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Bradley R. Schiller THE ECONOMY TODAY 13e with The University of Nevada—Reno Cynthia Hill Idaho State University Sherri
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THE
ECONOMY TODAY 13e
Bradley R. Schiller The University of Nevada—Reno
with Cynthia Hill Idaho State University
& Sherri Wall University of Alaska—Fairbanks
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THE ECONOMY TODAY Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020. Copyright © 2013, 2010, 2008, 2006, 2003, 2000, 1997, 1994, 1991, 1989, 1986, 1983, 1980 by The McGraw-Hill Companies, Inc. All rights reserved. Printed in the United States of America. 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 The McGraw-Hill Companies, Inc., 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 0 DOW/DOW 1 0 9 8 7 6 5 4 3 2 ISBN 978-0-07-352321-7 MHID 0-07-352321-6 Vice president and editor-in-chief: Brent Gordon Publisher: Douglas Reiner Sponsoring editor: Scott Smith Director of digital content: Douglas Ruby Executive director of development: Ann Torbert Development editor: Marianne L. Musni Vice president of marketing: Robin J. Zwettler Director of marketing: Bradley Parkins Senior marketing manager: Melissa Larmon Vice president of editing, design, and production: Sesha Bolisetty Lead project manager: Harvey Yep Senior buyer: Michael R. McCormick Lead designer: Matthew Baldwin Senior photo research coordinator: Keri Johnson Photo researcher: Michelle Buhr Lead media project manager: Allison Souter Media project manager: Ron Nelms Interior designer: Matthew Baldwin Cover designer: Laurie Entringer Cover image: © Getty Images Typeface: 10/12 Times New Roman Compositor: Aptara®, Inc. Printer: R. R. Donnelley Library of Congress Cataloging-in-Publication Data Schiller, Bradley R., 1943– The economy today / Bradley R. Schiller, Cynthia Hill, Sherri Wall.—13th ed. p. cm.—(The McGraw-Hill series economics) Includes index. ISBN-13: 978-0-07-352321-7 (alk. paper) ISBN-10: 0-07-352321-6 (alk. paper) 1. Economics. I. Hill, Cynthia. II. Wall, Sherri. III. Title. HB171.5.S292 2013 330—dc23 2011046155
www.mhhe.com
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A B O U T
T H E
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A U T H O R S
Bradley R. Schiller has over four decades of experience teaching introductory economics at the University of Nevada, American University, the University of California (Berkeley and Santa Cruz), and the University of Maryland. He has given guest lectures at more than 300 colleges ranging from Fresno, California, to Istanbul, Turkey. Dr. Schiller’s unique contribution to teaching is his ability to relate basic principles to current socioeconomic problems, institutions, and public policy decisions. This perspective is evident throughout The Economy Today. Dr. Schiller derives this policy focus from his extensive experience as a Washington consultant. He has been a consultant to most major federal agencies, many congressional committees, and political candidates. In addition, he has evaluated scores of government programs and helped design others. His studies of poverty, discrimination, training programs, tax reform, pensions, welfare, Social Security, and lifetime wage patterns have appeared in both professional journals and popular media. Dr. Schiller is also a frequent commentator on economic policy for television and radio, and his commentary has appeared in The Wall Street Journal, The Washington Post, The New York Times, and Los Angeles Times, among other major newspapers. Dr. Schiller received his Ph.D. from Harvard and his B.A. degree, with great distinction, from the University of California (Berkeley). He is now a professor of economics at the University of Nevada in Reno, where he hosts McGraw-Hill’s annual West Coast Teaching Economics Conference. On his days off, Brad is on the tennis courts, the ski slopes, or the crystal-blue waters of Lake Tahoe. Cynthia D. Hill is a professor of economics at Idaho State University, where she has dedicated herself to helping students develop as thinkers and scholars. Her academic research is primarily focused on economic education and the advancement of classroom pedagogy. Over the past decade Professor Hill has undertaken many administrative roles, which focus on student success and educational advancement. These positions include director of the University Honors Program, director of the Center for Teaching and Learning, and currently the position of executive director of the Student Success Center. Professor Hill has won numerous teaching and public service awards over her 14-year tenure at Idaho State University, including the Carnegie Foundation for the Advancement of Teaching Idaho Professor of the Year, two-time Master Teacher, five-time Most Influential Professor, two-time Outstanding Public Servant, and Distinguished Public Servant. She earned her bachelor’s degree from the University of Montana and her Ph.D. from Washington State University. Sherri L. Wall has taught economics in the School of Management at the University of Alaska–Fairbanks since 2006. She is the founding faculty advisor for two student organizations at UAF: SWEET (Students Who Enjoy Economic Thinking) and SIFE (Students in Free Enterprise). The UAF SIFE team has won three Regional championships, and in 2011, were 2nd runner up in the opening round of competition at the National Exposition. Sherri was a finalist in the Market-Based Management Institute’s Economic Communicators contest at the Association of Private Enterprise Conference in 2008. In that same year, she was recognized as Outstanding Faculty Member of the year by the UAF student body, and in 2010, Outstanding Student Organization Advisor. Sherri has a Master’s of Science in Resource and Applied Economics, and is completing her Ph.D. through a National Science Foundation fellowship. Her research interests include economic issues of climate change in Alaska, institutional economics and economic education. She has presented her research at universities and conferences around the world. In her spare time, she finds great utility in the outdoor recreational opportunities in Alaska, including flying with her husband, hiking, fishing, hunting, skiing, and trail running.
©Kelly Atlee Photography.
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P R E FA C E
The Great Recession of 2008–2009 lingered for far too long. But that devastating experience had at least one positive effect: it revitalized interest in economics. People wanted to know how a modern economy could stumble so badly—and why it took so long to recover. Public debates about economic theory became increasingly intense and partisan. Everything from Keynesian theory to environmental regulation became the subject of renewed scrutiny. These debates increased the demand for economic analysis and for principles instruction as well. Indeed, one could argue that the Great Recession proved that economics instruction is an inferior good: as the economy contracts, the demand for economics courses increases. While we might take offense at the thought of producing an inferior good, we should certainly rise to the occasion. This means bringing the real world into the classroom as never before: tying theoretical controversies about macro stability to both the ongoing business cycle and the intensely partisan policy debates about cause and effect; relating basic micro principles to the policy debates over taxes, regulation, energy, climate change, poverty, and trade; getting students to appreciate why and how economic issues were the central focus of the 2012 election campaigns. The Economy Today has always been a policy-driven introduction to economic principles. Indeed, that is one of its most distinctive features. This 13th edition continues that tradition with even more fervor. It challenges students to think more critically about the dominant policy issues of the day. Consider solar energy, for example. Students overwhelmingly embrace the potential of “clean” solar energy to replace “dirty” fossil fuels, thereby saving the environment, breaking the power of “Big Oil,” and achieving energy independence. But what about opportunity costs? Economists preach that there is neither a “free lunch” nor a “free” solar panel. The first chapter of this text tries to get students thinking more like economists—that is, about resource constraints and implied trade-offs. The same critical thinking is applied in Chapter 1 to the “guns versus butter” debate that soaring budget deficits have brought to the fore once again (that is, which to cut). Then there is the renewed debate over “taxes on the rich,” which relates both to equality (what is a “fair” distribution of the deficit-cutting burden) and to efficiency (production and investment disincentives). A section titled “The Economy Tomorrow” at the end of every chapter focuses on these kinds of front-page policy issues. But the real-world emphasis of this text is not confined to that feature. Every chapter has an array of In the News and World View boxes that offer real-world illustrations of basic economic principles. And the body of the text itself is permeated with actual companies, products, people, and policy issues that students will recognize. There are no mythical widgets or Jack & Jill water companies in this textbook. Students will see and appreciate the links between core principles and real-life events. They will also learn and remember those principles far longer.
DIF FERENTIATING FEATU RES The policy-driven focus of The Economy Today clearly differentiates it from other principles texts. Other texts may claim real-world content, but none comes close to the empirical perspectives of this text. Beyond this unique approach, The Economy Today offers a combination of features that no other text matches, including the following.
Macro Focus on Short-Run Cycles
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Most principles texts moved away from the short-run business cycles to more emphasis on long-run macro dynamics about 10–15 years ago. Many even suggested the business cycle was dead. Now they know they missed the boat. And so do the students who have to read those texts and wonder why there is so little discussion of the macro events that have created so much economic and political turmoil. The Economy Today is one of the few textbooks that puts greater emphasis on short-run cyclicality than on long-run stability.
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PREFACE
Another pedagogical advantage of The Economy Today is its use of a single framework for teaching all macro perspectives. Other principles texts continue to present both the Keynesian cross framework and the aggregate demand/supply (AD/AS) framework. This twomodel approach is neither necessary nor efficient. All of the core ideas of Keynesian theory, including the multiplier, can be illustrated in the AD/AS framework. Keynes never drew the “Keynesian” cross and would not use it today, especially in view of the superiority of the AD/AS model in conveying his ideas. And we all know that the Keynesian cross is of no use in illustrating the short-run trade-off between inflation and full employment that bedevils policy makers and even defines our concept of full employment. Why overburden students with a two-model approach that confuses them and eats scarce instruction time? Instructors who adopt this text’s one-model approach are invariably impressed with how much more efficient and effective it is.
One-Model Macro
We all know there is no such thing as a pure market-driven economy and that markets operate on the fringe even in the most centralized economics. So “markets versus government” is not an all-or-nothing proposition. It is still a central theme, however, in the real world. Should the government assume more responsibility for managing the economy—or will less intervention generate better macro and micro outcomes? Public opinion is clear: as the accompanying News reveals, three out of four Americans have a negative view of federal intervention. The challenge for economics instructors is to enunciate principles that help define the boundaries of public and private sector activity. When do we expect market failure to occur? How and why do we anticipate that government intervention might result in government failure? Can we get students to think critically about these central issues? The Economy Today certainly tries, aided by scores of real-world illustrations.
