ECONOMICS. Nineteenth Edition. PAULA. SAMUELSON Institute Professor Emeritus Massachusetts Institute of Technology

Transcription

1 ECONOMICS Nineteenth Edition PAULA. SAMUELSON Institute Professor Emeritus Massachusetts Institute of Technology WILLIAM D.NORDHAUS Sterling Professor of Economics Yale University McGraw-Hill Irwin Boston Burr Ridge, IL Dubuque, IA New York San Francisco St. Louis Bangkok Bogota Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto

2 Contents A Centrist Proclamation Preface xviii XVI For the Student: Economics and the Internet xxiii PART ONE BASIC CONCEPTS I Chapter I The Central Concepts of Economics 3 A. Why Study Economics? 3 For Whom the Bell Tolls O Scarcity and Efficiency: The Twin Themes of Economics 3 O Definitions of Economics O Scarcity and Efficiency O Microeconomics and Macroeconomics o The Logic of Economics 5 O Cool Heads at the Service of Warm Hearts 6 O B. The Three Problems of Economic Organization 7 Market, Command, and Mixed Economies 8 O C. Society's Technological Possibilities 8 Inputs and Outputs 9 O The Production-Possibility Frontier 9 o Applying the PPF to Society's Choices O Opportunity Costs O Efficiency O Summary 15 o Concepts for Review 15 o Further Reading and Internet Websites 16 O Questions for Discussion 16 o Appendix I How to Read Graphs 18 The Production-Possibility Frontier 18 O Production- Possibility Graph o A Smooth Curve o Slopes and Lines O Slope of a Curved Line O Slope as the Marginal Value O Shifts of and Movement along Curves O Some Special Graphs O Summary to Appendix 23 O Concepts for Review 24 O Questions for Discussion 24 o Chapter 2 The Modern Mixed Economy 25 A. The Market Mechanism 26 Not Chaos, but Economic Order O How Markets Solve the Three Economic Problems O The Dual Monarchy O A Picture of Prices and Markets O The Invisible Hand O B. Trade, Money, and Capital 30 Trade, Specialization, and Division of Labor 31 O Money: The Lubricant of Exchange 33 O Capital 33 O Capital and Private Property O C. The Visible Hand of Government 34 Efficiency 35 O Imperfect Competition O Externalities O Public Goods O Equity 38 O Macroeconomic Growth and Stability 39 O The Rise of the Welfare State 40 O Conservative Backlash O The Mixed Economy Today O Summary 41 O Concepts for Review 42 o Further Reading and Internet Websites 43 O Questions for Discussion 43 O Chapter 3 Basic Elements of Supply and Demand 45 A. The Demand Schedule 46 The Demand Curve 47 O Market Demand O Forces behind the Demand Curve O Shifts in Demand O B. The Supply Schedule 51 The Supply Curve 51 O Forces behind the Supply Curve O Shifts in Supply O C. Equilibrium of Supply and Demand 53 Equilibrium with Supply and Demand Curves 54 o Effect of a Shift in Supply or Demand O Interpreting Changes in Price and Quantity O Supply, Demand, and Immigration o Rationing by Prices 59 O Summary 60 O Concepts for Review 61 O Further Reading and Internet Websites 61 O Questions for Discussion 61 o VII

3 VIII CONTENTS PART TWO MICROECONOMICS: SUPPLY, DEMAND, AND PRODUCT MARKETS 63 Chapter 4 Supply and Demand: Elasticity and Applications 65 A. Price Elasticity of Demand and Supply 65 Price Elasticity of Demand 65 O Calculating Elasticities O Price Elasticity in Diagrams O A Shortcut for Calculating Elasticities 0 The Algebra of Elasticities O Elasticity Is Not the Same as Slope O Elasticity and Revenue 70 O The Paradox of the Bumper Harvest O Price Elasticity of Supply 72 O B. Applications to Major Economic Issues 13 The Economics of Agriculture 73 O Long-Run Relative Decline of Farming O Impact of a Tax on Price and Quantity 75 O Minimum Floors and Maximum Ceilings 77 O The Minimum-Wage Controversy O Energy Price Controls O Rationing by the Queue, by Coupons, or by the Purse? O Summary 81 O Concepts for Review 82 o Further Reading and Internet Websites 82 O Questions for Discussion 82 O Chapter 5 Demand and Consumer Behavior 84 Choice and Utility Theory 84 O Marginal Utility