Ⅰ INTRODUCTION: THINKINGLIKE AN ECONOMIST 4
1. Economics and Economic Reasoning 4
Appendix A: Graphish: The Language of Graphs 20
2. The Economic Organization of Society 27
Appendix A: The History of Economic Systems 49
3. The U.S. Economy in a Global Setting 55
Appendix A: Valuing Stocks and Bonds 77
4. Supply and Demand 82
5. Using Supply and Demand 103
Appendix A: Algebraic Representation of Supply,Demand, and Equilibrium 124
Ⅱ MICROECONOMICS 132
I MICROECONOMICS: THE BASICS 132
6. Describing Supply and Demand: Elasticities 132
7. Taxation and Government Intervention 156
Ⅱ FOUNDATIONS OF SUPPLY AND DEMAND 176
8. The Logic of Individual Choice: The Foundationof Supply and Demand 176
Appendix A: Indifference Curve Analysis 194
9. Production and Cost Analysis Ⅰ 200
10. Production and Cost Analysis Ⅱ 217
Appendix A: Isocost/Isoquant Analysis 233
Ⅲ MARKET STRUCTURE AND POLICY 238
11. Perfect Competition 238
12. Monopoly 261
Appendix A: The Algebra of Competitive andMonopolistic Firms 280
13. Monopolistic Competition, Oligopoly, and Strategic Pricing 282
14. Globalization, Technology, and Real-World Competition 305
Ⅳ APPLYING ECONOMIC REASONING TO POLICY 326
15. Government Policy and MarketFailures 326
16. Antitrust Policy and Regulation 346
17. Microeconomic Policy, Economic Reasoning,and Beyond 371
V POLICY ISSUES IN DEPTH 390
18. Politics and Economics: The Case ofAgricultural Markets 390
19. International Trade Policy 405
Appendix A: The Geomet of Absolute Advantageand Comparative Advantage 422
Ⅵ FACTOR MARKETS 428
20. Who Gets What? The Distribution of Income 428
21. Work and the Labor Market 451
Appendix A: Derived Demand 474
Appendix B: Nonwage Income and PropertyRights 479
Ⅲ MACROECONOMICS 484
Ⅰ MACROECONOMIC PROBLEMS 484
22. Economic Growth, Business Cycles,Unemployment, and Inflation 484
23. National Income Accounting 512
Ⅱ THE MACROECONOMIC FRAMEWORK 533
24. Growth, Productivity, and the Wealthof Nations 533
25. Aggregate Demand, Aggregate Supply,and Modern Macroeconomics 566
26. The Multiplier Model 580
Appendix A: An Algebraic Presentation of theExpanded Multiplier Model 600
Appendix B: The Multiplier Model and the AS/ADModel 601
Ⅲ POLICY ISSUES 604
27. Demand Management Policy 604
28. Politics, Surpluses, Deficits, and Debt 626
29. Money, Banking, and the Financial Sector 647
Appendix A: A Closer Look at Financial Institutionsand Financial Markets 667
Appendix B: Creation of MoneyUsing T -Accounts 677
30. Monetary Policy and the Debate aboutMacro Policy 680
Appendix A: The Effect of Monetary PolicyUsing T-Accounts 700
31. Inflation and Its Relationship to Unemploymentand Growth 702
Ⅳ INTERNATIONAL POLICY ISSUES 724
32. Open Economy Macro: Exchange Rate andTrade Policy 724
Appendix A: History of Exchange Rate Systems 747
33. International Dimensions of Monetary and FiscalPolicies 750
V COMBINING THE FRAMEWORK WITH POLICY 766
34. Tools, Rules, and Policy 766
Ⅰ INTRODUCTION: THINKINGLIKE AN ECONOMIST 4
1. ECONOMICS AND ECONOMICREASONING 4
What Economics Is 5
A Guide to Economic Reasoning 6
Marginal Costs and Marginal Benefits 6
KNOWING THE TOOLS: Economic Knowledge inOne Sentence: TANSTAAFL 7
Economics and Passion 8
Opportunity Cost 8
Economic and Market Forces 9
BEYOND THE TOOLS: Economics in Perspective 10
Economic Terminology 12
Economic Insights 12
The Invisible Hand Theory 12
APPLYING THE TOOLS: Winston Churchill andLady Astor 13
Economic Theory and Stories 13
KNOWING THE TOOLS: Dealing withMath Anxiety 14
Microeconomics and Macroeconomics 14
Economic Institutions 15
Economic Policy Options 15
Objective Policy Analysis 16
Policy and Social and Political Forces 17
Conclusion 17
Chapter Summary 18
Key Terms 18
Questions for Thought and Review 18
Problems and Exercises 19
Web Questions 19
Answers to Margin Questions 20
Appendix A: Graphish: The Language of Graphs 20
2. THE ECONOMIC ORGANIZATION OFSOCIETY 27
Capitalism 28
Reliance on the Market 28
What's Good about the Market? 29
Socialism 29
Socialism in Theory 30
Socialism in Practice 30
Evolving Economic Systems 30
APPLYING THE TOOLS: Tradition and Today'sEconomy 31
BEYOND THE TOOLS: The Rise of Markets inPerspective 32
The Need for Coordination in an Economic System 32
Evolutionary Changes within Systems 33
A Blurring of the Distinction between Capitalism andSocialism 33
The Production Possibility Curve and EconomicReasoning 33
The Production Possibility Table 34
The Production Possibility Curve 34
KNOWING THE TOOLS: Production PossibiliCurves 37
Some Examples of Shifts in the Production PossibilityCurve 39
The Production Possibili Curve and EconomicSystems 40
The Production Possibili Curve andTough Choices 41
Comparative Advantage, Specialization, and Trade 42
The Division of Labor 44
Markets, Specialization, and Growth 44
Conclusion 45
Chapter Summary 45
Key Terms 46
Questions for Thought and Review 46
Problems and Exercises 46
Web Questions 47
Answers to Margin Questions 47
Appendix A: The History of Economic Systems 49
3. THE U.S. ECONOMY IN A GLOBALSETTING 55
The U.S. Economy 56
Business 57
Consumer Sovereignty and Business 57
Forms of Business 57
BEYOND THE TOOLS: Is the United States aPostindustrial Society? 58
KNOWING THE TOOLS: The Stock Market 60
Finance and Business 60
E-Commerce and the Digital Economy 61
Households 61
The Power of Households 62
Suppliers of Labor 62
Government 62
