Macroeconomics Private And Public Choice, 17th Edition
By James D. Gwartney, Richard L. Stroup, Russell S. Sobel and David A. Mcpherson
Contents:
Preface xvii
Acknowledgments xxiii
About the Authors xxv
Part 1 The Economic Way of Thinking 1
Chapter 1 The Economic Approach 2
1-1 What Is Economics About? 3
1-1a Scarcity and Poverty Are Not the Same 5
1-1b Scarcity Necessitates Rationing 6
1-1c The Method of Rationing Influences the Nature of Competition 6
1-2 The Economic Way of Thinking 6
1-2a Eight Guideposts to Economic Thinking 7
1-3 Positive and Normative Economics 12
1-4 Pitfalls to Avoid in Economic Thinking 13
1-4a Violation of the Ceteris Paribus Condition Can Lead One to Draw the Wrong Conclusion 13
1-4b Good Intentions Do Not Guarantee Desirable Outcomes 13
1-4c Association Is Not Causation 14
1-4d The Fallacy of Composition: What’s True for One Might Not Be True for All 15
Key Points 15
Critical Analysis Questions 16
Chapter 2 Some Tools of the Economist 17
2-1 What Shall We Give Up? 18
2-1a Opportunity Cost 18
2-1b Opportunity Cost and the Real World 18
2-2 Trade Creates Value 19
2-2a Transaction Costs—A Barrier to Trade 20
2-2b The Middleman as a Cost Reducer 21
2-3 The Importance of Property Rights 22
2-3a Private Ownership and Markets 24
2-4 Production Possibilities Curve 26
2-4a Shifting the Production Possibilities Curve Outward 28
2-4b Production Possibilities and Economic Growth 31
2-5 Trade, Output, and Living Standards 32
2-5a Gains from Specialization and Division of Labor 32
2-5b Gains from Mass Production Methods 33
2-5c Gains from Innovation 34
2-6 Human Ingenuity, Entrepreneurship, and the Creation of Wealth 34
2-7 Economic Organization 35
2-7a Market Organization 35
2-7b Political Organization 37
Key Points 37
Critical Analysis Questions 38
Addendum 39
Comparative Advantage, Specialization, and Gains from Trade 39
Part 2 Markets and Government 41
Chapter 3 Demand, Supply, and the Market Process 42
3-1 Consumer Choice and the Law of Demand 43
3-1a The Market Demand Schedule 44
3-1b Consumer Surplus 45
3-1c Responsiveness of Quantity Demanded to Price Changes: Elastic and Inelastic
Demand Curves 46
3-2 Changes in Demand versus Changes in Quantity Demanded 47
3-3 Producer Choice and the Law of Supply 50
3-3a The Role of Profits and Losses 52
3-3b Market Supply Schedule 52
3-3c Producer Surplus 53
3-3d Responsiveness of Quantity Supplied to Price Changes: Elastic and Inelastic
Supply Curves 54
3-4 Changes in Supply versus Changes in Quantity Supplied 55
3-5 How Market Prices Are Determined: Demand and Supply Interact 57
3-5a Market Equilibrium 57
3-5b Efficiency and Market Equilibrium 59
3-6 How Markets Respond to Changes in Demand and Supply 60
3-7 Entrepreneurship, Profit, and the Dynamics of Market Competition 63
3-8 Invisible Hand Principle 65
3-8a Prices and Market Order 65
3-8b Competition and Property Rights 67
Key Points 67
Critical Analysis Questions 68
Chapter 4 Demand and Supply: Applications and Extensions 70
4-1 The Link between Resource and Product Markets 71
4-2 The Economics of Price Controls 72
4-2a The Impact of Price Ceilings 72
4-2b Rent Control: A Closer Look at a Price Ceiling 75
4-2c The Impact of Price Floors 76
4-2d Minimum Wage: A Closer Look at a Price Floor 77
4-3 Black Markets and the Importance of the Legal Structure 80
4-4 The Impact of a Tax 80
4-4a The Deadweight Loss Caused by Taxes 82
4-4b Actual versus Statutory Incidence 82
4-4c Elasticity and the Incidence of a Tax 84
4-4d Elasticity and the Deadweight Loss 85
4-5 Tax Rates, Tax Revenues, and the Laffer Curve 85
4-6 The Impact of a Subsidy 88
4-6a Elasticity and the Benefit of Government Subsidy Programs 88
4-6b Real-World Subsidy Programs 89
Key Points 91
Critical Analysis Questions 91
Chapter 5 Difficult Cases for the Market, and the Role of Government 93