and the Law of Diminishing Marginal Utility O A Numerical Example O Derivation of Demand Curves 87 O The Equimarginal Principle O Why Demand Curves Slope Downward O Leisure and the Optimal Allocation of Time O Analytical Developments in Utility Theory O An Alternative Approach: Substitution Effect and Income Effect 89 O Substitution Effect O Income Effect O From Individual to Market Demand 91 O Demand Shifts O Substitutes and Complements O Empirical Estimates of Price and Income Elasticities O The Economics of Addiction 94 O The Paradox of Value 95 O Consumer Surplus 96 O Applications of Consumer Surplus O Summary 98 O Concepts for Review 99 O Further Reading and Internet Websites 99 O Questions for Discussion 99 O Appendix 5 Geometrical Analysis of Consumer Equilibrium 101 The Indifference Curve 101 O Law of Substitution O The Indifference Map O Budget Line or Budget Constraint 103 O The Equilibrium Position of Tangency 104 O Changes in Income and Price 104 O Income Change O Single Price Change O Deriving the Demand Curve 105 O Summary to Appendix 106 o Concepts for Review 106 O Questions for Discussion 106 O Chapter 6 Production and Business Organization 107 A. Theory of Production and Marginal Products 107 Basic Concepts 107 O The Production Function O Total, Average, and Marginal Product O The Law of Diminishing Returns O Returns to Scale 111 O Short Run and Long Run 112 O Technological Change 113 O Productivity and the Aggregate Production Function 116 O Productivity O Productivity Growth from Economies of Scale and Scope O Empirical Estimates of the Aggregate Production Function O B. Business Organizations 118 The Nature of the Firm 118 O Big, Small, and Infinitesimal Businesses 119 O The Individual Proprietorship O The Partnership O The Corporation O Ownership, Control, and Executive Compensation O Summary 123 O Concepts for Review 124 O Further Reading and Internet Websites 124 o Questions for Discussion 124 O Chapter 7 Analysis of Costs 126 A. Economic Analysis of Costs 126 Total Cost: Fixed and Variable 126 O Fixed Cost O Variable Cost O Definition of Marginal Cost 127 O Average Cost 129 O Average or Unit Cost O Average Fixed and Variable Costs O The Relation between Average Cost and Marginal Cost O The Link between Production and Costs 132 O Diminishing Returns and U-Shaped Cost Curves O Choice of Inputs by the Firm 134 O Marginal Products and the Least-Cost Rule O B. Economic Costs and Business Accounting The Income Statement, or Statement of Profit and Loss 135 O The Balance Sheet 136 O Accounting Conventions O Financial Finagling O 135

4 CONTENTS IX C. Opportunity Costs Opportunity Cost and Markets 140 O 139 Chapter 9 Imperfect Competition and Monopoly 169 Summary 141 O Concepts for Review 142 o Further Reading and Internet Websites 142 O Questions for Discussion 142 O Appendix 7 Production, Cost Theory, and Decisions of the Firm 144 A Numerical Production Function 144 O The Law of Diminishing Marginal Product 144 O Least-Cost Factor Combination for a Given Output 145 O Equal-Product Curves O Equal-Cost Lines O Equal-Product and Equal-Cost Contours: Least-Cost Tangency O Least-Cost Conditions O N Summary to Appendix 147 O Concepts for Review 148 O Questions for Discussion 148 O Chapter 8 Analysis of Perfectly Competitive Markets 149 A. Supply Behavior of the Competitive Firm 149 Behavior of a Competitive Firm 149 O Profit Maximization O Perfect Competition O Competitive Supply Where Marginal Cost Equals Price O Total Cost and the Shutdown Condition O B. Supply Behavior in Competitive Industries 154 Summing All Firms' Supply Curves to Get Market Supply 154 O Short-Run and Long-Run Equilibrium 155 O The Long Run for a Competitive Industry O C. Special Cases of Competitive Markets 157 General Rules 157 O Constant Cost O Increasing Costs and Diminishing Returns O Fixed Supply and Economic Rent O Backward-Bending Supply Curve O Shifts in Supply O D. Efficiency and Equity of Competitive Markets 