ECONOMICS - Willkommen — Verbundzentrale des GBV Preface xvii Economics and the Internet xxiii PART ONE BASIC CONCEPTS Chapter I The Fundamentals of Economics A. Introduction For

ECONOMICSEighteenth Edition

PAUL A. SAMUELSONInstitute Professor Emeritus

Massachusetts Institute of Technology

WILLIAM D. NORDHAUSSterling Professor of Economics

Yale University

Boston Burr Ridge, IL Dubuque, IA Madison, Wl New York San Francisco St. LouisBangkok Bogota Caracas Kuala Lumpur Lisbon London Madrid Mexico CityMilan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto

Contents in Brief

Preface xviiEconomics and the Internet xxiii

PART ONE BASIC CONCEPTS

Chapter 1 The Fundamentals of Economics 3

Appendix 1 How to Read Graphs 18

Chapter 2 Markets and Government in a Modern Economy 25

Chapter 3 Basic Elements of Supply and Demand 45

PART TWO MICROECONOMICS: SUPPLY, DEMAND,AND PRODUCT MARKETS

Chapter 4 Applications of Supply and Demand 65

Chapter 5 Demand and Consumer Behavior 84

Appendix 5 Geometrical Analysis of Consumer Equilibrium 101

Chapter 6 Production and Business Organization 107

Chapter 7 Analysis of Costs 124

Appendix 7 Production, Cost Theory, and Decisions of the Firm 142

Chapter 8 Analysis of Perfectly Competitive Markets 147

Chapter 9 Imperfect Competition and Monopoly 166

Chapter 10 Oligopoly and Monopolistic Competition 184

Chapter 11 Uncertainty and Game Theory 204

63

PART THREE FACTOR MARKETS: LABOR, LAND,AND CAPITAL

Chapter 12 How Markets Determine Incomes 225

Chapter 13 The Labor Market 243

Chapter 14 Land and Capital 264

Appendix 14 Markets and Economic Efficiency 283

223

VI CONTENTS IN BRIEF

PART FOUR APPLIED MICROECONOMICS: INTERNATIONALTRADE, GOVERNMENT, AND THE ENVIRONMENT 291

Chapter 15 Comparative Advantage and Protectionism 293

Chapter 16 Government Taxation and Expenditure 318

Chapter 17 Promoting More Efficient Markets 341

Chapter 18 Protecting the Environment 361

Chapter 19 Efficiency vs. Equality: The Big Tradeoff 382

PART FIVE MACROECONOMICS: ECONOMIC GROWTH ANDBUSINESS CYCLES 403

Chapter 20 Overview of Macroeconomics 405

Appendix 20 Macroeconomic Data for the United States 423

Chapter 21 Measuring Economic Activity 424

Chapter 22 Consumption and Investment 445

Chapter 23 Business Fluctuations and the

Theory of Aggregate Demand 466

Chapter 24 The Multiplier Model 481

Chapter 25 Financial Markets and the Special Case of Money 502

Chapter 26 Central Banking and Monetary Policy 531

PART SIX GROWTH, DEVELOPMENT, ANDTHE GLOBAL ECONOMY 553

Chapter 27 The Process of Economic Growth 555

Chapter 28 The Challenge of Economic Development 577

Chapter 29 Exchange Rates and the International Financial System 598

Chapter 30 Open-Economy Macroeconomics 619

PART SEVEN UNEMPLOYMENT, INFLATION, ANDECONOMIC POLICY

Chapter 31 Unemployment and the Foundationsof Aggregate Supply 645

Chapter 32 Ensuring Price Stability 667

Chapter 33 The Warring Schools of Macroeconomics 690

Chapter 34 Policies for Growth and Stability 709

Glossary of Terms 731Index 754

643

Contents

Preface xvii

Economics and the Internet xxiii

PART ONEBASIC CONCEPTS

Chapter IThe Fundamentals of Economics

A. IntroductionFor Whom the Bell Tolls • Scarcity and Efficiency: TheTwin Themes of Economics 3 • Microeconomics andMacroeconomics • The Logic of Economics 5 • CoolHeads at the Service of Warm Hearts 6 •

B. The Three Problems of Economic OrganizationMarket, Command, and Mixed Economies 8 •

C. Society's Technological PossibilitiesInputs and Outputs 9 • The Production-PossibilityFrontier 9 • Putting the PPF to Work • OpportunityCosts • Efficiency •

Summary 15 • Concepts for Review 15 • FurtherReading and Internet Websites 16 • Questions forDiscussion 16 •

