumers often turn to less expensive substitutes or delay major purchases until the economy rebounds. in the automobile sector, for example, there was a sharp decline in demand at the onset of the recession. the fall in demand for new cars and used cars is reflected in the steep declines in prices as shown by consumer price index data for new vehicles (see http://research.stlouisfed.org/fred2/series/cusr0000seta01) and used vehicles (see http://research.stlouisfed.org/fred2/series/cusr0000seta02). prior to the recession, there was a sharp uptick in consumer credit that coincided with the real estate boom. proceeding the bust, consumer credit fell dramatically during the recession, as shown by debt outstanding in the us household/consumer credit sector (see http://research.stlouisfed.org/fred2/series/hccsdodns), despite falling interest rates (which may reflect credit constraints dominating the countervailing effect of cheap credit). hence, during the recession marketers would strive to create ways to make a product’s cost less painful and mindful of the credit constrained, beyond simply lower interest rates. some of the examples discussed below include revival of layaway programs, payment plans for larger ticket purchases, and opportunities to exchange stimulus checks for greater than their face value when exchanged for gift cards. all of the above represent promotions that we observe primarily when the economy’s pulse is weak and consumers are credit constrained. as consumers tightened their spending at the onset of the great recession, the retail industry took a big hit, and while retail and food service industries (see www.census.gov/retail/marts/www/timeseries.html) showed some promising signs at the middle of 2008, sales plummeted sharply as the recession wore on through the middle of 2009. even though we usually regard food and clothing as staples, consumers find a number of ways to cut back when times are tough. for example, consumers may eat fewer meals in restaurants or might http://research.stlouisfed.org/fred2/series/pcedg http://research.stlouisfed.org/fred2/series/altsales http://research.stlouisfed.org/fred2/series/bomtvlm133s http://research.stlouisfed.org/fred2/series/cusr0000seta01 http://research.stlouisfed.org/fred2/series/cusr0000seta02 http://research.stlouisfed.org/fred2/series/hccsdodns http://www.census.gov/retail/marts/www/timeseries.html 83 | journal for economic educators, 14(1), summer 2014 choose to buy more “off brand” products to save money. figure 3 shows slower declines in the clothing, electronics, and furniture industries during the recession. figure 3. real monthly retail sales by category (seasonally adjusted, in millions of dollars) data from u.s census bureau, available at www.census.gov/retail/marts/www/timeseries.html. even products that are considered to be “essential” or lack close substitutes showed reduced sales. for example, consumption of gasoline fell during the recession (see www.census.gov/retail/marts/www/timeseries.html). in the short term, consumers can find ways to cut uncessary travel or even carpool. in the medium or longer run, consumers can substitute to more fuel efficient cars. some sectors continue successful marketing campaigns, even into a recession, if the sector shows signs of health and stability. for example, retail sales for sporting goods/hobbies and for health/beauty were relatively flat during the great recession. this suggests that consumers do not scale back proportionately across all industries, and some markets may fare better than others in the face of an economic downturn, as illustrated in figure 4. figure 4. monthly retail sales by category (seasonally adjusted, in millions of dollars) data from u.s census bureau, available at www.census.gov/retail/marts/www/timeseries.html. 5,000 10,000 15,000 20,000 ja n -2 0 0 6 ju l2 0 0 6 ja n -2 0 0 7 ju l2 0 0 7 ja n -2 0 0 8 ju l2 0 0 8 ja n -2 0 0 9 ju l2 0 0 9 ja n -2 0 1 0 ju l2 0 1 0 ja n -2 0 1 1 ju l2 0 1 1 ja n -2 0 1 2 furniture electronics clothing 5,000 10,000 15,000 20,000 25,000 ja n -2 0 0 6 a u g -2 0 0 6 m a r2 0 0 7 o ct -2 0 0 7 m a y2 0 0 8 d e c2 0 0 8 ju l2 0 0 9 f e b -2 0 1 0 s e p -2 0 1 0 a p r2 0 1 1 n o v2 0 1 1 health and beauty sports, hobbies, books, and music http://www.census.gov/retail/marts/www/timeseries.html http://www.census.gov/retail/marts/www/timeseries.html http://www.census.gov/retail/marts/www/timeseries.html 84 | journal for economic educators, 14(1), summer 2014 we have observed that many health and beauty products maintained relatively consistent marketing strategies over this time period, one of the more famous being l’oreal’s “because you’re worth it” slogan (l'oréal group 2009). sporting goods brands like nike continued marketing premium products endorsed by big name athletes, consistent through the years. a 2012 foxnews.com article entitled, “what recession? nike unveils the $315 lebron x sneaker,” chronicles nike’s roll out of its priciest sneaker yet, despite the fact that employment had not rebounded from is recessionary levels. these companies continue to appeal to uniqueness and quality more than price, despite the tough economic times. as a result, they are seemingly immune to the recession (at least relative to other industries). however, each industry is different, and this certainly holds true during recessions. marketing approaches may need to be adapted based on the specific situation facing each industry during difficult economic times. thus, the more marketers understand the economic data specific to their industry, the better marketers become at devising optimal strategies for weathering the storm of (or, in the case of the health and beauty sector, sustaining sales during) an economic downturn. in the next section, we make connections between economics principles that students learn in introductory economics classes and specific marketing strategies used during the great recession. we will expand on some of the examples above and will also offer additional ones. linking economic principles to marketing the following discussion highlights additional advertisements and promotions that emerged during the great recession to show where and how economic data is useful for marketers. some of these strategies were employed as a direct result of the recession and were temporary. other strategies might have been employed in a non-recessionary time, but appear timely during the recession nonetheless. either way, the connections to basic economic theory are interesting and help provide a real world context for the theories economic educators teach in their classrooms. law of demand one strategy used by marketers is simply to exploit the inverse relationship between price and quantity demanded (law of demand). except for in the very rare case of perfectly inelastic demand (e.g. a medicine essential to someone’s life), decreasing the price of a product leads to an increase in the number of units demanded. firms might reduce listed prices or use promotions to generate the same result. and in the case of a contracting market, firms slash prices to maintain market share or prevent sales from slowing quite as much as they otherwise would. for example, during the great recession, quiznos advertized that “over 35 items now have lower prices” where previous ads focused more on quality (quiznos 2009). pepsi and frito lay offered 20% more product for the same price—both effectively changing price per unit (cordeiro 2009). coupons are also an important element of this type of marketing approach since they are an obvious way to lower prices for consumers willing to use them. cnn money reports that use of coupons was on the rise during the great recession, as was membership on free sites (such as www.couponmom.com), where shoppers could learn other money saving ideas (bassett 2009). to offset the “stigma” of coupon clipping, retailers used technology, offering online coupons, ways to save coupons to loyalty cards (for example, kroger), or and ways to use via apple’s iphone (bassett 2009). though we see an array of different approaches, these marketing tactics are all exploiting one simple economic theory—the law of demand. 85 | journal for economic educators, 14(1), summer 2014 price elasticity of demand economic principles show that increasing (or decreasing) prices may not always be a good idea when trying to increase revenues. the theory of price elasticity of demand underscores the importance of knowing how responsive consumers are to changes in price. for example, an accountant might not wish to lower his or her prices during a recession. while some households might prepare their own taxes, accounting firms tend to retain the bulk of their clients, suggesting that some tax preparers enjoy “inelastic” demand for their product given that tax returns must be filed every year (recession or not). for price discounts to increase revenues, the lost revenue from the lower price must be more than offset by increases in quantity. as economic educators explain in the classroom, this will only be the case if price reductions are targeted at products that have more elastic demand, where consumers are relatively more responsive to changes in price. marketers who recognize the price sensitivity (or insensitivity) of their customers will be better equipped to make revenue maximizing pricing decisions. for example, one study reports that the elasticity of demand for movies by american adults is 2.0 (a 1% increase in price would decrease quantity by 2%) but elasticity of demand for teenagers is 0.2 (a 1% increase in price would decrease quantity by 0.2%) (melvin and boyes 2002). during a recession, this phenomenon might be compounded by the fact that teenagers have a lower opportunity cost for their leisure, as teenage unemployment typically increases during a downturn. us data (see http://research.stlouisfed.org/fred2/series/usaurtnaa) shows this uptick in teenage unemployment, rising from around 15% prior to the recession to over 25% during the recession. thus, given their elasticities, a decrease in the price of movie tickets could result in net revenue increases for adults and revenue decreases for teenagers. yet, sometimes changing price is not the best strategy depending on the product, consumer, and the firm’s marketing strategy. the example discussed earlier of l’oreal maintaining its “because i’m worth it” marketing approach (and using celebrities such as gwen steffani to endorse their products) is one such example. nike’s successful launch of its high priced lebron x sneaker confirms that, depending on the product, not every consumer is price sensitive during a recession. it is important to note that marketing strategies vary greatly from product to product, and firms may explore other strategies beyond lowering prices. determinants of elasticity of demand availability of substitutes economic theory also explains what factors influence price elasticity of demand. the number/availability of substitutes is one key determinant—more substitutes make it easier for consumers to switch one product for another (making demand more elastic). for example, there is a high degree of substitutability between burgers, suggesting relatively elastic demand for the fast food hamburger market. it is not surprising that marketing has been very aggressive in the restaurant industry. during the great recession, for example, sonic entered the dollar menu war with their new “everyday value menu” (ayrouth 2009), while kfc introduced their 99 cent menu to compete with mcdonalds and other restaurants with dollar menus (kfc corp. 2008). luxury vs. necessity another factor influencing elasticity of demand is whether the good is a luxury or necessity. consumers might be more price sensitive (i.e. have more elastic demand) when dining out (a luxury) than when using utilities (a necessity), holding all else constant. there are a few http://research.stlouisfed.org/fred2/series/usaurtnaa 86 | journal for economic educators, 14(1), summer 2014 interesting examples of businesses that are more likely to enjoy a “recession-proof” status. for example, the short-run price elasticity for hospital and physician services is 0.1 (very inelastic), since families are not likely to put off a trip to a doctor if it is necessary (miller 2010). auto mechanics frequently appear on the list of “recession-proof” careers for a similar reason—auto repairs cannot generally be put off for long. this means that, at least in the short run, there are some businesses that might be relatively recession-proof because they offer something perceived as a “necessity.” however, this is not the norm. luxury and big ticket items such as new cars and vacations are adversely affected by a recession. it is, therefore, not surprising that disney theme parks offered promotions such as free admission on birthdays and free extra nights (the walt disney co. 2008). suzuki introduced “free gas for summer” where they paid for the buyers’ gasoline from may through august 2010 (suzuki motor of america inc. 2010). ford, gm, and chrysler used employee pricing and 0% financing to make their luxury items more economical. timeframe in which to respond as economic educators communicate in their classrooms, the time frame within which consumers operate also matters. consumers have more elastic demand in the long run than in the short run, because they have more time to react to changes in price. for example, it is estimated that the short run demand for gasoline has a price elasticity of 0.2 whereas long run demand (more than a year) has a price elasticity of 0.5 (miller 2010). price of the good relative to one’s budget finally, the price of the good relative to a consumer’s budget impacts elasticity. holding all else constant, consumers will have a higher price elasticity of demand for something that requires a larger share of the budget. this helps explain the aforementioned statistics about falling durable goods sales, as consumers try to avoid large purchases. as noted above, during the great recession, car companies such as ford, gm, chrysler, and suzuki used record discounts and creative strategies to sell such big ticket items, from employee discounts to 0% financing (tucker 2008) to “free gas for summer” (degen 2009) programs, acknowledging the price sensitivity customers face. conversely, relatively small purchases tend to have more inelastic demand. this might explain why grand’s biscuits changed their marketing campaign briefly during the great recession, claiming that “at only 25 cents a biscuit you’ll use any excuse to eat in” (lyden 2009). grand’s is not advertising a price change—instead they remind consumers that including biscuits on the dinner table involves a very small expenditure. table 1 in the appendix summarizes the economic principles above (regarding demand and elasticity) and the corresponding advertisements/promotions that link them. shifting demand another role of the marketer is to increase demand for goods or services. there are variables other than price that encourage/discourage consumers’ willingness to buy: income, strength of preferences, prices of complements and substitutes, consumers’ expectations about future prices, and the number of demanders. as economic educators we refer to these as demand “shifters,” because they shift demand as opposed to causing movement along a demand curve. marketers often target these “shifters” in an effort to raise demand for their products, especially to combat the fall in demand that normal goods experience during recessions. 87 | journal for economic educators, 14(1), summer 2014 change in income the variable most relevant in a recession is the change in consumer income. in recessions, decreases in income (real or expected) lead consumers to decrease their demand for goods and services. some taxes have also increased as state and local governments wrestled with budget deficits. most households were impacted in some way, resulting in less disposable income. marketers cannot literally raise the incomes of their customers during recessions, but they can frame savings as closely approximating a rise in income. in some cases, the savings was more direct. for example, sears (and also kroger grocery stores) offered consumers the opportunity to exchange their stimulus checks for gift cards reflecting 110% of the check’s face value (brennan 2008). in other cases, the appeal was less direct. geico has made this appeal with its “15 minutes could save you 15% or more” marketing campaigns utilizing the iconic gecko or caveman. however, during the great recession, geico introduced a new approach utilizing a stack of money with eyes—the “money you could be saving with geico” campaign—to remind consumers that this savings represents real money (geico 2009). other companies focused on “value” to ensure customers that their money was being well spent. wrangler commercials had iconic figures such as nfl quarterback brett favre stating “when i think of wrangler i think of value. you can pay more but you won’t get more” (wrangler jeans co. 2009). some companies made it easier for consumers to pay for purchases. major retailers like kmart and sears revived their layaway programs during the great recession, allowing customers to pay over time (pr newswire 2010). disney created a payment plan for florida residents, making it easier to purchase annual passes to their theme parks (see disney.com). uncertainty about future income consumers make decisions about consumption based on their current income as well as their future income. with unemployment exceeding 10% during the great recession, uncertainty was widespread and may have led consumers who have not experienced a change in income to cut back on spending, perhaps putting off a vacation or the purchase of a durable good. some producers of high ticket items reduced the level of perceived risk by offering consumers guarantees in the event that their economic situation changed. hyundai launched its “hyundai assurance” to promote “certainty in an uncertain world,” allowing consumers to return their cars if they lost their income (friedman 2009). saturn’s “total confidence” program actually poked fun at hyundai’s promise by referring to it in their own ads as “the worst day ever” (losing your job and your car) and instead offered to make car payments for nine months for consumers who lost their income (saturn corp. 2009). kia and sears made commitments similar to hyundai’s (ottley 2009), and jet blue airline offered refunds on vacation packages in the event of unemployment (schlangenstein 2009). according to wards auto, such strategies paid off for hyundai as they increased market share during the great recession (bunkley 2009). (for data, see wardsauto.com/keydata/historical/usasa28summary/) substitutes and complements in a principles course, economic educators usually teach about the role of substitutes and complements on demand. the demand for margarine might increase when the price of butter goes up and the demand for hotdog buns might increase when the price of hotdogs goes down. real world marketers often make appeals linked to these substitutes and complements in an attempt to raise the demand for their products. as the demand for new and existing homes 88 | journal for economic educators, 14(1), summer 2014 dropped during the great recession, the demand for complements like appliances, furniture, and other durable goods fell accordingly (see http://research.stlouisfed.org/fred2/series/a35sno). marketers are cognizant of the relationships between compliments and may use this in their promotions to shift demand. for example, marketers at disney world understand that restaurant meals and vacations are complements, as vacationers generally eat out more while on a trip (peterson 2010). during the great recession, disney offered a promotion where meals were free, attempting to raise demand for vacations to its parks by lowering (to zero) the cost of dining (peterson 2010). in a similar vein, at one point hyundai offered a lower gas price guarantee, where customers could lock in gasoline prices at $1.49 per gallon during the summer of 2009 (shunk 2009) and a suzuki promotion mentioned above offered free gas for summer. southwest airline also focused on the price of a complementary service—the cost of checking luggage. rather than simply lowering their fares (as they are already known as a low fare airline) southwest airlines employed their “bags fly free” campaign, where they point out that, unlike their competitors, they charge no fees for baggage (southwest airlines co. 2009). expectations about future prices economic educators also emphasize that demand can be influenced by consumers’ expectations about future prices. that is, if consumers expect the price of a product to rise in the future, then they will increase demand for that product now. this helps explain why marketers’ promotional strategies are so frequently “for a limited time,” especially during recessions. many internet retailers offered promotions such as “free shipping” or a price discount only good for the current shopping day to lure consumers into making purchases that might otherwise be delayed. preferences and number of buyers in a principles class, economics educators offer examples of demand shifts that result from an increase in preferences or number of buyers. for example, if the driving age increases and the drinking age decreases, the number of demanders for used cars may decrease and the number of demanders for alcohol might increase. clorox offers an interesting strategy in attempt to increase number of demanders. their product is generally thought of as a laundry additive. yet, during the great recession, clorox began promoting new uses for bleach around the house such as disinfecting children’s toys and lengthening the life of flowers (see clorox.com). the approach is not necessarily selling on price, quality, or asking consumers to substitute from another brand. instead, clorox is trying to shift demand directly by capturing new consumers (and selling more to existing consumers) by promoting the versatility of its product more directly. during a recession, more consumers might be receptive of a versatile product with many uses than a product with a very specific use. table 2 in the appendix summarizes the demand “shifters” above and the corresponding advertisements/promotions that link them. table 3 in the appendix serves the same function, but for the next section. other marketing strategies during the great recession price discrimination a favorite topic of many economic educators is price discrimination, where firms charge different prices to different consumers based on price elasticity. consumers with more elastic demand (more price sensitive) are charged a lower price than consumers with a more inelastic demand (less price sensitive). professors typically use examples such as airlines charging more http://research.stlouisfed.org/fred2/series/a35sno 89 | journal for economic educators, 14(1), summer 2014 for tickets purchased within seven days of travel to illustrate price discrimination. however, during the great recession one author of this paper took advantage of an innovative offer from a pontiac/gmc car dealership. specifically, pontiac/gmc offered $1000 off the price of a new car to customers owning a car that was not one of these brands. initially this seems counterintuitive—customers loyal to pontiac/gmc would not be rewarded for their loyalty. but, on the basis of economics, this promotion makes sense. owners of pontiacs and gmcs are more likely to purchase another vehicle of the same make and may already have brand loyalty. the $1000 promotion was used to lure consumers who are less likely to purchase a pontiac/gmc (and therefore have more elastic demand). anecdotally, another interesting price discrimination strategy was observed by one of the authors of this paper. composite acoustic, known for higher end guitars made from a composite material (durable and not temperature sensitive) offered a line of guitars that had a matte finish instead of the traditional glossy finish. the change resulted in a significant cost savings in production that could be passed on to the consumer, allowing the company to attract the more price-conscious buyer. in both examples, the marketing strategies exploited such segmenting techniques with the goal of generating additional revenues. brand name capital while discounting prices can be an effective way to increase sales, firms must consider the potential impact on their image and perceptions of quality. in economics courses, firms’ decisions are most often modeled as a function of price and quantity. but, there is a quality variable that enters into the decision process and brand name is also discussed as an important barrier to entry in standard economic models. firms devote an enormous amount of financial capital toward creating the brand name capital that deters entry of competitors. during the recession, smucker aired commercials that focused on quality (j.m. smucker co. 2009), as they reminded consumers of the value associated with their brand name. smucker’s consistency in its marketing strategy demonstrates its long term investment in its brand, which stands as a significant barrier to entry for many of its products. allstate insurance also points to the value of their name and slogan in their “back to basics” ad that ran during the great recession: “1931 was not exactly a great year to start a business. but that’s when allstate opened its doors. and through the 12 recessions since, they’ve noticed that after the fear subsides, a funny thing happens. people start enjoying the small things in life—a home cooked meal, time with loved ones, appreciating the things we do have, the things we can count on. it’s back to basics and the basics are good. protect them. put them in good hands” (allstate corporation 2010). in addition to focusing on family values, allstate reminds consumers that they have been in business for eight decades and are here to stay. this long-term commitment to quality and differentiating one’s product through one’s brand could pay dividends for marketing strategists. a recession could be an opportune time to make such an investment in one’s brand, because competitors’ appeals to value and price could open the door to a separating of one’s brand from the pack. understanding sentiment and the use of economic nomenclature during a recession anyone who has experienced a recession understands the general picture painted in the news—increased layoffs, rising unemployment, decreasing income, and an overall sense of insecurity. as the overall economy worsened, the economy was increasingly on the minds of americans as bad economic data swamped the news. so it is not surprising that marketers 90 | journal for economic educators, 14(1), summer 2014 utilized economic content and buzzwords as part of marketing campaigns themselves. for example, at&t has long promoted its rollover minutes as being an advantage of their company compared to others. however, during the great recession they added the reminder that “these days we cannot afford to be wasteful” (at&t inc. 2008). the recession affected how consumers spent their time, with more emphasis put on time at home with friends and family (knowledge@wharton 2010). in one commercial, allstate’s spokesman deviates from the traditional focus on competitive prices and good customer service to remind consumers about the lessons learned--that “meatloaf and jenga can be more fun than reservations and box seats” (allstate corporation 2010). in addition, walmart, known for advertising that focuses on low prices, released their “little things” commercial where there were no products or prices mentioned. instead, lyrics reminded viewers that “the little things go a long way” and “it’s not the money you spend, but the time” (wal-mart stores, inc. 2009). allstate commercials also opened with scenes from the great depression as a reminder to appreciate the small things in life (allstate co. 2010). part of these advertisements’ effectiveness lay in their ability to capture a common sentiment shared by the entire country. other references based on the economy’s overall health were sometimes in the form of humor. a mexican fast food chain’s radio ad had a burrito arriving for the “worldwide interglobal micro macro conference,” and referenced its low prices by asking, “how is that for a bailout plan?” domino’s pizza referred to its “big taste bailout,” with the ceo claiming (in reference to government bailout programs) “i’m not here to get one; i’m here to give one!” (domino’s pizza, inc. 2009). other ads used a simple play on words, for example, “danonomics” -dannon yogurt’s reference to low prices -and “digiornomics”—the idea that digiorno’s pizza is cheaper than delivery (fredrix 2008). wendy’s launched the “3conomics” campaign, promoting three new sandwiches for under a dollar (friedman 2009). in all of these campaigns, economic references, albeit serious or humorous, capture the attention of viewers as the economy occupies nearly everyone’s mind during a recession. conclusion this paper offers economic context to marketing strategies and promotional campaigns during recessions (and the recent great recession in particular) for economic educators to build connections between economics and marketing that more aptly reflect the real world. marketing and economics departments generally operate independently within business schools, but in the real world there is a higher degree of integration. our goal is to highlight some of these connections for the classroom so that students can better understand the integrated realities of business in the real world. marketing during a recession presents an enormous challenge to marketers, often stretching the limits of creativity when budgets are tight. in fact, research suggests that it is during these difficult times that marketing decisions are the most crucial. our paper points out that data about the overall economy and specific sectors can play an important role when devising a marketing strategy during a recession. and since every sector is different, understanding the data and current outlook for one’s own industry may prove decisive for marketers contemplating the direction of their campaign. we believe that reinforcing these connections in the classroom not only furthers the goal of integration among business disciplines, it also reconciles classroom principles with real world strategies. 91 | journal for economic educators, 14(1), summer 2014 references 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0>. the walt disney co. 2008, september 25. “free on birthdays [television advertisement].” <http://www.youtube.com/watch?v=rzc7ees4qq&feature=playlist&p=3a8623bb64de3840&playnext_from=pl&index=6>. wal-mart stores, inc. 2009, october 27. “little things [television advertisement].” <http://www.youtube.com/watch?v=bh_o7h4eofq&feature=playlist&p=3a8623bb64 de3840&playnext_from=pl&index=25>. wrangler jeans co. 2009, september 18. “wrangler value [television advertisement].” <http://www.youtube.com/watch?v=mgh69jcnxme>. 94 | journal for economic educators, 14(1), summer 2014 appendix table 1 – summary of marketing strategies/advertisements relevant to demand and price elasticity economic concept explanation marketing strategy used relevant examples law of demand holding all else constant, there is an inverse relationship between price and quantity demanded. as price decreases, quantity demanded increases (ceterus paribus). price decreases are a way to increase sales, especially if there is a way to segment the market to capture those individuals who are more likely to respond to the lower price. besides simple mark downs and sales, firms offered an array of price discounts ranging from value menus to larger packages for the same price to promoting coupon use in order to offer consumers lower prices.  quiznos advertizing lower prices on over 35 menu items.  pepsi and frito lay offering more product for the same price, effectively reducing price per unit.  kroger reducing the stigma of coupons by allowing them to be saved to loyalty cards.  apple’s iphone application that promotes use of coupons. note that other examples below tie into the idea of lower price. price elasticity of demand general understanding of the topic and why it is relevant price elasticity of demand measures how sensitive consumers are to changes in price. lowering prices when consumers are more price-sensitive (price elastic) is revenue-enhancing but it is not when consumers are less price-sensitive (price inelastic). marketers benefit from knowing how pricesensitive their consumers are. as noted above, decreasing price can increase sales. but, in limited cases, marketers were possibly better off by not lowering prices when it will not be revenue enhancing or when it might dilute the brand.  l’oreal maintaining its “because i’m worth it” marketing approach, as opposed to competing over price which could dilute the brand name.  nike’s lebron x sneaker despite the fact that it was the priciest sneaker in the company’s history. price elasticity of demand impact of the availability of substitutes price elasticity of demand measures how sensitive consumers are to changes in price. the availability of substitutes impacts how price sensitive consumers are. when few substitutes exist, consumers are relatively less price sensitive than when they have opportunities to substitute. firms in highly competitive markets must be concerned about their consumers substituting to other firms. there were examples from the highly competitive fast-food industry where price competition, as opposed to quality competition, dominated the strategy.  sonic entering the dollar menu war.  kfc also introducing the 99 cent menu. price elasticity of demand impact of luxury vs. necessity consumers have relatively more pricesensitivity (more elastic demand) when considering purchases of luxury items. for example, the demand for vacations is going to be more price elastic than the demand for groceries. when tightening spending, luxuries are likely to be the first to be eliminated in the household budget. firms specializing on higher priced luxury purchases offered strategies to make the purchases more economical.  disney’s free admission on birthday and extra nights free.  promotions aimed at selling new cars. price elasticity of demand impact of the price of a good relative to one’s overall budget consumers are more price-sensitive when items take up a larger share of their budget as opposed to when an item takes up a smaller share of the budget. marketers acknowledged that large ticket items may be impacted by a recession more than small ticket items. as such, consumers benefited from strategies that reduced the price (noted above) and decreased the proportion of the budget that the expenditure took up. promoting small ticket items that did not impact the budget significantly was also observed.  data showing decrease in sales for consumer durables such as cars. attempts to lower the price (noted above) serve to lower the overall impact on household budgets.  employee pricing and 0% interest for ford, gm, and chrysler.*  suzuki’s free gas for summer.*  grand’s biscuits focusing on the small price tag of having biscuits on the dinner table. *also ties into law of demand as these serve to decrease p. 95 | journal for economic educators, 14(1), summer 2014 table 2 – summary of marketing strategies/advertisements relevant to shifting demand economic concept explanation marketing strategy used relevant examples demand shifters impact of changes in income income is a ceterus paribus assumption for demand (something held constant along a given demand curve and something that, when changes, will shift demand). for normal goods, as consumers’ income falls, demand falls (or shifts back). as would be expected in a recession, household incomes/wealth fall (lack of raises or even pay cuts, reduction in hours, decreased portfolio and investment income, etc.). firms used strategies that put more money in consumers’ pockets and allowed them to spread expenses over time.  sears and kroger exchanging economic stimulus checks for gift cards worth 110% of the check’s value.  geico introducing the visual representation of money saved by using the stack of money with eyes instead of gecko.  major retailers such as kmart and sears reviving their layaway plans in order to benefit customers.  disney payment plans for florida residents so that expenses for annual passes are spread out over time.  wrangler focusing on value of their jeans with “when i think of wrangler i think of value” and stating “you can pay more but you won’t get more.” demand shifters impact of uncertainty about future income recessionary periods are characterized by increased unemployment. even workers who have not been laid off are concerned about the potential for job loss, reduced hours, and pay cuts. that is, expectations of less future income will shift/lower demand. firms offered programs that decreased the uncertainty associated with large purchases by offering some guarantee such as returns and refunds. these programs decreased the risk to consumers and were aimed to offset uncertainty that might lower demand.  “hyundai assurance” program allowing consumers to return cars if they lost their income.  saturn’s “total confidence” program that would make nine months of car payments for individuals who lost jobs.  kia and sears offering a program similar to saturn’s.  jet blue airline offering refunds on vacation packages in the event of unemployment. demand shifters impact of complements and substitutes demand for a product is impacted by the price of substitutes and complements. as the prices of substitutes to product x decrease, the demand for x will fall. but, when the prices of complements to x fall, the demand for x will rise. firms lowered the price of complementary products as a way of stimulating sales of their products. for example, when the price of gas (a complement to autos) decreases, the demand for cars may increase as the total expense associated with the purchase falls. note that this also ties into the law of demand since combined price associated with the purchase is lower than before.  disney offering free meals, since dining out it a big expense associated with vacations.  hyundai offering a lower gas price guarantee where customers could lock into a very desirable price.  suzuki’s free gas for summer program.  southwest airline’s “bags fly free” campaign where they point out that, unlike competitors, there is no charge for checked baggage on their flights. demand shifters impact of expectations of future prices demand is a function of consumers’ expectations of future prices. if consumers expect prices to increase in the future, they may increase their demand for a product now, before prices change. firms can create an expectation in the minds of consumers by offering short term promotions. by doing so, consumers are aware that the price today is different than the price tomorrow.  internet retailers offering a discount or free shipping good for only a single day in order to compel consumers to act quickly (e.g. “for a limited time only”). demand shifters impact of preferences and number of buyers if consumers have stronger preferences for a good than before or if there are more consumers of a good than before (holding price constant), demand will increase. firms have an incentive to find ways to influence the preferences of their consumers so that they want to consume more of a good than before. firms also want to increase demand by finding new demanders for the product.  clorox promoting new uses for bleach such as disinfecting toys and extending the life of flowers (whereas clorox had previously been promoted for use with laundry). this approach is intended to get current consumers of bleach to buy more than before and to capture new consumers who did not respond to the idea of using bleach as a laundry additive. 96 | journal for economic educators, 14(1), summer 2014 table 3 – summary of other recession-specific marketing strategies/advertisements economic concept explanation marketing strategy used relevant examples price discrimination price discrimination strategies (third degree) allow firms to differentiate between customers who have relatively more elastic demand than those who are relatively less elastic. customers who have relatively more inelastic demand are charged higher prices for the same or similar product, where the price differential is not explained by cost of production. firms have an incentive to offer a lowerpriced product to consumers who are more price-sensitive. but, they do not want to offer the lower price to consumers who are not very price-sensitive. this requires them to sort between consumers. both pontiac and composite acoustic find a way to offer their product at a lower price to consumers who are more price sensitive.  pontiac offering a discount to drivers who were not currently consumers of their product. owners of pontiacs are, in theory, relatively more inelastic than drivers of substitute brands. offering the discount to non-pontiac owners allowed the company to target those individuals who were relatively more price sensitive.  composite acoustic guitars releasing a guitar with matte finish (less costly to produce) so it could be offered at a lower price point without compromising quality of the instrument. promoting brand name capital it is not always easy for consumers to measure the quality of products and firms with successful brand names can charge a premium over brands that are not well known. successful brand names instill a “trust” in consumers who might select a product with a name they recognize and identify with quality. establishing brand name “capital” can take an investment on the part of the company, but in return they can generate revenue from higher prices and/or sales volume. during a recession, consumers may be more price-conscious. products that charge a premium over more generic choices might fare well when companies remind consumers about the high quality associated with their brand. for services that are contracted over a period of time, consumers may want to know that the service provider “weathers the storm.” increased focus on brand-name and a company’s long-term success can offer this security to customers.  smucker has always used a tag line focusing on the value of its name (“with a name like smucker’s it has to be good.”) while smucker is more than a producer of jams and jellies, they aired commercials talking about the high quality associated with smucker’s jelly, a product that has not changed much since the late 1800s.  allstate reminded consumers in their “back to basics” ad aired during the great recession that they opened in 1931 (which they admit was not an easy time to start a business) and have weathered 12 recessions. with this they capitalize on the company name and its reputation. understanding sentiment and the effects of the recession as discussed in the paper, the great recession was accompanied by increased unemployment, decreasing real incomes/wealth and increased uncertainty about the future. as a result, consumer sentiment dipped and households tightened their spending. some firms sent general signals that they understand that times are tough. firms like walmart and allstate aired campaigns that did not focus on products, prices, or customer service. instead they offered uplifting messages that were empathetic.  walmart “little things” ad reminding consumers that “the little things go a long way” and “it’s not the money you spend, but the time….”  allstate ad reminding consumers that “meatloaf and jenga can be more fun that reservations and box seats.”  at&t, in reference to its rollover minutes, acknowledging to consumers that “these days we cannot afford to be wasteful.” use of economic nomenclature during the recession, the state of the economy was on the minds of everyone and was a central theme in magazine, newspapers, and television news reports. as such, consumers were regularly exposed to economics terminology. firms incorporated economics terminology in their marketing campaigns and tied into current events related to the recession.  digiorno pizza introducing “digiornomics”—the idea that buying their pizza is cheaper than delivery.  wendy’s “3conomics” campaign promoting three new sandwiches for under a dollar.  danon yogurt’s use of “danonomics.”  domino pizza’s ceo offering customers a “big taste bailout” and suggesting that “i’m not here to get one; i’m here to give one!” (play on the government bailouts) 40 | journal for economic educators, 17(1), 2017 40 on students’ perception of a multi-scheme assessment method ambrose leung1 and cheryl a. kier2 abstract the discipline of economics has the reputation of being abstract and difficult to understand. students’ perceptions about the course and its assessment methods may affect their learning strategies and outcomes. a flexible grading scheme (in terms of weights assigned to different assessment components) may help to reduce anxiety about the course, leading to improved performance and higher satisfaction. the present study reports on the implementation of such a flexible grading scheme. students in five introductory economics classes received their final course grade based on one of three grading schemes that gave them the highest mark. an 11-item satisfaction survey assessed students’ perceptions about the flexible marking scheme. students expressed a preference for flexibility over a more traditional, fixed marking scheme. this has implications for other courses that create anxiety among students and has the potential to improve students’ experiences at post-secondary institutions. key words: assessment; undergraduate teaching; students’ learning jel classification: a22, i23 introduction the study of economics provides students with a set of useful and relevant tools that enables them to make better decisions in every facet of their lives. the main purpose of a course in principles of microeconomics is to teach students how to weigh benefits against costs to achieve the best possible solution to any problem. the discipline of economics, however, has the reputation of a “dismal science” (perksy, 1990, p.165); an area of study replete with abstract concepts and often perceived as difficult to understand. borg and shapiro (1996), for example, comment that students more often hate rather than love economics. recently, economists have started to question whether adjustments in teaching styles to better accommodate students with different learning styles can improve student achievement and attitudes in introductory economics courses (boatman, courtney, & lee, 2008; leung, mcgregor, sabiston, & vriliotis, 2014). other studies have explored the effects of factors such as class size (becker & power, 2001; kennedy & siegfried, 1997), instructor effectiveness (shmanske, 1988; watts & bosshardt, 1991), and teaching methods (emerson & taylor, 2004; frank, 1997) on student performance. most of this literature found mixed evidence on these modifications, revealing a need for more research. 1 ambrose leung is the author for correspondence, associate professor of economics, department of economics, justice, and policy studies, mount royal university, 4825 mount royal gate sw, calgary, alberta, canada, t3e 6k6, e-mail: acleung@mtroyal.ca, phone: (403)-440-8515, fax: (403)-440-6815. 2 cheryl kier is an associate professor of psychology, centre for social sciences, athabasca university, 1 university drive, athabasca, alberta, canada, t9s 3a3, email: cherylk@athabascau.ca, phone: (403)-289-0408. mailto:acleung@mtroyal.ca mailto:cherylk@athabascau.ca 41 | journal for economic educators, 17(1), 2017 41 studies from the education literature suggest that students’ perceptions about assessment methods could affect their learning strategies and outcomes (drew, 2001). in this literature, the word “assessment” traditionally describes the processes applied to evaluate students’ understanding of the instructional materials. over the years, the meaning of assessment has broadened to include a wide range of educational activities in the teaching and learning process, referred to as assessment for learning (afl). the concept of afl has been an important force in the discussion of education policies. there does not appear to be a common definition of afl. afl can be described as assessment activities and strategies that promote and improve students’ learning (wiliam, 2011). wiliam pointed out frequent classroom testing as one useful afl strategy, because frequent testing has a strong relationship with better student performance. frequent testing also helps reduce students’ stress and boost students’ liking of the course (bangert-drowns, kulik, & kulik, 1991; dempsey & perkins, 1993). research on testing finds that tests often promote the retention of learned information (butler & roediger, 2007; rickards, 1979; runquist, 1986) and that the content and format of tests affect how students approach studying and learning for a course (biggs, 1996; ha & kapoor, 2015). students’ learning is adversely affected by assessment methods that are perceived to be inappropriate (struyven, dochy, & janssens, 2005), but learning improves when students perceive assessment as a means to make them accountable for their own learning (brown & hirschfeld, 2008). a literature review by bangert-drowns, et al. (1991) showed that performance improved when students were given a larger number of shorter tests as opposed to fewer, longer tests. furthermore, students held more favorable opinions of their classes when they were more frequently tested. this implies that frequent tests may help to foster an environment more conducive to learning and a mutually respectful classroom environment. frequent testing may discourage students from cramming for exams and reduce test anxiety (butler & roediger, 2007; dempster & perkins, 1993). other studies compared the advantages and drawbacks of different assessment methods. this literature differentiates between surface learning and deep learning. surface learning refers to learning with limited personal engagement and understanding of the material (struyven et al., 2005). surface learners often use routine memorization to complete learning tasks. deep learning, in contrast, refers to thoroughly understanding the subject matter, leading to much preferred high quality learning outcomes. although post-secondary students tend to prefer exams in multiple-choice rather than essay format, essay questions foster the preferred deep learning, while multiple-choice exams encourage surface learning (birenbaum, 2007). the literature on teaching economics, however, has shown that carefully written multiple-choice questions can test for in-depth understanding (buckles & siegfried, 2006). furthermore, multiple-choice and essay questions measure different dimensions of knowledge, so it is optimal to ask both types of questions on economics exams (becker & johnston, 1999; chan & kennedy, 2002). the literature on assessment considers both multiple-choice and essay exams inferior to less conventional assessment methods such as self-assessment, peer assessment, computer-based assessment, and portfolios (alquraan, 2012). traditional assessment methods have been criticized for not offering students sufficient flexibility and control over the assessment process (irwin & hepplestone, 2012). 42 | journal for economic educators, 17(1), 2017 42 while students appear to favor new and innovative assessment methods that improve learning outcomes (bevitt, 2014; sternberg, penn, & hawkins, 2011), these methods tend to be more costly to implement than traditional paper-and-pencil exams (alquraan, 2012). furthermore, many modern methods, such as portfolios and oral examinations, are often impossible for larger class sizes. this implies that finding other ways to improve flexibility in course assessment would be valuable. aside from the high costs and difficulties in applying alternative assessment methods, the traditional assessment processes is often associated with anxiety. two types of students suffer test anxiety (birenbaum, 2007). one type knows and understands the course material, but suffers interfering thoughts that restrict the process of retrieving relevant information during tests. the other type lacks effective study strategies to acquire the necessary knowledge to tackle a test. regardless of the type, a more flexible grading scheme in terms of weights assigned to different assessment components may reduce anxious feelings about the course and lead to improved performance and higher student satisfaction. this study adopted a flexible grading scheme based on frequent testing and assignments in order to realize some of the benefits of alternative assessment methods (i.e., reduce student stress and increase their enjoyment) while maintaining student learning and retention in an unpopular principles of microeconomics course. a flexible multi-scheme assessment method the present study introduced a multi-scheme assessment method in an attempt to improve student motivation and attitudes by using an afl strategy that encourages deep learning and limits anxiety while remaining feasible for classrooms with limited resources. the principles of microeconomics course was chosen to test this method, because it is notorious as course dreaded by students and has a low average course mark. for example, at the institution where data were collected, the percentage of students who received grades d, f, and w (withdrawn from course) was reported as roughly 15% overall, whereas the dfw rate for principles of microeconomics is consistently among the “top 20” at well above 20% (personal communication, november 22, 2016). furthermore, the course is required or strongly recommended for many first-term university students as one of their first university courses. the low course average is partly due to the typical grading scheme that consists of a relatively small weight on homework assignments (10 to 20%), with the remaining course grade determined by performance in two midterm exams (20 to 30% each) and a final exam (30 to 40%). therefore, poor performance on any one of the exams has a significant negative impact on overall course performance. with heavy weighting on in-class testing, many students express stress and anxiety about learning the course material. to compound the problem of heavy weighting on tests, few students consistently perform at a high level throughout the course. some students perform well in the beginning and taper off toward the end as the course materials become more complex. other students require more time to get used to the course materials and perform better at the end compared to the beginning. in some cases, students suddenly “click” with the material only at the very end after performing poorly throughout the term. given that principles of microeconomics is known to have a low course average, low levels of student satisfaction, and high levels of student anxiety, it was an appropriate course in which to test a flexible multi-scheme assessment method with more frequent testing. 43 | journal for economic educators, 17(1), 2017 43 using the guidelines in gibbs and simpson (2004), this course used two strategies for assessment in higher education that support students’ learning: 1) a sufficient number of assessed tasks to capture adequate study time and effort as well as to engage students in productive learning activities; and 2) sufficient timely feedback relevant to the criteria for success in the course. flexibility in assigning weights to different assessment components is achieved by giving more tests. frequent testing provides students with more practice as well as more feedback on their understanding of the course material (gholami, 2014). frequent testing is a way to promote student learning by encouraging students to engage continuously in the course material. learning can also occur during testing (chan, 2016; richland, kao, & kornell, 2008). it can help prevent procrastination and last minute studying right before the final exam (anthis & adams, 2012; kerdijk, cohen-schotanus, mulder, muntinghe & tio, 2015). evidence shows that students enjoy frequent testing and believe they learn more from the course as a result (roediger & karpicke, 2006). frequent testing also allows assigning smaller weights to each test, reducing student anxiety associated with less frequent and bigger exams. this in turn helps to boost test performance (ali zarei, 2015). schrank (2016) found that frequent testing enhanced students’ experience and satisfaction with an introductory sociology course that the author described as popular and “widely admired” (p. 118). as with other formative tasks, frequent testing provides students with feedback, so they can assess how well they understand the material and determine topics for review (laverty, bauer, kortemeyer, & westfall, 2012). it can also improve students’ motivation (domenech, blazquez, de la poza, & mu˜noz-miquel, 2015). furthermore, feedback helps students to develop deep learning (holmes & papageorgiou, 2009). this study examines whether the adoption of a multi-scheme assessment method, incorporating frequent testing and feedback, could change the attitude and experience of students towards the principles of microeconomics course. our hypotheses are: the multi-scheme assessment method will (1) reduce students’ anxiety associated with the course (2) enhance students’ satisfaction from the course (3) affect students’ study strategies, and (4) provide better incentive for students to learn the course material this study assessed students’ attitudes toward the course in which the final course grade was determined by one of three grading schemes that gave the student the highest grade. the grading scheme replaced the two midterm exams with five quizzes that were shorter in length and covered less material. one-fifth of the course grade was allocated to computer homework assignments that provided students with instant detailed feedback. these five sets of homework assignments served as practice for each of the five quizzes. the assignments were intended to make students accountable for their own learning before each quiz (brown & hirschfeld, 2008). all assignments and tests contained both multiple-choice and essay questions. these included computational and graphical analysis to ensure testing of different dimensions of knowledge and to increase opportunities for students to show their understanding of the materials through different test formats. three assessment schemes were offered with each student’s final course grade determined by the scheme that offered the highest grade. students did not need to decide on 44 | journal for economic educators, 17(1), 2017 44 which scheme they would use, as their marks were derived automatically from a preprogrammed formula. the three assessment schemes are summarized below: scheme 1 scheme 2 scheme 3* computer lab work 20% 20% 20% quizzes 4 (out of 5) @ 15% each =60% 2 (out of 5) @ 15% each =30% 4 (out of 5) @ 20% each =80% final exam 20% 50% 0% total 100% 100% 100% *scheme 3 only applies to students who attended all quizzes on the scheduled days and time. scheme 1 applied to students who showed consistent effort and performance over the course. the weight over each assessment component in scheme 1 is relatively even (15% to 20% each). scheme 2 is tailored to students who prefer less frequent in-class testing, (e.g., due to a busy work schedule), and to those who tend to show continuous improvement over time. scheme 3 is designed for students who perform better with shorter tests that cover a smaller quantity of material on each test. to ensure that all students were tested on all course materials, scheme 3 was only an option to students who wrote all five quizzes, because this scheme allowed students to opt out of the final exam. furthermore, since the computer homework assignments covered all course materials, all schemes ensured that students were responsible for learning all the course material. of the 165 students who received a grade for the course, 4.2% (7 students) ended up with scheme 1 (20% final exam), 8.5% (14) ended up with scheme 2 (50% final exam), and 87.3% (144) ended up with scheme 3 (0% final exam). from the students’ perspective, the flexibility of the assessment scheme offered each of them a better chance to obtain a higher course grade relative to fixed marking schemes by accommodating different study preferences/habits and personal schedules. from a pedagogical perspective, the hope is that the more flexible assessment scheme reduces student anxiety and aversion towards the course, and provides students with added motivation to devote more effort toward studying. improvement in student attitude and experience towards the course may also enhance student learning and retention of the course material. participants one-hundred forty-seven students completed satisfaction surveys about the flexible course scheme, once at the beginning of the course and once at the end. two different instructors used the scheme, resulting in two classes taught by one instructor and three classes taught by the second instructor. each class had approximately 35 students. we did not gather information about sex or age from participants, but the university records office reported that of 537 students registered in principles of microeconomics courses in the fall of 2015, most were first year students (n=461; 85.8%) and male (n=299; 55.7%) (personal communication, may 13, 2016). measures a student satisfaction survey was administered at two time points. the survey consisted of 11 questions, eight of which contained a 5-point likert scale, along with three open-ended 45 | journal for economic educators, 17(1), 2017 45 questions. an additional question asked students which of the three schemes they thought would result in their highest mark. the survey questions included, “how much difference do you think having a variety of marking schemes will make to your satisfaction with the course?” and “how much do you think your studying will be affected by having a variety of marking schemes?” the surveys took five to ten minutes to complete. procedure ethical approval was provided by the research ethics boards of both authors’ institutions. to avoid any conflict of interest and to prevent students from feeling an obligation to complete the surveys, the surveys were distributed in the classrooms by people who were not associated with the university. the course instructors were absent during the survey so that students did not feel coerced to participate. results chi-square analyses were conducted for each of the eight likert scale items to compare scores at the beginning versus the end of the semester. see table 1 for these results. table 1: chi-square statistics3 of the eight likert scale survey items question number frequency counts for answering 1,2, or 3 beginning of semester; n=146 (%) frequency counts for answering 1,2, or 3 end of semester n=147 (%) chi-square results for differences between beginning and end of semester 1 5 (3%) 5 (3%) n. a. 2 18 (12%) 5 (3%) chi-square (2) = 4.72, p<.10 3 36 (23% ) 35 (24%) n. a. 4 135 (92%) 138 (94%) n. a. 5 108 (74% ) 114 (78%) chi-square (4) = 18.8, p<.001. 6 18 (12% ) 9 (6%) chi-square (2) = 4.96 p<.10 7 36 (25% ) 21 (14%) chi-square = 29.53 (4), p<.001. 8 103 (71% ) 106 (72%) n. a. for each question we compared scores at one end of the continuum (1, 2, and 3) to scores at the other end of the continuum (4 and 5). however, because we reversed the polarity for some of the questions to avoid response sets (e.g., international encyclopedia of the social sciences, n.d.), the definitions of the anchor points are unique for each question. these definitions are covered below as we describe the results for each question in more detail. several of the questions reached the ceiling (92% or higher agreement) at which no differences were found. 3 the formula used to compute the chi-square statistic is 𝜒𝑐 2 = σ (𝑂𝑖−𝐸𝑖) 2 𝐸𝑖 , where o and e represents the observed and expected values respectively. 46 | journal for economic educators, 17(1), 2017 46 taken as a whole, the results of both the quantitative data and the open-ended answers of the satisfaction survey indicate that students were satisfied with the flexible marking scheme. we present evidence for each question of the survey. 1: how much do you like the idea of having a variety of marking schemes? don’t like very much like very much 1 2 3 4 5 at both the beginning and the end of the semester, 97% of students replied that they highly or very highly liked the idea of having a variety of marking schemes. 2: how much difference do you think having a variety of marking schemes will make to your satisfaction with the course? not very much difference very much difference 1 2 3 4 5 the chi-square analysis shows that 88% of students indicated they thought the flexible marking scheme would affect their satisfaction in the course at the beginning of the semester while 97% believed this at the end of the semester. there is a marginally significant trend for a difference between beginning and end of term when scores 1-3 are collapsed and compared against scores 4 and score 5. the trend is toward very much difference in their satisfaction in the course, as many more students chose 5, but fewer students chose 4 or 1 at the end of the semester. 3. how much difference do you think the different marking schemes will make to your performance on the course? not very much difference very much difference 1 2 3 4 5 at the beginning of the semester, 23% of students reported they believed the flexible marking scheme would not make much difference to their course performance. at the end of the semester, 24% reported that they did not think the flexible marking scheme made much difference to their performance. the difference is not significant. 4. how confusing do you think it is to have a variety of marking schemes? not very confusing very confusing 1 2 3 4 5 there was no significant difference between the beginning and the end of the semester in terms of confusion over the flexible marking scheme. at the beginning, 92% of students believed it was not confusing while 94% believed this at the end of the semester. 5. how highly would you recommend this variety of marking schemes for other courses? highly recommend not recommend at all 1 2 3 4 5 47 | journal for economic educators, 17(1), 2017 47 there was a small, but statistically significant difference in recommendations of the flexible marking scheme from beginning to end of semester based on the chi-square analysis. at the beginning 74% were likely to recommend a flexible marking scheme vs. 78% at the end of the semester, chi-square (4) = 18.8, p<.001. students moved from selecting high scores (4 & 5) at the beginning of the semester toward selecting lower scores at the end of the semester, indicating an increased likelihood of recommending flexible marking schemes for other courses. 6. if you were able to choose, how likely would you be to choose a section that had a variety of marking schemes over a section that only offered one marking scheme? not very likely very likely 1 2 3 4 5 at the beginning of the semester, 88% of students indicated they were likely to choose a section of the course that had a flexible marking scheme compared to 94% at the end of the semester. this is marginally significant for a change in likelihood when answers 1-3 are collapsed, chisquare (2) = 4.96, p<.10. students moved their answers more from 1 to 5. this indicates a shift toward greater likelihood to choose a course with a variety of marking schemes. 7. how much do you expect to enjoy this course as compared to courses that do not use a variety of marking schemes? enjoy much less enjoy much more 1 2 3 4 5 at the beginning of the semester, 75% of students believed they would enjoy the course more since it had a flexible marking scheme. this compares to 86% who believed this at the end of the semester. this was a significant difference, chi-square (4) = 29.53, p<.001. the shift from beginning of term to end of term was from lower numbers to higher numbers. this indicates that students believed the flexible marking scheme helped them to enjoy the course more than they expected to. 8. how much do you think your studying will be affected by having a variety of marking schemes? very much change not very much change 1 2 3 4 5 there was no perceptible change in the number of students who believed their studying would be affected by having a flexible marking scheme instead of a fixed one. at the beginning of the semester, 71% believed this compared to 72% at the end of the semester. 8a. in what ways has your studying has been affected? this open-ended question revealed that 55 of 147 students (37%) said they studied harder/more/more consistently. six students said they studied less or put in less effort, because they did not need to worry about marks when there were so many opportunities to improve. 48 | journal for economic educators, 17(1), 2017 48 9. what do you like best about having different marking schemes? at the end of the semester, 14 students (out of 147; 10%) mentioned less stress or pressure was a benefit of the flexible marking scheme. sample answers included, “the flexibility it allows, and the reduction in stress caused by being able to measure marks in different ways,” “have to study more for the quizzes and show up to every class so i do not have extra exam stress”, and “it makes the course less stressful, and easier to get the higher mark”. not having to take a final exam was a motivating factor for a number of students; 42 out of 147 students (29%) mentioned this. typical comments included, “i felt like i had to be much more prepared for each quiz to be able to use a marking scheme with a lower value for the final” and “i have kept up with the course work because i am motivated not to write the final as i am not good at writing finals. this helped me understand the course material better.” 10. what do you think is the worst feature about having different marking schemes? twenty three of 146 students (15.8%) at the beginning of the semester and 19 of 147 students (12.9%) at the end of the semester said that having different options of marking schemes could be confusing. sample comments include, “people may be confused,” “confusing at times and tends to cause me to overthink,” and “somewhat confusing but once you’re used to it everything is fine.” 11. which marking scheme do you think will lead to your highest mark? scheme 1 scheme 2 scheme 3 (20% final) (50% final) (no final) in the beginning of the semester, 109 of 146 or 74.7% of students thought scheme 3 with no final exam would lead to the highest mark, compared to 118 of 147 (80.3%) students at the end of the semester. very few students thought scheme 2, with a 50% weight on the final exam, would lead to the highest mark both in the beginning (5.5% of students) and at the end (4.1% of students) of the semester. discussion the purpose of this paper was to explore whether an assessment scheme increased students’ motivation and reduced their anxiety in principles of economics courses. we also wanted to know whether the multi-scheme assessment method would affect students’ study strategies. the evaluation scheme provided flexibility in terms of weights assigned to various assessment components in the course. overall, students appear to like the flexibility offered by the multi-scheme assessment method very much. the results further show that this attitude was consistent at the beginning and at the end of the semester. as for level of anxiety, the written comments provided some support for students’ enjoyment of the multi-scheme assessment method. they frequently mentioned reduced stress or anxiety (17.8% and 27.2% in the beginning and end of semester, respectively) as benefits of the flexible scheme. studying strategies appear to change only moderately based on the likert scale instrument. about two-thirds of students (67% and 63% in the beginning and end of semester, respectively) gave some indication in their written comments that the multi-scheme assessment method motivated them to keep up with the course throughout the term. 49 | journal for economic educators, 17(1), 2017 49 while the students certainly seemed to enjoy the flexibility offered by the multi-scheme assessment method, the current study was only tentatively able to identify the reasons for this. in written comments, students claimed they appreciated the opportunity to avoid the final exam (35.6% and 39.5% in the beginning and end of semester, respectively); believed the flexible scheme increased performance and success in the course (30.1% and 31.3%); and provided flexibility (36.3% and 40.8%). however, we are unable to determine which components of the scheme account for their satisfaction. for example, the possibility of avoiding the final exam is a component of the assessment method. such a feature can increase motivation to study consistently throughout the semester and it can reduce stress associated with taking the course. further research should investigate whether merely removing a final exam is sufficient to obtain such high levels of satisfaction. although there is debate in the literature about the value of final exams (e.g., glass, ingate, & sinha, 2013; khanna, badura brack, & finken, 2013; szpunar, mcdermott, & roediger iii, 2007), research on frequent testing and retention suggests that students may learn and remember as much from courses using this method as from those with a heavily weighted final exam. nevertheless, the impact of the flexible assessment method on student learning remains unclear. for example, will a student be less likely to remember the course material without writing the final exam, or by writing a final exam that carries only a small weight in the course grade? it is possible that students feel less incentive to study (and thus remember the material) if they expect the exam will not count for very much. the data used here, unfortunately, does not constitute a large enough sample to analyze the issue of information retention. of the 165 students who received a grade, only 25 wrote the final exam, as the vast majority managed to complete all the assignments and quizzes. four, seven, and fourteen students ended up using the final exam to account for 0% (average mark on the final exam = 72.82), 20% (average mark = 44.53), and 50% (average mark = 61.5) of the course grade, respectively. within this small sample, students who wrote, but did not end up using, the final exam to account for anything in their course grade earned an average mark that was much higher than that of their counterparts. if the final exam indicates how well students retain course information, then this may imply that students who keep up with studying throughout the term remember the material best. however, the seven students who ended up with the final exam counting for 20% had a lower average mark than the 14 students who used the final exam for 50% of their course grade. this may imply that students have less incentive to study for the final exam when the weight of the final exam is low. student learning and information retention in relation to the flexible assessment scheme is an important issue that requires further research. conclusion this study sheds light on the potential of multi-scheme assessment methods to reduce the long-standing negative perception associated with principles of economics courses. given that students indicated a strong preference for a flexible marking scheme compared to a fixed one, we recommend that courses in other disciplines investigate its use. although previous research suggests that frequent tests improve student performance (bangert-drowns et al., 1991; domenech, et al., 2015; laverty et al., 2012), future research could examine whether students’ course marks are affected by these changes in motivation and anxiety. 50 | journal for economic educators, 17(1), 2017 50 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struyven, k., f. dochy & s. janssens. 2005. “students’ perceptions about evaluation and assessment in higher education: a review.” assessment & evaluation in higher education, 30(4): 331-347. watts, m., & w. bosshardt. 1991. “how instructors make a difference: panel data estimates from principles of economics courses.” review of economics and statistics, 73(2): 33640. wiliam, d. 2011. “what is assessment for learning?” studies in educational evaluation, 37(1): 3-14. 1 |journal for economic educators, 18(1), 2018 surpluses, transfers, deadweight loss and blueberries ellen sewell1 abstract the two big ideas around which an introductory microeconomics course should be constructed are efficiency and equity. policy decisions generally affect both. this paper demonstrates that a simple analysis of government intervention in the blueberry market illustrates the concept of deadweight loss and the impact of market intervention on efficiency. the division of the deadweight loss, combined with transfers, provides the basis for weighing the impact on equity. a fuller understanding of these concepts demonstrates the need to balance equity and efficiency considerations in the public policy arena. these concepts and their application are well within the reach of introductory students. key words: efficiency, equity, deadweight loss, consumer surplus, producer surplus jel classification: a22 introduction a somewhat uncomfortable truth is that most principles of economics students do not progress beyond the introductory course(s). for them in particular, teachers of economics have only a brief opportunity to introduce the economic way of thinking, including the basic tools needed to gain a richer insight into public policy and the society in which they reside. public policy debates center on the issues of efficiency and equity. these are the two big ideas around which an introductory microeconomics course should be constructed. academic economists have been somewhat reluctant to address questions of equity because the concept is dependent upon individual values. so equity considerations have traditionally been scarcely mentioned at the principles level. a cursory presentation of the current income (and sometimes wealth) distribution is often all that gets included. recently, equity considerations have moved closer to the forefront in the public policy arena. while it may be inappropriate for an economist to impose values on the audience, it is certainly appropriate to provide a framework for understanding issues of equity. an analysis of efficiency, of course, has always been the backbone of a micro principles course. an essential concept for the understanding of both efficiency and equity is deadweight loss. fifteen years ago, deadweight loss was introduced in every leading text for an introductory microeconomics course. today, all of the leading u.s. texts argue that the competitive market output is, in general, socially optimal, and that any deviation from this output results in an inefficient allocation of resources, but often the discussion abruptly ends there. it should not. the coverage of deadweight loss has suffered a slow decline at the introductory level. admittedly, there are well recognized problems in the precise measurement of consumer surplus and hence deadweight loss. according to hausman (1981), the controversy over measurement was 1 assistant professor of economics, the university of north carolina at charlotte, 9201 university city boulevard, charlotte, nc 28223. 2 |journal for economic educators, 18(1), 2018 once sufficiently severe to cause both paul samuelson and ian little to conclude that the economics profession would be better off without these concepts. yet both concepts are key inputs into public policy decisions. at the introductory level, only the very brightest student will be concerned by the possibility of non-constant marginal utility of income and its consequence. that problem can be effectively assumed away, as marshall (1920) himself did.2 furthermore, measurement problems pale against the need for students to recognize that the theoretical concepts being studied can be applied in practice. blueberries in the summer of 2016, an exceptionally abundant crop of blueberries, specifically wild berries in maine, depressed the market price. the federal government through the department of agriculture stepped in to support a price above the equilibrium market price by purchasing 30 million pounds of blueberries.3 this intervention in the blueberry market was brought up by a student very early in an intermediate course that summer when the topic of market intervention was first introduced. he had noticed a picture online of a bear eating blueberries out of a trash container at a local foodbank. while the government had made efforts to distribute its purchased berries to organizations providing food to the poor, inadequate refrigerator/freezer capacity had forced some of the recipients to dispose of many of the berries. the student wanted to know whether the imposition of a limitation on production harvesting in the case of wild berries would have been a better alternative than the purchase and subsequent destruction of the berries. this was a perfect opportunity to encourage the students to apply some of the basic concepts that were presumably mastered at the principles level. the students were asked how an economist would assess the adverse consequence(s) of the government intervention, assuming for simplicity, that all of the surplus berries were destroyed. they were also asked whether a restriction of output by the same 30 million pounds would have had a greater or smaller adverse impact and by how much as well as what the impact on equity would be? in the resulting discussion, it became quite clear that students lacked the tools to answer any of these questions. deadweight loss in the case of an output restriction, the blueberry analysis should have been straightforward, but only if these students had been introduced to the concept of deadweight loss. traditionally, the concept was almost universally included in introductory micro texts to illustrate the social cost of monopoly. harberger’s (1954) famous triangle applies just as effectively in this case as in the case of a restriction in output due to monopoly. today, the few texts that introduce the concept now often called social welfare loss monopoly is where it is introduced. most commonly it is 2 in book v, chapter ii (page 195 in the eighth edition), marshall recognizes that in his calculation of consumer surplus, ”we allowed for the diminution in the buyers' need of corn [its marginal utility to them] as the amount bought increased. but we did not allow for any appreciable change in their unwillingness to part with money [its marginal utility]; we assumed that that would be practically the same…” 3 http://boston.cbslocal.com/2016/04/15/maine-wild-blueberries-usda-government-buying/ 3 |journal for economic educators, 18(1), 2018 simply the identification of a shaded, roughly triangular area.4 the absence of elaboration results in a tremendous missed pedagogical opportunity. the social damage from any restriction of output below the socially optimal output can be identified using simple cost-benefit analysis. this approach is intuitively plausible and, because it avoids the need to introduce surpluses, it can be readily incorporated into a presentation for high school students or non-majors. the social welfare loss is simply the excess of value over cost on those units that should have been produced, but were not. a pedagogical bonus is the chance to review and emphasize that the integral of marginal cost, the area under the competitive supply curve, is variable cost. equity considerations allocative inefficiency and deadweight loss from a restriction of output may be identified using only simple cost-benefit analysis, but the impact on equity requires the introduction of consumer and producer surplus. this allows a division of the deadweight loss between the two sides of the market and identifies the associated transfer. the harm to consumers is the full loss of consumer surplus with a portion of that loss transferred to suppliers. the benefit to providers is the transfer less the portion of the deadweight loss associated with supply. while the deadweight loss is comparable for a restriction of output due to monopoly or a government quota, there are differences worth considering involving equity. in the case of blueberries, there are intra-group transfers as well. how is the output allowed under the quota distributed across growers? growers awarded a quota benefit, while those denied one clearly lose.5 this discussion provides an excellent opportunity to introduce another important concept that appears in few introductory texts: rent-seeking, or socially unproductive expenditures designed to secure a transfer. suppose, for example, that blueberry farmers expended resources lobbying the government to impose a quota. then part of the previously identified transfer must be added to the deadweight loss and deducted from the net benefit to producers.6 overproduction an advantage of approaching deadweight loss through costs and benefits is that the extension to the case of overproduction is straightforward. the deadweight loss as the excess of social cost (the area under the supply curve) above social benefit (the area under the demand curve) on those units which are being produced, but should not be, can be readily seen. graphically, this is simply the roughly triangular area to the right of the equilibrium point and bounded by demand, supply and output. at an output of q1, this is the shaded area to the right of the equilibrium point in the diagram below. 4 the concept of deadweight loss is included in the advanced placement curriculum for microeconomics, but tests from the past five years focus only on the identification of harberger’s triangle. 5 it might be insightful to discuss whether a quota allocation based on a typical year’s output is more equitable than allocations based on a lottery. 6 a bright student once asked whether this presumes that lobbyists have an alternative productive use for their time. 4 |journal for economic educators, 18(1), 2018 the analysis in terms of surpluses is considerably more challenging.7 the deadweight loss is solely a function of output, but consumer and producer surplus are also dependent upon price. further, for an output beyond the equilibrium quantity, an assumption must be made as to whether price is determined by demand (p1 in the diagram above), by supply (p2), or is somewhere inbetween. an intermediate student should be able to demonstrate that deadweight loss is unaffected by price, but that a difference in price alters the distribution of the full surplus between consumers and producers.8 while this exercise demonstrates the distinction between efficiency and equity, it is likely beyond the reach of an introductory student. more blueberries the standard analysis of the consequences of overproduction makes an assumption that is not appropriate for the analysis of the blueberry market. that assumption is that the quantity produced is also the quantity consumed, so that the social value of the output is the full area under the demand curve up to q1 in the diagram, where q1 is the quantity both produced and consumed. in the case of blueberries, there is a gap between the quantity produced and the quantity consumed. if p2 is the target price, q1 berries are produced, but only q2 are demanded and consumed. the difference, q1− q2, are destroyed. consumer surplus is now only the area under the demand curve above p2. at this point, the overall impact of the intervention is explained most easily by breaking the output into those units that enter the market and are consumed, and those that are destroyed. providing an output of only q2 units to the market results in the familiar deadweight loss from under-provision, or the shaded left triangle in the diagram above. the remaining q1-q2 units are 7 for many years i wondered why many students could correctly identify the deadweight loss associated with underproduction, but could not extend that analysis to overproduction. i suspect this is because deadweight loss was presented to them only in terms of surpluses and the extension in those terms is quite challenging. 8 the analysis in terms of surpluses is complicated by the recognition that one of them may now be negative for some quantity. price quantity s d p2 p1 q* q1 q2 5 |journal for economic educators, 18(1), 2018 destroyed. the deadweight loss for these units is simply the waste of resources used to produce them. the economic cost of these units is the area under the supply curve, or the integral of marginal cost, for those units. adding the two components, the full deadweight loss is the familiar triangle from under-provision plus the relevant area under the supply curve.9 this result is intuitively appealing to students. where allocative efficiency is concerned, the only difference between allowing only q2 units to be produced, resulting in a market price of p2, or buying and destroying the surplus berries at the target price of p2 is the economic cost of producing the extra berries. the difference in social welfare loss is simply the area under the supply curve between q2 and q1. but what about equity? farmers are clearly better off with the purchase of the surplus berries at a price of p2 than with a restriction of output at q2.10 government expenditure on the berries is p2 (q1-q2), but costs also are incurred in the production of these berries. farmers are better off by the amount of the additional revenue minus the additional cost, or the producer surplus on the q1-q2 units sold to the government. this is simply the area between p2 and the supply curve for the range of output between q2 and q1. and, of course, taxpayers are worse off by the amount of the government expenditure. but here, we need to remember that the purpose of the price support was to benefit farmers all along. at this point, an attentive student is bound to ask how the analysis would be altered if the surplus berries had been successfully given to food pantries or distributed to the poor. surely society is better off relative to destruction of the berries, but how much better off? giving the surplus berries to food pantries would have reduced the deadweight loss by as much as the consumer surplus that would now be realized on those berries. this could be as large as the area under the demand curve between q2 and q1. but what is then left? production and consumption are again equal, and the resulting deadweight loss is the right hand triangle associated with overproduction. deadweight loss is only a function of output as long as consumption and production balance and the output is optimally distributed. the discussion of reduction in deadweight loss when the surplus berries are given away, rather than destroyed, provides an opening for a discussion of the impact of the method of distribution on deadweight loss. if the surplus berries are priced at zero, then quantity demanded exceeds q1. maximum consumer surplus on these berries requires that they be distributed to those with the highest reservation prices. if some berries are distributed to consumers along the portion of the demand curve below p1 then consumer surplus falls and deadweight loss increases. allowing the market distribution of a good assures consumption by those with the highest reservation prices, minimizing or eliminating deadweight loss. with the mention of food pantries, it is difficult to suppress concerns of equity. economists are in no better position to define equity than anybody else. society must grapple with whether a transfer from one group to another is equitable. policy makers must recognize that there are often tradeoffs between efficiency and equity. the purchase of blueberries with distribution to the poor adversely impacts efficiency, but this damage could be partially (or fully) offset through improved 9 again, the identification of deadweight loss by examining the changes in consumer and producer surplus resulting from the program is challenging to the average intermediate student. they have difficulties dealing with the new market participant, namely the government. they can be directed toward the correct conclusion by pointing out that the government expenditure on the q1-q2 units is a mere transfer to producers. 10 it was pointed out that some bears were apparently better off as well. 6 |journal for economic educators, 18(1), 2018 equity. farmers benefit as do those low income recipients of free berries. the impact of any policy on efficiency and equity must be recognized and balanced by policymakers, as well as voters. and this should be understood by students of economics. price floors and ceilings a second topic area where deadweight loss sometimes arises in the texts, although more typically at the intermediate level rather than in the introductory books, is the analysis of price ceilings and price floors. the analysis of a price ceiling is more straightforward, because production is equal to consumption. it results in the familiar deadweight loss due to underproduction. but like any price below the equilibrium, the ceiling results in a shortage. this is a perfect opportunity to introduce the concept of black markets.11 for reasons unclear to me, students seem excited, even fascinated, by this topic.12 this provides another chance to emphasize that free exchange minimizes deadweight loss by ensuring that those with the highest reservation prices receive the good. the concept of transaction costs can also be introduced to explain why all mutually beneficial exchanges do not occur.13 the analysis of a binding price floor poses the same challenges as the target price discussed above. if consumption and production balance at the mandated price, then the resulting deadweight loss from a price floor set at p2 is the shaded left triangle in the diagram. but this requires that no more is produced than consumers are willing to purchase at p2. one could reasonably argue that this is the case with haircuts, medical care, and any services where quantity produced and quantity consumed must coincide. since the surplus goods are not produced, no costs are incurred for those units. if quantity produced exceeds quantity sold and consumed, then the analysis is equivalent to the case of the surplus blueberries being unsold or destroyed. costs of production are incurred with no associated benefit to consumers. several of the leading intermediate microeconomics texts (but not all) recognize that the deadweight loss from a price floor could exceed the familiar triangular area to the left of the equilibrium point but stop short of explaining why or by how much.14 again, this is a missed opportunity to address the impact on both efficiency and equity. conclusions few introductory students, or even more advanced majors, are excited by economic theory per se. they are only fully engaged when they are convinced of its applicability to the world around them. the ability to analyze public policy proposals or decisions empowers them. their enthusiasm blooms. public policy debates focus on both efficiency and equity. while economists cannot set the standard for an equitable distribution of resources, they are generally well aware of the equity implications that must be balanced against efficiency considerations. 11 authors differ in their use of the term black market. for some authors, the terms "black market" and "secondary market" are used interchangeably. for others, the term "black market" applies only to the case where transactions are illegal. 12 a relevant paper grounded in basic economics and accessible to stronger introductory students is “the economics of ticket scalping” by jimmy atkinson. my students enjoyed the paper and it sparked a lively discussion. http://jimmyatkinson.com/papers/the-economics-ofticket-scalping/. 13 sadly, the concept of pareto optimality has also faded from the leading introductory texts. a review of 10 of the leading texts did not turn up a single mention. 14 see, for example, the leading text by pindyck and rubinfeld (page 324 in the 8th edition). 7 |journal for economic educators, 18(1), 2018 deadweight loss is essential to the understanding of the consequences of any departure from the allocatively efficient output of a good. as such, it is also critical to the understanding of the beauty of competition and capitalism, but the concept of deadweight loss has been slowly vanishing from the introductory microeconomic texts. without it, there is little indication to the introductory student that the damage to society from allocative inefficiency can be quantified. with the question of equity moving to the forefront in public policy debates, the division of deadweight loss, combined with transfers, allows the students to understand the full picture. these concepts are not beyond the grasp of the introductory student. a single class period spent discussing the impact of a simple purchase of blueberries by the government resulted in a noticeable and lasting increase in engagement and enthusiasm. students were empowered to understand the basis for public policy debates and decisions. economics had moved beyond the textbook and into the public policy arena. references atkinson, jimmy. 2004. “the economics of ticket scalping.” jimmyatkinson.com. <http://jimmyatkinson.com/papers/the-economics-of-ticket-scalping>. accessed 5 january 2018. harberger, arnold c. 1954. "monopoly and resource allocation." american economic review. 44 (2): 77-87. hausman, jerry a. 1981. “exact consumer’s surplus and deadweight loss.” american economic review, 71(4):662-676. marshall, alfred. 1920. principles of economics. 8th edition. london: macmillan and co. pindyck, robert s. and daniel l. rubinfeld. 2013. microeconomics. 8th edition. boston: pearson. whittle, patrick. 2016. “why the government will spend up to $13 million on maine blueberries.” boston cbs. < http://boston.cbslocal.com/2016/04/15/maine-wildblueberries-usda-government-buying/>. accessed 12 august 2016. http://jimmyatkinson.com/papers/the-economics-of-ticket-scalping http://boston.cbslocal.com/2016/04/15/maine-wild-blueberries-usda-government-buying/ http://boston.cbslocal.com/2016/04/15/maine-wild-blueberries-usda-government-buying/ 1 |journal for economic educators, 21(2), 2021 breaking down the language barrier: using pop culture from across the globe to teach microeconomics wayne geerling 1 jadrian j. wooten 2 g. dirk mateer 3 florencia gabriele 4 abstract economic educators have been teaching with pop culture for decades, but the idea of using foreign-language teaching resources to create a more inclusive and diverse classroom has only recently been taken up. this paper builds on the work of wooten et al. (2020), who have shown how k-pop can be integrated into an english-language classroom. we expand on that work by compiling a set of 11 teaching guides using material from 11 different countries that demonstrate economic concepts commonly taught in a principles of microeconomics course. al-bahrani (2020) has called on educators to take a deliberate approach to diversifying their lecture material. it is our hope that, with time, broadly diverse and inclusive media will be ubiquitous when students are introduced to economics. key words: inclusive teaching, diversity, media, teaching economics jel classification: a20, a21 introduction economic educators have started to realize the importance of taking a proactive role in creating a more inclusive and diverse classroom. while researchers debate the cause of the lack of diversity in the profession, a number of explanations have been proposed for the profession’s “leaky pipeline.” one proposed recommendation to improve diversity focuses on educators taking a deliberate approach to diversifying their lecture material (al-bahrani 2020; bayer et al. 2020a; bayer et al. 2020b; benjamin, cohen, and hamilton 2020). this opportunity seems promising given that more than half of all instructors say they currently don’t reference diversity and inclusion in their introductory classroom (asarta, chambers, and harvey 2020). if educators were already extensively addressing diversity, calls for new material would be unwarranted. al-bahrani (2020), however, specifically calls for the development of resources for educators teaching introductory courses. these resources should help educators increase diversity, inclusion, and a sense of belonging among many first-year students. while only about 2% of students go on to major in economics (siegfried 2020), targeting diverse resources to firstyear students should increase the probability that a student will take additional courses, which may then lead to more students considering graduate school and joining the economics profession. 1 associate professor, department of economics, monash university, room e 970 menzies building, clayton, victoria 3800. 2 associate teaching professor, department of economics, penn state university, 315 kern graduate building, state college, pa 16801. 3 senior lecturer, department of economics, university of texas at austin, 2225 speedway, austin, tx 78712. 4 lecturer, department of business and economics, emmanuel college, 400 the fenway, boston, ma 02115. 2 |journal for economic educators, 21(2), 2021 while there have been calls to improve representation in textbooks (stevenson and zlotnik 2018), those changes require significantly more resources from authors, publishers, and educators alike. in time, those shortcomings will likely be corrected, but there are marginal changes that educators can adopt today to improve diversity in their teaching material. stowe (2010) suggests that the economics field may be able to attract different personality profiles simply by changing the instructional method. the following teaching guides outline a set of 11 media clips, representing 11 different countries, that demonstrate economic concepts commonly taught in a principles of microeconomics course. similar to the work of hobbs and wooten (2020), each teaching guide includes clip information along with multiple assessment questions that instructors can assign as part of an in-class discussion or integrated through a course management system to be used with discussion boards. literature review economic educators have a strong track record of not only identifying relevant media that can be used to teach economics but also developing innovative ways to incorporate that media into the classroom (wooten et al. 2020). nearly all of the previous work, however, has focused on english language media that was predominantly produced in the united states. media agglomerators like dirk’s media library (mateer 2012) or the economics media library (wooten 2018) contain a small number of foreign language media, but it’s sparse in the grand scheme of the overall collections. using media in the classroom is only one of the many ways that educators can bring active learning strategies into the classroom to make lectures more engaging (calhoun and mateer 2012) and to help students grasp economic content more quickly (hoyt 2003). the use of foreign-language material to teach economics has been almost non-existent. the major academic journals in economics pedagogy are based in the united states with authors from anglo-centric universities, primarily the united states, australia, and the united kingdom. the leading global box office and music scene for the past few decades has been the united states (krueger 2019), but it is worth noting that bollywood, the indian hindi-language film industry based in mumbai, now makes more films and has a larger audience than hollywood.5 the lack of diverse teaching material appears to be driven primarily by a lack of demand given that so much is available in an instructor’s native language. it’s not for a lack of supply. this could partly explain recommendations for a proactive approach to teaching with diverse material since english language material is so readily available. other countries have vibrant music and film scenes as well as creative commercial outlets, but there has previously been a language mismatch between students and the foreign media. due in part to the growth of streaming services like netflix and spotify, the barriers to consuming foreign-language media have fallen and are projected to continue falling (krueger 2019). wooten et al. (2020) have already shown how korean music (k-pop) can be integrated into an english-language classroom. the teaching guides below are intended to reduce the cost of introducing foreign language media by identifying foreign-language media with english subtitles, so that an instructor can diversify their curriculum while simultaneously ensuring that students understand the dialogue. 5 https://au.finance.yahoo.com/news/bollywood-hollywood-or-chinese-cinema-which-film-industry-makes-themost-052802841.html 3 |journal for economic educators, 21(2), 2021 simply identifying foreign-language media that can be used in the classroom isn’t sufficient for improving learning outcomes unless that media is integrated into the course with active learning techniques. while the majority of educators continue to lecture as their primary form of course instruction (asarta, chambers, and harter 2020), many also recognize it is not the most effective method (goffe and kauper 2014). the primary reason for not incorporating more active learning in the classroom is the cost of identifying and preparing that material. each of the teaching guides below includes a set of assessment questions to help an instructor more easily integrate the material consistent with their preferred active learning approach. the delivery method of each of the teaching guides we have developed focus on integrating the clips into the course through classroom response systems (calhoun and mateer 2012) or as think-pair-share activities (mcgoldrick 2012). the approach can be used in both small classrooms and large lectures with minor adjustments (buckles, hoyt, and imazeki 2012), or could be adapted to a variety of pedagogical approaches. there has been a growing emphasis on the publication of books by leading cognitive researchers that are targeted at improving pedagogy across all levels of instruction (agarwal & bain 2019; ambrose et al. 2010; brown 2014, lang 2016, miller 2014, willingham 2009). teaching guides the clips used in this paper cover a wide range of media, including anime, commercials, film scenes, music videos, and general videos from youtube. all of the scenes selected were chosen to complement the curriculum of a principles of microeconomics course. the teaching guides are mapped to a principles of microeconomics textbook and arranged in the same order as the textbook. while not all topics covered in a principles of microeconomics text have an accompanying teaching guide below, we cover many of the major chapters. to emphasize the truly global nature of the project, we decided to use media that are recorded in 11 different languages, one for each lesson plan. when choosing clips, we wanted to introduce important country-specific cultural elements. these clips are not just ‘from another country;’ they are ‘about another country’ and its culture. table 1 provides a summary of the 11 lesson plans contained in this section. we should emphasize that we are not expecting educators to use every single guide in a one semester course. each of the teaching guides are brief enough, so that they could be added to a course and only require 10 to 15 minutes of class time. these teaching guides are an opportunity for educators to make a marginal change to their course. interested instructors need not restructure their entire course around these guides, but rather make incremental adjustments to their existing pedagogical approach. the progression towards using more foreign-language clips in the classroom should be a gradual decision based on marginal analysis. table 1 topic title/company type length (min: sec) source country source language 1. incentives do it for denmark commercial 2:00 denmark danish 4 |journal for economic educators, 21(2), 2021 2. production possibilities frontier g.e.m, “tik tok” annotated music video 4:02 china mandarin 3. markets maeklong outdoor market youtube video 1:20 thailand thai 4. elasticity le trefle commercial 0:42 belgium french 5. market efficiency jojo’s bizarre adventure anime 2:39 japan japanese 6. externalities bts, “no” annotated music video 4:03 south korea korean 7. innovation volvo commercial 1:10 sweden swedish 8. monopolistic competition burger king commercial 1:30 argentina spanish 9. behavioral economics joris, “heart over head” annotated music video 3:27 germany german 10. information asymmetry volkswagen commercial 0:51 netherlands dutch 11. international trade pizza hut commercial 1:01 russia russian teaching guide #1: incentives clip title: spies travels, “do it for denmark” media type: commercial clip length: 2 minutes, 0 seconds clip link: https://criticalcommons.org/view?m=cjv7aa5up country: denmark https://criticalcommons.org/view?m=cjv7aa5up 5 |journal for economic educators, 21(2), 2021 language: danish summary: an advertising campaign aimed at increasing the birth rate in denmark. play the clip above and then have students work in groups to answer the following questions. 1. what are some of the costs of having a child? 2. according to the commercial, how many danish children are conceived on holiday? a) 50% b) 25% c) 10% d) 33% 3. the commercial incentivizes travel by offering anyone with a positive fertility test: a) free condoms for a year. b) the chance to win a new home. c) the chance to win free baby stuff and a child-friendly vacation. d) two around the world airline tickets. 4. explain why people have more sex on holidays. suggested answers: 1. when considering whether or not to have a child, couples typically think of the short-term costs (diapers, clothing, sleepless nights, baby food, etc) but those costs are relatively small compared to the long-run costs (which can amount to $250,000 or more in usd). there is also the opportunity cost of lost income to consider. 2. the answer is c (10%). spies travel is attempting to boost this percentage. 3. the answer is c. think about the incentives. answer a lowers the fertility rate, so it is incorrect. answer b would create a strong positive incentive to try to win the contest but that is not the correct answer in the commercial. answer c also provides the correct incentives to submit a positive result, since the winner receives free baby stuff and a child-friendly vacation. this is the correct answer. answer d is a positive incentive, but this option was not presented in the commercial. 4. when a couple is on holiday, the opportunity cost of leisure time is lower since they are taking time off from work. this frees up time to be with one another. all else being equal, couples will have more time for sex than they would at home and/or at work. teaching guide #2: production possibilities frontier clip title: g.e.m., “tik tok” 6 |journal for economic educators, 21(2), 2021 media type: annotated music video clip length: 4 minutes, 2 seconds clip link: https://criticalcommons.org/view?m=2quilkucv country: china language: mandarin summary: a song about infinite love throughout a lifetime, which is used as a metaphor for economic growth. play the clip above and then have students work in groups to answer the following questions6: 1. when g.e.m sings the following lines: “waiting for the sunset in paris, holding on to you under the eiffel tower”, she is illustrating the ________ between _______ and _______. a) tradeoff; past; present b) tradeoff; present; future c) tradeoff; past; future 2. what is the difference between capital goods and consumer goods? 3. how does the short-run production possibilities frontier illustrated below represent the tradeoff between consumer goods and capital goods? 4. based on the two hypothetical ppfs below, which country will likely experience higher economic growth in the long-run? illustrate your answer on the ppfs below. 6 the ppf diagrams in this lesson plan come from mateer and coppock (2020), p. 50. https://criticalcommons.org/view?m=2quilkucv 7 |journal for economic educators, 21(2), 2021 country a country b suggested answers: 1. the answer is b tradeoff; present; future. 2. capital goods are used to produce other valuable goods, unlike consumer goods which are typically used or consumed in the period in which they are purchased. examples of capital goods include buildings, factories, roads, machinery, computers and education. 3. if an economy wants to grow (shift its ppf to the right), it has to sacrifice some consumer goods to invest in capital goods. the slope of the ppf at any point shows that trade-off. 4. country b will likely grow more. sacrificing more consumption today allows a country to invest in capital goods, which means higher levels of growth in future. in contrast, country a has chosen to produce many consumer goods and fewer capital goods. therefore, its ppf will expand in the long run but by less than country b. country a 8 |journal for economic educators, 21(2), 2021 country b teaching guide #3: markets clip title: maeklong outdoor market media type: youtube clip clip length: 1 minutes, 20 seconds clip link: https://criticalcommons.org/view?m=it0gmhh6o country: thailand language: thai summary: a local market operates over train tracks, except when the train is scheduled to pass through the market. play the clip above and then have students work in groups to answer the following questions. 1. which of the following best describes the types of problems economics solves? a) resources have to be allocated among competing uses. b) consumers have infinite wants. c) governments cannot always deal with market failures. d) every decision an individual makes creates an externality. 2. in what ways does the maeklong outdoor market demonstrate the economic concept known as scarcity? 3. how has this particular market allocated its scarce resources? 4. the competitive markets model applies when three of the following conditions are met. which of these conditions is not required? https://criticalcommons.org/view?m=it0gmhh6o 9 |journal for economic educators, 21(2), 2021 a) there must be a lot of buyers. b) there must be a lot of sellers. c) the item traded must be a physical product. d) the buyers and sellers must trade identical products. suggested answers: 1. the answer is a. economics is the study of how scarce resources are allocated among competing interests. 2. scarcity is a finite limit on goods. people in thailand want transportation (the train), but they also want to be able to buy things from market stalls. there’s a limited amount of space in the area for both. 3. the train only runs through the town at certain times of the day, which leaves the space available during the rest of the day for the market. the residents have decided to allocate the space to the train when it’s passing through but allow the market to operate on the tracks at other times of the day. 4. the answer is c. markets also exist for services, like those provided by trains. teaching guide #4: elasticity clip title: le trèfle, “emma” media type: commercial clip length: 0 minutes, 42 seconds clip link: https://criticalcommons.org/view?m=0kvxuzqvk country: belgium language: french summary: a commercial for a popular brand of toilet paper in belgium. play the clip above and then have students work in groups to answer the following questions.7 1. in which of these circumstances would your demand for toilet paper be the most inelastic? a) toilet paper is a large share of your budget. b) your income is low. c) the number of substitutes is large. d) you are buying the toilet paper at a convenience store. 2. innovations, such as the ipad shown in the commercial, are good at replacing what types of products? 7 the diagrams in this lesson plan were created by the authors. https://criticalcommons.org/view?m=0kvxuzqvk 10 |journal for economic educators, 21(2), 2021 3. which of the following graphs best illustrates the elasticity of demand for toilet paper in the commercial? explain your answer in 2-3 lines. 4. what has happened to the elasticity of demand for toilet paper during covid-19? suggested answers: 1. the answer is d. answer a is incorrect. when an item comprises a large share of your budget, small changes in the price of the item have a greater material impact on how much you can purchase. answer b is incorrect. a low income (like answer a) means that toilet paper comprises a relatively large share of your budget, so your demand is elastic. answer c is incorrect, as more substitute products (like paper towels, wipes, and tissues) mean that the consumers have more choice. this makes demand more elastic. answer d is correct, as a convenience store does not carry as many choices as a supermarket, so the demand is more inelastic. also, people who frequent convenience stores are in a hurry and this makes the demand less elastic too since customers are more concerned about saving time than getting the lowest price possible. 2. this commercial shows how an ipad can replace the use of paper (for drawing, sticky notes, printing, and reading). however, even as wonderful as a tablet is, there are limits to how much paper use can be reduced. 3. the demand for toilet paper is perfectly inelastic in the commercial (expressed as a vertical demand curve). this is easy to observe since he realizes (belatedly) that he is out of toilet paper. therefore, the need is immediate and there are no good substitutes available to him. 11 |journal for economic educators, 21(2), 2021 4. during covid-19 the elasticity of demand became more inelastic. consumers were concerned about product shortages and this drove many people to hoard toilet paper. teaching guide #5: market efficiency clip title: jojo’s bizarre adventure: stardust crusaders haggling with joseph media type: anime clip length: 2 minutes, 39 seconds clip link: https://criticalcommons.org/view?m=2fk32fvwa country: japan language: japanese summary: joseph teaches viewers how to haggle for kebabs in a market. play the clip above. ask students to take notes on the specific values discussed in the clip, before answering the following questions: 1. how does the negotiating scene establish the market price? 2. what does consumer surplus measure? calculate joseph’s consumer surplus. 3. what does producer surplus measure? calculate the owner’s producer surplus. 4. calculate the total surplus generated from the exchange. suggested answers: 1. joseph negotiates with the owner of a kebab stand over the price of 5 kebabs. the owner is trying to establish joseph’s maximum willingness to pay, so starts with a high “foreigner price” of 1,000 yen. joseph is trying to identify the minimum price the owner would accept, so starts with a low offer of 250 yen. during negotiations, they go back and forth: the seller’s asking price falls; joseph’s willingness to pay rises. they finally settle on a price of 425 yen. 2. consumer surplus measures the net gain that accrues to the buyer. he was willing to pay 1,000 yen, but only had to pay 425 yen. consumer surplus = willingness to pay price consumer surplus = 1,000 yen – 425 yen consumer surplus = 575 yen 3. producer surplus measures the net gain that accrues to the seller. he was willing to accept 150 yen but received a higher price of 425 yen. producer surplus = price – willingness to sell producer surplus = 425 yen – 150 yen https://criticalcommons.org/view?m=2fk32fvwa 12 |journal for economic educators, 21(2), 2021 producer surplus = 275 yen 4. total surplus = consumer surplus + producer surplus total surplus = 575 yen + 275 yen = 850 yen teaching guide #6: externalities clip title: bts, “no” media type: annotated music video clip length: 4 minutes, 3 seconds clip link: https://criticalcommons.org/view?m=rchfnkcls country: south korea language: korean summary: the song is about the pressure south korean children face when it comes to school and grades. play the clip above and then have students work in groups to answer the following questions: 1. the costs or benefits of a market activity that affect a third party are called: a) externalities b) public goods c) club goods d) common-resource goods 2. does education create a negative or positive externality in this clip? 3. what are some of the negative externalities highlighted by bts? 4. how do these negative externalities impact south korea’s demographics and labor market? suggested answers: 1. the answer is a. 2. this clip focuses on negative externalities. 3. these include high suicide rates and medical costs involved in treating young people who drop out of education or the labor market. 4. south korea has the highest suicide rate of young people in the world: many young people simply can’t cope with the pressure to succeed or the fallout from failure and never complete https://criticalcommons.org/view?m=rchfnkcls 13 |journal for economic educators, 21(2), 2021 their studies or find a proper job. this imposes huge medical costs on society. many young south koreans hold off on getting married or having kids because of the pressure to prioritize education and establish a career. south korea’s current birth rates are among the lowest in the developed world. the ageing population has already created acute labor-market shortages and will have long-term consequences: a decline in productivity, economic growth and revenue, additional government outlays to cover rising health and pension costs. teaching guide #7: innovation clip title: tech insider, “volvo developed self-driving garbage truck” media type: video clip length: 1 minutes, 10 seconds clip link: https://criticalcommons.org/view?m=z6dqckgpb country: sweden language: swedish summary: volvo has developed a self-driving garbage truck that helps garbage collectors to be more productive. play the clip above and then have students work in groups to answer the following questions. 1. what impact will the use of self-driving garbage trucks have on the marginal cost of labor? a) the marginal cost of labor will fall. b) the marginal cost of labor will rise. c) the marginal cost of labor will rise then fall. d) the marginal cost of will remain constant. 2. do innovations, such as the self-driving garbage truck, reduce the pay of workers and lead to more or less employment? 3. what do you think will happen to the cost of providing garbage services once self-driving garbage trucks are used everywhere? 4. what will happen to the unemployed garbage workers when they are replaced by self-driving garbage trucks? suggested answers: 1. the answer is a. as labor becomes more productive, you can produce the same amount of output with fewer workers. thus, the marginal cost of labor falls. https://criticalcommons.org/view?m=z6dqckgpb 14 |journal for economic educators, 21(2), 2021 2. the impact on workers’ pay is not certain. in this case, technological innovation increases the marginal product of labor of the one remaining worker in this video. the worker complements the innovation by ensuring that the self-driving truck does not encounter an unexpected situation it is unable to handle. in most cases, the investments in innovation are designed to replace labor. we only see one worker assisting the self-driving garbage truck instead of two workers operating a traditional garbage truck. in this case, fewer workers would be employed in garbage collection. 3. volvo would not manufacture a self-driving garbage truck if it thought the new technology would be too expensive to be utilized. likewise, municipalities would not buy volvo garbage trucks if they thought that they could operate trash collection in a more economical way using the existing trucks. the answer here is that investments in capital that lead to innovations in technology often lead to reduced costs. 4. these workers become structurally unemployed. the workers will need to transition to new jobs. this requires the unemployed worker to be retrained for jobs in other fields. this process takes time and often results in a lower salary than before since they are not as experienced as they were before. teaching guide #8: monopolistic competition clip title: burger king: a day without whopper media type: commercial clip length: 1 minute, 30 seconds clip link: https://criticalcommons.org/view?m=akvttlqt5 country: argentina language: spanish summary: burger king stops selling their signature sandwich so that customers will visit their rivals. play the clip above and then have students work in groups to answer the following questions. 1. what is the primary way burger king tries to differentiate themselves from mcdonalds? 2. how does product differentiation impact the demand curve for the product? 3. if a third restaurant opened down the street from burger king, what would happen to the demand for burger king burgers? a) an increase in demand for burger king. b) a decrease in demand for burger king. c) an increase in the quantity of burger king demanded. https://criticalcommons.org/view?m=akvttlqt5 15 |journal for economic educators, 21(2), 2021 d) a decrease in the quantity of burger king demanded. 4. what will happen to the market for burger king (and mcdonald’s) in the long run? a) both will eventually break-even as more competitors enter the market. b) both will lower their prices until average total cost is minimized. c) one of the firms will invest in a barrier to entry to maintain profits. suggested answers: 1. while both companies sell hamburgers, burger king offers flame-grilled burgers while mcdonalds does not. 2. product differentiation makes the demand curve steeper because it gives firms some market power over their product. it reduces the number of substitutes. 3. the answer is b. a new competitor would operate as a substitute for burger king, which would decrease the demand for burger king. a change in quantity demanded is based on a price change, which hasn’t happened yet. 4. the answer is a. the long run outcome of monopolistically competitive markets is that firms will break-even and earn no excess profit. unlike in perfect competition, this will not be where average costs are minimized. teaching guide #9: behavioral economics clip title: joris, “heart over head” media type: annotated music video clip length: 3 minutes, 27 seconds clip link: https://criticalcommons.org/view?m=9o5zpffc3 country: germany language: german summary: the main character must decide whether to stay with his girlfriend or leave and be on his own. play the clip above and then have students work in groups to answer the following questions. 1. how do standard economic models assume people behave? 2. what dilemma is the protagonist describing in the following lines: “whenever it is time to go, i miss the moment and stand still. the heart says stay. the head cries go.” https://criticalcommons.org/view?m=9o5zpffc3 16 |journal for economic educators, 21(2), 2021 3. which of the following is not one of the concepts from behavioral economics that can be used to explain why people stay in toxic relationships? a) prospect theory (loss aversion) b) status quo bias c) sunk cost fallacy d) mental accounting 4. is the outcome at the end of the song optimal? why/why not? suggested answers: 1. standard economic theory assumes that we behave rationally: making logical and consistent choices that maximize utility. 2. the protagonist is caught in a toxic relationship. his struggle is between emotion (heart) and logic (head). he knows he should leave his girlfriend, but he can’t. 3. the answer is d. mental accounting 4. behavioral economists use the term “bounded rationality” to explain why people make apparently irrational decisions. this results in a market failure with a sub-optimal outcome where he remains in a relationship that is toxic. teaching guide #10: information asymmetry clip title: volkswagen – buying a used car media type: commercial clip length: 51 seconds clip link: https://criticalcommons.org/view?m=znkfhhibs country: netherlands language: dutch summary: a father and son want to buy a car from an old woman, but it’s not visible how the woman used to drive the car. play the clip above and then have students work in groups to answer the following questions. 1. what do economists mean when they say that a market suffers from asymmetric information? 2. describe some other markets that may contain asymmetric information. 3. what is one way that the “lemons problem” in the used-car industry can be mitigated? a) raising the price of used cars. https://criticalcommons.org/view?m=znkfhhibs 17 |journal for economic educators, 21(2), 2021 b) hiring mechanics to sell used cars. c) requiring sellers to guarantee trouble-free cars. d) allowing owners to trade in their own cars when purchasing a used car. 4. what is the difference between moral hazard and adverse selection? suggested answers: 1. one party to the transaction has more information than the other side. that information is important for the product/service being traded and could influence the final price. 2. the best examples often occur in the case of “matching” issues, like when new college graduates are interviewing for jobs or when two single adults are trying to find partners. other examples occur in fields like health insurance or financial markets. 3. the answer is c. because the seller has more information about the quality of the car, the burden of a “lemon” should be placed on the seller. 4. adverse selection means that people with information make different choices depending on what they know about the product. a moral hazard deals with the risks people are willing to take based on the information they know. teaching guide #11: international trade clip title: soviet pizza hut media type: commercial clip length: 1 minute, 01 seconds clip link: https://criticalcommons.org/view?m=vrprwvfj4 country: russia language: russian summary: a family debates life after the fall of the soviet union after seeing mikhail gorbachev at a nearby table. play the clip above and then have students work in groups to answer the following questions. 1. what are the differences in overall market structure of the former soviet union and the united states? 2. given that pizza hut has now opened a store in russia, what does that suggest about russia’s ability to produce pizza? https://criticalcommons.org/view?m=vrprwvfj4 18 |journal for economic educators, 21(2), 2021 3. why do nations conduct international trade? a) some nations prefer to produce one thing while other nations produce different things. b) resources are not equally distributed among all trading nations. c) trade enhances opportunities for firms to be profitable. d) interest rates are not identical in both countries. 4. which of the following is not one of the arguments used for restricting trade between countries? a) retaliation b) specialization c) cheap labor d) diverse industries suggested answers: 1. the ussr was more of a command economy while the us leaned more toward a market economy. 2. if a us company is selling pizza to russians, it would suggest that russia has a high opportunity cost of producing pizza. it would also suggest that the us has a comparative advantage in producing pizza. 3. the answer is b. trade is based on comparative advantage, which looks at the opportunity cost of using resources to produce various items. 4. the answer is b. specialization is actually an argument in support of international trade. conclusion we provide 11 lesson plans designed to minimize the transaction costs for economic educators wishing to implement this novel approach. the microeconomic topics range from foundational coverage (incentives, the production possibilities frontier, markets, elasticity and market efficiency) to more advanced coverage (externalities, innovation, monopolistic competition, behavioral economics, information asymmetry and international trade). instructors need not adopt all the resources; they can incorporate individual topics incrementally. we see this manuscript as a small piece of a big rethink required to internationalize introductory courses in economics, so that u.s. centric students can better learn global perspectives, while at the same time providing a more inclusive learning environment for international students who undertake economics in the united states. acknowledgements the authors wish to thank david addison and michael smiddy for their insightful comments and feedback and nicola thomas for help managing the database, from which the clips for this project came. 19 |journal for economic educators, 21(2), 2021 references agarwal, pooja, k. and patrice m. bain. 2019. powerful teaching: unleash the science of learning. hoboken: john wiley & sons. al-bahrani, abdullah. a. 2020. “classroom management and student interaction interventions: fostering diversity, inclusion, and belonging in undergraduate economics.” ssrn working paper #3644803 http://dx.doi.org/10.2139/ssrn.3644803 accessed 23 march 2021. ambrose, susan, michael bridges, michele dipietro, marsha c. lovett, and marie k. norman., m. 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toronto.” aea papers and proceedings, 110: 299–303. boyle, austin and william l. goffe. 2018. “beyond the flipped class: the impact of researchbased teaching methods in a macroeconomics principles class.” aea papers and proceedings, 108: 297-301. brown, peter, henry l. roediger, and mark a. mcdaniel. 2014. make it stick. cambridge: harvard university press. buckles, stephen, gail hoyt, and jennifer imazeki. 2012. “making the large-enrollment course interactive and engaging.” in g. hoyt and k. mcgoldrick (eds). international handbook on teaching and learning economics. cheltenham: edward elgar. calhoun, joseph and g. dirk mateer. 2012. “incorporating media and response systems in the economics classroom.” in g. hoyt and k. mcgoldrick (eds). international handbook on teaching and learning economics. cheltenham: edward elgar. goffe, william l and david kauper. 2014. “a survey of principles instructors: why lecture prevails.” the journal of economic education, 45(4): 360-375. hobbs, kelsi and jadrian j. wooten. 2020. “teaching principles of microeconomics with the economics media library.” applied economics teaching resources, 3(1): 37-57. hoyt, gail. 2003. “how to make economics the fulfilling social science.” southern economic journal, 70(1): 201-206. krueger, alan. 2019. rockonomics: a backstage tour of what the music industry can teach us about economics and life. new york: broadway business. lang, james m. 2016. small teaching: everyday lessons from the science of learning. hoboken: john wiley & sons. http://dx.doi.org/10.2139/ssrn.3644803 20 |journal for economic educators, 21(2), 2021 mateer, g. dirk and lee coppock. 2020, principles of microeconomics, 3rd edition. new york: w.w. norton. mateer, g. dirk. 2012. “econ 1-0-what?” the journal of economic education, 43(4): 440. mcgoldrick, kimmarie. 2012. “using cooperative learning exercises in economics.” in g. hoyt and k. mcgoldrick (eds). international handbook on teaching and learning economics. cheltenham: edward elgar. miller, michelle d. 2014. minds online: teaching effectively with technology. cambridge: harvard university press. siegfried, john j. 2020. “trends in undergraduate economics degrees, 2001–2019.” the journal of economic education, 51(3-4): 359-363. stevenson, betsey and hanna zlotnik. 2018. “representations of men and women in introductory economics textbooks.” aea papers and proceedings, 108: 180-185. stowe, kristin. 2010. “a quick argument for active learning: the effectiveness of one-minute papers.” the journal for economic educators, 10(1): 33-39. willingham, daniel. 2009. why don't students like school?: a cognitive scientist answers questions about how the mind works and what it means for the classroom. hoboken: john wiley & sons. wooten, jadrian j. 2018. “economics media library.” the journal of economic education, 49(4): 364-365. wooten, j., a. al-bahrani, k. holder, and d. patel. 2021. “the role of relevance in economics education: a survey.” journal for economics educators, 21(1): 11-34. wooten, jadrian j., wayne geerling, and angelito calma. 2020. “diversifying the use of pop culture in the classroom: using k-pop to teach principles of economics.” international review of economics education, 38: 100220. 16 | journal for economic educators, 18(1), 2018 16 algebraic optimization: marginal analysis without calculus joseph g. eisenhauer 1 abstract teaching students to conduct marginal analysis before they have studied calculus is a major challenge in introductory economics courses. this paper offers a simple algebraic approach to optimization that allows students to extract explicit marginal revenue and marginal cost functions from quadratic total revenue and total cost functions. for firstor second-degree polynomials, the algebraic results are identical to those derived from differential calculus. the technique offers students a deeper understanding of the profit maximization process than can be obtained from spreadsheets and other conventional teaching methods. the resulting functions can be used to develop related insights regarding issues such as deadweight loss and competitive market adjustments. numerical examples of monopoly and perfect competition are used to illustrate the algebraic optimization technique. key words: algebraic optimization; marginal analysis; profit maximization jel classifications: a22, c00, d40 introduction marginal analysis is clearly among the most central notions in the entire canon of economics. indeed, saunders (1994) identified marginal analysis as one of the seven most important economic concepts for developing critical thinking and decision-making skills, and karunaratne et al. (2016) list it as one of the ten threshold concepts in the discipline. 2 the topic receives a fairly thorough treatment in intermediate microeconomics courses, where students are assumed to be familiar with differential calculus (carbaugh and prante, 2011), but most college students do not major in economics, and thus never study this subject at the intermediate level. 3 1 professor of economics and dean of the college of business administration, university of detroit mercy, 4001 w. mcnichols road, detroit, michigan 48221. i thank rod raehsler, doris geide-stevenson, and lester hadsell for helpful comments on an earlier draft; any errors are my own. 2 threshold concepts are those that lead to a transformed way of thinking. the economic threshold concepts listed by karunaratne, et al. (2016) include: economic models, opportunity cost, marginal analysis, equilibrium and disequilibrium, market structures and interactions, elasticity, efficiency, comparative advantage, real versus nominal values, and cumulative causation. saunders’ (1994) list of the most important concepts includes opportunity cost, marginal analysis, independence, exchange, productivity, money, and markets and prices. 3 in reviewing the transcripts of more than 8,100 college students, bosshardt and watts (2008) found that nearly 60 percent had completed at least one economics course, but the average was only 1.5 courses, and only those majoring in economics or business averaged two or more courses. mumford and ohland (2011) and bosshardt and walstad (2017) obtained similar results. thus, perumal (2012, p. 3) notes, “the majority of such students are non-economics majors who often study no more than one or two compulsory economic principles courses.” 17 | journal for economic educators, 18(1), 2018 17 given the importance of marginal analysis and the fact that most individuals receive no more than a principles-level introduction to this concept, it is essential to present the topic as thoroughly, effectively, and efficiently as possible in basic courses. moreover, a rewarding experience at the principles level can encourage students to pursue the economics major. yet introductory textbooks are challenged to present optimization methods to students whose assumed level of mathematical competence is restricted to algebra and geometry. most resort to rather unsatisfactory approaches that often lack realism, do not fully utilize the mathematical backgrounds they assume students have, and fail to engage students in actually conducting marginal analysis. thus, while noting that “marginal analysis is at the heart of economics,” asano (2006, p. 46) observes, “the majority of first year students, however, seem to struggle in applying it to a firm’s profit maximization problem.” the present note offers an alternative approach to the study of marginal analysis in the context of profit maximization. the method is quite simple—relying exclusively on algebra— and yet exceptionally rigorous. for firstor second-degree polynomial functions, it yields results identical to those obtained from the application of derivatives. the following section describes the problem to be addressed and the difficulties inherent in the customary approaches. the algebraic optimization method is then presented, extended, and illustrated with some brief numerical examples. the article ends with a short conclusion. existing approaches to profit maximization consider the fundamental problem of maximizing a firm’s profit, given a demand curve and a total cost function. to keep the analysis as general as possible, we will not assume that the firm is necessarily a competitive price-taker; rather, we can specify a linear demand curve as bqap  (1) where q denotes the firm’s output, p denotes price, and a and b are demand parameters such that a > 0 and b ≥ 0. (if the firm is assumed to be a perfectly competitive price-taker, then b = 0 and the price is constant at p = a regardless of the firm’s output level). total revenue (tr) is easily obtained as the multiplicative product of price and quantity: 2 )( bqaqqtr  . (2) although most principles texts present total cost as a schedule of numerical values, a number of textbooks and other pedagogical materials specify a total cost function. we follow examples in cowen and tabbarok (2013), stengel (2011), hirschey (2006), cheung (2005) and others in assuming the firm has a quadratic total cost (tc) function. 