Preface
“What is above all needed is to let the meaning choose the word, and not the other way about.”
George Orwell, “Politics and the English Language,” 1946
From Paul
Robin and I like to think that we wrote this book with Orwell’s injunction in mind. We wanted to write a different sort of book, one that gives as much attention to the task of making sure the student understands how economic models apply to the real world as it gives to models themselves. We wanted to adapt Orwell’s principle to the writing of an economics textbook: to let the purpose of economics—to achieve a deeper understanding of the world—rather than the mechanics of economics dictate the writing.
We believe that writing in this style reflects a commitment to the reader—a commitment to approach the material from a beginner’s point of view, to make the material entertaining and accessible, to make discovery a joy. That’s the fun part. But we also believe that there is another, equally compelling obligation on the part of an author of a principles of economics text. Economics is an extremely powerful tool. Many of us who are economists originally started in other disciplines (I started in history, Robin in chemistry). And we fell in love with economics because we believed it offers a coherent worldview that offers real guidelines to making the world a better place. (Yes, most economists are idealists at heart.) But like any powerful tool, economics should be treated with great care. For us, this obligation became a commitment that students would learn the appropriate use of the models—understand their assumptions and know their limitations as well as their positive uses. Why do we care about this? Because we don’t live in a “one model of the economy fits all” world. To achieve deeper levels of understanding of the real world through economics, students must learn to appreciate the kinds of trade-offs and ambiguities that economists and policy makers face when applying their models to real-world problems. We hope this approach will make students more insightful and more effective participants in our common economic, social, and political lives.
To those familiar with my academic work, this perspective will probably look familiar. There I tried to make the problem to be solved the focus, and to avoid unnecessary technique. I tried to simplify. And I tried to choose topics that had important real-world implications. Writing for a large, nontechnical audience has only reinforced and expanded these tendencies. I had to begin with the working assumption that readers initially have no reason to care about what I am writing about—that it is my responsibility to show them why they should care. So the beginning of each chapter of this book is written according to the dictum: “If you haven’t hooked them by the third sentence, then you’ve lost them.” I’ve also learned that about all you can take for granted in writing for a lay audience is basic numeracy—addition and subtraction, but no more than that. Concepts must be fully explained; likely confusions must be anticipated and headed off. And most of all, you must be judicious in choosing the content and pacing of the writing—don’t overwhelm your reader.
From Robin
Like Paul, I wanted to write a book that appeals to students without unduly sacrificing an instructor’s obligation to teach economics well. I arrived at a similar perspective on how this book should be written, but by a different path. It came from my experiences teaching economics in a business school for a few years. Facing students who were typically impatient with abstraction and often altogether unhappy to be taking economics (and who would often exact bloody revenge in teaching evaluations), I learned how important it is to “hook” the students into the subject matter. Teaching with case studies, I found that concepts had been truly learned only when students could successfully apply them. And one of the most important lessons I learned was not to patronize. We—economists, that is—often assume that people who aren’t familiar with conceptual thinking aren’t smart and capable. Teaching in a business school showed me otherwise. The majority of my students were smart and capable, and many had shouldered a lot of responsibility in their working lives. Although adept at solving practical problems, they weren’t trained to think conceptually. I had to learn to acknowledge the practical skills that they did have, but also show them the importance of the conceptual skills they didn’t have. Although I eventually returned to an economics department, the lessons I learned about teaching economics in a business school stayed with me and, I believe, have been crucial ingredients in writing this textbook.
Advantages of This Book
Despite our fine words, why should any instructor use our text? We believe our book distinguishes itself in several ways that will make your introductory macroeconomics course an easier and more successful undertaking for the following reasons:
Tools for Learning
We have structured each of the chapters around a common set of features. The following features are intended to help students learn better while also keeping them engaged.
“What You Will Learn in This Chapter”
To help readers get oriented, the first page of each chapter contains a preview of the chapter’s contents, in an easy-to-review bulleted list format, that alerts students to the critical concepts and details the objectives of the chapter.