Government as an Actor 63
Government as a Referee 63
The Global Setting 64
Global Corporations 65
International Trade 66
APPLYING THE TOOLS: A World EconomicGeography Quiz 67
How International Trade Differs from Domestic Trade 69
BEYOND THE TOOLS: International Issues inPerspective 70
KNOWING THE TOOLS: Our InternationalCompetitors 71
Institutions Supporting Free Trade 72
Free Trade Organizations 73
International Economic Policy Organizations 73
Conclusion 74
Chapter Summary 74
Key Terms 75
Questions for Thought and Review 75
Problems and Exercises 76
Web Questions 76
Answers to Margin Questions 76
Appendix A: Valuing Stocks and Bonds 77
4 SUPPLY AND DEMAND 82
Demand 83
The Law of Demand 83
The Demand Curve 84
Shifts in Demand versus Movements along a DemandCurve 84
Shift Factors of Demand 85
A Review 86
The Demand Table 86
From a Demand Table to a Demand Curve 87
Individual and Market Demand Curves 88
KNOWING THE TOOLS: Six Things to RememberWhen Considering a Demand Curve 89
Supply 89
The Law of Supply 90
The Supply Curve 90
Shifts in Supply versus Movements along a SupplyCurve 91
Shift Factors of Supply 91
Shift in Supply versus a Movement along a SupplyCurve 92
A Review 93
The Supply Table 93
KNOWING THE TOOLS: Six Things to RememberWhen Considering a Supply Curve 94
From a Supply Table to a Supply Curve 94
Individual and Market Supply Curves 94
The Marriage of Supply and Demand 95
Excess Supply 95
Excess Demand 95
Price Adjusts 95
The Graphical Marriage of Supply and Demand 96
Equilibrium 97
What Equilibrium Is 97
What Equilibrium Isn't 97
Desirable Characteristics of Supply/DemandEquilibrium 97
APPLYING THE TOOLS: The Supply and Demand forChildren 99
Conclusion 99
Chapter Summary 99
Key Terms 100
Questions for Thought and Review 100
Problems and Exercises 101
Web Questions 102
Answers to Margin Questions 102
5. USING SUPPLY AND DEMAND 103
The Power of Supply and Demand 103
Six Real-World Examples 105
KNOWING THE TOOLS: Supply andDemand in Action 108
A Review 108
Government Interferences: Price Ceilings and Floors 110
Price Ceilings 110
Price Floors 111
Government Interferences: Taxes, Tariffs, and Quotas 113
Excise Taxes and Tariffs 113
Quotas 114
The Relationship between a Quota and a Tariff 115
The Limitations of Supply and Demand Analysis 115
Other Things Don't Remain Constant 115
The Fallacy of Composition 116
The Roles of Government 116
BEYOND THE TOOLS: Laissez-Faire Is NotAnarchy 117
Provide a Stable Set of Institutions and Rules 117
Promote Effective and Workable Competition 117
Correct for Externalities 118
Ensure Economic Stability and Growth 118
Provide for Public Goods 119
Adjust for Undesired Market Results 119
Market Failures and Government Failures 120
Conclusion 120
Chapter Summary 120
Key Terms 121
Questions for Thought and Review 121
Problems and Exercises 121
Web Questions 122
Answers to Margin Questions 123
Appendix A: Algebraic Representation of Supply, Demand,and Equilibrium 124
Ⅱ MICROECONOMICS 132
Ⅰ MICROECONOMICS: THE BASICS 132
6 DESCRIBING SUPPLY AND DEMAND:ELASTICITIES 132
Price Elasticity 133
Classifying Demand and Supply as Elastic or Inelastic 133
What Information Price Elasticity Provides 134
Elasticity Is Independent of Units 134
Calculating Elasticities 135
The End-Point Problem 135
The Arc Convention 136
KNOWING THE TOOLS: Calculating Elasticity at a Point 137
Elasticity and Supply and Demand Curves 137
Elasticity Is Not the Same as Slope 137
Elasticity Changes along Straight-Line Curves 139
Substitution and Elasticity 139
KNOWING THE TOOLS: Geometric Tricks forEstimating Price Elasticity 140
Substitution and Demand 140
Substitution and Supply 141
How Substitution Factors Affect Specific Decisions 142
Empirical Estimates of Elasticities 142
Elasticity, Total Revenue, and Demand 144
Total Revenue along a Demand Curve 145
Elasticity of Individual and Market Demand 146
Other Elasticity Concepts 146
APPLYING THE TOOLS: Empirically MeasuringElasticities 147
Income Elasticity of Demand 147
Cross-Price Elasticity of Demand 148
KNOWING THE TOOLS: A Review of the AlternativeElasticity Terms 149
Some Examples 150
The Power of Supply and Demand Analysis 150
When Should a Supplier Not Raise Price? 150
Elasticity and Shifting Supply and Demand 151
Conclusion 152
Chapter Summary 152
Key Terms 153
Questions for Thought and Review 153
Problems and Exercises 154
Web Questions 155
Answers to Margin Questions 155
7. TAXATION AND GOVERNMENTINTERVENTION 156
Taxation and Government 156
How Much Should Government Tax? 157
KNOWING THE TOOLS: Consumer and ProducerSurplus 158
Two Principles of Taxation 160
Who Bears the Burden of a Tax? 161
APPLYING THE TOOLS: What Goods Should BeTaxed? 163
Tax Incidence and Current Policy Debates 163
Government Intervention 164
Government Intervention as Implicit Taxation 164
Rent Seeking, Politics, and Elasticities 167
KNOWING THE TOOLS: Elasticity and Whether aPrice Increase Is Significant 169
Conclusion 171
Chapter Summary 172
Key Terms 172
Questions for Thought and Review 172
Problems and Exercises 173
Web Questions 174
Answers to Margin Questions 174
Ⅱ FOUNDATIONS OF SUPPLY ANDDEMAND 176
8. THE LOGIC OF INDIVIDUAL CHOICE:THE FOUNDATION OF SUPPLY ANDDEMAND 176
Utility Theory and Individual Choice 177
Measuring Pleasure 177
Total Utility and Marginal Utility 178
Diminishing Marginal Utility 179
