l<f 7.AA PRINCIPLES Macroeconomics

Transcription

1 l<f 7.AA PRINCIPLES OF Macroeconomics

2 Preface XVII PART 1 Introduction to Economics CHAPTER 1 The Central Idea 2 Scarcity and Choice for Individuals 4 Consumer Decisions 4 Opportunity Cost 4 a Gains from Trade: A Better Allocation 6 Producer Decisions 7 Cains from Trade: Greater Production 7 n Specialization, Division of Labor, and Comparative Advantage 8 International Trade 8 Scarcity and Choice for the Economy as a Whole 8 Production Possibilities 8 Increasing Opportunity Costs 9 The Production Possibilities Curve 11 Inefficient, Efficient, or Impossible? 11a Shifts in the Production Possibilities Curve 11a Scarcity, Choice, and Economic Progress 13 Market Economies and the Price System 13 Key Elements of a Market Economy 1 5 Freely Determined Prices 15 a Property Rights and Incentives 15 a Freedom to Trade at Home and Abroad 15 a A Role for Government 16 a The Role of Private Organizations 16 The Price System 1 6 Signals 17 a Incentives 17 a Distribution 17 Conclusion 20 Key Points 21 o Key Terms 21 a Questions for Review 21 a Problems 22 ECONOMICS IN ACTION: GAINS FROM TRADE ON THE INTERNET 7 ECONOMICS IN ACTION: TEACHING JOBS AND GRADUATE SCHOOL APPLICATIONS-TWO SIDES OF THE SAME COIN 9 ECONOMICS IN THE NEWS: GAINS FROM TRADE ON THE RADIO 18 CHAPTER 2 Observing and Explaining the Economy 24 What Do Economists Do? 25 The Fluctuating Price of Gasoline 26 Describing an Economic Event 26 Data Limitations 28 Explaining an Economic Event 28 Correlation versus Causation 30 a The Lack of Controlled Experiments in Economics 30 Predicting the Impact of Future Changes 32 Economic Models 32 a Microeconomic Models versus Macroeconomic Models 32 a An Example: A Model with Two Variables 33 The Ceteris Paribus Assumption 35 The Use of Existing Models 35 The Development of New Models 35 Recommending Appropriate Policies 36 Positive versus Normative Economics 36 Economics as a Science versus a Partisan PolicyTool 36 Economics Is Not the Only Factor in Policy Issues 37 Disagreement Between Economists 40 Conclusion: A Reader's Guide 40 Key Points 41 a KeyTerms 42 o Questions for Review 42 a Problems 42 ECONOMICS IN ACTION: AN ECONOMIC EXPERIMENT TO STUDY DISCRIMINATION 31 ECONOMICS IN ACTION: SCIENCE OR PERSUASION? 37 ECONOMICS IN THE NEWS: YOUNG ECONOMISTS AT WORK 38 VII

3 VIII Contents APPENDIX TO CHAPTER 2 Reading, Understanding, and Creating Graphs 44 Visualizing Observations with Graphs 44 Time-Series Graphs 44 Time-Series Graphs Showing Two or More Variables 46 Scatter Plots 47 Pie Charts 47 Visualizing Models with Graphs 48 Slopes of Curves 48 Graphs of Models with More than Two Variables KeyTerms and Definitions 50 a Questions for Review 50 a Problems CHAPTER 3 The Supply and Demand Model 52 Demand 53 The Demand Curve 54 Shifts in Demand 54 Consumers' Preferences 56 a Consumers' Information 56 a Consumers' Incomes 57 a Number of Consumers in the Market 57 a Consumers' Expectations of Future Prices 57 a Prices of Closely Related Goods 57 Movements Along versus Shifts of the Demand Curve 58 Supply 60 The Supply Curve 60 Shifts in Supply 61 Technology 62 o Weather Conditions 63 a The Price of Inputs Used in Production 63 The Number of Firms in the Market 63 a Expectations of Future Prices 63 a Government Taxes, Subsidies, and Regulations 63 Movements Along versus Shifts of the