Markets versus Government Theme
market failure: An imperfection in the market mechanism that prevents optimal outcomes.
IN THE NEWS
government failure:
Government Failure?
Government intervention that fails to improve economic outcomes.
An August 2011 Washington Post poll asked a cross-section of Americans the following question: Question:
Responses:
“In general, when the government in Washington decides to solve economics problems, how much confidence do you have that the problem actually will be solved?” A lot Some Little None
5% 21% 34% 39%
Source: The Washington Post, © August 9, 2011. All rights reserved. Used with permission.
Analysis: “Government failure” occurs when government intervention fails to improve economic outcomes—that is, solve economic problems. Three out of four Americans expect such failures to occur.
The staples of introductory economics are fully covered in The Economy Today. Beyond the core chapters, however, there is always room for additional coverage. In fact, authors reveal their uniqueness in their choice of such chapters. Those choices tend to be more abstract in competing texts, offering “extra” chapters on public choice, behavioral economics, economics of information, uncertainty, and asymmetric information. All of these are interesting and important, but they entail opportunity costs that are particularly high at the principles level. The menu in The Economy Today is more tailored to the dimensions and
Unique Topic Coverage
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issues of the world around us. Chapter 2, for example, depicts the dimensions of the U.S. economy in a comparative global framework. Where else are students going to learn that China is not the world’s largest economy, that U.S. workers are the most productive, or that income inequality is more severe in poor nations than rich ones? The same empirical foundation is apparent in the chapters on unemployment (6) and inflation (7). We economists take for granted that these are central macroeconomic problems. But students have little personal experience with either problem and even less appreciation of their significance. Chapters 6 and 7 try to bridge this gap by discussing why unemployment and inflation are such central concerns—that is, the kinds of socioeconomic harm they inflict. The intent here is to help students understand and embrace our economic goals before we ask them to explore potential solutions. Chapter 18 on “Theory versus Reality” offers yet another unique perspective on macroeconomics. It confronts the perennial question students ask: “If economic theory is so great, why is the economy so messed up?” Chapter 18 answers this question by reviewing the goal conflicts, measurement problems, design issues, and implementation obstacles that constrain even the best macro policies. The same emphasis on contemporary policy issues is evident in micro. The parallel chapters on taxes (33) and transfers (34) underscore the central conflict between equity and efficiency concerns that impedes easy solutions to important policy questions. The analysis of President Obama’s own 2010 tax return (p. 735) enlivens the discussion of tax “loopholes.” The extensive coverage of market structure includes two chapters on competition. The first (22) presents the standard, static profit maximization model for the perfectly competitive firm. The second chapter (23) adds real-world excitement. Chapter 23 focuses on market dynamics, emphasizing how competitive forces alter both market structures and market outcomes. The core case study takes students from the original Apple I (see the photo on p. 515) all the way to the iPad. Along the way, the effects of continuous entry, exit, and innovation are highlighted. Students come away with an enhanced appreciation of how competitive markets generate superior outcomes—one of the most important insights of the micro sequence. Also noteworthy in the micro sequence is the chapter (27) on natural monopoly. We know that natural monopoly presents unique challenges for antitrust and regulatory policy. This chapter first assesses the goal conflicts that complicate government intervention, and then reviews regulatory history and outcomes in the rail, telephone, airline, and cable industries.
Global Perspective
“Global perspective,” along with “real-world” content, is promised by just about every principles author. The Economy Today actually delivers on that promise. This is manifestly evident in the titles of Chapter 2 (global comparisons) and Chapter 37 (global poverty). The global perspective is also easy to discern in the boxed World View features embedded in every chapter (26 of which are new to this edition). More subtle, but at least as important, is the portrayal of an open economy from the get-go. While some texts start with a closed economy—or worse still, a closed, private economy—and then add international dimensions as an afterthought, The Economy Today depicts an open economy from start to finish. These global linkages are a vital dimension of both macro issues (e.g., cyclical instability, monetary control) and micro issues (e.g., effective competition, oil prices).
YouTube Content!
YouTube content has come to The Economy Today! Students are always checking things out on YouTube and even forwarding occasional videos they think relate to economics. So we decided to integrate YouTube videos into The Economy Today. Professors Sherri Wall (University of Alaska–Fairbanks) and Cindy Hill (Idaho State University) identified scores of YouTube videos that do, indeed, illustrate basic economic concepts. These were then annotated to explain that economic content, highlighting key terms from the text. Sherri and Cindy also provided questions to test student comprehension of the economic principles covered. The result is a new and exciting student supplement to The Economy Today—a catalog of chapter-specific, engaging, and instructive YouTube videos. They are available in the bookspecific Connect software system and the book-specific Online Learning Center.
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W H AT ’S NEW IN T HIS 1 3 TH ED ITION Every edition of The Economy Today introduces a wealth of new content and pedagogy. This is critical for a text that prides itself on currency of policy issues, institutions, and empirical perspectives. Every page, every example, and all the data have been reviewed for currency and updated where needed. Beyond this general upgrade, previous users of The Economy Today will notice some specific revisions, including the following. The previous chapter on “Consumer Demand” has been expanded into two new chapters. Chapter 19 on “Consumer Choice” now includes an extensive discussion of consumer surplus. All coverage of elasticity has been moved into the new Chapter 20, where the various elasticity concepts get more detailed coverage.
New Chapters on Consumer Choice and Elasticity
Each chapter ends with a feature called “The Economy Tomorrow” that challenges students to apply key concepts to current policy issues. There are eight new Economy Tomorrow features, ranging from “Harnessing the Sun” (the opportunity costs of solar energy) in Chapter 1 to “Policing World Trade” (international trade disputes) in Chapter 35.
New “Economy Tomorrow” Topics
The boxed World Views in each chapter are designed to showcase the global reach of economic principles. There are 26 new World Views in the 13th edition, including the 2010–2011 surge in oil prices (supply and demand shifts) in Chapter 3, the $100 trillion Zimbabwean banknote (the ravages of hyperinflation) in Chapter 7, China’s monetary restraint (Chapter 15), OPEC quota setting (oligopoly price-fixing) in Chapter 25, and Walmart’s epic union battles in Chapter 31. All of the World Views are annotated, are referred to in the body of the text, and often are the subject of end-of-chapter questions. These added dimensions help ensure that students will actually read the boxed material.
New “World Views”
The boxed In the News features highlight domestic applications of basic principles. There are 41 new In the News boxes in this edition. In Chapter 3 alone there are three new ones on selling human organs (supply and demand); the BP oil spill and shrimp prices (supply shift); and ticket scalping (disequilibrium prices). The News in Chapter 4 about firefighters watching a house burn to the ground in Tennessee is a vivid introduction to the concepts of public goods and externalities. In macro, some of my new favorites are the depiction of the 2008–2009 multiplier process as it spread despair beyond the housing industry (p. 213) and the avowed reluctance of banks to lend money despite burgeoning reserves (p. 322). In micro, the competitive chase in the tablet market (p. 529) underscores how market dynamics offer continuous product improvements and lower prices. The News on Google’s (p. 555) and AT&T’s (p. 580) alleged anticompetitive practices may get students thinking more critically about “fair” and “unfair” business behavior. Scrutiny of President Obama’s own tax return (p. 735) should spark debate about “fair” taxation as well.
New “In the News” Content
At the end of every chapter there are both questions for discussion and a separate set of numerical and graphing problems. The problem set is designed so students can answer and submit manually if desired. The same problems are also embedded in the course management system Connect to facilitate online submissions, automatic grading, and course monitoring. Both the questions for discussion and problems utilize tables, graphs, and boxed material from the body of the chapter, requiring the students to read and process core content. As a result, the end-of-chapter material has to be updated along with the text itself. In this 13th edition, there are 185 new problems and 78 new questions for discussion.
New Problems and Questions for Discussion
We are pleased to welcome Cynthia Hill (Idaho State University) and Sherri Wall (University of Alaska–Fairbanks) to the author team. Both are active instructors at their respective institutions and are dedicated to teaching and using technology as an innovative part of their courses. Cindy and Sherri have been brought into the Schiller franchise as digital coauthors. They have made important contributions to the 13th edition, including revising the end-of-chapter content, streamlining learning objective pedagogy, and most notably updating the technology features of the text. Working directly with the
New Digital Coauthors and Enhanced Digital Content
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content in McGraw-Hill’s homework management system, Connect, they have each created algorithmic problems, provided datasets, and accuracy-checked the content, ensuring correct and accurate material. YouTube Videos. The YouTube videos added to The Economy Today’s instructional package are the most visible contribution to this edition made by Cindy and Sherri. These short, engaging videos are annotated to highlight basic economic concepts. They can be used independently by students or used as visual aids in the classroom. In either case, they will enhance the learning experience.
