Florida State University Impact of Hurricanes in the Past Decade Discussion

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Read Chapter 20 "International Trade" of the attached PDF and VIEW ALL OF THE VIDEOS that are attached and complete the assignment below. I attached a PDF of the Book to read Chapter 20 in, and i also attached a Microsoft Word Document to show you what the finished product should look like.

The 3-Section assignment requires you to talk about being Confused, Surprised, and the Video that i attached.

I also attached an image of what the 3-Section Assignment should look like. Please be sure to view the image thoroughly.

You must only write 4-sentence paragraphs. You cannot go over 4-sentences per paragraph. Each sentence in the paragraph must be between 15-20 words.

IT Chapter

YouTube VideoProtectionism
Watch VideoProtectionism easily explained (explainity® explainer video)
User: n/a - Added: 4/6/17

YouTube VideoFree Trade
Watch VideoWhat is Free Trade ?
User: n/a - Added: 10/16/15
Free Trade 

YouTube VideoFair Trade
Watch VideoWhat is Free Trade?
User: n/a - Added: 5/4/15
This is actually the concept of "Fair Trade" 

  • Item

3-Section Assignment for this chapter.Read/view the assigned chapter and video(s) in Course Content.Submit 7(+) paragraphs about what you read or saw, in the following three (3) sections.

Section 1: What three (3) items MOST still confuse me about the chapter.

Section 2: What three (3) items MOST surprised me when I read the chapter.

Section 3: How did the video in this chapter in Course Content help you understand the material? (if there is more than one video, there will be more than one paragraph).

Use the Writing Guide Sheet for 3S Assignment found in the "Writing 101" Section on the left side of our BlackBoard Home Page.

