Introductory Macroeconomics, Hilary Term 2024
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Tutor
Tutorials
Tutorials take place in my room at the top of Staircase 1.
| Th. 2:00 - Webb, Baek, Laing |
| Th. 3:15 - Pittard, Samra, Thokala |
| Th. 4:30 - O'Leary, Slater |
Schedule overview
| Week | Topic | ||
| 1 | GDP | ||
| 2 | Economic Growth | ||
| 3 | Growth and technical progress | ||
| 4 | Building blocks: money & inflation, the labour market | ||
| 5 | Building blocks of aggregate demand: consumption and investment | ||
| 6 | A model for the short run: IS-LM | ||
| 7 | The supply side: the Phillips Curve | ||
| 8 | The open economy |
Teaching
Assignments
Preparing - by completing the assignments in advance - is a requirement for attending the
tutorial. If you think you will not be able to complete an assignment on time, contact me
in advance to discuss the possibility of an extension.
Essays
Essays should be about 1500 words, should have a bibliography listing any sources
used, and should be submitted by 12:00 on the day before your tutorial.
Please submit your essays in pdf format by e-mail.
Do not copy text from your sources without attribution: that is plagiarism. Copying many
two-sentence passages from several different sources is plagiarism. Copying three sentences,
in which you change just one or two words is plagiarism. Every term I submit at least one
week's essays to an online service which checks them against a huge library of sources,
including previously submitted student essays.
Essays are about both substance and style - style in the sense of crafting a persuasive argument,
not in the sense of ornament. A good essay will display lucid economic reasoning, will make
use of tools like diagrams as appropriate, and will bring relevant evidence to bear.
Feel free to start your research with websites and journalistic sources,
but try to consult a few sources authored by professional researchers
and published in academic journals (or working papers) or policy reports.
Problem sets
Some weeks you will be set some mathematical or diagrammatic problems to solve. Unlike the essays,
problem sets do not need to be submitted in advance. Bring your problem sets to the tutorial.
Please attach a cover sheet on which you indicate and briefly describe
any difficulties you have had. This helps me know where to focus my attention when I look
over your work, what feedback you most want.
Textbooks
As in the microeconomics course, there is not a single textbook. There are lots of good options and they all present basically the same material. I will rely on, and refer you to, two main texts:
N. Gregory Mankiw & Mark P. Taylor, Macroeconomics. 2nd European Edition.
I will give chapter numbers and titles from the above, but there are several
functionally-equivalent versions of this book in the College library:
1 of the 2014 2nd European edition; 2 of the 2008 1st European edition; 5 of the 2010 7th
international edition sole-authored by Mankiw; 3 of the 2013 8th international edition,
Mankiw sole author; and 1 of the 2016 9th edition with Mankiw as sole author. Frustratingly,
the version of Mankiw and Taylor that you have online access to via the Bodleian is sufficiently
different in format and organisation (though the content is still close to the same) that
you will find it difficult to use. There are also other versions of Mankiw macro texts that
I have not listed here, which you'll find in other libraries and for sale online. You want
a version with approximately these contents.
Olivier Blanchard, Alessia Amighini, and Francesco Giavazzi, Macroeconomics. A European Perspective.
We will rely on this one for developing aggregate supply and the Phillips curve based on a model of the
labour market. There are again several versions of this text that are essentially equivalent. We have
2 copies of the 2010 1st edition in the College library. Other editions are available at various
Oxford libraries (e.g. Social Sciences). The core of the book is the same as what you will find in
Olivier Blanchard & David Johnson, Macroeconomics, global edition. We have 5 copies of the 6th global
edition in the College library. You will find single-authored (Blanchard only) macro textbooks that
develop the labour market, Phillips curve, and aggregate supply in the same way; they are equally good.
The CORE Team, The Economy. Economics for a Changing World. (Oxford: OUP, 2017).
Citations refer to version 1.0 of this text, which is available in print or (freely
accessible) on-line..
A note on Jones. The lectures will be closely based on Charles Jones' textbook. I do not use that book because I don't like the way it mixes a model of how the economy works with a model of how policy responds to the economy; it becomes hard to tell which is which. I also prefer other expositions of aggregate supply. Finally, I am not (yet) persuaded that it's better to define variables in terms of deviations from long-run values rather than in absolute terms. There are no contradictions between what we will do in tutorials and what will be presented in lectures (and in the Jones book). There are differences in notation and exposition, but you will be learning the same models.