Rational Choice and Marginal Utility 180
Some Choices 180
The Principle of Rational Choice 181
Simultaneous Decisions 181
Maximizing Utility and Equilibrium 182
An Example of Maximizing Utility 182
Extending the Principle of Rational Choice 184
Rational Choice and the Laws of Demand and Supply 184
KNOWING THE TOOLS: Income and SubstitutionEffects 185
The Law of Supply 186
Opportunity Cost 187
Applying Economists' Theo of Choice to theReal World 188
The Cost of Decision Making 188
Given Tastes 189
Tastes and Individual Choice 189
APPLYING THE TOOLS: Making Stupid Decisions 190
Conclusion 190
Chapter Summary 191
Key Terms 191
Questions for Thought and Review 192
Problems and Exercises 192
Web Questions 193
Answers to Margin Questions 193
Appendix A: Indifference Curve Analysis 194
9. PRODUCTION AND COSTANALYSIS Ⅰ 200
The Role of the Firm 201
The Firm and the Market 201
APPLYING THE TOOLS: Value Added and theCalculation of Total Production 202
Firms Maximize Profit 202
The Production Process 203
The Long Run and the Short Run 203
Production Tables and Production Functions 204
The Law of Diminishing Marginal Productivity 204
The Costs of Production 206
Fixed Costs, Variable Costs, and Total Costs 206
Average Total Cost, Average Fixed Cost, and AverageVariable Cost 207
Marginal Cost 207
Graphing Cost Curves 208
Total Cost Curves 208
Average and Marginal Cost Curves 208
Downward-Sloping Shape of the Average FixedCost Curve 208
The U Shape of the Average and MarginalCost Curves 209
The Relationship between the Marginal Productivityand Marginal Cost Curves 210
The Relationship between the Marginal Cost andAverage Cost Curves 211
KNOWING THE TOOLS: Review of Costs 212
Intermission 213
Chapter Summary 213
Key Terms 213
Questions for Thought and Review 214
Problems and Exercises 214
Web Questions 215
Answers to Margin Questions 215
10. PRODUCTION AND COSTANALYSIS Ⅱ 217
Making Long-Run Production Decisions 217
Technical Efficiency and Economic Efficiency 218
APPLYING THE TOOLS: Producing the MazdaMiata 219
Determinants of the Shape of the Long-RunCost Curve 219
Economies of Scale 219
Diseconomies of Scale 221
Constant Returns to Scale 221
KNOWING THE TOOLS: Distinguishing Diseconomiesof Scale from Diminishing Marginal Productivity 222
The Importance of Economies and Diseconomies ofScale 222
Envelope Relationship 223
APPLYING THE TOOLS: Why Are TextbooksSo Long? 224
Entrepreneurial Activity and the Supply Decision 224
Using Cost Analysis in the Real World 225
Economies of Scope 225
Learning by Doing and Technological Change 226
Many Dimensions 229
Unmeasured Costs 229
APPLYING THE TOOLS: New Approaches in CostAnalysis 230
The Standard Model as a Framework 230
Conclusion and a Look Ahead 230
Chapter Summary 231
Key Terms 231
Questions for Thought and Review 231
Problems and Exercises 232
Web Questions 232
Answers to Margin Questions 233
Appendix A: Isocost/Isoquant Analysis 233
Ⅲ MARKET STRUCTURE AND POLICY 238
11. PERFECT COMPETITION 238
A Perfectly Competitive Market 239
The Necessa Conditions for Perfect Competition 239
The Definition of Supply and Perfect Competition 240
APPLYING THE TOOLS: The Internet and thePerfectly Competitive Model 241
Demand Curves for the Firm and the Industry 241
The Profit-Maximizing Level of Output 242
Marginal Revenue 242
Marginal Cost 243
Profit Maximization: MC = MR 244
The Marginal Cost Curve Is the Supply Curve 244
Firms Maximize Total Profit 245
Profit Maximization Using Total Revenueand Total Cost 245
APPLYING THE TOOLS: The Broader Importance ofthe MR = MC Equilibrium Condition 246
Total Profit at the Profit-Maximizing Level of Output 247
Determining Profit from a Table of Costsand Revenue 247
Determining Profit from a Graph 248
APPLYING THE TOOLS: Profit Maximization andReal-World Firms 250
The Shutdown Point 250
Short-Run Market Supply and Demand 251
KNOWING THE TOOLS: Finding Price, Output,and Profit 252
Long-Run Competitive Equilibrium 252
APPLYING THE TOOLS: The Shutdown Decision andthe Relevant Costs 253
Adjustment from the Short Run to the Long Run 253
An Increase in Demand 253
Long-Run Market Supply 254
KNOWING THE TOOLS: A Summary of a PerfectlyCompetitive Industry 255
An Example in the Real World 255
Conclusion 256
Chapter Summary 256
Key Terms 257
Questions for Thought and Review 257
Problems and Exercises 258
Web Questions 259
Answers to Margin Questions 259
12. MONOPOLY 261
The Key Difference between a Monopolist and a PerfectCompetitor 262
A Model of Monopoly 263
Determining the Monopolist's Price and OutputNumerically 263
KNOWING THE TOOLS: A Trick in Graphing theMarginal Revenue Curve 264
Determining the Monopolist's Price and OutputGraphically 264
Comparing Monopoly and Perfect Competition 266
An Example of Finding Output and Price 266
Profits and Monopoly 267
A Monopolist Making a Profit 267
A Monopolist Breaking Even and Making a Loss 268
KNOWING THE TOOLS: Finding a Monopolist'sOutput, Price, and Profit 269
The Price-Discriminating Monopolist 269
BEYOND THE TOOLS: Monopsony 270
The Welfare Loss from Monopoly 270
Barriers to Entryand Monopoly 271
Natural Ability 271
APPLYING THE TOOLS: Can Price Controls IncreaseOutput and Lower Market Price? 272
Economies of Scale 272
Government-Created Monopolies 274
Normative Views of Monopoly 274
Government Policy and Monopoly: AIDS Drugs 275
Conclusion 276
Chapter Summary 276
Key Terms 277