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ac ro macroeconomics m McConnell Brue Flynn Macroeconomics PRINCIPLES, PROBLEMS, AND POLICIES THE MCGRAW-HILL SERIES: ECONOMICS ESSENTIALS OF ECONOMICS Brue, McConnell, and Flynn Essentials of Economics Third Edition Mandel M: Economics, The Basics Third Edition Schiller and Gebhardt Essentials of Economics Tenth Edition PRINCIPLES OF ECONOMICS Asarta and Butters Connect Master: Economics First Edition Colander Economics, Microeconomics, and Macroeconomics Tenth Edition Frank, Bernanke, Antonovics, and Heffetz Principles of Economics, Principles of Microeconomics, Principles of Macroeconomics Sixth Edition Frank, Bernanke, Antonovics, and Heffetz Streamlined Editions: Principles of Economics, Principles of Microeconomics, Principles of Macroeconomics Third Edition Karlan and Morduch Economics, Microeconomics, and Macroeconomics Second Edition McConnell, Brue, and Flynn Economics, Microeconomics, and Macroeconomics Twenty-First Edition ECONOMICS OF SOCIAL ISSUES Guell Issues in Economics Today Seventh Edition Register and Grimes Economics of Social Issues Twenty-First Edition ECONOMETRICS Gujarati and Porter Basic Econometrics Fifth Edition Hilmer and Hilmer Practical Econometrics First Edition MANAGERIAL ECONOMICS Baye and Prince Managerial Economics and Business Strategy Ninth Edition Brickley, Smith, and Zimmerman Managerial Economics and Organizational Architecture Sixth Edition Cecchetti and Schoenholtz Money, Banking, and Financial Markets Fifth Edition URBAN ECONOMICS O’Sullivan Urban Economics Eighth Edition LABOR ECONOMICS Borjas Labor Economics Seventh Edition McConnell, Brue, and Macpherson Contemporary Labor Economics Eleventh Edition PUBLIC FINANCE Rosen and Gayer Public Finance Tenth Edition ENVIRONMENTAL ECONOMICS Thomas and Maurice Managerial Economics Twelfth Edition Field and Field Environmental Economics: An Introduction Seventh Edition INTERMEDIATE ECONOMICS INTERNATIONAL ECONOMICS Bernheim and Whinston Microeconomics Second Edition Dornbusch, Fischer, and Startz Macroeconomics Twelfth Edition Samuelson and Nordhaus Economics, Microeconomics, and Macroeconomics Nineteenth Edition Frank Microeconomics and Behavior Ninth Edition Schiller and Gebhardt The Economy Today, The Micro Economy Today, and The Macro Economy Today Fourteenth Edition ADVANCED ECONOMICS Slavin Economics, Microeconomics, and Macroeconomics Eleventh Edition MONEY AND BANKING Romer Advanced Macroeconomics Fourth Edition Appleyard and Field International Economics Ninth Edition Pugel International Economics Sixteenth Edition THE FOUR VERSIONS OF MCCONNELL, BRUE, FLYNN Chapter* Economics Microeconomics Macroeconomics Essentials of Economics 1. Limits, Alternatives, and Choices x x x x 2. The Market System and the Circular Flow x x x x 3. Demand, Supply, and Market Equilibrium x x x x 4. Market Failures: Public Goods and Externalities x x x x 5. Government’s Role and Government Failure x x x x 6. Elasticity x x 7. Utility Maximization x x 8. Behavioral Economics x x 9. Businesses and the Costs of Production x x x x 10. Pure Competition in the Short Run x x x 11. Pure Competition in the Long Run x x x 12. Pure Monopoly x x x 13. Monopolistic Competition x x x 14. Oligopoly and Strategic Behavior x x x 15. Technology, R&D, and Efficiency x x 16. The Demand for Resources x x 17. Wage Determination x x 18. Rent, Interest, and Profit x x 19. Natural Resource and Energy Economics x x 20. Public Finance: Expenditures and Taxes x x 21. Antitrust Policy and Regulation x x 22. Agriculture: Economics and Policy x x 23. Income Inequality, Poverty, and Discrimination x x 24. Health Care x x 25. Immigration x x 26. An Introduction to Macroeconomics x x x x 27. Measuring Domestic Output and National Income x x x 28. Economic Growth x x x 29. Business Cycles, Unemployment, and Inflation x x x 30. Basic Macroeconomic Relationships x x 31. The Aggregate Expenditures Model x x 32. Aggregate Demand and Aggregate Supply x x x 33. Fiscal Policy, Deficits, and Debt x x x x 34. Money, Banking, and Financial Institutions x x 35. Money Creation x x 36. Interest Rates and Monetary Policy x x 37. Financial Economics x x 38. Extending the Analysis of Aggregate Supply x x 39. Current Issues in Macro Theory and Policy x 40. International Trade x x x x 41. The Balance of Payments, Exchange Rates, and Trade Deficits x x x x 42. The Economics of Developing Countries x x x *Chapter numbers refer to Economics: Principles, Problems, and Policies. A red “X” indicates chapters that combine or consolidate content from two or more Economics chapters. x x Twenty-First Edition Macroeconomics PRINCIPLES, PROBLEMS, AND POLICIES Campbell R. McConnell University of Nebraska Stanley L. Brue Pacific Lutheran University Sean M. Flynn Scripps College MACROECONOMICS: PRINCIPLES, PROBLEMS, AND POLICIES, TWENTY-FIRST EDITION Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2018 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2015, 2012, and 2009. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 LWI 21 20 19 18 17 ISBN MHID ISBN MHID 978-1-259-91567-3 (student edition) 1-259-91567-0 (student edition) 978-1-259-91575-8 (instructor’s edition) 1-259-91575-1 (instructor’s edition) Chief Product Officer, SVP Products & Markets: G. Scott Virkler Vice President, General Manager, Products & Markets: Marty Lange Vice President, Content Design & Delivery: Betsy Whalen Managing Director: Susan Gouijnstook Senior Brand Manager: Katie Hoenicke Director, Product Development: Rose Koos Product Developer: Adam Huenecke Senior Director, Digital Content Development: Douglas Ruby Marketing Manager: Virgil Lloyd Director, Content Design & Delivery: Linda Avenarius Program Manager: Mark Christianson Content Project Managers: Harvey Yep (Core); Bruce Gin (Assessment) Buyer: Laura Fuller Design: Tara McDermott Cover Image: © Getty Images/Kativ Content Licensing Specialists: Shawntel Schmitt (Image); Beth Thole (Text) Typeface: Stix Mathjax MAIN 10/12 Compositor: Aptara®, Inc. Printer: LSC Communications All credits appearing on page or at the end of the book are considered to be an extension of the copyright page. Library of Congress Cataloging-in-Publication Data Names: McConnell, Campbell R., author. | Brue, Stanley L., 1945- author. | Flynn, Sean Masaki, author. Title: Macroeconomics : principles, problems, and policies / Campbell R. McConnell, University of Nebraska, Stanley L. Brue, Pacific Lutheran University, Sean M. Flynn, Scripps College. Description: Twenty First Edition. | Dubuque : McGraw-Hill Education, [2018] | Revised edition of Macroeconomics, 2015. Identifiers: LCCN 2016044903| ISBN 9781259915673 (student edition : alk. paper) | ISBN 1259915670 (student edition : alk. paper) Subjects: LCSH: Macroeconomics. Classification: LCC HB172.5 .M3743 2018 | DDC 339—dc23 LC record available at https://lccn.loc.gov/2016044903 The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites. mheducation.com/highered To Mem and to Terri and Craig, and to past instructors ABOUT THE AUTHORS CAMPBELL R. MCCONNELL earned his Ph.D. from the University of Iowa after receiving degrees from Cornell College and the University of Illinois. He taught at the University of Nebraska–Lincoln from 1953 until his retirement in 1990. He is also coauthor of Contemporary Labor Economics, eleventh edition, and Essentials of Economics, third edition, and has edited readers for the principles and labor economics courses. He is a recipient of both the University of Nebraska Distinguished Teaching Award and the James A. Lake Academic Freedom Award and is past president of the Midwest Economics Association. Professor McConnell was awarded an honorary Doctor of Laws degree from Cornell College in 1973 and received its Distinguished Achievement Award in 1994. His primary areas of interest are labor economics and economic education. He has an extensive collection of jazz recordings and enjoys reading jazz history. STANLEY L. BRUE did his undergraduate work at Augustana College (South Dakota) and received its Distinguished Achievement Award in 1991. He received his Ph.D. from the University of Nebraska–Lincoln. He is retired from a long career at Pacific Lutheran University, where he was honored as a recipient of the Burlington Northern Faculty Achievement Award. Professor Brue has also received the national Leavey Award for excellence in economic education. He has served as national president and chair of the Board of Trustees of Omicron Delta Epsilon International Economics Honorary. He is coauthor of Economic Scenes, fifth edition (Prentice-Hall); Contemporary Labor Economics, eleventh edition; Essentials of Economics, third edition; and The Evolution of Economic Thought, eighth edition (Cengage Learning). For relaxation, he enjoys international travel, attending sporting events, and going on fishing trips. SEAN M. FLYNN did his undergraduate work at the University of Southern California before completing his Ph.D. at U.C. Berkeley, where he served as the Head Graduate Student Instructor for the Department of Economics after receiving the Outstanding Graduate Student Instructor Award. He teaches at Scripps College (of the Claremont Colleges) and is the author of Economics for Dummies, second edition (Wiley), and coauthor of Essentials of Economics, third edition. His research interests include finance, behavioral economics, and health economics. An accomplished martial artist, he has represented the United States in international aikido tournaments and is the author of Understanding Shodokan Aikido (Shodokan Press). Other hobbies include running, traveling, and enjoying ethnic food. viii KEY GRAPHS 1.2 The Production Possibilities Curve 11 2.2 The Circular Flow Diagram 38 3.6 Equilibrium Price and Quantity 57 10.2 Consumption and Saving Schedules 203 10.5 The Investment Demand Curve 210 11.2 Equilibrium GDP in a Private Closed Economy 225 11.7 Recessionary and Inflationary Expenditure Gaps 235 12.7 The Equilibrium Price Level and Equilibrium Real GDP 254 16.1 The Demand for Money, the Supply of Money, and the Equilibrium Interest Rate 325 16.4 Monetary Policy and Equilibrium GDP 340 16.5 The AD-AS Theory of the Price Level, Real Output, and Stabilization Policy 346 20.2 Trading Possibilities Lines and the Gains from Trade 417 21.1 The Market for Foreign Currency (Pounds) 441 ix PREFACE What’s New and Improved? One of the benefits of writing a successful text is the opportunity to revise—to delete the outdated and install the new, to rewrite misleading or ambiguous statements, to introduce more relevant illustrations, to improve the organizational structure, and to enhance the learning aids. We trust that you will agree that we have used this opportunity wisely and fully. Some of the more significant changes include the following. Separate Presentations of Monopolistic Competition and Oligopoly In response to instructor feedback, we have split the material on monopolistic competition and oligopoly that had together comprised a single chapter in previous editions into two separate chapters. The separated chapters have been made modular so that skipping either or covering both will be equally viable options for instructors. This should be particularly helpful to instructors who want to spend more time on oligopoly. Welcome to the 21st edition of Economics, the best-selling economics textbook in the world. An estimated 15 million students have used Economics or its companion editions, Macroeconomics and Microeconomics. Economics has been adapted into Australian and Canadian editions and translated into Italian, Russian, Chinese, French, Spanish, Portuguese, and other languages. We are pleased that Economics continues to meet the market test: nearly one out of five U.S. students in principles courses used the 20th edition. Fundamental Objectives We have three main goals for Economics: ∙ Help the beginning student master the principles essential for understanding the economizing problem, specific economic issues, and policy alternatives. ∙ Help the student understand and apply the economic perspective and reason accurately and objectively about economic matters. ∙ Promote a lasting student interest in economics and the economy. x Onboarding of Web Chapters and COI Material Economics is everywhere, so the 21st edition continues our commitment to providing instructors with accessible and intuitive coverage of a wide variety of economic subject areas. To that end, we are happy to report that we have been able to pull material that appeared only online in previous editions into the printed book. That includes what were previously two full-length Web Chapters as well as a large fraction of the material that had been posted online as Content Options for Instructors (COIs). “The Economics of Developing Countries,” is now Chapter 22. The online material that was not brought into the book was COI1, “The United States in the Global Economy.” That content largely duplicated material that ­appeared in other chapters and was not much used, so it will no longer be supported either online or in print. Modernized Presentation of Fixed Exchange Rates and Currency Interventions For this new edition, we have reorganized and rewritten large parts of Chapter 21 (The Balance of Payments, Exchange ere designed for our ancesThus, we often have diffiand decisions that involve d the future. Two of the maand time inconsistency. edness, refers to a defect of s appear fuzzy, out of focus, omists use the word myopia s have a hard time conceptuwith the present, the future rd to see. e very good at weighing curin order to make immediate seem “future blind” when it uture costs or future