Baumol & Blinder MACROECONOMICS (11th ed)

X	CONTENTS
Government Expenditures		34
Taxes in America 35
The Government as Redistributor			36
CONCLUSION: IT’S A MIXED ECONOMY			36
Summary	36
Key Terms	37
Discussion Questions 37
CHAPTER 3 THE FUNDAMENTAL ECONOMIC PROBLEM: SCARCITY AND CHOICE 39
ISSUE: WHAT TO DO ABOUT THE BUDGET DEFICIT?			40
SCARCITY, CHOICE, AND OPPORTUNITY COST 40
Opportunity Cost and Money Cost			41
Optimal Choice: Not Just Any Choice 42
SCARCITY AND CHOICE FOR A SINGLE FIRM				42
The Production Possibilities Frontier 43
The Principle of Increasing Costs			44
SCARCITY AND CHOICE FOR THE ENTIRE SOCIETY					45
Scarcity and Choice Elsewhere in the Economy					45
ISSUE REVISITED: COPING WITH THE BUDGET DEFICIT				46
THE CONCEPT OF EFFICIENCY		47
THE THREE COORDINATION TASKS OF ANY ECONOMY						48
SPECIALIZATION FOSTERS EFFICIENT RESOURCE ALLOCATION 48
The Wonders of the Division of Labor				48
The Amazing Principle of Comparative Advantage						49
SPECIALIZATION LEADS TO EXCHANGE			50
MARKETS, PRICES, AND THE THREE COORDINATION TASKS 50
LAST WORD: DON’T CONFUSE ENDS WITH MEANS					52

Summary 52

Key Terms 53

Test Yourself 53

Discussion Questions 53

CHAPTER 4 SUPPLY AND DEMAND: AN INITIAL LOOK 55

PUZZLE: WHAT HAPPENED TO OIL PRICES?	56
THE INVISIBLE HAND 56
DEMAND AND QUANTITY DEMANDED 57
The Demand Schedule 58
The Demand Curve 58
Shifts of the Demand Curve	58
SUPPLY AND QUANTITY SUPPLIED	61
The Supply Schedule and the Supply Curve 61
Shifts of the Supply Curve 62
SUPPLY AND DEMAND EQUILIBRIUM		64
The Law of Supply and Demand		66
EFFECTS OF DEMAND SHIFTS ON SUPPLY-DEMAND EQUILIBRIUM 66
SUPPLY SHIFTS AND SUPPLY-DEMAND EQUILIBRIUM			67
THOSE LEAPING OIL PRICES: PUZZLE RESOLVED		68
Application: Who Really Pays that Tax? 69
BATTLING THE INVISIBLE HAND: THE MARKET FIGHTS BACK 70
Restraining the Market Mechanism: Price Ceilings			70

