THE BASICS OF ECONOMICS David E. O’Connor GREENWOOD PRESS The Basics of Economics Recent titles in Basics of the Social Sciences The Basics of Western Philosophy Eugene Kelly THE BASICS OF ECONOMICS David E. O’Connor Basics of the Social Sciences GREENWOOD PRESS Westport, Connecticut • London Library of Congress Cataloging-in-Publication Data O’Connor, David E. (David Edward) The basics of economics / David E. O’Connor. p. cm. — (Basics of the social sciences) Includes index. ISBN 0–313–32520–0 (alk. paper) 1. Economics. 2. Economics—History. I. Title. II. Series. HB71.027 2004 330—dc22 2004008304 British Library Cataloguing in Publication Data is available. Copyright © 2004 by David E. O’Connor All rights reserved. No portion of this book may be reproduced, by any process or technique, without the express written consent of the publisher. Library of Congress Catalog Card Number: 2004008304 ISBN: 0–313–32520–0 First published in 2004 Greenwood Press, 88 Post Road West, Westport, CT 06881 An imprint of Greenwood Publishing Group, Inc. www.greenwood.com Printed in the United States of America The paper used in this book complies with the Permanent Paper Standard issued by the National Information Standards Organization (Z39.48–1984). 10987654321 Contents List of Figures and Tables vii Acknowledgments ix Preface xi Common Abbreviations in Economics xvii Timeline of Key Economic Events of the Modern Era: xxiii 1750 to 2005 Chapter 1: Economics as a Social Science 1 Chapter 2: A Survey of Economic History and Economic Thought 21 Chapter 3: The Rise of Modern Capitalism: The Power of the Market 47 Chapter 4: The Other Isms: Socialism, Communism, and Fascism 75 Chapter 5: Business Firms: The Basic Production Unit 105 Chapter 6: Consumers Organize: Consumer Behavior and Consumer Power 131 Chapter 7: Workers Organize: The Labor Force and Labor Power 159 Chapter 8: Financial Markets: The Arteries of Economic Activity 189 Chapter 9: Perspectives on Economic Growth 223 Chapter 10: In Search of Economic Stability 251 Chapter 11: Globalization: Creating a Global Marketplace 273 Chapter 12: The Challenge of Sustainable Economic Development 295 Chapter 13: Careers in Economics 319 Appendix A: Glossary of Selected Terms 335 Appendix B: Key Economic Web Sites 351 Appendix C: Selected Videotapes 355 Appendix D: Index to Biographies 361 General Index 365 Contents vi List of Figures and Tables FIGURES 1.1 Production Possibilities Curve for Nation X 5 2.1 Adam Smith Describes the Division of Labor 35 3.1 The Circular Flow Model 54 3.2 Government Workers by Level of Government: 1950–2003 62 4.1 The Pudong New Area 95 6.1 Sources of Household Income: 2003 132 6.2 Household Spending: 2001 133 6.3 Illustrating the Demand for Product X 138 6.4 Illustrating the Supply of Product X 140 6.5 Market Equilibrium for Product X 142 6.6 Price Ceilings and Shortages 143 7.1 U.S. Employment by Sector: 1900 and 2003 161 7.2 The Substitution Effect of a Wage Increase 164 7.3 The Income Effect of a Wage Increase 165 7.4 The Equilibrium Wage 168 7.5 Education and Income: 2000 169 7.6 The Minimum Wage and Labor Markets 172 8.1 The U.S. Money Supply (M1): 2003 192 8.2 Holders of Consumer Credit: 2002 195 8.3 Personal Income, Spending, and Saving: 2003 198 8.4 Commercial Banks and the Fed: 2002 204 8.5 The Dow Jones Industrial Average: 1896 and 2004 209 8.6 Types of Mutual Funds: 2002 213 9.1 Economic Growth: An Illustration 224 9.2 Calculating the Real GDP: 2003 225 9.3 Funding Research and Development: 2000 235 10.1 The Business Cycle Model 252 10.2 Calculating the Inflation Rate: 2002 255 12.1 Population Explosion: 1900–2050 299 13.1 Wages of Social Scientists: 2001 320 TABLES 4.1 Russia’s Performance Indicators: 1995–2004 91 5.1 Top 10 U.S. Corporations: 2003 107 5.2 Forms of Business Organization: 1997 114 5.3 Top 10 Franchises: 2003 115 6.1 Jeremy’s Diminishing Marginal Utility 134 6.2 Domestic Advertising Spending: 2002 Rankings 136 6.3 Major Consumer Organizations 145 6.4 Bankruptcy Filings: 2000–2003 152 7.1 Labor Force Participation Rate: 1900–2003 162 7.2 Education and Employment: March 2003 162 7.3 U.S. Population and the Labor Force: 1950–2010 168 7.4 U.S. Union Membership: 1900–2000 177 8.1 The U.S. Money Supply: 2003 193 8.2 U.S. Depository Institutions: 2002 196 8.3 Outstanding Bond Market Debt: 2003 210 9.1 Calculating the Nominal GDP: 2003 226 9.2 Economic Growth in the Global Economy: 1985–2004 227 9.3 The World’s Largest Economies: 2001 229 9.4 Total Entrepreneurial Activity: 2002 233 9.5 Freedom in the World: 1972–2002 238 10.1 Global Inflation Rates: 1985–2004 254 10.2 Federal Tax Receipts by Category: FY 2004 262 10.3 Budget Surpluses and Deficits: 1980–2009 264 10.4 Distribution of U.S. Money Income: 1975–2000 265 11.1 Top Exporting and Importing Nations: 2002 275 11.2 Exchange Rates: February 23, 2004 276 11.3 Selected Indicators of Transnationals: 1982–2002 277 11.4 Largest Nonfinancial Transnational Corporations: 2001 278 12.1 Classification of the World’s Economies: 2003 296 12.2 Income Distribution in Selected Developing Countries 297 12.3 Selected Quality of Life Indicators: 2001 301 12.4 Official Development Assistance: 2002 310 13.1 Annual Salaries of Business Economists: 2000 323 13.2 Top Salaries in the Federal Government: 2001 327 List of Figures and Tables viii Acknowledgments The author recognizes the following individuals for their contributions to this publication: Desmond McCaffrey, Instructional Developer at the Institute for Teaching and Learning, University of Connecticut, for the production of the book’s charts, graphs, and diagrams; Linda Mathes, Jane White, Jan Nuhn, and Peter Salesses of the Edwin O. Smith High School Library Media Center for technical assistance; the Government