Part 1 What Is Economics？ 1
Introduction The Ordinary Business of Life 1
Any Given Sunday 1
The Invisible Hand 2
My Benefit，Your Cost 3
Good Times，Bad Times 4
Onward and Upward 4
An Engine for Discovery 4
Chapter1 First Principles 5
Common Ground 5
Individual Choice：The Core of Economics 6
Resources are scarce 6
Opportunity cost：The real cost of something is what you must give up to get it 7
For Inquiring Minds：Got a Penny？ 8
“How much？” is a decision at the margin 8
People usually exploit opportunities to make themselves better off 9
For Inquiring Minds：Pay for Grades？ 10
Individual choice：Summing it up 10
Economics in Action：A Woman’s Work 10
Interaction：How Economies Work 11
There are gains from trade 12
Markets move toward equilibrium 13
For Inquiring Minds：Choosing Sides 13
Resources should be used as efficiently as possible to achieve society’s goals 14
Markets usually lead to efficiency 15
When markets don’t achieve efficiency，government intervention can improve society’s welfare 16
Economics in Action：Restoring Equilibrium on the Freeways 16
A Look Ahead 17
Chapter2 Economic Models：Trade-offs and Trade 20
Tunnel Vision 20
Models in Economics：Some Important Examples 21
For Inquiring Minds：Models for Money 21
Trade-offs：The production possibility frontier 22
Comparative advantage and gains from trade 26
Pitfalls：Misunderstanding Comparative Advantage 29
Comparative advantage and international trade 29
Transactions：The circular-flow diagram 30
Economics in Action：Rich Nation，Poor Nation 33
Using Models 34
Positive versus normative economics 34
When and why economists disagree 35
For Inquiring Minds：When Economists Agree 36
Economics in Action：Economists in Government 36
A Look Ahead 37
Chapter 2 Appendix：Graphs in Economics 41
Getting the Picture 41
Graphs，Variables，and Economic Models 41
How Graphs Work 41
Two-variable graphs 41
Curves on a graph 43
A Key Concept：The Slope of a Curve 44
The slope of a linear curve 44
Horizontal and vertical curves and their slopes 45
The slope of a nonlinear curve 46
Calculating the slope along a nonlinear curve 47
Maximum and minimum points 48
Graphs That Depict Numerical Information 49
Types of numerical graphs 49
Problems in interpreting numerical graphs 52
Part2 Supply and Demand 56
Chapter3 Supply and Demand 56
Gretzky’s Last Game 56
Supply and Demand：A Model of a Competitive Market 57
The Demand Curve 57
The demand schedule and the demand curve 58
Shifts of the demand curve 59
Understanding shifts of the demand curve 60
Economics in Action：Beating the Traffic 62
The Supply Curve 63
The supply schedule and the supply curve 63
Shifts of the supply curve 64
Understanding shifts of the supply curve 66
Economics in Action：Down（and Up） on the Farm 67
Supply，Demand，and Equilibrium 68
Pitfalls：Bought and Sold？ 68
Finding the equilibrium price and quantity 68
Why do all sales and purchases in a market take place at the same price？ 69
Why does the market price fall if it is above the equilibrium price？ 70
Why does the market price rise if it is below the equilibrium price？ 70
Using equilibrium to describe markets 70
Economics in Action：A Fish Story 71
Changes in Supply and Demand 72
What happens when the demand curve shifts 72
What happens when the supply curve shifts 73
Pitfalls：Which Curve Is It，Anyway？ 74
Simultaneous shifts in supply and demand 74
For Inquiring Minds：Supply，Demand，and Controlled Substances 76
Economics in Action：Plain Vanilla Gets Fancy 76
Competitive Markets—and Others 77
A Look Ahead 78
Chapter4 The Market Strikes Back 83
Big City，Not-So-Bright Ideas 83
Why Governments Control Prices 84
Price Ceilings 84
Modeling a price ceiling 85
Why a price ceiling causes inefficiency 86
For Inquiring Minds：The Rent Control Aristocracy 88
So why are there price ceilings？ 88
Economics in Action：Oil Shortages in the 1970s 89
Price Floors 90
For Inquiring Minds：Price Floors and Butter Cookies 92
Why a price floor causes inefficiency 92
So why are there price floors？ 93
Economics in Action：“Black Labor” in Southern Europe 93
Controlling Quantities 95
The anatomy of quantity controls 95
The costs of quantity controls 98
