Brief Principles of Macroeconomics

by Mankiw, N. Gregory

• ISBN13: 9780324171907
• ISBN10: 0324171900
• Edition: 3rd
• Format: Paperback
• Copyright: 2003-02-21
• Publisher: South-Western College Pub

Summary

When the Mankiw text was first published, The Economist wrote, "Mr. Mankiw's book sets a new standard of clarity and liveliness." USA Today called it "a grand success." Since then, the book has been translated into more than a dozen languages and has been used at hundreds of schools to introduce economics to hundreds of thousands of students around the world. South-Western is now pleased to bring you this third edition. To help you in your study, South-Western has prepared a variety of student resources to accompany the book. These supplements test your understanding and provide you with opportunities for practice and research in economics. Book jacket.

Table of Contents

Preface: To the Instructor	v
Preface: To the Student	xxii
PART 1 INTRODUCTION	1	(60)
Ten Principles of Economics	3	(16)
How People Make Decisions	4	(4)
Principle #1: People Face Tradeoffs	4	(1)
Principle #2: The Cost of Something Is What You Give Up to Get It	5	(1)
Principle #3: Rational People Think at the Margin	6	(1)
Principle #4: People Respond to Incentives	7	(1)
How People Interact	8	(3)
Principle #5: Trade Can Make Everyone Better Off	8	(1)
Principle #6: Markets Are Usually a Good Way to Organize Economic Activity	9	(1)
FYI: Adam Smith and the Invisible Hand
Principle #7: Governments Can Sometimes Improve Market Outcomes	10	(1)
How the Economy as a Whole Works	11	(4)
Principle #8: A Country's Standard of Living Depends on Its Ability to Produce Goods and Services	11	(1)
Principle #9: Prices Rise When the Government Prints Too Much Money	12	(1)
Principle #10: Society Faces a Short-Run Tradeoff between Inflation and Unemployment	13	(2)
FYI: How to Read This Book
Conclusion	15	(1)
Summary	15	(1)
Key Concepts	16	(1)
Questions for Review	16	(1)
Problems and Applications	16	(3)
Thinking Like an Economist	19	(26)
The Economist as Scientist	20	(8)
The Scientific Method: Observation, Theory, and More Observation	21	(1)
The Role of Assumptions	21	(1)
Economic Models	22	(1)
Our First Model: The Circular-Flow Diagram	23	(1)
Our Second Model: The Production Possibilities Frontier	24	(2)
Microeconomics and Macroeconomics	26	(2)
The Economist as Policy Adviser	28	(2)
Positive versus Normative Analysis	28	(1)
Economists in Washington	29	(1)
Why Economists Disagree	30	(2)
Differences in Scientific Judgments	30	(1)
Differences in Values	31	(1)
Perception versus Reality	31	(1)
Let's Get Going	32	(1)
Summary	33	(1)
Key Concepts	33	(1)
Questions for Review	33	(1)
Problems and Applications	34	(2)
Appendix Graphing: A Brief Review	36	(9)
Graphs of a Single Variable	36	(1)
Graphs of Two Variables: The Coordinate System	36	(1)
Curves in the Coordinate System	37	(4)
Slope	41	(1)
Cause and Effect	42	(3)
Interdependence and the Gains from Trade	45	(16)
A Parable for the Modern Economy	46	(4)
Production Possibilities	46	(2)
Specialization and Trade	48	(2)
The Principle of Comparative Advantage	50	(4)
Absolute Advantage	51	(1)
Opportunity Cost and Comparative Advantage	51	(1)
Comparative Advantage and Trade	52	(2)
FYI: The Legacy of Adam Smith and David Ricardo
Applications of Comparative Advantage	54	(2)
Should Tiger Woods Mow His Own Lawn?	54	(2)
Should the United States Trade with Other Countries?	56	(1)
In the News: Who Has a Comparative Advantage in Producing Lamb?
