How Does Economic Education Impact Economic Literacy?

Economic literacy was the focus of the December 1998 issue of The Region, in which the results were reported from a national survey of economic literacy sponsored by the Federal Reserve Bank of Minneapolis. The survey contained 13 items that tested the public's knowledge of basic economics and were based, in part, on questions from the Test of Economic Literacy. The Fed survey was administered to a randomly selected sample of U.S. adults in telephone interviews in fall 1998. The average test score was 45 percent correct, which indicates that there are major deficiencies in the public's understanding of basic economics.

But beyond the final score, what else do the survey results tell us? One important factor that would be expected to influence economic literacy is people's level of economic education. And although we expected those adults with a formal economic education to outscore those without one, we did not know if this would be the case with this sample and what the size of the group difference in test scores would be. This analysis should provide additional evidence of the contribution that formal economic education makes to the public's understanding of economics and how the economy works.

With and Without

For our investigation, we divided the sample into two groups: the 56 percent (221 respondents) who had not taken an economics course and the 44 percent (176) who reported taking an economics course. In the case of the latter group, we did not make a distinction concerning the educational level at which the course was taken (in high school or college).

The accompanying table reports the results for comparisons between the groups on the overall test and also for each item. The good news is that there is a statistically significant difference in test scores for those adults who had taken an economics course at some point in their education. These adults scored 12 percentage points higher than those without a formal economic education. Thus, the overall scores provide evidence that economic education has a major effect on what people know about basic economics.

A skeptic, however, can raise the question of whether 12 percentage points presents a major difference. To respond to this criticism, the results need to be put in perspective. First, the test was a short one and may not have fully or accurately measured what people learned from their economics courses. Second, knowledge of economics gained in a course may have depreciated over time, which would be an important consideration for older adults. Third, there may have been variability in the quality of the instruction or the materials used in an economics course that reduced the effectiveness of instruction. Fourth, the test was administered "cold" so there was no time for any review that would most likely benefit the economics group. Fifth, the opportunity for guessing on a multiple-choice test can inflate scores for those without economic knowledge. These factors tend to reduce group differences on this economics test. In light of these circumstances, we view the results as a strong indicator of the substantial differences between the groups in their economic understanding.

Item Results

The item percentages basically confirm what was found with the overall test scores. Adults with economics were more likely to give correct answers to each test question than those without an economic education. The differences were in the expected direction in all cases and were statistically significant for 11 of the 13 items.

Test question categories were microeconomics, macroeconomics and international economics, and among these, the influence of an economics education was greatest with microeconomic questions. The three items showing the largest gap dealt with the role of competitive markets in a market economy (Q5), the use of marginal cost and marginal benefit analysis (Q9) and the role of scarcity in determining the supply of a resource (Q8). Having taken a course in economics increased the probability of correctly answering these three questions by 19 percentage points, on average.

Responses to the two questions dealing with international trade (Q1 and Q4) also revealed the benefits of instruction. Adults with an economic education were more likely to supply correct answers by 13 percentage points, on average. In addition, the two questions dealing with trade-offs, Q2 and Q3, showed statistically significant differences related to economics instruction of about 8 to 10 percentage points.

The effect of an economics course was the smallest for the last two questions on government's role in the economy. Adults who had taken an economics course knew only slightly more about how monetary and fiscal policies could be used to reduce high inflation (Q12) than adults without an economics course. The rationale for government provision of public goods (Q13) was little affected by a course in economics. We suspect that these minimal differences probably reflect problems with teaching macroeconomics and the inadequate treatment of these topics in economics courses. The item findings, however, are only suggestive because there are too few items on the test to draw any strong conclusions about content emphasis and instruction.

Other Factors

We wanted to know if our overall results were seriously affected by other background variables. For example, a question could be raised that the positive effects of an economic education are not due to course work in economics but rather to the fact that one group had a higher level of education than the other group. To address this issue, we analyzed the data using multiple regression, which allowed us to isolate the effect of an economics course on the test score after controlling for other variables.

The regression equation we specified controlled for age, gender, the level of education (college graduate or not) and the taking of an economics course. The results showed that those adults who had taken an economics course scored significantly higher than those adults who had not taken such a course. In another regression analysis, we made a distinction about whether a person had taken an economics course in high school or college. We found that both the high school course in economics and the college course in economics have significant effects on economic understanding after controlling for the other factors. The contribution of the college economics course was almost twice that of the high school economics course, but the difference in contribution was to be expected given that a college education is more extensive and recent.

Conclusion

The fact that those adults who have taken a high school or college economics course score higher than those without such instruction is an encouraging finding. It suggests that economic education in high school or college does makes a difference to the economic understanding of adults. It also suggests that the economic knowledge gained in high school or college is retained over time.

These conclusions, however, must be tempered by another concern. The level of economic understanding for the group with an economics course was not impressive. Adults who have taken economics could correctly answer only about half the questions on the test. Although we can debate what the acceptable level of mastery should be, that issue misses the central point. A score of 100 percent correct is obviously too high a level to expect given the reasons that narrow differences in test scores, as noted above. Nevertheless, a score of 49 percent correct for those with economics seems too low to us. It indicates that many adults who have taken an economics course still lack an understanding of basic economics. It also suggests economic education needs to be improved if we are to increase economic literacy in the United States.

See the complete text of the Minneapolis Fed's economic literacy survey, including explanations of the correct answers.

References

1. Soper, John C. and Walstad, William B. (1987). Test of Economic Literacy (2nd edition). New York: Joint Council on Economic Education.

2. Walstad, William B. (1992). "Economics Instruction in High Schools," Journal of Economic Literature, 30:4, pp. 2019-2051.

3. Walstad, William B. (1997). "The Effects of Economic Knowledge on Public Opinion on Economic Issues," Journal of Economic Education, 28:3, pp. 195-205.

4. Walstad, William and Allgood, Sam. (1999). "What Do College Seniors Know About Economics?" American Economic Review, 89:2, pp. 350-354.