Supply Curve 64 Market Equilibrium: Combining Supply and Demand 65 Determination of the Market Price 66 Finding the Market Price 67 a Two Predictions 70 Finding the Equilibrium with a Supply and Demand Diagram 70 Market Outcomes When Supply or Demand Changes 71 Effects of a Change in Demand 71 a Effects of a Change in Supply 71 a When Both Curves Shift 74 Conclusion 77 Key Points 77 a KeyTerms 78 a Questions for Review 78 D Problems 78 ECONOMICS IN THE NEWS: WHY ROSES COST MORE ON VALENTINE'S DAY 68 ECONOMICS IN ACTION: USING THE SUPPLY AND DEMAND MODEL TO ANALYZE REAL-WORLD ISSUES 75 CHAPTER 4 Subtleties of the Supply and Demand Model: Price Floors, Price Ceilings, and Elasticity 80 Interference with Market Prices 81 Price Ceilings and Price Floors 81 Side Effects of Price Ceilings 82 Dealing with Persistent Shortages 82 a Making Things Worse 84 Side Effects of Price Floors 84 Dealing with Persistent Surpluses 84 a Making Things Worse 84 Elasticity of Demand 86 Defining the Price Elasticity of Demand 86 The Size of the Elasticity: High versus Low 88 The Impact of a Change in Supply on the Price of Oil Working with Demand Elasticities 93 The Advantage of a Unit-Free Measure 93 Elasticity versus Slope 94 Calculating the Elasticity with a Midpoint Formula Talking About Elasticities 96 Elastic versus Inelastic Demand 96 a Perfectly Elastic versus Perfectly Inelastic Demand 96 Revenue and the Price Elasticity of Demand 97 What Determines the Size of the Price Elasticity of Demand? 100 The Degree of Substitutability 100 a Big-Ticket versus Little-Ticket Items 100 a Temporary versus Permanent Price Changes 100 a Differences in Preferences 100 n Long-Run versus Short-Run Elasticity 101 Income Elasticity and Cross-Price Elasticity of Demand 101 Elasticity of Supply 10S Working with Supply Elasticities 106 Perfectly Elastic and Perfectly Inelastic Supply 107 a Why ' the Size of the Price Elasticity of Supply Is Important 107

4 IX Conclusion 110 Key Points 110 D KeyTerms 111 Questions for Review 111 n Problems 111 ECONOMICS IN ACTION: HOW POLICYMAKERS USE PRICE ELASTICITY OF DEMAND TO DISCOURAGE UNDERAGE DRINKING 87 ECONOMICS IN THE NEWS: INCREASING SCHOOL ENROLLMENT IN AFRICA 90 ECONOMICS IN ACTION: PREDICTING THE SIZE OF A PRICE INCREASE 92 ECONOMICS IN ACTION: WILL AN INCREASE IN THE MINIMUM WAGE BENEFIT POOR WORKERS? 1 03 PART 2 Principles of Macroeconomics us CHAPTER 5 Macroeconomics: The Big Picture 116 Measuring the "Size" of an Economy 117 Economic Growth: The Relentless Uphill Climb 118 Economic Fluctuations: Temporary Setbacks and Recoveries 122 A Recession's Aftermath 123 a Recessions versus Depressions 124 Unemployment, Inflation, and Interest Rates 125 Unemployment During Recessions 125 Inflation 126 Interest Rates 128 Different Types of Interest Rates and Their Behavior 128 u The Concept of the Real Interest Rate 129 Macroeconomic Theory and Policy 129 The Theory of Long-Term Economic Growth 130 The Production Function 130 Government Policy and Economic Growth 131 Fiscal Policy 131 a Monetary Policy 131 The Theory of Economic Fluctuations 132 Aggregate Demand and Economic Fluctuations 132 Macroeconomic Policy and Economic Fluctuations 134 Fiscal Policy 134 a Monetary Policy 134 Conclusion 135 Key Points 135 a KeyTerms 136 Questions for Review 136 a Problems 136 ECONOMICS IN THE NEWS: HOW ECONOMIC GROWTH CAN TRANSFORM