Economics in Action：The Clams of New Jersey 99
A Surprise Parallel：Taxes 99
Why is a tax like a quota？ 99
Who pays an excise tax？ 100
The revenue from an excise tax 101
The costs of taxation 102
For Inquiring Minds：If Selling Cigarettes Is a Crime，Only Criminals will Sell Cigarettes 103
Economics in Action：Who Pays the FICA？ 103
A Look Ahead 104
Chapter5 Consumer and Producer Surplus 109
Making Gains by the Book 109
Consumer Surplus and the Demand Curve 110
Willingness to pay and the demand curve 110
Willingness to pay and consumer surplus 111
How changing prices affect consumer surplus 113
For Inquiring Minds：I Want a New Drug 115
Economics in Action：When Money Isn’t Enough 116
Producer Surplus and the Supply Curve 116
Cost and producer surplus 116
Changes in producer surplus 119
Economics in Action：Gaining from Disaster 120
Consumer Surplus，Producer Surplus，and the Gains from Trade 121
The gains from trade 121
The efficiency of markets：A preliminary view 122
A few words of caution 125
Economics in Action：eBay and Efficiency 126
Applying Consumer and Producer Surplus：The Efficiency Costs of a Tax 127
Deadweight loss and elasticities 130
Economics in Action：Missing the Boats 132
A Look Ahead 133
Part 3 Introduction to Macroeconomics 138
Chapter6 Macroeconomics：The Big Picture 138
Disappointed Graduates 138
Microeconomics versus Macroeconomics 140
Macroeconomics：The whole is greater than the sum of its parts 140
Macroeconomic policy 141
Long-run growth 141
Economic aggregates 142
Economics in Action：The Great Depression 142
The Business Cycle 144
For Inquiring Minds：Defining Recessions and Expansions 145
Employment and Unemployment 145
Aggregate output 146
Taming the business cycle 148
Economics in Action：Has the Business Cycle Been Tamed？ 148
Long-Run Economic Growth 149
For Inquiring Minds：When Did Long-Run Growth Start？ 150
Economics in Action：The Difference a Point Makes 150
Inflation and Deflation 151
Economics in Action：A Fast（Food） Measure of Inflation 153
The Open Economy 153
Economics in Action：North of the Border 155
A Look Ahead 156
Chapter7 Tracking the Macroeconomy 159
After the Revolution 159
The National Accounts 160
The circular-flow diagram，revisited and expanded 160
Gross domestic product 163
Calculating GDP 164
For Inquiring Minds：OurImputed Lives 165
Pitfalls：GDP：What’s In and What’s Out 166
For Inquiring Minds：Gross What？ 167
What GDP tells us 168
Economics in Action：Creating the National Accounts 168
Real GDP and Aggregate Output 169
Calculating real GDP 169
A technical detail：“Chained” dollars 170
What real GDP doesn’t measure 171
Economics in Action：Good Decades，Bad Decades 172
The Unemployment Rate 173
Understanding the unemployment rate 173
Growth and unemployment 175
Economics in Action：Jobless Recoveries 176
Price Indexes and the Aggregate Price Level 176
Market baskets and price indexes 177
The consumer price index 178
Other price measures 179
For Inquiring Minds：Is the CPI Biased？ 180
Economics in Action：Indexing to the CPI 180
A Look Ahead 181
Part 4：The Economy in the Long Run 186
Chapter8 Long-Run Economic Growth 186
The Bad Old Days 186
Comparing Economies Across Time and Space 187
Real GDP per capita 187
Pitfalls：Change in Levels versus Rate of Change 188
Growth rates 189
Economics in Action：The Luck of the Irish 190
The Sources of Long-Run Growth 191
The crucial importance of productivity 191
Explaining growth in productivity 191
Accounting for growth：the aggregate production function 192
For Inquiring Minds：The Wal-Mart Effect 193
Pitfalls：It May Be Diminished…But It’s Still Positive 194
What about natural resources？ 196
Economics in Action：The Information Technology Paradox 197
Why Growth Rates Differ 198
Savings and investment spending 198
Foreign investment 199
Education 200
Infrastructure 200
Research and development 200
For Inquiring Minds：Inventing R＆D 201
Political stability，propetyy rights，and excessive government intervention 201
Economics in Action：The Brazilian Breadbasket 201
Success，Disappointment，and Failure 202
The East Asian miracle 203
Latin America’s disappointment 204
Africa’s troubles 204