160 Evaluating the Market Mechanism 160 O The Concept of Efficiency O Efficiency of Competitive Equilibrium O Equilibrium with Many Consumers and Markets O Marginal Cost as a Benchmark for Efficiency O Qualifications 163 O Market Failures O Two Cheers for the Market, but Not Three O Summary 165 o Concepts for Review 166 O Further Reading and Internet Websites 166 o Questions for Discussion 166 O A. Patterns of Imperfect Competition 169 Definition of Imperfect Competition O Varieties of Imperfect Competitors 171 O Monopoly O Oligopoly O Monopolistic Competition O Sources of Market Imperfections 173 O Costs and Market Imperfection O Barriers to Entry O B. Monopoly Behavior 177 The Concept of Marginal Revenue 177 O Price, Quantity, and Total Revenue O Marginal Revenue and Price O Elasticity and Marginal Revenue O Profit-Maximizing Conditions 180 O Monopoly Equilibrium in Graphs O Perfect Competition as a Polar Case of Imperfect Competition O The Marginal Principle: Let Bygones Be Bygones 183 O Loss Aversion and the Marginal Principle O Summary 184 o Concepts for Review 185 o Further Reading and Internet Websites 185 O Questions for Discussion 186 o Chapter 10 Competition among the Few 187 A. Behavior of Imperfect Competitors 187 Measures of Market Power O The Nature of Imperfect Competition Theories of Imperfect Competition 189 O Collusive Oligopoly O Monopolistic Competition O Rivalry among the Few O Price Discrimination 193 G B. GameTheory 195 Thinking about Price Setting O Basic Concepts 196 O Alternative Strategies O Games, Games, Everywhere... O C. Public Policies to Combat Market Power 199 Economic Costs of Imperfect Competition 199 O The Cost of Inflated Prices and Reduced Output O The Static Costs of Imperfect Competition O Public Policies on Imperfect Competition O Regulating Economic Activity 201 O Why Regulate Industry? O Containing Market Power O Remedying Information Failures O Antitrust Law and Economics 203 O The Framework Statutes O Basic Issues in Antitrust Law: Conduct and Structure 204 O Illegal Conduct O Structure: Is Bigness Badness? O Antitrust Laws and Efficiency O Summary 207 O Concepts for Review 208 O Further Reading and Internet Websites 208 O Questions for Discussion 209 o

5 CONTENTS Chapter 11 Economics of Uncertainty 211 A. Economics of Risk and Uncertainty 211 Speculation: Shipping Assets or Goods Across Space and Time 212 O Arbitrage and Geographic Price Patterns 0 Speculation and Price Behavior over Time O Shedding Risks through Hedging O The Economic Impacts of Speculation O Risk and Uncertainty 215 O B. The Economics of Insurance 216 Capital Markets and Risk Sharing O Market Failures in Information 217 O Moral Hazard and Adverse Selection o Social Insurance 218 O C. Health Care: The Problem That Won't Go Away 219 The Economics of Medical Care 219 O Special Economic Features of Health Care O Health Care as a Social Insurance Program O Rationing Health Care O D. Innovation and Information 221 Schumpeter's Radical Innovation O The Economics of Information o Intellectual Property Rights O The Dilemma of the Internet O Summary 224 o Concepts for Review 225 o Further Reading and Internet Websites 225 O Questions for Discussion 225 o PART THREE FACTOR MARKETS: LABOR, LAND, AND CAPITAL 227 Summary 244 o Concepts for Review 245 O Further Reading and Internet Websites 245 o Questions for Discussion 245 O Chapter 13 The Labor Market 248 A. Fundamentals of Wage Determination 248 The General Wage Level 248 O Demand for Labor 249 O Marginal Productivity Differences O International Comparisons O The Supply of Labor 251 o Determinants of Supply o Empirical Findings O Wage Differentials 253 O Differences in Jobs: Compensating Wage Differentials O Differences in People: Labor Quality O Differences in People: The "Rents" of Unique Individuals O Segmented Markets and Noncompeting Groups O B. Labor Market Issues and Policies 257 The Economics of Labor Unions 257 o Government and Collective