Case Study: Rent Controls in New York City 72

Restraining the Market Mechanism: Price Floors 73

Case Study: Farm Price Supports and the Case of Sugar Prices 74

A Can of Worms 75

CONTENTS

XI

A SIMPLE BUT POWERFUL LESSON 76

Summary 76

Key Terms 77

Test Yourself 77

Discussion Questions 78

PART 2	THE MACROECONOMY: AGGREGATE SUPPLY AND DEMAND 81
CHAPTER 5 AN INTRODUCTION TO MACROECONOMICS 83
ISSUE: WHY DID GROWTH SLOW IN 2006-2007?					84
DRAWING A LINE BETWEEN MACROECONOMICS AND MICROECONOMICS									84
Aggregation and Macroeconomics					84
The Foundations of Aggregation				85
The Line of Demarcation Revisited					85
SUPPLY AND DEMAND IN MACROECONOMICS							85
A Quick Review 86
Moving to Macroeconomic Aggregates						86
Inflation 87
Recession and Unemployment			87
Economic Growth 87
GROSS DOMESTIC PRODUCT		87
Money as the Measuring Rod: Real versus Nominal GDP								88
What Gets Counted in GDP? 88
Limitations of the GDP: What GDP Is Not							90
THE ECONOMY ON A ROLLER COASTER					91
Growth, but with Fluctuations			91
Inflation and Deflation		93
The Great Depression		94
From World War II to 1973 95
The Great Stagflation, 1973–1980				96
Reaganomics and Its Aftermath			97
Clintonomics: Deficit Reduction and the “New Economy” 97
Tax Cuts and the Bush Economy				98
ISSUE REVISITED: WAS IT GEORGE BUSH’S FAULT?						99
THE PROBLEM OF MACROECONOMIC STABILIZATION: A SNEAK PREVIEW									99
Combating Unemployment 99
Combating Inflation 100
Does It Really Work? 100
Summary	101
Key Terms	102
Test Yourself 102
Discussion Questions 103
CHAPTER 6 THE GOALS OF MACROECONOMIC POLICY								105
PART 1: THE GOAL OF ECONOMIC GROWTH						106
PRODUCTIVITY GROWTH: FROM LITTLE ACORNS . . . 106
ISSUE: IS FASTER GROWTH ALWAYS BETTER? 108
THE CAPACITY TO PRODUCE: POTENTIAL GDP AND THE PRODUCTION FUNCTION 108
THE GROWTH RATE OF POTENTIAL GDP					109
ISSUE REVISITED: IS FASTER GROWTH ALWAYS BETTER?							110
PART 2: THE GOAL OF LOW UNEMPLOYMENT							111
THE HUMAN COSTS OF HIGH UNEMPLOYMENT 112
COUNTING THE UNEMPLOYED: THE OFFICIAL STATISTICS								113
TYPES OF UNEMPLOYMENT		114

XII CONTENTS

HOW MUCH EMPLOYMENT IS “FULL EMPLOYMENT”? 115
UNEMPLOYMENT INSURANCE: THE INVALUABLE CUSHION									115
PART 3: THE GOAL OF LOW INFLATION					116
INFLATION: THE MYTH AND THE REALITY						117
Inflation and Real Wages			117
The Importance of Relative Prices					119
INFLATION AS A REDISTRIBUTOR OF INCOME AND WEALTH									120
REAL VERSUS NOMINAL INTEREST RATES						120
INFLATION DISTORTS MEASUREMENTS						121
Confusing Real and Nominal Interest Rates							122
The Malfunctioning Tax System					122
OTHER COSTS OF INFLATION			122
THE COSTS OF LOW VERSUS HIGH INFLATION							123
LOW INFLATION DOES NOT NECESSARILY LEAD TO HIGH INFLATION 125
Summary 125
Key Terms	126
Test Yourself	126
Discussion Questions 127
APPENDIX: HOW STATISTICIANS MEASURE INFLATION								127
Index Numbers for Inflation				127
The Consumer Price Index				128
Using a Price Index to “Deflate” Monetary Figures								128
Using a Price Index to Measure Inflation 129
The GDP Deflator 129
Summary		130
Key Terms		130
Test Yourself 130

CHAPTER 7 ECONOMIC GROWTH: THEORY AND POLICY			133
PUZZLE: WHY DOES COLLEGE EDUCATION KEEP GETTING MORE EXPENSIVE?		134
THE THREE PILLARS OF PRODUCTIVITY GROWTH 134
Capital 135
Technology 135
Labor Quality: Education and Training	136
LEVELS, GROWTH RATES, AND THE CONVERGENCE HYPOTHESIS				136
GROWTH POLICY: ENCOURAGING CAPITAL FORMATION		138
GROWTH POLICY: IMPROVING EDUCATION AND TRAINING			140
GROWTH POLICY: SPURRING TECHNOLOGICAL CHANGE		142
THE PRODUCTIVITY SLOWDOWN AND SPEED-UP IN THE UNITED STATES 143
The Productivity Slowdown, 1973–1995	143
The Productivity Speed-up, 1995–? 144
PUZZLE RESOLVED: WHY THE RELATIVE PRICE OF COLLEGE TUITION KEEPS RISING				146
GROWTH IN THE DEVELOPING COUNTRIES	147
The Three Pillars Revisited 147
Some Special Problems of the Developing Countries		148
FROM THE LONG RUN TO THE SHORT RUN	149
Summary 149