Week by week schedule
Week 1: GDP
This week we consider gross domestic product, the measure of output and income that
macroeconomists typically focus on. We will also look at a simple model of how incomes
are determined and how it comes to be that aggregate expenditure equals aggregate
output in a model with flexible prices and market-clearing.
Textbook readings:
Mankiw & Taylor, Chs. 1-3 ('The Science of Macroeconomics', 'The Data of Macroeconomics', 'National Income: Where It Comes From and Where It goes').
No problems for this week - be prepared to discuss equilibrium in a classical (flexible price, market clearing) economy
Essay topic:
Is GDP an imperfect but workable measure of welfare, or fundamentally flawed?
This is a big topic, with issues ranging from the nitty-gritty of calculations to
important philosophical considerations, from the home to the environment, the internet,
and the financial sector. While you should show an awareness of this range of
issues, you cannot develop more than a couple of ideas in any depth in a short essay.
That is fine. One more thought: note that if you argue that GDP growth or levels are underestimated
because they fail to account for quality improvements or free services provided by
the big technology companies, you are implicitly arguing that actually we are better off than we think,
that complaints about stagnant real wages for the last 15 years are just whingeing.
A nice starting point could be Diane Coyle's GDP: A Brief But Affectionate History
(Princeton: Princeton UP, 2014), esp. Chs. 1, 2, 5, and 6. This is a short volume that
you could read in an afternoon. It is discursive and a little short of detail, but
motivates the topic very well. One review is
here.
Another route into the topic could be the articles in the Journal of Economic Perspectives
"Symposium: Are Measures of Economic Growth Biased?" (vol. 31 no. 2, 2017),
accessible here.
Further, accessible overviews are an Economist article of 2016, "The Trouble with GDP",
here, and a 2010
New York Times article, "The Rise and Fall of the G.D.P."
here.
2018 Nobel Prize winner William Nordhaus made a number of important contributions to the
measurement of output and welfare. One of these was Nordhaus, William and James Tobin,
"Is Growth Obsolete?" in Economic Research: Retrospect and Prospect, vol. 5:
Economic Growth, NBER, 1972.
This week we study the Solow model of economic growth. When I say 'the Solow model'
I mean a model with the following elements: a constant returns to scale aggregate
production function with inputs capital, labour, and a technology parameter; capital accumulation;
an exogenous investment rate; exogenous population growth; and exogenous technical progress. It is
common to first present a simplified version where technology, and sometimes the labour force, are held constant.
That is not the full model.
Textbook readings:
Mankiw & Taylor Chs. 8-9.
Blanchard, Amighini & Giavazzi, Chs. 11-13.
Charles Jones, Macroeconomics (3rd international edition), Chs. 4-6.
Burda & Wyplosz, Macroeconomics. A European Text (7th ed.), Ch. 3.
CORE Team, The Economy, Ch. 2.
Problems for this week: here.
No essay this week.
This week we continue to discuss economic growth, now considering technical change in
greater detail.
Textbook readings: as last week. Consider also C. Jones, Introduction to Economic Growth
2e (London: Norton, 2002). Some of it is too technical for our purposes, but it does have
a chapter on natural resources, for example.
Problems for this week: here.
Essay topic: pick one of the following.
a. How successfully does the Solow model with exogenous population growth and technical change explain why some countries are rich and others poor? Does it predict the poor will catch up with the rich?
b. Population growth is considered a major threat to prosperity in poorer countries. China famously adopted a one-child policy to reduce population growth. Does the Solow model with technological progress justify such worries?
c. In his much-discussed Capital in the Twenty-First Century,Thomas Piketty predicted
that inequality in the advanced economies will get worse in decades to come: the capital/income
ratio will rise, and capital's share of income will grow bigger and bigger. According
to the Solow model with exogenous population growth and technical change,
is this a likely prospect?
This topic is potentially difficult. You will quickly find many reviews of Piketty's
book, which could be good starting places, for example Robert Solow's "Thomas Piketty
Is Right. Everything You Need to Know About Capital in the Twenty-First Century,"
New Republic, 23 April 2014. Or (then) MIT graduate student M. Rognlie's critique
"A note on Piketty and diminishing returns to capital". Piketty has an article in the
Journal of Economic Perspectives, vol. 29 no. 1 (Winter 2015).
d. Can 'secular stagnation' occur in the Solow model with exogenous
technical progress? in Romer's model of endogenous technical change? Is it in fact a
practical problem facing us today?
