ECONOMICSpreview.kingborn.net/804000/c3686e8a4bf1416f941601ac16b... · 2017-09-22 · Globalization...

∂ECONOMICS

F O U R T H E D I T I O N

Joseph E. StiglitzC O L U M B I A U N I V E R S I T Y

Carl E.WalshU N I V E R S I T Y O F C A L I F O R N I A , S A N TA C R U Z

∂ECONOMICS

F O U R T H E D I T I O N

BW. W. NORTON & COMPANY

NEW YORK • LONDON

BCopyright © 2006, 2002, 1997, 1993 by W. W. Norton & Company, Inc.

All rights reserved

Printed in the United States of America

Manufacturing by RR Donnelley

Book design by Rubina Yeh

Editor: Jack Repcheck

Director of Manufacturing—College: Roy Tedo�

Project Editor: Lory A. Frenkel

Manuscript Editor: Alice Falk

Editorial Assistants: Sarah Solomon, Mik Awake

Photo Researcher: Kelly Mitchell

Library of Congress Cataloging-in Publication Data

Stiglitz, Joseph E.

Economics / Joseph E. Stiglitz, Carl E. Walsh.—4th ed.

p. cm.

Includes index.

ISBN 0-393-92622-2

1. Economics. I. Walsh, Carl E. II. Title

HB171.5.S884 2005

330—dc22

2005055518

W. W. Norton & Company, Inc., 500 Fifth Avenue, New York, N. Y. 10110

www.wwnorton.com

W. W. Norton & Company Ltd., Castle House, 75/76 Wells Street, London W1T 3QT

1 2 3 4 5 6 7 8 9 0

W. W. Norton & Company has been independent since

its founding in 1923, when William Warder Norton and

Mary D. Herter Norton �rst published lectures

delivered at the People’s Institute, the adult education

division of New York City’s Cooper Union. The Nortons

soon expanded their program beyond the Institute,

publishing books by celebrated academics from

America and abroad. By mid-century, the two major

pillars of Norton’s publishing program—trade books

and college texts—were �rmly established. In the

1950s, the Norton family transferred control of the

company to its employees, and today—with a sta� of

four hundred and a comparable number of trade,

college, and professional titles published each year—

W. W. Norton & Company stands as the largest and

oldest publishing house owned wholly by its

employees.

ISBN 0-393-11644-1 (ebook)

www.wwnorton.com

ABOUT THE AUTHORS

Joseph E. Stiglitz is professor of economics, business, and international andpublic affairs at Columbia University. Before joining the Columbia faculty, he heldappointments at Yale, Oxford, Princeton, and Stanford. Internationally recognizedas one of the leading economists of his generation, Professor Stiglitz has made impor-tant contributions to virtually all of the major subfields of economics, in particularthe economics of information, one of the key topics highlighted in this text. He wasa co-recipient of the Nobel Prize in Economic Science in 2001, and earlier in hiscareer received the American Economic Association’s John Bates Clark Medal,which is given every two years to the most outstanding economist under the age offorty. Professor Stiglitz is the author and editor of hundreds of scholarly articlesand books, including the best-selling undergraduate textbook Economics of the Public

Sector (Norton) and, with Anthony Atkinson, the classic graduate textbook Lectures

in Public Economics. He is the author of two influential popular books as well:Globalization and Its Discontents and The Roaring Nineties. In addition, he was thefounding editor of the Journal of Economic Perspectives. Professor Stiglitz has alsoplayed a prominent role at the highest levels of economic policy making. He was amember and chairman of President Clinton’s Council of Economic Advisers andlater served as Senior Vice President and Chief Economist of the World Bank.

Carl E.Walsh is professor of economics at the University of California, SantaCruz, where he teaches principles of economics. He previously held faculty appoint-ments at Princeton and the University of Auckland, New Zealand, and has been a vis-iting professor at Stanford. He is widely known for his research in monetary economicsand is the author of a leading graduate text, Monetary Theory and Policy (MIT Press).Before joining the Santa Cruz faculty, Professor Walsh was senior economist at theFederal Reserve Bank of San Francisco, where he continues to serve as a visitingscholar. He has also been a visiting scholar at the Federal Reserve Banks of KansasCity, Philadelphia, and at the Board of Governors. He has taught courses in mone-tary economics to the research department and staff economists at the central banksof Hong Kong, Norway, Portugal, Spain, and the United Kingdom, and at theInternational Monetary Fund. He is a past member of the board of editors of theAmerican Economic Review and is currently an associate editor of the Journal of

Money, Credit, and Banking and the Journal of Economics and Business. He is also onthe editorial board of the Journal of Macroeconomics.

