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Part I Introduction to
Economics and Its Foundations
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Chapter 1 Observing
and Explaining the Economy 4
Observations: What Economists Endeavor to
Explain 5
Documenting and Quantifying Observations: A Case
Study 6
GDP, Health Care, and the Health-Care Share
/Overall Price Level, Health-Care Price, and
Relative Price
Interpreting the Observations 11
Correlation versus Causation / Controlled
Experiments / Experiments in Economics: A New Trend
/ Faulty Data / The Behavior of People Underlying
the Observations
Economic Models 15
What Are Economic Models? 15
An Example: A Model with Two Variables /
Prediction and the Ceteris Paribus Assumption
Microeconomic Models versus Macroeconomic
Models 17
The Use of Existing Models 19
The Development of New Models 19
Using Economics for Public Economic
Policy 20
Positive versus Normative
Economics 20
Economics as a Science versus a Partisan Policy
Tool 21
Economics Is Not the Only Factor in Policy
Issues 21
Conclusion: A Reader's
Guide 21
Key Points 23 - Key Terms 23 - Questions for Review
23 - Problems 24
E Using Economics to Explain Gender Pay
Gaps 18
Appendix to Chapter
1 Acquiring an Eye for Economics:
Reading and Understanding Graphs 25
Representing Observations with
Graphs 25
Time-Series Graphs 25
Time-Series Graphs Showing Two or More
Variables 28
Scatter Plots 29
Pie Charts 29
Representing Models with
Graphs 30
Slopes of Curves 30
Graphs of Models with More than Two Variables
31
Key Terms and Definitions 32 - Questions for Review
32 - Problems 32 Observing and Explaining the
Economy
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Chapter 2 Scarcity,
Choice, and Economic
Interaction 34
Scarcity, Choice, and Interaction for
Individuals 35
Consumer Decisions 35
Scarcity and Choice for Individual Consumers /
Gains from Trade / Improvements Through
Reallocation Producer
Decisions 37
Scarcity and Choice for Individual Producers /
Gains from Trade /Specialization, Division of
Labor, and Comparative Advantage
Trade Within a Country versus International
Trade 38
Multilateral Trade and the Need for a Medium of
Exchange 40
Different Money in Different Countries / Exchange
Rates
Scarcity and Choices for the Economy as a
Whole 41
Production Possibilities 41
Increasing Opportunity Costs 42
The Production Possibilities
Curve 42
Inefficient, Efficient, or Impossible? /
Economic Growth: Shifts in the Production
Possibilities Curve / Scarcity and Choices About
Economic Growth
Market Economies, Command Economies, and
Prices 47
Three Questions 47
Key Elements of a Market Economy 48
Freely Determined Prices / Property Rights and
Incentives / Competitive Markets / Freedom to Trade
at Home and Abroad / A Role for Government / The
Role of Nongovernment Organizations
Prices in Action: An Example 50
Conclusion 51
Key Points 51 - Key Terms 52 - Questions for Review
52 - Problems 52
E Adam Smith,
1723&endash;1790 39
E Using Economics to Explain Educational
Choice and Economic Growth 45
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Chapter 3 The Supply
and Demand Model 54
Demand 55
The Demand Curve 55
Shifts in Demand 56
Consumers' Preferences / Consumers' Information
/ Consumers' Incomes / Number of Consumers in the
Population / Consumers' Expectations of Future
Prices / Prices of Closely Related Goods
Movements Along versus Shifts of the Demand
Curve
Supply 60
The Supply Curve 61
Shifts in Supply 62
Technology / The Price of Goods Used in
Production / The Number of Firms in the Market /
Expectations of Future Price / Government Taxes,
Subsidies, and Regulations
Movements Along versus Shifts of the Supply
Curve 65
Market Equilibrium: Combining Supply and
Demand 65
Determination of the Market Price 66
Finding the Market Price / Two Predictions
Finding the Equilibrium with a Supply and
Demand Diagram 68
A Change in the Market 69
Effects of a Change in Demand / Effects of a
Change in Supply / When Both Curves Shift
Using the Supply and Demand Model: A Case
Study 73
Explaining and Predicting Peanut
Prices 73
Drought in the Southeast / A Change in the
Foreign Peanut Quota?