AN ECONOMY 1 20 ECONOMICS IN ACTION: THE ECONOMIC IMPACT OF SEPTEMBER APPENDIX TO CHAPTER 5 The Miracle of Compound Growth 138 How Compound Growth Works 138 Exponential Effects 138 Rule of Plotting Growing Variables 139 Key Points 140 o Key Term and Definition 140 a Questions for Review 140 n Problems 140 CHAPTER 6 Measuring the Production, Income, and Spending of Nations 142 Measuring GDP 143 A Precise Definition of GDP 143 Prices Determine the Importance of Goods and Services in GDP 144 a Intermediate Goods versus Final Goods 144 a Stocks versus Flows 145 a Three Ways to Measure GDP 146 The Spending Approach 146 Consumption 146 a Investment 147 Government Purchases 148 a Net Exports 148 a Algebraic Summary 149 The Income Approach 149 Labor Income 150 a Capital Income 150 a Depreciation 150 a Taxes, Subsidies, and Transfers 151 a Net Income of Foreigners 151 The Production Approach 152 Saving 154 Individual Saving National Saving

5 Measuring Real GDP 155 Adjusting GDP for Inflation 156 Calculating Real GDP Growth 156 a AYear-to-Year Chain 157 a Obtaining the Values of Real GDP 157 a Real GDP versus Nominal GDP over Time 157 The GDP Deflator 160 Alternative Inflation Measures 160 Shortcomings of the GDP Measure 162 Revisions to GDP 1 63 Omissions from GDP 163 Home Work and Production 163 a Leisure Activity 163 a The Underground Economy 163 a Quality Improvements 164 Other Measures of Well-Being 164 Conclusion 166 Key Points 1 67 o KeyTerms 1 67 a Questions for Review 167 o Problems 168 ECONOMICS IN ACTION: DISTINGUISHING BETWEEN STOCKS AND FLOWS 145 ECONOMICS IN THE NEWS: THE MONTHLY RELEASE OF GDP DATA 158 ECONOMICS IN ACTION: MEASURING THE QUALITY OF LIFE ACROSS NATIONS 1 65 CHAPTER 7 The Spending Allocation Model 170 The Spending Shares 171 Defining the Spending Shares 171 If One Share Goes Up, Another Must Go Down 173 The Effect of Interest Rates on Spending Shares 174 Consumption 174 Consumption and the Real Interest Rate 174 a Movements Along versus Shifts of the Consumption Share Line 175 Investment 176 Net Exports 177 The Interest Rate and the Exchange Rate 177 a The Exchange Rate and Net Exports 178 a Combining the Two Relationships 178 Putting the Three Shares Together 179 Determining the Equilibrium Interest Rate 179 The Nongovernment Share of GDP 180 The Government's Share of GDP and the Share of GDP Available for Nongovernment Use 180 Finding the Equilibrium Interest Rate 1 81 Analogy with Supply and Demand Rate in the Long Run 185 The Relationship Between Saving and Investment a The Real Interest Conclusion 189 Key Points 192 D KeyTerms 1 92 o Questions for Review 192 D Problems 193 ECONOMICS IN ACTION: USING THE SPENDING ALLOCATION MODEL TO ANALYZE THE LONG-RUN IMPLICATIONS OF SHIFTS IN GOVERNMENT PURCHASES AND CONSUMPTION 1 83 ECONOMICS IN THE NEWS: THE "TWIN DEFICITS" 190 CHAPTER 8 Unemployment and Employment 196 Unemployment and Other Labor Market Indicators 197 How Is Unemployment Measured? 197 Who Is Employed and Who Is Unemployed? 198 a The Labor Force and Discouraged Workers 198 n Part-Time Work 198 Comparing Three Key Indicators 199 Aggregate Hours of Labor Input 200 Cyclical, Frictional, and Structural Unemployment 201 The Nature of Unemployment 204 Reasons People Are Unemployed 204 Job Losers 204 a Job Leavers 206 a New Entrants and Re-entrants 206 The Duration of Unemployment 206 Unemployment for Different Groups 206