∂ v

This page intentionally left blank

CONTENTS IN BRIEF

∂ vii

PART 1 INTRODUCTION 1Chapter 1 Modern Economics • 3Chapter 2 Thinking Like an Economist • 25

PART 2 PERFECT MARKETS 51Chapter 3 Demand, Supply, and Price • 53Chapter 4 Using Demand and Supply • 77Chapter 5 The Consumption Decision • 101Chapter 6 The Firm’s Costs • 131Chapter 7 The Competitive Firm • 155Chapter 8 Labor Markets • 175Chapter 9 Capital Markets • 191Chapter 10 The Efficiency of Competitive Markets • 215

PART 3 IMPERFECT MARKETS 237Chapter 11 Introduction to Imperfect Markets • 239Chapter 12 Monopoly, Monopolistic Competition, and Oligopoly • 261Chapter 13 Government Policies Toward Competition • 289Chapter 14 Strategic Behavior • 311Chapter 15 Imperfect Information in the Product Market • 333Chapter 16 Imperfections in the Labor Market • 355

PART 4 ISSUES IN PUBLIC POLICY 373Chapter 17 The Public Sector • 375Chapter 18 Environmental Economics • 405Chapter 19 International Trade and Trade Policy • 423Chapter 20 Technological Change • 453

PART 5 INTRODUCTION TO MACROECONOMICS 471Chapter 21 Macroeconomics and the Economic Perspective • 473Chapter 22 Measuring Output and Unemployment • 485Chapter 23 The Cost of Living and Inflation • 509

PART 6 FULL-EMPLOYMENT MACROECONOMICS 523Chapter 24 The Full-Employment Model • 525Chapter 25 Government Finance at Full Employment • 547Chapter 26 The Open Economy at Full Employment • 567Chapter 27 Growth and Productivity • 585Chapter 28 Money, the Price Level, and the Federal Reserve • 605

PART 7 MACROECONOMIC FLUCTUATIONS 635Chapter 29 Introduction to Macroeconomic Fluctuations • 637Chapter 30 Aggregate Expenditures and Income • 661Chapter 31 Aggregate Demand and Inflation • 689Chapter 32 The Federal Reserve and Interest Rates • 715Chapter 33 The Role of Macroeconomic Policy • 727

PART 8 THE GLOBAL ECONOMY 755Chapter 34 The International Financial System • 757Chapter 35 Policy in the Open Economy • 779Chapter 36 Development and Transition • 793

PART 9 FURTHER TOPICS IN MACROECONOMICS 817Chapter 37 Inflation and Unemployment • 819Chapter 38 Controversies in Macroeconomic Policy • 837Chapter 39 A Student’s Guide to Investing • 865

