The Iowa Electronic Markets
Macroeconomic Conditions: Measurement
and Political Implications
Economics Curriculum Using the IEM
Presidential and Congressional Control Markets
Assignment 1
Economic Indicators and Measuring Economic Activity
Assignment Overview and Objectives:
Statistics on the unemployment rate, inflation rate, and real GDP provide information on
economic conditions in the nation. These statistics are often called “economic
indicators” because of their ability to “indicate” the overall health of the economy. In this
assignment, you will learn how to obtain data on various measures of economic activity
and calculate additional economic indicators based on this data.
Assignment:
Use tables A and B on the following pages to complete this exercise.
1. Obtain quarterly nominal GDP data (NGDP) (billions of $) from the first quarter of
1996 (1996:Q1) through the fourth quarter of 2000 (2000:Q4) from the St. Louis
Federal Reserve Bank’s Federal Reserve Economic Data (FRED) Web site
(http://www.stls.frb.org/fred/). Enter this data in the second column of Table A below.
2. Obtain quarterly real GDP data (RGDP) (billions of chained 1996 $) from the first
quarter of 1996 (1996:Q1) through the fourth quarter of 2000 (2000:Q4) from the St.
Louis Federal Reserve Bank’s Federal Reserve Economic Data (FRED) Web site.
Enter this data in the third column of Table A and the second column of Table B
below.
3. Calculate quarterly values for the GDP Deflator (DEF) by dividing nominal GDP by
real GDP for each quarter and multiplying the resulting value by 100. Enter these
values in the fourth column of Table A below.
Example: to calculate the GDP deflator for the first quarter of 1996:
DEF1996:Q1 
Nominal GDP1996:Q1
Real GDP1996:Q1
 100
4. Calculate the growth rate of the GDP deflator (the inflation rate) as the percentage
change in the value of the GDP deflator from one quarter to the next and enter this
data in the fifth column of Table A below.
Example: to calculate the percentage change in the value of the GDP deflator for the
second quarter of 1996:
Growth Rate of GDP Deflator1996:Q 2 
[ DEF1996:Q 2  DEF1996:Q1 ]
DEF1996:Q1
 100
5. Obtain monthly U.S. population data (POP) from January, 1996 (1996:1) through
December, 2000 (2000:12) from the St. Louis Federal Reserve Bank’s Federal
Reserve Economic Data (FRED) Web site . Convert this monthly data to quarterly
data by computing the quarterly average of the monthly data and fill in the third
column of Table B. The quarterly average is calculated as the simple average of the
three months included in a particular quarter of the year.
Example: to calculate the quarterly average of the population for the first quarter of
1996:
POP1996,Quarter1 
[Population
Jan.,1996
 Population
Feb.,1996
 Population
Mar.,1996
]
3
6. Calculate quarterly per capita real GDP (PCRGDP) by dividing real GDP by the
population for each quarter. Enter this data in the fourth column of Table B on the
following pages.
Example: to calculate the quarterly average of per capita real GDP for the first
quarter of 1996 (note: to obtain a value in dollars per person, the result is multiplied
by 10,000 because real GDP is measured in billions of dollars and population is
measured in hundreds of thousands)
PCRGDP1996:Q1 
Real GDP1996:Q1
Population1996:Q1
 10,000
7. Calculate the growth rate of per capita real GDP as the percentage change in the
value of per capita real GDP from one quarter to the next and enter this data in the
fifth column of Table B on the following pages.