Questions for Thought and Review 277
Problems and Exercises 277
Web Questions 278
Answers to Margin Questions 279
Appendix A: The Algebra of Competitive and MonopolisticFirms 280
13. MONOPOLISTIC COMPETITION, OLIGO-POLY, AND STRATEGIC PRICING 282
The Problems of Determining Industry Structure 283
Classifying Industries 283
Determining Industry Structure 284
Conglomerate Firms and Bigness 285
The Importance of Classifying Indust Structure 285
APPLYING THE TOOLS: Foreign CompetitiveOligopolies 286
Characteristics of Monopolistic Competition 286
Many Sellers 286
Product Differentiation 287
Multiple Dimensions of Competition 287
Ease of Entry of New Firms in the Long Run 287
Output, Price, and Profit of a MonopolisticCompetitor 288
Comparing Monopolistic Competition with PerfectCompetition 289
Comparing Monopolistic Competition with Monopoly 290
Advertising and Monopolistic Competition 290
Characteristics of Oligopoly 291
Models of Oligopoly Behavior 292
The Cartel Model 292
The Contestable Market Model 294
Comparison of the Contestable Market Model and theCartel Model 294
Strategic Pricing and Oligopoly 295
Game Theory, Oligopoly, and StrategicDecision Making 296
Prisoner's Dilemma and a Duopoly Example 296
Duopoly and a Payoff Matrix 298
BEYOND THE TOOLS: Game Theory andExperimental Economics 299
Oligopoly Models, Structure, and Performance 299
KNOWING THE TOOLS: A Comparison of VariousMarket Stctures 300
Conclusion 301
Chapter Summary 301
Key Terms 302
Questions for Thought and Review 302
Problems and Exercises 302
Web Questions 303
Answers to Margin Questions 304
14. GLOBALIZATION, TECHNOLOGY, ANDREAL-WORLD COMPETITION 305
The Goals of Real-World Firms and the Monitoring Problem 306
Short-Run versus Long-Run Profit 306
The Problem with Profit Maximization 306
What Do Real-World Firms Maximize? 308
The Lazy Monopolist and X-Inefficiency 308
How Competition Limits the Lazy Monopolist 308
Motivations for Efficiency other than theProfit Incentive 309
The Fight between Competitive and MonopolisticForces 310
How Monopolistic Forces Affect PerfectCompetition 310
Economic Insights and Real-World Competition 311
How Competitive Forces Affect Monopoly 311
Competition and Natural Monopoly 312
How Firms Protect Their Monopolies 314
Cost-Benefit Analysis of Creating and MaintainingMonopolies 314
Establishing Market Position 315
Driving Forces in Today's Economy 315
Globalization 315
Technology 318
Technology, Efficiency, and Market Structure 318
Perfect Competition and Technology 319
Monopolistic Competition and Technology 319
Monopoly and Technology 319
Oligopoly and Technology 319
Network Externalities, Standards, and TechnologicalLock-In 320
Conclusion 322
Chapter Summary 322
Key Terms 322
Questions for Thought and Review 323
Problems and Exercises 323
Web Questions 324
Answers to Margin Questions 324
Ⅳ APPLYING ECONOMIC REASONINGTO POLICY 326
15. GOVERNMENT POLICY AND MARKETFAILURES 326
KNOWING THE TOOLS: Pareto Optimality and thePerfectly Competitive Benchmark 327
Market Failures 327
Externalities 328
A Negative Externality Example 328
A Positive Externality Example 329
APPLYING THE TOOLS: Common Resources and theTragedy of the Commons 330
Alternative Methods of Dealing with Externalities 330
Direct Regulation 330
Incentive Policies 330
Voluntary Reductions 332
APPLYING THE TOOLS: Marketable Permits forPollution 333
The Optimal Policy 333
Public Goods 334
Informational Problems 336
Policies to Deal with Informational Problems 337
A Market in Information 337
Licensing of Doctors 337
The Informational Alternative to Licensure 339
Government Failure and Market Failures 341
Conclusion 342
Chapter Summary 342
Key Terms 342
Questions for Thought and Review 343
Problems and Exercises 343
Web Questions 344
Answers to Margin Questions 344
16. ANTITRUST POLICY ANDREGULATION 346
Antitrust Policy: Judgment by Performanceor Structure? 347
History of U.S. Antitrust Laws 347
The Sherman Antitrust Act 348
The Standard Oil and American Tobacco Cases:Judging Market Competitiveness byPerformance 349
The Clayton Act and the Federal Trade CommissionAct 349
The ALCOA Case: Judging Market Competitivenessby Structure 350
Judging Markets by Structure and Performance:The Reality 350
APPLYING THE TOOLS: Wal-Mart, State Laws, andCompetition 351
Recent Antitrust Enforcement 352
APPLYING THE TOOLS: Nefarious BusinessPractices 353
Three Recent Antitrust Cases 353
The IBM Case 353
The AT&T Case 354
The Microsoft Case 356
Assessment of Antitrust Policy 359
Mergers, Acquisitions, and Takeovers 359
Acquisitions and Takeovers 359
Mergers 360
BEYOND THE TOOLS: White Knights and GoldenParachutes 361
Recent Merger Activity and Deacquisitions 362
Assessment of Mergers and Acquisitions 363
International Competition and Antitrust Policy in OtherCountries 363
APPLYING THE TOOLS: Antitrust Agencies in SomeOther Countries 364
Regulation, Government Ownership, and IndustrialPolicies 365
Regulation 365
Government Ownership 365
Industrial Policies 367
Conclusion 367
Chapter Summary 368
Key Terms 368
Questions for Thought and Review 368
Problems and Exercises 369
Web Questions 369
Answers to Margin Questions 370
17. MICROECONOMIC POLICY, ECONOMICREASONING, AND BEYOND 371
Economists' Differing Views about Social Policy 372
How Economists' Value Judgments Creep into PolicyProposals 372
The Need for a Worldview 374
