NBA 524; Credit: 3 (not open for audit)
Spring 2008
Prof. I. Azis (ija1@cornell.edu)
TA: Mingkwan Thongpruksa (mt295@cornell.edu)

Tues & Thurs 14.55 – 16.10; Room: Sage B06
Office Hour: Tues: 11.00 – 14.00, and by appointment
Office: 213 West Sibley Hall (255-4271)
 

Purpose of the Course

The purpose of the course is to provide students with a knowledge of macroeconomics and international trade that are closely linked with business decisions and other important issues in the business world, e.g., what causes growth, recession, unemployment and inflation, why and how exchange rate and stock market crises come about, why countries trade, what do budget deficits and trade deficits mean for export-import businesses, and what macro policies can be anticipated based upon which business decisions are made, etc. The course will help students understand and able to use tools of analyses to better comprehend macroeconomic development and international trade issues relevant to the business world. Practical questions raised in each topic will focus on the link between macroeconomic-cum-trade development/policies and the role and response of the business sector as an economic agent.

Contents
I. Macroeconomic Concepts and Business Decisions

1)     National income accounting, balance-of-payment, and government budget

2)  Inflation, unemployment and output: how business sector and the financial market react when interest rates change, and how producers or suppliers respond when prices and wages change.

3)  Financial market, expectation, uncertainty, and policy credibility: how macroeconomic development and financial market interacts in an open economy, how the business sector anticipates monetary and fiscal policies, and why credibility matters.

4) Savings, investment, technology, and productivity: how productivity influences steady-state output, unemployment and how it interacts with the business’ long-run decisions.

II. International Trade, Finance, and Macroeconomy
 

1)     Why countries trade, and why the patterns of trade have changed over the years: comparative advantage, increasing returns to scale, and intra-industry trade

2)  Why regional trading agreements proliferate, and what are the costs and benefits of having such agreements

3)  How do capital flows interact with macroeconomic development and exchange rate regimes, and what should the business sector anticipate given the huge size of current account deficits and capital inflows.

III. Important Macroeconomic and Trade Phenomena from Business Perspective
Great depression, Japan’s long recession (liquidity trap and deflation), financial crises, effect of oil price surge, boom and bust of housing market (including sub-prime crisis), implications of outsourcing, rising inflows of sovereign fund.

Evaluation

Evaluation is based on: (1) students’ participation in class debates and discussions: 10%; (2) a set of home-works: 25%; (3) a mid-term exam: 25% and (4) a final exam: 40%. Although there is only 10% weight for class participation, I should caution that macroeconomics is cumulative; each topic is related to, or built upon, what students have learned before. Hence, it is important for students to keep up with the topics by attending every class meeting and actively discussing the materials in the class.

Schedule and Reading Materials

The main textbook is Macroeconomics by Oliver Blanchard (Prentice Hall). For international trade we will use International Economics: Theory and Policy by Paul Krugman & Maurice Obstfeld (Addison & Wesley). The book by Andrew B. Abel and Ben S. Bernanke Macroeconomics (Addison Wesley) is occasionally used for additional sources.

For homework and exercise, students are expected to use actual economic and trade data of selected countries. We recommend the following publications: World Economic Outlook (WEO), published annually by the IMF; and International Financial Statistics (IFS), published quarterly also by the IMF. While IFS contains macroeconomic and financial data of all countries in the world, WEO contains both data series and macroeconomic analysis of different groups of countries. For U.S data, students can also look at the website of the Bureau of Economic Analysis: http://www.bea.doc.gov/.

The following are the topics to be discussed week-by-week (notes: OB for Oliver Blanchard third edition; KO for Krugman & Obstfeld fifth edition; and AB for Abel & Bernanke fifth edition).

Week 1: (OB: Ch 1-4; AB: Ch 1 & Ch 2)
• Macroeconomics and its relevance to the business sector
• National income accounting, balance-of-payment, government budget
• Concepts of goods market and financial market (aggregate demand): interest rate determination
Week 2: (OB: Ch 5-7; AB: Ch 3.2-3.5, Ch 7 & Ch 9)
• Labor markets and aggregate supply: price determination
• Short-run and medium-run effects of anticipated monetary and fiscal policies
Week 3: (OB: Ch 8-9; AB: Ch 3.6 and Ch 12.1)
• Interactions among output-unemployment-prices
• Inflation and the role of expectation
Week 4: (OB, Ch 14-17; AB: Ch 4, Ch 10.3 & Ch 15)
• Real versus nominal interest rate
• Bonds market and stock market
• Incorporating agents’ expectations in aggregate demand analysis
• Fiscal and monetary policy, and the business response
Week 5: (OB, Ch 19; AB: Ch 5.2)
• Aggregate demand relations in an open economy
• Exchange rate and interest rate interactions: uncovered interest parity
• Twin deficit and its repercussions on business activities
Week 6: (OB, Ch 20-21, AB: Ch 13.2-13.4)
• Exchange rates regimes and common currency area
• Implications on financial market and vulnerability
Week 7: (OB, Ch 24-26; AB: Ch 12.3, 14 & 15; KO, Ch 6)
• Limitations and ineffectiveness of government policies
• Role of uncertainty and credibility, and implications of time consistency
Week 8: (OB: Ch 10-13; AB: Ch 3.1, Ch 6.1-6.3)
• Saving, investment, technology, and steady state: a long-run analysis
• Endogenous growth model, total factor productivity (TFP) and the link with unemployment and wages
• Anticipated policies and business response

SPRING RECESS
FOLLOWED BY A MID-TERM EXAM
Monday 3/24, 6PM-8PM

Week 9: (KO:Ch 4-6)
• Basic theories and concepts of international trade
• Terms of trade and the role of exchange rates
• Increasing returns and monopolistic competition
• Changing patterns of trade: intra-industry and its implications on trading activities
Week 10: (KO: Ch 8, Ch 11, Ch 20)
• Instruments of trade policy
• Optimum currency area, proliferation of free trade area
• Benefit and Cost of holding large foreign reserves
Week 11: (AB: Ch 5.1, Ch 13.1; OB, Ch 18.2 & Ch 18.3)
• Nominal versus real exchange rates and exchange rate model
• Capital flows, macroeconomic consequences, and corporate sector’s financing
• Balance-sheet effects and the repercussions on business decision on investment
Week 12: (OB, Ch 22-23; AB: Ch 8.2, Ch 13.5 & Ch 11.4)
• Great Depression
• Liquidity trap, deflation and Japanese recession
Week 13:
• Financial crisis and the risks of deflation
• Effect of recent oil price surge
Week 14:
• Yen-carry trade
• Global imbalances and Summary

FINAL EXAM
5/7 9AM-11.30AM

Each student in this course is expected to abide by the Cornell University Code of Academic Integrity. Any work submitted by a student in this course for academic credit will be the student's own work. "In compliance with the Cornell University policy and equal access laws, I am available to discuss appropriate academic accommodations that may be required for students with disabilities. Requests for academic accommodations are to be made during the first three weeks of the semester, except for unusual circumstances, so arrangements can be made."