Key Terms 150

Test Yourself 150

Discussion Questions 151

CHAPTER 8 AGGREGATE DEMAND AND THE POWERFUL CONSUMER 153

ISSUE: DEMAND MANAGEMENT AND THE ORNERY CONSUMER 154

AGGREGATE DEMAND, DOMESTIC PRODUCT, AND NATIONAL INCOME 154

CONTENTS

XIII

THE CIRCULAR FLOW OF SPENDING, PRODUCTION, AND INCOME 155
CONSUMER SPENDING AND INCOME: THE IMPORTANT RELATIONSHIP 157
THE CONSUMPTION FUNCTION AND THE MARGINAL PROPENSITY TO CONSUME 160
FACTORS THAT SHIFT THE CONSUMPTION FUNCTION				161
ISSUE REVISITED: WHY THE TAX REBATES FAILED IN 1975 AND 2001				162
THE EXTREME VARIABILITY OF INVESTMENT			164
THE DETERMINANTS OF NET EXPORTS		165
National Incomes 165
Relative Prices and Exchange Rates		165
HOW PREDICTABLE IS AGGREGATE DEMAND? 166
Summary	166
Key Terms	167
Test Yourself 167
Discussion Questions 168
APPENDIX: NATIONAL INCOME ACCOUNTING			168
Defining GDP: Exceptions to the Rules 168
GDP as the Sum of Final Goods and Services 169
GDP as the Sum of All Factor Payments			169
GDP as the Sum of Values Added		171
Summary	172
Key Terms	173
Test Yourself 173
Discussion Questions 174

CHAPTER 9		DEMAND-SIDE EQUILIBRIUM: UNEMPLOYMENT OR INFLATION? 175
ISSUE: WHY DOES THE MARKET PERMIT UNEMPLOYMENT? 176
THE MEANING OF EQUILIBRIUM GDP 176
THE MECHANICS OF INCOME DETERMINATION					178
THE AGGREGATE DEMAND CURVE			180
DEMAND-SIDE EQUILIBRIUM AND FULL EMPLOYMENT							182
THE COORDINATION OF SAVING AND INVESTMENT						183
CHANGES ON THE DEMAND SIDE: MULTIPLIER ANALYSIS							185
The Magic of the Multiplier			185
Demystifying the Multiplier: How It Works					186
Algebraic Statement of the Multiplier				187
THE MULTIPLIER IS A GENERAL CONCEPT				189
THE MULTIPLIER AND THE AGGREGATE DEMAND CURVE							190
Summary	191
Key Terms	192
Test Yourself		192
Discussion Questions 193
APPENDIX A: THE SIMPLE ALGEBRA OF INCOME DETERMINATION AND THE MULTIPLIER 193
Test Yourself 194
Discussion Questions 194
APPENDIX B: THE MULTIPLIER WITH VARIABLE IMPORTS							194
Summary		197
Test Yourself 197
Discussion Question 197
CHAPTER 10		BRINGING IN THE SUPPLY-SIDE: UNEMPLOYMENT AND INFLATION? 199
PUZZLE: WHAT CAUSES STAGFLATION? 200
THE AGGREGATE SUPPLY CURVE			200
Why the Aggregate Supply Curve Slopes Upward						200
Shifts of the Agregate Supply Curve				201

XIV CONTENTS

EQUILIBRIUM OF AGGREGATE DEMAND AND SUPPLY					203
INFLATION AND THE MULTIPLIER 204
RECESSIONARY AND INFLATIONARY GAPS REVISITED					205
ADJUSTING TO A RECESSIONARY GAP: DEFLATION OR UNEMPLOYMENT? 207
Why Nominal Wages and Prices Won’t Fall (Easily)					207
Does the Economy Have a Self-Correcting Mechanism? 208
An example from Recent History: Deflation in Japan					209
ADJUSTING TO AN INFLATIONARY GAP: INFLATION				209
Demand Inflation and Stagflation			210
A U.S. Example 210
STAGFLATION FROM A SUPPLY SHOCK			211
APPLYING THE MODEL TO A GROWING ECONOMY				212
Demand-Side Fluctuations		213
Supply-Side Fluctuations		214
PUZZLE RESOLVED: EXPLAINING STAGFLATION			216
A ROLE FOR STABILIZATION POLICY			216
Summary	216
Key Terms	217

