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Course: APPD-610

Professor: Dr. Stanley Samarasinghe

Contact information:
Payson Center for International Development and Technology Transfer
Tulane University
901 N. Stuart St. Suite 1100
Arlington, VA 22203
Tel: (703) 243-0871
Fax: (703) 243-1358
E-mail: ssamara@tulane.edu

Course Goals

• To introduce you to the basic analytical tools necessary for understanding economic analyses of development issues and problems;
• To introduce you to the basic microeconomic and macroeconomic concepts and methods used in the field of international development;
• To enable you to understand and critique the more widely accepted and applied theories of economic development;
• To provide you with a deeper understanding of the interrelationships between economic issues on the one hand and political and social issues on the other.

Recommended Readings

The required reading will come mainly from Baumol and Blinder. You must have your personal copy. For each class you will be required to read three chapters. The chapter titles are indicated as the class themes for each week. Any additional reading (very few, if any) will be distributed in class.

William J. Baumol and Alan S. Blinder, Microeconomics: Principles and Policy, Eighth Edition, The Dryden Press, 1999.

William J. Baumol and Alan S. Blinder, Macroeconomics: Principles and Policy, Eighth Edition, The Dryden Press, 1999.

USEFUL WEBSITES

http://www.stern.nyu.edu/~nroubini/asia/AsiaHomepage.html

this is an excellent website on the global financial system and related topics. Fort example, it is probably the ideal source to learn about the Asian financial crisis. The website is authored by a members of Bill Clinton’s Council of Economic Advisors Nouriel Roubini.

http://web.mit.edu/krugman/www/

This website id maintained by the MIT economist Paul Krugman. He is a prolific pundit who also writes to the NYT op-ed page The website contains Krugman’s many writings. They are usually very good and provocative.

Course Outline

Class One: Introduction to Economic Analysis

What is Economics; The Use and Misuse of Graphs; The Economy: Myth and Reality

Central ideas: Opportunity cost In this class we shall discuss the following basic concepts of economics:

Voluntary exchange; opportunity cost; “laws” of supply and demand; Marginal analysis; Externalities; Trade-off between output and equality; Trade-off between inflation and unemployment; Productivity growth; Comparative advantage

Central ideas: Economic model We shall also review the nature of Economics as a discipline:

Abstraction in economics; Role of economic theory; economic model; Imperfect information and value judgments; Graphs

Central ideas: How does a market economy work? Private enterprise; open and closed economies; inflation and growth; role of government; mixed economy

Class Two:

Scarcity and Choice; Supply and Demand; Consumer Choice

Central ideas: scarcity and choice; coordinating tasks (produce what, how and for whom)

In this session we shall discuss some of the most central concepts in economics: Scarcity, Opportunity cost; Efficiency, Division of labor; Exchange.

Central ideas: Prices as signals to buyers and sellers; Impact of government interference in free markets

In this session we shall also discuss the basic analytical structure of markets using demand and supply diagrams. We shall consider the concepts of demand, supply, equilibrium, shifts in demand curve and shifts in supply curve, price ceilings, and floor prices.

Central ideas: Diminishing marginal utility; consumer demand curve Scarcity and demand, Total and marginal utility; Optimal purchase rule; Consumer opportunity cost; Consumer surplus; The Diamond-water paradox; Prices, incomes, and demand; Market demand curve; “Law” of demand


Class Three

Demand and Elasticity; Production, Inputs, and Cost; Output, Price and profit;

The Market

Central ideas: Price elasticity of demand; The impact of a price change on revenue depends on price elasticity of demand Elasticity; Elasticity of demand and the shape of the demand curve; Elasticity of demand and total expenditure; Determinants of elasticity of demand; Income elasticity of demand; Price elasticity of supply; Cross elasticity of demand

Central ideas: a profit maximizing firm hires an input to the point where its marginal revenue product (MRP) equals its price; a profit maximizing firm will substitute inputs as their prices change to arrive at the least-cost combination for a given output

In this section we shall discuss the different concepts of cost used in analyzing the behavior of the firm: Total, average, and marginal physical product; The “law” of diminishing marginal returns; Cost curves; Fixed and variable cost; Shape of an average cost curve; Long-run vs. short-run costs; Production function; Economies of scale

Central ideas: A profit maximizing firm produces output at a level at which marginal revenue equals marginal cost

In this section we shall analyze the output and price decisions of the firm using the concepts of marginal profit, marginal cost, and marginal revenue.