Agreement among Economists about Social Policy 374
Economists' Cost/Benefit Approach to GovernmentRegulation 375
The Value of Life 375
Comparing Costs and Benefits of DifferentDimensions 377
Putting Cost/Benefit Analysis in Perspective 378
The Problem of Other Things Changing 378
The Cost/Benefit Approach in Context 378
KNOWING THE TOOLS: Economic Efficiency and theGoals of Society 379
Failure of Market Outcomes 379
Distribution 380
Examples of Distributional Issues 380
BEYOND THE TOOLS: The Ambiguity of TotalSurplus 381
Consumer Sovereignty and Rationality Problems 382
Inalienable Rights 382
APPLYING THE TOOLS: Elasticity and Taxation toChange Behavior 383
Government Failure 384
APPLYING THE TOOLS: The Conventional PolicyWisdom among Economists 385
Politics and Economic Policy 385
Conclusion 386
Chapter Summary 386
Key Terms 387
Questions for Thought and Review 387
Problems and Exercises 387
Web Questions 388
Answers to Margin Questions 389
V POLICY ISSUES IN DEPTH 390
18. POLITICS AND ECONOMICS: THE CASEOF AGRICULTURAL MARKETS 390
APPLYING THE TOOLS: The Cost of a Box ofWheaties 391
The Nature of Agricultural Markets 391
The Good/Bad Paradox in Agriculture 392
The Long-Run Decline of Farming 392
The Short-Run Cyclical Problem Facing Farmers 393
The Difficulty of Coordinating Farm Production 393
Ways around the Good/Bad Paradox 393
The General Rule of Political Economy 394
Four Price Support Options 394
Supporting the Price by Regulato Measures 395
Providing Economic Incentives to Reduce Supply 397
Subsidizing the Sale of the Good 398
Buying Up and Storing, Giving Away, or Destroyingthe Good 398
Which Group Prefers Which Option? 399
Economics, Politics, and Real-World Policies 399
Interest Groups 399
APPLYING THE TOOLS: Changes in U.S. AgriculturalPolicy 400
International Issues 400
Conclusion 401
Chapter Summary 401
Key Terms 402
Questions for Thought and Review 402
Problems and Exercises 402
Web Questions 403
Answers to Margin Questions 403
19. INTERNATIONAL TRADE POLICY 405
APPLYING THE TOOLS: The Gains to InternationalTraders 406
The Principle of Comparative Advantage 406
The Gains from Trade 406
BEYOND THE TOOLS: International Issues inPerspective 407
Dividing Up the Gains from Trade 407
Reasons for Trade Restrictions 408
Unequal Internal Distribution of the Gains fromTrade 409
Haggling by Companies over the Gains from Trade 410
Haggling by Countries over Trade Restrictions 411
Specialized Production 411
Macroeconomic Aspects of Trade 412
National Security 413
International Politics 413
Increased Revenue Brought In by Tariffs 413
Why Economists Generally Oppose TradeRestrictions 413
Varieties of Trade Restrictions 414
Tariffs 415
Quotas 416
Voluntary Restraint Agreements 417
Embargoes 417
Regulatory Trade Restrictions 417
APPLYING THE TOOLS: Hormones andEconomics 418
Nationalistic Appeals 418
Free Trade Associations 418
APPLYING THE TOOLS: Dumping 419
Conclusion 419
Chapter Summary 420
Key Terms 420
Questions for Thought and Review 420
Problems and Exercises 421
Web Questions 422
Answers to Margin Questions 422
Appendix A: The Geometry of Absolute Advantage andComparative Advantage 422
Ⅵ FACTOR MARKETS 428
20. WHO GETS WHAT? THE DISTRIBUTIONOF INCOME 428
Ways of Considering the Distribution of Income 429
The Share Distribution of Income 430
The Lorenz Curve 430
U.S. Income Distribution over Time 431
Defining Poverty 432
The Official Definition of Poverty 432
Debates about the Definition of Poverty 433
The Costs of Poverty 434
International Dimensions of Income Inequality 434
Comparing U.S. Income Distribution with That inOther Countries 434
KNOWING THE TOOLS: The Gini Coefficient 435
Income Distribution among Countries 436
The Total Amount of Income in VariousCountries 436
The Distribution of Wealth 436
A Lorenz Curve of the Distribution of Wealth 437
How Much Wealth Do the Wealthy Have? 437
Socioeconomic Dimensions of Income Inequality 438
Income Distribution according to SocioeconomicCharacteristics 438
Income Distribution according to Class 439
Income Distribution and Fairness 440
Philosophical Debates about Equality andFairness 440
Fairness and Equality 441
Fairness as Equality of Opportunity 442
The Problems of Redistributing Income 442
Three Important Side Effects of RedistributivePrograms 442
Politics, Income Redistribution, and Fairness 443
Income Redistribution Policies 443
Taxation to Redistribute Income 443
Expenditure Programs to Redistribute Income 445
How Successful Have Income Redistribution ProgramsBeen? 446
Conclusion 447
Chapter Summary 448
Key Terms 448
Questions for Thought and Review 448
Problems and Exercises 449
Web Questions 449
Answers to Margin Questions 450
21. WORK AND THE LABOR MARKET 451
The Supply of Labor 452
Real Wages and the Opportunity Cost of Work 453
KNOWING THE TOOLS: Income and SubstitutionEffects 454
The Supply of Labor and Nonmarket Activities 454
Income Taxation, Work, and Leisure 455
The Elasticity of the Supply of Labor 455
Immigration and the International Supplyof Labor 456
The Derived Demand for Labor 456
Factors Influencing the Elasticity of Demandfor Labor 457
Labor as a Factor of Production 458
Shift Factors of Demand 458
The Role of Other Forces in Wage Determination 460
Imperfect Competition and the Labor Market 461
Monopsony 461
Union Monopoly Power 462
Bilateral Monopoly 462
Downsizing, Upsizing, and X-Inefficiency 462