Bargaining O How Unions Raise Wages 258 O Theoretical Indeterminacy of Collective Bargaining O Effects on Wages and Employment 259 O Has Unionization Raised Wages? O Unions and Classical Unemployment O Discrimination 260 O Economic Analysis of Discrimination 261 O Definition of Discrimination O Discrimination by Exclusion O Taste for Discrimination O Statistical Discrimination O Economic Discrimination Against Women 263 O Empirical Evidence 263 O Reducing Labor Market Discrimination 264 O Uneven Progress O Summary 264 O Concepts for Review 265 o Further Reading and Internet Websites 265 O Questions for Discussion 266 o Chapter 12 How Markets Determine Incomes 229 A. Income and Wealth 229 Income 230 O Factor Incomes vs. Personal Incomes O Role of Government O Wealth 231 O B. Input Pricing by Marginal Productivity 232 The Nature of Factor Demands 233 O Demands for Factors Are Derived Demands O Demands for Factors Are Interdependent O Distribution Theory and Marginal Revenue Product 235 O Marginal Revenue Product O The Demand for Factors of Production 236 O Factor Demands for Profit-Maximizing Firms O Marginal Revenue Product and the Demand for Factors O Supply of Factors of Production 238 O Determination of Factor Prices by Supply and Demand 239 O The Distribution of National Income 241 O Marginal-Productivity Theory with Many Inputs O An Invisible Hand for Incomes? 243 O Chapter 14 Land, Natural Resources, and the Environment 267 A. The Economics of Natural Resources 267 Resource Categories 268 O Fixed Land and Rents 269 O Rent as Return to Fixed Factors O Taxing Land O B. Environmental Economics 271 Externalities 271 O Public vs. Private Goods O Market Inefficiency with Externalities 272 Q Analysis of Inefficiency O Valuing Damages O Graphical Analysis of Pollution O Policies to Correct Externalities 275 O Government Programs O Private Approaches O Climate Change: To Slow or Not to Slow 278 O Quarrel and Pollute, or Reason and Compute? O Summary 280 o Concepts for Review 281 o Further Reading and Internet Websites 281 O Questions for Discussion 281 O

6 CONTENTS XI Chapter 15 Capital, Interest, and Profits 283 A. Basic Concepts of Interest and Capital 283 What Is Capital? O Prices and Rentals on Investments O Capital vs. Financial Assets O The Rate of Return on Investments O Rates of Return and Interest Rates 284 O Rate of Return on Capital O Financial Assets and Interest Rates O The Present Value of Assets 285 O Present Value for Perpetuities O General Formula fok Present Value O Acting to Maximize Present Value O The Mysterious World of Interest Rates 287 O Real vs. Nominal Interest Rates O B. The Theory of Capital, Profits, and Interest 291 Basic Capital Theory 291 O Roundaboutness O Diminishing Returns and the Demand for Capital O Determination of Interest and the Return on Capital O Graphical Analysis of the Return on Capital O Profits as a Return to Capital 295 O Reported Profit Statistics O Determinants of Profits O Empirical Evidence on Returns to Labor and Capital O Compromises in Taxation O Federal Taxation 314 O The Individual Income Tax O Social Insurance Taxes O Corporation Taxes O Consumption Taxes O State and Local Taxes 317 O Property Tax O Other Taxes O Efficiency and Fairness in the Tax System 318 O The Goal of Efficient Taxation O Efficiency vs. Fairness O Final Word 320 O Summary 320 o Concepts for Review 321 o Further Reading and Internet Websites 321 O Questions for Discussion 321 O Chapter 17 Efficiency vs. Equality: The Big Tradeoff 323 A. The Sources of Inequality. 