Example: to calculate the percentage change in the value of per capita real GDP for
the second quarter of 1996:
Growth Rate of Per Capita Real GDP1996:Q 2 
[ PCRGDP1996:Q 2  PCRGDP1996:Q1 ]
PCRGDP1996:Q1
 100
TABLE A
Year and
Quarter
Real GDP
Growth Rate
Nominal GDP
(RGDP)
of GDP
GDP Deflator
(NGDP)
(billions of
Deflator (%)
(DEF)
(billions of $) chained 1996
$)
Inflation Rate
1996 Q1
Not Applicable
1996 Q2
1996 Q3
1996 Q4
1997 Q1
1997 Q2
1997 Q3
1997 Q4
1998 Q1
1998 Q2
1998 Q3
1998 Q4
1999 Q1
1999 Q2
1999 Q3
1999 Q4
2000 Q1
2000 Q2
2000 Q3
2000 Q4
TABLE B
Real GDP
Year and
Quarter
1996 Q1
1996 Q2
1996 Q3
1996 Q4
1997 Q1
1997 Q2
1997 Q3
1997 Q4
1998 Q1
1998 Q2
1998 Q3
1998 Q4
1999 Q1
1999 Q2
1999 Q3
1999 Q4
2000 Q1
2000 Q2
2000 Q3
2000 Q4
Population
(RGDP)
(POP)
(billions of
(hundreds of
chained 1996 thousands of
$)
people)
Per Capita
Real GDP
(PCRGDP)
Growth Rate
of Per Capita
Real GDP (%)
Not Applicable
Sources of Economic Data
Nominal GDP
Gross Domestic Product Billions of Dollars, Seasonally Adjusted Annual Rate
Source: U.S. Department of Commerce, Bureau of Economic Analysis
Source:
http://www.stls.frb.org/fred/data/gdp/gdp
Real GDP
Real Gross Domestic Product Billions of Chained 1996 Dollars, Seasonally Adjusted
Annual Rate Source: U.S. Department of Commerce, Bureau of Economic Analysis
Source:
http://www.stls.frb.org/fred/data/gdp/gdpc1
Population:
Total Population: All Ages Including Armed Forces Overseas Thousands Source:
U.S. Department of Commerce, Census Bureau
Source:
http://www.stls.frb.org/fred/data/employ/pop
2000 Poll Results:
http://www.pollingreport.com/wh2gen.htm
http://abcnews.go.com/sections/politics/PollVault/PollVault.html
http://www.cnn.com/ELECTION/2000/resources/polls.html
Gallup Presidential Job Approval Rating:
Source:
http://www.gallup.com/poll/trends/ptjobapp.asp
Analysis of polling data including House and Senate control:
Source:
http://www.cookpolitical.com/
Assignment 2
Economic Indicators and National Election Predictions
Assignment Overview and Objectives:
In this assignment, you will learn how economic indicators can be used to predict
national election results using an economic model. Using the data calculated in
Assignment 1, you will generate election forecasts for the 2000 presidential election
using an economic model developed by Ray Fair at Yale University. In addition, you will
compare your predictions to those from public opinion polls and the Iowa Electronic
Markets Presidential Vote-Share market.
Assignment:
1. Ray Fair, an economist at Yale University, has developed an economic model to
predict the Democratic share of the two-party (Republican, Democrat) presidential
vote. His model for the 2000 election is:
Dem. Vote Share = .423 + (.0070growth3) – (.0072inflation15) +
(.0091highgrowth)
where
growth3 =
growth rate of capita real GDP in the first three quarters of the election
year
inflation15 = absolute value of the growth rate of the GDP deflator in the first 15
quarters of the administration that is in power in the year of the
election
highgrowth = number of quarters in the first 15 quarters of the administration in
which the growth rate of real per capita is greater than 3.2%
a. For the 2000 election, determine the numerical values of the variables: growth3,
inflation15, and highgrowth and calculate the value of Vote Share using the
model above.
b. Compare the value of the prediction from the Fair model to the actual 2000
election outcome. Calculate the absolute percent error of the two-party voteshare prediction as follows:
Absolute Percent Error 
Actual Democratic Vote Share  Predicted Democratic Vote Share
Actual Democratic Vote Share
Note: Be sure to calculate the actual democratic vote share as a percentage of
the two-party presidential vote; i.e. (dem. presidential votes/(dem. presidential
votes + rep. presidential votes)
c. Calculate the absolute percent error of the presidential two-party vote-share
predictions from the IEM Presidential Vote-Share market using prices from
(1) October 1, 2000, and
(2) November 6, 2000 (the day before the election).
Note: Because the IEM Presidential Vote-Share market for the 2000 presidential
election contained three contracts representing the share of the three-party
presidential vote, you need to calculate the value of the IEM two-party vote share
using the following formula:
Dem. (IEM) Vote Share 
Dem IEM Contract Price
Dem. IEM Contract Price  Rep. IEM Contract Price
d. Calculate the absolute percent error of the presidential vote-share predictions
from one of the major national opinion polls on
(1) October 1, 2000, and
(2) November 6, 2000 (the day before the election)
Note: Depending on the poll, you may need to convert the vote-share predictions
from the polls to a two-party vote share.
e. Which method (economic model, IEM markets, polls) provided the most accurate
vote-share predictions (1) a month before the election (October 1, 2000), and (2)
one day before the election (November 6, 2000)? Why do you think that was?
Why did the other methods predict less accurately, in your view?
f.
Based on your analysis and results, do you think that national economic
conditions played a dominant role in the 2000 presidential election? Explain.