Opening Story
In contrast to other books in which each chapter begins with a recitation of some aspect of economics, we’ve adopted a unique approach: we open each chapter with a compelling story that often extends through the entire chapter. Stories were chosen to accomplish two things: to illustrate important concepts in the chapter and then to encourage students to want to read on to learn more.
As we’ve mentioned, one of our main goals is to build intuition with realistic examples. Because each chapter is introduced with a real-world story, students will relate more easily to the material. For example, we introduce Chapter 7, on macroeconomic data – usually one of the driest subjects in macroeconomics – with the story of how an accurate estimate of real GDP growth steadied nervous Portuguese officials and helped the country make the transition from dictatorship to democracy. (See “After the Revolution” on p. 159.). We introduce Chapter 15, on unemployment, with a story of two lives changed by job loss (see “Two Paths to Unemployment” on p. 000). A complete list of our opening stories appears on the inside front cover.
“Economics in Action” Case Studies
In addition to introducing chapters with vivid stories, we conclude virtually every major text section with still more examples: a real-world case study called “Economics in Action.” This feature provides a short but compelling application of the major concept just covered in that section. Students will experience an immediate payoff from being able to apply the concepts they’ve just read about. For example, our discussion of long-run fiscal issues (in Chapter 12, “Fiscal Policy), which includes the question of solvency, is followed by an account of Argentina’s debt default (see “Argentina’s creditors take a haircut,” p. 313). In Chapter 19, “Open-economy macroeconomics,” we follow the discussion of exchange rate policy with an account of China’s massive intervention to keep the yuan from rising (see “China pegs the yuan,” p. 000). For a complete list of all the “Economics in Action” cases in the text, see the page facing the inside front cover and also our table of contents.
Unique End-of-Section Review: “Quick Review” and “Check Your Understanding” Questions
In contrast to most other textbooks, which offer a review of concepts only at the end of each chapter, we include review material at the end of each major section within a chapter.
Economics contains a lot of jargon and abstract concepts that can quickly overwhelm the principles student. So we provide Quick Reviews, short bulleted summaries of concepts at the end of each major section. This review helps ensure that students understand what they have just read.
The Check Your Understanding feature, which appears along with every “Quick Review,” consists of a short set of review questions; solutions to these questions appear at the back of the book in the section set off with a burgundy tab at the edge of each page. These questions and solutions allow students to immediately test their understanding of the section just read. If they’re not getting the questions right, it’s a clear signal for them to go back and reread before moving on.
The “Economics in Action” cases, followed by the “Quick Reviews” and “Check Your Understanding” questions comprise our unique end-of-section pedagogical set that encourages students to apply what they’ve learned (via the “Economics in Action”) and then review it (with the “Quick Reviews” and “Check Your Understanding” questions). Our hope is that students will be more successful in the course if they make use of this carefully constructed set of study aids.
“For Inquiring Minds” Boxes
To further our goal of helping students build intuition with real-world examples, almost every chapter contains one or more “For Inquiring Minds” boxes, in which concepts are applied to real-world events in unexpected and sometimes surprising ways, generating a sense of the power and breadth of economics. These boxes help impress on students that economics can be fun despite being labeled “the dismal science.”
In a Chapter 8 box, for example, students learn how a substantial portion of recent productivity gains in the U.S. can be attributed to a rather unglamorous industry, one that most of us take for granted-- retailing (see the “For Inquiring Minds” entitled “The Wal-Mart effect,” on page 193). In Chapter 13, “Money, Banking, and the Federal Reserve System,” we point out the puzzling fact that there’s $2,500 worth of currency in circulation for every man, woman, and child in the United States (how many people do you know who keep $2,500 in their wallets?). We then explain how currency in domestic cash registers and in the hands of foreigners resolves the puzzle (see “What’s With All The Currency?”, p. 325.) For a list of all “For Inquiring Minds” boxes, see the page facing the inside front cover and our table of contents.