4 let 2 )( wqvqfqtc  (3) where f denotes fixed cost, and v and w are parameters of the variable cost portion of tc. to ensure that total cost and marginal cost are both increasing with output, we may for simplicity 4 davis (2014) finds that, even at the intermediate level, most cost functions are quadratic. 18 | journal for economic educators, 18(1), 2018 18 assume f > 0, v ≥ 0 and w > 0. 5 profit () is just the difference between total revenue and total cost: (q) = tr(q) – tc(q). introductory textbooks (such as krugman and wells 2009, mankiw 2012, or brue and mcconnell 2009) rightly explain that marginal cost (mc) is the change in tc from producing an extra unit of output, and marginal revenue (mr) is the change in tr from selling an extra unit; at the profit-maximizing output, mc equals mr, so that producing and selling one unit more or less would reduce profit. yet the mr and mc functions are typically asserted to be unobtainable in the absence of differential calculus. thus, second-best approaches are generally adopted. a common practice asks students to construct tables, or spreadsheets, showing values of p, tr, tc, mr, mc, and  at various levels of q. such exercises demonstrate numerically that, at the maximum profit, mr = mc. this is a workable, but rather awkward and time-consuming trial-and-error approach. the values of q are frequently limited to single or low-double digits, so that mr and mc can be calculated on the basis of single-unit changes; this restricts the analysis to extremely low output values, and implicitly assumes that output is a discrete, rather than continuous, variable. in some cases where discrete values are imposed, mr slightly exceeds mc at the optimum, without an explanation of how to handle continuous variables. other exercises direct students to use software, requiring them to first acquire the necessary computer skills, to construct spreadsheets or graph solutions (larson and swofford, 2015). 6 perhaps most worrisome, spreadsheets allow students to “cheat” by using tr and tc to find the highest profit first, and only afterwards verify that mr = mc at the maximum profit, rather than using mr and mc to find the optimum—essentially converting marginal analysis into marginal confirmation. 7 yet other approaches involve rather opaque methods. some textbooks, such as those by stengel (2011) and hirschey (2006), simply give students the mr and mc functions directly, without showing the derivations, and ask them to equate these functions to solve for the optimal q. still others, including cowen and tabbarok (2013), employ software such as excel macros or solver, requiring even greater computer skills than those needed for spreadsheets. such methods avoid the tedious computations of the spreadsheet, but by hiding the derivations of mr and mc, they represent “black boxes” (larson and swofford, 2015). in effect, these methods signal to principles students that marginal analysis is extremely important, but unless and until they study 5 if v = 0, the total cost function in (3) can be obtained from the cobb-douglas production function lkq  where l is labor and capital (k) is fixed at k = 1 in the short term, so that 2 ql  . then with w as the wage rate and f as the price of capital, 2 wqfwlfktc  . 6 some research suggests that purely graphical presentations may be confusing and even counterproductive to learning for some students (cohn, et al., 2001; zetland, et al., 2010). 7 other issues may also arise with spreadsheets. depending upon the structure of the exercise, the orders of magnitude that the price and quantity should be are not obvious to students. consequently, obtaining appropriate values can involve substantial guesswork, unless hints are given about the range and intervals of q to insert into the table. hirschey’s (2006, p. 40) exercises, for example, provide hints such as, “establish a range for q from 0 to 10,000 in increments of 1,000.” even then, extensive computation may be needed. finding values for six variables at ten levels of output requires 60 calculations. in texts that dispense with tr and tc functions entirely, the exercises typically begin with some values already inserted in the table and direct students to deduce the remaining entries. 19 | journal for economic educators, 18(1), 2018 19 calculus and intermediate microeconomics, they will not fully comprehend how to actually conduct profit maximization. 8 as an alternative to these pedagogies, the algebraic optimization shown below is an exceptionally simple technique that works with any firstor second-degree polynomials such as equations (2) and (3). it is neither a trial-and-error approach nor a black box. it utilizes the basic algebraic knowledge that principles students are assumed to have, giving students the satisfaction of solving such problems analytically. 9 we first present the analysis and extensions at a general level, then offer some numerical examples for classroom use. algebraic optimization recall the total revenue function in (2) above. the marginal revenue of the last unit sold can be defined as the total revenue at q units minus the total revenue at q – 1 units. likewise, starting from any level of q, the marginal revenue from selling one extra unit is the total revenue at q + 1 units minus the total revenue at q units. let us consider the additional revenue from those two units: one more and one less than q, and denote that as 2mr. then )1()1(2  qtrqtrmr , (4) or, after substituting from equation (2), ])1()1([])1()1([2 22  qbqaqbqamr . (5) many of the terms in (4) cancel, and elementary algebra reduces this expression to bqamr 422  . (6) because equation (6) represents the additional revenue from two units of output, we can divide it by 2 to obtain the marginal revenue function: bqamr 2 . (7) notice, importantly, that this is exactly the same marginal revenue function that we would derive by applying differential calculus to the tr function in (2). one advantage of this approach is readily apparent: by explicitly obtaining the mr function in (7) and comparing it to the demand 8 for example, although stengel (2011, p. 4) claims “an understanding of basic algebra will suffice,” he later notes (stengel, 2011, p. 20), “how to apply differential calculus is beyond the scope of this text; however, here are the functions that can be derived from the revenue, cost, and profit functions” and proceeds to write out the mr and mc functions needed to find the optimal output. a few authors, such as heckner and kretschmer (2008) and doviak (2005), attempt to teach enough calculus in the principles course to have students differentiate the tr and tc functions. 9 niven (1981) and cadeddu and lai (2015) have offered other techniques for finding maxima and minima without calculus, but their methods have not been applied to economic problems, and generally require mathematics that are well beyond basic algebra. 20 | journal for economic educators, 18(1), 2018 20 function in (1), students immediately see that the mr curve is exactly twice as steep as the linear demand curve—an insight that is not quite as obvious from spreadsheet calculations. 10 similarly, the additional cost of the two unit difference between q + 1 and q – 1 can be expressed as )1()1(2  qtcqtcmc ; or, after substitution from equation (3), ])1()1([])1()1([2 22  qwqvfqwqvfmc . (8) again, algebraic rearrangement simplifies this expression to wqvmc 422  , (9) and dividing by 2 gives the marginal cost function as wqvmc 2 , (10) exactly the same result that would be obtained from (3) by taking a first derivative. using equations (7) and (10), the optimal level of output, 0 q , can be found by setting mr = mc. this yields 11 )(2 0 wb va q    . (11) the optimal price to charge, 0 p , is then found by substituting (11) into (1), while total revenue and total cost are obtained by substituting (11) into (2) and (3), respectively. thus, this technique achieves a precise optimum from first principles without the use of differential calculus. the relationship between algebraic and differential optimization, including an algebraic determination of the second-order condition, is provided in the appendix. extensions the derivation of linear mr and mc curves also allows some rigor to be added to the customary lessons regarding market structure and costs that accompany profit maximization. these might be reserved as optional exercises, perhaps for an honors section of the course. for example, students are typically taught that a monopoly creates a deadweight loss, or inefficiency, by pricing above marginal cost. in the current framework, we can find the output level at which the mc curve intersects the demand curve by using (10) and (1) to set bqawqv  2 ; designate that level of output as 10 alternatively, we could define qqqtrqqtrmr  2/)]()([ with any 0q to obtain the same outcome. 1q is used for simplicity; another convenient choice would be 2/1q . 11 equivalently, as shown in the appendix, we could subtract (3) from (2) to establish the profit function, then apply algebraic optimization to obtain marginal profit, and set the latter expression equal to zero in order to obtain (11). 21 | journal for economic educators, 18(1), 2018 21 wb va q 2 1    . (12) because the demand and marginal cost curves are both linear, students can use the basic geometry of figure 1 (where d indicates the demand curve) to measure the deadweight loss (dwl) as the area of the triangle between the demand and marginal cost curves, from 0 q to 1 q . ])][()[(2/1( 0100 qqqmcpdwl  , (13) as in the first example below. consumer surplus can be measured in a similar manner. another familiar lesson is that average total cost (atc) declines when mc < atc, and rises when mc > atc, so that mc crosses atc at the minimum point of atc. the level of output at which this occurs can now easily be quantified. dividing (3) by q gives atc as wqvqfatc  )/( (14) and setting mc = atc from (10) and (14), respectively, gives wqqf / , or wfq l / (15) where the subscript l denotes the lowest average total cost. 12 (if p = mc < atc, the firm suffers a loss, but remains in operation if a > v. note from (11) that the shutdown point occurs at a ≤ v. a third lesson enabled by having an explicit mc function is that the market supply curve is the horizontal summation of individual supply curves, and an individual firm’s supply curve is the portion of the mc curve that lies above average variable cost. in the second example below, we show how this can be used to illustrate the effects of market entry or exit. this method of conducting marginal analysis is fully transparent and can be taught easily and quickly, especially with numerical examples of the type shown below. it allows students the satisfaction of deriving a solution to the profit maximization problem analytically, rather than via trial-and-error or being given mr and mc functions that have been obliquely derived elsewhere. and importantly, it promotes realism by facilitating exercises in which the optimal output and price need not be small, round, or even whole, numbers. indeed, by selecting appropriate values for a, b, f, v, and w, instructors can readily construct exercises with any desired outcomes. 13 we provide two examples below. 12 a limitation of using a quadratic total cost function is that average variable cost is not convex, as depicted in many texts; such a curve requires a cubic tc function. as davis (2014, p. 184) notes however, “many cubic functions are not plausible representations of a firm’s costs.” 13 in particular, cases in which  ≥(<) 0 can be constructed by selecting parameter values such that (a – v) 2 ≥(<) 4(b + w)f . classroom and homework exercises can be simplified by setting v = 0, and competitive firms can be assumed to face infinitely elastic demand curves such that b = 0. 22 | journal for economic educators, 18(1), 2018 22 figure 1. monopoly output, price, and deadweight loss numerical example: monopoly consider the standard profit maximization problem assuming that a firm operating as a monopoly faces a demand function given by qp 01.0100  , so that total revenue is 2 01.0100 qqtr  . (16) let the total cost function be given by 2 01.04800,2 qqtc  . (17) suppose first that students attempt to find the optimum using a spreadsheet—that is, by calculating tr and tc at various levels of q. using an iterative, trial-and-error procedure, they eventually arrive at the output level that yields the maximum profit, but only after extensive q0 q1 quantity p0 mc(q0) price mc mr d deadweight loss a v 0 23 | journal for economic educators, 18(1), 2018 23 calculations. alternatively, they might resort to the black box of mathematical software. neither practice ensures that they learn to obtain the solution by equating mr with mc. a more efficient, transparent, and less frustrating, approach applies the analytic technique above. using only algebra, students can readily calculate mr and mc as follows. ])1(01.0)1(100[])1(01.0)1(100[2 22  qqqqmr q04.0200  . (18) qmr 02.0100  . (19) ])1(01.0)1(4800,2[])1(01.0)1(4800,2[2 22  qqqqmc q04.08  . (20) qmc 02.04  . (21) finally, setting mr = mc yields the solution 400,2 0 q . substituting this into the demand curve reveals that the optimal price to charge is 76 0 p , and from tr and tc it is easy to calculate the maximum profit, 400,112 0  . if a student now chooses to use a spreadsheet to check the result, (s)he can immediately select values for q near 2,400 and thus quickly confirm that profit is indeed maximized at that level of output, with mr = mc = 52. note that in contrast to the more traditional approach, the solution is determined from the equivalence of mr and mc, and only confirmed through spreadsheet computations, rather than vice versa. as suggested earlier, this example can be extended to calculate the deadweight loss from monopoly, by first finding the quantity of output at which the marginal cost curve intersects the demand curve. setting qq 01.010002.04  gives 200,3 1 q . then the deadweight loss from monopoly is the triangular area 600,9)400,2200,3)(5276)(2/1(  . numerical example: perfect competition as a second example, consider a perfectly competitive firm confronting an initial market equilibrium price of p = 60, whose total revenue function is therefore tr = 60q. applying the technique above, students can calculate 60 2 )1(60)1(60    qq mr (22) which demonstrates that, for a perfectly competitive firm, the product price is the marginal revenue, so the optimality condition mr = mc becomes p = mc. let the firm’s total cost function be 2 100 qtc  where for convenience v = 0 and w = 1. using algebra, the marginal cost function is found as q qq mc 2 2 ])1(100[])1(100[ 22    . (23) 24 | journal for economic educators, 18(1), 2018 24 setting p = mc yields an optimum at 30 0 q ; then tr = 1,800 and tc = 1,000 so  = 800. such an example can also be used to illustrate the effects of market entry (or exit). assuming that new (and identical) firms enter the market and erode profits, students can determine both the new market price and the output that each firm will produce, by using the following logic. profit is eliminated when tr = tc, or equivalently, when p = atc. because the competitive firm optimizes where p = mc, the firm optimizes with zero profit when p = atc = mc. in this example, average total cost is qqatc  )/100( . (24) setting (24) equal to (23) yields 10 l q . at 10 units of output, atc = mc = p = 20. (students can easily check that atc is higher at any other level of output). thus, in the absence of barriers to entry, new firms will enter this initially profitable market, increasing the market supply, until the equilibrium price falls to p = 20. each firm will then experience tr = 200, tc = 200, and  = 0 in the long run. 14 with additional details, this example can be extended even further. assume that there are initially 40 firms in the market. let the market demand be given by p = 120 – 0.05q, or q = 2400 – 20p, where market output q is the sum of output from n identical firms, so q = nq. then with each firm setting p = 2q or q = p/2, the market supply from the 40 firms collectively was q = 20p. setting market demand equal to market supply confirms that the initial equilibrium price is 60 and the equilibrium output from 40 firms is 1,200. when new firms enter the market, the price drops to p = 20 and each firm produces only q = 10 units. the demand curve reveals that with p = 20, a total of q = 2,000 units are sold; thus, the final number of firms in the market can now be found as n = q/q = 200. the market supply curve—the horizontal summation of individual firms’ supply curves—has become q = 100 p. students can use the market supply and demand curves to verify that p = 20 is indeed the new equilibrium price. of course, the example can easily be reconfigured (with f > 900) to illustrate market exit following initial losses. as these examples suggest, enabling students to extract explicit mc and mr functions from tc and tr functions gives instructors the option to introduce as much or as little rigor into the course as they desire. exercises may be as elaborate or elementary as needed. indeed, output can be a continuous variable in fractional units at the optimum without increasing the complexity of student calculations. 15 conclusion principles-level economics students are expected to be familiar with algebra and geometry, yet in scrupulously avoiding calculus, introductory textbooks almost invariably resort to the simple arithmetic of spreadsheets to demonstrate profit maximization. that approach 14 textbooks often assert that all costs are variable in the long run, but as pointed out by wang and yang (2001), that is a misrepresentation caused by conflating fixed costs with sunk costs. thus, our example follows cheung (2005) in assuming that fixed cost persists as a component of total cost during the entry and exit pro cess leading to the long run equilibrium. 15 it should be emphasized that this technique is restricted to firstand second-degree polynomials, and should not be applied to other functional forms. 25 | journal for economic educators, 18(1), 2018 25 misses an opportunity to capitalize on the math skills that students already possess, and permits them to find the optimum through trial-and-error without actually using marginal analysis. the main stumbling block is the derivation of marginal revenue and marginal cost functions, typically delayed until intermediate courses where optimization is taught with derivatives. designed for measuring the effects of infinitesimal changes in variables, differential calculus is an ideal instrument for conducting marginal analysis, because it efficiently yields precise solutions to maximization and minimization problems. certainly, algebra is not a perfect substitute for calculus, but applying algebra to quadratic revenue and cost functions can bring much of that efficiency, precision, and power to an introductory course. working through profit maximization exercises like those above strengthens students’ problem-solving ability and ensures that they perceive marginal analysis as the centerpiece of optimization, rather than as an afterthought. thus, algebraic optimization can enrich students’ understanding of one of the key concepts in economics. by facilitating examples in which output can be a continuous variable of any magnitude, this approach brings greater realism to the course. greater realism, in turn, can both attract more students and lead to improved learning (mearman, et al., 2014). naturally, because students differ in their responses to various teaching methods, no single technique is necessarily superior to all others. tables or diagrams may be favored by some students, while algebraic optimization will be appreciated more by others, especially those with better algebraic skills. likewise, some instructors may prefer to use conventional methods for teaching marginal analysis, but others will find it advantageous to add algebraic optimization to their pedagogical toolkits, especially because it need not replace traditional tools entirely. algebraic optimization can easily be used in conjunction with spreadsheets and graphs. references asano, akihito. 2006. “teaching marginal analysis: on the importance of emphasising the second-order condition.” international review of economics education, 5(1): 46-59. bosshardt, william and michael watts. 2008. “undergraduate students’ coursework in economics.” journal of economic education, 39(2): 198-205. bosshardt, william and william b. walstad. 2017. “economics and business coursework by undergraduate students: findings from baccalaureate and beyond transcripts.” journal of economic education, 48(1): 51-60. brue, stanley l. and campbell r. mcconnell. 2009. essentials of economics. ny: mcgrawhill/irwin. cadeddu, lucio and giampaolo lai. 2015. “maxima and minima without derivatives?” college mathematics journal, 46(1): 15-22. carbaugh, robert and tyler prante. 2011. “a primer on profit maximization.” journal for economic educators, 11(2): 34-45. cheung, stephen l. 2005. “a classroom entry and exit game of supply with price-taking firms.” journal of economic education, 36(4): 358-368. cohn, elchanan, sharon cohn, donlad c. balch, and james bradley, jr. 2001. “do graphs promote learning in principles of economics?” journal of economic education, 32(4): 299-310. cowen, tyler and alex tabarrok. 2013. modern principles of economics, 2 nd ed. ny: worth. davis, lewis. 2014. “how to generate good profit maximization problems.” journal of economic education, 45(3): 183-190. 26 | journal for economic educators, 18(1), 2018 26 doviak, eric. 2005. lecture notes on the principles of microeconomics, 3 rd ed. http://www.doviak.net/microbook_3e.pdf, downloaded july 15, 2017. heckner, dominik and tobias kretschmer. 2008. don’t worry about micro: an easy guide to understanding the principles of microeconomics. berlin: springer. hirschey, mark. 2006. fundamentals of managerial economics, 8 th ed. mason, ohio: thomson. karunaratne, prashan shayanka mendis, yvonne a. breyer, and leigh n. wood. 2016. “transforming the economics curriculum by integrating threshold concepts.” education and training, 58(5): 492-509. krugman, paul and robin wells. 2009. economics. ny: worth publishers. larson, david a. and james l. swofford. 2015. “determining the competitive firm’s short run supply optimal output using excel’s solver tool.” perspectives on economic education research, 9(2): 65-71. mankiw, n. gregory. 2012. principles of microeconomics, 7 th ed. stamford, ct: cengage. mearman, andrew, aspasia papa, and don webber. 2014. “why do students study economics?” economic issues, 19(1): 119-147. mumford, kevin j. and matthew w. ohland. 2011. “student performance in undergraduate economics courses.” journal of economic education, 42(3): 275-282. niven, ivan. 1981. maxima and minima without calculus. washington, d.c.: mathematical association of america. perumal, muni. 2012. “should we teach microeconomics before macroeconomics? evidence from an australian university.”australasian journal of economics education, 9(2): 1-14. saunders, phillip. 1994. “a global framework for teaching economics.” in w. b. walstad (ed.), an international perspective on economic education. ny: springer. stengel, donald n. 2011. managerial economics: concepts and principles. ny: business expert press. wang, x. henry and bill z. yang. 2001. “fixed and sunk costs revisited.” journal of economic education, 32(2): 178-185. zetland, david, carlo russo, and navin yavapolkul. 2010. “teaching economic principles: algebra, graph, or both?” american economist, 55(1): 123-131. appendix: algebraic and differential optimization this appendix elucidates the relationship between differential and algebraic optimization. differential calculus measures the rate of change in a function for an infinitesimal increment to its argument. for any function g(x), a right-hand side derivative can be expressed as    )()( lim)( 0 xgxg xg r    (a1) and a left-hand side derivative is    )()( lim)( 0    xgxg xg l . (a2) http://www.doviak.net/microbook_3e.pdf 27 | journal for economic educators, 18(1), 2018 27 the algebraic optimization technique is analogous to averaging the right-hand side and left-hand side derivatives, but with  = 1 rather than vanishing. for any first-degree or second degree polynomial, this yields the same result as a derivative. notice that for any 2 )( xxg  , )(2 2 )12()12( 2 )]1()([)]()1([ 22 xgx xxxxxgxgxgxg       . (a3) as an application, consider the total profit function obtained by subtracting (3) from (2): ][][)( 22 wqvqfbqaqq  . (a4) applying algebraic optimization, we get the marginal profit function as follows: 2 )]1()1([ 2 )]1()([)]()1([ )(     qqqqqq qm   qwbvaqm )(2)(  . (a5) this is identical to the first derivative of (a4), and setting m(q) = 0 yields the optimum in (11). both asano (2006) and carbaugh and prante (2011) have emphasized the need, at least in intermediate and advanced microeconomics courses, for checking the second-order condition to ensure that 0 q represents a maximum rather than a minimum. although it need not be taught at the principles level, it may be useful for instructors to recognize that algebraic optimization can also be used to check the second-order condition. by analogy to a second derivative, the “marginal marginal” profit function (for lack of a better phrase), can be written as 2/)]1()1([)(  qmqmqmm  . (a6) after substitution from (a5), this becomes 2 )]1)((2[)]1)((2[ )(   qwbvaqwbva qmm . (a7) rearranging gives the same second-order condition that would be obtained by using calculus: 0)(2)(  wbqmm . (a8) 18 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 18 grade expectations and overconfidence: is economics different? dirk s. yandell 1 abstract do students in economics courses predict their course grade more accurately than students in other business school courses? data over several semesters and from a variety of disciplines suggest that business school students in all disciplines are overconfident. after controlling for other factors, however, economics and accounting students predict their grades more accurately than other students. key words: actual grade, expected grade, overconfidence jel classification: a22 introduction the causes and consequences of grade inflation, and the effects of grade inflation on both the grades that students expect and their evaluations of professors have been the topics of hundreds of published studies. although this paper is not intended to summarize this literature, some background is informative. college and university grade inflation in the u.s. has been a topic of interest since at least the vietnam era in the mid-1960's. many time-series studies provide similar estimates of the magnitude of the change in average grades. an early study by juola (1980) examined data from 180 colleges and reported a gpa increase of 0.432 grade points between 1960 and 1974. kuh and hu (1999) find an average increase of 0.27 grade points between 1984-87 and 1995-97. grove and wasserman (2004), for the four-year period from 1998 2002, report an increase of 0.11 of a grade point. the average annual increase is between 0.024 and 0.028 grade points in each of these studies. the website www.gradeinflation.com, with data maintained and summarized by stuart rojstaczer, suggests that the mean grade point average at u.s. universities and colleges has risen slightly slower, by about 0.15 points per decade over a longer time span, from an average of about 2.7 in 1983 to 3.15 in 2013. over that period, a’s have become the most common grade, and the prevalence of c and d grades are at historic lows. lowe, borstorff and landry (2008), using data from the baccalaureate and beyond longitudinal study conducted by the national center for educational statistics, find that for the nine year period from 1993 to 2000/01 the average student cumulative gpa increased 0.23 grade points, and major gpa rose 0.21 grade points. they found a higher level of within-major grade inflation for business graduates than for students with majors in engineering, life sciences, mathematics, and physical sciences, but lower than for graduates in education. many papers have examined the relationship between expected grades or actual grades on student evaluation of teacher performance. for example, krautmann and sander (1999) find that 1 professor of economics, school of business, university of san diego, 5998 alcala park, san diego, ca 92110. 19 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 19 grades affect an instructor’s evaluations. andrew ewing (2012), using multiple estimation models, also finds that instructors have an incentive to inflate grades to achieve higher evaluation scores. buying higher course evaluations by giving higher grades can contribute to grade inflation and diminish the effectiveness of student evaluations as a means of evaluating the quality of teaching. the focus of this paper is not specifically on grade inflation, but on grade expectations and whether students are accurate or overconfident when predicting their final grade. hossain and tsigaris (2015) surveyed 169 students in six sections of business and economic statistics over three semesters to examine students’ expectations about their final grade. they find that overconfidence is typical, but the difference between expected and actual grades diminishes over the semester as students receive new information about their performance. david burns (2007) evaluated predicted grades from the start of the semester and from the time of the final exam and found that the accuracy of predictions improved over time and were related to students’ class attendance rates, but not related to self-reported study time. overconfidence can have both positive and negative effects on student performance and effort. the accuracy of grades expected by students may have implications on the selection of a major and the amount of time dedicated to a course. grimes (2002) notes that the accuracy of grade predictions influences how students select study material and exert effort to succeed in a course. jensen and owen (2000) report that higher expected grades are associated with an increase in students’ confidence to succeed in economics. more recently, main and ost (2014) find no evidence that course grades affect students’ course behavior or major decisions. nowell and alston (2007) examine overconfidence in economics courses and find that male students and low-gpa students exhibit greater grade overconfidence than females and high-gpa students. more to the point of this paper, they also find that students in lower-division courses are more overconfident than upper-division students, a result consistent with widespread overconfidence among principles of economics students reported by grimes (2002) and grimes, millea, and woodruff (2004). an interesting question is whether economics courses differ from other disciplines. a study of grading patterns at wellesley college showed that economics grades were lower than in any other department in the social sciences and humanities, and 5 th lowest overall from the 28 departments studied (butcher, mcewan, and weerapana, 2014). after examining grades at the university of michigan across 25 different departments within the college of literature, science, and the arts, achen and courant (2009) report that lower-division economics grades were lower for 2005-2007 than for all but mathematics and statistics, and also 3 rd lowest overall for upper-division grades (only biology and statistics were lower). schulz and thöni (2016), examining data from two european universities, find that students of politics, law, business and economics are more overconfident than students in other disciplines. this paper extends the discussion of grade overconfidence and examines the accuracy of students’ expected grades by discipline within a business school. the goal is to see whether the results for economics classes differ from other business school disciplines, after controlling for class-level variation. data data were collected from over 1600 individual undergraduate courses taught over eight semesters within the business school at the university of san diego. the university is a selective private school with mostly resident students of traditional age. business school students from 20 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 20 2013-2015 had an average sat score of 1208 and high school gpa of 3.84, compared to 1212 and 3.87 for the entire university. all courses from each semester were included unless the course enrollment was below 10 students. eliminating low enrollment classes excludes a few special topics courses, practicums, and internship courses where grading standards might differ from the norm. the median class size in this study is 35 students, with a range from 10 to 55. the unit of observation for this study is the individual course, so data values such as expected grades and actual grades represent an aggregated value from the individual responses of the enrolled students in each class. the ending sample size is 1541. expected grades are captured from student evaluation forms, which are completed by students in every class during the last few days of each semester, but before the final exam. the business school uses the university of washington instructional assessment system evaluation forms, which include the question, “what grade do you expect in this course?” students select one of nine grade options ranging from a to f (including plus and minus distinctions). actual grade distributions for each course were obtained from the registrar’s office after the end of each semester. courses were categorized into six disciplines: business/management, decision science/information technology, accounting, finance/real estate, marketing, and economics. eight semesters are represented, from fall 2011 to spring 2015. of the 1541 courses, 302 (19.6%) were from economics. the final sample of 1541 courses represents 87 unique course numbers (11 from accounting, 18 from business/management, 6 from decision science, 22 from economics, 16 from finance/real estate, and 14 from marketing). these courses were taught over the eight semesters by 154 different instructors. it is important to note that this is class-level data. for each course, the summary statistics from the course evaluation were obtained, as well as the actual distribution of assigned grades. it is the policy in the business school that evaluations are completed and submitted confidentially. the instructor is not present when evaluations are completed and results are not made available until after final grades are submitted. for confidentiality and the protection of human subjects, individual evaluations are not available, only the summary results for each course. although it would be interesting to explore how gender, gpa, and other specific demographic variables influence overconfidence, no student-specific characteristics are available. some student details can be inferred, however. for example, freshman and sophomore students represent the majority of enrollment in lower-division courses (courses numbered in the 100's and 200's), and upper-division courses are restricted to junior and senior students by school policy. a dummy variable for lowerversus upper-division status is included in the regression model to determine whether there are differences by class level. the weighted mean response rate on student evaluations is 82.2%. this mean is obtained by dividing the total number of completed evaluations by the sum of all class enrollments. the standard deviation of the response rate over the 1541 courses is 10.8%, and the means and variation across departments are similar. students who did not complete evaluations were either not present on the day the evaluations were administered or had officially withdrawn from the class within the allowable withdraw period. withdrawing with a w grade is uncommon. only 970 w grades were reported (1.99%) out of the 48,891 grades assigned in these 1541 courses. failing grades are also rare (332 reported, or 0.68%). although there is slight variation by department as shown in table 1, the withdraw and failure proportions are too small to have a material impact in this study. 21 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 21 table 1: w and f grades by department # courses # grades w f % w % f acct 255 8544 284 85 0.0332 0.0099 bus/mgt 364 11008 123 30 0.0112 0.0027 dsci 202 6211 149 63 0.0240 0.0101 econ 302 9952 262 106 0.0263 0.0107 fina 201 6793 85 31 0.0125 0.0046 mktg 217 6273 67 17 0.0107 0.0027 overall 1541 48781 970 332 0.0199 0.0068 students who major in the business school take seven required lower division preparation courses. calculus is taught by the mathematics department outside the business school, but t he remaining six are represented here: two economics principles courses, two accounting principles courses, information systems, and business statistics. principles of microeconomics is the only course offered by the business school that students can count in the core curriculum, but the great majority of micro students are business majors or minors, so any influence from students entirely outside the business school is minimal. major requirements differ slightly but each bba major includes at least six required upper division courses and between four and nine additional upper-division courses. preliminary results the average economics gpa was 3.06, the lowest of the six departments. the school-wide average gpa was 3.23. in every discipline students expected higher grades than they achieved, but the gap was larger in economics than in any other area. across all disciplines, students expected an average gpa of 3.40; the average overconfidence was 0.1765 grade points. the correlation between expected grades and actual grades was strong at 0.81, but expected grades were consistently overestimated by students. figure 1 provides details by discipline. 22 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 22 figure 1: actual grades, expected grades, and overconfidence by discipline actual grade by discipline individual 95% cis for mean based on pooled stdev level n mean stdev -------+---------+---------+---------+- econ 302 3.0645 0.2812 (--*---) acct 255 3.0672 0.2424 (---*--) bus/mgt 364 3.3792 0.2945 @ (--*--) dsci/it 202 3.2563 0.3507 @ (---*---) fina/re 201 3.3348 0.2813 @ (--*---) mktg 217 3.2579 0.2419 @ (---*---) -------+---------+---------+---------+- 3.10 3.20 3.30 3.40 expected grade by discipline individual 95% cis for mean based on pooled stdev level n mean stdev -----+---------+---------+---------+--- econ 302 3.2853 0.2251 (--*--) acct 255 3.2698 0.1914 (---*--) bus/mgt 364 3.5237 0.1980 @ (-*--) dsci/it 202 3.4252 0.2905 @ (---*---) fina/re 201 3.4983 0.2167 @ (--*---) mktg 217 3.4150 0.1870 @ (---*--) -----+---------+---------+---------+--- 3.280 3.360 3.440 3.520 overconfidence (expected grade actual grade) by discipline individual 95% cis for mean based on pooled stdev level n mean stdev --------+---------+---------+---------+ econ 302 0.2208 0.2056 (------*-----) acct 255 0.2026 0.1538 (-------*------) bus/mgt 364 0.1445 0.1793 @ (-----*-----) dsci/it 202 0.1689 0.2023 @ (-------*--------) fina/re 201 0.1635 0.1961 @ (--------*-------) mktg 217 0.1571 0.1473 @ (-------*-------) --------+---------+---------+---------+ 0.150 0.180 0.210 0.240 @ denotes that the mean is significantly different from the economics mean at the 5% level of significance, using a tukey-kramer multiple comparison test. 23 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 23 the actual grades in economics and accounting were significantly lower than grades assigned in the other four disciplines, but expected grades were also significantly lower. when overconfidence is examined instead as a percentage of the actual grade rather than as a simple difference between expected and actual grades, the results do not change, as shown in figure 2. figure 2: overconfidence as a percentage of the actual grade by discipline overconfidence as % of actual grade by discipline individual 95% cis for mean based on pooled stdev level n mean stdev ------+---------+---------+---------+-- econ 302 0.07651 0.07412 (-----*-----) acct 255 0.06892 0.05541 (-----*------) bus/mgt 364 0.04672 0.05791 @ (----*----) dsci/it 202 0.05652 0.07052 @ (------*------) fina/re 201 0.05278 0.06451 @ (------*------) mktg 217 0.05062 0.04864 @ (------*------) ------+---------+---------+---------+-- 0.048 0.060 0.072 0.084 @ denotes that the mean is significantly different from the economics mean at the 5% level of significance, using a tukey-kramer multiple comparison test. compared to other departments, economics and accounting have a higher proportion of lower-division courses in the business school. prior studies have found that students in lower-division courses are more overconfident than upper-division students. does this explain the large difference in expected vs. actual grades for economics and accounting? a regression model is estimated to explore this question. model overconfidence, defined as the difference between the average expected grade and the average actual grade, is calculated for each course and is used as the dependent variable. a positive value for an individual class indicates that students are overly optimistic when predicting their performance, a negative value occurs when actual grades are higher than expected in that class. out of 1541 classes over the eight semesters examined, the gap is zero or negative in 252 classes and positive in 1289 cases. on average, students in all disciplines expected higher grades than they actually received, but the gap was largest for economics. can this gap be explained by other factors, such as the mix of uppervs. lower-division classes, the course enrollment, instructor characteristics, or the perceived rigor of the course? the following model is estimated: gapijk = β0 + β1 udi+ β2 ceii + β3 enrolli + β4 actuali + β5 evali + β6 responseratei + β7 parttimei + β8 ft-non-tti + γi deptj + δk semesterk where gapijk represents overconfidence, defined as the gpa difference between the expected grade and the actual grade for course i in department j during semester k. the independent variables are: 24 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 24 ud a dummy variable equal to one if the course was upper division (300 or 400 numbered courses), and zero if the course was lower division (100 and 200 numbered) cei the achallenge and engagement index score reported from the course evaluations, measured from student responses, used as a proxy for perceived course rigor enroll the number of students enrolled in the course actual the gpa based on grades actually assigned by the professor in that class eval the average course rating from student input on evaluations (0-5 scale) responserate the number of completed evaluations for the course divided by the reported enrollment parttime a dummy variable equal to one if the instructor was a part-time adjunct professor ft-non-tt a dummy variable equal to one if the instructor was full-time but not tenured or tenure track dept dummy variables for the five departments other than economics semester dummy variables for the semesters from spring 2012 to spring 2015 (fall 2011 is the default semester) summary statistics for all regression variables are shown in table 2. table 2: summary statistics for regression variables variable mean st.dev. minimum median maximum gap 0.1765 0.1842 -0.4662 0.1686 0.8154 ud 0.7236 0.4474 0.0000 1.0000 1.0000 cei 4.8824 0.5322 3.4000 4.8600 6.6667 enroll 32.034 8.2310 10.000 35.000 55.000 actual 3.2269 0.3111 2.0978 3.2316 3.9500 eval 3.9896 0.5717 1.4810 4.0909 5.0000 responserate 0.8269 0.1078 0.5556 0.8333 1.3571 parttime 0.2291 0.4204 0.0000 0.0000 1.0000 ft-non-tt 0.2323 0.4225 0.0000 0.0000 1.0000 acct 0.1655 0.3717 0.0000 0.0000 1.0000 bus_mgt 0.2362 0.4249 0.0000 0.0000 1.0000 dsci_it 0.1311 0.3376 0.0000 0.0000 1.0000 fina_re 0.1304 0.3369 0.0000 0.0000 1.0000 mktg 0.1408 0.3480 0.0000 0.0000 1.0000 results there is no apparent trend or semester effect, none of the dummy variables for semester are significant at even the 10% level. the model is quite robust to model specification, so the semester dummies were removed for simplicity. the ols estimates of the reduced model are in table 3. 25 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 25 table 3: ols results, dependent variable: gap (expected gpa actual gpa) coefficient std. error t-ratio p-value constant 1.74515 0.05950 29.331 0.0000 *** ud 0.02382 0.01073 2.219 0.0266 ** cei -0.07955 0.00708 -11.228 0.0000 *** enroll -0.00013 0.00042 -0.320 0.7488 actual -0.51951 0.01287 -40.362 0.0000 *** eval 0.12810 0.00682 18.774 0.0000 *** responserate -0.07390 0.03105 -2.380 0.0174 ** parttime 0.00072 0.00838 0.086 0.9313 ft_non_tt 0.03271 0.00831 3.938 0.0001 *** acct 0.00286 0.01155 0.248 0.8046 bus_mgt 0.02623 0.01318 1.991 0.0467 ** dsci_it 0.07990 0.01302 6.137 0.0000 *** fina_re 0.04707 0.01427 3.298 0.0010 *** mktg 0.01610 0.01395 1.154 0.2486 mean dependent var 0.1765 s.d. dependent var 0.1842 r-squared 0.5494 adjusted r-squared 0.5456 f(13, 1527) 143.226 p-value(f) 0.0000 significance level: *** 0.01 ** 0.05 * 0.10 after accounting for other factors, the gap between expected grades and actual grades is actually smaller for economics than for any of the other departments, as shown by the positive coefficients for the other discipline dummy variables. overconfidence in economics and accounting is essentially the same, but the expectations gap is larger for all of the other disciplines, and significantly larger in business/management, decision science, and finance/real estate, compared to economics. the average grade assigned in upper-division courses is higher than the average grade in lower-division courses. this compression of the upper-division grade scale should make it easier for such students to more accurately estimate their grade. the opposite is found here, the impact is small but significant. students in upper-division courses, all else equal, are more optimistic (less accurate) when predicting their ending grade. this may be true if most upper division courses are in the students’ intended major such that they have self-selected into these courses and expect to do well in their area of interest. but, this result is not consistent with nowell and alston’s (2007) findings that lower-division students were more overconfident than upper-division students. it is not surprising that as the perceived rigor of the course increases (a higher cei value), overconfidence decreases. this confirms the expectation that students expect lower grades in harder courses. as expected, higher average actual grades assigned in a course reduce the expectations gap. the results show that each 0.10 grade point increase in the actual average grade, all else constant, leads to a 0.052 grade point decrease in overconfidence. the size of the class did not have a statistically significant effect on the expected grade gap, but the overall course evaluation had a positive and significant effect on the gap. this is consistent with the notion that student evaluations tend to be higher for courses in which students expect to get good grades. since expected grades and actual grades are highly correlated, this supports the claim that professors can buy better evaluations by grading easier. 26 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 26 there is no difference in the expectations gap between students in courses led by part-time (adjunct) faculty and full-time tenured and tenure track faculty. students with full-time non-tenure-track faculty (clinical and visiting professors) were the most overconfident. alternative model specifications do not change the results. changing the dependent variable by defining overconfidence as a percentage of the actual grade instead of in gpa units does not change the significance of individual variables. a semi-log model in which the non-binary independent variables are transformed to log values also does not change the results. no multicollinearity is evident. variance inflationary factors for the thirteen variables are between 1.1 and 3.1, and none of the pairwise correlation coefficients is above 0.39. to further examine the effect of expected grades on course evaluations, a regression model is estimated using eval as the dependent variable. results are shown in table 4. table 4: ols results, dependent variable: eval coefficient std. error t-ratio p-value constant -2.08921 0.24508 -8.729 0.0000 *** ud -0.13689 0.03610 -3.792 0.0002 *** cei 0.31978 0.02355 13.580 0.0000 *** enroll -0.00279 0.00141 -1.973 0.0487 ** expected 1.35518 0.05213 25.994 0.0000 *** responserate 0.20039 0.10380 1.931 0.0537 * parttime -0.05019 0.02824 -1.777 0.0757 * ft-non-tt -0.05468 0.02817 -1.941 0.0524 * acct 0.04170 0.03906 1.068 0.2859 bus_mgt 0.10109 0.04452 2.271 0.0233 ** dsci_it -0.54545 0.04233 -12.886 0.0000 *** fina_re -0.02309 0.04840 -0.477 0.6334 mktg -0.02986 0.04721 -0.633 0.5271 mean dependent var 3.9896 s.d. dependent var 0.5717 r-squared 0.4640 adjusted r-squared 0.4598 f(12, 1528) 110.223 p-value(f) 0.0000 significance level: *** 0.01 ** 0.05 * 0.10 course evaluations are positively and significantly related to expected grades. the direction of causality remains an interesting question. do students assign higher course evaluations because they expect higher grades, or are grade expectations higher because they enjoyed and valued the course or instructor more highly? prior literature predominately assumes the former. it is interesting to note that cei is positive and significant. this supports the alternate view that students offer higher ratings to courses that provide more value, substance, and engagement, not just higher grades. summary although at first glance the level of grade overconfidence appeared to be high in economics courses, this analysis shows that the difference between actual grades and expected grades is smaller in economics than in other disciplines, and significantly less than in three of the five other areas, after accounting for class level, rigor, class enrollment, and other factors. 27 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 27 economics faculty assigned the lowest actual grades, and significantly lower than in all areas except accounting. this is consistent with reported results from wellesley college, where economics grades were also low compared to other disciplines. lower actual grades, all else equal, should increase the expected grade gap, but students in economics classes were actually less overconfident after accounting for other factors. these results add additional evidence to other studies in which economists and economics students have been shown to be different. a summary article by frank, gilovich, and regan (1993), for example, reports that economics students are different in risk attitudes, behave less cooperatively in trust games, and defect more often in prisoners’ dilemma games than other students, and that economics professors give less money to charity. results presented here suggest that economics faculty and students also are different in the way they assign grades and estimate expected grades. although all students are overconfident, it would be nice to believe that our economic lessons about rationality and efficiency make our students less irrationally exuberant than students in other disciplines. instead, since the teaching methods in economics classes have been reported to be more traditional than in other disciplines (becker, 1997), it may simply be that it is easier for economics students to judge their classroom performance. disciplines other than economics in the business school tend to use more teamwork, and rely on projects and cases more than exams, for example, so students may have a harder time estimating their grade when completing these less traditional activities. references achen, alexandra c., and paul n. courant, 2009. what are grades made of? journal of economic perspectives, 23(3): 77-92. barth, michael m., jun liu and william h. wells, 2009. a comparative analysis of grading practices by discipline within a college of business, academy of educational leadership journal, 13(4): 93-107. becker, william e., 1997. teaching economics to undergraduates, journal of economic literature, 35(3): 1347-1373. burcher, kristin f., patrick j. mcewan and akila weerapana, 2014. the effects of an anti-grade-inflation policy at wellesley college, the journal of economic perspectives, 28(3): 189-204. burns, david j., 2007. an examination of the accuracy of students' expected grades, academy of educational leadership journal, 11(3): 45-58. ewing, andrew m., 2012. estimating the impact of relative expected grade on student evaluations of teachers, economics of education review, 31(1): 141-154. frank, robert h., thomas gilovich and dennis t. regan, 1993. does studying economics inhibit cooperation?, the journal of economic perspectives, 7(2): 159-171. grimes, paul w., 2002. the overconfident principles of economics student: an examination of a metacognitive skill, journal of economic education, 33(1): 15b30. grimes, paul w., meghan j. millea and thomas w. woodruff, 2004. grades:who’s to blame? student evaluation of teaching and locus of control. journal of economic education, 35(2): 129b47. grove, wayne, and tim wasserman, 2004. the life-cycle pattern of collegiate gpa: longitudinal cohort analysis and grade inflation, journal of economic education, 35(2): 162-174. hossain, belayet, and panagiotis tsigaris, 2015. are grade expectations rational? a classroom 28 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 7 ( 2 ) , 2 0 1 7 28 experiment, education economics, 23(2): 199-212. juola, a. e.,1980. grade inflation in higher education-1979. is it over? retrieved from eric database (eric number: ed189129). krautmann, anthony c., and william sander, 1999. grades and student evaluations of teachers, economics of education review, 18: 59b63. kuh, g. d., and s. hu, 1999. unraveling the complexity of the increase in college grades from the mid-1980s to the mid-1990s, educational evaluation and policy analysis, 21: 297b320. lowe, s. keith, patricia c. borstorff and robert j. landry, iii, 2008. an empirical examination of the phenomenon of grade inflation in higher education: a focus of grade divergence between business and other fields of study, academy of educational leadership journal, 12(1): 15-33. main, joyce b., and ben ost, 2014. the impact of letter grades on student effort, course selection, and major choice: a regression-discontinuity analysis, the journal of economic education, 45(1): 1-10. millea, meghan., and paul w. grimes, 2002. grade expectations and student evaluation of teaching, college student journal, 36(4): 582-591. nowell, clifford and richard m. alston, 2007. i thought i got an a! overconfidence across the economics curriculum, the journal of economic education, 2007, 38(2): 131-142. schulz jonathan f., and christian thöni, 2016. overconfidence and career choice. plos one, 11(1): e0145126. doi:10.1371/journal.pone.0145126 40 |journal for economic educators, 22(1), 2022 using k-pop to teach indifference curve analysis, behavioral economics and game theory wayne geerling 1 kristofer nagy 2 elaine rhee 3 jadrian wooten 4 abstract economic educators have been teaching with pop culture for decades, but until recently the focus was on english-based media. in this paper, we build on the work of wooten et al. (2021b), who show how k-pop can be integrated into the principles-level curriculum. we develop three teaching guides that can be used to teach aspects of behavioral economics, game theory and indifference curve analysis – topics which are taught at the end of most principles-level courses but are also standalone upper-level courses. the three artists chosen – bts, blackpink and twice – have huge global followings. we hope this paper will contribute to the library of diverse and inclusive teaching resources while helping to address the deficit of resources available to instructors of upper-level courses. key words: inclusive teaching, media, music, teaching economics, game theory, behavioral economics, indifference curves jel classification: a20, a21 introduction over the past twenty years, a number of economic educators have developed resources for other educators to use in their classroom. these resources were most often developed to improve student engagement with the material so that learning the material would become easier (wooten et al. 2021a; picault 2019; stevenson 2022). while not specifically mentioned in the majority of the papers, most educators appear to focus on overcoming particular cognitive challenges present in the classroom (chew and cerbin 2021). if students are afraid of the subject, or afraid of failing the subject, they may actually be less motivated to learn. integrating media into the curriculum shows students that the material can be applied in a variety of ways and understood in a variety of contexts. media-focused resources have been developed using sources as varied as television shows to broadway shows (wooten et al. 2021a). this variety of resources allows an instructor to find a pop culture reference that they believe would be appropriate for their classrooms, and that they themselves are comfortable using. one of the growing concerns within the economics profession, however, is that the content within most lectures lacks diversity (bayer and rouse 2016; stevenson and zlotnik 2018; al-bahrani 2020). while faculty may find it more comfortable to share examples that they more easily relate to, it may further perpetuate the diversity issue. based on data collected by 1 corresponding author: associate professor, department of economics, room e970, monash university, vic 3800, australia. email: wayne.geerling@monash.edu 2 educational designer, faculty of business and economics, room 4.04, monash university, vic 3145, australia. email: kristofer.nagy@monash.edu 3 phd candidate, department of economics, university of arizona, america. email: rhee@email.arizona.edu 4 associate teaching professor, department of economics, 315 kern graduate building, penn state university, america. email: jjw27@psu.edu mailto:wayne.geerling@monash.edu mailto:kristofer.nagy@monash.edu mailto:rhee@email.arizona.edu mailto:jjw27@psu.edu 41 |journal for economic educators, 22(1), 2022 asarta, chambers, and harter (2021), at least half of the surveyed instructors never include references to diversity and inclusion issues or references to gender issues in their introductory classroom. this has not been the case for previous surveys of introductory educators, but it’s unclear what has caused that drop. in a survey of conference attendees by goffe and kauper (2014), the majority of respondents recognized that a purely didactic lecture was ineffective in improving student learning, but this style of information dissemination prevailed because the cost of doing something different was too high. perhaps the costs associated with integrating discussions centered around diversity are also perceived as too high currently. this paper aims to reduce that burden by outlining a series of diverse teaching guides using the popular korean music genre: k-pop. we develop three teaching guides that can be used in both upper-level and introductory university economics courses. the teaching guides cover topics that are more complex than those covered in previous publications and focus on providing resources for advanced courses to integrate diverse pop culture into their classroom. instead of relying on traditional english-based media, we identify references in k-pop music videos. in this sense, the paper provides two benefits: a diversification of pop culture resources and resources that can be used in more advanced classes. literature review the use of pop culture in the classroom has had a strong presence in the economics education literature over the past few decades (wooten et al. 2021a). most of that work, however, has been targeted at introductory-level content and has referenced english-language media. focusing on introductory content allows a wider range of faculty to use media in their classroom, but it means that upper-level economics instructors lack an equivalent variety of resources for their courses. previously, upper-level instructors would need to search through a site like the economics media library (wooten 2018) to find clips associated with the topics they were teaching and then develop the corresponding assessment questions. researchers have started to fill this void by identifying resources and developing teaching guides that allow educators to teach more advanced concepts in behavioral economics courses (briguglio et al. 2021) or game theory courses (geerling et al. 2021a). while most pop culture resources are based on english-language media, a limited set of resources exist to aid instructors who wish to teach with more diversity (geerling et al. 2021b; wooten et al. 2021b; bose 2020). as streaming services like spotify and netflix become increasingly ubiquitous, students are exposed to a wider variety of pop culture than what they would typically find as part of their traditional free-to-air or cable subscription. these streaming services have broken down the barriers associated with finding and understanding foreign media (ferreira and waldfogel 2013) and have resulted in people consuming genres that are much more similar to each other than in the past (a. krueger 2019). educators continue to identify a variety of songs that can be used in the classroom. whether it’s music genres like country music (melichar 2018) and broadway (rousu 2016) or entire playlists dedicated to fields like environmental economics (rousu, melichar, and hackenberry 2021) and macroeconomics (ben abdesslem 2021), great songs can likely be found and used to teach concepts in the classroom. beyond the engaging nature of songs in general, music can also be used as an effective scaffolding tool by educators who are looking to take some common element among students (e.g., music) to focus on teaching more difficult concepts (van de pol et al. 2010; j. krueger 2019). this approach can be beneficial for some students so 42 |journal for economic educators, 22(1), 2022 long as the selected song is specific to the economic content being assessed by the instructor (harter, 2003; mcclough and heinfeldt 2012; sickel 2019). the lesson plans outlined below purposefully link the economic topic to the song such that students and educators don’t have to guess why they’re listening to any particular song. an overview of k-pop the korean wave (hallyu in korean) is a collective term used to describe the growth of korean culture encompassing everything from music, movies, and drama to online games and korean cuisine.5 the south korean government is dedicated to becoming the world’s leading exporter of popular culture, and k-pop is one of the many “soft powers” used to achieve this aim. while k-pop is a genre of popular music that originated in south korea, it draws influence from a range of genres like pop, experimental, rock, hip-hop, r&b, electronic, house, and dance.6 the birth of k-pop can be traced to a 1992 performance by seo taiji & boys on a south korean television talent show, which opened the door to younger generations of artists.7 modern “idol culture” began in the mid-1990s and is centered around artists with massive, dedicated fan bases predominantly composed of teenagers and young adults.8 k-pop is now a multibillion-dollar global industry. groups like bts and blackpink sell out international concerts within minutes, including venues in north america and europe. in august 2020, bts was the first all-south korean group to reach #1 on the us billboard’s hot 100 chart,9 and blackpink was the first k-pop group to play coachella,10 the largest north american music festival. the contribution bts makes to the south korean economy through album and ticket sales, merchandise, and attracting tourists to south korea is estimated at close to $5 billion per year – about half a percent of the country’s annual gdp.11 in the latest global music report produced by the international federation of the phonographic industry (ifpi), bts was named the best-selling artist of 2020 (ifpi 2021, p. 6).12 the award is calculated according to an artist or group’s worldwide sales, downloads, and streams. the south korean group is the first non-western act to win the award and the first whose songs are not predominantly sung in english. according to the same report, south korea was the fastest-growing major market in the world with year-on-year growth of 44.8% (ifpi 2021, p. 16), and the country was ranked sixth in music markets worldwide (ifpi 2021, p. 11). the growth of k-pop internationally has been accentuated through the proliferation of digital music, now available through global platforms such as youtube and spotify (kim 2017). since the late 2000s, k-pop’s fan base has extended well beyond asia thanks to social media platforms such as facebook, twitter, and youtube. fans from across the globe can now view, download, purchase, or stream music. the major push of k-pop into western markets began 5 https://martinroll.com/resources/articles/asia/korean-wave-hallyu-the-rise-of-koreas-culturaleconomy-pop-culture/ 6 https://www.lafilm.edu/blog/a-brief-history-of-kpop/ 7 https://www.bbc.com/culture/article/20200309-the-soft-power-roots-of-k-pop 8 https://www.economist.com/asia/2010/01/25/hallyu-yeah 9 https://www.billboard.com/articles/business/chart-beat/9442836/bts-dynamite-tops-hot-100-chart 10 https://www.vulture.com/2019/04/coachella-2019-blackpink-set-was-historic-moment-for-k-pop.html 11 https://www.npr.org/2021/07/28/1021968141/bts-the-band-that-moves-the-economy 12 the top five artists were: 1. bts, 2. taylor swift, 3. drake, 4. weeknd, 5. billie eilish; see “global music report 2021”, international federation of the phonographic industry, p. 6. available to download at https://www.ifpi.org/ifpi-issues-annual-global-music-report-2021/ https://martinroll.com/resources/articles/asia/korean-wave-hallyu-the-rise-of-koreas-cultural-economy-pop-culture/ https://martinroll.com/resources/articles/asia/korean-wave-hallyu-the-rise-of-koreas-cultural-economy-pop-culture/ https://www.lafilm.edu/blog/a-brief-history-of-kpop/ https://www.bbc.com/culture/article/20200309-the-soft-power-roots-of-k-pop https://www.economist.com/asia/2010/01/25/hallyu-yeah https://www.billboard.com/articles/business/chart-beat/9442836/bts-dynamite-tops-hot-100-chart https://www.vulture.com/2019/04/coachella-2019-blackpink-set-was-historic-moment-for-k-pop.html https://www.npr.org/2021/07/28/1021968141/bts-the-band-that-moves-the-economy https://www.npr.org/transcripts/1021968141 https://www.ifpi.org/ifpi-issues-annual-global-music-report-2021/ https://www.ifpi.org/ifpi-issues-annual-global-music-report-2021/ https://www.ifpi.org/ifpi-issues-annual-global-music-report-2021/ 43 |journal for economic educators, 22(1), 2022 with psy’s parody of south korean culture in the hit song “gangnam style” in 2012. it became the first youtube video to achieve 1 billion views, and in the five years after its release, the original video was viewed more than 3 billion times. until 2017, it was youtube’s most-viewed video.13 hallyu has been rising for two decades, but k-pop has become increasingly visible to global audiences particularly in the past 10 years. several k-pop artists, including blackpink and twice, now regularly crack the top 10 of the billboard singles and albums charts, but bts remains at the apex. in the period since 2017, bts has had five #1 songs on the us chart, eight top 10 hits, and 22 singles in total be listed on the billboard hot 100.14 “dynamite,” their first song to be sung exclusively in english, debuted at #1 in august 2020, and the band has topped the billboard 200 main album chart five times.15 in 2020, bts was named time magazine’s entertainer of the year.16 the influence of hallyu extends to other aspects of south korean popular culture, including drama and film. in march 2020, “parasite” became the first non-english language film to win an academy award for best picture.17 in 2021, netflix’s dystopian korean-language drama “squid game” became a global sensation, smashing ratings records, and generating more than $1 billion for the streaming service since its september 17th premiere.18 a more comprehensive history of the south korean music and media industries lies outside the scope of this paper, but this summary has hopefully illustrated the growth of k-pop in recent decades and its transcendent effect on popular culture across the globe. methodology the teaching guides have been constructed in a way that allows the instructor to customize them for their audience and context, be it a remote, hybrid, or resident course. the questions accompanying each teaching guide have been designed to allow students to work on their own, in pairs as part of a think-pair-share activity, or in small groups. this teaching strategy allows it to be scaled up to large classes (buckles et al. 2013) or if classes are held remotely through video conference platforms like zoom (wooten et al. 2020b). each guide has 4 to 6 questions, ranging in difficulty from easy to intermediate-level, with the questions having the potential to be used in a standalone way, as a sequence, or covered as a full set, provided the instructor allows up to 30-45 minutes per teaching guide. with minor adjustments, an instructor could adapt the questions to be answered with a classroom response system (e.g., iclicker or poll everywhere) or played as an in-class game (e.g., kahoot! or quizizz). wooten et al. (2020a) and calhoun and mateer (2013) summarize the benefits of teaching economics with pop culture references using classroom response systems and in-class gaming systems. the teaching guides themselves can be adapted to a range of different learning situations: (1) assigned as part of an assessment or discussed in class; (2) used to introduce a concept; (3) as 13 https://www.vox.com/culture/2018/2/16/16915672/what-is-kpop-history-explained 14 in july 2021, bts made history again when their songs “butter” and “permission to dance” took turns at #1 on billboard’s hot 100 chart; see https://www.scmp.com/lifestyle/k-pop/artists-celebrities/article/3142861/bts-makehistory-again-songs-butter-and 15 https://www.billboard.com/articles/business/chart-beat/9490955/bts-be-billboard-200-albums-chart-number-one 16 https://time.com/entertainer-of-the-year-2020-bts/ 17 https://www.oscars.org/oscars/ceremonies/2020 18 https://www.nydailynews.com/snyde/ny-k-pop-bts-korean-popular-culture-20211101agwoda3sj5dxhjgbui4ia26ifq-story.html https://www.vox.com/culture/2018/2/16/16915672/what-is-kpop-history-explained https://www.scmp.com/lifestyle/k-pop/artists-celebrities/article/3142861/bts-make-history-again-songs-butter-and https://www.scmp.com/lifestyle/k-pop/artists-celebrities/article/3142861/bts-make-history-again-songs-butter-and https://www.scmp.com/lifestyle/k-pop/artists-celebrities/article/3142861/bts-make-history-again-songs-butter-and https://www.billboard.com/articles/business/chart-beat/9490955/bts-be-billboard-200-albums-chart-number-one https://time.com/entertainer-of-the-year-2020-bts/ https://www.oscars.org/oscars/ceremonies/2020 https://www.nydailynews.com/snyde/ny-k-pop-bts-korean-popular-culture-20211101-agwoda3sj5dxhjgbui4ia26ifq-story.html https://www.nydailynews.com/snyde/ny-k-pop-bts-korean-popular-culture-20211101-agwoda3sj5dxhjgbui4ia26ifq-story.html 44 |journal for economic educators, 22(1), 2022 a refresher; (4) in a recitation or tutorial; (5) as part of an exam review. we feel they work best as an ungraded, formative assessment following a lesson on a particular topic, but assigned before the subsequent lesson. students would then be expected to recall concepts from the previous lesson to answer the warm-up activity and assessment questions. this approach is supported by research that has found practice tests improve performance on final tests (roediger and karpicke 2006; putnam et al. 2017). by making these assessment activities low/no stakes and eliminating a grade component, it removes any anxiety in providing a wrong answer – which can still promote learning, particularly with follow-up feedback and discussion given (kornell, hays and bjork 2009). teaching guides given that microeconomics is fundamentally about human behavior and decision making, its principles can be applied to everyday life. thus, drawing on pop culture to illustrate concepts taught at the secondary level or in an undergraduate principles-level course is quite straightforward. finding suitable songs for upper-level topics is more challenging. the songs referenced below cover concepts typically taught at the end of a first-year microeconomics course, but which are also taught in more depth at the intermediate level, such as indifference curve analysis, behavioral economics and game theory. the math is intentionally limited in each teaching guide so that students are motivated to learn the intuition behind the concepts before being asked to learn more mathematically rigorous material. the teaching guides include information about the artists and songs, the economic concepts covered in each music video, a warm-up exercise for the particular topic and a set of questions with suggested answers that reference concepts found in the music video. each music video includes english captioning as well as commentary on relevant economics principles. the three artists chosen for this paper are bts, blackpink and twice. bts and blackpink are the two most popular k-pop groups in and outside of korea, with huge global fanbases, so their inclusion requires no special mention. twice became the first girl group in history to hit #1 on the billboard top album sales chart with an ep (mini album) in july 2021. while not enjoying the same stratospheric level of popularity as bts and blackpink, twice are in that second tier of k-pop artists who are well known and becoming increasingly popular outside of east asia. lesson #1: budget constraints and indifference curves song: more and more (2020) artist: twice length: 4 minutes music video url: https://music4econ.com/home-1/twice-more-and-more-1 summary: when a product or service is an economic good, “more is better.” however, in reallife we have a limited amount of money available. to maximize our utility with limited money, we find a combination of goods where the budget constraint and the indifference curve meet. https://music4econ.com/home-1/twice-more-and-more-1?rq=twice https://music4econ.com/home-1/twice-more-and-more-1?rq=twice 45 |journal for economic educators, 22(1), 2022 concepts: budget constraints, consumer optimization, economic goods, indifference curves, utility, utility maximization. key lyric: “you'll be begging for more. 'cause you can't get enough. you'll be craving for more. 'cause it's never enough”. expected time to complete: 30 minutes warm-up activity: assume you have $100 to spend at the mall later today. what factors determine the things you buy? suggested response: income and the prices of the goods we wish to purchase comprise the buyer’s budget constraint. we assume people want to maximize utility, so people buy a combination of goods that give them the highest level of satisfaction. in economic terms, they attempt to reach their highest indifference curve possible given their budget constraint. utility maximization is a constrained optimization problem. assessment: play the clip above and ask students to consider the following questions: 1. what is the difference between an economic good and an economic bad? what is the relationship between consumption and utility for each? 2. how can we illustrate the difference between an economic good and an economic bad with indifference curves? label the vertical axis as “slices of pizza” and the horizontal axis as “cans of pepsi”. 3. jeongyeon must decide how much pizza and pepsi to consume and has drawn the following indifference curve which illustrates the following combinations she is indifferent between. which assumption of indifference curve analysis has she violated in the indifference curve below? 46 |journal for economic educators, 22(1), 2022 4. jeongyeon is now given a budget of $10 to buy pizza and pepsi. pizza costs $2 per slice and pepsi costs $1 per can. illustrate the following combinations on a budget constraint with pizza on the vertical axis and pepsi on the horizontal axis. what are the affordable bundles? • 0 pepsi cans, 5 pizza slices • 4 pepsi cans, 3 pizza slices • 2 pepsi cans, 2 pizza slices • 10 pepsi cans, 5 pizza slices • 10 pepsi cans, 0 pizza slices 5. jeongyeon must decide between a combination of 4 cans of pepsi and 3 slices of pizza (4,3) or 2 cans of pepsi and 4 slices of pizza (2,4). use the diagram below to help jeongyeon discover her optimal consumption level.19 suggested answers: 1. an economic good is one in which consuming more leads to higher total utility (marginal utility is positive). an economic bad is one in which consuming more leads to lower total utility (marginal utility is negative). 2. quadrant i is the relevant region for our analysis. consuming more pizza and pepsi leads to higher utility. marginal utility is positive. in the other quadrants (ii, iii and iv), at least one of the items is reducing the consumer’s utility.20 19 diagram came from dirk mateer and lee coppock, principles of microeconomics 3e (w.w. norton: new york, 2021), p. 538. 20 ibid, p. 531. 47 |journal for economic educators, 22(1), 2022 3. indifference curves represent the various combinations of two goods that yield the same level of utility. by definition, points a, b and c should be equally preferable. however, point b has 1 more slice of pizza than point a. point c has 3 more cans of pepsi than point a. therefore, under the “more and more” assumption, points b and c should be strictly preferred to point a, which contradicts what we see in the thick indifference curve below.21 4. the following bundles are affordable because they lie on the budget constraint: (0,5), (4,3), (2,2) and (10,0). note: (2,2) is affordable, but lies inside the budget constraint, as jeongyeon is only spending $6. she can afford to buy more pepsi and pizza with the remaining $4, which will increase her total utility. (10,5) is unaffordable. with the prices given, she would need $20 to buy this combination, but only has $10.22 21 ibid, p. 535. 22 ibid, p. 532. 48 |journal for economic educators, 22(1), 2022 5. jeongyeon maximizes her utility by consuming 4 cans of pepsi and 3 slices of pizza. both (2,4) and (4,3) are on the budget constraint, so both combinations are affordable. the combination (4,3) lies on a higher indifference curve (ic3) than (2,4), so that combination must make her happier because of the “more and more” assumption. at (4,3) the slope of the budget constraint is equal to the slope of the indifference curve. what she must give up is equal to what she is willing to give up. lesson #2: ultimatum game song: how you like that? (2020) artist: blackpink length: 3 minutes 3 seconds music video url: https://music4econ.com/home-1/blackpink-how-you-like-that summary: the nash equilibrium of an ultimatum game is that proposers should offer $.01 to the receivers and keep the rest for themselves. assuming receivers are income maximizers, the receivers should accept this offer. in lab experiments, this is not the typical outcome: proposers usually offer more money to the receivers than the theory would predict and receivers reject offers that they feel are unfair, even though that means they earn nothing. concepts: backward induction, behavioral economics, fairness, nash equilibrium, rational choice, ultimatum games. key lyric: “your girl needs it all and that's a hundred…i want what's mine.” expected time to complete: 30 minutes https://music4econ.com/home-1/blackpink-how-you-like-that?rq=blackpink https://music4econ.com/home-1/blackpink-how-you-like-that?rq=blackpink 49 |journal for economic educators, 22(1), 2022 warm-up activity: play the ultimatum game with your students for 5-10 minutes.23 1. put students into pairs. 2. each pair gets $1,000 in participation points to divide.24 3. player 1 writes down an amount they are willing to offer their partner. if player 2 accepts their offer, they both earn the points. if player 2 rejects their offer, neither player gets anything. 4. to ensure friends don’t play with each other, students can be randomly partnered by drawing names from a bowl. 5. demonstrate the sequential nature of the game by noting that player 1 “moves first” because they must determine the initial offer and that player 2 can decide to accept or reject their offer after the decision is made by player 1. assessment: play the clip above and ask students to consider the following questions: jennie and lisa from blackpink are deciding how to split $1,000 in an ultimatum game. jennie can make an offer to lisa, who can either accept or reject it. if lisa accepts, they will split the money according to jennie’s offer (see the decision tree below). if lisa rejects the offer, neither of them get any money. 1. what is the nash equilibrium in this game assuming we use the standard rational choice model? use backward induction and the decision tree above to explain your answer. 23 when this experiment has been run in the authors’ classes, students typically reject unfair offers even though they hurt themselves by receiving $0 instead of $1 (or any other low-ball offer). player 2 does this to protest the unfairness of player 1. 24 instructors could use bonus points, or base it on a dollar, if they are worried that students won’t take this seriously. a bag of candy could also work provided the candy was easily divisible, e.g. in small packets. 50 |journal for economic educators, 22(1), 2022 2. blink (blackpink’s fan club) has a reputation for making decisions based on “fairness” alone. if members of this group played the ultimatum game among themselves, what results would we expect to see? assume that player 1 suggests how to allocate $1,000 and player 2 decides to reject or accept. 3. traditional economic theory suggests that when two traders each expect gains from a trade, they will reach an agreement, no matter how unequal those gains may be. frans de waal, a primatologist, replicated the ultimatum game with capuchin monkeys in his ted talk “moral behavior in animals” (de waal 2011). play the scene from 12:12-16:33 in class. what happens when two monkeys are paid unequally? is an unfair proposal accepted or rejected? 4. jennie is majoring in economics and has just read experimental results on the ultimatum game from gueth et al. (1982) which shows that, on average, proposers would offer between 30% and 40% of the endowed amount and that this split is almost always accepted by researchers. when the proposal falls to less than 20% of the endowment, the rejection rate exceeds 50%. if jennie thinks lisa would behave as an average receiver, how much would she offer lisa in an ultimatum game with $1,000 to split? suggested answers: 1. the nash equilibrium is (unfair proposal, accept). jennie receives $999, lisa receives $1. this is a sequential game; therefore, we can use backward induction to find the nash equilibrium. first, we find the subgames and then from the very bottom subgame to the very top, we figure out what a player would do for each subgame given the information from the subgame below. in this game, there are 3 subgames. in the bottom left subgame, lisa is the player who chooses an action. if lisa chooses to accept jennie’s proposal she receives $500. if lisa chooses to reject jennie’s proposal she receives $0. since $500 > $0, lisa chooses to accept. in the bottom right subgame, lisa is the player who chooses an action. if lisa chooses to accept jennie’s proposal she receives $1, whereas if she rejects she receives $0. since $1 > $0, lisa chooses to accept. in the very top subgame, jennie is the player who takes an action. if jennie chooses to make a fair proposal, she will receive $500. if jennie chooses to make an unfair proposal, she will receive $999. since $999 > $500, jennie chooses to make an unfair proposal. 51 |journal for economic educators, 22(1), 2022 2. if members of blink cared more about fairness, the most common outcome would be the proposers making a fair proposal to split the $1,000 with the receivers equally, which the receivers would accept. therefore, they would each get $500. 3. capuchin monkeys show their displeasure if given a smaller reward than a partner receives for performing a similar task. the monkey which receives cucumber as a reward becomes highly agitated when it discovers that its companion is receiving grapes instead. the conclusion de waal draws from this study is that monkeys share many behavioral traits we associate with humans: fairness, reciprocity, empathy and cooperation. an unfair proposal is rejected! 4. jennie will offer lisa $200 because she knows that an average receiver accepts offers >= 20% and rejects offers < 20%. 52 |journal for economic educators, 22(1), 2022 lesson #3: game theory song: seesaw (2018) artist: bts length: 4 minutes 5 seconds music video url: https://music4econ.com/home-1/bts-seesaw summary: the battle of the sexes game has two nash equilibria where each player prefers a different nash equilibrium. in experiments, to reach both nash equilibria equally (alternate nash equilibrium), the two players must coordinate. however, since each player tries to reach their preferred nash equilibrium, coordination is not easy. communication, signaling and sequencing moves can be a solution to this problem. concepts: battle of the sexes game, coordination, game theory, nash equilibrium, nash equilibria, sequential, signaling, strategies. key lyric: “let’s not drag it on and do as we please. let’s now make the decision whether to get off or not. a repetitive seesaw game. now, stop.” expected time to complete: 45 minutes warm-up activity: break your students into pairs, then pose the following scenario. there is a k-pop loving couple who have to decide which concert to attend that night. one person wants to see bts while the other wants to see blackpink. unfortunately, the two concerts are on at the same time and both of their cellphones are dead. both of them are worse off when they go to a concert separately compared to when they go to a concert together. in other words, they would rather go to a concert together even though it is a concert they do not like than go to different concerts separately. how can we solve this problem? ask students to list their responses on a notecard and then share their solutions with the class. suggested response: there is no unique, correct answer here, but some popular answers are: 1. the couple decides to take turns. 2. one of them sacrifices for the other. 3. follow the one who has a stronger payoff from the concert they want to attend. 4. take the initiative and make the other partner come with you. 5. don’t go to both concerts and find another activity to do together. this hypothetical scenario is an example of a two-player coordination game that also involves elements of conflict. assessment: play the clip above and ask students to consider the following questions: jimin and rm from bts need to decide which songs the group will perform at the upcoming mtv music awards. jimin is the row player and rm is the column player in the payoff matrix https://music4econ.com/home-1/bts-seesaw?rq=seesaw https://music4econ.com/home-1/bts-seesaw?rq=seesaw 53 |journal for economic educators, 22(1), 2022 below. each of them has two bts songs they want to sing. use this payoff matrix to answer the questions that follow. rm jimin dynamite permission to dance dynamite 2, 1 0, 0 permission to dance 0, 0 1, 2 1. what are the two nash equilibria in the game above? 2. does each player have a particular nash equilibrium that they prefer more than the other? 3. let’s say we did an experiment where 2 players played this game 10 times with each other. what patterns do you think we would detect? 4. some patterns are not ideal, but what are some possible solutions, which help players reach an optimal outcome in terms of payoffs? suggested answers: 1. the two nash equilibria are: (dynamite, dynamite) and (permission to dance, permission to dance). step 1: let’s assume we are jimin. when rm chooses dynamite, we have 2 strategies: dynamite and permission to dance. when rm chooses dynamite, if we choose dynamite, our payoff is 2, and if we choose permission to dance our payoff is 0. since 2 > 0, when rm chooses dynamite we want to choose dynamite too. when rm chooses permission to dance, if we choose dynamite our payoff is 0, and if we choose permission to dance, our payoff is 1. since 1 > 0, when rm chooses permission to dance, we also want to choose permission to dance. step 2: let’s assume we are rm. when jimin chooses dynamite, we have 2 strategies: dynamite and permission to dance. when jimin chooses dynamite, if we choose dynamite, our payoff is 1, and if we choose permission to dance our payoff is 0. since 1 > 0, when jimin chooses dynamite we want to choose dynamite too. when jimin chooses permission to dance and if we choose dynamite our payoff is 0, and if we choose permission to dance, our payoff is 2. since 2 > 0, when jimin chooses permission to dance, we also want to choose permission to dance. step 3: combining the results from above we have two nash equilibria: (dynamite, dynamite) and (permission to dance, permission to dance). 2. the two nash equilibria are (dynamite, dynamite) and (permission to dance and permission to dance). 54 |journal for economic educators, 22(1), 2022 jimin’s payoff from (dynamite, dynamite) is 2 and his payoff from (permission to dance, permission to dance) is 1. since 2 > 1, jimin likes the (dynamite, dynamite) nash equilibrium better than the (permission to dance, permission to dance) equilibrium. rm’s payoff from (dynamite, dynamite) is 1 and his payoff from (permission to dance, permission to dance) is 2. since 2 > 1, rm likes the (permission to dance, permission to dance) nash equilibrium better than the (dynamite, dynamite) nash equilibrium. 3. here are the four most common experimental results: a. one person gets their preferred equilibrium consistently. b. the two players alternate equilibria (take turns like a seesaw!) c. they play different strategies with frequencies close to the mixed strategy nash equilibrium. d. they keep playing (dynamite, permission to dance) and get zero payoff. each player keeps choosing the strategy that represents the nash equilibrium that they prefer. 4. there are many creative solutions which match with the solutions to the warm-up activity. two solutions we can take from experimental economics are: (1) communication and (2) make it a sequential game. communication stimulates pattern 2 (the seesaw pattern!) good communication helps players avoid the worst-case scenario (both earning 0 payoff) and promotes a fair outcome. making it a sequential game stimulates pattern 1. the first player to go chooses the strategy that represents the nash equilibrium they want, and the second player chooses the same strategy to avoid 0 payoff. conclusion behavioral economics, game theory and indifference curve analysis are challenging topics to teach. many students struggle to pick up the intuition when the concepts are taught through abstract mathematical methods alone. this material can be applied not only to principles-level courses, where these concepts are first introduced, but also to more advancedlevel courses, where the clips can be utilized as supplementary material to motivate deeper student interest, engagement, and discussion. this paper builds on the work of previous educators who have contributed to the creation of diverse teaching resources using pop culture. whereas previous publications typically focused on mapping concepts to principles-level courses, this paper is the first to introduce three teaching guides that can be used in both upper-level and principles-level economics courses. we hope that, over time, diverse and inclusive media will become standard in all introductory economics course and that the use of pop culture will become more common in upper-level courses as a way to engage students, as a refresher, or a lead-in to the more abstract concepts. references al-bahrani, a.a. 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(2021b). diversifying the use of pop culture in the classroom: using k-pop to teach principles of economics, international review of economics education, 38: 100220. https://www.aaea.org/userfiles/file/aetr_2021_002rprooffinal.pdf https://www.aaea.org/userfiles/file/aetr_2021_002rprooffinal.pdf https://www.aaea.org/userfiles/file/aetr_2021_002rprooffinal.pdf 33 |journal for economic educators, 18(1), 2018 undergraduate research connecting cultural gender norms and national prosperity molly p. howell and christopher c. klein1 abstract regression analysis is used to investigate the relationship between gdp per capita and several variables that capture gender norms in 91 countries. our results largely mirror the literature in that characteristics of more flexible gender roles are associated with higher per capita national income. nevertheless, some anomalies arise and we discuss some routes for their investigation in future research. jel codes: j11, j16, o15, o35 keywords: gender norms, gdp, fertility, labor force participation introduction the range of cultural habits and customs in the modern world is broad. particularly in the case of norms that govern the behaviors of women, expectations and available opportunities vary widely among diverse populations and cultural traditions. prior studies have found that per capita income growth, or per capita gdp, is positively related to female labor force participation and education, but negatively related to fertility rates, maternal mortality, and age at first birth or first marriage. in an attempt to understand how these expectations for women’s roles and the circumstances of women affect the prosperity of the nations in which they abide, we analyze crosssection data from 91 countries after the year 2000 for links between per capita gross domestic product (gdp) and representative variables reflecting these norms. generally, we find that indicators of less restrictive roles for women are positively related to gdp per capita. there are a few anomalies, however, that provide avenues for future research. the next section reviews the literature on women’s roles and national economic growth or income. we lay out our estimation strategy after that, then discuss the data. the results are summarized next, followed by a brief conclusion. literature review ozutnc, chi oo, and serin (2015) studied ties between long-term economic growth and gender norms in the asia pacific region between 1990 and 2010. they found that annual per capita income growth was positively associated with the fertility rate, the female labor force participation rate, and female primary school enrollment. similarly, torabi and abbasi-shavazi (2015) showed a link between women’s human capital and economic growth in the middle east and north africa. they concluded that countries with lower maternal mortality, higher female literacy, more female 1 this research is based on molly howell’s econometrics class project at middle tennessee state university where christopher klein (chris.klein@mtsu.edu) is a professor of economics and served as class instructor and mentor. mailto:chris.klein@mtsu.edu 34 |journal for economic educators, 18(1), 2018 tertiary education, and professional childbirth attendance tended to have higher national-level income. santelli, song, garbers, sharma, and viner (2017) examined adolescent fertility rates and several macroeconomic variables. they found that the recent global decline in adolescent fertility is related to gdp per capita, income inequality, and national educational expenditures, with rising national income being the most important factor. sarah carmichael (2011) studied and found a relationship between educational attainment, the age of a woman at first marriage, and the spousal age gap. she concluded that education is a significant factor in increasing female age at first marriage. estimation strategy based on the literature, we hypothesize that gdp per capita is related to indicators of gender roles. to test this, we estimate regression equations of the form: gdp per capita = b0 +b1 (literacy ratio) + b2 (lfp ratio) + b3 (total fertility) + b4 (maternal mortality) + b5 (age at first birth) + u the independent variables were chosen to capture cultural norms and circumstantial realities that the literature suggests are associated with national prosperity. therefore, we expect the following results for the regression coefficients. b1: the coefficient of the ratio of literate women to literate men (literacy ratio) should be positive. a higher literacy ratio can indicate that higher levels of education are available to a wider portion of the population, and higher levels of education frequently translate into higher wages. b2: the coefficient of the ratio of female to male participation in the labor force (lfp ratio) should be positive. a higher labor force participation ratio relative to men shows that more women participate in work outside of the home relative to men. a higher female to male labor force participation ratio suggests that the total labor force participation rate in a country is higher compared to countries with low female to male participation ratios. a higher rate of total participation maybe associated with a higher gdp per capita, other things equal. b3: the coefficient of a country’s total fertility rate (tfr) is expected to be negative. this reflects the average number of children that would be born to each woman, if all women lived through their childbearing years. increasing the number of children in a family can translate into more time spent childrearing by the parents, and less time spent working or attaining an education. this sacrifice of potential income maybe linked to lower gdp. also, a high fertility rate increases the total population faster than a low fertility rate, meaning that total gdp is divided by a larger number to attain a relatively smaller gdp per capita. b4: the coefficient of the maternal mortality rate (mmr), as measured in deaths per 10,000 live births, should be negative. a higher mortality rate may lead to fewer mothers returning to the labor force, lowering gdp per capita. this may also reflect poor health care or nutrition that may reduce labor productivity. b5: the coefficient of the average age of a mother at first birth is expected to be positive. women who have children later in life have more time to pursue further education and establish a career. this may lead to higher pay and a higher gdp per capita. we chose this variable over age at first marriage, since it is the birth of children and the accompanying childcare responsibilities that are more likely to interfere with education and career building. 35 |journal for economic educators, 18(1), 2018 data the variables and their sources are shown in the following table. not all data were available for all years. we selected data for each country that best matched the most recent year available. variable source gdp per capita the cia world factbook (data between 2009 and 2016) literacy ratio the cia world factbook (estimates between 2012 and 2016) lfp ratio united nations development programme, human development reports (2012 estimate) tfr the cia world factbook (2017 estimate) mmr the cia world factbook (2015 estimate) first birth the cia world factbook (estimates between 2007 and 2016) the resulting cross-sectional dataset includes observations for 91 countries. summary statistics are shown in table 1. table 1 variable minimum maximum mean std deviation gdp per capita 800 87,900 12,666 13,765 literacy ratio 0.4029 1.2596 0.8915 0.1620 lfp ratio 0.1970 1.0420 0.7504 0.1711 tfr 0.830 6.490 2.948 1.5169 mmr 2.0 1,100.0 221.2 242.9004 first birth 17.9 30.7 22.9 3.5133 results we tried several functional forms, including linear, polynomial, and log-linear forms for the regression equation. the log-linear regression produced the best fit, with an r2 value that was 0.14 and 0.44 higher, respectively, than the other two. the log-linear form also has the advantage of interpreting coefficients as elasticities or relative percentage changes. only the log-linear results are reported below. the first log-linear regression results are shown in table 2. five coefficients are significant, the r2 is 0.75 (adjusted r2 = 0.74) and the f-statistic (52.4) is significant at 1%. table 2 coefficients estimate std error t value p value intercept 5.10550 2.95485 1.728 0.0876 ln literacy ratio 0.85776 0.40525 2.117 0.0372 ln lfp ratio 0.33925 0.22912 1.481 0.1424 ln tfr 0.59850 0.26978 2.219 0.0292 ln mmr 0.20785 0.08084 2.571 0.0119 ln first birth 1.69006 0.85437 1.978 0.0512 we ran white’s test for heteroscedasticity in the r statistical package. this gave a chisquared statistic of 5.2109 with a p-value of 0.0224. the null hypothesis of homoscedasticity was 36 |journal for economic educators, 18(1), 2018 rejected at the 5% level of significance. the heteroscedasticity corrected results are shown in table 3. table 3 coefficients estimate std error t value p value intercept 5.105497 3.423411 1.4913 0.13957 ln literacy ratio 0.857756 0.451110 1.9014 0.06063 ln lfp ratio -0.339252 0.199328 -1.7020 0.09241 ln tfr -0.598505 0.320767 -1.8659 0.06551 ln mmr -0.207847 0.093499 -2.2230 0.02887 ln first birth 1.690062 0.971397 1.7398 0.08551 all of the coefficients of the explanatory variables are significant at the 10% level or better, although the intercept has become insignificant. only the maternal mortality rate is significant at better than 5%. all of the signs for the coefficients except for the female to male labor force participation rate ratio are as expected. although the sign for the labor force participation rate ratio was expected to be positive, one possible reason it could be negative is the exchange of time spent working for time spent attaining an education as gdp per capita rises. this could also be an income effect akin to a backward bending labor supply curve. as gdp per capita rises, some women may choose to work less outside the home relative to men, as part of the increased potential household income is “spent” on less market employment. this bears further investigation. another notable result is the magnitude of the coefficient on age at first birth. in table 3, this is 1.69, suggesting that a 1% increase in age at first birth is associated with a 1.69% increase in gdp per capita. this coefficient is over twice as large in absolute value as any other variables’ coefficient. is age at first birth a proxy for other gdp determinants? we fear it may be, such that further research is necessary to confirm the importance of this variable. for example, age at first birth may correlate with education levels or career opportunities that are not precisely measured by other variables. similarly, the relatively significant coefficient for the maternal mortality rate may occur as this variable serves as a proxy for technological levels, availability of public health services, or less income inequality or poverty. table 4 we did investigate possible multicollinearity among the explanatory variables. table 4 shows pairwise correlation coefficients for all of the explanatory variables along with variance inflation factors (vif). none of the vif’s exceed the commonly accepted value of 10 that ln mmr ln tfr ln lfp ratio ln lit ratio ln first birth ln mmr 1 ln tfr 0.849222734 1 ln lfp ratio 0.03715738 0.025156838 1 ln lit ratio -0.563697111 -0.669030218 0.238828437 1 ln first birth -0.856570138 -0.8225267 0.023597932 0.551283743 1 vif 4.99 5.07 1.15 2.05 4.33 37 |journal for economic educators, 18(1), 2018 indicates a serious problem, although tfr appears as the worst offender. consequently, table 5 shows the heteroscedasticity corrected results when tfr is dropped from the regression in table 3. table 5 coefficients estimate std error t value p value intercept 2.970226 3.720618 0.7983 0.426887 ln literacy ratio 1.253633 0.380703 3.2929 0.001440 ln lfp ratio -0.428138 0.207541 -2.0629 0.042137 ln mmr -0.285349 0.098564 -2.8951 0.004804 ln first birth 2.310199 1.054919 2.1899 0.031237 all of the coefficients in table 5 become more significant, but retain their former signs. the first birth coefficient increases to 2.31, perhaps deepening the mystery of the magnitude of this effect. note that the t-test of the tfr coefficient in table 3 is equivalent to an f-test between the two regressions in tables 3 and 4. since this test is significant, we would usually prefer the regression in table 3. we reserve any further investigation for future research. we also note that the direction of causation is not completely clear. do more femalefriendly gender norms lead to higher gdp per capita, or does higher gdp per capita lead to less restrictive norms for women? our research shows a significant association, but cannot answer the question of causality. conclusion while our results generally confirm findings in the literature, that variables consistent with more flexible gender roles for women are associated with higher per capita national income, we also find some anomalies. the negative sign of the female to male labor force participation rate ratio is the opposite of expected and the magnitude of the age at first birth coefficient is very large. both of these deserve more investigation in future research. more and better data allowing more regressions of various combinations of variables could eliminate the multicollinearity that we suspect. further research could analyze broader regressions by including data on the female to male ratio of education completion at the primary, secondary, and tertiary levels. the difficulty of finding data on these variables across a sufficient number of countries precluded their use here. additionally, studying the relationships among these variables in the context of a time series or panel regression could provide an interesting compliment to the understanding gained from the results reported here. references carmichael, sarah. 2011. “marriage and power: age at first marriage and spousal age gap in lesser developed countries.” history of the family, 16(4), 416-436. central intelligence agency. 2017. country comparison: gdp – per capita (ppp). retrieved https://www.cia.gov/library/publications/the-world-factbook/rankorder/2004rank.html. central intelligence agency. 2017. country comparison: maternal mortality rate. retrieved https://www.cia.gov/library/publications/the-world-factbook/rankorder/2223rank.html. central intelligence agency. 2017. country comparison: total fertility rate. retrieved from https://www.cia.gov/library/publications/the-world-factbook/rankorder/2127rank.html. 38 |journal for economic educators, 18(1), 2018 central intelligence agency. 2017. field listing: literacy. retrieved from https://www.cia.gov/library/publications/the-world-factbook/fields/2103.html. oztunc, h., chi oo, z., & serin, z. v. 2015. “effects of female education on economic growth: a cross country empirical study.” educational sciences: theory and practice, 15(2), pp. 349-357. santelli, j. s., song, x., garbers, s., sharma, v., & viner, r. m. 2017. “global trends in adolescent fertility, 1990–2012, in relation to national wealth, income inequalities, and educational expenditures.” journal of adolescent health, 60(2), 161-168. torabi, f., and mohammad jalal abbasi-shavazi. 2015. “women’s human capital and economic growth in the middle east and north africa.” journal of international women’s studies, 16(3), 237+. united nations, department of economic and social affairs, population division. 2013. world fertility report 2012 (united nations publication). retrieved from http://www.un.org/en/development/desa/population/publications/dataset/fertility/wfr2012 /wfr_2012/data_and_sources.html. united nations development programme. 2017. labour force participation rate (female-male ratio). retrieved from http://hdr.undp.org/en/content/labour-force-participation-ratefemale-male-ratio. 1 | journal for economic educators, 17(1), 2017 1 lecture, leisure, learning: teaching economic development abroad in india feler bose1 abstract nearly every college and university has a travel abroad program that students are encouraged to take advantage. there is a great deal of literature regarding studying abroad, but very little information on how to design an undergraduate study-travel economic course. this paper attempts to bridge this divide by tying insights from the travel abroad literature to my experience teaching economic development in india. the development course taught in india can be seen as a course with a lab component. this article describes what was done during a recent economic development course in india and reflects on what could be done in the future. key words: economic development, travel abroad, india jel classification: a22 introduction numerous people have written how to teach economics to undergraduates in an innovative way. becker and watts (1998) covers different ways to teach economics using sports, drama, or literature, etc. hall, et al., (2008) suggests using music to teach undergraduates, leet and houser (2003) talk about using movies to teach undergraduates, and hartley( 2001) uses great books from western civilization to teach economics to undergraduates. after surveying the literature, however, i was unable to find any information regarding using a travel course to teach economics. this article seeks to fill this gap by incorporating the travel abroad literature with my experience of teaching economic development in india. during the academic year 2012-2013, 289,408 students studied abroad for academic credit with 60% spending eight weeks or less2. this amounts to approximately 1% of the students enrolled in u.s. universities and colleges (babb, et al., 2013). based on data from the end of the last decade, about 3000 students from the u.s. go to india to study abroad on a yearly basis. in asia, india is the third most popular destination after china and japan. typically, u.s. students spend either a summer or a semester abroad. study abroad programs to india fall into four major categories: programs focusing on increasing knowledge about india, programs promoting “peace and understanding,” programs tied to academic and cultural issues, and programs to help the youth understand global issues. finding suitable faculty to make the study abroad program work in india is a major concern. one may utilize faculty from the home institution, or a local indian professor, although finding suitable indian faculty to teach american students can be a challenge (chow and kimberly, 2011). 1 associate professor of economics and business, falls school of business, anderson university, 1100 e. fifth street, anderson, in, 46012. 2 http://www.iie.org/research-and-publications/open-doors/data/us-study-abroad/infographic (accessed september 29, 2015). http://www.iie.org/research-and-publications/open-doors/data/us-study-abroad/infographic 2 | journal for economic educators, 17(1), 2017 2 yigitcanlar (2013) surveyed students who did not go abroad vs. students who did go abroad. the results show that students who went abroad received higher scores on the assignments. while this study is a major improvement over previous studies, the sample was not randomized. students who went abroad valued the networks formed, the cross-cultural engagement, and the unique experience. further, professors observed that students gained unique insights into the subject matter as well as cultural differences. one of the challenges of international travel is making sure that the logistics and organization is done properly to increase student satisfaction. a student can experience an economics course abroad in three primary ways. first, student may take any number of standard economics courses in a foreign institution. second, a college or a professor offers a standard economics course abroad for a few weeks. these two methods are not really a new way of teaching economics, but just offer a traditional course in an international environment. the two methods require a lot of planning. numerous standards have been written for student conduct, student outcomes, program resources, health and safety, and so forth, (custodi and lenhart, 2015). the third method involves taking a class abroad and using the country as a case study in understanding the subject matter. this third method is the most difficult to organize, requiring one to follow the above standards, but also to engage in additional program planning. nevertheless, it may be the most rewarding. i focus my attention on this third method. in my career, i have taught a dozen different economics courses at the undergraduate level. the course that i found most suitable for teaching abroad was economic development. when students are coming from a developed country like the u.s., the most suitable countries to visit are fast growing developing countries.3 this allows the use of the developing country as an example during lectures and also allows for visits to places, like companies, for students to learn about how changing institutions affect development. therefore, i chose india.4 section two provides background information on the course. section three details some applications of course content to india. section four provides information on how i organized the travel abroad program. section five reviews student responses from the on campus and travel courses as well as my response to the courses. section six concludes. background information and course development the college where i taught offered four-week spring term in the month of may during which students take an intensive course in one subject area. each student is required to take two spring term courses prior to graduation. one of these spring term courses must be a course that crosses “geographical, cultural or disciplinary boundaries.” for this reason, many faculty offer travel courses, often to other countries, in different subject areas.5 in order to reach a sufficient enrollment, provost office asked that i teach the development course as both a 300 level course (ecn 380) with prerequisites and as a 100 level course (ecn 180) with no prerequisites. the 300 level students were typically economics or business majors and had taken at least the two principles of economics courses. 100 level students ranged from freshmen to seniors who needed to meet a liberal arts requirement for graduation and had no economics background. designing and teaching a course at the 100 and 300 levels simultaneously produced several challenges. immediately, it was difficult to use a standard economic development textbook written 3 in a fast growing developing country, one can compare highly developed areas with areas that have seen very little development. 4 i also grew up there. 5 there are also many spring term courses offered on campus. 3 | journal for economic educators, 17(1), 2017 3 for an upper level course. the course instead revolved around books and journal articles that were easily accessible to a person with little economics background, but were also challenging enough for an upper level student. further, the use of mathematics in the course was minimized. the course benefited from being designed from the bottom up as a travel course. a standard textbook-based development course focusing on growth models, savings, investment, capital flows, and monetary policy would be difficult to teach as a travel course. the only people of interest in such a course are policy makers and top-down planners. further, a textbook creates too many constraints in a travel course. consequently, i chose five easily readable economic development books, one book on india,6 and numerous articles that were available online so that the students could print them beforehand7 or keep them in a digital format. appendix a provides a complete list. my course emphasized topics such as property rights, legal systems, trade, religion, education, medical tourism, and anarchy that are easily incorporated into a travel course. these topics allow students to interact with firms, individuals, and policy makers that had a vested interest in these topics. further, these topics impact development at the micro level which then impacts overall growth and development. to proceed, i broke the course up into fourteen units (see appendix a). each unit would take about one week to cover in a regular semester and would take approximately one class meeting during the spring term.8 the first four units laid the foundations of the course covering free trade, supply and demand, externalities, what is meant by economic growth, property rights, public choice economics, etc. these topics made sure that all the students were on the same page, as the students did not all have the same economics background. for the 100 level students, these topics were all new, whereas for the 300 level students, this was review. moreover, to minimize lecture time during the travel component, the students were required to complete the first four units prior to start of travel date.9 the next two units mainly used easterly’s book (easterly, 2001) on the failure of the top down approach to development (as directed by the world bank and international monetary fund), which has been dominant for decades, to help the countries in question. easterly’s book highlights growth theories without too much emphasis on the math. after dismissing the 100 level students, however, i spent additional time with the 300 level students doing some of the math behind the growth theories. the final eight units covered topics that i felt the students should be aware of and that could be used in the “lab” component of the course. for example, these topics included field experiments in development economics, the natural resource curse, property rights, culture/religion, legal systems, and the geography hypothesis. the importance of property rights in development was tied to de soto (2000), who states that the reason countries are poor is because the average person in that country does not have representation of their property. de soto’s solution for civil governments is to title all the property so that dead capital is converted to live capital. the problem with this solution is that it will only work if one lives in a culture that respects property rights. otherwise, this is a wasted exercise by 6 these were lightweight and inexpensive. the students could have also shared the text if they so desired. 7 printing in the hotels we stayed in was not always possible. 8 for the travel course in india, the amount of reading was reduced compared to an on campus course. nevertheless, all the topics in the campus course were covered and i incorporated additional readings tied to india. 9 the students met with me if they had questions and turned in notes from their readings. during the first lecture in india, we reviewed this material. 4 | journal for economic educators, 17(1), 2017 4 the state (raghuram rajan, 2004). the discussion of legal systems is focused on the common law system vs. civil law system and whether one has access to the informal or the formal legal system. the role of religion/culture in development and whether development can occur without the state (anarchy) were also discussed. we talked about how different beliefs result in different development paths. the discussion also delved into whether certain beliefs are a hindrance to development and what can be done about it. can the beliefs change without changing the character of the religious faith behind it? while most of the readings in this unit were from economists, i did use one article from an economic anthropologist (ensminger, 1997). on the topic of anarchy, the question is: will development occur without a central government? can other forms of governance help with development? from the readings written by economists, we find that sometimes the state is a hindrance to development. each day of lecture lasted about 2 hours and 50 minutes, including a break. during the first 15 to 20 minutes of the lecture, the 300 level students went over the readings with the 100 level students and answered any questions. i also occasionally dismissed the 100 level students early so i could go deeper into the material with the 300 level students. the students also had to provide daily notes on the readings they did prior to class. the assignments were different for the 100 and 300 level students. on similar assignments, i had different expectations for the 100 level versus 300 level students. for example, when students turned in notes on the readings, i expected the 300 level student notes to be of higher caliber and greater depth. for the project component of the course, i had the 100 level students do a photo album in which they used photos to discuss the cultural and economic factors they discovered. the 300 level students had to complete and present a research paper on an industry that was impacted by the major reforms of 1991. applying course content to india the advantages of a travel course are the numerous applications of what students learn in the lecture, in addition to cultural experiences. this ties-in with frank’s (2002) notion of learning economics through varied repetition and various experiences that help the student retain the economic concepts. i summarize these applications below. 1) in the area of property rights, the students saw how insecure property rights hinder economic development (desoto, 2000). one person in india told us a story of someone who fought for property in the courts for over 40 years. due to the uncertainty of ownership in the property, they were unwilling to develop the property (the lengthy court case was also an indication of a poor legal system).10 further, shop owners who are unable to claim rights to property will not invest in their shops; the students noticed how shopkeepers in certain areas without property rights had their shops on wheels.11 this allows shopkeepers to move their shops easily, if needed to avoid official harassment. expansion of the shops was out of the question. 2) the students learned about the private city of gurgoan, including the challenges of a private city that depends on the government to provide some of the infrastructure and how this affects development (tabarrok, 2011; yardley, 2011). this ties to the unit on development without the state. in india, we visited gurgoan and compared it with traditionally managed cities. from touring the cities around delhi, it was visibly clear that gurgoan was much more developed than the others. 10 the court case started in 1966. 11 some of the shop owners were given short-term leases. 5 | journal for economic educators, 17(1), 2017 5 3) when crossing state boundaries, the students saw numerous trucks stopped at the border. the trucks could not cross the state borders without paying registration fees12 and showing paperwork. they seemed to be waiting at the border for a long time.13 this illustrated the benefits of free trade. hindering trade by increasing transaction costs also hinders development by minimizing specialization, increasing smuggling and crime, etc. india was compared with the u.s., which is mostly a free trade zone of 50 states. 4) we learned about recent indian development from a book by nirmalya kumar (2009). both older and newer business houses said that the major turning point for india was the reforms in 1991 when india moved from a socialist outlook14 to a market outlook. when we visited various companies in india,15 we learned how the indian reforms of 1991 changed the dynamics of the indian market from an insular outlook toward a global outlook. the students also learned how development affected cultural and religious attitudes in areas such as the caste system. for example, globalization required individuals to look beyond caste and be willing to work with individuals from different castes. 5) the students had a chance to visit educational institutions and were surprised to see the continued active role the state plays in higher education (e.g. controlling salary structures and student admissions) and how it hinders india from developing many world class institutions (chow and cho, 2011). 6) students visited an educational institution that was a charitable venture of a billionaire from the it sector. they were able to understand how prosperity via liberalization in india allowed entrepreneurs to perform large acts of charity. 7) since trust is an important part of economic development, the students were asked to observe trust in the india. for example, the students pointed out how their bags were checked in numerous stores. in many places, homes were surrounded with walls and had iron bars in the windows. 8) the students had a chance to visit a premier dental clinic and had their teeth cleaned. we noticed numerous expats getting their teeth cared for. students saw how the 1991 liberalization in india allowed new areas, such as medical tourism, to develop and prosper, and how medical tourism might be a solution to some of the high health care costs in the u.s. and other western countries. 9) finally, some of the cultural visits to temples, the taj mahal, etc. also had relevance to economics, even though the primary reason for the visit was not economics. for example, the students learned from the tour guide that the taj mahal almost bankrupted the mughal empire in india, resulting in a coup. reflecting back, the taxation and property rights scheme of the mughal empire, and how it affects development today, could have been studied (chakravorty, 2013). further, one of the units discussed the effect of religion on development. however, due to a lack of a causal link in the economic literature, we were unable to discuss directly the link between hinduism, the dominant religion in india, and development.16 12 this would also include bribes. 13 the trucks were turned off. 14 the vast majority of the constituent assembly that wrote the indian constitution consisted of fabian and laski-ite socialists. they believed that “’socialism is everyday politics for social regeneration’ and that ‘democratic constitutions are…inseparably associated with the drive towards economic equality.’” one notable exception was sardar vallabhbhai patel who supported property rights and free enterprise (granville, 1966). 15 including information technology companies, a biopharmaceutical company, a clothing company, etc. 16 some recent work by sriya iyer and others could be included in a future trip to india (www.econ.cam.ac.uk/.../sriya-iyer_cv.pdf accessed september 22, 2015). http://www.econ.cam.ac.uk/.../sriya-iyer_cv.pdf 6 | journal for economic educators, 17(1), 2017 6 an assignment that i would like to have the students complete on my next trip is a survey of the multitude of mom and pop stores in india. the survey would include questions on the ownership of the property the store is on and the challenges for expansion; if the store is not registered, what it would take to register the store; how improvements to the store can be financed; taxes paid, etc. these issues would emphasize the importance of property rights and an impartial legal system. organizing a travel abroad program in this section i will discuss how i organized my travel course, how i chose the four locations in india, and issues of concern. locations chosen four primary locations were chosen for this trip. they were kodaikanal, chennai, bangalore, and new delhi. the main locations were in southern india. this was because i was familiar with the language. also, more people speak english in south india, making it easier for the students to get around on their own. further, the weather in south india is slightly better in may than that of the north. finally, the locations were based on contacts. some of these were my personal contacts and others came through the college (board members and faculty). kodaikanal is a small town located in the mountains. the weather is cooler there (70s and 80s), while the weather in may in the plains of india is usually in the 90s and 100s. we spent 10 days there. this was the primary place for the academic lectures which lasted about 3 hours daily. the small town atmosphere allowed a gentle introduction to india where students to got used to the culture and adjusted to jet lag. the lengthy stay of ten days also allowed students to adjust to the food and water, as nearly all students got sick at least one time.17 while i chose three major metropolises for the next stage of my trip, any other growing metros could have also been chosen (mumbai, pune, hyderabad, etc.). the next destination was chennai, a metropolis where we spent five days. here, the focus of the trip changed to visiting institutions, medical tourism, and cultural tourism in general. since chennai is a hub for medical tourism in india, we visited a premier dental clinic where the students experienced treatment and were given a tour. from my contacts in the u.s., i was able to arrange for a visit with a large information technology (it) company where students learned about the process of globalization and its effects on the it industry. finally, the students were able to visit a university started by the philanthropic efforts of a very successful it entrepreneur in india. the third destination was bangalore where we stayed three days. this city is known as the silicon valley of india and is a booming metropolis. here the students were able to visit another it company, a clothing company that has been around for over 100 years, and a biopharmaceutical company. the visit to the clothing company got the most positive reviews from the students as they were able to learn how indian policy over many decades affected the company as well as indian development overall. our final destination was delhi, where we stayed two days. since it was the weekend, i was unable to schedule any visits, so this portion of our trip focused on tourism in general. we visited the taj mahal, the lotus temple, forts, etc. 17 the immunity developed by getting sick one time prevented them from getting sick again during the second half of their stay in india. this is important, since if students are getting sick during the travel part of the trip, it creates logistical problems as the sick students stay behind and others go on ahead. 7 | journal for economic educators, 17(1), 2017 7 we also visited a number of cities for cultural experiences, including madurai (known as temple city), mahabalipuram (with a world heritage site), and agra (taj mahal). many students expressed gratitude for limiting the destinations visited, as it allowed them to absorb the experience at a slower pace.18 issues of concern while many travel websites give you advice on travelling in india, there are additional issues of concern for a travel course. in india when travelling across states, one encounters different languages. ideally, one’s local travel guide speaks english. when booking a hotel, make sure that a doctor or hospital is available nearby so one can handle emergencies should they arise. if enough students are enrolled in the course, i highly recommend that either a faculty from the opposite sex or one’s spouse come along for the trip as an additional guide/chaperone. having another adult helps with unexpected scenarios (williams and mcneil, 2010). if a student gets sick, one adult can stay behind while the rest of the group continues with the itinerary. the students are also more comfortable talking about illness and problems with someone of the same sex. setting up appointments with companies two or three months in advance is usually very difficult. some of my appointments were finalized one or two weeks in advance of arriving in india. one needs to have sufficient flexibility in the schedule to change things around as needed. further, to avoid cramming a lot of reading into the travel period, students were asked to complete units 1 to 4 prior to the may term. the students were also required to watch videos on india to get some familiarity with the people and traditions. this reduced the academic load during the actual travel portion of the class and allowed for a relaxing atmosphere. a post trip session was not completed, mainly because students spent the full may term in india.19 the only feedback the students completed prior to their departure to the u.s. was to provide a college approved standard course feedback (appendix c). if i were to do this course again, i would fly to an airport closer to kodaikanal to avoid the lengthy road trip. i would incorporate a service-oriented component to allow for more interaction with locals. further, i would continue to cultivate the contacts that i have in india. i also learned that, if one really wants to visit a company in india, one just needs to contact the human resources department of the company. many companies are willing to accommodate student visits. evaluation of the course due to a small number of students that took the travel course and an equivalent number that took the on campus course a few years earlier, it is not possible to make quantitative comparisons.20 the survey completed was a post-course evaluation. the survey was a standard college survey not tied specifically to travel courses. while a preand post-comparison cannot be made, i taught a similar course on campus during the may term for an earlier year that can be compared to the travel course. nevertheless, the sample size is small and there is no randomization. the survey questions are shown in appendix c. most are of a qualitative nature with some quantitative feedback tied to classroom delivery. a more scientific analysis of travel abroad courses are generally needed as seen in the study by tucker, et al. (2011). 18 this observation came from students who had gone on other travel abroad programs. 19 many travel courses at the college do not utilize the full may term to travel and hence those courses would have more extensive pre or post trip sessions. 20 courses above 30 students would allow for better statistical analysis. 8 | journal for economic educators, 17(1), 2017 8 in the surveys, many of the students who visited india realized the importance of learning economics and saw the material as “worthwhile.” many saw the link between their readings and what they observed in india. one student stated that the “case study on india was excellent.” another stated that it was “really cool” to observe and learn about economic development after doing the course work. one student learned “how globalization is changing the world in many positive ways.” another stated that, “it was because i was able to experience first hand [sic] what we were learning in class” that the course content was worthwhile for their education. student evaluations also showed that students enjoyed visiting companies that tied in with their major. for example, a biology major was happy to have visited a biopharmaceutical firm and an education major enjoyed visiting the educational institutions. some students said that flexibility was a requirement as plans “change suddenly; an independent attitude towards travelling a [sic] coursework is necessary.” an upper level student writes, “this course was also a truly liberal arts course in that it incorporated politics, religion, culture, trade, etc.” another student writes, “good content and ideas.” a third student writes, “the material was interesting, compelling, and thought provoking” and that his/her advice to other students was “since much of the material is different than what is taught in other classes, i would encourage an open mind.” in general, these comments were consistent with my desire to take a spring term abroad. the students learned more from the travel, especially the students who are taking it as a 100 level course. because there was a motley crew of students from different backgrounds and majors, with vastly different skill sets, it was clear almost from the beginning that certain students were well prepared for course, while others had trouble with the subject matter. the 100 level students who had travelled to india seemed to have done better than their counterparts that stayed on campus.21 further, including a global/international component to higher education is an important component of the accreditation process (babb, womble and de'armond, 2013; langlois and langlois, 2010). intercultural competence and international experiential learning are areas that accrediting agencies take into consideration to reflect overall quality of the educational institution. if there was one comment i heard from many students during our time in india, it was that they could see themselves “working in india” for a few years, especially if the opportunities in the u.s. were not available. this indicates to me that the trip fulfilled the purpose of internationalizing some of the students. conclusion trying something new comes with tradeoffs, and for the travel study course the main trade off is less lecture time. this can be rectified by using repetitions (through visiting companies) and different types of assignments in getting across the main economic ideas (frank, 2002). this is possible in a travel study course, as one narrows the readings to the most important concepts and the students hear it again on the field trips. numerous applications of the material learned were easily seen in the india trip. careful observation could have easily led to more examples. the 100 level students would have benefited from having an introductory course in economics. however, the 100 level students in the travel course seemed to learn a lot more economics than those in the on campus course, and had few 21 the final average grade for 100 level students between the on campus and off campus class was showed a difference of around seven percent with the off campus students doing better. while this could be attributed to slightly different assignments, when comparing the final exam which was nearly the same, the difference was even larger at nine percent. this result should be taken with caution due to self-selection issues. 9 | journal for economic educators, 17(1), 2017 9 complaints about the difficulty of the material. the syllabus developed for both the 100 and 300 level students was successful for the travel course. the locations chosen are ultimately up to the person organizing the trip. finally, a better measure is needed to understand the efficacy of the course in not just discipline specific knowledge content, but also in intercultural understanding, intercultural communication skills, etc. (tucker, gullekson and mccambridge, 2011). references: austin, granville. 1966. the indian constitution: cornerstone of a nation. london: clarendon press. babb, jeffry; lynsee a. womble and de' arno de'armond. 2013. "embedding international experiences in business curriculum design: cultivating a study abroad program." research in higher education journal, 20(june). becker, william e. and michael watts eds. 1998. teaching economics to undergraduates: alternatives to chalk and talk. northampton, ma: edward elgar. chakravorty, sanjoy. 2013. the price of land: acquisition, conflict, consequence. new delhi: oxford university press. chow, patricia and kimberly cho. 2011. "expanding u.s. study abroad to india: a guide for institutions," new york: institutue of international education, custodi, andrea and mark lenhart. 2015. standards of good practice for education abroad. carlisle, pa: the forum on education abroad. desoto, hernando. 2000. the mystery of capital: why captitalism triumphs in the west and fails everywhere else. new york: basic books. easterly, william. 2001. the elusive quest for growth: economist’ adventures and misadventures in the tropics. cambridge, ma: mit press. ensminger, jean. 1997. "transaction costs and islam: explaining conversion in africa." journal of institutional and theoretical economics, 152(1), 4-29. frank, robert h. 2002. "the economic naturalist: teaching introductory students how to speak economics." the american economic review, 92(2), 459-62. hall, joshua c.; robert a. lawson and g. dirk mateer. 2008. "from abba to zeppelin, led: using music to teach economics." journal of economic education, 39(1), 107. hartley, james e. 2001. "the great books and economics." the journal of economic education, 32(2), 147-59. kumar, nirmalya. 2009. india's global powerhouses: how they are taking on the world. boston, ma: harvard business press. langlois, ann and ed langlois. 2010. "designing and marketing a global business travel course." research in higher education journal, 6(march). leet, don and scott houser. 2003. "economics goes to hollywood: using classic films and documentaries to create an undergraduate economics course." journal of economic education, 34(4), 326-32. rajan, raghuram. 2004. "assume anarchy." finance & development, 56-57. tabarrok, alex. 2011. "india's voluntary city," www.marginalrevolution.com. tucker, mary l.; nicole l. gullekson and jim mccambridge. 2011. "assurance of learning in short-term, study abroad programs." research in higher education journal. williams, jacqueline a. and kimberly r. mcneil. 2010. "using scenario analysis to build university faculty & student travel competencies." research in higher education journal, 6(march). http://www.marginalrevolution.com/ 10 | journal for economic educators, 17(1), 2017 10 yardley, jim. 2011. "in india, dynamism wrestles with dysfunction," the new york times. online: yigitcanlar, tan. 2013. "cultivating the pedagogy of experience through international field trips." sage open, 3(2). appendix a an abridged reading list & required texts main texts: 1) william easterly, the elusive quest for growth: economist’ adventures and misadventures in the tropics. 2) johan norberg, in defense of global capitalism. 