(BQ) Part 2 book Survey of economics has contents: Gross domestic product, business cycles and unemployment, business cycles and unemployment, fiscal policy, international trade and finance, growth and the less developed countries, economies in transition,...and other contents.
3 THE MACROECONOMY AND FISCAL POLICY The first three chapters in this part explain key measures of how well the macroeconomy is performing These measures include GDP, business cycles, unemployment, and inflation Chapter 14 presents an important theoretical macro model based on aggregate demand and supply, and Chapter 15 demonstrates its application to federal government taxing and spending policies The part concludes with two chapters that provide actual data on such hotly debated topics as: government spending and taxation, federal deficits, surpluses, and the national debt CHAPTER 11 Gross Domestic Product Chapter Preview Measuring the performance of the economy is an important part of life Suppose one candidate for president of the United States proclaims that the economy’s performance is the best in a generation, and an opposing presidential candidate argues that the economy could perform much better Which statistics would you seek to tell how well the economy is doing? The answer requires understanding some of the nuts and bolts of national income accounting National income accounting is the system used to measure the aggregate income and expenditures for a nation Despite certain limitations, the national income accounting system provides a valuable indicator of an economy’s performance For example, you can visit the Internet and check the annual Economic Report of the President to compare the size or growth of the U.S economy between 2007 and 2008 or other years Prior to the Great Depression, there were no national accounting procedures for estimating the data required to assess the economy’s performance In order to provide accounting methodologies for macro data, the late economist Simon Kuznets, the “father of GDP,” published a small report in 1934 titled National Income, 1929–32 For his pioneering work, Kuznets earned the 1971 Nobel Prize in economics Today, thanks in large part to Kuznets, most countries use common national accounting methods National income accounting serves a nation similar to the manner in which accounting serves a business or household In each case, accounting methodology is vital for identifying economic problems and formulating plans for achieving goals In this chapter, you will learn to solve these economic puzzles: • Why doesn’t economic growth include increases in spending for welfare, Social Security, and unemployment programs? • Can one newscaster report that the economy grew, while another reports that for the same year the economy declined, and both reports be correct? • How is the calculation of national output affected by environmental damage? 218 CHAPTER 11 GROSS DOMESTIC PRODUCT 219 Gross Domestic Product The most widely reported measure throughout the world of a nation’s economic performance is gross domestic product (GDP), which is the market value of all final goods and services produced in a nation during a period of time, usually a year GDP therefore excludes production abroad by U.S businesses For example, GDP excludes General Motor’s earnings on its foreign operations On the other hand, GDP includes Toyota’s profits from its car plants in the United States Why is GDP important? One advantage of GDP is that it avoids the “apples and oranges” measurement problem If an economy produces 10 apples one year and 10 oranges the next, can we say that the value of output has changed in any way? To answer this question, we must attach price tags in order to evaluate the relative monetary value of apples and oranges to society This is the reason GDP measures value using dollars, rather than listing the number of cars, heart transplants, legal cases, toothbrushes, and tanks produced Instead, the market-determined dollar value establishes the monetary importance of production In GDP calculations, “money talks.” That is, GDP relies on markets to establish the relative value of goods and services GDP also requires that we give the following two points special attention: (1) GDP counts only new domestic production, and (2) it counts only final goods Gross domestic product (GDP) The market value of all final goods and services produced in a nation during a period of time, usually a year GDP Counts Only New Domestic Production National income accountants calculating GDP carefully exclude transactions in two major areas: secondhand transactions and nonproductive financial transactions Secondhand Transactions Current GDP does not include the sale of a used car or the sale of a home constructed some years ago Such transactions are merely exchanges of previously produced goods and not current production of new goods that add to the existing stock of cars and homes However, the sales commission on a used car or a home produced in another GDP period counts in current GDP because the salesperson performed a service during the present period of time Nonproductive Financial Transactions GDP does not count purely private or public financial transactions, such as giving private gifts, buying and selling stocks and bonds, and making transfer payments A transfer payment is a government payment to individuals not in exchange for goods or services currently produced Welfare, Social Security, veterans’ benefits, and unemployment benefits are transfer payments These transactions are considered nonproductive because they not represent production of any new or current output Similarly, stock market transactions represent only the exchange of certificates of ownership (stocks) or indebtedness (bonds) and not actual new production Transfer payment A government payment to individuals not in exchange for goods or services currently produced GDP Counts Only Final Goods The popular press usually defines GDP as simply “the value of all goods and services produced.” This is technically incorrect because GDP counts only final goods, which are finished goods and services produced for the ultimate user Including all goods and services produced would inflate GDP by double counting (counting many items more than once) In order to count only final goods and avoid overstating GDP, national income accountants must take care not to include intermediate goods Intermediate goods are goods and services used as inputs for the production of final goods Stated differently, intermediate goods are not produced for consumption by the ultimate user Suppose a wholesale distributor sells glass to an automaker This transaction is not included in GDP The glass is an intermediate good used in the production of cars When a customer buys a new car from the car dealer, the value of the glass is included in the car’s selling price, which is the value of a final good counted in GDP Let’s consider another example A wholesale distributor sells glass to a hardware store GDP does not include this transaction because the hardware store is not the final user When a customer Final goods Finished goods and services produced for the ultimate user Intermediate goods Goods and services used as inputs for the production of final goods 220 PART THE MACROECONOMY AND FISCAL POLICY buys the glass from the hardware store to repair a broken window, the final purchase price of the glass is added to GDP as a consumer expenditure Measuring GDP Circular flow model A diagram showing the flow of products from businesses to households and the flow of resources from households to businesses In exchange for these resources, money payments flow between businesses and households GDP is like an enormous puzzle with many pieces to fit together, including markets for products, markets for resources, consumers spending and earning money, and businesses spending and earning money How can one fit all these puzzle pieces together? One way to understand how all these concepts fit together is to use a simple macroeconomic model called the circular flow model The circular flow model shows the flow of products from businesses to households and the flow of resources from households to businesses In exchange for these resources, money payments flow between businesses and households Exhibit 11.1 shows the circular flow in a hypothetical economy with no government, no financial markets, and no foreign trade In this ultra-simple pure market economy, only the households and the businesses make decisions The Circular Flow Model The upper half of the diagram in Exhibit 11.1 represents product markets in which households exchange money for goods and services produced by firms The supply arrow in the top loop represents all finished products and the value of services produced, sold, and delivered to consumers The demand arrow in the top loop shows why the businesses make this effort to satisfy the consuming households When consumers decide to buy products, they are actually voting with their dollars This flow of consumption expenditures from households is sales revenues to businesses and expenses from the viewpoint of households Notice that the box labeled Product markets contains a supply and demand graph This means the forces of supply and demand in individual markets determine the price and quantity of each product exchanged without government intervention The bottom half of the circular flow diagram consists of the factor markets, in which firms demand the natural resources, labor, capital, and entrepreneurship needed to produce the goods and services sold in the product markets Our hypothetical economy is capitalistic, and the model assumes for simplicity that households own the factors of production Businesses therefore must purchase all their resources from the households The supply arrow in the bottom loop represents this flow of resources from households to firms, and the demand arrow is the flow of money payments for these resources These payments are also income earned by households in the form of wages, rents, interest, and profits As in the product markets, market supply and demand determine the price and quantity of factor payments Our simple model also assumes all households live from hand to mouth That is, households spend all the income they earn in the factor markets on products Households therefore not save Likewise, all firms spend all their income earned in the product markets on resources from the factor markets The simple circular flow model therefore fails to mirror the real world But it does aid your understanding of the relationships between product markets, factor markets, the flow of money, and the theory behind GDP measurement—to which we now turn our attention The Expenditure Approach Expenditure approach The national income accounting method that measures GDP by adding all the spending for final goods during a period of time How does the government actually calculate GDP? One way national income accountants calculate GDP is to use the expenditure approach to measure