Publications research staff at the Homer Babbidge Library, University of Connecticut, for its research support; Anne Thompson, Senior Development Editor, and Marie Ellen Larcada, Senior Ac- quisitions Editor, of the Greenwood Publishing Group, for their encouragement, advice, and guidance; and Liz Kincaid, Photo Researcher, for her assistance in locating and obtaining photo permissions. The author recognizes the following organizations and agencies for their work on behalf of economic education in the United States. Two of the unsung heroes are the National Council on Economic Education (NCEE) and the Foun- dation for Teaching Economics (FTE). Over the years their innovative programs for teachers and students and their instructional materials have advanced the cause of economic literacy at the elementary, middle, and high school levels. Deep appreciation is also extended to the National Council for the Social Stud- ies (NCSS) for its continued support of economic education in the nation’s schools. Finally, kudos are offered to the many U.S. government agencies and multilateral organizations that collect and disseminate important economic in- formation to citizens. The author recognizes the inspirational work of civil society organi- zations, which, collectively, work to improve the human condition. Civil society [...]... economy Microeconomics is the older of the two branches of economics, occupying much of the attention of the early schools of economic thought The most important participants in the microeconomy are households, business firms, and the government The private sector, or nongovernmental sector of the economy, consists of households and firms Households, for example, consume the lion’s share of all goods... that contributed to the maturing of economics into a social science The logical starting point for the timeline is the life and times of Adam Smith, the founder of modern economics The Basics of Economics is organized into 13 focused chapters Chapters 1–4 provide a foundation for the study of economics Chapter 1, “Economxii Preface ics as a Social Science,” defines economics, introduces basic economic... the theory of comparative advantage 1832 President Andrew Jackson vetoes legislation that would have extended the charter of the Second Bank of the United States for another 20 years 1848 Karl Marx and Friedrich Engels publish The Communist Manifesto, a fundamental treatise of the Marxist school of economic thought John Stuart Mill writes Principles of Political Economy, which serves as the basic economics. .. the variables that affect the actions of individuals or groups Despite these limitations, social scientists, including economists, have studied and drawn conclusions about people’s economic behaviors The two main branches of economics are microeconomics and macroeconomics Branches of Economics Microeconomics is the branch of economics that focuses on the interactions among the individual decision-making... economic systems and humanize society’s treatment of the poor and other economically distressed groups Sometimes shouted from the barricades, sometimes whispered in the halls of academia, economic ideas have played a central role framing the institutions, practices, and attitudes of the modern world The Basics of Economics attempts to capture the spirit of economics, its fundamental concepts, its guiding... a major component of economics Like the other social sciences, economics studies human relationships and behaviors of people The most important units of study in economics are the behaviors of households, businesses, and government Economics and the other social sciences—anthropology, human geography, psychology, and sociology— are not exact sciences, however Why is this so? First, the social sciences... basic economic questions of what, how, and for whom to produce Over the past two and a half centuries, the economic debates matured Professional economists developed and tested theories in the laboratory of everyday life Some theories reinforced the status quo, while other fomented revolution All attempted to explain and influence the economic behaviors of people Today the study of economics is highly scientific... management.1 It wasn’t until the early twentieth century that economics came into common usage, replacing the more familiar political economy—a term that was introduced in the early 1600s and popularized during the 1700s As the study of economics evolved over time, increased attention was given to how people used scarce re- The Basics of Economics sources, often referred to as the factors of production or productive... chance to succeed in the economy Macroeconomics is the branch of economics that deals with the economic performance of the entire economy Macroeconomics, as a broad field of study, arose during the twentieth century, largely in response to the global depression of the 1930s Macroeconomics focuses on economic growth and economic stability in a nation Economic growth is often measured by tracking a nation’s... express the cost of that cup of coffee in monetary terms—one dollar and fifty cents Economists, however, tend to measure the true cost of the choices people make through a different lens Economists see the real cost, or opportunity cost, of any decision in terms of what was foregone, or given up, if resources were used in one way rather than another That is, the opportunity cost of a choice represents the . THE BASICS OF ECONOMICS David E. O’Connor GREENWOOD PRESS The Basics of Economics Recent titles in Basics of the Social Sciences The Basics of Western. government, and economics were nestled beneath the academic umbrella of historians and social scientists. The Basics of Economics explores the fundamentals of economic