Conclusion	56	(1)
Summary	57	(1)
Key Concepts	57	(1)
Questions for Review	57	(1)
Problems and Applications	57	(4)
PART 2 SUPPLY AND DEMAND I: HOW MARKETS WORK	61	(28)
The Market Forces of Supply and Demand	63	(26)
Markets and Competition	64	(1)
Competitive Markets	64	(1)
Competition: Perfect and Otherwise	64	(1)
Demand	65	(6)
The Demand Curve: The Relationship between Price and Quantity Demanded	65	(1)
Market Demand versus Individual Demand	66	(1)
Shifts in the Demand Curve	67	(4)
Case Study: Two Ways to Reduce the Quantity of Smoking Demanded
Supply	71	(4)
The Supply Curve: The Relationship between Price and Quantity Supplied	71	(1)
Market Supply versus Individual Supply	72	(1)
Shifts in the Supply Curve	73	(2)
Supply and Demand Together	75	(8)
Equilibrium	75	(2)
Three Steps to Analyzing Changes in Equilibrium	77	(6)
In the News: Mother Nature Shifts the Supply Curve
Conclusion: How Prices Allocate Resources	83	(1)
Summary	84	(1)
Key Concepts	85	(1)
Questions for Review	85	(1)
Problems and Applications	86	(3)
PART 3 THE DATA OF MACROECONOMICS	89	(38)
Measuring a Nation's Income	91	(20)
The Economy's Income and Expenditure	92	(2)
The Measurement of Gross Domestic Product	94	(3)
``GDP Is the Market Value . . .''	94	(1)
``. . . Of All . . .''	94	(1)
``. . . Final . . .''	95	(1)
``. . . Goods and Services . . .''	95	(1)
``. . . Produced . . .''	95	(1)
``. . . Within a Country . . .''	95	(1)
``. . . In a Given Period of Time''	95	(2)
FYI: Other Measures of Income
The Components of GDP	97	(2)
Consumption	97	(1)
Investment	97	(1)
Government Purchases	98	(1)
Net Exports	98	(1)
Case Study: The Components of U.S. GDP
Real versus Nominal GDP	99	(5)
A Numerical Example	100	(1)
The GDP Deflator	101	(3)
Case Study: Real GDP over Recent History
In the News: GDP Lightens Up
GDP and Economic Well-Being	104	(3)
Case Study: International Differences in GDP and the Quality of Life
Case Study: Who Wins at the Olympics?
Conclusion	107	(1)
Summary	107	(1)
Key Concepts	108	(1)
Questions for Review	108	(1)
Problems and Applications	108	(3)
Measuring the Cost of Living	111	(16)
The Consumer Price Index	112	(7)
How the Consumer Price Index Is Calculated	112	(3)
FYI: What Is in the CPI's Basket?
In the News: Shopping for the CPI
Problems in Measuring the Cost of Living	115	(3)
The GDP Deflator versus the Consumer Price Index	118	(1)
Correcting Economic Variables for the Effects of Inflation	119	(4)
Dollar Figures from Different Times	119	(1)
Case Study: Mr. Index Goes to Hollywood
Indexation	120	(1)
Real and Nominal Interest Rates	121	(2)
Conclusion	123	(1)
Summary	123	(1)
Key Concepts	124	(1)
Questions for Review	124	(1)
Problems and Applications	124	(3)
PART 4 THE REAL ECONOMY IN THE LONG RUN	127	(90)
Production and Growth	129	(24)
Economic Growth around the World	130	(2)
FYI: Are You Richer Than the Richest American?
Productivity: Its Role and Determinants	132	(5)
Why Productivity Is So Important	132	(1)
How Productivity Is Determined	133	(4)
FYI: The Production Function
Case Study: Are Natural Resources a Limit to Growth?