C HAPTER-BY-CH A PTER CH A NGES The Economy Today, 13th edition, features improved and expanded learning objectives, end-of-chapter content, and up-to-date material and data reflecting today’s economy in every chapter. Changes include the following. Chapter 1 focuses on respective powers of market and government to fashion economic outcomes, reinforcing the market versus government theme of the text. A new discussion of normative versus positive analysis, an In the News article on unemployment in 2011, and illustrations of opportunity cost have been added, including a new Economy Tomorrow section discussing solar power and the opportunity costs of development. Chapter 2 is thoroughly updated with global and domestic comparison data, such as comparative output (GDP); GDP per capita around the world; GDP growth versus population growth; the education gap between rich and poor nations; the income share of the rich; U.S. output and population growth; and U.S. distribution of income. Chapter 3 emphasizes comparative advantage and specialization and features In the News and World View articles such as AT&T’s price cuts on the iPhone to illustrate the law of demand; BP’s oil spill and its effects on shrimp prices to show supply curve shifts; ticket scalping to exemplify market shortages; the 2011 gasoline price surge to demonstrate changing equilibrium; and the selling of human organs to describe a zero price ceiling. Chapter 4’s revisions include updated domestic data, new In the News and World View articles on fire protection in regards to public goods and the free-rider dilemma, externalities described by deaths due to secondhand smoke, and a new Economy Tomorrow section on public choice theory in “right-sizing government.” Chapter 5 streamlines the discussion of real versus nominal GDP, includes updated GDP data for 2010, and has a revised World View on the subject of global living standards. Chapter 6 covers an explicit analysis of “inflationary flashpoint” that describes full employment and showcases the new key term and definition of “inflationary flashpoint.” New In the News articles on structural unemployment and the unemployment rate have been added. Chapter 7 highlights the new key term “inflationary flashpoint” from the previous chapter, and associates this topic in a new Economy Tomorrow section about the virtues of inflation, which includes a new article about U.K. inflation and inflationary expectations. This chapter also illustrates inflation and hyperinflation in the In The News and World View pieces about the 2010–2011 tuition hikes and Zimbabwe’s $100 trillion banknote. Chapter 8 adds further coverage of the Great Recession with discussions of GDP decline in a new In the News article and a revised Economy Tomorrow section focusing on “Obama-nomics.” Chapter 9 introduces a new key term, “autonomous consumption,” helping to simplify the discussion of consumer spending. New In the News articles discuss New York State’s spending cuts in reaction to the recession and U.S. leading indicators predicting the economic outlook. Chapter 10 integrates 2007–2009 investment data and In the News examples concerning residential construction and consumer spending to illustrate and streamline the multiplier process.
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Chapter 11 lists new CBO estimates of Obama’s stimulus effects and includes an example of inflationary pressures in a new World View on U.K. inflation. Chapter 12 incorporates the CBO decomposition of deficit into cyclical and structural components and identifies ownership and burdens of the national debt. This chapter also covers the 2011 budget ceiling crisis and the debate on the 2011 deficit/debt in a new In the News article. Chapter 13 expands the discussion of bank bailouts and includes a recent In the News article about CD rates relating to money supply (M1 and M2). Chapter 14 focuses on the federal handling of the 2008 credit crisis, reviews the 2010–2011 “quantitative easing” strategy, and illustrates China’s 2011 increase in reserve requirements as an example of the central bank slowing economic growth. Chapter 15 uses the “Bernanke rule” to quantify equivalence of fiscal and monetary policies; discusses constraints on the effectiveness of the 2008–2011 monetary stimulus; and features new In the News and World View articles about the Fed’s 2009–2011 massive bond purchases to stimulate economic activity, the banks’ reluctance to lend in 2010–2011, and China’s 2010–2011 monetary restraint to stabilize inflation. Chapter 16 highlights new estimates of costs and benefits of infrastructure development, Obama’s 2011 executive order requiring the rebalance between regulation and economic growth, and current In the News and World View articles about the regulation of lead content used in toys potentially imposing additional costs for sellers and Japan’s tsunami/ earthquake-induced AS shift. Chapter 17 includes updated comparisons of global production and a new World View section on the IMF’s fear of raised interest rates and crowding out private investment. Chapter 18 has extended coverage and discussion of the 2009–2011 stimulus policies, including QE1, QE2, and budget deals; coverage of the July 2011 deficit ceiling debate; new global performance comparisons throughout the chapter; more emphasis on the absence of “shovel-ready” federal spending; new use of the key term “inflationary flashpoint”; and an In the News article on the belated NBER dating of the Great Recession. Chapter 19, retitled “Consumer Choice,” contains new content, such as the 2011 data on spending patterns; a new discussion of price discrimination and consumer surplus and an expanded discussion of marginal utility; the introduction of two new key terms, “consumer surplus” and “price discrimination”; and a new Economy Tomorrow section with new LeBron James examples. Chapter 20 is a new stand-alone chapter that focuses on various elasticities. Examples include a new segment on the elasticity of supply; a new key term, “price elasticity of supply”; numerous In the News and World View articles that cover the elasticity of iPhone demand; the impact of iPhone price cuts on substitute and complementary goods; the idea of alligator skins becoming a normal good due to the decline in income and demand; SUV sales declining and gas prices rising, showing that they are complementary goods; the price elasticity of gold supply; and a new Economy Tomorrow section, “Achieving Energy Independence.” Chapter 21 has new data on global competitiveness and a new In the News article on Ford’s investment decision in a new plant in Kansas City to illustrate long-run and shortrun costs. Chapter 22 includes a new figure that illustrates differing output goals, a new poll on public distrust of the profit motive, and an In the News piece on rising marginal costs in the catfish industry. Chapter 23 features an updated introduction on the 2009–2011 price and cost pressures of the catfish industry shutdowns and exits, as well as a new Economy Tomorrow section about competition in the tablet market that includes an In the News article exemplifying the economics behind innovation and pricing. Chapter 24’s updates include a new key term, “consumer surplus,” and In the News articles on Ticketmaster’s 2011 “dynamic pricing” strategy to show price discrimination and Intel’s monopoly practices and entry barriers. To end the chapter, the Economy Tomorrow section is centered on Microsoft and Google’s business practices. Chapter 25 is updated with new data on U.S. product markets and global market power and highlights new In the News and World View cases on 2011 airplane fare hikes; OPEC’s
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decision to hold production, causing oil prices to jump; and AT&T’s proposed purchase of T-Mobile. Chapter 26 has resequenced short- and long-term graphs, has updated data on advertising and brand values, and incorporates a new key term, “cross-price elasticity of demand.” Chapter 27, retitled “Natural Monopolies: (De)Regulation,” includes a new discussion of substitute goods (cable versus satellite) and two additional key terms: “substitute goods” and “price ceiling.” Chapter 28 covers the 2009 Copenhagen Accord, BP oil spill, and In the News pieces on the efficiency decision of a New York nuclear plant and its thermal pollution and on job losses due to the 2011 mining regulation. Chapter 29 previews the 2012 Farm Act, covers 2011 commodity inflation, and includes discussion of basic economics of farm subsidies in an In the News piece. Chapter 30 contrasts Larry Ellison’s salary (at Oracle) with average wage and MRP, along with Joe Maurer’s (from the Minnesota Twins) baseball contract and MRP expectation. This chapter also adds a new key term, “market surplus,” and updated data on 2010 MBA starting salaries. Chapter 31 details the growth of public sector unions, presents a new figure on private versus public unions, covers the 2011 NFL lockout, and describes Walmart’s collective bargaining situation in a new World View. Chapter 32 discusses the origins and financing of Facebook and has a new In the News article on Google’s reduced market share and stock price to illustrate the value of information in financial markets. Chapter 33 starts with a new introduction that highlights disparity between poverty budgets and Google executive salaries, discusses updated data on global top tax rates, and has In the News articles on Obama’s 2010 tax return “loopholes” and his 2011 proposal to raise the top marginal tax rates. Chapter 34 showcases new Social Security benefit calculations and has updated data on poverty thresholds, Social Security finances, wage replacement rates, and declining labor supply throughout the chapter. Chapter 35 includes updated export ratio and trade balance data. New World View and In the News articles explore tariffs on Chinese tires and sugar import quotas, discuss the Mexican trucking dispute, and focus on “Policing World Trade” in the Economy Tomorrow section. Chapter 36 contains updated data on foreign exchange rates, 2010 data for the U.S. balance of payment summary statement, and a World View about China’s deliberate attempt to keep the value of the yuan low by purchasing foreign currency. Chapter 37 is thoroughly updated with global data such as poverty thresholds and population, income distribution, foreign aid, growth rates, agriculture share of total output and productivity, and business climates.
EF F ECTIVE PED A GOGY Clean, Clear Theory
Despite the abundance of real-world applications, this is at heart a principles text, not a compendium of issues. Good theory and interesting applications are not mutually exclusive. This is a text that wants to teach economics, not just increase awareness of policy issues. To that end, The Economy Today provides a logically organized and uncluttered theoretical structure for macro, micro, and international theory. What distinguishes this text from others on the market is that it conveys theory in a lively, student-friendly manner.
Concept Reinforcement
Student comprehension of core theory is facilitated with careful, consistent, and effective pedagogy. This distinctive pedagogy includes the following features: Chapter Learning Objectives. Each chapter contains a set of chapter-level learning
objectives. Students and professors can be confident that the organization of each chapter surrounds common themes outlined by three to five learning objectives listed on the first
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page of each chapter. End-of-chapter material, including the chapter summary, discussion questions, and student problem sets, is tagged to these learning objectives, as is the supplementary material, which includes the Test Bank and Instructor’s Resource Manual. Self-Explanatory Graphs and Tables. Graphs are completely labeled, colorful, and
positioned on background grids. Because students often enter the principles course as graph-phobics, graphs are frequently accompanied by synchronized tabular data. Every table is also annotated. This shouldn’t be a product-differentiating feature, but sadly, it is. Putting a table in a textbook without an annotation is akin to writing a cluster of numbers on the board, then leaving the classroom without any explanation.
$50 Demand shifts when tastes, income, other goods, or expectations change.
