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Big Ideas in Macroeconomics

Big Ideas in Macroeconomics: A Nontechnical View

Kartik B. Athreya
Copyright Date: 2013
Published by: MIT Press
Pages: 432
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  • Book Info
    Big Ideas in Macroeconomics
    Book Description:

    Macroeconomists have been caricatured either as credulous savants in love with the beauty of their mathematical models or as free-market fundamentalists who admit no doubt as to the market's wisdom. In this book, Kartik Athreya draws a truer picture, offering a nontechnical description of prominent ideas and models in macroeconomics, arguing for their value as interpretive tools as well as their policy relevance. Athreya deliberately leaves out the technical machinery, providing students new to modern macroeconomics as well as readers with no formal training in economics or mathematics -- including economic writers and policymakers -- with an essential guide to the sometimes abstract ideas that drive macroeconomists' research and practical policy advice.Athreya describes the main approach to macroeconomic model construction, the foundational Walrasian general equilibrium framework, and its modern version, the Arrow-Debreu-McKenzie (ADM) model. He then explains the reasons for the relevance of this model for interpreting real-world outcomes, and lays out the so-called Fundamental Theorems of Welfare Economics. In the heart of the book, Athreya shows how the Walrasian approach shapes and unifies much of modern macroeconomics. He details models central to ongoing macroeconomic analyses: the neoclassical and stochastic growth models, the standard incomplete-markets model, the overlapping-generations model, and the standard search model. Athreya's accessible primer traces the links between the views and policy advice of modern macroeconomists and their shared theoretical approach.

    eISBN: 978-0-262-31440-4
    Subjects: Economics

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. Acknowledgments
    (pp. ix-xii)
  4. Introduction
    (pp. 1-10)

    I think what Solow and Kocherlakota each say is true. Therefore, unless one finds their assessment a satisfactory state of affairs, the central messages of the now almost entirely technical discipline of macroeconomics should be made accessible to thoughtful and curious readers who lack the narrow background needed to read either advanced textbooks or articles in academic economics journals.

    At the time of this writing, macroeconomic theory and practice are both under attack.² Critics of macroeconomics usually describe us macroeconomists in one of two fairly unappealing ways. The first is that we are credulous savants who, through an unfortunate combination...

  5. 1 The Modern Macroeconomic Approach and the Arrow-Debreu-McKenzie Model
    (pp. 11-46)

    Modern macroeconomics began about 140 years ago. The French economist Léon Walras, working in the late nineteenth century, provided inEléments d’économie politique purethe first formal model of an economy in which private participants interacted through a system of interrelated markets. The advance made by Walras was to study a large-scale system in which all activity would be determinedsimultaneously, as it logically must be. Generally speaking, what happens in one part of any resource allocation system (market-based or otherwise) can both depend on and affect what occurs elsewhere.

    Consider trade in cotton. Disturbances to weather, for example, could...

  6. 2 Prices, Efficiency, and Macroeconomics
    (pp. 47-120)

    In the course of this chapter, I’ll describe two of the three most influential findings economics has yet provided. The first is known as the First Fundamental Theorem of Welfare Economics, or the “invisible-hand” theorem. According to this theorem, in an economy where all goods and services are available at Walrasian prices, the choices of preference-maximizing consumers and profit-maximizing firms, taking these prices as given, will generate outcomes that are Pareto-optimal and in the core. Importantly, the result holds even if consumers are entirely self-interested, caring only about the bundle of goods and services they consume. The second result is...

  7. 3 Macroeconomists, Efficiency, and Inequality
    (pp. 121-156)

    The business of “positive” economics can keep macroeconomists busy for a long time. The daily work of research macroeconomists is typically aimed at measuring (by unearthing empirical regularities arising from the messy and decidedly nonexperimental data that real life provides) and understanding (by providing quantitatively and qualitatively plausible accounts of observed phenomena as equilibrium outcomes from the decentralized trade that characterizes most economic activity). Examples include the research programs in business cycles, labor market activity, and consumption (and, as I noted, the not yet fully successful attempts to explain the equity premium).

    One dimension of macroeconomic practice is the positive...

  8. 4 Macroeconomic Shortcuts
    (pp. 157-206)

    In chapters 1 and 2, I described how Walrasian models are constructed, and the way in which Walrasian theory connects macroeconomic outcomes arising from decentralized competitive (price-taking) trade to efficient outcomes. Chapter 3 then looked at the ideas that are most likely to be influential in macroeconomists’ views of the connections between decentralized outcomes, efficiency, and inequality. Those three chapters were intended to give readers a sense of the benchmark model most macroeconomists use when starting to frame questions, and against which most macroeconomists judge the outcomes from messier models where the welfare theorems do not hold.

    In this chapter,...

  9. 5 Benchmark Macroeconomic Models and Policy Advice
    (pp. 207-314)

    For macroeconomists, it is critical to have a model that allows for the explicit passage of time as well as the gradual resolution of uncertainty. After all, in the real world, decision makers of all stripes (households, firms, and government) clearly need to worry about the future, when their current decisions will have consequences, and often cannot know with certainty how that future will look. Think of your own decision to take an expensive vacation—it would be an easy decision if the world were about to end, but if not, then it takes some deliberation: if you don’t get...

  10. 6 Macroeconomic Theory and Recent Events
    (pp. 315-368)

    The financial crisis of 2007–2008 and subsequent recession have been the most wrenching economic events since the Great Depression. As of this writing, these events appear global in scope, sharply slowing the growth of North America, Europe, and even of India and China. In the end, these events have significantly hurt the prospects of more than half of the world’s population. What does modern macroeconomics have to say about any of this?

    In this chapter, I will give a highly selective survey of key types of models that help macroeconomists interpret the events of the crisis and the period...

  11. Notes
    (pp. 369-390)
  12. References
    (pp. 391-408)
  13. Index
    (pp. 409-416)