Class Four

Perfect Competition; The Price System; Monopoly

Central ideas: The degree of competition varies from market to market. Some are more competitive than others. The degree of competition has significant implications for resource use efficiency and consumer welfare. Some industries tend to have a “natural” monopoly. Under certain conditions monopoly may be good for the economy.

Class Five

Between Competition and Monopoly; The Market Mechanism

Central ideas: There are lots of industries that fall between perfect competition and monopoly. It is the most common type of market structure. However, the specifics of such markets also vary a lot. Some are more competitive and some are less so.

Central ideas: Do markets also perform efficiently to promote the welfare of the consumer and for the greater good? This is not always the case. Sometimes markets fail. Then governments may intervene. However, sometimes government intervention may make the problem worse.

Class Six

Microeconomics of Innovation; Pricing the Factors of Production; Labor

Central ideas: Market economies have generally grown much faster than other types of economies. The secret is in innovation.

Central ideas: The market mechanism distributes income through payment to factors of production, labor, land, and capital. Labor takes the largest share. But payment for labor varies greatly.

Class Seven

Poverty and Inequality; Taxation and Resource Allocation

Central ideas: When the market distributes income, there is no guarantee that it will be distributed equitably. This leads to the issue of poverty and inequality.

Class Eight

Limiting Market Power; Taxation and Resource Allocation; Externalities

Central ideas: Public interest demands that the government regulate the behavior of the private sector in the market. The conditions under which such regulation should be imposed are highly controversial.

Central ideas: How much should the government tax? In this section we try to see what economic theory has to say to help answer this question

Central ideas: Environmental sustainability of economic activity is a central concern today. Economics has something to say about using the market mechanism to promote sustainable growth.

PART II - MACROECONOMICS

Class Nine

The Realm of Macroeconomics; Goals of Macroeconomic Policy

Central ideas: Basic concepts of macroeconomics: supply and demand in macroeconomics, GDP and its determinants; Short-term fluctuations and long-term trends in output, Economic Stabilization; Economic Growth; Inflation and unemployment.

Class Ten

Income and Spending; Demand-Side Equilibrium

Central ideas: One of the key economic questions is why the market permits unemployment to occur. The answer depends on the behavior of aggregate demand and aggregate supply. The concepts of Aggregate demand; Consumer demand; Consumption function; Consumer behavior Investment; Exports; Equilibrium GDP and much more will be examined in this section.

Class Eleven

Changes on the Demand Side; Supply-Side Equilibrium

Central ideas: One of the most fascinating ideas in macroeconomics is the notion that an increase in expenditure will generate a still larger equilibrium GDP. This is explained by the concept of multiplier. We shall also look at how unemployment and inflation occur depending on aggregate demand and aggregate supply.

Class Twelve

Managing Aggregate Demand – Fiscal Policy; Money and Banking System; Monetary Policy

Central ideas: Fiscal policy involves taxes and government spending that can be manipulated to influence aggregate demand. We also consider supply-side tax cuts that some assert can influence aggregate supply.

This section will also review the basic principles of money and banking. Including how money is “created.” Finally we shall look at the role of the Central Bank and how it implements monetary policy.

Class Thirteen

Deficits, Monetary Policy and Growth; The Phillips Curve

Central ideas: In this section we look at the question of budget deficits, the national debt, and the debate surrounding economic growth. We also look at the Phillips Curve and its applicability.

Class Fourteen

International Trade; International Monetary System; Exchange Rates

Central ideas: These three themes relate to the international economy. We review the theory of comparative advantage, the structure and role of the international monetary system, and how exchange rates work.