[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

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economy has in the future, thereby lowering full-employment income in the future.When we discuss economic growth and productivity in Chapter 27, we will considersome types of government expenditures and taxes that might affect the discoveryof new technologies, the productivity of capital, and the demand for labor byfirms. When we deal with these policies, we will need to investigate their impact onpotential GDP.LEAKAGES AND INJECTIONSWe have focused our discussion of government deficits on the capital market. Recall,however, that when the capital market is in equilibrium, balancing national savingand investment, the leakages and injections in the circular flow of income will alsobe balanced. This result holds just as it did in Chapter 24 when we ignored the governmentsector. Leakages from the spending flow now consist of household savingand taxes, while injections into the spending flow consist of investment and governmentexpenditures. As they adjust to ensure that national saving equals investment,real interest rates also ensure that leakages equal injections at full-employmentoutput. The total demand for the goods and services produced by firms will balancethe total output that is produced at full employment.Adding Government Incorporating the government into our model gives usthree sources of aggregate demand—consumption, investment, and governmentpurchases:demand = C + I + G.For the economy to be at equilibrium at full employment, demand must equal fullemploymentincome. When the capital market is in equilibrium, desired investmentequals national saving (the sum of private saving and government saving). Privatesaving at full employment is equal to full-employment income Y f minus consumptionand taxes. Government saving is equal to taxes minus expenditures. We canexpress capital market equilibrium asRearranging this expression implies thatI = S N = S p + S g = (Y f − C – T) + (T – G).C + I + G = Y f ,which is to say that demand from consumption spending, investment, and governmentspending equals full-employment income. Thus, aggregate demand equals fullemploymentoutput and the product market is in equilibrium at full employmentwhen the capital market is in equilibrium.554 ∂ CHAPTER 25 GOVERNMENT FINANCE AT FULL EMPLOYMENT
International PerspectiveDEFICITS IN OTHER COUNTRIESWhen the United States ran a huge budget deficit during the1980s, it was not alone. Most other major economies also witnessedthe same problems of deficits and growing governmentdebt. The figure shows estimates from the InternationalMonetary Fund (IMF) of the “structural” budget deficit as apercentage of potential GDP for the United States, Japan, andother major industrialized economies (Canada, France,Germany, Italy, and the United Kingdom). The structural deficitis that part of the government’s deficit that is left after it iscorrected for the type of business cycle factors we will bestudying in Part Seven. It corresponds to an estimate of thebudget if the economy were at full employment. As the figureshows, only Japan among the major industrialized economiesexperienced a budget surplus during the 1980s.During the 1990s, the budget situation improved in theUnited States and the other industrialized economies, againwith the exception of Japan. The 1990s, when most industrializedeconomies enjoyed strong economic growth, are sometimesdescribed as “the lost decade” in Japan, as growthstagnated after the rapid economic expansion of the previousthirty years.According to the IMF’s estimates, the United States hadachieved a balanced budget by 1998, and ran surpluses in 1999and 2000. However, that budget situation changed dramaticallyafter 2001 as a result of tax cuts that reduced governmentrevenue and spending increases that were necessitatedby the war on terrorism. But unlike in the 1980s, the otherindustrialized economies did not show a similar budget picture.In fact, for 2004, the deficit as a percent of potential GDPin the industrialized economies fell to under 2 percent, evenas it rose to exceed 4 percent in the United States.2SURPLUS (+) OR DEFICIT (–) AS A PERCENTAGEOF POTENTIAL GDP10–1–2–3–4–5–6–7OtherindustrializedcountriesUnitedStatesJapan–81980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004STRUCTURED SURPLUS AS A PERCENTAGE OF POTENTIAL GDPSOURCE: IMF, World Economic Outlook (2004).ADDING THE GOVERNMENT ∂ 555
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∂ECONOMICSFOURTH EDITION
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∂ECONOMICSFOURTH EDITIONBW. W. NO
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ABOUT THE AUTHORSJoseph E. Stiglitz
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CONTENTS IN BRIEFPART 1 INTRODUCTIO
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CONTENTSPREFACEXXXVPART 1 INTRODUCT
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Sources of Shifts in Demand Curves
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Short-Run and Long-Run Cost Curves
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Conditions for the Pareto Efficienc
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THINKING LIKE AN ECONOMIST: Trade-O
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Search and Information Intermediari
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CHAPTER 19 INTERNATIONAL TRADE AND
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Government Deficits and Trade Defic
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Evaluating Government Deficits and
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PART 7MACROECONOMICFLUCTUATIONS 635
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An Expansionary Shift in the ADI Cu
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CHAPTER 35 POLICY IN THE OPEN ECONO
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CASE IN POINT: Fed Policy Statement
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PREFACEThe study of economics has a
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of the economist’s approach to im
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ture also allows an instructor who
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With SmartWork’s intuitive interf
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AcknowledgmentsThe book’s first t