Political and Social Forces and the Labor Market 463
Fairness and the Labor Market 463
Job Discrimination and the Labor Market 464
BEYOND THE TOOLS: Democracy in theWorkplace 465
The Evolution of Labor Markets 467
Conclusion: The Labor Market and You 469
Chapter Summary 471
Key Terms 471
Questions for Thought and Review 471
Problems and Exercises 472
Web Questions 473
Answers to Margin Questions 473
Appendix A: Derived Demand 474
APPLYING THE TOOLS: Difficulties in DeterminingMarginal Productivities 476
Appendix B: Nonwage Income and Property Rights 479
Ⅲ MACROECONOMICS 484
Ⅰ MACROECONOMIC PROBLEMS 484
22. ECONOMIC GROWTH, BUSINESSCYCLES, UNEMPLOYMENT, ANDINFLATION 484
Two Frameworks: The Long Run and the Short Run 484
Growth 485
KNOWING THE TOOLS: Your Consumption andAverage Consumption 486
Global Experiences with Growth 486
The Benefits and Costs of Growth 487
Business Cycles 488
The Phases of the Business Cycle 489
Why Do Business Cycles Occur? 490
Leading Indicators 491
Unemployment 492
Unemployment as a Social Problem 492
Unemployment as Government's Problem 493
Why the Target Rate of Unemployment Changed 493
BEYOND THE TOOLS: From Full Employment to theTarget Rate of Unemployment 494
Whose Responsibility Is Unemployment? 494
APPLYING THE TOOLS: Categories ofUnemployment 495
How Is Unemployment Measured? 496
Unemployment and Potential Output 498
Microeconomic Categories of Unemployment 499
Inflation 500
Measurement of Inflation 501
KNOWING THE TOOLS: Measurement Problems withthe Consumer Price Index 502
Real and Nominal Concepts 504
Expected and Unexpected Inflation 504
Costs of Inflation 505
Conclusion 506
Chapter Summary 506
Key Terms 507
Questions for Thought and Review 507
Problems and Exercises 507
Web Questions 508
Answers to Margin Questions 508
Appendix A: Nonmainstream Approaches to Macro 509
23. NATIONAL INCOME ACCOUNTING 512
National Income Accounting 513
Measuring Total Economic Output of Goods andServices 513
Calculating GDP 514
BEYOND THE TOOLS: Is GDP Biased againstWomen? 518
Two Methods of Calculating GDP 518
The National Income Accounting Identity 518
The Expenditures Approach 518
The Income Approach 521
Equality of Income and Expenditure 522
Other National Income Terms 523
Using GDP Figures 524
Comparing GDP among Countries 524
Economic Welfare over Time 525
Real and Nominal GDP 525
Some Limitations of National Income Accounting 526
GDP Measures Market Activity, Not Welfare 526
APPLYING THE TOOLS: The Colander HappinessIndex 527
Measurement Errors 527
Misinterpretation of Subcategories 528
Genuine Progress Indicator 528
APPLYING THE TOOLS: The UndergroundEconomy 529
Conclusion 529
Chapter Summary 530
Key Terms 531
Questions for Thought and Review 531
Problems and Exercises 531
Web Questions 532
Answers to Margin Questions 532
Ⅱ THE MACROECONOMIC FRAMEWORK 533
24. GROWTH, PRODUCTIVITY, AND THEWEALTH OF NATIONS 533
General Observations about Growth 534
Growth and the Economy's Potential Output 534
The Importance of Growth for Living Standards 534
BEYOND THE TOOLS: Is Growth Good? 535
Markets, Specialization, and Growth 536
Economic Growth, Distribution, and Markets 536
Per Capita Growth 537
The Sources of Growth 538
Investment and Accumulated Capital 538
Available Resources 539
Growth-Compatible Institutions 539
Technological Development 540
Entrepreneurship 540
Turning the Sources of Growth into Growth 541
The Production Function and Theories of Growth 541
The Standard Theory of Growth—the ClassicalGrowth Model 542
APPLYING THE TOOLS: Is the 21st Centu the Age ofTechnology or One of Many Ages of Technology? 544
New Growth Theory 545
Economic Policies to Encourage Per Capita Growth 547
Policies to Encourage Saving and Investment 548
Policies to Control Population Growth 549
Policies to Increase the Level of Education 549
Policies to Create Institutions That EncourageTechnological Innovation 550
Policies to Provide Funding for Basic Research 551
Policies to Increase the Economy's Openness toTrade 552
Conclusion 552
Chapter Summary 553
Key Terms 553
Questions for Thought and Review 553
Problems and Exercises 554
Web Questions 554
Answers to Margin Questions 555
25. AGGREGATE DEMAND, AGGREGATESUPPLY, AND MODERNMACROECONOMICS 556
The Historical Development of Modem Macro 557
From Classical to Keynesian Economics 557
Classical Economists 558
The Layperson's Explanation for Unemployment 558
The Essence of Keynesian Economics 558
KNOWING THE TOOLS: In the Long Run, We're AllDead 558
The AS/AD Model 560
The Aggregate Demand Curve 561
The Slope of the AD Curve 561
Shifts in the AD Curve 563
The Aggregate Supply Curve 565
The Slope of the AS Curve 566
Shifts in the AS Curve 566
The Potential Output Curve 567
Equilibrium in the Aggregate Economy 567
KNOWING THE TOOLS: Why Are PricesInflexible? 568
Short-Run Equilibrium 569
Long-Run Equilibrium 569
Integrating the Short-Run and Long-RunFrameworks 569
KNOWING THE TOOLS: A Review of the AS/ADModel 571
Some Additional Policy Examples 572
Why Macro Policy Is More Complicated Than theAS/AD Model Makes It Look 573
Three Policy Ranges 573
The Problem of Estimating Potential Output 574
Some Real-World Examples 575
Debates about Potential Output 576
Conclusion 576
Chapter Summary 576
Key Terms 577
Questions for Thought and Review 577
Problems and Exercises 577
Web Questions 578