3) hernando de soto, the mystery of capital 4) james tooley, the beautiful tree: a personal journey into how the world's poorest people are educating themselves 5) j. gwartney, r. stroup, d. lee, and t. ferrarini, common sense economics unit 1: what we need to know about economics and prosperity gwartney, stroup et. al. chapter 1 – twelve key elements of economics leonard reed, i pencil friedrich hayek. “use of knowledge in society,” american economic review. bastiat: what is seen and what is not seen unit 2: basic concepts property rights by armen a. alchian efficiency by paul heyne competition by wolfgang kasper free market by murray n. rothbard economic growth by paul m. romer entrepreneurship by russell s. sobel free trade by alan s. blinder protectionism by jagdish bhagwati unit 3: why countries grow gwartney, stroup, et. al. chapter 2 – seven major sources of economic progress bastiat: candle maker’s petition unit 4: role of government gwartney, stroup, et. al. chapter 3 – economic progress and the role of government tragedy of the commons, garrett hardin public goods by tyler cowen public choice by william f. shughart ii unit 5: what happens when countries don’t grow and when countries do grow? easterly and norberg texts http://www.amazon.com/beautiful-tree-personal-educating-themselves/dp/1933995920/ref=sr_1_1?ie=utf8&qid=1292646195&sr=8-1 http://www.amazon.com/beautiful-tree-personal-educating-themselves/dp/1933995920/ref=sr_1_1?ie=utf8&qid=1292646195&sr=8-1 http://oldfraser.lexi.net/publications/books/econ_prosp/part1.html http://oldfraser.lexi.net/publications/books/econ_prosp/part2.html http://oldfraser.lexi.net/publications/books/econ_prosp/part3.html 11 | journal for economic educators, 17(1), 2017 11 unit 6: why has growth been so elusive? why do countries still lag behind? what is the hope for the world’s poor? easterly’s text unit 7: property rights & economic development the mystery of capital, de soto property rights and beliefs: evidence from the allocation of land titles to squatters by rafael di tella, sebastian galiani, ernesto schargrodsky. the quarterly journal of economics unit 8: law & economic development robert cooter. “the rule of state law versus the rule of law state” annual world bank conference on development economics. glaeser, edward and andrei shleifer. “legal origins,” quarterly journal of economics, benito arrunada & veneta andonova. “market institutions & judicial rulemaking” published in claude menard and mary m. shirley, eds., handbook of new institutional economics unit 9: religion/culture and economic development timur kuran. “why the middle east is economically underdeveloped,” journal of economic perspectives. benito arrunada. “protestants and catholics: similar work ethic, different social ethic,” the economic journal. luigi guiso, et.al. “does culture affect economic outcomes?” journal of economic perspectives. gary richardson, “craft guilds and christianity in late-medieval england: a rational choice analysis,” rationality and society. ensminger, “transaction costs and islam: explaining conversion in africa,” journal of institutional and theoretical economics. unit 10: anarchy: development without the state benson, bruce. “the spontaneous evolution of commercial law,” southern economic journal. leeson, peter. “better off stateless: somalia before and after government collapse” journal of comparative economics. rajan, raghuram (2004). “assume anarchy,” finance & development. adolphson, mikael, ramseyer, j. mark (2009) “the competitive enforcement of property rights in medieval japan: the role of temples and monasteries” journal of economic behavior & organization. unit 11: institutions & geography north, douglass. “institutions,” journal of economic perspectives. acemoglu & johnson. “reversal of fortune: geography and institutions in the making of the world income distribution,” quarterly journal of economics. frye, timothy and andrei shleifer. “the invisible hand and the grabbing hand,” american economic review. sachs, jeffery et. al. "geography, economic policy, and regional development in china," asian economic papers. http://www.atypon-link.com/aeap/loi/jep http://www.atypon-link.com/aeap/loi/jep http://papers.ssrn.com/sol3/papers.cfm?abstract_id=879798 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=879798 http://www.sciencedirect.com/science/journal/01672681 http://www.sciencedirect.com/science/journal/01672681 12 | journal for economic educators, 17(1), 2017 12 unit 12: natural resource curse sa beaulier, jr subrick. “mining institutional quality: how botswana escaped the natural resource curse,” indian journal of economics and business. unit 13: miscellaneous avner greif. “history lessons: the birth of impersonal exchange: the community responsibility system and impersonal exchange,” the journal of economic perspectives. james tooley’s text. esther duflo. “field experiments in development economics.” joshua c. hall & peter t. leeson. “good for the goose, bad for the gander: international labor standards and comparative development.” j labor res. leigh turner. “first world health care at third world prices,” globalization, bioethics and medical tourism fuller and romer, “cities from scratch.” unit 14: india nirmalya kumar’s text carl dahlman and anuja utz. “india and the knowledge economy: leveraging strengths and opportunities,” (world bank study). alex tabarrok. “india voluntary city,” www.marginalrevolution.com. “in india, dynamism wrestles with dysfunction,” the new york times, june 8, 2011 gurcharan das, “india grows at night” appendix b: travel itinerary day 1: leave u.s. from detroit international airport day 2: flight. day 3: arrive in thiruvananthapuram airport early morning. road trip to kodaikanal (about 8 hours away) with short stop in kanyakumari (tip of india as a tourist destination). day 4 to day 13: about 2 hours and 50 minutes of classes every morning at the hotel conference room. no class on sunday. afternoon: visit local tourism spots (temple, boating) and educational institutions (schools, colleges, and an observatory), shopping, hiking, and free time. nightfall curfew (mainly for safety reasons) but also for some study time. hotel had a bonfire at night. day 14: travel to chennai. visit meenakshi temple in madurai. day 15 to 19: visit with companies and experience dental tourism. visit mahabalipuram (world heritage site) and nearby beach. take final exam in chennai hotel lobby during inconspicuous hour. day 19-22: travel to bangalore. visit with companies. local tourism (visit palace of local maharaja) and shopping. student project presentations in hotel. day 22-24: travel to new delhi. tourism in the city. visit the taj mahal. day 25: depart early morning from new delhi to detroit. appendix c standard course evaluation. questions 1 to 7 were scored from 1 (strong disagree) to 5 (strongly agree) with additional space for comments that a student can provide. http://www.scottbeaulier.com/revisedcurse2__2_.doc http://www.scottbeaulier.com/revisedcurse2__2_.doc http://www.amazon.com/nirmalya-kumar/e/b001jrvils/ref=sr_ntt_srch_lnk_1?qid=1323234073&sr=8-1 13 | journal for economic educators, 17(1), 2017 13 1. i found the classroom atmosphere conductive to learning. 2. the instructor appeared to be well-prepared for class sessions. 3. the instructor seemed enthusiastic about teaching. 4. if i needed help outside of class, the instructor was accessible. 5. my interest in the subject matter increased as a result of taking this course. 6. the instructor created assignments which were helpful to me in understanding the course material. 7. the instructor’s comments on my work (e.g., assignments, exams, projects, presentations) were helpful. questions 8 to 11 required students to provide additional feedback. 8. a course should challenge students to stretch themselves intellectually. did this course challenge you in ways which strengthened your ability to think and learn? and if so, how? 9. regardless of your own level of enjoyment or success in this course, do you consider the course content to have been worthwhile for your education? why or why not? how serious was your own effort to understand and master the material covered in this course? 10. in a liberal arts setting, courses should increase students’ awareness of connections between related areas within their own major discipline as well as those between their own and other disciplines. comments on those connections you became aware of during this course. 11. what advice would you give to other students who were planning to take this course? if you had known earlier what you now know, would you approach your own work in this course differently? flipping the econ class: reconsidered 1 |j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 1 flipping the econ class: reconsidered todd broker1, victor raj2, and simone silva3 abstract this paper examines the effectiveness of flipping the classroom by comparing exam performance in several microeconomics courses taught by the same instructor over the course of one academic year. overall, we found mixed evidence regarding the effectiveness of exposing students to a flipped classroom environment. while flipping the class may improve exam scores after controlling for numerous independent variables, these results are not robust across specifications, and deeper analysis showed that certain groups of students were actually hurt by the classroom format change. somewhat contrary to other research, our findings suggest that flipping the classroom puts more responsibility on students and some student subgroups do not handle this change effectively, though course design and other variables can also be relevant factors. key words: flipped classroom, achievement, learning, engagement jel classification: a20, a22 introduction teaching more effectively has been a long-standing pursuit for educators, especially among those who teach what are perceived to be more challenging courses, such as economics. one teaching strategy that has recently grown in popularity is called the “flipped classroom.” this format reverses the typical or “traditional classroom” format by moving lectures to an online platform for students to absorb individually outside of class. once class time is free from the constraints of a typical lecture, classes are redirected towards more group-based interactive learning activities (bishop & verleger 2013). this study seeks to better understand the effect of flipping the classroom on student performance, particularly with regard to economic education. to this end, we gathered data from four different sections of the introductory microeconomics course at murray state university, a four-year public regional university in the south during the academic year 2015-2016. each of these sections had the same instructor and approximately half of the students were exposed 1 director, center for economic education, arthur j. bauernfeind college of business, murray state university, 307 business building, murray, ky 42071 (corresponding author) 2 professor of computer science & information systems, arthur j. bauernfeind college of business, murray state university, murray, ky 42071 3 associate professor of economics, department of economics and finance, arthur j. bauernfeind college of business, murray state university, murray, ky 42071 2 |j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 2 randomly to the flipped format while the other half were exposed to the traditionally formatted class structure. interestingly, students in the flipped classes performed worse on exams overall than students in the traditionally formatted classes (75.4% avg. compared to 79.7% avg.). however, after controlling for various student-specific factors, this result only remained significant for particular cases. in addition, when pooling all exams in the regression analysis to increase the degrees of freedom, we found some positive but not robust evidence of flipping the classroom. thus, overall, this experiment’s results suggest that the benefits of flipping a class are not consistent, although this may arise from the small size of the sample as well as some specific student groups suffering a negative impact on their learning. specifically, the interaction between a student’s prior gpa and flipping the class suggests that this variable, which is typically a significant predictor of students’ future educational success (larose & roy 1991), may be less influential when a student is in a flipped class. in addition, students that work more hours on outside jobs also struggled with the change in the classroom format. possible explanations of these results are explored further below. the literature on the flipped classroom is reviewed in the next section. the experimental design of our study is then laid out. next we analyze the student data and discuss our findings. finally, we propose various implications of our results, which we hope will add to the discourse on this relevant pedagogical topic. review of the literature the flipped class has been prevalent in education literature at least since 2000 (lage et al. 2000). since that time, some educators have concluded that their lectures were most effective if reviewed by the students outside of the classroom. this reversal of format, they reasoned, would free up valuable class time for more interactive lessons (tucker 2012). what makes the flipped classroom model so appealing? researchers have noted that it may have numerous benefits including (but not limited to) aiding in the development of life-long learners, increasing students’ engagement with the material, and increasing the quality and quantity of interactions between students and faculty (bergmann, et al. 2014). furthermore, flipping the classroom allows instructors more class time to tailor learning experiences to better match each student’s unique learning style, thus improving educational outcomes (lage, et al. 2000) and may also reduce cheating among students (hoxie, et al. 2015). advocates of the flipped class format argue that educational theory has long shown that traditional lectures are essentially ineffective at fostering student learning and that student-centered approaches create better student-learning outcomes (bishop and verleger, 2013). for example, research has found that students learn slightly more from visual-based instruction (videos) than from conventional lectures (cohen, et al. 1981) and that students come to class better prepared when supplied with optional videos to watch about the class content (falconer, et al. 2009). this 3 |j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 3 is important, especially considering that students tend to shirk outside class reading assignments (sappington, et al. 2002). flipped classroom supporters also point out that successfully flipping the classroom involves a lot more than just adding technology to a set of curricula (tucker, 2012). indeed, technology by itself, when implemented for activities such as homework assignments, has a mixed record on improving student learning (bonham, et al. 2003). many authors argue that a successful strategy involves changing the instructor’s approach to teaching. this occurs by putting more responsibility for learning in the students’ hands within an engaging student-centered learning environment (bergmann, et al. 2014). this approach not only takes advantage of technology, but can capture the benefits of cooperative learning (johnson and johnson, 2001). however, when implementing a flipped classroom, many educators may find it difficult to fully integrate the new format for a variety of reasons. for instance, some instructors may find it difficult to remove themselves from the primary role of importance, moving from the “sage on the stage” to more of a “guide on the side” (frydenberg, 2012). also, if instructors fail to communicate the purpose of the new format, fail to convince the students of its advantages, or are simply unwilling to “let go” of their traditional lecture practices, flipping the classroom may prove to be ineffective (findlay-thompson and mombourquette, 2014). successful implementation of the flipped classroom format must incorporate these factors and can also benefit from using shorter lecture videos, less than 15 minutes in length (stone, 2012), as well as creating incentives to review the video content through the use of lecture video assessments (bishop and verleger, 2013). current research about student preferences seems to suggest that students are generally receptive to changing the instructional format to the flipped classroom model (bishop and verleger, 2013). not all students necessarily like the change. some seem conflicted, because, although they like the interactive class time in the flipped format, they miss the live in-person lectures found in the traditional class (toto and nguyen, 2009). some studies have shown that flipped classrooms require more self-discipline on the part of students and more time spent with the class material than the traditional format. even though both of these may help students learn the material, neither would likely be well received (lee and lee, 2015). other studies have shown that students prefer the flipped classroom, even when students feel the new format is more challenging (wilson, 2013). regarding student learning, many studies suggest that a flipped classroom improves academic outcomes. for example, flipping a large-lecture principles of economics course yields numerous positive benefits for students, including better performance and effort during the semester (balaban, et al. 2016), even though the difference in average student improvement is often modest between traditional and flipped classes (olitsky, 2016). additionally, adopting the flipped format in an introductory biology course has been shown to improve exam performance significantly (moravec, et al. 2010). the flipped format has also positively affected student performance in senior-level computer classes (day and foley, 2006). also, flipping a large biology class and a smaller genetics class showed that academic results in 4 |j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 4 the flipped classes were consistently higher than in the traditional format, although the effects were more robust for the smaller more specialized genetics class (stone 2012). other studies have shown mixed results with little to no effect on student performance from flipping the classroom. for example, researchers in canada studied the effects of flipping some university level introductory business courses. they found that student academic outcomes were identical across the different sections of the course, regardless of class structure (findlaythompson and mombourquette, 2014). thus, given the current literature, it may be difficult to say definitively whether or not flipping the classroom will be a “home run” for any instructor. further investigation is needed. experimental design this study was structured as an experiment using four different class sections of a microeconomics course taught by the same instructor over the course of one academic year (20152016) at murray state university, a four-year public regional university in western kentucky. two of the course sections were taught in the fall semester and two in the spring. during each semester, one of the sections met during a late morning time slot and the other met during an early afternoon time slot. in each semester, one course section was flipped for this study and the other section continued under the traditional format. students did not know which course sections were flipped or traditional before registering for the course. also, the specific time slot for the flipped class varied between semesters; the afternoon class flipped in the fall semester and the morning class flipped in the spring semester. each section of the course covered identical course content during the year (e.g. identical textbook chapters) and used identical standardized exams. other features of the course, including grading scheme, attendance policy, etc. were identical. structurally, the traditional sections were setup with “chalk and talk” lectures given in class twice per week with the aid of powerpoint and with 2-3 homework assignments on the course’s online homework platform. very little, if any, class time was devoted to working in groups to collaborate on homework problems or questions in the traditional sections. on the other hand, the flipped sections involved two unique structural differences: 1) all class lectures were recorded by the instructor (interactive presentation and audio) and were required viewing for the students outside of class. 2) roughly 75% of the newly available class time was spent collaboratively working on chapter-specific, group-based problem sets unique to the flipped class sections. during a typical week in the flipped sections, the first class session was spent conducting a high level overview of the material with an introduction to new content and the use of hands-on worksheets and examples that were completed in small groups. these same worksheets were often used in the traditional classes as well, but with less emphasis, interaction, and time. the second class session during the week for the flipped sections was usually spent assessing students for 5 |j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 5 watching the online lectures (i.e. lecture quiz) and then allowing the students to collaboratively work on a set of graded problems and questions in groups. during this time, the instructor consistently walked around the classroom to aid students in their understanding and application of the material. there were 30 lecture videos uploaded for the flipped sections, each video ranging between 15 and 30 minutes in length with an average of 24 minutes. the total online video lecture duration (i.e. all the lecture content added together) was about 12 hours.4 to encourage students to watch the online lecture videos, two separate lecture assessments were given, one in class and one online. exactly how many students watched the video lectures and for how long is unknown, but a simple tally of the number of online views5 was 1,714 shortly after the completion of the academic year.6 this means that on average each online lecture video was viewed only 57 times. even if we assume that each recorded video view represents a unique student (which is far from likely) this number is still far less than the total number of students enrolled in the flipped classes during the experiment. in other words, it is extremely likely that not all students were watching the online lecture videos. as noted in the literature review, flipping the classroom can be difficult and can be done poorly. despite the best efforts of the instructor in the experiment, it seems obvious that the video format was not structured effectively, nor were the majority of students given proper incentives to watch the lecture videos outside of class. these could be important factors in the final results. data during this experiment in academic year 2015-2016, 172 students7 were enrolled in the four sections of microeconomics studied. of these, 145 agreed to participate in this research (~ 84%). most of the students who did not participate in the study were not present in class on the day of data collection. asking students to participate in the study (in terms of data collection) occurred near the end of the course to limit students’ ability to change sections based on their preferences for one teaching method over the other. to our knowledge, no student changed course sections to either avoid or seek out the flipped class structure during the study period. data on study participants were collected from three different sources. one was a short survey voluntarily filled out by participants near the end of the semester. the survey asked about the students’ attitude towards the course, the instructor’s contribution to the class, and some demographic information (appendix 1). the second source of data was student activity in class, such as attendance and exam performance. finally, the third source was individual student data gathered from the university registrar, such as a student’s prior gpa, etc. 4 this lecture time compares to total traditional class lecture time of between 30-35 hours spread out over about 30-45 class periods in 50-75 minute individual class sessions. in sheer time magnitude, the online videos represented only a fraction of the burden to students that traditional class lectures typically represent. 5 youtube counts a video view after a user has watched a video for “around” 30 seconds 6 august 2016 7 there were 180 students that began the course in these four sections but only 172 completed the course 6 |j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 6 table 1 contains explanations of the variables used in our analysis and table 2 gives descriptive statistics of the same variables. table 1: list of variables used in the analysis variable description overall exam performance students’ exam average based on three equally weighted standardized tests given in each class exam 1 performance students’ standardized grade for exam 1 exam 2 performance students’ standardized grade for exam 2 exam 3 performance students’ standardized grade for exam 3 flipped classroom: dummy a dummy variable equal to 1 if the student was in one of the instructor determined “flipped” classrooms prior gpa the student's cumulative grade point average prior to taking economics class attendance (%) the instructor determined absence percentage for each participating student perfect attendance: dummy a dummy variable equal to 1 if the student had perfect attendance during the semester race (white): dummy a dummy variable equal to 1 if the student was white / caucasian gender (male): dummy a dummy variable equal to 1 if student was male age variable for how old the student was in years when enrolled in economics course ky residence: dummy a dummy variable equal to 1 if the student’s permanent residence was labeled as in-state (ky) stem major: dummy a dummy variable equal to 1 if the student’s major was labeled as either science, technology, engineering, or mathematics educational attainment of parent / guardian the student-reported highest educational attainment of their parents / guardians 7 |j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 7 parent / guardian college degree: dummy a dummy variable equal to 1 if at least one parent / guardian of the student had earned a college degree course rating the student's rating, on a 10-point scale, of how they felt about their economics course overall (10 = highest positive) instructor rating the student's rating, on a 10-point scale, of the instructor’s contribution to their economics course (10 = highest positive) effort rating a student-reported rating, on a 10-point scale, of how much effort they put forth in their economics course compared to their other courses use of online materials a student-reported rating, on a 10-point scale, of how much they utilized online materials in their economics course hours devoted to course the student-reported number of hours they spent working on material for their economics course in a typical week hours of employment the average number of hours the student worked at a job in a given week during the semester data sources student self-reported data came from a voluntary survey and all other data was collected, with permission, from the university registrar 8 |j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 8 table 2: variable descriptive statistics variables mean standard deviation minimum maximum observations overall exam performance 77.57 12.86 43.33 100.33 145 exam 1 performance 78.11 13.95 26.00 103.00 145 exam 2 performance 77.71 13.35 34.00 100.00 145 exam 3 performance 76.88 15.32 39.00 104.00 145 flipped classroom: dummy 0.50 0.50 0.00 1.00 145 prior gpa 2.86 0.87 0.00 4.00 145 class attendance (%) 0.09 0.11 0.00 0.71 145 perfect attendance: dummy 0.26 0.44 0.00 1.00 145 stem major: dummy 0.14 0.35 0.00 1.00 145 race (white): dummy 0.85 0.36 0.00 1.00 145 gender (male): dummy 0.50 0.50 0.00 1.00 145 age 18.72 1.72 16.00 27.00 145 ky residence: dummy 0.56 0.50 0.00 1.00 145 edu. of parent / guardian 3.51 1.07 1.00 5.00 144 at least one parent / guardian has college degree: dummy 0.57 0.50 0.00 1.00 144 course rating 8.05 1.55 4.00 10.00 145 instructor rating 9.12 1.31 4.00 10.00 145 effort rating 7.00 1.79 2.00 10.00 145 9 |j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 9 use of online materials 7.54 2.24 1.00 10.00 145 hours devoted to course 5.72 2.55 1.00 15.00 145 hours of employment 11.14 12.24 0.00 50.00 145 methods and results the fact that students were not aware of the classroom format when registering should simplify the statistical analysis since, presumably, it avoids the issue of self-selection bias, a fundamental problem in micro econometric evaluation studies (caliendo and kopeinig, 2008). however, given the small size of the sample (145 participants), there is a considerable possibility that, even if by coincidence, the two groups of students differ significantly in characteristics relevant to academic performance. for instance, if the students enrolled in the traditional class sections happen to have a stronger work ethic than the students enrolled in the flipped class sections, one may wrongly conclude that flipping the classroom negatively impacts academic achievement, when in reality the lower grades are most likely the result of less effort. this possibility is considered in table 3, which presents the means of the variables for the flipped and traditional sections. first, note that the students in the flipped sections on average performed worse on the exams than the students in the traditional class sections. we computed the (james, 1954) test of mean equality across groups, which is robust under heterogeneous covariance matrices, and found that this difference is significant at 90 percent in the case of the second and third exams. however, students in the traditional classes also presented significantly higher average gpas prior to the semester and a larger fraction of them were stem majors which, according to anecdotal evidence, tend to perform better in the subject. therefore, although most of the other variables seem balanced across the two sets, this information must be kept in mind when comparing the average grades across groups and in performing multivariate analysis. to investigate the effects of flipping the classroom, we calculated the overall exam performance, the simple average of the three exams’ scores, for each student. next, we grouped the students by several variables related to academic achievement and calculated the average of the overall performances across groups, also differentiating by classroom structure. the results are presented in table 4. note the second to last column, which presents the p-values (f test) of the null hypotheses that, for each group (defined in the rows), the averages of the performances are the same for the flipped and the traditional cases. 10 |j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 10 table 3: means of the variables across flipped and traditional classroom sections variables traditional flipped total traditional flipped pvalue* exam 1 performance 79.9 76.3 78.1 3.6 0.121 exam 2 performance 80.0 75.4 77.7 4.6 0.037 exam 3 performance 79.2 74.5 76.9 4.6 0.069 gender (male): dummy 0.5 0.5 0.5 0.0 0.804 race (white): dummy 0.9 0.8 0.8 0.1 0.341 age 18.7 18.7 18.7 0.0 0.951 prior gpa 3.1 2.7 2.9 0.4 0.005 stem major: dummy 0.2 0.1 0.1 0.2 0.004 perfect attendance: dummy 0.2 0.3 0.3 0.0 0.672 hours devoted to course 5.8 5.6 5.7 0.2 0.563 hours of employment 11.8 10.4 11.1 1.4 0.496 at least one parent / guardian has college degree: dummy 0.6 0.6 0.6 0.0 0.739 course rating 8.1 8.0 8.0 0.0 0.875 instructor rating 9.1 9.1 9.1 0.0 0.845 effort rating 7.0 7.0 7.0 0.1 0.782 sample size 73 72 145 *note: prob. > f: james’ (1954) test for equal means, allowing heterogeneous covariance matrices across bygroups. 11 |j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 11 table 4: average overall exam performance across students’ groups traditional flipped traditional flipped pvalue* observations all obs 79.7 75.4 4.3 0.045 145 male 79.9 76.9 3.0 0.337 72 female 79.5 74.0 5.5 0.062 73 white 80.3 76.3 4.0 0.072 123 non-white 75.4 71.5 3.9 0.576 22 up to 18 years old 77.5 75.8 1.7 0.512 92 older than 18 years old 83.2 74.7 8.5 0.019 53 high prior gpa (>3) 84.8 83.4 1.4 0.569 71 low prior gpa (0-3) 72.3 70.3 2.0 0.491 74 stem major 78.8 78.3 0.5 0.955 20 not a stem major 79.9 75.2 4.7 0.031 125 perfect attendance 79.8 79.5 0.3 0.938 38 less than perfect attendance 79.6 73.8 5.8 0.018 107 often use of online material (9-10) 77.4 74.6 2.8 0.354 59 less use of online material (1-8) 80.9 76.1 4.9 0.104 86 hours devoted to course (6-15) 74.8 72.6 2.2 0.466 63 hours devoted to course (1-5) 83.1 77.8 5.3 0.063 82 hours of employment (>9) 78.9 73.6 5.3 0.093 71 hours of employment (0-9) 80.7 76.8 3.8 0.204 74 12 |j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 12 at least one parent / guardian has college degree 81.2 76.6 4.7 0.097 82 parents/guardians have no college degree 77.3 74.0 3.3 0.316 62 *note: prob > f: james’ (1954) test for equal means, allowing heterogeneous covariance matrices across bygroups. when all observations are included, we can see that the hypothesis that the averages are the same in both class structures is rejected: students did worse in the flipped classes. when separating by gender, however, there is statistical evidence that only the female students did worse, indicating that women adapted worse to flipping the classroom. a similar pattern is found regarding white and non-white students. while the sample sizes of male and female participants are almost identical, there are only 22 non-white students, reducing our confidence in this finding. more interesting are the results regarding the following groups: students older than 18 years of age, students that are not stem majors, and students with less than perfect attendance. note that the p-values that indicate that students in these groups performed worse in the flipped format are even smaller than the p-value when all observations are included, even though the sample sizes are smaller. students that devoted less than 5 hours of work per week to the course or worked more than 9 hours per week at a job (i.e. employment) also had issues adapting to the new format, and, somewhat surprisingly, so did students who reported at least one parent/guardian having a college degree. overall, to the extent that perfect attendance, hours devoted to the class per week and hours spent towards a job/employment (all of which crowd out time to study) are proxies for effort put into the course, it seems that flipping the class has a detrimental effect only on less dedicated students. we get further insights with a multivariate analysis next. table 5 presents the ols regression results using the huber/white/sandwich estimator of variance–covariance matrix to account for the possibility of heteroscedasticity. the dependent variables are the overall performance in the exams with each exam’s grade considered separately. two models are considered for each case, the second including more controls. given that these variables are obviously related to each other, most of them being proxies for effort, we checked for collinearity across variables and found no major problem.8 in the last two columns, we pooled 8 multicollinearity (so long as it is not perfect) does not violate ols assumptions and the estimates are still unbiased and blue (best linear unbiased estimators). however, it can substantially increase standard errors reducing the level of significance of the results. when we include the interaction between flipping the classroom and age and the interaction between flipping the classroom and prior gpa in the same regression, we detected a variance inflation factor above 10 for these two variables, 10 being the rule of thumb to consider multicollinearity a potential problem. this is expected since both variable are interacted with the same dummy. we redid all our analysis excluding the interaction with age. the results, qualitatively similar (although slightly less significant), are available upon request. 13 |j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 13 all three exams in order to increase the degrees of freedom. when interpreting these results, however, one should keep in mind that we do not actually have a larger sample, the same control variables are included three times, once for each exam. table 5: multivariate analysis estimates variables all exams all exams exam 1 exam 1 exam 2 exam 2 exam 3 exam 3 exams pooled exam pooled coef/pvalue coef/pvalue coef/pvalue coef/pvalue coef/pvalue coef/pvalue coef/pvalue coef/pvalue coef/pvalue coef/pvalue flipped classroom: dummy 45.265 42.660 47.515 44.990 38.045 34.739 50.236 48.252 45.26** 42.660* (0.210) (0.241) (0.195) (0.234) (0.326) (0.372) (0.218) (0.232) (0.038) (0.051) gender (male): dummy 0.854 0.901 3.404 3.294 -1.682 -1.412 0.840 0.820 0.854 0.901 (0.727) (0.715) (0.207) (0.232) (0.560) (0.617) (0.766) (0.776) (0.592) (0.571) interaction: flipped classroom, male student 1.963 2.207 1.323 1.851 0.934 1.065 3.633 3.706 1.963 2.207 (0.604) (0.576) (0.757) (0.674) (0.821) (0.799) (0.420) (0.435) (0.420) (0.376) age 1.227 1.353 0.636 0.933 1.511 1.493 1.534 1.632 1.227 1.353* (0.373) (0.326) (0.622) (0.479) (0.279) (0.290) (0.334) (0.298) (0.124) (0.089) interaction: flipped classroom, age -1.400 -1.300 -1.679 -1.597 -1.255 -1.078 -1.266 -1.226 -1.400 -1.300 (0.437) (0.477) (0.383) (0.419) (0.489) (0.562) (0.516) (0.527) (0.190) (0.227) prior gpa 10.38*** 10.13*** 8.65*** 8.29*** 9.08*** 9.13*** 13.41*** 12.98*** 10.38*** 10.13*** (0.000) (0.000) (0.004) (0.006) (0.001) (0.001) (0.000) (0.000) (0.000) (0.000) interaction: flipped classroom, prior gpa -7.397** -7.113** -6.636* -6.215* -5.477 -5.477 10.07*** 9.647*** -7.397*** -7.113*** (0.019) (0.023) (0.058) (0.077) (0.111) (0.101) (0.003) (0.005) (0.000) (0.000) perfect attendance: dummy -0.695 -0.558 -2.422 -2.300 0.639 1.151 -0.302 -0.525 -0.695 -0.558 (0.821) (0.863) (0.523) (0.563) (0.847) (0.743) (0.933) (0.890) (0.723) (0.785) 14 |j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 14 interaction: flipped classroom, perfect attendance 5.264 4.388 7.274 6.034 1.957 0.530 6.560 6.600 5.264* 4.388 (0.220) (0.334) (0.143) (0.237) (0.669) (0.913) (0.216) (0.251) (0.056) (0.130) stem major: dummy -1.817 -2.091 -4.569 -4.821 0.211 -0.476 -1.093 -0.976 -1.817 -2.091 (0.649) (0.610) (0.276) (0.260) (0.961) (0.915) (0.816) (0.843) (0.467) (0.412) interaction: flipped classroom, stem 4.780 4.696 10.983 10.474 1.449 2.181 1.906 1.434 4.780 4.696 (0.612) (0.614) (0.154) (0.161) (0.889) (0.835) (0.873) (0.903) (0.405) (0.406) hours devoted to course -1.026** -0.867 -1.124** -0.880 -0.960* -0.834 -0.996* -0.888 -1.026*** -0.867*** (0.037) (0.106) (0.045) (0.152) (0.074) (0.174) (0.075) (0.124) (0.001) (0.009) interaction: flipped classroom, hours devoted to course 0.125 0.146 -0.048 -0.037 0.244 0.277 0.178 0.199 0.125 0.146 (0.886) (0.868) (0.964) (0.972) (0.792) (0.767) (0.856) (0.840) (0.822) (0.791) hours of employment 0.081 0.072 0.029 0.013 0.134 0.137 0.079 0.066 0.081 0.072 (0.474) (0.526) (0.823) (0.921) (0.295) (0.283) (0.541) (0.620) (0.261) (0.318) interaction: flipped classroom, hours of employment -0.313* -0.307* -0.231 -0.223 -0.330* -0.328* -0.377** -0.372** -0.313*** -0.307 *** (0.051) (0.055) (0.209) (0.221) (0.068) (0.071) (0.038) (0.042) (0.002) (0.002) race (white): dummy 2.240 4.041 0.803 1.876 2.240 (0.566) (0.407) (0.841) (0.630) (0.344) term attempted hours 0.098 0.069 -0.003 0.228 0.098 (0.840) (0.887) (0.996) (0.683) (0.743) at least one parent / guardian has college degree: dummy 1.087 1.120 2.268 -0.127 1.087 (0.609) (0.637) (0.329) (0.959) (0.416) 15 |j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 15 constant 30.099 23.658 47.590* 36.749 28.563 25.984 14.144 8.240 30.099* 23.658 (0.299) (0.436) (0.066) (0.198) (0.361) (0.430) (0.677) (0.813) (0.078) (0.186) no. of observations 145 144 145 144 145 144 145 144 435 432 r2 0.268 0.271 0.221 0.228 0.210 0.219 0.280 0.278 0.219 0.221 aic 1,137. 957 1,136. 309 1,170. 566 1,167. 903 1,159. 701 1,157. 336 1,186. 234 1,184. 632 3,466. 636 3,448. 946 bic 1,185. 585 1,192. 735 1,218. 193 1,224. 330 1,207. 329 1,213. 762 1,233. 862 1,241. 059 3,531. 841 3,526. 246 note: *** p<0.01, ** p<0.05, * p<0.1 the first interesting result is that, after including all controls, the dummy for the flipped classroom is not significant overall (unless we pool the data), but some of its interactions are. that seems to corroborate with the evidence discussed in table 4, that is, that flipping the classroom is may be disadvantageous to certain groups of students. specifically, while prior gpa is a very significant and meaningful (given the size of the coefficient) determinant of grades, it is less important when the class is flipped. that can be seen by the coefficient of the interaction between prior gpa and the flipped classroom dummy. although the effect of prior gpa is still positive for the flipped classroom, the coefficient is roughly reduced from 10 to 3, which is a substantial change. the interaction between flipping the classroom and hours of employment is also significant, especially for the third exam, indicating that students employed with a job performed worse in the flipped classes. surprisingly, the coefficient of hours devoted to the course, even when significant, has a negative sign. that may be because students who were struggling more with the material had to study more hours. on the other hand, since perfect attendance, the stem major dummy, hours devoted to course, and hours of employment are all, at least potentially, proxies for effort, it may be difficult to disentangle each of their effects in the regression, which could explain the many insignificant results. however, we experimented running with only one or two of these variables at a time and got very similar results. in addition, the inclusion of other controls in each specification (columns 2, 4, 6, 8 and 10) does not meaningfully change the results either, except for the variable of hours devoted to course. thus, the results seem robust. the pooled analysis (columns 10 and 11 in table 5) did yield a significant positive result for the flipped classroom variable. although this may indicate a positive overall benefit from flipping the classroom, we are only cautiously optimistic about this result since the same coefficient was insignificant across all other specifications, although this can be a result of the sample size. on the other hand, most of our other results remained similar or became stronger after pooling the data, showing the robustness of the negative impact of flipping the classroom on some student groups. one noticeable change was that the interaction between the flipped classroom 16 |j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 16 variable and the perfect attendance variable became significant after pooling the data, indicating that students who came to class more tended to do better in the flipped classroom environment. this result seems consistent with our other findings suggesting that the students most harmed by the flipped classroom environment are those who are unable or unwilling to put forth the necessary effort to succeed. as a whole, the evidence seems to suggest that, when the classroom is flipped, each student’s past performance, proxied by prior gpa, is less relevant for grade achievement. on the other hand, a students’ current effort does seem to be a determinant, as can be seen in the results presented in table 4 and, to the extent that students that worked more hours could not put the same amount of effort into the class, as observed in the multivariate analysis. discussion and conclusions the results suggest that flipping the classroom can negatively impact student academic achievement among certain student sub-groups. students who are seemingly less able or less willing to put forth as much effort into their economics studies can suffer academically from a flipped classroom. this seems consistent with other research showing that flipping the classroom puts more responsibility on students and thus requires more effort from them to succeed (wilson, 2013; findlay-thompson and mombourquette, 2014; lee and lee, 2015). the overall results challenge most of the current literature on the subject, which shows broad positive improvement for students in flipped classes. one possible explanation is that flipping the classroom makes it substantially easier to shirk lecture content for students. as mentioned earlier, it seems likely that students were not given proper incentives to watch lecture videos outside of class in this study. additionally, these videos may not have been structured effectively, leading to numerous students coming to class essentially unprepared with the thought that they would figure out what they needed to know or “wing it” as they worked through the inclass problem sets. if this is true, it is a substantial problem in a flipped classroom, because the lectures serve as the foundation of the learning process and the in-class component is meant to build upon that groundwork. it would be very difficult to build anything substantial (i.e. for substantive learning to occur) if there were no original underpinning. this differs from the traditionally formatted class where, given the right attendance policy (broker, et al. 2014), students presumably come to class and at least gain some foundational knowledge of the material. even if students shirked the homework in the traditionally formatted class, they would presumably at least have the foundation gained from sitting through the in-class lecture from which to work. if this were the case, then we would expect to see students with less ability or willingness to apply effort as prime candidates for doing poorly in a flipped classroom environment. in this study, most of our student breakdowns by potential “effort” categories (i.e. more hours of employment, less hours devoted to course, less use of online course materials, and less than perfect 17 |j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 17 attendance) showed that these students performed significantly worse in the flipped classroom environment, lending at least some credibility to this claim. some possible methods to improve this outcome are to enhance the flipped classroom format to entice students to want to put forth more effort, especially in watching the video lectures outside of class. this might be done with shorter (10 minutes or less) and more entertaining videos, such as those produced professionally for marginal revolution university (http://www.mruniversity.com).9 applying more weight on watching the videos in students’ final grades could also provide more incentive. another possibility is that the instructor unknowingly displayed a distinct comparative advantage when teaching in the traditionally formatted classes. this would put the students in the flipped classroom environment at a disadvantage, not because the flipped format is inherently less effective, but because the instructor is personally more effective in a traditionally formatted class. this difference in teaching quality could be the result of experience or natural skills. the students in the study, regardless of class format, gave the instructor high marks for quality teaching (table 3), so it is difficult to know how much of this teacher quality differentiation was truly present. but, overcoming even perceived differences in teacher ability with respect to different teaching formats could be important. over time it is possible that any negative outcomes for students resulting from different classroom structures could be improved as those instructors using the flipped format (or some other format) gain more confidence and 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to increase active learning and student engagement,” proceedings from 28th annual conference on distance teaching & learning. <http://www.uwex.edu/disted/conference/resource_ library/proceedings/56511_2012.pdf>. accessed 27 july, 2016. toto, r. and nguyen, h. 2009. “flipping the work design in an industrial engineering course,” 39th ieee frontiers in education conference, pp. 1–4. tucker, b. 2012. “the flipped classroom,” educationnext, vol. 12, no. 1. <http://educationnext.org/the-flipped-classroom/>. accessed 27 july, 2016. wilson, s. g. 2013. “the flipped class: a method to address the challenges of an undergraduate statistics course,” teaching of psychology. vol. 40, no. 3, pp. 193-199. 20 |j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 20 appendix 1 21 |j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 21 42 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 42 a primer on deposit insurance: the federal deposit insurance corporation and the national credit union administration robert carbaugh and peter saunders 1 abstract although college textbooks in money and banking discuss the role of deposit insurance and the federal deposit insurance corporation, they tend to pay only scant attention to these topics. the purpose of this article is to fill this void by providing a primer on deposit insurance, the federal deposit insurance corporation, and the national credit union administration which provide safety for banks and credit unions and public confidence in our financial system. in particular, the paper discusses the incidence of deposit insurance premiums and the merger policies of the federal deposit insurance corporation and the national credit union administration. the paper is written for a general audience, including college students and the public who are interested in contemporary banking issues. key words: deposit insurance, federal deposit insurance corporation, national credit union administration jel classification: a2, g0 introduction during the 2008-2009 financial crises, 165 banks failed in the united states including washington mutual bank, the fifth largest bank in the country. another 249 banks failed during 2010-2011. these failures threatened the stability of the u.s. economy. they also brought into the forefront the role that bank supervision and deposit insurance play in preserving the wellbeing of our financial system. these services are provided by the federal deposit insurance corporation (fdic) and the national credit union administration (ncua). however, college textbooks in money and banking and principles of macroeconomics tend to pay only scant attention to the fdic and the ncua. the purpose of our paper is to fill this void by providing a primer on the fdic and the ncua. its intended audience is students in upper level courses in money and banking and macroeconomic principles who want to learn more about the role of the fdic and ncua in providing safety for banks and credit unions and public confidence in our banking system. the paper is also aimed at the general audience who is interested in our financial system. although our paper primarily addresses the fdic, it also discusses the role that the ncua has in preserving the safety of credit unions. the paper begins by describing the historical events that led to the fdic’s creation. this is followed by a discussion of the nature and operation of the fdic. the paper uses the concepts of elasticity of supply and demand to discuss the issue of who bears the assessments (premiums) ---------------------------- 1 professors of economics, central washington university, 400 east university way, ellensburg, wa 98926. 43 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 43 that the fdic charges on bank deposits. finally, the paper considers the fdic’s role in resolving bank failures, including its deposit payoff approach and purchase and assumption approach. of particular interest is the merger policy of the fdic and the recognition that it gives to the monopoly power aspects of bank mergers and efficiencies that can result from bank mergers. the concept of deadweight loss of consumer surplus is included in this discussion to help promote student understanding. finally, our paper outlines the history of credit unions and their role in the u.s. financial sector, as well as their supervision and regulation by the ncua. events leading up to the fdic’s creation between 1921 and 1929, about 600 banks failed per year in the united states. this was about ten times the failure rate of the previous decade. yet these failures led to only modest alarm because they mainly consisted of small, rural banks, many of which were judged to be poorly run. the general consensus was that exit of these banks enhanced the strength of the overall banking system (federal deposit insurance corporation, 1984). concerning deposit insurance, it originated in the states decades prior to becoming a policy of the u.s. government. the first deposit insurance program was enacted by the state of new york in 1829, followed by 13 other states that established deposit insurance programs. the state insurance programs had several parts: (1) a deposit insurance fund that was supported by the assessments (premiums) of banks; (2) a board of commissioners which had the authority to conduct bank examinations; and (3) a defined list of investments for bank capital. although these insurance programs initially had some success in protecting depositors, they could not deal with the economic events of the 1920s. the economic downturn of 1921, and the substantial agricultural problems that lasted throughout much of the decade, resulted in numerous bank failures. the first state deposit insurance program to terminate operations was washington’s in 1921. by early 1930, all of the state programs had shut down (federal deposit insurance corporation, september, 1998). the great depression, which began in 1929, shook the u.s. banking system. it triggered a severe panic that led to numerous depositors attempting to convert their deposits into currency. however, many banks could not fulfill the deposit withdrawals and they closed. this resulted in the public’s confidence in the banking system deteriorating further and bank runs increased. moreover, during this period, the federal reserve did not help banks by injecting sufficient liquidity into the banking system. critics noted that the federal reserve allowed the money supply to decrease, thus reinforcing the economic downturn (friedman and schwartz, 1963). as seen in table 1, 1,352 banks failed in 1930, followed by 2,294 bank failures in 1931, and 1,456 bank failures in 1932. the panic had its hardest impact on small banks that were located in rural areas of the country. simply put, it was the loss of depositors’ confidence in the banking system, and the suddenness of their withdrawal demands, that triggered a panic of extraordinary magnitude. in an attempt to calm nervous depositors, many states enacted bank holidays. this was reinforced by president franklin roosevelt’s declaring a nationwide bank holiday during march 6-10, 1933. in spite of these efforts, 4,004 banks failed in 1933. as america’s banking system deteriorated, congress debated the possibility of federal deposit insurance. skeptics maintained that federal deposit insurance would be a failure and they noted the inability of state deposit insurance programs to stabilize the banking system, to prove their point. they also contended that federal deposit insurance would eliminate the penalties for the bad management of banks, thus allowing them to assume too much risk. furthermore, they felt that the cost of federal deposit insurance would be excessive and that federal deposit 44 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 44 insurance would involve an excessive invasion of the federal government into the economy’s private sector. president roosevelt himself was suspicious of the federal government’s insuring bank deposits, saying, "we do not wish to make the united states government liable for the mistakes and errors of individual banks, and put a premium on unsound banking in the future" (shaw, 2015). however, the american public overwhelmingly supported the concept of deposit insurance. on june 16, 1933, roosevelt signed the banking act of 1933 into law, creating the fdic. its purpose is to promote public confidence and stability in the banking system. the year 1934 marked the first year of the fdic’s operation. initially the fdic insured deposits up to $2,500 (about $45,000 today); by 1935, the deposit insurance was increased to $5,000, and so on as noted below.  1934 – $2,500  1935 – $5,000  1950 – $10,000  1966 – $15,000  1969 – $20,000  1974 – $40,000  1980 – $100,000  2008 – $250,000 with trust in the banking system strengthening because of deposit insurance, bank runs dramatically declined. in 1934, only 61 banks failed as seen in table 1. table 1. number of bank failures in the united states ------------------------------------------------------------------------------------------------------- year number of bank failures 1930 1,352 1931 2,294 1932 1,456 1933 4,004 1934 61 1934-1979 558 1980-1989 1,015 1990-1999 1,507 2000-2009 197 2010-2015 356 2016 5 2017 8 ---------------------------------------------------------------------------------------------------------- source: federal deposit insurance corporation, bank failures in brief, 2017 and various annual reports breaking down the fdic as an independent agency of the u.s. government, the fdic strives to foster public 45 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 45 confidence and stability in america’s banking system. to achieve this goal, it protects depositors of insured banks against the loss of their deposits if their bank fails. also, the fdic examines and supervises banks for safety, soundness, and consumer protection. when a bank fails, the fdic is ordinarily appointed receiver. this means that the fdic assumes responsibility for recovering the maximum amount possible from the disposition of the failed bank’s assets and the pursuit of the bank’s claims. in 2016, the fdic insured deposits of $6.8 trillion in about 600 million accounts at almost 6,000 banks, including commercial banks, mutual savings banks, and savings and loan associations (federal deposit insurance corporation, 2016). concerning credit unions, the ncua insures their accounts. the fdic provides insurance coverage for any person or entity, including americans and non-americans, conducting business with an insured bank. fdic insurance is backed by the full faith and credit of the united states government. the fdic is proud to note that, since its beginning in 1934, no depositor has ever lost a penny of deposits insured by the fdic (federal deposit insurance corporation, 2014). the fdic insures all types of deposits that a bank receives throughout its daily business activities. these accounts include savings and checking accounts, negotiable order of withdrawal (now) accounts, time certificates of deposits (cds), money market deposit accounts, and cashier’s checks and money orders issued by a bank. however, the fdic does not insure non-deposit investments such as stocks and bonds, mutual funds, annuities, and life insurance policies. the basic amount of deposit insurance is $250,000 per depositor, per insured bank, for each account ownership category (federal deposit insurance corporation, 2014). to cover its operating costs, the fdic must generate income. what are its sources of income? rather than receiving appropriations from the u.s. government, the fdic charges assessments (premiums) that banks must pay for deposit insurance coverage. the fdic also receives interest income from its portfolio of treasury securities. for example, in 2016 the fdic’s income totaled $10.6 billion; of this amount, assessment revenue was $10.0 billion and interest revenue on u.s. treasury securities was $0.6 billion. the balance on the fdic’s deposit insurance fund was $82.2 billion in 2016. moreover, the fdic has a $100 billion line of credit with the u.s. treasury in the event of an emergency (federal deposit insurance corporation, 2016). fdic advocates contend that federal deposit insurance benefits the banking system. it guarantees small depositors that they will have immediate access to their insured funds if their bank fails. also, it promotes public confidence in the banking system. however, skeptics argue that deposit insurance reduces the motivation for depositors to monitor the conduct of banks, thus allowing bankers to engage in risky activities. how to increase your fdic insurance coverage beyond $250,000 the fdic’s basic insurance amount is $250,000 per individual account holder, per insured bank. this includes principal and accrued interest up to the $250,000 limit. funds deposited in different branches of an insured bank are not insured separately. in spite of this limitation, you may be able to increase your deposit insurance coverage beyond $250,000. if you have deposits in different categories of legal ownership, they are separately insured by the fdic. for example, you may have a single-ownership account and a joint-ownership account. a family of two in this situation could obtain deposit insurance coverage of $1,000,000, as seen below. 46 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 46 wife’s single account $250,000 husband’s single account $250,000 joint account of wife and husband $500,000 $1,000,000 if you have accounts at more than one bank, they will be insured separately, up to a maximum of $250,000 at each bank. but if the two banks undergo a merger, your accounts will be covered as if they had been opened at the same bank. to find out more about deposit insurance coverage, you can visit the fdic’s web page at www.fdic.gov. click the icon labeled electronic deposit insurance estimator which allows you to determine your insurance coverage. you can also phone the fdic at 877-275-3342 to determine your coverage. bank examinations: the camels system the fdic conducts on-site examinations of banks to ensure that they are operating in a safe and responsible manner, thus protecting the integrity of the deposit insurance fund. fdic staff evaluate a bank’s capital, assets, management, earnings, liquidity, and sensitivity to market risk—the acronym camels represents these six components of bank examination. this system is also used by the federal reserve, comptroller of the currency, and national credit union administration to examine banks and credit unions. 1. capital adequacy. bank capital is the value of a bank's assets minus its liabilities. assets include cash, loans, and securities while liabilities include customer checking and savings deposits and money owed to other banks and, perhaps, the federal reserve. examiners expect a bank to retain capital that matches the nature and extent of its risks. 2. asset quality. asset quality relates to a bank’s portfolio of loans and securities. for example, bank managers care about the default risk of their loans since they provide earnings for the bank. 3. management: is the ability of a bank’s staff to ascertain, quantify, and control the risks of the bank’s actions and to safeguard that the bank is financially sound in its business operations. 4. earnings: is the income from all operations of a bank such as interest from loans and investments in securities and fees charged for a bank safe-deposit boxes. 5. liquidity: is the bank’s ability to convert assets into cash. 6. sensitivity to market risk: indicates how changes in interest rates, commodity prices, and foreign exchange rates influence a bank’s earnings and capital. after an examination by the fdic, a bank receives a grade in the form of a camels rating, based on a numerical scale from 1 to 5. the highest rating that a bank can receive is a 1; it represents the strongest performance and risk management practices and least likelihood of bank failure. a 5 rating is the lowest grade and it represents weak risk management practices and highest likelihood of bank failure. a bank’s total grade (composite rating) is based on all six components. if the fdic determines that a bank’s camels rating is unfavorable, it can demand that the bank modify its behavior. this demand is supported by the fdic’s issuing a legally 47 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 47 enforceable cease and desist order, or even closing a bank if its camels rating is sufficiently low. the fdic examines banks at least once a year. to avoid repetition of effort, the fdic works with other bank regulators. this means that, state-chartered banks that are members of the federal reserve system are examined by the federal reserve, national banks with federal charters are examined by the office of the comptroller of the currency, and insured state banks that are not members of the federal reserve system are examined by the fdic. also, credit unions are examined by the ncua. fdic insurance assessments (premiums) the fdic’s deposit insurance fund is financed by insurance premiums, known as “bank assessment,” that banks pay to the fdic. a bank’s assessment is determined by multiplying its assessment base times the assessment rate (premium rate). bank assessment = assessment base x assessment rate the assessment base approximately equals total domestic deposits for most banks. 1 concerning the assessment rate, a bank’s camels composite rating is used in determining the price of deposit insurance. as seen in table 2, banks that have favorable camels composite ratings of 1 and 2 are considered to be of relatively low risk to the deposit insurance fund; they pay relatively low assessment rates for deposit insurance. however, more risky banks with camels composite ratings of 3-5 must pay higher assessment rates. banks pay their insurance assessments to the fdic four times a year; the assessment rate and assessment base are revised quarterly by the fdic. also, fdic assessment rates vary with a bank’s size and complexity. large and more complex banks, with financial derivatives as liabilities, tend to be more risky to the deposit insurance fund than small banks with no financial derivatives. therefore, in 2016 large banks had to pay an additional surcharge for deposit insurance which equaled 4.5 cents per $100 of assessment base. these “large” banks are generally defined as those with total assets of $10 billion or more. table 2 shows the fdic’s assessment rates for 2016. who bears the burden of increasing deposit insurance premiums? in march, 2010 the new mexico business weekly published an article, “rising fdic premiums bleed lenders” (domrzalski, 2010). the article discusses that in 2008, first community bank of new mexico paid premiums of $2.3 million for fdic deposit insurance. as the financial crisis of 2008-2009 worsened, many banks failed, thus draining the fdic’s deposit insurance fund. to replenish revenues, the fdic increased its deposit insurance rates for banks. thus, in 2009, first community’s insurance premiums were increased to almost $9 million, a fourfold jump compared to 2008. moreover, century bank in santa fe, new mexico realized a sizable increase in its deposit insurance premiums. in 2007, the bank paid no premiums to the fdic because the deposit insurance fund was ample. however, century paid ------------------- 1 prior to 2010, a bank’s assessment base was approximately equal to its total domestic deposits. however, in 2010 the dodd-frank act modified the definition of the assessment base. a bank’s assessment base now equals its average consolidated total assets minus its average tangible equity. therefore, for most banks the assessment base is approximately equal to total domestic deposits. yet for large banks, that have financial derivatives as liabilities, the assessment base becomes larger. 48 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 48 table 2. fdic assessment rates for established small banks, insured five or more years (under $10 billion in assets)* -------------------------------------------------------------------------------------------------------------- composite camels fdic assessment rate range: rating (cents per $100 of insured deposits) 1 or 2 1.5-16 3 3-30 4 or 5 11-30 --------------------------------------------------------------------------------------------------------------- *banks that are not “established” (insured less than five years) pay higher assessment rates ranging from 7 to 40 cents per $100 of insured deposits. source: federal deposit insurance corporation, fdic assessment rates, july 1, 2016. $200,000 in 2008 for deposit insurance, $700,000 in 2009, and $2 million in 2010. the increase in insurance premiums had the effect of raising the banks’ costs of doing business and decreasing their profitability. to avoid this outcome, banks sought ways to pass the rising insurance assessments on to their patrons. to pass higher insurance premiums onto its patrons, a bank might impose fees on depositors’ checking or savings accounts, lower interest rates paid to depositors on their savings accounts, or increase interest rates on loans to households and businesses. under what conditions will a bank be able to pass rising deposit insurance premiums on to its depositors in the form of lower interest rates? the concept of interest elasticity of supply helps provide an answer to this question. consider the two extreme cases of perfectly inelastic supply and perfectly elastic supply, as discussed below.  perfectly inelastic supply of deposits: households bear all of the increase in deposit insurance premiums. figure 1 illustrates the market for savings deposits. assume that a household’s only saving option is to maintain deposits at a particular bank. therefore, the household’s supply curve of savings deposits is perfectly inelastic (vertical), as seen in figure 1a. this means that the household will supply $100 of savings deposits no matter what the interest rate is on these deposits. now suppose that the fdic raises its premium on deposit insurance. this results in an increase in the bank’s cost of doing business, a decrease in its profitability, and a decrease in its demand curve for savings deposits—the bank’s demand curve for savings deposits decreases from d0 to d1. therefore, the equilibrium interest rate on savings deposits decreases from 5 percent to, say, 3 percent; but the household still supplies $100 of savings deposits to the bank. the household’s lack of saving alternatives means that the bank will be able to pass all of the increase in deposit insurance premiums to the household in the form of a lower interest rate on savings deposits. 49 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 49  perfectly elastic supply of deposits: banks bear all of the increase in deposit insurance premiums. assume that a household has many (an infinite number of) alternatives for saving money such as treasury securities, corporate stocks or bonds, 50 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 50 mutual funds, savings deposits at banks, and the like. referring to figure 1b, the household’s supply curve of savings deposits becomes perfectly elastic (horizontal) at the interest rate of 5 percent; that is, the household will not supply deposits at any interest rate less than 5 percent. when the fdic raises its premium on deposit insurance, the bank’s demand curve for savings deposits decreases from d0 to d1. however, the interest rate that the bank must pay households remains unchanged at 5 percent. thus, the bank bears all of the premium increase in the form lower net revenues. from these two cases, we can make the following generalizations. given the bank’s demand curve for savings deposits, the more inelastic the household’s supply curve of deposits, the greater the extent that the household will bear the increase in deposit-insurance premiums in the form of a lower interest rate on savings deposits (or a higher service fee on savings deposits). conversely, the bank will absorb more of the increase in insurance premiums out of decreasing net revenue as the household’s supply curve of deposits becomes more elastic. 2 resolving bank failures: deposit payoffs versus purchase-and-assumption transactions although the fdic strives to promote sound financial practices for insured banks, failures sometimes occur. the resolution process begins when a bank is proclaimed a failed bank by its chartering agency—the office of the comptroller of the currency has the exclusive authority to issue a federal charter for a national bank while any state may issue a charter for a state-chartered bank. this results in the fdic’s becoming the receiver of the failed bank, which means that it has the authority to dispose of the bank’s assets and pay off the depositors. (federal deposit insurance corporation, 2017) table 3 provides two examples of these approaches. as a receiver of a failed bank, the fdic can pay off patrons directly for their deposit accounts, up to the insured limit of $250,000 per depositor for each account-ownership category, as soon as the records of the deposit accounts are determined. this is known as the deposit payoff approach. depositors having accounts greater than the insurance cap become creditors of the failed bank for the amount that their deposits are greater than the insurance limit. the fdic mails a check to each depositor on the uninsured portion of their deposits when the fdic liquidates the assets of the failed bank, such as the bank building, office equipment, and so on. whether depositors receive full payment on their uninsured deposits depends on the value of these assets when they are liquidated. the payments that the fdic makes to depositors is a drain on its deposit insurance fund. an advantage of the deposit payoff approach is that it tends to promote market discipline on banks through the influence of uninsured depositors. these depositors realize that, in the event of bank failure, they may not receive the full value of their deposits. thus, they have the incentive to monitor the activities and performance of their bank. however, there are disadvantages to the deposit payoff approach. banking services are temporarily suspended, even for fully insured depositors who must wait several days to receive checks from the fdic. for ------------------------ 2 it is also important to note the effects of the elasticity of a bank’s demand for deposits on the incidence of insurance premiums in cases where the elasticity of supply of deposits is anywhere between the two above described examples—that is, where its numerical range is between zero and infinity. in such cases, the less elastic the demand for deposits and the more elastic the supply of deposits, the larger is the share of insurance premiums received from the bank’s revenues rather than from its share paid by the bank’s customers. 51 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 51 table 3. fdic resolution of bank failures: example of purchase and assumption approach and deposit payoff approach -------------------------------------------------------------------------------------------------------------------- conway bank assumes the deposits of the farmers and merchants state bank of argonia on october 13, 2017, the farmers and merchants state bank of argonia, (argonia, kansas) was closed by the office of the state bank commissioner of kansas, which appointed the fdic as receiver. to protect the depositors, the fdic entered into a purchase and assumption agreement with conway bank (conway springs, kansas) to assume all of the deposits of the farmers and merchants state bank of argonia, thus becoming the merger partner. the two branches of the farmers and merchants state bank of argonia reopened as branches of conway bank during their normal business hours. depositors of the farmers and merchants state bank of argonia automatically became depositors of conway bank. deposits continued to be insured by the fdic, so there was no need for customers to change their banking relationship in order to retain their deposit insurance coverage up to applicable limits. as of june 30, 2017, the farmers and merchants state bank of argonia had approximately $34.2 million in total assets and $29.6 million in total deposits. conway bank will pay the fdic a premium of 2.5 percent to assume all of the deposits of the farmers and merchants state bank of argonia. besides assuming all of the deposits of the failed bank, conway bank agreed to purchase essentially all of the assets. fdic approves the payout of the insured deposits of the community's bank on september 13, 2013, the fdic approved the payout of the insured deposits of the community's bank (bridgeport, connecticut). the bank was closed by the connecticut department of banking, which appointed the fdic as receiver. the fdic was unable to find another bank to take over the operations of the community's bank. the fdic will mail checks directly to depositors of the community's bank for the amount of their insured money. as a convenience to depositors, the fdic has made arrangements with people's united bank (bridgeport, ct) to accept the failed bank's direct deposits from the federal government, such as social security and veterans' payments for 90 days. as of june 30, 2013, the community's bank had about $26.3 million in total assets and $25.7 million in total deposits. the fdic estimated that the resolution cost to the deposit insurance fund was $7.8 million. -------------------------------------------------------------------------------------------------------------------- source: federal deposit insurance corporation, bank failures in brief, 2017, washington, d.c. uninsured depositors, even if they receive full payment, they may have to wait a considerable period of time for the fdic to liquidate the bank’s assets. moreover, when a failed bank closes its doors, such action is generally widely reported in newspapers and on television. this can cause fear among the banking public concerning the soundness of the banking system (gilbert, 1985). the other option for resolving bank failure is the purchase and assumption approach under which a healthy bank mergers with a failing bank. this means that the healthy bank purchases (assumes) all of the deposits liabilities of the failed bank. the depositors of the failed 52 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 52 bank become depositors of the healthy bank and they have immediate rights to their money. thus, all depositors, even those having accounts in excess of the insurance limit, are fully protected. moreover, the healthy bank may purchase some or all of the failing bank’s assets, such as loans and securities, that it deems to be of good value. the fdic provides additional cash to the healthy bank if the value of the assets of the failed bank offered for purchase is less than the deposit liabilities to be assumed. this cash payment is a drain on the fdic’s deposit insurance fund. to implement a purchase and assumption transaction, the fdic first identifies a group of healthy banks as possible merger partners of the failing bank. it takes into account overall financial condition, competitive environment, geographic location, minority owned status, and the like. in strict confidence, the fdic invites healthy banks to submit bids to purchase all of the failed bank’s deposit liabilities and those assets that the bidding bank considers to be of high quality. the fdic’s board of directors is responsible for determining the winning bid. in a purchase and assumption transaction, an account owner’s deposit contract is with the failed bank, and it is canceled upon the bank’s failure. the healthy bank is not responsible for maintaining either the failed bank’s interest rates or the terms of the deposit contract. however, depositors of a failed bank can establish a new account with the acquiring bank or withdraw their funds without penalty (federal deposit insurance corporation, 2014). an advantage of the purchase and assumption approach is that the failing bank is not shut down. on the next business day following the takeover, the failing bank is open for business as usual, except that it now has a new name on its front door—the name of its acquiring merger partner. the banking public tends to be accepting of this process and thus the public’s confidence in the banking system is maintained. so which approach should the fdic use in resolving bank failures—the deposit payoff approach or the purchase and assumption approach? in selecting its resolution method, the fdic currently uses the least-cost principle which means that it uses the approach that has the lowest cost to the deposit insurance fund, irrespective of other factors. in practice, the purchase and assumption approach is currently used in the high majority of bank failure resolutions. for example, during 2007-2017, 516 banks failed in the united states. the fdic resolved these failures by using the purchase and assumption approach in 97 percent of the failures and the deposit payoff approach in 3 percent of the failures (federal deposit insurance corporation, 2017). generally, the fdic will receive at least one bid that is less costly than the estimated cost of liquidation via the deposit payoff approach. however, if the fdic is unable to find another bank to take over a failing bank, it will resort to the deposit payoff approach. 3 during the great recession of 2007-2009, many people worried about the safety of their bank deposits. to reassure depositors about its resolution of bank failures, the fdic provided them a rare look at how it takes over a failed bank and selects a merger partner for the bank. in march, 2009 the fdic allowed the staff of cbs news to film the takeover of heritage ------------------------ 3 in the past, the fdic sometimes (rarely) used open-bank-assistance to prevent bank failures. this resulted in the fdic granting a failing bank direct loans, cash contributions, asset purchases, or the assumption of liabilities including deposits. generally, open bank assistance was used when the fdic determined that the failing bank was so large that its closure could threaten the stability of the nation’s entire financial system (“too big to fail”). this option was terminated by the fdic in 1991, although it was temporarily used during the financial crisis of 2008 in order to keep citigroup and bank of america afloat. the dodd-frank act of 2010 totally eliminated this option (federal deposit insurance corporation, 2017). 53 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 53 community bank of illinois, which had bad real estate loans. the takeover occurred in secrecy on a friday night, after the bank closed for the day, to make sure that there were no depositors at the bank who might panic. seizing the bank on a friday also gave the fdic the weekend to go through the bank’s books so the bank could reopen smoothly the following monday with a new merger partner. this fascinating takeover was broadcast on cbs 60 minutes--your bank has failed: what happens next? it can be seen by going to https://www.youtube.com/watch?v=90m1ouyeir4. does fdic insurance encourage bankers’ risk taking and misuse of funds? since its beginnings, the fdic has helped prevent runs on banks. however, does deposit insurance encourage risk taking and the misuse of funds by bankers? without deposit insurance, depositors tend to be concerned that their bank might fail, thus providing them an incentive to monitor the bank’s actions. for example, prior to making a deposit, households and businesses could analyze a bank’s balance sheet and income statement to make sure that the bank is safe and sound. after making deposits, they would continue to keep track of the bank’s activities and they might withdraw funds if red flags appear. therefore, the threat of deposit withdrawals by savvy depositors can discourage a bank from taking excessive risks or misusing funds. however, deposit insurance reduces the incentives of depositors to police banks. small depositors, having deposits less than $250,000, know that they will be fully reimbursed if their bank fails; so they are not unduly concerned if bankers take excessive risks. moreover, such depositors do not generally analyze balance sheets or income statements for danger signs. this lack of attention provides bankers additional leeway to misuse deposits since they are not concerned that their excessive risk taking will be disciplined by withdrawals of deposits. however, large depositors, with deposits greater than the insured limit of $250,000, have greater concern about the behavior of bankers since they may not be fully compensated if the bank fails. simply put, with deposit insurance, bankers tend to assume more risk than they would normally, because they realize the benefits of risky behavior while the fdic assumes the costs. thus, in protecting depositors, the fdic creates what economists call moral hazard. most economic and financial historians believe that fdic insurance has contributed to the rise in risk taking among bankers. the failure of the first national bank of keystone (fnbk) in 1999 provides an example of excessive risk taking and misuse of bank funds (pasley, 2016). in 1904 fnbk originated as a small community bank in the coal-mining town of keystone, west virginia. it served the local economy well by making loans to businesses and households and accepting their deposits. by the 1970s, the bank’s business had grown beyond keystone, and it made loans throughout west virginia and pennsylvania. in the early 1990s, the fnbk was characterized as one of the country’s top performing banks. however, during the mid-1990s, the bank began purchasing risky loans from other banks throughout the nation. to attract deposits to fund its loan portfolio, fnbk bank provided interest rates on time certificates of deposits (cds) that were 2 percentage points higher than the banking-industry average. this behavior put fnbk in a risky position which resulted in defaults occurring on many of the loans that the bank purchased. moreover, the top managers of the bank embezzled tens of millions of dollars. for years, they deceived banking regulators and their depositors by forging documents and board minutes. however, in 1999, the regulators determined that fnbk was insolvent. the bank was closed on september 1, 1999 and the fdic was named the receiver. on september 3, 1999 the fdic reached an 54 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 54 agreement with ameribank, a healthy bank, to merge with fnbk (federal deposit insurance corporation, 1999). federal prosecutors filed criminal charges against the managers of fnbk, several of which were convicted and imprisoned. bank merger welfare effects the merger of washington mutual bank (wamu) and jpmorgan chase provides an example of the possible welfare effects of bank mergers. founded in 1889, wamu originally served as a conservative savings bank, providing financial services to local households and businesses. by the early 2000s, wamu aggressively offered mortgages and credit cards to customers that other banks deemed too risky. during 2007-2008, wamu suffered sizable losses on its mortgage loans and credit card loans, and its credit rating fell. as customers’ confidence in wamu deteriorated, they withdrew almost 9 percent of the bank’s deposits, $17 billion, over the course of ten days. this resulted in the bank’s failure in 2008. the fdic became the receiver and it arranged a merger between wamu and jpmorgan chase, thus protecting all of wamu’s depositors. the failure of wamu resulted in jpmorgan chase, the nation’s third largest bank, merging with wamu, the nation’s fifth largest bank. this resulted in jpmorgan chase’s becoming the nation’s second largest bank, with $2 trillion of assets (grind, 2012). the merger of these financial giants had implications for antitrust policy in that it could result in additional monopoly power as well as greater operating efficiencies. mergers among competing banks can yield welfare gains and losses for the economy. welfare gains stem from increasing operating efficiencies (economies of scale and economies of scope). welfare losses arise if the merger results in monopoly power for the newly established bank–the ability to restrict output and charge a higher price for its services. whether the economy’s welfare increases or decreases depends on the magnitudes of these two opposing forces, as outlined in the following section (williamson, 1968). figure 2 illustrates the market for loans offered by bank a and bank b, the only banks making loans in the state of washington. being equally efficient banks, suppose that they each operate under constant cost conditions in which mc0 = ac0 = $600. also, being competitive banks, suppose that they operate at their break-even points in the long run; therefore, each bank charges a price of $600 per loan and produces an output of 60 loans. consumer surplus equals area a+b+c, which totals $18,000. 4 from this starting point, we compare two cases. first, a merger of bank a and bank b occurs which results in the newly established bank, bank c, becoming a monopoly; but there is no improvement in operating efficiencies. second, a merger of bank a and bank b occurs which results in bank c becoming a monopoly that realizes improvements in operating efficiencies. case 1: monopoly with no efficiency gains. referring to figure 2, by operating as a monopoly, bank c will maximize total profit by providing 30 loans, where marginal revenue (mr) equals marginal cost (mc0), and charging a price of $900 per loan; the bank realizes a profit totaling $9,000, denoted by area b. however, because bank c is a monopoly, it ------------------------ 4 consumer surplus is the difference between the maximum price that a buyer is willing and able to pay for a particular quantity and the lower market equilibrium price. geometrically, consumer surplus is the triangular area under a product’s demand curve down to the equilibrium price. the dollar value of this triangle equals (base x height) / 2. 55 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 55 maximizes profit by restricting output below the competitive level (60 loans) and charging a higher price. this results in a deadweight loss of consumer surplus of $4,500, denoted by area a. this sum represents the cost that society bears as a result of the monopoly power of bank c. case 2: monopoly with efficiency gains. as a result of the merger, suppose that bank c realizes operating efficiencies that neither bank a nor bank b could realize by themselves. referring to figure 3, suppose that these efficiencies cause bank c’s cost curve to decrease to mc1 = ac1. as a monopoly, bank c will maximize profit by providing 40 loans, where mc1 = mr, and charging a price of $800 per loan. this results in a deadweight loss of consumer surplus of $2,000, denoted by area d. however, against this efficiency loss is the reduction in operating cost from $600 to $400 per loan. therefore, bank c can operate at its profitmaximizing output of 40 loans, at a reduction in cost totaling $8,000, denoted by area e. comparing these opposing forces, we conclude that the merger is desirable because area e ($8,000) exceeds area d ($2,000). in in other words, there is a net efficiency gain of $6,000 as a result of the merger (deyoung, 1991). it has been assumed that bank c realizes cost reductions that are caused by the merger, and they were unavailable to bank a or bank b. if the cost reductions stem from productivity improvements, such as technological advances or new work rules leading to increased output per worker, a welfare gain occurs for the economy because fewer resources are needed to produce a 56 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 56 given level of output. these resources can be shifted to the production of other goods. however, cost reductions due to the formation of bank c can be monetary in nature. being a newly-formed bank, suppose that bank c can extract wage concessions from its workers that could not be attained by bank a or bank b. such a cost reduction represents a transfer of dollars from workers to bank c and does not provide a welfare gain for the overall economy. in this case, the merger of bank a and bank b reduces the economy’s welfare by the amount of the deadweight loss of consumer surplus (area d) with no welfare-increasing efficiency effect (area e). therefore, the economy’s welfare falls by the amount of the deadweight loss of consumer surplus. according to the bank merger act of 1960, mergers of federally insured banks cannot occur without the prior approval of the comptroller of the currency, the federal reserve board, or the fdic, depending on whether the newly created bank is a national bank, a state member bank of the federal reserve system, or a state bank that is not a member of the federal reserve system, respectively. concerning these regulators, the bank merger act forbids them from approving a proposed merger that would lead to a monopoly in any part of the united states. however, an exception can be made if the regulator determines that the anticompetitive effect of the proposed merger is dwarfed by a merger that fulfills the convenience and needs of the community to be served. 5 for example, the fdic may approve a merger transaction in order to prevent the harm done to society if one of the banks fails. also, the fdic can take into account the degree to which the proposed merger would likely create a stronger, more efficient bank that 57 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 57 is able to compete more vigorously in the relevant geographic market (federal deposit insurance corporation, 2014). imply put, regulators consider both the monopoly power effect and efficiency effect of a bank merger 6 (u.s. department of justice and the federal trade commission, 1997). however, it is difficult to determine how much weight regulators give to these effects when they evaluate mergers. 7 national credit union administration and deposit insurance a complete analysis of the safety of our banking industry necessitates a brief outline of the history, role and regulation of credit unions in the united states. although the total assets of the credit unions are relatively small in comparison to the combined assets of the u.s. commercial banks, there are over 5,000 credit unions currently operating in the country. credit unions play an important role in financial intermediation, especially with respect to providing funds to small borrowers and serving particular communities where they conduct their business. yet, in spite of their obvious contributions to the proper functioning and the wellbeing of our financial system, analyses and descriptions of these financial intermediaries in leading money and banking textbooks are typically more scant than those of commercial banks. our paper attempts to remedy this omission. the st. mary’s cooperative credit association was america’s first credit union. it began operating on april 6 th , 1909 in manchester, new hampshire. on april 15 th of the same year, the massachusetts credit union act was passed, thereby establishing a basic legal structure of credit unions in the united states. this legal document provided key elements for subsequent credit unions laws, including the 1934 federal credit union act. this act created the federal credit union division and placed it under the farm credit administration’s control. the number of credit unions grew from its humble beginnings in 1909 to 3,756 by the end of 1940. this growth continued in both the number of credit unions and their assets. by the end of 1960, there were 9,905 credit unions with $2.7 billion in assets and some 6.1 million members. by the end of 1970, the number of credit unions increased to 12,977 and their assets rose to $8.8 billion. the first decade of 2000 saw a decline in the number of credit unions combined with an increase of their asset holdings, resulting in 7,339 credit unions with $914 billion in total assets in 2010. in 2010 the membership of credit unions reached nearly 90.5 million. the upward growth trend in the credit unions membership and their combined assets continued thereafter. as of june 2017, the membership of the federally insured credit unions increased to 109.3 million and their total ------------------------ 5 the bank regulators’ recognition of possible efficiencies in bank mergers is consistent with the 1997 horizontal merger guidelines of the antitrust division of the justice department and the federal trade commission which state that mergers may foster efficiencies (e.g., economies of scale, technological innovation), and these efficiencies may take place in markets where they are likely to be passed on to consumers to the degree that the efficiencies outweigh any probable anticompetitive effect. (u.s. department of justice and the federal trade commission, 1997) 6 based on the authors’ phone conversations with economists at the board of governors of the federal reserve system and the fdic, we became aware of an efficient way of learning about the possible monopoly power effect and efficiency effect of a bank merger. for example, go to the home page of the board of governors of the federal reserve system. use the search box to find federal reserve orders that approve the merger of various banks. reading these orders, you can find details about the factors that the federal reserve considered when making a merger decision. 7 a more detailed outline of the history of u.s. credit unions and their oversight by the ncua is available at the ncua’s website at www.ncua.gov. http://www.ncua.gov/ 58 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 58 assets reached $1.35 trillion. 8 u.s. credit unions were granted full legal status under the 1934 federal credit union act. this congressional legislation authorized, among other legal issues, the formation of federally chartered credit unions in all 50 states. it also determined the amount of coverage and the terms of all federally insured accounts. in 1970, congress created the national credit union administration (ncua), an independent agency that supervises and charters federal credit unions. its structure and procedures resemble closely those of the fdic, with a few minor differences. the same year the national credit union share insurance fund was established. this agency provided, for the first time in the credit unions’ history, share deposit insurance up to $20,000 per deposit for all federally chartered credit unions. in 1974 insurance coverage was increased to $40,000 per share deposit. this insurance coverage was increased further to $100,000 per deposit in 1979. an important milestone in the credit union deposit insurance coverage expansion was reached in 1987, when the ncua notified state-chartered credit unions that they could qualify for federal share insurance. this led to 432 state-chartered credit unions converting to the federal insurance program by 1991. noteworthy is also the fact that the ncua adopted the camels rating system for evaluating credit unions. the most recent increase in the credit union share deposit insurance occurred in 2010, within the clauses of the dodd-frank wall street reform and consumer protection act, whereby the maximum amount of share insurance rose to $250,000 per deposit. at the end of june 2017, the national credit union share insurance fund, that provides this share deposit coverage, had $13.2 billion in assets. this insurance fund is financed by the premiums of credit unions and interest income on the ncua’s holdings of government securities. it has the backing of the full faith and credit of the u.s. government. similar to the fdic, the ncua resolves failures of credit unions through its deposit payoff approach and its purchase and assumption approach (national credit union administration, 2016). conclusion financial institutions play a key role in our country’s economic growth by facilitating flows of financial capital between savers and borrowers. the beginnings of economic recessions can often be traced to financial crises that originated in the banking sector. therefore, the safety and the proper functioning of the banking sector is of paramount importance. illiquidity caused by runs on banks was one of the main reasons for numerous bank failures throughout the u.s. banking industry’s history. the fdic has played a crucial role in preventing runs on banks by providing deposit insurance since its establishment in 1934. yet, in spite of its obvious importance in our economy, its structure, functions and the role it fulfills in providing safety for banks and confidence in our banking system are typically not sufficiently analyzed in most leading money and banking textbooks. similarly, most money and banking textbooks also do not include analyses of the ncua, the insurer of share drafts and the regulatory agency of u.s. credit unions. our article remedies these omissions. the focus of our paper is on describing and analyzing the methods that the fdic uses to prevent bank failures and to assess bank mergers. we also provide a detailed discussion of the insurance coverage that is provided by the fdic and the ncua. one of the key contributions of ------------------------ 8. the most current information about the status of u.s. credit unions is available in industry at glance (2017) published by the ncua. 59 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 59 our article with respect to the fdic’s methods of the prevention of bank failure, is our analysis of the welfare costs and benefits of bank mergers for the u.s. economy. mergers tend to result in movement toward monopoly. we describe two possible welfare effects of such a monopoly. first our paper focuses on a monopoly with no efficiency gain, and thereafter the case of a monopoly with an efficiency gain is analyzed. these methods are used, to some extent, by regulators in their decisions concerning the approval or the denial of bank mergers. we also use micro economic concepts of the elasticity of supply and demand for insurance premiums to determine whether their incidence falls on banks or depositors. it is our hope that these contributions will provide useful information for economic classes in principles of economics and money and banking courses. references deyoung, robert. 1991. “the efficiencies defense and commercial bank merger regulation,” review of industrial organization, 6 (3): 269-282. domrzalski, dennis. 2010. “rising fdic premiums bleed lenders,” new mexico business weekly. march 15. federal deposit insurance corporation. 2017. bank failures in brief. washington, d.c. federal deposit insurance corporation. 2017. resolutions handbook. washington d.c. federal deposit insurance corporation. 2017. crisis and response: an fdic history, 20082013, washington d.c. federal deposit insurance corporation. 2016. annual report. washington, d.c. federal deposit insurance corporation. 2014, april. bank merger transactions-fdic. washington, d.c. at https://www.fdic.gov/regulations/laws/rules/5000-1200.html federal deposit insurance corporation. 2014. your insured deposits. washington, d.c. federal deposit insurance corporation. 1999. fdic approves assumption of insured local deposits of first national bank of keystone. september 3. washington, d.c. federal deposit insurance corporation. 1998. a brief history of deposit insurance in the united states. september. washington, d.c. federal deposit insurance corporation. 1998. managing the crisis: the fdic and rtc experience, 1980-1994. washington, d.c. federal deposit insurance corporation. 1984. the first fifty years: a history of the fdic, washington d.c. friedman, milton and anna schwartz. 1963. a monetary history of the united states, 18671960. national bureau of economic research, princeton, nj. gilbert, alton. 1985. “recent changes in handling bank failures and their effects on the banking industry,” review, federal reserve bank of st. louis, july-august: 21-28. grind, kirsten. 2012. the lost bank: the story of washington mutual—the biggest bank failure in american history. new york, simon and schuster. national credit union administration. 2017. industry at a glance. washington, d.c. national credit union administration. 2016. annual report. washington, d.c. pasley, robert. 2016. anatomy of a banking scandal: the keystone bank failure—harbinger of the 2008 financial crisis. new brunswick, nj. transaction publishers. u.s. department of justice and the federal trade commission. 1997. horizontal merger guidelines: issued on april 2, 1992, revised on april 8, 1997. washington, d.c. williamson, oliver. 1968. “economies as an antitrust defense: the welfare tradeoffs,” american economic review. december. https://www.fdic.gov/regulations/laws/rules/5000-1200.html 22 |journal for economic educators, 22(2), 2022 using data from classroom experiments to teach deadweight loss austin brooksby1 lucas rentschler2 abstract this paper demonstrates a novel approach to teaching the concept of deadweight loss using a double oral auction experiment conducted in the classroom. after the experiment, students are given the associated data and are tasked with calculating both predicted and observed consumer and producer surplus transaction by transaction. they are then asked to differentiate between deadweight loss resulting from an inefficient allocation of production and consumption given the observed number of transactions and the deadweight loss resulting from an inefficient number of transactions. we find an improved understanding of these concepts from the participating class. keywords: deadweight loss, double oral auction, classroom experiments jel classification: a22 introduction the equilibrium predictions associated with the supply and demand framework and the underlying economic logic are fundamental to any introductory course in microeconomics. as such, convincing students of these predictions’ utility assures them that the model they are learning is relevant and can help them understand the world around them. one effective way of illustrating this is a classroom experiment in which students participate in a market with induced supply and demand curves. after running the experiment, the realized outcomes can be compared with predictions. perhaps the most popular classroom experiment along these lines is the double oral auction. as first shown in smith (1962), in this mechanism, both convergence to equilibrium and adjustment to changes in either supply and demand is rapid. when analyzing the results of the experiment with students, the focus of the analysis typically concerns the validity of the equilibrium predictions. this paper argues that additional benefits can be wrung from this exercise. namely, providing students with the raw data from the experiment and asking them to calculate predicted and observed consumer surplus, producer surplus, and deadweight loss deepens their understanding of these concepts. this exercise is particularly valuable for illustrating deadweight loss. since there is no predicted deadweight loss in market equilibrium, most textbooks initially focus their discussion of welfare on consumer and producer surplus and the prediction of perfect market efficiency. the concept of deadweight loss is given short shrift until there is a reason to predict an inefficient market outcome. typically, this arises due to ad valorem taxes or subsidies, where the associated deadweight loss arises entirely due to an inefficient number of transactions. as such, 1 graduate student, department of economics, university of california, santa barbara, 2127 north hall, university of california, santa barbara, ca 93106 2 associate professor of economics, department of economics and finance, utah state university, 3565 old main hill, logan ut 84322 23 |journal for economic educators, 22(2), 2022 students end up associating deadweight loss with harberger's triangle and neglecting welfare losses related to a misallocation of resources and production for a given number of transactions. asking students to manually calculate welfare losses realized in a classroom experiment emphasizes the fact that welfare losses are also found when: 1) the marginal value of a buyer associated with a transaction is less than the marginal value of a buyer that was not associated with a transaction; 2) the marginal cost of a seller associated with a transaction is greater than another marginal cost of a seller that was not associated with a transaction. details of the double oral auction in the double oral auction, students are divided into buyers and sellers. each buyer can purchase a number of units and is provided with marginal values of purchasing (consuming) each of these units. for each buyer, these marginal values decrease in the number of units purchased. similarly, each seller can produce a number of units and is provided with marginal costs for each of these units. further, the marginal costs are increasing in the number of units sold. marginal values and costs are private information, and subjects do not know anything beyond their own private information before trading begins. students are informed that each transaction in the experiment consists of a single unit. for any transaction, the net benefit of the buyer is her marginal value of the corresponding unit less the agreed upon price. the net benefit of the seller is this price less the marginal cost of the corresponding unit. the total benefit of any student is simply the sum of the net benefit associated with all their transactions. to begin the experiment, the instructor announces that a market period is open. during the period any buyer can submit a bid, and any seller can submit an ask. the only constraint is that any new bid or ask must improve upon the preceding bid or ask. once the highest bid and lowest ask reveals the potential for gains from trade, a trade is conducted. the price is set at the bid or ask that was submitted first. trades can also be initiated if a buyer (seller) decides to accept the current best ask (bid). the market period ends after a specified amount of time, or when no additional transactions are being made. upon the closure of the market period, the profits of the transacting individuals are calculated, and a new market period is opened with fresh supply and demand. these market periods can be conducted as many times as desired. instructors wishing to conduct a double oral experiment in the classroom have a variety of options. in our view, moblab.com provides an excellent implementation that is browser-based, so that students can participate from any internet-connected device. another browser-based implementation is veconlab.econ.virginia.edu (which has the added benefit of being free). the economic science institute at chapman university provides free software for a desktop-based version of the double oral auction, which is intended to be paired with the curriculum presented in jaworski et al. (2010).3 finally, centro vernon smith de economia experimental at universidad francisco marroquin provides an excellent implementation using z-tree, which is a popular platform for running research experiments.4 3 this software can be found at https://www.chapman.edu/research/institutes-and-centers/economic-scienceinstitute/research/software.aspx 4 this software can be found at https://fce.ufm.edu/centro-de-economia-experimental/fruit/ 24 |journal for economic educators, 22(2), 2022 calculating deadweight loss in the experiment, quantities of the good are in discrete (integer) amounts, and marginal values and marginal costs are induced. this allows the instructor to show the class the associated supply and demand schedules after the experiment. constructing supply and demand functions from these schedules helps students build intuition about how marginal costs and marginal benefits map into the linear functions they typically see in their textbooks. after the experiment, we suggest that students be provided the supply and demand schedules from a single round of the experiment. to ensure a thorough understanding of deadweight loss, we suggest the instructor choose a period in which the number of transactions is not equal to the equilibrium prediction, and at least one observed transaction involves a marginal cost or marginal value that was not predicted to transact, given the observed number of transactions.5 in the assignment itself, students are asked to answer each of the following questions: 1. what is the predicted level of consumer surplus in this market? 2. what is the predicted level of producer surplus in this market? 3. what is the predicted level of deadweight loss in this market? 4. what is the observed level of consumer surplus in this market? 5. what is the observed level of producer surplus in this market? 6. what is the observed level of deadweight loss in this market? 7. how much, if any, of the deadweight loss in this market is the result of transactions not involving the lowest available marginal cost? 8. how much, if any, of the deadweight loss in this market is the result of transactions not involving the highest available marginal value? moblab example by way of example, consider table 1, which contains the induced supply and demand schedules from a double oral auction implemented in moblab. figure 1 illustrates these supply and demand schedules graphically.6 it is straightforward to determine the equilibrium number of transactions by comparing the marginal value to the marginal cost for each quantity. whenever the marginal value weakly exceeds the marginal cost, a transaction is predicted to take place. in this case, we arrive at a prediction of 13 transactions. any price between the marginal value and the marginal cost of this transaction is consistent with equilibrium. for simplicity, we assume that the equilibrium price will be equal to the midpoint of this interval. in this example, this corresponds to a price of $1.12. having determined the equilibrium price, calculating the predicted consumer and producer surplus is straightforward. it is again worth emphasizing that these calculations assume that transactions will only involve marginal values weakly greater than $1.12, and marginal costs weakly less than $1.12. to find the predicted consumer surplus, one calculates the net benefit to the buyer for each predicted transaction and then sums them. for the first transaction, the net benefit is $1.50 − $1.11 = $0.38. these calculations are reported in column 4 of table 1. summing across all 13 predicted transactions yields a predicted consumer surplus of $2.60. finding the predicted producer surplus involves a similar exercise, except that one calculates the net benefit to the seller for each predicted transaction. for the first transaction, this 5 it is possible, although extremely unlikely that no such period emerges from the experiment. if this is the case, the instructor can simply use the example highlighted in the current paper, or construct an example of their own. 6 we would like to thank moblab.com for allowing us to use this figure. 25 |journal for economic educators, 22(2), 2022 net benefit is $1.12 − $0.50 = $0.62. these calculations are reported in column 5 of table 1. note that summing across all 13 predicted transactions yields a predicted producer surplus of $4.16. calculating the predicted level of deadweight loss is trivial, as equilibrium predicts that welfare will be maximized. that is, no deadweight loss is predicted. table 1: induced supply and demand schedules, with predicted consumer and producer surplus quantity buyer marginal value seller marginal cost consumer surplus producer surplus 1 $1.50 $0.50 $0.38 $0.62 2 $1.47 $0.55 $0.35 $0.57 3 $1.44 $0.60 $0.32 $0.52 4 $1.41 $0.65 $0.29 $0.47 5 $1.38 $0.70 $0.26 $0.42 6 $1.35 $0.75 $0.23 $0.37 7 $1.32 $0.80 $0.20 $0.32 8 $1.29 $0.85 $0.17 $0.27 9 $1.26 $0.90 $0.14 $0.22 10 $1.23 $0.95 $0.11 $0.17 11 $1.20 $1.00 $0.08 $0.12 12 $1.17 $1.05 $0.05 $0.07 13 $1.14 $1.10 $0.02 $0.02 14 $1.11 $1.15 15 $1.08 $1.20 notes: the predicted number of transactions is 13. there is a continuum of prices consistent with equilibrium. for simplicity, we assume the equilibrium price will be the midpoint of this interval, which is $1.12. figure 1: graph of induced supply and demand 26 |journal for economic educators, 22(2), 2022 turning attention to the observed welfare measures, table 2 contains the observed transactions from a simulated experiment.7 note that there are 12 transactions, while 13 transactions are predicted, further, note that each transaction is associated with a price and that there is considerable heterogeneity in prices across transactions. to find the observed consumer surplus, one simply calculates the net benefit of the buyer for each transaction and then sums across all (12) of the observed transactions. for example, in the first observed transaction, the buyer had a marginal value of $1.11, and transacted at a price of $1.00, for a net benefit of $1.11 − $1.00 = $0.11. the relevant calculations are reported in column 5 of table 2. note that the total observed consumer surplus is $2.20. to find the observed producer surplus, the exercise is the same, except that for each of the observed transactions one calculates the net benefit of the seller. for example, in the first observed transaction, the seller transacted at a price of $1.00, and had a marginal cost of $0.50. thus, the net benefit of the seller for this transaction is $1.00 − $0.50 = $0.50. the associated calculation for each observed transaction is reported in column 6 of table 2. the observed producer surplus is $4.02. note that the predicted sum of consumer and producer surplus is $6.76. in the data from the simulated experiment, the realized sum is $6.22. the difference ($0.54) is the deadweight loss in the market. while this calculation is simple to do, asking students to determine the sources of the deadweight loss is insightful. to do so, students must first compare the set of marginal values that are predicted to be associated with transactions with the set of marginal values actually associated with transactions.8 in our example, two marginal benefits that were predicted to be associated with transactions were not: $1.41 and $1.14. in addition, a marginal benefit of $1.11 was associated with a transaction, contrary to predictions. 7 to avoid irb concerns about using data from an actual classroom experiment, we present a detailed example using simulated data. the outcomes described in this example are commonly found in a typical classroom experiment double oral auction. 8 the set of marginal values predicted to be associated with a transaction is {1.50, 1.47, 1.44, 1.41, 1.38, 1.35, 1.32, 1.29, 1.26, 1.23, 1.20, 1.17, 1.14}. the set of marginal values that are actually associated with a transaction in this example is {1.50, 1.47, 1.44, 1.38, 1.35, 1.32, 1.29, 1.26, 1.23, 1.20, 1.17, , 1.11} 27 |journal for economic educators, 22(2), 2022 table 2: observed transactions, consumer surplus, and producer surplus transaction buyer marginal value seller marginal cost price consumer surplus producer surplus 1 $1.11 $0.50 $1.00 $0.11 $0.50 2 $1.32 $0.65 $1.08 $0.24 $0.43 3 $1.50 $1.05 $1.31 $0.19 $0.26 4 $1.26 $0.55 $0.98 $0.28 $0.43 5 $1.17 $0.75 $1.04 $0.13 $0.29 6 $1.29 $0.85 $1.16 $0.13 $0.31 7 $1.44 $0.80 $1.14 $0.30 $0.34 8 $1.23 $0.60 $0.95 $0.28 $0.35 9 $1.47 $1.15 $1.36 $0.11 $0.21 10 $1.38 $1.00 $1.28 $0.10 $0.28 11 $1.20 $0.90 $1.14 $0.06 $0.24 12 $1.35 $0.70 $1.08 $0.27 $0.38 next, students must compare the set of marginal costs predicted to be associated with transactions with the set of marginal costs actually associated with transactions.9 in our example, two marginal costs that were predicted to be associated with a transaction were not: $0.95 and $1.10. further, a marginal cost of $1.15 was associated with a transaction, contrary to predictions. one source of deadweight loss is when the “wrong” part of the supply or demand curve is involved in the observed transactions. that is, if production and consumption are not efficiently allocated given the observed number of transactions, this results in deadweight loss. to calculate this, exchange marginal values (costs) associated with transactions for the highest (lowest) available marginal value (cost) not associated with a transaction, whenever it is possible to do so. keep in mind that each marginal value/cost can be associated with a single transaction. the sum of the difference between any profitable exchange is deadweight loss. in our example, one transaction involved a marginal cost of $1.15, while a seller with a marginal cost of $0.95 did not transact. thus, $1.15 − $0.95 = $0.20 was lost. in addition, one transaction involved a marginal value of $1.11, while a buyer with a marginal value of $1.41 did not transact. thus, $1.41 − $1.11 = $0.30 was lost. the second source of deadweight loss is an inefficient number of transactions, assuming that the transactions involve the highest marginal values and the lowest marginal costs. the magnitude of the difference between the marginal cost and the marginal value of each of these “missing” or “excess” transactions is lost. in our example, there is one less transaction than predicted. the marginal value associated with this missing transaction is $1.14. the associated marginal cost is $1.10. thus, the deadweight loss from this step is $1.14 − $1.10 = $0.04. by separately considering the sources of deadweight loss outlined above, students learn that market inefficiencies can arise when goods are not put to their highest-value uses, 9 the set of marginal costs predicted to be associated with a transaction is {0.50, 0.55, 0.60, 0.65, 0.70, 0.75, 0.80, 0.85, 0.90 0.95, 1.00, 1.05, 1.10}. the set of marginal costs actually associated with a transaction in this example is {0.50, 0.55, 0.60, 0.65, 0.70, 0.75, 0.80, 0.85, 0.90, 1.00, 1.05, 1.15}. 28 |journal for economic educators, 22(2), 2022 production is not made at the lowest marginal costs, and when the level of production is not determined by ensuring that the marginal benefit of an additional unit is weakly greater than the marginal cost. in our view, this reinforces crucial economic ideas and ensures that students learn more from welfare analysis than the formula for the area of a triangle. conclusion there is significant evidence that the use of classroom experiments increases student outcomes in economics courses (emerson and taylor, 2004; lin, 2020). further, cartwright and stepanova (2012) find that student outcomes can be further improved if the students are subsequently asked to write a report on the experiment. in this vein, we propose pairing a double oral auction experiment with a homework assignment in which students are asked to calculate the equilibrium and observed levels of consumer and producer surplus. in addition, students are asked to calculate the observed deadweight loss and distinguish between deadweight loss due to an inefficient number of transactions, and deadweight loss due to inefficient allocation of production and consumption conditional on the observed number of transactions. we feel this exercise connects welfare analysis directly to the underlying market transactions and leads to a more holistic understanding of deadweight loss and better classroom performance. in the spring of 2020, for a principles of microeconomics course at utah state university, we tested this exercise. since we did not perform a formal experiment in which some students were randomly assigned the homework assignment while others were not, our results are anecdotal. however, we strongly believe that this exercise improved student understanding and outcomes. in addition, student engagement surrounding this assignment was extremely high. there was a prolonged classroom discussion on how to solve each of the homework questions as well as a marked increase in office hour attendance. lastly, we noted a dramatic increase in student understanding of the welfare analysis of market outcomes later in the course. references cartwright, edward and anna stepanova. 2012. “what do students learn from a classroom experiment: not much, unless they write a report on it.” journal of economic education, 43(1):48–57. emerson, tisha and beck taylor. 2004. “comparing student achievement across experimental and lecture-oriented sections of a principles of microeconomics course.” southern economic journal, 70(3): 672–693. jaworski, taylor and vernon smith and bart wilson. 2010. “discovering economics in the classroom with experimental economics and the scottish enlightenment.” international review of economics education, 9(2): 10-33. lin, tin-chun. 2020. “effects of classroom experiments on student learning outcomes and attendance.” international journal of education economics and development, 11(1):76– 93. smith, vernon. 1962. “an experimental study of competitive market behavior.” journal of political economy, 70(2):111–137. 29 |journal for economic educators, 22(2), 2022 price elasticity, tax incidence, and sales volume: a simple model joseph g. eisenhauer1 abstract most intermediate microeconomics textbooks introduce taxes into the basic market model by using a supply-and-demand diagram, and explaining that the economic incidence of the tax falls most heavily on the group (buyers or sellers) whose behavior is least price-elastic. we extend that presentation by using algebra to relate the tax incidence more explicitly to the measurement of price elasticity. the result is a convenient equation showing that the ratio of tax burdens is exactly the inverse of the ratio of (absolute) price elasticities, along with well-known expressions for each group’s share of the tax burden. additionally, the model generates the impact factor by which an excise tax reduces the quantity of a good sold. both hypothetical and empirical examples of price elasticity are provided to illustrate the effects of excise and sales taxes. key words: price elasticity, taxation, incidence jel classifications: a22, d01, h22 introduction because taxes are ubiquitous, taxation often receives a prominent treatment in intermediate microeconomics courses. there is, however, one feature of taxation that is customarily covered less thoroughly than one might expect: the incidence of a tax. most textbooks rightly assert that the economic incidence, or burden, of a tax falls on consumers and producers in inverse proportion to their absolute price elasticities and proceed to illustrate that rule with supply and demand curves of varying steepness (see, for example, krugman and wells, 2015, or varian, 2014). this note suggests that a slightly more rigorous approach can provide additional insights. in particular, if the concept of elasticity has already been covered, incorporating its measurement into the analysis of tax incidence creates the possibility of utilizing numerical examples, including those taken from the empirical literature. this not only illuminates the tax issue; it can also make learning the price elasticity formulas more meaningful for students. in the sections below, we briefly review the conventional presentation of an excise tax and then extend it by explicitly including the price elasticities of supply and demand. that is followed by both hypothetical and real-world numerical examples, an application to sales taxes, and a short conclusion. an appendix discusses the phenomenon of “over-shifting” of taxes. the standard presentation the customary presentation relies on a market diagram such as figure 1, where p denotes price, q denotes quantity, and the supply (s) and demand (d) curves are depicted as being linear. equilibrium occurs at point c, with price at p* and quantity at q*. consumer surplus is initially given by triangle ace, and producer surplus is depicted by triangle ecg. this basic diagram, of 1 professor of economics and dean of the college of business administration, university of detroit mercy, 4001 w. mcnichols road, detroit, michigan 48221. i thank the editor and an anonymous referee for helpful comments. 30 |journal for economic educators, 22(2), 2022 course, can represent the market for any good or service. for convenience, we will refer to those on the demand side of the market as consumers or buyers, and those on the supply side as producers or sellers.2 figure 1. the effects of a tax q* q we assume that the market is perfectly competitive and initially consider the imposition of an excise tax (a fixed dollar amount of tax per unit), though as discussed below, the same framework can be modified for a sales tax. we follow krugman and wells (2015), varian (2014), and similar texts that show a tax as driving a wedge between the price paid by buyers, denoted pd, and the price received by sellers, denoted ps. we let t be the dollar amount of the tax per unit, so 𝑇 = 𝑃𝐷 − 𝑃𝑆 . the market clears at the quantity qt, with consumer surplus reduced to abd, producer surplus reduced to fgh, tax revenue of tqt (indicated by rectangle dbhf), and a deadweight loss shown by triangle bch. the portion of the tax revenue paid by consumers is given by rectangle dbje, and the portion paid by producers is rectangle ejhf. it is customary to illustrate how the economic incidence of the tax changes as the supply and demand curves become steeper or flatter, while explaining that the group with the greater absolute price elasticity pays a smaller share of the tax than the group with less absolute price elasticity, because the greater ability (or willingness) to alter q in response to the tax enables one side to shift some of the tax incidence to the other side. there are two shortcomings with this pictorial approach. one is that it is not very specific; it begs the question of how much the tax incidence shifts if the elasticities are not the same, as 2 if we are interested in an income tax, then we can think of this as a labor market, in which demand comes from employers and supply is from employees. j qt h g f e d c b a p p* pd ps s d 31 |journal for economic educators, 22(2), 2022 well as how much the sales volume declines. the other is that the slopes of the linear s and d curves are not actually their price elasticities, so flatness (steepness) is really just a proxy for elasticity (inelasticity). while such diagrams are indispensable as visual aids, an algebraic model can add specificity and insight, as indicted below. an algebraic model we propose that the discussion of taxation begin with the graphical presentation of figure 1 and come after the price elasticities of demand and supply have already been taught. indeed, many intermediate microeconomics textbooks employ such sequencing; both varian (2014) and krugman and wells (2015), for example, discuss taxation in the chapter immediately following the introduction of elasticity. as an alternative, the model below can be presented as a realworld application within the elasticity lesson itself. either way, before starting this model, students should be familiar with price elasticity, defined as the percentage change in quantity divided by the percentage change in price. for present purposes, this is calculated as an arc elasticity.3 using the notation from figure 1, we can write the price elasticity of demand as 𝜀𝑃 𝐷 = [(𝑄𝑇 − 𝑄 ∗) 𝑄∗⁄ ] [(𝑃𝐷 − 𝑃∗) 𝑃∗⁄ ]⁄ . (1) because 𝑃𝐷 ≥ 𝑃∗ and 𝑄𝑇 ≤ 𝑄 ∗, we have 𝜀𝑃 𝐷 ≤ 0. similarly, the price elasticity of supply is 𝜀𝑃 𝑆 = [(𝑄𝑇 − 𝑄 ∗) 𝑄∗⁄ ] [(𝑃𝑆 − 𝑃∗) 𝑃∗⁄ ]⁄ (2) where 𝑃𝑆 ≤ 𝑃∗ so that 𝜀𝑃 𝑆 ≥ 0. using 𝑇 = 𝑃𝐷 − 𝑃𝑆 , the burden, or share, of the tax falling on consumers can be written as 𝐵𝐷 = (𝑃𝐷 − 𝑃∗) (𝑃𝐷 − 𝑃𝑆)⁄ . (3) (in the public finance literature, 𝐵𝐷 is sometimes called the pass-through rate, as it indicates the extent to which a tax levied on sellers is passed on to buyers). the burden ultimately falling on sellers is 𝐵𝑆 = (𝑃∗ − 𝑃𝑆 ) (𝑃𝐷 − 𝑃𝑆 )⁄ , (4) where 𝐵𝐷 + 𝐵𝑆 = 1. notice that the ratio of (4) to (3) equals (the absolute value of) the ratio of (1) to (2): 𝐵𝑆 𝐵𝐷⁄ = −𝜀𝑃 𝐷 𝜀𝑃 𝑆⁄ . (5) according to (5), the ratio of the tax burdens is inversely proportional to the ratio of the absolute price elasticities. this result quantifies the often-repeated statement that buyers (sellers) pay 3 many intermediate texts use point elasticities, but for linear functions, the values from an initial position of equilibrium will be the same as the arc elasticities used here. for the demand function 𝑄 = 𝑎 − 𝑏𝑃, the point elasticity at (q*, p*) is (𝜕𝑄 𝜕𝑃⁄ )(𝑃∗ 𝑄∗⁄ ) = −𝑏(𝑃∗ 𝑄∗⁄ ), where 𝑏 = (𝑄∗ − 𝑄𝑇 ) (𝑃 𝐷 − 𝑃∗)⁄ , giving the same expression as in (1); an analogous result holds for supply. other texts, especially at the principles level, use an arc elasticity with a midpoint formula, taking the average of the new and original values as the denominator of a percentage change; that would lead to different results. 32 |journal for economic educators, 22(2), 2022 relatively more of a tax if their behavior is less elastic than that of sellers (buyers).4 this can be given an intuitive interpretation if we think of elasticity in terms of behavioral flexibility. the greater the ability and/or willingness of consumers to purchase substitute goods or simply buy less of the taxed item, the more they are able to force sellers to bear a greater share of the tax burden. the opposite is also true: if sellers are collectively more flexible or adaptable than buyers, then buyers will have to shoulder a greater share of the tax; and in a competitive market, those shares are determined precisely by the relative flexibility of each side. additionally, (5) implies that anything that alters the price elasticities of market supply or market demand, such as consumers’ incomes, also alters the tax incidence. moreover, substituting 1 − 𝐵𝐷 for 𝐵𝑆 in (5) and rearranging yields the buyer’s share of the tax burden, 𝐵𝐷 = 𝜀𝑃 𝑆 (−𝜀𝑃 𝐷 + 𝜀𝑃 𝑆)⁄ . (6) equivalently, replacing 𝐵𝐷 in (5) with 1 − 𝐵𝑆 yields the seller’s share of the tax burden as 𝐵𝑆 = −𝜀𝑃 𝐷 (−𝜀𝑃 𝐷 + 𝜀𝑃 𝑆)⁄ . (7) notice that if buyers and sellers are equally flexible, so that the price elasticities are equal in absolute value, then the tax incidence is shared equally between buyers and sellers. equations (6) and (7) are well-known in the public finance literature (see, for example, benedek, et al., 2015) and appear in public finance textbooks (gruber, 2019) and some earlier pedagogical papers (zupan, 1988; swinton and thomas, 2001), but they are curiously absent from most microeconomics textbooks. when used in the classroom, they can give specificity to the claim that the incidence of the tax falls most heavily on the party with the lowest (absolute) price elasticity, and permit numerical examples to be constructed, as shown in the next section. in addition, the model allows us to determine the magnitude of the effect of an excise tax on the quantity of the good or service being traded. let 𝑡 = 𝑇 𝑃∗⁄ , where t is the tax rate, calculated as a percentage of the original equilibrium price. then from (4), 𝑃∗ − 𝑃𝑆 = 𝐵𝑆𝑡𝑃∗; substituting this into (2) and rearranging gives [(𝑄∗ − 𝑄𝑇 ) 𝑄 ∗⁄ ] = 𝜀𝑃 𝑆𝐵𝑆 𝑡. now, substituting from (7) yields [(𝑄∗ − 𝑄𝑇 ) 𝑄 ∗⁄ ] = [(−𝜀𝑃 𝐷 × 𝜀𝑃 𝑆) (−𝜀𝑃 𝐷 + 𝜀𝑃 𝑆)⁄ ]𝑡 (8) or more succinctly, [(𝑄∗ − 𝑄𝑇 ) 𝑄 ∗⁄ ] = 𝑓𝑡. equation (8) is also common in public finance (see gravelle and lowry, 2013; gruber, 2019); it relates the percentage change in the quantity traded to the tax rate and a tax impact factor (𝑓) composed of the price elasticities. the tax impact factor, in brackets on the right-hand side of (8), is the absolute value of the multiplicative product of the price elasticities divided by the sum of the elasticities, and it indicates the effect that a given excise tax rate will have on the quantity of the good traded in the market. because discouraging production and consumption of goods that generate negative externalities is a 4 as noted above, 𝜀𝑃 𝐷 ≤ 0, so −𝜀𝑃 𝐷 ≥ 0 in (5) and subsequent equations. it is worth emphasizing to students that the more negative the price elasticity of demand is, the more elastic behavior is, and vice versa. thus, demand is priceinelastic when −1 ≤ 𝜀𝑃 𝐷 ≤ 0, it is of unitary price elasticity when 𝜀𝑃 𝐷 = −1, and it is price-elastic when 𝜀𝑃 𝐷 < −1. 33 |journal for economic educators, 22(2), 2022 fundamental purpose of pigouvian or “sin taxes” such as those on gasoline and tobacco, the ability to measure the impact on the volume of trade is especially valuable in such contexts.5 the excise tax revenue is 𝑇𝑄𝑇 = 𝑡𝑃 ∗𝑄∗ (1 − 𝑓𝑡); (9) or, written as a percentage of equilibrium expenditures, 𝑇𝑄𝑇 𝑃 ∗𝑄∗⁄ = 𝑡(1 − 𝑓𝑡). thus, the model can be used to demonstrate how governments (ideally) employ elasticities to determine a suitable tax level, whether the purpose is to raise public revenue or reduce negative externalities. according to (6) and (7), a proportional increase of k in the absolute value of both price elasticities—that is, both buyers and sellers becoming equally more flexible—leaves the tax incidence unchanged. but according to (8), multiplying both 𝜀𝑃 𝑆 and 𝜀𝑃 𝐷 by k would increase the tax impact factor by k, reducing the volume of sales further, as illustrated in the examples below. although this model only requires algebra and should therefore be accessible to undergraduates, students do not need the ability to derive these equations in order to appreciate their importance. indeed, the results are nicely intuitive: equations (5)-(7) are simply convenient mathematical expressions of the customary statement that the party with the greatest (absolute) price elasticity bears a lower share of the tax, while (8) and (9) use the elasticities to determine the effects of a tax on sales volume and tax revenue, respectively. because students pay taxes themselves, using calculated price elasticities to generate results related to taxes makes learning the elasticity concepts more meaningful to them. and although we have been considering an excise tax, equations (1) through (7) remain the same if we consider a sales tax; with some adjustment, (8) can also be adapted, as shown below.6 examples the model above can easily be verified and illustrated with numerical examples. in this section, we offer three types of cases: a fully specified market model, some examples using hypothetical elasticities alone, and others that use empirical elasticities of supply and demand taken from the research literature. a complete market first, assume that the supply and demand functions are known, and prices are in dollars. let the demand function be 𝑄𝐷 = 1,000 − 2𝑃𝐷 and let the supply function be 𝑄𝑆 = 3𝑃𝑆 . equilibrium initially occurs at 𝑄∗ = 600 and 𝑃∗ = $200. now suppose that an excise tax of $20 per unit is imposed, so that 𝑃𝐷 = 𝑃𝑆 + 𝑇 and 𝑇 = 20 = .10𝑃∗. then the market clears when 𝑄𝐷 = 𝑄𝑆 = 𝑄𝑇; that is, when 1,000 − 2(𝑃 𝑆 + 𝑇) = 3𝑃𝑆, from which we get 𝑃𝑆 = 200 − .4𝑇 = 192, 𝑃𝐷 = 200 + .6𝑇 = 212, and 𝑄𝑇 = 600 − 1.2𝑇 = 576. notice that the quantity of the good traded has declined by 24/600, or four percent; buyers pay 12/200 or six percent more per unit than they did at equilibrium, and sellers receive 8/200 or four percent less per unit. 5 if the supply and demand curves are linear, then the deadweight loss (dwl) shown as triangle bch in figure 1 is 𝐷𝑊𝐿 = 0.5𝑇(𝑄∗ − 𝑄𝑇 ). substituting from (8), this can be written in terms of the price elasticities as 𝐷𝑊𝐿 = 0.5𝑇2(𝑄∗ 𝑃∗) (−𝜀𝑃 𝐷 × 𝜀𝑃 𝑆 ) (−𝜀𝑃 𝐷 + 𝜀𝑃 𝑆 )⁄⁄ ; see hyman (2011) or gruber (2019) for a more elaborate treatment. 6 for simplicity, we have assumed that the market into which a tax is introduced is perfectly competitive. in industries characterized by some degree of monopolistic or oligopolistic market power on the part of suppliers and highly convex demand, there is a possibility of “over-shifting” of excise taxes—sellers increasing retail prices by more than the excise tax. this is illustrated briefly in the appendix. 34 |journal for economic educators, 22(2), 2022 because demand is linear with a nonzero intercept in this example, the price elasticity of demand changes at different locations along the curve. nonetheless, the elasticity can be calculated within the relevant range. between 𝑄∗ and 𝑄𝑇 , demand is inelastic, with 𝜀𝑃 𝐷 = −0 . 04 0.06 = −0.667⁄ , and supply is of unitary elasticity, with 𝜀𝑃 𝑆 = . 04 . 