Some possible readings to get started on secular stagnation:
Gordon, Robert, "Secular Stagnation: A Supply-Side View," American Economic Review: Papers
and Proceedings, vol. 105, no. 5 (2015), pp. 54-59.
Summers, Lawrence, "The Age of Secular Stagnation," Foreign Affairs, March/April 2016.
There is more on Summers' website.
Eichengreen, Barry, "Secular Stagnation: The Long View," NBER Working Paper, no. 20836,
January 2015.
This week's focus is unemployment and inflation. We will consider the labour
market and unemployment in somewhat greater detail, in particular the "competing claims"
model of real wages and employment. This will serve you well for the second year macro
course, which builds on this foundation, and should be familiar after last term's discussion
of employment contracts in micro.
Readings:
The labour market
The Core Team. The Economy. Economics for a Changing World. (Oxford: OUP, 2017),
Ch. 9.
(There is additional material on employment relations in firms in Ch. 6.)
Blanchard, Amighini & Giavazzi: Ch. 7.
Mankiw & Taylor Ch. 7; Jones Ch. 7. These textbook chapters provide a useful overview
of data, definitions, and theories of unemployment. They do not develop the competing
claims model.
Money and inflation
Mankiw & Taylor, Chs. 4-5.
Jones, Ch. 8.
Core Team, Chs. 15, 8.
The Economy offers extra detail on bank lending (Ch. 10) and the Phillips curve (Ch. 15).
The Phillips curve and aggregate supply are what we are building up to here.
Problems for this week: here.
Essay topic:
No essay this week.
This week lays some foundations for a theory of how changes in demand can affect output and employment. We examine the microeconomics of consumption and investment, which are the biggest and the most volatile components of aggregate demand, respectively.
Readings:
Jones: Chs. 16-17
Mankiw & Taylor: Chs. 18-19.
Core: Unit 10 ("Banks, Money, and the Credit Market")
Blanchard, Amighini & Giavazzi: Ch. 16 ("Expectations, Output, and Policy")
Problems for this week: here.
Essay topic:
"The life-cycle and permanent-income models of consumption teach us that household
expenditure is very stable, hence not important in business cycle fluctuations."
Do you agree or disagree?
In addition to the textbook readings given above, have a look at the recent
Journal of Economic Perspectives article by Mian and Sufi: "Finance and Business Cycles: The
Credit-Driven Household Demand Channel" (vol. 32, no. 3, Summer 2018).
Also useful are the Bank of England's 2014 Q3 Quarterly Bulletin
(here)
and the 2018 Parliamentary Briefing Paper on household debt
here.
If you wish to write about investment instead, e-mail me with a proposed topic.
Building in part on last week's work on consumption and investment, we now develop a model of the economy in the short-run. In this model, output is determined by demand, rather than by full employment of the factors of production in an aggregate production function. This model, called the IS-LM model, looks slightly different to what is presented in the Jones textbook and the lectures, but is in fact the same. The main difference is that Jones replaces the LM relationship with an assumption about central bank policy, embodied in an "MP" curve. You can think of the MP relationship as a special case of the LM curve. Jones also expresses variables in deviations from long-run values rather than as absolute magnitudes.
Readings:
Mankiw & Taylor (1e): Chs. 10-11 ("Aggregate Demand I" and "Aggregate Demand II") .
CORE: Unit 14 ("Unemployment and Fiscal Policy")
Blanchard, Amighini & Giavazzi: Ch. 5 "Goods and Financial Markets: the IS-LM Model"
Problems for this week: here.
Essay topic:
No essay this week.
In the IS-LM model we have a good tool for understanding the demand side of macroeconomic
equilibrium. But that model simply assumes that sufficient supply will be forthcoming, at
constant prices; we need to do better than that. So this week we look at aggregate
supply, the most important aspects of which can be captured in the Phillips curve (PC).
We will build the PC on the foundation of the 'competing claims' model of the labour market
that we studied earlier this term. Other derivations are possible (see Mankiw & Taylor),
but they arrive at the same place.
To keep the workload manageable this week, we will not work on the aggregate-supply/aggregate-demand
(AS/AD) model that the PC and IS-LM models imply. Be aware that the version of AD presented in
the Jones book is somewhat unconventional. Like the MP curve in the Jones version of IS-LM
(in fact, building precisely on that curve), the Jones AS/AD setup mixes together a
model of how the economy works on its own with an assumption about how policy makers react
to and try to influence the economy. There is a loss of transparency and generality there, it seems to
me. Also a conventional AD curve relates the price level (rather than inflation) to output.