Answers to Margin Questions 578
26. THE MULTIPLIER MODEL 580
BEYOND THE TOOLS: Econometric Models 581
The Multiplier Model 581
BEYOND THE TOOLS: History of the MultiplierModel 582
Aggregate Production 582
Aggregate Expenditures 583
Determining the Level of Aggregate Income 587
KNOWING THE TOOLS: Solving for EquilibriumIncome Algebraically 588
The Multiplier Equation 588
The Multiplier Process 589
The Circular Flow Model and the Intuition behind theMultiplier Process 590
The Multiplier Model in Action 591
The Steps of the Multiplier Process 592
Examples of the Effects of Shifts in AggregateExpenditures 593
KNOWING THE TOOLS: Determinants of the AECurve 595
Limitations of the Multiplier Model 595
The Multiplier Model Is Not a Complete Model of theEconomy 595
Shifts Are Not as Great as Intuition Suggests 595
The Price Level Will Often Change in Response toShifts in Demand 596
People's Forward-Looking Expectations Make theAdjustment Process Much More Complicated 596
Shifts in Expenditures Might Reflect Desired Shifts inSupply and Demand 596
Expenditures Depend on Much More Than CurrentIncome 597
Conclusion 597
Chapter Summary 597
Key Terms 598
Questions for Thought and Review 598
Problems and Exercises 598
Web Questions 599
Answers to Margin Questions 599
Appendix A: An Algebraic Presentation of the ExpandedMultiplier Model 600
Appendix B: The Multiplier Model and the AS/ADModel 601
Ⅲ POLICY ISSUES 604
27. DEMAND MANAGEMENT POLICY 604
The Story of Fiscal Policy 605
Aggregate Demand Management 605
BEYOND THE TOOLS: Keynes and Fiscal Policy 606
Fighting Recession: Expansionary Fiscal Policy 606
Fighting Inflation: Contractionary Fiscal Policy 609
The Questionable Effectiveness of Fiscal Policy 609
APPLYING THE TOOLS: Using Taxes Rather ThanExpenditures as the Tool of Fiscal Policy 610
Alternatives to Fiscal Policy 610
Directed Investment Policies: Policy AffectingExpectations 611
KNOWING THE TOOLS: Government DemandManagement Policies 612
Trade Policy and Export-Led Growth 612
Autonomous Consumption Policy 613
Real-World Examples 614
Fiscal Policy in World War Ⅱ 614
Recent Fiscal Policy 615
Problems with Fiscal and Other Activist Policies 615
1. Financing the Deficit Doesn't Have OffsettingEffects 616
2. Knowing What the Situation Is 618
3. Knowing the Level of Potential Income 618
4. The Government's Flexibility in Changing Taxesand Spending 619
APPLYING THE TOOLS: Fighting Vietnam WarInflation 620
5. Size of the Government Debt Doesn't Matter 620
6. Fiscal Policy Doesn't Negatively Affect OtherGovernment Goals 620
Summaryof the Problems 620
Building Fiscal Policies into Institutions 621
Conclusion 621
Chapter Summary 622
Key Terms 623
Questions for Thought and Review 623
Problems and Exercises 623
Web Questions 624
Answers to Margin Questions 624
28. POLITICS, SURPLUSES, DEFICITS, ANDDEBT 626
Defining Surpluses and Deficits 627
Financing the Deficit 627
Arbitrariness of Defining Surpluses and Deficits 628
Many Right Definitions 628
Surpluses and Deficits as Summary Measures 628
Nominal and Real Surpluses and Deficits 629
Structural and Passive Surpluses and Deficits 630
The Definition of Debt and Assets 631
Debt Management 631
Difference between Individual and GovernmentDebt 633
U.S. Government Deficits and Debt: The HistoricalRecord 634
The Debt Burden 635
U.S. Debt Relative to Other Countries 635
Interest Rates and Debt Burden 636
The Modern Debate about the Surplus 636
Why Did the Surplus Come About? 637
KNOWING THE TOOLS: Four Important Points aboutDeficits and Debt 638
What Should the Government Do with the Surplus? 638
Implications of the Government's Cash FlowAccounting System 638
The Social Security System 638
Why the Surplus Is Not As Large As It Looks 641
The Real Problem and the Real Solution 641
BEYOND THE TOOLS: The Stock Market Crash of2014? 643
Conclusion 644
Chapter Summary 644
Key Terms 644
Questions for Thought and Review 645
Problems and Exercises 645
Web Questions 646
Answers to Margin Questions 646
29. MONEY, BANKING, AND THEFINANCIAL SECTOR 647
Why Is the Financial Sector Important to Macro? 648
The Role of Interest Rates in the Financial Sector 649
Saving That Escapes the Circular Flow 650
The Definitions and Functions of Money 650
The U.S. Central Bank: The Fed 650
Functions of Money 651
Alternative Measures of Money 653
M1 653
KNOWING THE TOOLS: Characteristics of a GoodMoney 654
Mz 654
Beyond M2: L 654
Distinguishing between Money and Credit 655
APPLYING THE TOOLS: NOW Accounts and MoneyMarket Accounts 656
Banks and the Creation of Money 656
How Banks Create Money 656
The Money Multiplier 658
Faith as the Backing of Our Money Supply 661
APPLYING THE TOOLS: The Real-World MoneyMultiplier and Recent Reforms in Banking 662
Regulation of Banks and the Financial Sector 662
Financial Panics 662
Anatomy of a Financial Panic 663
Government Policy to Prevent Panic 663
The Benefits and Problems of Guarantees 663
The Savings and Loan Bailout 664
Conclusion 665
Chapter Summary 665
Key Terms 665
Questions for Thought and Review 666
Problems and Exercises 666
Web Questions 667
Answers to Margin Questions 667
Appendix A: A Closer Look at Financial Institutions andFinancial Markets 667
KNOWING THE TOOLS: Do Financial Assets MakeSociety Richer? 670
Appendix B: Creation of Money Using T-Accounts 677
30. MONETARY POLICY AND THE DEBATEABOUT MACRO POLICY 680
