Econ 165: International Economics. dfitzger at stanford.edu (please put Econ 165 in the subject line)

Transcription

1 Econ 165: International Economics Professor: Office: Office Hours: Doireann Fitzgerald Room 335, Economics Department Wednesdays 9 am 11 am dfitzger at stanford.edu (please put Econ 165 in the subject line) TA: Todd Schoellman, azyndros at stanford.edu Course description: The aim of this class is to give students the tools necessary to read critically and understand discussions of international trade and macroeconomic policy found in popular media such as The Economist magazine, the Wall Street Journal and the Financial Times. The course is organized around several questions of current interest to policy makers, business leaders and the general public. It covers selected basic models in international trade and international macroeconomics relevant to these questions. Recent research on the empirical and practical relevance of these models is also discussed. Prerequisites: Econ 50, 51, 52. Course schedule and location: Monday, Wednesday, 1.15pm 3.05pm in Econ 140. Final exam: Friday December 15 th, 8.30am 11.30am. If you cannot make this time, do not take this class. Assessment: There will be five problem sets (20%) two midterms (20% each) and a final exam (40%). In marginal cases, class participation will be taken into account. Readings: The main textbook for the class is International Economics: Theory and Policy, 7 th edition, by Krugman and Obstfeld (K&O). Additional required readings will be posted on the class webpage. Some recommended readings will be taken from Pop Internationalism by Paul Krugman, Free Trade Under Fire (2 nd edition) by Douglas Irwin and Foundations of International Macroeconomics, by Maurice Obstfeld and Kenneth Rogoff (O&R). These texts are on reserve at the library. Other recommended readings and resources will be made available through links on the class webpage. Discussions: Where noted, the last 15 minutes of class will be devoted to general discussion of a set topic of current interest. If you do no other reading, at least do the readings to prepare for these discussions! I will call on students at random to participate in the discussion (cold calling). What you say in the discussion will not affect your grade. Unexplained absences, however, may count against you. Webpage: Available through Frequently asked questions How much math is used in this course? Familiarity with basic calculus is assumed. No accommodation will be made for students that do not have this familiarity.

2 How much reading should I do? Required readings have been kept to a minimum. Discussion readings are also required, and should be done before the class for which they are assigned. If you are particularly interested in a topic, you are invited to explore the recommended readings. Do I have to go to section? Section is compulsory. Attendance will be taken. Where indicated, the TA will cover new material. The TA will also go through the solutions to the previous problem set, and discuss any questions you have on problem sets, readings or lectures. Can my friends and I work together on the problem sets? Yes. The problem sets are intended to be learning experiences, so feel free to work in groups. However you may find it useful to attempt the problems on your own before working with others. Each student must submit their own problem set solutions. Doing the problem sets is the best way to prepare for the exams. If you copy another student s answers without understanding the material, your exam performance will suffer. How are the problem sets graded? The problem sets are graded on a scale of check plus, check, check minus and zero (if no problem set is handed in). Legibility is important. Typewritten problem sets are much appreciated. Where appropriate, graphs (drawn by hand) are very useful. Can I turn a problem set in late? No. Problem sets turned in after the deadline (12 noon) will not be graded. What if I cannot take one of the midterms? There will be no make up exams. You should contact me in advance if you cannot make a midterm. What material will be covered on the midterms? The first midterm will cover the material from the first part of the quarter. The second midterm will cover only the material from the second part of the quarter. What do I do if a mistake was made in grading my midterm? After a midterm is returned, you will have one week to contact your TA with problems or concerns. Beyond this deadline, no complaints will be entertained. What material will be covered on the final? The final will cover material from the entire quarter, weighted towards the final part. Week 1 Lecture 1: Monday 25 th September 2006 Topic: Introduction 1. What is international economics? 2. Motivating facts and questions 3. Review of budget sets, utility maximization and demand. Key concepts: Diminishing marginal rate of substitution;; Relative demand K&O Chapter 2