“Pitfalls” Boxes
Certain concepts are prone to be misunderstood when students are beginning their study of economics. We have tried to alert students to these mistakes in the “Pitfalls” boxes. Here common misunderstandings are spelled out and corrected—for example, the tricky business of how to read an exchange rate (see the “Pitfalls” box “Which way is up?” on page 000). For a list of all the “Pitfalls” boxes in chapters, see the table of contents. [note: box is in Ch 19]
Student-Friendly Graphs
Comprehending graphs is often one of the biggest hurdles for principles students. To help alleviate that problem, this book has been designed so that figures are large, clear, and easy for students to follow. Many contain helpful annotations—in an easy-to-see balloon label format—that link to concepts within the text. Figure captions have been written to complement the text discussion of figures and to help students more readily grasp what they’re seeing.
We’ve worked hard to make these graphs student-friendly. For example, to help students navigate one of the stickier thickets—the distinction between a shifting curve and movement along a curve—we encourage students to see this difference by using two types of arrows: a shift arrow and what we call a “movement-along” arrow. You can see these arrows at work in Figures 3-12 and 3-13 on pages 73 and 74.
In addition, several graphs in each chapter are accompanied by the icon ---- , which indicates that these graphs are available online as simulations (the graphs are animated in a Flash format and can be manipulated). Every interactive graph is accompanied by a quiz on key concepts to further help students in their work with graphs.
Instructing students in the use of graphs is also enhanced by our use of a lot of real-world data, often presented in the form of charts that can be compared directly to the analytical figures. For example, the aggregate supply curve can seem like a highly abstract concept, but in Chapter 10, “Aggregate Supply and Aggregate Demand,” we make it less abstract by illustrating the concept with the actual behavior of aggregate output and the aggregate price level during the 1930s (see Figure 10-6 on p. 245).
Helpful Graphing Appendix For students who would benefit from an explanation of how graphs are constructed, interpreted, and used in economics, we’ve included a detailed graphing appendix after Chapter 2 on page 41. This appendix is more comprehensive than most because we know that some students need this helpful background, and we didn’t want to breeze through the material. Our hope is that this comprehensive graphing appendix will better prepare students to use and interpret the graphs in this textbook and then out in the real world (in newspapers, magazines, and elsewhere).
Definitions of Key Terms
Every key term, in addition to being defined in the text, is also placed and defined in the margin to make it easier for students to study and review.
A Look Ahead
The text of each chapter ends with an “A Look Ahead” section, a short overview of what lies ahead in upcoming chapters. This concluding section provides students with a sense of continuity among chapters.
End-of-Chapter Review
In addition to the “Quick Review” at the end of each major section, each chapter ends with a complete but brief Summary of the key terms and concepts. In addition, a list of the Key Terms is placed at the end of each chapter along with page references.
Finally, we have created for each chapter a comprehensive set of End-of-Chapter Problems—problems that test intuition as well as the ability to calculate important variables. Much care and attention have been devoted to the creation of these problems so that instructors can be assured that they provide a true test of students’ learning.
Macroeconomic data
Because we use so much real-world data to illustrate macroeconomic concepts, we’ve included a broad selection of macroeconomic data at the back of the book in the section set off with a blue tab at the edge of each page. These data series include most of the important macroeconomic variables for the United States. Selected early years illustrate the behavior of the economy during the Great Depression and the postwar boom. The series also include data for each year from 1970 to 2004 for full coverage of recent years.
The Organization of This Book and How to Use It
This book is organized as a series of building blocks in which conceptual material learned at one stage is clearly built upon and then integrated into the conceptual material covered in the next stage. These building blocks correspond to the eight parts into which the chapters are divided. We’ll walk through those building blocks shortly. First, however, let’s talk about the general question of the order in which macroeconomic topics are best covered.
Teaching macroeconomics: Short run or long run first?
The history of macroeconomic theory is one in which short-run and long-run issues vie for priority. The long-run focus of classical economists gave way to the short-run focus of Keynesian economics; then the pendulum swung back to the long run, and lately it seems to be swinging back to the short run. This struggle over priority is reproduced every time an instructor must decide how to teach the subject. Two issues are particularly tricky. First, should long-run economic growth be covered early, or later, after the business cycle has been discussed? Second, should classical, full-employment analysis of the price level come before or after business cycle analysis?
