Economics
There will be a restricted class Web page which will include:
- a section for class handouts, and announcements, posting of problem set solutions, etc.;
- a Discussion Group" site to permit ongoing exchange of ideas pertaining to the general subject matter of the course;
- contact information;
- links to "Interesting Web Sites" providing economic data for most countries of the world.
The Discussion Group feature can be used to continue discussion that began in class to contribute examples of applications of principles developed in calls, or to raise questions about how such principle apply to specific situations, etc.
Readings in the Course Syllabus
A. Abel and B. Bernanke, MACROECONOMICS: 4th ed., Addison Wesley, 2001
Part A. TOPICS IN MICROECONOMICS
1. Prisoners' Dilemmas vs. Cooperation
The economic basis for non-cooperative behavior between firms in oligopolistic industries will be considered in the first part of the class, using price and advertising wars as illustrations. Given the incentives for non-cooperative behavior, how can cooperative behavior be induced? The WSJ article provides an illustration of one mechanism. When does it raise antitrust issues? These questions will be addressed via a discussion of the Ethyl case.
"Dispatches from the Air Fare Front," Wall Street Journal
"The Ethyl Case," in Kwoka and White, pp. 183-208
2. Competitive Strategy
This session extends applications of game theory begun in the previous session. Read the Kreps et al article to learn the basic analytical approaches of game theory. In class we shall discuss applications to product choice and entry deterrence.
D. Kreps et al, "A (Very) Short Course in Game Theory"
Problem Set #1
3. Network Effects and Competition
The class will examine the economic structure of markets for software and some other high-tech products. A key feature of many of these markets is that the utility that a consumer receives from the good increases with the number of other consumers on the same network. (Think of the value of owning a telephone.) We will also examine some special aspects of competition and antitrust in markets with these structures.
M. Katz and C. Shapiro, "Systems Competition and Network Effects"
R. Schmalensee, "Antitrust Issues in Schumpeterian Industries"
4. Risk and Insurance Markets
This session addresses the allocation of risk through insurance arrangements and examines potential market failures that can limit the scope of insurance.
Note on Risk and Insurance
L. White, "The Reform of Federal Deposit Insurance"
T. O'Brien, "From Rock 'n' Roll to Russia, Having a Likely Rescuer Fosters Moral Hazard," New York Times, May 1, 1999
5. Comparative Advantage and Protection
There are two things to look for in these readings: (1) An understanding of the principle of Comparative Advantage and its importance as a basis for trade policy (readings in C&F and The Economist); and (2) The economic analysis of protectionist devices—gains and who loses.
Case and Fair, PRINCIPLES OF MICROECONOMICS, Chap. 16
"The Miracle of Trade," The Economist, 1/27/96, pp. 61-62
"Open International Markets and Prosperity," Economic Report of the President, Feb. 1992, pp. 193-201
6. Trade Policy
These readings build on the previous discussion of comparative advantage and protection to analyze trade policies around the world and evaluate some of the critiques of free trade.
S. Nasar, "A Primer: Why Economists Favor Free Trade Agreement," New York Times
"Opportunity and Challenge in the Global Economy," Economic Report of the President, Feb. 2000, pp. 199-223
"The Race for the Bottom," The Economist, 10/7/95, p. 90
Part B. MACROECONOMICS
This part of the course provides an introduction to macroeconomic analysis and policy. Macroeconomics addresses the behavior of aggregate economic variables—as GDP growth, unemployment, inflation and interest rates—well as government policies that may influence their behavior. One goal of this part of the course is to use the theory to understand contemporary economic policy debates around the world. A second goal is to develop skill in interpreting changes in widely reported measures of economic activity.
7. Introduction to Macroeconomics
Chapter 1 in Abel and Bernanke (A&B) provides an introduction to macroeconomics and reviews the main areas of controversy among macroeconomists. Note the main differences in perspective from micro. The readings in Chapter 8 provide an introduction to business cycles and illustrates how important macroeconomic variables behave over a business cycle.