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Alternative Course OutlineIn the Fo
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Plus any of the optional chapters c
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∂Part 1INTRODUCTION∂1
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Chapter 1MODERNECONOMICS∂The past
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the illegal online sharing of music
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2. In making choices, individuals r
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gal activity, and on the other side
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Internet ConnectionAUCTION SITESAn
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and products. It is hard to imagine
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The primary reliance on private dec
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Microeconomics andMacroeconomics:Th
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does not prove that the coin is not
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Review and PracticeSUMMARY1. Econom
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Chapter 2THINKING LIKE ANECONOMIST
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COMPETITIVE MARKETSTo complete the
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new insights into markets and situa
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INCENTIVES VERSUS EQUALITYWhile inc
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line up to buy at that price. (The
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she has more of both goods than at
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Diminishing returns is an important
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Thinking Like an EconomistTRADE-OFF
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computers and textiles. The develop
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To understand sunk costs, let’s g
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Review and PracticeSUMMARY1. The ba
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Appendix: Reading GraphsWhether the
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Now look at point A, where the econ
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∂Part 2PERFECT MARKETS∂51
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Chapter 3DEMAND, SUPPLY,AND PRICE
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you might buy a few, and if the pri
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SHIFTS IN DEMAND CURVES1.25When the
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Case in PointGASOLINE PRICES AND TH
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In practice, both effects are often
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higher performance at that price. A
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Wrap-UpSUPPLY CURVEThe supply curve
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A change in the natural environment
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USING DEMAND AND SUPPLY CURVESThe c
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Internet ConnectionTHE DEMAND AND S
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the demand and supply curves. What
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Chapter 4USING DEMANDAND SUPPLY∂W
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ABPRICE ($)Demand fororange juice2.
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Table 4.1PRICE ELASTICITY OF DEMAND
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International PerspectiveCOMPARING
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the supply curve becomes close to v
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be reflected more in changes in qua
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to illustrate the market’s failur
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New York City leads, in the short r
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Case in PointRENT CONTROL IN NEW YO
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ment is concerned with low wages pa
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2. Imagine that the short-run price
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fall represents a larger percentage
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Chapter 5THE CONSUMPTIONDECISION∂
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As we learned in Chapter 2, a budge
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450ALL OTHER GOODS ($)300GG'FF'20 3
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The consumption of some goods actua
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Internet ConnectionWHAT WE CONSUMET
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tive or negative. Generally, though
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Normally, demand curves are downwar
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is 30, and that of the last pizza i
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CONSUMER SURPLUSIn Chapter 1, we le
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nomic model of consumer choice can
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The Status Quo Bias Loss aversion a
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of $60,000 per year. Imagine that t
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Moving along the curve in one direc
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number of CDs, having an additional
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candy increases. Now he can buy few
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Chapter 6THE FIRM’S COSTS∂Imagi
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The relationship between the quanti
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COST (THOUSANDS OF DOLLARS)AB175C15
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ABCOST (DOLLARS PER UNIT)Marginalco
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average costs are declining at outp
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Table 6.4DEBORAH’S COSTS IF SHE W
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COST (DOLLARS PER UNIT)ALong-run to
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There is one last case to consider.