benefits. luating possibilities that will months into the future. myopia is that when people omething that will generate hat won’t yield benefits for a strong tendency to favor the ample, imagine that Terence nd on a vacation next month ears. ve great difficulty imagining at he will be able to enjoy in On the other hand, it is very un he could have next month a result, he will be strongly ey next month. With myopia g-term option, the short-term active. stick with a diet or follow an e immediate and clearly vists or hanging out, the future ercising consistently are just to be very attractive. Preface xi Rates, and Trade Deficits). The key revision has to do with our presentation of fixed exchange rates. We now show with greater clarity that under a fixed exchange rate regime, changes in the balance of payments generate automatic changes in both foreign exchange reserves and the domestic money supply that then have to be dealt with by a nation’s central bank. Our new presentation uses China as an example of these forces and how they often lead to “sterilization” ­actions on the part of the central banks that are engaged in currency pegs. Our new presentation also clarifies the relationship between trade deficits and foreign exchange reserves under a currency peg. We have also inserted additional examples into our presentation of flexible exchange rates and have introduced a new Last Word on optimal currency areas to give students insight into some of the European Monetary Union’s current problems and how they relate to the fact that a monetary union is equivalent to simultaneous multilateral currency pegs. For instructors who wish to give a larger historical perspective, we have created a brief appendix that covers the gold standard era as well as the Bretton Woods period. This material was previously available in Content Options for Instructors 1 (COI2). New “Consider This” and “Last Word” Pieces LAST WORD Antitrust Online The Internet Has Presented Antitrust Authorities with Both Old and New Causes for Concern. The Airline Tariff Publishing case was the first important example of how digital communication platforms could be used by businesses to engage in price-fixing. In the late 1980s, U.S. airlines began to post both current and future prices for airline tickets on a centralized computer system known as the Airline Tariff Publishing Company. The system was set up so that travel agents could comparison shop for their clients. But the airlines used the system’s ability to list start dates and end dates for ticket purchases as a way of colluding. As an example, suppose that American Airlines and Delta Airlines had both been charging $200 for a one-way ticket between New York and Chicago. American could then post a higher price of $250 for the route with the stipulation that nobody could start buying tickets at that price until the next month. Delta could then respond by also saying that it would start selling tickets at the higher price next month. In that way, the two airlines could tacitly coordinate their price setting ahead of time so as to collude on a major price increase. The antitrust authorities at the U.S. Department of Justice stopped this practice in 1994 by getting the airlines to agree to the behavioral remedy that any fare changes would have to become immediately available to consumers. Airlines could no longer use suggested future prices as a way of signaling each other about how to collude. The monopoly power gained during the 1990s and early 2000s by online giants such as Microsoft and Google has also led to business practices that have raised the ire of antitrust authorities. Microsoft, for example, was fined $2.7 billion after being convicted in 2000 of using the near-monopoly (95 percent market share) dominance of its Windows operating system software to coerce computer makers into favoring Microsoft’s Internet Explorer web browser over rival browsers such as Netscape Navigator. More recently, Google was indicted in 2015 by European Union antitrust officials for allegedly using its 90 percent share of the market for Internet searches in Europe to favor its Google Shopping price-comparison service over price-comparison services run by rival firms. For example, if a person in Germany types “prices for used iPhones” into Google’s search bar, the top of the search results page will feature images of several used iPhones for sale on Google Shopping. By contrast, anyone wanting comparison prices for used iPhones that are listed on other price-comparison sites will have to click on links further down on the search-results page to get to those other sites and their respective lists of used iPhone prices. Google faces up to €6.6 billion in fines if convicted. © grzegorz knec/Alamy Stock Photo The most recent threat to competition spawned by the Internet is the rise of collusion via pieces of software that use pricing algorithms (automatically applied rules for setting prices) to constantly adjust a company’s the online prices in response to seeing what rival firms are charging for similar products. The problem for regulators is that the pricing algorithms of different firms could end up interacting in ways that collusively raise prices for consumers. This is especially true for pieces of software that use artificial intelligence to learn how to achieve preset goals. Two such pieces of software could each be programmed to try to maximize profits and, as they interacted with each other, “realize” that the best way to do so is by coordinating rather than competing. That possibility is especially challenging because, given the way antitrust laws are currently written, firms can be prosecuted for collusion only if they make an anticompetitive “agreement” with each other. If the algorithms come to collude on their own, there is no such agreement to prosecute. In fact, the behavior of the two pieces of software could just as easily be interpreted as independent parallel conduct rather than coordination since they don’t even directly communicate with each other. And, in addition, should asking a piece of software to try to figure out how to maximize profits be illegal just by itself? These issues are still very much up in the air but being faced squarely by U.S. regulators, who made their first prosecution against the collusive use of algorithmic pricing software in 2015 and who established the Office of Technology Research and Investigation as part of the Federal Trade Commission’s Bureau of Consumer Protection that same year. a­ pplications or case studies that are placed near the end of each chapter. For example, the “Last Word” section for Chapter 1 (Limits, Alternatives, and Choices) examines pitfalls to sound e­ conomic reasoning, while the “Last Word” section for Chapter 4 (Market Failures: Public Goods and Externalities) examines cap-and-trade versus carbon taxes as policy responses to excessive carbon dioxide emissions. There are 6 new “Last Word” sections in this edition. If you are unfamiliar with Economics, we encourage you to thumb through the chapters to take a quick look at these highly visible features. 433 Our “Consider This” boxes are used to provide analogies, ­examples, or stories that help drive home central economic ideas in a student-oriented, real-world manner. For instance, a “Consider This” box titled “McHits and ­McMisses” ill­ ustrates consumer s­ overeignty through a listing of successful and unsuccessful products. How businesses exploit price discrimination is CONSIDER THIS . . . driven home in a A Bright Idea In sunny areas, a solar “Consider This” box panel can make up for the cost of its installation that explains why ballin just a few years by greatly reducing or even parks charge different eliminating a household’s electricity bill. After admission prices for Source: © Federico Rostagno/ Shutterstock.com those years of payback adults and children but are finished, there will be almost nothing but benefits because the solar panel will only one set of prices continue to provide free electricity at only modest maintenance costs. Consequently, nearly every household in sunny at their concession areas could rationally profit from installing solar panels. Unfortunately, myopia discourages most people from stands. These brief viwanting to reap the net benefits. Because people are myopic, they focus too strongly on the upfront costs of installing gnettes, each accomsolar panels while at the same time discounting the longrun benefits from being able to generate their own electricpanied by a photo, ity. The result is major inefficiency as most homeowners end up foregoing solar panels. illustrate key points in A company called Solar City has figured out a way to work with rather than against people’s myopia. It does so by a lively, colorful, and offering leasing and financing options that eliminate the need for consumers to pay for the upfront costs of installeasy-to-remember ing a solar system. Instead, Solar City pays for the upfront costs and then makes its money by splitting the resulting way. We have added 7 savings on monthly electricity bills with consumers. This arrangement actually benefits from myopia because new “Consider This” consumers get to focus on instant savings rather than initial costs. The same strategy can also be used to promote other boxes in this edition. investments that would normally be discouraged by myopia, Our “Last Word” such as installing energy-efficient furnaces, air conditioners, and appliances. pieces are lengthier mcc23224_ch21_420-436.indd 433 normally do. But when your alarm goes off the next morning at that earlier time, you loath the concept, throw the alarm across the room, and go back to sleep. That switch in your 12/22/16 2:04 PM New Discussions of Unconventional Monetary Policy and Interest-Rate Normalization Our macroeconomics chapters on monetary policy have been rewritten in many places to reflect the historically unprecedented monetary policy regimes that have been instituted by central banks since the Financial Crisis. Thus, for instance, we have included material that will allow students to comprehend the negative interest rates that are now common in Europe. Also necessary was a revised treatment of the federal funds rate to reflect the fact that monetary policy has been implemented in recent years in the United States by means of open-market interventions aimed at quantitative easing rather than open-market interventions aimed at lowering the federal funds rate, which has been stuck near the zero lower bound since the Great Recession. We have also been sure to include intuitive coverage of the monetary policy tools that the Federal Reserve says it will be using in coming years to “normalize” monetary policy and raise short-term interest rates in the context of massive excess bank reserves. To that end, we have truncated our coverage of the federal funds market because the Fed has stated that it xii Preface intends to normalize via the repo market and the interest rate that it pays banks on excess reserves (IOER). We cover those mechanisms in detail and explain how the Fed intends to use them in coming years. Tested Content for Peer Instruction Economics has been at the forefront of pedagogical innovation since our first edition, when we debuted the first separate student study guide and the first explanations next to each figure so that students could understand what was going on without having to hunt around in the main text for an explanation. Successive editions have brought additional firsts, from being the first with prepared overhead slides to being the first with SmartBook and adaptive-learning technology. While technology has made learning with Economics more efficient for the individual student, we wanted to offer new methods to enhance the effectiveness of the classroom experience as well. We are consequently proud that we are now going to be the first textbook to offer Peer Instruction materials that are highly effective, comprehensive, and classroom-tested. Peer Instruction was pioneered by Eric Mazur of Harvard University’s Physics Department. It is a student-focused, interactive teaching method that has been shown to massively increase the depth of student understanding across a wide ­variety of disciplines. It works by having students, in groups, ponder and discuss questions about challenging scenarios ­before their instructor steps in to clear up any lingering ­misconceptions. Along the way, students first answer each question individually before voting as a team after a discussion. Those two answers—individual, then group—provided the evidence for the effectiveness of Peer Instruction. As explained by Harvard psychologist Stephen Pinker, the group discussions lead to a deeper and more intuitive understanding of concepts and theories than can usually be achieved with lecture-based instruction. That is the case because beginners are often better than experts at explaining challenging ideas to other beginners. The problem with ­experts—that is, instructors like you and me—is that the process of becoming an expert rewires the brain so that the expert can no longer think like a beginner. Our own expertise makes it difficult to see where students are getting confused and it is consequently very useful to unleash the power of Peer Instruction to help beginners tackle new material. The effectiveness of Peer Instruction depends, however, on the quality of the questions and scenarios that students are asked to ponder. Developing good questions and effective scenarios is highly time intensive and often a matter of experimentation; you just don’t know how well a question or scenario will work until you try