total spending flowing through product markets in the circular flow diagram.1 The expenditure approach measures GDP by adding all the spending for final goods during a period of time Exhibit 11.2 shows 2006 GDP using the expenditure approach, which breaks down expenditures into four components The data in this exhibit show that all production in the U.S economy is ultimately Another somewhat more complex method is called the income approach This approach calculates GDP by summing the incomes earned by households for factors of production flowing through the factor markets in the circular flow diagram The expenditure and income approaches yield the same GDP because the model assumes households spend all income earned CHAPTER 11 EXHIBIT 11.1 GROSS DOMESTIC PRODUCT The Basic Circular Flow Model In this simple economy, households spend all their income in the upper loop and demand consumer goods and services from businesses Businesses seek profits by supplying goods and services to households through the product markets Prices and quantities in individual markets are determined by the market supply and demand model In the factor markets in the lower loop, resources (land, labor, and capital) are owned by households and supplied to businesses that demand these factors in return for money payments The forces of supply and demand determine the returns to the factors, for example, wages and the quantity of labor supplied Overall, goods and services flow clockwise, and the corresponding payments flow counterclockwise Product markets S ly pp Q $ E xpe nd itu re an d (n s ic e s rv $ a D $ $ om m De nd $ Ac tua lg oo ds se Su P $ a in $ lG DP ) $ Businesses Households $ s, r ge (wa $ $ or ct ts, Fa en uc tio n (la nd , $ Factor markets S lab or, and cap ita l) W $ $ $ d an m e D l pp Su y d ro fp so tor Fac p in aym te re en st, ts pro $ fits ) D Q purchased by spending from households, businesses, government, or foreigners Let’s discuss each of these expenditure categories Personal Consumption Expenditures (C) The largest component of GDP in 2006 was $9,269 billion for personal consumption expenditures, represented by the letter C Personal consumption expenditures comprise total spending by households for durable goods, nondurable goods, and services Durable goods include items such as automobiles, appliances, and furniture because they last longer than years Food, clothing, soap, and gasoline are examples of nondurables, because they are considered used up or consumed in less than a year Services, which is the largest category, include recreation, legal advice, medical treatment, education, and any transaction not in the form of a tangible object 221 222 PART EXHIBIT 11.2 THE MACROECONOMY AND FISCAL POLICY Gross Domestic Product Using the Expenditure Approach, 2006 Amount (billions of dollars) National Income Account Personal consumption expenditures (C) Durable goods Nondurable goods Percentage of GDP $9,269 70% 2,213 17 2,528 19 À763 À6 $1,070 2,715 Services Gross private domestic investment (I) Fixed investment Change in business inventories Government consumption expenditures and gross investment (G) Federal State and local Net exports of goods and services (X − M) Exports (X) Imports (M) 5,484 2,163 50 927 1,601 1,466 2,229 Gross domestic product (GDP) $13,247 100% Source: Bureau of Economic Analysis, National Economic Accounts, http://www.bea.doc.gov/national/nipaweb/SelectTable.asp?Selected¼Y, Table 1.1.5 Gross Private Domestic Investment (I) In 2006, $2,213 billion was spent for what is officially called gross private domestic investment (I) This national income account includes “gross” (all) “private” (not government) “domestic” (not foreign) spending by businesses for investment in assets that are expected to earn profits in the future Gross private domestic investment is the sum of two components: (1) fixed investment expenditures for newly produced capital goods, such as commercial and residential structures, machinery, equipment, and tools; and (2) change in business inventories, which is the net change in spending for unsold finished goods Note that gross private domestic investment is simply the national income accounting category for “investment,” defined in Chapter The only difference is that investment in Exhibit 2.5 of Chapter was in physical capital, rather than the dollar value of capital Now we will take a closer look at gross private domestic investment Note that national income accountants include the rental value of newly constructed residential housing in the $2,163 billion spent for fixed investment A new factory, warehouse, or robot is surely a form of investment, but why include residential housing as business investment rather than consumption by households? The debatable answer is that a new home is considered investment because it provides services in the future that the owner can rent for financial return For this reason, all newly produced housing is considered investment whether the owner rents or occupies the property Finally, the $50 billion change in business inventories means this amount of net dollar value of unsold finished goods and raw materials was added to the stock of inventories during 2006 A decline in inventories would reduce GDP because households consumed more output than firms produced during this year When businesses have more on their shelves this year than last, more new production has taken place than has been consumed during this year CHAPTER 11 GROSS DOMESTIC PRODUCT Government Consumption Expenditures and Gross Investment (G) This category includes the value of goods and services government purchases at all levels measured by their costs For example, spending for salaries for police and state university professors enters the GDP accounts at the prices the government pays for them In addition, the government spends for investment additions to its stock of capital, such as tanks, schools, highways, bridges, and government buildings In 2006, federal, state, and local government consumption expenditures and gross investment (G) were $2,528 billion As the figures in Exhibit 11.2 reveal, consumption expenditures and gross investment of state and local governments far exceeded those of the federal government It is important to understand that consumption expenditures and gross investment exclude transfer payments because, as explained at the beginning of the chapter, they not represent newly produced goods and services Instead, transfer payments are paid to those entitled to Social Security benefits, veterans’ benefits, welfare, unemployment compensation, and benefits from other programs Net Exports (X À M) The last GDP expenditure account is net exports, expressed in the formula (X À M) Exports (X) are expenditures by foreigners for U.S domestically produced goods Imports (M) are the dollar amount of our purchases of Japanese automobiles, French wine, and other goods produced abroad Because we are using expenditures for U.S output to measure GDP, one might ask why imports are subtracted from exports The answer is the result of how the government actually collects data from which GDP is computed Spending for imports is not subtracted when spending data for consumption, investment, and government consumption are reported These three components of GDP therefore overstate the value of expenditures for U.S.-produced products Consider the data collected to compute consumption (C) In reality, personal consumption expenditures reported to the U.S Department of Commerce include expenditures for both domestically produced and imported goods and services For example, automobile dealers report to the government that consumers purchased a given dollar amount of new cars during 2006, but they are not required to separate their figures between sales of U.S cars and sales of foreign cars Because GDP measures only domestic economic activity, foreign sales must be removed Subtracting imports in the net exports category removes all sales of foreign goods, including new foreign cars, from consumption (C) and likewise from investment (I) and government consumption expenditures (G) The overstatement of 2006 GDP expenditures is corrected by subtracting $2,229 billion in imports from $1,466 billion in exports to obtain net exports of À$763 billion The negative sign indicates that the United States is spending more dollars to purchase foreign products than it is receiving from the rest of the world for U.S goods The effect of a negative net exports figure is to reduce U.S GDP because it is subtracted from the consumption, investment, and government components Prior to the early 1980s, the United States was a consistent net exporter, selling more goods and services to the rest of the world than we purchased from abroad Since 1983, the United States has been a net importer Chapter 21 discusses international trade in more detail A Formula for GDP Using the expenditure approach, GDP is expressed mathematically in billions of dollars as GDP ẳ C ỵ I þ G þ ðX À MÞ For 2006 (see Exhibit 11.2), $13; 247 ẳ $9; 269 ỵ $2; 213 ỵ $2; 258 ỵ $1; 466 $2; 229ị This simple equation plays a central role in macroeconomics It is the basis for analyzing macro problems and formulating macro policy When economists study the macro economy, they can apply this equation to predict the behavior of the major sectors of the 223 224 PART THE MACROECONOMY AND FISCAL POLICY economy: consumption (C) is spending by households, investment (I) is spending by firms, government consumption expenditures and gross investment (G) is spending by the government, and net exports (X À M) is net spending by foreigners CHECKPOINT How Much Does Mario Add to GDP? Mario works part-time at Pizza Hut and earns an annual wage plus tips of $15,000 He sold 4,000 pizzas at $10 per pizza during the year He was unemployed part of the year, so he received unemployment compensation of $3,000 During the past year, Mario bought a used car for $1,000 Using the expenditure approach, how much has Mario contributed to GDP? GDP in Other Countries Exhibit 11.3 compares GDP for selected countries in 2006 The United States had the world’s highest GDP U.S GDP was about three times Japan’s GDP and about five times the GDP of China International Economics GDP Shortcomings For various reasons, GDP omits certain measures of overall economic well-being Because GDP is the basis of government economic policies, there is concern that GDP may be giving us a false impression of the nation’s material well-being GDP is a less-than-perfect measure of the nation’s economic pulse because it excludes the following factors Nonmarket Transactions Because GDP counts only market transactions, it excludes certain unpaid activities, such as homemaker production, child rearing, and do-it-yourself home repairs and services For example, if you take your dirty clothes to the cleaners, GDP increases by the amount of the cleaning bill paid But GDP ignores the value of cleaning these same clothes if you wash them yourself at home There are two reasons for excluding nonmarket