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` ABOUT THE AUTHORS
`
` PAUL A. SAMUELSON, founder of the
`renowned MIT graduate department of economics,
`was trained at the University of Chicago and Harvard.
`His many scientific writings brought him world fame
`at a young age, and in 1970 he was the first American
`to receive a Nobel Prize in economics. One of those
`rare scientists who can communicate with the lay
`public, Professor Samuelson wrote an economics col-
`umn for Newsweek for many years and was economic
`adviser to President John F. Kennedy. He testifies
`often before Congress and serves as academic con-
`sultant to the Federal Reserve, the U.S. Treasury, and
`various private, nonprofit organizations. Professor
`Samuelson, between researches at MIT and tennis
`games, is a visiting professor at New York University.
`His six children (including triplet boys) have con-
`tributed 15 grandchildren.
`
` NORDHAUS
` WILLIAM D.
` is one of
`America’s eminent economists. Born in Albuquer-
`que, New Mexico, he received his B.A. from Yale and
`his Ph.D. in economics at MIT. He is Sterling Profes-
`sor of Economics at Yale University and on the staff
`of the Cowles Foundation for Research in Economics
`and the National Bureau of Economic Research. His
`research has spanned much of economics—including
`the environment, energy, technological change, eco-
`nomic growth, and trends in profits and productivity.
`In addition, Professor Nordhaus takes a keen inter-
`est in economic policy. He served as a member of
`President Carter’s Council of Economic Advisers
`from 1977 to 1979, serves on many government advi-
`sory boards and committees, and writes occasionally
`for The New York Review of Books and other periodi-
`cals. He regularly teaches the Principles of Econom-
`ics course at Yale. Professor Nordhaus lives in New
`Haven, Connecticut, with his wife, Barbara. When
`not writing or teaching, he devotes his time to music,
`travel, skiing, and family.
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`Contents in Brief
`
`A Centrist Proclamation xvi
`Preface xviii
`For the Student: Economics and the Internet xxiii
`
`PART ONE
`
`BASIC CONCEPTS
`
`1
`
`Chapter 1
`
`The Central Concepts of Economics 3
`
`Appendix 1
`
`How to Read Graphs 18
`
`Chapter 2
`
`Chapter 3
`
`The Modern Mixed Economy 25
`
`Basic Elements of Supply and Demand 45
`
`PART TWO MICROECONOMICS: SUPPLY, DEMAND, AND
`PRODUCT MARKETS
`
`63
`
`Chapter 4
`
`Chapter 5
`
`Supply and Demand: Elasticity and Applications 65
`
`Demand and Consumer Behavior 84
`
`Appendix 5
`
`Geometrical Analysis of Consumer Equilibrium 101
`
`Chapter 6
`
`Chapter 7
`
`Production and Business Organization 107
`
`Analysis of Costs 126
`
`Appendix 7
`
`Production, Cost Theory, and Decisions of the Firm 144
`
`Chapter 8
`
`Chapter 9
`
`Analysis of Perfectly Competitive Markets 149
`
`Imperfect Competition and Monopoly 169
`
`Chapter 10
`
`Competition among the Few 187
`
`Chapter 11
`
`Economics of Uncertainty 211
`
`PART THREE FACTOR MARKETS: LABOR, LAND, AND CAPITAL
`
`227
`
`Chapter 12
`
`How Markets Determine Incomes 229
`
`Chapter 13
`
`The Labor Market 248
`
`Chapter 14
`
`Land, Natural Resources, and the Environment 267
`
`Chapter 15
`
`Capital, Interest, and Profi ts 283
`
`
`
`v
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`vi
`
`CONTENTS IN BRIEF
`
`PART FOUR APPLICATIONS OF ECONOMIC PRINCIPLES
`
`301
`
`Chapter 16
`
`Government Taxation and Expenditure 303
`
`Chapter 17
`
`Effi ciency vs. Equality: The Big Tradeoff 323
`
`Chapter 18
`
`International Trade 339
`
`PART FIVE MACROECONOMICS: ECONOMIC GROWTH
`AND BUSINESS CYCLES
`
`365
`
`Chapter 19
`
`Overview of Macroeconomics 367
`
`Appendix 19 Macroeconomic Data for the United States 385
`
`Chapter 20
`
`Measuring Economic Activity 386
`
`Chapter 21
`
`Consumption and Investment 408
`
`Chapter 22
`
`Business Cycles and Aggregate Demand 428
`
`Chapter 23
`
`Money and the Financial System 453
`
`Chapter 24
`
`Monetary Policy and the Economy 475
`
`PART SIX
`
`GROWTH, DEVELOPMENT, AND THE GLOBAL
`ECONOMY
`
`499
`
`Chapter 25
`
`Economic Growth 501
`
`Chapter 26
`
`The Challenge of Economic Development 521
`
`Chapter 27
`
`Exchange Rates and the International Financial System 543
`
`Chapter 28
`
`Open-Economy Macroeconomics 564
`
`PART SEVEN UNEMPLOYMENT, INFLATION, AND
`ECONOMIC POLICY
`
`587
`
`Chapter 29
`
`Unemployment and the Foundations of Aggregate Supply 589
`
`Chapter 30
`
`Infl ation 609
`
`Chapter 31
`
`Frontiers of Macroeconomics 630
`
`Glossary of Terms 654
`Index 677
`
`
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`Contents
`
`A Centrist Proclamation xvi
`Preface xviii
`For the Student: Economics and
`the Internet xxiii
`
`PART ONE
`BASIC CONCEPTS
`1
`
`Chapter 1
`The Central Concepts of Economics
`
`3
`
`A. Why Study Economics?