45
PRICE (per hour)
40 35
Shift in demand
d2
d1
D2: increased demand
30 25 20
Movement along curve
FIGURE 3.3 Shifts vs. Movements
g1
15 D1: initial demand
10 5 0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 QUANTITY (hours per semester)
Quantity Demanded (Hours per Semester) Price (per Hour) A B C D E F G H I
$50 45 40 35 30 25 20 15 10
Initial Demand
After Increase in Income
1 2 3 5 7 9 12 15 20
8 9 10 12 14 16 19 22 27
Reinforced Key Concepts. Key terms are defined in the margin when they first appear
and, unlike in other texts, redefined in the margin as necessary in subsequent chapters. Website references are directly tied to the book’s content, not hung on like ornaments. Endof-chapter discussion questions use tables, graphs, and boxed news stories from the text, reinforcing key concepts, and are linked to the chapter’s learning objectives. Boxed and Annotated Applications. In addition to the real-world applications that run through the body of the text, the new design of The Economy Today intersperses boxed domestic (In the News) and global (World View) case studies intertextually for further understanding and reference. Although nearly every text on the market now offers boxed
A demand curve shows how a consumer responds to price changes. If the determinants of demand stay constant, the response is a movement along the curve to a new quantity demanded. In this case, the quantity demanded increases from 5 (point d1), to 12 (point g1), when price falls from $35 to $20 per hour. If the determinants of demand change, the entire demand curve shifts. In this case, a rise in income increases demand. With more income, Tom is willing to buy 12 hours at the initial price of $35 (point d2), not just the 5 hours he demanded before the lottery win.
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applications, The Economy Today’s presentation is distinctive. First, the sheer number of In the News (123) and World View (64) boxes is unique. Second, and more important, every boxed application is referenced in the body of the text. Third, every News and World View comes with a brief, self-contained explanation, as the accompanying example illustrates. Fourth, the News and World View boxes are the explicit subject of the end-of-chapter discussion questions and student problem set exercises. In combination, these distinctive features assure that students will actually read the boxed applications and discern their economic content. The Test Bank provides subsets of questions tied to the News and World View boxes so that instructors can confirm student use of this feature.
WORLD VIEW Gas Prices High—and Might Get Higher NEW YORK (CNNMoney)—Strong worldwide oil demand and lack of supply are to blame for steadily rising gasoline prices in the United States, an oil industry group said Friday. . . . Felmy said worldwide oil demand in 2010 hit a record of more than 87 million barrels a day, driven largely by strong growth in India, China, and the Middle East. Supply, meanwhile, was constricted by the drilling moratorium in the Gulf of Mexico following the BP disaster, slow production growth in nonOPEC countries, and OPEC production controls. . . . Over the last year, prices are up 39 cents a gallon or 14 percent. Crude oil is up by a similar percentage, currently trading at just under $90 a barrel. —Steve Hargreaves Source: CNNMoney.com, January 21, 2011. © 2011 Time Inc. Used under license.
Analysis: Equilibrium prices change whenever market demand or supply curves shift. In this case, both curves are shifting, and the equilibrium price is rising.
Photos and Cartoons. The text presentation is also enlivened with occasional photos and
cartoons that reflect basic concepts. The photos on page 40 are much more vivid testimony to the extremes of inequality than the data in Figure 2.3 (p. 39). The contrasting photos of the original Apple I (p. 515), the iMac, and the iPhone (p. 525) underscore how the “animal spirits” of competitive markets spur innovation. Every photo and cartoon is annotated and
© Santokh Kochar/Getty Images/DAL
Gene Alexander, USDA Natural Resources Conservation Service/DAL
Analysis: An abundance of capital equipment and advanced technology make American farmers and workers far more productive than workers in poor nations.
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referenced in the body of the text. These visual features are an integral part of the presentation, not diversions. The one adjective invariably used to describe The Economy Today is “readable.” Professors often express a bit of shock when they realize that students actually enjoy reading the book. (Well, not as much as a Stephen King novel, but a whole lot better than most textbooks they’ve had to plow through.) The writing style is lively and issue-focused. Unlike any other textbook on the market, every boxed feature, every graph, every table, and every cartoon is explained and analyzed. Every feature is also referenced in the text, so students actually learn the material rather than skipping over it. Because readability is ultimately in the eye of the beholder, you might ask a couple of students to read and compare a parallel chapter in The Economy Today and in another text. This is a test The Economy Today usually wins.
Readability
I firmly believe that students must work with key concepts in order to really learn them. Weekly homework assignments are de rigueur in my own classes. To facilitate homework assignments, I have prepared the student problem set, which includes built-in numerical and graphing problems that build on the tables, graphs, and boxed material that align with each chapter’s learning objectives. Grids for drawing graphs are also provided. Students cannot complete all the problems without referring to material in the chapter. This increases the odds of students actually reading the chapter, the tables, and the boxed applications. The student problem set at the end of each chapter is reproduced in the online student tutorial software (Connect® Economics, discussed in the following pages). This really helps students transition between the written material and online supplements. It also means that the online assignments are totally book-specific.
Student Problem Set
N E W AND IMP ROVE D SU PPL EM ENTS Test Bank. William Aldridge of the University of Alabama–Tuscaloosa and Diane Keenan
of Cerritos College, with the help of Mack Bean of Franklin Pierce University and Steve Abid of Grand Rapids Community College, have thoroughly revised the Test Bank for the Thirteenth edition. This team assures a high level of quality and consistency of the test questions and the greatest possible correlation with the content of the text. All questions are coded according to chapter learning objectives, AACSB Assurance of Learning, and Bloom’s Taxonomy guidelines. The computerized Test Bank is available in EZ Test, a flexible and easy-to-use electronic testing program that accommodates a wide range of question types, including user-created questions. Tests created in EZ Test can be exported for use with course management systems such as WebCT, BlackBoard, or PageOut. The program is available for Windows, Macintosh, and Linux environments. Test Banks are offered in micro and macro versions, each of which contains over 5,000 questions, including more than 150 essay questions. PowerPoint Presentations. Mike Cohick of Collin College, with the help of Susan Glanz of Saint John’s University, created new presentation slides for the Thirteenth edition. Developed using Microsoft PowerPoint software, these slides are a step-by-step review of the key points in each of the book’s 37 chapters. They are equally useful to the student in the classroom as lecture aids or for personal review at home or the computer lab. The slides use animation to show students how graphs build and shift. Digital Image Library. All of the text’s tables and graphs have been reproduced as full-
color images on the website for instructor access. Instructor’s Resource Manual. Jan Ojdana of the University of Cincinnati, with the help
of Stephanie Campbell of Mineral Area College, has prepared the Instructor’s Resource Manual. The Instructor’s Resource Manual is available online, and it includes chapter summaries and outlines, “lecture launchers” to stimulate class discussion, and media exercises to extend the analysis.
Instructor Aids
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News Flashes. As up-to-date as The Economy Today is, it can’t foretell the future. As the future becomes the present, however, I write two-page News Flashes describing major economic events and relating them to specific text references. These News Flashes provide good lecture material and can be copied for student use. Adopters of The Economy Today have the option of receiving News Flashes via fax or mail. They’re also available on the Schiller website. Four to six News Flashes are sent to adopters each year. (Contact your local McGraw-Hill/Irwin sales representative to get on the mailing list.)
Student Aids
At the instructor’s discretion, students have access to the News Flashes. In addition, the following supplements can facilitate learning. Built-in Student Problem Set. The built-in student problem set is found at the end of every chapter of The Economy Today. Each chapter has 8 to 10 numerical and graphing problems tied to the content of the text. Graphing grids are provided. The answer blanks are formatted to facilitate grading, and all answers are contained in the end-of-chapter Solutions Manual. For convenience, the student problem set pages can also be found on the textbook’s website in exactly the same order and format. This facilitates either manual or electronic retrieval of homework assignments.
Study Econ Mobile App
McGraw-Hill is proud to offer a new mobile study app for students learning economics from Schiller’s The Economy Today, 13th edition. The features of the Study Econ app include flashcards for all key terms, a basic math review, customizable self-quizzes, common mistakes, and games. For additional information, please refer to the back inside cover of this book. Visit your mobile app store and download a trial version of the Schiller Study Econ app today!
DIS TINCTIVE WEB SU PPORT The Thirteenth edition of The Economy Today continues to set the pace for web applications and support of the principles course.
Web Analysis Boxes
A mini website directory is provided in each chapter’s marginal Web Analysis boxes, created and updated by Mark Wilson of West Virginia University Institute of Technology. These URLs aren’t random picks; they were selected because they let students extend and update adjacent in-text discussions.
Online Learning Center www.mhhe. com/schiller13e
The Economy Today’s website now includes even more features that both instructors and students will find engaging and instructive. The Online Learning Center is user-friendly. Upon entering the site at www.mhhe.com/schiller13e, students and instructors will find detailed information on the new edition and links to the specific site for the version of the book they are using. Proceeding into the Student Center, students will find lots of brand-new interactive study material. Mark Wilson, with the help of Rondi Schei of Portland State University, has revised 10 self-grading multiple-choice questions per chapter, which are ideal for self-quizzing before a test. In addition, they have enhanced the Auxiliary Problem Sets for the site through updating the problems for added practice. Professors can assign these extra problems as homework or students can access them for additional skills practice. Answers can be found on the passwordprotected Instructor’s Edition of the website. Mark and Rondi have also revised and created new Web Activities for each chapter. On top of all that, students have access to my periodic News Flashes along with my e-mail address to ask me any questions directly, under “ask Brad.” The password-protected Instructor Center includes some wonderful resources for instructors who want to include more interactive student activities in their courses. The downloadable Instructor’s Resource Manual, end-of-chapter Solutions Manual, Test Bank, PowerPoints, Auxiliary Problem Sets and answers, Web-Based Activities and answers, and YouTube Activity answers are available to provide guidance for instructors who collect these assignments and grade them. Premium Content. The Online Learning Center now offers students the opportunity to pur-
chase Premium Content. Like an electronic study guide, the OLC Premium Content enables
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students to download Schiller-exclusive iPod content including podcasts by Brad Schiller, Paul Solman videos, and chapter summaries—all accessible through the student’s MP3 device. Less Managing. More Teaching. Greater Learning. McGraw-Hill Connect® Econom-
ics is an online assignment and assessment solution that connects students with the tools and resources they’ll need to achieve success. McGraw-Hill Connect® Economics helps prepare students for their future by enabling faster learning, more efficient studying, and higher retention of knowledge. Connect® Economics offers a number of powerful tools and features to 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. Connect® Economics offers you the features described here. Simple Assignment Management. With Connect® Economics, creating assignments is
easier than ever, so you can spend more time teaching and less time managing. The assignment management function enables you to
• • •
Create and deliver assignments easily with selectable end-of-chapter questions and test bank items. Streamline lesson planning, student progress reporting, and assignment grading to make classroom management more efficient than ever. Go paperless with the eBook and online submission and grading of student assignments.