We have chosen to cover long-run growth early (Part 4, Chapters 8 and 9), because we feel that an early discussion of the long-run growth of real GDP helps students understand why the business cycle involves fluctuations around an upward trend. We have, however, structured the subsequent short-run analysis (Part 5, Chapters 10 – 14) in a way that allows instructors to reverse this order, deferring our chapter on long-run growth (Chapter 8) until later in the course. However, we’ve taken a firmer stand when it comes to the second question. We believe that the fundamental approach of this book – to tie macroeconomics to real-world concerns – requires that a discussion of the short-run effects of demand and supply shocks come before a discussion of the classical model.
Although some macroeconomics textbooks treat the classical model first, and some even devote more space to long-run analysis than to the short run, we believe – based on our own teaching experience – that this is a formula for losing the interest of beginning students. We are, after all, living in a time of activist monetary and fiscal policy. Students are likely to read newspaper accounts of the Federal Reserve’s attempts to stabilize the economy, or of debates over the impact of tax cuts on job creation. If students begin their study of macroeconomics with models in which monetary policy has no effect on aggregate output they will get the impression that what they are learning in the classroom is irrelevant to the real world. In this book we explain early why demand shocks have no effect on output in the long run, but we don’t emphasize the long-run neutrality of money before describing how monetary and fiscal policy work in the short run.
We also believe that students could lose their sense that macroeconomics is relevant if the book starts with a model best used to explain inflation. We’re living in a time when sustained high inflation is a distant memory in wealthy nations, and even in many developing countries. The great majority of students likely to use this book hadn’t been born the last time the U.S. core inflation rate was above 6%. In contrast, the effects of short-run demand and supply shocks, such as the 2001 recession and the subsequent jobless recovery, or the surge in energy prices from 2003 to 2005, are fresh in our memories. We believe that a book aimed at showing students how economics applies to the real world must emphasize early on, rather than later, how macroeconomic models help us understand such events.
We believe that the diffidence with which some textbooks approach the short run is partly driven by reluctance to enter an area that was marked by fierce debates in the 1970s and 1980s. But the ferocity of those debates, like double-digit inflation, has receded into the past. Yes, there are still serious disputes about macroeconomic theory and policy. But as we explain in Chapter 17, “The Making of Modern Macroeconomics,” there is also far more consensus than in the past. Students are best served by a book that emphasizes the macroeconomic issues that matter most to public debate, rather than downplays these issues out of fear of stepping into contentious areas. That’s why we have chosen to provide an extended, early discussion of the short-run effects of demand and supply shocks and the role of fiscal and monetary policy in responding to these shocks.
Finally, one last issue involves the order in which the short run should be taught. Some instructors prefer to begin their coverage with a traditional Keynesian discussion of the determinants of aggregate expenditure. Some prefer placing that discussion after a basic introduction to aggregate supply and aggregate demand. And a third group prefers to skip that analysis altogether. We’ve used a structural innovation to make all three approaches work, by including an intuitive discussion of the multiplier in Chapter 10, on aggregate supply and aggregate demand, followed by a more detailed, algebraic discussion in Chapter 11, “Income and Expenditure.” Instructors who follow the table of contents, teaching Chapter 11 after Chapter 10, can treat the famous 45-degree diagram and its associated algebra as a more in-depth discussion of the multiplier principle students have already learned. Instructors who choose to teach Chapter 11 first can treat Chapter 10’s discussion as a reinforcement of the graphical and algebraic analysis. And instructors who skip Chapter 11 will find that the intuitive discussion of the multiplier in Chapter 10 is sufficient for the analysis of fiscal and monetary policy.
With that, let’s walk through the book’s organization.
Part 1: What Is Economics?