Appendix IHow to Read Graphs 18

The Production-Possibility Frontier 18 • Production-Possibility Graph • A Smooth Curve • Slopes and Lines •Slope of a Curved Line • Shifts of and Movementalong Curves • Some Special Graphs •

Summary to Appendix 23 • Concepts for Review 23 •Questions for Discussion 24 •

Chapter 2

Markets and Government in aModern Economy 25The Mixed Economy •

A. What Is a Market? 26Not Chaos, but Economic Order • How Markets Solvethe Three Economic Problems • Monarchs of theMarketplace • A Picture of Prices and Markets • TheInvisible Hand •

B. Trade, Money, and Capital 31Trade, Specialization, and Division of Labor 31 •Money: The Lubricant of Exchange 33 • Capital 33 •Capital and Private Property •

C. The Economic Role of Government 35Efficiency 35 • Imperfect Competition •Externalities • Public Goods • Equity 38 •Macroeconomic Growth and Stability 39 • Twilight ofthe Welfare State? 40 • The Mixed Economy Today •


Chapter 3Basic Elements of Supplyand Demand 45

A. The Demand Schedule 46The Demand Curve 47 • Market Demand • Forcesbehind the Demand Curve • Shifts in Demand •

B. The Supply Schedule 5 /The Supply Curve 51 • Forces behind the SupplyCurve • Shifts in Supply •

C. Equilibrium of Supply and Demand 54Equilibrium with Supply and Demand Curves 55 •Effect of a Shift in Supply or Demand • InterpretingChanges in Price and Quantity • Supply, Demand, andImmigration • Rationing by Prices 59 •

VII

VIII CONTENTS

Summary 60 • Concepts for Review 61 • FurtherReading and Internet Websites 61 o Questions forDiscussion 61 •

Appendix 5Geometrical Analysis ofConsumer Equilibrium 101

PART TWOMICROECONOMICS: SUPPLY, DEMAND,

AND PRODUCT MARKETS63

Chapter 4Applications of Supply and Demand 65

A. Price Elasticity of Demand and Supply 65Price Elasticity of Demand 66 • Calculating Elasticities •Price Elasticity in Diagrams • Elasticity and Revenue 70 •The Paradox of the Bumper Harvest • Price Elasticity ofSupply 72 •

B. Applications to Major Economic Issues 73The Economics of Agriculture 74 • Long-Run RelativeDecline of Farming • Impact of a Tax on Price andQuantity 75 • Minimum Floors and MaximumCeilings 77 • The Minimum-Wage Controversy • EnergyPrice Controls •


Chapter 5Demand and Consumer Behavior 84

The Indifference Curve 101 • Law of Substitution • TheIndifference Map • Budget Line or Budget Constraint103 • The Equilibrium Position of Tangency 104 •Changes hi Income and Price 104 • Income Change •Single Price Change • Deriving the Demand Curve 105 •

Summary to Appendix 106 • Concepts for Review 106• Questions for Discussion 106 •

Chapter 6Production and Business Organization 107

A. Theory of Production and Marginal Products 107Basic Concepts 107 • The Production Function • Total,Average, and Marginal Product • The Law of DiminishingReturns • Returns to Scale 111 • Short Run and LongRun 112 • Technological Change 113 • Productivity andthe Aggregate Production Function 116 • Productivity •Productivity Growth from Economies of Scale • EmpiricalEstimates of the Aggregate Production Function •

B. Business Organizations 118The Nature of the Firm 118 • Big, Small, andInfinitesimal Businesses 118 • The IndividualProprietorship • The Partnership • The Corporation •


Choice and Utility Theory 84 • Marginal Utility andthe Law of Diminishing Marginal Utility • A NumericalExample • Equimarginal Principle: Equal MarginalUtilities per Dollar for Every Good 87 • Why DemandCurves Slope Downward • Leisure and the OptimalAllocation of Time • An Alternative Approach:Substitution Effect and Income Effect 89 • SubstitutionEffect • Income Effect • From Individual to MarketDemand 90 • Demand Shifts • Substitutes andComplements • Empirical Estimates of Price andIncome Elasticities • The Economics of Addiction 93 •The Paradox of Value 95 • Consumer Surplus 96 •Applications of Consumer Surplus •


Chapter 7Analysis of Costs 124

A. Economic Analysis of Costs 114Total Cost: Fixed and Variable 124 • Fixed Cost •Variable Cost • Definition of Marginal Cost 125 •Average Cost 127 • Average or Unit Cost • AverageFixed and Variable Cost • Minimum Average Cost •The Link between Production and Costs 130 •Diminishing Returns and U-Shaped Cost Curves •Choice of Inputs by the Firm 132 • Marginal Productsand the Least-Cost Rule • Financial Finagling •