A. Abel and B. Bernanke, Macroeconomics, 4th ed. (A&B hereafter), pp. 2-11; 16-20; 274-78; and 284-95
8. Measuring the National Economy
This session addresses the framework for national income accounting —and its limitations as a measure of national welfare.
A & B, pp. 46-52; 91-98
9. Measuring Inflation and Unemployment
In this session we examine how two of the most closely watched macro variables are measured and interpreted.
A & B, pp. 46-52; 91-98
Problem set # 2
10. Growth, Potential Output, and Productivity
The readings indicate why long-run growth rates differ between countries and how government policies might alter growth rates.
A & B, pp. 205-15; 232-37
"The New Trend in Productivity Growth," Economic Report of the President, January 2001, pp. 26-41
11. The Domestic Goods Market
This reading begins the analysis of (1) why actual output in a "closed" economy (no international trade) may depart from the potential output that the economy could produce, and (2.) how a government's fiscal policies influence actual output.
A & B, pp. 108-25 (top); 131-42
12. The Goods Market With International Trade
The first part of the textbook reading provides an introduction to the balance of payments accounts. Think about why the capital account balance must be the mirror image of the current account balance. The remaining readings indicate the role of international trade in determining actual output and show one mechanism through which economic conditions in one country may influence conditions in other countries.
A & B, pp. 168-80; 186-90; 193-97
"In Defense of Deficits," The Economist, 12/16/95
"Fall in US Trade Threatens Global Economy," Financial Times, 7/19/01
"Singapore lurches into recession," Financial Times, 7/10/01
13. Financial Markets
The reading integrates money, asset markets and interest rates into the analysis of aggregate demand and shows how a government's monetary policies may influence actual output. As you read, (1) focus on how the mechanisms of adjustment operate in money markets, and (2) think about the difference in how monetary and fiscal policies influence the economy.
A & B, Chap. 7
Problem set # 3
14. Central Banking and Monetary Policy
How money is created; the policy tools of a central bank. Policy issues for central banks.
A & B, Chap. 14
"Monopoly Power Over Money," The Economist
15. Integrating Goods and Financial Markets
This session integrates the goods and financial markets and illustrates how different macroeconomic outcomes can be obtained by integrating fiscal and monetary policy. The textbook chapter is more technical than others, but it provides the basis for understanding (1.) why different countries may choose different mixes of monetary and fiscal policy and (2.) why "Keynesians" and monetarists" usually recommend different policies to stabilize the economy.
A & B, Chap. 9
16. Explaining Inflation and Unemployment
This session considers the costs of unemployment and inflation, the question of whether of whether there is a tradeoff between the two, and policy options.
A & B, Chap. 12
A. Bennett, "Business and Academia Clash Over a Concept: 'Natural' Jobless, Rate," Wall Street Journal, 1/24/95
"Recent Inflation Performance and the NAIRU, Economic Report of the President, Feb. 1998, pp.57-63
Problem set # 4
17. Exchange Rates
The determination of exchange rates; short-run and long-run behavior of exchange rates. The role of exchange rates in transmitting inflation and unemployment between countries.
A & B, pp. 471-93
"A Much Devalued Theory," The Economist, 1/20/96
"Central bankers fear the effects of strong dollar," Financial Times, 7/9/01
18. International Monetary System
Focus on the policy options and constraints faced when operating in international markets. Fixed vs. flexible exchange rates systems. Can exchange rates be "managed"? The Euro and monetary unions.
A & B, pp. 493-511
"The Merits of One Money," The Economist, 10/24/98
"Euro Towers or Faulty Towers," The Economist, 10/31/98
19. Government Budget Deficits and Public Debt
The macroeconomic role of the government budget. Government deficits and debt and whether you should worry about them.
A & B, pp. 563-84
"The Burdensome National Debt," The Economist, 2/10/96