activities from GDP First, it would be extremely imprecise to attempt to collect data and assign a dollar value to services people provide for themselves or others without compensation Second, it is difficult to decide which nonmarket activities to exclude and which ones to include Perhaps repairing your own roof, painting your own house, and repairing your own car should be included Now consider the value of washing your car GDP does include the price of cleaning your car if you purchase it at a car wash, so it could be argued that GDP should include the value of washing your car at home The issue of unpaid, do-it-yourself activities affects comparisons of the GDPs of different nations One reason some less-developed nations have lower GDPs than major industrialized nations is that a greater proportion of people in less-developed nations farm, clean, make repairs, and perform other tasks for their families rather than hiring someone else to the work Distribution, Kind, and Quality of Products GDP is blind to whether a small fraction of the population consumes most of a country’s GDP or consumption is evenly divided GDP also wears a blindfold with respect to the quality and kinds of goods and services that make up a nation’s GDP Consider the fictional economies of Zuba and Econa Zuba has a GDP of $2,000 billion, and Econa has a GDP of $1,000 billion At first glance, Zuba appears to possess superior economic well-being However, Zuba’s GDP consists of only military goods, and Econa’s products include computers, CHAPTER 11 EXHIBIT 11.3 225 GROSS DOMESTIC PRODUCT An International Comparison of GDPs, 2006 This exhibit shows GDPs in 2006 for selected countries The United States has the world’s highest GDP U.S GDP is about three times the size of Japans GDP and about five times the GDP of China 14 $13,247 13 12 11 10 GDP (billions of dollars) $4,367 $2,897 $2,630 $2,373 $2,231 $1,269 $979 $845 United States Japan Germany China United France Kingdom Canada Russia Mexico Country Source: International Monetary Fund, World Economic Outlook Database, http://www.inf.org/external/pubs/ft/weo/2007/01/data/weoselgr.aspx tractors, wheat, milk, houses, and other consumer items Moreover, assume the majority of the people of Zuba could care less about the output of military goods and would be happier if the country produced more consumer goods Conclusion GDP is a quantitative, rather than a qualitative, measure of the output of goods and services Neglect of Leisure Time In general, the wealthier a nation becomes, the more leisure time its citizens can afford Rather than working longer hours, workers often choose to increase their time for recreation and travel Since 1900, the length of the typical workweek in the United States declined steadily from about 50 hours in 1900 to about 34 hours in 2006.2 Economic Report of the President, 2007, http://www.gpoaccess.gov/eop/, Table B-47 226 PART THE MACROECONOMY AND FISCAL POLICY Conclusion It can be argued that GDP understates national well-being because no allowance is made for people working fewer hours than they once did The Underground Economy Illegal gambling, prostitution, loan-sharking, illegal guns, and illegal drugs are goods and services that meet all the requirements for GDP They are final products with a value determined in markets, but GDP does not include unreported criminal activities The “underground” economy also includes tax evasion One way to avoid paying taxes on a legal activity is to trade or barter goods and services rather than selling them One person fixes a neighbor’s car in return for babysitting services, and the value of the exchange is unreported Other individuals and businesses make legal sales for cash and not report the income earned to the Internal Revenue Service Estimates of the size of this subterranean economy vary Some studies by economists estimate the size of the underground sector is between and 13 percent of GDP.3 This range of estimates is slightly less than the estimated size of the underground economy in most European countries Conclusion If the underground economy is sizable, GDP will understate an economy’s performance Economic Bads More production means a larger GDP, regardless of the level of pollution created in the process Recall from Chapter the discussion of negative externalities, such as pollution caused by steel mills, chemical plants, and cigarettes Air, water, and noise pollution are economic bads that impose costs on society not reflected in private market prices and quantities bought and sold When a polluting company sells its product, this transaction increases the GDP However, critics of GDP argue that it fails to account for the diminished quality of life from the “bads” not reported in GDP Stated another way, if production results in pollution and environmental change, GDP overstates the nation’s well-being Other National Income Accounts In addition to GDP, the media often report several other national income accounts because they are necessary for studying the macro economy We now take a brief look at each National Income (NI) National income (NI) The total income earned by resource owners, including wages, rents, interest, and profits NI is calculated as gross domestic product minus depreciation of the capital worn out in producing output It can be argued that depreciation should be subtracted from GDP Recall that GDP is not entirely a measure of newly produced output because it includes an estimated value of capital goods required to replace those worn out in the production process The measurement designed to correct this deficiency is national income (NI), which is the gross domestic product minus depreciation of the capital worn out in producing output Stated as a formula: NI ¼ GDP À depreciation (consumption of fixed capital) In 2006, $1,545 billion was the estimated amount of GDP attributable to depreciation during the year Exhibit 11.4 shows the actual calculation of NI from GDP in 2006 NI measures how much income is earned by households who own and supply resources It includes the total flow of payments to the owners of the factors of production including Jame S Proule, “The Other Path: Why Are Your Neighbors Paying in Cash?” The Wall Street Journal of Europe, Feb 28, 2001, p 518 G L O S S A RY Communism A stateless, classless economic system in which all the factors of production are owned by the workers, and people share in production according to their needs In Marx’s view, this is the highest form of socialism toward which the revolution should strive Comparable worth The principle that employees who work for the same employer must be paid the same wage when their jobs, even if different, require similar levels of education, training, experience, and responsibility A nonmarket wage-setting process is used to evaluate and compensate jobs according to point scores assigned to different jobs Comparative advantage The ability of a country to produce a good at a lower opportunity cost than another country Complementary good A good that is jointly consumed with another good As a result, there is an inverse relationship between a price change for one good and the demand for its “go together” good Constant returns to scale A situation in which the long-run average cost curve does not change as the firm increases output Consumer price index (CPI) An index that measures changes in the average prices of consumer goods and services Consumer sovereignty The freedom of consumers to cast their dollar votes to buy, or not to buy, at prices determined in competitive markets Cost-push inflation An increase in the general price level resulting from an increase in the cost of production Crowding-in effect An increase in private-sector spending as a result of federal budget deficits financed by U.S Treasury borrowing At less than full employment, consumers hold more Treasury securities and this additional wealth causes them to spend more Business investment spending increases because of optimistic profit expectations Crowding-out effect A reduction in private-sector spending as a result of federal budget deficits financed by U.S.Treasury borrowing When federal government borrowing increases interest rates, the result is lower consumption by households and lower investment spending by businesses Currency Money, including coins and paper money Cyclical unemployment Unemployment caused by the lack of jobs during a recession D Debt ceiling A legislated legal limit on the national debt Deflation A decrease in the general (average) price level of goods and services in the economy Demand A curve or schedule showing the various quantities of a product consumers are willing to purchase at possible prices during a specified period of time, ceteris paribus Demand curve for labor A curve showing the different quantities of labor employers are willing to hire at different wage rates in a given time period, ceteris paribus It is equal to the marginal revenue product of labor Demand for money curve A curve representing the quantity of money that people hold at different possible interest rates, ceteris paribus Demand-pull inflation A rise in the general price level resulting from an excess of total spending (demand) Depreciation of currency A fall in the price of one currency relative to another Derived demand The demand for labor and other factors of production that depends on the consumer demand for the final goods and services the factors produce Direct relationship A positive association between two variables When one variable increases, the other variable increases, and when one variable decreases, the other variable decreases Discount rate The interest rate the Fed charges on loans of reserves to banks Discouraged worker A person who wants to work, but who has given up searching for work because he or she believes there will be no job offers Discretionary fiscal policy The deliberate use of changes in government spending or taxes to alter aggregate demand and stabilize the economy Diseconomies of scale A situation in which the long-run average cost curve rises as the firm increases output Disinflation A reduction in the rate of inflation Disposable personal income (DI) The amount of income that households actually have to spend or save after payment of personal taxes E Economic growth The ability of an economy to produce greater levels of output, represented by an outward shift of its production possibilities curve Also, an expansion in national output measured by the annual percentage increase in a nation’s real GDP Economic profit Total revenue minus explicit and implicit costs Economic system The organizations and methods used to determine what goods and services are produced, how they are produced, and for whom they are produced Economics The study of how society chooses to allocate its scarce resources to the production of goods and services in order to satisfy unlimited wants Economies of scale A situation in which the long-run average cost curve declines as the firm increases output Elastic demand A condition in which