04 = 1⁄ . the share of the tax borne by consumers can be calculated from either (3) or (6) as 𝐵𝐷 = 0.6, and the share borne by sellers can be calculated from (4) or (7) as 𝐵𝑆 = 0.4 . these results verify equation (5); that is, 𝐵𝑆 𝐵𝐷⁄ = −𝜀𝑃 𝐷 𝜀𝑃 𝑆⁄ = 0.667. and by utilizing (8), we can obtain the factor by which the tax affects output as (−𝜀𝑃 𝐷 × 𝜀𝑃 𝑆) (−𝜀𝑃 𝐷 + 𝜀𝑃 𝑆)⁄ = 0.667 1.667⁄ = 0.40. thus, the tax, levied at ten percent of the equilibrium price, reduced the quantity by (0.40)(0.10) = 0.04. as a consequence, the tax revenue is $11,520, or four percent less than 𝑡𝑃∗ 𝑄∗. hypothetical examples using only elasticities it is not, however, necessary to develop a complete market with specified supply and demand functions in order to illustrate the model. equations (5), (6), (7) and (8) facilitate the calculation of the tax incidence and the effect on q directly from the price elasticities and the excise tax rate. some hypothetical numerical examples are given in table 1. table 1. hypothetical examples 𝜺𝑷 𝑫 𝜺𝑷 𝑺 𝑩𝑫 𝑩𝑺 𝒇 -0.1 0.1 0.50 0.50 0.050 -0.2 0.3 0.60 0.40 0.120 -0.9 0.3 0.25 0.75 0.225 -0.5 1.0 0.67 0.33 0.333 -1.0 0.5 0.33 0.67 0.333 -1.5 0.5 0.25 0.75 0.375 -1.8 0.6 0.25 0.75 0.450 -1.0 1.0 0.50 0.50 0.500 -1.0 2.0 0.67 0.33 0.667 -1.6 1.6 0.50 0.50 0.800 -1.2 6.0 0.83 0.17 1.000 -2.0 2.0 0.50 0.50 1.000 -3.0 2.0 0.40 0.60 1.200 -2.0 6.0 0.75 0.25 1.500 suppose that both demand and supply are price-inelastic, but not equally so. if 𝜀𝑃 𝐷 = −0.9 while 𝜀𝑃 𝑆 = 0.3, as in the third row of table 1, then because consumers exhibit three times as much absolute price elasticity as producers, producers will pay three times as much of the tax; that is, producers pay 0.9 (0.9 + 0.3) = 0.75⁄ , or 75 percent, while consumers pay 25 percent. the tax impact factor is (0.9 × 0.3) (0.9 + 0.3) = 0.225⁄ , so a tax equal to 10 percent of 𝑃∗ would reduce output by only (0.225 × 0.1) = 0.0225, or 2.25 percent. when there is greater absolute price elasticity in supply and/or demand, the effect of the tax on output is greater. if both supply and demand are twice as elastic, (say, in another market or at another time), so that 𝜀𝑃 𝐷 = −1.8 and 𝜀𝑃 𝑆 = 0.6 as in the seventh row of table 1, then the tax incidence is unchanged but the tax factor doubles to 0.45. indeed, in the event that both supply and demand are so 35 |journal for economic educators, 22(2), 2022 elastic that the product of the elasticities exceeds their sum, (−𝜀𝑃 𝐷 × 𝜀𝑃 𝑆) ≥ (−𝜀𝑃 𝐷 + 𝜀𝑃 𝑆), then the tax factor is greater than or equal to 1. if, for example, 𝜀𝑃 𝐷 = −2 and 𝜀𝑃 𝑆 = 6 as in the final row of the table, then the tax factor is 1.5, so an excise tax levied at 10 percent of the equilibrium price would reduce output by 15 percent. empirical elasticities supplementing (or entirely supplanting) such hypothetical examples with empirical scenarios can add real-world credence to the lesson. in table 2, we present 30 pairs of price elasticities of demand and supply for goods and services taken from the empirical literature. though it is not uncommon to find estimates of the price elasticity of demand for various goods in textbooks, it is less common to find estimates of the price elasticity of supply for the same goods, as in table 2. the categories shown include energy products (oil, natural gas, gasoline, and ethanol), medical care, water entitlements, agricultural products, leisure and travel, guns, building materials, housing, and higher education. all estimates are for the united states, except as otherwise indicated. in each case, 𝜀𝑃 𝐷 and 𝜀𝑃 𝑆 were both taken from the same source, so that within each row, the elasticities are given for the same product definition, methodology, time period, location, etc. (in some cases, ranges or multiple estimates were provided, from which the most illustrative values were adopted in table 2). the sources differ across rows, however, so that differences in data sets, research methods, time frames, and so forth reveal some variations in elasticity estimates for the same or similar products, which can also be used to prompt classroom discussions. for example, hausman and kellogg (2015) estimated both the supply and demand for natural gas to be about twice as elastic as did arora (2014); while they imply a similar incidence, the more elastic estimates imply roughly twice the impact on sales volume for any given tax. even more dramatic are the differences in the elasticities for ethanol: the estimates of roberts and schlenker (2013) imply that consumers would pay most of a tax, while the estimates of luchansky and monks (2009) imply that sellers would bear the primary tax burden. clearly, caution should be exercised when relying on such elasticity estimates for policy purposes, but this in itself is a valuable lesson for students. with a little effort, students can find other published estimates of price elasticities to which the model can be applied or locate news reports of taxes to analyze. beekman (2019), for example, reported that consumers paid $1.47 of a $1.75 excise tax on sugar-sweetened sports drinks; from this, students can infer that supply was 5.25 times as elastic as demand. active learning that engages students in finding and analyzing such examples enhances comprehension and retention of ideas (simkins, 1999; salemi, 2002; mendez-carbajo and asarta, 2017). a sales tax in practice, most of the items in table 2 are more likely to be subject to sales taxes than excise taxes. by definition, a sales tax is measured as a percentage of 𝑃𝑆 rather than as a percentage of 𝑃∗. since 𝑃𝑆 ≤ 𝑃∗, it follows that 𝑇 𝑃𝑆 ≥ 𝑇 𝑃∗⁄⁄ . because the ratio of these two expressions is identical to the ratio of 𝑃∗ to 𝑃𝑆 , one can always be retrieved from the other if needed. in the full market example above, the $20 excise tax was 10 percent of 𝑃∗ but 10.4 percent of 𝑃𝑆 , so it could be treated as a 10.4 percent sales tax. 36 |journal for economic educators, 22(2), 2022 table 2. examples using empirical price elasticities product or service sources of price elasticities 𝜺𝑷 𝑫 𝜺𝑷 𝑺 𝑩𝑫 𝑩𝑺 𝒇 oil greene & leiby (2006) -0.400 0.330 0.452 0.548 0.181 gasoline coyle, et al. (2012) -0.075 0.289 0.794 0.206 0.060 ethanol roberts & schlenker (2013) -0.062 0.112 0.644 0.356 0.040 ethanol luchansky and monks (2009) -2.915 0.258 0.081 0.919 0.237 natural gas arora (2014) -0.240 0.420 0.636 0.364 0.153 natural gas hausman & kellogg (2015) -0.470 0.810 0.633 0.367 0.297 doctors’ services yang (1987) -0.929 1.164 0.556 0.444 0.517 water (australia) wheeler, et al. (2008) -1.510 0.890 0.371 0.629 0.560 water (australia) zuo, et al. (2016) -0.570 0.420 0.424 0.576 0.242 soybeans babcock, et al. (2021) -0.350 0.137 0.281 0.719 0.098 canned tuna babula & corey (2004) -0.300 0.200 0.400 0.600 0.120 walnuts russo, et al. (2008) -0.480 0.190 0.284 0.716 0.136 rice russo, et al. (2008) -0.360 0.720 0.667 0.333 0.240 rice (pakistan) rani, et al. (2020) -0.739 0.198 0.211 0.789 0.156 wheat (pakistan) rani, et al. (2020) -0.346 0.142 0.291 0.709 0.101 almonds russo, et al. (2008) -0.690 0.670 0.493 0.507 0.340 almonds babcock, et al. (2021) -0.400 0.470 0.540 0.460 0.216 mandarins babcock, et al. (2021) -0.500 0.785 0.611 0.389 0.305 pistachios babcock, et al. (2021) -0.500 1.373 0.733 0.267 0.367 cotton russo, et al. (2008) -0.950 15.33 0.942 0.058 0.895 airbnb rentals bibler, et al. (2021) -0.480 2.160 0.818 0.182 0.393 golf melvin & mccormick (2001) -1.790 2.860 0.615 0.385 1.101 tourism (brazil) rocha de ferias, et al. (2009) -1.710 0.680 0.285 0.715 0.487 lumber song, et al. (2011) -0.181 0.233 0.563 0.437 0.102 stump lumber tanger & parajuli (2018) -1.180 0.590 0.333 0.667 0.393 particleboard (iran) tajdini, et al. (2011) -0.650 2.310 0.780 0.220 0.507 housing (china) chow (2015) -1.100 0.500 0.313 0.688 0.344 guns bice & hemley (2002) -3.279 2.791 0.460 0.540 1.508 guns mcdougal, et al. (2020) -3.288 3.422 0.510 0.490 1.677 education koshal & koshal (1999) -4.620 3.680 0.443 0.557 2.048 indeed, such examples can also be used to dispel the misconception that the buyer necessarily pays all or most of a sales tax. suppose a consumer purchases a case of walnuts, priced in a store at $50, and subject to a 6 percent sales tax. although the consumer pays $53 and the store keeps $50, contrary to what might naively be assumed, the consumer does not pay the entire sales tax. rather, it is again necessary to compare the prices paid and received with the original equilibrium price in order to determine how the tax incidence is distributed. although the equilibrium price is not obvious, we can determine it from table 2. given the price elasticities for walnuts that were estimated by russo, et al. (2008), 𝜀𝑃 𝐷 = −0.48 and 𝜀𝑃 𝑆 = 0.19, the tax burdens are 𝐵𝐷 = 0.284 and 𝐵𝑆 = 0.716; consequently, the seller pays $3 × 0.716 = $2.15 and the consumer pays only 85 cents of the $3 tax. from this, we can deduce that in the absence of a tax, the equilibrium price of the case of walnuts would have been $52.15. (notice 37 |journal for economic educators, 22(2), 2022 also that the 6 percent sales tax is equivalent to an excise tax of $3 per case, or about 5.75 percent of 𝑃∗. since the impact factor for an excise tax on walnuts is found in table 2 to be 0.136, we can calculate that such a tax reduces sales of walnuts by 0.136 × 0.0575 = 0.0078, or about 0.78 percent of the equilibrium quantity). conclusion elasticity has been identified as a threshold concept in economics—a potential gateway to a transformation in the way one thinks about the world (davies and mangan, 2007; karunaratne, et al., 2016). as such, it should be reinforced as soon and as often as possible through integration with other concepts, real-world applications, and current events, especially those to which students can easily relate (davies and mangan, 2007; karunaratne, et al., 2016; tang, 2019). unfortunately, tang’s (2019) survey suggests that this rarely happens; many intermediate microeconomics students do not see the connections among concepts and are unable to apply the ideas to real-world situations. thus, karunaratne, et al. (2016, p. 502) recommend that when taught, elasticity be “immediately applied to the market structures so that students could engage the threshold concept of elasticity in a practical application of the content.” as mendez-carbajo and asarta (2017, p. 176) put it, “the concept of price elasticity…is foundational in the discussion of advanced topics such as tax incidence…. given its relevance across the economics curriculum, it is critically important for students to not only know how to compute it but also to be able to apply it in a variety of contexts.” the present paper facilitates a closer integration of elasticity and its computation with tax incidence and sales volume in a way that helps make studying both the core concept and the applications more meaningful for students. importantly, we have not advocated abandoning the graphical presentation of taxes; rather, this paper suggests an algebraic extension to be offered as a complement to the conventional graph. exposure to such rigor is beneficial for students. as wilkins (1992, p. 317) noted, graphical models…provide the beginning student with a powerful tool for analytical reasoning. algebraic models, however, provide the continuing student with an even more valuable tool for at least two reasons: algebraic equations allow models to be linked together in ways that cannot easily be accomplished using graphs; and econometric tests of theory must be based on algebraic models. thus, teaching economics majors to express economic theory in algebraic form is an important goal for an undergraduate program… and the intermediate microeconomics classroom is a good place to introduce students to this skill. indeed, mearman, et al. (2014) have found that students value rigor in economics courses, especially when it is applied to realistic and relevant policy issues. real-world applications that are perceived as relevant can improve learning and attract more students to the discipline. relating price elasticities to tax incidence and the volume of trade, especially through the use of empirically estimated elasticity values, offers one way to introduce greater realism, relevance, and rigor to the intermediate economics course, in order to achieve these outcomes. because all students pay taxes, such applications are certainly perceived as relevant and help make the study of price elasticities more interesting. 38 |journal for economic educators, 22(2), 2022 references arora, vipin. 2014. “estimates of the price elasticities of natural gas supply and demand in the united states” mpra paper no. 54232, march 6. https://mpra.ub.unimuenchen.de/54232/1/mpra_paper_54232.pdf. babcock, bruce, mehdi nemati, and dat tran. 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https://doi.org/10.3390/f9040211 https://doi.org/10.1111/j.1467-8489.2008.00416.x https://doi.org/10.2307/1183307 https://doi.org/10.1177%2f101053958700100206 https://doi.org/10.1093/ajae/aav022 https://onlinelibrary.wiley.com/doi/10.1111/j.1465-7295.1988.tb01500.x 41 |journal for economic educators, 22(2), 2022 appendix: over-shifting in this appendix, we briefly illustrate the possibility of “over-shifting”—a phenomenon in which sellers with market power shift more than 100 percent of an excise tax onto buyers when demand is sufficiently convex. this represents a further integration of ideas, linking the concepts of demand, taxation, and monopoly. one way that this can be shown is numerically. let demand be 𝑃 = 1000/√𝑄. table a1 shows a portion of the demand schedule, total revenue, and marginal revenue. if a monopolist has constant average and marginal cost of $100, then output is initially 25 units and 𝑃 = $200. now if an excise tax of $25 is imposed, so that marginal cost is $125, output falls to 16 units, tax revenue is $400, and the retail price rises to 𝑃𝑇 = $250; the monopolist has passed double the full tax onto buyers. a nice diagram is given by stiglitz (2000), and dutkowsky and sullivan (2014) provide empirical cases. table a1. over-shifting of an excise tax 𝑸 𝑷 total revenue marginal revenue 16 250.00 4000.00 127.02 17 242.54 4123.11 123.11 18 235.70 4242.64 119.54 19 229.42 4358.90 116.26 20 223.61 4472.14 113.24 21 218.22 4582.58 110.44 22 213.20 4690.42 107.84 23 208.51 4795.83 105.42 24 204.12 4898.98 103.15 25 200.00 5000.00 101.02 26 196.12 5099.02 99.02 for courses using calculus, over-shifting can be demonstrated more generally. suppose demand is convex, such that 𝑃 = 𝛽𝑄−𝜆 , where 0 < 𝜆 < 1, and let the monopolist have constant average and marginal cost of 𝑐. the firm’s profit function is 𝜋 = 𝑄𝛽𝑄−𝜆 − 𝑐𝑄. profit maximization determines the monopolist’s output, 𝑄𝑚 = [𝛽(1 − 𝜆) 𝑐⁄ ] 1/𝜆 , and the retail price initially charged to consumers, 𝑃 = 𝑐 (1 − 𝜆)⁄ . if an excise tax is now imposed that increases the firm’s marginal cost to 𝑐𝑇, the retail price will increase by more than the tax: 𝜕𝑃 𝜕𝑐⁄ = 1 (1 − 𝜆)⁄ > 1. the percentage decrease in output will be (𝑄𝑚 − 𝑄𝑇 ) 𝑄𝑚 = 1⁄ − (𝑐 𝑐𝑇⁄ ) 1/𝜆. in the example above, 𝜆 = 0.5, so 200 percent of the tax is passed through to consumers, and output falls by 1 − (100 125⁄ )2 or 36 percent. a more elaborate treatment is provided by stiglitz (2000). using the same framework, it might also be of interest to note that a monopolist facing a linear demand function inevitably passes exactly half of the tax through to consumers, and if demand is semilogarithmic (𝑃 = 𝛼 − 𝛾𝑙𝑛𝑄), then a monopolist shifts precisely 100 percent of the tax onto consumers. 39 |journal for economic educators, 18(1), 2018 undergraduate research do major currency trading volumes explain the rise of bitcoin’s price? jordan evans and christopher c. klein1 abstract we examine the determinants of the bitcoin price over the period from september 2012 to september 2017. unlike conventional currency demand models, trading volume is negatively related to the bitcoin price and the frequency of internet searches for the term bitcoin is positively associated with the price. we find strong and significant time trends in the bitcoin price. these results suggest that the rise in bitcoin’s price during our observation period was driven largely by speculation. jel codes: a22, e42, f33, f65, g41 key words: bitcoin, cryptocurrency, speculation introduction near the end of 2017, bitcoin’s exchange rate to the united states dollar was 1btc = $4,255usd. in the previous year, the price of 1btc was $623.19usd, approximately a 583% increase. subsequently, the bitcoin price soared to around $20,000 on december 16, 2017, then precipitously declined to about $7,000 on february 5, 2018, when trading volume peaked. the extreme magnitude of these investment gains motivated us to investigate the factors underlying the bitcoin phenomenon. in 2009, one or more programmers using the alias of satoshi nakamoto created bitcoin, a digital fiat currency that can be exchanged peer to peer without the need for a financial intermediary. individuals all over the world invested in bitcoin even as many analysts claimed that it was entirely speculative, inhabiting a bubble analogous to the dutch tulip mania. others claim bitcoin may become the global currency of the future due to its decentralized nature, anonymity, protection from local currency instability, and low transactions cost. some attribute the rise in bitcoin’s price level to scarcity as a fundamental element of bitcoin’s code. the total supply of bitcoin is limited to 21 million coins and the software imposes the restriction that over time a decreasing quantity of coins can be mined until the 21 million 1 jordan evans completed the research described here in the undergraduate econometrics class taught by dr. klein. christopher c. klein is professor of economics at middle tennessee state university, chris.klein@mtsu.edu. before conducting this study, one or more of the authors held or traded crypto-currencies including bitcoin and litecoin. the authors currently do not have any holdings in the cryptocurrency market. the authors thank an anonymous referee for comments that improved the article. mailto:chris.klein@mtsu.edu 40 |journal for economic educators, 18(1), 2018 capacity has been reached.2 the implementation of scarcity mimics the economic behavior of traditional commodities like gold. we examine monthly bitcoin prices from september 2012 to september 2017. we find that the price is negatively related to u.s. trading volumes and positively related to internet searches for the term bitcoin. there is also a strong nonlinear time trend in prices over this period. we conclude that the results are consistent with a speculative motive for movements in bitcoin prices. the following section reviews the empirical literature on bitcoin prices. then, we lay out our estimation strategy. next we discuss the data, followed by the results. the final section offers a conclusion. literature review due to the recent inception of bitcoin, and its even more recent mainstream adoption, econometric analysis of its determinants is somewhat sparse. the bulk of discussion revolves around determining bitcoin’s status under traditional definitions of currency. kubat (2015) examined volatility rates among bitcoin, gold, the euro, and apple stock, attributing excessive volatility to bitcoin and concluding it does not meet the criteria as a store of value against traditional assets. similarly, yermack (2013) found that bitcoin is much more volatile than fiat currencies and uncorrelated with them. dyhrberg (2016), however, found that bitcoin volatility is similar to that of gold and the u.s. dollar, suggesting possible hedging capabilities and advantages as a medium of exchange. beyond the issue of volatility, the academic literature finds that traditional macroeconomic variables may correlate with bitcoin’s price. puri (2016), for example, examined country specific inflation rates, unemployment rates, industrial production, and money supply as determinants of bitcoin prices, concluding that inflation alone was statistically significant. this is consistent with using bitcoin to hedge against risk in other currencies. increases in inflation should correspond to more demand for bitcoin and therefore a higher price. zhu, dickinson, and li (2017) found that the cpi, the federal funds rate, and a usd index negatively influenced bitcoin over the long run. the negative correlation of the usd index and the federal funds rate to the bitcoin price is consistent with economic theory. if the dollar has been gaining strength, investors want to hold dollars when bitcoin is stagnant or going through a price correction due to over valuation. even though these variables may negatively affect the bitcoin price, bitcoin’s value has skyrocketed against the dollar. observing a negative relationship between cpi and bitcoin, as zhu, et al. (2017) do, seems contrary to logic, but they grouped the data for cpi, federal funds rate, and usd index together since their trend-lines move in the same direction, thus eliminating the confusion. even though the literature points to macroeconomic variables as factors in the price of bitcoin, the influence of speculative factors outweighs them. bianchi (2018) finds that returns on cryptocurrencies (of which bitcoin is one) are significantly correlated with returns on commodities such as gold and energy, but that macroeconomic factors do not significantly drive trading activity. 2 the limit is set by the technical details that established bitcoins. every new block that is “mined” initially releases 50 new coins, but this quantity halves every 210,000 blocks. the limit of the resulting geometric series is 21 million. the founders apparently wished to limit the number to prevent a situation of an issuer, such as a central bank, debasing the cryptocurrency by issuing more of it for its own profit. 41 |journal for economic educators, 18(1), 2018 kristoufek (2015) found a link between internet interest (searches for the term “bitcoin”) and bitcoin’s price. during bubble formation, internet interest boosted the bitcoin price further, while during the bursting of a bubble, it pushed bitcoin prices lower. puri (2016) also examined global internet searches and downloads of bitcoin client (necessary to hold and trade coins without an exchange) discovering that they are significantly positively related to the bitcoin price, although the effect fades over time. from the literature, we hypothesize that bitcoin’s price should be positively correlated with variables such as google search trends, wikipedia search, bitcoin client downloads, and blog posts, because society has not fully adopted bitcoin, leading to an extremely volatile demand. as the average number of individuals holding bitcoin rises, the long run demand for bitcoin should stabilize. the increasing holdings of bitcoin by the general public may reflect the experience of the 2008 financial crisis, greek economic instability, and global conflicts. avoiding currency failures by holding bitcoins should be attractive for individuals who suspect that another such incident is imminent, similar to an increase in the demand for gold following a financial crisis or an economic recession. estimation strategy: we utilize a log-linear regression equation to determine the significance of several variables in explaining bitcoin’s price, as shown in the following equation. ln(bitcoin price) = b1 + b2 ln(ustv) + b3 ln(jptv) + b4ln(chtv) + b5ln(btr) + b6dmg + b7t + b8ts ustv, jptv, and chtv represent the monthly trading volume on bitcoin exchanges in u.s. dollars, japanese yen, and chinese yuan. increased activity in certain exchanges could imply arbitrage similar to the global currency exchange. which coefficients show the most significance will indicate which currencies’ exchanges contribute most to bitcoin’s price. btr is an index for google searches for the term bitcoin. values are from 0-100 with zero being the fewest searches and 100 representing the highest. bitcoin was obscure from 2009-2013, just on the periphery of most americans’ perception. from 2013 onward, especially in 2016 and 2017, bitcoin moved to the mainstream as casual investors took notice. if more individuals are researching bitcoin, there is a high probability they are also purchasing it, leading to higher demand and price. we expect that an increase in searches for bitcoin leads to a higher bitcoin price. dmg is a dummy variable representing the time period after an incident in which the largest bitcoin exchange at the time, mt. gox, mishandled customers’ bitcoin accounts. although negative, this event was one of the first times bitcoin received coverage by mass media. we suspect that this actually increased interest in the asset as the media coverage exposed ordinary citizens to bitcoin. despite the negative coverage, an immediate sell off created an opportunity to get cheap bitcoin. t is a time trend variable. as time moves forward, more individuals are open to the concept of bitcoin, perhaps increasing its price. any trends caused by left-out variables also are captured here. despite the big dip in price from the mt. gox incident, bitcoin’s price has consistently risen as time has moved forward. ts is the time trend squared. this will capture any nonlinear changes over time caused by left-out variables. bitcoin’s price exhibits growth that appears to be non-linear. bitcoin’s price has 42 |journal for economic educators, 18(1), 2018 not risen gradually over time, but by huge increases in short amounts of time not seen by other investments, as shown below. data the data are a time series beginning in september of 2012 and continuing monthly until september 2017 for a total of 61 observations. the data sources are shown in the following table. variable source btcp https://data.bitcoinity.org/markets/price/30d/usd?r=day&t=l ustv https://data.bitcoinity.org/markets/volume/30d/usd?t=b jptv https://data.bitcoinity.org/markets/volume/all/jpy?r=month&t=b chtv https://data.bitcoinity.org/markets/volume/all/cny?r=month&t=b btr https://trends.google.com/trends/explore?date=all&q=bitcoin the following table shows descriptive statistics for all variables. note that the bitcoin price is in thousands of u.s. dollars. subsequent to our data period, the bitcoin price rose to $20,000 on https://data.bitcoinity.org/markets/price/30d/usd?r=day&t=l https://data.bitcoinity.org/markets/volume/30d/usd?t=b https://data.bitcoinity.org/markets/volume/all/jpy?r=month&t=b https://data.bitcoinity.org/markets/volume/all/cny?r=month&t=b https://trends.google.com/trends/explore?date=all&q=bitcoin 43 |journal for economic educators, 18(1), 2018 december 16, 2017, then precipitously declined to about $7,000 on february 5, 2018, even though trading volume simultaneously peaked. variable mean min max sd btcp 5.765 2.424 8.328 1.346977634 ustv 14.49 13.31 15.66 0.488549776 jptv 10.89 2.427 13.714 2.107027793 chtv 14.941 9.719 18.969 2.518556708 btr 2.7729 .6931 4.6052 0.81312459 dmg .7049 0 1 0.459864556 t 31 1 61 17.75293403 ts 1271 1 3721 1135.60511 results all statistical analyses were performed using the r statistical package. the initial regression in log linear form yielded the following results: coefficients estimate std. error t value pr(>|t|) (intercept) 7.8694318 0.9759560 8.063 8.87e-11 ustv -0.4846286 0.0671618 -7.216 2.03e-09 jptv 0.0192558 0.0247529 0.778 0.440075 chtv -0.0203009 0.0261812 -0.775 0.441551 btr 1.2570245 0.0544192 23.099 < 2e-16 dmg 0.3607715 0.1967867 1.833 0.072375 t 0.0789097 0.0193844 4.071 0.000157 ts -0.0009246 0.0002296 -4.028 0.000181 r-squared: 0.9752, adjusted r-squared: 0.9719, f: 297.3 p-value: < 2.2e-16 the breush-godfrey test for autocorrelation produced a p-value of .3584, such that the null hypothesis of no autocorrelation could not be rejected. consequently, no correction for autocorrelation was made. coefficients estimate std. error t value pr(>|t|) (intercept) 7.8931097 0.9145548 8.631 8.28e-12 ustv -0.4853586 0.0665816 -7.290 1.26e-09 btr 1.2458930 0.0500234 24.906 < 2e-16 dmg 0.2968465 0.1532821 1.937 0.0579 t 0.0734610 0.0122340 6.005 1.58e-07 ts -0.0008159 0.0001493 -5.464 1.16e-06 r-squared: 0.9747, adjusted r-squared: 0.9724, f: 423.2 p-value: < 2.2e-16 44 |journal for economic educators, 18(1), 2018 the variables chtv and jptv were dropped for lack of significance and a restricted regression was run on the remaining variables as shown above. a restricted least squares f-test gave a p-value of 0.5872 that was insufficient to reject the null hypothesis that the r-squares of the two regressions were equal. by ockham’s razor, we prefer the restricted regression. all coefficients are significant at the 1% level, except for the dummy, dmg, significant at 10%. the dependent variable and the explanatory variables ustv and btr were run in log form such that these coefficients represent relative percentage changes %y/%x. the rest of the explanatory variables (dmg, t, and ts) were run as integers, so these coefficients represent an average rate of change. the ustv coefficient shows that for a 1% change in u.s. dollar trade volume the bitcoin price drops by about .48%. this is consistent with economic theory, because if speculative factors are causing the price of bitcoin to rise, then u.s. investors may hold, but not buy, bitcoin at high prices, then cash out as the price falls. u.s. buying does not begin again until the price has fallen. this behavior would generate an inverse relationship between trading volume and price. the shortcoming to this variable is that trade volume and bitcoin price are only represented by transactions on exchanges; peer to peer transactions are not counted. the coefficient for btr, bitcoin search trend data, is significant at less than 1% and shows that for a 1% increase in google searches for the keyword bitcoin, the bitcoin price rises by about 1.25%. this result indicates that the bitcoin market is driven by mere interest, rather than more substantial factors. the results for ustv are consistent with this, because if the price was driven by u.s. demand, then ustv should have a positive coefficient. the coefficient for dmg, the dummy variable for the period after the mishandling of bitcoin by mt.gox, is significant at 10%, but very close to the 5% level. the coefficient indicates that after the incident, there is a one-time increase of about 30% in the bitcoin price. this result is compatible with the view that the incident boosted the popularity of bitcoin by exposing everyday citizens to it, even though it was bad press on the largest exchange at the time. the time trend (t) and its square (ts) were significant at less than 1% and their signs indicate that the bitcoin price is increasing at a decreasing rate, other things equal. this complies with economic theory, because when the price of bitcoin is low, more people will buy, and this will drive the price up over time. as the price continues to rise, buying slows as investors begin to fear that its price may tumble. to the extent this price rise over time is independent of real economic factors, it may indicate speculative behavior. conclusion the results indicate that the rise of bitcoin’s price is highly speculative. upon starting this study, we expected the trade volume for major currencies to be significantly related to bitcoin’s price, but the results indicate that social forces play more of a role. when this study began on september 19, 2017, the price of one bitcoin was $4,255. upon completion of the study on december 7, 2017, the bitcoin price stood at $16,260. given this magnitude of return to investment in bitcoin, the academic economic community should focus on thoroughly analyzing the potential determinants of bitcoin’s price. the main issue with the validity of bitcoin as a currency is that many people do not use it to purchase goods, but simply hold it in the expectation that it will become more valuable. since the value has been increasing, many people have decided it must be a sound investment, even though they may not know what they are purchasing and do not use it as a medium of exchange. 45 |journal for economic educators, 18(1), 2018 this econometric study does not account for all the possible determinants of bitcoin’s dramatic price increase. in the future, it would be worthwhile to examine the trade volumes across all currencies as well as the number of bitcoins in circulation to confirm that traditional indicators of demand are affecting the bitcoin price. it would also be interesting to gather daily data so as to have more observations. references bianchi, daniele. 2018. "crytocurrencies as an asset class: an empirical assessment." economics of networks ejournal 10 (4). dyhrberg, a. h. 2016. "bitcoin, gold and the dollar a garch volatility analysis." finance research letters 16: 85-92. kristoufek, ladislav. 2015. "what are the main drivers of the bitcoin price? evidence from wavelet coherence analysis." plos one 1-15. kubat, max. 2015. "virtual currency bitcoin in the scope of money definition and store of value." procedia economics and finance 30 409-416. pavel ciaian, miroslava rajcaniova, d'artis kancs. 2016. "the economics of bitcoin price formation." applied economics 48 (19): 1799-1815. puri, varun. 2016. "cmc senior theses.paper 1418." http://scholarship.claremont.edu/cmc_theses/1418. april 25. accessed october 8, 2017. yermack, d. 2013. "is bitcoin a real currency? an economic appraisal." national bureau of economic research. zhu, yechen, david dickinson, and jianjun li. 2017. "analysis on the influence factors of bitcoin's price based on the vec model." financial innovation 1-13. 1 |journal for economic educators, 22(1), 2022 the micro in principles of macro: a survey and modest proposal nancy j. burnett, marianne johnson, and alexander kovzik1 abstract to better understand the degree to which students enrolled in principles of macroeconomics are exposed to fundamental microeconomic concepts, we survey twenty popular textbooks. using the tuce guidelines as a framework, we categorize the microeconomic content of the textbooks by topic and amount of coverage. we find that for the significant percentage of undergraduates who take only a single semester of macroeconomics, these students are left without enough exposure to the core concepts of microeconomics – including ones that underpin macroeconomic models. on its own, we hope our detailed survey will prove useful to instructors who must select between a myriad of seemingly similar textbooks. in addition, we make a modest proposal for how instructors could include some specific microeconomic content at low opportunity cost. key words: principles of macroeconomics, micro-foundations, textbooks of economics jel codes: a22 introduction undergraduates since the time of alfred marshall have studied the principles of economics (1890). for marshall, all such principles were microeconomic in nature. subsequent textbooks from the early 20th century, including richard t. ely’s best-selling outlines of economics (1930), followed marshall’s focus on microeconomic theory but appended a handful of chapters on ‘macroeconomic’ topics such as monetary policy and business cycles. paul samuelson’s economics (1948) fundamentally changed both the conception and the teaching of economics by integrating the two into “a grand neoclassical synthesis.” 2 the inaugural edition of his textbook placed macroeconomic problems such as unemployment and depressions first; these were followed by microeconomic topics. in later editions, the order would be reversed. contemporary textbooks go both ways – some opt for microeconomics before macroeconomics (mankiw 2021) and others, after a few introductory chapters, present macroeconomics before microeconomics (miller 2021). a distinct minority of recent books have attempted to upend the established orderings by reconceiving textbooks along applied or topical lines (core 2017; bowles and carlin 2020). while having some ardent adopters, such textbooks are not yet the mainstream of undergraduate teaching. 1 nancy j. burnett, professor of economics, emeritus, university of wisconsin oshkosh, oshkosh, wi, 54901. marianne johnson, professor of economics, university of wisconsin oshkosh, oshkosh, wi, 54901. alexander kovzik, associate professor of economics, university of wisconsin oshkosh, oshkosh, wi, 54901. 2 the relation of macro to micro has been “actively discussed from nearly the moment that the distinction between micro and macroeconomics emerged in the 1930s” (duarte and lima 2012, 4). questions about the scale of analysis and aggregating individual behaviors continue to persist. the push for micro-foundations for macroeconomics that emerged in the later 1970s has only complicated the issue, so that now for “many young economists who are unfamiliar with the history of macro, the thought of doing macro without representative agent micro foundations is almost heretical” (colander et al. 2008, 236). 2 |journal for economic educators, 22(1), 2022 the absence of consensus regarding the optimal sequencing of economics textbooks spills over to the sequencing of principles courses. whereas john fizel and jerry johnson (1986) recommended micro to precede macro, jane lopus and nan maxwell (1995) suggested the opposite. others such as david brasfield et al. (1993) claim it makes no difference. andy terry and ken galchus (2003) solve the problem by arguing for concurrent enrollment. more recently, gerald prante (2016, 82) reviewed the offerings of the 380 colleges and universities listed in the princeton review’s best colleges edition. he finds that the majority of schools offer separate microeconomic and macroeconomic principles courses, and most institutions allow students to choose the order in which to take the classes. the teaching of economics principles is not a trivial matter. in their survey of undergraduate education, sam allgood, william walstad, and john siegfried (2015) outline the instructional obligations of economics departments – certainly to offer a set of courses for the major. with much wider reach, however, economics departments also offer principles courses in service to other departments. these courses form the foundation for study in fields such as business, political science, sociology, environmental studies, and international studies. most such departments require students to take one or two courses in economics early in the major. siegfried and walstad (2014) similarly emphasize the importance of principles courses to the broader educational experience, estimating that 40 percent of undergraduates take at least one economics course during their collegiate career. “obviously, the course taken most often would be introductory economics, either as a single-semester course, a two-semester sequence of principles of microeconomics and principles of macroeconomics, or at least half of the twocourse sequence” (siegfried and walstad 2014, 148). this has long been true – samuelson envisioned his textbook as being useful for those students “who will never take more than one or two semesters of economics” (1948, v). most economists would likely agree that in an ideal world all undergraduates would take both microeconomics and macroeconomics. well-informed citizens and voters should understand both the implications of government policy decisions regarding unemployment as well as how the profit motive spurs businesses to expand or contract employment and/or to substitute capital for labor in the production process. however, university pressures to keep general education requirements minimal and manageable and departmental incentives to encourage courses within rather than outside one’s major mean that practically, many u.s. students will only take a single economics course.3 although precise estimates are sparse, anecdotal and observational evidence suggests quite a lot of students fall into the “half of the two-course sequence” category – especially common would be the non-business and noneconomics majors who take economics to fulfill general education requirements or major requirements.4 it was concern for these students that led lopus and maxwell (1995) to conclude that for those who take only one principles course, it should be macroeconomics, as it tends to 3 one option that some institutions adopt is that of a hybrid or survey course. offering such a course has implications for resource allocations in a department, especially if the course might not regularly fill, if other departments might not choose to require the course, or if faculty are needed to teach semester-long micro or macroeconomics sections. at our institution, for example, we have a hybrid course, but it does not meet the same general education requirements as microeconomics or macroeconomics. further, departments such as social work and sociology require either macroeconomics or microeconomics and do not allow the survey course. hence, the survey course is offered infrequently compared to micro and macroeconomics. 4 prante (2016, 78) reports that of 369 schools, 92 offer a combined micro-macro principles course and seven schools offer a choice of a combined micro-macro survey course or separate courses in microeconomics and macroeconomics. 3 |journal for economic educators, 22(1), 2022 incorporate some fundamental microeconomic principles, whereas microeconomics tends not to cover any macroeconomics at all. hart hodges, yvonne durham, and steve henson (2018) speculate that many students may voluntarily opt for macroeconomics over microeconomics because they think microeconomics has steeper mathematics requirements or because they see macroeconomics as more practical and interesting. the purpose of this paper is not to change policies regarding which course should be taken first, or which single class must be taken by those in the “half of the two-course sequence” category. rather than recommending substantial instructional or institutional changes, we take as given that a significant number of students either will take only a single economics principles course or will take macroeconomics before they take microeconomics for various reasons.5 the question thus becomes how instructors can best convey the wholeness of economics to these students – the fundamental principles and ways of thinking that underpin much of both micro and macroeconomics. students not exposed to the core microeconomic concepts on which macroeconomics is built may finish the course without any vision of ‘the big picture,’ leaving them less able to spot specious economic arguments. we suggest that macroeconomics instructors can incorporate some essential microeconomics concepts in an introductory macroeconomics course with little cost and potentially much benefit, measured as deeper student comprehension. we motivate our discussion with a survey of popular macroeconomics textbooks, considering which ‘microfoundations’ each includes and how these topics induce a deeper understanding of macroeconomic concepts. using the tuce guidelines as a framework, we categorize the microeconomic content of the textbooks by topic and amount of coverage. judging by textbook exposure, we infer that a significant proportion of students may have only limited exposure to the core concepts of microeconomics that are important to macroeconomics – including ones that underpin macroeconomic models.6 on its own, we hope our detailed survey will prove useful to instructors who must select between a myriad of seemingly similar textbooks. we also make a modest proposal for how instructors could include some microeconomic content with low opportunity cost. in doing so, we attempt to make the case for instructors to occasionally reflect on their course structure and content, to reconsider their textbook choices, and to think deeply about the picture of economics they give to students. survey of textbooks we survey the current editions of twenty common macroeconomics principles textbooks published on the microeconomic content included.7 to organize the microeconomic concepts contained in macroeconomics textbooks, we employ the structure and classifications of the test 5 during the last twenty years, our institution has experimented with the sequencing order before finally giving up and allowing students full flexibility in scheduling their principles courses. such flexibility is not without a cost. when students were required to take microeconomics before macroeconomics, every student was in the same position and most macroeconomics syllabi would include only a very brief review of the supply and demand mechanism. now, instructors must devote extra time to the detailed introduction of core microeconomics principles at the expense of some macroeconomics topics. 6 such similarity has been previously noted: “past studies of achievement in introductory economics found that the choice of textbook does not appear to matter, probably because of the homogeneity in textbook features and content coverage among the leading principles of economics textbooks (allgood, walstad and siegfried 2015, 294). 7 it is difficult to generate a definitive list of top-selling textbooks beyond that by mankiw, which is estimated to cover 20 to 25% of the market for introductory textbooks. those included here were in part influenced by samuelson (2019) and bowles and carlin (2020), as well as by our own experiences and those of our colleagues. 4 |journal for economic educators, 22(1), 2022 of understanding in college economics (tuce-4). the tuce is a joint effort of the committee on economic education (cee) of the american economic association (aea) and the national council on economic education (ncee); it has long offered a reliable assessment instrument for students in principles of economics courses (walstad, watts, and rebeck, 2007). the tuce’s content categories for microeconomics and the recommended percentage ranges for the allocation of test items are summarized in table 1. we realize the inclusion of microeconomics topics in macroeconomics textbooks does not guarantee that instructors will necessarily discuss them. however, this applies equally well to macroeconomics topics. while many instructors may not have time to cover international economics or exchange rates, these topics are still routinely included in macroeconomics textbooks because (i) they are important subjects, and (ii) textbooks operate as a resource for students seeking more information. we argue it is better for an instructor to have the option to assign particular chapters as suggested reading, supplemental reading, or a bonus assignment than to have to find or generate their own material to fill in gaps. an insufficiency of microeconomic content in macroeconomic textbooks can also contribute to perceptions that the material is not of importance or that the topics are “a collection of random topics” (kagundu and ross 2015, 20) rather than fundamental building blocks. table 1. microeconomic topics in the tuce category examples of topics recommended percentage allocation a. the basic economic problem scarcity, opportunity cost, choice 10 – 15% b. markets and price determination determinants of supply and demand, utility, elasticity, price ceilings and floors 20 – 25% c. theory of the firm revenues, costs, marginal analysis, market structures 25 – 30% d. factor markets wages, rents, interest, profits, income distribution 10 – 15% e. the role of government in a market economy public goods, maintaining competition, externalities, taxation, income redistribution, public choice 15 – 20% f. international economics comparative advantage, trade barriers, exchange rates 10 – 15% as publishers seek to balance content coverage with production costs, it is inevitable that textbook authors must make decisions about which topics are most deserving of inclusion. certainly, it would be unrealistic to expect macroeconomics textbooks to fully cover the gamut of microeconomics topics – yet many authors make the choice to include at least some brief discussion of various microeconomic concepts. not infrequently, authorial choices regarding coverage are criticized. for example, robert samuelson (2019) suggests it is time to retire the mankiw textbook because it fails to cover the impact of the internet or digitalization — nor does 5 |journal for economic educators, 22(1), 2022 it pay much attention to the great recession of 2007 – 2009 or the rise of china. samuel bowles and wendy carlin (2020) call for a major overhaul of textbooks to better address contemporary economic problems such as climate change and discrimination. not surprisingly, the textbooks we survey include different amounts of microeconomic content, measured by topics covered, the number of chapters, and the number of pages. although all the textbooks have about the same amount of coverage of the basic economic problem of scarcity and opportunity cost, from there, texts diverge significantly. for instance, miller (2021), mcconnel, brue and flynn (2021), and sexton (2020) each devote two chapters to the analysis of market failures, including externalities and public goods. cowen and tabarrok (2018) include a full chapter on public choice later in their book, and stevenson and wolfers (2020) have a chapter on inequality all of these follow the traditional discussion of the mechanism of supply and demand and government intervention via taxes and price controls. the other textbooks include notably less on these topics. to better capture specific topics, we divide each of the general categories listed in table 1 into subtopics (also guided by the tuce). in some cases, we find significant commonalities, while in others there is much less agreement on what should be included in a macroeconomics textbook. our findings are summarized in table 2. appendix a provides detailed list of the exact number of ‘microeconomic’ chapters in the introduction section of various macroeconomics textbooks and their location in the book. 6 |journal for economic educators, 22(1), 2022 table 2. microeconomics topics and macroeconomic textbook coverage 7 |journal for economic educators, 22(1), 2022 key for table 2 n = not included y= yes included d= definition only c = competitive markets discussed i = imperfect markets included no = no distinction dmb = diminishing marginal benefit rp = relative prices dmu = diminishing marginal utility dmv = diminishing marginal value se = substitution effect ie = income effect i = in international chapter (end of text) g = in general (early in book) material mi* = international material early in text rather than later in the book lw = losers and winners mentioned (only) nl = net loss (only, rather than dwl) dwl = dead weight loss markets and price determination beginning with the tuce microeconomic classification of markets and price determination, we note that understanding markets (supply, demand, equilibrium) may be the most critical microfoundation for macroeconomics. this rather broad classification, however, contains a wealth of subtopics that are covered quite differently across the texts in our sample. in eight of the surveyed textbooks, the supply and demand model is the only microeconomic topic included beyond scarcity, opportunity cost, and choice. all 20 macroeconomic textbooks devote time and effort to explicating the factors of supply and demand – and it is not surprising that in all cases, the model is elaborated succinctly in one or two chapters. furthermore, market structure is often confined to the case of perfect competition. in seven out of 20 textbooks (table 2, noted by “c, i” for both competitive and imperfect markets)., there is a single statement to the effect that the study of perfect competition provides useful insights into real-life markets despite these being rarely characterized by perfect competition (karlan and morduch 2021). in another four textbooks, the authors emphasize that the price mechanism presumes a competitive market, but without any discussion of imperfect markets (“c” for only mention of perfect competition without any reference to other market structures in table 2). in the remaining nine textbooks, the authors explain the law of demand, the law of supply, and equilibrium without any reference to market structures (“no” means no distinction between market structures in table 2, supply and demand column). although the tuce lists utility as an important subcomponent of markets and price determination, it is all but excluded from macroeconomic textbooks. this seems unfortunate as the concept of diminishing marginal utility is one of the pillars of mainstream microeconomics, grounding explanations of the law of demand. since demand is what people are willing and able to buy at all possible prices, a traditional explanation of the law of demand suggests three major arguments: the diminishing marginal utility, the substitution effect, and the income effect. in microeconomics, the chapter on consumer behavior usually provides an analysis of the three 8 |journal for economic educators, 22(1), 2022 phenomena based on the utility function and the budget constraint. in macro textbooks, only case and fair (2021) and mcconnell, brue and flynn (2021) make any reference to marginal utility in their presentation of the law of demand (table 2, “dmu”). in four books, the authors use the term diminishing marginal benefit (or value) to address the motivation of the law of demand (“dmb” in table 2). in five books, the only reason for the negative slope of the demand line is the change in the relative price “rp” which appears to be hinting at the substitution effect. in four books, the authors refer to two out of the three major arguments and only mcconnell, brue, and flynn (2021) explain the law of demand on the basis of all three – the substitution effect, the income effect, and the diminishing marginal utility. in six books, the law of demand is defined without any explanation as to why people buy more when the price goes down and buy less when it goes up (this is noted with a “no” in table 2 in the law of demand and supply column). using the concept of diminishing marginal returns is one common way to generate an understanding of the law of supply in microeconomics. students who take only macroeconomics will have limited exposure to production decision-making. in all 20 of our surveyed textbooks, the idea of diminishing marginal returns is used to build the macroeconomic production function in the chapter on economic growth. this is done without any connection to the law of supply. furthermore, the law of supply, itself, is generally developed in macroeconomic textbooks separate from profit considerations. in twelve textbooks, profits are excluded entirely, though even a very compact introduction to profit as a motive for production would be useful in explaining the difference between the change in supply and the change in quantity supplied. similarly, though elasticity is another important tool of the price determination only five textbooks cover elasticities; other authors opt not to introduce the concept at all. consumer and producer surplus are defined and discussed in thirteen of the 20 textbooks in our survey (fourth column under market and price determination in table 2). sexton (2020) and stevenson and wolfers (2020) measure consumer surplus for an individual using an individual’s demand curve before explaining the idea at the market level. the other textbooks only explain consumer surplus in the context of market demand. price discrimination, when different customers pay different prices for the same product, or when a customer pays a different price for larger quantities than for smaller quantities, is not addressed in macroeconomic textbooks. consumer and producer surplus, along with deadweight loss, can be applied to outcomes of government intervention in markets applicable in macroeconomics including situations of price ceilings/floors, excise taxes, tariffs, and quotas. eighteen textbooks cover some aspect of price floors or price ceilings; in twelve, however, the negative impact of government restrictions is addressed without reference to deadweight loss. furthermore, although tax incidence can probably be best explained using the concept of elasticity, only four textbooks do so; eleven (including six that list consumer/producer surplus in the index) do not raise the question of tax incidence. atypical of the group, coppock and mateer (2021) devote fifteen pages of their macroeconomic textbook to tax incidence, which includes analysis of deadweight loss and elasticity. theories of the firm after the problem of scarcity and the three fundamental questions of what, how, and for whom to produce, there remains the idea of how each society will organize its economic system. u.s. macroeconomic texts generally confine themselves to the capitalist system as based on the profit motive and entrepreneurial ability, though rarely do they make this explicit. in eight books 9 |journal for economic educators, 22(1), 2022 out of the 20, profit is mentioned in the supply and demand chapter, but that mention is often brief and without further elaboration. the most common context for the definition of profit (in 16 books) is the circular flow model and/or the description of the four major real resources and the four corresponding monetary incomes. in nine out of these 16 textbooks, there is a statement regarding the role of an entrepreneur in putting other factors of production together but often without analysis of profit as the major driving force of the market economy. the description of entrepreneurship is often compressed into one or two short paragraphs. for example, classification of sole proprietorships, partnerships, and corporations in the 16 texts is not followed by a discussion of profit. the authors of the remaining four books we survey do not list ‘profit’ in the index, though we are able to find casual mentions in the introductory chapters and the chapters on national income accounting. only one of the four books talks about the role of the entrepreneur in a market economy (o’sullivan, sheffrin and perez 2020). see table 2, second column under the heading of theory of the firm; the first letter indicates the existence of profit in the index and the second letter indicates mention of entrepreneurship. for example, “y, n” would mean there is a mention of profit, but no mention of the role of the entrepreneurship. turning to other important subcategories under the tuce classification of theory of the firm, only stevenson and wolfers (2020) make profit and profit maximization a focal point in the explanation of not only the law of supply but also of the marginal principle, in general. they illustrate profit maximization in the labor market decision with a computation of total revenues, total costs, marginal revenues, marginal costs, and profits in a table traditional for microeconomics. acemoglu, laibson, and list (2018), case and fair (2020), mcconnell, brue, and flynn (2021), and mceachern (2017) emphasize profit maximization (in addition to profit) as a goal. however, the analysis runs to one or two sentences without much explication of the mechanism by which to achieve it. in six books listed in the mr=mc column of table 2, the general marginal principle is illustrated with the examples of various types of business practices, but without the direct reference to profit (case and fair 2020; hubbard and o’brien 2021; mankiw 2021; mceachern 2017; o’ sullivan, sheffrin, and perez 2020; and sexton 2020). one popular example is when airlines sell a discount ticket that does not cover the average cost of flying, so long as it covers the marginal cost of the additional passenger (case and fair 2020; mankiw 2021; and sexton 2020). however, while the marginal cost is defined in almost every textbook, either in connection to the law of supply or to the marginal principle in general, this is not the case when it comes to average costs, which is treated more casually, and often without the distinction between fixed and variable costs. as we noted previously, imperfect markets are not treated in chapters on supply and demand in 18 out of 20 books. monopoly is mentioned in 12 books as an example of market failure but without discussion of the mechanism of price determination. the concept of elasticity and the availability of substitutions clearly demonstrate ideas of market power. yet, of the five textbooks that cover elasticity, none connect elasticity to market power. overall, the microeconomic category of theories of the firm is the least treated in macroeconomic textbooks. factor markets bowles and carlin (2020) suggest that microeconomics can be integrated into macroeconomics most easily in discussions regarding labor and credit markets. although factor markets are important in both micro and macroeconomics, most mainstream textbooks diverge over which of the factors receives the most play. microeconomics tends to give significant space to the determination of wages; interest rates receive extensive treatment in macroeconomics. the 10 |journal for economic educators, 22(1), 2022 concept of rents typically emerges only in the context of the circular flow model and in national income accounting for gdp calculation. it would be fair to note that in microeconomics, rent is also not deeply analyzed. we argue that all students need to understand that markets exist for labor, land, and capital – their prices determined by markets. such analysis of factor markets underpins discussions of income distribution. yet, textbooks avoid direct explications of the marginal productivity theory of distribution – the closest is connecting the marginal productivity of labor to the real wage (acemoglu, laibson, and list 2018; bade and parkin 2021; and o’sullivan, sheffrin, and perez 2020). the inefficiency of excise or sale taxes and/or tax incidence is addressed only in 9 out of the 20 textbooks (tax incidence column of table 2 under factor markets). the tuce considers income distribution and redistribution separately. in principles of microeconomics textbooks, income distribution, inequality, poverty, discrimination, and the role of the government to correct such market outcomes are often bundled together in the same chapter. in macroeconomics, however, these concepts are scattered among several chapters. since it is impossible to teach national income accounting, business cycles, unemployment, fiscal policy, and debt and deficit structure and financing without at least a brief description of the progressive tax system, transfer payments, unemployment compensation, and other entitlement programs, all such concepts appear readily in the text of the surveyed books. however, if students were assigned to study income distribution as a concept, they would need to read through the entire book to put the various pieces of the puzzle together. only stevenson and wolfers (2020) dedicate a chapter to “inequality, social insurance, and redistribution.” how the government can alter income distribution is briefly articulated in eight textbooks; the most detailed treatment occurs in stevenson and wolfers (2020) in the context of the trade-off between equity and efficiency and a caution regarding the potential degradation of economic outcomes with income redistribution. sexton (2020, 55) similarly notes “the degree-of-equality argument can generate some sharp disagreements.” about half of the textbooks we survey exclude mention of redistribution as a function of government. bowles and carlin (2020) report that the problems of inequality and poverty animate much of student interest in economics globally – being two of “the most pressing problems economists should address.” 8 as an indicator of income inequality, we examined the textbooks for use of the lorenz curve and the gini coefficient in the context of poverty and/or discrimination all the textbook authors leave the instruments for measuring inequality to microeconomics. poverty as a subject is excluded from baumol and blinder (2020), hubbard and o’brien (2021), and krugman and wells (2021). in the other 16 textbooks, poverty is defined in chapters on either economic growth or development economics (e.g., coppock and mateer 2021, 359 360). poverty in the united states is less popular; for example, the definition of the poverty line for the u.s. is not found in any of our surveyed macroeconomic textbooks, other than in stevenson and wolfers (2020). although ‘discrimination’ was rarely specifically identified when students were asked about “the most pressing problems” in contemporary economics, the prevalence of related words suggest that discrimination is, in fact, a serious concern for students (related words include immigration, fairness, refugee crisis, wage gap, equal pay, minimum wage, disparities, and social 8 over the past several years, core instructors have been asked to collect from their students one-word answers to the question “what is the most pressing problem economists today should be addressing?” data imaging from more than 4400 students at 25 universities and in twelve countries are available at https://www.core-econ.org/escapingfrom-imaginary-worlds-update/ https://www.core-econ.org/escaping-from-imaginary-worlds-update/ https://www.core-econ.org/escaping-from-imaginary-worlds-update/ 11 |journal for economic educators, 22(1), 2022 injustice). yet, only two macroeconomics textbooks in our survey list discrimination as a specific topic in the index (boyes and melvin 2016; sexton 2020). for example, sexton (2020) explains rent controls can encourage housing discrimination because landlords can indulge in their ‘taste’ for discrimination without any additional loss beyond that generated by the market controls alone. consequently, they can choose to rent to people they deem more desirable. fifteen textbooks address discrimination tangentially in tables on the unequal burdens of unemployment, but without much elaboration. mcconnell, brue, and flynn (2021) and taylor and weerapana (2020) provide some specific examples of discrimination against women and/or minorities; the former, for example, comments on racial differences in unemployment rates in the united states. in three textbooks, differing unemployment rates by race are unconsidered (bade and parkin 2020; cowen and tabarrok 2018; miller 2021). role of government the economic role of government in a market economy includes such various topics as market failure, public choice, public goods, and externalities (the four columns under the heading of role of government in table 2). though treated as conceptually similar problems in microeconomics, this is not the case in macroeconomics. for example, of the 13 macroeconomic textbooks that cover both the concept of deadweight loss and market failure, only six connect the two. stevenson and wolfers (2020) is an outlier of the macroeconomic textbooks, including a detailed introduction to market failure, deadweight loss, and government action. as noted, imperfect markets receive little discussion in macroeconomic textbook chapters on supply and demand. monopoly and the role for government in preserving competition do get some treatment elsewhere in the textbooks. twelve textbooks identify monopoly power as a market failure, and ten out of the 12 declare market regulation as one of the major functions of the government. the role of the government in promoting competition is generally mentioned without much insight into particular policy instruments. contrary to microeconomics, where monopoly is the traditional example of the inefficiency of underproduction, only one of the surveyed macroeconomics textbooks deploy deadweight loss as a measure of such inefficiency. (stevenson and wolfers (2020). it is perhaps surprising that public choice gets so little consideration in macroeconomic textbooks – in the contemporary literature, public choice has much to contribute to understanding deficit spending, the ratchet effect, policy decision-making, and other aspects of discretionary governmental spending. yet, public choice goes unmentioned in fifteen macroeconomic textbooks; two others provide minimal cursory treatment (boyes and melvin 2016; chiang 2020). mcconnell, brue, and flynn (2021) and cowen and tabarrok (2018) both dedicate a chapter to the political economy of the government; in sexton (2020) public choice theory is addressed as a section of a similarly oriented chapter. all three books emphasize the costs and benefits of government policies and the limitations of majority voting. among the 11 textbooks that include public goods in the index, seven define public goods, nonrivalry, and non-excludability in one or two paragraphs in a larger list of market failures. in another four textbooks, there is a more detailed description of the characteristics of the pure private and pure public goods and the free-rider problem. only mcconnell, brue, and flynn (2021) offer the traditional microeconomic graph of market demand for public goods, which is based on the vertical summation of individual demand lines as opposed to the horizontal summation for the private goods. descriptions in other books leave some room for misunderstanding when authors claim only that it is not profitable for the private companies to 12 |journal for economic educators, 22(1), 2022 produce public goods. we do not find a clear distinction between the provision of public goods and the production of public goods; publicly produced private goods are mentioned in one textbook (miller 2021). in the other nine textbooks, public goods go unmentioned (the public goods column of table 2). in three out of these 9 texts, the government is added to the circular flow diagram, however, the flows between the government and the private sector include taxes and money transfers without reference to public goods. those books we surveyed that employ the formula c + i + g + (x – im) do not distinguish between government purchases of private goods, such as office supplies, from the provision of public goods, such as national parks. as a result, there is no discussion in the context of leakages and injections in national income accounting of the role of government as an intermediary between taxpayers and the private companies contracted to implement public projects. the treatment of externalities in macro textbooks is similar to that of public goods. out of 20 textbooks, a definition and a very brief description can be found in 11 textbooks typically in the chapter or section devoted to market failures. acemoglu, laibson, and list (2018), chiang (2020), and stevenson and wofers, (2020), define externalities without direct reference to the role of the government regulation in internalizing them. a relatively substantial number of pages are devoted to externalities and government policies in four books, including discussion of pigouvian taxes and subsidies and regulation. the problem of unclear property rights as a cause of externality is covered in three; only mcconnell, brue, and flynn (2018) and sexton (2020) consider transferable pollution permits, and only sexton (2020) refers to the coase theorem. five books do not raise the question of externalities at all (externality column, table 2). although issues of sustainability and climate change have become increasingly important to students (bowles and carlin 2020), they have not yet found their way into most macroeconomic textbooks (samuelson 2019). international economics since adam smith’s wealth of nations (1776), international economics has been a focus of study. both contemporary microeconomics and macroeconomics textbooks give the topic notable coverage, though usually with a somewhat different focus. in macroeconomic textbooks, the most common discussions are issues of exchange rates, barriers to trade, gains from trade, and the notions of comparative and absolute advantage. most texts allocate a chapter to international economics at the end of the book – it is for the most part treated separately from the ‘principles of macroeconomics.’ further, by virtue of appearing last, international economics is less likely to receive coverage if time is short – as a sidebar, having this material at the end of the book implies it is less important than earlier material. most commonly are the concepts of absolute and comparative advantage. out of 20 textbooks, 12 discuss it twice: first in the context of the opportunity costs and the production possibilities frontier and a second time in the chapter on international trade. in three textbooks, this concept is introduced as a general principle only and completely omitted from the international material (cowen and tabarrok 2018; karlan and morduch 2021; and mankiw 2021). three books positioned all of the material on international economics at the front, making it a part of their general introduction to economics (see table 2, “mi”). in only two textbooks does the concept of absolute and comparative advantage appear for the first time in the final chapters (table 2, where “i” indicates the only mention for the concept). most textbooks relegate the topic of exchange rates solely to the chapter on international trade. however, in five textbooks, the exchange rate is introduced either as an example of a realworld supply-and-demand application or as a facet of national income accounting. while trade 13 |journal for economic educators, 22(1), 2022 barriers are discussed in 19 of the 20 texts in our survey, different authors treat the outcome of tariffs and quotas differently. for example, when examining the losses to limiting trade opportunities, some texts offer a full analysis using deadweight loss (8 texts, see table 2, the “dwl” designator). four textbooks focus on net loss (“nl” table 2), and seven remaining books consider ‘winners and losers’ (“lw”) without drawing a general conclusion about the inefficiency of trade restrictions. macro bits versus micro splits the majority of microeconomics and macroeconomics textbooks – including all those in our sample – can be characterized as text splits, where a split is one part of a two-text set drawn from an existing single volume principles of economics textbook. locating the corresponding microeconomics split for each of our 20 macroeconomics textbooks (by name, publisher, and author), confirms that, at the principles-level, there does not appear to be a division of labor by authors. no one specializes in either macro or micro as is common at the intermediate level. another relevant point is that even though there exist consistent sets of macro and micro splits, students who take both classes are not guaranteed to have the matching halves of a whole textbook, unless perhaps, text decisions are made jointly across the department. that said, we clearly see the pattern that individual course textbooks are designed as if micro and macro are two parts of the same book. the introductory chapters which cover basic principles and the economic way of thinking can generally be found in both the microeconomic and macroeconomic editions (see table 3). in 16 out of the 20 cases we sample, the introductory chapters in both splits are identical. in the other four cases, the micro textbooks include one or two extra chapters relating fundamental principles to microeconomic material in greater depth. we have not found a single case where a macro split has more chapters in the introduction than its matching micro split. there is also a consensus among the authors regarding the role of microeconomic foundations for macroeconomics: “don’t think about microand macroeconomics as distant halves of economics. rather, think about macroeconomics as being built upon your understanding of microeconomics” (stevenson and wolfers 2020, 216). a modest proposal as each author or group of authors must decide for themselves the optimal amount of microfoundations for macroeconomics – and so must each instructor. as faculty face greater and greater demands on their time – publishing, committee work, larger classes, pandemic adjustments – it is easy to revert to the same textbook one has used in the past. we hope this detailed survey of macroeconomic textbooks, as filtered through the lens of the microeconomic topics included, provides a way to compare options which are rooted in a traditional or mainstream approach. for faculty that like to use textbook supplements such as online homework or quiz systems or who rely on test banks, choosing a book to match one’s own interests can make the textbook and its supplements more useful for students. the better matching of books to interests can bridge some of this difficulty. we also hope that consideration of the textbook topics provides an impetus to reflection on the course structure and content chosen by instructors. our survey persuades us that there is room to improve the microeconomic content in macroeconomic textbooks without substantial additional costs and without significant tradeoff of macroeconomic material. we identify a short list of microfoundations that could be added to a macroeconomic principles course without significant commitment of time or effort by 14 |journal for economic educators, 22(1), 2022 instructors. we match these concepts to the macroeconomics textbooks we identify as having relatively better coverage of the topic. last, we suggest where in a typical macroeconomic syllabus the topic could be incorporated (table 3). based on our own teaching experience, the recommended adjustments to the syllabus may require approximately one class period to elaborate on market and government failures in more detail as a way to bridge the introductory part of the course to national income accounting. the other microeconomic concepts can find homes in the introductory week and throughout the course, as indicated in table 3. table 3. recommendations for microfoundations topics recommendations best practice topic in the syllabus markets and price determination supply & demand include a short description of different market structures. karlan & morduch supply and demand law of demand explain the law of demand on the basis of all three major arguments – the substitution effect, the income effect, and the diminishing marginal utility. mcconnel, brue & flynn supply and demand elasticity explain elasticity and apply to analyze tax incidence and market power. coppock & mateer sexton supply and demand consumer/producer surplus use the tools of consumer and producer surplus and deadweight loss to measure market inefficiencies. sexton stevenson & wolfers supply and demand price ceilings and floors illustrate the negative impact of government restrictions using the concept of deadweight loss. sexton supply and demand theory of the firm profit motive in supply stress from the outset that supply decisions depend on profit potential. case & fair the core principles of economics. profit listed in the index/ role of the entrepreneur emphasize that an entrepreneur’s goal to maximize profit is a driving force of the market economy as opposed to command economy. mcconnel, brue & flynn the core principles of economics. mr = mc rule make profit and profit maximization (mr = mc rule) a focal point in the explanation acemoglu, laibson, & list the core principles of economics. 15 |journal for economic educators, 22(1), 2022 of the marginal principle in general (mb = mc rule). stevenson & wolfers market power/regulation illustrate that the inefficiency of monopoly with the deadweight loss that results from underproduction. baumol & blinder chiang o’sullivan, sheffrin & perez supply and demand factor markets poverty extend the discussion of the equity-efficiency tradeoff by showing how inequality is measured and providing some basic data about the number of americans living below the poverty line. stevenson & wolfers the core principles of economics; economic growth unequal burden of unemployment address discrimination when discussing unemployment and provide data on the differences in unemployment rates by race and gender. boyes & melvin taylor & weerapana business cycles, unemployment, and inflation tax incidence use elasticity to illustrate tax incidence, including a discussion of the elasticity of labor supply versus capital supply. coppock & mateer supply and demand; fiscal policy redistribution recognize that regardless of political leanings, redistribution is now one of the major functions of government; continue the discussion of the equityefficiency tradeoff. stevenson & wolfers fiscal policy role of government market failure address the problems of market failure and of government failure when discussing the efficiency of markets. stevenson/wolfers the core principles of economics; market failures. public choice introduce the pros and cons of the mechanism of democratic decision-making; discuss why government failure might occur in budgeting and policydecision making. cowen & tabarrok mcconnell, brue & flynn the core principles of economics; market failures; 16 |journal for economic educators, 22(1), 2022 public goods make a clear distinction between the provision and the production of public goods versus private goods; consider the case of publicly provided private goods. mcconnell, brue & flynn, miller market failures; supply and demand; national income accounting externalities explain the ‘missing market” interpretation of externalities and the role of the government in internalizing externalities. sexton market failures; supply and demand international trade comparative advantage this concept is well explained in most textbooks. hubbard & o’brien krugman & wells stevenson & wolfers the core principles of economics; international trade exchange rates introduce the exchange rate in the foundations chapter or use the price of a foreign currency as an example of the realworld supply-and-demand application, emphasizing that currency is just another good. mceachern colander supply and demand; the aggregate expenditures model barriers to trade use deadweight loss in the assessment of trade barriers to draw a general conclusion about the inefficiency of trade restrictions. mankiw supply and demand; aggregate demand and aggregate supply our recommendations can be adopted and adapted by instructors; we also hope they will spur authors, publishers, and book reviewers to think seriously about the microfoundations that underlie many of the tools and concepts of modern macroeconomics. students need to understand these fundamental microfoundations to be able to see the bigger or overarching picture that economics paints of societal functioning.9 to create a more holistic vision of the economic approach, we suggest the following as a set of best practices. we stress that our recommendations target precision in presentation of 9 we disagree with kagundu and ross’s (2015, 20) description of their unconventional “global economy” introductory course is illustrative. the first part of the course is “a collection of random topics…these concepts include definitions of economics, marginal analysis, opportunity cost, supply and demand, gross domestic product (gdp), inflation, and the production possibilities frontier (ppf). each of these topics is independent of the others and can be presented in any order.” 17 |journal for economic educators, 22(1), 2022 microeconomic topics, repeated application of core concepts, and brief ‘big picture’ discussions rather than the inclusion of significant additional material, which we realize would impose opportunity costs on both authors and instructors by diverting time and effort from critical macroeconomic content. we understand that the inclusion of these topics does not guarantee coverage in the classroom by instructors. however, including these microfoundations opens an opportunity for instructors to discuss the topics and provides students with a more complete resource. a). since the entrepreneur has the leading role putting other factors of production together, profit maximization should be seen as a core concept in the introduction to economics and the driving force of the market economy. profit maximization as a goal of an entrepreneur (and the mr = mc rule) can be generally introduced in the section on the foundations of economics. b). the demand-and-supply chapter should include a definition of perfectly competitive markets as well as imperfect markets. the major characteristics of each type of market structure should be discussed, including the number of producers, the severity of the barriers to entry, and the availability of the substitutes. students need to understand that the supply-and-demand model presumes competition with all the participants being price-takers. other market structures may see prices determined by different mechanisms. c). the explanation of the law of demand should be rooted in (i) the concept of diminishing marginal utility, (ii) the substitution effect, and (iii) the income effect. what consumers are willing and able to buy at each possible price depends on their utility function and the budget constraint. not using all three arguments in introducing the law of demand, would be equivalent to considering utility function without the budget constraint or other way around. the law of supply should be motivated by profit maximization. since profit is the difference between revenues and costs, supply is likely to react to changes in revenues, which depend on the price of the product, and changes in production costs, which depend on many factors. the supply decision is just one of several decisions that firms make to maximize profit (case and fair 2020). understanding profit maximization is very helpful in explaining the difference between the change in supply and the change in quantity supplied. d). elasticity is a fundamental concept in economics that underpins changes in the quantity demanded, the ability of suppliers to respond to market shocks, market power, tax incidence, and the impact of governmental interventions in the economy. for students taking only a single economics principles course, we argue some exposure to elasticity is fundamental to the economic way of thinking. the discussion need not be as detailed as it would be in microeconomics and could be a part of the general supply and demand discussion with an emphasis on the relative strength of the market players. e). the concepts of consumer and producer surplus and deadweight loss are also essential microeconomic tools, which have important implications for macroeconomics. considerations of the efficiency of the market and of government policies should not be elective in macroeconomic textbooks if one goal of the course is to educate voters on policies such as price ceilings and floors, raising taxes, anti-trust, and trade restrictions. f). we find treatment of market failure and of evaluating government policies is scattershot at best in principles of macroeconomics textbooks. stevenson and wolfers (2020) provide an exception, with a thoughtful introduction of market failure, deadweight loss, and government failure. given the importance of fiscal policy for standards of living – beyond the smoothing of business cycles – we suggest textbooks give more room to market failures, 18 |journal for economic educators, 22(1), 2022 including the implications of and policy recommendations for situations of public goods, externalities, and market power. g). much like samuelson (2019) and bowles and carlin (2020), we find the problems of income inequality, poverty, and discrimination are under considered – sometimes woefully so – in introductory macroeconomics textbooks despite being leading topics of student interest. we suggest the simplest way to address income distribution is to extend the segment in the fundamentals chapter which distinguishes between efficiency and equity. we also suggest to textbooks and instructors include measures of inequality and provide some basic data about the number of americans living below the poverty line. problems of discrimination and redistribution could be integrated throughout the textbook – in chapters on unemployment, economic growth, and fiscal policy. the distribution of goods and services (and/or their redistributions) should be treated as a fundamental macroeconomic function of government along with the allocation of resources and the stabilization of the economy. h). despite an increasingly globalized economy, many students lack even a rudimentary understanding of the functioning of exchange rates. the idea that exchange rates are ancillary is reinforced by covering them solely in a late textbook chapter on international trade. instead, we argue to include discussion of exchange rates throughout the course and textbook, including in sections on national income accounting, economic growth, and aggregate demand. a general introduction of exchange rates is possible as an example of the real-world application of supply and demand. i). last, returning to market inefficiencies – now in the context of international trade – we argue to treat trade barriers like the related governmental policy interventions of price floors and ceilings by using deadweight loss. more general examinations of the costs of barriers to trade, along the lines of ‘winners’ and ‘losers,’ complicate drawing conclusions consistent with the broader framework of economics. conclusions the most common goal of introductory economics is to encourage students to develop an economic way of thinking so that they can understand the mechanisms of market economies. while business and economics majors will be exposed to both microeconomics and macroeconomics at the principles level, a substantial number of students will take only one principles-level economics course. for these students, specific economic lessons will likely fade. ideally, however, they will retain some grasp of economic principles and understand the major functions of the market and government for the rest of their lives. this was the point of paul samuelson’s famous claim – “i don’t care who writes a nation’s laws if i can write its economics textbooks” (samuelson 1990, xi – x). or, as mankiw noted, “the typical student is not a future economist but is a future voter” (2016, 170). for those selecting only one course, the opportunity cost is high: you graduate either without knowing the golden rule of profit maximization or without a clue about what are fiscal and monetary policy. in this paper, we argue that there is room for the judicious inclusion of fundamental microeconomics topics in an introductory macroeconomics course. we motivate our suggestion with a detailed examination of popular macroeconomics textbooks. these books differ notably in the amount and type of micro-foundational content. the absolute minimum number of microeconomic chapters in macroeconomics principles texts is two: scarcity and opportunity cost and supply and demand. our goal is not to rank the textbooks, but to facilitate better matching of books with instructor interest. having a text that covers the material that an instructor most wants 19 |journal for economic educators, 22(1), 2022 to highlight makes learning much easier – and is perhaps even more important as online, hyflex, and hybrid options become mainstays of undergraduate education. certainly, we recognize that considerations such as length, writing level, and cost play a role in textbook decisions. however, we hope that the comparisons provided here prove useful to instructors choosing among the myriad of macroeconomic textbook options to find the one that most closely aligns with their course goals and objectives. we do not mean to imply, however, that the choice of textbook can solve the entire problem of providing macroeconomics students with sufficient grounding to understand the big picture of economics. what we hope is that our detailed consideration of the textbook coverage of microfoundations will encourage instructors to reflect upon their own course structure and content coverage and what they feel is most important to convey to students. to this end, we make a modest proposal for how and where macroeconomics instructors could include some microeconomic content with low opportunity cost and explain how these concepts can deepen students understanding of macroeconomic concepts. references acemoglu, daron, david laibson, and john a. list. 2018. macroeconomics. 2nd edition. new york, ny: pearson. allgood, sam, william b. walstad, and john j. siegfried. 2015. “research on teaching economics to undergraduates.” journal 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<https://www.econedlink.org/wp-content/uploads/2018/09/tuce-4th.pdf>. accessed 8 september 2021. https://www.washingtonpost.com/opinions/its-time-we-%09tear-up-our-economics-textbooks-and-start-over/2019/06/23/54794ab8-9432-11e9-%09b570-6416efdc0803_story.html https://www.washingtonpost.com/opinions/its-time-we-%09tear-up-our-economics-textbooks-and-start-over/2019/06/23/54794ab8-9432-11e9-%09b570-6416efdc0803_story.html https://www.washingtonpost.com/opinions/its-time-we-%09tear-up-our-economics-textbooks-and-start-over/2019/06/23/54794ab8-9432-11e9-%09b570-6416efdc0803_story.html https://www.econedlink.org/wp-content/uploads/2018/09/tuce-4th.pdf 22 |journal for economic educators, 22(1), 2022 appendix a. micro content in the opening sections of macroeconomics textbooks authors macroeconomics microeconomics acemoglu/ laibson/list 1 the principles and practice of economics 2 economic methods and economic questions 3 optimization: doing the best you can 4 demand, supply, and equilibrium 1 the principles and practice of economics 2 economic methods and economic questions 3 optimization: doing the best you can 4 demand, supply, and equilibrium bade/parkin 1 getting started 2 the u.s. and global economies 3 the economic problem 4 demand and supply 1 getting started 2 the u.s. and global economies 3 the economic problem 4 demand and supply baumol/ blinder 1 what is economics? 2 the economy: myth and reality 3 the fundamental economic problem: scarcity and choice 4 supply and demand: an initial look 1 what is economics? 2 the economy: myth and reality 3 the fundamental economic problem: scarcity and choice 4 supply and demand: an initial look boyes/ melvin 1 the wealth of nations: ownership and economic freedom 2 scarcity and opportunity costs 3 the market and price system 4 the aggregate economy 1 the wealth of nations: ownership and economic freedom 2 scarcity and opportunity costs 3 the market and price system 4 the aggregate economy case/fair 1 the scope and method of economics. 2 the economic problem: scarcity and choice. 3 demand, supply, and market equilibrium. 4 demand and supply applications. 1 the scope and method of economics. 2 the economic problem: scarcity and choice. 3 demand, supply, and market equilibrium. 4 demand and supply applications. 5 elasticity chiang 1 exploring economics. 2 production, economic growth, and trade. 3 supply and demand. 4 markets and government. 1 exploring economics. 2 production, economic growth, and trade. 3 supply and demand. 4 markets and government. 23 |journal for economic educators, 22(1), 2022 colander 1 economics and economic reasoning 2 the production possibilities model, trade, and globalization 3 economic institutions 4 supply and demand 5 using supply and demand 1 economics and economic reasoning 2 the production possibilities model, trade, and globalization 3 economic institutions 4 supply and demand 5 using supply and demand coppock/ mateer 1 five foundations of economics 2 model building and gains from trade 3 the market at work: supply and demand. appendix 3a: changes in both demand and supply 4 market outcomes and tax incidence appendix 4a: price elasticity of demand and supply 5 price controls 1 five foundations of economics  2 model building and gains from trade  3 the market at work: supply and demand. appendix 3a: changes in both demand and supply  4 elasticity  5 market outcomes and tax incidence  6 price controls  cowen/ tabarrok 1 the big ideas 2 the power of trade and comparative advantage 3 supply and demand 4 equilibrium: how supply and demand determine prices 5 price ceilings and floors 1 the big ideas 2 the power of trade and comparative advantage 3 supply and demand 4 equilibrium: how supply and demand determine prices 5 elasticity and its applications 6 taxes and subsidies 7 the price system: signals, speculation, and prediction 8 price ceilings and floors 1 economics: foundations and models 2 trade-offs, comparative advantage, and the market system 3 where prices come from: the interaction of demand and supply 4 economic efficiency, government price setting, and taxes 5 the economics of health care 6 firms, the stock market, and corporate governance 1 economics: foundations and models 2 trade-offs, comparative advantage, and the market system 3 where prices come from: the interaction of demand and supply 4 economic efficiency, government price setting, and taxes 5 externalities, environmental policy, and public goods 24 |journal for economic educators, 22(1), 2022 hubbard/ o’brien 7 comparative advantage and the gains from international trade 6 elasticity: the responsiveness of demand and supply 7 the economics of health care 8 firms, the stock market, and corporate governance 9 comparative advantage and the gains from international trade karlan/ morduch 1 economics and life 2 specialization and exchange 3 markets 4 elasticity 5 efficiency 6 government intervention 1 economics and life 2 specialization and exchange 3 markets 4 elasticity 5 efficiency 6 government intervention krugman/ wells 1 first principles 2 economic models: trade-offs and trade appendix: graphs in economics 3 supply and demand 4 price controls and quotas: meddling with markets 5 international trade appendix consumer and producer surplus 1 first principles 2 economic models: trade-offs and trade appendix: graphs in economics 3 supply and demand 4 consumer and producer surplus 5 price controls and quotas: meddling with markets 6 elasticity 8 international trade mankiw 1 ten principles of economics 2 thinking like an economist 3 interdependence and the gains from trade 4 the market forces of supply and demand 5 elasticity and its application 6 supply, demand, and government policies 7 consumers, producers, and the efficiency of markets 8 application: the costs of taxation 9. application: international trade. 1 ten principles of economics 2 thinking like an economist 3 interdependence and the gains from trade 4 the market forces of supply and demand 5 elasticity and its application 6 supply, demand, and government policies 7 consumers, producers, and the efficiency of markets 8 application: the costs of taxation 9. application: international trade. 1. limits, alternatives, and choices 2. the market system and the circular flow 3. demand, supply, and market 1. limits, alternatives, and choices 2. the market system and the circular flow 3. demand, supply, and market 25 |journal for economic educators, 22(1), 2022 mcconnell/ brue/flynn equilibrium 4. market failures caused by externalities & asymmetric information 5. public goods, public choice, and government failure equilibrium 4. market failures caused by externalities & asymmetric information 5. public goods, public choice, and government failure mceachern 1 the art and science of economic analysis. 2 economic tools and economic systems 3 economic decision makers. 4 demand and supply analysis. 1 the art and science of economic analysis. 2 economic tools and economic systems 3 economic decision makers. 4 demand and supply analysis. miller 1 the nature of economics 2 scarcity and the world of trade-offs 3 demand and supply 4 extensions of demand and supply analysis 5 public spending and public choice 6 funding the public sector 1 the nature of economics 2 scarcity and the world of trade-offs 3 demand and supply 4 extensions of demand and supply analysis 5 public spending and public choice 6 funding the public sector o’sullivan/ sheffrin/ perez 1 introduction: what is economics? 2 key principles of economics 3 exchange and markets 4 demand, supply, and market equilibrium 1 introduction: what is economics? 2 key principles of economics 3 exchange and markets 4 demand, supply, and market equilibrium sexton 1 the role and method of economics 2 economics: eight powerful ideas 3 scarcity, trade-offs, and production possibilities 4 demand, supply, and market equilibrium 5 markets in motion and price controls 6 elasticities 7 market efficiency and welfare 8 market failure 9 public finance and public choice 1 the role and method of economics 2 economics: eight powerful ideas 3 scarcity, trade-offs, and production possibilities 4 demand, supply, and market equilibrium 5 markets in motion and price controls 6 elasticities 7 market efficiency and welfare 8 market failure 9 public finance and public choice stevenson/ wolfers 1 the core principles of economics 2 demand: thinking like a buyer 1 the core principles of economics 2 demand: thinking like a buyer 26 |journal for economic educators, 22(1), 2022 3 supply: thinking like a seller 4 where supply meets demand 5 welfare and efficiency 6 gains from trade 7 international trade 8 inequality, social insurance and redistribution 3 supply: thinking like a seller 4 where supply meets demand part ii analyzing markets 5 elasticity: measuring responsiveness 6 when governments intervene in markets 7 welfare and efficiency 8 gains from trade 9 international trade 13 inequality, social insurance and redistribution taylor/ weerapana 1 the central idea 2 observing and explaining the economy 3 the supply and demand model 4 subtleties of the supply and demand model 1 the central idea 2 observing and explaining the economy 3 the supply and demand model 4 subtleties of the supply and demand model 1 |journal for economic educators, 21(1), 2021 motivating quality research in economics capstone courses m.c. seeborg1 abstract there has been a proliferation of capstone experiences in economics. these experiences often require that students complete original research and write a lengthy paper, a task that many undergraduates find intimidating. this paper explores methods that reduce anxiety and incentivize undergraduate students to create new knowledge through quality research by examining our capstone seminar experience at a small midwestern university. the paper recommends encouraging high-quality student research by breaking projects into manageable parts, having explicit grading criteria, and using peer review. students also benefit from sharing their work with others through oral presentation and publication in undergraduate journals. key words: capstone course, pedagogy, undergraduate research, active learning jel classification: a22 introduction the role of incentives in motivating desirable economic behavior is central to economic theory and dominates economic policy discussion. however, we sometimes miss opportunities to provide students with readily available incentives to do high-quality research. focusing on a research-oriented senior seminar capstone course at a small midwestern university, this paper explores several best practices that increase the quality of undergraduate research in capstone courses: • require students to make an original contribution; • break senior research projects into multiple graded parts of written work and oral presentations and always provide a clear grading rubric; • require students to review each other’s work to introduce the motivating force of peer pressure; • encourage students to share what they learn with each other and through conference presentations; • encourage students to publish and review articles in undergraduate journals. require students to create new knowledge hansen (1986, 2001) argues that economics programs will be most effective if they help students develop specific proficiencies. traditional classes that emphasize only lectures and exams cannot achieve these proficiencies. writing and active learning are also important (feyrer, 2017; schmeiser, 2017; walstad & saunders, 1998). hanson’s six proficiencies are: 1 robert eckley professor of economics, emeritus, department of economics, state farm hall, illinois wesleyan university, 1402 park st., bloomington, il 61702-2900. 2 |journal for economic educators, 21(1), 2021 1. access existing knowledge 2. display command of existing knowledge 3. interpret existing knowledge 4. interpret and manipulate economic data 5. apply existing knowledge 6. create new knowledge hansen (2001) ranks the proficiencies in order of cognitive requirements, with proficiency number 6 generally being reached in a senior capstone experience involving research and at least one paper. completion of a well-designed capstone experience involves the application of all six proficiencies. hansen (2001) emphasizes the importance of helping students develop these proficiencies throughout the economics curriculum with the types of active learning advocated by walstad and saunders (1998). there is increasing recognition of the importance of undergraduate research in the curriculum (hoyt & mcgoldrick, 2017; mcgoldrick, 2007; siegfried, 2001), and economics capstone courses have become more prevalent in recent years. these capstone courses take different forms depending on program characteristics and student skills. (e.g., conaway, clark, arias, & folk, 2018; feyrer, 2017; li & simonson, 2016a; raymond, deck & mccrickard, 2013). undergraduate capstone experiences occur at r1 universities, state colleges, and small liberal arts institutions. the purpose of this paper is to describe a capstone course at a small midwestern university that has a mix of liberal arts and professional programs. we offer our capstone course during the fall semester and require all senior economics majors to complete this course as part of the economics core. it is essential to offer the course in the fall so that students have the opportunity to extend their research through the spring if they choose to do so. some of our best students choose to extend their research into the spring by pursuing “research honors” in economics under a faculty committee’s direction. others continue their research through the spring in an advanced research seminar or an independent study course. successful capstone courses are often supported by a curriculum that emphasizes writing, statistics, and econometrics. however, many curricular models prepare undergraduates for quality undergraduate research. for example, butcher and weerapana (2017) describe a research-oriented program at wellesley college, feyrer (2017) outlines a program that emphasizes active learning at dartmouth, and brunnermeier (2017) explains how princeton prepares and incentivizes students for a quality senior thesis experience. however, elite universities do not have a monopoly on high-quality capstone experiences. for example, li and simonson (2016) describe and assess a well-designed research-oriented capstone experience at minnesota state university: mankato. they found that “despite substantial differences in the academic backgrounds of our students, the outcome from this capstone course rivaled successful capstone and senior research experiences reported in the literature” (p. 365). they found that students who completed their new research-oriented capstone course were more likely to pursue graduate school and be successful in blind review research competitions. econometrics is an essential preparatory course for senior research. an ideal econometrics course would require students to write an empirical paper that involves multivariate analysis (klein, 2013). students who have taken such a course during their 3 |journal for economic educators, 21(1), 2021 sophomore or junior year are comfortable with basic econometric methods and writing a technical paper before starting the capstone senior seminar course. in addition to econometrics, senior capstone seminar students benefit from having many opportunities to write within the major. mccloskey (2000) argues that students learn solid analytic thinking through writing and that requiring writing in courses is essential. fisher (2019) shows how research and writing are possible in introductory economics courses. schmeiser (2017) presents several innovative ways that mount holyoke college uses writing throughout the economics curriculum. she concludes that offering a “variety of types of assignments throughout the economics curriculum helps students learn critical and clear thinking, engages them, and helps them prepare for a career” (p. 262). this type of departmental commitment to developing writing skills also prepares students for a capstone senior research experience. while a bit nerve-racking for students, the requirement to make an original contribution helps motivate them. often the contributions are not earthmoving and sometimes involve as little as analyzing a new data set with an already developed model. still, the prospect of sharing their findings energizes students. the instructor’s primary role in a capstone senior seminar course is to serve as a mentor and occasionally as a demonstrator. mcelroy (1997) suggests that students benefit when instructors share their research and become fellow participants in the seminar process. the seminar’s most distinguishing feature is the equal participation of the instructor, creating his or her research paper and presenting mini drafts of each component about one week before similar student assignments are due. these written “demonstrations” underscore the importance the professor places on research and writing, clarify expectations, and minimize questions about format, style, and audience. along with their verbal justifications, the demonstrations also allow the professor to model in a staged sequence, concrete solutions to specific problems the students are also confronting how to limit the question, select appropriate variables, interpret results, and draw out research and policy implications. the demonstrations also provide the professor with an opportunity to solicit student comments and incorporate their suggestions. this helps create a collaborative and participatory classroom atmosphere. (mcelroy, 1997, p. 33). the instructor’s participation has been an essential component of our senior capstone course for the past 30 years. students enjoy having the professor writing along with them and modeling the research process in real-time. these student-professor interactions in the seminar have resulted in much co-authored research with students after they graduate. mentoring relationships often become professional partnerships. allowing students to choose their research topic is an important feature of our senior seminar course. as long as the chosen topic has economic content, we approve it. when students choose a topic that they are passionate about, they are more likely to be fully engaged and, in the end, make an original contribution. since the topics vary greatly, we require that senior seminar participants consult with at least two faculty members about their topics. the entire department becomes consultants who are readily available to help students with ideas and guide them toward appropriate literature. students enjoy sharing research with faculty members, and faculty members enjoy being part of the creative process. 4 |journal for economic educators, 21(1), 2021 break big projects into a set of small graded projects many senior seminar students are overwhelmed by the requirement to complete an original research project, write a lengthy paper, and formally present the paper to the seminar. our senior seminar course attempts to relieve this anxiety and prevent procrastination by dividing the senior project into several graded components. students also make several formal oral presentations during the semester. breaking the senior project into multiple graded parts relieves some of the stress and motivates the entire process with a set of rewards given throughout the semester. table 1 details the assignments for fall 2019, in chronological order. table 1: seminar assignments in chronological order points first visit to two faculty mentors 10 second visit to two faculty mentors 10 3-page review of a survey article 20 4-page research topic proposal 50 2-page review of undergraduate economic review submission 20 3-page review of research paper 20 lead discussion of sample research 10 research proposal 50 research proposal presentation 20 presentation of theory 10 presentation of empirical model 10 presentation of results 10 annotated bibliography 40 draft of first part of senior project 50 draft of complete senior project 100 oral presentation of senior project 100 final draft of senior project paper participation grade 300 100 since students choose their research topics, mentoring students on content is difficult. however, the freedom to choose does motivate students because they enjoy researching something that has real meaning. this year’s senior seminar topics range from an analysis of the u.s. vs. china trade war to college majors’ earnings premiums. after topic selection, students complete a series of graded assignments on related literature, including three critical article reviews and an annotated bibliography. students reflect on how they intend to incorporate the articles’ content into their projects in the annotated bibliography. they also write reports about the content of office visits with faculty members where they discuss their projects and get ideas on related literature. the senior seminar research paper proceeds in four stages. students understand that they are making progress toward their final paper by completing each stage. this reassurance that small manageable assignments will turn into a comprehensive research paper provides some comfort to students who are intimidated by the idea of doing an original research project. first, students write a research proposal (50 points) that establishes the project’s feasibility, provides relevant background information, and argues that the research question is important. second, 5 |journal for economic educators, 21(1), 2021 students submit a draft of the first half of their research paper (50 points) that includes several sections of the paper: introduction, review of related literature, theory, statement of research hypotheses, description of data, and development of the empirical model. third, a rough draft of the entire paper (100 points) is submitted about two weeks before the semester ends. fourth, students polish their draft, hopefully responding to instructor feedback, and submit their finished papers (300 points) at the end of the semester. students submit each draft electronically as a word document. we use the “track changes” feature of word to make comments and suggestions. students appreciate the feedback and generally respond with constructive changes in each subsequent draft. this iterative approach with multiple graded drafts and constructive feedback breaks the large research project into manageable parts. when students receive positive feedback on early assignments, they gain confidence in their work and are more likely to have the incentive to work toward the best possible final product. much of the in-class seminar time is devoted to student presentations of their research. peer pressure is a great motivator, and students seem to work hard in preparation for these presentations. during the semester, students make five oral presentations: 1. research proposal presentation 2. theory presentation 3. empirical model presentation 4. results presentation 5. final paper formal presentation. the first three presentations permit students to get frequent useful feedback to prepare for their final presentation. this sequencing also makes the final presentation less daunting since the earlier shorter presentations allow students to prepare powerpoint slides and other materials well in advance of the final presentation. while the course content and the many requirements may seem overwhelming, there is a distinct advantage to this approach. breaking the project into many components encourages students to make a steady effort throughout the course. the result is less anxiety by students who would otherwise procrastinate and more student satisfaction with the final products. use peer pressure through peer review peer review is an essential component of our senior seminar course. as mentioned above, there are plenty of opportunities early in the seminar for students to review each other’s work. the instructor attempts to create a healthy atmosphere where students offer constructive criticism to help each other. the early semester short presentations result in some of the best constructive peer discussions. about three weeks before the end of the semester, students are paired up and exchange complete drafts of their papers for an extensive review. the reviewers do not grade their partners’ papers but offer constructive ideas in light of the instructor’s grading criteria. specific grading criteria help the student reviewers focus on the same aspects of the research that the instructor uses for determining grades. the idea is for the reviewer to help the author add value to the paper by focusing on important issues. for example, the criteria direct the reviewer to consider specific questions: 6 |journal for economic educators, 21(1), 2021 • does the introduction carefully develop the research problem? • is it clear how the reviewed literature relates to the research problem? • does the theory fit the research problem? • does the theory suggest a testable hypothesis? • is the empirical research design appropriate to test the research hypotheses? without this direct guidance, peer review sessions quickly devolve into copy editing sessions that do not focus on organizational and content issues. we also engage our students as reviewers for our two undergraduate journals. the first is a journal that only publishes papers authored by students from our university. the other is an online journal that accepts submissions of undergraduate economic research from students around the world. a survey of 17 student reviewers indicates some benefits from engaging students in the review process (davis-kahl, et al., 2013). for example, we suggested several possible benefits from the review experience and then asked the student reviewers to indicate the extent that they experienced each benefit. the possible responses ranged from “yes, definitely” to “not at all.” benefits that received at least 75 percent of the responses in the “yes, definitely” and “somewhat” favorable categories were: • exposed me to other models of research and inquiry • helped make me more aware of using data as evidence in my writing • offered a model for my writing • helped me further develop analytical thinking skills • helped me learn about other areas of economics • helped me to learn new applications of economic concepts • improved my understanding of how articles are reviewed and selected in professional journals also, most of the 17 respondents felt that the review process was a “valuable use of their time,” and most felt that reviewing offered “evidence of co-curricular activity on their resume.” incentivize quality research by requiring a formal public presentation students make a formal presentation of their research paper during the last week of class. faculty members also attend. we also encourage students to consider presenting at a campuswide undergraduate research conference that takes place every april. scheduling the capstone course for the fall gives students plenty of time to prepare for spring conferences. conferences like this are a great way to recognize students’ research publicly and give them opportunities to present to broader audiences. in the process, students build confidence and improve their formal presentation skills. conference presentations seem to increase student interest in research. we encourage students to present at professional meetings. there are undergraduate sessions at the missouri valley economic association meetings in the fall and sessions at the midwest economic association and eastern economic association meetings in the spring. the undergraduate journal issues in political economy organizes undergraduate sessions at the eastern economic association meetings. this initiative is an excellent idea because it links two beneficial co-curricular activities: journal publication and student research presentation. 7 |journal for economic educators, 21(1), 2021 we are fortunate to have a dedicated university budget to support student presentations off-campus. several students have taken advantage of this resource to present at various venues, including the carroll round conference on international economics at georgetown university and undergraduate sessions at the missouri valley economic association meetings, the midwest economic association meetings, and the eastern economic association meetings. students who give off-campus presentations seem to benefit from the opportunity to interact with highly motivated peers from other institutions and from the feedback and encouragement that they receive from professional economists at these conferences. these experiences seem to pique their research interest and provide encouragement to pursue graduate study. incentivize quality undergraduate research by providing opportunities to publish research on economics education has a long-standing interest in the importance of active learning (brunnermeier, 2017; walstad, & saunders., 1998). engaging students in original research and presenting that research is one of the best active learning devices. writing requirements are increasing in economics programs, with a survey of 254 economics departments reporting that 70 percent have some sort of formal writing requirement (mcgoldrick, 2008). with the increase in writing at the undergraduate level, it seems that providing undergraduate publishing opportunities would give students an incentive to publish. the importance of sharing undergraduate research is receiving increasing attention in the literature. for example, deloach, perry-sizemore, and borg (2012) refer to a joint statement by the national association of undergraduate research, and the national conferences on undergraduate research suggests a four-step research process. the last of the four steps is to share research findings with others. undergraduate publications can play an important role in incentivizing quality research and complement a department’s writing-intensive capstone experience (carlson et al., 1998). in addition to motivating students to publish, undergraduate journals can show students examples of high-quality student work that might serve as models for their research. at present, there are not very many opportunities for undergraduate economics students to publish their research. however, technological changes have made web-based open access publishing a real possibility for many economics departments (carlson et al., 1998; suber, 2012). any program that emphasizes writing and active learning could benefit from helping students establish a journal. also, today’s students desire to have a positive online image. publishing in a reputable online journal helps them create a favorable image (martinez, alemán, and wartman, 2009). it is reasonably easy to get started. all that is needed are concrete guidelines to authors, explicit criteria for assessing submissions, and a web page with a table of contents and links to accepted articles. there must also be a faculty advisor who can monitor the project and a student editor-in-chief to coordinate article reviews and make final decisions. departments should consider choosing their editor-in-chief from students who have paid student assistantships to assure consistent time commitments. our department, in cooperation with our library, publishes two undergraduate journals. our first undergraduate journal was introduced in 1993 and linked closely to the capstone senior seminar course. the idea was that seniors could complete the seminar during the fall semester and then polish and submit their work for publication in their student-edited journal. the journal has a student editorial staff that considers articles submitted by our economics students. the editorial staff also writes feature stories about economics alumni and news stories about the department. a hard copy version of the journal is published and distributed to illinois wesleyan 8 |journal for economic educators, 21(1), 2021 university students, faculty, and alumni. we also publish this journal online. the in-house undergraduate journal encourages excellence in research, promotes goodwill with alumni, and helps students develop leadership skills. like professional economists, students do better work when there is a good chance that their work is appreciated and acknowledged by a wider audience. our university has developed a second student-edited journal that is online with no print edition. first published in 2005, the undergraduate economic review now solicits high-quality undergraduate research articles from universities worldwide. the editorial staff and most article reviewers are economics majors from our university. open access publishing makes it possible for student research to be widely available, free of charge, wherever readers access the internet. the journal typically gets between 4,500 and 5,500 full-text downloads of published articles per month. students are excited to be involved in the editing and reviewing process for this journal and feel connected in a tangible way with ambitious and gifted students from other universities competing for the opportunity to publish. these interactions help to motivate students to produce their own high-quality research for publication. creating undergraduate journals does require some faculty effort, but the task is not as daunting as might first appear. for example, we have collaborated with our library, which has a contract with digital commons to post and manage creative materials on the university web pages. this partnership makes the journal’s construction relatively easy and lifts traditional burdens on editors through electronic tracking systems and automatically generated correspondence between editors, authors, and reviewers. because of the ease of setting up online publications, we expect to see more undergraduate economics journals. even where this type of collaboration is not possible, economics departments can quickly start a no-frills in-house online journal. all that is needed is a journal home page that gives the table of contents, provides links to editorial policies, and hyperlinks to published student papers. since journal involvement motivates undergraduate researchers to develop their research skills, faculty mentors should consider encouraging senior seminar students to review articles. we require every senior seminar student to review two submitted papers. they enjoy reviewing the work of students from other universities and take seriously the fact that their decisions are meaningful to the authors. many of the student reviewers eventually submit their research papers for publication. conclusions this paper outlines several elements of our capstone course at a small midwestern university in light of literature on best practices for capstone experiences. here is what we learned. first, require students to make an original contribution to the discipline to motivate significant research effort. second, break the research project into many graded parts to guide students through the research process and keep them on track. third, provide a detailed grading rubric so that students understand instructor expectations throughout the course. fourth, require seminar students to review each other’s work to motivate quality research through exchange of research ideas and application of peer pressure. fifth, provide meaningful opportunities for students to share their research with a broader audience, such as oral presentations on-campus or off-campus at professional meetings. sixth, encourage students to publish in undergraduate journals and serve as student reviewers and editors. while this paper focuses on a single example of a capstone course that attempts to integrate best practices, there are many other models. departments that seek to develop new or 9 |journal for economic educators, 21(1), 2021 improve existing capstone courses should design those experiences around their unique resources and student characteristics. our capstone course began 30 years ago as a stand-alone fall semester research course culminating in a paper and presentation at the end of the semester. over time, we learned how to break up the project into components and developed several cocurricular activities around undergraduate publications and conference presentations that reinforce course objectives. departments that want to develop a capstone experience for economics majors could start with a basic fall semester research course. this capstone experience should actively engage students in an original research experience of their own choosing. the course should include multiple graded assignments, peer review of drafts, oral presentations, and detailed grading criteria. as resources permit, departments could develop a student-edited undergraduate journal. this publication should initially be a simple web page with links to student papers chosen for publication. if this no-frills journal is successful, faculty members can collaborate with student editors to create more sophisticated publication frameworks. references brunnermeier, s. 2017. “learning by doing: the challenge of engaging undergraduates in economics research.” the journal of economic education, 48(4), 290–294. butcher, k. f., & weerapana, a. 2017. “striving to involve undergraduates in economic research at wellesley college.” the journal of economic education, 48(4), 295–300. carlson, j. l., chizmar, j. f., seeborg, m. c. & walbert, m. s. 1998. “using undergraduate journals and peer pressure to improve undergraduate writing in economics.” the journal of economics, 24(2), 77-86. conaway, b., clark, c., arias, j. j., & folk, j. 2018. “integrating econometrics: a modern undergraduate economics capstone experience.” the journal of economic education, 49(3), 260–270. davis-kahl, s., leekley, r. m., & seeborg, m. c. 2013. “undergraduate economics journals: learning by doing.” journal of college teaching & learning (tlc), 10(2), 105–112. deloach, s. b., perry-sizemore, e., & borg, m. o. 2012. “creating quality undergraduate research programs in economics: how, when, where (and why).” the american economist, 57(1), 96–110. feyrer, j. 2017. “undergraduate research in the dartmouth economics department.” the journal of economic education, 48(4), 306–309. fisher, r.c. 2019. “illustrative assignments to incorporate research and writing in introductory economics classes.” journal of economics teaching, 4(1), 1-14. hansen, w. l. 2001. “expected proficiencies for undergraduate economics majors.” the journal of economic education, 32(3), 231-242. hansen, w. l. 1986. “what knowledge is most worth knowing for economics majors?” american economic review, 76(2), 377-403. hoyt, g. m., & mcgoldrick, k. 2017. “promoting undergraduate research in economics.” american economic review, 107(5), 655–659. klein, c. c. 2013. “econometrics as a capstone course in economics.” the journal of economic education, 44(3), 268–276. 10 |journal for economic educators, 21(1), 2021 li, i., & simonson, r. d. 2016. “capstone senior research course in economics.” the journal of economic education, 47, 161-167. li, i., & simonson, r. d. 2016a. “the value of a redesigned program and capstone course in economics.” international review of economics education, 22, 48–58. martínez, m., alemán a., & wartman, k. l. 2009. online social networking on campus: understanding what matters in student culture. routledge. mccloskey, d. n. 2000. economical writing. waveland press. mcelroy, j. l. 1997. “the mentor demonstration model: writing with students in the senior economics seminar.” the journal of economic education, 28(1), 31. mcgoldrick, k. 2007. “undergraduate research in economics. handbook for economics lecturers.” retrieved from: http://www.economicsnetwork.ac.uk/handbook/ugresearch/. mcgoldrick, k. 2008. “writing requirements and economic research opportunities in the undergraduate curriculum: results from a survey of departmental practices.” the journal of economic education, 39(3), 287–296. raymond, f., deck a., & mccrickard, m.j. 2013. “creating a relevant and beneficial capstone experience in economics.” journal of business and behavioral sciences. 45(2), 73-82. schmeiser, k. 2017. “teaching writing in economics.” the journal of economic education, 48(4), 254–264. siegfried, j. 2001. “principles for a successful undergraduate economics honors program.” the journal of economic education, 32(2), 169-177. suber, p. 2012. open access overview (website). http://www.earlham.edu/~peters/fos/overview.htm. walstad, w. b., & saunders, p. 1998. teaching undergraduate economics: a handbook for instructors. boston: irwin mcgraw-hill. http://www.economicsnetwork.ac.uk/handbook/ugresearch/ 1 |journal for economic educators, 20(2), 2020 the relationship between grit and academic performance in the classroom doris bennett1, cynthia mccarty2, and shawn carter3 abstract a student’s perseverance and dedication to successfully completing their goals for academic success are studied to determine if grit may be a measurable qualifying factor used to predict a positive student outcome. this analysis examines how student grit in undergraduate economics courses, along with other control variables, contributes to student success, as measured by their average grade earned in the course. our results indicate that grit has a statistically significant positive impact on student performance in the classroom. key words: grit, financial stress, and academic performance jel classification: a22 introduction in numerous research papers since 2007 and in her best-selling book, grit: the power of passion and perseverance (2016), angela duckworth explains how grit, defined as the “perseverance and passion needed to accomplish long-term goals in the face of challenges and obstacles,” may be as essential as intelligence in achieving success in most endeavors. duckworth hypothesizes that skills and traits other than intelligence are important factors for successfully achieving goals under difficult circumstances. she claims that grit is an important trait possessed by successful people in many fields including business, art, athletics, education, medicine, and law. in addition to duckworth, many studies in education, including chang (2014), cross (2013), and mason (2018, and strayhorn (2014) have shown a positive correlation between grit and longterm academic success, measured as the students’ grade point averages (gpa) over their high school or college careers. although grit is usually linked to the achievement of long-term goals, this accomplishment is the result of a series of short-term successes. our research seeks to establish the relationship between grit and short-term success by examining end of semester course grades rather than long term gpa. we also analyze whether grit varies according to students’ gender and ethnicity. literature review duckworth et al. (2007) hypothesizes that the traits of perseverance and passion, grit, played a very important role in explaining the achievements of very successful people. they 1 professor of economics, department of finance, economics and accounting, jacksonville state university, 700 pelham rd n, jacksonville, al 36265 2 professor of economics, department of finance, economics and accounting, jacksonville state university, 700 pelham rd n, jacksonville, al 36265 3 professor of economics, department of finance, economics and accounting, jacksonville state university, 700 pelham rd n, jacksonville, al 36265 2 |journal for economic educators, 20(2), 2020 developed a seventeen-item questionnaire to measure grit, consistency of interest, and perseverance of effort, which they validated across six studies. the samples in the first two studies were composed of people aged twenty-five and older who volunteered to answer the grit survey online. in both studies, there was a positive association between grit and the level of education of the participant. the third study found that among 139 undergraduate students, those with a higher grit score had significantly higher gpas. in the fourth and fifth studies, which were conducted in 2004 and 2006 on more than one thousand freshman cadets entering the united states military academy at west point, duckworth et al. (2007) found that grit was the best predictor of whether a cadet would complete the rigorous summer training program. finalists in the scripps national spelling bee were the subject of the sixth study which found that the children with higher grit scores outperformed those with lower scores. many studies have confirmed the importance of grit as an important factor leading to success in the pursuit of long-term goals. maddi et al. (2012) found that grit accurately predicted retention among freshman cadets at the united states military academy in 2008. strayhorn (2014) found that grit was positively related to college grades for african american men attending predominantly white colleges. using a sample of over 2000 freshmen at a large private institution, chang (2014) found that gender, sat scores, ethnicity and the perseverance subscale score of grit were significant in predicting the students’ gpas. cross (2013) found significant relationships between grit and gpa, number of hours studied, and age among doctoral students. examining a sample of 121 south african university students, mason (2018) found that students with high grit scores obtained higher semester grades than those with lower grit scores. in an interview with lee duckworth, perkins-gough (2013) points out that college admissions decisions include considerations for character traits like grit that are important in determining student success. she recommends that schools be involved in character building of personality traits such as grit, self-control, gratitude, honesty, and skills to deal with setbacks. agarwal (2019) also recommends helping college students to develop grit, so that they can “think outside the box,” and develop confidence that promotes success. some recent research has contradicted duckworth’s findings. bazelais et al. (2016) found that grit was not a significant predictor of grades for first-year community college students in a physics course, but high school gpa was found to have a significant positive effect in their study. in a sample of 66,807 individuals, crede et al. (2017) found that grit was only moderately correlated with academic performance and retention, and that the personality trait of conscientiousness was a better predictor of academic success. they conclude that improving grit is not as important as teaching study skills and ensuring class attendance. they cautioned that grit may make individuals persist in unproductive pursuits and fail to ask for help when it is needed. studying a sample of 4,642 sixteen year-olds in the united kingdom, rimfeld et al. (2016) came to the same conclusion, that grit adds very little to the personality trait, conscientiousness, as a predictor of academic performance. kohn (2014) makes the point that not everything is worth doing; that is, the person may be working hard, but not in the pursuit of something worthwhile. kohn questions persistence and says that it may be counter-productive in some cases. he quotes the law of holes, which states, “when you’re in a hole, stop digging.” he suggests that the single-minded pursuit that grit proposes is often counterproductive. kohn suggests that grit masks the assertion that education needs to be more democratic and collaborative in favor of teaching skills that many students need in order to maintain the status quo. 3 |journal for economic educators, 20(2), 2020 rose (2012) and denby (2016) are both critical of grit because they feel that gritty people may lack flexibility and have difficulty learning from mistakes. they also point out that, in order to have grit, a person needs financial resources to give them the opportunity to pursue goals. they worry that prioritizing grit development will divert resources from policies that better the financial and social welfare of students from low-income homes. methodology and empirical results data for this study come from a survey administered at jacksonville state university, a regional public university in northeast alabama. the survey included 304 undergraduate students in the school of business and industry who were enrolled in undergraduate economics courses during the fall semester of 2015. at the beginning of the semester, the students answered the seventeen-item grit scale in addition to completing a survey that collected the expected hours worked per week for those who were employed, the expected study hours per week for their enrolled economics course, and the level of financial stress (see appendix a for an explanation of the grit scale, and appendix b for the questions used to measure financial stress). the students’ gender, ethnicity, act score, and gpa in jsu courses were obtained from jsu student records. the three instructors provided the students’ final averages in their courses, which were used as a measure of academic performance. table 1 summarizes the characteristics of the students included in the sample. approximately 56% of the students were male, and 44% were female. almost 18% were african american, while 82% were caucasian. the composite average grade across all courses was 75.6%. the average grades for instructors a and b, 79.4 and 75.4, respectively, were not significantly different. however, the average grade for instructor c, 71.6, was significantly different (p<0.000) from those for both instructors a and b. the average grade for microeconomics courses, 72.1, was significantly lower (p<0.000) than the average grade for macroeconomics courses, 79.4. the average act score was 22.6, and the average gpa in jsu courses was 3.14 on a 4.0 scale. the average score on the grit scale (grit) was 3.65 on a scale from 1 to 5, with 5 indicating the highest level of grit. perseverance of effort (pe) and consistency of interests (ci) are two components of grit. pe was measured using a scale of 1 to 5, with 5 indicating the strongest level of agreement, to statements such as “i finish whatever i begin.” ci was reverse scored on a scale of 1 to 5 based on responses to six items, such as “i become interested in new pursuits every few months.” the average ci was 3.14, while the average pe was 4.15. the average financial stress level, measured on a scale of 1 (no stress) to 4 (considerable stress) in response to questions such as, “in the last year, how often have you worried about not having enough money to pay for regular expenses?,” was 2.14 (see appendix b for more details on the financial stress survey). students planned to study for their economics course an average of 4.28 hours per week. students in upper level courses planned to study 4.46 hours per week, while students in the principles courses planned to study 4.21 hours per week, but these were not significantly different. forty-two percent were not employed, sixteen percent worked less than 20 hours per week, and forty-two percent worked 20 hours or more per week. the fifty-eight percent of students who were employed averaged 24.2 hours of work per week. 4 |journal for economic educators, 20(2), 2020 table 1: student characteristics values in parentheses are standard deviations. table 2 summarizes student characteristics by gender. the men had slightly higher final grades, act, grit, ci, and pe scores, but were not significantly different compared to women in the sample. women had slightly higher gpas, planned study hours, and longer weekly work hours, but were not significantly different compared to men in the sample. a significantly higher proportion of women were employed, 66% compared to 51.5% of men. women reported a significantly higher level of financial stress than men. gender female 43.75% male 56.25% ethnicity african american 17.8% caucasian 82.2% averages grade 75.6 (3.56) instructor a n=21 75.4 (10.50) instructor b n=145 79.4 (11.57) instructor c n=138 71.6 (13.78) micro n=159 72.1 (13.43) macro n=145 79.4 (10.67) act 22.6 (3.93) gpa 3.14 (0.58) grit 3.65 (0.53) ci 3.14 (0.68) pe 4.15 (0.53) financial stress level 2.14 (0.81) planned weekly study hours 4.28 (3.61) principles n=201 4.21 (3.15) upper level n=102 4.46 (4.41) student employment not employed 42.1% work < 20 hours per week 15.5% work >20 hours per week 42.4% average weekly work hours 24.2 (9.57) n=176 5 |journal for economic educators, 20(2), 2020 table 2: student characteristics by gender men n=171 women n=133 significance (p-value) grade 76 (12.51) 75.1 (12.98) 0.54 act 22.65 (3.93) 22.45 (3.94) 0.66 gpa 3.11 (.592) 3.17 (.566) 0.45 grit 3.67 (.570) 3.62 (.481) 0.44 ci 3.16 (0.70) 3.11 (0.67) 0.49 pe 4.16 (0.56) 4.14 (0.50) 0.72 financial stress level 2.04 (.797) 2.27 (.802) 0.012 planned weekly study hours 4 (3.54) 4.68 (3.68) 0.104 employed 51.5% 66.9% 0.006 weekly work hours 23.77 (8.83) 24.67 (10.28) 0.529 values in parentheses are standard deviations. as can be seen in table 3, there are large and significant differences in student characteristics between african american and caucasian students. the average grade for african american students was 66.8, 10.6 points lower (p=0.000) than the average of 77.4 for caucasian students. african americans also had significantly lower gpas and act scores. their grit and pe scores, however, were significantly higher than those of caucasians, which may indicate that the african american students worked harder to compensate for their lower gpas and act scores. the african americans’ ci scores were higher than the caucasians’ scores, but the differences were not statistically significant (p=0.12). african american students also worked significantly more hours per week (p=0.029), had significantly higher financial stress levels (p=0.001), and planned to study significantly longer (p=0.0014) than the caucasian students. table 3: student characteristics by ethnicity caucasian n=250 african american n=54 significance (p-value) grade 77.4 (12.25) 66.8 (12.03) 0.000 act 23.3 (3.77) 19.4 (2.99) 0.000 gpa 3.25 (.534) 2.61 (.491) 0.000 grit 3.62 (.539) 3.78 (.51) 0.05 ci 3.11 (0.68) 3.27 (0.68) 0.12 pe 4.12 (0.52) 4.27 (0.59) 0.083 financial stress level 2.06 (.794) 2.48 (.782) 0.001 planned study hours 3.92 (3.31) 6.04 (4.42) 0.0014 employed 57.6% 61.1% 0.632 weekly work hours 23.4 (9.31) 27.7 (10.03) 0.029 values in parentheses are standard deviations. we utilized regression analysis to determine the impact of grit and various other factors on the grade earned in the economics courses surveyed. we included grit, gender, ethnicity, 6 |journal for economic educators, 20(2), 2020 gpa, act, level of financial stress, hours worked, planned study hours, course level, and instructor as the explanatory and control variables. the overall course grade was used as the dependent variable. gender, ethnicity, and course level, were dummy variables 0= male and 1 = female, 0 = caucasian and 1=african american, 0=upper level course and 1 = principles level. dummy variables, ins b and ins c, for the instructors are as follows: if instructor a, ins b=0 and ins c=0 if instructor b, ins b=1 and ins c=0 if instructor c, ins b=0 and ins c=1 table 4: regression results for all variables on grades entire sample (n=304) caucasian (n=250) african american (n=54) gender -1.386 (0.111) -1.697 (0.069) -0.41 (0.876) ethnicity -0.56 (0.655) grit 1.921 (0.015) 1.20 (0.155) 5.48 (.018) gpa 15.432 (0.000) 15.59 (0.000) 11.36 (0.001) act 0.355 (0.015) 0.337 (0.017) 0.478 (0.332) work hours -0.025 (0.426) 0.017 (0.629) -0.224 (0.020) financial stress -0.026 (0.963) -0.189 (0.754) -0.20 (0.905) study hours -0,063 (0.731) -0.028 (0.893) -0.060 (0.897) course level -0.903 (0.312) -1.164 (0.212) -1.99 (0.496) ins b 2.46 (0.154) 4.01 (0.049) -2.14 (0.598) ins c -6.28 (0.000) -4.88 (0.017) -11.26 (0.013) adjusted r2 0.680 0.673 0.519 values in parentheses are p-values. as shown in table 4, when the entire sample of 304 students was analyzed, the level of financial stress, hours worked, gender, planned study hours, course level, instructor b, and ethnicity were not significant predictors of the course grade. interestingly, grit was a significant predictor of overall performance when analyzing the full sample (p=0.015) or only african american students (p=0.018), but grit became statistically insignificant when only analyzing the caucasian students. in contrast, gender was significant only when analyzing the caucasian students. act was significant for the entire sample and for caucasian students, but it was not significant for african american students. hours worked had a significant negative impact only for the african american students. gpa consistently had significant positive impacts on course grades, while instructor c consistently had significant negative impacts on grades. instructor b had a significant positive effect on the grades of the caucasian students. financial stress, planned study hours, and course level were never significant. stepwise regressions, displayed in tables 5a, 5b, and 5c, were performed to determine the variables that explained the most variation in the average grades. grit was positive and significant for the entire sample and for african american students, but not for the sample of caucasian students. for the entire sample and the samples of caucasian students and african american students, gpa had highly significant positive effects, while instructor c had a highly significant negative effect. instructor b had a significant impact for the caucasian students only. 7 |journal for economic educators, 20(2), 2020 act had a significant positive impact for the entire sample and for the caucasian students, but it was not significant for the african american students. being female had a significant negative effect for the entire sample and for the caucasian students, but it was not significant for the african american students. hours worked had a significant negative impact for the african american students only. table 5a: stepwise regressions for entire sample (n=304) variable step 1 step 2 step 3 step 4 step 5 grit 0.61 (0.646) 1.023 (0.239) 1.262 (0.095) 1.652 (0.031) 1.597 (0.036) gpa 16.511 (0.000) 17.033 (0.000) 15.657 (0.000) 15.794 (0.000) ins c -8.396 (0.000) -8.277 (0.000) -8.303 (0.000) act 0.349 (0.009) 0.331 (0.013) gender -1.673 (0.046) adjusted r2 0.07 0.565 0.672 0.679 0.682 values in parentheses are p-values. table 5b: stepwise regressions for caucasian students (n=250) variable step 1 step 2 step 3 step 4 step 5 step 6 grit 1.33 (0.349) 0.478 (0.622) 0.851 (0.303) 1.126 (0.174) 1.351 (0.105) 1.231 (0.138) gpa 16.533 (0.000) 16.912 (0.000) 15.732 (0.000) 15.431 (0.000) 15.559 (0.000) ins c -8.637 (0.000) -8.501 (0.000) -5.08 (0.011) -5.05 (0.011) act 0.322 (0.020) 0.343 (0.013) 0.333 (0.016) ins b 3.82 (0.056) 3.86 (0.053) gender -1.701 (0.056) adjusted r2 0.036 0.539 0.663 0.669 0.673 0.676 values in parentheses are p-values. 