viii ∂

CONTENTS ∂ ix

CONTENTS

PREFACE XXXV

PART 1 INTRODUCTION 1

CHAPTER 1 MODERN ECONOMICS 3INTERNET CONNECTION: Tracking the Digital

Economy 6

What Is Economics? 6

Trade-offs 7

Incentives 8

THINKING LIKE AN ECONOMIST: Incentives and

the Price of AOL 9

Exchange 10

INTERNET CONNECTION: Auction Sites 11

Information 13

Distribution 14

The Three Major Markets 15

Keeping Track of Tricky Terms 16

Microeconomics and Macroeconomics: The Two

Branches of Economics 17

The Science of Economics 18

Discovering and Interpreting Relationships 18

Causation and Correlation 19

Why Economists Disagree 19

REVIEW AND PRACTICE 21

CHAPTER 2 THINKING LIKE AN ECONOMIST 25The Basic Competitive Model 25

Rational Consumers and Profit-Maximizing Firms 26

Competitive Markets 27

e-INSIGHT: Markets, Exchange, and e-Commerce 27

Efficiency and Distribution in the Basic Competitive

Model 28

The Basic Competitive Model as a Benchmark 28

Incentives and Information: Prices, Property Rights, and

Profits 29

Incentives Versus Equality 31

When Property Rights Fail 31

Alternatives to the Price System 32

Opportunity Sets and Trade-Offs 34

Budget and Time Constraints 34

The Production Possibilities Curve 35

Costs 37

Opportunity Costs 38

THINKING LIKE AN ECONOMIST: Trade-Offs 39

INTERNET CONNECTION: Internet Resources for

Economists 40

CASE IN POINT: The Opportunity Cost of Attending

College 40

Sunk Costs 42

Marginal Costs 43

INTERNET CONNECTION: The Economists’ Voice

43


APPENDIX: Reading Graphs 47

Slope 48

Interpreting Curves 49

PART 2 PERFECT MARKETS 51

CHAPTER 3 DEMAND, SUPPLY, AND PRICE 53The Role of Prices 53

Demand 54

The Individual Demand Curve 54

The Market Demand Curve 55

Shifts in Demand Curves 57

x ∂ CONTENTS

Sources of Shifts in Demand Curves 57

CASE IN POINT: Gasoline Prices and the Demand for

SUVs 59

Shifts in a Demand Curve Versus Movements along a

Demand Curve 60

FUNDAMENTALS OF DEMAND, SUPPLY, AND

PRICE 1: Demand Declines as Price Rises 61

Supply 61

e-INSIGHT: The Demand for Computers and

Information Technology 62

Market Supply 64

Shifts in Supply Curves 65

Sources of Shifts in Supply Curves 65

Shifts in a Supply Curve Versus Movements along a

Supply Curve 67


PRICE 2: Supply Increases as Price Rises 67

Law of Supply and Demand 67

Using Demand and Supply Curves 69

Consensus on the Determination of Prices 70


PRICE 3: The Market Clears at the Equilibrium

Price 71

Price, Value, and Cost 70

INTERNET CONNECTION: The Demand and Supply

in the Oil Market 71


CHAPTER 4 USING DEMAND AND SUPPLY 77The Price Elasticity of Demand 77

Price Elasticity and Revenues 79

The Determinants of the Elasticity of Demand 80

The Price Elasticity of Supply 82

INTERNATIONAL PERSPECTIVE: Comparing

Reactions to the Oil Price Shock of 2000 83

Using Demand and Supply Elasticities 85

Shortages and Surpluses 88

Interfering with the Law of Supply and Demand 90


the Window Tax 90

Price Ceilings 91

CASE IN POINT: Rent Control in New York City 93

CONTENTS ∂ xi

Price Floors 93

INTERNET CONNECTION: Flawed Deregulation 94

Alternative Solutions 94


APPENDIX: Elasticity and Slope 98

CHAPTER 5 THE CONSUMPTION DECISION 101The Basic Problem of Consumer Choice 101

The Budget Constraint 102

Choosing a Point on the Budget Constraint: Individual

Preferences 104

What Happens to Consumption When Income Changes?

105

CASE IN POINT: The Fate of the BTU Tax 107

INTERNET CONNECTION: What We Consume 109

A Closer Look at the Demand Curve 109

Deriving Demand Curves 110

The Importance of Distinguishing Between Income and

Substitution Effects 111

THINKING LIKE AN ECONOMIST: Incentives,

Income Effects, and Substitution Effects 112

Utility and the Description of Preferences 113

Consumer Surplus 117

Looking Beyond the Basic Model 118

How Well Do the Underlying Assumptions Match Reality?