Test Yourself 217

Discussion Questions 218

PART 3		FISCAL AND MONETARY POLICY							219
CHAPTER 11		MANAGING AGGREGATE DEMAND: FISCAL POLICY 221
ISSUE: AGGREGATE DEMAND, AGGREGATE SUPPLY, AND THE CAMPAIGN OF 2008									222
INCOME TAXES AND THE CONSUMPTION SCHEDULE								222
THE MULTIPLIER REVISITED				223
The Tax Multiplier			223
Income Taxes and the Multiplier						224
Automatic Stabilizers				225
Government Transfer Payments						225
ISSUE REVISITED: THE 2008 DEBATE OVER TAXES AND SPENDING								226
PLANNING EXPANSIONARY FISCAL POLICY							226
PLANNING CONTRACTIONARY FISCAL POLICY 227
THE CHOICE BETWEEN SPENDING POLICY AND TAX POLICY									227
ISSUE REDUX: DEMOCRATS VERSUS REPUBLICANS 228
SOME HARSH REALITIES			228
THE IDEA BEHIND SUPPLY-SIDE TAX CUTS							229
Some Flies in the Ointment					230
ISSUE: THE PARTISAN DEBATE ONCE MORE					231
Toward an Assessment of Supply-Side Economics								232
Summary	233
Key Terms	233
Test Yourself 234
Discussion Questions 234
| APPENDIX A | GRAPHICAL TREATMENT OF TAXES AND FISCAL POLICY										235
MULTIPLIERS FOR TAX POLICY						237
Summary		237
Key Terms		237
Test Yourself 238
Discussion Questions			238
| APPENDIX B | ALGEBRAIC TREATMENT OF TAXES AND FISCAL POLICY										238

Test Yourself 240

CONTENTS

XV

CHAPTER 12 MONEY AND THE BANKING SYSTEM					241
ISSUE: WHY ARE BANKS SO HEAVILY REGULATED?				242
THE NATURE OF MONEY		242
Barter versus Monetary Exchange				243
The Conceptual Definition of Money 244
What Serves as Money? 244
HOW THE QUANTITY OF MONEY IS MEASURED 246
M1	246
M2	247
Other Definitions of the Money Supply 247
THE BANKING SYSTEM		248
How Banking Began 248
Principles of Bank Management: Profits versus Safety 250
Bank Regulation		250
THE ORIGINS OF THE MONEY SUPPLY				251
How Bankers Keep Books			251
BANKS AND MONEY CREATION			252
The Limits to Money Creation by a Single Bank					252
Multiple Money Creation by a Series of Banks					254

The Process in Reverse: Multiple Contractions of the Money Supply 256

WHY THE MONEY-CREATION FORMULA IS OVERSIMPLIFIED 258

THE NEED FOR MONETARY POLICY 259

Summary 259

Key Terms 260

Test Yourself 260

Discussion Questions 260

CHAPTER 13 MANAGING AGGREGATE DEMAND: MONETARY POLICY						261
ISSUE: JUST WHY IS BEN BERNANKE SO IMPORTANT? 262
MONEY AND INCOME: THE IMPORTANT DIFFERENCE 262
AMERICA’S CENTRAL BANK: THE FEDERAL RESERVE SYSTEM					263
Origins and Structure 263
Central Bank Independence		264
IMPLEMENTING MONETARY POLICY: OPEN-MARKET OPERATIONS 265
The Market for Bank Reserves			265
The Mechanics of an Open-Market Operation 266
Open-Market Operations, Bond Prices, and Interest Rates					268
OTHER METHODS OF MONETARY CONTROL				268
Lending to Banks 269
Changing Reserve Requirements 270
HOW MONETARY POLICY WORKS		270
Investment and Interest Rates			271
Monetary Policy and Total Expenditure				271
MONEY AND THE PRICE LEVEL IN THE KEYNESIAN MODEL 272
Application: Why the Aggregate Demand Curve Slopes Downward						273
FROM MODELS TO POLICY DEBATES			274
Summary	274
Key Terms	275