323 The Distribution of Income and Wealth 324 O How to Measure Inequality among Income Classes O Distribution of Wealth o Inequality across Countries O Poverty in America 327 O Who Are the Poor? O Who Are the Rich? O Trends in Inequality O Summary 297 o Concepts for Review 298 O Further Reading and Internet Websites 298 o Questions for Discussion 299 o PART FOUR APPLICATIONS OF ECONOMIC PRINCIPLES 301 Chapter 16 Government Taxation and Expenditure 303 A. Government Control of the Economy 303 The Tools of Government Policy 304 O Trends in the Size of Government O The Growth of Government Controls and Regulation O The Functions of Government 306 O Improving Economic Efficiency O Reducing Economic Inequality O Stabilizing the Economy through Macroeconomic Policies O Conducting International Economic Policy O Public-Choice Theory 308 O B. Government Expenditures 309 Fiscal Federalism 309 O Federal Expenditures O State and Local Expenditures O Cultural and Technological Impacts 311 O C. Economic Aspects of Taxation 3/2 Principles of Taxation 312 O Benefit vs. Ability-to-Pay Principles O Horizontal and Vertical Equity O Pragmatic B. Antipoverty Policies 330 The Rise of the Welfare State O The Costs of Redistribution 331 O Redistribution Costs in Diagrams O How Big Are the Leaks? O Adding Up the Leaks O Antipoverty Policies: Programs and Criticisms 333 O Income-Security Programs O Incentive Problems of the Poor O The Battle over Welfare Reform 334 o Two Views of Poverty O Income-Support Programs in the United States Today O TheEarned-Income Tax Credit O The 1996 U.S. Welfare Reform O Economic Policy for the 21st Century 336 O Summary 336 o Concepts for Review 337 o Further Reading and Internet Websites 337 o Questions for Discussion 338 o Chapter 18 International Trade 339 A. The Nature of International Trade 339 International vs. Domestic Trade O Trends in Foreign Trade O The Reasons for International Trade in Goods and Services 340 O Diversity in Natural Resources O Differences in Tastes O Differences in Costs O B. Comparative Advantage among Nations 341 The Principle of Comparative Advantage 341 O Uncommon Sense O Ricardo's Analysis of Comparative Advantage O The Economic Gains from Trade O

7 XII CONTENTS Outsourcing as Another Kind of Trade O Graphical Analysis of Comparative Advantage 344 O America without Trade O Opening Up to Trade O Extensions to Many Commodities and Countries 347 O Many Commodities O Many Countries O Triangular and Multilateral Trade O Qualifications and Conclusions 348 O C. Protectionism 349 Supply-and-Demand Analysis of Trade and Tariffs 350 vp Free Trade vs. No Trade O Trade Barriers O The Economic Costs of Tariffs O The Economics of Protectionism 355 O Noneconomic Goals O Unsound Grounds for Tariffs O Potentially Valid Arguments for Protection O Other Barriers to Trade O Multilateral Trade Negotiations 359 O Negotiating Free Trade O Appraisal O Summary 361 O Concepts for Review 362 O Further Reading and Internet Websites 362 O Questions for Discussion 363 o PART FIVE MACROECONOMICS: ECONOMIC GROWTH AND BUSINESS CYCLES 365 Chapter 19 Overview of Macroeconomics 367 A. Key Concepts of Macroeconomics 368 The Birth of Macroeconomics 368 O Objectives and Instruments of Macroeconomics 370 O Measuring Economic Success O The Tools of Macroeconomic Policy O International Linkages 376 O B. Aggregate Supply and Demand 377 Inside the Macroeconomy: Aggregate Supply and Demand 377 O Definitions of Aggregate Supply and Demand O Aggregate Supply and Demand Curves O Macroeconomic History: O The Role of Macroeconomic Policy O Chapter 20 Measuring Economic Activity 386 Gross Domestic Product: The Yardstick of an Economy's Performance 386 O Two Measures of National Product: Goods Flow and Earnings Flow O National Accounts Derived from Business Accounts O The Problem of "Double Counting" O Details of the National Accounts 391 O Real vs. Nominal GDP: "Deflating" GDP by a Price Index O Consumption O Investment. and Capital Formation o Government Purchases O Net Exports O Gross Domestic Product, Net Domestic Product, and Gross National Product O GDP and NDP: A Look at Numbers O From GDP to Disposable Income O Saving and Investment O Beyond die National Accounts 400 O Price Indexes and Inflation 402 O Price Indexes O Accounting Assessment 404 O Summary 405 O Concepts for Review 406 O Further Reading and Internet Websites 