8 |journal for economic educators, 20(2), 2020 table 5c: stepwise regressions for african american students (n=54) variable step 1 step 2 step 3 step 4 grit 2.96 (0.294) 3.10 (0.149) 3.28 (0.087) 4.27 (0.028) gpa 16.35 (0.000) 15.30 (0.000) 12.95 (0.000) ins c -8.08 (0.002) -9.85 (0.000) work hours -0.1980 (0.017) adjusted r2 0.023 0.478 0.515 0.560 values in parentheses are p-values. summary and conclusions our regression results indicate that grit has a statistically significant positive impact on performance as measured by the average grade earned by a student in principles and intermediate economics courses for the entire sample of 304 students and for the sub-sample of 54 african american students. grit was not significant when the sub-sample of 250 caucasian students was analyzed separately, which suggests that the african american students were driving the significant grit results for the entire sample, as only african american students had a significant negative impact on hours worked. the fact that the african american students had higher grit scores but lower course grades coupled with a higher proportion of the sample that worked, higher levels of financial stress, and longer work hours may imply that the african american students’ passion and focus had to be spent on earning money for both college costs and everyday living expenses. although they planned to study significantly longer than the caucasian students, the hours required for work could have disrupted their study plans. interestingly, being female had a significant negative impact in the regressions for the entire sample and for the sample of caucasian students when it was analyzed separately. however, gender was not significant for the sample of african american students. this suggests that the results for the gender variable for the caucasian students were driving the results for the entire sample. although in the descriptive statistics for the sample shown in table 2, male students had slightly higher grades and grit scores than female students, the differences were not significant. we did find that a significantly higher proportion of women were employed, that women planned to study significantly longer than men and women reported significantly higher levels of financial stress. these factors may explain the significant negative effect of gender among the caucasian students in the regressions. the impact of instructor c was significant in the regressions for the entire sample as well as the individual samples for caucasian and african american students. instructor c’s classes were all microeconomics, both principles and intermediate, while instructor b had all principles and intermediate macroeconomics. instructor a had relatively few students in the sample, 14 students in principles of microeconomics and 7 in managerial. the lower grades for instructor c may be due to the quantitative nature of microeconomics which makes it more difficult for many students. (the results of regressions with dummy variables for micro vs macro as explanatory variables were very similar to the results using dummy variables for the instructors and are found in appendix c.) however, the results for instructor c are difficult to explain and warrant further investigation. topics for future research can explore the influence of grit in micro versus macro 9 |journal for economic educators, 20(2), 2020 courses that would look deeper into the impact of the increased quantitative rigor of microeconomics, student preparedness as measured by the act math sub-score, the course times (morning, afternoon), the number of students who drop the course (which grit could impact), and the course format (on-line, hybrid or traditional), among other factors. references agarwal, pragya, 2019. “how can we nurture grit in our children, and why should we?” https://medium.com/publishous/sho-can-we-nuture-grit-in-our-children-and-why-shouldwe-b07b8499f4b. bazelais, paul, lemay, david john, and doleck, tenzin. 2016. “how does grit impact college students’ academic achievement in science?” european journal of science and mathematics education, vol.4 no. 1, 2016. 33-43. chang, winnie. 2014. “grit and academic performance: is being grittier better?” open access dissertations, paper 1306. crede, marcus, tynan, marcus, and harms, michael. 2017, “much ado about grit: a metaanalytic synthesis of the grit literature.” journal of personality and social psychology, vol 113(3), september 2017, 492-511. cross, theodore martin. 2013. “staying the course: grit, academic success, and non-traditional doctoral students.” ph.d. thesis, pepperdine university. denby, david. “the limits of grit.” the new yorker, june 21, 2016. duckworth, a.l. grit: the power of passion and perseverance. scribner, 2016. duckworth, angela, peterson, christopher, matthews, michael, and dennis kelly. “grit: perseverance and passion for long-term goals.” journal of personality and social psychology, 92.6. 2007. 1087-1101. kohn, alfie. the myth of the spoiled child. da capo books, 2014. maddi, salvatore, matthews, michael, kelly, dennis, villarreal, brandilynn, and white, marina. 2012. “the role of hardiness and grit in predicting performance and retention of usma cadets.” military psychology, vol. 24. pp 19-28. mason, henry d. 2018. “grit and academic performance among first-year university students: a brief report.” journal of psychology in africa. vol.28. issue 1, 66-68. perkins-gough, deborah. 2013. “the significance of grit: a conversation with angela lee duckworth.” resilience and learning, vol. 71 no. 1 14-20. rimfeld, kaili, kovas, yulia, dale, phillip s, and plomin, robert. 2016. “true grit and genetics: predicting academic achievement from personality.” journal of personality and social phychology, vol.111 no.5 780-789. rose, mike. back to school: why everyone deserves a second chance at education. the new press, 2012. straus, valerie. “why teaching kids to have grit isn’t always a good thing,” the washington post, may 14, 2015. strayhorn, terrell. 2014. “what role does grit play in the academic success of black male collegians at predominantly white institutions?” journal of african american studies, vol. 18, 1-10. https://medium.com/publishous/sho-can-we-nuture-grit-in-our-children-and-why-should-we-b07b8499f4b https://medium.com/publishous/sho-can-we-nuture-grit-in-our-children-and-why-should-we-b07b8499f4b 10 |journal for economic educators, 20(2), 2020 appendix a grit scale please respond to the following statements by marking the one that best describes you. be honest – there are no right or wrong answers! 1. i aim to be the best in the world at what i do. _____ very much like me _____ mostly like me _____ somewhat like me _____ not much like me _____ not like me at all 2. i have overcome setbacks to conquer an important challenge. _____ very much like me _____ mostly like me _____ somewhat like me _____ not much like me _____ not like me at all 3. new ideas and projects sometimes distract me from previous ones. _____ very much like me _____ mostly like me _____ somewhat like me _____ not much like me _____ not like me at all 4. i am ambitious. _____ very much like me _____ mostly like me _____ somewhat like me _____ not much like me _____ not like me at all 5. my interests change from year to year. _____ very much like me _____ mostly like me _____ somewhat like me _____ not much like me _____ not like me at all 6. setbacks don’t discourage me. _____ very much like me _____ mostly like me _____ somewhat like me 11 |journal for economic educators, 20(2), 2020 _____ not much like me _____ not like me at all 7. i have been obsessed with a certain idea or project for a short time but later lost interest. _____ very much like me _____ mostly like me _____ somewhat like me _____ not much like me _____ not like me at all 8. i am a hard worker. _____ very much like me _____ mostly like me _____ somewhat like me _____ not much like me ____ _ not like me at all 9. i often set a goal but later choose to pursue a different one. _____ very much like me _____ mostly like me _____ somewhat like me _____ not much like me _____ not like me at all 10. i have difficulty maintaining my focus on projects that take more than a few months to complete. _____ very much like me _____ mostly like me _____ somewhat like me _____ not much like me _____ not like me at all 11. i finish whatever i begin. _____ very much like me _____ mostly like me _____ somewhat like me _____ not much like me _____ not like me at all 12. achieving something of lasting importance is the highest goal in life. _____ very much like me _____ mostly like me _____ somewhat like me _____ not much like me _____ not like me at all 12 |journal for economic educators, 20(2), 2020 13. i think achievement is overrated. _____ very much like me _____ mostly like me _____ somewhat like me _____ not much like me _____ not like me at all 14. i have achieved a goal that took years of work. _____ very much like me _____ mostly like me _____ somewhat like me _____ not much like me _____ not like me at all 15. i am driven to succeed. _____ very much like me _____ mostly like me _____ somewhat like me _____ not much like me _____ not like me at all 16. i become interested in new pursuits every few months. _____ very much like me _____ mostly like me _____ somewhat like me _____ not much like me _____ not like me at all 17. i am diligent. _____ very much like me _____ mostly like me _____ somewhat like me _____ not much like me _____ not like me at all directions for scoring the grit scale for questions 1, 2, 4, 6, 8, 11, 12, 14, 15, and 17, assign the following points: 5 = very much like me 4 = mostly like me 3 = somewhat like me 2 = not much at all like me 1 = not like me at all for questions 3, 5, 7, 9, 10, 13, and 16, assign the following points: 13 |journal for economic educators, 20(2), 2020 1 = very much like me 2 = mostly like me 3 = somewhat like me 4 = not much at all like me 5 = not like me at all grit is calculated as the average score for items 1, 4, 12, 13, and 15 consistency of interest is calculated as the average score for items 3, 5, 7, 9, 10, and 16. perseverance of effort is calculated as the average score for items 2, 6, 8, 11, 14, and 17. grit scale citation duckworth, a.l. and quinn, p.d. 2009. “development and validation of the short grit scale.” journal of personality assessment, 91. 166-174. duckworth, angela, peterson, christopher, matthews, michael, and dennis kelly. “grit: perseverance and passion for long-term goals.” journal of personality and social psychology 92.6. 2007. 1087-1101. appendix b financial stress questions 1. in the last year, how often have you worried about having enough money to pay for regular expenses? _______ very often _______ often _______ sometimes _______ never 2. in the last year how often have you worried about paying for college? _______ very often _______ often _______ sometimes _______ never 3. in the last year how often have you chosen not to participate in an educational activity (clubs, field trips) due to lack of money? _______ very often _______ often _______ sometimes _______ never 4. in the last year how often have you chosen not to purchase required academic materials due to their cost? _______ very often _______ often _______ sometimes _______ never 5. financial concerns have interfered with my academic performance. _______ strongly agree _______ agree _______ disagree _______ strongly disagree 4 = very often and strongly agree 3 = often and agree 2 = sometimes and disagree 1 = never and strongly disagree the financial stress level is calculated as the average response on the five questions. 14 |journal for economic educators, 20(2), 2020 appendix c although grades for instructor c were significantly lower than those for instructors a and b, instructor c taught only microeconomics, so it is possible that the differences in instructor grades might be explained by the subject matter, rather than the instructor. also, instructor a had relatively very few students, 21 out of the sample of 304. when dummy variables for both the instructor and the subject were included in the model, minitab automatically removed one of them, since they were the same variable except for 21 observations, instructor a’s students. the estimations in tables c1-c4 use the same explanatory variables as those in table 4 and tables 5a5c, except the dummy variables for instructor are replaced by dummy variables for micro vs. macro, where micro=1 and macro=0. in all cases, micro had a significant negative impact on the average grade, and the significance of the other explanatory variables was almost identical to the results using dummy variables for the instructors. table c1: regression results for all variables on grades with dummy variable for micro entire sample n=304 caucasian n=250 african american n=54 gender -1.377 (0.121) -1.859 (0.048) 0.25 (0.928) ethnicity -0.14 (0.911) grit 2.035 (0.011) 1.365 (0.112) 5.23 (0.032) gpa 15.167 (0.000) 15.25 (0.000) 12.67 (0.001) act 0.398 (0.004) 0.379 (0.007) 0.741 (0.151) work hours -0.0063 (0.843) 0.0308 (0.373) -0.1561 (0.107) financial stress -0.026 (0.963) -0.117 (0.847) -0.55 (0.753) study hours 0.011 (0.953) 0.038 (0.855) 0.059 (0.903) course level -0.879 (0.335) -1.216 (0.196) -1.15 (0.708) micro -7.863 (0.000) -8.376 (0.000) -6.06 (0.029) adjusted r2 0.668 0.667 0.460 table c2: stepwise regressions for entire sample (n=304) with dummy variable for micro variable step 1 step 2 step 3 step 4 step 5 grit 0.61 (0.646) 1.023 (0.239) 1.566 (0.042) 2.026 (0.009) 1.978 (0.011) gpa 16.511 (0.000) 16.671 (0.000) 15.063 (0.000) 15.178 (0.000) micro -7.899 (0.000) -7.878 (0.000) -7.857 (0.000) act 0.410 (0.002) 0.395 (0.003) gender -1.425 (0.093) adjusted r2 0.007 0.565 0.661 0.670 0.672 15 |journal for economic educators, 20(2), 2020 table c3: stepwise regressions for caucasian students (n=250) with dummy variable for micro variable step 1 step 2 step 3 step 4 step 5 grit 1.33 (0.349) 0.478 (0.622) 1.261 (0.133) 1.586 (0.058) 1.463 (0.080) gpa 16.533 (0.000) 16.371 (0.000) 14.990 (0.000) 15.123 (0.000) micro -8.445 (0.000) -8.388 (0.000) -8.392 (0.000) act 0.378 (0.006) 0.366 (0.008) gender -1.724 (0.055) adjusted r2 0.004 0.539 0.656 0.665 0.669 table c4: stepwise regressions for african american students (n=54) with dummy variable for micro variable step 1 step 2 step 3 grit 2.96 (0.294) 3.10 (0.149) 3.27 (0.115) gpa 16.35 (0.000) 16.50 (0.000) micro -5.55 (0.028) adjusted r2 0.023 0.423 0.470 20 |journal for economic educators, 23(1), 2023 towards a renewed perspective on teaching trade junaid b. jahangir1 abstract the objective in this paper is to provide a renewed perspective on teaching trade. the idea is to create a teaching module like the one offered by the core textbook that blends microeconomics and macroeconomics concepts to address globalization. neoclassical textbooks are contrasted with heterodox ones to provide a comparative outlook on key themes on trade. subject material from various textbooks is complemented with youtube videos, game theory applications, and a nuanced graphical analysis on topical issues. apart from tariffs and current account deficits, the issues of fair trade, environmental sustainability, and economic sanctions are considered to appeal to students. keywords: core text; trade; teaching economics jel classification: a22, f10 introduction in the aftermath of the financial crisis of 2008, some student groups criticized the way economics is taught exclusively through the neoclassical paradigm, and more through stylized mathematical models than real world issues. hodgson (2019) notes how students “formed organizations, mounted demonstrations, pushed for alternative curricula and published books.” likewise, bowles and carlin (2020) have promoted the core textbook, arguing for the need to address contemporary economics issues including climate change, economic inequality, and the future of work with globalization and automation, in introductory economics classes. thus, student groups (earle, moran, and ward-perkins, 2017) have been bolstered by some faculty (skidelsky, 2020; bowles and carlin, 2020; komlos, 2019; reardon et al., 2018) in the push for pluralist perspectives in economics education. given the shift in universities towards interdisciplinary approaches and critical thinking, especially in those institutions that focus on liberal arts education, instructors face the push towards providing pluralist perspectives. this is especially true in institutions like mine where the department of economics is combined with both anthropology and political science. particularly, when students are exposed to various ideas on globalization, inequality, and climate change in other social sciences, some of them are put off by the stylized topics, technical treatment, and the lecture method of instruction in principles and intermediate level classes in economics. the criticism of this chalk and talk method of instruction in economics was led by becker and watts (1996). they reiterated that “economists are less likely to use non-lecture teaching methods than instructors in other fields” (becker and watts, 2001). however, becker (2000) emphasized that students expect to be “actively engaged in the learning process” rather than “sit passively through lectures.” similarly, in the context of nurturing critical thinking, o’donnell (2010) highlights factors including “awareness of different viewpoints,” “thinking outside the conventional 1 associate professor of economics, department of anthropology, economics, and political science, macewan university, 7-368, 10700 104 ave, edmonton, ab, t5j 4s2, canada 21 |journal for economic educators, 23(1), 2023 framework,” and “openness to non-conformity” (p. 264). thus, pluralist perspectives are justified through the argument of building critical thinking skills. overall, given the push towards pluralist perspectives, building critical thinking skills, and addressing real world issues, the main objective in this paper is to offer a renewed perspective on teaching trade to economics students. this is done by considering environmental sustainability, economic inequality associated with globalization, and geopolitics pertaining to russia and china. a subsidiary objective is to transcend the chalk and talk method of instruction by complementing the content of this paper with a couple of youtube clips and material from various textbooks to further student interest and engagement. in this regard, the paper brings microeconomics and macroeconomics concepts together to address the topic of trade. the approach adopted is simpler than that of the modules in the core textbook, as it avoids the use of intermediate level concepts like indifference curves and marginal rate of transformation. instead, it provides a comparative view of standard economic theory and highlights topical issues including tariffs, fair trade, the environment, economic sanctions, and current account deficits. yet, another objective is to assemble these topics in one place as a resource for instructors of principles or intermediate level special-topics courses, who would like to focus on topical issues in an accessible manner. the paper is divided into ten sections. the motivation for facilitating a renewed perspective on teaching trade is provided in section 2. in section 3, a review of the standard neoclassical theory on free trade in three mainstream economics textbooks is undertaken, which is followed by a critical look at free trade and the ricardian model from three alternative textbooks in section 4. this facilitates introducing students to diverse perspectives in economics, which would strengthen their ability to hold conversations with peers outside economics and to build critical thinking skills by contrasting mainstream and alternate perspectives in economics. additionally, starting from the end of section 4, lesson plans are delineated at the end of each section with various activities such as discussing pluralist perspectives, doing in class calculations, using technology to find social media articles, and discussing ideas based on youtube videos. in the spirit of pluralism, a nuanced perspective on tariffs is developed in section 5. this is followed by considering topics that are not usually covered in principles level courses. thus, the topic of fair trade is briefly addressed in section 6, which is followed by the application of game theory to environmental concerns in section 7, and to economic sanctions in section 8. the use of a game theoretic approach is undertaken to elicit student interest. finally, the issue of persistent current account deficits is addressed in section 9, which remains a topical issue especially for the u.s. with respect to china. concluding remarks are presented in section 10. motivation krugman (1993) pushed for “a solid grounding in the principles of international trade,” as most econ 101 students do not take higher-level economics courses, much less graduate in economics. arguing against the need for a new paradigm, he emphasized that the basics of trade do not change. he mentioned that teaching about “high value sectors” is silly, trade policy including tariffs should not be debated based on jobs, government support for an industry draws resources away from other sectors, and that we should continue to teach the fundamentals of comparative advantage as propounded by ricardo. krugman (2020) reiterated the message that both economists and business leaders had a consensus that trump’s tariffs on steel and aluminum were a bad idea, and that the world did not see a shift towards protectionism after the 2008 financial crisis even as he mentioned the backlash against globalization from labor groups and business 22 |journal for economic educators, 23(1), 2023 interests (p. 246, 252). thus, krugman remains a proponent of teaching ricardian principles and the basics of free trade. like krugman, critics of free trade, who are more open to heterodox perspectives in economics, strongly reject protectionist policies that are led by “right-wing, isolationist political movements” (earle, perez-rocha, and sinclair, 2019, p. 9, 81). however, concerned about the impact of corporation-led globalization on lowering worker wages and environmental standards, they argue for trade that rests on human rights rather than corporate rights (p. 80). similarly, while gassler (2020) constructs the “neoclassical argument against free trade,” he emphasizes that “we are better off with globalization than without” with the caveat that it should conform to the un sustainable development goals. thus, heterodox economists tout the benefits of trade even as they express concerns about labor rights and environmental sustainability. this suggests that a renewed perspective on trade can be facilitated by incorporating concerns related to the environment and other issues while teaching the basics of trade as propounded by krugman. such an approach facilitates teaching pluralist perspectives on trade including both the neoclassical and alternate paradigms. as noted earlier, this approach of comparing diverse ideas helps build critical thinking skills and enables students to have more informed conversations with peers outside economics. in addition, there is the criticism of the chalk and talk method led by becker and watts (1996). however, hoyt and mcgoldrick (2019) have documented the use of instructional methods beyond the chalk and talk method over a span of 50 years. these modes of instruction include semester long games and simulations, field work through involvement in community, undergraduate research, writing and presentations like one-minute papers, technology like clickers and aplia platforms, the use of social media, and the use of literature, paintings, drawings, popular movies, animations, and music, as a way of engaging students in a more creative way. in the specific context of trade, geerling et al. (2021) have used short video clips from eleven different countries to introduce students to topics in the principles of economics including free trade. strow and strow (2004) use a game to teach students that while some individuals may be hurt, the country overall is made better off by trade. this has allowed them to address student criticism that free trade leads to the exploitation of poor countries. on the other hand, weber (2007) addresses student concerns by showcasing how free trade allows the option of increased leisure, lower pollution, and the use of fewer natural resources instead of increased consumption. however, he expounds technically through indifference curves and without offering much rationale behind the process. this is problematic because economics students end up with only a technical exposition that does not allow them to discuss real world issues with their peers in other social sciences. overall, the critique of the lecture method, the limits of abstract models in enabling interdisciplinary conversations, and the significance of pluralist perspectives in building critical thinking skills all motivate a renewed approach to teaching trade to economics students at both principles and higher levels. this approach is undertaken by considering diverse perspectives in economic theory on trade and tariffs and by considering topical issues of fair trade, the environment, geopolitics pertaining to russia and china, and current account deficits in the context of u.s. and china. additionally, some of these topics are complemented with video clips, for such an approach reinforces concepts and ideas and catches student interest in a way that traditional pedagogies cannot. the idea is not to overwhelm the instructor but to assemble the topical issues and resources in one place. this means that those teaching principles classes can borrow and focus on some topics given time constraints, while those teaching intermediate level special-topics classes can use multiple topics to teach an entire module on trade that rests on both 23 |journal for economic educators, 23(1), 2023 microeconomics and macroeconomics concepts. finally, a lesson plan is provided for each topic by highlighting activities, questions for discussions, key concepts, and learning outcomes. thus, by adopting pluralist perspectives, using video clips and games, and considering topical issues, a renewed perspective in teaching trade is effectively presented. a review of mainstream economics textbooks mankiw, kneebone, and mckenzie the mankiw, kneebone, and mckenzie (2020a, b) textbooks are popular because of their simple approach. these textbooks are used by the author to teach principles of economics courses. however, the topic of free trade does not appear in one chapter and a comprehensive treatment requires collecting material from various chapters across both the microeconomics and macroeconomics textbooks. chapter 1 in mankiw, kneebone, and mckenzie (2020a) indicates that “free trade can make everyone better off”. by using the word “can,” it offers a nuanced principle, which is appreciated even by goodwin (2014), who is extremely critical of mankiw’s principles of economics. in chapter 3, the case for free trade is made by showing how a point beyond the production possibility frontier (ppf) becomes feasible through trade. this case is made through calculations and graphs, which does not allow students to fluently engage in discourse on real world issues. the arguments in support of free trade arrive in chapter 9. chapter 9 indicates that there are losers from trade, who are often not compensated. it mentions that free trade creates jobs just as it destroys them and supports government policies to facilitate worker transition to new jobs. additionally, it highlights the dead weight loss from a tariff and counters the arguments for restricting trade. in the context of trump’s tariffs on steel and aluminum, and in the case of the infant industry argument, it mentions that protection is often given to powerful industries that exaggerate their role in national defense. it states that once instituted, protection is difficult to remove, and that protection is not necessary for the growth of infant industries. similarly, it states that taxpayers bear the cost of protection. however, chapter 17 on oligopoly assigns a prisoner’s dilemma game where the dominant strategy for both countries and hence the nash equilibrium is that of the imposing high tariffs. chapter 12 in mankiw, kneebone, and mckenzie (2020b) showcases the identities nx = nco, s – i = nco, and y = c + i + g + nx, to indicate that current account deficits are synonymous with net capital inflows, investment more than saving, and expenditure greater than income. chapter 13 assigns a problem which yields the understanding that persistent current account deficits are due to low saving rate relative to investment. the chapter also shows that trade restrictions do not work, as the real exchange rate appreciates, which reduces exports and therefore net exports remain unchanged. thus, students learn that reducing current account deficits requires increasing saving relative to investment. however, they also learn in chapter 7 that investment contributes to growth through capital stock accumulation. therefore, they note that in the absence of domestic saving the economy has to rely on foreign borrowing to grow, which means that subsequent profits are shipped overseas. on the other hand, if the rate of growth is greater than the cost of borrowing, net capital inflow should not be much of a problem. overall, the mankiw, kneebone, and mckenzie (2020a, b) textbooks make a strong case for free trade by countering the arguments for restricting trade, showcasing the deadweight loss due to tariffs, and highlighting the ineffectiveness of trade restrictions. however, creating a comprehensive module on trade requires collecting the material from the various chapters of the textbooks. additionally, the textbooks do not showcase the assumptions of the ricardian model 24 |journal for economic educators, 23(1), 2023 on trade or the new trade theory that bases the case for free trade on economies of scale. thus, a renewed outlook requires complementing the textbooks with additional material. krugman, wells, au, and parkinson the krugman et al. (2018) macroeconomics textbook is considered because of krugman’s association with the new trade theory and because of his distinguished stature in international economics. chapter 5 on international trade offers the usual quantitative case for free trade based on comparative advantage, the dead weight loss due to tariffs, and the critique of arguments for protectionism. these arguments, which include the vulnerability of supply chains during international conflict and support for high tech industries, are countered by mentioning that politically influential industries seek protection and that governments are poor predictors of winning technologies. however, unlike the mankiw, kneebone, and mckenzie textbooks, krugman et al. provides a relatively comprehensive treatment of the topic. specifically, chapter 5 mentions reshoring that is emerging because the cost saving due to outsourcing is increasingly being offset by the disadvantages of long shipping times and other issues. this would possibly include rising energy prices and the increasing labor costs in china. the chapter expressly indicates the reasons behind comparative advantage, which include differences in climate, factor endowments, and technology. in mentioning technology, it underscores the point that comparative advantage is not static and is subject to change based on a country maintaining its technological edge. additionally, it expressly highlights the heckscherohlin model to state that trade increases the return to factors that are abundantly available, so that the wages of high skilled canadian workers increase and those of low skilled canadian workers decrease thereby exacerbating inequality within the country. thus, even as inter-country inequality declines, as unskilled workers who are abundant in labor-intensive developing countries gain, inequality within developed economies increases. in short, the krugman et al. textbook offers a relatively nuanced depiction of trade by viewing the concept of comparative advantage as dynamic and by highlighting the challenges of globalization that arise due to inequality and outsourcing despite the recent rise of reshoring production and jobs. ragan the ragan (2020) microeconomics textbook builds the case for free trade based on economies of scale and learning by doing, as shown by new trade theory. this allows for an explanation for why developed countries specialize in similar but differentiated products and trade among themselves, thereby providing consumers more choice. chapter 32 expressly indicates that current comparative advantage can be lost if a country fails to innovate and adopt the latest technologies, and ita therefore allows for the role of policy through tax incentives in developing new comparative advantage. this allows a country to avoid perverse specialization based on resource-based primary products. additionally, the chapter explicitly mentions that while there is no need to discard ricardian theory, it is equally true that comparative advantage can be shaped by public policy and private entrepreneurship, as in the case of taiwan’s electronics industry. however, this conclusion is tempered with the fact that not all governments have been successful in creating such comparative advantage, as in the case of ireland and automobiles. chapter 33 goes further to indicate that a large open economy can improve its terms of trade, defined as the ratio of export prices to import prices, by tariffs that would lower the price charged by foreign exporters. it also justifies protection through tariffs based on new trade theory with the caveat of removing such protection from unsuccessful infant industries ruthlessly, as done 25 |journal for economic educators, 23(1), 2023 by taiwan and south korea. additionally, it showcases strategic trade policy, according to which domestic firms can be supported by taxpayers, with the caveat that such a policy can be problematic, as governments are likely to make bad decisions in picking winners in the industry. finally, the chapter indicates that using protection to create domestic jobs is a bad policy because it expands employment in inefficient importing industries and contracts employment in efficient exporting industries. overall, by delving into dynamic comparative advantage, new trade theory, and rationalizing the role of tariffs under specific conditions, the ragan textbook offers a more diverse perspective on trade than the mankiw, kneebone, and mckenzie textbooks. overall, mainstream textbooks offer the standard quantitative treatment of comparative advantage, counter the arguments for restricting trade, and highlight the deadweight loss due to tariffs. in this regard, the mankiw, kneebone, and mckenzie textbooks uphold the standard neoclassical paradigm. on the other hand, both the krugman et al. and the ragan textbooks offer a relatively more nuanced depiction of trade by delving into dynamic comparative advantage, highlighting the challenges of globalization that arise due to inequality and outsourcing, or rationalizing the role of tariffs under specific conditions. however, generally the textbooks do not critically delve into the assumptions of the ricardian model based on comparative advantage, an approach that is upheld by heterodox textbooks. alternative perspectives core: the economy one inspiration for this paper comes from the core online textbook that provides modules on topics like globalization, climate change, and inequality. chapter 18 of the core textbook offers a capstone module on globalization that brings together microeconomics and macroeconomics concepts to address the topic. it states that exchange can lead to unfair distribution of gains and that policy including tariffs can lead towards fairness. it underscores that new trade theory offers a justification for tariffs. while it extols the benefit of trade through sharing of technology, it highlights the cost of perverse specialization. additionally, it states that there are different routes to growth, for the u.s. used tariffs against british competition in the late 1800s, scandinavia balanced openness with high taxes for social safety and worker retraining, and east asian countries picked national winners and offered protection from imports. on current account deficits, it states that if the borrowed funds through capital inflows are used for investment, then foreign debt can be repaid. on comparative advantage it refers to economies of scale and economies of agglomeration apart from climate and factor endowments. it also mentions that inequality results when skilled workers gain in capital-intensive countries and unskilled workers lose out. on the environment, it raises the concern that governments oppose environmental sustainability and economic justice through lax regulation, less protection for labor, and lower taxes to attract foreign direct investment. thus, it emphasizes the tradeoff between globalization and democracy. overall, the core textbook indicates the issues of inequity and environmental sustainability with trade, the justification of tariffs through new trade theory, and the cost of perverse specialization. however, the textbook is fraught with information overload, as students navigate from one link to another and as they are exposed to intermediate level concepts like indifference curves and marginal rate of transformation at the principles level. additionally, it has met with myriad criticisms including the complexity of language, which has been conceded by bowles and carlin (2020). this necessitates looking at other alternative perspectives. 26 |journal for economic educators, 23(1), 2023 komlos the komlos (2019) textbook is written as a critique of standard mainstream neoclassical theory that is found in textbooks. chapter 13 delves into international trade and offers a strong critique of the ricardian model on comparative advantage. it states that ricardian theory does not account for current account deficits and exchange rate manipulations, as has been done by china in recent years to keep the value of the yuan low. additionally, the theory is built on the assumption that those who lose jobs would find employment in a different sector, which goes against the notion of pareto efficiency if they are unable to do so and hence are made worse off. the theory also assumes that goods are produced competitively, whereas most traded goods are produced by oligopolies. moreover, according to the chapter, the ricardian model was refuted by krugman, as countries trade the same goods among themselves, which is explained through economies of scale, branding, and diversity in consumption. the chapter highlights the welfare enhancing property of tariffs given unemployment, as there would be a gain to the workers through the multiplier effect. additionally, it indicates that even if consumers lose because of higher prices, these losses are dispersed among many people, whereas the gains are concentrated among the smaller group of workers. moreover, the benefit of low-priced consumer goods under free trade cannot trump the cost brought by underemployment. such an argument turns the tables, as neoclassical economics focuses on the losses of the smaller group of losers and gains dispersed among millions of consumers under free trade. the chapter also mentions that free trade is not an engine of growth, for while china was able to translate the gains from trade by investing its profits, the u.s. bought consumer goods, which does not have lasting growth effects. overall, the komlos textbook offers a strong critique of the ricardian model, highlights the welfare-enhancing role of tariffs, and critiques trade as the engine of growth. in doing so, it takes a stronger position than the core textbook. reardon, madi, and cato the reardon, madi, and cato (2018) textbook offers another heterodox perspective, and like the core textbook, it blends microeconomics and macroeconomics concepts together in various chapters. chapter 16 indicates that free trade is not necessarily fair trade and that it relies on cheap energy, which is unsustainable. it mentions that trade takes a heavy toll on the environment, as mass production is undertaken in countries with poor environmental standards and low wages, and as components of the goods are transported across the world many times before the final goods are sold. it also delves into a critique of the ricardian model by mentioning that it was developed in a time without concern for environmental limits. it adds that free trade strengthens the economic power of elites in poor countries and exposes unskilled workers in developed countries to international competition, which reduces their wages. the chapter mentions that ricardo himself acknowledged the unrealistic assumptions of his theory, which include that the two countries should be relatively equal in wealth to prevent the richer country from getting more favorable terms of trade, have perfect competition, have full employment, and have constant instead of increasing returns to scale so that smaller countries could produce just as efficiently as the bigger ones. overall, the reardon, madi, and cato textbook rejects free trade as beneficial for all contexts and all times, alludes to fair trade and the detrimental impact on the environment, and critiques the unrealistic assumptions of the ricardian model. to recapitulate, the review of the mainstream neoclassical paradigm on trade in section 3 and of alternative approaches in section 4 indicates that there are multiple perspectives on the subject, where each author adopts positions that may cut across ideological divides. nonetheless, 27 |journal for economic educators, 23(1), 2023 a generalized classification of the neoclassical and alternative perspectives is provided in table 1, which facilitates a comparative outlook on both paradigms. table 1: the neoclassical paradigm and alternative perspectives on trade topic neoclassical paradigm alternative perspective ricardian model specializing based on comparative advantage allows the economy to consume beyond the production possibility frontier ricardian model is based on unrealistic assumptions of full employment, perfect competition, and may lead to perverse specialization comparative advantage rests on differences in climate, factor endowments, technology comparative advantage can be lost if countries do not keep up with technological advancement; government policy and private entrepreneurship can shape comparative advantage growth developing countries have been able to grow by access to international markets; the biggest benefit arises from transfer of technology free trade is not an engine of growth, for where china was able to invest its gains, the u.s. has focused on consumption that does not have lasting growth effects environment trade allows higher income and access to new technology, which can be used for the environment with global supply chains, goods are transported many times across the globe that takes a toll on the environment; countries can engage in a race to the bottom with lax environmental standards to attract foreign direct investment inequality trade has led to a decrease in inequality between developed and developing countries intra country inequality has been exacerbated, as unskilled workers in developed countries have lost jobs; the elites in developing countries have gained where labour works in poor conditions tariffs protectionism through tariffs or quotas leads to inefficiency (dead weight loss); there is rent seeking by powerful industries that can lobby; the tariffs can be welfare enhancing under conditions of high unemployment; the cost of tariffs is dissipated across millions of consumers, 28 |journal for economic educators, 23(1), 2023 cost of saving one job can exceed a million dollars but the benefit is concentrated among smaller groups of workers, which is worthwhile current account deficits current account deficits are concomitant with net capital inflows, which allow for growth when domestic saving is not enough for investment; if growth is greater than the cost of borrowing, such deficits do not matter persistent current account deficits are problematic, as jobs are lost; net capital inflow is problematic if domestic assets are increasingly owned by foreigners who can assert political influence and siphon off profits abroad lesson plan activity: assign chapter 9 from mankiw, kneebone, and mckenzie (2020) and chapter 13 from komlos (2019) as background reading. this pairing works best, as the latter textbook is written as a critique of standard neoclassical textbooks (jahangir, 2020). create student groups based on class size and assign a topic from table 1. facilitate one group to adopt the neoclassical perspective and the other to defend the alternate perspective. ask them why they selected the perspective and what would allow them to adopt the other perspective. allow room for non-binary positions so that students can traverse rigid binary boundaries and hold multiple perspectives. present table 1 in advance to students as a base for class discussion. this activity could replace a whole lecture in an intermediate level special-topics class or could take about 20-30 minutes in a principles level class if the instructor decides to focus on one or two topics. key concepts: all topics in table 1 can be considered in an intermediate level special-topics class, whereas, only a few topics can be selected at the principles level based on time constraints and the content emphasized by the instructor. the key concepts and ideas are based on the topics in table 1 including comparative advantage based on specialization; the issue of perverse specialization; the efficacy of active government policy in creating comparative advantage; the impact of trade on economic growth, environment, and inequality; the impact of tariffs on efficiency and welfare; and whether we should be worried about persistent current account deficits. questions for discussions: the instructor will have to lead discussions in the case of weaker or indifferent students. following is a brief sketch of sample questions and suggested answers. 1. if a country like pakistan is endowed with cotton, then should it focus on developing its comparative advantage based on cotton? perspective 1: focus on comparative advantage, as it would allow to go beyond the ppf perspective 2: specializing in cotton could lead to perverse specialization, as the country faces price volatility in the market for cotton 2. what is the impact of trade on economic growth, inequality, and the environment? 29 |journal for economic educators, 23(1), 2023 perspective 1: trade leads to a greater variety and more and cheaper goods; it has allowed developing countries like bangladesh to grow rapidly thereby reducing inequality between advanced and developing economies; it allows developing countries access to new technology that can be used to address environmental damage perspective 2: developing countries face balance of payment and currency crises as in the recent cases of sri lanka and pakistan; inequality has exacerbated in advanced economies as jobs have been offshored; corporations in advanced economies can buy environmental offsets so that they merely shift pollution from one location to another 3. are tariffs beneficial or detrimental to the economy? perspective 1: protectionism is led by rent-seeking firms that gain at the expense of taxpayers and consumers perspective 2: tariffs can be welfare enhancing in the presence of unemployed and underemployed labor and resources 4. should we worry about persistent current account deficits? perspective 1: current account deficits go with net capital inflows that allow foreign investment, which is not an issue if economic growth is greater than the interest rate perspective 2: jobs are lost in the export sector; corporate profits are siphoned off abroad learning outcomes: such an activity exposes students to diverse perspectives and allows building critical thinking skills, as students contrast different positions. a nuanced perspective on tariffs there has been a general concern on economic inequality, as unskilled workers in developed countries have faced the brunt of globalization through lower wages or loss of jobs. therefore, tariffs constitute a topical issue especially with former president trump’s rhetoric on bringing jobs back to the u.s. and with the institution of tariffs on steel and aluminum. the phenomenon of reshoring also counters the general trend of offshoring, as corporations no longer experience cost advantages in setting up manufacturing plants overseas due to rising wages and transportation costs. yet, standard mainstream neoclassical theory rejects protectionism, including tariffs, which dissuade corporations from seeking cost saving efficiencies by outsourcing or offshoring. 30 |journal for economic educators, 23(1), 2023 standard neoclassical textbook theory also substantiates the argument against tariffs through a welfare analysis exercise that highlights how deadweight loss arises with tariffs, as consumers end up buying less and as inefficient domestic production takes resources away from other sectors. figure 1a illustrates the case of a small open economy with competition where the world price pw is taken as given by the importing country. the demand (qd = 100 – p) and supply equations (qs = p) are kept simple for the calculations, which involve the world price (pw = 20) and a tariff (t = 10). the standard analysis shows deadweight loss because of areas b (inefficient production) and d (lower consumption), which yield a total of 100. thus, standard mainstream neoclassical theory shows how tariffs introduce inefficiency in the economy. 31 |journal for economic educators, 23(1), 2023 figure 1: welfare analysis of a tariff with a small open economy 32 |journal for economic educators, 23(1), 2023 however, komlos (2019) turns the standard analysis on its head. alluding to the assumption of full employment in the ricardian model, he argues that with unemployment, workers gain area e (200), as they now have jobs with the imposition of a tariff. therefore, with the gain of (b + e) and loss of (b + d), the net impact of a tariff is (e – d). based on the calculations, this yields a net gain of 150 (250 – 100). thus, even with the standard analysis, a justification for tariffs can be provided when the assumption of full employment is relaxed. additionally, through stylized calculations, komlos also shows that the loss of tariffs is spread over millions of consumers, but the gains are concentrated among a small group of workers. for instance, even if the loss from tariffs is $10 million, then divided among 30 million consumers, the annual cost is dissipated to roughly 33 cents per consumer, whereas even a gain of just $500,000 divided among 50 workers constitutes a $50,000 annual income each. this provides an alternate perspective to the standard neoclassical paradigm on the merits of free trade and rejection of tariffs. however, even standard neoclassical theory shows conditions under which tariffs can be rationalized, as in the case of a large open economy that gains due to improved terms of trade with the imposition of a tariff. the feenstra and taylor (2014) textbook, which is used in elective international economics classes, showcases a model in chapter 9 with a small open economy that imposes a tariff on goods sold by a foreign monopoly (pp. 291-293). for the purposes of this paper, a simple numerical example is created based on this model. specifically, based on the same demand curve (qd = 100 – p) and the associated marginal revenue curve (mr = 100 – 2q), figure 1b shows that the imposition of a tariff (t = 10) increases the original price of 60 to only 65, as the foreign monopolist absorbs part of the tariff by lowering its price to 55. thus, while consumers lose [(65-60)*35 + (65-60)(40-35)*0.5], the government gains [(65-55)*35] in tariff revenues, which leads to the net effect of [(60-55)*35 (65-60)(40-35)*0.5]. based on the calculations this constitutes a net gain of 162.5 (175 – 12.5), which underscores the point on the welfare enhancing property of tariffs under certain conditions. overall, complementing the standard neoclassical textbook analysis with a popular socially relevant video and with alternative perspectives from a heterodox approach and a simplified analysis from a higher-level textbook provides a more interesting, richer, and diverse perspective on tariffs to economics students. lesson plan activity: based on the instructor approach and preparation level of the student cohort, a mathematical treatment of tariffs can be undertaken with simple calculations shown above. the instructor will have to direct these calculations step by step. students should be actively engaged with the calculations and the instructor should wait for their answers before transcribing them to the white board. key concepts: the focus is on the positive and negative impact of tariffs questions for discussions: 1. are tariffs beneficial or detrimental to the economy? perspective 1: tariffs lead to inefficiency (see the dead weight loss b and d in figure 1a) 33 |journal for economic educators, 23(1), 2023 perspective 2: tariffs can be welfare enhancing in the presence of unemployed and underemployed labor and resources and in the case of a foreign monopoly (see the net gain of 150 from figure 1a and of 162.5 from figure 1b) 2. should nike shoes be made in the u.s. (or canada based on the home country)? perspective 1: based on comparative advantage, nike shoes should be made in a developing country with lower labor costs otherwise they will be quite expensive perspective 2: advanced economies like the u.s. have lost many blue-collar jobs that have disrupted whole communities; unless the individuals who lose because of free trade are compensated, free trade is not a win-win proposition; with the pandemic and rising concerns on climate change, the issue of supply chain disruptions and ghg emissions due to transportation have become pressing; there is also a trend towards re-shoring of companies; therefore such considerations should be reflected in the decision to offshore jobs like assembling nike shoes in the first place learning outcomes: students can see the connection between basic mathematical calculations and the diverse positions on tariffs. they would learn that there are multiple answers to the same question. whither fair trade? economics students can connect with chocolate and as an exercise they can be directed to the faq page of the organic house that specializes in chocolates in ontario, canada. on the query on fair trade, their faq page states: “is your chocolate fair trade? better it's ethically sourced and direct trade. we pay the farmers more than if it was fair trade. we ensure there is no child labour that comes with our cacao.” source: https://www.theorganichouse.ca/pages/faqs this indicates that the hype around fair trade from a few years back when it was heavily promoted in coffee shops and chocolateries now seems to be channeled towards ‘direct trade.’ generally, textbooks do not delve much into fair trade save on a single page, where the matter is presented as a passing topic. chapter 7 of the carbaugh (2013) textbook, which is used in elective international economics classes, states that the objective of the fair trade movement is to increase the income of poor farmers in developing countries through a system where they can bypass middlemen and sell coffee beans directly to roasters and retailers. however, it also mentions the criticism that the biggest winners from fair trade have been retailers, who sometimes charge huge markups while promoting themselves as corporate citizens, and that consumers do not know how much of the price goes to the poor farmers (pp. 235-236). dragusanu, giovannucci, and nunn (2014) mention that fair trade rests on price floors that cover the average cost of sustainable production, which includes banning of harmful chemicals and genetically modified crops. it is also based on a fair trade premium that allows investment in community infrastructure including schools, health clinics, electricity, water systems, and roads. the authors state that fair trade farmers receive higher prices, greater access to credit, find https://www.theorganichouse.ca/pages/faqs 34 |journal for economic educators, 23(1), 2023 themselves economically more stable, and get incentivized to engage in environmentally friendly framing practices. however, they also note that as more producers become certified as fair trade farmers, it dissipates monetary benefits, and any rents go towards the cost of certification. it is therefore not surprising that direct trade is deemed preferable to fair trade, as it avoids the pitfalls of the latter. overall, however, students can be exposed to a discussion on the issue for a broader perspective on trade, as mainstream principles textbooks simply gloss over the topic. lesson plan activity: instructors can direct students to the faq page of the organic house chocolaterie in ontario or to any other chocolate shop in their respective regions. students should be allowed to use their cell phones, tablets, or laptops to actively engage in discovering the difference between fair trade and direct trade. advanced students can be assigned the dragusanu, giovannucci, and nunn (2014) paper to discuss in class and compare with textbook theory on free trade. instructors can also direct students to find information for class discussions from short newspaper, magazine, or other articles on social media. key concepts: the distinction between free trade, fair trade, and direct trade questions for discussions: 1. what are the pros and cons of free trade and fair trade? suggested answer: free trade allows access to a greater variety and more and cheaper goods. fair trade ensures that farmers are not exploited and the environment is not damaged in the process of extracting cocoa or coffee beans. however, fair trade goods are more expensive and some corporations siphon off huge share of profits even as they promote themselves as offering fair trade products. this has led towards direct trade where middlemen are removed. learning outcomes: students will learn to contrast differing perspectives on trade and actively use technology to find information for class discussion purposes in real time. game theory and the environment game theory is generally introduced to first year students through the prisoner’s dilemma. its application to trade is provided in the context of an exercise where the dominant strategy for both countries is to impose high tariffs, thereby making themselves worse off in the nash equilibrium (mankiw, kneebone, and mckenzie, 2020a, p. 394). applications on strategic trade theory arrive in intermediate-level economics courses, where usually the case of boeing and airbus is considered in the context of subsidies provided respectively by the u.s. and european governments (carbaugh, 2013, pp. 213-215; feenstra and taylor, 2014, pp. 352-358). both games offer the standard lessons that tariffs decrease welfare, and that subsidizing firms hurt taxpayers, and are only likely to be effective if the other firm exits the market. however, environmental issues in the context of free trade provide a more topical illustration of game theory applications. the carbaugh (2013) textbook indicates that free trade leads towards a race to the bottom in environmental standards, as corporations shift production to pollution havens, for poor countries place a higher priority on jobs and income instead of the environment (p. 192). however, it also 35 |journal for economic educators, 23(1), 2023 states that by disseminating environmentally friendly technology and by stimulating growth, free trade induces the demand for a cleaner environment (p. 193). in terms of game theory applications, feenstra and taylor (2014) assign a question on addressing global and local pollution respectively (p. 409). the idea is to showcase that with global pollution, the government puts more weight on producer profits than consumer welfare, as part of the costs are borne by the other country. however, with local pollution, the government puts more weight on consumer welfare than producer profits, as the costs to consumers outweigh the benefits to producers. based on this idea, figure 2 showcases the following two games, where the home country moves row wise, and the foreign country moves column wise. the games illustrate that the nash equilibrium is to not regulate with global pollution (70, 70), and to regulate with local pollution (70, 70). overall, the games indicate the need for multilateral agreements for the environment in the context of free trade and global pollution. figure 2: global and local pollution 2a. global pollution home / foreign regulate don’t regulate regulate 80, 80 50, 100 don’t regulate 100, 50 70, 70 2b. local pollution home / foreign regulate don’t regulate regulate 70, 70 70, 50 don’t regulate 50, 70 50, 50 lesson plan activity: both economic inequality and climate change are pressing issues of contemporary times. the impact of trade on the environment can be addressed through a simple game theory application even at the principles level where students are already exposed to the nash equilibrium and the prisoner’s dilemma game. the instructor can make use of the games in figure 2 to showcase the free rider problem in the case of environmental regulations on global pollution. key concepts: the impact of trade on the environment; game theory application of the nash equilibrium questions for discussions: 1. what is the impact of trade on the environment? perspective 1: trade allows developing countries access to new technology that can be used to address environmental damage perspective 2: corporations in advanced economies can buy environmental offsets so that they merely shift pollution from one location to another; developing countries engage in a race to the bottom by relaxing their environmental laws to attract corporations; with offshoring many goods 36 |journal for economic educators, 23(1), 2023 are produced, assembled, and finalized in different countries across the globe, so all this transportation contributes to ghg emissions 2. why is it difficult to have multilateral agreements on combating global pollution? suggested answer: free rider problem, where one country gains by continuing with business as usual as the cost of pollution is passed on to other countries (see the game in figure 2a); the cost of environmental regulation is borne by one country where another can attract foreign investment by offering lax environmental regulations learning outcomes: students can learn to contrast different viewpoints on the impact of trade on the environment. they can learn about the difficulty in achieving multilateral agreements on the environment through a game theory application. game theory and economic sanctions like fair trade and environmental sustainability, geopolitics is not usually considered at the principles level. however, a renewed perspective on international economics and trade warrants considering the 2022 russian invasion of ukraine and the subsequent economic sanctions by the west. in this regard, the carbaugh (2013) textbook indicates that economic sanctions are successful if many countries impose sanctions, when the target nation has strong economic and cultural ties to the imposing nations, and contingent on the strength of the political opposition in the target nation (p. 217). this indicates the concern with western sanctions on russia, as china and india among other countries in the global south want to retain their ties to russia and because of president putin’s control of any opposing russian oligarchs. in terms of game theory, the educational blog networks (2014) showcases a game that involves strategies by russia and nato. figure 3 illustrates the game, where nato moves row wise and russia column wise. the game shows a nuclear outcome when nato adopts a hawkish approach and russia persists in the invasion of ukraine. it shows that if russia backs down with a hawkish nato, the latter gains only 2, because of its heightened commitment of soldiers and weaponry. however, if russia persists and nato remains passive, russia gains a relatively higher 5, as it gains by meeting its territorial objectives. finally, nato gains 5 if russia unilaterally backs down, as nato would not have to be in a state of heightened vigilance. overall, the nash equilibrium (0,5) shows the current status quo of a passive nato and the persistence of russian invasion. figure 3: russian invasion of ukraine nato / russia follow through back down aggressive -15, -15 2, 0 passive 0, 5 5, 0 the russian invasion of ukraine warrants another question on the feasibility of economic sanctions were china to invade taiwan. this question is relevant if calls for boycotting chinese goods increase given concerns on china’s spy network in western countries, debt trap where ports and large infrastructure are taken over by china, and the possibility of using the belt and road initiative for military purposes, as highlighted by dhruv rathee in his educational youtube video. 37 |journal for economic educators, 23(1), 2023 his video elicits the question whether the world is prepared to look for substitute goods and willing to pay a higher price, were it to boycott chinese goods. rathee’s popular 15-minute video, which is in hindi but subtitled in english and whose viewership has surpassed 3.7 million, can be used as an ancillary international resource to facilitate class discussion on the topical issue of economic sanctions and boycotts. fair share laws allow showing the video for non-profit educational purposes in a closed classroom (as opposed to public viewing).2 overall, game theory application to the russian invasion of ukraine and rathee’s video on the boycott of chinese goods, allow for addressing topical issues in international economics and trade, and appeal to student interests. figure 4: dhruv rathee – why the world must boycott china! source: https://www.youtube.com/watch?v=f_0h2tvywrq lesson plan activity: the instructor can use the game in figure 3 to address the russian invasion of ukraine. this can be done after nash equilibrium is covered in class. additionally, to insert a break in the lecture, the instructor can show the 15-minute video by dhruv rathee on the role of china in the context of debt trap with countries like sri lanka that had to give up the hambantota port on a 99year lease. the instructor may have to pause the video at some instances to ensure that students grasp the ideas before moving ahead. the instructor can also ask students to check for bias in the video based on the language used and to be alert in imbibing information from educational youtube channels. moreover, the instructor can show other videos where people engaged in a 2 see fair use on youtube: https://support.google.com/youtube/answer/9783148?hl=en https://www.youtube.com/watch?v=f_0h2tvywrq https://support.google.com/youtube/answer/9783148?hl=en 38 |journal for economic educators, 23(1), 2023 social experiment on trying to live without made in china goods.3 the game and videos can be followed by class discussions, which the instructor can lead through a series of questions. key concepts: the limits of economic sanctions in preventing war; the limits of boycotts; debt trap questions for discussions: 1. what are the limits of economic sanctions and boycotts? suggested answer: economic sanctions have limits if there is no unanimity among the penalizing countries, as in the case of china and india continuing with their economic ties with russia; individual boycotts (parallel to individual diet and behavior changes) are ineffective on a larger scale where multilateral government responses are required; where colonialism of the past has emerged as an issue in post-colonial discourse, it is important to broaden the conversation by addressing modern equivalents where developing countries fall into a debt trap under emerging powers like china 2. based on dhruv rathee’s video, what are some of the tactics used by china in international trade? suggested answer: requirements for foreign companies on technology sharing; dumping; currency manipulation; debt trap learning outcomes: student can learn about the limits of economic sanctions and boycotts. they can also learn about the tactics used in international trade. additionally, they would learn about bias in educational youtube channels that have a large viewership. the issue of persistent current account deficits first year students learn that persistent current account deficits are due to low saving rate relative to investment and not because of greater taste for imported goods and services. this treatment can be complemented with material from the carbaugh (2013) textbook on international economics for greater detail and nuance. chapter 10 of this textbook mentions that current account deficits are matched by net capital inflows, which produces jobs for the economy. moreover, it indicates that current account deficits are problematic only when the borrowing due to net capital inflows is used to finance consumption instead of investment, as it does not boost productivity that would allow to service the debt. additionally, it brings in geopolitics by expressing the concern that u.s. foreign debt could be problematic if chinese investors suddenly shift their capital elsewhere or if china uses its large holdings of u.s. securities strategically against american policies that it opposes. the chapter indicates that foreign investors pulling out of the u.s. economy, were u.s. productivity to decline, would lead to a large decline in the dollar and an increase in interest rates, which would make foreign debt problematic. this motivates reducing persistent current account deficits. in this regard, the following standard equations, as adapted and 3 see for instance: what would life be like without any products made in china? https://www.youtube.com/watch?v=e1jz49xv-ou https://www.youtube.com/watch?v=e1jz49xv-ou 39 |journal for economic educators, 23(1), 2023 elaborated from chapter 10, can be worked out as follows to show how current account deficits can be addressed. y = c + i + g + nx y – c – g = i + nx y – t – c + t – g = i + nx spvt + t – g = i + nx -nx = (g – t) + (i spvt) where -nx (current account deficits) equate to (net capital inflows). the final equation indicates that current account deficits can be reduced by either increasing private saving, reducing investment, or reducing the budget deficit. equivalently, this means lowering expenditures relative to income. however, this is challenging, as the chapter indicates that reducing budget deficits means instituting unpopular tax hikes or cutting back government spending. moreover, reducing investments is also problematic for it is the key determinant of productivity and living standards. finally, even tax break policies that stimulate private saving are problematic, as they favor the rich instead of the poor. overall, complementing the principles analysis with material from the carbaugh (2013) textbook allows for a richer discussion on one of the pressing contemporary issues in international economics and trade. lesson plan activity: unlike other activities where the instructor shows videos for discussion, directs students to calculate areas of the graph, or asks them to find articles on social media, here the instructor will have to assume a larger role in leading students through the manipulation of the national accounts identity to determine the relation between current account deficits and the polices used to reduce them. key concepts: the connection between current account deficits and net capital inflows; the connection with budget deficits; the role of various policies in reducing current account deficits questions for discussions: 1. should we worry about persistent current account deficits? perspective 1: current account deficits go with net capital inflows that allow foreign investment, which is not an issue if economic growth is greater than the interest rate perspective 2: jobs are lost in the export sector; corporate profits are siphoned off abroad 2. what are the issues in combating persistent current account deficits? suggested answer: current account deficits can be reduced by increasing private saving, reducing investment, or reducing the budget deficit; reducing budget deficits means instituting unpopular tax hikes or cutting back government spending; reducing investment is problematic as it is the key 40 |journal for economic educators, 23(1), 2023 determinant of productivity and living standard; tax break policies to stimulate private saving favor the rich learning outcomes: students will learn that solutions to pressing economic problems are not straightforward as in the case of combating persistent current account deficits. additionally, they will learn that there are multiple perspectives on identifying an issue as a problem in the first place. concluding remarks the objective in this paper was to provide a renewed perspective on teaching trade to economics students. the idea was to create a module parallel to that offered by the core online textbook that brings microeconomics and macroeconomics concepts together to address the topic comprehensively. additionally, the objective was to highlight topical issues and to complement the subject material with a couple of videos and game theory exercises to appeal to economics students. the motivation for this renewed approach to teaching trade at both principles and higher levels emerges in the backdrop of the critique of the lecture method, the limits of abstract models in enabling interdisciplinary conversations, and the significance of pluralist perspectives in building critical thinking skills. this approach was achieved by first reviewing how neoclassical and heterodox textbooks address free trade and tabulating the differences on key themes including the ricardian model on trade. this comparative outlook showcases diverse perspectives on trade. following this, a nuanced perspective on tariffs was presented, where the standard treatment on tariffs was complemented by showcasing how by relaxing the assumption of full employment and by considering the case of a foreign monopoly, tariffs can be justified as welfare enhancing under certain circumstances. topical issues of fair trade and game theory applications on environmental sustainability and economic sanctions were also considered. such topics are not usually covered at the principles level but are significant in providing a real-world perspective and appealing to student interests. finally, the topic of persistent current accounts deficits was addressed to showcase the challenges of addressing them. in presenting the various topical issues, material was simplified and adapted from textbooks that are usually used for elective courses in international trade and international finance. other instructors can make use of the approach developed in this paper, as a whole or selectively based on the mathematics preparation level and interests of their student cohort. additionally, they can focus on a few topics at the principles level given time constraints or consider multiple topics in an intermediate level special-topics class. overall, by collecting material from various textbooks, adopting pluralist perspectives, providing exercises in graphical analysis and game theory for active learning, highlighting topical issues, and by complementing the subject material with youtube videos, a renewed perspective on teaching trade is effectively presented. references becker, w. 2000. “teaching economics in the 21st century.” journal of economics perspectives, 14(1): 109-119. becker, w., & m. watts. 1996. “chalk and talk: a national survey on teaching undergraduate economics.” american economic review, 86(2): 448-453. becker, w., and m. watts. 2001. “teaching economics at the start of the 21st century: still chalk and talk.” american economic review, 91(2): 446-451. bowles, s. and w. carlin. 2020. “what students learn in economics 101: 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“the global economy: a framework for teachers of microeconomics.” international journal of pluralism and economics education, 11(4): 309-325. geerling, w., j.j. wooten, g.d. mateer, and f. gabriele. 2021. “breaking down the language barrier: using pop culture from across the globe to teach microeconomics.” journal for economic educators, 21(2): 1-20. goodwin, m. 2014. “what is our child learning? or, greg mankiw and the terrible, horrible, no good, very bad textbook (now with single-page goodness!)” economix. november 19. https://economixcomix.com/2014/11/19/what-is-our-children-learning-or-greg-mankiwand-the-terrible-horrible-no-good-very-bad-textbook/ > accessed 27 september 2022. hodgson, g.m. 2019. is there a future for heterodox economics. cheltenham and northampton: edward elgar. jahangir, j. 2020. “teaching econ 101 pairing the mankiw and komlos texts.” international journal of pluralism and economics education, 11(4): 359-374. komlos, j. 2019. foundations of real-world economics: what every economics student needs to know. 2nd ed. new york: routledge. krugman, p. 1993. “what do undergrads need to know about trade?” american economic review, 83(2): 23-26. krugman, p., r. wells, i. au, and j. parkinson. 2018. macroeconomics. 3rd canadian ed. new york: worth publishers. krugman, p. 2020. arguing with zombies. new york: w.w. norton and company. mankiw, n.g., r.d. kneebone, and k.j. mckenzie. 2020a. principles of microeconomics. 8th canadian ed. canada: nelson. mankiw, n.g., r.d. kneebone, and k.j. mckenzie. 2020b. principles of macroeconomics. 8th canadian ed. canada: nelson. networks. 2014. “game theory in the crimean crisis.” course blog for info 2040/cs 2850/econ 2040/soc 2090, cornell university. september 14. <https://blogs.cornell.edu/info2040/2014/09/14/game-theory-in-the-crimean-crisis/> accessed 27 september 2022. o’donnell, r. 2010. “economic pluralism and skill formation.” in r. garnett, e.k. olsen and m. starr (eds), economic pluralism. new york: routledge, 262–277. https://www.core-econ.org/the-economy/book/text/0-3-contents.html https://policyalternatives.ca/publications/reports/beyond-nafta-20 https://economixcomix.com/2014/11/19/what-is-our-children-learning-or-greg-mankiw-and-the-terrible-horrible-no-good-very-bad-textbook/ https://economixcomix.com/2014/11/19/what-is-our-children-learning-or-greg-mankiw-and-the-terrible-horrible-no-good-very-bad-textbook/ https://blogs.cornell.edu/info2040/2014/09/14/game-theory-in-the-crimean-crisis/ 42 |journal for economic educators, 23(1), 2023 ragan, c.t.s. 2020. microeconomics. 16th ed. canadian ed. canada: pearson. rathee, d. 2020. “why the world must boycott china!” dhruv rathee youtube channel. june 18. <https://www.youtube.com/watch?v=f_0h2tvywrq>accessed 27 september 2022. reardon, j., m.a. madi and m.s. cato. 2018. introducing a new economics. london: pluto press. skidelsky, r. 2020. what’s wrong with economics. new haven: yale university press. strow, b.k., and c.w. strow. 2004. “illustrating trade in the classroom: how free trade can create wealth and decrease hunger, literally.” journal of economics and finance education, 3(2): 41-46. weber, c.e. 2007. “gains from trade for nonmaterialists, environmentalists, and the overworked.” journal of economic education, 38(4): 452-460. https://www.youtube.com/watch?v=f_0h2tvywrq 61 |journal for economic educators, 23(1), 2023 the economics major: who offers it and what is required of students? brooke dippold, brandon weaver, melanie marks, david zirkle1 abstract this paper econometrically investigates what variables impact the probability a college/university offers an undergraduate major in economics, multiple tracks within the major, or economics minor. data is collected from four-year, comprehensive institutions, with control variables accounting for whether the school is public, year founded, enrollment, if the school offers a business degree, and selectivity measures. in addition, data is collected on the requirements of economics majors across institutions. regression is used to determine what institutional variables influence specific track requirements, such as math/statistics, econometrics, capstone course, and internship. given the unique data set that has been created, this paper offers new information and several conclusions about the economics major. key words: economics major, economics minor, course requirements, undergraduate, regression jel classification: i21, i23, i29 introduction the rise of economics as an academic discipline dates back to 1870. before this, the occasional political economy course was buried in other departments, such as history or literature, or was provided by clergymen delivering “moral philosophy.” economists were generally selftrained and often travelled to europe for further study. in 1871 and 1872, respectively, harvard and yale established chairs that included “political economy” in the title. the field was further solidified when harvard, yale, and johns hopkins provided formal opportunities for graduate students to study political economy. by 1878, all three had awarded a ph.d. in political economy (parrish, 1967), and in 1886, harvard began publishing the quarterly journal of economics, the first journal of economics in the anglophone world (harvard department of economics, 2022). economics has become a mainstream academic discipline with 48,297 degrees awarded in 2019 by 806 4-year, not-for-profit institutions, 45% of which were public (data usa 2022). in that year, there were 791 public and 1,621 private, not-for-profit, 4-year institutions offering majors in economics (lederman, 2021). this suggests that approximately 46% of all public, 4year institutions and 27% of private, not-for-profit, 4-year institutions (including schools of art, divinity, etc.) offered a major in 2019. not surprisingly, the top five producers of economics majors (degrees conferred) were large, public institutions—ucla (799), uc-berkeley (745), wisconsinmadison (734), texas (611), and uc-santa barbara (599). however, several elite private schools 1 dippold and weaver started this work as undergraduate economics students. marks is professor of economics and zirkle is executive director of student success and instructor of economics. all authors are affiliated with longwood university, college of business and economics, farmville, virginia, 23901. the authors wish to acknowledge capable research assistance provided by gillian coleman (longwood) and chaney sheehan (university of virginia). 62 |journal for economic educators, 23(1), 2023 ranked amongst the top 20—nyu (#6), university of chicago (#15), boston college (#17), boston university (#18), and columbia university (#19) (data usa 2021). students can also study economics at some of the country’s smallest institutions. our data collection revealed 41 colleges with undergraduate enrollments below 1,000 (22% of sample) offering an economics major. what characteristics of colleges or universities increase the probability of offering an undergraduate economics major? are larger institutions more likely to offer an economics major? is exclusivity (sat scores or acceptance rates) a determining factor? does having a business degree (a competitor of the economics major) influence the probability? given the historical evolution of the major, are older institutions more likely to offer opportunities in economics? this study investigates these questions. additionally, our investigation focuses on paths (termed “tracks”) to a degree in economics, many of which are thematic and target specific audiences. the most frequently offered track was general economics, but others offered a more specific focus, such as international and development economics, financial economics, health economics, public policy, and environmental or resource economics. some tracks combined economics with other disciplines such as math/analytics, political science, or psychology/neuroscience. interestingly, a number of institutions offered only one track, with observations not limited to smaller schools. this suggests that, while enrollment might matter, other variables influence decisions about economics programs. perhaps the need to compete with business, accommodate graduate-school bound students, or appeal to students in other social science fields leads to more tracks. we also found that not all institutions offered an economics minor, even when offering economics courses or a major. there was variation in what constituted core classes in the economics major. is calculus more likely to appear in the core for more elite schools? are smaller institutions more likely to require a capstone experience? are internships more commonly a part of the private school or business school experience? we investigate these questions, as well. this study started with creation of a unique data set comprised of all 4-year, reasonably comprehensive, not-for-profit institutions in 24 states. we gathered both institutional variables and details of every track offered by schools with an economics major. linear probability and probit models are used to identify what factors influence the decision to offer an economics major, additional tracks leading to an economics degree, and economics minor. we also explore what variables explain the requirements of economics degrees (e.g., quantitative requirements, capstone courses, or internships). departments contemplating revisions to their curriculum will benefit from the track-level data presented. literature review siegfried (2021) analyzed 297 institutions and found 86% growth in the number of economics degrees awarded between 2001 and 2020. interestingly, 37% of those students graduated with a second degree as well. marshall and underwood (2022) conclude that quantitative economics degrees awarded increased dramatically between 2012 and 2019. we find no literature investigating who offers an economics major and limited information on what is required of students. there is more focus on skill requirements, core requirements, the discouraged business major effect (related to economics enrollment), and courses designed to enhance skills, such as the capstone and internship. 63 |journal for economic educators, 23(1), 2023 skills and requirements hansen (2001) described six proficiencies that students of economics should have at graduation—ability to “access existing knowledge, display command of existing knowledge, interpret existing knowledge, interpret and manipulate economic data, apply existing knowledge, and create new knowledge.” he suggested students generally display mastery of the first five but struggle with the last, leading him to advocate for a research experience in the major. myers, nelson, and stratton (2011) explored learning outcomes of economics major and found that critical thinking skills, using economic data appropriately, and applying existing knowledge were highly valued. zaho et al. (2018) surveyed students who completed internships at aacsb institutions. nearly all expressed an interest in learning to combine classroom knowledge with creativity and soft skills essential in the workplace. over half felt that professors limited creativity by requiring assignments be done exactly as advised; only 38% said that professors encouraged them to apply creativity. urquía-grande and pérez estébanez (2020) found that employers of interns noted a disconnect between students’ cognitive skills, their ability to apply what they know, and their ability to make creative and unique contributions to the company. professors understand that quantitative/math abilities influence success in economics. formal studies investigate if this is true at the principles level, but samples involve more than just students of economics. mccrickard et al. (2018) found that the aplia math assessment, which tests fundamental skills such as reading graphs, understanding slopes and areas, etc., was a significant predictor of success in introductory macroeconomics. darlington and bowyer (2017) surveyed economics students from the united kingdom on how they felt a-level exams (standardized tests in courses considered preparation for math-based disciplines in college) readied them for university study. the authors acknowledge selection bias, as students who did well were more likely to respond. amongst students who completed units in statistics, 56.1% reported content as very helpful. roughly 40% who completed units in “pure” mathematics (real analysis, geometry, algebra, calculus) regarded them as useful. when asked for overall assessments, most participants found their preparation through the uk programs were worthwhile for the study of economics. monteiro and lopes (2007) compared economics degrees in the us and europe to find that six courses were commonly required—introduction to economics, microeconomics, macroeconomics, econometrics, a math course, and a statistics course. bosshardt, watts, and becker (2013) found that over 90% of responding institutions required microeconomics, macroeconomics, and statistics. furthermore, 41% of bachelor of arts and 56% of bachelor of science degrees in economics required econometrics. petkus, perry, and johnson (2012) found that schools appearing in the 2010 us news & world report best colleges ranking offered an econometrics course, even if not required. marks and lehr (2014) conducted a six state analysis of economics major requirements—95% of programs required statistics, 54% calculus, and 53% a capstone course. econometrics, international economics, and internships were required less than half of the time, with internships being required in only 2% of programs. bosshardt and walstad (2017) reviewed over 15,000 transcripts of students graduating from us institutions in 2007-2008 and found that economics students took an average of 8.3 economics courses, while business majors completed an average of 2.5 courses. the most commonly completed courses included microeconomics, macroeconomics, econometrics, and international economics. more recently, 64 |journal for economic educators, 23(1), 2023 marshall and underwood (2022) found that over half of institutions offering economics provided both a traditional and quantitative option, with differences in requirements for introductory and multivariate calculus, linear algebra, and basic and advanced econometrics. additionally, starting in 2016, international students pursuing stem degrees could work in the usa for three years after graduation, as opposed to only one. departments had an incentive to redesign and designate their economics degrees as stem to attract foreign students, potentially increasing the quantitative focus seen in the past decade. discouraged business major effect increased mathematical requirements of economics graduate programs and importance in the admissions process (see jones et al., 2020; milkman and marjadi, 2019) has potentially influenced undergraduate offerings and requirements in economics. competition between economics and degrees in business (and other majors) might be influential, as well. a common assumption is that economics is a likely second choice for students who fail to meet business program entry requirements, termed the “discouraged business major” effect. asarta and butters (2012) determined this was not the driving force in their economics program (housed in arts & science), as only 9% of students did not meet qualifications for the economics degree offered in the business school. likely, students were choosing take advantage of the greater flexibility of studying economics in arts & science. emerson and mcgoldrick (2019) reviewed student transcripts for 6 institutions over 23 years. results showed that 83% of students graduating in economics switched into economics, with the majority coming from business, engineering, science, and mathematics. gpa and sat scores suggested that weak students in these fields switched into the economics major. capstone courses and internships over two decades ago, hansen (2001) advocated for a research-oriented capstone course to teach economics students about creation of knowledge. the specific model of the economics capstone course has evolved over time. siegfried (2001) recommended a senior honors thesis be completed with a faculty advisor for the duration of a student’s final 3 semesters, with requirements of a proposal, substantial data collection, and final paper worthy of submission to a scholarly journal. klein (2013) recommended a single semester course with requirements that paralleled those of siegfried (2001). however, klein envisioned a capstone that was combined with an econometrics course, allowing total credits to stay within state mandates and with a more realistic student to teacher ratio. more recently, li and simonson (2016) recommended a proposal, literature review, data work, analysis, and a final paper presentation, where students are guided by the professor through the process. given their program’s implementation at a small, private university, the professor could meet with students on a frequent and individual basis. marks and lehr (2014) reported that only 53% of economics programs in a six state data set included a capstone course. economics programs have also increased the skills of students through internships. in a pilot study, cameron et al. (2013) found that internships had a positive influence on students’ selfreported levels of satisfaction, self-efficacy, and perception of their general work-place skill set. authors acknowledge small sample size and short timeframe, suggesting need for more analysis. 65 |journal for economic educators, 23(1), 2023 despite potential usefulness, marks and lehr (2014) determined that only 2% of institutions in a six state region required internships for economics majors. decloure, karst, and longoria (2018) developed a model to prepare students for internships and the workforce, including a three-step process emphasizing career readiness, networking, and immersion experience and advocate for implementation of similar programs and emphasis on internships at other institutions. urquıagrande and perez estebanez (2020) collected student, employer, and academic advisor opinions related to internship success. students valued teamwork, oral communication skills, and creativity learned in college but found it difficult to apply course work to their internship experience, as company expectations did not match course outcomes. employers valued social skills and adaptation to the company but claimed creativity and cognitive skills could be improved. data and methodology as is evident in the literature review, only limited information is known about economics majors across institutions in the us. this study expands on the knowledge by exploring the following key questions: a. what variables influence the probability an institution offers an economics major/minor? b. what variables impact the number of program tracks students may choose between? c. what factors explain specific requirements of the economics major? data set this study involved collection of a unique data set capturing information about every institution in 24 randomly selected states that represented all official census bureau regions. information was retrieved primarily from college websites and undergraduate catalogs. to ensure data accuracy, more than one person coded each institution and discrepancies were investigated. observations were limited to 4-year, not-for-profit, reasonably comprehensive institutions with a face-to-face presence. schools with very few majors (for example, only education) and specialty schools offering only divinity or art degrees were omitted, leaving 409 institutions2. of these institutions, 58.2% (238) had a major in economics and 66% offered a minor. just over 41% of institutions are public, and schools varied greatly in enrollment (360 to over 61,000) and selectivity (acceptance rates ranging from 6% to 100%). table 1 summarizes the institutional characteristics collected. 2 we were on the fence about one institution included in table 1, given it was only somewhat comprehensive. without this observation, minimum sat measures change to an average of 820, 25th percentile of 740, 75th percentile of 900, and range of 60. however, regression results do not change in significance or magnitude of estimates with inclusion of the observation, so it was retained. 66 |journal for economic educators, 23(1), 2023 table 1. descriptive statistics of institutional characteristics (n=409) table 2 illustrates that the 409 institutions are distributed across census bureau regions. regions serve as control variables in regression analysis, in lieu of state controls, to avoid perfect identification. for example, wyoming has only one university in the data set, so a state dummy is a perfect predictor. table 2. regional level data on institutions with economics majors (n=409) table 3 details the programmatic variables collected. out of 409 schools, 92.2% offered a business degree. of this subset, 21.4% (0.922*0.232) offered a business economics track, 64.7% (0.922*0.702) have a formal college or school of business (as opposed to department), and 37.9% (0.922*0.411) were aacsb accredited. a master’s in economics is offered at 13.9% and a doctorate at 9.5% of all institutions, translating into 23.9% and 16% of programs offering an undergraduate degree in economics. there is only one institution offering a doctorate in economics but not an undergraduate degree. all institutions offering a master’s in economics also offer the undergraduate major. table 3. descriptive statistics of programmatic variables (n=409) variables definitions mean std. dev. min max econ major =1 if institution offers an econ major. 0.582 0.494 0 1 minor =1 if institution offers an econ minor. 0.660 0.474 0 1 public =1 if institution is public. 0.416 0.493 0 1 under. enrollment undergrad enrollment for institution. 5856.4 7375.6 350 49209 total enrollment total enrollment for institution. 7509.7 9520.9 360 61391 sat average average sat score for institution. 1129.7 122.5 575 1520 sat 25 th sat at the 25th percentile. 1027.6 125.1 550 1470 sat 75 th sat at the 75th percentile. 1231.4 123.8 600 1570 sat range (75-25) interquartile range of sat scores. 203.8 44.4 50 409 acceptance rate acceptance rate for institution. 69.4 19.8 6 100 age age of institution (since founded). 130.5 46.2 16 325 region without major with major total midwest 73 (40.1%) 108 182 northeast 16 (37.2%) 27 43 south 63 (51.2%) 60 123 west 19 (31.1%) 42 61 total 171 (41.8%) 238 409 variables definitions mean std. dev. min max business degree =1 if institution offers a degree in business. 0.922 0.269 0 1 business econ =1 if institution offers business econ. concentration. 0.232 0.423 0 1 business school =1 if institution has school/college of business. 0.702 0.458 0 1 aacsb =1 if business is aacsb accredited. 0.411 0.493 0 1 masters =1 if institution offers a master’s in economics. 0.139 0.347 0 1 phd =1 if institution offers a phd in economics. 0.095 0.294 0 1 tracks number of different tracks offered in economics. 1.210 1.521 0 9 minor credits number of credits required for economics minor. 12.71 9.622 0 32 67 |journal for economic educators, 23(1), 2023 methodology the first investigation focuses on the probability an institution offers an economics major. this was explored using the following model, where “i” denotes the college or university: yi = β0xi + β1θi + β2zi + εi yi captures whether or not institution i offers an economics major (binary dependent variable), xi is a vector of i’s institutional characteristics (subset of table 1), and θi is a vector of programmatic variables (subset of table 3), including if the institution offers a degree in business. having a degree in business is also interacted with whether or not the business degree offers a concentration in economics, if business has aacsb accreditation, and if it is housed in a formal school of business. finally, zi is a vector of dummy variables capturing regional effects since state dummies are perfect predictors at times and consume many degrees of freedom. a related model investigates the probability of offering an economics minor (yi becomes a binary variable indicating a minor). additional models investigate what factors influence the number of tracks offered by institutions and also specific requirements—econometrics, capstone course, internship, and specific quantitative courses. results who offers an economics major? linear probability models (lpm) and marginal effects from probit models were used to analyze the factors that impact the probability an institution offers an economics major. in model 1, probability of offering a major is a function of institutional variables—if the school is public, average sat scores (measured in 100s), natural log of undergraduate enrollment (allowing for nonlinearities), natural log of age of the institution (allowing for nonlinearities), and the ratio between graduate and undergraduate students.3 all models employed regional dummy variables with standard errors clustered by state in lieu of state controls, since some state variables perfectly predict economics major in the probit analysis. interestingly, the proportion of institutions within a state with an economics major ranges from 33% (alabama) to 100% (rhode island with 7 of 7 and, trivially, wyoming with 1 of 1). since clustered standard errors result in higher standard errors and lower t-statistics than robust standard errors, this approach sets a higher bar for hypothesis testing. table 4 details regression results for specifications that differ by programmatic variables. specification 1a captures whether the institution offers a degree in business, a discipline that competes with economics. specification 1b interacts the business major variable with others that might be influential—if business offers a concentration in economics, is aacsb accredited, and is housed in an identifiable school/college of business. interactions allow having a business degree to impact the probability of offering an economics major differently, based on opportunity to study business economics, indications of quality/prestige, and visibility. for example, an institution offering a business degree might impact the probability of offering a degree in economics, but the impact might differ in magnitude if business is aacsb accredited. note that interactions fall out 3 a specification using enrollment and enrollment2 was tested and produced similar results. 68 |journal for economic educators, 23(1), 2023 for the handful of institutions that are only aacsb accredited for a graduate program and do not have an undergraduate business program. this is the intended effect since we speculate that graduate programs in business do not impact the probability of offering an undergraduate economics major. for ease of discussion, the lpm results are interpreted, and large differences from probit results are noted. results for model 1a suggest that an institution being public or private had no bearing on the probability of offering an economics major, but size of institutions did. for every 10% increase in enrollment, there is a 1.52% increase in probability of offering an economics major. as institutions get 10 years older, the probability increases by 2.12%. average sat score is highly significant across models, where an increase of 100 points raises the probability of offering an economics major by 14.6%. we speculated that sat range (interquartile range) might matter, as it reflects heterogeneity/homogeneity in student abilities, but it did not. also, acceptance rate—another measure of exclusivity that is not highly correlated with sat average—was not a significant factor. the proportion of graduate to undergraduate students did matter. when the ratio increases by .1, the probability of offering an economics major decreases by 1.25%. having a competing business degree has no influence, unless the degree is aacsb accredited (model 1b), where accreditation increases the probability of an economics major. 69 |journal for economic educators, 23(1), 2023 table 4. probability of offering an economics major model 1 was applied to a stratified data set, where we separated institutions with and without graduate schools, as seen in table 5. results were generally similar with a couple of exceptions. enrollment is not a significant factor for undergraduate-only institutions but is for institutions with graduate schools. age of the institution is significant in all specifications but differs in level of significance and magnitude of impact. aacsb increases the probability of an economics major at institutions with graduate programs but not for undergraduate-only institutions. sat average continues to be highly significant for both subgroups. variables lpm (1a) probit (1a) lpm (1b) probit (1b) public -0.0569 (0.061) -0.0226 (0.053) -0.0826 (0.056) -0.0485 (0.050) ln (undergrad enrollment) 0.152## (0.031) 0.143## (0.026) 0.114*** (0.036) 0.119## (0.033) ln (age of institution) 0.212*** (0.060) 0.193## (0.054) 0.218*** (0.058) 0.191## (0.053) sat average (100s) 0.146## (0.016) 0.164## (0.016) 0.137## (0.014) 0.154## (0.015) sat range (75 -25) -0.000236 (0.000) -0.000299 (0.000) -0.000171 (0.000) -0.000250 (0.000) acceptance rate (in %) 0.000103 (0.001) -0.00161 (0.001) 0.0000247 (0.001) -0.00153 (0.001) grad/undergrad ratio -0.125## (0.031) -0.107*** (0.033) -0.128## (0.030) -0.108*** (0.037) business degree 0.0757 (0.080) 0.120 (0.088) 0.0358 (0.081) 0.0955 (0.085) business * business econ ---- -0.0281 (0.053) -0.0312 (0.048) business * aacsb ---- 0.173*** (0.046) 0.108*** (0.041) business * business school ---- -0.0120 (0.067) -0.00234 (0.055) midwest region 0.101** (0.047) 0.0983** (0.043) 0.122** (0.049) 0.109** (0.045) northeast region 0.0671 (0.083) 0.0817 (0.079) 0.0819 (0.080) 0.0900 (0.077) west region 0.145** (0.063) 0.123** (0.061) 0.159** (0.069) 0.135** (0.068) observations r-square/pseudo 409 0.354 409 0.334 409 0.369 409 0.342 standard errors in parentheses; mcfadden’s r-square is reported for probit models. * p < 0.10, ** p < 0.05, *** p < 0.01, ## p < 0.001 70 |journal for economic educators, 23(1), 2023 table 5. probability of offering an economics major-undergraduate only vs graduate who offers an economics minor? hours required for an economics minor ranged from 12 to 32 in this sample. table 6 presents results related to the probability of offering an economics minor. not surprisingly, 91.5% of institutions with an economics major also offer an economics minor. however, only 31.2% of those without a major offer a minor. analysis was performed using all institutions and regional dummies, with standard errors clustered by state. note that a probit analysis cannot be employed with specification 1e because for schools without an economics major, lack of a business degree perfectly predicts lack of an economics minor. perhaps the most interesting result is the coefficient on economics major in version 1c. as expected, it is highly significant. having an economics major increases the probability of an economics minor by 56.5% in lpm or 40.3% in probit. while these are large, we anticipated an even greater impact, since departments with an undergraduate degree can design a minor at zero cost (as it is usually a subset of the major). in models 1d and 1e, being a public institution reduces variables lpm undegrad. only (1c) probit undergrad. only (1c) lpm with graduate (1d) probit with graduate (1d) public -0.0593 (0.098) -0.680 (0.422) -0.0617 (0.071) -0.0317 (0.063) ln (undergrad enrollment) 0.154 (0.091) 0.106 (0.065) 0.110*** (0.038) 0.116## (0.034) ln (age of institution) 0.370## (0.071) 0.226* (0.124) 0.188** (0.072) 0.175*** (0.064) sat average (100s) 0.176## (0.030) 0.184## (0.027) 0.132## (0.022) 0.147## (0.020) sat range (75 -25) -0.00145 (0.002) -0.00107 (0.001) -0.0000879 (0.000) -0.000192 (0.000) acceptance rate (in %) 0.00204 (0.003) -0.000743 (0.002) 0.0000340 (0.002) -0.00143 (0.001) grad/undergrad ratio ---- -0.0933*** (0.033) -0.0848** (0.037) business degree -0.0520 (0.127) -0.638 (0.402) 0.0948 (0.088) 0.176* (0.093) business * business econ -0.0534 (0.128) 0.150 (0.118) -0.0176 (0.054) -0.0228 (0.050) business * aacsb 0.0930 (0.209) 0.0426 (0.104) 0.169*** (0.050) 0.108** (0.045) business * business school -0.121 (0.115) -0.135 (0.088) 0.0392 (0.085) 0.0399 (0.071) midwest region -0.00976 (0.121) 0.0395 (0.069) 0.137** (0.055) 0.122** (0.052) northeast region -0.253* (0.140) 0.0715## (0.009) 0.140* (0.080) 0.134* (0.078) west region 0.0362 (0.122) 0.164 (0.160) 0.173** (0.072) 0.146** (0.070) observations r-square/ pseudo 61 0.624 61 0.701 348 0.347 348 0.317 standard errors in parentheses; mcfadden’s r-square is reported for probit models. * p < 0.10, ** p < 0.05, *** p < 0.01, ## p < 0.001 0.359 71 |journal for economic educators, 23(1), 2023 the probability of having an economics major by 11% for lpm and 8.6% for probit, when analyzing only schools with an economics major. acceptance rate has a negative impact except for with schools without the economics major—if acceptance rate decreases by 10% (more exclusive), the probability of offering an economics minor increases marginally by .0262% when employing the data set with all schools. a similar result appears in all versions except for schools without an economics major (1e). table 6: probability of offering an economics minor (models 1c, 1d, 1e) standard errors in parentheses; mcfadden’s r-square is reported for probit models. * p < 0.10, ** p < 0.05, *** p < 0.01, ## p < 0.001 number of and types of tracks offered many institutions offer multiple “tracks” leading to a degree in economics. additional tracks might add more rigor for students preparing for graduate school or might be specialized variables all schools lpm (1c) all schools probit (1c) with major lpm (1d) with major probit (1d) without major lpm (1e) economics major 0.565## (0.045) 0.403## (0.021) ------ public -0.00204 (0.082) -0.00708 (0.064) -0.110* (0.055) -0.0863* (0.052) 0.0867 (0.120) ln (undergr enrollment) -0.00476 (0.040) -0.00110 (0.035) 0.0359 (0.038) 0.0367 (0.041) -0.0234 (0.055) ln (age of institution) 0.0743 (0.045) 0.0799** (0.039) 0.0870 (0.052) 0.0988** (0.042) 0.0445 (0.065) sat average (100s) -0.0101 (0.030) -0.0165 (0.025) -0.0318 (0.021) -0.0255 (0.021) 0.00482 (0.049) sat range (75 -25) -0.000212 (0.000) -0.000107 (0.000) -0.0000906 (0.001) -0.000168 (0.000) 0.0000327 (0.001) acceptance rate (in %) 0.00262** (0.001) 0.00239*** (0.001) 0.00377*** (0.001) 0.00289## (0.001) 0.000223 (0.001) grad/undergrad ratio -0.0262 (0.043) -0.00753 (0.032) 0.0421 (0.079) 0.0170 (0.056) -0.0407 (0.065) business degree 0.0607 (0.101) 0.0362 (0.079) 0.0271 (0.142) -0.0374 (0.066) 0.149 (0.101) business * bus. econ 0.136*** (0.046) 0.146## (0.043) -0.00405 (0.035) 0.0127 (0.043) 0.322## (0.078) business * aacsb 0.139** (0.062) 0.160*** (0.060) 0.0751 (0.058) 0.0835 (0.065) 0.264* (0.128) business * bus. school 0.0662* (0.037) 0.0442 (0.034) 0.0507 (0.076) 0.0185 (0.051) 0.111** (0.050) midwest region -0.0527 (0.038) -0.0206 (0.034) -0.0257 (0.034) -0.0176 (0.031) -0.0101 (0.067) northeast region -0.0166 (0.048) 0.0168 (0.055) -0.0745 (0.047) -0.0508 (0.037) 0.218*** (0.060) west region -0.0184 (0.038) 0.0185 (0.039) -0.0278 (0.039) 0.0181 (0.043) 0.0150 (0.095) observations r-square/pseudo 409 0.482 409 0.453 238 0.195 238 0.283 171 0.238 72 |journal for economic educators, 23(1), 2023 (public policy, environmental, etc.). table 7 offers a breakdown of concentrations associated with the 471 different economics tracks offered at 234 institutions (purging a handful where we could not obtain information about degree requirements). a majority of tracks are labelled as “general economics” (55%). the next most prevalent track was marketed with titles signaling “quantitative economics” (10.8%), followed by business economics, financial economics, international/development economics, public policy economics, and environmental economics. “other” captures a handful of tracks including computer science and economics, law and economics, and secondary education licensure. table 7. types of economics tracks offered (n=471) number of tracks varied substantially across institutions, ranging from 1 to 9, with a mean of 2.01. table 8 presents results of a linear model, poisson model, and negative binomial model (with average marginal effects reported for the latter two) for model 3, where the dependent variable is “additional tracks” (beyond 1 track). the number of observations falls since institutions offering a single track are eliminated. the boundary likelihood ratio test of the dispersion parameter (alpha) generates a test statistic of 13.57, indicating that there is more dispersion than appropriate for the poisson model. thus, the negative binomial results are preferred and are what we interpret. regardless, results are very similar across the models. since number of tracks might reflect the size of the economics program, a variable capturing number of economics degrees awarded per institution (2015 to 2019) is added. different specifications are tested, including the 5-year average (logged and linear), a weighted 5-year average with more weight placed on recent years (logged and linear), and number of economics degrees awarded as a percent of undergraduate enrollment.4 degrees awarded was also not prohibitively correlated with institution enrollment. interestingly, number of economics degrees awarded was not significant in any form. controlling for enrollment, size of the economics program does not influence number of tracks offered. for that reason, only the log of the 5-year weighted mean is reported. 4 it should be noted that degrees awarded includes graduate students and data could not be disaggregated. however, graduate degrees awarded in economics are usually small relative to the number of undergraduates, and many institutions have no graduate programs. track type freq. percent general economics track 259 55.0 quantitative economics track 55 11.6 business economics track 37 7.9 international or development economics track 32 6.8 financial economics track 31 6.6 public policy economics track 27 5.7 environmental economics track 17 3.6 other 13 2.8 73 |journal for economic educators, 23(1), 2023 table 8: number of “additional” tracks offered (models 3a, 3b, 3c) having a graduate program in economics had no impact on number of tracks. also, age and exclusivity (sat, acceptance rates) had no impact. however, public institutions offered onehalf as many tracks, all else constant. greater undergraduate enrollment increased the number of tracks, with diminishing returns. the graduate to undergraduate enrollment ratio decreased the number of tracks offered, where a 0.1 unit change (adding a graduate program that is 10% of the undergraduate program or increasing the size of the graduate school by 10%) decreases tracks by .083. simply having a business degree (a competitor) at the institution did not impact number of economics tracks offered, unless business was aacsb accredited. in that case, for the poisson variables linear (3a) poisson (3b) negative binomial (3c) ln (degrees awarded) 0.120 (0.140) 0.151 (0.162) 0.134 (0.153) public -0.524* (0.297) -0.700** (0.337) -0.685** (0.327) ln (undergr enrollment) 0.417** (0.182) 0.494** (0.202) 0.473** (0.189) ln (age of institution) 0.0224 (0.214) 0.0486 (0.251) 0.0323 (0.262) sat average (100s) 0.0452 (0.129) 0.0525 (0.115) 0.0632 (0.115) sat range (75 -25) -0.00124 (0.002) -0.00265 (0.003) -0.00206 (0.003) acceptance rate (in %) 0.00346 (0.006) 0.00627 (0.006) 0.00584 (0.006) grad/undergrad ratio -0.731** (0.285) -0.851** (0.357) -0.828** (0.361) business degree 0.552 (0.521) 0.535 (0.441) 0.467 (0.421) business * bus. econ -0.361 (0.226) -0.430* (0.244) -0.440* (0.235) business * aacsb -0.369 (0.238) -0.431** (0.218) -0.362* (0.203) housed with business 0.0905 (0.226) 0.166 (0.236) 0.189 (0.241) econ grad program 0.240 (0.302) 0.136 (0.327) 0.137 (0.301) midwest region 0.127 (0.163) 0.180 (0.187) 0.178 (0.187) northeast region 0.586 (0.367) 0.604** (0.300) 0.573* (0.312) west region 0.937*** (0.323) 0.856*** (0.279) 0.837*** (0.272) constant -3.621* (1.827) observations r-square/ pseudo 227 .0167 227 0.106 227 .0672 standard errors in parentheses; mcfadden’s r-square is reported for poisson and negative binomial models. * p < 0.10, ** p < 0.05, *** p < 0.01, ## p < 0.001 74 |journal for economic educators, 23(1), 2023 and binomial distributions, an institution had 0.43 or 0.36 fewer tracks (negative binomial only significant at 10%) if competing with an accredited business degree. in these same models, institutions offered 0.43 or 0.44 fewer tracks when they faced competition from a business degree offering a concentration in economics (significant only at 10%). this is logical since a business economics degree is essentially an additional track available to students. requirements of economics majors data was collected on the requirements associated with the 471 different economics tracks. it should be noted that all tracks leading to a degree in economics were coded, even if requirements seemed quite light (a rare instance discussed below). table 9 provides track-level descriptive statistics. just over 38% of degree tracks lead to a bachelor of science, as opposed to bachelor of arts. international economics was required in 18.5% of tracks and money & banking in 14.2% of tracks. econometrics was required in 64.5% of tracks and a capstone course in 52% of tracks. internships are not often required—only 6.4% of tracks required one. calculus 1 is required in 63.3% of tracks, but statistics 1 is required more frequently, in 87.4% of tracks. if looking only at degree tracks requiring students to take calculus 1 or statistics 1, only 28% of tracks require math/stat beyond that level. computer science courses are required in only 11% of tracks. total number of economics credits required ranges from 9 to 72, with a mean of 32.3 credits. this represents a range of 8% to 54% of total credits required for degree completion, with a mean of 17.6%. data on total economic credits required can be misleading, however. in rare instances, an economics track really did have miniscule economics requirements (9-12 credits). other tracks had limited economics requirements (15-21), but then students had to choose from a list of classes that included economics. likely, students took more than the required minimum number of economics credits. also, some degree tracks that were lighter in economics supplemented with extra analytics courses taught outside of the economics department. some tracks combined economics with other complementary fields, such as philosophy or political science. table 9: track-level variable descriptive statistics (n=471) variables definitions mean std. dev. min max bs =1 if track leads to a bs instead of a ba degree .382 .486 0 1 international =1 if track requires international econ .185 .388 0 1 money & banking =1 if track requires money & banking .142 .350 0 1 econometrics =1 if track requires econometrics .645 .479 0 1 capstone =1 if track requires capstone course .520 .500 0 1 internship =1 if track requires internship .064 .244 0 1 calculus1 =1 if track requires calculus 1 .633 .483 0 1 statistics1 =1 if track requires statistics 1 .874 .331 0 1 advanced math =1 if track requires math beyond calc1 or stat1 .259 .439 0 1 advanced math --using only schools requiring calc1 or stat 1 .281 .450 0 1 computer science =1 if track requires computer science .110 .314 0 1 econ credits total econ credits required for degree 32.286 9.342 9 72 econ credits % econ as proportion of total hours required .257 .064 .08 .54 total credits total credits required for degree 126.348 17.571 96 210 75 |journal for economic educators, 23(1), 2023 in a final analysis, we explore what impacts the probability of including specific requirements— capstone course, internship, international economics, econometrics, calculus 1, and advanced math beyond calculus 1 or statistics 1. control variables include categorical dummies for track concentrations (table 9), with “general economics” as the omitted category, regions, and number of total tracks offered at the institution. tables report lpm and probit results with regional dummies suppressed. some variables perfectly predicted internships (given they are infrequent) so only 311 observations were usable. discussions focus on results that were consistent between the lpm and probit models with the lpm results interpreted. table 10 reveals that the probability of requiring international economics decreased by 1.13% for an additional 10 years of age for the institution, increased by 9.2% when economics is housed with business, increased by 16.7% when the track is branded as financial and 67.1% when branded as international economics (relative to general economics). the probability of requiring a capstone course increased by 22.8% for public institutions, and, not surprisingly, decreased with enrollment. the probability of requiring an internship also decreased with enrollment. given the resource requirements, capstone courses and internships may be difficult to deliver on a large scale. the probability of requiring an internship did, however, increase by 8.4% when economics was housed with business. tracks focusing on financial economics were also 10.9% more likely to require an internship, but the result was slightly smaller in magnitude and more significant in the probit model. despite this, capstone and internships are more likely a departmental or college requirement and would not be impacted by theme of tracks or number of tracks an institution offers. 76 |journal for economic educators, 23(1), 2023 table 10. probability of international, capstone, and internship (models 4,5,6) variables internat. lpm (4a) internat. probit (4b) capstone lpm (5a) capstone probit (5b) internsh. lpm (6a) internsh. probit (6b) bs -0.0118 (0.037) -0.0120 (0.033) -0.0195 (0.062) -0.0198 (0.059) 0.0242 (0.024) 0.0283 (0.028) public 0.0606 (0.074) 0.0583 (0.061) 0.228** (0.112) 0.250** (0.110) -0.0127 (0.052) 0.0251 (0.065) ln (undergr enrollment) 0.00520 (0.051) 0.00263 (0.040) -0.183** (0.080) -0.189** (0.076) -0.0738* (0.044) -0.0831** (0.037) ln (age of institution) -0.113* (0.060) -0.107** (0.048) 0.112 (0.114) 0.123 (0.105) 0.0387 (0.043) 0.0362 (0.048) sat average (100s) -0.00675 (0.027) -0.00633 (0.022) -0.00324 (0.043) -0.00347 (0.041) -0.0360* (0.022) -0.0192 (0.021) sat range (75 -25) -0.000450 (0.001) -0.000387 (0.001) -0.000995 (0.001) -0.000990 (0.001) 0.000347 (0.000) -0.000379 (0.001) acceptance rate (in %) -0.000745 (0.001) -0.000175 (0.001) 0.00313 (0.002) 0.00333 (0.002) -0.00172 (0.001) -0.000895 (0.001) grad/undergrad ratio 0.106 (0.089) 0.102 (0.074) 0.0857 (0.137) 0.107 (0.134) 0.0817 (0.058) 0.0939 (0.071) business degree 0.0611 (0.050) 0.0659 (0.064) -0.123 (0.134) -0.128 (0.130) 0.0487 (0.049) 0.112* (0.060) business * bus. econ -0.0199 (0.058) -0.00983 (0.043) -0.0559 (0.089) -0.0479 (0.084) 0.0279 (0.045) 0.0215 (0.035) business * aacsb -0.0113 (0.060) -0.0126 (0.051) -0.0214 (0.107) -0.0310 (0.102) 0.0429 (0.053) -0.0223 (0.040) b&e housed together 0.0920* (0.050) 0.0719* (0.039) 0.0392 (0.081) 0.0324 (0.077) 0.0840** (0.041) 0.0756** (0.033) grad program in econ -0.0975 (0.069) -0.101* (0.057) 0.0141 (0.113) 0.0140 (0.106) 0.0155 (0.045) 0 (.) quantitative track -0.0601 (0.040) -0.118* (0.066) 0.0289 (0.065) 0.0225 (0.062) 0.0280 (0.030) 0.0673* (0.038) financial track 0.167* (0.095) 0.142** (0.063) 0.0452 (0.083) 0.0411 (0.078) 0.109* (0.058) 0.0869*** (0.033) business track 0.0196 (0.064) 0.00186 (0.055) 0.0557 (0.079) 0.0536 (0.075) 0.0770 (0.066) 0.128*** (0.043) international track 0.671## (0.085) 0.422## (0.058) 0.155** (0.068) 0.158** (0.067) -0.000332 (0.025) -0.0387 (0.032) environmental track -0.0258 (0.079) -0.0346 (0.110) 0.0673 (0.156) 0.0452 (0.143) -0.0586 (0.038) 0 (.) public policy track -0.0201 (0.061) -0.00292 (0.064) 0.113 (0.089) 0.120 (0.091) 0.0209 (0.026) 0.00392 (0.025) other track 0.0304 (0.119) 0.0233 (0.096) -0.0904 (0.137) -0.0884 (0.141) -0.0542 (0.036) 0 (.) 2 tracks 0.0594 (0.056) 0.0620 (0.044) 0.0655 (0.078) 0.0625 (0.074) 0.0256 (0.040) 0.0172 (0.050) 3 tracks -0.0559 (0.056) -0.0709 (0.054) 0.0792 (0.109) 0.0790 (0.101) 0.0374 (0.052) 0.00980 (0.053) 4 tracks -0.0237 (0.065) -0.00732 (0.058) 0.191 (0.125) 0.217* (0.129) -0.00951 (0.049) -0.0748 (0.075) 5-9 tracks -0.0117 (0.084) -0.0470 (0.069) -0.00635 (0.145) -0.00799 (0.136) 0.183 (0.113) 0.167*** (0.060) observations r-square/pseudo 471 0.287 471 0.283 471 0.149 471 0.119 471 0.224 311 0.401 standard errors in parentheses; mcfadden’s r-square is reported for probit models. * p < 0.10, ** p < 0.05, *** p < 0.01, ## p < 0.001 77 |journal for economic educators, 23(1), 2023 table 11 presents a similar analysis for econometrics, calculus, and math required beyond calculus 1 and statistics 1. since more than 86% of tracks required statistics 1, we exclude that from the analysis. results indicate that the probability of requiring econometrics increases by 10% when the track leads to a bs instead of ba, by 17% if the institution offers a graduate degree in economics, and by 19.3% if the track is labelled as quantitative. the probability decreases by 23.4% when there is a 100 point greater range between the 25th and 75% percentile of sats, by 1.4% if the graduate to undergraduate ratio increases by 10%, by 21% if the institution offers a business degree with an even larger decrease of an additional 16.6% if business offers a concentration in economics, and by 29.5% if the track has a public policy focus. the probability of requiring calculus 1 increases by 11.7% for every 100 point increase in the sat average and decreases by 17.4% for every additional 100 point increase in the interquartile range of sat scores. having a competing business degree does not impact the probability of requiring calculus 1 unless business offers a concentration in economics, and then probability of calculus 1 decreases by 15%. the probability of requiring calculus 1 increases by 27.7% if a track is marketed as quantitative economics and 21.5% if it is marketed as environmental economics. the probability of requiring calculus decreases by 19.6% if a track focuses on international economics and by 20.7% if public policy. interestingly, the probability of requiring calculus is not different for a bs versus ba. the probability of requiring advanced math (beyond calculus 1 and statistics 1) increases by 15.5% if the track leads to a bs, by 5.57% for each additional 100 points increase in sat average, by 15.5% if the institution offers a business degree, by 20.8% if the institution offers a graduate degree in economics, by 57.6% if the track is labelled as quantitative economics, and by 16.5% if the track is labelled as financial economics. 78 |journal for economic educators, 23(1), 2023 table 11. probability of econometrics, calculus, and advanced math (models 7,8,9) variables ecmt. lpm (7a) ecmt. probit (7b) calculus lpm (8a) calculus probit (8b) adv math lpm (9a) adv math probit (9b) bs 0.100* (0.054) 0.102** (0.049) 0.0785 (0.060) 0.0738 (0.058) 0.169## (0.046) 0.155## (0.039) public 0.0304 (0.090) 0.0317 (0.083) 0.0162 (0.088) 0.0177 (0.085) 0.119* (0.072) 0.120* (0.072) ln (undergr enrollment) -0.0284 (0.060) -0.0327 (0.055) 0.0116 (0.065) 0.0147 (0.061) -0.0942 (0.059) -0.0977* (0.054) ln (age of institution) 0.0682 (0.083) 0.0641 (0.075) 0.00537 (0.102) 0.0123 (0.091) 0.0482 (0.064) 0.0545 (0.064) sat average (100s) 0.0391 (0.033) 0.0340 (0.032) 0.117## (0.033) 0.110## (0.029) 0.0537** (0.027) 0.0557** (0.026) sat range (75 -25) -0.00234** (0.001) -0.00212** (0.001) -0.00174* (0.001) -0.00178** (0.001) -0.000213 (0.001) -0.000460 (0.001) acceptance rate (in %) 0.000177 (0.002) -0.000335 (0.002) 0.00213 (0.002) 0.00168 (0.002) -0.00100 (0.002) -0.000856 (0.002) grad/undergrad ratio -0.140 (0.114) -0.110 (0.118) -0.0898 (0.111) -0.0813 (0.105) 0.0435 (0.096) 0.0346 (0.086) business degree -0.210** (0.092) -0.247** (0.114) 0.0826 (0.102) 0.0925 (0.100) 0.155** (0.069) 0.180** (0.084) business * bus. econ -0.166** (0.079) -0.152** (0.066) 0.150** (0.067) 0.143** (0.064) 0.0465 (0.066) 0.0484 (0.055) business * aacsb 0.0151 (0.073) 0.00800 (0.072) -0.0169 (0.080) -0.0365 (0.075) 0.123 (0.079) 0.121* (0.070) b&e housed together 0.0573 (0.062) 0.0485 (0.055) -0.0309 (0.064) -0.0227 (0.060) 0.0158 (0.050) 0.0257 (0.046) grad program in econ 0.170** (0.085) 0.191** (0.078) 0.0364 (0.090) 0.0362 (0.085) 0.208** (0.096) 0.187** (0.074) quantitative track 0.193## (0.054) 0.246## (0.063) 0.277## (0.060) 0.373## (0.090) 0.576## (0.069) 0.438## (0.049) financial track 0.0270 (0.070) 0.0313 (0.064) -0.0429 (0.072) -0.0475 (0.061) 0.165** (0.078) 0.151** (0.060) business track -0.0408 (0.085) -0.0329 (0.076) -0.0126 (0.083) -0.0174 (0.073) -0.0524 (0.062) -0.0575 (0.067) international track -0.106 (0.074) -0.0990 (0.063) -0.196** (0.077) -0.181*** (0.066) -0.0540 (0.045) -0.0577 (0.045) environmental track 0.160* (0.096) 0.216 (0.133) 0.215** (0.102) 0.245* (0.132) -0.100 (0.070) -0.102 (0.084) public policy track -0.295*** (0.098) -0.266*** (0.084) -0.207** (0.085) -0.189*** (0.071) -0.0230 (0.080) -0.0232 (0.083) other track -0.0805 (0.126) -0.0773 (0.111) -0.157 (0.131) -0.168 (0.106) 0.156 (0.126) 0.112 (0.088) 2 tracks 0.0209 (0.070) 0.00224 (0.063) -0.116 (0.071) -0.105* (0.063) 0.0125 (0.055) 0.00202 (0.051) 3 tracks -0.0520 (0.087) -0.0782 (0.077) -0.0324 (0.091) -0.0303 (0.084) -0.0316 (0.074) -0.0379 (0.068) 4 tracks 0.0822 (0.081) 0.0617 (0.076) -0.179** (0.091) -0.185** (0.085) -0.0515 (0.076) -0.0455 (0.074) 5-9 tracks 0.0942 (0.101) 0.0919 (0.105) 0.0448 (0.113) 0.0569 (0.114) -0.00237 (0.101) -0.00887 (0.090) observations r-square/pseudo 471 0.207 471 0.187 471 0.224 471 0.197 471 0.321 471 0.290 standard errors in parentheses; mcfadden’s r-square is reported for probit models. * p < 0.10, ** p < 0.05, *** p < 0.01, ## p < 0.001 79 |journal for economic educators, 23(1), 2023 given that the set of regression equations in tables 10 and 11 is estimated using the same 471 observations, it seems plausible that there could be cross-equation correlations in the error terms. to investigate, this system of equations was estimated via seemingly unrelated regression (sur). the breusch-pagan test strongly rejects the assumption of independence with chi2(15)=46.232 and p-value=0.0000. the larger issue in this system is that the observations are not seemingly unrelated, as many colleges have multiple tracks, meaning that observations are correlated within the regression. however, lpm is estimated with errors clustered by college. in 90% of the cases where the significance level of a coefficient differs between the two models, the lpm model produces larger standard errors which would result in lower t-statistics. in the other 10% (three cases) the coefficients in the sur model remain significant, but at a lower level. the bottom line is that lpm sets a higher threshold for hypothesis testing and, therefore, is the more rigorous test. the sur results are available upon request. conclusion the goal of this paper is to investigate which colleges and universities offer an economics major and minor and what they require of their students. we gathered data from over 400 institutions across 24 randomly selected states representing all census bureau regions. these institutions, collectively, offer 471 different paths to a degree in economics. in addition to providing a useful snapshot of the major, we use econometrics to identify the likelihood a given institution will offer a major, have additional tracks (beyond the first), or have a minor. we also identify the likely requirements of an institution’s economics degree. our findings indicate that colleges/universities that are larger and older, have a higher sat average, have a higher graduate to undergraduate population ratio, and those with aacsb accredited business programs are more likely to have an economics major. our findings also indicate that larger, private institutions, with smaller graduate to undergraduate population ratios are more are more likely to offer multiple tracks that lead to a degree in economics. in some specifications, having a business degree that offers a concentration in economics or an accredited business program decreases the probability of having multiple tracks in economics. not surprisingly, tracks leading to a bachelor of science (as opposed to arts) are more likely to require econometrics and math beyond calculus and principles of statistics. econometrics is also more likely required when the interquartile range in sat scores is smaller (students are more homogenous), when the institution offers a graduate degree in economics, and when a track is marketed as quantitative; 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resources to an interested educator has grown substantially. we survey the literature of active teaching techniques and resources as well as provide sources for aspiring educators wishing to enhance the relevance of their coursework. key words: economics education, introductory economics, teaching, television, movies, podcasts, teaching methods, undergraduate economics jel codes: a1, a2 introduction the classic example in macroeconomics for the production possibilities frontier is a country’s decision between producing capital goods (guns) versus consumption goods (butter). the “guns & butter” model has been a staple in economics textbooks,5 but the example is past the one-hundred-year mark since its initial conception. students desire real-world applications to see the relevancy of the material they are learning (berk, 2009; ghosh & rahman, 2011), but guns and butter are no longer relevant to this generation of students. becker (2003) argued that the growth of business degrees comes partly from their ability to engage students in real-world situations with case studies or projects. however, he had the following slight against the economics discipline: 1 associate teaching professor of economics, department of economics, the pennsylvania state university, 315 kern graduate building, university park, pa 16803 2 associate professor of economics, haile/u.s bank college of business, northern kentucky university, nunn drive, highland heights, ky 40199 3 senior lecturer of economics, richards college of business, university of west georgia, 1601 maple street, carrollton, ga 30118 4 senior lecturer of economics, gatton business and economics, university of kentucky, 550 south limestone, lexington, ky 40506 5 one early example of the guns and butter model occurred in quelch (1893) 12 |journal for economic educators, 21(1), 2021 “professors of economics, however, are generally still delivering dry, make-believe examples that have little to do with students’ lives. textbook-style competitive markets that may work for agricultural commodities, at least in an idealized world, do not work when imperfect information leads to the use of price as a measure of quality -as in the used car, insurance, and labor markets.” (p. 197) becker argued that economics programs need to change their approach to teaching in exchange for more interesting topics that are applicable to the real world faced by our students. the idea that there has been a decrease in enrollments across the united states seems to conform more with mcmillin’s (2003) observation that the long-run average issuance of economics degrees hovers around 2% and that year-to-year differences are cyclical changes. in 2003, the national center for education studies (u.s. department of education, 2013) reported that 1.94% of all bachelor degrees were awarded to economics majors.6 more recent data suggests that the level continues to be around 2% as recent as 2019 (siegfried, 2020). the fear that the discipline has lost a significant number of enrollments because of its lack of appeal does not seem to hold since becker’s proposition around the turn of the most recent century. the scope of this paper is to highlight the input-side of producing great lectures. we focus on ways educators have developed resources to bring relevancy back into the classroom and then organize and summarize the economic literature regarding attempts to introduce relevancy to the economics curriculum. the range of examples presented in the literature and our suggestions can be used at multiple levels of economic education. as a field, the teaching of economics has grown substantially since 2001, however, there has been little work in measuring the impact of relevancy on assessments. we provide a brief overview of assessments but note that this is where the frontier of this field currently lies. as the number of resources grows, it is only a matter of time before educators begin testing their efficacy. challenging the need to be sexy one of hoyt’s (2003) main suggestions to counter becker’s criticism of the teaching community was that instructors need some hook to engage the students in the material and that a change of the actual material was not necessary. while faculty may have little room in adjusting theories they teach, they have complete control in the content they select to accompany the theories. one of hoyt’s main arguments is that the content selected by the faculty needs to be relevant to the students. there are a variety of “hooks” to engage students and the instructor has the ability to select methods throughout an academic timeframe to bring the students into economics. faculty may fear the level of involvement in “active learning,” but hoyt simplifies active learning to be “anything you do in the classroom that actively engages students, physically and mentally” (p. 203). we argue that faculty should engage students with hoyt’s “‘real’ hook” 6 the discipline divisions that were included in the calculation included majors that were categorized as agricultural economics, natural resource economics, business/managerial economics, general economics, applied economics, econometrics and quantitative economics, development economics and international development, international economics, “other” economics, and political economy. 