Economics in Action：Are Economies Converging？ 205
A Look Ahead 206
Chapter9 Savings，Investment Spending，and the Financial System 210
A Hole in the Ground 210
Matching Up Savings and Investment Spending 211
Pitfalls：Investment versus Investment Spending 211
The savings-investment spending identity 211
Pitfalls：The Different Kinds of Capital 214
For Inquiring Minds：Who Enforces the Accounting？ 216
The market for loanable funds 216
Savings，investment spending，and government policy 219
Economics in Action：Budgets and Investment Spending in the 1990s 221
The Financial System 221
Three tasks of a financial system 222
Types of assets 225
Financial intermediaries 226
Economics in Action：Banks and the South Korean Miracle 228
Financial Fluctuations 229
The demand for stocks 229
For Inquiring Minds：How Now，Dow Jones？ 230
Stock market expectations 230
Stock prices and macroeconomics 231
Economics in Action：“Irrational Exuberance” 232
A Look Ahead 233
Part5 Short-Run Economic Fluctuations 236
Chapter10 Aggregate Supply and Aggregate Demand 236
Shocks to the system 236
Aggregate Supply 237
The short-run aggregate supply curve 237
For Inquiring Minds：What’s Truly Flexible，What’s Truly Sticky 239
Shifts of the short-run aggregate supply curve 240
The long-run aggregate supply curve 242
From the short run to the long run 244
Pitfalls：Are We There Yet？What the Long Run Really Means 245
Economics in Action：Prices and Output in the Great Depression 245
Aggregate Demand 246
Why is the aggregate demand curve downward-sloping？ 247
Shifts in the aggregate demand curve 248
Pitfalls：Changes in Wealth：A Movement Along versus a Shift of the Aggregate Demand Curve 249
Government policies and aggregate demand 249
Economics in Action：Moving Along the Aggregate Demand Curve，1979-80 250
The Multiplier 251
The AS-AD Model 254
Short-run macroeconomic equilibrium 255
Shifts of the SRAS curve 256
Shifts in aggregate demand：Short-run effects 257
Long-run macroeconomic equilibrium 258
Economics in Action：Supply Shocks versus Demand Shocks in Practice 260
Macroeconomic Policy 261
For Inquiring Minds：Keynes and the Long Run 262
Policy in the face of demand shocks 262
Responding to supply shocks 263
Economics in Action：The End of the Great Depression 263
A Look Ahead 264
Chapter11 Income and Expenditure 269
Be a Patriot and Spend 269
Consumer Spending 270
Current disposable income and consumer spending 270
Shifts of the aggregate consumption function 273
Economics in Action：Famous First Forecasting Failures 274
Investment Spending 276
The interest rate and investment spending 276
Expected future real GDP，production capacity，and investment spending 277
Inventories and unplanned investment spending 278
Economics in Action：A Tale of Two Investment Spending Slumps 279
Behind Shifts of the Aggregate Demand Curve：The Income-Expenditure Model 280
Planned aggregate spending and real GDP 281
Income-expenditure equilibrium 283
Pitfalls：Income-Expenditure Equilibrium versus Short-Run Macroeconomic Equilibrium 284
The multiplier process and inventory adjustment 285
Economics in Action：Bad Times in Buenos Aires 288
A Look Ahead 288
Chapter11 Appendix：Deriving the Multiplier Algebraically 292
Chapter12 Fiscal Policy 293
A Bridge to Prosperity？ 293
Fiscal Policy：The Basics 294
Taxes，purchases of goods and services，government transfers，and borrowing 294
The government budget and total spending 295
For Inquiring Minds：Investment Tax Credits 296
Expansionary and contractionary fiscal policy 296
A cautionary note：Lags in fiscal policy 298
Economics in Action：Expansionary Fiscal Policy in Japan 298
Fiscal Policy and the Multiplier 299
Multiplier effects of an increase in government purchases of goods and services 299
Multiplier effects of changes in government taxes and transfers 300
How taxes affect the multiplier 301
Economics in Action：How Much Bang for the Buck？ 302
The Budget Balance 304
The budget balance as a measure of fiscal policy 304
The business cycle and the cyclically adjusted budget balance 305
Should the budget be balanced？ 307
Economics in Action：Stability Pact—or Stupidity Pact？ 307