Economic Growth and Public Policy	137	(13)
The Importance of Saving and Investment	137	(1)
Diminishing Returns and the Catch-Up Effect	138	(1)
Investment from Abroad	139	(2)
Education	141	(1)
In the News: Promoting Human Capital
Property Rights and Political Stability	142	(1)
Free Trade	143	(1)
Research and Development	144	(2)
Case Study: The Productivity Slowdown and Speedup
Population Growth	146	(4)
In the News: A Solution to Africa's Problems
Conclusion: The Importance of Long-Run Growth	150	(1)
Summary	150	(1)
Key Concepts	150	(1)
Questions for Review	151	(1)
Problems and Applications	151	(2)
Saving, Investment, and the Financial System	153	(22)
Financial Institutions in the U.S. Economy	154	(6)
Financial Markets	154	(2)
FYI: How to Read the Newspaper's Stock Tables Financial Intermediaries	156	(3)
Summing Up	159	(1)
In the News: Finance in China
Saving and Investment in the National Income Accounts	160	(2)
Some Important Identities	160	(2)
The Meaning of Saving and Investment	162	(1)
The Market for Loanable Funds	162	(9)
Supply and Demand for Loanable Funds	163	(2)
Policy 1: Saving Incentives	165	(1)
Policy 2: Investment Incentives	166	(1)
Policy 3: Government Budget Deficits and Surpluses	167	(4)
Case Study: The History of U.S. Government Debt
Conclusion	171	(1)
Summary	172	(1)
Key Concepts	172	(1)
Questions for Review	172	(1)
Problems and Applications	173	(2)
The Basic Tools of Finance	175	(16)
Present Value: Measuring the Time Value of Money	176	(2)
FYI: The Magic of Compounding and the Rule of 70
Managing Risk	178	(5)
Risk Aversion	178	(1)
The Markets for Insurance	179	(1)
Diversification of Idiosyncratic Risk	180	(2)
The Tradeoff between Risk and Return	182	(1)
Asset Valuation	183	(4)
Fundamental Analysis	183	(1)
The Efficient Markets Hypothesis	184	(1)
Case Study: Random Walks and Index Funds Market Irrationality	185	(2)
In the News: Some Lessons from Enron
Conclusion	187	(1)
Summary	188	(1)
Key Concepts	188	(1)
Questions for Review	189	(1)
Problems and Applications	189	(2)
Unemployment and Its Natural Rate	191	(26)
Identifying Unemployment	192	(7)
How Is Unemployment Measured?	192	(5)
Case Study: Labor-Force Participation of Men and Women in the U.S. Economy
Does the Unemployment Rate Measure What We Want It To?	197	(1)
How Long Are the Unemployed without Work?	197	(2)
Why Are There Always Some People Unemployed?	199	(1)
Job Search	199	(4)
Why Some Frictional Unemployment Is Inevitable	200	(1)
Public Policy and Job Search	200	(1)
Unemployment Insurance	201	(2)
In the News: German Unemployment
Minimum-Wage Laws	203	(2)
Unions and Collective Bargaining	205	(3)
The Economics of Unions	205	(1)
Are Unions Good or Bad for the Economy?	206	(2)
In the News: Should You Join a Union?
The Theory of Efficiency Wages	208	(4)
Worker Health	209	(1)
Worker Turnover	209	(1)
Worker Effort	209	(1)
Worker Quality	210	(2)
Case Study: Henry Ford and the Very Generous $5-a-Day Wage
Conclusion	212	(1)
Summary	212	(1)
Key Concepts	213	(1)
Questions for Review	213	(1)
Problems and Applications	213	(4)
PART 5 MONEY AND PRICES IN THE LONG RUN	217	(48)
The Monetary System	219	(18)
The Meaning of Money	220	(6)
The Functions of Money	220	(1)
The Kinds of Money	221	(2)
In the News: Money on the Island of Yap
Money in the U.S. Economy	223	(3)
FYI: Credit Cards, Debit Cards, and Money
Case Study: Where Is All the Currency?
The Federal Reserve System	226	(1)
The Fed's Organization	226	(1)
The Federal Open Market Committee	226	(1)
Banks and the Money Supply	227	(7)
The Simple Case of 100-Percent-Reserve Banking	228	(1)
Money Creation with Fractional-Reserve Banking	228	(1)
The Money Multiplier	229	(2)
The Fed's Tools of Monetary Control	231	(1)
Problems in Controlling the Money Supply	232	(2)
Case Study: Bank Runs and the Money Supply
Conclusion	234	(1)
Summary	234	(1)
Key Concepts	235	(1)
Questions for Review	235	(1)
Problems and Applications	235	(2)
Money Growth and Inflation	237	(28)
The Classical Theory of Inflation	238	(13)
The Level of Prices and the Value of Money	239	(1)
Money Supply, Money Demand, and Monetary Equilibrium	239	(2)
The Effects of a Monetary Injection	241	(1)
A Brief Look at the Adjustment Process	242	(1)
The Classical Dichotomy and Monetary Neutrality	243	(2)
Velocity and the Quantity Equation	245	(3)
Case Study: Money and Prices during Four Hyperinflations
The Inflation Tax	248	(1)
In the News: Russia Turns to the Inflation Tax
The Fisher Effect	249	(2)
The Costs of Inflation	251	(10)
A Fall in Purchasing Power? The Inflation Fallacy	251	(1)
Shoeleather Costs	252	(1)
Menu Costs	253	(1)
Relative-Price Variability and the Misallocation of Resources	253	(1)
Inflation-Induced Tax Distortions	254	(1)
Confusion and Inconvenience	255	(1)
In the News: The Hyperinflation in Serbia
A Special Cost of Unexpected Inflation: Arbitrary Redistributions of Wealth	256	(5)
Case Study: The Wizard of Oz and the Free-Silver Debate
In the News: How to Protect Your Savings from Inflation
Conclusion	261	(1)
Summary	261	(1)
Key Concepts	262	(1)
Questions for Review	262	(1)
Problems and Applications	262	(3)
PART 6 THE MACROECONOMICS OF OPEN ECONOMIES	265	(48)
Open-Economy Macroeconomics: Basic Concepts	267	(22)
The International Flows of Goods and Capital	268	(9)
The Flow of Goods: Exports, Imports, and Net Exports	268	(2)
Case Study: The Increasing Openness of the U.S. Economy
The Flow of Financial Resources: Net Capital Outflow	270	(1)
In the News: How the Chinese Help American Home Buyers
The Equality of Net Exports and Net Capital Outflow	271	(2)
Saving, Investment, and Their Relationship to the International Flows	273	(1)
Summing Up	274	(3)
Case Study: Is the U.S. Trade Deficit a National Problem?