Smart Grading. When it comes to studying, time is precious. Connect® Economics helps
students learn more efficiently by providing feedback and practice material when they need it, where they need it. When it comes to teaching, your time also is precious. The grading function enables you to
• • •
Have assignments scored automatically, giving students immediate feedback on their work and side-by-side comparisons with correct answers. Access and review each response; manually change grades or leave comments for students to review. Reinforce classroom concepts with practice tests and instant quizzes.
Instructor Library. The Connect® Economics Instructor Library is your repository for
additional resources to improve student engagement in and out of class. You can select and use any asset that enhances your lecture. The Connect® Economics Instructor Library includes
• • • • • • • • • • •
eBook. PowerPoint presentations. Test Bank. Solutions Manual. Instructor’s Manual. Auxiliary Problem Sets and answers. Web-Based Activities and answers. YouTube Activity answers. Digital Image Library. Video Cases. Logic Cases.
Student Library. The Connect® Economics Student Library is the place for students to
access additional resources. The Student Library
• • •
Offers students quick access to lectures, practice materials, eBooks, and more. Provides instant practice material and study questions, easily accessible on the go. Gives students access to the Self-Quiz and Study described below.
McGraw-Hill Connect® Economics
economics McGraw-Hill Connect® Economics Features
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Self-Quiz and Study. The Self-Quiz and Study (SQS), updated by Tim Kochanski of Portland State University with the help of Rondi Schei, connects each student to the learning resources needed for success in the course. For each chapter, students
• • •
Take a practice test to initiate the Self-Quiz and Study. Immediately upon completing the practice test, see how their performance compares to content by sections within chapters. Receive a Study Plan that recommends specific readings from the text, supplemental study material, and practice work that will improve their understanding and mastery of each learning objective.
Diagnostic and Adaptive Learning of Concepts. LearnSmart Students want to
make the best use of their study time. The LearnSmart adaptive self-study technology within Connect® Economics provides students with a seamless combination of practice, assessment, and remediation for every concept in the textbook. LearnSmart’s intelligent software adapts to every student response and automatically delivers concepts that advance the student’s understanding while reducing time devoted to the concepts already mastered. The result for every student is the fastest path to mastery of the chapter concepts. LearnSmart
• • • • •
Applies an intelligent concept engine to identify the relationships between concepts and to serve new concepts to each student only when he or she is ready. Adapts automatically to each student, so students spend less time on the topics they understand and practice more those they have yet to master. Provides continual reinforcement and remediation, but gives only as much guidance as students need. Integrates diagnostics as part of the learning experience. Enables you to assess which concepts students have efficiently learned on their own, thus freeing class time for more applications and discussion.
Student Progress Tracking. Connect® Economics keeps instructors informed about how
each student, section, and class is performing, allowing for more productive use of lecture and office hours. The progress-tracking function enables you to
• • •
View scored work immediately and track individual or group performance with assignment and grade reports. Access an instant view of student or class performance relative to learning objectives. Collect data and generate reports required by many accreditation organizations, such as AACSB.
Lecture Capture. Increase the attention paid to lecture discussion by decreasing the attention paid to note taking. For an additional charge, Lecture Capture offers new ways for students to focus on the in-class discussion, knowing they can revisit important topics later. Lecture Capture enables you to
• • • •
Record and distribute your lecture with a click of button. Record and index PowerPoint presentations and anything shown on your computer so it is easily searchable, frame by frame. Offer access to lectures anytime and anywhere by computer, iPod, or mobile device. Increase intent listening and class participation by easing students’ concerns about note-taking. Lecture Capture will make it more likely you will see students’ faces, not the tops of their heads.
McGraw-Hill Connect® Plus Economics. McGraw-Hill reinvents the textbook learning
experience for the modern student with Connect® Plus Economics. A seamless integration
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of an eBook and Connect® Economics, Connect® Plus Economics provides all of the Connect® Economics features plus the following
• • •
An integrated eBook, allowing for anytime, anywhere access to the textbook. Dynamic links between the problems or questions you assign to your students and the location in the eBook where that problem or question is covered. A powerful search function to pinpoint and connect key concepts in a snap.
In short, Connect® Economics offers you and your students powerful tools and features that optimize your time and energies, enabling you to focus on course content, teaching, and student learning. Connect® Economics also offers a wealth of content resources for both instructors and students. This state-of-the-art, thoroughly tested system supports you in preparing students for the world that awaits. For more information about Connect, go to www.mcgrawhillconnect.com, or contact your local McGraw-Hill sales representative. 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 one-click start-and-stop process, you capture all computer screens and corresponding audio. Students can replay any part of any class with easy-touse browser-based viewing on a PC or Mac. 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 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, watch a two-minute Flash demo at http://tegritycampus. mhhe.com.
Tegrity Campus: Lectures 24/7
Many educational institutions today are focused on the notion of assurance of learning, an important element of some accreditation standards. The Economy Today is designed specifically to support your assurance-of-learning initiatives with a simple yet powerful solution. Each test bank question for The Economy Today maps to a specific chapter learning outcome/objective listed in the text. You can use our test bank software, EZ Test and EZ Test Online, or Connect® Economics to easily query for learning outcomes/objectives that directly relate to the learning objectives for your course. You can then use the reporting features of EZ Test to aggregate student results in similar fashion, making the collection and presentation of assurance-of-learning data simple and easy.
Assurance-ofLearning Ready
The McGraw-Hill Companies is a proud corporate member of AACSB International. Understanding the importance and value of AACSB accreditation, The Economy Today, 13th edition, recognizes the curricula guidelines detailed in the AACSB standards for business accreditation by connecting selected questions in the text and the test bank to the six general knowledge and skill guidelines in the AACSB standards. The statements contained in The Economy Today, 13th edition, are provided only as a guide for the users of this textbook. The AACSB leaves content coverage and assessment within the purview of individual schools, the mission of the school, and the faculty. While The Economy Today, 13th edition, and the teaching package make no claim of any specific AACSB qualification or evaluation, we have labeled within The Economy Today, 13th edition, selected questions according to the six general knowledge and skills areas.
AACSB Statement
At McGraw-Hill, we understand that getting the most from new technology can be challenging. That’s why our services don’t stop after you purchase our products. You can e-mail our product specialists 24 hours a day to get product training online. Or you can search our knowledge bank of frequently asked questions on our support website. For Customer Support, call 800-331-5094, or visit www.mhhe.com/support. One of our technical support analysts will be able to assist you in a timely fashion.
McGraw-Hill Customer Experience Support Team
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CourseSmart is a new way for faculty to find and review eTextbooks. It’s also a great option for students who are interested in accessing their course materials digitally. CourseSmart offers thousands of the most commonly adopted textbooks across hundreds of courses from a wide variety of higher education publishers. It is the only place for faculty to review and compare the full text of a textbook online. At CourseSmart, students can save up to 50 percent off the cost of a print book, reduce their impact on the environment, and gain access to powerful web tools for learning, including full text search, notes and highlighting, and e-mail tools for sharing notes between classmates. Complete tech support is also included in each title. Finding your eBook is easy. Visit www.CourseSmart.com and search by title, author, or ISBN.