Test Yourself 275

Discussion Questions 276

CHAPTER 14 THE DEBATE OVER MONETARY AND FISCAL POLICY 277

ISSUE: SHOULD WE FORSAKE STABILIZATION POLICY? 278

XVI CONTENTS

VELOCITY AND THE QUANTITY THEORY OF MONEY	278
Some Determinants of Velocity 280
Monetarism: The Quantity Theory Modernized	281
FISCAL POLICY, INTEREST RATES, AND VELOCITY	281
Application: The Multiplier Formula Revisited	282

Application: The Government Budget and Investment 283

DEBATE: SHOULD WE RELY ON FISCAL OR MONETARY POLICY? 283

DEBATE: SHOULD THE FED CONTROL THE MONEY SUPPLY OR INTEREST RATES? 284

Two Imperfect Alternatives 286

What Has the Fed Actually Done? 286

DEBATE: THE SHAPE OF THE AGGREGATE SUPPLY CURVE 287 DEBATE: SHOULD THE GOVERNMENT INTERVENE? 289

Lags and the Rules-versus-Discretion Debate 291

DIMENSIONS OF THE RULES-VERSUS-DISCRETION DEBATE 291

How Fast Does the Economy’s Self-Correcting Mechanism Work? 291 How Long Are the Lags in Stabilization Policy? 292

How Accurate Are Economic Forcasts? 292 The Size of Government 292

Uncertainties Caused by Government Policy 293 A Political Business Cycle? 293

ISSUE REVISITED: WHAT SHOULD BE DONE? 295

Summary 295

Key Terms 296 Test Yourself 296

Discussion Questions 297

CHAPTER 15 BUDGET DEFICITS IN THE SHORT AND LONG RUN 299

ISSUE: IS THE FEDERAL GOVERNMENT BUDGET DEFICIT TOO LARGE?				300
SHOULD THE BUDGET BE BALANCED? THE SHORT RUN 300
The Importance of the Policy Mix 301
SURPLUSES AND DEFICITS: THE LONG RUN 301
DEFICITS AND DEBT: TERMINOLOGY AND FACTS 303
Some Facts about the National Debt 303
INTERPRETING THE BUDGET DEFICIT OR SURPLUS				305
The Structural Deficit or Surplus		305
On-Budget versus Off-Budget Surpluses			307
Conclusion: What Happened after 1981? 307
WHY IS THE NATIONAL DEBT CONSIDERED A BURDEN? 307
BUDGET DEFICITS AND INFLATION		308
The Monetization Issue 309
DEBT, INTEREST RATES, AND CROWDING OUT			310
The Bottom Line 311
THE MAIN BURDEN OF THE NATIONAL DEBT: SLOWER GROWTH					311
ISSUE REVISITED: IS THE BUDGET DEFICIT TOO LARGE?			313
THE ECONOMICS AND POLITICS OF THE U.S. BUDGET DEFICIT					314
Summary	315
Key Terms	315

Test Yourself 316

Discussion Questions 316

CHAPTER 16 THE TRADE-OFF BETWEEN INFLATION AND UNEMPLOYMENT 317

ISSUE: IS THE TRADE-OFF BETWEEN INFLATION AND UNEMPLOYMENT A RELIC OF THE PAST? 318

DEMAND-SIDE INFLATION VERSUS SUPPLY-SIDE INFLATION: A REVIEW	318
ORIGINS OF THE PHILLIPS CURVE 319
SUPPLY-SIDE INFLATION AND THE COLLAPSE OF THE PHILLIPS CURVE	321

CONTENTS

XVII

Explaining the Fabulous 1990s	321
ISSUE RESOLVED: WHY INFLATION AND UNEMPLOYMENT BOTH DECLINED				322
WHAT THE PHILLIPS CURVE IS NOT	322
FIGHTING UNEMPLOYMENT WITH FISCAL AND MONETARY POLICY					324
WHAT SHOULD BE DONE? 325
The Costs of Inflation and Unemployment			325
The Slope of the (Short-Run) Phillips Curve			325
The Efficiency of the Economy’s Self-Correcting Mechanism 325
INFLATIONARY EXPECTATIONS AND THE PHILLIPS CURVE				326
THE THEORY OF RATIONAL EXPECTATIONS		328
What Are Rational Expectations? 328
Rational Expectations and the Trade-Off		329
An Evaluation 329
WHY ECONOMISTS (AND POLITICIANS) DISAGREE 330
THE DILEMMA OF DEMAND MANAGEMENT		331
ATTEMPTS TO REDUCE THE NATURAL RATE OF UNEMPLOYMENT					331
INDEXING 332