The Prices for International Transactions: Real and Nominal Exchange Rates	277	(3)
Nominal Exchange Rates	277	(1)
Real Exchange Rates	278	(2)
FYI: The Euro
A First Theory of Exchange-Rate Determination: Purchasing-Power Parity	280	(5)
The Basic Logic of Purchasing-Power Parity	281	(1)
Implications of Purchasing-Power Parity	281	(3)
Case Study: The Nominal Exchange Rate during a Hyperinflation
Limitations of Purchasing-Power Parity	284	(1)
Case Study: The Hamburger Standard
Conclusion	285	(1)
Summary	286	(1)
Key Concepts	286	(1)
Questions for Review	286	(1)
Problems and Applications	286	(3)
A Macroeconomic Theory of the Open Economy	289	(24)
Supply and Demand for Loanable Funds and for Foreign-Currency Exchange	290	(5)
The Market for Loanable Funds	290	(2)
The Market for Foreign-Currency Exchange	292	(3)
FYI: Purchasing-Power Parity as a Special Case
Equilibrium in the Open Economy	295	(3)
Net Capital Outflow: The Link between the Two Markets	295	(1)
Simultaneous Equilibrium in Two Markets	296	(2)
How Policies and Events Affect an Open Economy	298	(9)
Government Budget Deficits	298	(2)
Trade Policy	300	(4)
Political Instability and Capital Flight	304	(3)
In the News: The U.S. Trade Deficit
Conclusion	307	(1)
Summary	307	(1)
Key Concepts	308	(1)
Questions for Review	308	(1)
Problems and Applications	309	(4)
PART 7 SHORT-RUN ECONOMIC FLUCTUATIONS	313	(88)
Aggregate Demand and Aggregate Supply	315	(32)
Three Key Facts about Economic Fluctuations	316	(3)
Fact 1: Economic Fluctuations Are Irregular and Unpredictable	316	(1)
Fact 2: Most Macroeconomic Quantities Fluctuate Together	316	(3)
Fact 3: As Output Falls, Unemployment Rises	319	(1)
In the News: The Trash Indicator
Explaining Short-Run Economic Fluctuations	319	(2)
How the Short Run Differs from the Long Run	319	(1)
The Basic Model of Economic Fluctuations	320	(1)
The Aggregate-Demand Curve	321	(5)
Why the Aggregate-Demand Curve Slopes Downward	321	(2)
Why the Aggregate-Demand Curve Might Shift	323	(3)
The Aggregate-Supply Curve	326	(8)
Why the Aggregate-Supply Curve Is Vertical in the Long Run	326	(1)
Why the Long-Run Aggregate-Supply Curve Might Shift	327	(2)
A New Way to Depict Long-Run Growth and Inflation	329	(1)
Why the Aggregate-Supply Curve Slopes Upward in the Short Run	330	(2)
Why the Short-Run Aggregate-Supply Curve Might Shift	332	(2)
Two Causes of Economic Fluctuations	334	(9)
The Effects of a Shift in Aggregate Demand	334	(5)
Case Study: Two Big Shifts in Aggregate Demand: The Great Depression and World War II
Case Study: The Recession of 2001
The Effects of a Shift in Aggregate Supply	339	(4)
Case Study: Oil and the Economy
FYI: The Origins of Aggregate Demand and Aggregate Supply
Conclusion	343	(1)
Summary	343	(1)
Key Concepts	344	(1)
Questions for Review	344	(1)
Problems and Applications	345	(2)
The Influence of Monetary and Fiscal Policy on Aggregate Demand	347	(26)
How Monetary Policy Influences Aggregate Demand	348	(9)
The Theory of Liquidity Preference	349	(3)
FYI: Interest Rates in the Long Run and the Short Run