AC KNOWL ED GM ENTS This Thirteenth edition is unquestionably the finest edition of The Economy Today, and I am deeply grateful to all those people who helped develop it. Marianne Musni was my faithful, fastidious, and cheerful development editor, who checked every word and feature in the text, prompting scores of corrections. Harvey Yep, the project manager, once again did an exceptional job in assuring that every page of the text was visually pleasing, properly formatted, error-free, and timely produced. Douglas Reiner served as the publisher, offering sage advice and savvy leadership. Scott Smith joined the team as editor late in the game but contributed as well. The design team, led by Matt Baldwin, created a vibrant palette of colors and features that enhanced The Economy Today’s readability. My thanks to all of them and their supporting staff. Special appreciation is extended to Cindy Hill and Sherri Wall, who together assumed responsibility for the digital content of the teaching package. The chapter-specific library of annotated YouTube videos is their most visible contribution to this Thirteenth edition. But their efforts in integrating and upgrading the learning objectives, discussion questions, and problem sets in both the print and digital platforms will yield even greater pedagogical value. I also want to express my heartfelt thanks to the professors who have shared their reactions (both good and bad) with me. Direct feedback from users and reviewers has always been a great source of continuing improvements in The Economy Today:
Reviewers
Cynthia E. Abadie Southwest Tennessee Community College Mark Abajian San Diego Mesa College Steve Abid Grand Rapids Community College Ercument G. Aksoy Los Angeles Valley College Mauro Cristian Amor Northwood University Catalina Amuedo-Dorantes San Diego State University Gerald Baumgardner Penn College Mack A. Bean Franklin Pierce University Adolfo Benavides Texas A&M University–Corpus Christi Anoop Bhargava Finger Lakes Community College Joerg Bibow Skidmore College
Eugenie Bietry Pace University John Bockino Suffolk County Community College Peter Boelman Norco College Walter Francis Boyle Fayetteville Technical Community College Amber Brown Grand Valley State University Don Bumpass Sam Houston State University Suparna Chakraborty Baruch College, CUNY Stephen J. Conroy University of San Diego Sherry L. Creswell Kent State University Manabendra Dasgupta University of Alabama–Birmingham Antony Davies Duquesne University
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Diane de Freitas Fresno City College Diana Denison Red Rocks Community College Alexander Deshkovski North Carolina Central University John A. Doces Bucknell University Ishita Edwards Oxnard College Eric R. Eide Brigham Young University Yalcin Ertekin Trine University Kelley L. Fallon Owensboro Community & Technical College Frank Garland Tri-County Technical College Leroy Gill The Ohio State University Paul Graf Indiana University Barnali Gupta Miami University Sheila Amin Gutierrez de Pineres University of Texas–Dallas Jonatan Jelen City College of New York Hyojin Jeong Lakeland Community College Barbara Heroy John University of Dayton Tim Kochanski Portland State University David E. Laurel South Texas College Raymond Lawless Quinsigamond Community College Richard B. Le Cosumnes River College Jim Lee Texas A&M University–Corpus Christi Sang H. Lee Southeastern Louisiana University Minghua Li Franklin Pierce University Yan Li University of Wisconsin–Eau Claire
Paul Lockard Black Hawk College Rotua Lumbantobing North Carolina State University Paula Manns Atlantic Cape Community College Jeanette Milius Iowa Western Community College Norman C. Miller Miami University Stanley Robert Mitchell McLennan Community College Stephen K. Nodine Tri-County Technical College Phacharaphot Nuntramas San Diego State University Seth Ari Roberts Frederick Community College Michael J. Ryan Western Michigan University Craig F. Santicola Westmoreland County Community College Rolando A. Santos Lakeland Community College Theodore P. Scheinman Mt. Hood Community College Marilyn K. Spencer Texas A&M University–Corpus Christi Irina Nikolayevna Strelnikova Red Rocks Community College Michael Swope Wayne County Community College Gary Lee Taylor South Dakota State University Deborah L. Thorsen Palm Beach State College Ngoc-Bich Tran San Jacinto College Markland Tuttle Sam Houston State University Kenneth Lewis Weimer Kellogg Community College Selin Yalcindag Mercyhurst College Erik Zemljic Kent State University
Finally, I’d like to thank all the professors and students who are going to use The Economy Today as an introduction to economics principles. I welcome any responses (even the bad ones) you’d like to pass on for future editions. —Bradley R. Schiller
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B R I E F
PREFACE VIII
PART 1: THE ECONOMIC CHALLENGE CHAPTER 1: ECONOMICS: THE CORE ISSUES 2 Appendix: Using Graphs 22 CHAPTER 2: THE U.S. ECONOMY: A GLOBAL VIEW 30 CHAPTER 3: SUPPLY AND DEMAND 45 CHAPTER 4: THE ROLE OF GOVERNMENT 70
MACRO PART 2: MEASURING MACRO OUTCOMES CHAPTER 5: NATIONAL INCOME ACCOUNTING 92 CHAPTER 6: UNEMPLOYMENT 113 CHAPTER 7: INFLATION 132 PART 3: CYCLICAL INSTABILITY CHAPTER 8: THE BUSINESS CYCLE 154 CHAPTER 9: AGGREGATE DEMAND 178 Appendix: The Keynesian Cross 199 CHAPTER 10: SELF-ADJUSTMENT OR INSTABILITY? 207 PART 4: FISCAL POLICY TOOLS CHAPTER 11: FISCAL POLICY 228 CHAPTER 12: DEFICITS AND DEBT 250 PART 5: MONETARY POLICY OPTIONS CHAPTER 13: MONEY AND BANKS 276 CHAPTER 14: THE FEDERAL RESERVE SYSTEM 296 CHAPTER 15: MONETARY POLICY 314 PART 6: SUPPLY-SIDE OPTIONS CHAPTER 16: SUPPLY-SIDE POLICY: SHORT-RUN OPTIONS 340 CHAPTER 17: GROWTH AND PRODUCTIVITY: LONG-RUN POSSIBILITIES 365 PART 7: POLICY CONSTRAINTS CHAPTER 18: THEORY VERSUS REALITY 386 xxiv
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CONTENTS IN BRIEF
MICRO PART 8: PRODUCT MARKETS: THE BASICS CHAPTER 19: CONSUMER CHOICE 412 Appendix: Indifference Curves 427 CHAPTER 20: ELASTICITY
436
CHAPTER 21: THE COSTS OF PRODUCTION
456
PART 9: MARKET STRUCTURE CHAPTER 22: THE COMPETITIVE FIRM 484 CHAPTER 23: COMPETITIVE MARKETS CHAPTER 24: MONOPOLY
533
CHAPTER 25: OLIGOPOLY
559
510
CHAPTER 26: MONOPOLISTIC COMPETITION
585
PART 10: REGULATORY ISSUES CHAPTER 27: NATURAL MONOPOLIES: (DE)REGULATION? 602 CHAPTER 28: ENVIRONMENTAL PROTECTION
622
CHAPTER 29: THE FARM PROBLEM 645 PART 11: FACTOR MARKETS: BASIC THEORY CHAPTER 30: THE LABOR MARKET 662 CHAPTER 31: LABOR UNIONS 686 CHAPTER 32: FINANCIAL MARKETS 706 PART 12: DISTRIBUTIONAL ISSUES CHAPTER 33: TAXES: EQUITY VERSUS EFFICIENCY 728 CHAPTER 34: TRANSFER PAYMENTS: WELFARE AND SOCIAL SECURITY 747
INTERNATIONAL PART 13: INTERNATIONAL ECONOMICS CHAPTER 35: INTERNATIONAL TRADE 764 CHAPTER 36: INTERNATIONAL FINANCE CHAPTER 37: GLOBAL POVERTY 810 Glossary G-1 Index I-1
790
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VIII
PART 1: THE ECONOMIC CHALLENGE CHAPTER 1: ECONOMICS: THE CORE ISSUES 2 The Economy Is Us 3 Scarcity: The Core Problem 4 Opportunity Costs 6 Production Possibilities 7 Three Basic Decisions 12 The Mechanisms of Choice 13 What Economics Is All About 18
Summary
CHAPTER 2: THE U.S. ECONOMY: A GLOBAL VIEW 30
Measures of Output 93 The Uses of Output 101 Measures of Income 102 The Flow of Income 106
THE ECONOMY TOMORROW: Ending Global Poverty 41 WORLD VIEW Comparative Output (GDP) 31 GDP per Capita around the World 32 The Education Gap between Rich and Poor Nations 36 Income Share of the Rich 40
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WORLD VIEW Secondhand Smoke Kills 600,000 People a Year: Study 74
CHAPTER 5: NATIONAL INCOME ACCOUNTING 92
41
66
IN THE NEWS Firefighters Watch as Home Burns to the Ground 73 Perpetuating Poverty: Lotteries Prey on the Poor 82 Persistent Doubts about Government Waste 83
PART 2: MEASURING MACRO OUTCOMES
What America Produces 31 How America Produces 35 For Whom America Produces 38
Summary
86
THE ECONOMY TOMORROW: “Right”-Sizing Government? 84
11
WORLD VIEW Chronic Food Shortage Shows Despite Efforts by North Korea to Hide It 10 Rocket Launch Cost Enough to End Famine in North Korea for a Year 10 Market Reliance vs. Government Reliance? 15 Index of Economic Freedom 16
Market Participants 46 The Circular Flow 47 Demand 48 Supply 55 Equilibrium 59 Market Outcomes 63
70
Market Failure 71 Growth of Government 78 Taxation 79 Government Failure 82
THE ECONOMY TOMORROW: Harnessing the Sun 20
CHAPTER 3: SUPPLY AND DEMAND