Long-Run Implications of Fiscal Policy 308
Deficits，surpluses，and debt 308
Pitfalls：Deficits versus Debt 309
Problems posed by rising government debt 309
Deficits and debt in practice 310
For Inquiring Minds：What Happened to the Debt from World War Ⅱ？ 312
Implicit liabilities 312
Economics in Action：Argentina’s Creditors Take a Haircut 313
A Look Ahead 315
Chapter 12 Appendix：Taxes and the Multiplier 319
Chapter13 Money，Banking，and the Federal Reserve System 321
A Waggon-Way Through the Air 321
The Meaning of Money 322
What is money？ 322
Pitfalls：Plastic and the Money Supply 322
Roles of money 323
Types of money 323
Measuring the money supply 324
For Inquiring Minds：What’s with All the Currency？ 325
Economics in Action：The History of the Dollar 325
The Monetary Role of Banks 326
What banks do 326
The problem of bank runs 327
Bank regulation 328
For Inquiring Minds：Is Banking a Con？ 328
Economics in Action：It’s a Wonderful Banking System 329
Determining the Money Supply 330
How banks create money 330
Reserves，bank deposits，and the money multiplier 331
The money multiplier in reality 332
Economics in Action：Multiplying Money Down 333
The Federal Reserve system 334
The Fed：America’s central bank 334
What the Fed does：Reserve requirements and the discount rate 335
Open-market operations 336
Economics in Action：Building Europe’s Fed 338
A Look Ahead 338
Chapter14 Monetary Policy 342
Eight Times a Year 342
The Demand for Money 343
The opportunity cost of holding money 343
The money demand curve 345
Prices and the demand for money 345
Shifts of the real money demand curve 347
The velocity approach to money demand 348
Economics in Action：A Yen for Cash 349
Money and Interest Rates 350
The equilibrium interest rate 350
Two models of interest rates？ 351
Pitfalls：The Target versus the Market 351
Monetary policy and the interest rate 351
For Inquiring Minds：Long-Term Interest Rates 353
Economics in Action：The Fed Takes Action 353
Monetary Policy and Aggregate Demand 354
Expansionary and contractionary monetary policy 354
Monetary policy and the multiplier 356
Two models of interest rates，revisited 357
Economics in Action：The Fed and the Output Gap，1985-2004 359
Money，Output，and Prices in the Long Run 360
Short-run and long-run effects of an increase in the money supply 360
Monetary neutrality 361
The interest rate in the long run 362
Economics in Action：International Evidence of Monetary Neutrality 363
A Look Ahead 364
Part 6 The Supply Side and the Medium Run 368
Chapter15 Labor Markets，Unemployment，and Inflation 368
Two Paths to Unemployment 368
The Nature of Unemployment 369
For Inquiring Minds：Full Employment—It’s the Law 369
Job creation and job destruction 369
Frictional unemployment 370
Structural unemployment 371
The natural rate of unemployment 373
Changes in the natural rate of unemployment 374
Economics in Action：Eurosclerosis 376
Unemployment and the Business Cycle 377
The output gap and the unemployment rate 377
Okun’s law 379
Pitfalls：When is a “Law” Not a Law 379
Economics in Action：Jobless Recoveries 380
Why Doesn’t the Labor Market Move Quickly to Equilibrium？ 380
Economics in Action：Sticky Wages in the Great Depression 382
Unemployment and Inflation：The Phillips Curve 382
The short-run Phillips curve 383
For Inquiring Minds：The Aggregate Supply Curve and the Short-Run Phillips Curve 384
Inflation expectations and the short-run Phillips curve 385
The long-run Phillips curve 387
The natural rate，revisited 388
Economics in Action：From the Scary Seventies to the Nifty Nineties 388
A Look Ahead 389
Chapter16 Inflation，Disinflation，and Deflation 393
Hourly Wages 393
Money and Inflation 394
Money and prices，revisited 394
For Inquiring Minds：Indexing to Inflation 397
The inflation tax 397
The Logic of Hyperinflation 398
Economics in Action：Money and Prices in Brazil，1985-1995 399
Effects of Inflation 400
Winners and losers from unexpected inflation 400
Expected inflation and interest rates 401
The costs of inflation 403
The optimal rate of inflation 405
For Inquiring Minds：A Case for Deflation？ 405
Economics in Action：Inflation and Interest Rates in the United States 406