Interference with Market
Prices 79
Price Ceilings and Price Floors 79
Shortages and Related Problems Resulting from Price
Ceilings 79
Dealing with Persistent Shortages / Making
Things Worse
Surpluses and Related Problems Resulting from
Price Floors 81
Conclusion 84
Key Points 84 - Key Terms 85 - Questions for Review
85 - Problems 85
E Overiew of Supply and
Demand 66
E Reading the News About Supply and
Demand 78
E Reading the News About Price
Floors 83
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Chapter 4 Elasticity
and Its Uses 88
The Price Elasticity of
Demand 89
The Importance of Knowing the Price Elasticity of
Demand 89
High versus Low Elasticity / The Impact of a
Change in Supply on the Price of Oil
Definition of the Price Elasticity of
Demand 92
The Minus Sign Is Implicit / The Advantage of a
Unit-Free Measure / Elasticity versus Slope
Terminology for Discussing
Elasticities 93
Elastic versus Inelastic Demand / Relatively
Elastic versus Relatively Inelastic Demand /
Perfectly Elastic versus Perfectly Inelastic
Demand
Elasticities and Sketches of Demand
Curves 95
Calculating the Elasticity with a Midpoint Formula
95
Revenue and the Price Elasticity of
Demand 96
The Two Effects of Price on Revenue
Differences in the Price Elasticity of
Demand 98
The Degree of Substitutability / Big-Ticket
versus Little-Ticket Items / Temporary versus
Permanent Price Changes / Long-Run versus Short-Run
Elasticity
Elasticities Related to Shifts in
Demand 100
The Price Elasticity of
Supply 101
Why the Price Elasticity of Supply Is
Important 101
Definition of the Price Elasticity of
Supply 102
Applications of
Elasticity 105
The Size of the Oil Price
Increase 105
Setting National Park Fees 105
Taxes and Labor Supply 107
Conclusion 107
Key Points 107 - Key Terms 108 - Questions for
Review 108 - Problems 108
E Alfred Marshall,
1842&endash;1924 106
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Part 2 Introduction to
Macroeconomics
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Chapter 5 A Preview
of Macroeconomics 112
Economic Output over
Time 113
Economic Growth: The Relentless Uphill
Climb 113
The Economic Growth Record / The Economic Growth
Slowdown
Economic Fluctuations: Temporary Setbacks and
Recoveries 115
A Recession's Aftermath / Recessions versus
Depressions
Jobs, Inflation, and Interest
Rates 119
Employment, Productivity, and
Unemployment 119
The Record on Jobs and Productivity /
Unemployment During Recessions
Inflation 123
Interest Rates 124
Different Types of Interest Rates and Their
Behavior / The Concept of the Real Interest
Rate
Macroeconomic Theory and
Policy 126
Economic Growth Theory and Economic Fluctuation
Theory 126
Aggregate Supply and Long-Term Economic
Growth 126
The Production Function
Government Policy for Long-Term Economic
Growth 128
Fiscal Policy / Monetary Policy
Economic Fluctuations Theory and
Policy 129
Aggregate Demand and Economic Fluctuations /
Macroeconomic Policy for Economic Fluctuations
Conclusion 130
Key Points 132 - Key Terms 132 - Questions for
Review 132 - Problems 132
E Using Economics to Explain a Recession's Pain
Around the Country 122
Appendix to Chapter
5 The Miracle of Compound
Growth 135
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Chapter 6 Measuring
the Macroeconomy 136
Measuring GDP 137
A Precise Definition of GDP 137
Prices Determine the Importance of Goods and
Services in GDP / Intermediate Goods Are Part of
Final Goods / Three Ways to Measure GDP
The Spending Approach 139
Consumption / Investment / Government Purchases
/ Net Exports / A Key Equation
The Income Approach 143
Labor Income / Capital Income / Depreciation /
Indirect Business Taxes / Net Income of Foreigners
/ National Income and Personal Income
The Production Approach 145
Saving, Investment, and Net
Exports 148
The Definition of a Country's
Saving 148
Saving Equals Investment plus Net
Exports 148
Saving by the Young, the Middle-Aged, and the
Old / Government Saving /People Saving and
Investing