B. Economic Costs and Business AccountingThe Income Statement, or Statement of Profit andLoss 133 • The Balance Sheet 135 • AccountingConventions •

133

CONTENTS IX

C. Opportunity CostsOpportunity Cost and Markets 138 '*

137


Appendix 7Production, Cost Theory, andDecisions of the Firm 142

A Numerical Production Function 142 • The Law ofDiminishing Marginal Product 142 • Least-Cost FactorCombination for a Given Output 143 • Equal-ProductCurves • Equal-Cost Lines • Equal-Product andEqual-Cost Contours: Least-Cost Tangency • Least-CostConditions •

Summary to Appendix 145 • Concepts for Review 146• Questions for Discussion 146 •

Chapter 8Analysis of Perfectly Competitive Markets 147

A. Supply Behavior of the Competitive Firm 147Behavior of a Competitive Firm 147 • ProfitMaximization • Perfect Competition • CompetitiveSupply Where Marginal Cost Equals Price • TotalCost and the Shutdown Condition •

B. Supply Behavior in Competitive Industries 152Summing All Firms' Supply Curves to Get Market Sup-ply 152 • Short-Run and Long-Run Equilibrium 152 •The Long Run for a Competitive Industry •

C. Special Cases of Competitive Markets 155General Rules 155 • Constant Cost • Increasing Costsand Diminishing Returns • Fixed Supply and EconomicRent • Backward-Bending Supply Curve • Shifts inSupply •

D. Efficiency and Equity of Competitive Markets 158Evaluating the Market Mechanism 158 • The Concept ofEfficiency • Efficiency of Competitive Equilibrium •Equilibrium with Many Consumers and Markets •The Central Role of Marginal-Cost Pricing •Qualifications 161 • Market Failures • The Role ofGovernment Intervention •


Chapter 9Imperfect Competition and Monopoly 166

A. Patterns of Imperfect Competition 166Definition of Imperfect Competition • Varieties ofImperfect Competitors 168 • Monopoly • Oligopoly •Monopolistic Competition • Sources of MarketImperfections 170 • Costs and Market Imperfection •Barriers to Entry •

B. Marginal Revenue and Monopoly 173The Concept of Marginal Revenue 174 • Price, Quantity,and Total Revenue • Marginal Revenue and Price •Elasticity and Marginal Revenue • Profit-MaximizingConditions 176 • Monopoly Equilibrium in Graphs •Perfect Competition as a Polar Case of ImperfectCompetition • The Marginal Principle: Let BygonesBe Bygones 179 •


Chapter 10Oligopoly and Monopolistic Competition 184

A. Behavior of Imperfect Competitors 184Measures of Market Power • The Nature ofImperfect Competition 186 • Theories of ImperfectCompetition 186 • Collusive Oligopoly • MonopolisticCompetition • Rivalry among the Few • GameTheory • Price Discrimination 191 •

B. Innovation and Information 192Behavior of Large Corporations 192 • Divorce ofOwnership and Control • Information, Innovation, andSchumpeterian Economics 193 • The Economics ofInformation • Intellectual Property Rights • TheDilemma of the Internet • The SchumpeterianHypothesis •

C. A Balance Sheet on Imperfect Competition 197Economic Costs of Imperfect Competition 197 • TheCost of Inflated Prices and Insufficient Output •Measuring the Waste from Imperfect Competition •Intervention Strategies 198 •


CONTENTS

Chapter I IUncertainty and Game Theory 204

A. Economics of Risk and Uncertainty 205Speculation: Shipping Assets or Goods across Space andTime 205 • Arbitrage and Geographic Price Patterns •Speculation and Price Behavior over Time • SheddingRisks through Hedging • The Economic Impacts ofSpeculation • Risk and Uncertainty 208 • Insurance andRisk Spreading 210 • Capital Markets and Risk Sharing •Market Failures in Information 210 • Moral Hazard andAdverse Selection • Social Insurance •

B. Game Theory 212Thinking about Price Setting • Basic Concepts 213 •Alternative Strategies • Some Important Examples ofGame Theory 216 • To Collude or Not to Collude • ThePrisoner's Dilemma • The Pollution Game • DeadlyArms Races • Games, Games, Everywhere ... •