Duties and Structure of the Fed 682
Structure of the Fed 682
APPLYING THE TOOLS: Central Banks in OtherCountries 684
Duties of the Fed 684
BEYOND THE TOOLS: Histoof the U.S. BankingSystem 685
The Importance of MonetaPolicy 685
The Conduct of Monetary Policy 686
Tools of Moneta Policy 686
Changing the Reserve Requirement 686
APPLYING THE TOOLS: Three Letters 687
Changing the Discount Rate 688
KNOWING THE TOOLS: Fancy Lingo 689
Executing Open Market Operations 689
Monetary Policy in the AS/AD Model 692
Monetary Policy in the Circular Flow 693
The Emphasis on the Interest Rate 693
Real and Nominal Interest Rates 693
Real and Nominal Interest Rates and MonetaryPolicy 695
Problems in the Conduct of Monetary Policy 695
Knowing What Policy to Use 695
Understanding the Policy You're Using 696
Lags in Monetary Policy 696
Political Pressure 696
Conflicting International Goals 696
Conclusion 697
Chapter Summary 697
Key Terms 697
Questions for Thought and Review 698
Problems and Exercises 698
Web Questions 699
Answers to Margin Questions 699
Appendix A: The Effect of Monetary Policy UsingT-Accounts 700
31. INFLATION AND ITS RELATIONSHIP TOUNEMPLOYMENT AND GROWTH 702
Some Basics about Inflation 703
The Distributional Effects of Inflation 703
Expectations of Inflation 703
Productivity, Inflation, and Wages 704
Theories of Inflation 704
The Quantity Theory of Money and Inflation 704
KNOWING THE TOOLS: Demand-Pull and Cost-PushInflation 705
BEYOND THE TOOLS: The Keeper of the ClassicalFaith: Milton Friedman 709
The Institutional Theory of Inflation 710
KNOWING THE TOOLS: Dieting and FightingInflation 713
Inflation and Unemployment: The Phillips Curve 713
History of the Phillips Curve 714
The Breakdown of the Short-Run Phillips Curve 715
The Long-Run and Short-Run Phillips Curves 715
Stagflation and the Phillips Curve 717
The New Economy: The Late 1990s and Early2000s 717
The Relationship between Inflation and Growth 718
Quantity Theoryand the Inflation/GrowthTrade-Off 719
Institutional Theory and the Inflation/GrowthTrade-Off 719
Conclusion 720
Chapter Summary 720
Key Terms 720
Questions for Thought and Review 721
Problems and Exercises 721
Web Questions 722
Answers to Margin Questions 722
Ⅳ INTERNATIONAL POLICY ISSUES 724
32. OPEN ECONOMY MACRO: EXCHANGE 724
RATE AND TRADE POLICY 724
The Balance of Payments 725
The Current Account 726
The Capital Account 727
The Official Transactions Account 728
Exchange Rates 728
Exchange Rates and the Balance of Payments 730
Fundamental Forces Determining Exchange Rates 730
Why Exchange Rate Determination Is MoreComplicated Than Supply/Demand Analysis MakesIt Seem 731
International Trade Problems from Shifting Values ofCurrencies 731
How a Fixed Exchange Rate System Works 731
KNOWING THE TOOLS: Exchange Rates Set by Law:Nonconvertible Currencies and Capital Controls 732
APPLYING THE TOOLS: Determining the Causes andFluctuations in the Dollar's Value 734
Advantages and Disadvantages of Alternative ExchangeRate Systems 736
Fixed Exchange Rates 736
Flexible Exchange Rates 737
Partially Flexible Exchange Rates 738
Which View Is Right? 738
APPLYING THE TOOLS: The Euro 739
Adjusting the Economy to the Exchange Rate via TradePolicy 739
Varieties of Trade Restrictions 739
Economists' Dislike of Trade RestrictionPolicies 742
Strategic Trade Policies 742
Conclusion 743
Chapter Summary 743
Key Terms 744
Questions for Thought and Review 744
Problems and Exercises 745
Web Questions 745
Answers to Margin Questions 746
Appendix A: History of Exchange Rate Systems 747
33. INTERNATIONAL DIMENSIONS OFMONETARY AND FISCAL POLICIES 750
The Ambiguous Inteational Goals of MacroeconomicPolicy 751
The Exchange Rate Goal 751
The Trade Balance Goal 751
APPLYING THE TOOLS: The U.S. Trade Deficit 752
International versus Domestic Goals 752
Monetary and Fiscal Policy with Fixed ExchangeRates 753
Increase the Private Demand for Francs viaContractionary Monetary Policy 753
Decrease the Private Supply of Francs viaContractionary Monetary and Fiscal Policy 754
Monetary and Fiscal Policy with Flexible or PartiallyFlexible Exchange Rate Regimes 754
Monetary Policy's Effect on Exchange Rates 754
Monetary Policy's Effect on the Trade Balance 756
Fiscal Policy's Effect on Exchange Rates 758
Fiscal Policy's Effect on the Trade Deficit 759
International Phenomena and Domestic Goals 760
International Monetary and Fiscal Coordination 760
KNOWING THE TOOLS: Monetary and Fiscal Policy'sEffect on International Goals 761
Coordination Is a Two-Way Street 761
Crowding Out and International Considerations 761
Conclusion 762
Chapter Summary 763
Questions for Thought and Review 763
Problems and Exercises 764
Web Questions 764
Answers to Margin Questions 764
V COMBINING THE FRAMEWORK WITHPOLICY 766
34. TOOLS, RULES, AND POLICY 766
Models 767
Micro Models 767
Macro Models 769
KNOWING THE TOOLS: Key Models in IntroductoMacroeconomics 773
Using Models to Understand and Discuss Policy 773
Policies and Institutions 773
Worldviews and Policy 775
Keynesian and Classical Policy Views 776
Monetaryand Fiscal Policy 776
Policy Process and Credibility 779
Has the Economy Entered a New Era? 781
BEYOND THE TOOLS: The Stock Market Boom andthe Economy 783
Conclusion 784
Chapter Summary 784
Key Terms 785
Questions for Thought and Review 785
Problems and Exercises 785
Web Questions 786
Answers to Margin Questions 786