the percentage change in quantity demanded is greater than the percentage change in price Embargo A law that bars trade with another country Entrepreneurship The creative ability of individuals to seek profits by taking risks and combining resources that produce innovative products Equation of exchange An accounting identity stating that the money supply times the velocity of money equals total spending Equilibrium A market condition that occurs at any price and quantity at which the quantity demanded and the quantity supplied are equal Excess reserves Potential loan balances held in vault cash or on deposit with the Fed in excess of required reserves Exchange rate The number of units of one nation’s currency that equals one unit of another nation’s currency G l O S S A RY Expenditure approach The national income accounting method that measures GDP by adding all the spending for final goods during a period of time Explicit costs Payments to nonowners of a firm for their resources External national debt The portion of the national debt owed to foreign citizens Externality A cost or benefit imposed on people other than the consumers and producers of a good or service F Federal Deposit Insurance Corporation (FDIC) A government agency established in 1933 to insure commercial bank deposits up to a specified limit Federal funds market A private market in which banks lend reserves to each other for less than 24 hours Federal funds rate The interest rate banks charge for overnight loans of reserves to other banks Federal Open Market Committee (FOMC) The Federal Reserve’s committee that directs the buying and selling of U.S government securities, which are major instruments for controlling the money supply The FOMC consists of the seven members of the Federal Reserve’s Board of Governors, the president of the New York Federal Reserve Bank, and the presidents of four other Federal Reserve district banks Federal Reserve System The 12 central banks that service banks and other financial institutions within each of the Federal Reserve districts; popularly called the Fed Fiat money Money accepted by law and not because of its redeemability or intrinsic value Final goods Finished goods and services produced for the ultimate user Fiscal policy The use of government spending and taxes to influence the nation’s output, employment, and price level Fixed input Any resource for which the quantity cannot change during the period of time under consideration Foreign aid The transfer of money or resources from one government to another for which no repayment is required Fractional reserve banking A system in which banks keep only a percentage of their deposits on reserve as vault cash and deposits at the Fed Free trade The flow of goods between countries without restrictions or special taxes Frictional unemployment Unemployment caused by the normal search time required by workers with marketable skills who are changing jobs, initially entering the labor force, re-entering the labor force, or seasonally unemployed Full employment The situation in which an economy operates at an unemployment rate equal to the sum of the frictional and structural unemployment rates Also called the natural rate of unemployment G Game Theory A model of the strategic moves and countermoves of rivals 519 GDP chain price index A measure that compares changes in the prices of all final goods during a given year to the prices of those goods in a base year GDP gap The difference between full-employment real GDP and actual real GDP GDP per capita The value of final goods produced (GDP) divided by the total population Government expenditures Federal, state, and local government outlays for goods and services, including transfer payments Gross domestic product (GDP) The market value of all final goods and services produced in a nation during a period of time, usually a year H Human capital The accumulation of education, training, experience, and health that enables a worker to enter an occupation and be productive Hyperinflation An extremely rapid rise in the general price level I Implicit costs The opportunity costs of using resources owned by the firm Independent relationship A zero association between two variables When one variable changes, the other variable remains unchanged Industrially advanced countries (IACs) High-income nations that have market economies based on large stocks of technologically advanced capital and well-educated labor The United States, Canada, Australia, New Zealand, Japan, and most of the countries of Western Europe are IACs Inelastic demand A condition in which the percentage change in quantity demanded is less than the percentage change in price Inferior good Any good for which there is an inverse relationship between changes in income and its demand curve Inflation An increase in the general (average) price level of goods and services in the economy Infrastructure Capital goods usually provided by the government, including highway, bridges, waste and water systems, and airports In-kind transfers Government payments in the form of goods and services, rather than cash, including such government programs as food stamps, Medicaid, and housing Interest-rate effect The impact on total spending (real GDP) caused by the direct relationship between the price level and the interest rate Intermediate goods Goods and services used as inputs for the production of final goods Intermediate range The rising segment of the aggregate supply curve, which represents an economy as it approaches full-employment output Internal national debt The portion of the national debt owed to a nation’s own citizens 520 G L O S S A RY International Monetary Fund (IMF) The lending agency that makes short-term conditional low-interest loans to developing countries Inverse relationship A negative association between two variables When one variable increases, the other decreases, and when one variable decreases, the other variable increases Investment The accumulation of capital, such as factories, machines, and inventories, that is used to produce goods and services Invisible hand A phrase that expresses the belief that the best interests of a society are served when individual consumers and producers compete to achieve their own private interests K Keynesian range The horizontal segment of the aggregate supply curve, which represents an economy in a severe recession L Labor The mental and physical capacity of workers to produce goods and services Laffer curve A graph depicting the relationship between tax rates and total tax revenues Lagging indicators Variables that change after real GDP changes Land A shorthand expression for any natural resource provided by nature Law of demand The principle that there is an inverse relationship between the price of a good and the quantity buyers are willing to purchase in a defined time period, ceteris paribus Law of diminishing returns The principle that beyond some point the marginal product decreases as additional units of a variable factor are added to a fixed factor Law of increasing opportunity costs The principle that the opportunity cost increases as production of one output expands Law of supply The principle that there is a direct relationship between the price of a good and the quantity sellers are willing and able to offer for sale in a defined time period, ceteris paribus Leading indicators Variables that change before real GDP changes Less-developed countries (LDCs) Nations without large stocks of technologically advanced capital and well-educated labor LDCs are economies based on agriculture, such as most countries of Africa, Asia, and Latin America Long run A period of time so long that all inputs are variable Long-run aggregate supply curve (LRAS) The curve that shows the level of real GDP produced at different possible price levels during a time period in which nominal incomes change by the same percentage as the price level changes Long-run average cost curve (LRAC) The curve that traces the lowest cost per unit at which a firm can produce any level of output when the firm can build a plant of any desired plant size M M1 The narrowest definition of the money supply It includes currency, traveler’s checks, and checkable deposits M2 The definition of the money supply that equals M1 plus near monies, such as savings deposits and small-time deposits of less than $100,000 Macroeconomics The branch of economics that studies decision making for the economy as a whole Marginal analysis An examination of the effects of additions to or subtractions from a current situation Marginal cost (MC) The change in total cost when one additional unit of output is produced Marginal product (MP) The change in total output produced by adding one unit of a variable input, with all other inputs used being held constant Marginal propensity to consume (MPC) The change in consumption spending resulting from a given change in real disposable income Marginal revenue (MR) The change in total revenue from the sale of one additional unit of output Marginal revenue product (MRP) The increase in a firm’s total revenue resulting from hiring an additional unit of labor or other variable resource Marginal tax rate The fraction of additional income paid in taxes Market Any arrangement in which buyers and sellers interact to determine the price and quantity of goods and services exchanged Market economy An economic system that answers the What, How, and For Whom questions using prices determined by the interaction of the forces of supply and demand Market failure A situation in which market equilibrium results in too few or too many resources used in the production of a good or service This inefficiency may justify government intervention Market structure A classification system for the key traits of a market, including the number of firms, the similarity of the products they sell, and the ease of entry into and exit from the market Medium of exchange The primary function of money to be widely accepted in exchange for goods and services Microeconomics The branch of economics that studies decision making by a single individual, household, firm, industry, or level of government Mixed economy An economic system that answers the What, How, and For Whom questions through a mixture of traditional, command, and market systems Model A simplified description of reality used to understand and predict the relationship between variables Monetarism The theory that changes in the money supply directly determine changes in prices, real GDP, and employment Monetary Control Act A law, formally titled the Depository Institutions Deregulation and Monetary Control Act of 1980, that gave the Federal Reserve System greater control over G l O S S A RY nonmember banks and made all financial institutions more competitive Monetary policy The Federal Reserve’s use of open-market operations, changes in the discount rate, and changes in the required reserve ratio to change the money supply (M1) Money Anything that serves as a medium of exchange, unit of account, and