it. It is not a surprise, then, that today’s busy instructors often shy away from Peer Instruction because of the high start-up costs and the time required to develop truly effective questions and scenarios. Fortunately for you, we did all the work. Author Sean Flynn and Todd Fitch of the University of San Francisco have field-tested hundreds of questions and scenarios for effectiveness. So with this 21st edition of McConnell, we are ready to offer a fully supported set of Peer Instruction material tied directly to each of the learning objectives in Economics. The questions and scenarios, as well as resources to help organize a Peer Instruction classroom can be found in Connect. If you have ever been in a situation in which more experienced students helped to teach newer students, you have seen the power of Peer Instruction. Our new materials bring us back to that paradigm. So while we are first once again with Peer Instruction in economics, credit belongs to the pioneering work of dedicated teachers like Eric Mazur and Stephen Pinker for making this method available across disciplines. Full Support for Flipped Classroom Teaching Strategies We have also designed our new Peer Instruction materials to facilitate flipped-classroom teaching strategies, wherein ­students learn basic material at home, before lecture, before being challenged in class to reach higher levels of understanding. In K–12 math programs, for example, students study short videos on new content at home before coming to class to work problems. That sequence of learning activities assures that an instructor is present at the stage where students encounter the most difficulties, namely, when they attempt to apply the material. By contrast, the traditional (non-flipped) method for teaching elementary math presents new content in class before sending students home to work problems by themselves. That sequence leaves students without expert help when they are most vulnerable to misunderstandings and errors. We have designed our new Peer Instruction materials to facilitate the flipped-classroom method by leveraging the adaptive learning materials that are already available in our Connect online learning platform. In particular, students can be assigned new material before lecture via SmartBook, which is an adaptive-learning technology that tutors students through the basic concepts and skills presented in each section of the book. We also recommend that students work before class on end-of-chapter problems and LearnSmart (which also come with adaptive feedback thanks to Connect). Those pre-class activities will allow students to master the lower levels of Bloom’s Taxonomy of learning objectives— things like remembering and understanding—before they come to class. They will then be ready to attack the higher levels of Bloom’s Taxonomy—things like applying, analyzing, and evaluating. That’s where our new Peer Instruction material comes in. Students who have each already worked their way through the lower levels of Bloom’s Taxonomy come together in class under the instruction of an expert—their teacher—to Preface xiii work in unison on the higher levels of understanding that are the ultimate goal of economics instruction. We are consequently happy to be offering students and instructors yet another first, namely, the first high-quality, proven, flipped-classroom package available for principles of economics classes. Not every instructor will choose to use this material, but we are confident that those who do will wish that it had arrived much sooner. For those instructors who are new to either Peer Instruction or the flipped-classroom method, we will be offering extensive complimentary training and support via online seminars and message boards. If you are eager to try these new methods, we will be happy to help you get going and keep going. Current Discussions and Examples The 21st edition of Economics refers to and discusses many current topics. Examples include surpluses and shortages of tickets at the Olympics; the myriad impacts of ethanol subsidies; creative destruction; applications of behavioral economics; applications of game theory; the most rapidly expanding and disappearing U.S. jobs; oil and gasoline prices; cap-andtrade systems and carbon taxes; occupational licensing; state lotteries; consumption versus income inequality; the impact of electronic medical records on health care costs; the ­surprising fall in illegal immigration after the 2007–2009 recession; conditional and unconditional cash transfers; the difficulty of targeting fiscal stimulus; the rapid rise in college tuition; the slow recovery from the Great Recession; ballooning federal budget deficits and public debt; the long-run funding shortfalls in Social Security and Medicare; the effect of rising ­dependency ratios on economic growth; innovative Federal Reserve policies, including quantitative easing, the zero interest rate policy, and explicit inflation targets; the massive excess reserves in the banking system; the jump in the size of the Fed’s balance sheet; the effect of the zero interest rate policy on savers; regulation of “too big to fail” banks; trade adjustment assistance; the European Union and the eurozone; changes in exchange rates; and many other current topics. Chapter-by-Chapter Changes Each chapter of Macroeconomics, 21st edition, contains updated data reflecting the current economy, revised Learning Objectives, and reorganized and expanded end-of-chapter content. Every chapter also contains one or more Quick Review boxes to help students review and solidify content as they are reading along. Chapter-specific updates include: Chapter 1: Limits, Alternatives, and Choices features two refreshed Consider This pieces as well as revised new examples and working improvements to clarify the main concepts. Chapter 2: The Market System and the Circular Flow contains updated examples and a brief new introduction to the concept of residual claimant. Chapter 3: Demand, Supply, and Market Equilibrium includes a new Last Word on how student lending raises college tuition as well as data updates and updated examples. Chapter 4: Market Failures: Public Goods and Externalities features updated examples and a new Key Word on Pigovian taxes. Chapter 5: Government’s Role and Government Failure has a new Consider This on government agencies violating government laws, several new examples, and wording revisions for increased clarity. Chapter 6: An Introduction to Macroeconomics incorporates data updates, wording improvements, and several new examples. Chapter 7: Measuring Domestic Output and National Income features extensive data updates and a short new section discussing the importance of paying attention to intermediate economic activity as measured by gross output. Chapter 8: Economic Growth contains data updates, new examples, and a new discussion of the slowdown in productivity growth that has occurred since the Great Recession. Chapter 9: Business Cycles, Unemployment, and Inflation features both a new Consider This on deflationary spirals as well as an extended discussion of negative interest rates. Chapter 10: Basic Macroeconomic Relationships features data updates and a new Last Word that humorously illustrates the multiplier concept in the same parody style that was used in the Last Word piece that this all-new story replaces. Chapter 11: The Aggregate Expenditures Model contains data updates and minor wording improvements. Chapter 12: Aggregate Demand and Aggregate Supply ­incorporates updates to both data and examples. Chapter 13: Fiscal Policy, Deficits, and Debt uses extensive data updates to reflect the current U.S. fiscal situation and place it in an international context. Chapter 14: Money, Banking, and Financial Institutions features a new Last Word on central bank bailouts for insolvent as well as illiquid financial institutions, a policy derided by some as “extend and pretend.” Chapter 15: Money Creation incorporates a few data updates as well as a new section explaining the demise of the federal funds market after the Financial Crisis of 2007–2008. Chapter 16: Interest Rates and Monetary Policy features new material on the unorthodox monetary policy of the last 10 years. Coverage of the federal funds market has been slashed, reflecting the fact that the massive excess reserves in the banking system mean that the Fed now uses open-market operations for quantitative easing rather than adjustments to xiv Preface the federal funds rate (which is constantly forced toward zero by those massive excess bank reserves). We also give an indepth explanation of the Federal Reserve’s plan to normalize monetary policy by using reverse repos and the rate of interest on excess reserves (IOER) to raise short-term interest rates in the coming years. To aid comprehension of how repos and reverse repos work, we have also added a new Consider This piece. Chapter 17: Financial Economics has extensive data updates and a new Consider This on how increased institutional stock ownership may have exacerbated the principal-agent problem and thereby engendered a greater amount of selfserving behavior on the part of corporate managers. Chapter 18: Extending the Analysis of Aggregate Supply incorporates data updates and new material that updates our discussion of the empirical validity of the Phillips Curve by including the most recent data on inflation and unemployment. Chapter 19: Current Issues in Macro Theory and Policy contains a new section explaining the Federal Reserve’s 2-percent inflation target as well as a new Last Word describing Market Monetarism. Chapter 20: International Trade contains new examples and data updates. Chapter 21: The Balance of Payments, Exchange Rates, and Trade Deficits is heavily revised for this edition. There is an entirely new presentation of fixed exchange rates and how the balance of payments under a fixed exchange rate determines the direction of change of both foreign exchange reserves as well as the domestic money supply. This presentation is illustrated with a new Consider This on China’s currency peg as well as a new Last Word on whether common currencies (which are implicit pegs) are a good idea. This chapter also has a new appendix that includes the material on previous (pre-Bretton Woods) exchange rate systems that was previously presented in Content Options for Instructors 2 (COI2). Chapter 22: The Economics of Developing Countries has an updated discussion on China’s recently terminated one-child policy as well as a new Last Word that reviews the povertyfighting effectiveness of microcredit, conditional cash transfers, and unconditional cash transfers. Distinguishing Features Comprehensive Explanations at an Appropriate Level Economics is comprehensive, analytical, and challenging yet fully accessible to a wide range of students. The thoroughness and accessibility enable instructors to select topics for special classroom emphasis with confidence that students can read and comprehend other independently assigned material in the book. Where needed, an extra sentence of explanation is provided. Brevity at the expense of clarity is false economy. Fundamentals of the Market System Many economies throughout the world are still making difficult transitions from planning to markets while a handful of other countries such as Venezuela seem to be trying to reestablish ­government-controlled, centrally planned economies. Our detailed description of the institutions and operation of the market system in Chapter 2 (The Market System and the Circular Flow) is therefore even more relevant than before. We pay particular attention to property rights, entrepreneurship, freedom of enterprise and choice, competition, and the role of profits because these concepts are often misunderstood by beginning students worldwide. Extensive Treatment of International Economics We give the principles and institutions of the global economy extensive treatment. The appendix to Chapter 3 (Demand, Supply, and Market Equilibrium) has an application on exchange rates. Chapter 20 (International Trade) examines key facts of international trade, specialization and comparative advantage, arguments for protectionism, impacts of tariffs and subsidies, and various trade agreements. Chapter 21 (The Balance of Payments, Exchange Rates, and Trade Deficits) discusses the balance of payments, fixed and floating exchange rates, and U.S. trade deficits. Web Chapter 22 (The Economics of Developing Countries) takes a look at the special problems faced by developing countries and how developed countries try to help them. Chapter 20 (International Trade) is constructed such that instructors who want to cover international trade early in the course can assign it immediately after Chapter 3. Chapter 20 requires only a good understanding of production possibilities analysis and supply and demand analysis to comprehend. International competition, trade flows, and financial flows are integrated throughout the micro and macro sections. “Global Perspective” boxes add to the international flavor of the book. Early and Extensive Treatment of Government The public sector is an integral component of modern capitalism. This book introduces the role of government early. Chapter 4 (Market Failures: Public Goods and Externalities) systematically discusses public goods and government policies toward externalities. Chapter 5 (Government’s Role and Government Failure) details the factors that cause government failure. Step-by-Step, Two-Path Macro As in the previous edition, our macro continues to be distinguished by a systematic step-by-step approach to developing ideas and building models. Explicit