In the Introduction, “The Ordinary Business of Life,” students are initiated into the study of economics in the context of a shopping trip on any given Sunday in everyday America. It provides students with basic definitions of terms such as economics, the invisible hand, and market structure. In addition it serves as a “tour d’horizon” of economics, explaining the difference between microeconomics and macroeconomics.
In Chapter 1, “First Principles,” nine principles are presented and explained: four principles of individual choice, covering concepts such as opportunity cost, marginal analysis, and incentives; and five principles of interaction between individuals, covering concepts such as gains from trade, market efficiency, and market failure. In later chapters, we build intuition by frequently referring to these principles in the explanation of specific models. Students learn that these nine principles form a cohesive conceptual foundation for all of economics.
Chapter 2, “Economic Models: Trade-offs and Trade,” shows students how to think like economists by using three models—the production possibility frontier, comparative advantage and trade, and the circular-flow diagram—to analyze the world around them. It gives students an early introduction to gains from trade and to international comparisons. The Chapter 2 appendix contains a comprehensive math and graphing review for those students and instructors who wish to cover this material.
Part 2: Supply and Demand
In this part we provide students with the basic analytical tools they need to understand how markets work, tools that are common to microeconomics and macroeconomics.
Chapter 3, “Supply and Demand,” covers the standard material in a fresh and compelling way: supply and demand, market equilibrium, and surplus and shortage are all illustrated using an example of the market for scalped tickets to a sports event. Students learn how the demand and supply curves of scalped tickets shift in response to the announcements of a star player’s impending retirement.
Chapter 4, “The Market Strikes Back,” covers various types of market interventions and their consequences: price and quantity controls, inefficiency and deadweight loss, and excise taxes. Through tangible examples such as New York City rent control regulations and New York City taxi licenses, the costs generated by attempts to control markets are made real to students.
Chapter 5, “Consumer and Producer Surplus,” is designed to be optional. In the chapter, students learn how markets increase welfare through examples such as a market for used textbooks and eBay. Although the concepts of market efficiency and deadweight loss are strongly emphasized, we also describe the ways in which a market can fail. This chapter will be particularly helpful for instructors who teach Chapter 18 on international trade.
Part 3: Introduction to Macroeconomics
Chapter 6, “Macroeconomics: The Big Picture,” introduces the big ideas in macroeconomics. Starting with an example close to students’ hearts – how the business cycle affects the job prospects of graduates, this chapter provides a quick overview of recessions and expansions, employment and unemployment, long-run growth, inflation versus deflation, and the open economy.
Chapter 7, “Tracking the Macroeconomy,” explains how the numbers macroeconomists use are calculated, and why. We start with a real-world example of how an estimate of real GDP helped save a country from policy mistakes, then turn to the basics of national income accounting, unemployment statistics, and price indexes.
Long-run growth We begin our discussion of macroeconomic models with long-run economic growth. We believe that students are best prepared to understand the significance of fluctuations around long-run trends if they first acquire an understanding of where long-run trends come from. Instructors can, however, defer Chapter 8 until later in the course if they choose.
Part 4: The Economy in the Long Run
Chapter 8, “Long-run Economic Growth,” starts with a reality TV show – a BBC series about a family that spent three months living life as it was in 1900 – to illustrate the human significance of economic growth. When we turn to economic data, we emphasize an international perspective – economic growth is a story about the world as a whole, not just the United States. The chapter uses a streamlined approach to the aggregate production function to present an analysis of the sources of economic growth, and the reasons why some countries have been more successful than others.
Chapter 9, “Savings, Investment Spending, and the Financial System,” introduces students to financial markets and institutions. We group it with Chapter 8 in this part because it highlights the role of these markets and institutions in economic growth. Chapter 9 is also, however, integral to short-run analysis, for two reasons. First, its analysis of the market for loanable funds and the determination of interest rates provides an analytical tool that will be helpful for understanding monetary policy, international capital flows, and other topics covered later in the book. Second, its discussion of financial institutions provides background when we turn to the role of banks in creating money.