13 |journal for economic educators, 21(1), 2021 and determine real world examples coming from current events and everyday life that students can find relatable. some educators wishing to appeal to students beyond guns and butter have incorporated “shock and awe” examples such as marijuana, alcohol, and sex. while these topics may garner a chuckle from students, their use is often limited in scope and is often used for shock value rather than as relevant illustrations of economics in everyday life. the examples become tiresome because they are typically not directly applicable to the concepts taught so additional references need to be used for other students in the class. these examples also tend to be less inclusive to the general classroom sample. we argue that future purveyors of active learning start smaller. we believe that educators want to be more effective in the classroom, but it takes time to connect material with students’ interest. identifying low-cost, high-benefit activities takes time and effort that many feel they do not have (goffe & kauper, 2014). moving beyond chalk and talk the use of alternative media in the classroom has grown over the last two decades. watts and schaur (2011) summarize four major surveys of economics courses conducted through the american economic association. while the majority of class time is still spent doing “traditional” lectures and chalkboard work,7 the average number of participants in these categories has declined since 1995. while the remaining teaching methods have stayed relatively stable, the bulk of growth has come from the use of powerpoint and computer-generated displays.8 the trends are present in principles of economics courses as well as intermediate courses, statistics and econometrics, and upper-division field courses. a number of studies have shown that economics educators favor “chalk and talk” (siegfried, saunders, stinar, & zhang, 1996; becker, 1997; becker & watts, 1996; becker & watts, 2001; bligh, 1998), but there have been a series of papers written to improve the educational delivery process and move away from the “traditional” method, which we hope to display here. a large push over the last decade to increase the number of alternative media in the classroom has been met with a fear of its educational effectiveness. a series of authors have found support for various nontraditional teaching methods (barr & carr, 1970; slavin, 1990; thomas & sherman, 1986; meyers and jones 1993; koeber 2005; yamarik 2007) while others have found no significant differences (abu and flowers, 1997; bligh 1998; marburger, 2005; malek et al. 2014). the most compelling use of relevant material comes from bligh (1998) and malek, hall, and hodges (2014). bligh concluded his analysis of nontraditional teaching methods (discussion, programmed learning, reading/independent study, projects, and other—audio, tv, computerassisted learning) by encouraging the use of mixed mediums because students do not learn to think during a traditional lecture. most lecturers do not stimulate creative thinking and are not effective in generating enthusiasm for the subject. malek et al. (2014) provide the impetus for 7 roughly 73% of survey participants used traditional lectures in 1995 while only 65% of participants used traditional lecturers in 2010. the earliest survey for chalkboard/whiteboard use occurred in 2000 with 65% of respondents using this method. chalkboard/whiteboard use fell to 57% of respondents in 2010. 8 in 1995, only 5% of survey respondents used powerpoint or computer-generated presentations (with more than half not using it at all). by 2010, 37% of survey participants were using digital presentations. 14 |journal for economic educators, 21(1), 2021 staying relevant with examples and activities for various learning styles in economics, while more recent books have focused on small teaching activities that can be done in the classroom (lang 2016) and online (darby and lang 2019). even if some students might not benefit from a particular teaching method, “mixing it up” by addressing auditory, visual, and kinesthetic learners will not only teach to the entire class but it, at the very least, could reinforce what students already have learned via another method. if all that is different is that students enjoy and value economics and their education more when alternative teaching methods are used in the classroom, this in itself is a strong enough reason for a professor to evaluate their teaching pedagogy and make changes where necessary. if students do not come to understand the power of the economic way of thinking nor come to the realization of how interesting, applicable, and even fun economics can be in their everyday life after taking a principles class, then that is a teaching failure. overall, these practices assist in enhancing the classroom experience for both students and teachers. in order to bring educators and students to a more common ground, it is important for educators to stay current with student interests. this is not limited to just popular media. more relevant examples for teaching the twenty-first century student could include sharing-service providers like uber, lyft, airbnb, and zipcars when teaching about competition or digital currency like bitcoin and dogecoin when teaching about the function of money. not only are these examples relevant to students, but they are also applicable to many of the topics covered in a variety of economics classes. these examples are so familiar to today’s net generation of students that they have been branded as digital natives (prensky, 2001; 2006). students have become “native speakers” of all things digital, including video games, the internet, social media and computer programs. in contrast, many faculty members are still referred to as digital immigrants. berk (2009) notes that digital immigrants have one foot stuck in the past and struggle to become fluent in “digital” technologies.9 our goal of the following sections is to survey the available literature for resources on engaging students in the classroom using a vast amount of digital resources, some of which may help faculty assimilate. popular culture economic educators and researchers have spent the past few decades collecting, organizing, and presenting their work on using popular media in the classroom in order to bring material “up to date” with student experiences. our hope is that the lists provided here will serve as a starting point for educators interested in expanding their reach in the classroom with material that has already been developed by others. this notion of crowdsourcing will lead into the following section which focuses on identifying resources in real-time from a variety of author-endorsed resources. the most common media presented in the classroom would cover traditional usage of television clips (table 1) or movie clips (table 2). the use of music (table 3) has seen an increase since becker’s critique, but is not as abundant as movies and television clips. regardless of the medium, the purpose of each should be to have students think critically about why that 9 examples that berk (2009) gives of digital immigrants are faculty members that print out e-mails, print a document to edit it, or phone someone to see if they received an e-mail. 15 |journal for economic educators, 21(1), 2021 information is being introduced in the course. in each of the sections below, we summarize the seminal work in the area, but also provide summaries on the effective use of these resources on student learning. each section has a more extensive table providing citations to more specific media sources. tv and movies since the seminal becker and watts (1996) survey on teaching methods, the response has heavily emphasized the use of movie and television clips in the classroom. the perk of using videos in the classroom is that they can be engaging (mateer & calhoun, 2012) and students readily admit that it is their favorite way to learn (vazquez & chiang, 2015). for educators worried that using videos in the classroom decreases the rigor of a classroom, sexton (2006) argues that well-selected videos can provide a more concrete framework and improve retention. picault (2019) and wooten (2020) outline a variety of ways that media clips can be integrated into the classroom. the value of using movies and television clips in the economics classroom boils down to the relevancy for the students. using clips that are relevant to the topic (whether public choice or healthcare) and relevant to the student (the simpsons or south park) can reinforce topics and concepts that otherwise would appear abstract. vidal, mungenast, and vidal (2020) went so far as to design an entire course on economic thinking centered entirely around films, while conaway and clark (2015) designed an entire introductory course around parks and recreation. 16 |journal for economic educators, 21(1), 2021 table 1: using television shows in the classroom variety sexton (2006) mateer, ghent, & stone (2011) mateer (2012) wooten (2018) malek and acchiardo (2020) adam ruins everything wooten & tierney (2019) breaking bad duncan, muchiri, & parschiv (2020) muchiri, parschiv, & wooten (2020) espn 30 for 30 crisp & mixon jr. (2012) al-bahrani & patel (2015b) have gun -will travel murphy, schuler, and wooten (2020) modern family wooten, staub, and reilly (2020) parks and recreation conaway & clark (2015) wooten & staub (2019) seinfeld ghent, grant, & lesica (2011) deal & hegde (2013) hendrickson (2017) ghent and grant (2020) shark tank patel, al-bahrani, acchiardo, sheridan (2014) south park hoffer and crowley (2015) the big bang theory tierney, mateer, geerling, wooten, & smith (2016) geerling, mateer, smith, tierney & wooten (2018) the colbert report randolph (2016) the office kuester, mateer, & youderian (2014) kuester & mateer (2018) the simpsons hall (2005) considine (2006) luccasen & thomas (2010) gillis & hall (2010) chu (2014) butler, butler, and considine (2016) 17 |journal for economic educators, 21(1), 2021 the earliest research summarized a few popular movies and television clips that displayed a strong amount of particularly appropriate content. as web hosting prices declined and the ability to procure particular clips increased, researchers began identifying a variety of clips and posting them online. research notes have identified websites that host clips that can be used across an economics curriculum. websites currently exists for seinfeld,10 the big bang theory,11 the office,12 modern family,13 parks and rec,14 shark tank,15 and breaking bad.16 these websites take a broad approach to teaching with media and often rely on the educator to determine the best way to implement them in their curriculum. because their approach is to host a wide variety of clips, some of the segments are less clear on their economic content than others. each site does, however, include teaching guides that demonstrate ways a few of the videos can be used in the classroom and as part of assessments. table 2: using movies in the classroom variety bhadra (2006) mateer (2006) sexton (2006) macy & terry (2008) parker (2009) mateer & stephenson (2011) mixon (2010) samaras (2014) mateer, o’roark, & holder (2016) carrasco-gallego (2017) burke, robak, & stumph (2018) staley (2018) classic films leet & houser (2003) harry potter deyo & podemska-mikluch (2014) podemska-mikluch, deyo, & mitchell (2016) the hunger games cleveland, holder, & o’roark (2016) mad max mateer & vachris (2017) mateer & vachris (2018) westerns braun (2011) 10 http://yadayadayadaecon.com 11 http://bazinganomics.com 12 http://economicsoftheoffice.com 13 http://modernfamilyecon.com 14 http://economicsofparksandrec.com 15 http://econshark.com/ 16 http://breakingbadecon.com 18 |journal for economic educators, 21(1), 2021 a more recent trend has focused on using media to teach narrow concepts rather than identifying broad concepts in the media itself. researchers have identified relevant media that can be used to teach futures trading (lang, 2013), voting (hoffer and crowley, 2015), marginal revenue product (wooten & white, 2018), functions of markets (kuester & mateer, 2018; rousu 2018), and the coase theorem (murphy, schuler, & wooten, 2020). the benefit of these particular projects is that the focus is on a specific concept and then applies a television show or movie to that concept. for example, murphy, schuler, and wooten (2020) use a single episode of the show have gun – will travel to demonstrate various nuances of the coase theorem. music second to the use of movies and television clips in teaching economics comes music. early work focused on identifying a few key songs that could be used in the classroom to teach particular topics (tinari & khandke, 2010). by identifying a few key songs that correspond to particular topics, educators could play the songs before class as an introduction that day’s lesson (acchiardo & mateer, 2015) or ask students to sing karaoke to demonstrate the supply curve (geerling & mateer, 2015). songs could be played during class and students asked to summarize how the song applies to class content as part of a formative assessment. some websites have been created, which are discussed more below, that have screened songs that contain a strong amount of content and can be used in class. using music to convey economic concepts has been found in the past to improve some student learning (harter, 2003; mcclough and heindfelt, 2012). more recent projects have focused on students developing projects around music or music videos or putting the identification process in the hands of students. some educators have assigned formative assessments that require students to identify a popular song and analyze the song for economic concepts. this assignment can be particularly effective given that new music is released regularly across the world and can help students focus on evaluating the songs for concepts rather than just identifying particular concepts. other educators have taken much larger summative assessments that require students to create music videos that focus entirely on economics concepts (holder, hoffer, al-bahrani, & lindalh, 2015; al-bahrani, libis, drabik, & gibson, 2017). this approach is often used in place of a final exam because of the time requirements to identify a song, write lyrics that incorporate economic content, and produce the actual final music video. this has been found (raehsler, 2013) to have a positive impact on attendance, evaluations, and assessment scores. researchers have also created websites focused on identifying economic concepts in popular music. websites currently exist for country music (melichar, 2018) and broadway music (rousu, 2016). websites that aggregate media, like the economics media library (wooten, 2018) and dirk’s media library (mateer, 2012) have music videos as well. some websites provide more context on the particular song and the economic content, while others rely on the listener to pick up the key concepts in the music video. as with television and movie clips, most authors take the position that if an instructor does not immediately notice the application when they watch the clip, they should probably not use the clip in the classroom. using media in the 19 |journal for economic educators, 21(1), 2021 class requires a certain level of cultural understanding that some may not be comfortable exposing to their classrooms. we cover some of the main criticisms of using media in the classroom later in the paper. table 3: using music in the classroom variety of examples mateer & rice (2007) hall & lawson (2008) hall, lawson, mateer, & rice (2008) tinari & khandke (2010) mcclough & heinfeldt (2012) krasnozhon (2012) o’roark, holder, and mateer (2018) pop songs van horn & van horn (2013) mateer, o’roark, & holder (2016) country music melichar (2018) student generated videos holder, hoffer, al-bahrani, & lindahl (2015) al-bahrani, libis, drabik, & gibson (2017) al-bahrani & thompson (2019) geerling, mateer, and o’roark (2019) nontraditional media although movies, music, and television are the largest source of popular media, they are not the only avenues that researchers have undertaken to parse out economics examples in everyday life. perhaps the most consistent use of media in the classroom has been having students read newspaper articles and listen to podcasts. many universities subsidize newspaper subscriptions for students and major newspapers also have started daily news digests that can be delivered to an inbox. kelley (1983) proposed students create their own newspaper using articles that they identify before class, while hall and podemska-mikluch (2015) emphasized using opeds to teach the economic way of thinking. the prevalence of news media makes this particular form of relevancy more easily accessible, even if it were only the campus newspaper. smallstakes assignments could require students to identify a news article each week and have them submit a short summary to a learning management system. podcasts are another way to bring current issues to the classroom, rather than through hypothetical situations. moryl (2014) created a website17 dedicated to providing resources for instructors interested in integrating podcasts into their curriculum. the continuously updated library includes links to popular podcasts like freakonomics or planet money and are linked to topics in a traditional principles textbook. other researchers have looked specifically at using econtalk with russ roberts (hall, 2012) or npr’s planet money (luther, 2015) in teaching 17 www.audioecon.com 20 |journal for economic educators, 21(1), 2021 economics at the principles level. similar to the introduction of student-generated music videos, student-generated podcasting assignments (moryl, 2016) allow students to apply their economic proficiency and create some deliverable, which the american economic association would perhaps believe satisfies their goal of having undergraduate students be able to present and discuss economics broadly. table 4: using non-traditional media in the classroom art watts & christopher (2012) arriba bueno & vidagañ murgui (2014) al-bahrani, holder, patel, & wooten (2016) vidagañ murgui & arriba bueno (2016) fantasy football nagel (2016) collins and hoffer (2016) general literature watts & smith (1989) watts (2003) historical literature hartley (2001) considine (2006) dighe (2007) cotti & johnson (2012) american novels chamlee-wright (2011) vachris & bohanon (2012) short stories ruder (2010) children's books miller & watts (2011) harter & harter (2014) yetter (2016) comic books o'roark (2017) o’roark (2018) o'roark & grant (2018) o’roark (2019) humans of new york acchiardo, al-bahrani, holder, and mateer (2017) poetry ziliak (2009) bohanon (2012) davis (2019) pokémon al-bahrani, mahon, mateer, and murphy (2018) shakespeare kish-goodling (1998) 21 |journal for economic educators, 21(1), 2021 podcasts hall (2012) moryl (2013) moryl & jiang (2013) moryl (2014) moryl (2016) luther (2015) broadway shows tinari and khandke (2010) rousu (2016) rousu & conrad (2017) rousu (2018) op-ed articles hall & podemska-mikluch (2015) scrapbooking al-bahrani, dowell, & patel (2016) literature has typically been readily available prior to the availability of streaming movies and music. similar to the work in popular television shows, early research focused on a few key novels or important works that could be used to teach economics while future research has explored entire series for economics content. researchers identifying teachable content from literature run the gamut from the shakespeare (kish-goodling, 1998) to the berenstain bears (yetter, 2016). while some instructors may require students read entire books as part of the curriculum, there are many books where the chapters are self-contained to the point where only a subsection of the book could be assigned for a particular topic. wooten and smith (2018) use popular press books like freakonomics as the basis of a homework assignment which can be randomly generated for an entire class using google scripts. a more common approach might be to have students read a book over the entire course of the semester and write a book summary or answer short response questions on an exam. concerns on relevancy there are two main concerns on using popular media in the classroom from a relevancy standpoint: preferences evolve over time and each reference won’t resonate with every student. given the vast number of media available, and the improved access to media compared to earlier in the century, there are vastly more opportunities to use media in the classroom. hit shows and movies seemingly occur more often and it’s possible that the popular culture that has been identified is not currently what students enjoy (al-bahrani, holder, patel, & sheridan, 2016). a more pressing concern may not be whether students find the material enjoyable, but rather if they recognize the media at all. it’s possible, even likely, that some students may not have seen the television show, movie, or song that an educator has chosen to play for that day. this concern, however, is true for any examples that an instructor would chose to use in class and isn’t specific to using media. while student preferences may represent the demand side of using popular media in the classroom, we’d be remiss if we didn’t also consider supply-side concerns as well. given that it 22 |journal for economic educators, 21(1), 2021 is likely at least one student may not recognize the media that was selected, it’s important that educators be comfortable with the content of the clip to be able to describe the story well enough that intimate knowledge of the show is unnecessary. this is one of the rationales for listing the resources above by media source rather than the number of materials available to an educator. the concept of opportunity costs can be found in any number of television shows, movies, or songs listed above, but an educator who is familiar with a particular show will be able to describe the backstory well enough so that students can focus on the economics rather than the media. the final concern of using media in the classroom considers the efficacy of using popular culture to achieve learning objectives. this is an area of the literature that we believe currently is understudied but will likely grow in importance as online teaching becomes more common. one of the difficulties in testing the impact of media in the classroom is that it is difficult to randomly assign classes a particular teaching approach if the instructor believes the media is an important component of the learning process. however, there has been some work showing learning gains associated with using popular media. in a study on the effectiveness of using episodes of the simpsons, chu (2014) finds a positive relationship between exam scores and questions using references from the show. the impact is strongest for students on the lower end of the grade distribution. mcclough and heinfeldt (2012) measure the impact of using songs in a traditional lecture format and find both positive and negative impacts of music on student performance. they argue the impact is medium-specific and that the more concrete and tangible the concept is to student, the more effective popular culture can be. music, and they suggest other popular culture, may have negative impacts on students when the material doesn’t directly relate to the class content. we believe, especially with the growth in online and remote education, a growing number of researchers will turn their attention to studying the impact of popular culture on student learning outcomes. using online courses, educators may be able to randomize the treatment of students exposed to movies, television clips, and music while maintaining the same exams and course content delivery. this appears to be an area ripe for further exploration. staying relevant while the amount of material available is ever-growing, it is essentially already outdated once its published. kenneth elzinga likened the economics lecture to that of a refrigerator in that the material we cover is like the food inside of a refrigerator, “both need to be regularly emptied of items that have gone stale and to have fresh items put in” (2001, p. 251). the following section outlines popular sources of current topics for use in the economics classroom that the authors actively use in their classrooms. note that the material here only lists sources for finding examples, and not the examples used themselves. the use of some of these alternative resources may seem daunting at first, but repeated interaction with these sources can ease anxiety. lewis & fabos (2005) described the process as such that, “when technology becomes ‘normal’…it is no longer complicated, nor is it notable to its users. it is a fact of life, a way of being in the world, a producer of social subjects that find it unremarkable. …[s]o unremarkable that it seems ‘everybody does it’” (p. 470). while the resources outlined below provide many non-economic related concepts, it opens the opportunity for the instructor to begin the process of identifying, utilizing, and 23 |journal for economic educators, 21(1), 2021 (hopefully) sharing those resources with others in the economics community. each section provides a brief background of the resource and what types of examples they may provide. data journalism sites data journalism is a relatively new field of journalism that specializes in numerical data as the basis for information. it incorporates work from traditional journalists, graphic designers, and computer programmers to create and disseminate information. the information available through these sources can be as varied as data visualizations, podcasts, interactive graphs, short digital films, opinion-editorials, and news pieces. similar to the material that has been published previously, students could be asked to merely search for relevant topics and submit summaries each week or educators could select topics and discuss them in class. three prominent data journalism sites include fivethirtyeight, the upshot, and vox news. fivethirtyeight is a statistics-driven branch of abc news18 focusing on the emerging field of data journalism. while initially created by political pundit nate silver, the site has grown to encompass more than political conversations. the site creates and uses polling data on a variety of topics to create data visualization tools. the site has sections for politics, economics, science, life, and sports and covers a broad range of national and international issues. thus, the use of fivethirtyeight articles works best for field courses in health, labor, or political economy courses. the site also makes some of their data publicly available through github,19 which may aid faculty teaching statistics, econometrics, or data analytics. similar to fivethirtyeight, the upshot (a division of the new york times) covers a broad range of national and international topics. the upshot occasionally provides “everyday economics” topics that look at economics applied in everyday situations. the goal of the upshot was to take complicated news issues and present them in an approachable way. students do not need a new york times subscription to access material on the upshot. vox media has a significant presence in data journalism but provides additional analysis through nontraditional techniques. major news topics are digested frequently with a frequently asked questions article in an attempt to consolidate frequent news updates. the site’s signature feature is the use of wiki-like “card stacks” that can be updated as news changes. the card stacks include relevant data, definitions, and context to news articles. vox cards can be used as initial resources for students writing papers on recent events because the information is condensed to a manageable list of known facts. vox also produces short videos illustrating important debates or relevant news. these videos are usually less than three minutes in length and can often be safe to show in class. vox also produces listicles, which are articles of lists, such as “37 maps that explain how america is a nation of immigrants.”20 listicle articles contain data visualizations and charts that may be relevant in principles and upper-division classes. another strong resource is the econofact network21 which summarizes major economic and social policies. the analysis is provided in a form of a short memo through data and historical experience. contributors are primarily academic economists from a variety of 18 fivethirtyeight was formerly a branch of the new york times. 19 https://github.com/fivethirtyeight 20 http://www.vox.com/2015/1/12/7474897/immigration-america-maps 21 https://econofact.org/ 24 |journal for economic educators, 21(1), 2021 institutions who focus on using non-technical language and attempt to separate themselves from political views. this particular site provides good review material for students who may be asked to present projects on particular topics or who may be required to participate in a class debate. reddit reddit is a community where individuals can submit, share, and discuss content from around the internet. the power of reddit lies in sheer size of its user base (approximately 170 million unique monthly visitors) and the vast array of information posted in over 8,000 different categories (known as subreddits). there are a few very popular subreddits that contain information that can be used to teach economics, which are detailed below. subreddits are denoted in shorthand as the portion of the url following reddit.com. for example, the subreddit for economics is denoted as /r/economics. for valuable infographics and data visualization sources, the data is beautiful subreddit (/r/dataisbeautiful) has with more than 14 million subscribers. this subreddit contains visual representations of various data sources, and often feature graphs, charts and maps. this subreddit is a great source of information for courses that utilize a lot of data, particularly in upper-division courses like labor, development, health, and trade. posters are required to include links to their datasets, which can be a good source for students looking to analyze unique data sets. for a course focused on data analytics or econometrics, the subreddit data is ugly (/r/dataisugly) can provide some often-humorous examples of how not to represent data. other, similar, subreddits include /r/mapporn, /r/infographics, /r/wordcloud, and /r/mathpics. reddit hosts an active economics community at /r/economics. the focus of the subreddit is the dissemination and discussion of research and news from the perspective of economists. the 800,000+ subscribers tend to focus primarily on macroeconomic related topics. there are occasional conversations of microeconomic topics that come from various news outlets like the economist or fivethirtyeight. thus, the economics subreddit is ideal for infusing current events into a principles or upper-division class. many larger universities (as well as cities and states) have subreddits that can be used to find news that students may find relevant to their personal lives. while many university subreddits focus on posts about degree information and sports results, many city and state subreddits have local news that could have some economic implications. in the past, the authors have used information about local businesses closing or relocating to discuss operating costs or monopolistic competition. the use of familiar establishments helps students see economics occurring around campus or town. satirical news satire has become a popular source of news for many online. based on surveys conducted by the pew research center22 of people’s media habits, more adults had heard of the colbert report (62%), a former cable satirical news show, than npr (53%), the economist (34%), and 22 https://www.pewresearch.org/fact-tank/2014/12/12/for-some-the-satiric-colbert-report-is-a-trusted-source-ofpolitical-news/ 25 |journal for economic educators, 21(1), 2021 buzzfeed (31%). satirical news productions like saturday night live’s weekend update, the daily show with trevor noah (formerly jon stewart), stephen colbert’s former show the colbert report, and john oliver’s last week tonight have become common method of introducing sensitive subjects with a humorous twist. all three of standalone shows focus on current events, and john oliver has even been accused of being a “real journalist” even though he considers himself a satirist.23 satirical video clips are typically under 8 minutes in length and can provide poignant economic arguments without coming across as academic. while many of the sites mentioned earlier were developed around the practice of showing short clips demonstrating economic principles, many of the satirical shows take very complex economic issues and present them in an easy to understand way in a relatively short amount of time. for example, john oliver works through the most relevant issues of the gender pay gap in a seven-minute video.24 oliver works through wage inequality in the united states in a fourteen-minute video.25 thomas piketty, author of capital in the twenty-first century, has appeared as a guest on the colbert report26 to discuss his book, while daniel hamermesh appeared on a segment of the daily show27 to discuss his research on the discrimination for ugly people. it is important to discuss the satirical nature of the video or news with students, especially if using a video from a heavily satirical site like the onion. most students seem to understand the nature of these shows and many can see through the satirical veil to the underlying concepts being discussed, but for students whom english is a second language this may not be as easy. it is also important to watch the clip in its entirety before showing to students because these are shown on cable networks, which means some adult language can slip into the video. social media over the past decade, social media has grown as a place that all people can gather, share experiences, and learn from each other. social media can be used by economics educators to collect relevant information to share with their students, either online or in the classroom. as social media has grown, some instructors have moved to place social media prominently in their classrooms, while others have shown some reluctance (al-bahrani, patel, & sheridan, 2017a). social media can be used for communicating directly with students (al-bahrani & patel, 2015a; al-bahrani, patel, & sheridan, 2015, al-bahrani, patel, & sheridan, 2017b), operating as a discussion forum for sharing ideas (jones & baltzersen, 2017; harmon, alpert & histen, 2014; george 2019), or actually used as part of an assessment (dowell & duncan, 2016; kassens, 2014). while there are a variety (and growing) number of social media sites, al-bahrani & patel (2015a) suggest that twitter is a better communication tool than instagram or facebook. twitter is a social media platform that allows for one-way or two-way communication with students, colleagues, experts, political figures, and the general population. each of the authors of this 23 https://time.com/3589285/unfortunately-john-oliver-you-are-a-journalist/ 24 https://econ.video/2015/01/13/last-week-tonight-gender-pay-gap/ 25 https://econ.video/2020/05/14/last-week-tonight-wealth-gap/ 26 https://econ.video/2020/05/14/the-colbert-report-picketty/ 27 https://econ.video/2017/11/27/the-daily-show-ugly-people-discrimination/ 26 |journal for economic educators, 21(1), 2021 paper is an active twitter user along with significantly more notable economists. many universities and academic departments are active on twitter as well and provide the opportunity for local or university news to be presented in class as relevant examples for students. nearly 330 million active monthly users, compose tweets, which are snippets of information.28 many tweets are of updates or commentary, but certain accounts provide links to news articles and graphics. users can follow the tweets of anyone with a public profile or request access to someone’s private tweets. the use of hashtags (#) allow for the grouping of tweets under a certain topic which acts almost like a filing system. there is an active group of economic educators that share news articles, images, and podcasts under the hashtag #teachecon and #econtwitter. a wider audience of educators from a variety of disciplines follow with the hashtag #academicchatter and #academictwitter. using hashtags and connecting with fellow educators increases the availability of high-quality sources that twitter can provide. by following popular websites, including some of the sources listed above, educators can create a stream of sources with little upfront cost. the use of twitter as a teaching tool, however, has been shown to have mixed results on student learning outcomes (enz & kassens, 2016; al-bahrani, patel, & sheridan, 2017a). similar to a previous conjecture from before, if students enjoy the class more and the teaching method does not hinder performance, it may still be worth the investment by faculty members. conclusion staying relevant is a struggle for many economic educators, but it doesn’t have to be. call it status quo bias or a comfort, but many educators are hesitant to introduce new material and methods in class. this explains why more than half of instructors report using 85% of class time in traditional lecture mode. for many educators, it can be uncomfortable to introduce new teaching methods or teaching examples that are not familiar to them. elzinga (2001) once remarked, “i have the reputation as teaching tough courses but caring for my students. part of my reputation for care comes from expenditure of time; part comes from simply signaling a willingness to care” (p. 256). while some, or maybe most, of the resources provided here may seem irrelevant, the goal is to motivate readers to continue to find relevant examples. a lot of work has been completed to show that finding the material can be done, but it is up to the educator to continue that work and connect economics to relevant examples facing their student population. references abu, r., & flowers, j. 1997. “the effects of cooperative learning methods on achievement, retention, and attitudes of home economics students in north carolina.” journal of career and technical education, 13(2): 8. acchiardo, c., al-bahrani, a., holder, k., & mateer, d. 2017. “through the lens of life: teaching principles of economics with humans of new york.” journal of economics and finance education, 16(2): 19-30. 28 one of the novelties of twitter is that tweets must be less than 280 characters. more information on twitter user demographics can be found at 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economics teaching, 1(1): 42-70. ziliak, s. 2009. “haiku economics: little teaching aids for big economic pluralists.” international journal of pluralism and economics education, 1(1/2): 108-129. 1 |journal for economic educators, 23(1), 2023 undergraduate research nudging students through email communication justin davidson,1 chanikan (pluem) yongyuan,1 and joshua a. price2 abstract this study analyzes the results of an experiment using personalized emails to nudge second-year students to attend a career fair. the study relied on peer mentors to send out emails informing students about the details of the career fair. students were randomly assigned to receive an email that focused on the benefits of attending the career fair and offered pizza and a prize if they attended a session to help them sign up and prepare for the career fair. the results indicate that the intervention had no measurable effect on increasing the likelihood that students attend the help session or attend the career fair. several reasons for this might be because of email overload, present-biased preferences, and factors related to covid. further, we provide guidance on what might be done to address these factors in future interventions. key words: higher education, behavioral nudges, student engagement jel classification: i23 introduction one way in which universities have evolved over time is through increases in student services. these services offer students opportunities to engage with the university outside of instructional hours. this engagement, referred to as institutional engagement, comes in the form of extracurricular activities, student clubs, sporting events, career preparation centers, etc. (page, 2020). students who are institutionally engaged are 2.5 times more likely to say that they get excellent grades and do well in school, and they are 4.5 times more likely to be hopeful about the future than their disengaged peers (hodges, 2021). students who reported more frequent engagement in university activities earned higher grades and were more satisfied with their college experience (svanum & bigatti, 2009). as a result, universities often dedicate resources to provide a wide array of opportunities to engage students. as universities increase their student service offerings, one of the challenges they face is how to get students to participate in the opportunities offered. reasons why students may not participate can be attributed to two factors: awareness and salience of benefits. awareness includes students being informed of the opportunities the university offers. salience of benefits involves students’ knowledge of the benefits of participating in these opportunities. consider the example of a university-sponsored career fair. awareness would include knowing about the time and date of the event, but it would also include information about what is required to register, which employers will be recruiting, and what is needed to participate. many 1 undergraduate student, economics, marketing and analytics department, southern utah university, 351 w. university blvd., cedar city, ut 84720 2 associate professor of economics, economics, marketing and analytics department, southern utah university, 351 w. university blvd., cedar city, ut 84720 2 |journal for economic educators, 23(1), 2023 students are informed of the event details but may wonder how attending a job fair in october would be beneficial if they don’t graduate until may. students may not be aware that many employers recruit during the fall months to fill positions that start after graduation. this highlights the second reason why a student may not participate: the benefits are unknown to them. this study examines an intervention designed to overcome the two obstacles that might prevent students from attending a campus sponsored career fair. the intervention focused on increasing awareness of the event through personalized emails sent from peer mentors. the emails explicitly listed potential benefits that the student could experience realize if they attended the career fair. the results indicate that this intervention had no measurable impact on students attending the career fair. included is a discussion about the implications of this intervention on institutional engagement of college students and about what can be learned from this intervention in improving institutional engagement among college students. literature review the intervention that this study examines uses informational nudges to influence behavior. there are several studies which have examined the effectiveness of informational nudges in higher education. castleman and page (2015) show that personalized text messages from near-aged peer mentors were effective at improving college outcomes for low-income students, focusing on enrollment between the senior year of high school and freshmen year of college. castleman and meyer (2020) analyzed a university-based text messaging system to overcome informational barriers in college persistence. they found that students receiving the text messaging are more likely to remain enrolled through their first year of college. oreopolous et al. (2020) found that a large-scale text messaging campaign designed to improve students’ academic and non-academic outcomes did not improve course performance. however, they also found that student satisfaction and sense of belonging to the university increased. a common component in these studies is that the informational nudges were paired with personalized support to help individuals act upon the nudge received. other studies that focused on informational nudges alone found that they were not effective in improving student outcomes. oreopolouls and petronijevic (2018) found that weekly study reminders sent via text message had a small impact on study times and no measurable impact on grades. bettinger et al. (2012) used informational nudges to induce eligible individuals to apply for a pell grant. their results showed that informational nudges without any support to act on the nudge did not lead more individuals to apply for the pell grant. bird et al. (2019) attempted a large-scale randomized control trial to replicate studies that showed positive impacts of informational nudges, but their study found that these informational nudges were not effective. making the benefits of a program salient is also a key component to studies that find positive impacts of informational nudges. marx and turner (2019) showed that providing a letter with the exact amount of loans a student is eligible for increases the likelihood that they apply for a loan by 40%. price (2021) showed that a letter from a university to high school seniors providing the potential pell grant award amount increases the probability that students apply to that college. dyanarski et al. (2021) found that personalized letters with financial aid information increased application and enrollment rates of high school seniors. the focus of this study is on a university-sponsored career fair. career fairs can provide great benefits for students as they can be a low-cost way for students to meet many potential employers and apply for jobs. an intervention was designed to bring awareness of the event to students and to make the benefits of attending more salient. personalized emails were sent to 3 |journal for economic educators, 23(1), 2023 individual recipients from an existing peer mentor.3 this peer mentor was available to help students act upon the nudge to register for and attend the career fair. the messages focused on highlighting the benefits that the student could receive by attending the career fair with the intention of making these benefits more salient for the recipient. the contribution of this study is two-fold. first, this study examines a setting in which a university had a goal of increasing student engagement by attending a career fair. an intervention was designed based on previous research with the goal of increasing attendance. even though the intervention was based on what worked for previous studies (personalized emails, partnered with a peer mentor, and a focus on the benefits), the results indicate that the intervention was not successful. understanding why such an intervention was not successful can be informative in designing future interventions. second, the target population of the intervention was sophomores in college. this group was chosen primarily because each sophomore was assigned a peer mentor which allowed the researchers to couple informational nudges with additional support.4 providing resources for underclassmen to prepare for their career can be very beneficial for these individuals. stabelton and diamond (2018) showed that often underclassmen are very concerned about their future careers but don’t have access to resources to help them in the job search as do upperclassmen. finding effective interventions early in their college careers can better prepare students for success when they graduate. the intervention the intervention was conducted at a regional public university in the western united states. the university hosts two campus-wide career fairs each year, one in the fall and one during the spring semester. in a typical year, the career fair is held in-person on campus throughout the day in the middle of the week. the career fair is advertised through multiple mediums by different organizations on campus (career services, student mentors, faculty members, university website, emails, and the student’s online portal). normally, students can show up on the day of the fair and participate. however, in 2021, the career fair was held virtually as a result of the covid-19 pandemic. as a result, students had to sign up beforehand in order to participate in the career fair. the university has a peer mentoring program for firstand second-year students which matches them with an upper-class or graduate mentor. the mentors are trained to provide students with individualized mentoring and professional and personal development. they are also intended to be a primary point of contact for accessing resources on campus. the current study focuses on second-year students as they are more likely to benefit from a career fair compared to first-year students. second-year mentors are known as leads (called after the program they participate in, which stands for leadership, engagement, and development), and each lead is assigned around 20 second-year students. the leads take the initiative to communicate with their mentees and form relationships throughout the school year. the intervention was designed to use information about the career fair to nudge secondyear students to attend. due to the requirement that students had to register for the career fair beforehand, the intervention also included a help session where leads were available to work 3 previous studies have used both text messages and emails to reach target populations. among the existing peermentors, email was the most common form of communication. (millican (2020) identifies email marketing as the most cost-effective communication for educational institutions.) 4 juniors and seniors are not assigned peer mentors at the university. 4 |journal for economic educators, 23(1), 2023 with students one-on-one to help them register. there is a location in the student center where the leads are normally located to help students; the help session was hosted at this location. to identify the causal effect of the information coupled with peer-mentor assistance, second-year students were randomly assigned to either a treatment or control group. assignment to each group was done by block random assignment for each lead. those assigned to the control group were sent an email from their lead with the time and date of the career fair and a link that they could use to register. they were also notified of the date and time that the help session would be held. the help session was scheduled five days before the career fair and was designed to help students register and prepare for the fair. in accordance with campus covid policies, students could attend the help session in person or meet with a lead through zoom. those in the treatment group were sent the same email but with two important additions. first, the emails listed specific reasons why they should attend the career fair. these reasons included the following: employers were hiring summer interns now even though it was fall, the career fair offered an opportunity to practice how to act in a professional setting, and the career fair offered the opportunity to network with potential employers. this was done to highlight the benefits available to second-year students for attending the career fair with the intention of inducing students to attend. the second way in which the treatment differed from the control was to provide immediate and salient benefits to those who attended the help session. in addition to the times and dates, those in the treatment group were offered free pizza and were entered into a lottery to win $50 at the university bookstore if they attended. analysis this university has over 10,000 undergraduate students, and 2,110 of those students are sophomores. using the university’s website, table 1 reports the breakdown of enrollment for all sophomores between the university’s nine colleges during the 2020-2021 academic year. humanities and social sciences has the most sophomores with officially declared majors followed by health sciences and engineering and computational sciences. 5 |journal for economic educators, 23(1), 2023 table 1. head counts of sophomore students in each college college number of students humanities and social sciences 705 health sciences 322 engineering/computational sci 314 business 232 education & human develop 214 sciences 170 library 147 performing and visual arts 147 integrative & engaged learning 6 total number of sophomores 2,110 in our study, there were a total of 1,866 second-year students that had been assigned a peer mentor.5 in the control group there were 931 students, and these received the email that only provided dates and times of the events. the other 935 students were assigned to the treatment group which identified the benefits of attending the career fair and offered pizza and a prize for attending a help session. out of the 1,866 students in this study, only four showed up to the help session. those four all went on to attend the career fair. a total of 45 sophomores attended the career fair, which amounts to 2.41% of all sophomores. this is significantly lower than previous years, mostly attributed to the virtual nature of the fair in response to covid. the research design relied on the random assignment of students to the treatment and control groups in order to identify the effects of the intervention. two outcomes were examined to measure the effectiveness of the intervention. the first is a binary outcome that equals one if the student attended the help session designed to help them register and prepare for the career fair. the second outcome is also a binary outcome that equals one if the student signed up for the career fair. students could sign up for the career fair on their own, they did not need to meet with the 5 second-year students who are classified as full-time online students are not assigned a peer mentor. 6 |journal for economic educators, 23(1), 2023 leads to do so. outside of these two outcomes and the assignment to the treatment and control group, no other data was available. as such, we do not have data on observable characteristics of the students including gender, race, major, grade point average, etc. we use the following model to estimate the effectiveness of the intervention: (1) 𝑃𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦(𝑂𝑢𝑡𝑐𝑜𝑚𝑒 = 1)𝑖 = 𝛽0 + 𝛽1(𝑇𝑟𝑒𝑎𝑡𝑚𝑒𝑛𝑡)𝑖 + 𝜆𝑗 + 𝑢𝑖 the outcome is one of the two mentioned above. treatment equals one if individual i was assigned to the treatment group. as each lead has a unique relationship with the students whom they mentor, 𝜆𝑗, represents a vector of dummy variables for each lead to control for lead-specific factors. table 2 presents the results of the linear probability estimations of model (1). in regard to the outcome of attending the help session, the treatment variable shows that those in the treatment group were no more likely to attend the session. of the four that attended, one was in the control group and three were in the treatment group. however, the small sample size does not allow the model to identify any statistical difference. table 2. estimation of linear probability model with the two outcomes of model (1) (1) (2) (3) (4) variables help session help session attend career fair attend career fair treatment 0.002 0.002 0.005 0.005 [0.002] [0.002] [0.007] [0.007] constant 0.001 0.001 0.021*** 0.022*** [0.002] [0.002] [0.005] [0.005] control for lead no yes no yes observations 1,866 1,866 1,866 1,866 r-squared 0.001 0.013 0.000 0.014 standard errors in brackets *** p<0.01, ** p<0.05, * p<0.1 columns (3) and (4) of table 2 display the results of model (1) with the outcome being equal to one if the individual attended the career fair. column (4) includes controls for the lead and shows that 2.15% of those in the control group attended the career fair. those in the treatment group were 0.5 percentage points more likely to attend or 24% more likely to attend, though the difference is not statistically different from zero. overall, these results show three key findings. first, holding the help session appears to have been ineffective in encouraging students to sign up for and attend the career fair. second, a very small fraction of sophomores attended the career fair. and third, the messaging used in the email does not appear to have been effective in nudging more students to attend the career fair. 7 |journal for economic educators, 23(1), 2023 discussion the important question, then, is why was the intervention not successful? we will explore several explanations with the hopes of informing and influencing others as they seek to improve the effectiveness of communication with college students. email overload email overload refers to receiving so many emails that the recipient’s inbox becomes overcrowded, and new emails are not organized, categorized, or even read. in a study about email overload, grevet et al. (2014) state, “one indication we had about information overload was the mentioning of large volumes of unwanted emails. our participants often called these messages ‘spam.’” as a result of email overload, many emails are not even opened by the recipient. in the grevet et al. (2014) study, the average number of unread messages in participants’ work email was 696. email overload makes email a less effective mode of communication. if college students experience email overload, then communications from their university may be less effective because they fall amongst the clutter of other emails received. for example, a study at michigan state university revealed that students received over 400 emails from the school each semester. “students understandably didn't have the time or inclination to read the tremendous amount of information pushed to them each day. as a result, they missed out on important information from the university” (trost, 2018). as email is often the university’s primary means of communicating with students, whether it be professors, student services, etc., it is highly likely that email overload may make a single email an ineffective means of communicating with students. the intervention for our study examines the effectiveness of a single email. if that email is one of 400 received, then it is not surprising that it had little to no impact. the following could be done to increase the effectiveness of email communications: 1) the university and groups within the university could reduce the number of emails sent. this is not likely to work. that is, if every entity were to commit to reduce the number of emails, one group could see a benefit if they were to deviate and send multiple emails. the relative salience and importance of their emails make this strategy individually beneficial. since each entity faces the same potential benefits, it is unlikely to work. 2) increase the “catchiness” of the email. this can be done with short subject lines, preheaders, optimizing images, etc., that can be accessible over computer and mobile formats to engage the recipient (millican, 2020). the challenge with this is that what might be catchy for one recipient may not catch the attention of another. 3) have the email come from a known sender. emails sent by known senders might lead students to be more likely to open the message. many recent phishing emails rely on this by using names of known individuals within the subject line or even email address. it may not be enough for emails to come from official school emails. they may need to come from known individuals within the circles of students on campus. in this intervention, the email came from an assigned peer-mentor (lead) but there may be better known senders to send important information, such as a professor. organizations often form marketing campaigns to reach the target audience. marketing campaigns can last days, weeks, or months. our intervention consisted of a single email a few days before the target event. many organizations on campus form marketing campaigns that use more than just email. these might include signage on campus, announcements on the student’s university portal, and even social media posts. henley (2011) found that “effective social 8 |journal for economic educators, 23(1), 2023 marketing requires coordinated approaches both upstream and downstream. in practices, social marketing campaigns need to be sustained over time to create change at a cultural or societal level.” for example, an entire marketing campaign is used on campus to nudge students to register for classes, including announcements placed in restrooms on campus. present-biased preferences the decision to attend campus events, like a career fair, can be viewed using an investment framework. when making the decision to invest, the cost of the investment is usually upfront while the benefits are realized in the future. the decision to attend college is exactly one of these decisions. the costs (i.e. tuition) are required up front, and the benefits (i.e. learning, social experiences, improved career options) are realized in the future. present bias refers to favoring decisions that provide net benefits today even if that means forgoing a greater net benefit in the future. in other words, individuals have preferences that are inconsistent over time. rabin and o’donoghue (1999) state that time consistent preference “ignores the human tendency to grab immediate rewards and to avoid immediate costs in a way that our ‘long-run selves’ do not appreciate.” the example provided in their paper explains that individuals would prefer to do an unpleasant task for seven hours one month in the future than conduct the same unpleasant task for eight hours, one month and two weeks in the future. yet when it came time to complete the unpleasant task for seven hours, individuals preferred to wait the additional two weeks to do the task even if it required them to do it for an additional hour. their preferences changed over time, giving the present more weight in their decision-making process. this bias towards the present can explain why students chose not to get involved in campus activities, such as a career fair. most students, when asked, would say that going to a career fair would be beneficial in helping them find employment after graduation. going to a career fair can be unpleasant for many students. it requires students to prepare a resume, dress up, and engage in conversations with strangers. many students recognize that attending the career fair is more beneficial than searching for a job all on their own several months later. however, due to presentbiased preferences, they might initially make the decision to go to the career fair, but when the day of the career fair arrives, they choose not to attend. instead, they may decide that they will search for a job on their own at some future date even if it requires more time and be more difficult to do. present-biased preferences may be an even stronger explanation for the null results in this study. the participants in this study were sophomores. these students are at least two years away from the traditional time to search for a post-graduation job. for them, the benefits of finding a job are so far in the future, present-biased preferences may have had a much stronger impact than if the experiment had been conducted among seniors or even juniors. to address this potential bias, pizza and the potential to win a gift card were offered to attend the help session. while it is often thought free pizza is the best incentive to motivate college students, it may not have been sufficient to overcome the upfront costs that students perceive in this scenario. additionally, the lottery to win the gift card makes a portion of the immediate benefit not known with certainty. a more salient and effective reward, though more expensive, might be a gift card of a smaller amount for every student who participates in the intervention. another way to combat present-biased preferences, individuals can be nudged to commit to their planned action. this can be done by using current preferences to help individuals commit to future actions. an example of this can be seen in weight loss programs that require individuals to post a bond up front and then be refunded as they reach their goals. structuring a weight loss 9 |journal for economic educators, 23(1), 2023 program like this can be more effective than simply paying for weight loss (cawley and price, 2013). however, applying refundable bonds in the higher education setting may not be practical. a similar way to overcome present bias is for individuals to set a plan of action for their future self to follow. in a field experiment designed to increase voter turnout, a call to encourage voters to vote had no effect on turnout. but if the caller facilitated the formation of a voting plan, individuals were 9.1 percentage points more likely to vote (nickerson and rogers, 2010). if students can create a plan, they can improve their future outcomes. this is regularly done when students fill out a “plan of study” in which they plan which classes they will take each year as they work toward graduation. students could also complete such plans in regard to participating in important extracurricular activities, such as a career fair. covid related issues covid has brought on new challenges for college students. one of these challenges has been the openness of college campuses and courses. in response to covid, many colleges converted the traditional face-to-face experience to a virtual one during the second half of the academic school year in 2020. as colleges prepared for the 2020-2021 academic school year, difficult decisions were made about the appropriate balance between in-person and virtual courses and campus activities. the university where this intervention was conducted made the decision to be open for inperson classes and activities for the 2020-2021 school year, with several caveats. first, both faculty and students could opt for virtual instruction. this led many students to not physically be on campus because they could complete their coursework virtually. this also meant that many students who were physically on campus had courses that were taught virtually based on the faculty member’s decision. second, there were limitations placed on the number of individuals that could gather indoors. as a result, many larger activities that had happened in the past were required to be virtual during the covid pandemic. third, due to the virtual nature of many activities, participants were required to register beforehand. essentially, this created an added step to follow, or in other words, an added hurdle that individuals who wanted to participate had to overcome. these three points provide a plausible explanation as to why the intervention was not effective. the virtual nature of campus limited the reach of on-campus advertising of events. as such, more advertising was done via email, adding to the potential for email overload. even if the students in the treatment group saw the email, and it was effective in getting them to act, the registration requirement to attend the career fair may have been a hurdle preventing the students from acting upon the prompt. in a typical year, a prompt could have been sent the day of the event and the student could have immediately responded and walked over to the career fair. however, in our setting and due to covid, students had to create a handshake account in order to register for the career fair. this was a much more onerous task than what was previously required of students. when the process to register for a program becomes too complex or time-consuming, it may lead individuals for whom the program is designed to not participate in the program. an example of this is the complexity of the process to complete a fafsa in order to receive a pell grant (dynarski & scottclayton, 2006; cochrane, 2010; bettinger et al., 2012; kofoed, 2017). the recommendation for colleges is to simplify the registration process as much as possible. another potential explanation of the ineffectiveness of the intervention is that students may have been experiencing burnout from having to deal with the pandemic over the past year. studies have shown that the prevalence of depression, anxiety, and stress were higher for college students 10 |journal for economic educators, 23(1), 2023 during the pandemic (wang et al., 2020; son, et. al., 2020; fruehwirth, 2021). under such conditions, students may have sought to reduce stressors in their lives, which could have included participating in the career fair. this may be especially true for second-year students because they were still years away from graduation. conclusion in conclusion, our intervention was designed to nudge students toward participating in a campus activity. the nudge was focused on providing salient information on the benefits of attending a campus career fair. knowing that registering might be a hurdle for some, the intervention also included a session to help individuals register for the career fair. to induce individuals to come to the help session, pizza and a prize were offered. the information was provided in personalized emails from peer mentors who had already established a rapport with the students. the results indicate that the intervention had no measurable effect on increasing the likelihood that students attend the help session or the career fair. we have presented several reasons why this might be the case: email overload, present-biased preferences, and factors related to covid. further we have provided guidance on what could be done to address these factors for future interventions. even with the lack of statistically significant results, the question to be asked is should colleges continue in attempts to use light-touch informational nudges to influence student behavior? in a cost-benefit framework, the costs to conduct such interventions are low such that a very small benefit would justify the intervention. as such, the focus going forward should be on the design of the nudge. this includes answering questions like what information should be provided and how should the information be provided (framing). additionally focus should be given on how the information is communicated and what medium should be used to communicate with students (email, text, social media): how often should messages be sent, and who should send those messages? focusing on these aspects will increase the effectiveness of future interventions and ultimately improve student outcomes. references bettinger, e. p., long, b. t., oreopoulos, p., & sanbonmatsu, l. 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(2018, october 4). you're sending too many emails: signal vine blog. signal vine. https://www.signalvine.com/texting-best-practices/are-you-sending-too-many-emails. accessed 5/10/21 https://www.signalvine.com/texting-best-practices/are-you-sending-too-many-emails.%20accessed%205/10/21 https://www.signalvine.com/texting-best-practices/are-you-sending-too-many-emails.%20accessed%205/10/21 12 |journal for economic educators, 23(1), 2023 wang, x., hegde, s., son, c., keller, b., smith, a., & sasangohar, f. (2020). investigating mental health of us college students during the covid-19 pandemic: cross-sectional survey study. journal of medical internet research, 22(9), e22817. 25 |journal for economic educators, 20(2), 2020 towards a renewed perspective on teaching minimum wage junaid b. jahangir1,2 abstract the objective in this paper is to show how the textbook treatment of minimum wage can be enhanced. this is done by contrasting textbook material with that from the popular press and think tank analyses and by including a review of the empirical evidence. three extensions of the standard model on minimum wage are delineated – the use of an inelastic demand curve for labor, incorporation of the boom and bust cycle, and the monopsony model. the debate around the profile of the minimum wage worker is introduced to show students how data can be marshalled by opposing sides of the debate. a simple exercise on the disemployment effect is also introduced in a bid to motivate students with real life data. these enhancements to the textbook material offer a more comprehensive understanding than the simplistic standard model. key words: minimum wage, disemployment effect, profile of minimum wage worker, monopsony jel classification: a22, j380 introduction about two decades ago, krueger (2001) argued for a renewed perspective on teaching minimum wage at the first-year level when students are introduced to the principles of economics. he asserted that it was hard to think of any other economic policy that affects first year students. additionally, he opined that the treatment of minimum wage at the principles econ 101 level is quite superficial compared to its coverage in an undergraduate labor economics textbook. therefore, he argued for the incorporation of alternative economic models including the monopsony model, which is usually taught at the intermediate microeconomics level, along with empirical evidence on minimum wages at the econ 101 level. the presentation of minimum wage at the econ 101 level based on popular principles textbooks continues to revolve predominately around the basic demand supply model approach that was initially propounded by stigler (1946). the basic lesson hammered into students is that of the disemployment effect that arises as a consequence of a binding price floor. but as first year economics students face alternative arguments in wake of the move towards $15 minimum wage, increasing inequality, concerns on low paying jobs and student debt, and the debate on social media, it is a disservice to economics students to simply cover the basic model and rush through this topic without adequately addressing the full breadth of arguments, both in favor and in opposition to the increase in minimum wage, as they appear in media articles. the objective in this paper, therefore, is to determine how the econ 101 textbook treatment of minimum wage can be complemented not only by krueger’s aforementioned suggestions but also by drawing from how the discussion is shaped by academics, think tank 1 assistant professor of economics, department of anthropology, economics and political science, macewan university, 10700 104 ave, edmonton, alberta, t5j 4s2 2 i am grateful to denise young for her critical input and support. 26 |journal for economic educators, 20(2), 2020 experts and journalists in media articles. this paper is divided into seven sections. the next section draws out main themes from the discussion on minimum wage in canadian textbooks and media articles (mostly in the context of alberta). the idea is to tabulate how canadian textbooks fail to comprehensively touch upon these themes and therefore to support the case for complementing the textbook exposition with discussion from media articles. the third section follows up on krueger’s suggestion to delineate how the empirical evidence on minimum wage offers a nuanced picture in contrast to the simplistic standard demand and supply model. the fourth section focuses on extending the standard model with the case of inelastic demand curve for labor, the relevance of the boom and bust cycle, and by building on krueger’s suggestion to present the monopsony model. the idea is to show that with these extensions, students at the principles level can better understand how the disemployment effect in the standard model is mitigated. the fifth section delineates the representation of the minimum wage worker in the media, which is a focal point in the debate on raising the minimum wage. the idea is to show how the same data can be presented differently to bolster the case of both opponents and advocates of the minimum wage. the sixth section shows how the disemployment effect is differently reported in media analyses. it also shows the use of simple calculations, based on sonn and lathrop (2016), that first year students can perform to gauge the disemployment effect. the seventh section provides concluding remarks. media articles versus canadian econ 101 textbooks the differential treatment of minimum wage in canadian textbooks many textbooks used in the canadian context predominately focus on the standard theoretical model. however, while some are skewed towards arguments from the opponents of minimum wage, others highlight arguments from the advocates of minimum wage. mankiw, kneebone, and mckenzie (2020) predominately emphasize the negative impact of minimum wage by presenting arguments that high minimum wage causes unemployment, encourages teenagers to drop out of school and prevents some workers from obtaining on the job training. they emphasize the empirical result that a 10% increase in minimum wage reduces teenage employment between 1% and 3%. parkin and bade (2015), hubbard, o’brien, serletis and childs (2017), and ragan (2020) substantiate that the impact of minimum wage in a canadian context is more adverse than in the u.s, that is, between 3% and 5%. as an alternative to minimum wage, hubbard et al. (2017) mention that the earned income tax credit (eitc) reduces the tax liability of low-wage workers and places a lesser burden on small businesses. karlan, morduch, alam and wong (2017), sexton, fortura and kovacs (2010), and cohen (2015) adopt a relatively more balanced approach and provide arguments in support of the advocates of minimum wage. karlan et al. (2017) connect minimum wage with efficiency wage to argue that higher minimum wage would incentivize firms to hold on to experienced workers and that workers would work harder to avoid being fired. sexton, fortura and kovacs (2010) mention the beliefs held by some that the unemployment cost would be a reasonable price for ensuring a decent wage. cohen (2015) mentions that hundreds of economists including five nobel prize winners believe that the benefits of minimum wage outweigh the costs. he asserts that evidence suggests that minimum wage has little to zero effect on employment and that most beneficiaries are adult, female, and the working poor. yet, none of these texts provide a comprehensive treatment on minimum wage in one place and therefore do not capture the multi-faceted discussions in media articles. this necessitates 27 |journal for economic educators, 20(2), 2020 complementing the terse textbook exposition with the rich discussion based on media and some think tank articles as follows. the opponents and proponents of minimum wage in the media disemployment effects businesses and conservative politicians often exaggerate the adverse impact of minimum wage by alluding to job losses, business shutdowns and reduction in labor hours that affect young, low skilled and people of color workers (sonn and lathrop 2016). often such opponents of minimum wage do not make the nuanced argument that the minimum wage could be raised too high, phased in quickly, or instituted when the economy is too weak to absorb the change (hanaeur may 6, 2016). reduced benefits for youth advocates argue that increasing minimum wage contributes to less debt accumulation among students. however, opponents argue that raising minimum wage would lead to fewer opportunities for new entrants in the labor force, reduced school enrollment among teenagers and higher school dropout rate (cbc news, june 5, 2017). moreover, reduction in training due to minimum wage would prevent low wage workers from developing skills, which could lead to long term reduction in family income (congressional budget office 2019). automation opponents allude to lordan and neumark (2018) indicating that based on thirty years of data, increases in minimum wage resulted in increased automation. however, automation is driven more by the falling price of capital partly due to computerization irrespective of any minimum wage increase (corak jan 7, 2018). additionally, minimum wage jobs including food preparation, childcare and eldercare do not facilitate replacing labor with technology (reich, allegretto and godoey 2017). the costs to small businesses opponents argue that minimum wage workers are typically employed in competitive, low margin industries and that raising minimum wage exacerbates costs for small businesses. however, yalnizyan (june 2, 2017) questions why businesses and many economists decry the rise in minimum wage when they remain quiet about rising compensation of senior management and ceos. benefits of minimum wage – purchasing power advocates of minimum wage allude to the benefits of increased purchasing power in big cities with stagnant wages and rising housing costs. they argue that lower income households contribute all of their higher income to local spending in contrast to higher income households who save or spend any additional income on vacations and imported goods. however, opponents indicate that any increase in consumption could be offset by a decrease in investment by employers (gunderson 2008), that prices and interest rates would rise to dampen consumption (dunstan 2018) and that the share of total consumers at the lower end of income distribution is small (brouillette, cheung, gao and gervais 2017). 28 |journal for economic educators, 20(2), 2020 benefits of minimum wage – productivity and cost efficiencies advocates allege that even if some jobs are lost, the benefits of raising the minimum wage include less turnover and employee absenteeism, fewer sick days, longer staff retention, improved staff morale, lower financial stress, lower recruitment and training costs. however, the argument that increasing minimum wage induces labor to become more productive or incentivizes firms to introduce cost saving efficiencies assumes that firms were not maximizing profits in the first place. alternatives to minimum wage – eitc/witb opponents support alternatives to minimum wage including earned income tax credit (eitc) in the u.s. or the working income tax credit (witb) in canada, as they do not distort incentives to work. they argue that increasing the minimum wage would push the working poor to a higher tax bracket, which may lead to the claw back of income support. however, advocates argue that a higher minimum wage would lessen the burden on social support programs and that workers need a stable income throughout the year and not just a break at tax time (fargassomarquis may 1, 2017). other alternatives to minimum wage opponents support a training tax credit that would be given when small firms hire and train new workers (braun-pollon, demarco and wong 2011). however, advocates believe that job creation and skill training are secondary and focus on low wage jobs as drivers of poverty. they mention that higher paid, unionized, manufacturing jobs have been replaced by lower paid, nonunionized retail and customer service jobs (tencer may 31, 2016). therefore, they argue for a shift from easy to access low wage jobs with high turnover to stable jobs with higher wages and low turnover that are harder to get. in summary, media analyses highlight the effects of minimum wage including disemployment effects, reduced benefits for youth, automation, costs to small businesses, benefits of purchasing power and productivity apart from alternatives to minimum wage. however, the treatment of minimum wage in a single textbook is quite narrow in scope and does not prepare students along all facets of the discussion on minimum wage. appendix i, which also includes the issues of pegging minimum wage and poverty alleviation, shows the themes that each canadian textbook fails to consider. generally, the textbook treatment of the discussion is often cursory, which necessitates the use of discussions in media articles to complement the textbook material. empirical evidence the empirical evidence provides a more nuanced view than is usually depicted in econ 101 textbooks. it does not necessarily support the consensus view that a 10% increase in minimum wage reduces teenage employment between 1% and 3%. challenging this view, krueger (2001) argued for the incorporation of empirical evidence on minimum wages at the econ 101 level. he argued that this view is based on theoretical reasoning and early time series studies that did not have the benefit of natural experiments and better econometric techniques including panel data estimation and difference in differences methods. like krueger, edagbami (2006) indicates that time series studies dominated the literature until the early 1980s when they were challenged by panel data studies that found little to no disemployment effects. he suggests that there are three phases of research on minimum wage. the first phase, until the early 1980s, based on time series data, supported the traditional consensus. in the second phase, card and krueger (2000) in the u.s. challenged that viewpoint. however, in the 29 |journal for economic educators, 20(2), 2020 third phase, the consensus viewpoint was re-validated. some allude to neumark and wascher (2007), which substantiated the consensus view on the basis of 100 minimum wage studies. however, doucouliagos and stanley (2009) offered a meta-study of 64 studies between 1972 and 2007 to highlight that most precise estimates show zero employment effects of minimum wage. likewise, schmitt (2013) reviewed 21st century studies on minimum wage to show that reduction in labor turnover, reduction in high skilled worker pay and small price increases sufficiently counter disemployment effects. more recently, wolfson and belman (2019) indicate that there has been a shift in the consensus range to 1.3% to 0.7% in response to a 10% increase in minimum wage. the empirical evidence in canada, based on both cross province and time series variation, shows that a 10% increase in minimum wage would lead to a 3% to 6% reduction in teen employment (gordon feb 19, 2013). according to marchand (2017), a 10% minimum wage increase would lead to 1.7% to 7.5% reduction in affected employment. however, fortin (2010) argued that negative effects arise when the minimum wage to average wage ratio exceeds 50% but not when this ratio is less than 45%. more strongly, brennan and stanford (2014), who studied minimum wage increases in 10 provinces over 30 years, found no connection between minimum wage and employment levels in canada. krueger (2001) mentions that, based on a 1996 survey of labor economists in the top economics departments in the u.s., a majority expect a 1% reduction in teenage employment in response to a 10% increase in minimum wage. many listed 0% as their best estimate. generally, the support for minimum wage is higher amongst labor economists than american economics association (aea) members (klein and dompe 2007). in the u.s., around 600 economics professors signed a letter concluding that increases in minimum wage have little to no negative effect on employment even during a weak labor market (epi, jan 14, 2014). this includes seven nobel prize winning economists who endorsed raising minimum wages by 40%. likewise, in canada, about 53 economists endorsed a $15 minimum wage for ontario in 2017 (rozworski june 29, 2017). to reiterate, the empirical evidence provides a more nuanced view than is usually depicted in econ 101 textbooks. this supports the case for following krueger (2001) to include empirical evidence at the first-year level. applications inelastic demand for labor, monopsony model and the boom and bust cycles econ 101 textbooks predominately focus on the labor demand and supply model as propounded by stigler to delineate the disemployment effect of raising the minimum wage. however, apart from the empirical evidence, the basic model can be extended in three ways to provide a more nuanced exposition of the impact of raising the minimum wage. the three extensions include considering an inelastic demand for labor, the monopsony market model and incorporating the boom and bust cycle in the context of a minimum wage increase. inelastic demand curve for labor the traditional model focuses on a single competitive market with homogeneous workers where the impact of minimum wage on employment depends on the degree of substitutability between labor and other inputs (edagbami 2006). this degree of substitutability between labor and capital determines the elasticity of the demand for labor and therefore the extent of disemployment effect. the elasticity of labor demand also depends on labor share of production costs and consumer demand for products (belser and rani 2015). specifically, the disemployment 30 |journal for economic educators, 20(2), 2020 effect is limited when labor costs only comprise 30% of operating costs in the affected industries (reich, allegretto and godoey 2017), when unemployed workers can find jobs in the sector uncovered by minimum wage (edagbami 2006), or when they drop out of the labor force (benjamin, gunderson and lemieux 2017). this necessitates using the labor demand and supply model to show students how the disemployment effect is reduced when the labor demand curve is relatively inelastic. figure i shows the case of a perfectly inelastic demand curve and therefore zero disemployment effect. the equation of the demand curve is ld = 10 and that of the supply curve is ls = w, where w is the wage and labor can be measured as number of workers. when a $15 minimum wage is introduced, while the number of workers seeking jobs goes up to 15, there is zero disemployment effect. this means that there is no impact on the existing workers in terms of their jobs. figure i: the case of a perfectly inelastic demand curve however, the long run effects are more adverse in low wage industries like sales, service, and tourism because labor demand is elastic, labor costs are a substantial portion of total costs, and, since the industries are competitive, they are unlikely to absorb the higher costs by reduction in profits. moreover, while for older workers, reduction in layoffs offsets the reduction in hiring that results in an insignificant effect on employment, for teenagers the reduction in hiring and the number of layoffs significantly and negatively affect employment (brochu and green 2013). yet, even in the long run, the disemployment effect can be small. this is true when the incidence of payroll taxes falls mostly on workers and in an oligopolistic industry, where firms try to absorb wage increases to avoid losing market share (benjamin, gunderson and lemieux 2017). specifically, komlos (2019) argued that mcdonald’s makes profits based on location, brand name and a unique menu, all of which confer market power despite competition from other fast food chains and which means that such corporations can absorb small minimum wage increases without raising prices or decreasing their labor force. 0 5 10 15 20 0 5 10 15 20 ls = w ld = 10 min wage = 15 31 |journal for economic educators, 20(2), 2020 in summary, the disemployment effect of raising the minimum wage can be minimized when the labor demand is inelastic, yet this depends on the distinction between the long run and the short run, the fraction of total costs due to labor, older versus teenage workers, and the market power of the firm in the output market. monopsony power another extension to the standard demand and supply model would be to follow up on kruger’s suggestion to expound the monopsony model at the first-year level. most econ 101 textbooks shy away from introducing this model. however, ragan (2020) provides one example that students do not have to wait until the intermediate economics level to be introduced to this model. krueger (2001) argued that the standard view on minimum wage comes from stigler (1946) who assumed perfect mobility and full information. however, to the extent these assumptions are violated due to imperfect information, search frictions, commuting costs, and inertia, firms have monopsony power and therefore will not lose workers even if they reduce their wages. komlos (2019) notes that many teenagers and poor people without transportation are unable to commute outside their neighborhood, which means that local businesses exert monopsony power in setting wages. likewise, benjamin, gunderson and lemieux (2017) mention that even with fast food restaurants like mcdonalds, imperfect information about job opportunities indicates that the firm faces an upward sloping labor supply curve, which is true for the case of a pure monopsony. in essence, due to imperfect information, labor market frictions, and monopsony power, the firm can pay workers below the marginal product of labor (belser and rani 2015) and hire fewer workers than a competitive market. this means that increasing the minimum wage would increase both labor hours and the wage paid. this necessitates using the monopsony model to show students how an increase in minimum wage can increase employment. in the monopsony model, achieving maximum positive wage effect is different from achieving maximum positive employment effect. the former occurs at the intersection of the marginal expenditure (me) and the marginal revenue product (mrp), whereas, the latter occurs at the intersection of the average expenditure (ae) and the mrp. the distance along the mrp between these two points shows the trade-off between the two effects. additionally, the elasticity of labor supply determines the ability of minimum wage to increase jobs under monopsony (edagbami 2006). figure ii shows how an increase in minimum wage increases employment in the monopsony model. the demand curve for labor, also referred to as the marginal revenue product (mrp) is given by mrp = 30 – l, where l is the number of workers. the average expenditure (ae) curve for the firm is given by ae = l and the marginal expenditure (me) is given by me = 2l. in this model, a competitive market would equate mrp with ae, employ 15 workers and offer a $15 wage, whereas a monopsonist would equate mrp with me, hire only 10 workers and offer a $10 wage. in this regard, raising the minimum wage up to $15 would increase the wage and the number of workers hired. far from creating any disemployment effect, within the range from $10 to $15, raising the wage increases the number of workers hired. depending upon the mathematics preparation of students, they can solve for the intersection points in the graph, as the equations have been kept quite simple. 32 |journal for economic educators, 20(2), 2020 figure ii: the monopsony market model boom and bust cycles econ 101 textbooks do not touch upon the relevance of boom and bust cycles in the labor market. this is relevant because other than minimum wage, labor demand is determined by the state of the economy that is shaped by the housing market, consumer purchasing power, and oil prices. therefore, krueger (2001) cautioned about accounting for other economic trends. according to brennan and stanford (2014), employment levels are predominately determined by larger macroeconomic factors like aggregate demand and gdp growth instead of wage regulations. likewise, murray and mackenzie (2007) state that minimum wage impacts are mostly invisible as they are swamped by more significant economic changes and that large-scale changes in the economy drive the employment rate including recession, economic growth, and growth of female labor participation. in a similar vein, benjamin, gunderson and lemieux (2017) mentioned factors that tend to offset the impact of minimum wage, which include increase in output demand or increase in price of substitutes, both of which increase the demand for labor and therefore employment. while older studies on minimum wage often failed to isolate the impact of minimum wage increase from the boom and bust of the economy (rank and file feb 1, 2017), it is important to account for the boom and bust cycles or larger economic trends. sonn and lathrop (2016) indicate that in the few cases where employment levels declined after minimum wage increases in the u.s., all of them coincide with periods of recessions, suggesting that employment declines are better explained by business cycles rather than minimum wage. additionally, at least five different academic studies in the u.s. show that increase in minimum wage during periods of high unemployment (7% to 12.3%) has no significant impact on employment levels, which can be explained through reduction in turnover and boost in demand (lester, madland and bunker june 20, 2012). 0 5 10 15 20 25 30 0 5 10 15 20 25 30 ae = l me = 2l mrp = 30 l min wage = 15 33 |journal for economic educators, 20(2), 2020 in the context of alberta, marchand (2017) asserted that the boom and bust nature of alberta’s energy resource economy could mitigate or exacerbate the employment effect of a large minimum wage hike, as energy prices influence labor demand. therefore, he argued that alberta should have timed its minimum wage increase with rising energy prices and coupled it with the job creation tax credits. likewise, the td bank analysis mentioned that the best time to raise the minimum wage is when the economy is strong (rozworski sep 29, 2017). in a similar vein, gunderson (2014) argued that minimum wage increase should be dependent on the state of the economy and should be continuous with small adjustments instead of being large and infrequent. marchand (2017) showed how the standard model could be extended to indicate that the disemployment effect of minimum wage are mitigated when the raise is instituted in boom time periods. this extension of the standard model can also be used to show how minimum wage may increase productivity, shifting the demand curve to the right, thereby mitigating the disemployment effect. following marchand (2017), figure iii shows how a rightward shift in the labor demand curve under a boom time period with job tax credits or with increased labor productivity nullifies the disemployment effect. the labor demand curve is given by ld = 20 – w, and the labor supply curve is ls = w. an increase in minimum wage to $15 causes a disemployment effect of 5 workers. however, when the labor demand experiences a shock due to a boom, increase in productivity or through a job creation credit, the demand curve shifts to the right, yielding the equation ld’ = 30 – w, which nullifies the disemployment effect and also absorbs the additional workers looking for jobs. the new equilibrium is able to support the hiring of 15 workers at the wage of $15. figure iii: a labor demand shock during a boom in summary, extending the standard model by considering an inelastic demand for labor, the monopsony market model and incorporating the boom and bust cycle in the context of a minimum wage increase, can all help students at the principles level to understand how the disemployment effect of the policy are mitigated. 0 5 10 15 20 25 30 0 5 10 15 20 25 30 ls = w ld = 20 w ld' = 30 l min wage = 15 34 |journal for economic educators, 20(2), 2020 the profile of minimum wage workers the profile of minimum wage workers is often brought up in the debate on raising the minimum wage. opponents and advocates paint very different pictures of the minimum wage worker. amongst econ 101 textbooks, mankiw et al. (2020) mention that raising minimum wage is a blunt tool against poverty since minimum wage workers are often teenagers from middle class homes earning extra income. similarly, amongst labor economics textbooks, benjamin et al. (2017) mention that many poor people do not work and therefore raising the minimum wage cannot help them and that many low-wage workers (teenagers) live in high-income families. in media analyses, opponents of minimum wage argue that only 11% of minimum wage workers in canada are from low-income families, that 89% live in a household above the low income cut off (lico) level, that 58% are between 15 and 24 years old, and that only 2% are single parents (lammam and macintyre 2018: 12). however, advocates argue that not all teenagers have family support for education and that they have to pay tuition and move out of their parents’ home. they indicate that 64% of minimum wage workers across canada in 2016 were not teenagers (yalnizyan june 2, 2017), 37% already have education beyond high school (murray and mackenzie 2007) and that 59% of the workers who would benefit from a minimum wage increase to $15 work for large companies with more than 500 employees while only 17% work for small companies with less than 20 employees (macdonald 2017). this difference in the profile of minimum wage workers between opponents and advocates of minimum wage is also manifest provincially in canada. opponents argue that only 1.8% of albertans in 2013 worked at minimum wage and that almost 50% of them were teenagers (mintz oct 2018). however, advocates argue that 36% of workers making $15 or less are post-secondary graduates, that more than 70% of albertans earn less than $15 per hour, that 74% of alberta’s low wage workers are not teenagers, 62% do not live home with their parents, and 58% work for big businesses with more than 100 employees (hussey 2018a). the above clearly shows that there exists difference in how the profile of the minimum wage worker is reported. therefore, a useful exercise for econ 101 students would be to look at the profile of the minimum wage worker and then critically evaluate the differential presentation of this information in media analyses. table i provides the profile of alberta minimum wage workers from the government of alberta documents. the latest numbers from 2017-2018 show that roughly 70% of minimum wage workers are not teenagers, close to 50% work full time at minimum wage jobs, about 73% have such jobs as a permanent one, about 16% have been working at such jobs over 5 years, 72% are not students, and that about 46% have had at least some post-secondary education. additionally, the proportion of minimum wage workers has increased over the years in alberta by 5% points. overall, table i shows that the profile of the minimum wage worker in alberta has remained consistent and does not fit with the picture portrayed by econ 101 textbooks. 35 |journal for economic educators, 20(2), 2020 ] table i: the profile of minimum wage workers in alberta years ab ca teenagers 15-19 years full time permanent job tenure > 5 years some postsecondary to university education nonstudent % of employees earning minimum wage % of minimum wage workers 20092010 1.4% 5.9% 36.4% 46.2% 75.2% 19.7% 33.7% 20102011 1.2% 7.5% 30.9% 55.3% 71.5% 16.3% 44.2% 20112012 1.6% 7.0% 36.1% 46.3% 76.4% 19.6% 41.1% 20122013 1.8% 7.0% 41.8% 46.0% 72.6% 13.9% 40.1% 20132014 1.6% 7.0% 35.1% 50.3% 68.6% 13.8% 33.7% 20142015 2.2% 7.4% 33.5% 48.9% 72.3% 16.8% 38.5% 20152016 3.9% 7.0% 32.4% 40.4% 75.7% 12.7% 42.4% 78.9% 20162017 5.0% 6.6% 32.6% 41.5% 74.3% 11.6% 42.8% 75.3% 20172018 6.4% 6.9% 28.8% 48.2% 73.4% 15.9% 45.8% 71.7% source: alberta government. “alberta minimum wage profile.” case study of disemployment in alberta econ 101 textbooks usually present the consensus view that a 10% increase in minimum wage reduces teenage employment by 1% to 3%. however, the empirical evidence and media analyses both provide a very different and nuanced view. this motivates introducing econ 101 students to simple calculations to gauge the disemployment effect. in this regard, a case study of disemployment in alberta is illustrated as follows. it may be argued that the disemployment effect in alberta would be less than elsewhere, as the province has the lowest percentage of workers earning the minimum wage, the highest median wage and the lowest poverty rate from 2005 to 2015 (breakenridge oct 3, 2017). however, from 2015 to 2019 alberta experienced a 47% increase in minimum wage (younglai oct 1, 2017). in 2015, the canadian federation of independent businesses (cfib) claimed that the minimum 36 |journal for economic educators, 20(2), 2020 wage increase in alberta would result in between 53,000 and 195,000 fewer jobs. marchand, however, found that from april 2015 to april 2017, the number of employed albertans aged 15 to 24 dropped from 326,000 to 298,600, a reduction of 27,700 jobs, and that this was most likely due to the recession (marchand 2017). in opposition, hussey argued that the alberta service sector added 26,500 jobs in 2016 even as the economy was in a recession and 27,100 jobs in 2017 when the economy was recovering and that the food and accommodation industries added 6,200 jobs in 2016 and 1,500 jobs in 2017 despite the fact that minimum wage increased 33% from 2015 to 2017 (hussey 2018a,b,c). others argued that $15 minimum wage is neither extreme nor unreasonable for alberta and that a $15 minimum wage would boost the alberta economy by about $1 billion (mcgowan october 3, 2016). the above cautions first year students to be careful about how opponents and advocates differently report the disemployment effect. it also motivates the use of a simple exercise for students at the first-year level to gauge the disemployment effect. based on seven decades of historical u.s. data, sonn and lathrop (2016) found no correlation between minimum wage increases and employment levels. instead of using regression analysis, they simply looked at trends in total employment, total hours worked, and employment in sectors like retail and restaurants, before minimum wage increase and for twelve months after each minimum wage increase. they conclude that their results confirm the evidence obtained from most rigorous studies that find zero effects on jobs. table ii shows a simple exercise to gauge any disemployment effect in alberta when the minimum wage was increased overall by 47% over a four-year period (2014-2018). a contrast is made with the neighboring province saskatchewan where the minimum wage was increased at the average rate of the percentage change cpi and the average hourly wage from the previous year. the percentage changes for alberta for average weekly hours, employment for hourly workers, the number of employees aged 15 – 24 in the food and accommodation industry are positive for all years except 2015. the percentage changes for the number of employees aged 25 and above in the food and accommodation industry are all positive. since the western canadian select oil prices, which are relevant for alberta, sharply dropped from 73.6$/bbl to 35.28$/bbl, it seems the negative percentage changes are capturing more of the oil price shock than the change in minimum wage for 2015. the average of all these percentage changes from 2015 to 2018 are all positive and less than 1% with the exception of the percentage change in the average weekly hours that are slightly negative at -0.18%. the numbers for saskatchewan follow a similar pattern but are relatively higher. generally, this indicates that the disemployment impact is exaggerated in econ 101 textbooks, as for both alberta and saskatchewan that rely on oil prices, despite low oil prices and rising minimum wage, the overall effect on employment had been slightly positive for alberta and relatively higher for saskatchewan. finally, table ii indicates that inequality as measured by the ratio of the total median wage of the top 1% to the bottom 50% has decreased for both provinces when the time period 20012018 is considered. specifically, the average of this ratio declines from 24.55 for 2001-2018 to 21.8 for 2015-2018 in alberta and from 14.84 to 13.91 in saskatchewan for those respective time periods. these numbers show the much higher inequality in alberta and therefore the justification for higher minimum wage increase in this province to adjust for historical inequality. indeed, the last column of table ii shows that minimum wage as a fraction of the average hourly earnings increased from 37.13% for 2001-2018 to 44.81% for 2015-2018 in alberta and from 41.16% to 41.42% in saskatchewan respectively. to the extent the negative disemployment effect is pronounced when the minimum wage is more than 50% of the average wage, based on dube 37 |journal for economic educators, 20(2), 2020 (2014) in the u.s. and battle (2011) in canada, it is not surprising to see that the increase in minimum wage in alberta is bereft of a drastically negative disemployment effect. in short, these simple percentage change calculations can help students to be engaged with real world data and obtain a more nuanced understanding of the issue than that offered by the simplistic standard model. table ii: disemployment effect for alberta and saskatchewan years ab min wage min wage (% change) average weekly hours employment for hourly workers food and business (15-24 years) food and business (>25 years) top 1% / bottom 50% (total median income) min wage/ average hourly earnings oct-15 11.2 9.80% -2.50% -5.39% -8.19% 1.37% 26.19 38.70% oct-16 12.2 8.93% 1.95% 2.79% 1.08% 1.82% 19.18 43.19% oct-17 13.6 11.48% 0.00% 3.72% 3.30% 0.12% 20.03 46.91% oct-18 15 10.29% 5.63% 0.50% 50.46% average (2015 2018) -0.18% 0.38% 0.45% 0.95% 21.80 44.81% average (2001-2018) 24.55 37.13% years sk min wage min wage (% change) average weekly hours employment for hourly workers food and business (15-24 years) food and business (>25 years) top 1% / bottom 50% (total median income) min wage/ average hourly earnings oct-15 10.5 2.94% -2.95% -1.79% -12.33% 11.06% 14.91 40.69% oct-16 10.72 2.10% 1.70% -0.03% -24.29% 3.40% 13.45 41.25% oct-17 10.96 2.24% 0.33% 3.58% 35.85% -10.70% 13.36 41.53% oct-18 11.06 0.91% 9.56% 12.69% 42.19% average (2015 2018) -0.31% 0.59% 2.20% 4.11% 13.91 41.42% average (2001-2018) 14.84 41.16% 38 |journal for economic educators, 20(2), 2020 source: government of canada. “hourly minimum wages in canada for adult workers.” statistics canada: cansim table 14100067: v3550644, v3550739: food and accommodation business (total employees, all establishment sizes), workers aged 15 – 24 years and over 25 for ab [v3548079, v3548174: the same for sk] cansim table 14-10-0222-01: v54027409, v54027398: average weekly hours; v54027410, v54027399: employment for hourly workers; v54027407, v54027396: average hourly earnings [for ab and sk respectively] cansim table 11100056: v62871760, v62871935: top 1% and bottom 50% (total median income) for ab; [v62871535, v62871710: the same for sk] concluding summary the objective in this paper was to follow up on krueger (2001) to enhance the exposition of the minimum wage in econ 101 canadian textbooks, specifically in the wake of the move towards a $15 minimum wage. it was shown that the treatment of minimum wage in a single textbook is quite narrow and does not prepare students along all facets of the discussion in the media. specifically, media analyses highlight the effects of minimum wage including disemployment effects, reduced benefits for youth, automation, costs to small businesses, benefits of purchasing power and productivity apart from alternatives to minimum wage. since canadian textbooks fail to comprehensively touch upon these themes, it is argued to complement textbook exposition with them. it was confirmed that the empirical evidence does not necessarily support the consensus view and provides a more nuanced view than is usually depicted in econ 101 textbooks. therefore, the case by krueger (2001) to include empirical evidence at the first-year level is effectively bolstered. the standard labor demand and supply model as propounded by stigler is extended by considering an inelastic demand for labor, the monopsony market model and by incorporating the boom and bust cycle in the context of a minimum wage increase. these three extensions help students at the principles level to understand how the disemployment effect is mitigated. econ 101 textbooks usually depict minimum wage workers as teenagers living with their parents. the profile of minimum wage workers is often brought up in the debate on raising the minimum wage. it was shown how opponents and advocates of the minimum wage increase present this profile differently. it was also shown how the disemployment effect is differently reported in media analyses. this provides motivation to facilitate first year students to critically evaluate the profile of the minimum wage worker and to gauge any disemployment effect, using alberta as a case study, with simple calculations and without the use of advanced econometric techniques. in conclusion, by complementing the textbook material with discussion themes, extensions of the standard model, critically evaluating the profile of the minimum wage worker and performing basic data calculations and analysis, first year students can have a better and comprehensive understanding of the issue. references alberta government. “alberta minimum wage profile.” various issues. april 2010 – march 2018. <https://open.alberta.ca/publications/2292-9223> accessed 26 may 2020. https://open.alberta.ca/publications/2292-9223 39 |journal for economic educators, 20(2), 2020 battle, ken. 2011. “restoring minimum wages in canada,” caledon institute of social policy, april. belser, patrick and u. rani. 2015. “minimum wages and inequality” in janine berg (ed.), labor markets, institutions and inequality, chapter 5, 123-146, edward elgar publishing. benjamin, dwayne, m. gunderson and t. lemieux. 2017. labor market economics. mcgrawhill ryerson. braun-pollon, m., a. demarco, and q. wong. 2011. “minimum wage: reframing the debate.” 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“increasing the minimum wage in ontario: a flawed anti-poverty policy.” fraser institute, june 19. lester, t.w., d. madland and n. bunker. 2012. “the facts on raising the minimum wage when unemployment is high.” center for american progress, june 20. lordan, g. and d. neumark. 2018. “people versus machines: the impact of minimum wages on automatable jobs.” labor economics 52, june, 40-53. macdonald, d. 2017. “ontario needs a raise: who benefits from a $15 minimum wage?” canadian centre for policy alternatives, july. https://www.huffingtonpost.ca/2017/05/01/minimum-wage-canada_n_16359872.html https://www.macleans.ca/economy/business/want-to-help-the-poor-dont-waste-your-time-with-the-minimum-wage/ https://www.macleans.ca/economy/business/want-to-help-the-poor-dont-waste-your-time-with-the-minimum-wage/ http://srv116.services.gc.ca/dimt-wid/sm-mw/rpt2.aspx?goctemplateculture=en-ca https://www.businessinsider.com/minimum-wage-effect-on-jobs-2016-5 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https://www.macleans.ca/economy/economicanalysis/why-a-15-minimum-wage-is-good-for-business/ https://www.theglobeandmail.com/report-on-business/alberta-and-ontario-increase-minimum-wage-as-they-aim-for-15/article36450596/ https://www.theglobeandmail.com/report-on-business/alberta-and-ontario-increase-minimum-wage-as-they-aim-for-15/article36450596/ https://www.theglobeandmail.com/report-on-business/alberta-and-ontario-increase-minimum-wage-as-they-aim-for-15/article36450596/ 43 |journal for economic educators, 20(2), 2020 appendix i: discussion themes in media and textbooks media articles (2013 2018) mankiw, kneebone and mckenzie (2020) hubbard, o'brien, serletis and childs (2020) ragan (2020) karlan, morduch, alam and wong (2017) parkin and bade (2015) cohen (2015) sexton, fortura and kovacs (2010) disemployment effects job losses vs lower hiring rate ✔ labor hours decline min wage too high, instituted too quickly or when economy is weak ✔ long run effects more adverse/ better detection of impact in long run ✔ work under the table at lower than min wage ✔ increased job search costs ✔ ✔ reduced benefits for youth raising min wage → less inequality, lower debt raising min wage → helps with tuition costs fewer job opportunities for youth ✔ high school dropouts ✔ lower on the job training ✔ non-wage benefits decline ✔ lower skill development → lower long run income ✔ automation min wage leads to automation ✔ automation chiefly due to decline in price of capital (computerization) jobs like childcare, elderly care, baristas unlikely to be automated firms adjust first by increasing price, lowering turnover before automation ✔ costs to small businesses ✔ those earning slightly higher than min wage would need a raise small businesses have mortgages, families, thin profit margins compare min wage increase with ceo compensation increases larger companies support min wage to reduce competition, small can't automate like them ✔ some small businesses also support min or living wage 44 |journal for economic educators, 20(2), 2020 alternatives to minimum wage – eitc eitc targets low income workers eitc does not distort incentive to work eitc does not lead to job losses/ less burden on small businesses ✔ increasing min wage pushes to higher tax bracket, clawback of benefits eitc reduces the taxes paid ✔ lower taxes paid → lower benefits higher min wage → less burden on social services workers need income year long not just at tax time raising min wages means not raising taxes eitc can be financed by sales tax sales tax will dampen consumption wage subsidy is partly captured by employers other alternatives to minimum wage low income housing tax credits, scholarships and loans, childcare benefits training, wage subsidies ✔ training tax credits for small firms there has been a shift from higher paid to low paying jobs replace low wage jobs by stable ones benefits of minimum wage purchasing power stagnant wages and rising housing costs consumption is 57% of gdp low income households spend in the economy ✔ purchasing power most important way to support job creation interest rates go up and investment declines high food prices ✔ ✔ share of consumers at lower end of income distribution is small prices are driven by oil sands and larger economic forces than min wage benefits of minimum wage productivity and cost efficiencies less turnover, reduced absenteeism, less sick days ✔ improved morale, lower stress, higher productivity ✔ 45 |journal for economic educators, 20(2), 2020 lower recruitment and training costs ✔ pegging minimum wage ✔ stronger disemployment when min wage 45 50% of average wage min wage could be increased to 50% of median wage without significantly impacting output peg min wage to lico pegging min wage → high youth unemployment have differential min wage based on cities, occupations, firm size poverty alleviation ✔ teenagers living in well off households would benefit wage decrease in the uncovered sector could be greater families living under lico increase even living wage is insufficient small % of earnings gain goes to the poor profile of minimum wage worker min wage workers are teenagers from middle class homes earning extra income ✔ ✔ many poor do not work min wage workers are adults, some with high education work in large companies monopsony market model ✔ imperfect information, job search costs, high transportation costs --> monopsony inelastic demand curve ✔ boom and bust cycles empirical literature effect insignificant for older workers ✔ ✔ other economists/meta study → zero employment effects ✔ ✔ ✔ canadian studies show larger disemployment effects ✔ ✔ nobel prize winning and other economists endorse $15 min wage ✔ 10% increase leads to 1-3% decline in teenage employment/ standard result ✔ ✔ ✔ opinions of economists ✔ 1 |journal for economic educators, 22(2), 2022 teaching climate change to econ 101 students junaid b. jahangir1 abstract there is a growing recognition that econ 101 does not adequately prepare students to address the pressing issues of our times including climate change. however, options such as the core text are unsuitable because of information overload and the use of advanced technical concepts and techniques. the objective in this paper is to introduce climate change to econ 101 students in a way that minimizes student confusion, instructor workload, and upholds mankiw’s approach of clarity before nuance. a new approach is delineated based on popular books, magazine articles, a youtube video, and simple exercises. this five-part approach consists of emphasizing the urgency of climate change, thinking outside the box through geoengineering, the limits of individual actions like buying local or going vegan, the comparative outlook on various policy tools with a simple equation solving exercise, and game theory to broach the issue of international collaboration. keywords: econ 101, core, teaching economics, climate change jel classification: a22, q54 introduction there is a growing recognition that econ 101 does not adequately prepare students to address the pressing issues of our times including climate change, economic inequality, and the future of work with automation (bowles and carlin, 2020). among all these issues, climate change stands out, as krugman warns that if greenhouse gas emissions are not limited then none of the other issues of healthcare spending, budget deficits, and inequality will matter (krugman, 2020, p. 327). yet, econ 101 students are trained more to solve for equilibrium, calculate elasticities, and determine the profit maximizing solution, than addressing contemporary issues. for instance, i use the mankiw, kneebone, and mckenzie (2020a) textbook to teach econ 101, where economic inequality does not appear until chapter 20 and climate change is subsumed in a section on externalities that is briefly covered towards the end of term. the objective in this paper is to explore how best to introduce climate change to econ 101 students in a way that causes the least disruption for both instructors and students who are engaged with the mainstream neoclassical paradigm. to this end, the motivation for this paper is offered through a brief review of a few recent papers on teaching climate change and economics in section 2. this is followed by a critical evaluation of three alternatives to the mankiw, kneebone, and mckenzie textbook in section 3. having delineated the concerns with these substitutes, a new way of introducing climate change to econ 101 students through a video, articles, and exercises from other books is presented through a five-part approach in section 4. concluding remarks are presented in section 5. 1 associate professor of economics, department of anthropology, economics, and political science, macewan university, 7-368, 10700 104 ave, edmonton, alberta, t5j 4s2, canada 2 |journal for economic educators, 22(2), 2022 motivation in their review of teaching climate change and econ 101, liu, bauman, and chuang (2019) indicate that for most textbooks, climate change is subsumed in the chapters on externalities or environmental economics. therefore, they suggest addressing the topic more broadly beyond the externality framework. they are concerned that the way climate change is presented may lead students to think of it as a “minor aberration” and allow instructors to skip the topic altogether due to its location in the textbook. additionally, they mention that despite the consensus position among climate scientists that human beings are largely responsible for global warming, some textbooks eschew that scientific consensus. finally, they state that while all textbooks emphasize the key message that incentive-based mechanisms are better than command-and-control regulations, most textbooks do not delve into a preference between a capand-trade program and carbon taxes. lewis and wichman (2021) indicate that instructors are increasingly teaching climate change content because of demand from economics students. based on their survey of various courses, they mention that while externalities are usually taught in depth, topics like tipping points and geoengineering are now being included in some courses. gonzales-ramirez, cavigliaharris, and whitehead (2021) confirm that the most common topic is how incentive-based approaches (permits and taxes) to addressing externalities are more efficient than command-andcontrol policies (standards). they survey the literature to showcase a multitude of games that have been designed for pedagogical purposes. several of these games are quite time intensive, with a few being semester long with weekly discussions. these games include corrigan (2011), which delves into illustrating the relative strengths of various market-based approaches to addressing externalities, as textbooks don’t generally address this comparison. however, this game assumes prior economic knowledge on marginal analysis and externalities. duke and sassoon (2017) also present a game but mention that the literature indicates that while students recall more of the acquired knowledge, the evidence of improved learning through such activities is modest. even in the game designed by cavigliaharris and melstrom (2015) where prior economic knowledge on marginal analysis and externalities is not required and which only takes 20 minutes of class time, there are concerns. the issues include excessive time and preparation required of instructors for seemingly low level of improved learning results. other concerns are about relatively weaker students getting embroiled with the logistics of games or failing to act rationally and getting results contrary to what the instructor expected to show. thus, such a situation could lead to both student confusion and instructor frustration despite spending so much time and effort. just as there are concerns with using games as pedagogical tools, there are issues with including extra reading material to teaching climate change. basu (2021) opines that while it is important to remain updated with material beyond the textbook, instructors must be mindful of assigning additional reading that yield diminishing returns if students find them overwhelming and too much work. likewise, with large class sizes and without proper help on grading, instructors may find their workload burdensome as well. similarly, innovations in teaching pedagogy like decker (2020), which uses isoquants and isocosts to compare emission taxes and subsidies, are not necessarily suitable for econ 101 students who get lost in technical logistics instead of learning the basic results. all such innovations in teaching climate change, take us back to mankiw, who argues that the capacity of students to absorb information does not expand just because economic knowledge does (mankiw, 2020b), that we must avoid information 3 |journal for economic educators, 22(2), 2022 overload and that less is more (mankiw, 2020c). in short, mankiw remains a proponent of clarity before nuance. to recapitulate, the brief literature review shows that it is increasingly important to teach climate change and emphasize that human beings have been responsible for global warming. it underscores topics like tipping points, geoengineering, and the comparative outlook on policy tools. however, it shows the limits in using innovations in teaching pedagogy like games, advanced tools like isoquants, or extraneous readings, as students may get confused by logistical details and instructors may get frustrated with increased workload only to achieve modest improved learning results. therefore, it is important that before we start piling up econ 101 with more detail, we ensure clarity and avoid information overload. it is this principle of clarity before nuance that should guide our initiatives on teaching climate change to econ 101 students. alternatives while mankiw highlights the principle of clarity before nuance, it is also true that the treatment of climate change in his textbook is inadequate. this is because climate change is subsumed in a section on externalities and is not presented as an urgent issue to be discussed. additionally, topics including tipping points, geoengineering, individual actions, and international collaboration are starkly missing. the various policy tools on climate change are also not adequately compared. this necessitates investigating alternatives to the mankiw, kneebone, and mackenzie textbook to find the most effective way of teaching climate change to econ 101 students. three disparate options including the core text for introduction to economics, the microeconomics principles textbook by ragan (2020), and the chapter on climate change in the tietenberg and lewis (2015) textbook on environmental and resource economics are reviewed below. core: the economy the first option is the core text, which has recently been promoted by bowles and carlin (2020) in the journal of economic literature. they mention that the core text emphasizes feasible sets, indifference curves and nash equilibrium, and concede that on the complexity of language, the core text is “somewhat more complex than mankiw’s.” the core textbook is freely available online and blends both micro and macro topics in the same chapters. while it introduces the issue of the environment early on, it is only in the capstone chapter 20 that it delves into details on the economics of the environment. divided into ten sections, this chapter makes use of intermediate microeconomics concepts like the marginal rate of transformation and the marginal rate of substitution, to offer a technical discussion with the use of graphs on the environment-consumption frontier and indifference curves. this allows to capture the trade-off and citizen preferences between the environment and consumption. section 5 of the chapter provides the more conventional graph on marginal abatement costs and highlights the problems of the cap-and-trade approach including oversupply of permits and falling prices, which reduce the incentives to abate emissions. however, section 7 returns to intermediate microeconomics concepts of income and substitution effects in the context of an environment tax. section 8 illustrates a tipping point as an unstable equilibrium at which environmental degradation is irreversible. any uncertainty on the tipping point substantiates the use of prudential policy like a cap-and-trade program, as opposed to a tax, for it can guarantee 4 |journal for economic educators, 22(2), 2022 the emission level. finally, section 9 focuses on why addressing climate change is difficult by alluding to the difficulty in international collaboration through the prisoner’s dilemma. overall, it seems that in trying to do too much, the core text disrupts the sequential introduction of economic concepts in favour of an eclectic approach. it links to various extraneous reports and articles and uses exercises involving present value calculations and scatter plots. as such, the problem of information overload becomes overwhelming. moreover, it zigzags between intermediate and principles level concepts, and adequately addresses the topic far later in chapter 20. thus, the use of advanced technical concepts and the late location of the topic do not facilitate using the core text as a viable alternative to the mankiw, kneebone, and mackenzie textbook to teach climate change to econ 101 students. the ragan textbook while the core text offers an unorthodox approach, the ragan (2020) textbook provides a more conventional approach to the topic of climate change that is suitable for econ 101 students. while it also introduces the topic later in chapter 17, it does offer more detail than the mankiw, kneebone, and mackenzie textbook. ragan expressly states the consensus amongst scientists that human beings are contributing to climate change through greenhouse gas emissions. he confirms climate change as the mother of all externalities and alludes to the consequences of the loss of fresh water supplies, displacement of people with rising sea levels, extinction of some species, destruction of wildlife habitat, reduced food yields, and increased intensity of storms and volatility of weather. ragan emphasizes that some environmental damage is inevitable with the production of goods and services. although, he also states that several european countries have achieved emission reductions along with continued growth in gdp. focusing on pollution abatement, he confirms the main point that market-based policies (taxes and permits) are more efficient than command-and-control regulation because they are cost effective and incentivize innovation. moreover, in underscoring the problems with both emission taxes and cap-and-trade systems, he chiefly emphasizes the issue of measuring pollution with accuracy. similarly, on renewable energy, he mentions the issues of scarcity of sites for hydro energy, safe storage for nuclear energy, and capital costs for solar and wind energy. finally, he emphasizes that significant reduction in emissions will not result from individual small actions in our daily lives. overall, while simpler than the core text, ragan (2020) offers more detail and presses the urgency of climate change compared to the mankiw, kneebone, and mackenzie textbook. however, it has several issues of its own. first, it does not consider topics like tipping points and geoengineering. second, the comparison of various policies on abatement is effectively lost in the wordy text. third, students may find the graphical presentation confusing as the letter q is used to denote both quantities of goods and pollution abatement. fourth, the graphical analysis does not use the marginal abatement and marginal damage framework, which is usually used in environmental economics courses. finally, climate change is a small section of the chapter, which is situated late in the book. this necessitates looking at another option to the mankiw, kneebone, and mackenzie textbook to teach climate change to econ 101 students. the tietenberg and lewis chapter the benefit of considering a chapter from the tietenberg and lewis (2015) textbook on environmental and resource economics is that it directly focuses on climate change instead of embedding the topic in a chapter on externalities. the authors state outrightly that it is extremely 5 |journal for economic educators, 22(2), 2022 likely that human beings have been the dominant cause of global warming and that we need to act now despite limited information to avoid acting under future emergency conditions. they briefly mention geoengineering and indicate how game theory helps explain the difficulties in international collaboration. while they mention the prisoner’s dilemma to explain lack of collaboration and showcase how cooperation can be achieved by linking climate change with other issues like international debt, trade agreements or sharing r&d, they do not illustrate these ideas with specific games. similarly, in addressing carbon taxes and emission trading systems (ets), they do not use the graphical model with marginal abatement costs and marginal damages. the authors indicate that carbon taxes and emission trading are more effective at reducing emissions than renewable resource subsidies and regulation. however, they express concerns with both taxes and permits. specifically, they state that emission trading markets are susceptible to market power and price manipulation and that there have been issues of over allocation of permits in the eu ets. likewise, they mention that countries like norway have had reported increases in emission because of extensive exemptions on the carbon tax. overall, the benefit of using the chapter from tietenberg and lewis (2015) is that it directly addresses climate change instead of a sub-topic under externalities, and that the material comes from a course in environmental and resource economics. however, the treatment of topics like geoengineering and tipping points are inadequate. similarly, the use of visual illustrations through graphs and games is starkly lacking. moreover, it does not offer a thorough comparative discussion on taxes and permits. therefore, this chapter is inadequate as a supplementary resource to the mankiw, kneebone, and mackenzie textbook to teach climate change to econ 101 students. to recapitulate, while the mankiw, kneebone, and mackenzie textbook does not present climate change as a pressing issue to be effectively addressed, each of the alternatives are not suitable either. the core text has been recently promoted in the journal of economic literature, as a call to change the way we teach economics. however, it is fraught with information overload and advanced technical concepts and techniques. the ragan textbook offers more detail through a conventional approach, but it seems wordy and offers graphical analysis that is not consistent with the approach usually used in environmental economics courses. similarly, borrowing a chapter from the tietenberg and lewis textbook is inadequate as it is bereft of graphical analysis despite addressing climate change directly. this necessitates charting a new approach to teaching climate change to econ 101 students. presenting climate change to econ 101 students in developing an effective way to teach climate change to econ 101 students, it is important to avoid information overload and ensure that any pedagogical tools like games, assigned readings, and exercises are sequentially introduced at a level that econ 101 students can connect with without being overwhelmed by workload and logistical details. to this end, i have compiled material from the pindyck and rubinfeld (2018) intermediate microeconomics textbook, the field and olewiler (2011) environmental economics textbook, popular books super freakonomics (2009) and when to rob a bank (2015) by levitt and dubner, a couple of articles from the magazine alberta views, and a video from dhruv rathee’s educational channel on youtube. both the textbooks utilize much easier games and graphical analysis than those presented in the educational literature and the core text. the chapters from super 6 |journal for economic educators, 22(2), 2022 freakonomics and how to rob a bank help instructors retain student interest. the alberta views articles advance student understanding through the currency of issues. rathee’s video in hindi but subtitled in english is structured, succinct, and shows the point that people outside the western world are also deeply concerned about climate change. finally, keeping in mind mankiw’s point on clarity before nuance, these supplementary resources are introduced systematically through a five-part approach, which consists of emphasizing the urgency of climate change, thinking outside the box through geoengineering, the limits of individual actions like buying local or going vegan, the comparative outlook on various policy tools with a simple equation solving exercise, and game theory to broach the issue of international collaboration. the idea in the following presentation is not to reinvent the wheel on various concepts but to showcase how the five topics can be broached through a simple and engaged manner with supplementary resources. the urgency of climate change econ 101 textbooks usually focus on addressing externalities and view climate change as just another issue for discussion. they usually do not address tipping points. on the other hand, the core text illustrates a tipping point using an “s” shaped graph that shows an unstable equilibrium at which environmental degradation becomes irreversible. however, instead of delving into the details of this graph, the key point is to simply emphasize the implication that we need to act prudently now before it is too late to rectify irreversible damage to the environment. this is because if we reach the tipping point, then additional efforts to curb climate change would not amount to much, as global warming is related to the stock (as opposed to the flow) of carbon emissions in the atmosphere. in this regard, dhruv rathee’s video “extreme heat wave in canada” is helpful as it allows students to visually understand the urgency of the issue (figure 1). the video indicates that 50 degrees celsius observed in july 2021 in lytton, british columbia is a temperature that is not even expected in places like new delhi, india. it shows that some places like canada are experiencing global warming more than average and highlights the danger of even 35 degrees celsius at much higher humidity levels. with heat wave related fatalities, the video emphasizes that individual solutions of keeping the thermostat lower or biking instead of driving may not be enough to arrest this change and that governments will have to take a strong stand on ending fossil fuel subsidies and imposing a carbon tax. the video can also engender a discussion on which government policies (regulation, taxes, and permits) would be most effective against climate change. 