Moderate Inflation and Disinflation 407
Causes of moderate inflation 407
The problem of disinflation 407
Economics in Action：The Great Disinflation of the 1980s 408
Deflation 410
Effects of unexpected deflation 410
Effects of expected deflation 410
Economics in Action：Japan’s Trap 411
A Look Ahead 411
Part 7 Events and Ideas 415
Chapter17 The Making of Modern Macroeconomics 415
Purge the Rottenness？ 415
Classical Macroeconomics 416
Money and the price level 416
The business cycle 417
Economics in Action：When did the business cycle begin？ 417
The Great Depression and the Keynesian Revolution 418
Keynes’s theory 418
For Inquiring Minds：The Politics of Keynes 420
Policy to fight recessions 420
Economics in Action：The End of the Great Depression 421
Challenges to Keynesian Economics 422
The revival of monetary policy 422
Monetarism 422
Inflation and the natural rate of unemployment 425
The political business cycle 425
Economics in Action：The Fed’s Flirtation with Monetarism 426
Rational Expectations，Real Business Cycles，and New Classical Macroeconomics 426
Rational expectations 427
Real business cycles？ 427
For Inquiring Minds：Supply-side Economics 428
Economics in Action：Total Factor Productivity and the Business Cycle 428
The Modern Consensus 429
Is expansion and monetary policy helpful in fighting recessions？ 430
Is fiscal policy effective in fighting recessions？ 430
Can monetary and/or fiscal policy reduce unemployment in the long run？ 430
Should fiscal policy be used in a discretionary way？ 430
Should monetary policy be used in a discretionary way？ 431
The clean little secret of macroeconomics 432
Economics in Action：After the Bubble 432
A Look Ahead 433
Part 8 The Open Economy 436
Chapter18 International Trade 436
A Rose by Any Other Nation 436
Comparative Advantage and International Trade 437
Production possibilities and comparative advantage，revisited 438
The gains from international trade 440
Pitfalls：The Pauper Labor Fallacy 441
Sources of comparative advantage 441
For Inquiring Minds：Does Trade Hurt Poor Countries？ 442
For Inquiring Minds：Increasing Returns and International Trade 443
Economics in Action：The Comparative Advantage of the United States 444
Supply，Demand，and International Trade 444
The effects of imports 445
The effects of exports 447
International trade and factor markets 448
Economics in Action：Trade，Wages，and Land Prices in the Nineteenth Century 449
The Effects of Trade Protection 450
The effects of a tariff 450
The effects of an import quota 452
Economics in Action：Trade Protection in the United States 452
The Political Economy of Trade Protection 453
Arguments for trade protection 453
For Inquiring Minds：Bittersweet 454
The politics of trade protection 454
International trade agreements and the World Trade Organization 455
Economics in Action：Declining Tariffs 455
A Look Ahead 456
Chapter19 Open-Economy Macroeconomics 460
Euro Dilemmas 460
Capital Flows and the Balance of Payments 461
Balance of payments accounts 461
For Inquiring Minds：GDP，GNP，and the Current Account 464
Modeling private international capital flows 464
Underlying determinants of international capital flows 467
For Inquiring Minds：Twin Deficits？ 467
Economics in Action：The Golden Age of Capital Flows 468
The Role of the Exchange Rate 469
Understanding exchange rates 469
Pitfalls：Which Way Is Up？ 470
The equilibrium exchange rate 470
Inflation and real exchange rates 473
Purchasing power parity 475
For Inquiring Minds：Burgernomics 476
Economics in Action：The Dollar and the Deficit 476
Exchange Rate Policy 478
Exchange rate regimes 478
How can an exchange rate be held fixed？ 478
The exchange rate regime dilemma 480
For Inquiring Minds：From Bretton Woods to the Euro 481
Economics in Action：China Pegs the Yuan 482
Exchange Rates and Macroeconomic Policy 482
Devaluation and revaluation of fixed exchange rates 483
Monetary policy under floating exchange rates 483
International business cycles 484
Economics in Actions：The Joy of a Devalued Pound 485
Solutions to “Check Your Understanding”Questions 489
Macroeconomic Data 1929-2004 513
Glossary 519
Index 529