PART THREEFACTOR MARKETS: LABOR,

LAND, AND CAPITAL223

Chapter 12How Markets Determine Incomes

A. Income and WealthIncome 226 • Factor Incomes vs. PersonalIncomes • Role of Government • Wealth 228 •

225

225

229B. Input Pricing by Marginal ProductivityThe Nature of Factor Demands 229 • Demands forFactors Are Derived Demands • Demands for FactorsAre Interdependent • Distribution Theory andMarginal Revenue Product 231 • Marginal RevenueProduct • The Demand for Factors of Production 232 •Factor Demands for Profit-Maximizing Firms • MarginalRevenue Product and the Demand for Factors • Supplyof Factors of Production 234 • Determination of FactorPrices by Supply and Demand 235 • The Distribution ofNational Income 237 • Marginal-Productivity Theory withMany Inputs • An Invisible Hand for Incomes? 239 •


Chapter 13The Labor Market 243

A. Fundamentals of Wage Determination 243The General Wage Level 243 • Demand for Labor 244 •Marginal Productivity Differences • InternationalComparisons • The Supply of Labor 247 •Determinants of Supply • Empirical Findings • WageDifferentials 249 • Differences in Jobs: CompensatingWage Differentials • Differences in People: LaborQuality • Differences in People: The "Rents" ofUnique Individuals • Segmented Markets andNoncompeting Groups •

B. Labor Market Issues and Policies 253History and Practice of Labor Unions 253 • Governmentand Collective Bargaining • How Unions RaiseWages 254 • Theoretical Indeterminacy of CollectiveBargaining • Effects on Wages and Employment 256 •Has Unionization Raised Wages? • Effects onEmployment • Discrimination 257 • EconomicExplanations of Discrimination 257 • Definition ofDiscrimination • Discrimination by Exclusion • Tastefor Discrimination • Statistical Discrimination •Economic Discrimination against Women 259 •Empirical Evidence 259 • Reducing Labor MarketDiscrimination 260 • Uneven Progress •


Chapter 14Land and Capital 264

A. Land and Rent 264Rent as Return to Fixed Factors • Taxing Land •

B. Capital and Interest 267Basic Concepts 267 • Prices and Rentals on CapitalGoods • Rate of Return on Capital Goods • FinancialAssets vs. Tangible Assets • Financial Assets and InterestRates • Real vs. Nominal Interest Rates • PresentValue of Assets 269 • Present Value for Perpetuities •General Formula for Present Value • Acting to MaximizePresent Value • Profits 271 • Reported ProfitStatistics • Determinants of Profits • Review •The Theory of Capital and Interest 273 •Roundaboutness • Diminishing Returns and the

CONTENTS XI

Demand for Capital • Determination of Interest andthe Return on Capital • Graphical'Analysis of theReturn on Capital • Applications of Classical CapitalTheory 277 • Taxes and Inflation • TechnologicalDisturbances • Uncertainty and Expectations •Empirical Findings 277 • Returns to Labor andCapital • Valedictory Thoughts on Factor Prices,Efficiency, and Distribution 277 •


Appendix 14Markets and Economic Efficiency 283

The Efficiency of Perfect Competition 283 • A GeneralEquilibrium of All Markets 283 • Interaction of AllMarkets in General Equilibrium • Properties of aCompetitive General Equilibrium 284 • 1. The BasicPrinciples of a General Equilibrium • 2. The BasicResults of a General Equilibrium • 3. DetailedAnalysis of General Equilibrium • 4. The Efficiency ofCompetitive Markets • A Graphical Demonstration •

Summary to Appendix 289 • Concepts for Review289 • Questions for Discussion 290 •

PART FOURAPPLIED MICROECONOMICS:

INTERNATIONAL TRADE, GOVERNMENT,AND THE ENVIRONMENT

291

Chapter 15Comparative Advantage and Protectionism 293

A. The Nature of International Trade 293International vs. Domestic Trade • Trends in ForeignTrade • The Sources of International Trade in Goodsand Services 294 • Diversity in Natural Resources •Differences in Tastes • Differences in Costs •

B. Comparative Advantage among Nations 295The Principle of Comparative Advantage 295 •Uncommon Sense • Ricardo's Analysis of ComparativeAdvantage • The Economic Gains from Trade •Graphical Analysis of Comparative Advantage 297 •America without Trade • Opening Up to Trade •Extensions to Many Commodities and Countries 301 •

Many Commodities • Many Countries • Triangular andMultilateral Trade • Qualifications and Conclusions 302 •