5-1 A Closer Look at Economic Efficiency 94
5-1a If It’s Worth Doing, It’s Worth Doing Imperfectly 95
5-2 Thinking About the Economic Role of Government 96
5-2a Protective Function of Government 96
5-2b Productive Function of Government 96
5-3 Potential Shortcomings of the Market 97
5-3a Lack of Competition 97
5-3b Externalities—A Failure to Account for All Costs and Benefits 98
5-3c External Costs 99
5-3d What Should Be Done About External Costs? 100
5-3e External Benefits 101
5-3f Expanding the Scope of a Project and Capturing External Benefits 102
5-3g Public Goods and Why they Pose a Problem for the Market 104
5-3h Potential Information Problems 105
5-3i Information as a Profit Opportunity 106
5-4 Market and Government Failure 108
Key Points 109
Critical Analysis Questions 109
Chapter 6 The Economics of Political Action 110
6-1 The Size and Growth of the U.S. Government 111
6-2 Similarities and Differences between Political and Market Allocation 113
6-3 Political Decision-Making: An Overview 114
6-3a Incentives Confronted by the Voter 115
6-3b Incentives Confronted by the Politician 116
6-3c Incentives Confronted by the Government Bureaucrat 117
6-4 When the Political Process Works Well 118
6-5 When the Political Process Works Poorly 120
6-5a Special-Interest Effect 120
6-5b Shortsightedness Effect 123
6-5c Rent-seeking 124
6-5d Inefficiency of Government Operations 125
6-6 Political Favoritism, Crony Capitalism, and Government Failure 125
6-7 The Economic Way of Thinking about Markets and Government 128
Key Points 129
Critical Analysis Questions 129
Part 3 Core Macroeconomics 131
Chapter 7 Taking the Nation’s Economic Pulse 132
7-1 GDP—A Measure of Output 133
7-1a What Counts toward GDP? 133
7-1b Dollars Are the Common Denominator for GDP 135
7-2 GDP as a Measure of Both Output and Income 135
7-2a Deriving GDP by the Expenditure Approach 136
7-2b Deriving GDP by the Resource Cost–Income Approach 138
7-2c The Relative Size of GDP Components 139
7-2d The COVID-19 Pandemic and GDP 140
7-3 Adjusting for Price Changes and Deriving Real GDP 140
7-3a Key Price Indexes: The Consumer Price Index and the GDP Deflator 141
7-3b Using the GDP Deflator to Derive Real GDP 142
7-4 Problems with GDP as a Measuring Rod 145
7-4a Nonmarket Production 145
7-4b Underground Economy 146
7-4c Leisure and Human Costs 146
7-4d Quality Variation and the Introduction of New Goods 146
7-4e Harmful Side Effects and Economic “Bads” 147
7-4f GDP Understates Well-Being in the Information Age 147
7-5 Differences in GDP over Time 149
7-6 The Great Contribution of GDP 150
Key Points 153
Critical Analysis Questions 153
Addendum 155
The Construction of a Price Index 155
Chapter 8 Economic Fluctuations, Unemployment, and Inflation 156
8-1 Swings in the Economic Pendulum 157
8-1a A Hypothetical Business Cycle 157
8-2 Economic Fluctuations and the Labor Market 159
8-2a The Labor Force Participation and Unemployment Rates 160
8-2b Employment Fluctuations and Trends: The Historical Record 161
8-2c Dynamic Change and Reasons for Unemployment 163
8-3 Three Types of Unemployment 164
8-3a Frictional Unemployment 165
8-3b Structural Unemployment 166
8-3c Cyclical Unemployment 167
8-4 Full Employment and the Natural Rate of Unemployment 168
8-5 Actual and Potential GDP 169
8-6 The Effects of Inflation 170
8-6a Unanticipated and Anticipated Inflation 171
8-6b Why Does Inflation Adversely Affect the Economy? 171
8-6c What Causes Inflation? 172
Key Points 172
Critical Analysis Questions 173
Chapter 9 An Introduction to Basic Macroeconomic Markets 175
9-1 Understanding Macroeconomics: Our Game Plan 176
9-2 Four Key Markets: Resources, Goods and Services, Loanable Funds, and
Foreign Exchange 176
9-3 Aggregate Demand for Goods and Services 178
9-3a Why Does the Aggregate Demand Curve Slope Downward? 179
9-3b The Downward-Sloping Aggregate Demand Curve: A Summary 180