The Downward Slope of the Aggregate-Demand Curve	352	(1)
Changes in the Money Supply	353	(2)
The Role of Interest-Rate Targets in Fed Policy	355	(2)
Case Study: Why the Fed Watches the Stock Market (and Vice Versa)
How Fiscal Policy Influences Aggregate Demand	357	(6)
Changes in Government Purchases	357	(1)
The Multiplier Effect	357	(1)
A Formula for the Spending Multiplier	358	(2)
Other Applications of the Multiplier Effect	360	(1)
The Crowding-Out Effect	360	(1)
Changes in Taxes	361	(2)
FYI: How Fiscal Policy Might Affect Aggregate Supply
Using Policy to Stabilize the Economy	363	(5)
The Case for Active Stabilization Policy	363	(2)
Case Study: Keynesians in the White House
The Case against Active Stabilization Policy	365	(1)
Automatic Stabilizers	366	(2)
In the News: The Independence of the Federal Reserve
Conclusion	368	(1)
Summary	369	(1)
Key Concepts	369	(1)
Questions for Review	369	(1)
Problems and Applications	370	(3)
The Short-Run Tradeoff between Inflation and Unemployment	373	(28)
The Phillips Curve	374	(3)
Origins of the Phillips Curve	374	(1)
Aggregate Demand, Aggregate Supply, and the Phillips Curve	375	(2)
Shifts in the Phillips Curve: The Role of Expectations	377	(7)
The Long-Run Phillips Curve	377	(3)
Expectations and the Short-Run Phillips Curve	380	(2)
The Natural Experiment for the Natural-Rate Hypothesis	382	(2)
In the News: The Benefits of Low Expected Inflation
Shifts in the Phillips Curve: The Role of Supply Shocks	384	(4)
The Cost of Reducing Inflation	388	(8)
The Sacrifice Ratio	388	(1)
Rational Expectations and the Possibility of Costless Disinflation	389	(1)
The Volcker Disinflation	390	(2)
The Greenspan Era	392	(4)
Case Study: Why Were Inflation and Unemployment So Low at the End of the 1990s?
In the News: The Case for Inflation Targeting
Conclusion	396	(1)
Summary	396	(1)
Key Concepts	397	(1)
Questions for Review	397	(1)
Problems and Applications	397	(4)
PART 8 FINAL THOUGHTS	401	(20)
Five Debates Over Macroeconomic Policy	403	(18)
Should Monetary and Fiscal Policymakers Try to Stabilize the Economy?	404	(2)
Pro: Policymakers Should Try to Stabilize the Economy	404	(1)
Con: Policymakers Should Not Try to Stabilize the Economy	404	(2)
Should Monetary Policy Be Made by Rule Rather Than by Discretion?	406	(3)
Pro: Monetary Policy Should Be Made by Rule	406	(2)
In the News: Alan Greenspan versus the PC
Con: Monetary Policy Should Not Be Made by Rule	408	(1)
Should the Central Bank Aim for Zero Inflation?	409	(3)
Pro: The Central Bank Should Aim for Zero Inflation	409	(1)
Con: The Central Bank Should Not Aim for Zero Inflation	410	(2)
Should the Government Balance Its Budget?	412	(2)
Pro: The Government Should Balance Its Budget	412	(1)
Con: The Government Should Not Balance Its Budget	413	(1)
Should the Tax Laws Be Reformed to Encourage Saving?	414	(3)
Pro: The Tax Laws Should Be Reformed to Encourage Saving	415	(1)
Con: The Tax Laws Should Not Be Reformed to Encourage Saving	416	(1)
Conclusion	417	(1)
Summary	417	(1)
Questions for Review	418	(1)
Problems and Applications	419	(2)
Glossary	421	(3)
Index	424