C. Protectionism 302Supply-and-Demand Analysis of Trade and Tariffs 303 •Free Trade vs. No Trade • Trade Barriers • TheEconomic Costs of Tariffs • The Economics ofProtectionism 308 • Noneconomic Goals • UnsoundGrounds for Tariffs • Potentially Valid Arguments forProtection • Other Barriers to Trade • MultilateralTrade Negotiations 313 • Negotiating Free Trade •Appraisal •

Summary 315 • Concepts for Review 3 16 • FurtherReading and Internet Websites 316 • Questions forDiscussion 316 •

Chapter 16Government Taxation and Expenditure 318

A. Government Control of the Economy 318The Tools of Government Policy 319 • Trends in the Sizeof Government • The Growth of Government Controlsand Regulation • The Functions of Government 321 •Improving Economic Efficiency • Reducing EconomicInequality • Stabilizing the Economy throughMacroeconomic Policies • Conducting InternationalEconomic Policy • Public-Choice Theory 324 •

B. Government Expenditures 324Fiscal Federalism 324 • Federal Expenditures • Stateand Local Expenditures • Cultural and TechnologicalImpacts 327 •

C. Economic Aspects of Taxation 327Principles of Taxation 328 • Benefit vs. Ability-to-PayPrinciples • Horizontal and Vertical Equity • PragmaticCompromises in Taxation • Federal Taxation 329 • TheIndividual Income Tax • Social Insurance Taxes •Corporation Taxes • Consumption Taxes • State andLocal Taxes 333 • Property Tax • Other Taxes • Taxesand Efficiency 334 • Efficiency vs. Fairness • TheThorny Problem of Tax Incidence 336 • Incidence ofFederal Taxes and Transfers • Final Word 337 •


XI I CONTENTS

Chapter 17Promoting More Efficient Markets 341

341A. Business Regulation:Theory and PracticeTwo Brands of Regulation 342 • Why RegulateIndustry? 342 • Containing Market Power • RemedyingInformation Failures • Dealing with Externalities •Interest-Group Theories of Regulation 344 •Public-Utility Regulation of Natural Monopoly 344 •The Costs of Regulation 347 • Decline of EconomicRegulation • Pioneering Deregulation in the AirlineIndustry • Deregulation: An Unfinished Story •

B. Antitrust Policy 350Review of Imperfect Competition • The FrameworkStatutes 351 • Sherman Act (1890) • Clayton Act(1914) • Federal Trade Commission • Basic Issues inAntitrust: Conduct and Structure 352 • Illegal Conduct •Structure: Is Bigness Badness? • Recent StructtxralCases • Mergers: Law and Practice • Antitrust Lawsand Efficiency 357 •


Chapter 18Protecting the Environment

A. Population and Resource LimitationsMalthus and the Dismal Science 362 • Wealthier IsHealthier 363 •

361

362

B. Natural-Resource Economics 365Resource Categories 365 • Appropriable vs.Inappropriable Resources • Renewable vs.Nonrenewable Resources • Allocation of AppropriableNatural Resources 366 • Resource Price Trends •

C. Environmental Economics 370Externalities 370 • Public vs. Private Goods • MarketInefficiency with Externalities 371 • Analysis ofInefficiency • Valuing Damages • Graphical Analysisof Pollution • Policies to Correct Externalities 374 •Government Programs • Private Approaches •Climate Change: To Slow or Not to Slow 377 •Quarrel and Pollute, or Reason and Compute? •


Chapter 19Efficiency vs. Equality:The Big Tradeoff 382

A. The Sources of Inequality 382The Distribution of Income and Wealth 383 • How toMeasure Inequality among Income Classes •Distribution of Wealth • Inequality across Countries •Inequality in Labor Income 387 • Abilities andSkills • Intensities of Work • Occupations • OtherFactors • Inequality in Property Income 388 •Life-Cycle Saving as a Source of Wealth •Entrepreneurship • Inheritance • Poverty in America389 • Who Are the Poor? • Trends in Inequality •

B. Antipoverty Policies 392The Rise of the Welfare State • The Costs ofRedistribution 392 • Redistribution Costs in Diagrams •How Big Are the Leaks? • Adding Up the Leaks •Antipoverty Policies: Programs and Criticisms 395 •Income-Security Programs • Incentive Problems ofthe Poor • The Battle over Welfare Reform 396 • TwoViews of Poverty • Income Supplemental Programs inthe United States Today • The EarnedTncome TaxCredit • The 1996 U.S. Welfare Reform • EconomicPolicy at Century's Dawn 399 •


PART FIVEMACROECONOMICS:

ECONOMIC GROWTH ANDBUSINESS CYCLES

403

Chapter 20Overview of Macroeconomics 405

A. Key Concepts of Macroeconomics 406The Birth of Macroeconomics 406 • Objectives andInstruments of Macroeconomics 408 • MeasuringEconomic Success • The Tools of MacroeconomicPolicy • International Linkages 414 •

8. Aggregate Supply and DemandInside the Macroeconomy: Aggregate Supply andDemand 415 • Definitions of Aggregate Supply andDemand • Aggregate Supply and Demand Curves •

414

CONTENTS XIII

Macroeconomic History: 1900-2003 417 • The Role ofEconomic Policy •


Appendix 20Macroeconomic Data for the United States 423

Chapter 21Measuring Economic Activity 424

Gross Domestic Product: The Yardstick of an Economy'sPerformance 424 • Two Measures of National Product:Goods Flow and Earnings Flow • National AccountsDerived from Business Accounts • The Problem ofDouble Counting • Details of the NationalAccounts 428 • Real vs. Nominal GDP: "Deflating" GDPby a Price Index • Consumption • Investment andCapital Formation • Government • Net Exports •Gross Domestic Product, Net Domestic Product, andGross National Product • GDP and NDP: A Look atNumbers • From GDP to Disposable Income • Savingand Investment • Beyond the National Accounts 438 •Price Indexes and Inflation 439 • Price Indexes •Accounting Assessment 442 •



Chapter 22Consumption and Investment 445

445A. Consumption and SavingBudgetary Expenditure Patterns • Consumption,Income, and Saving 448 • The Consumption Function •The Saving Function • The Marginal Propensity toConsume • The Marginal Propensity to Save • BriefReview of Definitions • National ConsumptionBehavior 454 • Determinants of Consumption • TheNational Consumption Function • Alternative Measuresof Saving •

B. Investment 458Determinants of Investment 459 • Revenues • Costs •Expectations • The Investment Demand Curve 460 •Shifts in the Investment Demand Curve • On to theTheory of Aggregate Demand 462 •

Chapter 23Business Fluctuations and theTheory of Aggregate Demand 466

A. Business Fluctuations 467Features of the Business Cycle 468 • Business-CycleTheories 469 • Forecasting Business Cycles 472 •Econometric Modeling and Forecasting •

B. Foundations of Aggregate Demand 473The Downward-Sloping Aggregate Demand Curve 474 •Shifts in Aggregate Demand • Relative Importance ofFactors Influencing Demand 477 • Is the BusinessCycle Avoidable? •


Chapter 24The Multiplier Model 481

A. The Basic Multiplier Model 481Output Determination with Saving and Investment 482 •Output Determined by Total Expenditures 484 • TheAdjustment Mechanism • An Arithmetic Analysis • TheMultiplier 486 • Graphical Picture of the Multiplier •The Multiplier Model in Perspective 488 • The MultiplierModel Compared with the AS-AD Model •

B. Fiscal Policy in the Multiplier Model 489How Government Fiscal Policies Affect Output 490 •Impact of Taxation on Aggregate Demand •A Numerical Example • Fiscal-Policy Multipliers 493 •Impact of Taxes • Fiscal Policy in Practice • The OtherPartner in Stabilization Policy • Multipliers inAction 497 • Beyond the Multiplier Model •


Chapter 25Financial Markets and the Special Case of Money

A. The Modern Financial SystemThe Role of the Financial System • FinancialIntermediaries • The Functions of the Financial

502

502

XIV CONTENTS

System • The Flow of Funds • A Menu of FinancialAssets 504 • Interest Rates and thejReturn on FinancialAssets 505 • An Array of Interest Rates • Real vs.Nominal Interest Rates •

B. The Special Case of Money 510The Evolution of Money 511 • The History of Money •Components of the Money Supply • The Demand forMoney 513 • Money's Functions • The Costs of HoldingMoney • Two Sources of Money Demand •

C. Banking and the Supply of Money 5(5How Banks Developed from Goldsmith Establishments •Modern Fractional-Reserve Banking 516 • The Process ofDeposit Creation 516 • How Deposits Are Created:First-Generation Banks • Chain Repercussions on OtherBanks • Final System Equilibrium • Two Qualificationsto Deposit Creation •

D. The Stock Market 521Risk and Return on Different Assets • Bubbles andCrashes • Efficient Markets and the Random Walk •Personal Financial Strategies 526 •