118

Behavioral Economics 119


APPENDIX: Indifference Curves and the Consumption

Decision 124

Using Indifference Curves to Illustrate Consumer Choices

124

Indifference Curves and Marginal Rates of Substitution

126

Using Indifference Curves to Illustrate Choices 127

Using Indifference Curves to Derive Demand Curves 128

Substitution and Income Effects 128

CHAPTER 6 THE FIRM’S COSTS 131Profits, Costs, and Factors of Production 132

Production with One Variable Input 132

Types of Costs and Cost Curves 135

xii ∂ CONTENTS

Short-Run and Long-Run Cost Curves 141

Short-Run Cost Curves 142

Long-Run Cost Curves 142

INTERNET CONNECTION: Economic Definitions

146

Production with Many Factors 146

Cost Minimization 147

The Principle of Substitution 147

CASE IN POINT: The Principle of Substitution and

Global Warming 148

Economies of Scope 150


CHAPTER 7 THE COMPETITIVE FIRM 155Revenue 155

Costs 156

INTERNET CONNECTION: Firms’ Profit-and-Loss

Statements 157

Basic Conditions of Competitive Supply 158

Entry, Exit, and Market Supply 160

Sunk Costs and Exit 161

The Firm’s Supply Curve 162

The Market Supply Curve 163

Long-Run Versus Short-Run Supply 164

e-INSIGHT: The 2001 Recession: Cutbacks Versus

Shutdowns 165

Accounting Profits and Economic Profits 166


Economic Rent 168

CASE IN POINT: Entering the Painting Business and


The Theory of the Competitive Firm 171


CHAPTER 8 LABOR MARKETS 175The Labor Supply Decision 175

INTERNET CONNECTION: Labor Force Data 176

The Choice Between Leisure and Consumption 176

Labor Force Participation 179

THINKING LIKE AN ECONOMIST: Trade-Offs 179

Firms and the Demand for Labor 181

Factor Demand 182

CONTENTS ∂ xiii

From the Firm’s Factor Demand to the Market’s Factor

Demand 184

Labor Supply, Demand, and the Equilibrium Wage 184


APPENDIX: Indifference Curves and the Labor Supply

Decision 188

Deciding Whether to Work 188

CHAPTER 9 CAPITAL MARKETS 191Supply in the Capital Market 191

The Household Decision to Save 192

THINKING LIKE AN ECONOMIST: Wealth

Distribution and Interest Rates 197

INTERNET CONNECTION: Household Saving 198

CASE IN POINT: Why is the U.S. Saving Rate So Low?

198

Demand in the Capital Market 200

A Behavioral Perspective on Saving 202

Education and Human Capital 203

e-INSIGHT: Financing the New Economy 205

Education and Economic Trade-Offs 206

The Basic Competitive Model 206


APPENDIX A: Indifference Curves and the Saving

Decision 209

Deciding How Much to Save 209

Changing the Interest Rate 210

APPENDIX B: Calculating Present Discounted Value 211

CHAPTER 10 THE EFFICIENCY OF COMPETITIVEMARKETS 215Competitive Markets and Economic Efficiency 216

Consumer and Producer Surplus 217

FUNDAMENTALS OF COMPETITIVE MARKETS 1:

Households and Firms are Price Takers 218


The Equilibrium Price Maximizes Consumer Plus

Producer Surplus 219

INTERNET CONNECTION: Digital Economist 219

Taxes and Efficiency 220

Efficiency 221

Pareto Efficiency 222

xiv ∂ CONTENTS

Conditions for the Pareto Efficiency of the Market

Economy 222

THINKING LIKE AN ECONOMIST: Exchange and

Distribution 224

Competitive Markets and Pareto Efficiency 225


The Competitive Market Economy is Pareto

Efficient 225

Competitive Markets and Income Distribution 225

General Equilibrium Analysis 227

The Basic Competitive Equilibrium Model 227

THINKING LIKE AN ECONOMIST: Indirect Trade-

Offs and Air Safety for Children 228

CASE IN POINT: The Labor Market and the Widening

Wage Gap 230

CASE IN POINT: The Minimum Wage and General

Equilibrium 231

General Equilibrium Over Time 232

When Partial Equilibrium Analysis Will Do 234

Looking Beyond the Basic Model 234


PART 3 IMPERFECT MARKETS 237

CHAPTER 11 INTRODUCTION TO IMPERFECTMARKETS 239Extending the Basic Competitive Model 240

FUNDAMENTALS OF IMPERFECT MARKETS 1:

Imperfect Markets Lead to Market Failures 242

Imperfect Competition and Market Structure 242

Price and Quantity with Imperfect Competition 244

Government Policies 245

INTERNET CONNECTION: The Federal Trade

Commission 245

INTERNATIONAL PERSPECTIVE: Trade and

Competition 246


Imperfect Competition 246

Imperfect Information 247

The Information Problem 247

How Big a Problem? 247

CONTENTS ∂ xv

How Prices Convey Information 248

Markets for Information 249

e-INSIGHT: Information, Competition, and the Internet

249

Government Policies 250


Imperfect Information 251

Externalities 252

Government Policies Toward Externalities 252


the Environment 253


Externalities 254

Public Goods 254


Public Goods 255

Looking Ahead 256


CHAPTER 12 MONOPOLY, MONOPOLISTICCOMPETITION, AND OLIGOPOLY261Monopoly Output 261

An Example: The ABC-ment Company 264

Monopoly Profits 265

Price Discrimination 266

Economies of Scale and Natural Monopolies 267

INTERNATIONAL PERSPECTIVE: South Africa,

AIDS, and Price Discrimination 268

Assessing the Degree of Competition 270

Number of Firms in the Industry 270

Product Differentiation 271

e-INSIGHT: Network Externalities, the New Economy,

and Monopoly Power 272

Equilibrium with Monopolistic Competition 273

Oligopolies 274

Collusion 275

Restrictive Practices 279

Entry Deterrence 281

INTERNET CONNECTION: Keeping Track of

Oligopolies 281

xvi ∂ CONTENTS

THINKING LIKE AN ECONOMIST: Trade-Offs,

American Airlines, and Predation 283

The Importance of Imperfections in Competition 284


CHAPTER 13 GOVERNMENT POLICIES TOWARDCOMPETITION 289The Drawbacks of Monopolies and Limited Competition

289

Restricted Output 289

Managerial Slack 291

Reduced Research and Development 291

Rent Seeking 292

Further Drawbacks of Limited Competition 292

e-INSIGHT: Using the Internet to Enhance Price

Discrimination 293

Policies Toward Natural Monopolies 293

Public Ownership 294

Regulation 295

Encouraging Competition 296

INTERNATIONAL PERSPECTIVE: The Darker Side of

Privatization 296

CASE IN POINT: California Electricity Deregulation

298

Antitrust Policies 299

Limiting Market Domination 300

Defining Markets 301

INTERNET CONNECTION: U.S. Department of

Justice and Antitrust Laws 301


the Remedy to the Microsoft Monopoly Problem

302

Curbing Restrictive Practices 304

Enforcing the Antitrust Laws 305

CASE IN POINT: Coke and Pepsi Play Merger 306


CHAPTER 14 STRATEGIC BEHAVIOR 311Review of the Prisoner’s Dilemma 312

Dominant Strategies 313

CONTENTS ∂ xvii

Nash Equilibrium 313

Strategic Behavior in More General Games 316

Games With Only One Dominant Strategy 316

INTERNATIONAL PERSPECTIVE: Beggar-Thy-

Neighbor Tariff Policies 317

Games Without Dominant Strategies 318

INTERNET CONNECTION: The Zero-Sum Game

Solver 319

Repeated Games 320

Reputations 321

Tit for Tat 321

INTERNET CONNECTION: The Prisoner’s Dilemma

321

Institutions 322

CASE IN POINT: Banking Panics 322

Sequential Moves 324

THINKING LIKE AN ECONOMIST: Information and

Thinking Strategically 326

Time Inconsistency 326

Commitment 327


CHAPTER 15 IMPERFECT INFORMATION IN THEPRODUCT MARKET 333The Market for Lemons and Adverse Selection 333

Signaling 335

Judging Quality by Price 336

The Incentive Problem 337

Market Solutions 337

Contract Solutions 338

Reputation Solutions 339

The Market for Health Insurance 340

CASE IN POINT: Buying Health Insurance 341

The Search Problem 342

THINKING LIKE AN ECONOMIST: Incentive and

Information Problems in the Housing Market

343

e-INSIGHT: Information Technology and Middlemen

344

INTERNET CONNECTION: Job Search 345

Search and Imperfect Competition 345

Search and the Labor Market 346

xviii ∂ CONTENTS

Search and Information Intermediaries 346

Advertising 347

Advertising and Competition 348

Advertising and Profits 348

The Importance of Imperfect Information 350


CHAPTER 16 IMPERFECTIONS IN THE LABOR MARKET 355Labor Unions 355

A Brief History 356

INTERNET CONNECTION: Unions on the Internet

358

Economic Effects 359

Limits on Union Power 360

Wage Differentials 362

Discrimination 363

Motivating Workers 364

Piece Rates and Incentives 365

Efficiency Wages 366

CASE IN POINT: Minimum Wages 367

Other Incentives 368

Compensating Workers 368

e-INSIGHT: Labor Markets and the Internet 369


PART 4 ISSUES IN PUBLIC POLICY373

CHAPTER 17 THE PUBLIC SECTOR 375Why Does the Government Intervene in the Economy?