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produce the same output in several
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Hydroelectric power being generated
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Review and PracticeSUMMARY1. A firm
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Chapter 7THE COMPETITIVEFIRM∂Whet
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Internet ConnectionFIRMS’ PROFIT-
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Figure 7.3 develops the graphical a
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ABCOST OR PRICE (DOLLARS PER UNIT)p
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COST OR PRICE (DOLLARS PER UNIT)c m
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e-InsightTHE 2001 RECESSION: CUTBAC
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invested in this enterprise would p
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In some cases, supplies of inputs a
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Wrap-UpACCOUNTANTS’ VERSUS ECONOM
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ant, who helps him to draw up the f
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CHAPTER 8LABOR MARKETS∂The previo
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“standard” workweek—the 40-ho
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Wrap-UpWAGE CHANGES AND LABOR SUPPL
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656055Female labor forceparticipati
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Thus, in Figure 8.5, at the price p
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market is in equilibrium, the deman
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constraint has a kink at 37 hours o
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AOriginal budgetconstraintBOriginal
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Chapter 9CAPITAL MARKETS∂At any g
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Joan chooses among the points on th
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past twenty years computer prices h
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The slope of the budget constraint
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gests that the personal saving rate
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would have earned $1,000 in interes
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Despite offering important insights
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e-InsightFINANCING THE NEW ECONOMYW
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Review and PracticeSUMMARY1. The in
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Appendix A: IndifferenceCurves and
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increase in the interest rate, we n
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Chapter 10THE EFFICIENCY OFCOMPETIT
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CONSUMER AND PRODUCERSURPLUSTo unde
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unable to find an apartment when re
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PRICE OF CIGARETTESPrice paid bycon
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Exchange Efficiency Exchange effici
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COMPETITIVE MARKETS ANDPARETO EFFIC
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more extensive government intervent
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households determine their saving,
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AUnskilled laborsupply (SU )BSkille
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today, but it will also depend on p
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Review and PracticeSUMMARY1. Genera
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∂Part 3IMPERFECT MARKETS∂237
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Chapter 11INTRODUCTION TOIMPERFECTM
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price. The basic competitive model
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is called monopoly. Your local elec
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How much the price must change as s
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Imperfect InformationThe model of p
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MARKETS FOR INFORMATIONInformation
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ness scandals in recent years have
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Thinking Like an EconomistINCENTIVE
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practical matter, this can be done
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Review and PracticeSUMMARY1. By and
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Chapter 12MONOPOLY,MONOPOLISTICCOMP
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In Chapter 7, we used a graph that
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of $9,000, it sells 2 units; and at
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United StatesJapanPRICE (p )p 1PRIC
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A natural monopoly occurs whenever
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Table 12.2DEGREE OF COMPETITION IN
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Equilibrium with MonopolisticCompet
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A firm that is part of an oligopoli
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and still be better off. However, t
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backward through time, this logic w
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Wrap-UpFORMS OF RESTRICTIVE PRACTIC
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Review and PracticeSUMMARY1. Both m
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9. Explain why frequent-flier progr
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Chapter 13GOVERNMENTPOLICIES TOWARD
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MANAGERIAL SLACKChapter 6 argued th
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e-InsightUSING THE INTERNET TO ENHA
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marginal cost and to make up the de
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let us first review why competition
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deregulation, government had retain
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demeanor.” (A 1974 amendment made
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demand for them would increase. And
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arguments brought by a small Virgin
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If we plug in the 34 percent share
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long-distance service between major
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Chapter 14STRATEGICBEHAVIOR∂Durin
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Figure 14.1, which reproduces a dia
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Consider the case of politicians A
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International PerspectiveBEGGAR-THY
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Internet ConnectionTHE ZERO-SUM GAM
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REPUTATIONSDeveloping good reputati
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If you have a deposit in a commerci
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competes peacefully. Assume Microso
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to actually carry out the threat wh
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Review and PracticeSUMMARY1. In per
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summer her parents decide whether o
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Chapter 15IMPERFECTINFORMATION INTH
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quantity demanded will actually fal
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The Incentive ProblemProviding ince
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REPUTATION SOLUTIONSReputation play
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Case in PointBUYING HEALTH INSURANC
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Thinking Like an EconomistINCENTIVE
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Internet ConnectionJOB SEARCHThe In
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stores’ buyers seek out literally
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remains the same, so the second sou
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Review and PracticeSUMMARY1. The ba
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Chapter 16IMPERFECTIONS INTHE LABOR
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unions had claimed that when they n
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ECONOMIC EFFECTSThe source of union
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When a union goes on strike, the fi
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firm long enough to make his traini
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machines have one advantage over hu
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These “wages of trust” may expl
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by the firm: the company can try to
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Review and PracticeSUMMARY1. The pr
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∂Part 4ISSUES INPUBLIC POLICY∂3
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Chapter 17THE PUBLIC SECTOR∂Throu
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Why Does the GovernmentIntervene in
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The lifetime prospects for children
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e-InsightTHE NEW ECONOMY AND INEQUA
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Wrap-UpCRITERIA FOR EVALUATING A TA
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The income tax is only one of sever
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1997, the program commonly known as
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SOCIAL INSURANCEThe United States h
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Government FailuresDecisions about
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BUDGETING AND SPENDING PROCEDURESTh
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campaign contributions affect the b
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that point, additional sources of r
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Health care is different from most
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Review and PracticeSUMMARY1. Govern
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Chapter 18ENVIRONMENTALECONOMICS∂
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Consider what happens if, in the pr
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matters? Some economists, led by th
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in such developments. The end of lo
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the socially optimal level of produ
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by 2 units and plant B by 4 units.