store of value Money multiplier The maximum change in the money supply (checkable deposits) due to an initial change in the excess reserves banks hold The money multiplier is equal to divided by the required reserve ratio Monopolistic competition A market structure characterized by (1) many small sellers, (2) a differentiated product, and (3) easy market entry and exit Monopoly A market structure characterized by (1) a single seller, (2) a unique product, and (3) impossible entry into the market Mutual interdependence A condition in which an action by one firm may cause a reaction from other firms N National debt The total amount owed by the federal government to owners of government securities National income (NI) The total income earned by resource owners, including wages, rents, interest and profits NI is calculated as GDP minus depreciation of the capital worn out in producing output Natural monopoly An industry in which the long-run average cost of production declines throughout the entire market As a result, a single firm can supply the entire market demand at a lower cost than two or more smaller firms Net exports effect The impact on total spending (real GDP) caused by the inverse relationship between the price level and the net exports of an economy Net public debt National debt minus all government interagency borrowing Nominal GDP The value of all final goods based on the prices existing during the time period of production Nominal income The actual number of dollars received over a period of time Nominal interest rate The actual rate of interest without adjustment for the inflation rate Nonprice competition The situation in which a firm competes using advertising, packaging, product development, better quality, and better service, rather than lower prices Normal good Any good for which there is a direct relationship between changes in income and its demand curve Normal profit The minimum profit necessary to keep a firm in operation A firm that earns normal profits earns total revenue equal to its total opportunity cost Normative economics An analysis based on value judgment O Oligopoly A market structure characterized by (1) few sellers, (2) either a homogeneous or a differentiated product, and (3) difficult market entry 521 Open market operations The buying and selling of government securities by the Federal Reserve System Opportunity cost The best alternative sacrificed for a chosen alternative P Peak The phase of the business cycle in which real GDP reaches its maximum after rising during a recovery Perfect competition A market structure characterized by (1) a large number of small firms, (2) a homogeneous product, and (3) very easy entry into or exit from the market Perfect competition is also referred to as pure competition Perfectly competitive firm’s short-run supply curve The firm’s marginal cost curve above the minimum point on its average variable cost curve Perfectly competitive industry’s short-run supply curve The supply curve derived from horizontal summation of the marginal cost curves of all firms in the industry above the minimum point of each firm’s average variable cost curve Perfectly elastic demand A condition in which a small percentage change in price brings about an infinite percentage change in quantity demanded Perfectly inelastic demand A condition in which the quantity demanded does not change as the price changes Personal income (PI) The total income received by households that is available for consumption, saving, and payment of personal taxes Positive economics An analysis limited to statements that are verifiable Poverty line The level of income below which a person or a family is considered to be poor Precautionary demand for money The stock of money people hold to pay unpredictable expenses Price ceiling A legally established maximum price a seller can charge Price discrimination The practice of a seller charging different prices for the same product that are not justified by cost differences Price elasticity of demand The ratio of the percentage change in the quantity demanded of a product to a percentage change in its price Price floor A legally established minimum price a seller can be paid Price leadership A pricing strategy in which a dominant firm sets the price for an industry and the other firms follow Price maker A firm that faces a downward-sloping demand curve and therefore it can choose among price and output combinations along the demand curve Price system A mechanism that uses the forces of supply and demand to create an equilibrium through rising and falling prices Price taker A seller that has no control over the price of the product it sells Product differentiation The process of creating real or apparent differences between goods and services 522 G L O S S A RY Production function The relationship between the maximum amounts of output that a firm can produce and various quantities of inputs Production possibilities curve A curve that shows the maximum combinations of two outputs an economy can produce in a given period of time with its available resources and technology Progressive tax A tax that charges a higher percentage of income as income rises Proportional tax A tax that charges the same percentage of income, regardless of the size of income Also called a flat tax rate or simply a flat tax Protectionism The government’s use of embargoes, tariffs, quotas, and other restrictions to protect domestic producers from foreign competition Public choice theory The analysis of the government’s decision-making process for allocating resources Public good A good or service with two properties: (1) users collectively consume benefits, and (2) there is no way to bar people who not pay (free riders) from consuming the good or service Q Quantity theory of money The theory that changes in the money supply are directly related to changes in the price level Quota A limit on the quantity of a good that may be imported in a given time period R Rational ignorance The voter’s choice to remain uninformed because the marginal cost of obtaining information is higher than the marginal benefit from knowing it Real balances or wealth effect The impact on total spending (real GDP) caused by the inverse relationship between the price level and the real value of financial assets with fixed nominal value Real GDP The value of all final goods produced during a given time period based on the prices existing in a selected base year Real income The actual number of dollars received (nominal income) adjusted for changes in the CPI Real interest rate The nominal rate of interest minus the inflation rate Recession A downturn in the business cycle during which real GDP declines Also called a contraction Recovery An upturn in the business cycle during which real GDP rises Also called an expansion Regressive tax A tax that charges a lower percentage of income as income rises Required reserve ratio The percentage of deposits that the Federal Reserve requires a bank to hold in vault cash or on deposit with the Fed Required reserves The minimum balance that the Federal Reserve requires a bank to hold in vault cash or on deposit with the Fed Resources The basic categories of inputs used to produce goods and services Resources are also called factors of production Economists divide resources into three categories: land, labor, and capital S Scarcity The condition in which human wants are forever greater than the available supply of time, goods, and resources Short run A period of time so short that there is at least one fixed input Short-run aggregate supply curve (SRAS) The curve that shows the level of real GDP produced at different possible price levels during a time period in which nominal incomes not change in response to changes in the price level Shortage A market condition existing at any price at which the quantity supplied is less than the quantity demanded Slope The ratio of the change in the variable on the vertical axis (the rise or fall) to the change in the variable on the horizontal axis (the run) Socialism An economic system characterized by government ownership of resources and centralized decision making Speculative demand for money The stock of money people hold to take advantage of expected future changes in the price of bonds, stocks, or other nonmoney financial assets Spending multiplier (SM) The change in aggregate demand (total spending) resulting from an initial change in any component of aggregate demand, including consumption, investment, government purchases, and net exports As a formula, the spending multiplier equals 1/(1ÀMPC) Stagflation The condition that occurs when an economy experiences the twin maladies of high unemployment and rapid inflation simultaneously Store of value The ability of money to hold value over time Structural unemployment Unemployment caused by a mismatch of the skills of workers out of work and the skills required for existing job opportunities Substitute good A good that competes with another good for consumer purchases As a result, there is a direct relationship between a price change for one good and the demand for its “competitor” good Supply A curve or schedule showing the various quantities of a product sellers are willing to produce and offer for sale at possible prices during a specified period of time, ceteris paribus Supply curve of labor A curve showing the different quantities of labor workers are willing to offer employers at different wage rates in a given time period, ceteris paribus Supply-side fiscal policy A fiscal policy that emphasizes government policies that increase aggregate supply in order to achieve long-run growth in real output, full employment, and a lower price level Surplus A market condition existing at any price at which the quantity supplied is greater than the quantity demanded T Tariff A tax on an import Tax multiplier The change in aggregate demand (total spending) resulting from an initial change in taxes As a formula, the tax multiplier equals 1-spending multiplier G l O S S A RY Technology The body of knowledge and skills applied to how goods are produced Total cost (TC) The sum of total fixed cost and total variable cost at each level of output Total fixed cost (TFC) Costs that not vary as output varies and that must be paid even if output is zero These are payments that the firm must make in the short run, regardless of the level of output Total revenue (TR) The total number of dollars a firm earns from the sale of a good or service, which is equal to its price multiplied by the quantity demanded Total variable cost (TVC) Costs that are zero when output is zero and vary as output varies Traditional economy A system that answers the What, How, and For Whom questions the way they always have been answered Transactions demand for money The stock of money people hold to pay everyday predictable expenses Transfer payment A government payment to individuals not in exchange for goods or services currently produced Trough The phase of the business cycle in which real GDP reaches its