Real GDP and Nominal
GDP 151
Adjusting GDP for Inflation 151
Computing Real GDP Growth Between Two Years / A
Year-to-Year Chain / From the 1992 Base Year to
Other Years / Real GDP versus Nominal GDP over
Time
The GDP Deflator 153
Other Inflation Measures 156
Shortcomings of the GDP
Measure 157
Revisions in GDP
158 Omissions from GDP 158
Home Work and Production / Leisure Activity /
The Underground Economy /Improved Products
Other Measures of Well-Being 159
Vital Statistics on the Quality of Life /
Environmental Quality 160
International Comparisons of
GDP 160
The Problem with Using Market Exchange Rates for
Comparisons 161
Purchasing Power Parity Exchange
Rates 161
Reversals of International Rankings
Conclusion 162
Key Points 163 - Key Terms 163 - Questions for
Review 163 - Problems 164
E Stocks and Flows 141
E Reading the News About GDP Each
Month 154
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Part 3 Long-run
Fundamentals and Economic Growth
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Chapter
7 Unemployment and
Employment 168
Employment and Unemployment
Trends 169
Cyclical, Frictional, and Structural
Unemployment 169
How Is Unemployment Measured? 170
Who Is Employed and Who Is Unemployed? / The
Labor Force and DiscouragedWorkers / Part-Time
Work
Comparing Three Key Indicators 173
Aggregate Hours of Labor Input 174
Effects of Unemployment on Labor Input / Case
Study: CEA Forecasts of Future Aggregate Hours
The Nature of
Unemployment 176
Reasons People Are Unemployed 176
Job Losers / Job Leavers / New Entrants and
Re-entrants
Long-Term versus Short-Term
Unemployment 179
Unemployment for Different Groups 181
Determination of Employment and
Unemployment 182
Labor Demand and Labor Supply 182
Case Study: Explaining Long-Term Unemployment
Trends 183
Why Is the Unemployment Rate Always Greater than
Zero? 184
Job Rationing / Job Search
Policy Implications 186
The Effects of Taxes / Policies to Reduce the
Natural Unemployment Rate
Conclusion 190
Key Points 190 - Key Terms 190 - Questions for
Review 191 - Problems 191
E Reading the News About Employment Each
Month 180
E Reading the News About European
Unemployment 188
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Chapter 8 Investment
in New Capital 194
Investment and the Accumulation of Productive
Capital 195
Gross Investment, Net Investment, and Increases in
Capital 195
Government Investment 197
Public Infrastructure Investment / Using
Investment (I) in Practice
Investment As a Share of
GDP 198
The Investment Share versus the Other Shares of
GDP 198
If One Share Goes Up, Another Must Go
Down 199
Interest Rates and Consumption, Investment,
and Net Exports 200
Consumption 200
Consumption and the Interest Rate / Movements
along versus Shifts of the Consumption Share
Line Investment 202
Net Exports 203
The Interest Rate and the Exchange Rate / The
Exchange Rate and Net Exports / Combining the Two
Relationships
Putting the Three Shares
Together 205
Determining the Equilibrium Interest
Rate 206
Adding the Nongovernment Shares
Graphically 206
The Share of GDP Available for Nongovernment
Use 206
Finding the Equilibrium Interest Rate
Graphically 207
Analogy with Supply and Demand / The Real
Interest Rate in the Long Run
Impacts on the Investment
Share 209
A Change in Government Purchases 209
Impact on Investment of a Shift in
Consumption 210
The Saving Investment
Approach 212
The National Saving Rate and the Interest
Rate 213
Determination of the Equilibrium Interest
Rate 213
Effect of a Downward Shift in the National Saving
Rate 214
Determination of Government's Share of GDP
215
Arguments over the Appropriate Size of Government
215
Size of Government and Economic Growth 216
Conclusion 216
Key Points 217 - Key Terms 217 - Questions for
Review 217 - Problems 218
E Interest Rates and Exchange
Rates 204
E Anticipation of Changes in Government
Purchases 212
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Chapter 9 Technology
and Economic Growth 220