`For Whom the Bell Tolls ● Scarcity and Effi ciency:
`The Twin Themes of Economics 3 ● Defi nitions of
`Economics ● Scarcity and Effi ciency ● Microeconomics
`and Macroeconomics ● The Logic of Economics 5 ●
`Cool Heads at the Service of Warm Hearts 6 ●
`
`3
`
`B. The Three Problems of Economic Organization
`Market, Command, and Mixed Economies 8 ●
`
`C. Society’s Technological Possibilities
`Inputs and Outputs 9 ● The Production-Possibility
`Frontier 9 ● Applying the PPF to Society’s
`Choices ● Opportunity Costs ● Effi ciency ●
`
`Summary 15 ● Concepts for Review 15 ● Further
`Reading and Internet Websites 16 ● Questions for
`Discussion 16 ●
`
`Appendix 1
`How to Read Graphs
`
`7
`
`8
`
`18
`
`The Production-Possibility Frontier 18 ● Production-
`Possibility Graph ● A Smooth Curve ● Slopes and
`Lines ● Slope of a Curved Line ● Slope as the Marginal
`Value ● Shifts of and Movement along Curves ● Some
`Special Graphs ●
`
`Summary to Appendix 23 ● Concepts for
`Review 24 ● Questions for Discussion 24 ●
`
`Chapter 2
`The Modern Mixed Economy
`
`A. The Market Mechanism
`Not Chaos, but Economic Order ● How Markets
`Solve the Three Economic Problems ● The Dual
`Monarchy ● A Picture of Prices and Markets ● The
`Invisible Hand ●
`
`25
`
`26
`
`B. Trade, Money, and Capital
`Trade, Specialization, and Division of Labor 31 ●
`Money: The Lubricant of Exchange 33 ● Capital 33 ●
`Capital and Private Property ●
`
`30
`
`C. The Visible Hand of Government
`Effi ciency 35 ● Imperfect Competition ●
`Externalities ● Public Goods ● Equity 38 ●
`Macroeconomic Growth and Stability 39 ● The Rise of
`the Welfare State 40 ● Conservative Backlash ●
`The Mixed Economy Today ●
`
`34
`
`Summary 41 ● Concepts for Review 42 ● Further
`Reading and Internet Websites 43 ● Questions for
`Discussion 43 ●
`
`Chapter 3
`Basic Elements of Supply and Demand
`
`A. The Demand Schedule
`The Demand Curve 47 ● Market Demand ● Forces
`behind the Demand Curve ● Shifts in Demand ●
`
`B. The Supply Schedule
`The Supply Curve 51 ● Forces behind the Supply
`Curve ● Shifts in Supply ●
`
`45
`
`46
`
`51
`
`53
`C. Equilibrium of Supply and Demand
`Equilibrium with Supply and Demand Curves 54 ● Effect
`of a Shift in Supply or Demand ● Interpreting
`Changes in Price and Quantity ● Supply, Demand, and
`Immigration ● Rationing by Prices 59 ●
`
`Summary 60 ● Concepts for Review 61 ● Further
`Reading and Internet Websites 61 ● Questions for
`Discussion 61 ●
`
`
`
`vii
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`viii
`
`CONTENTS
`
`PART TWO
`MICROECONOMICS: SUPPLY, DEMAND,
`AND PRODUCT MARKETS
`63
`
`Chapter 4
`Supply and Demand: Elasticity and Applications
`
`65
`
`65
`A. Price Elasticity of Demand and Supply
`Price Elasticity of Demand 65 ● Calculating Elasticities ●
`Price Elasticity in Diagrams ● A Shortcut for Calculating
`Elasticities ● The Algebra of Elasticities ● Elasticity Is
`Not the Same as Slope ● Elasticity and Revenue 70 ●
`The Paradox of the Bumper Harvest ● Price Elasticity of
`Supply 72 ●
`
`73
`B. Applications to Major Economic Issues
`The Economics of Agriculture 73 ● Long-Run Relative
`Decline of Farming ● Impact of a Tax on Price and
`Quantity 75 ● Minimum Floors and Maximum
`Ceilings 77 ● The Minimum-Wage Controversy ●
`Energy Price Controls ● Rationing by the Queue, by
`Coupons, or by the Purse? ●
`
`Summary 81 ● Concepts for Review 82 ● Further
`Reading and Internet Websites 82 ● Questions for
`Discussion 82 ●
`
`Chapter 5
`Demand and Consumer Behavior
`
`84
`
`Choice and Utility Theory 84 ● Marginal Utility and
`the Law of Diminishing Marginal Utility ● A Numerical
`Example ● Derivation of Demand Curves 87 ● The