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operation causes. Thus, the price h
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Review and PracticeSUMMARY1. Govern
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Chapter 19INTERNATIONALTRADE AND TR
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relative to the size of the populat
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Internet ConnectionDAVID RICARDOThe
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e-InsightTHE UNITED STATES’ COMPA
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has a comparative advantage in fine
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But trade among individuals and tra
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restrict the importation of goods.
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OTHER NONTARIFF BARRIERSVERs and qu
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they can raise prices. In such a ca
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BEGGAR-THY-NEIGHBOR POLICIESConcern
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Thinking Like an EconomistDISTRIBUT
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parent: everyone can see that it is
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Environmental and human rights issu
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Internet ConnectionTHE WORLD TRADE
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9. How is it possible that while th
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Chapter 20TECHNOLOGICALCHANGE∂For
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e-InsightTHE NEW ECONOMY AND INNOVA
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uncertain about whether it will be
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Soon after Henry Ford’s Model T h
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Because expenditures on R & D are f
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SCHUMPETERIAN COMPETITIONAlthough c
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even the existence of certain mater
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increasing awareness of the importa
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Review and PracticeSUMMARY1. Ideas
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∂Part 5INTRODUCTIONTO MACROECONOM
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Chapter 21MACROECONOMICSAND THEECON
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302520PERCENT1510501900 1910 1920 1
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Today, a slight rise in the unemplo
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GOVERNMENT DEFICITS AND TRADE DEFIC
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significant periods of deflation si
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Review and PracticeSUMMARY1. The th
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Chapter 22MEASURINGOUTPUT ANDUNEMPL
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Table 22.1CALCULATING GDPPrices and
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MEASURING GDP: THE VALUE OF OUTPUTT
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Wrap-UpGDP equals consumption plus
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spending represents income for thos
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International PerspectiveWHAT GETS
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Measuring Nonmarket Goods Nonmarket
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ment represents economic hardship.
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1412FranceUNEMPLOYMENT RATE (%)1086
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Page 565 and 566: To see how a price index like the C
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Page 597 and 598: Chapter 25GOVERNMENTFINANCE AT FULL
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Page 617 and 618: Chapter 26THE OPENECONOMY AT FULLEM
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Page 651 and 652: Thinking Like an EconomistTRADE-OFF
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Chapter 28MONEY, THE PRICELEVEL, AN
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2015RATE OF INFLATION IN CPI (%)105
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Since we are interested in the dema
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807060INFLATION RATE (%)50403020100
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important of these are banks, but t
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pay their workers. How could the lo
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Money as a Store of Value People wi
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Table 28.2GLOSSARY OF FINANCIAL TER
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Table 28.3AMERICABANK BALANCE SHEET
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e-InsightELECTRONIC CASHA TV ad sho
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Table 28.5SUPERBANK BALANCE SHEETAs
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The Federal Reserve was created by
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the banking system as a whole remai
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If (for good reasons or bad) many d
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Review and PracticeSUMMARY1. In the
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∂Part 7MACROECONOMICFLUCTUATIONS
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Chapter 29INTRODUCTION TOMACROECONO
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A11,0001960-1961recession1969-1970r
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broken only by two brief recessions
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Thinking Like an EconomistEMPLOYMEN
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L 1 - L 0 , is the level of cyclica
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Thinking Like an EconomistINFORMATI
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market. Once this has happened, the
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assuming that the firm’s output i
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labor markets. Conversely, wages wi
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Fundamentals of Fluctuations 4INFLA
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Review and PracticeSUMMARY1. Econom
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Chapter 30AGGREGATEEXPENDITURES AND
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THE NATIONAL INCOME-OUTPUT IDENTITY
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the final increase in equilibrium o
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ical questions. First, why does the
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8,0007,000REAL CONSUMPTION(BILLIONS
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lion. If any of the components of E
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2018INVESTMENT (AS % OF GDP)1614121
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without waiting; otherwise, they ma
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The effect of exports and imports o
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became less expensive, imports rose
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Calculating Equilibrium OutputAt th
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Wrap-UpAGGREGATE EXPENDITURES AND O
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Review and PracticeSUMMARY1. Income
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Chapter 31AGGREGATEDEMAND ANDINFLAT
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When we discuss interest rates and
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Because equilibrium GDP is determin
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Fiscal Policy A change in governmen
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Wrap-UpFACTORS THAT SHIFT THE AGGRE
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But the story does not end there. A
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offsetting amount. But the contract
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Thinking Like an EconomistTOUGH TRA
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bank could cut interest rates at ea