6 XI Modeling the Labor Market 208 Labor Demand and Labor Supply 208 Explaining Labor Market Trends 210 Why Is the Unemployment Rate Always GreaterThan Zero? 210 Job Rationing 211 a Job Search 212 a Policies to Reduce Unemployment 216 Conclusion 217 Key Points 218 a KeyTerms 218 a Questions for Review 219 o Problems 219 ECONOMICS IN THE NEWS: UNEMPLOYMENT EACH MONTH 203 ECONOMICS IN ACTION: UNEMPLOYMENT AMONG YOUNG PEOPLE AROUND THE WORLD 214 CHAPTER 9 Productivity and Economic Growth 222 Labor and Capital Without Technology 223 Labor Alone 223 Diminishing Returns to Labor 224 Adding Capital 225 Diminishing Returns to Capital 225 Technology: The Engine of Growth 227 What Is Technology? 228 Invention, Innovation, and Diffusion 228 a Organization and Specialization 229 a Human Capital 230 The Production oftechnology: The Invention Factory 230 Special Features oftechnology 232 Measuring Technology 233 The Formula 233 Using the Formula 233 Technology Policy 234 Policy to Encourage Investment in Human Capital 235 Policy to Encourage Research and Innovation 235 Technology Embodied in New Capital 235 Is Government Intervention Appropriate? 237 Conclusion: The Importance of Productivity Growth 237 Key Points 238 o KeyTerms 238 a Questions for Review 238 D Problems 239 ECONOMICS IN ACTION: THE ROLE OFTECHNOLOGY IN ECONOMIC GROWTH 227 ECONOMICS IN ACTION: EXAMPLES OF CHANGES IN TECHNOLOGY THAT INCREASED PRODUCTIVITY 228 ECONOMICS IN ACTION: TWO INVENTION FACTORIES: PAST AND PRESENT 231 ECONOMICS IN ACTION: GROWTH ACCOUNTING IN PRACTICE 234 ECONOMICS IN THE NEWS: PRODUCTIVITY GROWTH 236 APPENDIX TO CHAPTER 9 Deriving the Growth Accounting Formula 240 Key Points 241 o Key Term and Definition 241 Questions for Review 241 a Problems 241 CHAPTER 10 Money and Inflation 244 What Is Money? 245 Three Functions of Money 245 Medium of Exchange 245 a Store of Value 246 a Unit of Account 246 Commodity Money 246 From Coins to Paper Money to Deposits 247 Measures of the Money Supply 248 The Fed, the Banks, and the Link from Reserves to Deposits 250 The Fed 251 Board of Governors 251 a The District Federal Reserve Banks 251 a The Federal Open Market Committee (FOMC) 252 The Banks 253 The Link Between Reserves and Deposits 254 A Formula Linking Reserves to Deposits 254 a Bank-by-Bank Deposit Expansion 255 How the Fed Controls the Money Supply: Currency plus Deposits 257 Money Growth and Inflation 258 The Quantity Equation of Money 258 Evidence 259 Worldwide Inflation in the 1970s and 1980s 259 a Hyperinflations 260

7 XII Contents Conclusion 262 Key Points 262 a KeyTerms 263 a Questions for Review 263 Problems 263 ECONOMICS IN THE NEWS: COUNTERFEIT MONEY 248 ECONOMICS IN ACTION: HYPERINFLATION AND TOO MUCH MONEY 260 ~ : -1 I PART 3 I Economic Fluctuations and Macroeconomic Policy 265 CHAPTER 11 The Nature and Causes of Economic Fluctuations 266 Changes in Aggregate Demand Lead to Changes in Production 269 Production and Demand at Individual Firms 270 The Unemployment Rate and the Deviations of Real GDP from Potential GDP 270 Could Economic Fluctuations Also Be Due to Changes in Potential GDP? 271 Forecasting Real GDP 274 A Forecast for Next Year 274 Impact of a Change in Government Purchases 274 The Response of Consumption to Income 275 The Consumption Function 276 The Marginal Propensity to Consume 276 Which Measure of Income? 