7 |journal for economic educators, 22(2), 2022 figure 1: dhruv rathee’s video “extreme heat wave in canada” image source: https://i.ytimg.com/vi/o-tmoecdeus/maxresdefault.jpg video: https://www.youtube.com/watch?v=o-tmoecdeus thinking outside the box: geoengineering another topic that is usually not considered in econ 101 is that of geoengineering, which offers a more hopeful outlook based on human ingenuity and innovation. thus, the pessimism evoked by tipping points can be balanced by the optimism created by geoengineering. in this regard, chapter 5 from super freakonomics by levitt and dubner (2009) and the alberta views magazine article “can climate change be reversed?” by kopecky (2019) are suitable. these resources are more suitable for econ 101 students than the more formal reports referred to in the core text. the chapter from levitt and dubner (2009) offers a controversial picture of geoengineering but one that is important to consider in the worst-case scenario of catastrophic outcomes with global warming. the authors refer to a u.s. private company, intellectual ventures, according to which global warming solutions including conservation efforts, alternative energy like wind power, and cap-and-trade programs are too little, too late, and too optimistic (p. 186-187). intellectual ventures supports a budyko’s blanket, which is about injecting so2 to the stratosphere that would wrap the planet in a protective layer, reduce global temperature and possibly reverse global warming (p. 193-197). however, a budyko’s blanket could make people complacent and increase the incentive to pollute (p. 197). in a similar vein, kopecky (2019) states that climate risk remains even if we stop all carbon emissions today and that it is impossible to achieve a 1.5 degrees celsius warming target without negative emissions technology. in this regard, he mentions direct air capture (dac), which is about taking more co2 from the atmosphere than we release to it, and air to fuels (atf), which is about adding hydrogen to co2 to create carbon neutral synthetic fuels to replace fossil fuels. however, he cautions that such carbon engineering should be carefully considered due to side effects. similarly, tietenberg and lewis (2015) state that generally such approaches https://i.ytimg.com/vi/o-tmoecdeus/maxresdefault.jpg https://www.youtube.com/watch?v=o-tmoecdeus 8 |journal for economic educators, 22(2), 2022 are fraught with uncertainties and may have possible adverse effects. this opens room for discussion with students on topics of risk and unintended consequences associated with geoengineering, as a colder earth would be more hostile to life than a warmer earth.2 nonetheless, including geoengineering as a discussion topic helps students think outside the box (the usual standards, taxes, and permits) to address climate change. the limits of individual small actions as mentioned earlier, ragan (2020) emphasizes that significant reduction in emissions will not result from individual small actions in our daily lives. this point can be substantiated through chapter 7 from when to rob a bank by levitt and dubner (2015). the authors provide a very interesting observation that greenhouse gas (ghg) emissions from walking 1.5 miles and replacing those calories by drinking milk are equivalent to those from simply driving the same distance (p. 167). the reason is that ghg emissions are connected to milk, as methane, which is a more potent ghg than co2, is released due to cow farts in a dairy farm. therefore, the authors suggest that instead of jumping on the “buy local” bandwagon, turning to a vegan diet would be more effective in tackling climate change (p. 179). however, van tighem (2020) states in his alberta views magazine article, “an environmentalist’s case for beef” that big corporations that promote “beyond meat” products profit by mass producing plant commodities. this is problematic, as genetically modified crops are grown on depleted soil that is supplemented by chemical fertilizers and pesticides, which kill native vegetation, destroy wildlife habitat, imperil biodiversity of wildlife and fish, and facilitate more emissions, as carbon cannot be safely stored in depleted soil. therefore, instead of a vegan diet, he suggests grass fed beef, as it sustains biodiversity and living soil, which effectively stores carbon. thus, introducing econ 101 students to the ideas propounded by levitt and dubner (2015) and van tighem (2020) helps them understand that arresting climate change is not as simple as walking, buying local, or going vegan. on the other hand, individual small actions contribute to the overall public morality on climate change. this is important, as civic virtue facilitates the implementation of effective government policies on climate change (field and olewiler, 2011, p. 176). comparative analysis of policy tools since individual efforts are not sufficient, governments will have to take a strong stand on climate change through policy tools that include standards, carbon taxes, and cap-and-trade programs. in contrast to the topics on tipping points, geoengineering, and individual small actions, much of this discussion is already contained in econ 101 textbooks in the chapters on externalities or the economics of the environment. however, as noted earlier, liu, bauman, and chuang (2019) indicate that while all textbooks emphasize that market-based mechanisms (taxes, permits) are better than standards, most textbooks do not delve into a preference between a capand-trade program and carbon taxes. in this regard, material from various chapters of field and olewiler (2011) can be stitched together to evaluate the policies comparatively. additionally, in contrast to the more advanced tools used in the core text, this textbook also facilitates a simple numerical exercise that helps with the comparative evaluation of policies. table 1, which is based on material from chapters 11, 12, and 13 of field and olewiler (2011), offers a comparative outlook on standards, taxes, and permits by showcasing the issues pertaining to each of the policy tools. this is a more effective way of presenting detailed 2 i am grateful to the anonymous referee for this point. 9 |journal for economic educators, 22(2), 2022 information than wordy text. additionally, this tabulated information is more comprehensive than that presented in each of the three alternatives discussed in section 3. table 1: comparison of policy tools theme standards carbon tax emission trading technological incentives no incentive to do better than achieving the emission standard incentivizes investment in new technologies to limit tax payment incentivizes r&d to reduce emissions to sell permits cost effectiveness technology standards take away flexibility to abate emissions at lower costs tax is cost-effective even if the regulator does not know about the marginal abatement costs (macs) like a carbon tax, macs are equalized firm behaviour firms engage in lobbying and delay compliance firms with market power may pass the tax cost to consumers firms can exercise market power and price manipulation government behaviour governments avoid imposing stringent penalties to avoid economic dislocation governments may provide tax exemptions, especially considering international competitiveness governments may end up offering too many permits enforcement issues firms may install technology but ignore equipment maintenance and training of personnel regulator faces issues in setting the tax rate, monitoring performance, and collecting tax bills regulator has to monitor polluters to check if emissions are consistent with the number of permits government revenues no revenues are associated with emission or technology standards governments can use revenues to offer rebates to low-income households, and reduce distortionary taxes governments can make revenues if permits are auctioned instead of freely allocated political feasibility firms only have to worry about abatement costs instead of taxes or buying permits in addition to abatement costs citizens are usually wary of additional taxes politically easier to justify permits than taxes design issues information requirement is high for cost-effective individual standards the regulator may have to iterate to get the right tax rate if permits are freely allocated, firms may increase emissions to get more permits the policy tools can also be comparatively evaluated based on their cost effectiveness through the help of a numerical exercise for advanced student cohorts that are more well prepared mathematically. chapter 14 of field and olewiler (2011) offers a problem that can be simplified and adapted for econ 101 students (p. 229). this approach, which rests on solving simple equations, is consistent with the equilibrium solving exercise in the mankiw, kneebone and mackenzie textbook. while calculator intensive, this exercise is familiar for students, who are already prepared to solve simultaneous equations and determine areas on graphs. this contrasts with the advanced graphical analysis in the core text that rests on intermediate level concepts of indifference curves, income and substitution effects, present value calculations, and scatter plot diagrams. in what follows a simple problem of comparing the firms’ compliance costs under a uniform standard, emission tax, and tradable emission permits are compared. the basic idea is 10 |journal for economic educators, 22(2), 2022 that the cost-effective solution arises when the marginal abatement cost (mac), which is the cost of abating one more unit of emission, is equalized across the firms. in this regard, consider two firms h and l with high and low macs that are based on emissions eh and el respectively. assume that the total emissions are limited to a total of 80 units. mach = 100 – eh macl = 50 – el eh + el = 80 figure 2: analyzing uniform standard, emission tax, and tradable emission permits note: pictures are not drawn to scale. figure 2 indicates three graphs that showcase the impact of a uniform standard, emission tax, and tradable emission permits respectively. in the absence of any market-based or command-and-control regulation, firms h and l would not abate any emission, which would mean eh = 100 and el = 50. a uniform standard would impose a limit of eh = el = 40 units of emissions for each of the firms, which would necessitate firms h and l to abate 60 and 10 units of emissions respectively. this would yield mach = 60 and macl = 10. total abatement costs (tacs) are tach = ½ (60)(60) = 1800 (blue area) and tacl = ½ (10)(10) = 50 (black area) with a grand total tac = 1850. an emission tax would be set through the principle that mach = macl, which would yield the tax rate that provides the cost-effective solution. thus, using the equation mach = macl along with the condition eh + el = 80 would allow to solve for cost-effective emission levels of eh = 65 and el = 15, and mach = macl = 35, which is also the tax rate. it becomes clear that firms h and l would have to abate 35 units of emissions each. total abatement costs are tach = tacl = ½ (35)(35) = 612.5 each (blue and black triangle areas) with a grand total tac = 1225. while firm h pays a tax on 65 units and firm l pays a tax on 15 units, which yield (65)(35) = 2275 (blue rectangle area) and (15)(35) = 525 (black rectangle area) respectively with a total of 2800, this amount is transferred to the government. the tax cost of the firm is offset by 11 |journal for economic educators, 22(2), 2022 the revenue benefit of the government. overall, the cost is 1225, which is lower than the 1850 with a uniform standard. thus, an emission tax yields the cost-effective solution. for simplification purposes, emission permits can be allocated equally. therefore, eh = el = 40, which yields mach = 60 and macl = 10. this means that firm h values the permit at 60 and firm l at 10. a mutually beneficial trade can occur between them where firm l sells permits, and firm h buys them. the way the price is set is through the same principle of mach = macl. this condition along with the stipulation eh + el = 80 yields the same permit price as the tax rate of 35. at a permit price of 35, firm h emits 65 units and buys (65-40 = 25) permits. similarly, firm l emits 15 units and sells (40-15 = 25) permits. the cost and revenue of permits (25*35 = 875) (green rectangle and dotted pink rectangle area) offset each other. this leaves the total abatement costs as tach = tacl = ½ (35)(35) = 612.5 each (blue and black triangle areas) with a grand total tac = 1225. thus, both permits and taxes as policy tools yield the costeffective solution compared to uniform standards. table 2 indicate these mathematical results in a concise form. table 2: analyzing uniform standard, emission tax, and tradable emission permits uniform standard emission tax tradable emission permits standard imposed: eh = el = 40 amount abated: h: 100 – 40 = 60 l: 50 – 40 = 10 mach = 100 – eh = 60 macl = 50 – el = 10 tach = ½ (60)(60) = 1800 tacl = ½ (10)(10) = 50 tac = tach + tacl = 1850 solving for tax rate: 1) eh + el = 80 2) mach = macl 100 – eh = 50 – el solving 1 and 2: eh = 65 el = 15 mach = macl = tax = 35 amount abated: h: 100 – 65 = 35 l: 50 – 15 = 35 tach = ½ (35)(35) = 612.5 tacl = ½ (35)(35) = 612.5 tac = tach + tacl = 1225 tax paid: h: (65)(35) = 2275 l: (15)(35) = 525 total tax paid = 2800 offset by government revenue permits allocated: eh = el = 40 value of the permits: mach = 100 – eh = 60 macl = 50 – el = 10 solving for permit price: 1) eh + el = 80 2) mach = macl 100 – eh = 50 – el solving 1 and 2: eh = 65 el = 15 mach = macl = price = 35 amount abated: h: 100 – 65 = 35 l: 50 – 15 = 35 tach = ½ (35)(35) = 612.5 tacl = ½ (35)(35) = 612.5 tac = tach + tacl = 1225 permits needed: h: 65 – 40 = 25 (buys) l: 15 – 40 = -25 (sells) h: cost = 25*35 = 875 l: revenue = 25*35 = 875 offset each other 12 |journal for economic educators, 22(2), 2022 international collaboration with game theory having considered topics that underscore the urgency of climate change, thinking outside the box, the limits of individual actions, and the issues of various policy tools, it is also important to highlight concerns on international collaboration. this is because addressing climate change requires concerted international action. tietenberg and lewis (2015) allude to the free rider problem, that is, that countries incur the marginal costs of abating emissions but receive only a fraction of the marginal benefits of their actions, which incentivizes them to free ride on the efforts of others. additionally, according to ragan (2020), there are concerns that developed countries want equal participation, as they don’t want developing countries free riding. however, developing countries indicate that the primary responsibility should fall on the developed countries that are responsible for the bulk of the ghg emissions stock, and that developed countries can help by making large financial contributions to them (ragan, 2020, p. 425). such issues lead to problems in international collaboration on climate change. however, tietenberg and lewis (2015) mention the strategy of issue linkage through which cooperation of climate change can be achieved by linking climate change agreements with economic agreements like forgiving international debt, signing free trade agreement, or sharing r&d. while they mention the prisoner’s dilemma to explain lack of collaboration and highlight the strategy of issue linkage in game theory, they do not visually illustrate these ideas with specific games. since econ 101 students are introduced to the prisoner’s dilemma and the strategy of issue linkage is a minor addition through a bargaining strategy game, pay off matrices for these games can be constructed by borrowing and adapting from chapter 13 of the pindyck and rubinfeld (2018) textbook (p. 500-501). this approach is much simpler than those in the literature reviewed in section 2 that are time intensive, require too much preparation, and where relatively weaker students get confused with the logistics of games. the simple prisoner’s dilemma and the bargaining strategy game with the respective pay-off matrices are illustrated in table 3. matrix a showcases the prisoner’s dilemma game to indicate that the dominant strategy for both countries is to emit. it shows that a country incurs abatement costs which makes it less competitive compared to others who remain competitive and obtain benefit from the other country’s abatement. thus, it shows that while both countries can be better off by abating (10, 5), the incentive to free ride on the efforts of others leads them to the inferior solution (-5, -5). 13 |journal for economic educators, 22(2), 2022 table 3: prisoner’s dilemma and the bargaining strategy games a country 1 country 2 abate emit abate 10, 5 -10, 15 emit 15, -10 -5, -5 b developing countries developed countries collaborate don’t collaborate business as usual 10, 5 10, 10 take responsibility 15, 8 5, 15 c developing countries developed countries no treaty trade agreement no treaty 5, 5 5, 10 trade agreement 10, 5 20, 20 matrix b shows that the dominant strategy for developing countries is to not collaborate. this leads to the nash equilibrium (10,10) where there is no international collaboration, and it is business as usual. developed countries would prefer that developing countries collaborate for them to justify taking equal responsibility on climate change. thus, while the outcome is (10, 10), developed countries would prefer (15, 8). this can be achieved by issue linkage. therefore, consider matrix c, which presents another game that shows that the dominant strategy for both developed and developing countries is to enter into free trade agreements, which yields the nash equilibrium (20, 20). it is here, developed countries could bargain by withholding free trade agreements, which yields the outcome (5, 10), unless the developing countries collaborated on climate change actions in matrix b. if developing countries collaborate, developed countries would enter into a free trade agreement, which would yield a total outcome of 20 + 8 = 28 for developing countries. if developing countries don’t collaborate, developed countries would withhold the free trade agreement, which would yield a total outcome of 10 + 10 = 20 for developing countries. since 28 > 20, issue linkage through this bargaining strategy would facilitate international collaboration on climate change. thus, econ 101 students can learn about issues of international collaboration through game theory in a simpler way than semester long time-consuming games and excessive assigned readings. concluding remarks the objective in this paper was to explore how to introduce climate change to econ 101 students in a way that causes the least disruption for both instructors and students who are engaged with the mainstream neoclassical paradigm. this is because of the growing recognition that econ 101 textbooks do not prepare students to address pressing contemporary issues and because of the challenge posed by bowles and carlin (2020), who have promoted the core text as a viable alternative to conventional textbooks like mankiw, kneebone, and mackenzie (2020a). to this end, a review of the literature on teaching climate change and economics and three principal options to either replace or supplement the mankiw, kneebone, and mackenzie 14 |journal for economic educators, 22(2), 2022 textbook was undertaken. the objective was to minimize student confusion and instructor workload and to uphold mankiw’s approach of clarity before nuance. the literature review showcased games and additional readings that were time intensive, increased instructor workload for modest improved learning results, and which could overwhelm students by embroiling them in the logistics of techniques instead of learning the basic ideas. the issue of information overload was also highlighted in the case of the core text, which was found to be fraught with advanced technical concepts and techniques that are not suitable for introducing climate change to econ 101 students. similarly, other options were not found to be adequate either due to the wordy text or lack of visual illustrations. thus, a new approach was delineated based on material that comprised of popular books, magazine articles, a youtube video, and exercises suitable for econ 101 students based on other textbooks. the five-part approach consisted of emphasizing the urgency of climate change, thinking outside the box through geoengineering, the limits of individual actions like buying local or going vegan, the comparative outlook on various policy tools with a simple equation solving exercise, and simple game theory to broach the issue of international collaboration. these five topics are usually missing or inadequately presented in textbooks. other instructors can make use of this approach based on material specific to their respective jurisdictions. they can consider it in its entirety or focus more on some aspects based on the background and preparation level of their student cohort. in essence, this five-part approach offers a renewed approach to introducing climate change to econ 101 students. references basu, s. 2021. “teaching economics of climate change and sustainability as an introductory interdisciplinary elective using critical reading of supplementary sources.” the journal of economic education, 52(4): 353-362. bowles, s. and w. carlin. 2020. “what students learn in economics 101: time for a change.” journal of economic literature, 58(1): 176-214. caviglia-harris, 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|journal for economic educators, 19(1), 2019 an analysis of mathematics requirements and recommendations for phd programs in economics in canada and the united states m.i. milkman1 and r. d. marjadi2 abstract this paper collects the data on mathematics requirements and recommendations for admission to ph.d. programs in economics. there are several differences between this paper and milkman and marjadi (2017). this paper includes ph.d. programs in canada and compares them with the programs in the united states. then, we split our sample based on whether we had obtained the mathematics course requirements directly from the programs through the questionnaire or phone interview or from the programs’ websites. we then analyzed the data to find that there are differences in those requirements and recommendations between programs in canada and the united states. we also found that there are differences in those requirements and recommendations among different quality tiers. keywords: admission requirements; mathematics requirements; ph.d. in economics jel classification: a230, a20 introduction the role of mathematics in the study of economics has long been an issue for debate (quddus and rashid 1994; quddus and rashid 1990; hill 1966; weintraub 2002). we have seen an increasing application of mathematics in modern economics. consequently, in preparing for new ph.d.s in economics, many economics ph.d. programs expect prospective students to possess some mathematical skills. an economics ph.d. program would normally express this expectation in their admission requirements. it is common or even expected for a ph.d. program to require or recommend prospective students to have specific mathematics courses on their academic transcripts. one may interpret a “requirement” for a specific mathematics course means that the absence of the course on an applicant’s academic transcript will significantly reduce, or eliminate, the probability of admission into the program. on the other hand, one may interpret a “recommendation” for a specific mathematics course means that having the course on an applicant’s academic transcript may enhance an application. an economics ph.d. program may recommend a mathematics course because it believes such course will help students to succeed in their doctoral course of study. data we gathered a dataset on mathematics course requirements and recommendations from economics ph.d. programs across the united states and canada. we identified 159 economics 1 professor emeritus of economics, department of economics and finance, murray state university, 307 business building, murray, ky 42071 2 adjunct lecturer, department computer science and information systems, murray state university, 333 wells hall, murray, ky 24 |journal for economic educators, 19(1), 2019 ph.d. programs from both peterson’s guide for grad school (2015) and the american economic association (2015). then in the spring and summer 2016, we surveyed those programs using an online instrument. the survey questionnaire lists eleven mathematics courses commonly mentioned in the admission requirements of economics ph.d. programs. those courses are calculus 1, calculus 2, multivariate calculus, matrix theory/linear algebra, differential equations, statistics 1, statistics 2, econometrics 1, econometrics 2, real analysis, and stochastic processes. we asked if any of these courses are required or recommended for admission. we also gave the program directors the opportunity to list additional mathematics courses that were either required or recommended. we emailed non-respondents up to three times and ended up with 75 completed surveys. for the remaining programs, we examined the program’s website and we collected 70 completed surveys from the websites of these universities. some of the programs’ websites did not specify prerequisite courses in mathematics, statistics, and econometrics. for those programs we telephoned the program director. all of these efforts resulted in data from 154 ph.d. economics programs, a collection rate of 96.86%. table 1. mathematic courses requirement and recommendation for admission to ph.d. in economics programs name of university tier (2017 rep ec) calc 1 calc 2 mult calc mtrx lin algb diff eq stoc proc real ana stat 1 stat 2 econ 1 econ 2 american university, us 5 2 2 2 2 1 1 1 1 1 1 1 arizona state university at the tempe campus, us 3 1 1 1 1 1 0 1 1 1 0 0 auburn university, us*) 5 2 2 2 0 0 0 0 0 0 0 0 binghamton university, us 5 2 2 2 2 2 2 1 2 2 2 1 boston college, us*) 3 1 1 1 1 0 0 1 1 1 0 0 boston university, us 2 1 1 1 1 0 0 1 1 0 1 0 brandeis university, us 5 2 2 2 2 1 1 1 2 1 2 1 brown university, us 2 2 2 2 1 1 1 1 1 1 1 1 carleton university, canada 5 2 2 2 2 2 0 0 2 2 2 2 carnegie mellon university, us 4 0 0 0 0 0 0 0 0 0 0 0 claremont graduate university, us 5 2 2 2 2 0 0 1 2 1 0 0 clark university, us 5 2 2 2 2 2 0 0 0 0 0 0 clemson, us 5 2 2 2 2 0 0 1 2 0 2 0 colorado state university, us*) 5 2 2 0 0 0 0 0 0 0 2 0 columbia university, us 1 2 2 2 2 1 1 1 2 2 2 2 concordia university, canada*) 5 1 1 1 1 1 1 1 1 1 2 1 cornell university, us 3 2 2 2 2 1 0 2 2 1 2 1 dalhousie university, canada*) 5 2 2 0 2 0 0 0 2 2 2 2 drexel university, us 5 2 2 2 2 1 1 1 2 2 2 1 duke university, us 3 2 2 2 2 2 1 1 2 1 1 1 emory university, us 5 1 1 1 1 1 0 1 1 1 1 0 florida international university, us 5 2 2 1 2 0 0 0 2 1 1 0 florida state university, us 5 2 2 0 2 0 0 0 2 2 1 0 25 |journal for economic educators, 19(1), 2019 name of university tier (2017 rep ec) calc 1 calc 2 mult calc mtrx lin algb diff eq stoc proc real ana stat 1 stat 2 econ 1 econ 2 fordham university, us 5 2 2 2 2 1 1 1 2 2 1 0 george mason university, us 5 1 1 0 1 0 0 0 1 1 1 0 george washington university, us*) 4 2 2 0 0 0 0 0 0 0 0 0 georgetown university, us 3 2 2 2 1 1 0 0 2 2 0 0 georgia institute of technology, us 5 2 2 2 2 0 0 0 0 0 0 0 georgia state university, us*) 5 2 2 2 1 1 1 1 1 1 1 1 harvard university, us 1 2 2 0 2 0 0 1 0 0 0 0 howard university, us 5 0 0 0 0 0 0 0 2 2 2 0 indiana university bloomington, us 4 2 2 1 1 1 0 0 1 1 0 0 indiana university purdue university indianapolis (iupui) , us 5 2 2 2 2 0 0 0 2 2 0 0 iowa state university, us 4 2 2 2 2 0 0 1 2 2 0 0 john hopkins university, us 4 2 2 1 2 1 0 1 1 1 0 0 kansas state university, us 5 2 0 0 0 0 0 0 2 0 0 0 lehigh university, us 5 2 2 2 2 1 1 1 2 2 2 1 louisiana state university, us 5 2 2 2 2 1 1 1 2 1 0 0 massachusetts institute of technology, us*) 1 2 2 2 0 0 0 0 0 0 0 0 mcgill university, canada 5 2 2 2 2 1 1 1 2 2 2 2 mcmaster university, canada*) 5 0 0 0 0 0 0 0 0 0 2 2 michigan state university, us 3 2 2 2 2 2 0 2 2 1 0 0 middle tennessee state university, us 5 2 1 1 1 0 0 0 1 0 0 0 mississippi state university, us 5 2 2 0 0 0 0 0 2 0 0 0 new school for social research, us 5 0 0 0 0 0 0 0 0 0 0 0 new york university, us 2 2 2 2 2 1 1 2 1 1 2 2 north carolina state, us 5 2 2 2 2 2 0 1 2 0 1 1 northeastern university, us 5 2 2 1 1 0 0 1 2 1 0 0 northern illinois university, us 5 2 2 1 1 0 0 1 2 2 0 0 northwestern university, us*) 2 2 2 2 2 2 0 0 0 0 0 0 oklahoma state university, us 5 2 2 1 2 1 0 0 2 2 0 0 oregon state university, us 5 0 2 0 2 0 0 0 2 2 2 0 penn state university, us 3 2 2 2 0 0 0 0 0 0 0 0 princeton university, us*) 5 2 2 2 2 0 0 0 0 0 0 0 purdue university, us 5 2 2 0 2 0 0 0 2 0 0 0 rice university, us 5 2 2 2 2 0 0 1 0 0 0 0 rutgers university, new brunswick, us 4 2 2 1 2 1 0 1 2 1 1 1 simon fraser university, canada 4 2 2 2 2 1 1 1 2 2 2 2 southern illinois university carbondale, us 5 2 1 1 1 0 0 0 1 0 1 0 26 |journal for economic educators, 19(1), 2019 name of university tier (2017 rep ec) calc 1 calc 2 mult calc mtrx lin algb diff eq stoc proc real ana stat 1 stat 2 econ 1 econ 2 southern methodist university, us 5 2 2 2 2 0 0 1 2 0 0 0 stanford university, us 1 2 2 2 2 0 0 0 2 2 0 0 stony brook university, us 5 2 2 1 1 1 1 1 2 2 2 1 syracuse university, us 5 2 2 2 1 1 0 1 1 1 1 1 temple university, us 5 2 2 2 2 1 0 1 1 0 1 0 texas a&m university, us 5 2 2 1 2 1 1 1 2 1 2 1 texas tech university, us 5 2 2 2 1 1 0 0 2 2 0 0 the graduate center city university of new york, us 5 0 0 0 2 2 0 0 2 0 0 0 the ohio state university, us 4 2 2 2 2 2 1 1 2 2 1 1 tulane university, us*) 5 2 2 0 0 0 0 0 0 0 0 0 university of california davis economics, us 3 2 2 2 2 1 1 1 1 1 1 0 university of north carolina greensboro, us 5 2 1 1 1 1 0 0 2 2 2 2 university of iowa, us 5 2 2 2 1 1 1 1 2 1 1 1 universite de montreal, canada 5 2 2 2 2 1 1 1 2 2 2 2 universite du quebec a montreal, canada*) 5 0 0 0 0 0 0 0 0 0 0 0 universite laval, canada*) 5 2 2 0 2 2 0 0 2 2 2 0 university at albany, us 5 2 2 2 2 1 1 1 2 1 1 1 university at buffalo, the state university of new york, us 5 2 2 1 1 1 0 1 1 1 0 0 university of alabama, us 5 2 2 2 2 2 1 1 1 1 1 1 university of alberta, canada 5 2 2 2 2 1 1 1 2 0 2 2 university of arizona, us 5 2 2 0 2 2 0 2 1 0 1 0 university of arkansas, us 5 2 2 1 2 1 0 1 0 0 0 0 university of british columbia, canada 2 2 2 0 2 2 0 0 2 2 2 0 university of calgary, canada*) 5 0 0 0 0 0 0 0 0 0 2 2 university of california los angeles (ucla) , us 3 2 2 0 2 0 0 0 2 0 0 0 university of california santa barbara, us 4 1 1 1 1 0 0 1 1 1 2 0 university of california irvine, us 3 2 2 2 2 0 0 0 0 0 2 2 university of california, berkeley, us 1 2 2 2 2 1 2 2 2 2 0 0 university of california, riverside, us 5 2 2 2 2 0 0 0 2 2 1 0 university of california, san diego, us 2 2 2 2 2 0 1 1 0 0 0 0 university of california, santa cruz, us 4 2 2 0 2 0 0 0 2 2 0 0 university of chicago, us*) 1 2 2 2 2 0 0 0 2 2 2 2 university of cincinnati, us 5 2 2 2 2 0 1 1 2 2 2 1 university of colorado, us 4 2 2 1 2 1 0 1 2 1 1 1 university of connecticut, us 5 2 2 2 2 0 0 0 2 2 0 0 university of delaware, us 5 2 2 1 1 1 0 1 2 1 2 1 27 |journal for economic educators, 19(1), 2019 name of university tier (2017 rep ec) calc 1 calc 2 mult calc mtrx lin algb diff eq stoc proc real ana stat 1 stat 2 econ 1 econ 2 university of florida, us 5 2 2 2 2 2 0 1 2 0 0 0 university of georgia, us 5 2 1 1 1 0 0 0 0 0 0 0 university of guelph, canada 5 1 1 1 1 0 0 0 2 0 2 1 university of hawaii at manoa, us 5 2 2 1 1 1 0 1 0 0 0 0 university of houston, us 5 2 2 2 1 1 1 1 1 1 1 1 university of illinois at chicago, us 5 1 1 1 1 1 0 0 1 0 1 0 university of illinois at urbanachampaign, us 5 0 0 0 0 0 0 1 2 2 0 0 university of kansas, us 5 2 2 2 2 0 0 0 0 0 0 0 university of kentucky, us 5 1 1 1 1 0 0 0 1 1 0 0 university of manitoba, canada*) 5 2 2 0 2 2 0 0 0 0 2 0 university of maryland at college park, us 3 2 2 2 2 1 0 2 1 1 1 1 university of massachusetts amherst, us 5 2 2 0 2 0 0 0 2 0 0 0 university of memphis, us 5 2 1 1 1 0 0 0 2 0 0 0 university of miami, us 5 2 2 2 2 1 0 1 2 1 1 0 university of michigan, us 2 2 2 0 2 0 0 0 1 1 0 0 university of minnesota, twin cities campus, us*) 5 2 2 0 0 1 0 1 1 1 0 0 university of mississippi, us*) 5 1 0 0 1 1 0 0 1 1 0 0 university of missouri, us 5 2 2 1 0 0 0 0 1 0 0 0 university of missouri-kansas city, us*) 5 1 0 0 1 1 0 0 2 0 0 0 university of nebraska-lincoln , us 5 2 2 0 2 1 0 1 2 0 0 0 university of nevada, reno, us 5 2 2 0 1 1 0 0 0 0 1 0 university of new hampshire, us 5 2 1 1 1 1 0 0 2 0 2 0 university of new mexico, us 5 2 2 0 2 0 1 0 2 1 2 1 university of north carolina, us 5 2 2 2 2 0 0 1 0 0 0 0 university of notre dame, us 4 1 1 1 1 0 0 0 1 1 0 0 university of oklahoma, us 5 2 2 0 1 0 0 0 2 0 0 0 university of oregon, us 5 2 2 2 2 1 0 1 2 2 0 0 university of ottawa, canada 5 2 2 2 2 0 0 0 2 0 2 2 university of pennsylvania the wharton school, us 5 2 2 2 2 1 1 1 2 1 2 1 university of pennsylvania, us 2 2 2 2 2 1 1 2 2 1 2 1 university of pittsburgh, us 4 2 2 0 2 1 0 1 1 1 0 0 university of rhode island, us 5 2 2 1 0 0 0 0 2 1 2 1 university of rochester, us 5 1 1 1 1 0 0 0 1 1 0 0 university of south carolina, us 5 2 0 0 0 0 0 0 2 2 0 0 university of south florida, us 5 2 2 0 0 0 0 0 2 0 0 0 university of southern california, us 3 2 0 0 0 0 0 0 2 2 2 0 university of tennessee, us 5 2 2 1 2 1 1 1 2 1 2 1 28 |journal for economic educators, 19(1), 2019 name of university tier (2017 rep ec) calc 1 calc 2 mult calc mtrx lin algb diff eq stoc proc real ana stat 1 stat 2 econ 1 econ 2 university of texas, us 4 2 2 2 2 1 0 1 2 2 1 1 university of texas at dallas, us 5 2 2 2 2 1 1 1 2 1 1 1 university of toronto, canada 3 2 2 1 2 1 1 1 2 2 2 2 university of utah, us 5 2 1 1 1 1 0 0 2 0 1 0 university of victoria, canada 5 1 1 0 1 1 0 0 0 0 1 1 university of virginia, us 4 2 2 2 2 1 0 1 0 0 0 0 university of washington, us 4 2 2 1 2 1 0 0 2 2 1 0 university of waterloo, canada*) 5 2 2 0 2 2 0 0 2 2 2 0 university of western ontario, canada 4 2 0 0 2 0 0 0 0 0 0 0 university of wisconsin madison, us 3 2 2 2 2 0 0 0 2 0 0 0 university of wisconsin milwaukee, us 5 2 2 0 0 0 0 0 2 0 0 0 university of wyoming, us 5 2 2 1 1 1 1 0 1 1 2 1 utah state university, us 5 2 2 2 1 0 0 0 2 2 2 2 vanderbilt university, economics, us 3 2 2 0 1 1 0 1 2 0 1 0 virginia tech, us 5 2 2 2 2 1 1 1 2 2 1 1 washington state university, us 5 2 2 2 2 1 1 1 2 0 2 2 washington university in st. louis, us 4 2 2 1 1 1 1 1 1 1 1 1 wayne state university, us 5 2 2 0 1 1 0 0 2 0 0 0 west virginia university, us 5 2 1 1 1 1 0 0 2 0 0 0 western michigan university, us 5 2 2 0 0 0 0 0 0 0 0 0 yale university, us 2 1 1 1 1 0 0 0 1 1 0 0 york university, canada 5 2 1 1 2 1 1 1 1 1 2 2 notes:  values: 2: required 1: recommended 0: neither required nor recommended  *) implicit requirements and/or recommendations there are several differences between this paper and milkman and marjadi (2017). first, this paper includes ph.d. programs in canada and compares them with the programs in the united states. second, when the tier analysis is done we used a different ranking scheme because the ranking scheme used by milkman and marjadi (2017) does not contain information about ph.d. programs in canada. third, we split our sample based on whether we had obtained the mathematics course requirements directly from our questionnaire, the phone interview or from a program’s website. we published a list of the mathematics courses required or recommended for admission to economics ph.d. programs in the united states (2016) hoping that it may guide aspiring economics ph.d.s in preparing for their future study. we then published another paper (2017) analyzing the dataset for economics ph.d. programs in the united states. in this paper, we expand the scope of our analysis to include economics ph.d. programs in canada (in the spring of 2019, 29 |journal for economic educators, 19(1), 2019 there are more than 500 ph.d. students in canadian economics programs). our dataset contains 134 programs in the united states and 20 programs in canada. table 1 displays the mathematics course requirements and recommendations for admission to ph.d. in economics programs in canada and the united states. for each cell in table 1, there is a number of 2, 1, or 0. the number 2 indicates that the economics ph.d. department requires that course for admission, the number 1 indicates that the program recommends such course for students, and the number 0 indicates that the course is neither required nor recommended for incoming students. some of the program directors noted that they also recommend courses in numerical methods, functional analysis, probability theory, complex analysis, topological space, convex analysis, sets and logic, optimization theory, game theory, and mathematical economics. if potential ph.d. students and advisors are using this the information in table 1, they would want to check whether the requirements and recommendations have changed since the data was collected in 2016. analysis of mathematics requirements to illustrate how many mathematics courses that an aspiring economics ph.d. student may need, we conducted a frequency analysis on our dataset. we counted how many mathematics courses are required for admission by each of the economics ph.d. program. we also counted how many mathematics courses are required and recommended by each program. we then counted the frequency of programs that require a certain number of mathematic courses. the highest number of mathematics courses required by an economics ph.d. program is nine. there are two (1.30%) programs that require nine mathematics courses. there are 15 (9.74%) programs that do not require any mathematics courses. we also counted the number of mathematics courses required or recommended for admission by each of the economics ph.d. program. there are 29 (18.83%) programs that require or recommend 11 mathematics courses and there are three (1.95%) programs that do not require nor recommend any mathematics courses. given the almost universal mathematics skill requirements of economics ph.d. programs, one may wonder the rationale of not requiring or recommending any mathematics courses. one respondent wrote: “unlike most graduate programs in economics, we have chosen not to impose rigid course requirements on students. instead, we emphasize involving students in research early in their graduate careers. students in the doctoral program … take courses in order to learn the fundamental principles of economic theory underlying all areas of application, and to master the analytic and modelling techniques of the practicing research economist. in-depth knowledge of specialized areas is required as a by-product of research activity.” comparing mathematics courses in canada and the united states we then compared the frequency of the numbers of “required” and “required or recommended” mathematics courses between the united states and canada. we arranged the data in contingency tables (table 2 and table 3). then we ran the fisher’s exact test on each of the tables. 30 |journal for economic educators, 19(1), 2019 table 2. number of mathematics courses required country 0 1 2 3 4 5 6 7 8 9 total canada 2 1 4 0 1 1 0 7 3 1 20 % in canada 10.00 5.00 20.00 0.00 5.00 5.00 0.00 35.00 15.00 5.00 100.00 cummulative % 10.00 15.00 35.00 35.00 40.00 45.00 45.00 80.00 95.00 100.00 us 13 5 15 25 22 24 16 10 3 1 134 % in the us 9.70 3.73 11.19 18.66 16.42 17.91 11.94 7.46 2.24 0.75 100.00 cummulative % 9.70 13.43 24.62 43.28 59.70 77.61 89.55 97.01 99.25 100.00 total 15 6 19 25 23 25 16 17 6 2 154 percent 9.74 3.90 12.34 16.23 14.94 16.23 10.39 11.04 3.90 1.30 100.00 cummulative % 9.74 13.64 25.98 42.21 57.15 73.38 83.77 94.81 98.71 100.01 note: p<.0001, fisher’s exact test table 2 shows that 55% of ph.d. programs in canada require seven or more mathematic courses (35% require seven, 15% require eight, and 5% require nine mathematics courses). in the united states, only 10.45% of the ph.d. programs require seven or more mathematics courses (7.46% require seven, 2.24% require eight, and 0.75% require nine mathematics courses). these results are statistically significant with p-value <0.0001. it is clear that the number of mathematics classes required for admission to economics ph.d. programs is higher in canada than in the united states. table 3. number of mathematics courses required or recommended country 0 2 3 4 5 6 7 8 9 10 11 total canada 1 3 0 0 1 1 6 0 1 1 6 20 % in canada 5.00 15.00 0.00 0.00 5.00 5.00 30.00 0.00 5.00 5.00 30.00 100.00 cummulative % 5.00 20.00 20.00 20.00 25.00 30.00 60.00 60.00 65.00 70.00 100.00 us 2 4 11 12 13 19 21 11 6 12 23 134 % in the us 1.49 2.99 8.21 8.96 9.70 14.18 15.67 8.21 4.48 8.96 17.16 100.00 cummulative % 1.49 4.48 12.69 21.65 31.35 45.53 61.20 69.41 73.89 82.85 100.01 total 3 7 11 12 14 20 27 11 7 13 29 154 percent 1.95 4.55 7.14 7.79 9.09 12.99 17.53 7.14 4.55 8.44 18.83 100.00 cummulative % 1.95 6.50 13.64 21.43 30.52 43.51 61.04 68.18 72.73 81.17 100.00 note: p=.0686, fisher’s exact test table 3 combines the required and recommended mathematics classes for admission in both countries. the fisher’s exact test indicate that there is a lower level of statistical significance in the difference between canada and the united states (p-value = 0.0686). table 4. contingency table for calculus 1 required recommended neither required nor recommended total canada 14 3 3 20 united states 115 13 6 134 total 129 16 9 154 note: p=.0841, fisher’s exact test in order to gain insight into which courses are more frequently required in canada, we conducted a contingency table analyses, comparing the requirements or recommendations of mathematics courses between canada and the united states. table 4 shows an example of a contingency table for calculus 1. all of the contingency tables for the other courses are listed in the appendix. we summarize the p-values from fisher’s exact test for all the mathematics 31 |journal for economic educators, 19(1), 2019 courses in table 5. table 5 illustrates that economics ph.d. programs in canada are more likely to require statistics 2, econometrics 1, and econometrics 2. table 5. p-values from fisher's exact test courses p value calculus 1 .0841 calculus 2 .0934 multivariate calculus .1154 matrix theory/linear algebra .2978 differential equations .0828 stochastic processes .4446 real analysis .4399 statistics 1 .2446 statistics 2 .0325 econometrics 1 .0001 econometrics 2 .0001 quality tiers we also attempted to see whether program “quality tiers” make a difference in the mathematics requirements for admission. we defined quality as the level of academic research activity produced by the program. to determine quality tiers, we used a method (hansen 1991) that puts ph.d. in economics programs into five different tiers (“top 6, the next 9, the next 15, the next 18 and the remaining departments”). the tier ranking come from research papers in economics (repec, n.d.). it is based on bibliographic data or metadata of over 700,000 publication items of economic research (zimmermann 2007). the repec metadata are continuously updated and the ranking are refreshed monthly. we used the data from august, 2017. repec gives a score to each registered author based on several criteria including number of works, citation counts and impact factors. the institution ranking is derived from the aggregate of all authors from that institution. zimmermann (2007) noted that taking the aggregate scores gives advantage to institutions that have many authors. he added that taking the average scores “…would make little sense, as author registration is not mandatory, and potentially lower ranked authors may be discouraged to register.” we recognized that smaller departments may have a lower ranking, for example princeton university’s is in tier 5. however, despite its flaws, this is the only ranking of research productivity that includes institutions in the united states and canada. we then analyzed the tier ranking to group the programs into the five tiers, constructed the two-way table, and conducted the chi-square test of independence for each of the courses. we summarize the results on tables 6 and 7. (table 1 lists the tier ranking of all of the economics departments in our sample.) it is interesting to note that none of the ph.d. programs in canada are in the top tier. 32 |journal for economic educators, 19(1), 2019 table 6. number of required mathematics courses among different quality tiers ranking tier number of mathematics courses required frequency row pct 0 1 2 3 4 5 6 7 8 9 total 1 0 0.00 0 0.00 0 0.00 2 33.33 0 0.00 0 0.00 1 16.67 0 0.00 3 50.00 0 0.00 6 100.00 2 2 22.22 0 0.00 0 0.00 2 22.22 1 11.11 1 11.11 0 0.00 3 33.33 0 0.00 0 0.00 9 100.00 3 2 13.33 0 0.00 0 0.00 2 13.33 3 20.00 3 20.00 2 13.33 3 20.00 0 0.00 0 0.00 15 100.00 4 2 11.11 1 5.56 4 22.22 2 11.11 3 16.67 2 11.11 2 11.11 1 5.56 1 5.56 0 0.00 18 100.00 5 9 8.49 5 4.72 15 14.15 17 16.04 16 15.09 19 17.92 11 10.38 10 9.43 2 1.89 2 1.89 106 100.00 total 15 9.74 6 3.90 19 12.34 25 16.23 23 14.94 25 16.23 16 10.39 17 11.04 6 3.90 2 1.30 154 100.00 table 6 shows that two-thirds of the top tier programs requires six or more mathematics courses. this is proportionally more than the other programs in different quality tiers. these differences are statistically significant with p-value of 0.0125. this is similar to the results for the tier analysis in milkman and marjadi (2017). table 7. number of required or recommended mathematics courses among different quality tiers ranking tier number of mathematics courses required and recommended frequency row pct 0 2 3 4 5 6 7 8 9 10 11 total 1 0 0.00 0 0.00 1 16.67 1 16.67 0 0.00 1 16.67 0 0.00 1 16.67 1 16.67 0 0.00 1 16.67 6 100.00 2 0 0.00 0 0.00 0 0.00 0 0.00 2 22.22 2 22.22 2 22.22 0 0.00 0 0.00 0 0.00 3 33.33 9 100.00 3 0 0.00 0 0.00 1 6.67 2 13.33 1 6.67 1 6.67 3 20.00 2 13.33 0 0.00 3 20.00 2 13.33 15 100.00 4 1 5.56 2 11.11 0 0.00 0 0.00 1 5.56 2 11.11 3 16.67 3 16.67 0 0.00 3 16.67 3 16.67 18 100.00 5 2 1.89 5 4.72 9 8.49 9 8.49 10 9.43 14 13.21 19 17.92 5 4.72 6 5.66 7 6.60 20 18.87 106 100.00 total 3 1.95 7 4.55 11 7.14 12 7.79 14 9.09 20 12.99 27 17.53 11 7.14 7 4.55 13 8.44 29 18.83 154 100.00 table 7 also shows that two-thirds of the top tier programs require or recommend six or more mathematics courses. 33 |journal for economic educators, 19(1), 2019 implicit v. explicit requirements as noted earlier, after we had closed the survey collection, we attempted to collect the data from the program websites. many of the programs mention the mathematics course requirements explicitly. twenty-one programs did not specifically describe their mathematics course requirements or recommendations. however, one can infer the requirements or recommendation from the general admission requirements. we interpreted the requirements from these programs. for example, if the program requires calculus 2, we can infer that the program requires calculus 1, even though it is not a listed requirement. because of this and at a suggestion of a conference discussant, we divided our data into two categories. the first category is where we either have a completed form from the program or have completed a conversation with that program (explicit, n=133) and the second category is where we only have the data from the website (implicit, n=21). table 1 includes these categories for each program. table 8. number of required mathematics courses, explicit vs. implicit explicit/ implicit number of mathematics courses required frequency row pct 0 1 2 3 4 5 6 7 8 9 total explicit 12 9.09 4 3.03 14 10.61 21 15.91 22 16.67 23 17.42 16 12.12 13 9.85 5 3.79 2 1.52 132 100.00 implicit 3 13.64 2 9.09 5 22.73 4 18.18 1 4.55 2 9.09 0 0.00 4 18.18 1 4.55 0 0.00 22 100.00 total 15 9.74 6 3.90 19 12.34 25 16.23 23 14.94 25 16.23 16 10.39 17 11.04 6 3.90 2 1.30 154 100.00 table 9. number of required or recommended mathematics courses, explicit vs. implicit explicit/ implicit number of mathematics courses required frequency row pct 0 2 3 4 5 6 7 8 9 10 11 total explicit 2 1.52 3 2.27 8 6.06 10 7.58 11 8.33 19 14.39 22 16.67 10 7.58 7 5.30 13 9.85 27 20.45 132 100.00 implicit 1 4.55 4 18.18 3 13.64 2 9.09 3 13.64 1 4.55 5 22.73 1 4.55 0 0.00 0 0.00 2 9.09 22 100.00 total 3 1.95 7 4.55 11 7.14 12 7.79 14 9.09 20 12.99 27 17.53 11 7.14 7 4.55 13 8.44 29 18.83 154 100.00 then, we compared the mathematics course requirements or recommendations between the programs that explicitly mention their requirements or recommendations and those that imply their requirements or recommendations. tables 8 and 9 are the contingency tables that summarize the number of mathematic courses between the two categories (explicit and implicit). we compared the two categories using wilcoxon rank sum non-parametric test. we ran one test for the number of mathematics courses required and another for the number of mathematics courses required and recommended. for the test on number of mathematics courses required, there is no significant difference between the two categories (z=-1.5, p=.1232). however, the other test indicated that economics ph.d. programs that did not mention specific mathematics requirements or recommendations are likely to have fewer mathematics courses required or recommended, (z=3.2, p=.0014). 34 |journal for economic educators, 19(1), 2019 conclusion this paper reports and analyzes the mathematics requirements and recommendations for economics ph.d. programs in canada and the united states. we find that programs in canada are more likely to require or recommend more mathematics courses than programs in the united states. our results indicate that programs in canada are more likely to require statistics 2, econometrics 1, and econometrics 2. we also find that two-thirds of the top-tier programs require six or more mathematics courses. we also find that the explicit programs require more mathematics courses than the implicit programs. future research can examine if students who are admitted to ph.d. programs without the required or recommended mathematics courses have a different completion rate than students who do have the required and recommended courses. while it is true that many economics undergraduate programs are not necessarily focused on training researchers, it may still be the large numbers of mathematics courses that are recommended or required discourage women and minorities from applying to economics ph.d. programs. science, technology, engineering, and mathematics (stem) programs also require many mathematics courses, and they have made significant progress in encouraging more women and minorities to pursue ph.d.s in the stem disciplines than those in economics. however, this effort has been backed by extensive funding from both the public and private sector. also, one might further investigate why programs in canada require more mathematics courses than programs in the united states. references american economic association. 2015. “alphabetical list of u.s. graduate programs in economics.” https://www.aeaweb.org/resources/students/schools. hansen, w. lee. 1991. “the education and training of economics doctorates: major findings of the executive secretary of the american economic association’s commission on graduate education in economics.” journal of economic literature 29 (3): 1054–87. http://www.jstor.org/stable/2727611. hill, lewis. 1966. “the use and abuse of mathematics in economics.” the american journal of economics and sociology 25 (2): 212–14. http://www.jstor.org/stable/3485335. milkman, martin, and riza marjadi. 2016. “undergraduate mathematics courses required and recommended for admission to economics ph.d. programs in the united states.” the american economist 62 (1): 118–25. doi:10.1177/0569434516672777. milkman, martin, and riza marjadi. 2017. “an analysis of mathematics requirements and recommendations for admission to ph.d. programs in economics.” the american economist 63 (1): 110–14. doi:10.1177/0569434517746389. peterson’s. 2015. “peterson’s guide for grad school.” https://www.petersons.com/graduateschools.aspx. quddus, munir, and salim rashid. 1990. “relations between the growth of mathematics and economics in the eighteenth and nineteenth centuries.” 90–1644. bebr faculty working paper. urbana-champaign. https://www.ideals.illinois.edu/bitstream/handle/2142/30045/relationsbetween1644qudd. pdf?sequence=2. quddus, munir, and salim rashid. 1994. “the overuse of mathematics in economics : nobel resistance.” eastern economic journal 20 (3): 251–65. http://www.jstor.org/stable/40325574. repec. n.d. “research papers in economics (repec).” http://repec.org/. 35 |journal for economic educators, 19(1), 2019 weintraub, e. roy. 2002. how economics became a mathematical science. durham: duke university press. https://www.dukeupress.edu/how-economics-became-a-mathematicalscience. zimmermann, christian. 2007. “academic rankings with repec.” 2007–36r september. department of economicsworking paper series. storrs, ct. http://www.econ.uconn.edu/. 36 |journal for economic educators, 19(1), 2019 appendix  contingency tables for each mathematics course required or recommended for admission. calculus 1 required recommended neither required nor recommended total canada 14 3 3 20 us 115 13 6 134 total 129 16 9 154 calculus 2 required recommended neither required nor recommended total canada 12 4 4 20 us 105 19 10 134 total 117 23 14 154 multivariate calculus required recommended neither required nor recommended total canada 6 4 10 20 us 61 38 35 134 total 67 42 45 154 matrix theory/linear algebra required recommended neither required nor recommended total canada 14 3 3 20 us 72 42 20 134 total 86 45 23 154 differential equations required recommended neither required nor recommended total canada 5 8 7 20 us 11 60 63 134 total 16 68 70 154 stochastic processes required recommended neither required nor recommended total canada 0 7 13 20 us 2 30 102 134 total 2 37 115 154 37 |journal for economic educators, 19(1), 2019 real analysis required recommended neither required nor recommended total canada 0 7 13 20 us 7 61 66 134 total 7 68 79 154 statistics 1 required recommended neither required nor recommended total canada 12 2 6 20 us 76 34 24 134 total 88 36 30 154 statistics 2 required recommended neither required nor recommended total canada 9 2 9 20 us 32 48 54 134 total 41 50 63 154 econometrics 1 required recommended neither required nor recommended total canada 17 1 2 20 us 29 35 70 134 total 46 36 72 154 econometrics 2 required recommended neither required nor recommended total canada 11 3 6 20 us 7 33 94 134 total 18 36 100 154 60 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 60 incorporating field trips into the teaching of business and economics: method and evaluation steve onyeiwu1 and hoa nguyen2 abstract although field trips have been recognized as effective for bridging the gap between theory and practice, instructors rarely step out of the classroom with their students. one reason is that it is unclear how those trips can be efficiently incorporated into the traditional classroom. in this paper, we discuss the motivation, organization and outcomes of field trips in our managerial economics and international business classes. we use cost-benefit analysis to evaluate the pedagogical value of field trips, and suggest that many of the benefits are non-pecuniary. although the benefits are subjective and difficult to quantify, pre-and-post tests administered to students suggest that field trips improve their knowledge, as well as enable them to apply classroom learning to practical problems. the paper identifies factors that should be considered when planning and organizing field trips in economics and business. keywords: field trips, experiential learning, learning outcomes, cost-benefit analysis, manufacturing jel codes: a22, c83 introduction the teaching of economics and business should accomplish a number of important goals, including content delivery and the application of course contents to the real world. it should also enable students to learn how knowledge gained from courses can be used to formulate policy, as well as make informed decisions (buckles 1998). anecdotal evidence suggests that most economics and business instructors focus more on the coverage of course content, and far less on other objectives. without opportunities for students to step-out of the classroom in order to observe how real-world businesses operate, students forget that businesses play roles that transcend the quest for profit maximization. when in the classroom, students learn mostly about how firms expand their market shares, minimize cost and pursue their profit motive. by going out of the classroom to meet with business executives, employees and other stakeholders, students are better positioned to understand the modus operandi of firms, as well as the challenges and the broader roles that businesses play in the areas of social responsibility, ethics, sustainability, and civic engagement. the business economics track at allegheny college was established in 2001 partly to address the lack of emphasis on real-world and policy-related issues in the teaching of economics and business. 1 professor and chair of economics department, allegheny college, meadville, pa 16335 2 assistant professor, department of economics, allegheny college, meadville, pa 16335 we are grateful to the participants at the economics department seminar series, allegheny college, participants at teaching economics conference, robert morris university, as well as anonymous reviewers for their constructive comments. we hold none of them culpable for any errors. 61 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 61 the track, which is offered within the economics department, was designed in a way that enables students to apply theoretical issues to real-world problems (goldstein and onyeiwu 2007). our department has used various mechanisms to infuse real-world issues into our curriculum, including an executive-in-residence program, guest lecturers from the business world, one-on-one mentoring by business executives, an annual executive roundtable, creditbearing internships and biennial experiential learning trips to new york city. we have, however, not systematically incorporated field trips into our curriculum. one of the authors of this paper had organized about 10 field trips to various companies in the past, but those trips were not preplanned and students’ perceptions of the outcomes of the trips were not solicited. the trips were not pre-planned in the sense that no scoping trips were undertaken prior to the trips, and no learning goals were explicitly articulated. we wish to begin the process of moving away from the traditional approach of teaching managerial economics and international business, and explore ways of intentionally infusing experiential learning opportunities into these courses, with careful planning in order to maximize students’ learning experience. this is in line with the interactive education method proposed by lempert (1996), which encourages students to see the world for themselves, draw their own conclusions and raise awareness of society. a major goal of this article is to discuss our experiences with the use of field trips for teaching economics and business courses. we discuss the planning, organization and logistics of field trips, using two iterations of trips to local companies in 2016 and 2017. the paper contributes to the literature on experiential learning in a number of ways. first, it estimates the costs and benefits of organizing field trips in economics and business courses. this is very important because, while scholars discuss the benefits and costs of experiential learning, they rarely estimate those costs and benefits (lawson, 2007; smith, 2007). we expect our cost-benefit analytical framework to serve as a benchmark for instructors who are interested in organizing field trips. second, the paper proposes a template for crafting learning outcomes for field trips, as well as how to assess those outcomes. specifically, we use both qualitative and quantitative information to assess the outcomes of field trips. lastly, we suggest important measures that should be undertaken in order to foster a successful field trip. literature review the use of field trips as a pedagogical technique in the teaching of economics and business courses (accounting, entrepreneurship, marketing, finance, etc.) is atypical. lempert (1996) is intrigued by the fact that the mainstream model of education in america has drifted away from american principles of “experimentation, pragmatism, participation and community.” he argues that social scientists often teach from texts, and do not place their teaching within the context of real-world problems. rather than encourage students to learn how to apply classroom knowledge to solving societal problems, they assign abstract exercises instead. while mcgoldrick (1998) observes that economists have been very slow at using experiential learning (including field trips) techniques in their courses, smith (2007) was perplexed that the first major article on the use of field trips in economics appeared in the journal of economic education 36 years after the journal was founded! in the few cases when field trips have been used by business and economics instructors, they ranged from visits to a horse racing center, a local auction house (smith, 2007), a museum (galizzi, 2014) and a historical park (smith and o’connell, 1997). during one such visit to a museum, students learned about the history of america’s industrial revolution, and participated in a role-playing exercise about the division of labor (galizzi, 2014). out-of-classroom activities 62 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 62 in business and economics have typically been undertaken in the context of service-learning (mcgoldrick, 1998; paxton, 2015; and smith, 2007). a common trend has been for instructors to use projects (for instance, managing investment funds), internships and business plan competitions as platforms for infusing experiential learning into their courses (dolan and stevens, 2006). although literature on field trips in business and economics classes is sparse, there is a very robust literature on experiential learning in higher education. pioneered by dewey (1938) and lewin (1951), experiential learning has been recognized as a pedagogy that fosters interaction between the learner and her environment. many studies on experiential learning highlight its value in reinforcing classroom teaching and learning (simpson, 1997; loomis and cox, 2000; walstad, 2001; becker and watts, 1996). amongst the benefits of experiential learning is that it helps prepare college students for leadership positions in business and civic organizations (middleton, 2005). experiential learning is particularly valuable because it enables students to understand the applicability of their knowledge to solving practical problems (eyler, 1993; eyler and giles, 1999). ziegert and mcgoldrick (2008) argue that service-based experiential learning fosters “deep learning,” which they describe as learning that involves “critical thinking skills, integration of knowledge over time and subjects, theoretical application to practical situations and higher order skills of analysis and synthesis” (p. 40). using the case of the business conditions and economic analysis (bcea) program at the university of richmond, dolan and stevens (2006) suggest that experiential learning can improve student skills and competencies dramatically. the lack of interest by many business and economics instructors in experiential learning activities (and field trips in particular), despite their pedagogical value, is attributable to a number of factors. first, the explicit and implicit costs of organizing field trips can be high. this is coupled with the fact that instructors seem to be oblivious of the potential benefits of field trips for students, colleges and local communities. second, some untenured faculty may consider it too risky to incorporate an unpredictable and unorthodox pedagogy into their courses, fearing that it may adversely affect their teaching evaluation, which is very critical for earning tenure, especially at liberal arts colleges. third, business and economics courses, especially at the intro levels, cover too many topics within a semester, leaving little or no time for outside-theclassroom experiences. fourth, mainstream economists believe that the realism of the assumptions of economic theory is not as important as its predictive power. consequently, many economics instructors do not see compelling reasons for stepping out of the classroom to understand the nature of the real world, as long as the predictions of economic theory are accurate. the reluctance of business and economics instructors to undertake field trips has been reinforced by the fact that there has been no compelling evidence that field trips enhance test scores or foster positive academic outcomes (lee, 1997; koran and baker, 1979; becker and watts, 1998). we argue below that field trips in economics and business do improve test scores, while also enabling students to apply their learning to real-world issues. given the dearth of literature on business and economics field trips, much of what is known about field trips is based on studies on trips undertaken in the natural sciences and k-12 schools, where students typically participate in trips to zoos, parks, shopping malls, museums, and big cities (bauerle and park, 2012). these studies suggest that field trips enable students to be aware of their environment, spur their interests in science, as well as enhance their observation and perception skills (spence, 1991). it has also been observed that field trips foster community and collaborative learning, and promote cordial student-teacher relationships 63 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 63 (hammerman and hammerman, 1973; bateson, 1981). bauerie and park (2012) show that field trips combined with homework assignments increase assignment scores in the plant sciences. they also argue that field trips in the sciences help students to develop their cognitive, emotional and physical faculties. it is partly on the basis of some of the positive outcomes highlighted by these studies that we decided to explore how we might use this experiential learning technique in our courses. a question that arose in this regard is what types of field trips should we adopt, and how should we structure them in order to accomplish our learning goals? we address these questions in the next section. field trips can be classified into two broad categories, depending on their duration and focus. in terms of duration, there are two types of field trips: extended trips and “one-off” trips. an extended field trip lasts for a week or more (smith, 2007), while a one-off trip occurs over a short period, usually within a couple of hours. the learning outcomes from these trips may differ. extended trips might give students the opportunity to participate in hands-on activities at the project sites. students could also be involved in solving practical problems in local communities. a one-off trip is an opportunity for students to observe and contextualize theoretical concepts in real-life setup. both types of trips enable students to interact with members of the community, and thus enhance their interpersonal skills. however, given time limitations and expenses, it makes more sense for theory-based courses (intro and intermediate micro and macro) to go on “one-off” trips and courses that are more applied or project-oriented to adopt extended trips. these include upper-level electives in economics and businesses. field trips can also be classified according to their focus. there are project-based, policy-oriented and firm-based field trips. the goal of a project-based field trip is to deepen understanding of a project, especially if the project enables students to contextualize the contents of a course. policy-oriented field trips facilitate understanding of the various ramifications of a given policy, and the intended/unintended consequences of the policy (smith, 2007). a firmoriented field trip focuses on a visit to a single firm, with the goal of understanding the issues affecting the firm and the sector in which it is operating. the latter type of trip also enables students to ascertain how the theory of the firm explains the behavior of real-world firms. smith (2007) undertook only one firm-oriented field trip and reported that it had positive outcomes. most of the studies on field trips are based on disciplines other than economics and business. though insightful, the experiences from field trips in the sciences may not be directly relevant for the organization of field trips in economics and business. economics and business instructors should begin to undertake field trips and gather information that would be more useful for organizing future trips. that is part of our motivation for experimenting with field trips in our courses. our study is based on field trips to two firms (acutec precision machining, and seco warwick corporation) in meadville, pennsylvania, a visit to the on-campus kitchen facilities of allegheny college’s food-catering company (parkhurst dining services, inc.), and an on-campus presentation by one of the executives of parkhurst. in the following sections, we discuss the planning of the trips, organization and logistics, post-trip debriefing, and the outcomes of the trips. based on our experiences and the challenges we encountered, we suggest measures that should be considered when planning and executing field trips. planning field trips this paper is based on two iterations of field trips for the following courses: international business and introduction to managerial economics. the first iteration was undertaken in the fall of 2016, while the second took place in fall of 2017. our major goal was to fill the void in 64 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 64 the teaching of business and economics with regard to the non-application to the real world. we wanted to provide appropriate contexts within which students could apply and comprehend the concepts learned in class. while it is debatable whether alternative pedagogies such as case studies, videos, or the invitation of executives to our classes would accomplish the same goals, we chose field trips because they enable students to observe real-world firms and contextualize classroom learning in real-time. in contrast to alternative pedagogies, field trips enable students to develop interpersonal skills through interactions with executives, managers and workers. baker and griffin (2010) suggest that gaining interpersonal skills and networking is not a luxury but a necessity that facilitates student success. moreover, we use cost-benefit analysis to explore whether field trips are valuable, and justify the associated costs. with little to no guidelines on how to organize the field trips, we applied to the provost of our college for a small grant to enable us work over the summer on developing the project. with grant in hand, we met periodically over a two-week period in the summer of 2016 to discuss issues related to the field trips. the first issue was the redesign of the syllabi for the two courses. the most challenging decision was identifying a suitable week for the trips. undertaking a field trip very early in a semester is not advisable, as students may not have learned enough content to contextualize the field experience. introducing the trip very late in the semester risks being undermined by the mad rush, as well as the burnout of faculty and students, that usually characterize the end of the semester. thus, an optimal time for organizing a field trip in the fall semester is somewhere before the thanksgiving break, and for the spring semester shortly before the spring break. another issue was the theme of the trips. to be meaningful for students, we recognized that field trips have to be carefully grafted onto some of the topics covered in class. the last thing students want to do is go on a trip that is unrelated to their classes. that is a recipe for disaster for the instructor! to develop appropriate themes for the trips, we decided to adopt what we refer to as a “backward-infusion” approach, rather than a “forward-induced” approach. in the former approach, an instructor undertakes a scoping trip to the organization to which she or he plans to take students. the instructor undertakes a guided tour of the organization; meets with the organization’s managers and top executives, and learns about the organization’s vision, mission and strategy. in contrast, a “forward-induced” approach is more prescriptive. here, an instructor identifies some themes to be covered in class, and then asks the intended organization to set up the field trip according to a pre-packaged set of themes. while this approach may be easier, the instructor runs the risk of asking for what the organization is either not capable of doing, or unwilling to undertake. we found that managers of manufacturing plants tend to be more interested in the production and engineering aspects of their activities, rather than the economics and business aspects. there is also the risk that the organization’s activities may not be relevant to the contents covered in class. we adopted the “backward-infusion” approach in order to avoid those risks, as well as to enable us get to know the top executives of the organizations. moreover, we chose “backward-infusion” because the overarching goal of our classes is not to test hypotheses, but to provide contexts for students to observe the application of class content. in other words, the “forward-induced” approach is more appropriate for courses that seek to test the veracity of certain theoretical postulations. to identify appropriate themes, we addressed the question of which organizations to select for the field trips. since this was our first attempt at explicitly incorporating field trips into our classes, we proceeded modestly. we identified two companies for the 2016 field trip, and 65 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 65 one firm for the 2017 trip.3 one of the companies we visited in 2016 was acutec precision machining, which is owned by a former chair of allegheny college’s board of trustees. acutec is a medium-sized, family-owned business that manufactures precision parts for the aerospace industry. some of its customers include global corporations such as boeing, bell helicopters, and bombardier. it recently found new customers in europe and the middle east. during the 2016 trip, all of the 25 students in the international business class and 12 of those in the managerial economics class went to acutec. it may be desirable to introduce a control group when designing field trips.4 the control group enables instructors to assess the effects of field trips on the treatment group. in our case, the group that visited acutec was the treatment group, while the control group consisted of students who stayed on campus. students in the control group met with an executive of parkhurst, who gave a presentation on the firm’s sustainability strategy. to further understand the company’s sustainability strategy, students toured the parkhurst’s kitchen facilities after the presentation. parkhurst dining services, inc., is a major food service company in northwestern pennsylvania and the owner of the restaurant chain, eat-n-park, which runs the food service of a number of universities and colleges, including allegheny. we used our contact with the campus manager of the firm to secure a visit to the company’s on-campus facilities, as well as an invitation to a top executive to serve as a guest lecturer in the managerial economics class to discuss the company’s strategic positioning. a total of 16 students in the managerial economics class went to parkhurst. these students constituted our control group. a few of them were in this group, because they were not able to go on the acutec trip, and the rest were chosen randomly. while one might think that the control group should have been the students who did not go on any trip outside of the classroom, we had to let all students go on one trip or another, because that is required for our courses. it would be awkward to exclude some students from a field trip, especially when they may not fully understand the motivation for doing so. moreover, visiting parkhurst is like a placebo treatment. since one of our learning goals for the 2016 trip was to ascertain whether field trips improve students’ understanding of manufacturing (more on learning outcomes in the next sections), we expected that students who visited the campus kitchen would not see any improvement in their knowledge of manufacturing. in designing field trips, however, we suggest a control group of students who did not go on a trip. then their course performance or learning outcomes can be compared with those that went on the trip. the control group could experience alternative experiential learning pedagogies (case studies, videos, guest lectures by ceos, etc.). for instance, half of the students in a class could go on a field trip (the treatment group), while the other half (the control group) are shown a recorded interview with a ceo of a company. that video interview may also show the ceo taking visitors on a tour of the company, as well as explaining the strategies and operations of the firm. pre and post-tests could assess which of the groups learned more, using some preselected learning outcomes. we selected seco warwick, a global manufacturer of industrial furnaces, for our 2017 field trip. the company has been operating in meadville, pennsylvania, since 1958. polish 3 acutec precision machining and parkhurst corporation were used for the first iteration in 2016, while seco warwick was selected for the trip in 2017. 4 the use of control and treatment groups may be necessary for instructors who are undertaking field trips for the first time, and who seek to ascertain the learning outcomes from those initial trips. once the pedagogical value of a field trip has been established, there may not be need for control and treatment groups for subsequent trips. 66 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 66 investors bought a majority of the company’s shares in 2005, and moved the headquarters to warsaw. it supplies industrial furnaces to customers in a variety of industries, including boeing, airbus, ford, and general electric. the trip to the company was facilitated by the program coordinator of allegheny’s center for business and economics (cbe), who previously worked for the company for over 20 years. all of the students in both classes (55 in total) rode on two buses to seco warwick during the 2017 trip. these adjustments to the experimental design were prompted by the fact that our learning goals for the 2017 trip were different from those of 2016. moreover, trying different strategies (2016 with the control group and 2017 without the control group) enabled us to compare and contrast two different experimental designs. in the next sections, we discuss the organization of the field trips and the learning outcomes from the two experimental designs. table 1: data summary of student characteristics variable obs mean min max 2016 2017 2016 2017 2016 2017 2016 2017 male 52 55 0.79 0.69 0 0 1 1 white 52 55 0.75 0.65 0 0 1 1 gpa 48 53 2.99 3.14 2 2 3.94 3.86 hours study/ week for this class 50 55 5.4 3.8 1 1 25 11 economics major 52 55 0.75 0.67 0 0 1 1 course relevant to manufacturing** 52 55 3.48 3.34 1 1 5 5 desire to work in manufacturing before the trip* desire to work in manufacturing after the trip* 52 41 54 49 2.15 2.59 2.15 2.84 1 1 1 1 5 5 5 5 knowledge about manufacturing in the u.s. before the trip** 52 55 2.34 2.38 1 1 5 5 knowledge about local manufacturing before the trip** 52 55 1.73 1.54 1 1 4 5 the trip helps increase knowledge about manufacturing in the u.s.* 41 52 3.84 3.98 1 2 5 5 the trip helps increase knowledge about local manufacturing* 41 52 3.85 4.17 1 2 5 5 *1 is “least likely”; 5 is “most likely” ** 1 is “nothing at all”; 5 is “a lot” 67 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 67 organizing field trips prior to our trips to the 2016 and 2017 field sites, students were given an anonymous “pre-field trip survey” to complete. the goal of this survey was to obtain basic information about the students’ gender, ethnic, academic and parental educational/career background.5 this information is important to ascertain the extent to which some of our learning outcomes are correlated with students’ demographic characteristics. data from the demographic surveys of the students are reported in table 1. as figures 1 to 8 show, about 80 percent of the students who went on the 2016 trip were male, while 75 percent were white. these data reflect the gender composition of economics students at allegheny college, where a preponderance of economics majors are male and white. the average gpa of the students who went on the 2016 trip was about 3.0. the majority of the students expressed a relatively low desire to work in manufacturing (average score of 2.15 out of 5 scale, where 5 represents “most likely to look for a job in manufacturing”). they also considered themselves not knowledgeable about manufacturing (2.34 out of 5, where 1 represents “nothing at all” and 5 was “a lot”). all of the students said they did not know much about manufacturing in the local economy before the trips (1.73 out of 5). students on the 2017 trip were relatively more diverse than the 2016 iteration, reflecting recent changes in allegheny’s demographic profile. about 69 percent of the students who participated in the 2017 trip were male and 65 percent were white. their average gpa of 3.14 was slightly higher than that of their peers in 2016. they still had a low intention to seek a manufacturing job (2.15 out of 5 scale). similar to the 2016 cohort, they were very modest when estimating their knowledge about manufacturing in the united states, as well as manufacturing in the local economy (less than 2.5 out of 5 scale for both categories). after the completion of the demographic surveys in 2016, the students and faculty car pooled to acutec. during the 2017 trip to seco warwick, however, we rented two buses instead. while it was obviously inexpensive to car pool, there were risks involved. allegheny college may be legally liable for whatever happens to students in cars driven by other students. this risk was particularly worrisome, because the college did not have insurance policies to cover liabilities associated with field trips, nor were there college-wide policies governing how faculty should conduct field trips. at the factories, after a short greeting and introduction of the companies’ managers, students were divided into groups of about 12 for approximately one-hour tours of the facilities at acutec and seco warwick. in each group, an employee explained the company’s business model, strategy and production processes while showing students around. students also had the opportunity to speak with shop-floor workers during the tour. afterwards, the groups convened in the companies’ auditoriums for post-tour discussions. the top executives of the two firms tried to contextualize observations made by students and faculty during the tour and answered questions. the rest of the students in introduction to managerial economics went on the parkhurst “field trip” in 2016. on the day of the class, an executive of parkhurst gave the group an in-class lecture on the company’s business model and sustainability strategy in a conference room at the student center, which was very close to parkhurst’s kitchen facilities. the students heard that “sustainability” is a central component of the firm’s strategy, and that the company wants to position itself as a food service company that is sensitive to the health of its customers. 5 given the confidential and sensitive nature of this information, we sought and obtained approval from allegheny’s institutional review board (irb) before administering the survey. 68 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 68 after the half-hour lecture, the group (including the two instructors) toured parkhurst’s oncampus catering facilities to observe the company’s operations. the activities lasted about two 0 2 0 4 0 6 0 8 0 p e rc e n t o f fr e q f m figure 1: student gender 2016 0 2 0 4 0 6 0 8 0 p e rc e n t o f fr e q a b other w figure 2: student ethnicity 2016 0 1 0 2 0 3 0 4 0 5 0 p e rc e n t o f fr e q 2 to 2.99 3 to 3.49 3.5 to 4 figure 3: gpa distribution 2016 0 2 0 4 0 6 0 8 0 p e rc e n t o f fr e q less likely more likely figure 4: want to work in manufacturing 2016 0 2 0 4 0 6 0 8 0 p e rc e n t o f fr e q a b other w figure 6: student ethnicity 2017 0 2 0 4 0 6 0 p e rc e n t o f fr e q 2 to 2.99 3 to 3.49 3.5 to 4 figure 7: gpa distribution 2017 0 2 0 4 0 6 0 p e rc e n t o f fr e q less likely more likely figure 8: want to work in manufacturing 2017 69 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 69 hours. students who visited acutec the previous week did not have to participate in parkhurst’s activities. debriefing after field trips a debriefing session took place during the next class following each of the trips. a major goal of the debriefing was to integrate observations during the trip with some of the topics covered in class. the sessions also enabled the instructors to ascertain the extent to which students were able to apply what they learned in class to real-world problems. the sessions typically started with the instructor asking students to discuss their most memorable observations during the tour of each company. in those discussions, some key concepts learned in class were highlighted by the students. one student in the international business class said he “was surprised to learn that acutec places a lot of emphasis on skills.” one of the themes in this class is that firms cannot compete effectively in international markets without unique skills and capabilities. “is acutec really a global corporation. it sells to domestic customers, who in turn export acutec’s products,” another student commented. yet, another student observed that acutec “focuses on raising worker productivity, which explains why the company made the decision to purchase 3d printers.” students in introduction to managerial economics discussed the sources of acutec’s competitive advantage, the challenges acutec faces, government policies that affect acutec, and the company’s impact on the local community. they debated whether acutec is environmentally friendly. most of the students realized that acutec’s key competitive advantage is the company’s decision to make huge capital investments in support of customers’ needs. the firm uses complex machinery and computers to reduce labor costs. moreover, students identified acutec’s policy of encouraging workers to brainstorm and generate innovative ideas as a source of competitive advantage. they hire anybody who has good work ethic and ability to learn, including those without college degrees in engineering. that helps keep labor costs even lower and strengthens acutec’s competitive advantage against its rivals. acutec had been under intense competition, including copyright violations by asian and mexican companies, and that the appreciation of the us dollar had negatively affected the firm’s exports. many of the students were intrigued to hear how changes in exchange rates affect realworld firms. another insightful learning moment occurred when students were told that government requirements to provide health insurance for workers had the perverse effect of weakening the company’s global competitiveness. an interesting observation that relates to the content in introduction to managerial economics is that acutec has been trying to be environmental friendly by reducing and recycling its waste. it has donated generously to the local community and intentionally hired local people. about 75 percent of acutec’s workers are from the local community. students also heard that “lean manufacturing” and “iso certification,” are strategies that acutec uses to minimize production costs while maximizing output. in other words, students had the opportunity to learn how a non-imaginary firm organizes its production function. the structure of the 2017 debriefing sessions in each of the two classes was similar to that of 2016. in the introduction to managerial economics class, students discussed seco warwick’s competitive advantage in fast-changing domestic and international markets. they noted that seco warwick’s main contributions to the local economy were in the areas of job creation and charitable contributions. they realized, however, that it is not obvious that the 70 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 70 company is environmental friendly or goes the extra mile to fulfill its corporate social responsibility, two important topics in this class. given that this class is about managerial economics, students wished to see less of the factory and more of the firm’s management-related activities. students also seemed to be interested in the decision-making process to position the firm in the market. they seemed to enjoy the ceos’ presentations and q&a sessions more than touring the factories. this are important lessons for us in organizing future trips. the role of field trips in helping students contextualize classroom learning was evident during the debriefing session in the international business class. one student pointed out that he was intrigued by the configuration of seco’s global value chain, and wondered why low labor cost was one of the factors that motivated the firm to locate some of its operations in poland. the student said he would never have imagined that poland could have a low labor cost advantage. another student attributed seco’s decision to invest in foreign markets to the cyclical nature of the market for industrial furnaces, which tends to make the domestic market for furnaces volatile and unpredictable. since patented technology is one of seco’s competitive advantages, some students wondered what would happen to the firm when those patents expire. overall, the 2016 and 2017 debriefing sessions suggest that the vast majority of the students were able to integrate class materials with field observations. experimental design and learning outcomes of field trips college-level field trips should not be motivated purely by the need to break “boredom” in the classroom, or to enable students “see the world,” though these can also be valuable experiences. it is important that the field experience enhances student learning, or at the very least, provides a context within which they can understand the course materials. in this section, we assess the outcomes of the 2016 and 2017 field trips. one of the challenges of organizing field trips is how to design instruments that would enable the instructor to objectively measure the outcomes of the trip. it is therefore very important that instructors articulate a set of measurable learning outcomes prior to embarking on a field trip. our primary goal for the 2016 iteration was for students to learn about manufacturing and the local economy. we also sought to know whether the trips had any effect on students’ career preferences. the inclusion of a control group is important for assessing the impact of field trips, especially if those trips are undertaken for the first time. campbell and stanley (1963), quoted in harrison et al. (1983, p.66), identify three factors that make the inclusion of a control group crucial. the first factor is the “history problem,” in which extraneous events occur at the time of the treatment event. the second factor is the “maturation problem,” when extraneous events affect the dependent variable as a function of time. one potential extraneous event in our case could be the exposure of all of the students in the managerial economics class to information about manufacturing prior to the field trip. the third factor is “self-selection bias,” whereby the treatment group (the acutec group) is subjected to the treatment in a way that differs systematically from the population of interest. considering that our field trips may be susceptible to these three factors, we used students in the managerial economics course who only toured parkhurst’s campus kitchen and listened to a talk by a parkhurst representative as our control group. to assess the extent to which our learning goals were accomplished, we designed two surveys for students to complete before and after the 2016 trips to acutec and parkhurst. the surveys included questions about students’ knowledge of manufacturing in general, and local 71 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 71 manufacturing in particular. each student was randomly assigned an identification number, which they anonymously wrote on the surveys before and after the field trips (in order to maintain confidentiality). the response rates were above 95% in both years, and the results are reported in table 2. table 2 shows students’ feedback after the trips by gender, race and gpa. while the differences across most of the assessment criteria are not statistically significant, the students who visited acutec said that the field trip helped them understand manufacturing nationally and locally, while students who visited parkhurst’s kitchen facilities on campus said that their trip did not help them at all. as expected, the differences between the perceptions of manufacturing in the united states by those who went to acutec and those who visited parkhurst were statistically significant at the one percent level. however, the two groups’ post-trip responses were not too different when asked about the local economy understanding and their propensity to consider a career in manufacturing. these findings are not surprising, because one single trip is unlikely to give a full picture of meadville’s economy, or to influence students’ career paths. in addition to assessing how much they learned about manufacturing and the local economy, we also wanted to know whether the field trips helped them understand some of the contents of the two courses. to this end, we used qualitative (or narrative) information from students’ end-of-semester course evaluations as presented in allegheny’s report of student experience (rse).6 table 3 summarizes some of the students’ qualitative assessments of the trip to acutec based on those comments, we believe that students learned and contextualized some key concepts that are relevant to the two courses, including the following: outsourcing, skills and human capital, technology, vertical integration, ownership structure, competitive advantage, and firm growth. of all the 38 students who went on the acutec trip, only one commented negatively on the trip. the 2017 post-trip surveys also show that students overwhelmingly valued the experience, and would be willing to undertake another field trip. 6 allegheny college’s evaluation has both quantitative and qualitative segments. we focus on the qualitative segment in our analysis of the outcomes of the field trips. 72 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 72 table 2: comparison of students’ feedback after the trips gender race gpa to what extend has this trip helped you understand manufactur ing in the u.s.? f 2016 2017 3.9 3.68 m 2016 2017 3.8 4.11 w 2016 2017 3.9 3.97 nw 2016 2017 3.56 4 high 2016 2017 3.96 3.94 low 2016 2017 3.67 4.08 to what extend has this trip helped you understand manufactur ing in meadville? f 2016 2017 3.9 3.87 m 2016 2017 3.83 4.3 w 2016 2017 3.94 4.08 nw 2016 2017 3.5 4.33 high 2016 2017 3.91 4.21 low 2016 2017 3.73 4 to what extend has this trip helped you understand the local economy f 2016 2017 3.4 3.31 m 2016 2017 3.38 3.38 w 2016 2017 3.42 3.38 nw 2016 2017 3.25 3.33 high 2016 2017 3.65 3.36 low 2016 2017 3 3.25 after the trip, would you be more likely or less likely to work in manufactur ing f 2016 2017 2.7 2.4 (2) (1.88) m 2016 2017 2.54 3.02 (2.2) (2.27) w 2016 2017 2.54 3.06 (2.15) (2.08) nw 2016 2017 2.75 2.37 (2.15) (2.3) high 2016 2017 2.56 2.94 (2.11) (2) low 2016 2017 2.53 2.63 (2.27) (2.7) 73 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 73 learning objective scores (total 20 points) f 2016 2017 15 (8.88) m 2016 2017 15.8 (9.81) w 2016 2017 15.7 (10) nw 2016 2017 15.22 (8.78) high 2016 2017 15.73 (9.51) low 2016 2017 14.91 (9.66) note: numbers in parenthesis are from pre-trip survey. t-tests showed statistically significant (at the 5 percent level) difference between male vs. female students and between white vs. non-white students on the question about having a career in manufacturing. 2016 trips were not designed with learning objective scores. table 3: summary of students comments concepts learned: outsourcing, salience of skills and human capital, technology, vertical integration, ownership structure, competitive advantage, firm growth sample student comments that reflect the above concepts: “it was interesting to hear their (acutec’s owners) opinions on outsourcing” “it was valuable to know that acutec relies heavily on skill-intensive labor” the company’s philosophy stood out most to me. they stressed that their employees are their competitive advantage which i found unique considering most employees do not have college degrees whereas competitors often hire engineers”. “i learned how acutec was able to be much more effective through technology”. “acutec’s vertical integration strategies that have all brought success to acutec”; realizing that “acutec is impressive for being still family owned but it is able to compete with other big companies.” “learning about how acute has grown and expanded over the years”. negative comment: “the trip to acutec was the least helpful in this course (international business) because the firm operated differently than what we discussed in class; the company is privately owned, rather than publicly owned.” instructors’ note: apparently, international business as a course typically focuses on big publicly owned corporations, and the student found it to be an aberration that a small, family owned business in a small town could compete in foreign markets. this was an important learning experience that we did not foresee. key expressions from 2017 post-trip surveys: learned about the firm’s competitive advantage understood the ways by which a real business works gained insight into how the firm operates globally it was interesting to hear about how cultural practices affect businesses learned how seco interacted with its stakeholders understood the challenges of dealing with customers had a better understanding of a local business talking with an actual factory worker was a great experience negative comments we spent too much time touring the factory, rather than discussing management and business related issues. i am less interested in the technical side of seco’s operations. we should have been given extra credits for the large amount of time we spent on this field trip. we next assess the outcomes of the 2017 field trip. there are substantial learning effects in organizing field trips. subsequent trips benefit tremendously from the experiences gained from previous trips. one of the important lessons learned from the 2016 trip was the salience of crafting learning outcomes that can be assessed objectively. thus, the 2017 learning outcomes 74 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 74 are different from those of 2016 and are more closely tied to the contents of our courses. the 2017 learning outcomes are:  understanding production functions in manufacturing, particularly the manufacture of furnaces.  learning about manufacturing technology in general.  gaining knowledge of the local economy and the corporate responsibility activities of a local company.  using the case of seco warwick to understand the strategies that firms use to compete locally and globally. to measure the extent to which these outcomes were achieved, we designed preand post-tests containing 20 multiple-choice questions spread across the four learning outcomes.7 the summary of students’ test scores are reported in the last row of table 2. the mean score for the pre-test was 9.52 out of 20, with a standard deviation of 2.52. the mean for the post-test was 15.56, with a standard deviation of 2.25. this suggests there was a 63 percent increase in student performance as a result of the field trip. student performance varied slightly by gender, ethnicity and academic abilities, but most of the differences were not statistically significant. however, after the trip, male and white students were significantly (at the 5 percent level) more likely to seek a job in manufacturing than female and non-white students, respectively. this reflects a complex correlation between students’ career orientation and experiential learning, which could be an interesting topic for future work. one reason that male students experienced larger changes in their understanding of manufacturing may be attributed to the fact that manufacturing has historically been a male-dominated sector. the larger changes in the understanding of manufacturing by white students can be explained by the lack of racial and gender diversity at the two factories we visited. we did not construct a control group in the 2017 setup because our goals were different from those of the previous year. in 2016, besides improving student learning, we were interested in identifying the value of a field trip to a manufacturing firm compared to a guest speaker’s presentation on sustainability in the food services sector. given students’ positive learning experiences from the 2016 field trip, we became more confident about the benefits of a field trip. we therefore decided to take all of our students on the 2017 trip and focused on evaluating student learning before and after the trip. it was also easier to organize one trip for the entire class, instead of taking two groups (control and treatment groups) to two separate locations on two different days. cost-benefit analysis is another way to assess the value of field trips. table 4 shows the costs and benefits of the 2016 and 2017 field trips. that most of the benefits of field trips are non-pecuniary and difficult to quantify complicates the analysis. the contingent valuation method (cvm) could be used to input monetary values on the benefits, but this task is beyond the scope of the present article. consequently, rather than ascertaining whether the benefits of field trips exceed the costs, we merely identify the various benefits and costs. we decompose the costs and benefits, explaining each component, in table 4. the marginal cost of undertaking successive trips falls over time, while the benefits increase and can offset the costs. transportation expenses increased slightly in 2017, but 7 as mentioned earlier on, students took the pretest about 30 minutes before departure to seco warwick. the identity of the company was deliberately concealed from the students until the day of the trip. this was to avoid students accessing information about the company prior to taking the test. 75 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 75 opportunity costs decreased, because of the savings in faculty and companies’ intellectual capital costs. as a result, total cost decreased. table 4: cost-benefit analysis costs benefits faculty: pre-trip travel1: $3 (2016) $3 (2017) field trip day travel1: $3 (2016) $3 (2017) intellectual capital cost2: $2000 (2016) $1000 (2017) faculty: besides receiving a small stipend $500 (2016), organizing field trips is an opportunity for faculty professional development through presenting results at conferences and publication. those trips also foster close interaction between faculty and students. this could lead to better report of student experience. at the same time, they improve faculty’s understanding and appreciation of the local community. students: field trip day travel1: $45 (2016) $0 (2017) opportunity costs2: $406 (2016) $565.5 (2017) students: these trips are often the first-time visit to a real world manufacturing company for most of the students. they provide opportunities to deepen students’ knowledge of course content. close interaction with faculty and classmates in an informal environment can improve class dynamic. direct interaction with ceos enables students to ask questions and better prepare for future job interviews. other parties: allegheny college3: $500 + $45 (2016) $110 (2017) companies’ implicit costs2: $462 + $262 (2016) $462 (2017) summary: total implicit cost: $3130 (2016) $2027.5 (2017) total explicit cost: $590 (2016) $116 (2017) total cost: $3720 (2016) $2143.5 (2017) other parties: allegheny college: field trips add value to the college educational offering; promote town-gown relationship and enhance the college’s image positively in the local community; positive interaction with companies from field trips might increase internship opportunities for the college. companies/hosts/sites: besides small gifts from faculty, companies can promote their images through these visits and recruit interns from the college. field trips are also opportunities for firms to gain alternative perspective and knowledge from students and faculty through direct and on-the-spot discussion. 1 travel cost in 2016 is the estimated product of the round-trip distance from allegheny college to a local company and $0.54/mile compensation. we had 9 cars driving on the day of the field trip in 2016. for 2017, a bus charged $1/person each way. we had 55 students on the trip. the department of economics covered for the travel cost in 2017. two faculty and two staff drove in one of the staff’s car. 2 faculty’s opportunity cost is the product of 10 summer working days at the cost of $100/day for two faculty in 2016. in 2017, 2 faculty only met 5 days to plan the trip. the students’ opportunity cost is the product of 2 hours working at the minimum wage of $7.25/hour for about 75% of the students. companies’ opportunity cost is the product of 4 hours working at the average wage per hour for ceos in pittsburgh area. we spent 2 hours with them in our pre-trip visit and 2 hours during the field trip. parkhurst sourcing and sustainability director drove from pittsburgh to allegheny college to give a presentation for our class so we counted his travel expenses in 2016. 3 allegheny college’s costs include lunch compensation for 2 faculty working over the summer 2016, gifts for the managers, and bus tickets for students in 2017. 76 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 76 on the benefit side, the more trips instructors undertake, the stronger the bond between the college and the local community. moreover, the trips helped improve faculty and student understanding and appreciation of the local community. direct interaction with ceos enables students to ask questions and better prepare for future job or internship interviews. in other words, they gain interpersonal and soft skills that are essential for success in the job market. close interaction among faculty and classmates in an informal environment can improve class dynamics. organizing field trips is an opportunity for faculty professional development through presentation of results at conferences and/or publication. lastly, firms may gain knowledge from students and faculty about becoming better corporate citizens and improving their corporate public image. conclusions preand post-tests from our field trips suggest that this form of experiential learning results in better test performance, thus enhancing students’ understanding of the contents of a course. post-trip surveys and debriefing sessions indicate that field trips provide contexts within which students apply concepts learned in class to real-world issues. cost-benefit analysis suggests that field trips have non-pecuniary benefits and these may differ among instructors. because those benefits are difficult to quantify, ascertaining whether the benefits exceed the costs would be onerous. the calculus of the benefits and costs of field trips could change by instructor and by class. while the inclusion of implicit costs raises the cost of field trips, those costs fall over time as instructors undertake subsequent trips. there are also substantial learning effects associated with field trips, as subsequent trips tend to be better organized and more effective than initial trips. apart from providing contexts for applying concepts, field trips add value and enrich a class. they become a focal point for class discussions for the rest of the semester. nearly all the topics discussed in the international business class after the 2016 and 2017 trips were done in reference to acutec and seco warwick. in a sense, both firms became the poster children for important class discussions. for the rest of the semester, one frequently heard comments such as: “but that’s not what acutec did;” “acutec should have done x or y.” in a discussion of entry strategies into foreign markets, students wondered why seco warwick did not license its brand name and technology to its polish partners, rather than going into a joint venture with them. field trips are effective ways of teaching students about a sector as well as the local economy. most of the students who went on the trips to acutec and seco warwick had never visited a manufacturing plant before. many students commented that they learned much about manufacturing during the trip. it is also common knowledge that students who attend colleges located in small communities rarely step out of their campuses to learn about the local economy. by taking the students into the community and learning about a sector they had no prior knowledge of, field trips produce non-academic value that may improve students’ awareness of local communities and the economy. suggestions for future field trips based on our experiences in organizing field trips, we offer the following suggestions for structuring future trips: apply for funding to support trip planning: introducing new teaching techniques often require planning and sustained efforts by faculty. given the high opportunity cost of instructors’ time during the semester, summer break is a good period to plan for trips in the fall and winter 77 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 77 break is a good period to plan for trips in the spring. universities and colleges often have funding for faculty development that instructors could use to pay for expenses associated with identifying potential field trip locations, as well as pre-trip visits to those locations (i.e. “backward infusion” approach). funding may also be available to pay a stipend to compensate for the opportunity cost of instructors’ time in planning field trips. instructors who are planning field trips should consider applying for funding to support their endeavors. identify expected learning outcomes before the trip: a challenging aspect of organizing field trips is identifying testable learning outcomes. it is helpful to identify what you expect to accomplish with a field trip. this helps design the preand post-survey questions to capture those outcomes. adding outcomes that can be quantified not only reduces subjectivity in the evaluation of the outcomes, but also enables a quantitative analysis of the results. overall, articulating expected outcomes improves the quality of survey questions. we found it helpful to design the learning outcomes right after the faculty had taken the pre-trip visit to the sites. include a “treatment” and a “control” group in experimental design: in assessing the learning outcomes from field trips, it is important to minimize subjectivity by randomly designating some students as the “treatment group” and others as the “control group.” the treatment group should go on the trip, while the control group would either not go on the trip, or be subjected to an alternative experiential learning pedagogy. if the control group is shown an interview with firms’ executives or listens to guest speakers in class, instructors should make sure that the content and topics of those interviews or discussions are consistent with what the treatment group might see and hear during the field trip. one suggestion is to record the presentation and q&a session at the host firm and show them to students who did not participate in the field trip. this design is appropriate in cases where instructors are uncertain about the benefits of field trips compared to other pedagogical alternatives. but once instructors are more convinced about the benefits of field trips, they should take all students on a trip and then show them how much they learned by comparing their knowledge before and after the trip. students often appreciate the experience more when they realize how much they have learned from a field trip. not all field trips require “treatment” and “control” groups: we wish to emphasize, however, that treatment and control groups may be necessary only when the learning outcomes from a particular kind of field trip are unclear. once the outcomes from an initial trip are positive, there may not be need for treatment and control groups for future trips. by the same token, if previous studies unambiguously affirm the pedagogical value of a field trip, instructors that are planning field trips may choose not to use treatment and control groups in their trips. include managers and executives of companies in the debriefing sessions: some students complained that there was not enough time after the tour of acutec factory to discuss students’ observations in the factory. one way of addressing this problem is to have managers from the companies participate in the debriefing sessions that take place in class, or to schedule a longer q&a session at the end of the trip. find the right balance between tour of the company and q&a sessions with the firm’s executives: in economics and business field trips, it may be unwise to spend too much time touring the company’s facilities. economics and business students are more interested in discussing the firm’s strategy and management-related issues, rather than the firm’s technical operations. a significant number of students on our 2017 field trip thought we spent too much time touring the factory, and spent less time discussing management-related issues. 78 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 78 avoid organizing field trips that overlap with the lunch hour: workers and managers often lose momentum toward the lunch hour. some important staff members may have gone for lunch when they are most needed by the visiting students and faculty. as well, students value their lunchtime, and may frown at the idea of going on a field trip that interferes with lunch, unless the provision of lunch is part of the trip. require students to come to the field trip with note pads and pens: to facilitate posttrip debriefing and completion of surveys, students need to take notes. this is very important, as the debriefing usually takes place a couple of days after the trip. taking notes during tours of a factory, as well as during conference-room discussions, is a mark of respect for the managers of companies. it empowers factory managers, and indicates that their views and opinions are valuable. it also helps to mitigate the perception (rightly or wrongly) by blue-collar workers that college students are elitist and unappreciative of the work that non-credentialed workers do. ensure that students comply with the company’s safety and security protocols: touring a manufacturing plant is inherently risky. sparks from welding equipment may cause irreparable damages to students’ vision, as ca metal chips that fall from various cutting tools. there are also dangers from heavy objects falling off cranes, or protruding sharp objects that may not be clearly visible. this is quite apart from areas of the factory marked “toxic” and “out-of-bounds” to unauthorized visitors. it is standard practice for students to wear company-provided glasses, helmets, and other protective gears before entering a factory. flip-flops and open-toed foot-wear are usually not allowed in factories. it may also be helpful to enquire, in advance, whether the company has security policies for us and non-us students. some manufacturing firms that supply the us defense department are required to identify non-us citizens who visit their plant. use network to identify companies to visit: identifying and soliciting companies to visit on a field trip can be a very daunting task. making cold calls to companies that you had no previous contacts are unlikely to succeed. our experience shows that it is more efficient to use networks to identify and contact potential companies to visit. the institution’s vendors, board of trustees members who own businesses, and alumni can be important networks for field trips. but all networks are not born equal. our experiences suggest that it is more effective to develop networks at the highest levels of a company. arranging a field trip through mid-level managers may not succeed, as they usually do not have enough influence to persuade management to agree to the trip. select field trip locations that are close to campus: to minimize disruptions in students’ schedules, it is helpful, as much as possible, to select sites that are not too far away from campus. for students, there is a huge opportunity cost involved in participating in field trips. students’ perception of the value of a field trip can be clouded by the extent of this opportunity cost. our hypothesis is that students are more likely to value a field trip that causes less disruption to their schedule, than one for which they have to miss too many classes, or give up some of their regular chores. some students suggested the award of extra credit to compensate them for the opportunity cost of going on field trips. other potential sites and companies for future trips: the manufacturing sector is not the only appropriate site for field trips. other potential industries include: information and communication technologies, financial institutions (such as banks and investment companies), non-profit organizations (such as hospitals, assisted living houses, and museums), and government agencies (the food and drug administration (fda), the federal deposit insurance corporation (fdic), etc.). 79 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 79 references baker v.l. and griffin k. a. 2010. beyond mentoring and advising: toward understanding the role of faculty "developers" in student success, about campus, 14(6): 2-8. bateson, j.d. 1981. changes in student-teacher perceptions following a residential outdoor program. published doctoral dissertation, university of british columbia, canada. bauerie, t.l. and park, t.d. 2012. experiential learning enhances student knowledge retention in the plant sciences, hort technology, 22(5): 715-718. becker, w.e. and watts, m. 1998. teaching economics: what was, is, and could be. in . w.e. becker and m. watts (eds), teaching economics to undergraduates: alternatives to chalk and talk. cheltenham, england: edward elgar. buckles, s. 1998. using cases as an effective active learning technique. in w.e. becker and m. watts (eds.), teaching economics to undergraduates: alternatives to chalk and talk. cheltenham, england: edward elgar. dewey, j. 1938. experience and education. new york: macmillan. dolan, r.c. and stevens, j.l. 2006. business conditions and economic analysis: an experiential learning program for economics students, journal of economic education, 37(4): 395-405. eyler, j. and giles, jr., d.e. 1999. where’s the learning in service-learning? san francisco: jossey-bass. eyler, j. 1993. the college internship and its impact on student learning, journal of cooperative education, 29(1): 41-52. galizzi, m. 2014. bringing adam smith’s pin factory to life: field trips and discussions as forms of experiential learning. journal of the scholarship of teaching and learning, 14(5): 27-47. goldstein, d. and onyeiwu, s. 2007. toward a liberal arts managerial economics pedagogy, journal of the academy of business education, spring: 69-82. hammerman, d.r. and hammerman, w.m. 1973. teaching in the outdoors. minneapolis: burgess. harrison, w.t. 1983. the use of control groups in capital market research. journal of accounting research, 21(1): 65-77. koran, j. and baker, d. 1979. evaluating the effectiveness of field experiences. in m.b. rowe (ed.) what research says to science teachers. washington, dc: national teachers association. lawson, l.l. 2007. the economics of experience-based higher education. atlantic economic journal, 35: 23-31. lee, s.w. 1997. assessment of effect of field trips on students’ achievement and attitudes toward field trips in college biology. doctoral dissertation, university of north colorado. lempert, d. h., in association with de souze briggs, x. n., and contributors. 1996. escape from the ivory tower: student adventures in democratic experiential education. san francisco: jossey-bass publishers. lewin, k. 1951. field theory in social science: selected theoretical papers. new york: harper. loomis, d.g. and cox jr. j.e. 2000. a course in economic forecasting: rationale and content. journal of economic education, 31(4): 349-357. mcgoldrick, km. 1998. service-learning in economics: a detailed application. journal of economic education, 29(4): 365-376. 80 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 80 middleton, k. 2005. the service-learning project as a supportive context for charismatic leadership emergence in nascent leaders. academy of management learning & education 4(3): 295-308. paxton, j. 2015. a practical guide to incorporating service learning into development economics classes. international review of economics education, 18: 25-36. simpson, g. 1997. relevance in financial education: a comprehensive approach worthy of don quixote. journal of financial education, 23 (spring): 34-40. smith, m.g. 2007. case studies on location: talking to the field in economics. journal of economic education, 38(3): 308-317. smith, r., & o’connell, p. w. 1997. workers on the line: teaching industrial history at the tsongas industrial history center and lowell national historical park. oah magazine of history, 11(2): 22-26. spence, l.l. 1991. factors that characterize teachers who plan and take field trips. doctoral dissertation, north carolina state university. walstad, w.b. 2001. improving assessment in university economics. journal of economic education, 32(3): 282-93. ziegert, a.l. and mcgoldrick, km. 2008. when service is good for economics: linking the classroom and community through service learning, international review of economics education, 7(2): 39-56. 27 |journal for economic educators, 22(1), 2022 undergraduate research with international students doris geide-stevenson1 abstract over the last decade, pedagogies have shifted toward high impact practices, asking students at us universities to engage in undergraduate research, for example. at the same time, the enrollment of international students, especially in the business and economics disciplines, has increased substantially until 2019. this study focuses on student performance and the pedagogical strategies of teaching a required undergraduate economics research capstone course with a majority of international students from china and south korea. differences between the pedagogical practices of the home and host countries are highlighted with reference to confucian heritage learners. ten years of performance data from the capstone course reveal that international students are more likely to successfully complete their undergraduate research experience than domestic students but earn lower grades in the process. this corroborates the hypothesis that confucian heritage learners may struggle with undergraduate research requirements at us universities. a number of strategies are discussed that were implemented to help international students complete their capstone experience course. international students received focused help with ideation, application of the scientific method, language preparation and plagiarism, as well as cultural knowledge. key words: capstone course, undergraduate research, international students, confucian heritage learners jel classification: a22 introduction in 2004, the economics department at a large comprehensive regional public university in the western united states implemented a required capstone experience course for all economics majors. this course was added as ‘research methods’ to the major program and requires all students to conceive and complete an independent research project that demonstrates understanding of the scientific method, an approach that is outlined, for example, in the textbook ‘doing economics’ by greenlaw (2006). by requiring a capstone experience that asks students to engage in original knowledge creation, the department sought a more deliberate approach to skill development and curricular planning, wanting to provide students with multiple opportunities to engage in aspects of undergraduate research. in that regard the department sought to become an exemplary economics program as described in hoyt & mcgoldrick (2017), deloach et. al. (2012) and wagner (2015). using the required capstone course as an assessment point for basic knowledge in microand macroeconomics, as well as an assessment of other departmental learning outcomes, helped this process of curriculum planning and skill development. prior to the introduction of the required capstone course economics majors were 1 professor of economics, department of economics, weber state university, 1337 edvalson st. dept. 3807, ogden, ut 84408-3807 28 |journal for economic educators, 22(1), 2022 rarely involved in undergraduate research. in 2008, after the economics department had started to incorporate ‘research methods’ into its program, it placed in a small group of only 10% of all economics programs to require such a course (mcgoldrick, 2008). over time, required senior theses have become more prevalent among economics programs (siegfried and walstad, 2014; hoyt and mcgoldrick, 2017). just a few years after the described curricular change, the number and composition of economics majors within the department changed dramatically due to a successful implementation of an international transfer program that recruited economics majors from partner universities in china and south korea. through the creation of a program where international transfer students are able to complete two economics degrees, both at their home and host institutions within four years, the economics department saw the number of majors quadruple and the number of graduates double over a few years. students in the research methods course were now predominantly from china and south korea. with more economics departments requiring a senior thesis to graduate, and substantial increases in enrollments of international students in business and economics within the united states until 2019 (open doors, 2021), the economics department is placed in the middle of these two national trends. this warrants an exploration of teaching undergraduate research with a student body that differs with respect to cultural, educational and language background. this paper contributes to the literature on teaching a diverse student body by specifically exploring the concept of the confucian heritage learner that can be found in the pedagogical literature and to-date is not reflected in the scholarship of teaching and learning economics. students from china and south korea are from countries whose cultural identities are shaped by confucian thought. this paper will develop the hypothesis that the background of confucian heritage learners may present those students with specific challenges in completing undergraduate research. the first section of the paper gives a broader overview of undergraduate research in economics and the structure of the research methods course before the concept of the confucian heritage learner is explored. after presenting the performance data in the research methods course for international and domestic students, the paper presents specific strategies in teaching the course with international students who have a background as confucian heritage learners. undergraduate research undergraduate research within the economics profession is still considered an innovative teaching practice as described in the teaching resources featured on the american economic association’s website startingpoint (aea, 2021), and it fits well into the learning outcomes or ‘essential competencies’ for economists (allgood & bayer, 2017). undergraduate research within economics capstone experiences and undergraduate research are both practices that are identified as “high impact” and that have become a hallmark of fostering quality teaching within higher education settings in the united states. the original list of high impact practices, generated by kuh (2008), has been adopted and expanded by national organizations such the american association of colleges & universities (aac&u), as well as regional organizations. for example, the commissioner of higher education in utah recommends that all students within the public higher education system participate in at least two high impact practices at the undergraduate level (ushe, 2017). while many of the identified high impact practices such as 29 |journal for economic educators, 22(1), 2022 undergraduate research have been part of curricula for a long time, kuh (2008) is to be credited with providing a unifying theme to pedagogic strategies that focus explicitly on active learning together with a focus on empirical evidence that documents improvements in various student outcomes (kinzie, 2012). the council of undergraduate research classifies economics under its general social science division, unlike psychology, a discipline with a longer history of undergraduate research that has its own division. with undergraduate research in economics being classified as an innovative teaching strategy by the american economic association, it is still relatively rare to see undergraduate research formalized as part of the required curriculum within economics departments. as of 2008, only about 10% of surveyed economics departments required students to complete a research methods course as a capstone experience in which students completed an undergraduate thesis (mcgoldrick, 2008). a comprehensive survey of undergraduate economics major coursework conducted by siegfried and walstad (2014), notes that only 18% of all colleges and universities surveyed (n = 334) require a senior thesis to graduate and that only 10% of public bachelor’s granting institutions (n = 72) require a senior thesis. in a more recent review of undergraduate research at the top 30 liberal arts colleges and top 30 national universities, hoyt and mcgoldrick (2017) find that 63% of those top liberal arts colleges and 27% of those national universities require a capstone or thesis from all their majors. economics learning outcomes and undergraduate research the capstone course at the present institution was introduced with the intention of fostering a broader set of learning outcomes compared to the traditional curricular approach within economics programs that requires a number of field courses that focus explicitly on specific content areas such as labor, international trade, or game theory, for example. in contrast, the capstone course focuses on learning how to do economics, based on the textbook with the same name ‘doing economics’ (greenlaw, 2006), with the goal of learning how to apply the scientific method and fostering general skills such as written and oral communication and quantitative literacy. this curricular change preceded and foreshadowed the development of the american economic association’s framework of five essential competencies for all students in economics as described by allgood and bayer (2016, 2017). specifically, the curricular change asked students to develop three of the five essential competencies, the ‘ability to apply the scientific process to economic phenomena,’ the ‘ability to use quantitative approaches to economics,’ and the ‘ability to communicate economic ideas in diverse collaborations’. in the capstone course, students are asked to develop their own topic that could draw on any field in economics. through carefully structured assignments throughout the course, students find relevant academic papers that will inform their topic, relate their topic to relevant economic theories and develop an appropriate hypothesis. they then develop an empirical model, collect an appropriate data set, and finally analyze and discuss their results. all students are asked to apply quantitative tools that are acquired in statistics courses and often also in an elective econometrics course, requiring them to recall and transfer quantitative skills from earlier coursework. finally, all students develop a research poster and present their project to a group of peers and departmental faculty. these course assignments match seeborg’s (2021) suggestions of how to motivate quality research in an economics capstone course. the structure of the course closely follows the outline of greenlaw’s (2006) ‘doing economics’ which provides a suitable framework for students by first introducing them to the research process in economics, guiding them in surveying the literature on a topic in economics, providing examples and advice on 30 |journal for economic educators, 22(1), 2022 writing in economics as well as critical reading. this textbook then moves on to explain how to apply appropriate economic theory to generate a research hypothesis, how to locate data and assemble a data set, and how to analyze the data through various empirical tests. the final chapter of the textbook focuses on communicating results. less explicit, but equally important as ‘doing economics’, is the goal of fostering the learning of values and habits in these students completing the economics program. in the context of the capstone course, habits such as self-regulation, perseverance, time-management, intellectual curiosity, and the ability to productively use feedback are part of the more implicit learning goals. the department decided on implementing the capstone course requirement as part of a communal pedagogy that could help in achieving discipline-specific goals, as well as broader learning outcomes or ‘essential competencies’. using the categories of established pedagogical approaches outlined by peterson (2018) and the course description in mcgoldrick (2008), the economics capstone course is an example of productand process-oriented, inquirybased learning that is to help in skill transfer, metacognition, self-management, and engagement. the economics department was particularly interested in fostering skill transfer in writing and statistical methods. within the taxonomy of economics undergraduate research provided by deloach et. al. (2012), such a course provides a mentoring focus on the group as well as on the individual and provides a unique opportunity within the economics program to engage in adaptive teaching an approach that encourages teaching “individuals within classrooms” as opposed to “teaching classes” (corno, 2008). such an approach combines whole group instruction with “differentiation practices” that capitalize on the strengths of individuals as wells as circumvents weaknesses. differentiation may be justified based on a broad range of needs, skills and backgrounds. the current paper will focus on differentiation techniques that accommodate students from a different cultural and linguistic background, specifically international students from china and south korea studying in the united states in the context of the research methods course. confucian heritage learners – are international students different? a comprehensive attempt to systematically explore ‘chinese learners’ goes back to watkins and biggs (1996) who study cultural, psychological, and contextual influences on the learning style of students from countries whose cultural identities are shaped by confucian thought. learners from china – as well as hong kong and taiwan – and learners from japan, korea, and southeast asian countries are often referred to as confucian heritage learners (chls) (chan, 1999; saravanamuthu, 2006; wang, 2013). while much of that literature distills and explores features of the learning style of confucian heritage learners, there seems to be a consensus that a student’s cultural background does not predetermine their learning style, but that students are able to adapt to a changing context (wong, 2004; wu, 2015) when they participate in authentic learning experiences. it may be argued that part of the study abroad experience of chls at us universities is an expectation that those students adjust to different modes of instruction. the task for instructors of the receiving institutions, in this case us institutions of higher education, is to understand the learning beliefs and behaviors of the international students from confucian heritage countries and to help students adapt to the changed context. to help instructors with this task it is useful to scan the existing literature for stylized features of the learning style of confucian heritage learners. issues encountered by instructors in the us teaching chls have also generally been covered in this literature. chan (1999) postulates that with cultural values focused on harmony within a collective 31 |journal for economic educators, 22(1), 2022 and a strong sense of maintaining face within the confucian tradition the “participative approach commonly used in western teaching may … cause a problem for chinese learners” (chan, 1999). specifically, chinese learners or confucian heritage learners are used to a more teacherfocused model of instruction. the teacher is often the ‘sage on the stage’ and responsible to convey the correct knowledge. this may prevent those students in fully participating in classroom discussions or in group learning (wu, 2015; wong, 2004; hodkinson and poropat, 2014) as they are less confident in their own knowledge and experience and feel uncomfortable sharing in what they consider a traditional classroom setting. chinese learners are observed to be more reluctant to ask spontaneous questions in class or to contribute a point of view, making it more difficult for instructors to explicitly engage students in their learning and to receive continuous feedback on students’ understanding, a practice that is fairly common in classroom settings in the united states. hodkinson and poropat (2014) call this the phenomenon of the ‘silent chinese student’ which makes the active co-creation of knowledge with students in a classroom harder for instructors teaching international students than it would be with students who are more used to interactive learning styles. another feature attached to the learning style of confucian heritage learners is the prevalence of rote learning, which relies heavily on memorization and repetition (chan, 1999; wong, 2004; wu, 2015). this style of learning does not mean that chls are not capable of deep learning or attaching meaning to the learned material, indeed saravanamuthu (2008) characterizes chinese learners as preferring to achieve deep learning through repetition. however, the reliance on rote learning or memorization may make it harder for learners from this cultural background to engage in more creative class assignments that require original thought or encourage a high level of individuality or differentiation in completing an assignment. in turn, this may lead instructors to assume that chls lack creativity relative to the students they are normally used to working with. another issue that arises when students are used to relying on memorization is that it becomes more difficult for instructors at the host university to convey the importance of acknowledging the sources of information for student work (watkins & biggs, 1996). this difficulty may lead instructors to identify chls as engaging in plagiarism or cheating when students reproduce memorized information or conversely may make it more difficult for students to understand when they should acknowledge the source of information. in addition, the assessment techniques that chls are accustomed to are high-stakes examinations. examples are the nation-wide systems of standardized exams that largely determine the university placements for students from china and south korea, and also course work that is primarily assessed through a final exam only. compounding these stylized differences in learning styles and environments is the fact that chls have to adjust not only to different pedagogies but have to adjust to a different language. inadequate language skills compound, but do not cause, all of the difficulties that chls face in classrooms at us or western institutions of higher learning (geide-stevenson, 2018). maybe not surprisingly in light of the different learning environments, rao (2017) finds that international students struggle with “writing academic papers, enhancing class participation, and having local mentors” (rao, 2017). to be sure, good teachers in china and the united states share many common features and both can learn from each other. relevant to the present study though, in comparing us and chinese instructors grant et al. (2013) conclude that chinese teachers “can learn from their us peers about providing students more opportunities to explore and develop their own views” (grant et al., 2013). however, the stylized features of students’ learning behavior and beliefs from a confucian cultural heritage as describe here should be seen as just that, a stylization that 32 |journal for economic educators, 22(1), 2022 is relevant for us instructors who are first faced with teaching a larger cohort of students from this background. more in-depth accounts of the learning of this group of students can be found elsewhere, for example in wang (2013). as is true for any group of students, there are also individual differences among chls that need to be recognized by instructors. and, as the educational systems in other countries continue to evolve and undergo reforms, it remains to be seen how enduring those stylized features will be as the culture of chinese higher education changes (grant et al., 2013; cosgrove et al., 2015). this study will work with the premise that the background of chls may be at odds with the requirement to complete an independent, individually conceived, undergraduate research thesis that requires the application of the scientific process and making an original contribution to the discipline. comparison of student performance the data on course enrollments in the capstone course over the time period from fall 2010 through spring 2020 show that 389 students completed the course and received grades over this time period (excluding students who withdrew from the class). of the 389 course completions, 30% were domestic students and 70% were international transfer students. all of the students are economics majors. over this time period, the average grade earned in the course was a 2.96/4.0, slightly below a b grade average. the average grade earned for domestic students was 3.07 and for international transfer students 2.92. those means are not statistically different. however, this picture changes when only students who successfully completed or passed the course are considered. students need to earn a cgrade (1.67/4.0) for successful completion. for this group of students, the average grade for domestic students was 3.48, and 3.18 for international students. this grade difference is statistically significant at the 1% level. this grade pattern emerges due to a higher failure rate for domestic students at 12.2% compared with international students at 8.4%, also statistically significant. so, while domestic students are more likely not to pass the capstone course, if they do pass they earn on average a higher grade than an international transfer student. the pattern of lower failing rates for international transfer students, but lower overall grades, may be explained by the substantially higher cost that international students face when they have to repeat a course at the end of their program of study at the host university. most students take the capstone course during their last planned semester at the host university and would have to extend their stay for another term in order to be able to graduate. this would require additional costs of living in the united states, as well as a tuition rate that is above the instate tuition rate paid by the domestic students. some international students need to work around visa issues to be able to extend their stay, which imposes additional costs as well. teaching international students the issues in teaching a large percentage of international students stem from the differences between domestic and international students that are common across all universities, but also from the specific implementation of the transfer program for international students at the current university. the issues were identified through a short survey of departmental faculty who have been teaching the capstone course at the present university. getting started – finding a research question while domestic students seem to accept the requirement of finding their own research topic and then a specific research question, it is more common for international students to wait for the course instructor to suggest a topic or research question. this is sometimes interpreted as 33 |journal for economic educators, 22(1), 2022 a lack of creativity on those students’ part but may stem from the instructional model they have been exposed to at their home institution. in practice, it takes more effort on the instructor’s part to provide specific examples of research projects along with group and one-on-one discussions with the international students to emphatically make the point that the students are to be in the driver’s seat in terms of ideation. just as identified in the literature, the phenomenon of the ‘silent chinese student’ (hodkinson & poropat, 2014) has been observed in the capstone course. faculty have adopted a strategy where every single student shares their idea for a research topic during a class session. this provides a chance for the domestic students to model asking questions and thinking out loud about the creation of a project. it will likely take several class sessions and additional one-on-one meetings to craft a feasible research question for all students, but some international students get positively excited once they truly believe that they can work on a project of their choosing. in terms of mentoring, instructors need more resolve in getting students to ideate, but in terms of final results, the effort is often very gratifying. to get students to open up about their personal interests, one avenue to find a research topic, it may be useful to have all students share an article they have read on social media, thus validating their interests and taking the opportunity to show how an economic research question may be arrived at. for example, several students have been very interested in issues of family dynamics such as divorce, the decision of how many children to have, or domestic violence. because students are not aware that there exists an economic theory of family (becker, 1991), they may not know how to turn their personal interest into a final thesis. several international students have successfully found national data for china and the us to analyze projects along those lines. some of the international students focus on their home country, but many students also study issues that are more peculiar to the united states such as obesity, specific welfare programs, or housing prices in their host community. pedagogical models – background in scientific method while domestic students have been exposed to working with the scientific method at least since junior high school, often through science fair projects, the international transfer students in this department generally do not come with the same preparation. this group of international students indicate that they have never been asked to complete a significant project following the scientific method before studying in the united states. most chinese high schools require students to choose between a science or humanities track during their senior year in high school before taking the national college entrance examination in either of the two specialties (gao, 2013). as all chinese international transfer students major in economics at their home institution, they chose the humanities track in high school, thus reducing their chances of exposure to the applications of the scientific method in high school. in practice, this requires instructors to pay close attention to the language of the scientific method and to relate this language to the specific research question chosen by the student. especially for international students, the distinction between dependent and independent variables can be easily confused. early during the class, this confusion can get in the way of an effective literature review that will lead the students to academic research papers that are helpful in completing the thesis. if students are confused about the terminology of dependent and independent variables, and cannot properly apply this terminology to the research question they have chosen, they may end up looking into the wrong literature. for example, one student wanted to study the impact of the yuan/dollar exchange rate on the price of gold. she needed to find literature on what types of economic variables drive the gold price in order to build an empirical model that would include the exchange rate as her focus variable. the student initially 34 |journal for economic educators, 22(1), 2022 started to look for academic research papers that explain the exchange rate, not finding much help for her project. this problem also arises with some domestic students but is more likely to be encountered with international students. it is important to check early during the semester that students are actually looking for the type of literature that will help them with their project. another common misconception, especially among international students, is that they will ‘prove’ their hypothesis. the fact that they may have to reject their initial hypothesis and have to conclude that their data does not support their initial thinking, even if supported by economic theory, seems even more disappointing to international students than domestic students. instructors stress from the beginning that students are not graded on the outcome of their project, but on whether they can defend the methods they have employed. instructors have to emphasize that finding no evidence for the research hypothesis is an acceptable result as long as students have checked for potential mistakes (e.g. econometric model, data coding) along the way. once students present results it is important to reassure them that they are not graded on whether or not their research finding is affirmative. when the answer to their research question turns out to be contrary to their expected result, their confidence in content knowledge seems to get challenged more profoundly than for domestic students. despite the challenges of teaching students that are less prone to participate in class and who struggle with english, the present department has chosen to keep the course requirements and structure of the capstone course intact. the realization of the differences in student backgrounds has not led to a redesign in the course; if anything, it has strengthened the decision to have students choose their own topic, almost as a sort of pinnacle of their education in the united states. this requirement has served students who have completed the program and applied for graduate programs in the united states well. the motives of establishing transfer programs between chinese and western universities are manifold, but one stated objective from our partners is that they want their students to be exposed to western methods. in fact, the chinese partner university will now accept the capstone course paper and presentation as fulfilling their home thesis requirement. illustrative of the difference in expectations for the performance of international students at their home versus host institutions is that their home institution seemed primarily concerned with the minimum word count of a student’s thesis in contrast to the us faculty who were focused on the mastery of a process. in response to student questions about the required length of the thesis, the us faculty’s approach has been to keep emphasizing that all elements of the paper have to be present and the research question has to be answered in a reasonable way in order for the thesis to be satisfactory. another example that illustrates international student’s difficulties in embracing the requirement to follow a process rather than more easily measured criteria such as a word count is found in a common question regarding their empirical regression model. once students have identified a research question and are confident in distinguishing their dependent and independent variables, they will ask: “how many independent variables do i need?”