How Economics Got the Nickname the "Dismal
Science" 221
Labor Alone 222
Diminishing Returns to Labor / Malthusian
Predictions
Labor and Capital Only 227
Output Can Rise above Subsistence / Diminishing
Returns to Capital
Labor, Capital, and
Technology 231
What Is Technology? 231
Invention, Innovation, and Diffusion /
Organization and Specialization / Human Capital
The Production of Technology: The Invention
Factory 233
Special Features of the Technology
Market 234
Growth Accounting 236
The Growth Accounting Formula 236
Case Studies: Using the Growth Accounting
Formula 238
Productivity Slowdown in the United States /
Demise of the Soviet Union / A Tale of Two
Countries
Technology Policy 240
Policy to Encourage Investment in Human
Capital 240
Policy to Encourage Research and
Innovation 240
Technology Embodied in New
Capital 241
Is Government Intervention
Appropriate? 241
Conclusion: Implications for Potential
GDP 242
Key Points 243 - Key Terms 243 - Questions for
Review 243 - Problems 244
E Thomas Robert Malthus,
1766&endash;1834 226
E A Graphical Illustration of Growth
Accounting 237
Appendix to Chapter
9 Deriving the Growth Accounting
Formula 245
Key Points 246 - Key Term and Definition 246 -
Questions for Review 247 - Problems 247
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Chapter 10 The
Monetary System and Inflation 248
What Is Money? 249
Commodity Money 249
Three Functions of Money 249
Medium of Exchange / Store of Value / Unit of
Account
From Coins to Paper Money to
Deposits 250
Alternative Definitions of the Money
Supply 251
The Fed and the Banks: Creators of
Money 252
The Fed 253
Board of Governors / The District Federal
Reserve Banks / The Federal Open Market Committee
(FOMC) The Balance Sheet of a Commercial
Bank 255
The Role of Banks in Creating
Money 256
Bank-by-Bank Deposit Expansion / A Formula
Linking Reserves and Deposits
How the Fed Controls the Money Supply:
Currency Plus Deposits 259
The Money Supply (M) and Bank Reserves
(BR) 260
Currency versus Deposits 260
The Money Multiplier 261
Money Growth and
Inflation 263
The Quantity Equation of Money 263
Some Key Episodes in Monetary
History 264
Inflation: Effects on Unemployment and
Productivity Growth 267
Effects on Unemployment 267
Effects on Productivity Growth 268
Why Is Inflation Almost Always Greater than
Zero? 269
Printing Money to Finance Government
Expenditures / Bias in Measuring Inflation /
Concerns about Deflation or Disinflation
Conclusion 270
Key Points 271 - Key Terms 271 - Questions for
Review 271 - Problems 272
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Part 4 Economic
Fluctuations
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Chapter 11 The First
Steps Toward Recession or
Boom 276
Changes in Aggregate Demand First Lead to
Changes in Output 277
Production and Demand at Individual
Firms 279
Normal Capacity Utilization and the Natural
Unemployment Rate / Production and Employment
Decisions at Actual Firms
Why Changes in Demand Are Translated into
Changes in Production 280
Limited Information and Implicit Contracts / A
Graphical Illustration of theTypical Firm
Could Economic Fluctuations Also Be Due to
Changes in Potential GDP? 282
Forecasting Real GDP 283
A Forecast for Next Year 283
A Conditional Forecast 285
The Response of Consumption to
Income 286
The Consumption Function 286
The Marginal Propensity to Consume / Which
Measure of Income?
What About Interest Rates and Other Influences
on Consumption? 286
Finding Real GDP When Consumption and Income
Move Together 289
The Logic of the Two-Way Link Between Consumption
and Income 289
The 45-Degree Line 290
The Aggregate Expenditure Line 290
The Slope of the AE Line / Shifts in the AE
Line
Determining Real GDP Through Spending
Balance 293
A Better Forecast of Real GDP 294
Spending Balance and Departures of Real GDP
from Potential GDP 297
Stepping Away from Potential GDP 297
Starting Away from Potential GDP 298
Conclusion 298
Key Points 299 - Key Terms 299 - Questions for
Review 299 - Problems 300