`Equimarginal Principle ● Why Demand Curves Slope
`Downward ● Leisure and the Optimal Allocation
`of Time ● Analytical Developments in Utility
`Theory ● An Alternative Approach: Substitution
`Effect and Income Effect 89 ● Substitution
`Effect ● Income Effect ● From Individual to
`Market Demand 91 ● Demand Shifts ● Substitutes
`and Complements ● Empirical Estimates of Price
`and Income Elasticities ● The Economics of
`Addiction 94 ● The Paradox of Value 95 ●
`Consumer Surplus 96 ● Applications of Consumer
`Surplus ●
`
`Summary 98 ● Concepts for Review 99 ● Further
`Reading and Internet Websites 99 ● Questions for
`Discussion 99 ●
`
`Appendix 5
`Geometrical Analysis of Consumer Equilibrium
`
`101
`
`The Indifference Curve 101 ● Law of Substitution ●
`The Indifference Map ● Budget Line or Budget
`Constraint 103 ● The Equilibrium Position of
`Tangency 104 ● Changes in 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 6
`Production and Business Organization
`
`107
`
`107
`A. Theory of Production and Marginal Products
`Basic Concepts 107 ● The Production Function ● Total,
`Average, and Marginal Product ● The Law of Diminishing
`Returns ● Returns to Scale 111 ● Short Run and Long
`Run 112 ● Technological Change 113 ● Productivity and
`the Aggregate Production Function 116 ● Productivity ●
`Productivity Growth from Economies of Scale and Scope ●
`Empirical Estimates of the Aggregate Production Function ●
`
`B. Business Organizations
`The Nature of the Firm 118 ● Big, Small, and
`Infi nitesimal Businesses 119 ● The Individual
`Proprietorship ● The Partnership ● The Corporation ●
`Ownership, Control, and Executive Compensation ●
`
`118
`
`Summary 123 ● Concepts for Review 124 ● Further
`Reading and Internet Websites 124 ● Questions for
`Discussion 124 ●
`
`Chapter 7
`Analysis of Costs
`
`126
`
`126
`
`A. Economic Analysis of Costs
`Total Cost: Fixed and Variable 126 ● Fixed Cost ●
`Variable Cost ● Defi nition of Marginal Cost 127 ●
`Average Cost 129 ● Average or Unit Cost ● Average
`Fixed and Variable Costs ● The Relation between
`Average Cost and Marginal Cost ● The Link between
`Production and Costs 132 ● Diminishing Returns
`and U-Shaped Cost Curves ● Choice of Inputs by the
`Firm 134 ● Marginal Products and the Least-Cost Rule ●
`
`B. Economic Costs and Business Accounting
`The Income Statement, or Statement of Profi t and
`Loss 135 ● The Balance Sheet 136 ● Accounting
`Conventions ● Financial Finagling ●
`
`135
`
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`CONTENTS
`
`C. Opportunity Costs
`Opportunity Cost and Markets 140 ●
`
`139
`
`Chapter 9
`Imperfect Competition and Monopoly
`
`ix
`
`169
`
`Summary 141 ● Concepts for Review 142 ● Further
`Reading and Internet Websites 142 ● Questions for
`Discussion 142 ●
`
`Appendix 7
`Production, Cost Theory, and Decisions
`of the Firm
`
`144
`
`A Numerical Production Function 144 ● The Law of
`Diminishing Marginal Product 144 ● Least-Cost Factor
`Combination for a Given Output 145 ● Equal-Product
`Curves ● Equal-Cost Lines ● Equal-Product and
`Equal-Cost Contours: Least-Cost Tangency ● Least-Cost
`Conditions ●
`
`Summary to Appendix 147 ● Concepts for
`Review 148 ● Questions for Discussion 148 ●
`
`Chapter 8
`Analysis of Perfectly Competitive Markets
`
`149
`
`A. Supply Behavior of the Competitive Firm
`Behavior of a Competitive Firm 149 ● Profi t
`Maximization ● Perfect Competition ● Competitive
`Supply Where Marginal Cost Equals Price ● Total Cost
`and the Shutdown Condition ●
`
`149
`
`B. Supply Behavior in Competitive Industries
`Summing All Firms’ Supply Curves to Get Market
`Supply 154 ● Short-Run and Long-Run Equilibrium 155 ●