minimum after falling during a recession U Unemployment rate The percentage of people in the civilian labor force who are without jobs and are actively seeking jobs 523 Unit of account The function of money to provide a common measurement of the relative value of goods and services Unitary elastic demand A condition in which the percentage change in quantity demanded is equal to the percentage change in price V Variable input Any resource for which the quantity can change during the period of time under consideration Velocity of money The average number of times per year a dollar of the money supply is spent on final goods and services Vicious circle of poverty The trap in which countries are poor because they cannot afford to save and invest, but they cannot save and invest because they are poor W Wage-price spiral A situation that occurs when increases in nominal wage rates are passed on in higher prices, which, in turn, result in even higher nominal wage rates and prices Wealth The value of the stock of assets owned at some point in time World Bank The lending agency that makes long-term lowinterest loans and provides technical assistance to less-developed countries World Trade Organization (WTO) An international organization of member countries that oversees international trade agreements and rules on trade disputes This page intentionally left blank INDEX A Ability-to-pay principle, 337, 340, 355 Absolute advantage, 440 Absolute poverty, 203 Accounting profit, 108–109 Accumulation of capital, 490–491 AD See Aggregate demand curve (AD) AD-AS model See Aggregate demandAggregate supply model Advertising, 175 Agency for International Development (AID), 495, 496 Aggregate demand, 277–299 and aggregate supply model, 286 effect of expansionary monetary policy, 415 effects of increase in, 288 and full employment, 293 and gold standard, 456 increasing, 323 and macroeconomic equilibrium, 285–286 nonprice-level determinants of, 280–281, 291 Aggregate demand-Aggregate supply model, 287, 414–416 Aggregate demand curve (AD), 278–279 and increase in aggregate supply curve, 295 and macroeconomic equilibrium, 287 shape of, 279–280 shift in, 281, 294 Aggregate supply, 277–299 and aggregate demand model, 287 classical view of, 283–285 increasing, 321 Keynesian view of, 281–283 and macroeconomic equilibrium, 285–286 nonprice-level determinants of, 289–290, 291 Aggregate supply curve (AS), 285–286 classical vertical, 284 and increase in aggregate demand curve, 293 Keynesian, 282 and macroeconomic equilibrium, 287 ranges of, 285–286 rightward shift in, 290, 294 Agricultural price supports, 77–79 AID See Agency for International Development (AID) AIDS vaccinations, 83–84 Airlines, 181 Alligator farming, 139–140 American Airlines, 181 Amish, 470 Antipoverty programs, 205–207 APEC See Asian-Pacific Economic Cooperation (APEC) Appreciation of currency, 454 Arbitrage, 158 Asian-Pacific Economic Cooperation (APEC), 444 Assembly line, 34, 120 Assets, 391 Association, ATS accounts See Automatic transfer of savings (ATS) account Automatic stabilizers, 319–321 Automatic transfer of savings (ATS) account, 377 Average cost curves, 115–116 Average fixed cost (AFC), 115 Average tax rate, 338 Average total cost (ATC), 116 Average variable cost (AVC), 116 B Balance of payments, 445–450 Balance of trade, 445, 450, 451, 458 See also Trade Balance of trade surplus, 445–446 Balance sheet, 390, 396 Balanced Budget Act of 1997, 355 Bananas, 446–447 Bankruptcy, 358–360 Banks/banking, 381–383 See also Federal Reserve System changes in 1980s, 383–385 multiplier expansion of money, 394–396 Barter, 373 Base year, 260 Benefit-cost analysis, 336, 342–343 Benefits-received principle, 336, 340, 355 Bernanke, Ben, 380 Black market, 75–76 Board of Governors, 380 Bolivia, 270 Bottlenecks, 287 Break-even point, 130 Buchanan, James, 341–342 Budget deficit, 321, 353, 354 Budget Enforcement Act (BEA), 355 Budget resolution, 352–353 Budget surplus, 321–322, 354, 357 Budgets capital, 365 federal (See Federal budget) financing, 334–335 operating, 365 share spent on product, 103 Bureau of Economic Analysis (BEA), 227 Bureau of Engraving and Printing, 383 Bureau of Labor Statistics, 246, 260 Bureaucracy, 344–345 Bush, George, 312, 317, 330 Business Conditions Digest, 241 Business Cycle Dating Committee, 239 Business cycles, 236–237 1929-2006, 241 defined, 238 four phases of, 238–240 indicators, 243 and total spending, 243 and unemployment, 251 Buyers, 48, 50, 92–93 C CAFTA See Central American Free Trade Agreement (CAFTA) Capital, accumulation of, 490–491 efficiency of, 120–121 human, 193 Capital account, 447–448 Capital budget, 365 Capitalism, 472–473 Carlson, Chester, 34 Cartel, 180–181, 182, 184 Cash transfer programs, 205–206 Castro, Fidel, 476 Causation, Causation chain, 33 CDs See Certificates of deposit (CDs) Central American Free Trade Agreement (CAFTA), 444 Central government, 474 Central planners, 466–469 Certificates of deposit (CDs), 266, 378 Ceteris paribus assumption, 7–8, 20, 31 Change in demand, 47 Change in quantity demanded, 46 Change in quantity supplied, 54–57 Change in supply, 54–57 Chavez, Hugo, 478 Checkable deposits, 377, 378, 390–391 Checks, 382, 393–394 China, 445, 477–478, 479, 493 Choices, 5, 28 Cigarettes, 103 Circular flow model, 220, 221 Civil Rights Act, 210 Civilian labor force, 244, 245, 253 Civilian unemployment rate, 245 Classical economists, 283, 421 Classical range of aggregate supply curve, 285, 289 Clinton, Bill, 312, 330, 355 Coincidence of wants, 373 Coincident indicators, 242–243 COLA See Cost-of-living adjustment (COLA) Collective bargaining, 197–198 Command economy, 466–469 Command socialism, 473 Commercial banks, 384 Commodity money, 376 Common Market, 448 Communism, 473–474, 478, 479 Communist Manifesto (Marx), 473–474 Comparable worth, 208–209, 210–211 Comparative advantage, 440 Competition, 58, 345, 470, 472 foreign, 442 525 526 INDEX free, 469 lack of, 80–81 monopolistic (See Monopolistic competition) nonprice, 180 perfect (See Perfect competition) and protectionism, 443 Complementary good, 50 Computers, 248–249 Conditional positive statement, 10 Congressional Budget Office (CBO), 352 Constant dollar GDP, 229 Constant returns to scale, 119, 121 Consumer confidence index, 242 Consumer price index (CPI), 230, 260, 262 composition of, 261 criticisms, 263–264 how it’s computed, 260 and inflation rates, 263 Consumer protection, 383 Consumer sovereignty, 472 Consumption possibilities, 438 Continuing resolutions, 353 Contraction, 238 Contractionary fiscal policy, 313, 318 Copayment rate, 90, 91 Copyrights, 150 Corporate income tax, 334 Correlation, Cost-of-laughing index, 264–265 Cost-of-living adjustment (COLA), 267 Cost-of-living index, 260 Cost-push inflation, 268–269, 290–299 Costs defined, 27 minimizing in natural monopoly, 151 of production, 108–126 and profit, 109–110 Counterfeiting, 375 Credit cards, 374, 377 Crowding-in effect, 365–366 Crowding-out effect, 363–366, 422, 424 Cuba, 476–477 Currency, 377, 382 appreciation of, 454 depreciation of, 453 Current account, 445–447 Current-dollar GDP, 228 Curve movement along, 20–21, 55 Cyclical unemployment, 251 D Dairy industry, 79–80 Das Kapital (Marx), 473 Debt, federal See National debt Debt, international, 448–449 Debt ceiling, 358 Debtor-lender contracts, 270 Decentralization, 472 Decision making centralized, 474–475 decentralized, 472 Defense-related industries, 443 Deficit, budget See Budget deficit Deficit Reduction Act, 355 Deflation, 260, 262 Deflator index, 229 Demand See also Market demand changes in, 71–72 derived, 192 for labor, 191–192 law of, 45–47, 74–79 for monopolist, 153 nonprice determinants of, 48–51 price elasticity of (See Price elasticity of demand) unions and labor, 195–196 Demand curve, 45–46 Impact of changes in nonprice determinants, 51 for monopolistically competitive firm, 174 movement along, 48 price elasticity of demand variations along, 99–101 Demand curve for labor, 191, 196 Demand deposit, 377 Demand for money curve, 410–411 Demand-pull inflation, 268–269, 290–299, 321 Demand shifters, 47 Demand-side fiscal policy, 325 Deng Xiaoping, 479 Deposit multiplier, 395 Depository Institutions Deregulation and Monetary Control Act, 377 Deposits, new, 391–392 Depreciation of currency, 453 Depression, 238, 282 Derived demand, 192, 195–196 Dictator, 466 Differentiation, product, 171 Direct relationship, 17–18 Disability benefits, 332 Discount rate, 398–400 Discounting, 383 Discouraged workers, 246–247 Discretionary fiscal policy, 313–319 Discretionary spending, 355 Discrimination, 207–209 Diseconomies of scale, 120–121 Disinflation, 261–262, 263 Disposable personal income (DI), 228, 230, 316, 324 Distribution of Income, 200 Division of labor, 120 Dollar, strong, 458 Domestic production, 219 Draft, 470 Durable goods, 221 E Economic, international fair trade and protectionism, 441–442 Economic bads, 226, 227 Economic development factors that determine, 495 and growth around the world, 487–497 Economic efficiency, 472 Economic freedom, 472–473 Economic goods, 227 Economic growth accelerating, 37 defined, 240 and development around the world, 487–497 factors that determine, 495 sources of, 32–35 Economic indicators, 9, 241 Economic profit, 109–110 Economic Report of the President, 218, 261 Economic systems, 466–472, 476 Economic way of thinking, 2–16 Economics applying graphs to, 17–25 careers in, 12–13 defined, methodology of, 5–7 normative, 10, 11 positive, 10, 11 three fundamental questions, 27 Economics, international cartels, 180–181 exchange rates, 450–458 and future production possibilities curve, 35–37 government expenditures, 333–335 inflation, 270–272 less-developed countries, 483–501 and mixed economy, 470–472 money, 374–375 monopolies, 150 national debt, 360, 361 price systems, 62 real GDP growth rates, 241–243 taxes, 336 unemployment, 246, 250 unions around the world, 199–200 Economies in transition, 476–479 Economies of scale, 119, 120–121, 150–151 Economists classical, 283 disagreements among, 9–12 Economy, underground, 226 Education, 80–81, 255, 332 Efficiency and equality, 201–202 Efficiency of capital, 120–121 Efficient points, 31, 80 Elastic demand, 96–97, 152 Elasticity, price See Price elasticity of demand Elasticity coefficient, 95, 96, 102 Elasticity formula, 96 Electricity, 75 INDEX Embargo, 441 Employment full, 251–254, 282, 283, 293 and monetary policy, 414–416 and protectionism, 443–444 Employment Act of 1946, 244 EMU See European Economic and Monetary Community (EMU) Entitlement programs, 205 Entrepreneurship, 4, 34 Entry, market, 126, 149, 173–174, 175, 179 Equal Credit Opportunity Act, 383 Equal Pay Act, 210 Equality and efficiency, 201–202 Equation of exchange, 416–417 Equilibrium, 61 long-run perfectly competitive, 141 market (See Market equilibrium) short-run perfectly competitive, 138 Equilibrium exchange rates, 456 Equilibrium interest rate, 411–412 Equilibrium price and exchange rates, 453 and perfect competition, 129 and quantity, 61 Equilibrium wage rate, 193–195, 207 EU See European Union (EU) Euro, 