277 What About Interest Rates and Other Influences on Consumption? 278 Finding Real GDP When Consumption and Income Move Together 278 The 45-Degree Line 280 The Expenditure Line 280 The Slope of the Expenditure Line 282 a Shifts in the Expenditure Line 282 Determining Real GDP Through Spending Balance 283 A Better Forecast of Real GDP 284 Spending Balance and Departures of Real GDP from Potential GDP 286 Stepping Away from Potential GDP 287 Conclusion 287 Key Points 288 a KeyTerms 288 a Questions for Review 288 a Problems 288 ECONOMICS IN ACTION: REAL-LIFE EXAMPLES OF HOW FIRMS RESPOND TO DEMAND 271 ECONOMICS IN THE NEWS: ASSESSING THE MACROECONOMIC IMPACT OF A TERRORIST ATTACK 272 ECONOMICS IN ACTION: THE PROFESSIONAL FORECASTERS 275 ECONOMICS IN ACTION: MAKING TIME'S TOP APPENDIX TO CHAPTER 11 Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model 290 The Keynesian Multiplier 290 A Graphical Review 290 The Algebraic Derivation 291 Following the Multiplier Through the Economy 292 a What If Net Exports Depend on Income? 292 The Forward-Looking Consumption Model 293 Forward-Looking People 294 Tests and Applications of the Forward-Looking Model 295 Permanent versus Temporary Tax Cuts 295 a Anticipating Future Tax Cuts or Increases 295 Key Points 295 a KeyTerms and Definitions 295 a Questions for Review 296 a Problems 296

8 XIII CHAPTER 12 The Economic Fluctuations Model 298 The Aggregate Demand Curve 299 Interest Rates and Real GDP 300 Investment 300 a Net Exports 301 a Consumption 301 a The Overall Effect 302 Interest Rates and Inflation 303 Central Bank Interest Rate Policy 303 a How the Fed Changes the Interest Rate 304 a A Graph of the Response of the Interest Rate to Inflation 304 a A Good Simplifying Assumption 306 Derivation of the Aggregate Demand Curve 306 Movements Along the Aggregate Demand Curve 309 a Shifts of the Aggregate Demand Curve 309 The Inflation Adjustment Line 311 The Inflation Adjustment Line Is Flat 312 Expectations of Continuing Inflation 313 a Staggered Price and Wage Setting 313 The Inflation Adjustment Line Shifts Gradually When Real GDP Departs from Potential GDP 314 Changes in Expectations or Commodity Prices Shift the Inflation Adjustment Line 314 Does the Inflation Adjustment Line Fit the Facts? 314 Combining the Aggregate Demand Curve and the Inflation Adjustment Line 315 Conclusion 316 Key Points 317 a KeyTerms 317 a Questions for Review 317 a Problems 317 ECONOMICS IN THE NEWS: THE FED RAISES AND THEN LOWERS THE INTEREST RATE 307 CHAPTER 13 Using the Economic Fluctuations Model 320 Changes in Government Purchases 321 Real GDP and Inflation overtime 321 Details on the Components of Spending 324 Short Run 324 Long Run 324 The Return to Potential GDP After an Increase in Government Spending 325 Changes in Monetary Policy 326 The Volcker Disinflation 328 Reinflation and the Great Inflation 328 Price Shocks 329 What Is a Price Shock? 