`The Long Run for a Competitive Industry ●
`
`154
`
`157
`C. Special Cases of Competitive Markets
`General Rules 157 ● Constant Cost ● Increasing Costs
`and Diminishing Returns ● Fixed Supply and Economic
`Rent ● Backward-Bending Supply Curve ● Shifts in
`Supply ●
`
`160
`D. Effi ciency and Equity of Competitive Markets
`Evaluating the Market Mechanism 160 ● The Concept
`of Effi ciency ● Effi ciency of Competitive Equilibrium ●
`Equilibrium with Many Consumers and Markets ●
`Marginal Cost as a Benchmark for Effi ciency ●
`Qualifi cations 163 ● Market Failures ● Two Cheers for
`the Market, but Not Three ●
`
`A. Patterns of Imperfect Competition
`Defi nition of Imperfect Competition ● Varieties of
`Imperfect Competitors 171 ● Monopoly ● Oligopoly ●
`Monopolistic Competition ● Sources of Market
`Imperfections 173 ● Costs and Market Imperfection ●
`Barriers to Entry ●
`
`169
`
`177
`B. Monopoly Behavior
`The Concept of Marginal Revenue 177 ● Price, Quantity,
`and Total Revenue ● Marginal Revenue and Price ●
`Elasticity and Marginal Revenue ● Profi t-Maximizing
`Conditions 180 ● Monopoly Equilibrium in Graphs ●
`Perfect Competition as a Polar Case of Imperfect
`Competition ● The Marginal Principle: Let Bygones Be
`Bygones 183 ● Loss Aversion and the Marginal Principle ●
`
`Summary 184 ● Concepts for Review 185 ● Further
`Reading and Internet Websites 185 ● Questions for
`Discussion 186 ●
`
`Chapter 10
`Competition among the Few
`
`187
`
`A. Behavior of Imperfect Competitors
`Measures of Market Power ● The Nature of
`Imperfect Competition 189 ● Theories of Imperfect
`Competition 189 ● Collusive Oligopoly ● Monopolistic
`Competition ● Rivalry among the Few ● Price
`Discrimination 193 ●
`
`187
`
`195
`B. Game Theory
`Thinking about Price Setting ● Basic Concepts 196 ●
`Alternative Strategies ● Games, Games, Everywhere . . . ●
`
`199
`C. Public Policies to Combat Market Power
`Economic Costs of Imperfect Competition 199 ● The
`Cost of Infl ated Prices and Reduced Output ● The
`Static Costs of Imperfect Competition ● Public Policies
`on Imperfect Competition ● Regulating Economic
`Activity 201 ● Why Regulate Industry? ● Containing
`Market Power ● Remedying Information Failures ●
`Antitrust Law and Economics 203 ● The Framework
`Statutes ● Basic Issues in Antitrust Law: Conduct and
`Structure 204 ● Illegal Conduct ● Structure: Is Bigness
`Badness? ● Antitrust Laws and Effi ciency ●
`
`Summary 165 ● Concepts for Review 166 ● Further
`Reading and Internet Websites 166 ● Questions for
`Discussion 166 ●
`
`Summary 207 ● Concepts for Review 208 ● Further
`Reading and Internet Websites 208 ● Questions for
`Discussion 209 ●
`
`
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`x
`
`CONTENTS
`
`Chapter 11
`Economics of Uncertainty
`
`211
`
`Summary 244 ● Concepts for Review 245 ● Further
`Reading and Internet Websites 245 ● Questions for
`Discussion 245 ●
`
`211
`A. Economics of Risk and Uncertainty
`Speculation: Shipping Assets or Goods Across Space and
`Time 212 ● Arbitrage and Geographic Price Patterns ●
`Speculation and Price Behavior over Time ● Shedding
`Risks through Hedging ● The Economic Impacts of
`Speculation ● Risk and Uncertainty 215 ●
`
`B. The Economics of Insurance
`Capital Markets and Risk Sharing ● Market Failures
`in Information 217 ● Moral Hazard and Adverse
`Selection ● Social Insurance 218 ●
`
`216
`
`219
`C. Health Care: The Problem That Won’t Go Away
`The Economics of Medical Care 219 ● Special Economic
`Features of Health Care ● Health Care as a Social
`Insurance Program ● Rationing Health Care ●
`
`D. Innovation and Information
`Schumpeter’s Radical Innovation ● The Economics