377

INTERNATIONAL PERSPECTIVE:The Size of

Government in Different Countries 377

Equity-Efficiency Trade-Offs 380

e-INSIGHT: The New Economy and Inequality 381

The U.S. Tax System in Practice 381

CONTENTS ∂ xix

Characteristics of a Good Tax System 382

The Scope of the U.S. Tax System 383

Grading the U.S. Tax System 383

Transfers 386

Welfare 387

Housing 388

Social Insurance 389

Designing Government Programs 390

Government Failures 391

Incentives and Constraints 392

Budgeting and Spending Procedures 393

Imperfections of Information 393

Collective Decision Making 394

Current and Recent Controversies in the Economics of

the Public Sector 395

Dealing With the Deficit 395

Social Security 396

Health Care 398

INTERNET CONNECTION: Policy Analysis 400


CHAPTER 18 ENVIRONMENTAL ECONOMICS 405Negative Externalities and Oversupply 405

Policy Responses to Problems in the Environment 407

Property Rights Responses 407

INTERNATIONAL PERSPECTIVE: Global Warming

408

THINKING LIKE AN ECONOMIST: Environmental

and Economic Trade-Offs 410

Regulation 410

Taxes and Subsidies 412

The Marketable Permit Response 413

CASE IN POINT: Reducing Acid Rain 414

Weighing the Alternative Approaches 415

Natural Resources 416

INTERNET CONNECTION: The National Center for

Environmental Economics 416

e-INSIGHT: Information and the Environment 418

Merit Goods and the Environment 418


xx ∂ CONTENTS

CHAPTER 19 INTERNATIONAL TRADE AND TRADEPOLICY 423Trade Between Countries 423

Interdependence in the Product Market 424

Interdependence in the Labor Market 424

Interdependence in the Capital Market 425

Multilateral Trade 425

Comparative Advantage 426

INTERNET CONNECTION: David Ricardo 427

Production Possibilities Curves and Comparative

Advantage 427

Comparative Advantage and Specialization 428

e-INSIGHT: The United States’ Comparative Advantage

in the Internet Age 429

What Determines Comparative Advantage? 430

The Perceived Costs of International Interdependence

432

THINKING LIKE AN ECONOMIST: Exchange and

the Globalization Controversy 432

Trade Policies 434

Commercial Policy 434

Tariffs 435

Quotas 436

Voluntary Export Restraints 436

Other Nontariff Barriers 437

“Fair Trade” Laws 437

INTERNATIONAL PERSPECTIVE: Surrogate

Countries and Canadian Golf Carts 438

Political and Economic Rationale for Protection 439

Displaced Firms and Workers 440

Beggar-Thy-Neighbor Policies 441

Wages in Affected Sectors 442

Increased Competition 442

THINKING LIKE AN ECONOMIST: Distribution and

Trade Liberalization 443

The Infant Industry Argument 443

e-INSIGHT: Trade Liberalization in Information

Technology and Financial Services 444

Strategic Trade Theory 445

International Cooperation 445

GATT and the WTO 445

CONTENTS ∂ xxi

The Growing Protest Against the WTO 446

CASE IN POINT: The Banana War 447

Regional Trading Blocs 448

INTERNET CONNECTION: The World Trade

Organization 449


CHAPTER 20 TECHNOLOGICAL CHANGE 453Links Between Technological Change and Imperfect

Competition 454

e-INSIGHT: The New Economy and Innovation 455

Patents and the Production of Ideas 455

THINKING LIKE AN ECONOMIST: Intellectual

Property Rights and Distribution 456

The Trade-Off Between Short-term Efficiency and

Innovation 457

CASE IN POINT: Eli Whitney and the Cotton Gin 460

R & D as a Fixed Cost 460

Learning by Doing 461

Access to Capital Markets 462

Schumpeterian Competition 463

Basic Research as a Public Good 464

Government Promotion of Technological Progress 465

Subsidies 465

Protection 466

Relaxing Antitrust Policies 466

INTERNET CONNECTION: Competitiveness 468

Technological Change and Economic Growth 468


PART 5 INTRODUCTION TOMACROECONOMICS 471

CHAPTER 21 MACROECONOMICS AND THEECONOMIC PERSPECTIVE 473The Commitment to Full Employment and Growth 474