Chapter 26Central Banking and Monetary Policy 53 I

A. Central Banking and the Federal Reserve System 531The Federal Reserve System 531 • Structure of the FederalReserve • Overview of the Fed's Operations • BalanceSheet of the Federal Reserve Banks • The Nuts and Boltsof Monetary Policy 536 • Open-Market Operations •Operating Procedures • Discount-Rate Policy: A SecondInstrument • The Role of Reserve Requirements •Monetary Policy in the Open Economy •

B. The Effects of Money on Output and Prices 542The Monetary Transmission Mechanism 542 • The MoneyMarket 543 • Supply of and Demand for Money • TheMonetary Transmission Mechanism 545 • GraphicalAnalysis of Monetary Policy • Monetary Policy in anOpen Economy • Monetary Policy in the AD-ASFramework • Monetary Effects in the Long Run •From Aggregate Demand to Aggregate Supply •


4PART SIX

GROWTH, DEVELOPMENT, ANDTHE GLOBAL ECONOMY

553

Chapter 27The Process of Economic Growth

The Long-Term Significance of Growth •

555

A. Theories of Economic Growth 556The Four Wheels of Growth 557 • Human Resources •Natural Resources • Capital Formation • TechnologicalChange and Innovation • Theories of EconomicGrowth 561 • The Classical Dynamics of Smith andMalthus • Economic Growth with Capital Accumulation:The Neoclassical Growth Model • Geometrical Analysisof the Neoclassical Model • The Importance ofTechnological Change • Technological Change as anEconomic Output •

B. The Patterns of Growth in the United States 567The Facts of Economic Growth • Relationship of theSeven Trends to Economic-Growth Theories • TheSources of Economic Growth • Recent Trends inProductivity 572 • The Productivity Rebound •


Chapter 28The Challenge of Economic Development 577

A. Economic Growth in Poor Countries 577Aspects of a Developing Country 577 • HumanDevelopment • The Four Elements in Development580 • Human Resources • Natural Resources •Capital Formation • Technological Change andInnovations • Vicious Cycles to Virtuous Circles •Strategies of Economic Development 584 • TheBackwardness Hypothesis • Industrialization vs.Agriculture • State vs. Market • Growth andOutward Orientation • Summary Judgment •

B. Alternative Models for Development 587A Bouquet of "Isms" 587 • The Central Dilemma: Mar-ket vs. Command • The Asian Models 588 • Dragonsand Laggards • The Chinese Giant: Market Leninism •Socialism 589 • The Failed Model: Soviet

CONTENTS XV

Communism 590 • Baleful Prophesies • From Textbooksto Tactics: Soviet-Style Command Economy • From Marxto Market • A Cautionary Final Note 595 •


Chapter 29Exchange Rates and theInternational Financial System 598

International Linkages 598 • Trends in ForeignTrade 599 •

A. The Balance of International Payments 600Balance-of-Payments Accounts 600 • Debits and Credits •Details of the Balance of Payments •

B. The Determination of Foreign Exchange Rates 603Foreign Exchange Rates 603 • The Foreign ExchangeMarket 604 • Effects of Changes in Trade • ExchangeRates and the Balance of Payments • Purchasing-PowerParity and Exchange Rates •

C. The International Monetary System 609Fixed Exchange Rates: The Classical Gold Standard 610• Hume's Adjustment Mechanism • InternationalMonetary Institutions after World War II 611 • TheInternational Monetary Fund • The World Bank •The Bretton Woods System • Intervention • FlexibleExchange Rates 614 • Managed Exchange Rates 615 •Today's Hybrid System 615 •

Summary 616 • Concepts for Review 61 7 • FurtherReading and Internet Websites 617 • Questions forDiscussion 6 1 7 *

Investment in the Open Economy 628 • Determination ofSaving and Investment at Full Employment • PromotingGrowth in the Open Economy 633 •

C. International Economic Issues at Century's Start 635Competitiveness and Productivity 635 • "TheDeindustrialization of America" • Trends inProductivity • The European Monetary Union 636 •European Monetary System: Europe's Bretton WoodsSystem • Toward a Common Currency: The Euro • \Costs and Benefits of Monetary Union • Final IAssessment 639 • /


PART SEVENUNEMPLOYMENT, INFLATION, AND

ECONOMIC POLICY643

Chapter 3 IUnemployment and the Foundations ofAggregate Supply 645

A. The Foundations of Aggregate Supply 645Determinants of Aggregate Supply 646 • PotentialOutput • Input Costs • Aggregate Supply in the ShortRun and Long Run 649 • Why Do Short-Run AS andLong-Run AS Differ? •