E The Forecasting Industry 284
E Forecasting with Econometric
Models 296
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Chapter 12 The
Uncertain Multiplier 302
How to Find the
Multiplier 303
A Graphical Derivation of the
Multiplier 303
The Multiplier for a General Shift in the
Aggregate Expenditure Line / Specific Cases of the
Multiplier
An Algebraic Derivation of the
Multiplier 305
Following the Multiplier Through the
Economy 308
The Size of the
Multiplier 311
The Multiplier and the Slope of the AE
line 311
The Multiplier and the Marginal Propensity to
Consume 312
Uncertainty about the Size of the
Multiplier 314
A Key International Issue: Net Exports Depend
on Income 314
How Do Net Exports Depend on
Income? 314
Exports / Imports / Net Exports
The AE Line When Net Exports Depend on
Income 316
Effects on the Size of
Multiplier 317
How the Multiplier Depends on the MPI and the
MPC / The Rounds of the Multiplier When Net Exports
Depend on Income
The Impact on the Trade
Deficit 320
Does Investment Depend on Income
Too? 321
The Multiplier for a Tax
Change 321
The Forward-Looking Consumption
Model 323
Consumption Smoothing 324
The MPC for Permanent versus Temporary Changes in
Income 324
Tests and Applications of the Forward-Looking
Model 325
Permanent versus Temporary Tax Cuts /
Anticipating Future Tax Cuts or Increases
Conclusion 327
Key Points 327 - Key Terms 327 - Questions for
Review 328 - Problems 328
E The Origins of the
Multiplier 309
E John Maynard Keynes,
1883&endash;1946 313
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Chapter 13 Aggregate
Demand and Price Adjustment 330
The Aggregate Demand/Inflation
Curve 332
Interest Rates and Real GDP 332
Investment / Net Exports / Consumption /
Spending Balance
Interest Rates and Inflation 336
Central Bank Interest Rate Policy / A Graph of
the Response of the Interest Rate to Inflation / A
Simplifying Assumption
Derivation of the Aggregate Demand/Inflation
Curve 339
Movements along the Aggregate Demand/Inflation
Curve / Shifts of the Aggregate Demand/Inflation
Curve
The Price Adjustment
Line 343
The Price Adjustment Line Is
Flat 343
Expectations of Steady Inflation / Staggered
Price and Wage Setting
The Price Adjustment Line Shifts Gradually When
Real GDP Departs from Potential
GDP 345
Changes in Expectations or Commodity Prices Shift
the Price Adjustment Line 346
Does the Price Adjustment Line Fit the
Facts? 346
Combining the Aggregate Demand/Inflation
Curve and the Price Adjustment
Line 348
Conclusion 349
Key Points 349 - Key Terms 350 - Questions for
Review 350 - Problems 350
E Reading the News About the
Fed 338
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Chapter 14 Toward
Recovery and Expansion 352
The End of Recessions and
Booms 353
Real GDP and Inflation over Time 353
A More Detailed Report: Economic Behavior Behind
the Scenes 355
Short Run / Medium Run / Long Run
The Return to Potential GDP after a
Boom 358
Changes in Monetary
Policy 359
The Volcker Disinflation 361
Reinflation 363
The Case of a Price Shock or Supply
Shock 363
What Is a Price Shock? 364
The Effect of Price Shocks 364
Temporary Shifts in the Price Adjustment Line /
Stagflation
Combining Different
Scenarios 366 A Monetary Policy
Change with a Government Purchases
Change 366 Monetary Errors and
Reversals: A Boom-Bust Cycle 367
Conclusion 369
Key Points 371 - Key Terms 371 - Questions for
Review 371 - Problems 372
E Using Economics to Explain the Recovery from
the Great Depression 362
E Brief History of Thought on Price
Adjustment 368
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Part 5 Macroeconomic
Policy
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Chapter 15 Fiscal
Policy and the Budget Deficit 376
The Government Budget: Taxes, Spending, the
Deficit, and the Debt 377
Setting the Annual Budget 377
A Balanced Budget versus a Deficit or Surplus /
The Proposed Budget versus the Actual Budget
A Look at the Federal Budget 380
The Deficit / Taxes and Spending / The U.S.
