This project will be using actual data for the U.S. economy to evaluate the Keynesian expenditure model and use it to estimate future changes in the economy.
Begin by reviewing the Okuns Law model in your text. Write a one page summary of the model emphasizing key assumptions and implications of the model.
You will be using date from the FRED database maintained by the Federal Reserve Bank of St. Louis. The web site is found at:
http://research.stlouisfed.org/fred2/
At the top of the web page you will find a search box. Search for unemployment rate. You will be taken to a page with a selection of data bases. Select UNRATE and click on the add to graph option. You should now be on a page with a graph of the unemployment rate. Take a moment and examine the graph. Placing your cursor over the graph will show the actual data represented.
Now click on the edit graph button found in the upper right part of the screen. This opens a table that will let you modify the data in the graph. Under frequency select quarterly and use average for the aggregation method.
Next, click on the ADD LINE tab and enter real GDP in the search box. Select the GDPC1 option and then click on add data. Then, under units, change the data to percentage change from one year ago. Click on the FORMAT tab, scroll down to line2 and change the vertical axis to right. Note how your graph has changed. Now click on the X in the upper right-hand portion of the editing table to close the table.
Using the date range selector chose Last 5 Years. Take a moment to examine your graph and how the three data sets relate to each other. Specially note that you have unemployment data for the first quarter of 2020, but the GDP series only has data for the fourth quarter of 2019. When you are done, click on the download button and download the data to an EXCEL spreadsheet. Open the EXCEL file and save it.
In your EXCEL file, create a column for estimated percentage change in GDP. To calculate this column, use Okuns Law. You should be able to estimate the values of real GDP for every quarter except the first quarter in your data (including the first quarter of 2020). Next, create a column labeled deviation from true. To calculate this column, subtract the estimated percentage change in GDP from the actual percentage change shown in your GDPC1 column.
At this point you can compare the prediction of the model to the actual data. Write a one page analysis describing how well you think the model performed in estimating the percentage change in GDP. Look at your estimate for the percentage change in real GDP for the first quarter of 2020. How confident are you with this estimate? Explain why or why you are not confident.
Be sure to include a copy of the EXCEL table with your paper.