406 O Questions for Discussion 406 O Chapter 21 Consumption and Investment 408 A. Consumption and Saving 408 Budgetary Expenditure Patterns O Consumption, Income, and Saving 411 O The Consumption Function O The Saving Function O The Marginal Propensity to Consume O The Marginal Propensity to Save O Brief Review of Definitions O National Consumption Behavior 416 O Determinants of Consumption O The National Consumption Function O Alternative Measures of Saving O B. investment 420 Determinants of Investment 420 O Revenues O Costs O Expectations O The Investment Demand Curve 421 O Shifts in the Investment Demand Curve O On to the Theory of Aggregate Demand 424 O Summary 424 O Concepts for Review 425 O Further Reading and Internet Websites 425 O Questions for Discussion 426 O Summary 382 O Concepts for Review 383 O Further Reading and Internet Websites 383 o Questions for Discussion 384 o Appendix 19 Macroeconomic Data for the United States 385 Chapter 22 Business Cycles and Aggregate Demand A. What Are Business Cycles? Features of the Business Cycle 429 O Business- Cycle Theories 431 O Financial Crises and Business Cycles O

8 CONTENTS XIII B. Aggregate Demand and Business Cycles 432 The Theory of Aggregate Demand 432 O The Downward-Sloping Aggregate Demand Curve 433 O Shifts in Aggregate Demand O Business Cycles and Aggregate Demand O Is the Business Cycle Avoidable? O C. The Multiplier Model 437 Output Determined by Total Expenditures 437 O Reminder on the Meaning of Equilibrium O The Adjustment Mechanism o A Numerical Analysis O The Multiplier 440 O The Multiplier Model Compared with the AS-AD Model O D. Fiscal Poficy in the Multiplier Model 441 How Government Fiscal Policies Affect Output 442 o Impact of Taxation on Aggregate Demand O A Numerical Example O Fiscal-Policy Multipliers 446 O Impact of Taxes O The Multiplier Model and the Business Cycle O The Multiplier Model in Perspective O Summary 449 O Concepts for Review 450 o Further Reading and Internet Websites 451 o Questions for Discussion 451 o Chapter 23 Money and the Financial System 453 Overview of the Monetary Transmission Mechanism O A. The Modern Financial System 454 The Role of the Financial System O The Functions of the Financial System O The Flow of Funds O A Menu of Financial Assets 456 O Review of Interest Rates O B. The Special Case of Money 458 The Evolution of Money 458 O The History of Money O Components of the Money Supply O The Demand for Money 461 O Money's Functions O The Costs of Holding Money O Two Sources of Money Demand O C. Banks and the Supply of Money 463 How Banks Developed from Goldsmith Establishments o Fractional-Reserve Banking O Final System Equilibrium O A Modern Banking System O 0. The Stock Market 465 Risk and Return on Different Assets O Bubbles and Crashes O Efficient Markets and the Random Walk O Personal Financial Strategies 470 b Summary 471 O Concepts for Review 472 O Further Reading and Internet Websites 473 o Questions for Discussion 473 O Chapter 24 Monetary Policy and the Economy 475 A. Central Banking and the Federal Reserve System 475 The Essential Elements of Central Banking 476 History a Structure O Goals of Central Banks O Functions of the Federal Reserve O Central-Bank Independence How die Central Bank Determines Short-Term Interest Rates 478 O Overview of the Fed's Operations Balance Sheet of the Federal Reserve Banks O Operating Procedures O How die Federal Reserve Affects Bank Reserves 479 O Open-Market Operations O Discount-Window Policy: A Backstop for Open-Market Operations O The Role of Reserve Requirements Determination of the Federal Funds Rate O B. The Monetary Transmission Mechanism A Summary Statement O The Effect of Changes in Monetary Policy on Output O The Challenge of a Liquidity Trap o Monetary Policy in the AS-AD Framework O Monetary Policy in the Long Run 484 C. Applications of Monetary Economics 489 Monetarism and die Quantity Theory of Money and Prices 489 O The Roots of