The Short Run Macroeconomics as we know it emerged during the Great Depression, and the effort to understand short-run fluctuations and the effects of monetary and fiscal policy remains as important as ever. So we devote a large block of chapters (Chapters 10-14) to short-run fluctuations. These chapters are, however, structured to allow instructors to choose their preferred level of detail. In particular, we know that some instructors want to place more emphasis than others on the consumption function and the multiplier. So we provide a basic, intuitive explanation of the multiplier in Chapter 10, but reserve a detailed discussion of consumer behavior and how it relates to the “45-degree” diagram for Chapter 11, which is designed to be optional (but can be taught before Chapter 10, if instructors choose.)
There is also an ongoing debate among economics instructors about whether the traditional presentation of aggregate supply and aggregate demand, which treats the aggregate quantities of goods and services demanded and supplied as functions of the price level, should be replaced with a framework that treats them as functions of the inflation rate. In this alternative framework the “aggregate supply curve” is really the short-run Phillips curve, and the “aggregate demand curve” is really a representation of the effects of monetary policy that leans against inflation. We understand the appeal of such a presentation, which makes an easier transition to the discussion of inflation. But we believe that this approach blurs the important distinction between the private sector’s behavior and the effects of policy responses to that behavior. Furthermore, a crucial insight from the traditional aggregate supply-aggregate demand approach is the economy’s ability to correct itself in the long run. This insight is lost in the alternative approach. So we introduce short-run macroeconomics with a traditional focus on the aggregate price level, and treat ongoing inflation as a “medium run” issue, reserved for Part 6.
Part 5: Short-run Economic fluctuations
Part 5 begins with Chapter 10, “Aggregate Supply and Aggregate Demand.” This chapter’s opening story covers the economic slump of 1979-1982, which startled Americans with its combination of recession and inflation. This leads into an analysis of how both demand shocks and supply shocks affect the economy. In analyzing demand shocks, we offer a simple, intuitive explanation of the concept of the multiplier, using the idea of successive increases in spending after an initial shock to explain how the aggregate demand curve shifts. In analyzing supply shocks, we emphasize positive shocks such as the productivity surge of the late 1990s as well as negative shocks. The chapter concludes with the key insight that demand shocks only affect output in the short run.
Chapter 11, “Income and Expenditure,” is an optional chapter for instructors who want to go into some detail about the sources of changes in aggregate demand. We use real-world data to delve more deeply into the determinants of consumer and investment spending, introduce the famous 45-degree diagram, and present a fully-fleshed out explanation of the logic of the multiplier. For instructors who would like more algebraic detail, the Chapter 11 appendix shows how to derive the multiplier algebraically.
Chapter 12, “Fiscal Policy,” starts in Japan, where discretionary fiscal policy has taken the form of huge public works projects, often of doubtful value. This leads us into an analysis of the role of discretionary fiscal policy in shifting the aggregate demand curve, which makes use of the intuitive explanation of the multiplier from Chapter 10. We also cover automatic stabilizers – using the woes of Europe’s “stability pact” to illustrate their importance -- and long-run issues of debt and solvency. The Chapter 12 appendix (“Taxes and the Multiplier”) shows how to introduce taxes into the analysis. It shows more specifically than the main text how the size of the multiplier depends on the tax rate, and provides an intuitive explanation, in terms of successive rounds of spending, of how taxes reduce the multiplier.
Part 5 concludes with two monetary chapters. Chapter 13, “Money, Banking, and the Federal Reserve System,”covers the roles of money, how banks create money, and the structure and role of the Federal Reserve and other central banks. We use episodes from U.S. history together with the story of the creation of the euro to illustrate how money and monetary institutions have evolved.
Chapter 14, “Monetary Policy,” covers the role of Federal Reserve policy in driving interest rates and aggregate demand. In the real-world examples we took full advantage of the dramatic developments in monetary policy since 2000, which make it easier than ever before to illustrate what the Federal Reserve does. We also made a special effort to build a bridge between the short run and the long run. For example, we carefully explain how the Federal Reserve can set the interest rate in the short run, even though that rate reflects the supply and demand for savings in the long run.