assumptions about price and wage stickiness are posited and then systematically peeled away, yielding new models and extensions, all in the broader context of growth, expectations, shocks, and degrees of price and wage stickiness over time. Preface xv In crafting this step-by-step macro approach, we took care to preserve the “two-path macro” that many instructors appreciated. Instructors who want to bypass the immediate short-run model (Chapter 31: The Aggregate Expenditures Model) can proceed without loss of continuity directly to the short-run AD-AS model (Chapter 32: Aggregate Demand and Aggregate Supply), fiscal policy, money and banking, monetary policy, and the long-run AD-AS analysis. Emphasis on Technological Change and Economic Growth This edition continues to emphasize economic growth. Chapter 1 (Limits, Alternatives, and Choices) uses the production possibilities curve to show the basic ingredients of growth. Chapter 8 (Economic Growth) explains how growth is measured and presents the facts of growth. It also discusses the causes of growth, looks at productivity growth, and addresses some controversies surrounding economic growth. Chapter 8’s Last Word examines whether economic growth can survive demographic decline. Web Chapter 22 focuses on developing countries and the growth obstacles they confront. Organizational Alternatives Although instructors generally agree on the content of principles of economics courses, they sometimes differ on how to arrange the material. Economics includes 11 parts, and thus provides considerable organizational flexibility. The two-path macro enables covering the full aggregate expenditures model or advancing directly from the basic macro relationships chapter to the AD-AS model. Finally, Chapter 20 on international trade can easily be moved up to immediately after Chapter 3 on supply and demand for instructors who want an early discussion of international trade. Pedagogical Aids Macroeconomics is highly student-oriented. The 21st edition is also accompanied by a variety of high-quality supplements that help students master the subject and help instructors implement customized courses. Digital Tools Adaptive Reading Experience SmartBook contains the same content as the print book, but actively tailors that content to the needs of the individual through adaptive probing. Instructors can assign SmartBook reading assignments for points to create incentives for students to come to class prepared. Extensive Algorithmic and Graphing Assessment­ Robust, auto-gradable question banks for each chapter now include even more questions that make use of the Connect graphing tool. More questions featuring algorithmic variations have also been added. Interactive Graphs This new assignable resource within Connect helps students see the relevance of subject matter by providing visual displays of real data for students to manipulate. All graphs are accompanied by assignable assessment questions and feedback to guide students through the experience of learning to read and interpret graphs and data. Videos New to this edition are videos that provide support for key economics topics. These short, engaging explanations are presented at the moment students may be struggling to help them connect the dots and grasp challenging concepts. Math Preparedness Tutorials Our math preparedness assignments have been reworked to help students refresh on important prerequisite topics necessary to be successful in economics. Digital Image Library Every graph and table in the text is available in the Instructor’s Resource section in Connect. Three Reorganized Test Banks The Economics test banks contain around 14,000 multiple-choice and true-false questions, many of which were written by the text authors. While previous editions grouped these questions into two separate test banks, this edition uses a consolidated test bank with advanced tagging features that will allow instructors to choose familiar questions from Test Banks I and II or create new assignments from the full variety of questions in each chapter. Each test bank question for Economics also maps to a specific learning objective. Randy Grant revised Test Bank I for the 21st edition. Felix Kwan of Maryville University updated Test Bank II. All Test Bank questions are organized by learning objective, topic, AACSB Assurance of Learning, and Bloom’s Taxonomy guidelines. Test Bank III, written by William Walstad, contains more than 600 pages of short-answer questions and problems created in the style of the book’s end-of-chapter questions. Test Bank III can be used to construct student assignments or design essay and problem exams. Suggested answers to the essay and problem questions are included. In all, nearly 15,000 questions give instructors maximum testing flexibility while ensuring the fullest possible text correlation. Computerized Test Bank Online TestGen is a complete, state-of-the-art test generator and editing application software that allows instructors to quickly and easily select test items from McGraw Hill’s test bank content. The instructors can then organize, edit, and customize questions and answers to rapidly generate tests for paper or online administration. Questions can include stylized text, symbols, graphics, and equations that are inserted directly into questions using builtin mathematical templates. TestGen’s random generator provides the option to display different text or calculated xvi Preface number values each time questions are used. With both quick-and-simple test creation and flexible and robust editing tools, TestGen is a complete test generator system for today’s educators. You can use our test bank software, TestGen, or Connect Economics to easily query for learning outcomes and objectives that directly relate to the learning objectives for your course. You can then use the reporting features to aggregate student results in a similar fashion, making the collection and presentation of assurance-of-learning data simple and easy. AACSB Statement The McGraw-Hill Companies is a proud corporate member of the Association to Advance Collegiate Schools of Business (AACSB) International. Understanding the importance and value of AACSB accreditation, Economics has sought to recognize the curricula guidelines detailed in the AACSB standards for business accreditation by connecting end-of-chapter questions in Economics and the accompanying test banks to the general knowledge and skill guidelines found in the AACSB standards. This AACSB Statement for Economics is provided only as a guide for the users of this text. The AACSB leaves content coverage and assessment within the purview of individual schools, their respective missions, and their respective faculty. While Economics and its teaching package make no claim of any specific AACSB qualification or evaluation, we have, within Economics labeled selected questions according to the eight ­general knowledge and skills areas emphasized by AACSB. Supplements for Students and Instructors Study Guide One of the world’s leading experts on ­economic education, William Walstad of the University of Nebraska–­ Lincoln, prepared the Study Guide. Many students find either the printed or digital version indispensable. Each chapter contains an introductory statement, a checklist of behavioral objectives, an outline, a list of important terms, fill-in questions, problems and projects, objective questions, and discussion questions. The Guide comprises a superb “portable tutor” for the principles student. Separate Study Guides are available for the macro and micro editions of the text. Instructor’s Manual Shawn Knabb of Western Washington University revised and updated the Instructor’s Manual to accompany the 21st edition of the text. The revised Instructor’s Manual includes: ∙ ∙ ∙ ∙ ∙ ∙ Chapter summaries. Listings of “what’s new” in each chapter. Teaching tips and suggestions. Learning objectives. Chapter outlines. Extra questions and problems. ∙ Answers to the end-of-chapter questions and problems, plus correlation guides mapping content to learning objectives. The Instructor’s Manual is available in the Instructor’s Resource section, accessible through the Library tab in Connect. PowerPoint Presentations A dedicated team of instructors updated the PowerPoint presentations for the 21st edition: Stephanie Campbell of Mineral Area College and Amy Chataginer of Mississippi Gulf Coast Community College. Each chapter is accompanied by a concise yet thorough tour of the key concepts. Instructors can use these presentations in the classroom, and students can use them on their computers. Digital Solutions McGraw-Hill Connect® Economics Less Managing. More Teaching. Greater Learning. Connect Economics is an online assignment and assessment solution that offers a number of powerful tools and features that make managing assignments easier so faculty can spend more time teaching. With Connect Economics, students can engage with their coursework anytime and anywhere, making the learning process more accessible and efficient. Learning Management System Integration McGraw-Hill Campus is a one-stop teaching and learning experience available to use with any learning management system. McGraw-Hill Campus provides single sign-on to faculty and students for all McGraw-Hill material and technology from within a school’s website. McGraw-Hill Campus also allows instructors instant access to all supplements and teaching materials for all McGraw-Hill products. Blackboard and Canvas users also benefit from McGrawHill’s industry-leading integration, providing single sign-on access to all Connect assignments and automatic feeding of assignment results to the Blackboard grade book. Simple Seamless Secure Tegrity Campus: Lectures 24/7 Tegrity Campus is a service that makes class time available 24/7 by automatically capturing every lecture in a searchable format for students to review when they study and complete assignments. With a simple oneclick start-and-stop process, you capture all computer screens and corresponding audio. Students can replay any part of any class with easy-to-use browser-based viewing on a PC or Mac. Preface xvii Educators know that the more students can see, hear, and experience class resources, the better they learn. In fact, studies prove it. With Tegrity Campus, students quickly recall key moments by using Tegrity Campus’s unique search feature. This search function helps students efficiently find what they need, when they need it, across an entire semester of class recordings. Help turn all your students’ study time into learning moments immediately supported by your lecture. To learn more about Tegrity, you can watch a twominute Flash demo at tegritycampus.mhhe.com. McGraw-Hill Customer Care Contact Information Getting the most from new technology can be challenging. So McGraw-Hill offers a large suite of complementary support services for faculty using Economics. You can contact our Product Specialists 24 hours a day to set up online technology instruction. Or you can contact customer support at any time by either calling 800-331-5094 or by visiting the Customer Experience Group (CXG) Support Center at www.mhhe .com/support. They will put you in touch with a Technical Support Analyst familiar with Economics and its technology offerings. And, of course, our online knowledge bank of Frequently Asked Questions is always available at the justmentioned website for instant answers to the most common technology questions. Acknowledgments We give special thanks to Ryan Umbeck, Peter Staples, Peggy Dalton, and Matt McMahon for their hard work updating the questions and problems in Connect, as well as the material they created for the additional Connect Problems. Thank you Jody Lotz for her dedicated copy editing of the Connect end-of-chapter material. Laura Maghoney’s expert revision of the SmartBook content and consultation on many other elements of this project were invaluable. Thanks to the many dedicated instructors who accuracy-checked the end-of-chapter content, test banks, and Instructor’s Manuals: Per Norander, Ribhi Daoud, Gretchen Mester, Erwin Erhardt, and Xavier Whitacre. We offer our deepest gratitude to the amazing Laureen Cantwell for her research assistance. Finally, we thank William Walstad and Tom Barbiero (the coauthor of our Canadian edition) for their helpful ideas and insights. We are greatly indebted to an all-star group of professionals at McGraw-Hill—in particular James Heine, Virgil Lloyd, Trina Maurer, Harvey Yep, Bruce Gin, Tara McDermott, Adam Huenecke, and Katie Hoenicke—for their publishing and marketing expertise. The 21st edition has benefited from a number of perceptive formal reviews. The reviewers, listed at the end of the preface, were a rich source of suggestions for this revision. To each of you, and others we may have inadvertently overlooked, thank you for your considerable help in improving Economics. Sean M. Flynn Stanley L. Brue Campbell R. McConnell REVIEWERS xviii Richard Agesa, Marshall University Carlos Aguilar, El Paso Community College, Valle Verde Yamin Ahmad, University of Wisconsin–Whitewater Eun Ahn, University of Hawaii, West Oahu Miki Anderson, Pikes Peak Community College Giuliana Andreopoulos, William Paterson University Thomas Andrews, West Chester University of Pennsylvania Fatma Antar, Manchester Community College Len Anyanwu, Union County College Emmanuel Asigbee, Kirkwood Community College John Atkins, Pensacola State College Moses Ayiku, Essex County College Wendy Bailey, Troy University Dean Baim, Pepperdine University Herman Baine, Broward College Tyra Barrett, Pellissippi State Community College David Barrus, Brigham