Monetarism O The Equation of Exchange and the Velocity of Money O The Quantity Theory of Prices p Modern Monetarism O The Monetarist Platform: Constant Money Growth The Monetarist Experiment O The Decline of Monetarism Monetary Policy in an Open Economy 493 O International Linkages O Monetary Transmission in die Open Economy 494 O From Aggregate Demand to Aggregate Supply 495 O Summary 495 o Concepts for Review 496 O Further Reading and Internet Websites 497 O Questions for Discussion 497 O PART SIX GROWTH, DEVELOPMENT, AND THE GLOBAL ECONOMY 499 Chapter 25 Economic Growth The Long-Term Significance of Growth O 501 A. Theories of Economic Growth 502 The Four Wheels of Growth 502 O Human Resources Natural Resources O Capital O Technological Change and Innovation O Theories of Economic Growth 506 e The Classical Dynamics of Smith and Malthus

9 XIV CONTENTS Economic Growth with Capital Accumulation: The Neoclassical Growth Model O Geometrical Analysis of the Neoclassical Model O The Central Role of Technological Change O Technological Change as an Economic Output O B. The Patterns of Growth in the United States 512 The Facts of Economic Growth O Relationship of the Seven Trends to Economic-Growth Theories O The Sources of Economic Growth O Recent Trends in Productivity 516 O The Productivity Rebound O Summary 518 o Concepts for Review 519 o Further Reading and Internet Websites 519 O Questions for Discussion 520 O Chapter 26 The Challenge of Economic Development 521 A. Population Growth and Development 52 / Malthus and die Dismal Science 521 O Limits to Growth and Neo-Malthusianism O B. Economic Growth in Poor Countries 524 Aspects of a Developing Country 524 O Human Development O The Four Elements in Development 525 O Human Resources O Natural Resources O Capital O Technological Change and Innovations O Vicious Cycles to Virtuous Circles O Strategies of Economic Development 531 O The Backwardness Hypothesis O Industrialization vs. Agriculture O State vs. Market O Growth and Outward Orientation O Summary Judgment O C. Alternative Models for Development 533 A Bouquet of "ISMS" 533 o The Central Dilemma: Market vs. Command O The Asian Models 534 O Asian Dragons O The Rise of China O Socialism 535 O The Failed Model: Centrally Planned Economies 536 O Baleful Prophesies O From Textbooks to Tactics: Soviet- Style Command Economy O From Marx to Market O A Final Note of Cautious Optimism O Summary 539 O Concepts for Review 540 O Further Reading and Internet Websites 540 o Questions for Discussion 541 o Chapter 27 Exchange Rates and the International Financial System 543 Trends in Foreign Trade 544 O A. The Balance of International Payments Balance-of-Payments Accounts 545 O Debits and Credits O Details of the Balance of Payments O 545 B. The Determination of Foreign Exchange Rates 548 Foreign Exchange Rates 548 O The Foreign Exchange Market 549 O Effects of Changes in Trade O Exchange Rates and the Balance of Payments O Purchasing-Power Parity and Exchange Rates O C. The International Monetary System 553 Fixed Exchange Rates: The Classical Gold Standard 554 O Hume's Adjustment Mechanism O Updating Hume to Modern Macroeconomics O International Monetary Institutions After World War II 557 O The International Monetary Fund O The World Bank O The Bretton Woods System Intervention O Flexible Exchange Rates 559 O Today's Hybrid System 560 O Concluding Thoughts O Summary 560 o Concepts for Review 561 Further Reading and Internet Websites 562 Questions for Discussion 562 o Chapter 28 Open-Economy Macroeconomics 564 A. Foreign Trade and Economic Activity 564 Net Exports and Output in the Open Economy O Determinants of Trade and Net Exports Short-Run Impact of Trade on GDP 566 O The Marginal Propensity to Import and the Spending Line O The Open-Economy Multiplier O Trade and Finance for the United States Under Flexible Exchange Rates 569 O The Monetary Transmission Mechanism in an Open Economy 571 B. Interdependence in the