Chapter 30Open-Economy Macroeconomics 619

6/9A. Foreign Trade and Economic ActivityNet Exports and Output in the Open Economy •Determinants of Trade and Net Exports • Short-RunImpact of Trade on GDP 621 • The MarginalPropensity to Import and the Spending Line • TheOpen-Economy Multiplier • Macroeconomic Policy andthe Exchange-Rate System 624 • Trade and EconomicActivity, 1980-2003 625 •

B. Interdependence in the Global Economy 627Economic Growth in the Open Economy 627 • Saving and

B. L/nemp/oyment 650Measuring Unemployment 651 • Impact ofUnemployment 651 • Economic Impact • SocialImpact • Okun's Law 653 • Economic Interpretation ofUnemployment 654 • Three Kinds of Unemployment •Microeconomic Foundations • Voluntary andInvoluntary Unemployment • Sources of WageInflexibility • Labor Market Issues 658 • Who Are theUnemployed? • Duration of Unemployment •Sources of Joblessness • Unemployment by Age •


XVI CONTENTS

Chapter 32Ensuring Price Stability ' 667

A. Definition and Impact of Inflation 667What Is Inflation? 667 • The History of Inflation •Three Strains of Inflation • Anticipated vs.Unanticipated Inflation • The Economic Impacts ofInflation 673 • Impacts on Income and WrealthDistribution • Impacts on Economic Efficiency •Macroeconomic Impacts • What Is the OptimalRate of Inflation? •

B. /Modern Inflation Theory 675Prices in the AS-AD Framework 676 • Inertial Inflation• Demand-Pull Inflation • Cost-Push Inflation •Expectations and Inertial Inflation • Price Levels vs.Inflation • The Phillips Curve 678 • Short-Run PhillipsCurve • The Nonaccelerating Inflation Rate ofUnemployment • From Short Run to Long Run •The Vertical Long-Run Phillips Curve • QuantitativeEstimates • Doubts about the NAIRU • Review •

C. Dilemmas of Anti-Inflation Policy 684How Long Is the Long Run? • How Much Does It Costto Reduce Inflation? • Credibility and Inflation • HowCan We Lower the NAIRU? •


Chapter 33The Warring Schools of Macroeconomics 690

A. Classical Stirrings and Keynesian Revolution 69 fThe Classical Tradition 691 • Say's Law of Markets •Policy Consequences • The Keynesian Revolution 692 •The Surprising Consequences • Theories andPolicy 693 •

B. The Monetarist Approach 694The Roots of Monetarism 694 • The Equation ofExchange and the Velocity of Money • The QuantityTheory of Prices • Modern Monetarism 696 • TheEssence of Monetarism • Comparison of Monetaristand Keynesian Approaches • The Monetarist Platform:Constant Money Growth • The MonetaristExperiment • The Decline of Monetarism •

C. New Approaches to Macroeconomics 700Foundations 701 • Rational Expectations • Implicationsfor Macroeconomics 701 • The Misperceptions BusinessCycle • Real Business Cycles • The Ricardian View ofFiscal Policy • Efficiency Wages • Supply-SideEconomics • Policy Implications 703 • PolicyIneffectiveness • The Desirability of Fixed Rules •Monetarist Rules and the Lucas Critique • State of theDebate 704 • A New Synthesis? • An InterimAppraisal 706 •


Chapter 34Policies for Growth and Stability 709

A. The Economic Consequences of theGovernment Debt 709

Fiscal History 710 • Government Budget Policy 711 •Actual, Structural, and Cyclical Budgets • TheEconomics of the Debt and Deficits 713 • TheShort-Run Impact of Government Deficits 713 • ShortRun vs. Long Run • Fiscal Policy and the MultiplierModel • Government Debt and Economic Growth 714 •Historical Trends • External vs. Internal Debt •Efficiency Losses from Taxation • Displacement ofCapital • Debt and Growth •

B. Stabilizing the Economy 718The Interaction of Monetary and Fiscal Policies 718 •Demand Management • The Fiscal-Monetary Mix •Rules vs. Discretion 722 • Budget Constraints onLegislatures? • Monetary Rules for the Fed? •

C. Economic Prospects in the New Century 724The High Stakes in Economic Growth 724 • The Spiritof Enterprise 725 • Fostering Technological Advance •Economic Progress and Political Freedoms 726 •


Glossary of Terms 731

Index 754

Documents

ECONOMICS - Willkommen — Verbundzentrale des GBV Preface xvii Economics and the Internet xxiii PART ONE BASIC CONCEPTS Chapter I The Fundamentals of Economics A. Introduction For