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Chapter 31: Open-Economy Macroeconomics: Basic Concepts

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(Note: Page numbers referenced in posts prior to June 1, 2011 refer to 5th edition)

 

December 21

Getting a Raise from Vladimir Putin

In the short run, purchasing-power parity can be swamped by events. In the case of Russia, a sharp fall in the price of oil (its main export) and sanctions imposed due to events in Ukraine have caused the ruble to plunge in value.

Textbook References:

Pages 685-690 “A First Theory of Exchange-Rate Determination: Purchasing-Power Parity”

November 12

A Textbook Example of Arbitrage

Arbitrage can occur between points in time as well as between locations. NPR reports on two arbitragers who noticed that the price of used textbooks is much lower in the summer than when school starts. The two doubled their money by buying used textbooks in the summer and selling them when classes started again.

Textbook References:

Page 686 “The Basic Logic of Purchasing-Power Parity”

December 10

She's German. He's Greek. It's Christmas.

A humorous video is a sequel to one about the difficult relationship between Germany and Greece in the Euro zone.

Textbook References:

Page 683 “The Euro”

September 19

She's German. He's Greek.

A nine-minute video about a difficult personal relationship is a metaphor for the Euro crisis.

Textbook References:

Page 683 “The Euro”

June 27

Should Germany exit the euro?

Kenneth Griffin and Anil Kashyap argue that Germany should reintroduce the mark. Doing so would cause the euro to fall in value. That, in turn, would boost the economies of Southern Europe and give them time to make the reforms that they must make to become competitive in the long run.

Textbook References:

Page 683 “The Euro”

May 29

Feldstein on the Euro

Martin Feldstein provides a brief history of the Euro and explains why it will remain a source of trouble.

Textbook References:

Page 683 “The Euro”

May 8

Eichengreen on the Dollar

Barry Eichengreen considers the implications of the U.S. dollar losing its special international status.

Textbook References:

Pages 672-682 “The International Flows of Goods and Capital”

April 1

How to teach PPP

Nick Rowe offers a clever way to understand Purchasing Power Parity.

Textbook References:

Pages 685-690 “A First Theory of Exchange-Rate Determination: Purchasing Power Parity”

December 31

A Half Dozen Short Takes

Six economists suggest ways to improve the economy in 2012.

Textbook References:

Pages 480-485 “Behavioral Economics”
Page 683 “The Euro”
Pages 758-767 “How Monetary Policy Influences Aggregate Demand”
Pages 767-773 “How Fiscal Policy Influences Aggregate Demand”
Pages 773-779 “Using Policy To Stabilize The Economy”

December 12

This Year's Nobel Lectures

Thomas Sargent draws parallels between the birth of the United States and the current situation in the European Union. Chris Sims gives a history of macroeconomic modeling.

Textbook References:

Pages 22-29 “The Economist as Scientist”
Page 683 “The Euro”

December 2

The Draghi Deal

The head of the European Central Bank promises to have loose monetary policy if European governments enact contractionary fiscal policy. That will allow Europe to tackle its debt problems without causing a recession.

Textbook References:

Page 683 “The Euro”
Pages 758-767 “How Monetary Policy Influences Aggregate Demand”
Pages 767-773 “How Fiscal Policy Influences Aggregate Demand”
Pages 773-779 “Using Policy To Stabilize The Econo”

November 8

Darkness in Europe

Barry Eichengreen says that when German Chancellor Angela Merkel and French President Nicolas Sarkozy said that Greece had to decide if it wanted to stay in the Euro, they opened the door to speculation that will make Greece's situation worse.

Textbook References:

Page 686 “The Euro”

July 21

The European Debt Crisis

Francesco Giavazzi and Anil Kashyap discuss the European debt crisis and what might be done about it.

Textbook References:

Page 683 “The Euro”
Pages 826-827 “Dealing with Debt and Deficits”

July 10

Choices for Greece

The Greek debt crisis has no easy solutions.

Textbook References:

Pages 568-572 “Policy 3: Government Budget Deficits and Surplusses”
Page 683 “The Euro”

May 27

Feldstein on Greece

Greece needs to devalue its currency to regain competitiveness, but as long as it is part of the Eurozone, it cannot devalue.

Textbook References:

Page 704 “The Euros”
Pages 718-721 “The Market for Foreign-Currency Exchange”

March 16

The Chinese Currency Question

Paul Krugman argues that China is hurting the global economy by undervaluing its currency. Mankiw disagrees.

Textbook References:

Pages 703-706 “The Prices for International Transactions: Real and Nominal Exchange Rates”
Pages 747-748 “The Price Level and Net Exports: The Exchange-Rate Effect”
Page 778 “The Exchange Rate Effect”

December 16

The Economics of Seinfeld

Clips from the TV show "Seinfeld" are used to illustrate a variety of economic concepts.