The Medium Run An important set of questions in macroeconomics revolves around unemployment and inflation: can monetary and fiscal policy be used to reduce unemployment, does the attempt to reduce unemployment cause inflation, is there a tradeoff between inflation and unemployment? These questions fall into the category of “medium run” issues, which apply to periods long enough so that wages and prices can’t be taken as given, but short enough that productivity and population growth don’t dominate the story.
Part 6: The Supply-Side and the Medium Run
Chapter 15, “Labor Markets, Unemployment, and Inflation,” begins with stories of how real people move into and out of unemployment. It explains why there is always some frictional and structural unemployment, illustrated by the problem of “Eurosclerosis.” It then turns to the relationship between unemployment and the output gap. It concludes with the Phillips curve, the role of inflation expectations, and how this relates to the natural rate hypothesis.
Chapter 16, “Inflation, Disinflation, and Deflation,” covers the causes and consequences of inflation, as well as the reasons why disinflation imposes large costs in lost output and employment. A unique final section analyzes the effects of deflation and the problems that a “zero bound” poses for monetary policy. As we explain, these issues, dormant for more than half a century after the Great Depression, surfaced in Japan in the 1990s, and have had a major impact on policy thinking.
If there’s time We recognize that many instructors will find that there’s only enough time to cover the basic material up through Chapter 16 on inflation. For those with enough time, however, Parts 7 and 8 (and Chapter 8, on long-run growth, for instructors who choose to cover it later) broaden the analysis. Part 7 offers a brief history of macroeconomic thought. Part 8 takes the analysis into international economics.
Part 7: Events and Ideas
Macroeconomics has always been a field in flux, with new policy issues constantly arising and traditional views often challenged. Chapter 17, “The Making of Modern Macroeconomics,” provides a unique overview of the history of macroeconomic thought, set in the context of changing policy concerns, then turns to a description of the current state of macroeconomic debates (there’s more agreement than people think.)
Part 8: The Open Economy
Chapter 18, “International Trade,” contains a recap of comparative advantage, traces the sources of comparative advantage, considers tariffs and quotas, and explores the politics of trade protection. In response to current events, we give in-depth coverage to the controversy over imports from low-wage countries.
Chapter 19, “Macroeconomic Policy in Open Economies,” analyzes the special issues raised for macroeconomics by the open economy. We frame the discussion with real-world concerns: Britain’s debate over whether to adopt the euro, America’s current account deficit, China’s accumulation of dollar reserves.
For instructors and students who want to delve more deeply into international macroeconomics, we provide a supplemental chapter – available online and in booklet form. Supplemental Chapter 20, “Currencies and Crises,” takes students into the world of currency speculation and international financial crises, with an emphasis on the dramatic events that unfolded in developing countries over the past decade.
What’s Core, What’s Optional?
As noted earlier, we realize that some of our chapters will be considered optional. On the facing page is a list of what we view as core chapters and those that could be considered optional. We’ve annotated the list of optional chapters to indicate what they cover should you wish to consider incorporating them into your course.
What's Core, What's Optional: An Overview
Core Optional
1. First Principles
2. Economic Models: Trade-offs and Trade
3. Supply and Demand
4. The Market Strikes Back
6. Macroeconomics: The Big Picture
7. Tracking the Macroeconomy
8. Long run Growth
9. Savings, Investment Spending, and the Financial System
10. Aggregate Supply and Aggregate Demand
12. Fiscal Policy
13. Money, Banking, and the Federal Reserve System
14. Monetary Policy
15. Labor Markets, Unemployment, and Inflation
16. Inflation, Disinflation, and Deflation
OPTIONAL
Introduction: The Ordinary Business of Life
Appendix: Graphs in Economics
A comprehensive review of graphing and math for students who would find such a refresher helpful.
5. Consumer and Producer Surplus A brief introduction to welfare economics, which helps drive home the reasons markets are usually efficient. This chapter will be particularly helpful for instructors who teach international trade(Chapter 18), in their macro course.