`of Information ● Intellectual Property Rights ● The
`Dilemma of the Internet ●
`
`221
`
`Summary 224 ● Concepts for Review 225 ● Further
`Reading and Internet Websites 225 ● Questions for
`Discussion 225 ●
`
`PART THREE
`FACTOR MARKETS: LABOR,
`LAND, AND CAPITAL
`227
`
`Chapter 13
`The Labor Market
`
`248
`
`248
`A. Fundamentals of Wage Determination
`The General Wage Level 248 ● Demand for Labor 249 ●
`Marginal Productivity Differences ● International
`Comparisons ● The Supply of Labor 251 ● Determinants
`of Supply ● Empirical Findings ● Wage Differentials 253 ●
`Differences in Jobs: Compensating Wage Differentials ●
`Differences in People: Labor Quality ● Differences in
`People: The “Rents” of Unique Individuals ● Segmented
`Markets and Noncompeting Groups ●
`
`257
`
`B. Labor Market Issues and Policies
`The Economics of Labor Unions 257 ● Government
`and Collective Bargaining ● How Unions Raise
`Wages 258 ● Theoretical Indeterminacy of Collective
`Bargaining ● Effects on Wages and Employment 259 ●
`Has Unionization Raised Wages? ● Unions and Classical
`Unemployment ● Discrimination 260 ● Economic
`Analysis of Discrimination 261 ● Defi nition of
`Discrimination ● Discrimination by Exclusion ● Taste
`for Discrimination ● Statistical Discrimination ●
`Economic Discrimination Against Women 263 ●
`Empirical Evidence 263 ● Reducing Labor Market
`Discrimination 264 ● Uneven Progress ●
`
`Summary 264 ● Concepts for Review 265 ● Further
`Reading and Internet Websites 265 ● Questions for
`Discussion 266 ●
`
`Chapter 12
`How Markets Determine Incomes
`
`229
`
`Chapter 14
`Land, Natural Resources, and the Environment
`
`267
`
`229
`A. Income and Wealth
`Income 230 ● Factor Incomes vs. Personal Incomes ●
`Role of Government ● Wealth 231 ●
`
`267
`A. The Economics of Natural Resources
`Resource Categories 268 ● Fixed Land and Rents 269 ●
`Rent as Return to Fixed Factors ● Taxing Land ●
`
`232
`
`B. Input Pricing by Marginal Productivity
`The Nature of Factor Demands 233 ● Demands for
`Factors Are Derived Demands ● Demands for Factors
`Are Interdependent ● Distribution Theory and Marginal
`Revenue Product 235 ● Marginal Revenue Product ●
`The Demand for Factors of Production 236 ● Factor
`Demands for Profi t-Maximizing Firms ● Marginal
`Revenue Product and the Demand for Factors ● Supply
`of Factors of Production 238 ● Determination of Factor
`Prices by Supply and Demand 239 ● The Distribution of
`National Income 241 ● Marginal-Productivity Theory with
`Many Inputs ● An Invisible Hand for Incomes? 243 ●
`
`271
`B. Environmental Economics
`Externalities 271 ● Public vs. Private Goods ● Market
`Ineffi ciency with Externalities 272 ● Analysis of
`Ineffi ciency ● Valuing Damages ● Graphical Analysis
`of Pollution ● Policies to Correct Externalities 275 ●
`Government Programs ● Private Approaches ● Climate
`Change: To Slow or Not to Slow 278 ● Quarrel and
`Pollute, or Reason and Compute? ●
`
`Summary 280 ● Concepts for Review 281 ● Further
`Reading and Internet Websites 281 ● Questions for
`Discussion 281 ●
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`xi
`
`Chapter 15
`Capital, Interest, and Profi ts
`
`283
`
`283
`A. Basic Concepts of Interest and Capital
`What Is Capital? ● Prices and Rentals on Investments ●
`Capital vs. Financial Assets ● The Rate of Return on
`Investments ● Rates of Return and Interest Rates 284 ●
`Rate of Return on Capital ● Financial Assets and
`Interest Rates ● The Present Value of Assets 285 ●
`Present Value for Perpetuities ● General Formula for
`Present Value ● Acting to Maximize Present Value ●
`The Mysterious World of Interest Rates 287 ● Real vs.