Young University, Idaho Jill Beccaris-Pescatore, Montgomery County Community College Kevin Beckwith, Salem State University Christian Beer, Cape Fear Community College Robert Belsterling, Pennsylvania State University, Altoona Laura Jean Bhadra, Northern Virginia Community College, Manassas Priscilla Block, Broward College Augustine Boakye, Essex County College Stephanie Campbell, Mineral Area College Bruce Carpenter, Mansfield University Tom Cate, Northern Kentucky University Semih Emre Çekin, Texas Tech University Suparna Chakraborty, University of San Francisco Claude Chang, Johnson & Wales University Amy Chataginer, Mississippi Gulf Coast Community College–Gautier Shuo Chen, State University of New York–Geneseo Jon Chesbro, Montana Tech of the University of Montana Amod Choudhary, Lehman College Constantinos Christofides, East Stroudsburg University Kathy Clark, Edison College, Fort Myers Wes Clark, Midlands Technical College Jane Clary, College of Charleston Jane Cline, Forsyth Technical Community College Patricia Daigle, Mount Wachusett Community College Anthony Daniele, St. Petersburg College–Gibbs Rosa Lee Danielson, College of DuPage Ribhi Daoud, Sinclair Community College Maria Davis, Indian River State College, Central William L. Davis, University of Tennessee–Martin Richard Dixon, Thomas Nelson Community College Tanya Downing, Cuesta College Scott Dressler, Villanova University Brad Duerson, Des Moines Area Community College Mark J. Eschenfelder, Robert Morris University Maxwell Eseonu, Virginia State University Michael Fenick, Broward College Tyrone Ferdnance, Hampton University Jeffrey Forrest, St. Louis Community College–Florissant Valley Richard Fowles, University of Utah, Salt Lake City Mark Frascatore, Clarkson University Preface xix Shelby Frost, Georgia State University Sudip Ghosh, Penn State University–Berks Daniel Giedeman, Grand Valley State University Scott Gilbert, Southern Illinois University James Giordano, Villanova University Susan Glanz, St. John’s University Lowell Glenn, Utah Valley University Terri Gonzales, Delgado Community College Michael Goode, Central Piedmont Community College Moonsu Han, North Shore Community College Charlie Harrington, Nova Southeastern University, Main Virden Harrison, Modesto Junior College Richard R. Hawkins, University of West Florida Kim Hawtrey, Hope College Glenn Haynes, Western Illinois University Mark Healy, Harper College Dennis Heiner, College of Southern Idaho Michael Heslop, Northern Virginia Community College, Annandale Calvin Hoy, County College of Morris Jesse Hoyt Hill, Tarrant County College Jim Hubert, Seattle Central Community College Greg W. Hunter, California State Polytechnic University, Pomona Christos Ioannou, University of Minnesota–Minneapolis Faridul Islam, Utah Valley University Mahshid Jalilvand, University of Wisconsin–Stout Ricot Jean, Valencia Community College–Osceola Jonatan Jelen, City College of New York Stephen Kaifa, County College of Morris Brad Kamp, University of South Florida, Sarasota-Manatee Gus Karam, Pace University, Pleasantville Kevin Kelley, Northwest Vista College Chris Klein, Middle Tennessee State University Barry Kotlove, Edmonds Community College Richard Kramer, New England College Felix Kwan, Maryville University Ted Labay, Bishop State Community College Tina Lance, Germanna Community College–Fredericksburg Sarah Leahy, Brookdale Community College Yu-Feng Lee, New Mexico State University–Las Cruces Adam Y.C. Lei, Midwestern State University Phillip Letting, Harrisburg Area Community College Brian Lynch, Lake Land College Zagros Madjd-Sadjadi, Winston-Salem State University Laura Maghoney, Solano Community College Vincent Mangum, Grambling State University Benjamin Matta, New Mexico State University–Las Cruces Pete Mavrokordatos, Tarrant County College–Northeast Campus Frederick May, Trident Technical College Katherine McClain, University of Georgia Michael McIntyre, Copiah-Lincoln Community College Robert McKizzie, Tarrant County College–Southeast Campus Kevin McWoodson, Moraine Valley Community College Edwin Mensah, University of North Carolina at Pembroke Randy Methenitis, Richland College Ida Mirzaie, The Ohio State University David Mitch, University of Maryland–Baltimore County Ramesh Mohan, Bryant University Daniel Morvey, Piedmont Technical College Shahriar Mostashari, Campbell University Stefan Mullinax, College of Lake County Ted Muzio, St. John’s University Cliff Nowell, Weber State University Alex Obiya, San Diego City College Albert Okunade, University of Memphis Mary Ellen Overbay, Seton Hall University Tammy Parker, University of Louisiana at Monroe Alberto Alexander Perez, Harford Community College David Petersen, American River College Mary Anne Pettit, Southern Illinois University–Edwardsville Jeff Phillips, Morrisville State College Robert Poulton, Graceland University Dezzie Prewitt, Rio Hondo College Joe Prinzinger, Lynchburg College Jaishankar Raman, Valparaiso University Natalie Reaves, Rowan University Virginia Reilly, Ocean County College Tim Reynolds, Alvin Community College Jose Rafael Rodriguez-Solis, Nova Community College, Annandale John Romps, Saint Anselm College Melissa Rueterbusch, Mott Community College Tom Scheiding, Elizabethtown College Amy Schmidt, Saint Anselm College Ron Schuelke, Santa Rosa Junior College Sangheon Shin, Alabama State University Alexandra Shiu, McLennan Community College Dorothy Siden, Salem State University Robert Simonson, Minnesota State University, Mankato Timothy Simpson, Central New Mexico Community College Jonathan Sleeper, Indian River State College Jose Rodriguez Solis, Northern Virginia Community College Camille Soltau-Nelson, Oregon State University Robert Sonora, Fort Lewis College Maritza Sotomayor, Utah Valley University, Orem Nick Spangenberg, Ozarks Technical Community College Dennis Spector, Naugatuck Valley Community College Thomas Stevens, University of Massachusetts, Amherst Tamika Steward, Tarrant County College, Southeast Robin Sturik, Cuyahoga Community College Western–Parma Travis Taylor, Christopher Newport University Ross Thomas, Central New Mexico Community College Mark Thompson, Augusta State University Deborah Thorsen, Palm Beach State College Michael Toma, Armstrong Atlantic State University Dosse Toulaboe, Fort Hays State University Jeff Vance, Sinclair Community College Cheryl Wachenheim, North Dakota State University–Fargo Christine Wathen, Middlesex County College Wendy Wysocki, Monroe County Community College Edward Zajicek, Winston-Salem State University Sourushe Zandvakili, University of Cincinnati ® Required=Results ©Getty Images/iStockphoto McGraw-Hill Connect® Learn Without Limits Connect is a teaching and learning platform that is proven to deliver better results for students and instructors. Connect empowers students by continually adapting to deliver precisely what they need, when they need it, and how they need it, so your class time is more engaging and effective. 73% of instructors who use Connect require it; instructor satisfaction increases by 28% when Connect is required. Analytics Connect Insight® Connect Insight is Connect’s new oneof-a-kind visual analytics dashboard that provides at-a-glance information regarding student performance, which is immediately actionable. By presenting assignment, assessment, and topical performance results together with a time metric that is easily visible for aggregate or individual results, Connect Insight gives the user the ability to take a just-in-time approach to teaching and learning, which was never before available. Connect Insight presents data that helps instructors improve class performance in a way that is efficient and effective. 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Over 8 billion questions have been answered, making McGraw-Hill Education products more intelligent, reliable, and precise. www.mheducation.com BRIEF CONTENTS Preface x Money, Banking, and Monetary Policy PART ONE Introduction to Economics and the Economy 1 2 Limits, Alternatives, and Choices The Market System and the Circular Flow 1 27 PART TWO Demand, Supply, and Market Equilibrium Market Failures: Public Goods and Externalities Government’s Role and Government Failure 289 308 323 352 18 19 Extending the Analysis of Aggregate Supply Current Issues in Macro Theory and Policy 373 393 PART SEVEN International Economics GDP, Growth, and Instability An Introduction to Macroeconomics Measuring Domestic Output and National Income Economic Growth Business Cycles, Unemployment, and Inflation Money, Banking, and Financial Institutions Money Creation Interest Rates and Monetary Policy Financial Economics Extensions and Issues 47 76 102 PART THREE 6 7 8 9 14 15 16 17 PART SIX Price, Quantity, and Efficiency 3 4 5 PART FIVE 123 137 158 179 20 21 22 International Trade The Balance of Payments, Exchange Rates, and Trade Deficits The Economics of Developing Countries Glossary Index PART FOUR 410 436 463 G1 IND1 Macroeconomic Models and Fiscal Policy 10 11 12 13 Basic Macroeconomic Relationships The Aggregate Expenditures Model Aggregate Demand and Aggregate Supply Fiscal Policy, Deficits, and Debt 201 221 243 266 xxiii List of Key Graphs Preface Reviewers ix x xviii PART ONE Introduction to Economics and the Economy 1 Chapter 1 Limits, Alternatives, and Choices 2 The Economic Perspective 3 Theories, Principles, and Models Microeconomics and Macroeconomics 4 5 Individual’s Economizing Problem 6 Society’s Economizing Problem 9 Production Possibilities Model 9 Scarcity and Choice / Purposeful Behavior / Marginal Analysis: Comparing Benefits and Costs Consider This: Free for All? 3 Consider This: Fast-Food Lines 4 Microeconomics / Macroeconomics / Positive and Normative Economics Limited Income / Unlimited Wants / A Budget Line Consider This: Did Zuckerberg, Seacrest, and Swift Make Bad Choices? 8 CONTENTS Scarce Resources / Resource Categories Production Possibilities Table / Production Possibilities Curve / Law of Increasing Opportunity Costs / Optimal Allocation Consider This: The Economics of War 12 Unemployment, Growth, and the Future 13 Chapter 1 Appendix: Graphs and Their Meaning 21 A Growing Economy / Present Choices and Future Possibilities / A Qualification: International Trade Last Word: Pitfalls to Sound Economic Reasoning 16 Chapter 2 The Market System and the Circular Flow 27 Economic Systems 27 Characteristics of the Market System 29 Five Fundamental Questions 32 The “Invisible Hand” 36 Laissez-Faire Capitalism / The Command System / The Market System Private Property / Freedom of Enterprise and Choice / Self-Interest / Competition / Markets and Prices / Technology and Capital Goods / Specialization / Use of Money / Active, but Limited, Government What Will Be Produced? / How Will the Goods and Services Be Produced? / Who Will Get the Output? / How Will the System Accommodate Change? / How Will the System Promote Progress? Consider This: McHits and McMisses 33 The Demise of the Command Systems / The Incentive Problem Consider This: The Two Koreas 37 xxiv Contents xxv The Circular Flow Model 37 How the Market System Deals with Risk 39 Households / Businesses / Product Market / Resource Market The Profit System / Shielding Employees and Suppliers from Business Risk / Benefits of Restricting Business Risk to Owners Consider This: Insurance 40 Last Word: Shuffling the Deck 41 46 Chapter 3 Demand, Supply, and Market Equilibrium 47 Markets Demand 48 48 Law of Demand / The Demand Curve / Market Demand / Changes in Demand / Changes in Quantity Demanded Supply 53 Market Equilibrium 56 Changes in Supply, Demand, and Equilibrium 58 Law of Supply / The Supply Curve / Market Supply / Determinants of Supply / Changes in Supply / Changes in Quantity Supplied Equilibrium Price and Quantity / Rationing Function of Prices / Efficient Allocation Consider This: Uber and Dynamic Pricing 58 Changes in Demand / Changes in Supply / Complex Cases Consider This: Salsa and Coffee Beans 60 Application: Government-Set Prices Price Ceilings on Gasoline / Rent Controls / Price Floors on Wheat Last Word: Student Loans and Tuition Costs 62 Chapter 3 Appendix: Additional Examples of Supply and Demand 60 69 76 Market Failures in Competitive Markets 77 Efficiently Functioning Markets 77 Public Goods 82 Private Goods Characteristics / Public Goods Characteristics / Optimal Quantity of a Public Good / Demand for Public Goods / Comparing MB and MC / Cost-Benefit Analysis / Quasi-Public Goods / The Reallocation Process Consider This: Street Entertainers 84 Consider This: Responding to Digital Free Riding 85 91 Chapter 4 Appendix: Information Failures 98 Chapter 5 Government’s Role and Government Failure 102 Government’s Economic Role 102 Government Failure 104 Chapter 5 Appendix: Public Choice Theory and Voting Paradoxes 115 Government’s Right to Coerce / The Problem of Directing and Managing Government Consider This: Does Big Government Equal Bad Government? 