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Case in PointTHE 1990SNow that we h
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to sustained increases in productiv
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Review and PracticeSUMMARY1. Aggreg
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Chapter 32THE FEDERALRESERVE ANDINT
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987INTEREST RATES (%)65432TargetFed
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The position of the demand curve fo
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equilibrium funds rate rises. If th
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tity of money increases. When the m
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Chapter 33THE ROLE OFMACROECONOMICP
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THE NEW TRADE-OFF:OUTPUT STABILITY-
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AggregatedemandinflationcurvesPoten
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ADI 1E 1Aggregatedemand-inflationcu
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765Actual deficitPOTENTIAL GDP (%)4
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Conducting Monetary Policy The FOMC
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The Committee perceives the upside
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stimulate aggregate expenditures, e
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Case in PointTHE INTEREST RATE CUT
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economy and lead to a resurgence of
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The Inflation Target The position o
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This discussion returns us to the t
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Wrap-UpDIFFERENCES BETWEEN MONETARY
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3. Assume that the economy is curre
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∂Part 8THE GLOBAL ECONOMY∂755
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Chapter 34THEINTERNATIONALFINANCIAL
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The foreign exchange market in Yere
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that wants to use the euros to buy
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States than moving it to Europe or
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Expectations about changes in the e
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expressed in terms of the value of
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One of the attractions of the Europ
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As speculators withdrew capital, th
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Under a currency board, the exchang
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Review and PracticeSUMMARY1. In a f
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Chapter 35POLICY IN THEOPEN ECONOMY
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While this discussion has focused o
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rises and its appreciation reduces
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Internet ConnectionFOREIGN EXCHANGE
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exports are a large fraction of tot
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Central Bank had increased the inte
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3. Suppose a fall in net exports du
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Chapter 36DEVELOPMENTAND TRANSITION
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$5,500$5,000$4,50019912002$4,000$3,
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LIFE IN A LESS-DEVELOPED COUNTRYJus
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Some of this inequality is simply d
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changes served to level the playing
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policies, together with macroeconom
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Trade Giving less-developed economi
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eroded significantly in 2001 as a r
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calculations of this kind allowed i
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with ethnic strife or conflicts wit
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the value of existing savings. Mafi
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6. What are some of the roles that
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∂Part 9FURTHER TOPICS INMACROECON
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Chapter 37INFLATION ANDUNEMPLOYMENT
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curve. A. W. Phillips was a New Zea
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1614INFLATION RATE (%)1210861960-19
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on the rate of inflation. The posit
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An important implication of this co
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Internet ConnectionWINNERS OF THE N
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the oil embargo imposed by the Orga
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expected inflation rate equal to π
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unemployment rate is 5 percent (i.e
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Chapter 38CONTROVERSIES INMACROECON
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ing a large tax cut through Congres
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rather than raising taxes to financ
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ity.” The Humphrey-Hawkins Act se
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THE INTERVENTIONIST PERSPECTIVEThe
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ceed in keeping the unemployment ra
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they argue that if the Fed is held
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These actions were taken in light o
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International PerspectiveCENTRAL BA
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rate−1 percent expected inflation
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but doing so leads to bigger swings
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between fluctuations in unemploymen
Page 913 and 914:
Page 915 and 916:
Chapter 39A STUDENT’S GUIDETO INV
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Internet ConnectionCALCULATING INTE
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regarding the prospects of the econ
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Table 39.1ALTERNATIVE INVESTMENTS A
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A crowd protests rate hikes by the
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12,000ADow Jones Industrial Average
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Investing in housing, particularly
Page 929 and 930:
Thinking Like an EconomistTHE DISTR
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subsides. Thus, if a person knows t
Page 933 and 934:
can expect to earn only a normal le
Page 935 and 936:
Strategies for Intelligent Investin
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Review and PracticeSUMMARY1. Invest
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Page 941 and 942:
capital goods: the machines and bui
Page 943 and 944:
Federal Open Market Committee(FOMC)
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M1, M2, M3: measures of the money s
Page 947 and 948:
price system: the economic system i
Page 949 and 950:
substitution effect: the reduced co
Page 951 and 952:
Page 953 and 954:
Page 955 and 956:
banks:assets of, 621-22, 625balance
Page 957 and 958:
currency (continued)inflation and,
Page 959 and 960:
exchange rates (continued)appreciat
Page 961 and 962:
horizontal restrictions, oligopolie
Page 963 and 964:
investment, investments, 672-76, 69
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monetary policy (continued)trade-of
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price takers, 27, 131, 218price war
Page 969 and 970:
Social Security (continued)as pay-a
Page 971:
unions (continued)strikes by, 355su
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