Getting the Country Moving Again 477

Stagflation 477

The Conquest of Inflation 478

xxii ∂ CONTENTS

Government Deficits and Trade Deficits 479

Getting the Economy Moving (Again) 479

New Challenges 480

The Three Key Goals of Macroeconomic Performance 481

A Look Ahead 482


CHAPTER 22 MEASURING OUTPUT ANDUNEMPLOYMENT 485Measuring Output and Growth 485

Gross Domestic Product 486

Measuring GDP: The Value of Output 489

INTERNET CONNECTION: The Bureau of Economic

Analysis 489

CASE IN POINT: Is Software a Final Good or an

Intermediate Good? 491

Potential GDP 494

INTERNATIONAL PERSPECTIVE: What Gets

Measured in the GDP? 495

Problems in Measuring Output 496

Measuring the Standard of Living 497

A Green GDP 497

Unemployment 498

Unemployment Statistics 499

Forms of Unemployment 500

Output Gaps and the Natural Rate of Unemployment 503

Flows and Stocks 505


CHAPTER 23 THE COST OF LIVING AND INFLATION 509The Costs of Inflation 509

Who Suffers from Inflation 510

The Economy 511

The Costs of Deflation 512

CASE IN POINT: Hyperinflation in Germany in the

1920s 512

Measuring Inflation 514

INTERNET CONNECTION: Improving Our Measure

of the CPI 516

CASE IN POINT: The Price Index Makes a Difference

516

CONTENTS ∂ xxiii

Alternative Measures of Inflation 517

INTERNET CONNECTION: The Inflation Calculator

517

e-INSIGHT: Measuring the Price and Quantity of

Software 518

The American Experience with Inflation 519


PART 6 FULL-EMPLOYMENTMACROECONOMICS 523

CHAPTER 24 THE FULL-EMPLOYMENT MODEL 525Macroeconomic Equilibrium 526

The Labor Market 527

Shifts in the Demand and Supply of Labor 529

CASE IN POINT: Mass Migration in the Nineteenth

Century 531

e-INSIGHT: Labor Markets and the Internet 532

The Product Market 532

Potential GDP 533

Demand and Equilibrium Output 534

The Capital Market 536

Household Saving 536

Investment 537

Equilibrium in the Capital Market 538

The General Equilibrium Model 540

Using the General Equilibrium Model 541


CHAPTER 25 GOVERNMENT FINANCE AT FULLEMPLOYMENT 547The Composition of Spending and Taxes 548

Extending the Basic Full-Employment Model 548

Adding the Government 549

The Government and the Capital Market 549

Leakages and Injections 554

INTERNATIONAL PERSPECTIVE: Deficits in Other

Countries 555

THINKING LIKE AN ECONOMIST: Distribution,

Deficits and Intergenerational Transfers 556

xxiv ∂ CONTENTS

Evaluating Government Deficits and Surpluses 557

Government Deficits and Surpluses: Our Recent

Experiences 558

Factors Affecting the Federal Budget 561

Risk Factors for the Federal Budget 562


CHAPTER 26 THE OPEN ECONOMY AT FULLEMPLOYMENT 567The Open Economy 568

The Capital Market in the Open Economy 568

The Basic Trade Identity 572

INTERNET CONNECTION: U.S. Trade Data 573

CASE IN POINT: The Trade Deficit 574

e-INSIGHT: High-Tech Exports and Imports 576

Exchange Rates 577

THINKING LIKE AN ECONOMIST: Net Exports and

the Exchange Rate 579

Is the Trade Deficit a Problem? 580


CHAPTER 27 GROWTH AND PRODUCTIVITY 585Rising Standards of Living 586

Explaining Productivity 589

INTERNET CONNECTION: How Fast Is Modern

Economic Growth? 590

The Capital Stock and the Role of Saving and Investment

590

The Quality of the Labor Force 592

The Reallocation of Resources from Low- to High-

Productivity Sectors 592

Technological Change and the Role of Ideas 593

Total Factor Productivity: Measuring the Sources of

Growth 596

CASE IN POINT: Calculating Total Factor Productivity

in the 1990s 597

e-INSIGHT: Computers and Increased Productivity

Growth 598

FUNDAMENTALS OF GROWTH: Growth in the

Economy’s Labor Force, Growth in the Economy’s

Capital Stock, Technological Change 599

CONTENTS ∂ xxv

Are There Limits to Economic Growth? 600

THINKING LIKE AN ECONOMIST: Trade-Offs and

the Costs of Economic Growth 601


CHAPTER 28 MONEY, THE PRICE LEVEL, AND THEFEDERAL RESERVE 605Prices and Inflation 606