329 The Effect of Price Shocks 330 Temporary Shifts in the Inflation Adjustment Line 332 a Stagflation 332 Conclusion 332 Key Points 333 o KeyTerms 333 a Questions for Review 333 n Problems 334 ECONOMICS IN ACTION: EXPLAINING THE RECOVERY FROM THE GREAT DEPRESSION 329 ECONOMICS IN ACTION: THE 2001 RECESSION AND RECOVERY 331 CHAPTER 14 Fiscal Policy 336 The Government Budget 337 Setting the Annual Budget 337 A Balanced Budget versus a Deficit or Surplus 337 a The Proposed Budget versus the Actual Budget 338 A Look at the Federal Budget 338 The Deficit 338 a Taxes and Spending 340 The Federal Debt 341 The Debt to GDP Ratio 342 State and Local Government Budgets 342 Countercyclical Fiscal Policy 343 Impacts of the Instruments of Fiscal Policy 343 Changes in Government Purchases 343 a Changes in Taxes 345 Countercyclical Fiscal Policy 346 Discretionary Changes in the Instruments of Fiscal Policy 349 a Automatic Changes in the Instruments of Fiscal Policy 349 The Discretion versus Rules Debate for Fiscal Policy 350

9 XIV Contents The Structural versus the Cyclical Surplus 351 Conclusion 353 Key Points 353 D KeyTerms 353 a Questions for - Review 354 a Problems 354 ECONOMICS IN ACTION: HOW SHOULD SOCIAL SECURITY BE REFORMED? 339 ECONOMICS IN ACTION: THE ECONOMIC REPORT OF THE PRESIDENT 348 CHAPTER 15 Monetary Policy 356 Why Are Central Banks Independent? 357 The "Gain Then Pain" Scenario 358 The Phillips Curve 358 a The Political Business Cycle 360 a Time Inconsistency 360 Potential Disadvantages of Central Bank Independence 360 Running Monetary Policy 364 Aggregate Demand: Just Right, Too Hot, ortoo Cold? 364 The Goldilocks Economy: Just Right 364 a A Misalignment: Aggregate Demand Is Too High 365 a Another Type of Misalignment: Aggregate Demand Is Too Low 365 Monetary Policy in The Inherent Uncertainty in Monetary Policy 366 Increased Transparency and Predictability 366 Money and Other Instruments of Monetary Policy 367 Money Demand, the Interest Rate, and the Money Supply 367 Money Demand 367 The Interest Rate and the Quantity of Money 369 a What About Focusing on the Money Supply? 370 Two Other Instruments of Monetary Policy 371 The Discount Rate 371 Reserve Requirements 372 The Exchange Rate and Monetary Policy 372 The Effects of a Fixed Exchange Rate System on Monetary Policy 374 Interventions in the Exchange Market 375 Why Fixed Exchange Rates? 375 Conclusion 376 Key Points 376 o KeyTerms 377 a Questions for Review 377 Problems 377 ECONOMICS IN THE NEWS: ANATOMY OF A HUMP 362 CHAPTER 16 Financial Markets 380 The Distinction Between Physical Capital and Financial Capital 381 Markets for Financial Capital 382 Stock Prices and Rates of Return 383 Bond, Prices and Rates of Return 383 The Tradeoff Between Risk and Return 387 Behavior Under Uncertainty 387 Risk and Rates of Return in Theory 389 Risk and Return in Reality 390 Diversification Reduces Risk 391 Efficient Market Theory 391 Corporate Governance Problems 392 Asymmetric Information: Moral Hazard and Adverse Selection 392 Incentives to Overcome Adverse Selection and Moral Hazard Problems 393 Conclusion 396 Key Points 397 a KeyTerms 397 Questions for Review 397 a Problems 397 ECONOMICS IN ACTION: UNDERSTANDING STOCK AND BOND PRICE LISTINGS IN NEWSPAPERS 384 ECONOMICS IN THE NEWS: CORPORATE GREED 394 APPENDIX TO CHAPTER 16 Present Discounted Value 399 Discounting the Future 399 Finding the Present Discounted Value 399 Key Points 400 n KeyTerms and Definitions 400 o Questions for Review 400 Problems 400