448–449 European Central Bank, 448 European Economic and Monetary Union (EMU), 448 European Union (EU), 444, 446–447, 448, 449 Excess capacity, 178 Excess quantity demanded See Shortage Excess quantity of money demanded, 411 Excess quantity of money supplied, 411–412 Excess quantity supplied See Surplus Excess reserves, 391, 398, 400 Exchange rates, 450–458, 492 Excise tax, 334, 339 Expansion, 238 Expansionary fiscal policy, 313 Expectations, 59, 269 Expenditure approach, 220–221, 222 Expenditures, federal, 354 Explicit costs, 109 Exports, net, 223 External benefits, 83 External costs, 82 External debt, 448 External national debt, 361–362 Externalities, 81–84 F Factor markets, 220 Factors of production See Resources Factory size, 118, 119 Fair Labor Standards Act, 11 Favorable balance of trade, 446 Featherbedding, 195 Federal Advisory Council, 381 Federal budget balancing act, 352–358 and foreign aid, 495 process, 352–353 Federal debt See National debt Federal Deposit Insurance Corporation (FDIC), 382 Federal funds market, 399–400 Federal funds rate, 400, 401 Federal Open Market Committee (FOMC), 381, 397, 400–401 Federal Reserve Bank of New York, 383, 397–398 Federal Reserve System, 377–381 See also Banks/banking balance sheet, 396 banks, 381–383 Federal Savings and Loan Insurance Corporation (FSLIC), 384–385 Federal Tax Code, 341 FedEx, 35 Fiat money, 376 FICA (Federal Insurance Contribution Act), 205, 339 Final Four basketball tournament, 184 Final goods, 219–220 Finance, international See International finance Financial capital, Financial Services and Modernization Act, 384 Fiscal policy, 312–329 combating inflation, 318–319 contractionary, 313, 318 defined, 312 discretionary, 313–319 expansionary, 313 and monetary policy, 403 supply-side, 321–325 Fixed costs, 113 Fixed input, 111 Fixed money target, 419 Fixed resources, 29 Fixed-weight price index, 260 Flat tax, 339–340, 341–342 Food stamps, 86, 206 Forbes, Steve, 330, 341 Ford, Henry, 34 Forecasting, Foreign aid, 447, 493–494, 495 Foreign exchange, 451–453 Fractional reserve banking, 390–394 Franchises, 149 Free competition, 469 Free enterprise system, 472 Free market reforms, 477–478, 479 Free to Choose (Friedman), 81 Free trade agreements, 444–445 and protectionism, 441–442 Free Trade Area of the Americas (FTAA), 444 Frictional unemployment, 248–249 Friedman, Milton, 81, 419, 421, 422, 473 527 FSLIC See Federal Savings and Loan Insurance Corporation (FSLIC) FTAA See Free Trade Area of the Americas (FTAA) Full employment, 251–254, 282, 283, 293 Full Employment and Balanced Growth Act, 244 Fully employed resources, 29 G Galbraith, John Kenneth, 165 Game theory, 181–183 Gasoline tax, 355 GATT See General Agreement on Tariffs and Trade (GATT) GDP See Gross domestic product (GDP) GDP chain price index, 229–232, 260 GDP gap, 252–253 GDP per capita, 484–486 General Agreement on Tariffs and Trade (GATT), 441, 445, 492 General Theory of Employment, Interest, and Money, The (Keynes), 281–282, 293, 409, 422 Germany, 271 Gold, 376, 383, 390 Gold standard, 456–457 Goldsmiths, 390 Goods, 49–50, 219–220 Gosplan, 466–469 Government, central, 474 Government, U.S and bankruptcy, 358–360 size and growth, 331–334 Government consumption expenditures and gross investment (G), 223 Government expenditures defined, 331 increasing to combat recession, 313–315 in other countries, 333–334 patterns, 332–333 state and local, 333 Government receipts, 335 Governments and barriers to market entry, 149–150 Graphical analysis, 82–83, 83–84 Graphs, 17–25 Great Depression, 244–245, 421, 422, 423 Gross domestic investment (I), 331 Gross domestic product (GDP), 218–236 defined, 219 federal expenditures, revenues, and deficits, 356–358 and federal net interest, 362 formula for, 223–224 and growth of taxes, 337 international comparisons, 225 measuring, 220–224 and national debt, 360 and national income, 228 in other countries, 224 528 INDEX shortcomings, 224–226 using expenditure approach, 222 Gross investment, 223 Gross private domestic investment (I), 222 Gross public debt, 355 H Hazardous waste, 226 Health care, 90–92, 248–249, 332 Hicks, John, 165 Homogeneous products, 126, 179 Hong Kong, 493–494 Housing, 75, 222 Housing assistance, 207 Human capital, 193, 489 Humor index, 264–265 Hyperinflation, 269–272 I Identity, 417 IMF See International Monetary Fund (IMF) Imperfect competition, 178 Implicit costs, 109 Imports, 442, 443, 448 Impossible entry, 149 In-kind transfers, 204, 207–208 Income, 50 distribution of, 200–201 and health care, 92 inequality of, 86, 201–202, 473 and inflation, 265–267 median, 201, 202 relative, 454 taxable, 338 Income distribution, 191–215, 475 Income security, 332 Income tax, 312, 334, 338, 340–341, 493 Increasing marginal returns, 113 Independent relationship, 20 Individual demand curve, 46 Individual income taxes, 334 Industrially advanced countries (IACs), 484 Inefficiencies, bureaucratic, 344–345 Inelastic demand, 97, 152 Infant industry, 444 Inferior good, 50 Infinite geometric series, 316 Inflation, 259–276 combating with fiscal policy, 317–318 consequences of, 264–268 defined, 260 and income, 265–267 and monetarism, 418 Nixon’s attempt to control, 76 in other countries, 270–273 and real interest rate, 268 and velocity of money, 419–420 and wealth, 267 Inflation psychosis, 270 Inflation rate, 261 1929-2006, 266 and consumer price indexes, 263 and money supply, 418 in Russia, 478 in selected countries, 273 U.S history of, 262–263 Infrastructure, 491, 492 Inquiry into the Nature and Causes of the Wealth of Nations, An (Smith), 79, 80, 120, 421, 469, 473 Insurance, health, 90–91 Interest rate, 412–414 Interest rate ceilings, 384 Interest-rate effect, 279, 280 Intermediate goods, 219 Intermediate range of aggregate supply curve, 285, 287–289 Internal national debt, 360–361 International finance, 436–463 International Monetary Fund (IMF), 456–457, 497 International trade, 436–463, 469, 492, 493 Invention, 34 Inverse relationship, 18–19 Investment, 36 Investment demand curve, 416, 424 Invisible hand, 469–470, 472 J Jackson, Andrew, 351 Japan, 36, 472 Jobs, Steven, 122 K Keating, Charles, 384–385 Keynes, John Maynard, 277, 281–283, 287, 293, 313, 322, 421, 422 Keynesian economics, 421–424 Keynesian range of aggregate supply curve, 285, 287 Kushner, Malcolm, 265–266 Kuznets, Simon, 218 L Labor, 4, 77 civilian, 77, 245 demand for, 190–191 foreign, 444 and minimum wage, 79 and unions, 77, 196–197 Labor markets, 191–214 and discrimination, 208 under perfect competition, 192–196 and supply-side fiscal policy, 324 Labor unions, 196–201 Laffer curve, 323, 330 Lagging indicators, 243 Laissez-faire, 283, 416, 469, 493 Land, Law and order, 492 Law of demand, 47, 74–79, 263–264 Law of diminishing returns, 112, 113, 191 Law of increasing opportunity cost, 31–32 Law of supply, 52–53, 74–79 Law of supply and demand, 74–79, 457 LDCs See Less-developed countries (LDCs) Leading indicators, 241 Leisure time, 225–226 Less-developed countries (LDCs), 483–501 Levi Strauss Company, Liabilities, 390–391 Licenses, 149 Lincoln, Abraham, 351 Lincoln Savings and Loan, 384–385 Liquidity, 374 Loans, 76, 391, 392–393 See also Mortgages, home clearing checks, 393–394 foreign, 496–497 Logrolling, 344 Long run, 111 comparison of monopolistic competition and perfect competition, 178 monopolistic competition, 175–176 and monopoly, 158 Long-run average cost (LRAC), 116–118, 119, 151 Long-run equilibrium, 137–140 Long-run growth, 321 Long-run perfectly competitive equilibrium, 140 Long-run production costs, 116–118 Long-run supply curves, 138–141 M Macroeconomic equilibrium, 285–286 Macroeconomics, 216–369 comparison of views, 420–424 defined, four measures of, 229 Majority-rule problem, 342–343 Many-sellers condition, 171 Marginal analysis, 28–29, 130 Marginal cost curve, 136 Marginal cost (MC), 116 Marginal product, 111, 113 Marginal product of labor, 192 Marginal propensity to consume (MPC), 315 Marginal revenue curve, 136 Marginal revenue equals marginal cost method, 130–133, 134, 155–157 Marginal revenue (MR), 129, 152–154 Marginal revenue product (MRP), 192, 208 Marginal tax rate, 338–339 Market barriers to entry, 175 defined, 59 entry into, 126, 149, 173–174, 179 Market basket cost, 260 Market clearing, 59 INDEX Market demand, 46–47, 278 See also Demand Market demand curve, 46–47 Market economy, 44, 283, 469–470 Market equilibrium, 71–74, 80 Market equilibrium price-quantity point, 63 Market failure, 80–86, 91 Market structures, 126 comparison of, 184 monopolistic competition, 173–174 oligopoly, 178–179 Market supply, 52–53 Market supply and demand analysis, 57–63 Market supply curve, 52–53, 54, 194, 281 Marshall, Alfred, 59 Marx, Karl, 473–474 McDonald’s, 120 Means test, 205 Medicare/Medicaid, 89, 206–207, 332 Medium of exchange, 373 Mercantilism, 469 METI See Ministry of Economy, Trade and Industry (METI) Mexico, 458 Microeconomics, 5, 42–215 Midpoints formula, 94–95 Milk, 79 Minimum wage, 11, 77, 79, 85 Ministry of Economy, Trade and Industry (METI), 472 Mints, U.S., 382 Mixed economy, 470–472 Model development, 6–7 Monetarism, 416–420, 424 Monetary Control Act, 383–384, 400 Monetary History of the United States, A (Friedman), 422 Monetary policy, 408–428 effect on money supply, 402 effects on prices, output and employment, 414–416 expansionary, 415 and fiscal policy, 403 during the Great Depression, 422 and interest rates, 412–414 Keynesian, 414 and money creation, 396–402 shortcomings, 402–403 using AD-AS model, 414–416 Monetary rule, 419 Money creation, 389–407 defined, 373 demand for, 409 functions of, 373–374 history of, 378–379 Keynesian view of its role, 409–416 multiplier expansion of, 394–396 properties of, 375–376 quantity theory of, 418 velocity of, 417 what’s behind it, 376 Money GDP, 228 Money income, 266 Money market mutual funds, 378 Money multiplier, 395–396, 402 Money supply controlling, 382 decreasing, 413–414 definitions of, 376–379, 402–403 effects of changes in, 413 expansion of, 395 increasing, 413 and inflation rate, 418 M1, 376–377, 393 M2, 378–379 and monetary policy tools, 402 Monopolist, 152–158 Monopolistic competition, 173–178 Monopolistically competitive firm, 174–176 Monopoly, 148–170 case for and against, 163–164 compared with perfect competition, 160–163 defined, 149 impact on industry, 163 market structure, 149–151 Mortgages, home, 77, 269, 384–385 Movement along a curve, 20–21, 48, 55 Movie theaters, 120–121 MPC See Marginal propensity to consume (MPC) Multinational corporations, 494–495 Multiplier expansion of money, 394–396 Musicians, 248–249 Mutual interdependence, 179, 181 N NAFTA See North American Free Trade Agreement (NAFTA) National accounts, 226–228 National Bureau of Economic Research (NBER), 239, 245 National debt, 332, 351 1930-2006, 359 burden to future generations, 360–363 defined, 355 financing, 353–355 how real it is, 365 international comparisons, 361 international perspective, 360 ownership of, 363 and percentage of GDP, 360 why worry about it, 358–366 National defense, 84, 332 National Income, 1929-1932 (Kuznets), 218 National