FRED and the Federal Budget Interactive Lesson
This lesson examines the current state of drought in the United States and the economic impact of drought on local communities.
As necessary, introduce the concepts of specialization and interdependence. Specialization is a situation in which people produce a narrower range of goods and services than they consume, which increases productivity. Interdependence is a situation in which decisions made by one person affect decisions made by other people, or events in one sector of the economy affect other sectors of the economy (EconEdLink Glossary). When people specialize, they do not try to provide for all their economic wants themselves; instead, for some wants, they depend on others. This is the basis of interdependence.
Water is a natural resource that is essential in the production of many goods and services. The United States has been experiencing drought conditions in various parts of the country for several years. Drought can affect local communities in a number of ways. Students participating in this lesson will learn about interdependence in a local community and see some ways in which interdependence can adversely affect the community when a drought occurs.
Direct the students to examine current drought conditions by looking at the drought monitor map (see resources). Ask the students whether their state is in any kind of a drought condition. If it is not, have the students look at states that are experiencing drought; where they find instances of drought, they should note the level of severity. Ask the students what percentage of the entire U.S. is in some degree of drought condition (answers vary over time as the level of drought changes).
The students then examine a hypothetical farming community called Bonedry. Bonedry has been in a severe agricultural drought for several years. The students’ task will be to calculate the economic impact of the drought for the town, using the information summarized below.
Bonedry once was home to 50 farmers, with an average farm-family income of $75,000 annually. Farmers are entrepreneurs; they operate their farms in expectation of making a profit, and they run the risk of not making any profit in certain years. The recent lack of moisture in Bonedry has reduced crop yields and profits from those crops. As a result, 10 of these farmers have left the area. The local farm implement company experienced a decrease in sales of 10% (annual sales had been $1.5 million). Due to the decrease in sales, the farm implement company cut one employee who had earned an annual salary of $40,000. Due to the decreased population, the local grocery store saw a decrease in sales of 8% (annual sales had been $900,000) and local restaurants experienced a 15 percent drop in revenues (annual revenues had been $500,000). Because of the decrease in sales of goods and services, Bonedry received 19 percent less in sales-tax revenues, which had been $420,000 annually. This loss of tax revenue caused the town to cut two police officers, each of whom each had earned annual salaries of $38,000. Based on the above information, students should fill in the amount of lost income or revenue in each of the boxes in the attached interdependence activity.
Farmers depend on rain to grow their crops.
Loss of farm income (10 farmers x $75,000 = $750,000)
Farm implement companies depend on farmers to buy their products.
Loss of sales revenue for the implement company ($1,500,000 x .10 = $150,000)
Employees at the farm implement company depend on the company for their wages.
Loss of employee wages ($40,000)
The local grocery store and local restaurants depend on the local population to buy their goods and services.
Loss of sales revenue for the grocery store ($900,000 x .08 = $72,000)
Loss of revenue for local restaurants ($75,000)
The city government of Bonedry depends on sales tax revenues to provide city services
Loss of city sales tax revenue ($420,000 x .19) = $79,800)
Local police officers depend on the city to pay their salaries.
Loss of police officer income ($38,000 x 2 = $76,000)
Total annual dollar impact for Bonedry ($1,242,800)
[NOTE: Teachers might point out that this is a very simplistic example and call upon students to think of other businesses or sectors of the town that would also be affected. For example, if 10 farm families left town, their children would also leave. This might mean the local schools would need fewer teachers and would let some teachers go. In addition, a declining population would affect retail stores. These businesses would also see a drop in sales revenue.]
Have students consider the following questions:
Go back to the drought monitor and have the students determine how many states or what percentage of states are in some state of drought at the present time. The students could update this percentage over time to see if it changes from month to month. In addition, the students could calculate which states have the highest drought levels as a percentage of total state area. After the students have studied these maps, they can access the state links at the Drought Conditions Map. These state links show how each state monitors drought in the state and, in some cases, how the states are responding to droughts or potential droughts. The students should understand that droughts affects many sectors of the economy in affected states, which is why states try to minimize the effect.
Here is a list of questions for the students to answer after they refer to the drought monitor.
Based on the interdependence activity above, have students construct an interdependence chart for your own city or area (but without dollar amounts) showing different businesses or organizations that would be affected by a drought. The students should show as many organizations or groups of people who might be affected as possible.