Global Economy 574 Economic Growth in the Open Economy 574 Saving and Investment in the Open Economy 574 O Determination of Saving and Investment at Full Employment O Promoting Growth in die Open Economy 578 C. International Economic Issues 580 Competitiveness and Productivity 580 O "The Deindustrialization of America" O Trends in Productivity O The European Monetary Union 581 O Toward a Common Currency: The Euro O Costs and Benefits of Monetary Union O Final Assessment 583 O Summary 583 o Concepts for Review 585 o Further Reading and Internet Websites 585 o Questions for Discussion 585 o

10 CONTENTS XV PART SEVEN UNEMPLOYMENT, INFLATION, AND ECONOMIC POLICY 587 Chapter 29 Unemployment and the Foundations of Aggregate Supply 589 A. The Foundations of Aggregate Supply 589' Determinants of Aggregate Supply 590 O Potential Output O Input Costs O Aggregate Supply in die Short Run and Long Run 593 O Sticky Wages and Prices and the Upward-Sloping AS Curve O B. Unemployment 594 Measuring Unemployment 595 O Impact of Unemployment 595 O Economic Impact O Social Impact O Okun's Law 597 O Economic Interpretation of Unemployment 597 O Equilibrium Unemployment O Disequilibrium Unemployment O Microeconomic Foundations of Inflexible Wages O Labor Market Issues 601 O Who Are the Unemployed? O Duration of Unemployment O Sources of Joblessness O Unemployment by Age o Summary 606 o Concepts for Review 607 O Further Reading and Internet Websites 607 o Questions for Discussion 607 O Chapter 30 Inflation 609 A. Definition and Impact of Inflation 609 What Is Inflation? 609 O The History of Inflation o Three Strains of Inflation o Anticipated vs. Unanticipated Inflation o The Economic Impacts of Inflation 614 O Impacts on Income and Wealth Distribution o Impacts on Economic Efficiency o Macroeconomic Impacts O What Is the Optimal Rate of Inflation? O B. Modern Inflation Theory 616 Prices in die AS-AD Framework 617 o Expected Inflation O Demand-Pull Inflation O Cost-Push Inflation and "Stagflation" O Expectations and Inflation o Price Levels vs. Inflation O The Phillips Curve 620 O Short- Run Phillips Curve O The Nonaccelerating Inflation Rate of Unemployment O From Short Run to Long Run O The Vertical Long-Run Phillips Curve O Quantitative Estimates O Doubts about the NAIRU O Review O C. Dilemmas of Anti-Inflation Policy 624 How Long Is the Long Run? O How Much Does It Cost to Reduce Inflation? O Credibility and Inflation O Policies to Lower Unemployment O Summary 627 O Concepts for Review 628 o Further Reading and Internet Websites 628 o Questions for Discussion 629 O Chapter 31 Frontiers of Macroeconomics 630 A. The Economic Consequences of the Government Debt 630 Fiscal History 631 O Government Budget Policy 632 O Actual, Structural, and Cyclical Budgets O The Economics of die Debt and Deficits 633 O The Short- Run Impact of Government Deficits 633 O Short Run vs. Long Run O Fiscal Policy and the Multiplier Model O Government Debt and Economic Growth 634 O Historical Trends O External vs. Internal Debt O Efficiency Losses from Taxation o Displacement of Capital O Debt and Growth O B. Advances in Modern Macroeconomics 638 Classical Macroeconomics and Say's Law 639 O Say's Law of Markets o Modern Classical Macroeconomics 639 O Rational Expectations o Real Business Cycles o The Ricardian View of Fiscal Policy O Efficiency Wages O Supply-Side Economics O Policy Implications 642 O Policy Ineffectiveness O The Desirability of Fixed Rules O A New Synthesis? O C. Stabilizing the Economy 643 The Interaction of Monetary and Fiscal Policies 643 O Demand Management o The Fiscal-Monetary Mix O Rules vs. Discretion 646 O Budget Constraints on Legislatures? O Monetary Rules for the Fed? O D. Economic Growth and Human Welfare 648 The Spirit of Enterprise 649 O Fostering Technological Advance O Summary 650 O Concepts for Review 652 O Further Reading and Internet Websites 652 O Questions for Discussion 652 o Glossary of Terms 654 Index 677