9-4 Aggregate Supply of Goods and Services 181
9-4a Aggregate Supply in the Short Run 181
9-4b Aggregate Supply in the Long Run 182
9-5 Equilibrium in the Goods and Services Market 184
9-5a Equilibrium in the Short Run 184
9-5b Equilibrium in the Long Run 184
9-5c Long-Run Equilibrium, Potential Output, and Full Employment 185
9-5d What Happens When the Economy’s Output Differs from Its Long-Run Potential? 186
9-6 Resource Market 187
9-7 Loanable Funds Market 188
9-7a Does Inflation Help Borrowers? 190
9-7b Loanable Funds Market, Interest Rates, and Bond Prices 191
9-7c Global Loanable Funds Market 191
9-8 Foreign Exchange Market 192
9-9 Long-Run Equilibrium 195
Key Points 195
Critical Analysis Questions 196
Chapter 10 Dynamic Change, Economic Fluctuations, and the AD–AS Model 197
10-1 Anticipated and Unanticipated Changes 198
10-2 Factors that Shift Aggregate Demand 198
10-3 Shifts in Aggregate Supply 201
10-3a Changes in Long-Run Aggregate Supply 202
10-3b Changes in Short-Run Aggregate Supply 203
10-4 Steady Economic Growth and Anticipated Changes in Long-Run Aggregate Supply 204
10-5 Unanticipated Changes and Market Adjustments 205
10-5a Unanticipated Increases in Aggregate Demand 205
10-5b Unanticipated Reductions in Aggregate Demand 207
10-5c Unanticipated Increases in Short-Run Aggregate Supply 208
10-5d Unanticipated Reductions in Short-Run Aggregate Supply 209
10-6 The Price Level, Inflation, and the AD–AS Model 210
10-7 Unanticipated Changes, Recessions, and Booms 210
10-7a Expansions and Recessions: The Historical Record 212
10-7b Using the AD–AS Model to Think About the Business Cycle and the Great
Recession of 2008–2009 212
Key Points 214
Critical Analysis Questions 215
Chapter 11 Fiscal Policy: The Keynesian View and the Historical
Development of Macroeconomics 217
11-1 The Great Depression, Economic Instability, and the Development of
Keynesian Economics 218
11-1a The Great Depression and Keynesian Economics 218
11-1b Output, Employment, and Keynesian Equilibrium 218
11-1c The Multiplier and Economic Instability 219
11-1d Adding Realism to the Multiplier 221
11-1e Keynes and Economic Instability: A Summary 221
11-2 The Federal Budget and Fiscal Policy 222
11-3 Fiscal Policy and the Good News of Keynesian Economics 222
11-3a Using the Budget to Promote Stability 223
11-3b Fiscal Policy Changes and Problems of Timing 225
11-3c Automatic Stabilizers 226
11-4 Saving, Spending, Debt, and the Impact of Fiscal Policy 227
Key Points 229
Critical Analysis Questions 230
Chapter 12 Fiscal Policy, Incentives, and Secondary Effects 231
12-1 Fiscal Policy, Borrowing, and the Crowding-Out Effect 232
12-1a Do Global Financial Markets Minimize the Crowding-Out Effect? 233
12-2 Fiscal Policy, Future Taxes, and the New Classical Model 234
12-2a Is Job Creation a Good Reason to Support a Government Spending Program? 236
12-3 Political Incentives and the Effective Use of Discretionary Fiscal Policy 237
12-4 Is Discretionary Fiscal Policy an Effective Stabilization Tool? 237
12-5 The Supply-Side Effects of Fiscal Policy 238
12-5a Why Do High Tax Rates Decrease Output? 239
12-5b How Important Are the Supply-Side Effects? 239
12-6 Fiscal Policy and Recovery from Recessions 242
12-6a Will Fiscal Stimulus Speed Recovery? 242
12-6b Tax Cuts versus Spending Increases 242
12-7 U.S. Fiscal Policy: 1990–2019 243
Key Points 246
Critical Analysis Questions 246
Chapter 13 Money and the Banking System 248
13-1 What Is Money? 249
13-1a Money as a Medium of Exchange 249
13-1b Money as a Store of Value 249
13-1c Money as a Unit of Account 249
13-2 How the Supply of Money Affects Its Value 250
13-3 How Is the Money Supply Measured? 250
13-3a The M1 Money Supply 250
13-3b The Broader M2 Money Supply 251
13-3c Credit Cards versus Money 252
13-4 The Business of Banking 252