. again, faculty at the host institution will revert back to emphasizing the process of following the scientific method and will ask students about their insights from the literature and economic theory. language preparation and plagiarism international students differ most obviously in their preparation for the capstone course with respect to english. this affects the frequency and depth of contributions in class, the ability to comprehend journal articles or more professional writing in general, and their writing and presentation skills. once a large number of international transfer students enrolled in the 35 |journal for economic educators, 22(1), 2022 capstone class, issues of plagiarism were magnified and the average quality of both written and oral presentations of material within the course decreased initially. with respect to plagiarism, the department uses turn-it-in to detect plagiarism in students’ final research papers. however, throughout the curriculum department faculty are encouraged to have students practice writing in many contexts. also, the course now contains an explicit module on plagiarism. the philosophy is that students cheat because they do not understand what is expected from them, or do not understand what might qualify as plagiarism, embracing james lang’s (2013) approach that academic integrity issues are best addressed by a supportive classroom environment. for example, at the beginning of the course, students may be asked, with an example from another subject, to identify plagiarism. in this exercise students have to decide whether an original passage has been rephrased sufficiently. students are instructed to carefully think about what it means to put something ‘in their own words’ with the caveat to look for sources that they can comprehend. in terms of class participation, instructors will call on students in order to make sure that all students have an opportunity to try out ideas. new class modules were also added to focus more on how to give an effective presentation with the help of presentation software. while it is tempting to think of non-native speakers as being disadvantaged and requiring more resources and instruction in order to complete a paper, it is important to realize that their language skills can also be an advantage in giving them access to a wider range of literature than students constrained by their native language. clear rules of using foreign language resources have to be agreed upon with students in order to make sure that instructors can reconstruct the literature review. typically, students are instructed to use english-language material for their theory part of the paper, but especially when students study a topic that pertains to their home country they are able to consult foreign-language data and possibly also research papers that enter the literature review. if that is the case, individual meetings are a good way to have students explain their data and to check their understanding. cultural knowledge through student interests, it is inevitable that course instructors will be more exposed to topics that center on china or south korea, and this forces instructors to engage with institutional and cultural realties from a country they are typically not as familiar with. it is important to have students share some of their background and personal interests in their home country to help them craft a thesis that is meaningful to them. conversely, individual mentoring of international students has to include a component on cultural differences and sensitivity when students attempt to study local issues in the united states that involve the design of a survey. international students may lack the knowledge of appropriate wording in asking about ethnic backgrounds, or they may have narrow views regarding marital status. they may also not be familiar with the appropriate brackets for income-related questions for their population. it becomes more important for those students to be pointed to good examples of surveys that pertain to their subject area. on the other hand, while lack of cultural knowledge may be a challenge in the research design stage in the presentation of their work, international students get the opportunity to showcase their new-found cultural knowledge. especially during their oral presentations, students might infuse some humor or use colloquial terms in an appropriate way. especially after working with those students over a two-year period, the value added by their education becomes broadly observable. cohort model because of the specific structure of the international transfer program, international 36 |journal for economic educators, 22(1), 2022 students in the capstone course are likely to be in one cohort that has studied together for 4 years. also, students tend to be very closely connected to senior students from their home country who might have taken on a strong peer mentoring role. this cohort model has advantages in that more recent cohorts seemed to have a better understanding of what is expected in the course. those expectations are not just communicated by faculty and advisers but also by more senior students who have completed the course. a disadvantage of this cohort model, however, is that faculty have to be mindful of past projects that were completed by students because some students are tempted to marginally modify the past work of others. the information-sharing among students that helps in conveying expectations can also lead to students choosing to work on very similar topics, defying the goal of having students think about their own interests. at times, faculty teaching the course have even sequestered topics that were frequently chosen in past classes. an example of such a topic is the impact of exchange rates on the bilateral trade balance of a country. another strategy in mitigating this issue is to identify students with similar topics and assign them the same faculty mentor in order to better monitor that those students work individually. faculty and department resources with the increasing number of students who need to be mentored each year, the department has also increased the number of faculty teaching the capstone course and the number of times the class is offered during the year. currently, the class is offered during both the spring and fall semesters and is also offered in the summer for students who did not complete their project in the spring semester. this gives students the option of graduating after the summer and enables them to start a graduate program in the fall instead of postponing their graduate studies. this is an option that is particularly beneficial for international students, but the increased frequency of class offerings benefits all majors in the program and has the potential to decrease the time it takes to graduate from the program. in terms of faculty workload, during one semester two faculty members mentored a total of 34 individual projects, which proved overwhelming. in response to this high workload, in the subsequent year, three faculty members were assigned to 31 students with each faculty member receiving credit for teaching a regular course. as stated in the literature (mcgoldrick, 2007), it is mostly senior faculty who champion and are willing to teach these kinds of capstone courses. however, with a wave of retirements and new job assignments, the average tenure of faculty within the department of this study is now relatively short. this means that the department was able to recruit new faculty who are interested in teaching a research-oriented course, but who need to be mentored in their role as advisers. this happens formally, by assigning new faculty to teach the class and sharing existing course materials from previously taught classes through the online learning platform with them, but also informally because students may seek out all faculty for advice on their topic. this fosters interdepartmental discussions between and among experienced and new faculty in terms of course design and expectations and provides an avenue for continuity on the one hand and course innovations on the other hand. unlike any other curriculum change, the decision to offer a capstone experience has fostered interdepartmental communication in terms of overarching program learning outcomes, and the final student presentations have become a highlight on the departmental calendar. one innovation after the implementation of the international transfer program was a move to poster presentations instead of individual power point presentations. this decreased the time commitment for faculty who attend the final presentations and turned the presentations into a more communal, even celebratory event. by attending these student presentations, faculty are able to benchmark how 37 |journal for economic educators, 22(1), 2022 other faculty advise and mentor students and what students are able to accomplish and in turn incorporate this knowledge into their own work. while there is no doubt that the workload of faculty has somewhat increased with the introduction of the capstone course, the department was successful in having a majority of faculty willingly participate in offering the capstone experience course. this has provided a natural avenue to observe student outcomes for both domestic and international students and is a model the department plans to continue at this point in time. conclusion this paper works with the assumption that because of their home learning environment, international transfer students from confucian heritage countries have formed learning styles and behaviors that may be at odds with the requirement of completing an independently conceived undergraduate research project, and this needs to be addressed by instructors. this assumption is corroborated by performance data from almost 400 students who completed the capstone experience course within the economics department in this study. the data indicate that international transfer students receive significantly lower grades than domestic students when only students who have passed the course are considered. on the other hand, international transfer students have lower course failure rates than domestic students likely because of the higher cost associated with repeating a course at the end of their program. faculty in the economics program have identified issues that present a relatively larger challenge for international transfer students than for domestic students. those issues are insufficient exposure to ideation and the conception of a feasible research question, likely as a result of receiving their previous education in a more teacher-centered environment, as well as insufficient exposure to applications of the scientific method in their previous academic experiences. maybe more obvious are challenges that center on cultural knowledge, for example in devising appropriate survey questions, and language problems which are sometimes reflected in plagiarism. the department in this study has found that those challenges can be addressed by appropriately mentoring individual students and by restructuring and emphasizing particular course assignments. despite the increased effort required by the department faculty in mentoring a more diverse student group, the department has intentionally chosen to maintain its approach to the capstone course as it provides rich opportunities for both students and faculty. this study is unique in recognizing a diverse student population in economics and exploring strategies to make economics a more inclusive discipline as envisioned by the american economic association (2020). references allgood, s., and a. bayer. 2016. “measuring college learning in economics”. in richard arum, josipa roksa, 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(eds), researching cultures of learning, palgrave macmillan. wong, j. k. 2004. “are the learning styles of asian international students culturally or contextually based?” international education journal. 4(4): 154 – 166. wu, q. 2015. “re-examining the “chinese learner”: a case study of mainland chinese students’ learning experiences at british universities.” higher education. 70: 753 – 766. https://higheredutah.org/pdf/agendas/20171117/tab%20c%202017-11-17.pdf 22 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 economic education production functions for the principles of macroeconomics and the principles of microeconomics: is there a difference? hart hodges1, yvonne durham2, and steve henson3 abstract this paper examines the relationships among student attitudes towards economics, performance, and knowledge retention in introductory economics courses. we find that the economic education production functions differ across the introductory microeconomics and macroeconomics courses. attitude affects performance in microeconomics, but not in macroeconomics, while performance does not impact ending attitude significantly in either course. classroom experiments and gender affect performance directly in macroeconomics, but only indirectly through attitude in microeconomics. the existence of differing production functions provokes important questions about how each of the introductory courses should be designed and taught, suggesting that it is not appropriate to treat all introductory courses in the same way. additionally, we find that the retention of knowledge depends primarily on past performance and native ability, with classroom experiments slowing the depreciation rate. key words: economics education; attitude; performance; retention; production functions jel classification: a20, a22, i21 introduction a substantial literature in economic education explores the factors that influence academic success in undergraduate introductory economics. these include such variables as student attitude, aptitude, attendance, effort, learning styles, personality types, gender, and class size. the specific relationships between many of these factors and various measures of performance have not been conclusively established. this may be due, in part, to the fact that the courses from which the data have been drawn have not been uniform. the courses are of a variety of formats, typically principles of macroeconomics, principles of microeconomics, or a combined principles of economics. if the factors influencing student success differ across these courses, the choice of course examined likely impacts the nature of the relationships observed. using a data set from an earlier study, we provide some insight into the relationships among, and determinants of, three outcome measures: attitude, performance, and retention. while including several of the factors indicated above as possible determinants, we explore the effects of classroom experiments on these three measures, and we do so separately in the introductory macroeconomics and microeconomics courses. we find that educational production functions do indeed differ across these courses, which may help explain prior conflicting results. 1 associate professor, department of economics, western washington university, 516 high st, bellingham, wa 98225 2 professor, department of economics, western washington university, 516 high st, bellingham, wa 98225 3 professor, department of economics, western washington university, 516 high st, bellingham, wa 98225 23 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 untangling the possible relationship between attitude toward economics and performance is challenging, and the specific nature of that relationship has not been conclusively determined. does a better attitude toward a particular subject lead to better academic performance, or does better performance lead to a better attitude? does the causality run in both directions? or are both attitude and performance jointly determined by other factors? and how might the retention of knowledge be related to these factors and how they interact? this study differs from previous research in two important ways. first, it is comprehensive, examining all three outcome measures. second, it explores the possibility of differing education production functions in the two principles courses, which to our knowledge has not yet been explicitly considered. the possibility of differing production functions provokes important questions about how each of the introductory courses should be designed and taught. we attempt to distinguish whether the factors that influence learning are the same and if they affect learning in the same way and to the same extent across the two courses. the results indicate that they do not. in particular, ending attitude affects performance in microeconomics but not in macroeconomics, and the mechanisms through which the use of classroom experiments affects performance appear to differ across the courses. in macro, for example, both gender and participation in classroom experiments directly affect performance; but in micro, these variables affect performance only indirectly, through their impacts on attitude. in addition, we find that retention of economic knowledge by business majors is determined by past performance, student aptitude, and time; and that participation in classroom experiments reduces the rate at which the stock of economic knowledge depreciates. we find no evidence that attitude toward economics affects retention of economic concepts directly; however, there may be indirect effects from a linkage between attitude and performance. in the following section, we review the literature on educational production functions and the factors influencing academic success in introductory economics. next we describe the model and data used in the present analysis, and we then discuss the results and their implications. background microeconomics versus macroeconomics principles textbooks generally distinguish between microeconomics and macroeconomics on the basis of the unit of exploration. from the student viewpoint, there appear to be two additional distinctions that may be important determinants of performance: differences in perceived course difficulty and subject matter appeal. student comments on various internet forums, and our own conversations with students, provide some insight into how some of our students may distinguish between the two courses on these other levels. students view micro as more difficult, involving more mathematics, graphs, and coverage of less familiar topics, and macro as more data driven and interesting because it explores more practical, applicable, and familiar concepts that appear in the news. the notion that students may find micro to be harder, less applicable, and less interesting is also consistent with previous research. for example, benedict and hoag (2002) find that students taking microeconomics are more likely to be apprehensive than those taking macro, perhaps because micro has the reputation of being more theoretical and less policy-oriented. hamermesh (2002) indicates that microeconomics can seem quite dry to students and only comes alive when instructors provide engaging examples that illustrate the key principles. research also provides some insight into differences in student performance across the two principles courses. grimes and nelson (1998) find that mastering microeconomic principles 24 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 appears to require more technical expertise than mastering macroeconomics. surprisingly, cohn et al. (2001) observe that in a principles of macroeconomics course there may be circumstances in which the use of graphs may be counterproductive, and suggest that their use may persist in large part because instructors prefer them. colander (2000) indicates that “…a large portion of our audience does not know the language of models, mathematics.” if micro is more theoretical, abstract, and graph-oriented, and if students struggle with graphs and models, then student perceptions that micro is harder than macro might be valid. in addition, one could argue that even some of the most basic concepts that form the foundation of the rational decision-making process studied extensively in microeconomics are initially counterintuitive to students. in their text, frank, bernanke, antonovics, and heffetz (2016) discuss some “important decision pitfalls,” incuding ignoring foregone opportunities, failing to ignore sunk costs, and not thinking at the margin. behavior that violates the basic tenets of microeconomic theory is common enough that the field of behavioral economics has arisen in order to explore these anomalies. so basic concepts that we often assume are intuitive or “common sense” to our students in micro may not be, requiring additional effort from both students and instructors. conversely, many macroeconomic ideas may tend to be more intuitive and familiar to our students. topics such as gdp, inflation, unemployment, and the federal reserve are often in the news. it would not be surprising to find that students struggle more, both from an interest and intellectual perspective, to grasp some of the more counterintuitive, technical, and less familiar ideas used in the study of microeconomics. given these disparities, it is plausible that learning occurs differently in these two courses, resulting in distinct educational production functions. attitude and success in economics in a seminal article, bach and saunders (1965) suggest that the understanding of economic ideas may depend on a student’s interest in economics. a series of studies followed, attempting to discover whether such a relationship actually exists, and if so, its nature. given the possible complexity of this interaction between attitude and performance, it is not surprising that the assorted specifications and choices of courses examined have resulted in differing conclusions. some studies find that attitude affects achievement (karstensson and vedder, 1974; wetzel, potter, and o’toole, 1982; chizmar and mccarney, 1984; brock, 2011); but others (manahan, 1983; hodgin, 1984; charkins, o’toole, and wetzel, 1985) find that it does not. there are also conflicting findings for the effect of achievement on attitude. the effects of learning styles and personality types several studies have examined the impacts of student learning styles, instructor teaching styles, and student and teacher personality types. many studies find improved performance and attitudes when learning and teaching styles or teacher/student personality types are better aligned (wetzel, potter, and o’toole, 1982; charkins, o’toole, and wetzel, 1985; borg and shapiro, 1996; borg and stranahan, 2002; terregrossa, englander, and wang, 2009). ziegert (2000) finds that personality differences may be partially responsible for the often observed “gender gap” discussed below. gender effects the role of gender in economic learning has not been resolved conclusively. much of the existing empirical work finds that males do better (dancer, 2003; jensen and owen, 2001; robb 25 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 and robb, 1999; feiner and roberts, 1995; ferber, 1995; anderson, benjamin, and fuss,1994). however, the relationship between gender and measures of economic learning appears to be complex. macdowell, senn and soper (1977) find that the gender effect found in college-level economics courses is not present in younger students. lumsden and scott (1987) offer evidence that gender effects depend on the testing format. multiple-choice exams are often used in the principles courses, and females tend to perform better on written tests. benedict and hoag (2002) also find females to be more apprehensive about economics courses than their male counterparts. the effects of classroom experiments while also not conclusive, there is some evidence that classroom experiments can improve performance (gremmen and potters, 1997; frank, 1997; dickie, 2006; durham, mckinnon, and schulman, 2007). cardell et al. (1996) and emerson and taylor (2004) get mixed results that depend on the university/course studied and the measure of performance used. yandell (1999) finds that increased use of classroom experiments does not significantly affect performance. durham, mckinnon, and schulman (2007) find that classroom experiments in the principles courses significantly affect performance on the specific material covered by the experiments, attitude toward economics, and retention, with a larger overall impact on experimental content performance in macroeconomics. retention as a measure of success in addition to performance measures such as course/exam grades and scores on the test of understanding of college economics (tuce), another important measure of academic success is student knowledge retention over time. as with the other performance measures, many possible determinants have been explored and the results are far from conclusive. walstad and allgood (1999) and walstad (2001) find evidence of fairly low retention rates for economic knowledge, while saunders and bach (1970) and crowley and wilton (1980) are more optimistic. research has explored the effects on retention of a wide range of variables including attitude, sat scores, gpa, time, original course grade, age, gender, major, and course format. conclusions have varied widely (saunders and bach, 1970; craig and o’neill, 1976; kohen and kipps, 1979; kane and spizman, 1999). since a compelling argument can be made that retention is one of the most important performance measures, determining what inputs are significant in the retention production function is an important task. the current study this study focuses on three things. first, we consider the relationship between student attitudes towards economics and performance, giving special attention to the effects of classroom experiments while controlling for student learning styles, demographic characteristics, attendance, and aptitude. second, we allow the production functions to differ between the introductory microeconomics and macroeconomics courses, yielding insights that have not been available from previous studies that did not consider this distinction. finally, we explore the determinants of retention of introductory economic concepts. model specification we hypothesize a joint production process in which a student’s performance in, and attitude towards, economics at the end of the semester are simultaneously determined throughout the course by four broad sets of variables: (1) the student’s stock of human capital at the beginning 26 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 of the course, (2) other individual-specific characteristics and experience that affect the student’s attitude toward the subject and/or ability to convert that human capital into performance, (3) a flow of inputs (effort) provided by the student, and (4) inputs provided by the institution. retention depends on these factors and on the student’s performance in the course. specifically, let a be a student’s attitude toward economics at the end of the course, p be performance as measured by course grade, and r be a measure of retention of the course material at some future date. we estimate a model of the form: (1) a i = γ 1 p i + x i β 1 + z 1i α 1 + u i (2) p i = γ 2 a i + x i β 2 + z 2i α 2 + ε i (3) r i = γ 3 p i + w i β 3 + v i . here x is a set of exogenous variables believed to directly affect both ending attitude and performance concurrently, such as demographic characteristics, effort (proxied by course attendance), and institutional inputs such as class size and whether experiments were used. the matrix z 1 contains variables that directly affect ending attitude toward economics but not performance. we hypothesize this to be the student’s attitude at the beginning of the course. a student’s initial attitude toward economics is the starting point from which attitude evolves as the course progresses, and is thus likely to be correlated with ending attitude. however, unlike in more familiar subjects from high school such as math and history, students often begin an economics course, particularly micro, with little or no prior knowledge about the subject matter. their relatively uninformed initial impressions of economics are likely to be only weakly related to unobserved variables that affect performance in the course. we thus use beginning attitude as an instrument for ending attitude in estimating the performance equation. the other set of instruments, z 2 , contains human-capital variables that are likely to affect the course grade but are unlikely to have a direct influence on ending attitude. as with attitude, ability is not observed directly. we proxy ability by using standardized test scores (act or sat) and cumulative gpa prior to the course. one question that might arise about the appropriateness of using general academic ability as an instrument for performance is that more-capable students might have overall better attitudes toward learning, so that past performance variables might be correlated with the error term in equation (1). this concern is mitigated by the fact that our attitude variables measure student attitude toward economics specifically rather than toward learning in general. additionally, several questions in the attitude survey ask the student to compare their view of economics with the other subjects they are studying. there is no reason to suspect that morecapable students would view economics in a better light than their other subjects. in the retention equation, w contains many of the same variables as x, as well as a measure of the time elapsed between the economics course and the retention test. the presumption that both ending attitude and course grade are interdependent and jointly determined means that ordinary least squares estimates of equations (1) and (2) may be biased and inconsistent, necessitating estimation by two-stage least squares. we test this hypothesis below. no such issue arises with equation (3), for which all right-hand-side variables are predetermined. 27 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 data the data used in this study come from a controlled experiment that was conducted at the university of arkansas from the fall semester of 2000 through the fall of 2002. while the experiment was conducted for the purpose of ascertaining the effects of classroom experiments on learning, information was collected on the three performance variables in which we are interested and many of the factors thought to affect them, for both introductory courses. the original study used a treatment/control group design, with the treatment (classroom experiments used) and control (no experiments used) groups separated across semesters to allow for control of confounding factors such as the instructor and the time, duration, and size of the class. the study used two sections each of introductory micro and macro per semester for four semesters. the four fall semester sections each year were control sections; the four sections in the spring semester used classroom experiments. all sections of both courses in the first year were 120-seat sections, and all in the second year were 60-seat. class times were held constant across treatment and control sections, with all macro courses taught on tuesdays and thursdays and all micro courses taught on a monday-wednesday-friday schedule, all between 8:00 and 11:00 am. the control sections were taught using a traditional lecture/class discussion format, while the treatment sections supplemented lectures with classroom experiments designed to illustrate a key basic economic concept.4 the pacing of the material was closely matched between control and treatment groups so that each received approximately the same amount of contact time for a particular topic area and no additional homework was assigned over the experiments. in the control group, additional discussion, examples, and problems were used instead of experiments. the macro sections were taught by one instructor and the micro sections by two other instructors, all of whom had limited experience using classroom experiments. the text used in the micro courses was similar in the technical/mathematical level of topics to that of the macro text.5 students in the study completed a survey at both the beginning and end of each course to assess their attitudes toward economics. the survey asked students to respond, on a five-point scale from “very poor” (1) to “very good (5),” to a set of eight questions about their interest in and attitude toward economics currently, their interest in learning more and taking more courses, and how their interest in economics compared to other subjects. the attitude variable used in the analysis is the average of these eight rankings.6 subsequently, in an upper-division finance course that had both principles courses as prerequisites, students from both the treatment and control sections were given a pretest that incorporated a basic question from each of the 13 topic areas covered by the experiments. student performance on this pretest allows us to assess retention of material from the earlier classes and to 4 micro sections used eight experiments and macro used five. the topic areas covered by the micro experiments were resource allocation, comparative advantage, demand and supply, diminishing marginal utility, production and costs, monopoly, cartels, and public goods; and macro covered equity versus efficiency, savings and consumption, money creation, cpi bias, and the federal funds market. descriptions of these experiments are available on request. given the nature of the material in the two courses, it is reasonable to expect that a different number of experiments might be appropriate for the different courses. experiments in macro can often be more complex and lengthy, and several of the micro experiments employed were fairly simple and short. while the number of experiments implemented differed, the total class time spent on them was likely similar. 5 while each instructor was asked to introduce the experiments, they chose the other material to cover. all three instructors used analytical/technical tools as the backbone of their courses, but did so with many examples and policy discussions to motivate the models. 6 for feasibility reasons, the attitude survey was administered during the last week of classes, prior to the final exam and determination of course grade. a copy of the attitude survey is available on request. 28 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 examine how retention might be affected by student characteristics, the use of classroom experiments, and other variables of interest. the original dataset contained 753 students in eight sections of macro, 727 in eight sections of micro, and 1,012 students in 18 sections of finance. after eliminating cases with missing data, we were left with usable samples of 466 students in macro, 309 in micro, and 268 in the retention file.7 sample means and standard deviations are presented in table 1. the “retention” column refers to students in the upper-division finance course used for the retention analysis. several aspects of the data are worth noting. first, consistent with the previous discussion of students’ perceived differences between microeconomics and macroeconomics, students generally found macro to be a more enjoyable experience than micro. not only are the beginning and ending attitudes both higher for macro than for micro, but the change in attitude from beginning to end of the course is significantly positive in macro (t = 9.63) and negative in micro (t = –5.06). this is also consistent with the overall higher course grades in macro than in micro.8 at the university of arkansas, students are not required to take the introductory courses in any particular order. however, the sequencing of course numbers places macro before micro, so many students take them in that order.9 it may be that some students have a fairly positive experience in macro that sets them up for disappointment in what they perceive to be more difficult material in micro.10 during the time period in which the data were collected, approximately 97% of all students at the university of arkansas submitted act scores in support of their admission application, and the remaining 3% submitted scores on the sat. in order to avoid losing the sat portion of the sample, we standardize each of these scores by subtracting its mean and dividing by its standard deviation. we do this separately for the quantitative and verbal portions of the tests, and use these standardized variables zactsat_math and zactsat_verbal as explanatory variables in the performance equation. the variables dlsv, dlsa, dlsr, and dlsk reflect student responses to the vark learningstyles questionnaire (fleming and bonwell (1998)). vark stands for visual, aural, read/write, and kinesthetic. the variables sophomore, junior, and senior are defined as of the quarter during which the macro or micro class is taken. the reference category is freshman, which make up 15.0% of the students in macro, 14.2% in micro, and 8.2% in finance. 7 in macro, there were final course grades for 700 students, suggesting that 53 (7.7%) had dropped the course during the semester. in micro we had final grades for 646, suggesting 81 drops (11.6%). the remainder of the missing observations are due to missing data on other variables, most commonly ending attitude, followed by beginning attitude and learning style. the retention file contains only students who were in either a treatment or control section of the macro or micro courses that were part of the study. for additional details on the experimental design, data collection procedures, and analysis of the effects of classroom experiments, see durham, mckinnon, and schulman (2007). 8 for the null hypothesis that mean grades are the same between micro and macro, t = 1.95 (p = 0.052 with n = 775). for the subsample of 76 students who took both courses during the study period, t = 0.6176. 9 at the university of arkansas, the principles of microeconomics and principles of macroeconomics courses can be taken to fulfill the social science portion of the university core requirements. so while these courses are not required for most non-business majors, they can be used to fulfill a graduation requirement. 10 the sequencing of courses probably explains why students in microeconomics are on average slightly older and more likely to be business majors, for whom the course is required. 29 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 table 1 summary statistics: sample means (standard deviations in parentheses) variable description macro micro retention gp grade in course (0-4) 2.616 (0.939) 2.479 (0.985) 2.695 (0.802) endatt ending attitude toward economics: 0 (very poor) – 4 (very favorable) 3.946 (0.726) 3.222 (0.849) begatt beginning attitude toward economics: 0 (very poor) – 4 (very favorable) 3.640 (0.685) 3.453 (0.689) busmajor 1 if business major, 0 otherwise 0.687 (0.464) 0.835 (0.372) cumgpa cumulative grade-point average at beginning of course (0-4) 2.919 (0.632) 2.839 (0.619) 3.015 (0.517) zactsat_math standardized value of act or sat quantitative score 0.000 (0.999) 0.000 (0.999) 0.000 (0.998) zactsat_verbal standardized value of act or sat verbal score 0.000 (0.999) 0.000 (0.999) 0.000 (0.998) male 1 if male, 0 otherwise 0.549 (0.498) 0.602 (0.490) 0.571 (0.496) minority 1 if african-american, hispanic, or native american; 0 otherwise 0.071 (0.257) 0.081 (0.273) 0.063 (0.244) age age in years 19.356 (1.600) 20.298 (2.255) dlsv 1 if learning style is “visual,” 0 otherwise 0.030 (0.171) 0.032 (0.177) 0.019 (0.136) dlsa 1 if learning style is “aural,” 0 otherwise 0.088 (0.284) 0.087 (0.283) 0.101 (0.312) dlsr 1 if learning style is “read/write,” 0 otherwise 0.054 (0.226) 0.036 (0.194) 0.063 (0.244) dlsk 1 if learning style is “kinesthetic,” 0 otherwise 0.212 (0.409) 0.201 (0.401) 0.198 (0.399) sophomore 1 if credits earned is at least 30 but less than 60, 0 otherwise 0.618 (0.486) 0.528 (0.500) 0.631 (0.484) junior 1 if credits earned is at least 60 but less than 90, 0 otherwise 0.185 (0.388) 0.288 (0.454) 0.276 (0.448) senior 1 if credits earned is at least 90 , 0 otherwise 0.047 (0.212) 0.042 (0.201) 0.011 (0.105) attend proportion of classes attended 0.804 (0.170) 0.713 (0.201) largeclass 1 if 120-seat class, 0 if 60-seat 0.719 (0.450) 0.647 (0.479) treatment 1 if classroom experiments used, 0 if not 0.491 (0.500) 0.531 (0.500) instruct binary indicator assigned to one of two micro instructors 0.440 (0.497) nlargeclasses number of large classes in introductory economics 1.813 (0.409) ntreatments number of treatment sections in introductory economics 0.627 (0.515) recent 1 / (number of months since most recent introductory economics class) 0.203 (0.162) score proportion of correct answers on retention test 0.505 (0.145) observations 466 309 268 30 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 attend is the proportion of class sessions that a student attended on randomly-selected days throughout the semester. the number of days sampled varied from class to class. this raises some doubt about the reliability of this variable and its comparability across different students. nevertheless, there are at least two arguments for its inclusion in the analysis. first, it is the only measure of student effort that is available to us, and its omission could bias the coefficients on other variables in the model to the extent that those variables are correlated with attendance. second, if measurement error in this variable is truly random, then we would expect its estimated coefficient to be biased toward zero. this is worth noting as we consider the results below.11 institutional inputs are captured by the variables largeclass, treatment, and instruct. the class size variable is equal to 1 if the class has 120 students rather than 60; treatment controls for whether the class included experiments; and instruct is a dummy variable that indicates which of two instructors taught the micro course.12 the bottom four rows in table 1 are unique to the retention data. we define the variable recent to be the inverse of the number of months between the end of the most-recent introductory economics class and the beginning of the finance class in which retention is measured. it ranges from 1, for students who took their final principles course in the fall and then finance in the spring semester of the same academic year, to 0.05, for students who took the finance course 20 months after the principles course. as for the other variables in the “retention” column, cumgpa, zactsat_math, zactsat_verbal, male, and minority were recorded at the beginning of the finance course; and gp and the learning-style variables in that column are an average of the values from the student’s micro and macro courses.13 the variable ntreatments is the sum of the number of macro and micro classes in which the student was exposed to experiments. this variable is equal to zero for 104 students. for 160 students it is equal to one, indicating experiments were used in either the micro or macro section that they took. it is equal to two for four students who were in sections of both micro and macro in which experiments were used. results following the organization of the background section above, we first present results on the relationship between attitude and performance and then discuss the effects of other variables such 11 since we do not have transcript information for the students in the study, we cannot determine if a student had previously taken the course and was repeating it. we only have this information for those students who had previously taken a section of the course that was included in the study. in macro, there were no students who had previously completed one of our macro sections, and only one who had previously enrolled but did not finish. in micro, six students had previous enrollments in one of our micro sections and three of these had completed the course. we examined some specifications that included dummy variables for previous enrollments or completions. none of these variables was statistically significant, and their inclusion had only minor effects, if any, on a few of the other coefficients at the second or third decimal place. results are available upon request. 12 because the data used in this study were gathered for a different objective, the experimental design controls for instructor across treatment and control sections but does not do so across the two courses. while this may seem problematic at first glance, a compelling argument can be made that it is actually appropriate for the current study. educational research supports an argument that it is not the specific person serving as the instructor that needs to be controlled, but rather, the level of expertise with which the particular course is taught. (see shulman (1986) and ball, thames, and phelps (2008)). the three faculty involved in the study each had a great deal of experience and expertise teaching the specific principles course for which they were the instructor. the same claim cannot be made with regard to their experience and expertise in teaching the other principles course. 13 this is necessary because separate scores for the micro and macro questions on the retention test were not available in the data. 31 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 as classroom experiments. we do not include a discussion of learning styles, as the learning style variables were not significant in any of the equations14 attitude and performance ordinary least-squares estimates of the attitude equation are presented in columns 1 and 3 of table 2. not surprisingly, beginning attitude toward economics is an important determinant of ending attitude in both macro and microeconomics. business majors have better attitudes toward economics at the end of their macro course than do their peers, but there is no significant difference in micro. on the other hand, males have better attitudes than females at the end of their micro course, but there is no gender difference in macro. participating in experiments appears to have a positive attitudinal impact for students in microeconomics but not in macro. ethnicity, age, learning style, and class size have no statistically significant effect on final attitude. the possibility that attitude and performance are interdependent and jointly determined raises the possibility that performance (measured by gp) may be correlated with unobserved variables that affect ending attitude, resulting in biased and inconsistent ols estimates. to test this possibility, we estimate equation (1) by two-stage least squares using cumgpa, zactsat_math, and zactsat_verbal as instruments for gp. results are given in columns 2 and 4. the row labeled “first-stage f” tests the joint significance of the instruments cumgpa and the two zactsat variables in the first-stage regression. based on this statistic, we reject the hypothesis of weak instruments in both the macro and micro regressions.15 the insignificant basmann (1960) 2 statistic indicates that we cannot reject the joint hypothesis that the model is correctly specified and that the instruments are exogenous. the hausman-wu test (hausman (1978), wu (1973)) easily rejects the hypothesis that gp is exogenous in both the micro and macro equations. the iv results differ from the ols estimates in two important respects. first, the apparent importance of gp as estimated by ols disappears when it is appropriately treated as endogenous. this conflicts with the notion that students’ attitudes toward a subject may be affected by how well they perform in it. as discussed earlier, the previous findings on the nature of this relationship are inconclusive. second, attendance continues to be statistically insignificant in micro, but becomes a strong predictor of ending attitude in macro. in addition, treatment is a predictor of ending attitude in micro but not in macro, but the effect is significant at only the 0.10 critical level. table 3 presents the results for the performance equation. in microeconomics, the ols and iv estimates are virtually identical, so the hausman-wu test fails to reject the hypothesis that endatt can be treated as exogenous. in macro, however, the post-estimation tests clearly favor the iv results. in what follows, therefore, we focus on the iv results.16 14 however, given their theoretical relevance, we retain these variables in the models to avoid any potential bias that might result from their joint exclusion. though they are individually insignificant, the learning style variables together account for 22-24% of the explained variance of endatt and gp. 15 for a discussion of this rule of thumb, see staiger and stock (1997) and stock, wright, and yogo (2002). 16 the basmann chi-square test was not performed because the performance equation is exactly identified, so there are no overidentifying restrictions to test. 32 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 table 2 dependent variable: ending attitude (1) (2) (3) (4) macro macro micro micro variables ols iv ols iv gp 0.154*** -0.031 0.218*** 0.024 (0.036) (0.052) (0.047) (0.069) begatt 0.561*** 0.565*** 0.500*** 0.543*** (0.042) (0.043) (0.060) (0.061) busmajor 0.186*** 0.131** 0.174 0.172 (0.065) (0.066) (0.113) (0.113) male 0.053 0.050 0.354*** 0.351*** (0.057) (0.058) (0.086) (0.085) minority -0.049 -0.088 -0.177 -0.195 (0.111) (0.112) (0.151) (0.150) age 0.032 0.026 -0.015 -0.024 (0.022) (0.022) (0.019) (0.019) dlsv -0.037 -0.016 -0.256 -0.283 (0.167) (0.169) (0.231) (0.231) dlsa 0.122 0.137 0.127 0.112 (0.101) (0.102) (0.146) (0.146) dlsr -0.151 -0.142 -0.079 -0.109 (0.126) (0.128) (0.212) (0.212) dlsk -0.000 0.020 -0.007 -0.039 (0.073) (0.073) (0.105) (0.105) sophomore -0.090 -0.046 -0.023 0.025 (0.086) (0.087) (0.123) (0.123) junior -0.075 0.012 0.020 0.105 (0.104) (0.106) (0.135) (0.137) senior -0.280* -0.216 -0.043 0.058 (0.163) (0.165) (0.235) (0.236) attend 0.134 0.630*** -0.011 0.450 (0.203) (0.228) (0.248) (0.274) largeclass 0.044 0.047 -0.124 -0.061 (0.074) (0.074) (0.095) (0.096) treatment 0.059 0.092 0.152* 0.145* (0.061) (0.062) (0.084) (0.084) instruct 0.079 0.057 (0.086) (0.086) constant 0.633 0.806* 0.905* 1.022** (0.464) (0.470) (0.509) (0.509) observations 466 466 309 309 r-squared 0.343 0.304 0.359 0.322 first-stage f 142.1*** 87.29*** basmann chi-square 1.814 hausman-wu f 26.92*** 15.99*** note: *** {**} [*] represent statistical significance at the 1% {5%} [10%] level. instruments for gp: cumgpa zactsat_math zactsat_verbal 33 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 table 3 dependent variable: course grade (1) (2) (3) (4) macro macro micro micro variables ols iv ols iv endatt 0.221*** 0.069 0.302*** 0.301*** (0.036) (0.069) (0.042) (0.088) cumgpa 0.930*** 0.934*** 1.037*** 1.037*** (0.053) (0.053) (0.072) (0.070) zactsat_math 0.065* 0.053 0.010 0.010 (0.036) (0.037) (0.047) (0.046) zactsat_verbal 0.079** 0.077** 0.037 0.037 (0.035) (0.035) (0.044) (0.042) male 0.158*** 0.170*** 0.048 0.048 (0.055) (0.055) (0.075) (0.078) minority 0.050 0.025 0.001 0.001 (0.101) (0.101) (0.127) (0.126) age 0.073*** 0.078*** 0.030* 0.030* (0.020) (0.020) (0.017) (0.016) dlsv 0.067 0.095 -0.102 -0.102 (0.151) (0.151) (0.195) (0.189) dlsa 0.021 0.024 -0.063 -0.063 (0.092) (0.092) (0.124) (0.121) dlsr -0.046 -0.064 -0.107 -0.107 (0.115) (0.115) (0.181) (0.176) dlsk 0.103 0.107 -0.117 -0.117 (0.066) (0.066) (0.088) (0.085) sophomore 0.101 0.084 0.119 0.119 (0.077) (0.078) (0.103) (0.100) junior 0.074 0.053 0.196* 0.196* (0.095) (0.095) (0.114) (0.111) senior -0.078 -0.169 0.189 0.189 (0.148) (0.152) (0.197) (0.191) attend 1.327*** 1.403*** 0.841*** 0.842*** (0.174) (0.177) (0.204) (0.200) largeclass -0.140** -0.123* 0.294*** 0.294*** (0.067) (0.068) (0.079) (0.077) treatment 0.209*** 0.201*** -0.095 -0.095 (0.054) (0.054) (0.071) (0.070) instruct -0.137* -0.137* (0.072) (0.070) constant -3.649*** -3.196*** -2.847*** -2.845*** (0.450) (0.482) (0.451) (0.500) observations 466 466 309 309 r-squared 0.678 0.664 0.662 0.662 first-stage f 166.3*** 79.87*** hausman-wu f 6.834*** 0.0001 note: *** {**} [*] represent statistical significance at the 1% {5%} [10%] level. instruments for endatt: begatt 34 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 as in table 2, there are some notable, and in some cases surprising, differences between the two courses. ending attitude is a significant predictor of performance in microeconomics, but not in macro. in micro, students in the 120-seat classes have higher final grades than those in the 60-seat sections, but in macro the opposite is true. we suspect this is related to the teaching experiences of the instructors in these courses. one could argue that both class sizes are “large,” so this is not really a comparison between small and large classes, but rather a comparison between “large” and even “larger” classes. the macro instructor had a lot of experience teaching “larger” classes, while both micro professors had more experience teaching “large” sections. males and students who participated in classroom experiments do better than their counterparts in macro but not in micro. interestingly, a student’s score on the verbal portion of the act or sat is a predictor of performance in macro but not in micro. performance on the quantitative part of the college admission test has no statistically significant impact in either course once endogeneity of attitude is taken into account. this suggests that whatever perceptions students may have about micro being more difficult because they perceive it to be more mathematical, their performance in micro is unrelated to their actual quantitative ability as measured by the college admission tests. and performance in macro appears to depend more on students’ verbal skills than on their mathematical ability. age, attendance, and cumulative gpa are significant determinants of performance in both classes. the impact of age is about twice as large in macroeconomics as in micro. the strong positive effect of attendance is notable given the possibility, noted above, of measurement error in this variable and the consequent attenuation of the coefficient estimate toward zero. ethnic background and learning style do not seem to matter. several conclusions emerge from these results. first and foremost, the determinants of, and the relationship between, attitude and performance differ between the two principles courses. students master the concepts of and form attitudes toward economics differently in macroeconomics than they do in micro. second, a student’s attitude towards economics at the end of the course does not appear to be affected by that student’s actual grade; and the final grade appears to be affected by final attitude in micro, but not in macro. the importance of attitude in determining performance in microeconomics may be due in part to the technical requirements of the course, with a better attitude providing the incentive to invest more time and energy in learning the material. third, the most important determinant of a student’s attitude toward economics at the end of the course is the student’s beginning attitude. fourth, the most significant predictors of performance are cumulative gpa, age, and attendance. and students’ performance on the verbal portion of the act or sat is a predictor of their performance in macro, but neither the verbal or quantitative scores appear to predict performance in micro. these conclusions taken together suggest that both attitude and performance are largely determined by student characteristics that are beyond the control of university administrators or instructors. indeed, the effects of university inputs are mixed. class size has no statistically significant effect on attitude. its impact on performance is measurable only in microeconomics and again, because the class sizes discussed here could both be construed as “large,” the results from the micro course may not be as paradoxical as they might appear. the instructor effect on grades in micro is small and could easily be due to a minor difference in grading standards. gender the results indicate that gender affects performance in macro directly, but in micro only indirectly through its effect on attitude. because their attitude is more favorable in micro, males 35 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 may be more willing and interested in investing the necessary time to master the more abstract concepts and required technical skills. experiments we find that experiments enhance students’ attitudes in microeconomics, and contribute directly to performance in macro. in micro, the effect of experiments on performance is indirect, via their positive influence on attitude, which in turn affects performance.17 while the reasons for this are unclear, one story that is consistent with these results relies on the distinctions discussed earlier. microeconomic concepts tend to be less familiar and initially intuitive, but arguably more technical than macroeconomic concepts. thus while experiments help students directly relate to and understand the macro concepts, they might not help with the technical and analytical skills needed in micro. rather, micro experiments may make the concepts more familiar, the students more comfortable, the problems more interesting, and/or the models more applicable. this likely makes learning economics more attractive and reduces apprehension, causing students to be more confident and willing to do the work necessary to learn the material. in short, the experiments may help provide students with the motivation to make the necessary investment in time and/or effort to learn the material in the micro course. retention table 4 presents results from the retention equation. in column 1, the strongest predictors of retention are the student’s overall academic ability as measured by the verbal portion of the college admission test (at the 0.01 critical level) and performance in introductory economics (at the 0.10 level). the only other variable that is statistically significant (at the 0.10 level) is the number of treatment sections.18 the time elapsed since the last introductory class also appears to have no effect on retention. when the number of treatment sections is interacted with recent, however, a more interesting picture emerges. in column 2, classroom experiments again have a direct positive impact on retention. we also see that the statistically insignificant effect of recent in column 1 masks different rates of depreciation between the treatment and control groups. we estimate a depreciation rate of 4.2 percentage points per year in the retention score for students who had no exposure to experiments in their introductory courses. for students with at least one course using 17 the effect is also numerically smaller. multiplying the relevant coefficients, for micro we get 𝜕𝑔𝑝 𝜕𝑡𝑟𝑒𝑎𝑡𝑚𝑒𝑛𝑡 = 𝜕𝑔𝑝 𝜕𝑒𝑛𝑑𝑎𝑡𝑡 × 𝜕𝑒𝑛𝑑𝑎𝑡𝑡 𝜕𝑡𝑟𝑒𝑎𝑡𝑚𝑒𝑛𝑡 = 0.292 × 0.152 = 0.044, compared with the direct effect of 0.178 for macro. 18 we include performance in introductory economics as a predictor of retention, but we do not use attitude in this equation. the main reasons for omitting attitude are that (a) it is statistically insignificant when included; (b) its inclusion reduces the sample size for this equation from 268 to 204 due to a low response rate; and (c) its omission does not affect the remaining coefficients within that smaller subsample, but its inclusion allows more precise estimation of the remaining coefficients due to the larger sample size. 36 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 table 4 dependent variable: retention score (1) (2) (3) (4) variables score_ret score_ret score_ret score_ret gp_mean 0.030* 0.030* 0.037 0.050 (0.016) (0.015) (0.037) (0.035) cumgpa 0.006 0.007 -0.008 -0.005 (0.026) (0.026) (0.056) (0.053) zactsat_math 0.003 0.001 0.015 0.001 (0.012) (0.012) (0.024) (0.024) zactsat_verbal 0.049*** 0.050*** 0.039* 0.040* (0.011) (0.011) (0.023) (0.021) male 0.014 0.018 0.020 0.046 (0.017) (0.017) (0.036) (0.035) minority 0.027 0.029 0.069 0.101 (0.033) (0.033) (0.065) (0.063) age 0.010 0.009 -0.008 -0.018 (0.008) (0.008) (0.020) (0.019) dlsv 0.026 0.031 (0.060) (0.060) dlsa 0.007 0.012 0.035 0.043 (0.027) (0.027) (0.071) (0.067) dlsr 0.003 0.002 0.086 0.126 (0.034) (0.034) (0.093) (0.089) dlsk 0.027 0.028 0.033 0.035 (0.020) (0.020) (0.044) (0.041) sophomore 0.049 0.050* 0.170 0.193* (0.030) (0.030) (0.108) (0.102) junior 0.057* 0.063* 0.140 0.181* (0.032) (0.032) (0.109) (0.103) senior -0.023 -0.016 0.000 0.000 (0.081) (0.081) (0.000) (0.000) nlargeclasses 0.024 0.021 0.071* 0.074* (0.023) (0.023) (0.042) (0.039) ntreatments 0.035* 0.075*** 0.063 0.240*** (0.018) (0.027) (0.061) (0.087) recent 0.057 0.300** 0.177* 0.659*** (0.061) (0.136) (0.091) (0.196) ntreatments  recent -0.290** -0.524*** (0.145) (0.191) microfirst 0.034 0.047 (0.034) (0.033) constant 0.073 0.051 0.188 0.106 (0.180) (0.179) (0.456) (0.430) observations 268 268 68 68 r-squared 0.272 0.283 0.345 0.430 note: see notes for table 2. 37 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 experiments, the annual rate of decline is 0.3 percentage points.19 this difference is both large and statistically significant, and is in addition to the indirect effect that experiments have on retention through their positive impact on performance in the introductory courses.20 a natural question is whether retention might be affected by the order in which the principles classes are taken. to examine this question we repeat this analysis using the subset of 68 students for which we have information on the quarters in which they took micro and macro. these are students who were in either a treatment or control section of both micro and macro that were part of this study. the variable microfirst indicates that the date of the micro course was earlier, which is the case for 43 of these 68 students. results are reported in columns 3 and 4 of table 4. as a likely consequence of the small sample size, all coefficients in column 3 other than the verbal score on the college entrance exam are statistically insignificant at the 10% level. however, when the recent variable is interacted with the number of treatment sections taken in column 4, the coefficients on ntreatments, recent, and their interaction are all statistically significant as in column 2. given the larger sample size in column 2, however, we do not calculate depreciation rates for this small subsample. conclusion the possibility of differing educational production functions for the introductory micro and macroeconomics courses sheds light on contradictory findings in the literature regarding the role of attitude and other factors in determining performance or retention in economics. we find that the determinants of, and the relationship between, attitude and performance differ across the two courses. students master the concepts of and form attitudes toward economics differently in micro and macro. while it is not surprising that the economic education production functions differ across the introductory courses, this issue has not explicitly been explored previously. our results suggest that the course itself may be an important determinant of the form of the production function, and the fact that previous studies use data from various economics courses at various levels may in part explain the lack of consistent findings. one of the ways in which the production processes differ is in the impact of classroom experiments. they positively affect attitudes in micro but not in macro, and they affect performance through different pathways, suggesting that the learning challenges are different 19 to illustrate the calculation, the coefficient on recent is score/recent = 0.300. but recent = months –1 , where months is the number of months since the most recent introductory economics course. so: score / months = (score / recent) x ((recent) / (months)) = 0.300  (–months –2 ) = –0.300/months 2 . this is the marginal effect of months for the control group. evaluated at the mean of months for that group (9.27), the monthly percentage depreciation rate is: score / months = –0.300/(9.27) 2 = –0.296/86.0133 = –0.00348. on an annual basis this is –0.00348 × 12 = –0.04181, or –4.18 percentage points. for the treatment group, the coefficient is 0.300 – 0.290 = 0.010 and the mean of months is 6.18, giving an annual depreciation rate of –0.30 percent. 20 a possible concern is that there may be bias due to self-selection into the retention sample resulting from the effects of classroom experiments in the prerequisite principles courses. this concern is mitigated by the fact that virtually all—260 of the 268 students in the finance course—had declared as business administration majors prior to enrolling in principles. thus the decision to include the finance course in their plan of study had effectively been made prior to enrollment in micro and/or macro for all but eight students in the sample. because the variable indicating a student’s major was recorded in the principles course and not in the finance course, it is possible that some of these eight students might have changed their majors to business following their experience in principles. however, results are virtually identical when these eight students are dropped from the sample. details are available on request. 38 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 and/or that experiments serve different purposes in the two courses. experiments directly impact performance in macro, while they impact performance indirectly through attitude in micro. while students “feel” better about macro when experiments are used, it is not the better attitude that improves their performance. better performance is a direct effect of the participation itself. also of interest is that the impact of gender differs across the two courses in a similar manner, and perhaps for some of the same reasons. gender has a direct impact on performance in macroeconomics, but only an indirect impact through attitude in micro. activities that improve attitudes toward economics in the introductory micro course are worth exploring, as are activities that promote hands-on, personalized interaction with the concepts in introductory macro. additionally, we find that retention depends primarily on past performance and native ability, but is also positively affected by the use of experiments. classroom experiments reduce the “depreciation rate” of economic knowledge. this alone may warrant their serious consideration for inclusion in both of the introductory courses. given the differing economic education production functions for the two principles courses, further discussion is needed on how the various types of introductory courses should be organized and taught. our findings indicate that it is not appropriate for instructors to view teaching methodologies for all principles courses as interchangeable. they suggest that instructors in introductory micro likely need to move beyond straightforward explanations of the concepts and traditional presentations of the material. micro instructors may need to exert additional effort to make initially unfamiliar and abstract concepts more intuitive and the models more applicable. it is important that these instructors understand the role that attitudes play in the learning process, the challenges students face in grasping concepts that may be counterintuitive initially (which might be related to attitude), and what might be needed for meaningful retention of ideas. while we often think of experiments as a way of illustrating ideas and giving hands-on experience with economic concepts, their most important contribution in microeconomics may be engaging students in a different way — changing the way they think or feel about the field itself, rather than just the concepts. such engagement appears to be critically important in micro, as students may start the course with poorer attitudes towards the subject and/or more apprehension. and engagement does not mean simply giving students more time to understand a graph or equation, nor necessarily trying to make the material more accessible by using fewer graphs and charts. it means helping students believe they can understand the material and helping them want to understand the material. in this way, instructors can help provide students with the motivation to make the 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o’toole. 1982. “the influence of learning and teaching styles on student attitudes and achievement in the introductory economics course: a case study.” the journal of economic education, 13(1), winter, 33-39. wu, d-m. 1973. “alternative tests of independence between stochastic regressors and disturbances.” econometrica, 41(4), july, 733-750. yandell, d. 1999. “effects of integration and classroom experiments on student learning and satisfaction.” working paper, university of san diego. 41 | j o u r n a l f o r e c o n o m i c e d u c a t o r s , 1 8 ( 2 ) , 2 0 1 8 ziegert, a.l. 2000. “the role of personality temperament and student learning in principles of economics: further evidence.” the journal of economic education, 31(4), autumn, 307322. 43 |journal for economic educators, 23(1), 2023 teaching price and income elasticities of demand using excel and federal reserve economic data tennecia dacass1 and elif b. dilden2 abstract this paper describes an assignment designed for use in an undergraduate principles of economics course. the assignment is a pedagogical tool that encourages collaborative problem-solving and the use of recent up-to-date data from the federal reserve economics data (fred) to compute and analyze the price and income elasticities of demand. this tool is an efficient way for undergraduate economics students to understand the price and income elasticity of demand, gain valuable experience using public datasets, and develop their computer skills without taking classes outside of the economics major. keywords: price elasticity of demand, fred, excel, active learning, collaborative problemsolving jel classification: a20, a22, c82, d12 introduction a discussion of elasticity is often introduced as a corollary to supply and demand analysis in the typical principles of economics class. in general, elasticity is a measure of the responsiveness of buyers and sellers to changes in price or income (coppock and mateer, 2014). price elasticity is an important concept in economics, and the knowledge of elasticity has applications in both consumer and firm theory (wei, 2013). for example, there is a direct relationship between price elasticity and consumer expenditure and total revenue. in addition, when examining the association between the price level and output using the aggregate demand/ aggregate supply model, or the price level and money supply using the quantity of theory money, elasticity stimulates the discussion of the short versus the long run. because of its applications, the concept is arguably one of the most essential definitions students learn in introductory economics courses. students are often introduced to price elasticity of demand, cross-price elasticity, income elasticity, and supply elasticity. despite its applications, instructors face several pedagogical challenges when introducing this topic, and principles textbooks are often criticized for confusing students (andrews and benzing, 2010). instructors often struggle with student engagement and innovation to enhance student learning and assess the quality of understanding (lodge et al., 2018). the use of artificial data by textbooks to help students compute the elasticity numbers without much success in promoting intuition and the application of elasticity has been a long-standing critique. as a result, 1 assistant professor of economics, department of economics, central washington university, 400 e. university way, ellensburg, wa 98926. 2 assistant professor of economics, college of business, influence, and information analysis, rockhurst university, 1100 rockhurst road, kansas city, mo 64110. we thank the editor, an anonymous referee, dr. kirsten potter, andré murray, and dr. terry wilson for their helpful comments. 44 |journal for economic educators, 23(1), 2023 elasticity is one of the more challenging concepts in economics courses as students struggle to grasp its real-life applications and may become less engaged (slater, 2018). this paper addresses the challenge of confusing and often unrelatable explanations of demand elasticity that use artificial data by instead employing a novel and easy to apply pedagogical tool: the “pre/post-in-class activity.” this tool focuses on improving students’ comprehension of price and income elasticity through reflection and collaborative learning with real-world data. by completing this activity, students form hypotheses regarding the economic theory of demand elasticity and check these predictions using recent, more relatable data. we recommend that students work in groups because collaboration enhances academic achievement, student attitudes, and student retention (prince, 2004). the activity can be administered in a principles of economics course to reinforce students’ understanding of demand elasticity. the assignment is designed to take one to two hours of instructional time and may be best suited for labs where students work on their laptops, tablets, or computers. specifically, the lesson requires students to compare their knowledge of concepts directly after the learning activity, which involves collecting data and analyzing the price and income elasticities of demand for popular consumer goods using federal reserve economic data (fred) from january 2000 to december 2021. the fred was chosen because it is publicly available, widely used, and can be easily incorporated into the classroom. fred was created and is maintained by the federal reserve bank of st. louis research department. it is an online platform that provides data from several international and domestic sources, such as the bureau of labor statistics (bls), census, and bureau of economic analysis (bea). additionally, it allows users to display data in tables or charts, and one can easily download data into spreadsheets. the fred includes data on nearly 818,000 domestic and international variables over time.3 we focus on data from the last two decades in this assignment because this period includes a mix of economic expansions and recessions that fostered significant changes in consumer demand. incorporating recent data in class activities is also supported by research showing that students are much more excited and can relate more quickly to current examples (ghosh and rahman, 2011; mendez-carbajo and asarta, 2017). using recent data also allows students to recall their unique demand response to the price and income changes discussed in the assignment. this connection with the data may lead to increased student engagement and discussion. hence, by using this tool, the instructor can overcome some of the common challenges associated with student engagement in the classroom. the assignment requires students to analyze the data using microsoft excel (hereafter, excel). consequently, it provides an opportunity for students to develop practical excel skills that can be used in other courses as well as in their future careers. one advantage of using excel in an introductory class is that minimal training is required. specifically, there is no complex computer programming language to learn when using excel. additionally, most college-level students have some knowledge of essential excel functions, so it should not take a lot of instructional time before students can apply the appropriate functions to calculate the desired concepts, i.e., price and income elasticities of demand. technology is an integral part of business and continues to evolve. therefore, it is essential to equip students with the necessary skills to thrive in this changing technological environment. formby et al. (2017) report that advanced analytical skills in excel are associated with increased marketability and compensation for college graduates. because graduates, particularly business 3for more information, please visit https://fredhelp.stlouisfed.org/fred/about/about-fred/what-is-fred/. https://fredhelp.stlouisfed.org/fred/about/about-fred/what-is-fred/ 45 |journal for economic educators, 23(1), 2023 students, frequently use excel in the workplace, students need to be exposed to the array of functions and capabilities in excel. the assignment outlined in the current paper provides an opportunity for students to gain some of these skills. in contrast to the traditional lecture, the proposed assignment uses collaborative learning where students work in small groups toward achieving a common goal. allowing student interaction is important; as neuroscience research shows, we do not pay as much attention to things we find boring (barreto, 2015). for example, in a class setting with a dominant speaker, students tend to listen and take notes instead of focusing entirely on that speaker. listening, doing something with a computer, i.e., visualizing the data, getting the summary statistics, or using formulas, is one step better (barreto, 2015; bonwell, 1991). research also outlines that using active learning techniques promotes mastery of the content and is superior to lectures (bonwell, 1991). as instructors, we can achieve the goal of helping students to think like economists only if they get a better understanding of the economic concepts so that they use them in problem-solving and analysis (salemi, 2002). collaborative learning supported by the current lesson is superior to the traditional lecture. our proposed assignment contributes to the literature on teaching economics using active learning techniques and public datasets by integrating data analysis. mendez-carbajo and asarta (2017), mendez-carbajo, taylor, and bayles (2017), and suiter and mendez-carbajo (2018), wolfe (2020) use fred to teach specific topics of price elasticity of demand, taylor rule, forecasting, and introductory level macroeconomics concepts, respectively. in addition, excel is adopted by briand and hill (2013) to teach monte carlo simulations in econometrics and by bongers et al. (2020) for the general equilibrium model. while sharing a similar pedagogical approach to this strand of teaching economics in higher education, our proposed pedagogical tool differs in the following ways: (i) integrates data analysis and group-based learning using “pre/postin-class activity” assessments; (ii) utilizes current data, which allows students to discuss the change in price and income elasticities during two economic downturns; and (iii) encourages desired analytical skills such as creating and describing of line graphs and teaches students how to shade recessionary periods using excel. the great recession and covid-19 pandemic knowledge of elasticity allows us to discuss “by how much” quantity demand and quantity supply change in response to an exogenous shock to price or income. several papers (for example, susskind and vines, 2020, lusk and mcfadden, 2021, and saksena et al., 2018) have discussed the effects of recent recessions (the great recession and the covid-19 recession) on consumer demand. we focus on the size of this decline, its impact on prices and income, and whether their effects align with a priori expectations and economic theory. this analysis is expected to provide a student with a methodological way to unpack real-world observations, such as why the demand for services declined by more than the fall in demand for groceries. using data from 2000 to 2021 to calculate price and income elasticities of demand, we can highlight the impact of two economic crises students may have experienced in their lifetime: the great recession and the covid-19 pandemic. the great recession began in december 2007 and ended in june 2009; it was the most prolonged economic downturn in many countriesincluding the united states, since the great depression (1929-1939). the economic crisis led to increased home mortgage foreclosures worldwide and caused millions of people to lose their savings, jobs, and homes. ten years after the great recession, in late 2019, a pneumonia disease appeared in wuhan, china, then spread globally, resulting in the pandemic known as covid-19 (zhu et al., 46 |journal for economic educators, 23(1), 2023 2020). with the recommendation of the world health organization (who), on march 13, 2020, the united states declared a nationwide emergency. following march 15, states began implementing shutdowns to prevent the spread of covid-19 (cdc, 2022). the great recession’s impacts on consumer demand operated almost exclusively through changes in income and unemployment. in contrast, the covid-19 implications for consumer spending include these channels and more, such as supply shocks (for example, regulations affected the supply of goods and services, and there were issues such as the temporary slowdown in meat processing due to worker illnesses) which resulted in significant changes to market price. additionally, government support sanctioned by the coronavirus aid, relief, and economic security (cares) act of 2020 caused aggregate personal income to increase (bea, 2022).4 consequently, the covid-19 pandemic-induced recession has different causes and features compared to the great recession. nonetheless, they share the common part of changes in income, rising unemployment, and lower consumer demand. so, it is instructive to compare consumer demand response to price and income changes during these recent economic downturns. almost all principles of economics textbooks include a section on the factors/determinants that affect the price elasticity of demand. for example, price inelastic products are typically described as necessities with a few substitutes, and expenditure on these products often absorbs a small fraction of income. conversely, elastic products tend to be luxuries, with many substitutes that cover a large proportion of income (acemoglu et al., 2021; hubbard and o’brien, 2021; bade and parkin, 2021). to cement the understanding of the price elasticity of demand, students will plot the elasticity numbers they calculate; hence they can observe the impact of downturns in the economy on certain goods and services. for students to better understand the price and income elasticity of demand, we carefully choose goods and services where there was a significant change in their consumption preferences and which are believed to be relatable. data from the bureau of labor statistics show that the largest changes in consumer spending during the pandemic were food away from home (fafh), alcoholic beverages, apparel, and services (bls, 2022). so, we analyze the price and income elasticity of demand for fafh, alcoholic beverages, and electricity. a natural extension to the current assignment may include a discussion of price and income elasticities for garments and air transportation. in-class activity assignment this section discusses the in-class assignment in detail. the activity is designed to take one to two hours of instructional time. student learning outcomes at the end of this assignment, students should be able to: 1. extract price, quantity, and income data from fred 2. calculate elasticity using excel 3. create graphs in excel 4 the 2020 recession may be described as unusual because aggressive government crisis relief payments and increases in unemployment benefits largely offset declines in aggregate income. the recession was very brief, lasting only two months and ending in april 2020. in the current paper, we use data from 2020 to 2021 to capture the effect of the covid-19 pandemic on consumer demand. however, improvements in the economy post-april 2020 may offset the recessionary impact. this is a limitation of the annual data used in the current exercise. 47 |journal for economic educators, 23(1), 2023 4. analyze data the activity begins with a presentation to review the main determinants of the price and income elasticity of demand. then in pairs or small groups (depending on the class size), have students consider the following products: food away from home and alcoholic beverages. specifically, they discuss how the demand for these products might have changed between 2000 and 2021. the faculty member should distinguish the effects of the great recession and the covid-19 pandemic on demand for these goods. to facilitate this discussion, the instructor can utilize the pre-activity quiz outlined in appendix a. after reviewing concepts and completing the pre-activity quiz, students extract the price, income, and quantity data from fred to calculate elasticities using excel. the instructor should emphasize the need for price, income, and quantity data for elasticity calculation. the instructor is also encouraged to explain how the consumer price index (cpi), real disposable personal income per capita, and real personal consumption expenditure (pce) quantity indexes could be used as proxies for price, income, and quantities in the elasticity formula. the instructor can use the following steps to demonstrate extracting data from fred. how to extract data from fred 1. go to https://fred.stlouisfed.org. it will look something like this: figure 1. the main page of the fred website. 2. click on the category tab. it will look something like this: https://fred.stlouisfed.org/ 48 |journal for economic educators, 23(1), 2023 figure 2. data categories under the fred. the numbers in parentheses indicate how many data series are in each category. for example, the money, banking, & finance category contains more than 9600 data series. 3. from the price category, select consumer price indexes (cpi and pce). it will look something like this: 49 |journal for economic educators, 23(1), 2023 figure 3. consumer price indexes (cpi and pce) on the fred website. to calculate the price and income elasticity of demand for food away from home (or alcoholic beverages), select the food and beverage sub-category and the series “consumer price index for all urban consumer: food away from home in u.s. city average” (or “consumer price index for all urban consumers: alcoholic beverages in u.s. city average”). we used the seasonally adjusted data series. click on it, and you will get a graph: 50 |journal for economic educators, 23(1), 2023 figure 4. line graph of the consumer price index for all urban consumers: food away from home in the u.s. city average observations from figure 4: • above the graph, the ticker is displayed. in this case, it is cusr0000sefv. this is a “nickname” for this data series. • above the graph, the last available data point is shown under observation. we are viewing monthly data displayed under frequency. we can also adjust the timeframe highlighted in the graph • below the graph, in the middle, the student can see the data source (u.s. bureau of labor statistics). • notice the gray bars. they indicate periods of economic recessions; the last gray bar highlights the covid-19-induced economic downturn in 2020. • there are several helpful features in the edit graph tab: o under edit line, the student can edit the data series. notice that students can choose the data frequency, such as monthly, quarterly, annually, etc. notice that students can change the units. o under add line, the student can add a data series to the graph, and we will use this option in the following steps. o under format, the student can edit the graph by changing the font, colors, etc. • the download tab allows the student to export the data in various formats. students can also export the data in csv or excel format. 51 |journal for economic educators, 23(1), 2023 in the fred search for “consumer price index for all urban consumers: food away from home in u.s. city average,” seasonally adjusted data. 4. click on the edit graph tab in the top right corner. 5. under frequency, select “annual.” 6. add line tab (top middle button), type in “real personal consumption expenditures: services: purchased meals and beverages (chain-type quantity index) or type dpmbra3a086nbea” and click on add data series below it. 7. similarly, under the add line tab, click “real disposable personal income: per capita” or type “a229rx0” and click on add data series below it. 8. adjust the date range as desired. we use annual averages for january 2000 to december 2021 (i.e., 2000-01-01 to 2021-12-01). 9. click the download tab to export data. a sample of the data in excel format is provided in appendix b. repeat similar steps for alcoholic beverages and electricity. how to calculate and analyze price and income elasticity in excel once the data is extracted, students start calculating the elasticities associated with fafh and alcoholic beverages using the necessary excel formula (ideally from the formula discussed in earlier lectures). like méndez-carbajo and asarta (2017), we use the following equations to calculate the price and income elasticities of demand: 𝑃𝑟𝑖𝑐𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑚𝑎𝑛𝑑 = 𝑀𝑖𝑑𝑝𝑜𝑖𝑛𝑡 𝑄𝐷 𝑀𝑖𝑑𝑝𝑜𝑖𝑛𝑡 𝑃 = 𝑄𝐷𝑡 −𝑄𝐷𝑡−1 𝑄𝐷𝑡 +𝑄𝐷𝑡−1 2 𝑃𝑡−𝑃𝑡−1 𝑃𝑡+𝑃𝑡−1 2 (1) where 𝑄 represents quantity demand, and 𝑃 represents price. the variable 𝑡 accounts for time such that 𝑄𝐷𝑡 measures quantity demanded during a particular year 𝑡, and 𝑄𝐷𝑡−1 captures quantity demanded during the previous year, 𝑡 − 1. similarly, income elasticity may be calculated using the following formula: 𝐼𝑛𝑐𝑜𝑚𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑚𝑎𝑛𝑑 = 𝑀𝑖𝑑𝑝𝑜𝑖𝑛𝑡 𝑄𝐷 𝑀𝑖𝑑𝑝𝑜𝑖𝑛𝑡 𝐼 = 𝑄𝐷𝑡−𝑄𝐷𝑡−1 𝑄𝐷𝑡+𝑄𝐷𝑡−1 2 𝐼𝑡−𝐼𝑡−1 𝐼𝑡+𝐼𝑡−1 2 (2) where 𝑄 represents quantity demand, and 𝐼 represents income. tables 1 and 2 outline elasticity values for the selected years. in the next step, students plot line graphs and illustrate the year-over-year elasticity numbers. finally, within their assigned group, students discuss their findings. to highlight the recessions’ impact on the price and income elasticities of demand, students plot the elasticity numbers with recessionary periods shaded (see figures 5 and 6). to create these figures, students create a new variable called “recessions” in their current excel file. under the recessions column, for the great recession (2007-2009) and the covid-19 pandemic (20202021), they will put numbers higher than the maximum elasticity value calculated; for example, students may use 10. the ‘max’ excel function can be used to identify the largest value in a series. 52 |journal for economic educators, 23(1), 2023 next, students will select the variables date, price elasticity of demand for fafh and alcoholic beverages, and recessions. they will click “insert” tab and select line graph. later, they will right-click the recessions series and change the chart format to the “area.” in the final step, they will change the filling color. this way, when students plot a line graph, they will be able to see the impact of recessions clearly on consumer behavior. after creating graphs, students will form groups, discuss their expectations, compare calculations, and examine whether their expectations were realized. to facilitate this discussion, the instructor can administer the post-activity quiz in appendix a as students work in groups. suggestions for additional discussion questions the instructor can extend the assignment by assigning the following questions for a group discussion: 1. starting from january 2000, examine the price elasticity numbers and determine whether the goods you analyzed are elastic or inelastic over time. 2. how does the data analysis inform or change your understanding of elasticity? 3. what happens to the income elasticity numbers during recessions? the u.s. economy experienced two recessions during the sample period. are the income elasticity numbers following a similar pattern? 4. consider the beginning of covid-19especially during march and april 2020, when stay-at-home orders were in effectdiscuss some of the changes made by the typical consumer. how can we use the elasticity numbers to explain these changes? summary of findings table 1 shows the price elasticity of demand for fafh and alcoholic beverages in absolute value. demand for fafh is inelastic between 2000 and 2006. this suggests that relatively large increases in the price of fafh result in relatively small decreases in quantity demanded quantity demand. during the great recession (2007-2009), consumers became more sensitive to price changes, and demand switched from price inelastic to elastic. as we expected, negative macroeconomic shocks decrease consumer confidence, partly explaining consumers’ responsiveness to price changes. specifically, the results outlined in table 1 suggest that a 1% increase in the price of fafh decreased the quantity demanded by 1.5% during the great recession. 53 |journal for economic educators, 23(1), 2023 table 1. price elasticity of demand for fafh, alcoholic beverages, and electricity (in absolute value). between 20002006 great recession (between 20072009) between 20102019 covid-19 pandemic (between 20202021) fafh 0.8651 1.5400 1.0291 4.2390 alcoholic bev. 1.0021 1.5292 1.8582 2.8802 electricity 0.3021 0.7724 0.0833 0.3763 as the macroeconomy improved between 2010 and 2019, quantity demanded became less responsive to price changes (the price elasticity value falls from 1.5% to 1.0%). however, demand for fafh remains price elastic. this observation may reflect a change in preferences associated with an increase in consumers’ ability to substitute food prepared at home with fafh. similarly, during the covid-19 pandemic, due to the lockdowns and covid restrictions, consumer demand for fafh became more responsive to price changes as the elasticity values rose to 4.2%. on the other hand, demand for alcoholic beverages is always price elastic, which suggests that relatively small increases in the price of alcoholic beverages result in relatively large decreases in the quantity demanded. as expected, the magnitude of the price elasticity values increases during economic recessions. table 2. income elasticity of demand for fafh, alcoholic beverages, and electricity. between 20002006 great recession (between 20072009) between 20102019 covid-19 pandemic (between 20202021) fafh 1.3290 7.7325 1.5145 9.1575 alcoholic bev. 1.2621 6.5303 1.4883 2.9407 electricity 0.7491 4.7525 0.0540 0.7565 we present the income elasticity of demand for fafh, alcoholic beverages, and electricity in table 2. a positive income elasticity value indicates a normal good, while a negative value indicates an inferior product. based on the results presented in table 3, all items are normal goods for the average u.s. consumer. however, fafh and alcoholic beverages are luxury items, while electricity is a necessity. 54 |journal for economic educators, 23(1), 2023 during the great recession, when average disposable income declined, demand for all three items became more responsive to income shocks (i.e., the income elasticity values increased in magnitude) as consumers reduced demand. between 2020 and 2021, disposable income increased by 2.1%. as a result, the positive income elasticity values reflect an increase in demand for these goods as income increases. higher disposable income during the pandemic years is often not associated with economic downturns but is attributed to the brief recession in 2020 and the speedy economic recovery following aggressive fiscal and monetary policies. it is important to note that for alcoholic beverages and electricity, the income elasticity values during the covid19 pandemic were smaller than the values recorded during the great recession when disposable income decreased.5 figure 5. price elasticity of demand for fafh and alcoholic beverages6 5 the larger income elasticity value associated with fafh may be associated with the reopening of restaurants in 2021, which bolstered demand. 6 the estimated price elasticity of demand values for 2010 and 2012 were higher than the sample average because of high demand. as a result, we replace these estimates with the previous year’s value. 55 |journal for economic educators, 23(1), 2023 figure 6. income elasticity of demand for fafh and alcoholic beverages pre/post-in-class exercise to enhance learning and provide a fruitful discussion, the instructor provides each student with two copies of a “pre/post-in-class activity” sheet at the beginning of the class.7 administering this quiz before and after the main assignment allows students to make predictions based on their elasticity knowledge from previous lectures and evaluate their understanding of the concept directly after completing the learning activity or assignment. this instructional method has received support from researchers such as fanta and boubacar (2016). after the individual data preparation and download, students discuss what they observe in small groups and compare their responses using the “pre/post-in-class activity” sheet. we encourage group discussions because team learning may help students tackle more complex problems, share diverse perspectives, and develop greater communication skills (caruso and woolley, 2008; mannix and neale, 2005). in addition, group work creates more opportunities for critical thinking and can promote student learning and achievement. since groups may approach and solve problems in interesting ways, this could be a refreshing approach for instructors. conclusion this paper presents an assignment for undergraduate principles of economics students. in the assignment, students work individually on the data preparation, elasticity calculations, and graphs; later, they form groups and discuss their observations. the assignment is designed to take one to two hours of instructional time so that it can be added to most undergraduate economics classes. experience with spreadsheets and exposure to the array of functions in excel are becoming necessary skills for most careers that economics or business graduates would pursue. the assignment outlined in this paper provides an opportunity for students to gain additional skills in excel, increase their familiarity with accessing public datasets, and apply formulas to understand real-life examples and interpret data. 7 appendix a shows the pre/post-in-class activity in detail. 56 |journal for economic educators, 23(1), 2023 references acemoglu, d., laibson, d. and j.a. list. 2021. microeconomics. 3rd edition, pearson. andrews, t., & benzing, c. 2010. “simplifying the price elasticity of demand.” journal for economic educators, 10(1):1-13. bade, r. and parkin, m. 2020. foundations of microeconomics. 9th edition, pearson. barreto, h. 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product increase decrease no change reason/rationale fafh alcoholic bev electricity 60 |journal for economic educators, 23(1), 2023 appendix b in this section, we provide an example of the data structure extracted from fred. in this example, we focus on food away from home. 35 |journal for economic educators, 21(1), 2021 attendance still matters in a world of digital learning: examining students in business statistics timothy j. haase1 abstract in this study i evaluate the importance of physically attending lectures in a business statistics course when an online digital learning companion is used. a sample of five sections of business statistics that used the exact same text, lecture format, and algorithmic assignments are used. overall, i find that students who attend all lectures perform significantly better on exams when compared to students who have been absent. on average, students with multiple absences perform significantly worse on the online component of the course, and students who perform better on the online component tend to score significantly higher on exams. key words: attendance, performance, statistics, computer jel classification: a22 introduction college attendance and its influence on performance is not a new area of academic research. it has been nearly 100 years since turner (1927) first explored this topic and found a negative relationship between class absences and gpa. since then, there have been incredible technological changes that have created alternate methods for delivering courses. an article by read (2005) highlights the use of audio recordings called podcasting at american, purdue, drexel, and duke university. a similar article by young (2008) tracks the use of video recorded lectures at the university of minnesota-twin cities. both uses of technology allow students to absorb their class lectures on their own time and on their own terms. on the other hand, others believe that inperson lectures are more effective, commonly in reference to quantitative courses. conners et. al. (1998) and perkins and saris (2001) both make the case for delivering a statistics curriculum in the classroom. they cite reasons such as active learning in the classroom helping retention and mitigating anxiety, cooperative learning is available when the student is with their classmates, and the feedback from the professor being helpful. cohn et. al. (1995) show that the individual act of taking notes during an economics lecture benefits the student more than just viewing and listening. the purpose of this paper is to investigate the impact attendance has on student performance in business statistics when there is a technology component in addition to traditional lecture. generation z is becoming the new population of college student and they are very reliant on technology. how well do traditional college lectures and technology mix? velleman and moore (1996) and basturk (2005), both motivating pieces, discuss the pros and cons of technology use in statistics courses, concluding that technology is a better supplement than a replacement. there are numerous ways in which the professor outperforms technology systems and i intend to see how that class time translates to student performance. in this paper i incorporate data from business 1 associate professor of economics, anisfield school of business, ramapo college of new jersey, 505 ramapo valley road, mahwah, nj 07430 36 |journal for economic educators, 21(1), 2021 statistics courses during three semesters from 2018 to 2019. the classes were taught traditionally with face-to-face lectures and incorporated an online learning component comprised of assignments, tutorials, study materials, and a statistical spreadsheet application. in this study i estimate the value attendance has on online assignment performance and on in-class exams while controlling for the online learning component. a brief literature review follows, which outlines the background motivation. i present the data next, followed by a discussion of the methodology and results. i conclude with a summary of the results, implications for teaching, and extensions to consider. background there is a large collection of literature that focuses on the importance of attendance in varying fields. anikeef (1954) estimated that 83% of class grade variation in a business school is explained through absences and other factors. day (1994) determined that absences were more important than gpa in predicting test scores in sociology classes. gump (2005) found a strong negative relationship between absences and final grades in an introduction to japanese culture general education course with no difference between the student majors that were represented. newman-ford et. al. (2008) found a significant and strong relationship between attendance and assessment outcomes for four different degree programs at the university of glamorgan that utilized electronic attendance monitoring. a more comprehensive meta-analysis was done by credé et. al. (2010) determining that class attendance is the best-known predictor of academic achievement. psychology is one of the fields of study where research seems to concentrate. gunn (1993), van blerkom (1992, 1996), and clump et. al. (2003) all find a negative relationship between absences and student performance for different undergraduate psychology courses. buckalew et. al. (1986) interestingly found that being absent from the first class meeting had a negative impact on performance in five different psychology courses. they also noted that seating arrangement mattered – students seated closer to the front of the classroom performed better. launius (1997) also finds that higher attendance leads to higher exam scores as well as performance in outside assignments. different fields of science have also been investigated. moore (2006) determined that attendance is a strong correlate of success for first year students in biology. moore et. al. (2003) found very high correlations between attendance and performance in freshmen level introductory science. they further note that attendance increased and so did grades when the correlation between attendance and grade was presented to the class. the authors determined that weekly reminders were effective to freshmen, especially when a class has no mandatory attendance policy. jenne (1973) found a strong relationship between attendance and learning in health science. the author referred to attendance as “distributed practice.” however, murphy and stewart (2015) found attendance in physics courses had no real effect when lectures were replaced with recordings. they considered face-to-face lectures and recorded lectures. those that chose recordings over attending lectures were lower achievers prior to the choice. the substitution of lectures with the virtual medium benefited the lower achieving student, but not enough to return them to the class average. economics is another area with a sizeable collection of studies. brocato (1989), park and kerr (1990), durden and ellis (1995), cohn et. al. (1995), devadoss and foltz (1996), maloney and lally (1998), marburger (2001), and chen and lin (2008) all produced variations of absenteeism negatively affecting student performance. romer (1993) used data from intermediate 37 |journal for economic educators, 21(1), 2021 macroeconomics to test the link between attendance and exam scores. he also incorporated controls for motivation such as gpa and fraction of assignments completed. he determined that attendance has a significant influence on exam scores and that the controls for student motivation (gpa, fraction of assignments completed) only have a moderate impact on that influence. cohn and johnson (2006), another motivating work, analyze students from principles of economics classes. they test numerous hypotheses from jones (1984), durden and ellis (1995), and romer (1993). the authors find that attendance has a positive influence on test scores; substantial absences have a larger negative impact on test scores; low test scores do not cause more absences; and that sat and gpa controls have more explanatory power than previously thought. uniquely, they incorporate dummy variables to categorize students by different percentages of classes attended. boyle and goffe (2018) used two large sections of a principles of macroeconomics course to apply research-based teaching methods. these methods were identified by cognitive scientists in the stem fields and provide evidence as to why attendance matters. the authors incorporate numerous teaching methods with success. their sample of over 500 students produced significant learning increases on the test of understanding of college economics. the four notable teaching methods identified as having the most impact are: providing considerable feedback; spacing of learning; frequent use of clickers to quiz on conceptual understanding; and quiz reflections. some literature using statistics courses focus on the use of technology in the classroom. velleman and moore (1996) illustrate many of the pros and cons of incorporating multimedia into the classroom. this referred to computer-based systems that combined sight, sound, and interaction from the student. the authors praise computers due to the large impact they make in teaching statistics however note it supplements teaching – not replace. their arguments are similar to conners et. al. (1998) and perkins and saris (2001) by claiming students benefit more from their own activity. they do however state that new technology is capable of successfully replacing teachers if the student is mature, strongly motivated, and disciplined. for most introductory statistics courses, this would not be the case. basturk (2005) used cai (computer assisted instruction) with graduate students in an introductory statistics course at carnegie i research university. roughly one third of the 205 students in the study signed up for a “lecture-plus-cai” section where they would complete computerized exercises and tutorials in addition to the regular lecture. students who completed the cai section scored significantly higher on both midterms and finals when compared to the lecture only cohort. data collection and variable summary the student data i use comes from five different course sections of a business statistics course i have taught from spring 2018 through spring 2019. the student population is typically sophomores and juniors in the business school; this course is a core course for all majors and requires a prerequisite math course. each section had the same instructor, textbook, lecture format, number of exams, and exam format. each section also utilized pearson’s mystatlab, an online “digital learning environment,” for assignments, tutorials, study material, and spreadsheet applications. the students also spend one class in a computer lab for instruction on microsoft excel, after which tutorials and assignments are made available. the lectures meet twice a week for 100 minutes each session and have a class capacity of 35 students. the frequent amount of interaction provides opportunities to connect statistical methods to practical, real world examples. most importantly, the rapport built in a small classroom allows the instructor to better know the students and thus be more aware of confusion in the 38 |journal for economic educators, 21(1), 2021 classroom. these lectures incorporate the social learning, curse of knowledge, considerable feedback, strengthening of schema and deliberate practice teaching methods outlined by boyle and goffe (2018). each lecture has time where the students are able to work through a question about that days’ topic. this creates two opportunities: students are able to work with each other and help each other out, and i am able to talk with students who are struggling. both of these interactions are things velleman and moore (1996) describe to be a weakness to technology use outside the classroom. technology is incorporated into the lectures using microsoft excel and mystatlab to better solve or display data. attendance is also taken during this time. there is no formal attendance policy, and a grade is not assigned to attendance. students are warned in the beginning of the semester that missing class will result in a lot of missed material. i do not provide notes; should someone miss class they must rely on classmates. since attendance is not for a grade, i do not distinguish between excused or unexcused. the focus is solely on who was present for the lecture. after accounting for exams, finals week, computer lab days, and snow days, there are 22 face-to-face lectures for each of the courses. i follow brocato (1989) and gump (2005) by not including the first day of the semester. student’s assignments, textbook, and study materials are all online in mystatlab. the homework assignments are designed using algorithm-built questions so no two students receive the exact same question. each student will work through the same type of question and calculate the same statistics, but the sample data randomly changes between individuals in an effort to minimize cheating. there are numerous learning tools within the program as well. there are video tutorials and presentations, self-assessment quizzes, an online text that links homework questions to textbook chapter and section, step-by-step walkthroughs for calculating complicated formulas, and more. at the end of the semester i can export a spreadsheet outlining student performance and time spent on each assignment. i do adjust homework settings so students have 3 attempts per assignment and the best performance is kept for their grade. this provides students the opportunity to try their hand at working through problem sets without worrying of getting them wrong the first time. it also allows for the motivated to try again to increase their scores. anecdotally, i have seen class exam score averages increase from using this program. after accounting for withdrawals and incomplete students, i have a total of 169 students that completed the course. the sample of data was gathered after the semesters had ended so i am limited to performance measures that a professor normally can observe. table 1 shows a simple summary of absences by letter grade earned. comparisons of the extremes suggest a distinct pattern between students that earn either an a or aand f. in fact, the group of students that scored in the a-range had a lower average number of absences and median number of absences than all other grade levels. with exception of the transition from the c-range to the d-range, the average and median number of absences increases as letter grade worsens. 39 |journal for economic educators, 21(1), 2021 table 1: summary of absences by letter grade earned grade range students absences average median min max a 47 1 0 0 5 b 45 1.489 1 0 5 c 34 3.353 2 0 18 d 28 2.107 2 0 8 f 15 4.667 3 1 12 whole sample 169 2.112 1 0 18 to investigate the role attendance has on student performance, i gathered or calculated the following variables:2 • test: weighted average of all exams. each student has two midterms and a final exam. each exam covers the same course material and is objective in nature. value range is from 0 – 100. • labscore: homework assignment score from mystatlab. it is an average of all chapter assignments. value range is from 0 – 100. • labpercent: labscore but in decimal form. for interpretation of coefficients in regressions. • labhr: total number of hours spent on assignments in mystatlab. fractional hours are allowed. • fraction: fraction of homework assignments completed. value range is 0 – 1. • att: attendance as a fraction of lectures attended. value range is 0 – 1. • abs0: dummy variable for students with no absences. 33.73% of students are represented. • abs1: dummy variable for students with one absence. 17.16% of students are represented. • abs2: dummy variable for students with two absences. 23.08% of students are represented. • abs3plus: dummy variable for students with three or more absences. 26.04% of students are represented. • fall18 & spring19: dummy variables to capture semester fixed effects. the spring 2018 semester is the reference group. test and labscore are the two performance measures of concern. table 2 and table 3 display summary measures for test and labscore, respectively, with different combinations of attendance percentages and assignment completeness. upon inspection of table 2, it is evident that students who attend every class and complete all assignments perform the best on exams. students who do not complete all assignments perform the worst. this is irrelevant of attendance. also students who attend all classes perform better than those that have absences, and students that complete all assignments perform better than those who missed at least one. the comparison to take from table 3 is that students who attend all classes have a higher average assignment score on mystatlab that students with absences. 2 this project was approved by the ramapo college institutional review board (irb approval #489) 40 |journal for economic educators, 21(1), 2021 table 2: test summary statistics obs. mean std. deviation min max full sample 169 77.589 14.216 34.67 98.89 attendance =100% 57 84.259 12.263 56.67 98.89 <100% 112 74.191 13.976 34.67 98.89 assignments =100% 142 79.675 13.748 34.67 98.89 <100% 27 66.603 11.442 43.2 91.33 subgroups attendance = 100% and assignments = 100% 53 85.631 11.573 56.67 98.89 attendance = 100% and assignments < 100% 4 66.081 3.394 63.22 70.13 attendance < 100% and assignments = 100% 89 76.129 13.771 34.67 98.89 attendance < 100% and assignments < 100% 23 66.693 12.373 43.2 91.33 table 3: labscore summary statistics obs. mean std. deviation min max full sample 169 85.478 18.022 10 100 attendance =100% 57 94.267 9.662 46.206 100 <100% 112 81.004 19.612 10 100 methodology and empirical results the first two equations i regress follows the model established by romer (1993). i use these as a benchmark to check the relationship between attendance and performance. (1) 𝑇𝑒𝑠𝑡𝑖 = 𝛽0 + 𝛽1𝐴𝑡𝑡𝑖 + 𝛽2𝐹𝑎𝑙𝑙18𝑖 + 𝛽3𝑆𝑝𝑟𝑖𝑛𝑔19𝑖 + 𝜀𝑖 (2) 𝑇𝑒𝑠𝑡𝑖 = 𝛽0 + 𝛽1𝐴𝑡𝑡𝑖 + 𝛽2𝐹𝑟𝑎𝑐𝑡𝑖𝑜𝑛𝑖 + 𝛽3𝐹𝑎𝑙𝑙18𝑖 + 𝛽4𝑆𝑝𝑟𝑖𝑛𝑔19𝑖 + 𝜀𝑖 equation 1 tests determines the impact attendance has on exam scores when measured in a continuous nature. equation 2 includes the fraction of assignments completed to capture a proxy for motivation. all equations include semester dummy variables to control for semester-effects. table 4 displays the results. 41 |journal for economic educators, 21(1), 2021 table 4: benchmark test regressions independent variable (1) (2) intercept 58.344*** 46.996*** (8.281) (9.966) att 27.365*** 21.097** (8.690) (9.160) fraction 17.418** (8.679) fall18 -6.232** -5.695** (2.835) (2.822) spring19 -7.790*** -7.575*** (2.839) (2.826) observations 169 169 r-squared 0.102 0.123 adj. r-squared 0.085 0.102 f-statistic 6.22 5.76 *,**,*** indicates significance at the 10%, 5%, and 1% levels standard errors in parentheses the coefficient of 27.365 for att in equation 1 represents the increase to exam scores when going from no attendance to attending 100% of classes. att is measured as a fraction, so a student who only attends half the classes tends to score 13.6 points lower than a student with full attendance. it is statistically significant at the 1% level. romer (1993) estimated that students who attended 100% of the lectures earned a b+. these results are similar, estimating that a student with 100% attendance would earn 85.7 points on a 100-point scale, which is a b. including fraction in equation 2 adds some explanatory power but att remains significant. romer (1993) noted that including the fraction of problem sets completed as a proxy for motivation did not negate the importance of attendance. his estimated coefficient for attendance remained significant but decreased by 20.5%. in my sample, the coefficient on att decreases similarly by 22.9% and is significant at the 5% level. now, a student who attends all classes will on average score 21.097 points higher on exams compared to the previous 27.365. these results are in line with romer (1993), that even with a proxy for motivation, attendance is still a stronger indicator of increased performance. the dummy variables fall18 and spring19 are both significant, negative, and close in magnitude. when compared to the reference semester spring 2018, students in the 2018-2019 academic year performed between 6.232 7.79 points lower on the overall exam score in equation 1. the decrease in exam scores lessens in equation 2 to a range of 5.695 – 7.575 points. the remaining equations i estimate follow a structure motivated by cohn and johnson (2006). they incorporate discrete dummy variables indicating different levels of absences with their students to test the conclusion of durden and ellis (1995) that substantial absences have a detrimental impact on performance. the attendance dummy variables used by cohn and johnson 42 |journal for economic educators, 21(1), 2021 (2006) are based on different percentages attended. for example, their sample had 8% of students attended all classes, 28% of students attended 92% or more but less than 100% of classes, and 23% of students attended less than 68% of classes. my sample has a very different pattern, so using these types of percentages does not represent it well. i use four dummy variables to represent the number of absences: no absences (33.73% of sample); one absence (17.16% of sample); two absences (23.08% of sample); three or more absences (26.04% of sample). considering that the attendance data i have constitutes 22 class meetings, missing two, or three or more could be considered substantial. since the course meets twice a week, missing two classes is the equivalent of missing one full week. equation 3 represents the regression using the dummy variables for absences to estimate test scores. the dummy that is omitted is the indicator for zero absences. (3) 𝑇𝑒𝑠𝑡𝑖 = 𝛽0 + 𝛽1𝐴𝑏𝑠1𝑖 + 𝛽2𝐴𝑏𝑠2𝑖 + 𝛽3𝐴𝑏𝑠3𝑝𝑙𝑢𝑠𝑖 + 𝛽4𝐹𝑎𝑙𝑙18𝑖 + 𝛽5𝑆𝑝𝑟𝑖𝑛𝑔19𝑖 + 𝜀𝑖 i also estimate variants that include the variables for the online digital learning component. this is motivated by basturk (2005) who shows students that participated in “computer assisted learning” performed better on exams. equation 4 incorporates the amount of time a student spent in mystatlab and equation 5 includes their performance measured as a decimal. (4) 𝑇𝑒𝑠𝑡𝑖 = 𝛽0 + 𝛽1𝐴𝑏𝑠1𝑖 + 𝛽2𝐴𝑏𝑠2𝑖 + 𝛽3𝐴𝑏𝑠3𝑝𝑙𝑢𝑠𝑖 + 𝛽4𝐿𝑎𝑏ℎ𝑟𝑖 + 𝛽5𝐹𝑎𝑙𝑙18𝑖 + 𝛽6𝑆𝑝𝑟𝑖𝑛𝑔19𝑖 + 𝜀𝑖 (5) 𝑇𝑒𝑠𝑡𝑖 = 𝛽0 + 𝛽1𝐴𝑏𝑠1𝑖 + 𝛽2𝐴𝑏𝑠2𝑖 + 𝛽3𝐴𝑏𝑠3𝑝𝑙𝑢𝑠𝑖 + 𝛽4𝐿𝑎𝑏𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑖 + 𝛽5𝐹𝑎𝑙𝑙18𝑖 + 𝛽6𝑆𝑝𝑟𝑖𝑛𝑔19𝑖 + 𝜀𝑖 i further examine the value of attendance by regressing the same variables from equations 3 and 4 on labscore as an alternative performance measure. i believe students’ performance on the online assignments will benefit from in class attendance, even considering all the relevant material, explanations, and tutorials are present in the online program. equations 6 and 7 represent those two specifications. all equations include semester dummy variables to control for semestereffects. table 5 displays the results. (6) 𝐿𝑎𝑏𝑠𝑐𝑜𝑟𝑒𝑖 = 𝛽0 + 𝛽1𝐴𝑏𝑠1𝑖 + 𝛽2𝐴𝑏𝑠2𝑖 + 𝛽3𝐴𝑏𝑠3𝑝𝑙𝑢𝑠𝑖 + 𝛽4𝐹𝑎𝑙𝑙18𝑖 + 𝛽5𝑆𝑝𝑟𝑖𝑛𝑔19𝑖 + 𝜀𝑖 (7) 𝐿𝑎𝑏𝑠𝑐𝑜𝑟𝑒𝑖 = 𝛽0 + 𝛽1𝐴𝑏𝑠1𝑖 + 𝛽2𝐴𝑏𝑠2𝑖 + 𝛽3𝐴𝑏𝑠3𝑝𝑙𝑢𝑠𝑖 + 𝛽4𝐿𝑎𝑏ℎ𝑟𝑖 + 𝛽5𝐹𝑎𝑙𝑙18𝑖 + 𝛽6𝑆𝑝𝑟𝑖𝑛𝑔19𝑖 + 𝜀𝑖 the coefficients from equation 3 capture the impact of different amounts of absences. the omitted dummy is for no absences, so all coefficients are interpreted as the change in test for an increase in absences from zero. the coefficient on abs1 is -7.440 and is significant at the 5% level. this indicates that the average student who misses one class will score 7 points lower on their exams. the coefficient on abs2 is -11.455 and is significant at the 1% level, indicating a larger drop in test scores for missing two classes. the coefficient of -10.253 for abs3plus is smaller in magnitude than abs2 indicating a smaller loss in test scores for missing three or more classes over the semester. it is also significant at the 1% level. this specification has a higher goodness of fit compared to the benchmark specification in equation 1 and the f-statistic is significant as well. 43 |journal for economic educators, 21(1), 2021 this equation is closest to the specification tested by cohn and johnson (2006). they found that students who attended between 76 – 84% of classes lost about 5 points to their weighted average exam score, and students that attended less than 68% of class meetings lost about 6 points from their scores. i am able to provide similar evidence that absences correlate to lower exam scores, albeit in greater magnitude. table 5: regression results independent variable test labscore (3) (4) (5) (6) (7) intercept 89.800*** 96.475*** 53.107*** 97.448*** 92.835*** (2.653) (2.935) (5.942) (3.292) (3.790) abs1 -7.440** -7.243** -5.687** -4.654 -4.790 (3.032) (2.874) (2.701) (3.761) (3.710) abs2 -11.455*** -12.041*** -6.542** -13.045*** -12.640*** (2.767) (2.626) (2.560) (3.433) (3.390) abs3plus -10.253*** -10.665*** -3.475 -17.999*** -17.714*** (2.653) (2.516) (2.559) (3.291) (3.248) labhr -0.289*** 0.199** (0.065) (0.084) labpercent 37.654*** (5.599) fall18 -6.620** -5.347** -5.826** -2.109 -2.989 (2.790) (2.660) (2.477) (3.462) (3.434) spring19 -7.566*** -7.114*** -5.060** -6.656* -6.969** (2.757) (2.615) (2.474) (3.421) (3.376) observations 169 169 169 169 169 r-squared 0.165 0.254 0.347 0.201 0.227 adj. r-squared 0.139 0.227 0.323 0.176 0.199 f-statistic 6.43 9.21 14.35 8.18 7.93 *,**,*** indicates significance at the 10%, 5%, and 1% levels standard errors in parentheses equation 4 includes the variable labhr to control for effort by the student. the coefficients on abs1, abs2, and abs3plus all remain significant at the same levels. the magnitudes for each change very little, and the coefficient for abs3plus remains smaller in magnitude than abs2. the coefficient on labhr, oddly enough, is negative with a value of -0.289 and is significant at the 1% level. the interpretation that spending more time working through exercises in mystatlab having a negative effect on test scores could imply that there are a number of students who really struggled and spent a long time on assignments. this mode of assessment with much more relaxed time 44 |journal for economic educators, 21(1), 2021 requirements may not translate well to timed exams for some. the goodness of fit for this specification increased with an adjusted r-squared of 0.227 and the f-statistic is significant. using labpercent as the measure of student ability in equation 5 instead of the time spent working in the online digital learning environment creates dramatic changes in the coefficients. the coefficient for the intercept decreases almost in half to 53.107 and is significant at the 1% level. the coefficients on abs1 and abs2 are significant at the 5% level. having three or more absences now is no longer a significant predictor of test scores. students absent once have test scores 5.687 points lower than those always in attendance; students who miss two class have scores 6.542 points lower. the coefficient on labpercent is significant at the 1% level and has a value of 37.654. this variable is measured as a percent between 0 and 1 so a student who earned a 100% on their mystatlab assignments increases their test scores, on average, by 37.654 points. this specification has the largest adjusted r-squared of 0.323 and f-statistic of 14.35. the results for equation 6 produce coefficients that further make the case for attending class – more specifically, not missing too many. the coefficient for abs1 is not significant indicating that missing one class has a negligible effect on your online assignment score. abs2 and abs3plus are both negative and significant at the 1% level. students who miss two classes have lower online assignment score by an average of 13.045 points; those that miss three classes or more have online assignment scores that are 17.999 points lower than those that make it to every class. this specification has an adjusted r-squared of 0.176. including labhr in equation 7, although significant at the 5% level, does very little to the magnitude of the other coefficients discussed and slightly increases the adjusted r-squared to 0.199. the coefficient of 0.199 for labhr logically implies that spending more time working on the online assignments will yield a higher score. at this point, we can look at the results from equations 5 and 7 together. from equation 5, we can confidently say that there is a significant correlation between a student’s test score and that student’s performance in their online assignments, and whether or not they missed one or two classes. perhaps there is some small detail missed from class that an exam covers, or perhaps the exercise worked on in class had a large learning benefit for those in attendance. but why do larger absences not matter in the test regressions? equation 7 illustrates that two absences has a large negative impact on the online assignment score. three or more absences has an even larger negative impact on the online assignment score – equal to the different between a band f. i think this is a unique impact because students have more time and multiple attempts to perform well on these assignments. the adverse effects of missing too many classes is most amplified in the online performance regressions, which in turn has the largest coefficient in any exam scores regression. an important limitation worth noting is that these equations lack some standard indicators of ability. romer (1993) and cohn and johnson (2006) both incorporated sat scores and gpa. these variables, when included, lessen the magnitude of attendance coefficients although attendance maintains its significance. i did not include these variables due to timing – this study was constructed after the semesters had ended and distributing letters of intent was inefficient. i do not have any reason to believe that these variables would have altered the story of how attendance is a good estimator of performance. however, gathering this information for future semesters would be very insightful for explaining more of the variation in performance and create more accurate representation of the role of attendance. 45 |journal for economic educators, 21(1), 2021 conclusion there are numerous studies in academic literature that estimate the effect of attendance on college performance. the overall sense is that attending class has significant benefits to the student. boyle and goffe (2018) outlined many teaching methods that benefits the in-person classroom, and many of these methods were applied. historically, many other studies date back decades and do not necessarily incorporate all of the available technologies available to student and professor alike. generation z, the current student population, is incredibly technology reliant. this study explains how both traditional lecture and the use of online digital learning environments can both benefit the student and are intertwined. i focused on students from a sophomore/junior level business statistics course and collected grade data as well as attendance. i find that physically showing up to class still has strong benefits to the student. students who attend class regularly perform better on exams. students who are regularly absent perform worse on exams and perform much worse on their online assignments. not surprisingly, students who perform better on their online assignments also perform much better on exams. the conclusions to be taken from this study is that attendance is important for student performance, both on exams and on their assignments. performance on their assignments, particularly when facilitated through an online digital learning environment full of supplemental help, is a very strong predictor of success on exams. the notion by velleman and moore (1996) that technology in the classroom is a great supplement, not a replacement, for lectures and the findings of basturk (2005) that students perform 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