10 XV PART 4 Trade and Global Markets 401 CHAPTER 17 Economic Growth and Globalization 402 Catching Up or Not? 403 Catch-up Within the United States 403 Catch-up in the Advanced Countries 405 Catch-up in the Whole World 405 Economic Development 407 Billions Still in Poverty 407 Geographical Patterns 407 Terminology of Economic Development 407 Spreading and Using Technology 409 Empowering Entrepreneurs 410 Remaining Problems in Developing Countries 411 Regulation and Legal Rights 411 Lack of Human Capital 411 Increasing Capital per Worker 412 Population Growth 413 National Saving 413 Foreign Investment from the Advanced Economies 413 Conclusion 415 Key Points 415 KeyTerms 416 a Questions for Review 417 a Problems 417 ECONOMICS IN ACTION: THE MILLENNIUM CHALLENGE CORPORATION 412 ECONOMICS IN ACTION: IS THERE A GLOBAL SAVING GLUT? 415 CHAPTER 18 The Gains from International Trade 418 Recent Trends in International Trade 419 Comparative Advantage 420 Getting a Gut Feeling for Comparative Advantage 420 Opportunity Cost, Relative Efficiency, and Comparative Advantage 421 a From People to Countries 421 Productivity in Two Countries 421 An American Worker's View 425 a A Korean Worker's View 425 Finding the Relative Price 425 Relative Price Without Trade 425 a Relative Price with Trade 425 Measuring the Gains from Trade 426 One Country's Gain 426 a The Other Country's Gain 426 n Just Like a New Discovery 427 A Graphical Measure of the Gains from Trade 427 Production Possibilities Curves Without Trade 427 a Production Possibilities Curves with Trade 428 a Increasing Opportunity Costs: Incomplete Specialization 430 Reasons for Comparative Advantage Labor versus Capital Resources 431 The Effect of Trade on Wages Gains from Expanded Markets 433 An Example of Gains from Trade Through Expanded Markets 433 Effects of a Larger Market 433 a Intraindustry Trade versus Interindustry Trade 435 Measuring the Gains from Expanded Markets 435 A Relationship Between Cost per Unit and the Number of Firms 435 a The Effect of the Size of the Market 435 a A Relationship Between the Price and the Number of Firms 436 a Equilibrium Price and Number of Firms 436 a Increasing the Size of the Market 438 a The North American Automobile Market 439 Conclusion 440 Key Points 440 KeyTerms 441 a Questions for Review 441 a Problems 441 ECONOMICS IN THE NEWS: THE ECONOMIC IMPACT OF OUTSOURCING 422 ECONOMICS IN ACTION: DOING POLITICS AND ECONOMICS 429

11 XVI Contents CHAPTER 19 International Trade Policy 444 Tariffs and Quotas 445 Tariffs 445 Quotas 447 The Costs of Trade Restrictions 450 The History of Trade Restrictions U.S. Tariffs From the Tariff of Abominations to Smoot-Hawley 451 a From the Reciprocal Trade Agreement Act to the WTO 452 a Antidumping Duties 453 a The Rise ofnontariff Barriers 453 Arguments for Trade Barriers 454 High Transition Costs 454 Phaseout of Trade Restrictions 454 a Trade Adjustment Assistance 455 The Infant Industry Argument 455 The National Security Argument 455 The Retaliation Argument 455 The Foreign Subsidies Argument 456 Environment and Labor Standards Arguments 456 The Political Economy of Protection 456 How to Reduce Trade Barriers 457 Unilateral Disarmament 457 Multilateral Negotiations 457 The Uruguay Round 458 a Most-Favored-Nation Policy 458 Regional Trading Areas 458 Trade Diversion versus Trade Creation 458 Areas versus Customs Unions 459 a Free Trade Conclusion 460 Key Points 460 a KeyTerms 460 a Questions for Review 461 a Problems 461 ECONOMICS IN ACTION: FROM STEEL TO SHRIMP: THE SAME OLD TARIFF STORY 447 ECONOMICS IN THE NEWS: THE END OF THE MULTI-FIBER AGREEMENT 449 ECONOMICS IN ACTION: ENDING THE CORN LAWS 459 Glossary C 7 Index 11 Credits Cl