(At a higher price level, the real money supply is smaller, interest rates higher, hence
demand-determined equilibrium output lower.)
Readings:
CORE, The Economy, Unit 15 ("Inflation, Unemployment, and Monetary Policy")
Blanchard, Amighini & Giavazzi: Chs. 9 ("The Natural Rate of Unemployment and the Phillips Curve")
and 10 ("Inflation, Activity and Nominal Money Growth").
Blanchard and Johnson, Macroeconomics (6 ed.), Chs. 7-8 ("Putting All Markets
Together: The AS-AD Model," "The Phillips Curve, the Natural Rate of Unemployment, and
Inflation").
Mankiw & Taylor, Ch. 13 ("Aggregate Supply and the Short-Run Tradeoff between
Inflation and Unemployment"). M&T offer alternative derivations of the PC.
Problems for this week: here.
Essay topic:
"Do economies have a 'natural' rate of unemployment?
This question has both a theoretical and an empirical aspect. You will probably want to
say at least a little bit about both. Be sure to use the 'competing claims' model of the
labour market to frame your answer, though you can be critical of it and/or go beyond it
to consider other approaches.
The textbooks are the right place to start. Consider Howell, Baker, Glyn, and Schmitt,
"Are Protective Labor Market Institutions at the Root of Unemployment? A Critical Review
of the Evidence," Capitalism and Society, vol. 2, no. 1 (2007), for a nice survey of
empirical work on the determinants of unemployment (here).
Heckman has a comment on the paper in the same issue.
There are a number of useful, accessible articles in the Journal of Economic Perspectives.
The Winter 1997 (vol. 11, no. 1) issue has a symposium on the natural rate of unemployment,
with articles by a number of prominent scholars. "What we know and do not know about the
natural rate of unemployment," by Olivier Blanchard and Lawrence Katz, has an exposition
of the competing claims model. The Autumn issue of the same year has a symposium on European
unemployment. In the Winter 2001 (vol. 15, no. 1) issue, Lindbeck & Snower's article
"Insiders versus Outsiders" could be useful. Finally, Ball & Mankiw have a useful article
on "The NAIRU in Theory and Practice" in vol. 16, no. 4 (Autumn 2002).
You can see that these readings are not especially up-to-date. I'd be happy if you found
more recent work for your essays!
This week we return to aggregate demand, now focussing on net exports and their counterpart in the balance of payments, net capital flows. A new question that arises when we imagine an integrated global financial market is whether interest rates in individual economies can differ from what prevails in the rest of the world. The simplest approach is to assume they cannot, which gives us the Mundell-Fleming model as set out in Mankiw & Taylor. You should start there. A more sophisticated treatment allows for temporary deviations, if the exchange rate also deviates temporarily from a long-run value, such that currency market traders anticipate a depreciation or appreciation that offsets the interest rate differential. This version is explained in Blanchard & Johnson or Blanchard, Amighini & Giavazzi. (Jones, meanwhile, offers a sort of hybrid: the home interest rate can vary relative to international rates, but the mechanics of how and why and for how long are not spelled out.)
Readings:
Mankiw & Taylor (2nd European ed. 2014), Ch. 6 ("The Open Economy") and 13 ("The Open Economy Revisited")
Chapter 6 defines the relevant variables (e.g. the real exchange rate) and sets out
how foreign trade fits into the classical model of an economy with perfectly competitive markets
and perfectly flexible wages and prices. Chapter 13 considers the same issues in
an IS-LM context, assuming a small economy in a big world. In the first European edition, the relevant chapters are 5 and 13.
Blanchard & Johnson (6e), Chs. 18-20, or Blanchard, Amighini & Giavazzi, Ch. 6, 18.
These texts investigate the issues in greater detail and with more sophistication, in
particular regarding the interest-rate -- exchange-rate connection. The material is
correspondingly more difficult than in Mankiw & Taylor. Chapter 18 defines variables
and discusses uncovered interest rate parity. Chapter 19 is relatively self-contained
and looks at how the exchange rate and net exports influence output. Chapter 20 puts this
all together into an open-economy IS-LM model. Moving along the IS curve, the interest
rate affects not only investment (and possibly consumption), but also the exchange rate,
and thus net exports.
Jones (4e, international student edition) covers the open economy in chapters 19 (definitions
and basic ideas) and 20 (a model in which interest rates can vary, with little explanation).
Problems for this week: here.
Essay topic:
No essay this week