IN THE NEWS AT&T Cuts Price on iPhone 3GS to $49 51 Seafood Prices Rise on BP Oil Spill 58 Students Struggle to Find Final Four Tickets 61 Study: People Would Donate Kidneys for Payment 66
CHAPTER 4: THE ROLE OF GOVERNMENT
Appendix: Using Graphs 22
Summary
64
WORLD VIEW Gas Prices High—and Might Get Higher 63
Summary 21
IN THE NEWS Job Market Loses Momentum
THE ECONOMY TOMORROW: Deadly Shortages: The Organ Transplant Market
45
Summary
109
THE ECONOMY TOMORROW: The Quality of Life 107 IN THE NEWS A Lot Going On under the Table 96 Material Wealth vs. Social Health 109 WORLD VIEW Global Inequalities
95
CHAPTER 6: UNEMPLOYMENT 113 The Labor Force 114 Measuring Unemployment The Human Costs 119
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CONTENTS
CHAPTER 9: AGGREGATE DEMAND 178
Defining Full Employment 121 The Historical Record 125 Summary 128 THE ECONOMY TOMORROW: Outsourcing Jobs 126 IN THE NEWS Unemployment Benefits Not for Everyone 119 How Unemployment Affects the Family 120 Carpentry Work Crashing Down: Construction Is among Industries That Aren’t Rebounding after Recession 122 Unemployment Rate Hits 10.2 Percent, a 26-Year High 126 Outsourcing May Create U.S. Jobs 127
CHAPTER 7: INFLATION
Macro Equilibrium 179 Consumption 180 The Consumption Function 183 Investment 189 Government and Net Export Spending 192 Macro Failure 194 Summary
198
Appendix: The Keynesian Cross 199 THE ECONOMY TOMORROW: Anticipating AD Shifts 197 IN THE NEWS Livin’ Large 181 News Release: Personal Income and Outlays 186 Consumer Confidence Index at All-Time Low 187 Cuomo to Cut New York State Spending by $8.86 Billion, Fire 9,800 Workers 192 U.S. Leading Indicators Index Increases More Than Forecast 198
132
What Is Inflation? 133 Redistributive Effects of Inflation 133 Macro Consequences 139 Measuring Inflation 140 The Goal: Price Stability 143 The Historical Record 145 Causes of Inflation 146 Protective Mechanisms 146
WORLD VIEW Panasonic Slashes Spending
191
CHAPTER 10: SELF-ADJUSTMENT OR INSTABILITY? 207
Summary 149 THE ECONOMY TOMORROW: The Virtues of Inflation 148 IN THE NEWS Rise in College Costs Hits Public Schools Hardest Ignoring Cell Phones Biases CPI Upward 144 WORLD VIEW Zimbabwe to Introduce $100 Trillion Banknote U.K. Inflation Soars 148
134
138
PART 3: CYCLICAL INSTABILITY CHAPTER 8: THE BUSINESS CYCLE
154
Stable or Unstable? 155 Historical Cycles 157 A Model of the Macro Economy 162 Aggregate Demand and Supply 163 Competing Theories of Short-Run Instability 170 Long-Run Self-Adjustment 172
Leakages and Injections 208 The Multiplier Process 212 Macro Equilibrium Revisited 218 Adjustment to an Inflationary GDP Gap Summary
220
224
THE ECONOMY TOMORROW: Maintaining Consumer Confidence
222
IN THE NEWS Deflation 211 Housing Starts Fall to 10-Year Low in July 213 U.S. GDP Down 3.8% in Q4, Biggest Drop Since 1982 215 Job Losses Surge as U.S. Downturn Accelerates 216 Hard-Hit Families Finally Start Saving, Aggravating Nation’s Economic Woes 223 WORLD VIEW Crisis in Europe and U.S. Hurts Asian Economies 217
Summary 175 THE ECONOMY TOMORROW: Coping with Recession: 2008–2011
PART 4: FISCAL POLICY TOOLS 173
IN THE NEWS Market in Panic as Stocks Are Dumped in 12,894,600-Share Day; Bankers Halt It 155 Economy: Sharpest Decline in 26 Years 162 WORLD VIEW Global Depression
159
xxvii
CHAPTER 11: FISCAL POLICY 228 Taxes Fiscal Fiscal Fiscal
and Spending 229 Stimulus 230 Restraint 240 Guidelines 243
Summary
247
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Decreasing the Money Supply 309
THE ECONOMY TOMORROW: The Concern for Content 245
Summary
IN THE NEWS $787b Stimulus Bill Approved 234 Just How Stimulating Are Those Checks? 238 Economy Is Already Feeling the Impact of Federal Government’s Spending Cuts 242
311
THE ECONOMY TOMORROW: Is the Fed Losing Control? 309
WORLD VIEW U.K. Inflation Soars 232 China Sets Big Stimulus Plan in Bid to Jump-Start Growth 235
IN THE NEWS Fed Cuts Deposit Reserve Requirements 300 Treasury Prices Fall as Refunding Weighs 304 U.S. Federal Reserve Cuts Interest Rates to Historic Low 306
CHAPTER 12: DEFICITS AND DEBT
WORLD VIEW China Hikes Reserve Requirements Again
250
Budget Effects of Fiscal Policy 251 Economic Effects of Deficits 258 Economic Effects of Surpluses 260 The Accumulation of Debt 261 Who Owns the Debt? 264 Burden of the Debt 265 External Debt 268 Deficit and Debt Limits 269
CHAPTER 15: MONETARY POLICY 314 The Money Market 315 Interest Rates and Spending 319 Policy Constraints 321 The Monetarist Perspective 326 The Concern for Content 331 Summary
Summary 271
IN THE NEWS Deficit Projected to Swell beyond Earlier Estimates 251 Fiscal Policy in the Great Depression 258 Deficit Outlook Darkens 264 253
PART 5: MONETARY POLICY OPTIONS CHAPTER 13: MONEY AND BANKS
276
What Is “Money”? 277 The Money Supply 278 Creation of Money 281 The Money Multiplier 287 Banks and the Circular Flow 289 Summary
292
THE ECONOMY TOMORROW: Bank Bailouts 291 IN THE NEWS CD Yields Stay Unchanged
280
WORLD VIEW The Cashless Society 277
CHAPTER 14: THE FEDERAL RESERVE SYSTEM 296 Structure of the Fed 297 Monetary Tools 298 Increasing the Money Supply 307
335
THE ECONOMY TOMORROW: Which Lever to Pull? 331
THE ECONOMY TOMORROW: Dipping into Social Security 270
WORLD VIEW Budget Imbalances Common
309
IN THE NEWS Fed Cut Means Lower Rates for Consumers 318 Fed to Pump $1.2 Trillion into Markets 320 Prices Are Low! Mortgages Are Cheap! But You Can’t Get One 322 Consumer Borrowing Dips More Than Expected in February 324 Lag Time Is a Variable to Watch in Fed Rate Cut 324 “Not Worth a Continental”: The U.S. Experience with Hyperinflation 329 WORLD VIEW China Again Hikes Interest Rate in Inflation Fight Rising Rates Haven’t Thwarted Consumers 325
321
PART 6: SUPPLY-SIDE OPTIONS CHAPTER 16: SUPPLY-SIDE POLICY: SHORT-RUN OPTIONS 340 Aggregate Supply 341 Shape of the AS Curve 341 Shifts of the AS Curve 345 Tax Incentives 348 Human Capital Investment 354 Deregulation 355 Easing Trade Barriers 358 Infrastructure Development 358 Expectations 359 Summary
361
THE ECONOMY TOMORROW: Rebuilding America 360
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IN THE NEWS The Misery Index 347 New Rules on Toys Could Spell Doom 357 To Jolt Economy, Obama and Congress Eye Billions in Infrastructure Spending 359
Consumer Surplus 419 Price Discrimination 421 Choosing among Products 421
WORLD VIEW Economic Hit from Japan Quake Seen up to $200 Billion 347
Appendix: Indifference Curves 427
Summary
CHAPTER 17: GROWTH AND PRODUCTIVITY: LONG-RUN POSSIBILITIES 365 The Nature of Growth 366 Measures of Growth 367 Sources of Growth 372 Policy Tools 376 Summary
IN THE NEWS Men vs. Women: How They Spend 413
436
Price Elasticity 437 Price Elasticity and Total Revenue 443 Cross-Price Elasticity 446 Income Elasticity 448 Elasticity of Supply 450
THE ECONOMY TOMORROW: Limitless Growth? 378 IN THE NEWS The New Economy 368 Intel Reveals Major Chip Design Advance
Summary
452
THE ECONOMY TOMORROW: Achieving Energy Independence 451
376
WORLD VIEW High Investment 5 Fast Growth 373 U.S. Workers Compete Well 375 IMF Warns of Acute Debt Challenges for West
378
PART 7: POLICY CONSTRAINTS CHAPTER 18: THEORY VERSUS REALITY 386 Policy Tools 387 Idealized Uses 391 The Economic Record 393 Why Things Don’t Always Work 395
IN THE NEWS Federal Cigarette Tax Going Up 441 After iPhone Price Cut, Sales Are Up by 200 Percent 441 PlayStation 3 Sales More Than Double after Price Cut 442 Professor Becker Corrects President’s Math 443 iPhone Price Cut a Blow to Palm, Motorola 447 SUV Sales Drop with Gasoline Price Rise 448 Recession Eats into Gator Market 450 WORLD VIEW High Gold Price Swells Ranks of Illegal Miners
CHAPTER 21: THE COSTS OF PRODUCTION 456
Summary 408 THE ECONOMY TOMORROW: Hands On or Hands Off? 405 IN THE NEWS Deficit-Cutting Wilts in Heat from Voters 396 It’s Official: The Great Recession Ended Last Summer No Recession, Bernanke Says 398 CBO’s Flawed Forecasts 401 Stimulus: Spend or Cut Taxes? 402 Lobbyists Flock as Businesses Seek Share of the Stimulus Pie 404
397
CHAPTER 19: CONSUMER CHOICE
The Production Function 457 Marginal Productivity 460 Resource Costs 461 Dollar Costs 463 Economic vs. Accounting Costs 471 Long-Run Costs 472 Economies of Scale 474 Summary
478
THE ECONOMY TOMORROW: Global Competitiveness 476
394
PART 8: PRODUCT MARKETS: THE BASICS
Determinants of Demand 413 The Demand Curve 415 Market Demand 419
THE ECONOMY TOMORROW: Caveat Emptor 425
CHAPTER 20: ELASTICITY
382
WORLD VIEW Comparative Macro Performance