13-4a Fractional Reserve Banking 253
13-4b Bank Runs, Bank Failures, and Deposit Insurance 254
13-5 How Banks Create Money by Extending Loans 254
13-5a The Actual Deposit Expansion Multiplier 256
13-6 The Federal Reserve System 256
13-6a Structure of the Fed 256
13-6b How the Fed Controls the Money Supply 259
13-6c Recent Fed Policy, the Monetary Base, and the Money Supply 261
13-6d The Fed and the Treasury 265
13-7 Ambiguities in the Meaning and Measurement of the Money Supply 266
Key Points 267
Critical Analysis Questions 268
Chapter 14 Modern Macroeconomics and Monetary Policy 270
14-1 Impact of Monetary Policy: A Brief Historical Background 271
14-2 The Demand and Supply of Money 271
14-2a The Equilibrium between Money Demand and Money Supply 273
14-3 How Does Monetary Policy Affect the Economy? 274
14-3a The Effects of an Unanticipated Expansionary Monetary Policy 276
14-3b The Effects of an Unanticipated Restrictive Monetary Policy 277
14-3c Shifts in Monetary Policy and Economic Stability 278
14-4 Monetary Policy in the Long Run 279
14-4a The Quantity Theory of Money 279
14-4b Long-Run Impact of Monetary Policy: The Modern View 280
14-4c Money and Inflation 282
14-5 Money, Economic Stability, and Proper Monetary Policy 282
14-5a Time Lags, Monetary Shifts, and Economic Stability 282
14-5b Monetary Policy and Price Stability 283
14-6 Recent Low Interest Rates and Monetary Policy 284
14-7 Interest Rates, Velocity of Money, and Monetary Policy 287
Key Points 289
Critical Analysis Questions 290
Chapter 15 Macroeconomic Policy, Economic Stability, and the Federal Debt 291
15-1 Economic Fluctuations: The Past 100 Years 292
15-2 Can Discretionary Policy Promote Economic Stability? 292
15-2a The Time Lag Problem 293
15-3 Forecasting Tools and Macro Policy 293
15-3a Index of Leading Indicators 294
15-3b Computer Forecasting Models 295
15-3c Market Signals as Forecasting Tools 296
15-3d Is Accurate Forecasting Feasible? 296
15-4 How Are Expectations Formed? 296
15-5 Macro Policy Implications of Adaptive and Rational Expectations 298
15-6 The Phillips Curve: The View of the 1960s versus Today 299
15-6a Expectations and the Modern View of the Phillips Curve 301
15-7 The Growing Federal Debt and Economic Stability 303
15-7a Deficits, Surpluses, and the National Debt 303
15-7b Who Owns the National Debt? 305
15-7c How Does Debt Financing Influence Future Generations? 306
15-7d Why Is Deficit Spending So Difficult to Control? 306
15-7e Have Federal Debt Obligations Grown to a Dangerous Level? 307
15-8 Perspective on Recent Macroeconomic Policy and Economic Instability 308
Key Points 309
Critical Analysis Questions 309
Chapter 16 Creating an Environment for Growth and Prosperity 311
16-1 Why Is Economic Growth Important? 312
16-1a The Impact of Sustained Economic Growth 312
16-2 Sources of Economic Growth and High Incomes 313
16-2a Gains from Trade 313
16-2b Entrepreneurship, Technology, and the Discovery of Better Ways of Doing Things 315
16-2c Investment in Physical and Human Capital 316
16-3 What Institutions and Policies Will Promote Growth? 317
16-3a Legal System: Secure Property Rights, Rule of Law, and Even-Handed
Enforcement of Contracts 318
16-3b Competitive Markets 319
16-3c Stable Money and Prices 319
16-3d Avoidance of Regulations that Restrict Trade and Entry into Markets 319
16-3e Avoidance of High Tax Rates 320
16-3f Trade Openness 321
16-4 Economic Freedom as a Measure of Sound Institutions 322
16-5 Institutions, Policies, and Economic Performance 323
16-5a Economic Freedom and Per Capita Income 324
16-5b Economic Freedom and Growth of Per Capita Income 325
16-5c Economic Freedom and the Poverty Rate 326
16-5d Economic Freedom and Life Expectancy 326
16-5e Economic Freedom and Environmental Quality 327
16-6 Economic Freedom and Per Capita Income: How Strong is the Linkage? 327