Budget Deficit versus Other Countries
The Federal Debt 381
Long-Term and Short-Term Debt / The Debt to GDP
Ratio
State and Local Government
Budgets 383
Discretionary and Automatic Countercyclical
Fiscal Policy 384
Impacts of the Instruments of Fiscal
Policy 384
Changes in Government Purchases / Changes in
Taxes
Countercyclical Fiscal
Policy 387
Discretionary Changes in the Instruments of
Fiscal Policy / Automatic Changes in the
Instruments of Fiscal Policy
The Discretion versus Rules Debate for Fiscal
Policy 390
Economic Impact of the Budget
Deficit 391
Short-Run and Long-Run Impact of the
Deficit 391
Ricardian Equivalence / The Burden of the Debt /
Overall Assessment
Credible Deficit Reduction
Plans 392
Interest Rates and Expectations
The Structural versus the Cyclical
Deficit 396
Budget Reforms 398
Conclusion 399
Key Points 399 - Key Terms 400 - Questions for
Review 400 - Problems 400
E Using Economics to Explain a Rise in Long-Term
Interest Rates 394
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Chapter 16 Monetary
Policy 402
Central Bank
Independence 403
Short-Run Gain versus Long-Run
Pain 403
The Political Business Cycle 405
Time Inconsistency 405
Government Borrowing from the Central
Bank 405
Possible Abuses of Independence 406
Money Demand, Money Supply, and the Interest
Rate 407
Money Demand 407
Money Supply 408
The Determination of the Interest
Rate 409
Fed Policy Actions 410
Open Market Operations and Changes in the Federal
Funds Rate 410
The Monetary Transmission
Channel 412
Other Tools of Monetary Policy 413
The Discount Rate / Changes in Reserve
Requirements
Alternative Monetary
Policies 414
The Constant Money Growth Rule 415
Implications for the Aggregate Demand/Inflation
Curve / Debates about Constant Money Growth
Rules
Real GDP in the Monetary Policy
Rule 416
The Gold Standard 418
Gains from Credibility 418
Interpreting Policy Actions 418
Expectations and Credible
Disinflation 421
Conclusion 421
Key Points 421 - Key Terms 422 - Questions for
Review 422 - Problems 422 E The Fed Chairman
Speaks on Principles of Monetary
Policy 419
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Chapter
17 International
Finance 424
The Balance of Trade Around the
World 425
The Trade Deficit 425
Both Merchandise Trade and Services Trade Are
Important 426
The U.S. Merchandise Trade Deficit / The U.S.
Services Trade Surplus
The Balance of Payments 427
The Current Account / The Capital Account
Bilateral Surpluses and
Deficits 431
Sectoral Deficits 432
Exchange Rate
Determination 433
Purchasing Power Parity (PPP) 433
Tradable Goods / Nontradable Goods / Explaining
Exchange Rates with PPP in Practice
The Interest Rate: A Reason for Deviations from
PPP 437
Fixed Exchange Rate
Systems 438
International Gold Standard 438
The Bretton Woods System 438
The European Monetary System 439
Fixed Exchange Rates and International
Independence 440
Loss of International Monetary
Independence 440
Interventions in the Exchange
Market 441
Reducing Exchange Rate Risk 441
Conclusion 442
Key Points 443 - Key Terms 444 - Questions for
Review 444 - Problems 444
E Desert Storm and the Current
Account 429
E Reading the News About Purchasing Power
Parity 435
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Chapter
18 Macroeconomic
Debates 446
Schools of Thought in
Macroeconomics 448
Developments from the 1930s Through the
1960s 448
Keynesian Economics / The Monetarist School /
The Neoclassical Growth School
Developments from the 1970s Through the
Present 451
New Classical Macroeconomics / The New Keynesian
School / The Real Business Cycle School / Supply
Side Economics
Macroeconomic Theory at the Turn of the
Century 454
Debates about Macroeconomic
Policy 455
The Bush Fiscal Package 455
Debates About the Bush Proposals
The Clinton Fiscal Package 457
Debate About the Clinton Proposals
Lessons 457
Conclusion 458
Key Points 459 - Key Terms 459 - Questions for
Review 459 - Problems 459
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Chapter 19 Economic
Growth Around the World 460
Catching Up or Not? 461
Catch-up Within the United
States 461
Catch-up in the Advanced
Countries 462
Catch-up in the Whole World 464
Economic Development 465
Billions Still in Poverty 465
Geographical Patterns 465
Terminology of Economic Development 466
Obstacles to the Spread of
Technology 468
Reduction in Restrictions in the Eighteenth and
Nineteenth Centuries 468
Remaining Restrictions in Developing
Countries 469
Human Capital 470
Obstacles to Raising Capital per
Worker 470
High Population Growth 470
Insufficient National Saving 471
The Lack of Foreign Investment in Developing
Countries 471
Loans from International Financial Institutions
/ Where Is the Saving Coming From?