426
412
IN THE NEWS Ford Pumps $400 Million in Kansas City Plant 472 Funeral Giant Moves In on Small Rivals 474 WORLD VIEW United States Gains Cost Advantage 477
451
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Ticketmaster Rolls Out “Dynamic” Pricing 546 Intel’s Concessions Settle Antitrust Suit 548 Jury Rules Magnetek Unit Is Liable for Keeping Technology off Market 549 Rocket Monopoly Approved 550 XM–Sirius Merger Made Simple: One Is Always Less Than Two 551 Judge Says Microsoft Broke Antitrust Law 553 Microsoft: Google Stifles Competition 555
PART 9: MARKET STRUCTURE CHAPTER 22: THE COMPETITIVE FIRM 484 The Profit Motive 485 Economic vs. Accounting Profits 486 Market Structure 489 The Nature of Perfect Competition 490 The Production Decision 492 Profit-Maximizing Rule 494 The Shutdown Decision 500 The Investment Decision 501 Determinants of Supply 502 Summary
WORLD VIEW Foxy Soviets Pelt the West 538
CHAPTER 25: OLIGOPOLY
506
THE ECONOMY TOMORROW: Internet-Based Price Competition
506
IN THE NEWS Are Profits Bad? 485 Strawberry Fields Forever? 487 T-Shirt Shop Owner’s Lament: Too Many T-Shirt Shops Southern Farmers Hooked on New Cash Crop 497 GM to Close 15 Plants for 9 Weeks 502 Dell Plans to Close Plant in Texas 502 As Price of Grain Rises, Catfish Farms Dry Up 504
CHAPTER 23: COMPETITIVE MARKETS
510
The Market Supply Curve 511 Competition at Work: Microcomputers 514 The Competitive Process 524 Summary
529
THE ECONOMY TOMORROW: $99 iPads? 528 IN THE NEWS IBM to Halt PCjr Output Next Month Tablet Brigade 529
Market Structure 560 Oligopoly Behavior 563 The Kinked Demand Curve 567 Game Theory 569 Oligopoly vs. Competition 571 Coordination Problems 573 Barriers to Entry 575 Summary
THE ECONOMY TOMORROW: Antitrust Enforcement 578 IN THE NEWS Pop Culture: RC Goes for the Youth Market 566 Major Airlines Match Southwest’s Fare Cuts 568 Major U.S. Airlines Roll Back Latest Fare Hike 568 Coke and Pepsi May Call Off Pricing Battle 571 Eliminating the Competition 575 Frito-Lay Devours Snack Food Business 576 AT&T to Buy T-Mobile Means Higher Prices, Fewer Phones 580
CHAPTER 26: MONOPOLISTIC COMPETITION 585 Structure 586 Behavior 588
CHAPTER 24: MONOPOLY 533
Summary
Market Power 534 Market Power at Work: The Computer Market Revisited 537 A Comparative Perspective of Market Power 543 Pros and Cons of Market Power 548 Summary 555 THE ECONOMY TOMORROW: Microsoft and Google: Bullies or Geniuses? 543
581
WORLD VIEW Putting Size in Global Perspective 563 OPEC Leaves Output on Hold, Causing Oil Price Jump 572
524
WORLD VIEW Economy Threatens Catfish Industry 511 Flat Panels, Thin Margins 514 Wireless Phone Rates in India Declining as Competition Grows 526
IN THE NEWS Ticketmaster–Live Nation: A Sour Note U.S. Sues over Drug’s Price Hike 545
489
559
552
596
THE ECONOMY TOMORROW: No Cease-Fire in Advertising Wars
594
IN THE NEWS What’s Behind Starbucks’ Price Hike? 587 Water, Water Everywhere; Coke, Pepsi Unleash Flood of Ad Muscle 589 Fast-Food Rivals Suit Up for Breakfast War 590 Premium Coffee Shops May Be Nearing Saturation Point 593 The Cola Wars: It’s Not All Taste 594 WORLD VIEW The Best Global Brands 596
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PART 10: REGULATORY ISSUES CHAPTER 27: NATURAL MONOPOLIES: (DE)REGULATION? 602 Antitrust vs. Regulation 603 Natural Monopoly 603 Regulatory Options 605 The Costs of Regulation 608 Deregulation in Practice 611
CHAPTER 30: THE LABOR MARKET
Summary
682
THE ECONOMY TOMORROW: Capping CEO Pay 680
CHAPTER 28: ENVIRONMENTAL PROTECTION 622
IN THE NEWS Job Fairs: Long Lines and a Ray of Hope 663 Challenging Work and Corporate Responsibility Will Lure MBA Grads 664 Mauer, Twins Agree to Eight-Year, $184 Million Extension 673 Obama Wants $9.50 Minimum Wage 677 Obama Talks Tough on CEO Pay 681
The Environmental Threat 623 Pollution Damages 625 Market Incentives 626 Market Failure: External Costs 628 Regulatory Options 631 Balancing Benefits and Costs 635 641
WORLD VIEW Your Money or Your Life
THE ECONOMY TOMORROW: The Greenhouse Threat 639 IN THE NEWS Kaua’i Beach among Most Polluted 624 Dirty Air Can Shorten Your Life 626 Wrong Answer at Indian Point 628 Study Finds Net Gain from Pollution Rules 636 Forced Recycling Is a Waste 637 New Rules Would Cut Thousands of Coal Jobs 638 WORLD VIEW Polluted Cities 623 Paying to Pollute 634 Evidence Is Now “Unequivocal” That Humans Are Causing Global Warming 639
666
CHAPTER 31: LABOR UNIONS 686 The Labor Market 687 Labor Unions 688 The Potential Use of Power 689 The Extent of Union Power 692 Employer Power 694 Collective Bargaining 697 The Impact of Unions 700 Summary
702
THE ECONOMY TOMORROW: Merging to Survive 702
645
Destabilizing Forces 646 The First Farm Depression, 1920–1940 649 U.S. Farm Policy 650 The Second Farm Depression, 1980–1986 655
THE ECONOMY TOMORROW: Farmers on the Dole 655
662
Labor Supply 663 Market Supply 666 Labor Demand 667 A Firm’s Hiring Decision 672 Market Equilibrium 675 Choosing among Inputs 677
IN THE NEWS Costs of Trucking Seen Rising under New Safety Rules 610 Bell Monopolies Push to Disconnect Competition 612 The JetBlue Effect 614 Financial Woes Heating Up 617
Summary 658
653
PART 11: FACTOR MARKETS: BASIC THEORY
THE ECONOMY TOMORROW: Deregulate Everything? 617
CHAPTER 29: THE FARM PROBLEM
IN THE NEWS Corn Acres Expected to Soar in 2007; USDA Says Ethanol, Export Demand Lead to Largest Planted Area in 63 Years 649 Farm Subsidies Ripe for Reform 657 WORLD VIEW EU Farm Subsidies
Summary 618
Summary
xxxi
IN THE NEWS The GM–UAW Deal 689 A Win for the Graduate(s) 695 Free Agents in Sports: A Threat to Monopsony 695 Caterpillar vs. the UAW 698 WORLD VIEW Union Membership 693 Walmart Chief Defends Closing Unionized Store 700
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CHAPTER 32: FINANCIAL MARKETS The The The The
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706
THE ECONOMY TOMORROW: Policing World Trade 785
Role of Financial Markets 707 Present Value of Future Profits 708 Stock Market 712 Bond Market 718
IN THE NEWS California Grape Growers Protest Mixing Foreign Wine End the Import Quotas on Sugar 783 NAFTA Reallocates Labor: Comparative Advantage at Work 786
Summary 722
IN THE NEWS Yahoo, Microsoft Gain Slim Search Share from Google—ComScore 716 Where Do Start-Ups Get Their Money? 722
WORLD VIEW Export Ratios 766 China Accuses Corning of “Dumping” 778 Meat Imports “Threaten” Farmers 779 U.S. to Impose Tariff on Tires from China 780 “Beggar-Thy-Neighbor” Policies in the 1930s 781 Mexico Retaliates for Loss of Truck Program 784
PART 12: DISTRIBUTIONAL ISSUES
CHAPTER 36: INTERNATIONAL FINANCE
CHAPTER 33: TAXES: EQUITY VERSUS EFFICIENCY 728
Exchange Rates: The Global Link 791 Foreign Exchange Markets 791 Market Dynamics 795 Resistance to Exchange Rate Changes 798 Exchange Rate Intervention 800
THE ECONOMY TOMORROW: Venture Capitalists—Financing Tomorrow’s Products
721
What Is Income? 729 The Size Distribution of Income 729 The Federal Income Tax 731 Payroll, State, and Local Taxes 737 Taxes and Inequality 739 What Is Fair? 740
Summary
WORLD VIEW U2 Avoids Taxes, Raising Ire in Ireland Top Tax Rates 741
737
CHAPTER 37: GLOBAL POVERTY 810
733
American Poverty 811 Global Poverty 812 Goals and Strategies 814 Income Redistribution 814 Economic Growth 817
CHAPTER 34: TRANSFER PAYMENTS: WELFARE AND SOCIAL SECURITY 747 Major Transfer Programs 748 Welfare Programs 750 Social Security 755
Summary
THE ECONOMY TOMORROW: Privatize Social Security? 758
PART 13: INTERNATIONAL ECONOMICS CHAPTER 35: INTERNATIONAL TRADE U.S. Trade Patterns 765 Motivation to Trade 768 Pursuit of Comparative Advantage 772 Terms of Trade 773 Protectionist Pressures 775 Barriers to Trade 778
829
THE ECONOMY TOMORROW: Unleashing Entrepreneurship 828
Summary 760
Summary 786
806
WORLD VIEW Foreign Exchange Rates 794 Weak Dollar Helps U.S. Firms 797 Dollar’s Fall Puts Big Crimp in European Tourism 797 Nobel Prize Was Nobler in October 799 Analysis: China’s $3 Trillion in Reserves More Bane Than Boon 803
THE ECONOMY TOMORROW: A Flat Tax? 742 IN THE NEWS The Obamas’ Taxes 735 Obama Pitches Tax Hike on the Rich
790
THE ECONOMY TOMORROW: Currency Bailouts 805
Summary 743
764
WORLD VIEW Glaring Inequalities 815 The Way We Give 817 The Female “Inequality Trap” 819 Dying for a Drink of Clean Water 820 Muhammad Yunus: Microloans 822 Jeffrey Sachs: Big Money, Big Plans 823 Chávez Sets Plans for Nationalization 825 African Sugar Production Ramps Up 828 Photo Credits Glossary Index
I-1
G-1
PC-1
776