103 Representative Democracy and the Principal-Agent Problem / Clear Benefits, Hidden Costs / Unfunded Liabilities / Chronic Budget Deficits / Misdirection of Stabilization Policy / Limited and Bundled Choice / Bureaucracy and Inefficiency / Inefficient Regulation and Intervention / Corruption / Imperfect Institutions Consider This: Mohair and the Collective Action Problem 105 Consider This: Government, Scofflaw 108 Last Word: “Government Failure” in the News 112 PART THREE GDP, Growth, and Instability Market Failures: Public Goods and Externalities Consumer Surplus / Producer Surplus / Efficiency Revisited / Efficiency Losses (or Deadweight Losses) Society’s Optimal Amount of Externality Reduction Consider This: Voter Failure 118 Chapter 4 Demand-Side Market Failures / Supply-Side Market Failures 88 Negative Externalities / Positive Externalities / Government Intervention / Consider This: The Fable of the Bees 90 MC, MB, and Equilibrium Quantity / Shifts in Locations of the Curves / Government’s Role in the Economy Last Word: Carbon Dioxide Emissions, Cap and Trade, and Carbon Taxes 93 PART TWO Price, Quantity, and Efficiency Externalities 122 Chapter 6 An Introduction to Macroeconomics 123 Performance and Policy The Miracle of Modern Economic Growth Saving, Investment, and Choosing between Present and Future Consumption 123 125 Uncertainty, Expectations, and Shocks 127 How Sticky Are Prices? Categorizing Macroeconomic Models Using Price Stickiness 131 Banks and Other Financial Institutions Consider This: Economic versus Financial Investment 127 The Importance of Expectations and Shocks / Demand Shocks and Sticky Prices / Example: A Single Firm Dealing with Demand Shocks and Sticky Prices / Generalizing from a Single Firm to the Entire Economy Consider This: The Great Recession 131 Last Word: Debating the Great Recession 133 126 132 xxvi Contents Chapter 7 Is Growth Desirable and Sustainable? Measuring Domestic Output and National Income 137 Assessing the Economy’s Performance 137 Gross Domestic Product / A Monetary Measure / Avoiding Multiple Counting / GDP Excludes Nonproduction Transactions / Two Ways of Looking at GDP: Spending and Income The Expenditures Approach Personal Consumption Expenditures (C ) / Gross Private Domestic Investment (Ig ) / Government Purchases (G ) / Net Exports (Xn) / Putting It All Together: GDP = C + Ig + G + Xn Consider This: Stocks versus Flows 143 140 The Income Approach 144 Other National Accounts 145 Compensation of Employees / Rents / Interest / Proprietors’ Income / Corporate Profits / Taxes on Production and Imports / From National Income to GDP Net Domestic Product / National Income / Personal Income / Disposable Income / The Circular Flow Revisited Nominal GDP versus Real GDP Adjustment Process in a One-Product Economy / An Alternative Method / Real-World Considerations and Data Shortcomings of GDP Nonmarket Activities / Leisure / Improved Product Quality / The Underground Economy / GDP and the Environment / Composition and Distribution of Output / Noneconomic Sources of Well-Being / The Importance of Intermediate Output Last Word: Magical Mystery Tour 153 147 151 The Antigrowth View / In Defense of Economic Growth Last Word: Can Economic Growth Survive Population Decline? 174 Chapter 9 Business Cycles, Unemployment, and Inflation 179 The Business Cycle 179 Unemployment 182 Inflation 188 Redistribution Effects of Inflation 191 Does Inflation Affect Output? 194 Phases of the Business Cycle / Causation: A First Glance / Cyclical Impact: Durables and Nondurables Measurement of Unemployment / Types of Unemployment / Definition of Full Employment / Economic Cost of Unemployment / Noneconomic Costs / International Comparisons Consider This: Downwardly Sticky Wages and Unemployment 183 Meaning of Inflation / Measurement of Inflation / Facts of Inflation / Types of Inflation / Complexities / Core Inflation Consider This: Clipping Coins 190 Nominal and Real Income / Anticipations / Who Is Hurt by Inflation? / Who Is Unaffected or Helped by Inflation? / Anticipated Inflation / Negative Nominal Interest Rates / Other Redistribution Issues Consider This: The Specter of Deflation 194 Cost-Push Inflation and Real Output / Demand-Pull Inflation and Real Output / Hyperinflation Last Word: Unemployment after the Great Recession 195 Chapter 8 Economic Growth 158 PART FOUR Economic Growth 159 Macroeconomic Models and Fiscal Policy Growth as a Goal / Arithmetic of Growth / Growth in the United States Modern Economic Growth The Uneven Distribution of Growth / Catching Up Is Possible / Institutional Structures That Promote Modern Economic Growth Consider This: Economic Growth Rates Matter! 163 Consider This: Patents and Innovation 164 160 Determinants of Growth 165 Accounting for Growth 167 Supply Factors / Demand Factor / Efficiency Factor / Production Possibilities Analysis Labor Inputs versus Labor Productivity / Technological Advance / Quantity of Capital / Education and Training / Economies of Scale and Resource Allocation Consider This: Women, the Labor Force, and Economic Growth 168 Recent Fluctuations in the Average Rate of Productivity Growth Reasons for the Rise in the Average Rate of Productivity Growth between 1995 and 2010 / Implications for Economic Growth / The Recent Productivity Slow Down 200 Chapter 10 Basic Macroeconomic Relationships 201 The Income-Consumption and Income-Saving Relationships 201 Nonincome Determinants of Consumption and Saving 206 The Interest-Rate–Investment Relationship 208 Shifts of the Investment Demand Curve 211 The Consumption Schedule / The Saving Schedule / Average and Marginal Propensities Other Important Considerations Consider This: The Great Recession and the Paradox of Thrift 208 Expected Rate of Return / The Real Interest Rate / Investment Demand Curve 170 173 Instability of Investment Consider This: The Great Recession and the Investment Riddle 213 Contents xxvii The Multiplier Effect Rationale / The Multiplier and the Marginal Propensities / How Large Is the Actual Multiplier Effect? Last Word: Toppling Dominoes 216 213 Fiscal Policy, Deficits, and Debt The Aggregate Expenditures Model 221 Assumptions and Simplifications Consumption and Investment Schedules Equilibrium GDP: C + Ig = GDP 222 222 223 Other Features of Equilibrium GDP 226 Saving Equals Planned Investment / No Unplanned Changes in Inventories Changes in Equilibrium GDP and the Multiplier Adding International Trade Net Exports and Aggregate Expenditures / The Net Export Schedule / Net Exports and Equilibrium GDP / International Economic Linkages 227 228 Adding the Public Sector 231 Equilibrium versus Full-Employment GDP 234 Government Purchases and Equilibrium GDP / Taxation and Equilibrium GDP Recessionary Expenditure Gap / Inflationary Expenditure Gap / Application: The Recession of 2007–2009 Last Word: Say’s Law, the Great Depression, and Keynes 237 266 Built-In Stability 270 Evaluating How Expansionary or Contractionary Fiscal Policy Is Determined 271 Recent and Projected U.S. Fiscal Policy 273 Problems, Criticisms, and Complications of Implementing Fiscal Policy 275 The U.S. Public Debt 278 Automatic or Built-In Stabilizers Cyclically Adjusted Budget Fiscal Policy from 2000 to 2007 / Fiscal Policy during and after the Great Recession / Past and Projected Budget Deficits and Surpluses Problems of Timing / Political Considerations / Future Policy Reversals / Offsetting State and Local Finance / CrowdingOut Effect / Current Thinking on Fiscal Policy Ownership / Debt and GDP / International Comparisons / Interest Charges / False Concerns / Bankruptcy / Burdening Future Generations / Substantive Issues / Income Distribution / Incentives / Foreign-Owned Public Debt / Crowding-Out Effect Revisited Last Word: The Social Security and Medicare Shortfalls 282 PART FIVE Chapter 12 Aggregate Demand and Aggregate Supply 266 Fiscal Policy and the AD-AS Model Expansionary Fiscal Policy / Contractionary Fiscal Policy / Policy Options: G or T ? Chapter 11 Tabular Analysis / Graphical Analysis Chapter 13 Money, Banking, and Monetary Policy 243 288 Chapter 14 Aggregate Demand 244 Money, Banking, and Financial Institutions Changes in Aggregate Demand 245 The Functions of Money The Components of the Money Supply 290 290 What “Backs” the Money Supply? 293 Aggregate Demand Curve Consumer Spending / Investment Spending / Government Spending / Net Export Spending Aggregate Supply Aggregate Supply in the Immediate Short Run / Aggregate Supply in the Short Run / Aggregate Supply in the Long Run / Focusing on the Short Run 248 Money Definition M 1 / Money Definition M 2 Consider This: Are Credit Cards Money? 293 Money as Debt / Value of Money / Money and Prices / Stabilizing Money’s Purchasing Power 289 Changes in Aggregate Supply 251 The Federal Reserve and the Banking System 295 Equilibrium in the AD-AS Model Changes in Equilibrium 253 253 Fed Functions, Responsibilities, and Independence 298 The Financial Crisis of 2007 and 2008 299 The Policy Response to the Financial Crisis 301 The Postcrisis U.S. Financial Services Industry 302 Input Prices / Productivity / Legal-Institutional Environment Increases in AD: Demand-Pull Inflation / Decreases in AD: Recession and Cyclical Unemployment / Decreases in AS: Cost-Push Inflation / Increases in AS: Full Employment with Price-Level Stability Consider This: Ratchet Effect 256 Last Word: Stimulus and the Great Recession 258 Chapter 32 Appendix: The Relationship of the Aggregate Demand Curve to the Aggregate Expenditures Model Historical Background / Board of Governors / The 12 Federal Reserve Banks / FOMC / Commercial Banks and Thrifts Federal Reserve Independence The Mortgage Default Crisis / Securitization / Failures and Near-Failures of Financial Firms The Treasury Bailout: TARP / The Fed’s Lender-of- LastResort Activities 263 Last Word: Extend and Pretend 304 xxviii Contents Chapter 15 Money Creation 308 The Fractional Reserve System 308 A Single Commercial Bank 309 Illustrating the Idea: The Goldsmiths / Significant Characteristics of Fractional Reserve Banking Transaction 1: Creating a Bank / Transaction 2: Acquiring Property and Equipment / Transaction 3: Accepting Deposits / Transaction 4: Depositing Reserves in a Federal Reserve Bank / Transaction 5: Clearing a Check Drawn against the Bank Transaction 6: Granting a Loan / Transaction 7: Buying Government Securities / Profits, Liquidity, and the Federal Funds Market The Banking System: Multiple-Deposit Expansion 316 The Monetary Multiplier 318 Reversibility: The Multiple Destruction of Money Last Word: Banking, Leverage, and Financial Instability 319 Interest Rates The Demand for Money / The Equilibrium Interest Rate / Interest Rates and Bond Prices 323 323 Tools of Monetary Policy 327 Targeting the Federal Funds Rate Expansionary Monetary Policy / Restrictive Monetary Policy / The Taylor Rule Monetary Policy, Real GDP, and the Price Level Cause-Effect Chain / Effects of an Expansionary Monetary Policy / Effects of a Restrictive Monetary Policy 333 338 Monetary Policy: Evaluation and Issues 342 The “Big Picture” 345 Recent U.S. Monetary Policy / Problems and Complications Last Word: Less Than Zero 344 Financial Investment Present Value Compound Interest / The Present Value Model / Applications 359 359 Comparing Risky Investments 361 The Security Market Line 363 Average Expected Rate of Return / Beta / Relationship of Risk and Average Expected Rates of Return / The RiskFree Rate of Return Security Market Line: Applications Last Word: Index Funds versus Actively Managed Funds 367 PART SIX 372 Extending the Analysis of Aggregate Supply 373 From Short Run to Long Run 374 Applying the Extended AD-AS Model 376 The Inflation-Unemployment Relationship 380 The Long-Run Phillips Curve 384 Taxation and Aggregate Supply 385 Demand-Pull Inflation in the Extended AD-AS Model / Cost-Push Inflation in the Extended AD-AS Model / Recession and the Extended AD-AS Model / Economic Growth with Ongoing Inflation The Phillips Curve / Aggregate Supply Shocks and the Phillips Curve Short-Run Phillips Curve / Long-Run Vertical Phillips Curve / Disinflation Taxes and Incentives to Work / Incentives to Save and Invest / The Laffer Curve / Criticisms of the Laffer Curve / Rebuttal and Evaluation Consider This: Sherwood Forest 387 Last Word: Do Tax Increases Reduce Real GDP? 388 Chapter 19 Chapter 17 Financial Economics Arbitrage Risk Short-Run Aggregate Supply / Long-Run Aggregate Supply / Long-Run Equilibrium in the AD-AS Model 326 Open-Market Operations / The Reserve Ratio / The Discount Rate / Interest on Reserves / Relative Importance Consider This: Repo, Man 331 358 Percentage Rates of Return / The Inverse Relationship between Asset Prices and Rates of Return Consider This: Corporate Ownership 358 Chapter 18 The Consolidated Balance Sheet of the Federal Reserve Banks Assets / Liabilities Calculating Investment Returns Extensions and Issues Chapter 16 Interest Rates and Monetary Policy 356 Stocks / Bonds / Mutual Funds Diversification Money-Creating Transactions of a Commercial Bank313 The Banking System’s Lending Potential Some Popular Investments 352 353 353 Current Issues in Macro Theory and Policy 393 What Causes Macro Instability? 393 Does the Economy “Self-Correct”? 397 Mainstream View / Monetarist View / Real-BusinessCycle View / Coordination Failures Consider This: Too Much Money? 396 New Classical View of Self-Correction / Mainstream View of Self-Correction Contents xxix Rules or Discretion? In Support of Policy Rules / In Defense of Discretionary Stabilization Policy / Policy Successes Consider This: On the Road Again 401 Summary of Alternative Views Last Word: Market Monetarism 405 401 Chapter 21 The Balance of Payments, Exchange Rates, and Trade Deficits 404 International Financial Transactions The Balance of Payments 436 437 Flexible Exchange Rates 440 Fixed Exchange Rates 445 Current Account / Capital and Financial Account / Why the Balance? Depreciation and Appreciation / Determinants of Exchange Rates / Disadvantages of Flexible Exchange Rates PART SEVEN International Economics 409 Chapter 20 International Trade 410 Some Key Trade Facts The Economic Basis for Trade 411 412 Comparative Advantage / Two Isolated Nations / Specializing Based on Comparative Advantage / Terms of Trade / Gains from Trade / Trade with Increasing Costs / The Case for Free Trade Consider This: A CPA and a House Painter 413 Consider This: Misunderstanding the Gains from Trade 418 Supply and Demand Analysis of Exports and Imports Supply and Demand in the United States / Supply and Demand in Canada / Equilibrium World Price, Exports, and Imports Trade Barriers and Export Subsidies Economic Impact of Tariffs / Economic Impact of Quotas / Net Costs of Tariffs and Quotas Consider This: Buy American? 