Inward-Looking versus Outward-Looking
Economic Policies 474
Conclusion 476
Key Points 477 - Key Terms 477 - Questions for
Review 477 - Problems 478
E Using Economics to Explain an Inadequacy of
World Saving 472
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Chapter 20 Emerging
Market Economies 480
Centrally Planned
Economies 481
Central Planning in the Soviet
Union 482
The Five-Year Plans / Centrally Controlled
Prices
Trade Between the Soviet Union and Eastern
Europe 485
Technological Change and the Quality of
Goods 486
From Perestroika to the End of the Soviet
Union 486
Soviet-Style Central Planning in
China 487
Alternative Paths to a Market
Economy 488
The Goals of Reform 488
Shock Therapy or Gradualism? 488
Economic Reform in
Practice 489
Reforms in Poland 490
Reforms in China 491
Economic Freedom and Political
Freedom 492
Conclusion 493
Key Points 494 - Key Terms 494 - Questions for
Review 494 - Problems 494
E Karl Marx,
1818&endash;1883 483
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Chapter 21 The Gains
from International Trade 496
Trade and Sovereignty 497
Sovereign National Governments 497
Recent Trends in International Trade 497
The Attack on Mercantilism 498
Mutual Gains from Voluntary Exchange of
Existing Goods 499
Increased Competition 499
The Division of Labor 499
Better Use of Skills and Resources in Different
Countries 500
Comparative Advantage 500
A Simple Example of Comparative
Advantage 501
Opportunity Cost, Relative Efficiency, and
Comparative Advantage / From People to
Countries
Trade Between Countries: Pharmaceuticals and
Electronics 502
An American Worker's View / A Korean Worker's
View
The Relative Price of Pharmaceutical Goods and
Electronic Goods 504
Relative Price Without Trade / Relative Price
with Trade
Comparative Advantage and Gains from
Trade 505
One Country's Gain / The Other Country's Gain /
Just Like a New Technique
Graphical Illustration of the Gains from
Trade 506
Production Possibility Curves Without Trade /
Production Possibility Curves with Trade /
Increasing Opportunity Costs: Incomplete
Specialization
Reasons for Comparative
Advantage 509
Dynamic Comparative
Advantage 509
Factor Abundance of Countries and Factor Intensity
of Industries 510
The Leontief Paradox / Factor-Price
Equalization
Gains from Expanded
Markets 512
An Example of Gains from Trade Through Expanded
Markets 512
Effects of a Larger Market / Intraindustry Trade
versus Interindustry Trade
Measuring the Gains from Expanded
Markets 513
A Relationship Between Cost per Unit and the
Number of Firms / A Relationship Between the Price
and the Number of Firms / Equilibrium Price and
Number of Firms / Increasing the Size of the Market
/ The North American Automobile Market
The Transition to Free
Trade 520
Phaseout of Trade Restrictions 520
Trade Adjustment Assistance 520
Conclusion 521
Key Points 521 - Key Terms 522 - Questions for
Review 522 - Problems 522
E Talking Points on the Gains from
Trade 514
E David Ricardo,
1772&endash;1823 519
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Chapter
22 International Trade
Policy 524
The Effects of Trade
Restrictions 525
Tariffs 525
Quotas 526
Voluntary Restraint Agreements
(VRAs) 528
Voluntary Import Expansion (VIE) 529
Trade Barriers Related to Domestic
Policies 529
The History of Trade
Restrictions 531
U.S. Tariffs 531
From the Tariff of Abominations to Smoot-Hawley
/ From the Reciprocal Trade Agreement Act to GATT /
Antidumping Duties / The Rise of Nontariff
Barriers
How Large Are the Gains from Reducing Trade
Restrictions? 533
The Political Economy of Protectionist
Pressures 534
Arguments for Trade
Barriers 534
Restricting Supply and Strategic Trade
Policy 534
The Infant Industry Argument 535
The National Security Argument 535
Retaliation Threats 536
What If Other Countries Subsidize Their
Firms? 536
Unfair Competition from the Sun? 536
How to Reduce Trade
Barriers 537
Unilateral Disarmament 537
Multilateral Negotiations 538
The Uruguay Round / Most-Favored Nation
Policy
Regional Trading Areas 539
Trade Diversion versus Trade Creation / Free
Trade Areas versus Customs Unions
Managed Trade 540
Conclusion 541
Key Points 541 - Key Terms 542 - Questions for
Review 542 - Problems 542
E Using Economics to Explain the End of the Corn
Laws 538
Glossary 545
Index 557
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