3 Paul Krugman: What do Undergrads Need to Know about Trade?, American Economic Review Papers and Proceedings, May 1993, p (also in Pop Internationalism) Hal Varian: Intermediate Microeconomics 7 th edition, Chapters 2-6 (or similar material in an alternative intermediate micro textbook). Douglas Irwin: Free Trade Under Fire, Chapter 1. Lecture 2: Wednesday 27 th September 2006 Topic: Endowment economies I 1. Aggregation over consumers some useful results with homothetic preferences 2. Free trade vs autarky in a 2-good small open endowment economy 3. A 2-country 2-good endowment world Key concepts: Homothetic preferences;; Terms of trade;; Perfect competition;; Small open economy;; Gains from trade;; Comparative advantage Hal Varian: Intermediate Microeconomics 7 th edition, Chapters 2-6 and 31 (or similar material in an alternative intermediate micro textbook). Alan Deardorff: Benefits and Costs of Following Comparative Advantage, Section: No section this week Week 2 Lecture 3: Monday 2 nd October 2006 Topic: Endowment economies II 1. Analysis of gains from trade using the Edgeworth Box 2. Evidence on trade liberalization and relative prices from Japan and the US 3. The redistributive effects of trade 4. Introduction to economies with production Key concepts: Pareto efficiency;; Contract curve Douglas Irwin (2005), The Welfare Cost of Autarky: Evidence from the Jeffersonian Trade Embargo, Review of International Economics 13 (4) Daniel Bernhofen and John Brown (2004), A Direct Test of the Theory of Comparative Advantage: The Case of Japan, Journal of Political Economy 112 (1) Hal Varian: Intermediate Microeconomics 7 th edition, Chapters 31 and 32 (or similar material in an alternative intermediate micro textbook). Discussion topic: Should trade policy be used as a tool for domestic redistribution? White House statement: President announces temporary safeguards for steel industry The Economist: Just Say No

4 Lecture 4: Wednesday 4 th October 2006 First problem set due Topic: The standard trade model (introducing production) 1. Economies with production 2. The effect of terms-of-trade changes in the short and long run 3. Evidence on trade liberalization, shifts in production and welfare 4. What explains changes in the terms-of-trade Key concepts: Production possibility frontier;; Immiserizing growth K&O Chapter 5 Hal Varian: Intermediate Microeconomics 7 th edition, Chapter 32 Douglas Irwin: Free Trade Under Fire, Chapters 2 and 3. Section: Trade policy Reading: Robert Baldwin (1989), The Political Economy of Trade Policy, Journal of Economic Perspectives 3 (4), Week 3 Lecture 5: Monday 9 th October 2006 Topic: Ricardo I 1. Introduction to technology and production 2. 2-good small open Ricardian economy 3. 2-good 2-country Ricardian world Key concepts: Factors of production;; Production function;; Marginal rate of transformation;; Constant returns to scale;; Unit input requirements;; Relative supply;; Absolute advantage K&O Chapter 3, pages Paul Krugman: Ricardo s Difficult Idea, Discussion topic: Does China s growth hurt the US? Martin Wolf in the Financial Times on the costs and benefits of globalization Paul Krugman: Does Third World Growth Hurt First World Prosperity? Harvard Business Review, July-August 1994 (in Pop Internationalism) Lecture 6: Wednesday 11 th October 2006 Second problem set due Topic: Ricardo II 1. Gains from trade in the 2-good 2-country model 2. Wages in the 2-good 2-country model 3. Sketch of a more general model 4. Evidence on the Ricardian view of the world 5. What the Ricardian model cannot explain Key concepts: Derived demand K&O Chapter 3, pages 40-47