`Nominal Interest Rates ●
`
`291
`
`B. The Theory of Capital, Profi ts, and Interest
`Basic Capital Theory 291 ● Roundaboutness ●
`Diminishing Returns and the Demand for Capital ●
`Determination of Interest and the Return on Capital ●
`Graphical Analysis of the Return on Capital ● Profi ts as
`a Return to Capital 295 ● Reported Profi t Statistics ●
`Determinants of Profi ts ● Empirical Evidence on
`Returns to Labor and Capital ●
`
`Summary 297 ● Concepts for Review 298 ● Further
`Reading and Internet Websites 298 ● Questions for
`Discussion 299 ●
`
`PART FOUR
`APPLICATIONS OF ECONOMIC
`PRINCIPLES
`301
`
`Chapter 16
`Government Taxation and Expenditure
`
`303
`
`303
`A. Government Control of the Economy
`The Tools of Government Policy 304 ● Trends in the Size
`of Government ● The Growth of Government Controls
`and Regulation ● The Functions of Government 306 ●
`Improving Economic Effi ciency ● Reducing Economic
`Inequality ● Stabilizing the Economy through
`Macroeconomic Policies ● Conducting International
`Economic Policy ● Public-Choice Theory 308 ●
`
`309
`B. Government Expenditures
`Fiscal Federalism 309 ● Federal Expenditures ● State
`and Local Expenditures ● Cultural and Technological
`Impacts 311 ●
`
`312
`C. Economic Aspects of Taxation
`Principles of Taxation 312 ● Benefi t vs. Ability-to-Pay
`Principles ● Horizontal and Vertical Equity ● Pragmatic
`
`Compromises in Taxation ● Federal Taxation 314 ●
`The Individual Income Tax ● Social Insurance Taxes ●
`Corporation Taxes ● Consumption Taxes ● State and
`Local Taxes 317 ● Property Tax ● Other Taxes ●
`Effi ciency and Fairness in the Tax System 318 ● The
`Goal of Effi cient Taxation ● Effi ciency vs. Fairness ●
`Final Word 320 ●
`
`Summary 320 ● Concepts for Review 321 ● Further
`Reading and Internet Websites 321 ● Questions for
`Discussion 321 ●
`
`Chapter 17
`Effi ciency vs. Equality: The Big Tradeoff
`
`323
`
`A. The Sources of Inequality
`The Distribution of Income and Wealth 324 ● How
`to Measure Inequality among Income Classes ●
`Distribution of Wealth ● Inequality across Countries ●
`Poverty in America 327 ● Who Are the Poor? ● Who
`Are the Rich? ● Trends in Inequality ●
`
`323
`
`330
`
`B. Antipoverty Policies
`The Rise of the Welfare State ● The Costs of
`Redistribution 331 ● Redistribution Costs in Diagrams ●
`How Big Are the Leaks? ● Adding Up the Leaks ●
`Antipoverty Policies: Programs and Criticisms 333 ●
`Income-Security Programs ● Incentive Problems of the
`Poor ● The Battle over Welfare Reform 334 ● Two
`Views of Poverty ● Income-Support Programs in
`the United States Today ● The Earned-Income Tax
`Credit ● The 1996 U.S. Welfare Reform ● Economic
`Policy for the 21st Century 336 ●
`
`Summary 336 ● Concepts for Review 337 ● Further
`Reading and Internet Websites 337 ● Questions for
`Discussion 338 ●
`
`Chapter 18
`International Trade
`
`339
`
`339
`A. The Nature of International Trade
`International vs. Domestic Trade ● Trends in Foreign
`Trade ● The Reasons for International Trade in Goods
`and Services 340 ● Diversity in Natural Resources ●
`Differences in Tastes ● Differences in Costs ●
`
`B. Comparative Advantage among Nations
`The Principle of Comparative Advantage 341 ●
`Uncommon Sense ● Ricardo’s Analysis of Comparative
`Advantage ● The Economic Gains from Trade ●
`
`341
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`CONTENTS