Summary 333

Key Terms 334

Test Yourself 334

Discussion Questions 334

PART 4		THE UNITED STATES IN THE WORLD ECONOMY 337
CHAPTER 17		INTERNATIONAL TRADE AND COMPARATIVE ADVANTAGE					339
ISSUE: HOW CAN AMERICANS COMPETE WITH “CHEAP FOREIGN LABOR”? 340
WHY TRADE?		341
Mutual Gains from Trade 341
INTERNATIONAL VERSUS INTRANATIONAL TRADE					342
Political Factors in International Trade			342
The Many Currencies Involved in International Trade 342
Impediments to Mobility of Labor and Capital					342
THE LAW OF COMPARATIVE ADVANTAGE			343
The Arithmetic of Comparative Advantage				343
The Graphics of Comparative Advantage				344
Must Specialization Be Complete? 347
ISSUE RESOLVED: COMPARATIVE ADVANTAGE EXPOSES THE “CHEAP FOREIGN LABOR” FALLACY							347
TARIFFS, QUOTAS, AND OTHER INTERFERENCES WITH TRADE						348
Tariffs versus Quotas 349
WHY INHIBIT TRADE? 350
Gaining a Price Advantage for Domestic Firms					350
Protecting Particular Industries 350
National Defense and Other Noneconomic Considerations						351
The Infant-Industry Argument 352
Strategic Trade Policy 353
CAN CHEAP IMPORTS HURT A COUNTRY? 353
A LAST LOOK AT THE “CHEAP FOREIGN LABOR” ARGUMENT 354
Summary	356
Key Terms	356
Test Yourself		357
Discussion Questions 357
| APPENDIX | SUPPLY, DEMAND, AND PRICING IN WORLD TRADE 358
HOW TARIFFS AND QUOTAS WORK 359
Summary		360

Test Yourself 360

XVIII CONTENTS

CHAPTER 18 THE INTERNATIONAL MONETARY SYSTEM: ORDER OR DISORDER? 361

PUZZLE: WHY HAS THE DOLLAR SAGGED? 362
WHAT ARE EXCHANGE RATES? 362
EXCHANGE RATE DETERMINATION IN A FREE MARKET	363
Interest Rates and Exchange Rates: The Short Run 365
Economic Activity and Exchange Rates: The Medium Run 366
The Purchasing-Power Parity Theory: The Long Run	366
Market Determination of Exchange Rates: Summary	368