Money Demand 607

Money Supply 609

The Price Level 609

INTERNET CONNECTION: How Much Cash Do We

Hold? 610

The Financial System in Modern Economies 612

CASE IN POINT: When Atlanta Printed Money 614

Creating Money in Modern Economies 615

Money Is What Money Does 615

Measuring the Money Supply 617

Money and Credit 618

CASE IN POINT: “Boggs Bills” and the Meaning of

Money 619

The Money Supply and the Bank’s Balance Sheet 620

THINKING LIKE AN ECONOMIST: Exchange,

Money, and the Internet 620

How Banks Create Money 622

e-INSIGHT: Electronic Cash 623

The Federal Reserve 626

How the Fed Affects the Money Supply 628

INTERNET CONNECTION: The Federal Reserve

Banks and International Central Banks 629

The Stability of the U.S. Banking System 630

Reducing the Threat of Bank Runs 631


xxvi ∂ CONTENTS

PART 7 MACROECONOMICFLUCTUATIONS 635

CHAPTER 29 INTRODUCTION TOMACROECONOMIC FLUCTUATIONS637Economic Fluctuations 638

INTERNET CONNECTION: Dating Business Cycle

Peaks and Troughs 642

CASE IN POINT: Estimating the Output Costs of a

Recession 642

THINKING LIKE AN ECONOMIST: Employment

Fluctuations and Trade-Offs 643

Why Economies Experience Fluctuations 643

Nominal Versus Real Wages 645

The Slow Adjustment of Nominal Wages 645

The Slow Adjustment of Prices 645

THINKING LIKE AN ECONOMIST: Information and

Measuring the Business Cycle 647

Understanding Macroeconomic Fluctuations: Key

Concepts 648

Sticky Wages 649

FUNDAMENTALS OF FLUCTUATIONS 1: Sticky

Wages 649

Sticky Prices 649

e-INSIGHT: Cyclical and Structural Productivity 650

FUNDAMENTALS OF FLUCTUATIONS 2: Sticky

Prices 651

Inflation and Adjustment 652

FUNDAMENTALS OF FLUCTUATIONS 3: Short-Run

Inflation-Unemployment Trade-Off 653

Inflation, Monetary Policy, and Spending 653

FUNDAMENTALS OF FLUCTUATIONS 4: Inflation,

Monetary Policy, and Spending 655

CASE IN POINT: Inflation Targeting 655

Linking the Four Key Concepts 656


CONTENTS ∂ xxvii

CHAPTER 30 AGGREGATE EXPENDITURES ANDINCOME 661Income-Expenditure Analysis 661

The National Income-Output Identity 663

Equilibrium Output 663

Shifts in the Aggregate Expenditures Schedule 664

Mathematical Formulation 665

A Look Forward 666

Consumption 667

Disposable Income 667

Expectations of Future Income 671

Wealth 671

Investment 672

Investment and the Real Interest Rate 673

Inventory Investment 674

Macroeconomic Implications of Investment 675

Government Purchases 676

Net Exports 676

Exports 678

Imports 678

Macroeconomic Implications 679

Putting International Trade into the Equation 680

Calculating Equilibrium Output 681

Aggregate Expenditures and the Real Interest Rate

683


the Real After-Tax Rate of Interest 684


CHAPTER 31 AGGREGATE DEMAND ANDINFLATION 689The Real Interest Rate and the Capital Market 690

The Aggregate Demand–Inflation Curve 691

The Fed’s Policy Rule 692

What Can Shift the ADI Curve? 694

INTERNATIONAL PERSPECTIVE: How Do Other

Central Banks React to Inflation? 696

Other Factors That Can Shift the ADI Curve 696

Using the ADI Curve 697

Output Effects of a Shift in the ADI Curve 698

CASE IN POINT: The Volcker Disinflation 700

xxviii ∂ CONTENTS

ECONOMICSpreview.kingborn.net/804000/c3686e8a4bf1416f941601ac16b... · 2017-09-22 · Globalization...

Documents

Transcript of ECONOMICSpreview.kingborn.net/804000/c3686e8a4bf1416f941601ac16b... · 2017-09-22 · Globalization...