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`Outsourcing as Another Kind of Trade ● Graphical
`Analysis of Comparative Advantage 344 ● America
`without Trade ● Opening Up to Trade ● Extensions
`to Many Commodities and Countries 347 ● Many
`Commodities ● Many Countries ● Triangular
`and Multilateral Trade ● Qualifi cations and
`Conclusions 348 ●
`
`349
`C. Protectionism
`Supply-and-Demand Analysis of Trade and Tariffs 350 ●
`Free Trade vs. No Trade ● Trade Barriers ● The
`Economic Costs of Tariffs ● The Economics of
`Protectionism 355 ● Noneconomic Goals ● Unsound
`Grounds for Tariffs ● Potentially Valid Arguments for
`Protection ● Other Barriers to Trade ● Multilateral
`Trade Negotiations 359 ● Negotiating Free Trade ●
`Appraisal ●
`
`Summary 361 ● Concepts for Review 362 ● Further
`Reading and Internet Websites 362 ● Questions for
`Discussion 363 ●
`
`PART FIVE
`MACROECONOMICS: ECONOMIC
`GROWTH AND BUSINESS CYCLES
`365
`
`Chapter 19
`Overview of Macroeconomics
`
`A. Key Concepts of Macroeconomics
`The Birth of Macroeconomics 368 ● Objectives and
`Instruments of Macroeconomics 370 ● Measuring
`Economic Success ● The Tools of Macroeconomic
`Policy ● International Linkages 376 ●
`
`367
`
`368
`
`B. Aggregate Supply and Demand
`Inside the Macroeconomy: Aggregate Supply and
`Demand 377 ● Defi nitions of Aggregate Supply and
`Demand ● Aggregate Supply and Demand Curves ●
`Macroeconomic History: 1900–2008 380 ● The Role of
`Macroeconomic Policy ●
`
`377
`
`Chapter 20
`386
`Measuring Economic Activity
`Gross Domestic Product: The Yardstick of an Economy’s
`Performance 386 ● Two Measures of National Product:
`Goods Flow and Earnings Flow ● National Accounts
`Derived from Business Accounts ● The Problem
`of “Double Counting” ● Details of the National
`Accounts 391 ● Real vs. Nominal GDP: “Defl ating”
`GDP by a Price Index ● Consumption ● Investment
`and Capital Formation ● Government Purchases ●
`Net Exports ● Gross Domestic Product, Net Domestic
`Product, and Gross National Product ● GDP and NDP: A
`Look at Numbers ● From GDP to Disposable Income ●
`Saving and Investment ● Beyond the National
`Accounts 400 ● Price Indexes and Infl ation 402 ● Price
`Indexes ● Accounting Assessment 404 ●
`
`Summary 405 ● Concepts for Review 406 ● Further
`Reading and Internet Websites 406 ● Questions for
`Discussion 406 ●
`
`Chapter 21
`Consumption and Investment
`
`408
`
`408
`
`A. Consumption and Saving
`Budgetary Expenditure Patterns ● Consumption,
`Income, and Saving 411 ● The Consumption Function ●
`The Saving Function ● The Marginal Propensity
`to Consume ● The Marginal Propensity to Save ●
`Brief Review of Defi nitions ● National Consumption
`Behavior 416 ● Determinants of Consumption ● The
`National Consumption Function ● Alternative Measures
`of Saving ●
`
`420
`B. Investment
`Determinants of Investment 420 ● Revenues ● Costs ●
`Expectations ● The Investment Demand Curve 421 ●
`Shifts in the Investment Demand Curve ● On to the
`Theory of Aggregate Demand 424 ●
`
`Summary 424 ● Concepts for Review 425 ● Further
`Reading and Internet Websites 425 ● Questions for
`Discussion 426 ●
`
`Summary 382 ● Concepts for Review 383 ● Further
`Reading and Internet Websites 383 ● Questions for
`Discussion 384 ●
`
`Chapter 22
`Business Cycles and Aggregate Demand
`
`Appendix 19
`Macroeconomic Data for the United States
`
`385
`
`A. What Are Business Cycles?