423 The Case for Protection: A Critical Review Military Self-Sufficiency Argument / Diversificationfor-Stability Argument / Infant Industry Argument / Protection-against-Dumping Argument / Increased Domestic Employment Argument / Cheap Foreign Labor Argument Multilateral Trade Agreements and Free-Trade Zones General Agreement on Tariffs and Trade / World Trade Organization / The European Union / North American Free Trade Agreement / Recognizing Those Hurt by Free Trade / Trade Adjustment Assistance / Offshoring of Jobs Last Word: Petition of the Candlemakers, 1845 431 436 Foreign Exchange Market / Official Reserves / The Sizes of Currency Purchases and Sales / Small and Alternating Changes in FX Reserves and the Domestic Money Supply / Large and Continuous Changes in FX Reserves and the Domestic Money Supply / Confusing Payments Terminology Consider This: China’s Inflationary Peg 448 The Current Exchange Rate System: The Managed Float 450 Recent U.S. Trade Deficits 452 Causes of the Trade Deficits / Implications of U.S. Trade Deficits Last Word: Are Common Currencies Common Sense? 454 Chapter 21 Appendix Previous International Exchange-Rate Systems 419 423 425 Chapter 22 The Economics of Developing Countries 463 The Rich and the Poor 463 Obstacles to Economic Development 466 The Vicious Circle The Role of Government 472 473 The Role of Advanced Nations 475 Classifications / Comparisons / Growth, Decline, and Income Gaps / The Human Realities of Poverty Natural Resources / Human Resources / Capital Accumulation / Technological Advance / Sociocultural and Institutional Factors A Positive Role / Public-Sector Problems 428 459 Expanding Trade / Admitting Temporary Workers / Discouraging Arms Sales / Foreign Aid: Public Loans and Grants / Flows of Private Capital Last Word: Microfinance and Cash Transfers Glossary Index G1 IND1 Selected Economics Statistics for Various Years, 1929–1990 Statistics in rows 1–5 are in billions of dollars in the year specified. Numbers may not add to totals because of rounding. GDP AND INCOME DATA 1929 1933 1940 1942 1944 1946 1948 1950 1958 1960 1962 104.6 57.2 102.9 166.0 224.6 227.8 247.8 300.2 482.0 543.3 605.1 1A Personal consumption expenditures 77.4 45.9 71.3 89.0 108.6 144.3 175.0 192.2 296.0 331.6 363.1 1B Gross private domestic investment 17.2 2.3 14.6 11.8 9.2 33.1 50.3 56.5 70.9 86.5 97.0 1C Government purchases 9.6 8.9 15.6 65.5 108.7 43.2 44.0 50.7 114.5 121.0 140.9 1D Net exports of goods and services 0.4 0.1 1.5 −0.3 −2.0 7.2 5.5 0.7 0.5 4.2 4.1 2 Net domestic product 94.2 49.2 92.3 151.1 203.2 202.0 243.4 266.8 419.6 475.4 531.0 3 National income 94.2 49.0 91.5 152.4 201.1 201.5 245.1 267.1 421.7 479.9 535.2 51.4 29.8 52.8 88.1 124.4 122.6 144.5 158.5 265.1 301.9 332.9 3B Rent 6.1 2.9 3.8 5.5 6.3 6.9 7.5 8.8 14.8 16.5 18 3C Interest 4.6 4 3.3 3.2 2.4 1.9 2.6 3.2 9.6 10.7 14.3 1 Gross domestic product 3A Wages and salaries 3D Profits 10.8 −0.2 9.9 20.8 25 18.2 31.4 36.1 43.9 54.7 64 3E Proprietor’s income 14.0 5.3 12.2 23.3 29.3 35.7 39.3 37.5 50.2 50.6 55.2 3F Taxes on production and imports* 7.3 7.2 9.5 11.5 13.7 16.2 19.8 23.0 38.1 45.5 50.8 4 Personal income 85.3 47.2 79.4 126.7 169.7 182.7 213.7 233.9 379.5 422.5 469.1 5 Disposable income 83.5 46.4 77.7 121.8 152.0 165.5 194.5 215.0 340.9 376.5 6 Disposable income per capita 685 7 Personal saving as percent of DI 4.7 OTHER STATISTICS 8 Real GDP (billions of 2009 dollars) 1929 1,055.6 369 −0.8 1933 588 6.8 903 26.2 1,099 27.9 1,170 11.8 1,326 8.9 1,417 9.3 1,958 11.4 2,083 10.0 417.5 2,238 11.1 1940 1942 1944 1946 1948 1950 1958 1960 1962 777.6 1,265.0 1,770.3 2,237.5 1,959.0 2,018.0 2,181.9 2,832.6 3,105.8 3,379.9 9 Economic growth rate (change in real GDP) — −1.3 8.8 18.9 8.0 −11.6 4.1 8.7 −0.7 2.6 6.1 10 Consumer Price Index (1982–1984 = 100) 17.1 13.0 14.0 16.3 17.6 19.5 24.1 24.1 28.9 29.6 30.2 0.0 −5.1 0.7 10.9 1.7 8.3 8.1 1.3 2.8 1.7 1.0 112.5 114.1 134.8 140.7 147.8 11 Rate of inflation (percent change in CPI) 12 Money supply, M1 (billions of $) 26.6 19.9 39.7 55.4 85.3 106.5 13 Federal funds interest rate (%) — — — — — — 1.75 2.07 1.57 3.22 14 Prime interest rate (%) 5.50 1.50 1.50 1.50 1.50 1.50 1.75 2.07 3.83 4.82 15 Population (millions) 2.71 4.50 121.8 125.6 132.1 134.9 138.4 141.4 146.6 152.3 174.9 180.7 186.5 16 Civilian labor force (millions) 49.2 51.6 55.6 56.4 54.6 57.5 60.6 62.2 67.6 69.6 70.6 16A Employment (millions) 47.6 38.8 47.5 53.8 54.0 55.3 58.3 58.9 63.0 65.8 66.7 1.6 12.8 8.1 2.7 0.7 2.3 2.3 3.3 4.6 3.9 3.9 17 Unemployment rate (%) 3.2 24.9 14.6 4.7 1.2 3.9 3.8 5.3 6.8 5.5 5.5 18 Productivity growth, business sector (%) — — — — — — 4.4 8.2 2.9 1.8 4.6 19 After-tax manufacturing profit per dollar of sales (cents) — — — — — — 7.0 7.1 4.2 4.4 4.5 20 Price of crude oil (U.S. average, dollars per barrel) 1.27 0.67 1.02 1.19 1.21 1.41 2.60 2.51 3.01 2.88 2.90 21 Federal budget surplus (+) or deficit (−) (billions of dollars) 0.7 −2.6 −2.9 −20.5 −47.6 −15.9 11.8 −3.1 −2.8 0.3 −7.1 16.9 22.5 50.7 79.2 204.1 271.0 252.0 256.9 279.7 290.5 302.9 — — — — — 4.9 2.4 −1.8 0.8 2.8 3.4 16B Unemployment (millions) 22 Public debt (billions of dollars) 23 Trade balance on current account (billions of dollars) *Combines items from other smaller accounts. 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 685.8 815.0 942.5 1,075.9 1,282.4 1,548.8 1,877.6 2,356.6 2,862.5 3,345.0 4,040.7 4,590.1 5,252.6 5,979.6 411.2 480.6 557.4 647.7 769.4 932.0 1,150.2 1,426.2 1,754.6 2,073.9 2,498.2 2,898.4 3,346.9 3,825.6 112.2 144.2 156.9 170.1 228.1 274.5 323.2 478.4 530.1 581.0 820.1 849.1 937.0 993.5 155.5 186.4 226.8 254.2 288.2 343.1 405.8 477.4 590.8 710.0 825.2 974.5 1,078.2 1,238.4 6.9 3.9 1.4 4.0 −3.4 −0.8 −1.6 −25.4 −13.1 −20.0 −102.7 −131.9 −109.4 −77.9 603.4 719.7 829.2 939.1 1,121.5 1,342.6 1,618.4 2,031.5 2,436.5 2,810.7 3,446.4 3,907.9 4,470.2 5,092.8 608.3 719.7 832.1 940.2 1,123.0 1,350.7 1,614.8 2,029.9 2,426.8 2,840.4 3,444.0 3,848.1 4,493.3 5,036.1 376.8 450.3 532.1 625.1 733.6 890.3 1,051.2 1,320.2 1,626.2 1,894.3 2,217.4 2,543.8 2,950 3,342.7 18.8 19.9 20.1 20.7 22.8 23.3 20.6 16.9 19.7 26.1 27.9 21.9 25.1 31.4 17.5 22.5 27.6 40.5 49.3 73.5 89.9 118.8 186.2 277.5 336.1 365.2 394.7 450.1 77.7 96.1 101.7 86.2 117.2 125.7 174.3 238.6 223.6 229.9 337.9 324.4 414.9 417.2 59.1 67.9 73.8 77.8 95.1 112.2 131 166 171.6 171.2 228.2 256.5 325.8 354.4 58.4 63.0 76.8 89.9 105.0 125.7 147.8 169.4 199.5 241.4 296.5 336.3 382.8 440.3 528.4 620.6 730.7 864.6 1,023.6 1,249.3 1,498.1 1,859.5 2,316.8 2,778.8 3,281.3 3,725.1 4,275.3 4,904.5 476.3 554.2 643.8 761.5 899.9 1,098.3 1,325.8 1,630.1 2,018.0 2,424.7 2,903.9 3,287.9 3,770.4 5,135 6,079 7,322 8,861 2,482 11.5 2,819 11.1 3,207 11.2 3,713 12.6 4,287 12.1 12.9 11.1 10.2 10.6 10,442 11.5 12,284 10.7 13,661 8.2 15,386 7.8 4,311.8 17,235 7.8 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 3,730.5 4,234.9 4,564.7 4,717.7 5,128.8 5,390.2 5,669.3 6,260.4 6,443.4 6,484.3 7,277.2 7,852.1 8,465.4 8,945.4 5.8 6.6 4.9 0.2 5.2 −0.5 5.4 5.6 −0.2 −1.9 7.3 3.5 4.2 1.9 31.0 32.4 34.8 38.8 41.8 49.3 56.9 65.2 82.4 96.5 103.9 109.6 118.3 130.7 1.3 2.9 4.2 5.7 3.2 11.0 5.8 7.6 13.5 6.2 4.3 1.9 4.1 5.4 160.3 172.0 197.4 214.4 249.2 274.2 306.2 357.3 408.5 474.8 551.6 724.7 786.7 824.7 3.50 5.11 5.66 7.18 4.43 10.50 5.05 7.93 13.36 12.26 10.23 6.81 7.57 8.10 4.50 5.63 6.31 7.91 5.25 10.80 6.84 9.06 15.27 14.86 12.04 8.33 9.32 10.01 191.9 196.6 200.7 205.1 209.9 213.9 218.0 222.6 227.2 231.7 235.8 240.1 244.5 249.5 73.1 75.8 78.7 82.8 87.0 91.9 96.2 102.3 106.9 110.2 113.5 117.8 121.7 125.8 69.3 72.9 75.9 78.7 82.2 86.8 88.8 96.0 99.3 99.5 105.0 109.6 115.0 118.8 3.8 2.9 2.8 4.1 4.9 5.2 7.4 6.2 7.6 10.7 8.5 8.2 6.7 7.0 5.2 3.8 3.6 4.9 5.6 5.6 7.7 6.1 7.1 9.7 7.5 7.0 5.5 5.6 3.4 4.1 3.4 2.0 3.2 −1.7 3.2 1.1 −0.2 −0.8 2.7 2.9 1.5 2.1 5.4 5.6 5.2 4.5 4.4 6.4 5.5 5.3 5.6 4.4 4.8 4.6 6.6 4.8 2.88 2.88 2.94 3.18 3.39 6.87 8.19 9.00 21.59 28.52 25.88 12.51 12.58 20.03 −5.9 −3.7 −25.2 −2.8 −23.4 −6.1 −73.7 −59.2 −73.8 −128.0 −185.4 −221.2 −155.2 −221.0 316.1 328.5 368.7 380.9 435.9 483.9 6.8 3.0 0.6 2.3 −5.8 2.0 629.0 776.6 909.0 1,137.3 1,564.6 2,120.5 2,601.1 3,206 4.3 −15.1 2.3 −5.5 −94.3 −147.2 −121.2 −79.0 Selected Economics Statistics for Various Years, 1991–2015 Statistics in rows 1–5 are in billions of dollars in the year specified. Numbers may not add to totals because of rounding. GDP AND INCOME DATA 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 6,174.0 6,539.3 6,878.7 7,308.7 7,664.0 8,100.2 8,608.5 9,089.1 9,665.7 10,289.7 10,625.3 3,960.2 4,215.7 4,471.0 4,741.0 4,984.2 5,268.1 5,560.7 5,903.0 6,316.9 6,801.6 7,106.9 Gross private domestic investment 944.3 1,013.0 1,106.8 1,256.5 1,317.5 1,432.1 1,595.6 1,735.3 1,884.2 2,033.8 1,928.6 1C Government purchases 1,298.2 1,345.4 1,366.1 1,403.7 1,452.2 1,496.4 1,554.2 1,613.5 1,726.0 1,834.4 1,958.8 −28.6 −34.8 −65.2 −92.5 −89.8 −96.4 −102.0 −162.7 −261.4 −380.1 −369.0 2 Net domestic product 5,242.9 5,579.6 5,875.1 6,253.1 6,541.2 6,924.2 7,368.5 7,778.8 8,264.8 8,775.5 9,021.3 3 National income 5,186.1 5,499.8 5,754.8 6,140.1 6,479.4 6,899.5 7,380.3 7,857.3 8,324.3 8,907.0 9,184.7 3,452 3,671.1 3,820.7 4,010.1 4,202.6 4,422.1 4,714.7 5,077.8 5,410.3 5,856.6 6,046.5 1 Gross domestic product 1A Personal consumption expenditures 1B 1D Net exports of goods and services 3A Wages and salaries 3B Rent 3C Interest 42.0 64.3 93.6 117.5 129.2 147.0 152.0 169.9 183.1 187.7 207.5 408.5 383.7 371.4 365.9 376.5 381.9 414.7 477.8 488.0 565.0 566.4 3D Profits 451.3 475.3 522.0 621.9 703.0 786.1 865.8 804.1 830.2 781.2 754.0 3E Proprietor’s income 356.0 402.4 430.5 459.5 484.5 547.4 587.9 644.2 700.4 757.8 836.8 3F Taxes on production and imports* 476.3 503.0 516.6 565.2 583.6 615.0 645.2 683.5 712.3 758.7 773.5 4 Personal income 5,071.1 5,410.8 5,646.8 5,934.7 6,276.5 6,661.9 7,075.0 7,587.7 7,983.8 8,632.8 8,987.1 5 Disposable income 4,484.5 4,800.3 5,000.2 5,244.2 5,532.6 5,829.9 6,148.9 6,561.3 6,876.3 7,400.5 6 Disposable income per capita 17,688 7 Personal saving as percent of DI 18,684 19,211 19,906 8.2 8.9 7.4 1991 1992 1993 1994 8,938.9 9,256.7 9,510.8 9 Economic growth rate (change in real GDP) −0.1 3.6 10 Consumer Price Index (1982–1984 = 100) 136.2 OTHER STATISTICS 8 Real GDP (billions of 2009 dollars) 11 Rate of inflation (percent change in CPI) 12 Money supply, M1 (billions of $) 6.3 20,753 21,615 22,527 6.4 5.9 1995 1996 5.7 9,894.7 10,163.7 10,549.5 11,022.9 2.7 4.0 2.7 3.8 140.3 144.5 148.2 152.4 4.2 3.0 3.0 2.6 897.0 1,024.9 1,129.8 1,150.8 23,759 26,206 7,752.3 27,179 4.3 4.0 1999 2000 2001 11,513.4 12,071.4 12,565.2 12,684.4 4.5 4.4 4.8 4.1 1.0 156.9 160.5 163.0 166.6 172.2 177.1 2.8 3.0 2.3 1.6 2.2 3.4 2.8 1,127.5 1,081.3 1,072.8 1,096.1 1,122.9 1,087.9 1,182.9 1997 6.2 24,617 1998 13 Federal funds interest rate (%) 5.69 3.52 3.02 4.20 5.84 5.30 5.46 5.35 4.97 6.24 14 Prime interest rate (%) 8.46 6.25 6.00 7.14 8.83 8.27 8.44 8.35 7.99 9.23 4.3 3.89 6.92 15 Population (millions) 252.2 255.0 257.8 260.3 262.8 265.2 267.8 270.2 272.7 282.2 285.0 16 Civilian labor force (millions) 126.3 128.1 129.2 131.1 132.3 133.9 136.3 137.7 139.4 142.6 143.7 16A Employment (millions) 117.7 118.5 120.3 123.1 124.9 126.7 129.6 131.5 133.5 136.9 136.9 16B Unemployment (millions) 8.6 9.6 8.9 8.0 7.4 7.2 6.7 6.2 5.9 5.7 6.8 17 Unemployment rate (%) 6.8 7.5 6.9 6.1 5.6 5.4 4.9 4.5 4.2 4.0 4.7 18 Productivity growth, business sector (%) 1.5 4.2 0.5 0.9 0.0 2.9 1.8 3.0 3.5 3.5 3.0 19 After-tax manufacturing profit per dollar of sales (cents) 4.1 3.1 3.7 5.5 6.0 6.5 6.7 6.0 6.4 6.9 5.7 16.54 15.99 14.25 13.19 14.62 18.46 17.23 10.87 15.56 26.72 21.84 20 Price of crude oil (U.S. average, dollars per barrel) 21 Federal budget surplus (+) or deficit (−) (billions of dollars) −269.2 −290.3 −255.1 −203.2 −164.0 −107.4 −21.9 69.3 125.6 236.2 128.2 22 Public debt (billions of dollars) 3,598.2 4,001.8 4,351.0 4,643.3 4,920.6 5,181.5 5,369.2 5,478.2 5,605.5 5,628.7 5,769.9 2.9 −51.6 −84.8 −121.6 −113.6 −124.8 −140.7 −215.1 −301.7 −416.3 −396.6 23 Trade balance on current account (billions of dollars) *Combines items from other smaller accounts. 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015** 10,980.2 11,512.2 12,277.0 13,095.4 13,857.9 14,480.3 14,720.3 14,417.9 14,958.3 15,517.9 16,155.3 16,691.5 17,393.1 18,036.6 7,385.3 7,764.4 8,257.8 8,790.3 9,297.5 9,744.4 10,005.5 9,842.9 10,201.9 10,689.3 11,050.6 11,361.2 11,863.4 12,283.7 1,925.0 2,027.9 2,276.7 2,527.1 2,680.6 2,643.7 ...
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Chapter 20
Confused
What confused me most about this chapter is the issue of terms of trade, and how it affects global
trade. Although specialization of products is a good idea, it can be difficult to divide the products
among the consumers. The terms of trade give a country an option to either be self sufficient or
to specialize in a particular product. It is confusing how these terms are established and the ratio
used to determine if the deal is better.
The second issue that confused me is the case for free trade between global nations. Since the
resources are different in different countries, each nation can produce particular products,
different from others. with technology, each nation would produce goods domestically at a lower
cost, and trade this with other nations freely. The concept is co...

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