5 Bela Belassa (1963), An Empirical Demonstration of Classical Comparative Cost Theory, Review of Economics and Statistics 45 (3), Section: Review for first midterm Week 4 Lecture 7: Monday 16 th October 2006 Topic: Specific factors model 1. More about production 2. Autarky in the specific factors model 3. A small open econonomy with specific factors 4. Distribution of gains from trade 5. Application: the trade and wages debate 6. Political economy of trade policy Key concepts: Marginal product;; Diminishing marginal product Hal Varian: Intermediate Microeconomics 7 th edition, Chapter 18 Discussion topic: Are sweatshops good for workers in developing countries? Paul Krugman: In Praise of Cheap Labor, Slate, March Nicholas Kristof in the NYT (you can find this through Lexis-Nexis if you don t have a New York Times subscription) Lecture 8: Wednesday 18 th October 2006 First midterm exam (1 hour) Topic: Increasing-returns-driven specialization I 1. Motivation: Evidence on intra-industry trade, trade between similar countries 2. What are increasing returns/ economies of scale? Key concepts: Imperfect competition;; Differentiated products;; Increasing returns to scale K&O Chapter 6, pages Hal Varian: Intermediate Microeconomics 7 th edition, Chapter 18 Section: Immigration and inequality in the US Reading: The Economist: Myths and Migration Week 5 Lecture 9: Monday 23 rd October 2006 Topic: Increasing-returns-driven specialization II 1. Imperfect competition monopoly 2. Imperfect competition monopolistic competition

6 3. Gains from trade Key concepts: Profit maximization;; Pure monopoly;; Monopolistic competition;; Fixed costs;; Markups;; Free entry K&O Chapter 6, pages Paul Krugman Talking About a Revolution Hal Varian: Intermediate Microeconomics 7 th edition, Chapter 24 Lecture 10: Wednesday 25 th October 2006 Topic: Increasing returns III;; Trade and development 1. Evidence on trade liberalization and variety 2. External economies and the agglomeration of economic activity 3. Infant industry protection theory and evidence 4. The evidence on trade liberalization, trade and growth Key concepts: External economies;; Path dependence K-O, Chapter 6, pages and Chapter 10 Douglas Irwin: Free Trade Under Fire, Chapter 6 Pete Klenow and Andres Rodriguez-Clare Quantifying Variety Gains from Trade Liberalization Douglas Irwin (2000), Did Late Nineteenth-Century US Tariffs Promote Infant Industries? Evidence from the Tinplate Industry, Journal of Economic History 60, Jeffrey A. Frankel and David Romer, Does Trade Cause Growth? American Economic Review, June 1999, pp Pinelope Goldberg and Nina Pavcnik, Distributional Effects of Trade Liberalization in Poor Countries Discussion: Should developing countries embrace free trade? David Dollar and Aart Kraay, Spreading the Wealth, Foreign Affairs, Jan-Feb Dani Rodrik, Globalization for Whom? Harvard Magazine, Jul-Aug The Economist, More or Less Equal? Section: Review of national income accounting in an open economy Reading: Greg Mankiw: Macroeconomics 5 th edition, Chapter 5, Sections 1 and 2 Week 6 Lecture 11: Monday 30 th October 2006 Third problem set due Topic: Intertemporal trade I 1. A small 2-period endowment economy 2. The role of government consumption 3. Adding investment to the model Key concepts: Intertemporal preferences;; Discount factor;; Interest rate;; Trade balance;; Current account K&O Chapter 12

7 O&R Chapter 1, Sections 1 and 2 Hal Varian: Intermediate Microeconomics 7 th edition, Chapter 10 Lecture 12: Wednesday 1 st November 2006 Topic: Intertemporal trade II 1. More on the small 2-period economy with investment 2. A 2-region world economy Key concepts: Elasticity of intertemporal substitution O&R Chapter 1, Sections 2 and 3 Economic Report of the President (2006), Chapter 6: The U.S. Capital Account Surplus, pp Maurice Obstfeld America s Deficit, the World s Problem Dooley, Michael P., David Folkert-Landau and Peter M. Garber, Interest Rates, Exchange Rates, and International Adjustment, National Bureau of Economic Research Working Paper 11771, November 2005 Discussion: Is the US current account deficit sustainable? The Economist Stop Worrying and Love the Deficit Section: Review of insurance and incentive compatibility Reading: Hal Varian: Intermediate Microeconomics 7 th edition, Chapter 12, Chapter 37, section 7 Week 7 Lecture 13: Monday 6 th November 2006 Fourth problem set due Topic: Sovereign debt I 1. A 2-state model with full commitment 2. Absence of commitment 3. Lack of commitment and sanctions 4. Why do countries repay their debts? 5. Investment and sanctions O&R Chapter 6, Sections 1 and 2 Hal Varian: Intermediate Microeconomics 7 th edition, Chapter 12, Chapter 37, section 7 Lecture 14: Wednesday 8 th November 2006 Topic: Sovereign debt II 1. Investment and sanctions debt overhang 2. Debt buybacks