`Features of the Business Cycle 429 ● Business-
`Cycle Theories 431 ● Financial Crises and Business
`Cycles ●
`
`428
`
`429
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`B. Aggregate Demand and Business Cycles
`The Theory of Aggregate Demand 432 ● The
`Downward-Sloping Aggregate Demand Curve 433 ●
`Shifts in Aggregate Demand ● Business Cycles and
`Aggregate Demand ● Is the Business Cycle Avoidable? ●
`
`432
`
`C. The Multiplier Model
`Output Determined by Total Expenditures 437 ●
`Reminder on the Meaning of Equilibrium ● The
`Adjustment Mechanism ● A Numerical Analysis ● The
`Multiplier 440 ● The Multiplier Model Compared with
`the AS-AD Model ●
`
`437
`
`441
`D. Fiscal Policy in the Multiplier Model
`How Government Fiscal Policies Affect Output 442 ●
`Impact of Taxation on Aggregate Demand ● A
`Numerical Example ● Fiscal-Policy Multipliers 446 ●
`Impact of Taxes ● The Multiplier Model and the
`Business Cycle ● The Multiplier Model in Perspective ●
`
`Summary 449 ● Concepts for Review 450 ● Further
`Reading and Internet Websites 451 ● Questions for
`Discussion 451 ●
`
`Chapter 23
`453
`Money and the Financial System
`Overview of the Monetary Transmission Mechanism ●
`
`A. The Modern Financial System
`The Role of the Financial System ● The Functions of
`the Financial System ● The Flow of Funds ● A Menu of
`Financial Assets 456 ● Review of Interest Rates ●
`
`454
`
`458
`B. The Special Case of Money
`The Evolution of Money 458 ● The History of Money ●
`Components of the Money Supply ● The Demand
`for Money 461 ● Money’s Functions ● The Costs of
`Holding Money ● Two Sources of Money Demand ●
`
`463
`C. Banks and the Supply of Money
`How Banks Developed from Goldsmith Establishments ●
`Fractional-Reserve Banking ● Final System
`Equilibrium ● A Modern Banking System ●
`
`D. The Stock Market
`Risk and Return on Different Assets ● Bubbles and
`Crashes ● Effi cient Markets and the Random Walk ●
`Personal Financial Strategies 470 ●
`
`465
`
`Summary 471 ● Concepts for Review 472 ● Further
`Reading and Internet Websites 473 ● Questions for
`Discussion 473 ●
`
`Chapter 24
`Monetary Policy and the Economy
`
`xiii
`
`475
`
`A. Central Banking and the Federal Reserve System 475
`The Essential Elements of Central Banking 476 ● History ●
`Structure ● Goals of Central Banks ● Functions of
`the Federal Reserve ● Central-Bank Independence ●
`How the Central Bank Determines Short-Term Interest
`Rates 478 ● Overview of the Fed’s Operations ●
`Balance Sheet of the Federal Reserve Banks ● Operating
`Procedures ● How the Federal Reserve Affects
`Bank Reserves 479 ● Open-Market Operations ●
`Discount-Window Policy: A Backstop for Open-Market
`Operations ● The Role of Reserve Requirements ●
`Determination of the Federal Funds Rate ●
`
`B. The Monetary Transmission Mechanism
`A Summary Statement ● The Effect of Changes in
`Monetary Policy on Output ● The Challenge of
`a Liquidity Trap ● Monetary Policy in the AS-AD
`Framework ● Monetary Policy in the Long Run ●
`
`484
`
`489
`
`C. Applications of Monetary Economics
`Monetarism and the Quantity Theory of Money and
`Prices 489 ● The Roots of Monetarism ● The Equation
`of Exchange and the Velocity of Money ● The Quantity
`Theory of Prices ● Modern Monetarism ● The
`Monetarist Platform: Constant Money Growth ● The
`Monetarist Experiment ● The Decline of Monetarism ●
`Monetary Policy in an Open Economy 493 ●
`International Linkages ● Monetary Transmission in
`the Open Economy 494 ● From Aggregate Demand to
`Aggregate Supply 495 ●
`
`Summary 495 ● Concepts for Review 496 ● Further
`Reading and Internet Websites 497 ● Questions for
`Discussion 497 ●
`
`PART SIX
`GROWTH, DEVELOPMENT,
`AND THE GLOBAL ECONOMY
`499
`
`Chapter 25
`Economic Growth
`The Long-Term Signifi cance of Growth ●
`
`501
`
`502
`A. Theories of Economic Growth
`The Four Wheels of Growth 502 ● Human Resources ●
`Natural Resources ● Capital ● Technological Change
`and Innovation ● Theories of Economic Growth 506 ●
`The Classical Dynamics of Smith and Malthus ●
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`xiv
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`CONTENTS
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`Economic Growth with Capital Accumulation: The
`Neoclassical Growth Model ● Geometrical Analysis
`of the Neoclassical Model ● The Central Role of
`Technological Change ● Technological Change as an
`Economic Output ●
`
`B. The Patterns of Growth in the United States
`The Facts of Economic Growth ● Relationship of the
`Seven Trends to Economic-Growth Theories ● The
`Sources of Economic Growth ● Recent Trends in
`Productivity 516 ● The Productivity Rebound ●
`
`512
`
`Summary 518 ● Concepts for Review 519 ● Further
`Reading and Internet Websites 519 ● Questions for
`Discussion 520 ●
`
`Chapter 26
`The Challenge of Economic Development
`
`521
`
`A. The Balance of International Payments
`Balance-of-Payments Accounts 545 ● Debits and
`Credits ● Details of the Balance of Payments ●
`
`545
`
`548
`B. The Determination of Foreign Exchange Rates
`Foreign Exchange Rates 548 ● The Foreign Exchange
`Market 549 ● Effects of Changes in Trade ● Exchange
`Rates