Textbook References:

Pages 4-5 “Principle 1: People Face Trade-offs”
Pages 5-6 “Principle 2: The Cost of Something is What You Give Up to Get It”
Page 6 “Principle 3: Rational People Think at the Margin”
Pages 7-8 “Principle 4: People Respond to Incentives”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Chapter 3 “Interdependence and the Gains from Trade”
Pages 67-72 “Demand”
Pages 73-76 “Supply”
Pages 144-153 “Controls on Prices”
Chapter 10 “Externalities”
Pages 226-227 “The Different Kinds of Goods”
Pages 227-232 “Public Goods”
Pages 230-232 “The Difficult Job of Cost-Benefit Analysis”
Pages 232-237 “Common Resources”
Pages 274-275 “Fixed and Variable Costs”
Page 281 “Economies and Diseconomies of Scale”
Pages 312-315 “Why Monopolies Arise”
Chapter 16 “Monopolistic Competition”
Pages 370-378 “The Economics of Cooperation”
Pages 399-400 “The Supply of Labor”
Page 414 “Compensating Differentials”
Page 442 “Utility”
Page 465 “Utility: An Alternative Way to Describe Preferences and Optimization”
Pages 484-489 “Asymmetric Information”
Pages 556-558 “Technological Knowledge”
Pages 578-580 “Financial Intermediaries”
Pages 598-600 “Present Value: Measuring the Time Value of Money”
Pages 603-604 “Diversification of Firm-Specific Risk”
Pages 606-609 “The Efficient Market Hypothesis”
Pages 630-631 “The Economics of Unions”
Pages 703-705 “The Prices for International Transactions: Real and Nominal Exchange Rates”
Pages 707-708 “The Basic Logic of Purchasing Power Parity”
Page 833 “Time Inconsistency”

October 26

John Cochrane on Tim Geithner

John Cochrane discusses Tim Geithner's plan to reduce "external imbalances." Cochrane suggests that Geithner and the IMF intend to engage in a type of global central planning that is bound to fail.

Textbook References:

Page 8 “Principle 5: Trade Can Make Everyone Better Off”
Pages 8-10 “Principle 6: Markets Are Usually A Good Way To Organize Economic Activity”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Pages 692-702 “The International Flows of Goods and Capital”
Pages 707-711 “A First Theory of Exchange-Rate Determination: Purchasing Power Parity”
Chapter 32 “A Macroeconomic Theory of the Open Economy”

July 20

Merle Hazard on the Greek Debt

Merle Hazard presents a humorous song about the current Greek debt crisis.

Textbook References:

Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Page 704 “The Euro”

July 10

The Trilemma

Mankiw suggests that some of the political friction on world trade issues stems from a failure to understand a trilemma: A country cannot have free flows of capital, a stable exchange rate, and the ability to use monetary policy to stabilize the economy. It must give one of them up.

Textbook References:

Pages 692-701 “The International Flows of Goods and Capital”

Pages 703-705 “The Prices for International Transactions: Real and Nominal Exchange Rates”

Pages 778-787 “How Monetary Policy Influences Aggregate Demand”

Pages 793-797 “Using Policy To Stabilize The Economy”


July 9

Prices Adjust When the Exchange Rate Can't

The crisis in Greece is affecting prices because Greece is part of the Euro area and can't devalue its currency.

Textbook References:

Pages 703-705 “The Prices for International Transactions: Real and Nominal Exchange Rates”

Page 704 “The Euro”

Pages 724-728 “Government Budget Deficits”


May 26

The World Economy in a Nutshell

A humorous video explains the current Euro crisis.

Textbook References:

Pages 654-655 “The Financial Crisis of 2008”

Page 704 “The Euro”


May 18

Lessons from Greece

Five prominent economists discuss what the Greek crisis means for the Euro-zone and for monetary unions in general.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Page 704 “The Euro”

May 10

The Welfare State's Death Spiral

Robert Samuelson argues that the problems affecting Greece stem from a problem common to almost all advanced countries: the people have been promised more benefits than they have paid for. The day of reckoning happened first in Greece, but it will come for us all.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Page 704 “The Euro”

May 7

Does a Common Currency Area Need A Centralized Fiscal Authority?

Paul Krugman argues that part of the problem in Greece is that the Euro zone lacks a central fiscal authority. Mankiw adds that another problem is that Greek workers cannot move easily to other parts of Europe.

Textbook References:

Page 704 “The Euro”

March 16

The Chinese Currency Question

Paul Krugman argues that China is hurting the global economy by undervaluing its currency. Mankiw disagrees.

Textbook References:

Pages 703-706 “The Prices for International Transactions: Real and Nominal Exchange Rates”
Pages 747-748 “Price Level and Net Exports: The Exchange-Rate Effect”
Page 778 “The Exchange Rate Effect”

Chapter 31: Open-Economy Macroeconomics: Basic Concepts
Archived Posts

 

October 18

China's Dollar Problem

Kenneth Rogoff explains why the Chinese are worried about the value of the dollar.

Textbook References:

Pages 692-702 “The International Flows of Goods and Capital”
Pages 718-721 “The Market for Foreign-Currency Exchange”
Pages 732-733 “Capital Flows from China”


June 15

Samuelson’s Words of Warning

Paul Samuelson worries that China may lose its appetite for dollars.

Textbook References:

Chapter 31 “Open-Economy Macroeconomics: Basic Concepts”
Chapter 32 “A Macroeconomic Theory of the Open Economy”


Feb. 24

Mixed Messages

The U.S. wants China to keep buying our treasury bonds, which has the effect of keeping the value of the dollar high against the Yuan. But the U.S. also wants China to raise the value of the Yuan against the dollar.

Textbook References:

Pages 692-702 “The International Flows of Goods and Capital”
Pages 724-733 “How Policies and Events Affect an Open Economy”