WHEN GOVERNMENTS FIX EXCHANGE RATES: THE BALANCE OF PAYMENTS 369

A BIT OF HISTORY: THE GOLD STANDARD AND THE BRETTON WOODS SYSTEM 370

The Classical Gold Standard	371
The Bretton Woods System	371

ADJUSTMENT MECHANISMS UNDER FIXED EXCHANGE RATES 372 WHY TRY TO FIX EXCHANGE RATES? 372

THE CURRENT “NONSYSTEM” 373

The Role of the IMF	374
The Volatile Dollar	374
The Birth of the Euro	375

PUZZLE RESOLVED: WHY THE DOLLAR ROSE AND THEN FELL 376

Summary 377

Key Terms 377

Test Yourself 378

Discussion Questions 378

CHAPTER 19 EXCHANGE RATES AND THE MACROECONOMY					379
ISSUE: SHOULD THE U.S. GOVERNMENT TRY TO STOP THE DOLLAR FROM FALLING?					380
INTERNATIONAL TRADE, EXCHANGE RATES, AND AGGREGATE DEMAND 380
Relative Prices, Exports, and Imports		381
The Effects of Changes in Exchange Rates 381
AGGREGATE SUPPLY IN AN OPEN ECONOMY		382
THE MACROECONOMIC EFFECTS OF EXCHANGE RATES 383
Interest Rates and International Capital Flows			384
FISCAL AND MONETARY POLICIES IN AN OPEN ECONOMY				384
Fiscal Policy Revisited 384
Monetary Policy Revisited	386
INTERNATIONAL ASPECTS OF DEFICIT REDUCTION			386
The Loose Link between the Budget Deficit and the Trade Deficit 387
SHOULD WE WORRY ABOUT THE TRADE DEFICIT? 388
ON CURING THE TRADE DEFICIT	388
Change the Mix of Fiscal and Monetary Policy			388
More Rapid Economic Growth Abroad		389
Raise Domestic Saving or Reduce Domestic Investment				389
Protectionism 389
CONCLUSION: NO NATION IS AN ISLAND 390

ISSUE REVISITED: SHOULD THE UNITED STATES LET THE DOLLAR FALL? 391

Summary 391

Key Terms 392

Test Yourself 392

Discussion Questions 392

| APPENDIX | Answers to Odd-Numbered Test Yourself Questions 393

GLOSSARY 405

INDEX 413

PREFACE

A s usual, when preparing a new edition, we have made many small changes to improve clarity of exposition and to update the text both for recent economics events and for relevant advances in the literature. But this time we have focused on one particular addition that will, so far as we have been able to find out, differentiate this book

from all other introductory texts.

We have included in the eleventh edition a substantial discussion of the role of the entrepreneurs and of the microtheory of their activities, their pricing and their earnings, and the implications for economic growth. Several studies of the place of the entrepreneur in economics textbooks (including earlier editions of this one) have all reached the same conclusion: that entrepreneurs are either completely invisible or are virtually so. Indeed, in a substantial set of the textbooks the word entrepreneur does not even appear in the index.

Now, this omission should appear strange because entrepreneurs are often classified as one of the four factors of production—but the only one to which no chapter is devoted. More than that, it seems universally recognized by economists that economic growth is the prime contributor to the general welfare and that more than 80 percent of the current income of the average American was contributed by growth in the past century alone. Moreover, it is clear that, even though entrepreneurs did not produce this growth by themselves, much if not most of this historically unprecedented achievement would not have occurred without them. Yet, in the textbooks, they have been the invisible men and women.

This eleventh edition is the product of nearly 30 years of the existence and modification of this book. In the responses to a survey of faculty users, it became clear that a number of chapters were generally not covered by instructors for lack of time, although the material is of considerable interest to students and is not—or need not be—technically demanding. So we simplified several such chapters further—notably Chapter 9 on the stock and bond markets, Chapter 13 on regulation and antitrust, Chapter 17 on environmental economics, and Chapter 21 on poverty and inequality—to make it practical for an instructor to assign any or all of them to the students for reading entirely by themselves.

In the macroeconomic portions of the book, we try to make the links between the short run and the long run clearer and more explicit with each passing edition. For the eleventh edition, we have also added much new material on the problems in the subprime mortgage markets, the ensuing financial crisis and possible recession, and several economic issues in the 2008 presidential campaign—even though, at this writing, no one yet knows who the Democratic nominee will be! As is our practice, these new materials are scattered over many chapters of the text, so as to locate the discussions of current events and policy close to the places where the relevant principles are taught. This edition also adds a bit more material on China; sadly, the experience in Zimbabwe has provided a contemporary example of hyperinflation.

We ended this section of the preface to the tenth edition by singling out the critical contributions of one colleague and friend of amazingly long duration. We now repeat some of our words about the late Sue Anne Batey Blackman, who worked closely with us through 10 editions of this book; for all practical purposes, she had become a coauthor. Indeed, the chapter on environmental matters is now largely her product. Her creative mind guided our efforts; her eagle eyes caught our errors; and her stimulating and pleasant company kept us going. Perhaps most important, we loved and valued her most profoundly. Unfortunately, she has been taken from us much too young. Our children and grandchildren will understand and surely support our decision, for once, not to dedicate this edition of the book to them, but rather to our precious lost friend, Sue Anne.

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