Key Points 330
Critical Analysis Questions 330
Addendum 332
The 2018 Economic Freedom of the World Country Rankings and Ratings 332
Chapter 17 The Economics of Development 335
17-1 The Economic Record of the Last 1000 Years 336
17-2 Theories of Development 337
17-2a Malthusian Theory of Development 337
17-2b Colonialism, European Settlements, and Institutions 338
17-2c Neoclassical Production Function Theory of Development 338
17-2d Geography and Development 339
17-3 The Transportation-Communication Revolution 341
17-4 The Transportation-Communication Revolution and Economic Development 343
17-5 The Transportation-Communication Revolution and the Historic Economic
Progress of the Past 50 Years 347
17-5a Growth of High-Income and Developing Countries During the Past
Half-Century 348
17-5b Countries With the Best and Worst Growth Records 349
17-5c Dramatic Reduction in the Worldwide Poverty Rate 350
17-6 The Transportation-Communication Revolution versus the Industrial Revolution 351
17-7 The Future of Economic Development 352
Key Points 353
Critical Analysis Questions 354
Part 4 International Economics 355
Chapter 18 Gaining from International Trade 356
18-1 The Trade Sector of the United States 357
18-2 Gains from Specialization and Trade 358
18-2a How Trade Expands Consumption Possibilities 360
18-2b Some Real-World Considerations 362
18-3 Supply, Demand, and International Trade 363
18-4 The Economics of Trade Restrictions 365
18-4a The Economics of Tariffs 365
18-4b The Economics of Quotas 367
18-4c Exchange Rate Controls as a Trade Restriction 368
18-5 Why Do Nations Adopt Trade Restrictions? 368
18-5a The National-Defense Argument 369
18-5b The Infant-Industry Argument 369
18-5c The Antidumping Argument 369
18-5d Special Interests and the Politics of Trade Restrictions 370
18-6 Do More Open Economies Perform Better? 371
18-7 Trade Barriers and Popular Trade Fallacies 372
18-7a Trade Fallacy 1: Trade Restrictions that Limit Imports Save Jobs and Expand
Employment 372
18-7b Trade Fallacy 2: Free Trade with Low-Wage Countries Like Mexico and China will
Reduce the Wages of Americans 374
18-8 Institutions and the Changing Nature of Global Trade 374
Key Points 376
Critical Analysis Questions 376
Chapter 19 International Finance and the Foreign Exchange Market 378
19-1 Foreign Exchange Market 379
19-2 Determinants of the Exchange Rate 381
19-3 Why Do Exchange Rates Change? 382
19-3a Changes in Income 383
19-3b Differences in Rates of Inflation 383
19-3c Changes in Interest Rates 384
19-3d Changes in the Business and Investment Climate 385
19-4 International Finance and Alternative Exchange Rate Regimes 386
19-4a Fixed Rate, Unified Currency System 386
19-4b Pegged Exchange Rate Regime 387
19-5 Balance of Payments 388
19-5a Current-Account Transactions 389
19-5b Balance on Current Account 390
19-5c Capital-Account Transactions 391
19-5d Official Reserve Account 391
19-5e The Balance of Payments Must Balance 392
19-6 Exchange Rates, Current Account Balance, and Capital Inflow 392
Key Points 395
Critical Analysis Questions 395
Part 5 Applying the Basics: Special Topics in Economics 397
Special Topic 1: Government Spending and Taxation 398
Special Topic 2: The Economics of Social Security 413
Special Topic 3: The Stock Market: Its Function, Performance, and Potential as an
Investment Opportunity 423
Special Topic 4: Keynes and Hayek: Contrasting Views on Sound Economics and the
Role of Government 434
Special Topic 5: The 2020 COVID-19 Recession: Cause, Response, and Implications
for the Future 441
Special Topic 6: The Great Recession of 2008–2009: Causes and Response 449
Special Topic 7: Lessons from the Great Depression 463
Appendix A General Business and Economics Indicators for the United States 477
Appendix B Answers to Selected Critical Analysis Questions 484
Glossary 495
Index 504