8 O&R Chapter 6, Sections 1 and 2 Jeremy Bulow and Kenneth Rogoff (1988), The Buyback Boondoggle, Brookings Papers on Economic Activity 2, Jeremy Bulow and Kenneth Rogoff (1990), Cleaning Up Third World Debt Without Getting Taken to the Cleaners, Journal of Economic Perspectives 4, Discussion: Should we forgive Third World debt? William Easterly Debt Relief, Foreign Policy, Nov-Dec Section: Review of sovereign debt Week 8 Lecture 15: Monday 13 th November 2006 Second midterm exam (1 hour) Topic: Crises in financial markets I 1. Simplest model of a bank run Hal Varian: Intermediate Microeconomics 7 th edition, Chapter 37, section 4 Lecture 16: Wednesday 15 th November 2006 Topic: Crises in financial markets II 1. More on bank runs 2. Moral hazard and the lender of last resort 3. Case study: the East Asian Crisis Paul Krugman Fire-sale FDI Douglas Diamond and Philip Dybvig (1983), Bank Runs, Deposit Insurance and Liquidity, Journal of Political Economy 91 (3), Kenneth Rogoff, "International Institutions for Reducing Global Financial Instability," Journal of Economic Perspectives 13, Fall 1999 What caused East Asia s crisis? FRBSF Economic Letter Paul Krugman (1998), What happened to Asia? Discussion: Do international institutions make international financial crises worse? Kenneth Rogoff, Moral Hazard in IMF Loans: How Big a Concern? Section: Review of financial crises Week 9 Lecture 17: Monday 27 th November 2006

9 Topic: Price levels and the exchange rate in the long run 1. What is the exchange rate 2. Facts about exchange rates 3. Theory of purchasing power parity 4. Evidence on purchasing power parity 5. The Balassa-Samuelson effect K&O Chapter 15, pages , The Economist: McCurrencies (text only from Proquest). Kenneth Rogoff, "The Purchasing Power Parity Puzzle," Journal of Economic Literature 34, June 1996, Lecture 18: Wednesday 29 th November 2006 Fifth problem set due Topic: The asset approach to exchange rate determination 1. The foreign exchange market 2. Demand for foreign currency assets 3. Market equilibrium 4. Evidence on interest parity conditions K&O Chapter 13, (including pages ) Section: Open economy IS-LM (Mundell-Fleming) Reading: Greg Mankiw: Macroeconomics 5 th edition, Chapter 5, Section 3 Week 10 Lecture 19: Monday 4 th December 2006 Topic: Monetary and exchange rate policy 1. Review of Mundell-Fleming 2. Exchange rates and the current account 3. Exchange-rate based stabilizations 4. Currency crises K&O Chapter 16, 17 and 19 Discussion: Exchange rate policy in developing countries fix or float? Paul Krugman: Don t Laugh At Me Argentina Lecture 20: Wednesday 6 th December 2006 Topic: Optimal currency areas;; Review 1. Theory of optimal currency areas 2. The evidence 3. Review K&O Chapter 20

10 Andrew Rose (2000), Does a Currency Union Boost International Trade? California Management Review Discussion: Did the Euro Experiment Fail? The Economist The Euro and Trade Section: Review