11. Income and Expenditure A chapter for instructors who want to provide full detail on the determinants of aggregate demand: the consumption function, the determinants of investment spending, and the determination of equilibrium by the requirement that planned spending equal GDP.
Chapter 11 Appendix: Deriving the multiplier algebraically An algebraic treatment of the multiplier, for instructors who want to supplement the graphical analysis
Chapter 12 Appendix: Taxes and the multiplier A more rigorous derivation of the role of taxes in reducing the multiplier and acting as an automatic stabilizer
17. The Making of Modern Macroeconomics A chapter for instructors who like to cover the history of economic ideas and the current state of policy debate. It offers a unique survey of changing macroeconomic thought, leading up to current debates about monetary policy.
18. International Trade This chapter recaps comparative advantage, considers tariffs and quotas, and explores the politics of trade protection. Coverage here links back to the international coverage in Chapter 2, and makes use of the welfare economics introduced in Chapter 5.
19. Open-economy Macroeconomics A chapter for instructors who want to take a more international approach. It covers how capital flows affect financial markets, the importance of exchange rates and exchange rate regimes, how the effect of monetary policy changes under fixed and floating rates.
Supplemental Chapter 20: Currencies and crises A supplemental chapter, available online and in booklet form, for instructors who want to cover currency speculation and international financial problems.
A Selection of Possible Outlines
To illustrate how instructors can use this book to meet their specific goals, we’ve constructed a selection of three possible outlines that are alternatives to simply covering the chapters in order (see page xxx). By no means exclusive, these outlines reflect a likely range of different ways in which this book could be used:
.
Three possible outlines
Basic macroeconomics Expenditure first Long run later
Basic Macroeconomics
Part 1
1. First Principles
2. Economic Models: Trade-offs and Trade
Appendix: Graphs in Economics
Part 2
3. Supply and Demand
4. The Market Strikes Back
Part 3
6. Macroeconomics: The Big Picture
7. Tracking the Macroeconomy
Part 4
8. Long-run Economic Growth
9. Savings, Investment Spending, and the Financial System
Part 5
10. Aggregate Supply and Aggregate Demand
12. Fiscal Policy
13. Money, Banking, and the Federal Reserve System
14. Monetary Policy
Part 6
15. Labor Markets , Unemployment, and Inflation
16. Inflation, Disinflation, and Deflation
And, if there is time: Part 8
18. International Trade
19. Open-economy Macroeconomics
Expenditure First
Part 1
1. First Principles
2. Economic Models: Trade-offs and Trade
Appendix: Graphs in Economics
Part 2
3. Supply and Demand
4. The Market Strikes Back
Part 3
6. Macroeconomics: The Big Picture
7. Tracking the Macroeconomy
Part 4
8. Long-run economic growth
9. Savings, Investment Spending, and the Financial System
Part 5
11. Income And Expenditure
10. Aggregate Supply and Aggregate Demand
12. Fiscal Policy
13. Money, Banking, and the Federal Reserve System
14. Monetary Policy
Part 6
15. Employment, Unemployment, and Inflation
16. Inflation, Disinflation, and Deflation
And, if there is time: Part 8
18. International Trade
19. Open-economy Macroeconomics
Long Run Later
Part 1
1. First Principles
2. Economic Models: Trade-offs and Trade
Appendix: Graphs in Economics
Part 2
3. Supply and Demand
4. The Market Strikes Back
Part 3
6. Macroeconomics: The Big Picture
7. Tracking the Macroeconomy
Part 4
9 Savings, Investment Spending, and the Financial System
Part 5
10. Aggregate Supply and Aggregate Demand
12. Fiscal Policy
13. Money, Banking, and the Federal Reserve System
14. Monetary Policy
Part 6
15. Employment, Unemployment, and Inflation
16. Inflation, Disinflation, and Deflation
8. Long-run Economic Growth
And, if there is time: Part 8
18. International Trade
19. Open-economy Macroeconomics