income accounting, 218 National income (NI), 226–227, 228, 230 National Industrial Recovery Act (NIRA), 200 National Labor Relations Act (NLRA), 200 National security, 443 Natural monopoly, 151 Natural resources, 4, 488–489 Near money, 378 529 Negative relationship, 18 Negative slope, 20 Negotiable order of withdrawal (NOW) accounts, 377 Neighborhood effects, 82 Net debtor, 449 Net exports effect, 279–280 Net exports (X-M), 223 Net interest, 332, 362 Net public debt, 355 Net unilateral transfers, 447 New economy, 34 Nixon, Richard, 76, 457 Nominal GDP, 228–232 Nominal income, 266–267 Nominal interest rate, 267 Non-renewable resources, Nonbanks, 402 Nondiscretionary fiscal policy, 319 Nondurable goods, 221 Nonmarket transactions, 224 Nonprice competition, 173, 180 Nonprice determinants, 47, 48–51, 51, 53 of aggregate demand, 48–51, 51, 53, 280–281, 291 of aggregate supply, 51, 53, 280–281, 291 and health care, 91–92 of supply, 55–57 and supply curve, 60 and trend of prices over time, 74 Nonproductive financial transactions, 219 Nonwhites, 207 Normal good, 50, 92 Normal profit, 110 Normative economics, 10, 11 North American Free Trade Agreement (NAFTA), 444, 458, 492 NOW accounts See Negotiable order of withdrawal (NOW) accounts Number-of-sellers condition, 126 Nurses, 248–249 O Office of Management and Budget (OMB), 352 Oil embargo, 76 Oil prices, 291 Oligopoly, 172–190 defined, 179 evaluation of, 183–185 market structure, 178–179 price and output decisions, 179–183 OPEC (Organization of Petroleum Exporting Countries), 180, 269 Open market operations, 396–398, 399 Operating budget, 365 Opportunity costs, 27–28, 75, 109, 409, 440 law of increasing, 31–32 and pricing, 52 Organ donations, 63 530 INDEX Organization of Petroleum Exporting Countries See OPEC (Organization of Petroleum Exporting Countries) Ostriches, 125 Output decisions for a monopolist, 152–158 decisions for a monopolistically competitive firm, 174–176 decisions for an oligopolist, 179–183 and monetary policy, 414–416 and monopolistic competition, 177–178 and perfect competition, 162–163 and specialization, 439 Outside lag, 403 Overpopulation, 489 Ownership private, 472 public, 474 sole, 149 P Pacific Rim, 493–494 Passbook savings accounts, 381 Patents, 150 Payoff matrix, 182, 183 Payroll taxes, 335, 340 Peak, 239 Per-unit cost, 115 Perfect competition, 127–146 compared with monopolistic competition, 176–178 compared with monopoly, 160–163 defined, 127 difference from monopoly, 152 labor market, 191–195 output, 162–163 Perfectly competitive firm, 127–129, 129–131, 132–134, 136 Perfectly competitive industry, 134 Perfectly elastic demand, 98, 128 Perfectly inelastic demand, 98, 99 Perot, Ross, 355 Personal consumption expenditures (C), 221 Personal income (PI), 227–228, 230 Personal Responsibility and Work Opportunity Act, 208 Pesos, 458 Politburo, 466 Political environment, 491–492 Pollution, 82–83 Population, 489 Positive economics, 10, 11 Positive reasoning, 77 Positive relationship, 17 Positive slope, 20 Potential real GDP, 252 Poverty, 202–207, 491 Poverty line, 203 Precautionary demand for money, 409, 410 Predictions, Preferences and taste, 49, 92, 453–456 Price adjustment to change over time, 104 and competition, 59 decisions for a monopolist, 152–158 decisions for a monopolistically competitive firm, 174–176 decisions for an oligopolist, 179–183 impact of decrease in on total revenue, 97 and inflation, 260–262 and monetary policy, 414–416 of other goods firm produces, 57 of related goods, 50 relative, 455–456 of resources, 56–57 trend over time, 74 Price ceilings, 74–77 Price discrimination, 158–160 Price elasticity of demand, 94–107, 152–154 and cigarettes, 103 determinants of, 101–104 midpoints formula, 95–96 total revenue test of, 96 variations along a demand curve, 99–101 Price fixing, 91, 468 Price floors, 77–79 Price leadership, 180, 183 Price maker, 152, 174 Price supports, agricultural, 77–79 Price system, 63 Price takers, 127–129, 177 Pricing policies, 468–469 Private ownership, 472 Problem identification, 5–6 Producers, 57 Product differentiation, 173, 179, 224–225 Production costs, 108–126, 288 decisions for a monopolist, 152–158 domestic, 219 and resources, 3–4 scales of, 118–122 Production function, 111, 112, 191 Production possibilities, 27 Production possibilities curve, 29–31, 362, 437–438, 440, 490 effect of external financing on LDCs, 496 model, 31–32 outward shift, 33, 487 present investment and the future, 35–37 Products homogeneous, 127 unique, 149 Profit,109–110 See also Short-run profit maximization maximizing,158 (See also Short-run profit maximization) Profit motive, 470, 472, 475 Progressive tax, 338–339, 340 Proletariat, 474 Property taxes, 334, 339 Proportional tax, 339–340 Protectionism, 441–442, 443–444 Public assistance, 332 Public choice theory, 341–345 Public goods, 84, 336 Public interest, 470, 473, 474 Public ownership, 474 Public sector, 330–349 Purchasing power, 266, 267 Q Quality-of-life measures, 486–487 Quantity theory of money, 418 Quota, 442, 448, 492 R Racial discrimination, 207–208, 209 Rational ignorance, 344 Reagan, Ronald, 312, 321, 322–323, 330, 358 Real balances effect, 279, 280, 283 Real GDP, 228–232, 241–243 Real income, 266–267 Real interest rate, 268 Real output, 418 Recessions, 282 in 2001, 318, 353, 357–358, 401 in 1990-1991, 353, 358, 401 and balance of trade, 446 combating by cutting taxes, 316–317 combating by increasing government spending, 313–315 defined, 238 difference from depression, 238 and national debt, 358 since World War II, 240 and stock market, 244–245 Recovery, 238 Regressive tax, 339, 355 Regulation, 83, 289 Relationship direct, 17–18 independent, 20 inverse, 18–19 three-variable, 20–21 Relative income, 454 Relative poverty, 203 Relative price, 455–456 Relative real interest rates, 456 Renewable resources, Rent control, 74–76 Required reserve ratio, 391, 400–402 Required reserves, 391 Resolution Trust Corporation (RTC), 385 Resources, 289 categories of, 3–4 changes in, 34 fixed, 29 fully employed, 29 human, 489 misallocation of, 161–162, 173 natural, 488–489 INDEX prices, 56–57, 92 and production, 3–4 underutilized, 178 Retirement benefits, 332 Revenues federal, 354 total (See Total revenue) Road to Serfdom, The (von Hayek), 472 Robotics, 248–249 Roosevelt, Franklin D., 456 Russia, 341–342, 477–479 S Salaries, 12 Sales tax, 334, 339, 341–342 Savings and Loan crisis, 384–385 Savings bonds, 355 Savings deposits, 378 Scalping, 79 Scarcity, 27, 31 and choices, links with choice and opportunity cost, 28 and money, 375 and price system, 63 problem of, Schools, 81–82 Schumpeter, Joseph, 164 Schwartz, Anna, 422 Search unemployment, 248 Secondhand transactions current, 219 Securities, U.S Treasury, 355 Sellers, 55, 93, 128, 149, 173, 179 Selling price, 58–59 September 11, 2001, 402 Services, 221 Shifts along a curve, 20–21, 54 Short-run, 111 Short-run cost curves, 115 Short-run cost formulas, 113–116, 117 Short-run equilibrium, 136–137, 174 Short-run loss, 157–158 Short-run loss minimization, 132–134 Short-run perfectly competitive equilibrium, 137 Short-run production costs, 111–113 Short-run profit maximization, 129, 131, 154–155, 155–157 Short-run supply curves, 135–137 Shortage, 58–59, 61, 62 Shortsightedness effect, 345 Shut down point, 133–134 Single seller, 149 Slope, 19–20 Small firms, 127 Small time deposits, 381 Smith, Adam, 79, 80, 118, 126, 277, 421, 469–470 Smith, Frederick W., 35 Smoot-Hawley Act, 441, 442 Social insurance taxes, 334 Social Security, 205–206, 332, 355 Socialism, 473–475 Soviet Union, 466–467 Special-interest group effect, 344 Specialization, 118, 438–439 Speculative demand for money, 408, 410 Spending multiplier, 314, 315–316, 317, 416 Spillover effects, 82 Stagflation, 291, 321 Standard of living, 266, 267 Standard Oil Company, 159 Steel industry, 82–84 Stock market, 242–243, 277 Store of value, 374 Structural unemployment, 249–251 Subsidies, 58, 83–84, 289 Substitute good, 50, 92, 102 Supply, 61 changes in, 72–73 defined, 52 and health care, 92 labor, 196–197 law of, 52–53, 74–79 Supply and demand, 74–79, 469–470 Supply and demand analysis, 57–63, 90–920 Supply curve, 55 and changes in nonprice determinants, 60 and external costs, 83 Supply curve of labor, 193–194, 195, 198 Supply shifters, 53 Supply-side fiscal policy, 321–325 Surplus, 59–60 budget, 320–321 of labor, 79 Survey of Current Business, 227 T T-accounts, 390 Take-home pay See Disposable personal income (DI) TANF (Temporary Assistance to Needy Families), 206 Tariff, 441–442–448–492 Tastes and preferences, 49, 92, 453–456 Tax credits, 324 Tax cuts, 322–323, 325, 330 Tax multiplier, 316–317, 324 Tax Reform Act, 341 Taxable income, 338 Taxes/taxation, 58, 82, 289, 470–471 See also specific tax, i.e Income tax art of, 335–341 cutting to combat recession, 316–317 growth as percentage of GDP, 337 in other countries, 334–335, 336 progressive, 338–339 proportional, 339–340 regressive, 339 system reform, 340–341 Technology, 29, 34, 56, 164, 289, 491 Temporary Assistance to Needy Families (TANF), 206 The Budget of the United States, 352 Theory, 6–7 See also Model Third parties, 82, 90 Three-variable relationship, 20–21 Thrift Bailout Bill, 385 Time deposits, 378 Tit-for-tat strategy, 182 Title VII, 210 Tobacco, 103 TOBOR, 249 Total cost curves, 113–115 Total cost (TC), 114 Total fixed cost (TFC), 113 Total revenue, 96–97, 152–154 and price elasticity, 100, 101 Total revenue test of price elasticity of demand, 96 Total revenue-total cost method, 129, 131, 154–155 Total spending, 243 Total variable cost (TVC), 113–114 Trade See also Balance of trade barriers, 443–444 benefits of, 438 and specialization, 439 U.S partners, 437 why nations need it, 437–439 Trade, international See International trade Trade deficit, 445, 446, 449 Trade surplus, 446 Traditional economy, 466 Transactions demand for money, 409 Transfer payments, 219, 223, 319, 331, 332–333 Transitional unemployment, 248 Trough, 238 U Underemployment, 247 Underground economy, 226 Unemployment, 244–251, 282 compensation, 86, 206, 333 cyclical, 251 and education, 254 frictional, 248–249 nonmonetary and demographic consequences of, 253–254 in other countries, 246 population and employment, 246 structural, 249–251 types of, 247–251 and velocity of money, 419–420 Unemployment rate, 244, 246–247, 250 Unfavorable balance of trade, 445 Unions See Labor unions Unique product, 149 Unit of account, 373–374 Unitary elastic demand, 98 531 532 United States balance of trade, 450, 451, 458 international debt, 448–449 as net debtor, 449 trade deficit, 449 trading partners, 437 Usury laws, 78 V Variable costs, 113, 114 Variable input, 111 Velocity of money, 417, 418, 419–420 Venezuela, 478 Vicious circle of poverty, 491, 493 von Hayek, Friedrick, 472 INDEX Vouchers, 85 W Wage-price spiral, 270–271 Wages, 75, 193–195, 197–198 Wagner Act, 199 War on terrorism, 35, 358 Wealth, 267 Wealth effect, 279 Wealth of Nations, The See Inquiry into the Nature and Causes of the Wealth of Nations, An (Smith) Welfare, 332–333 Welfare reform, 208 Women, 207, 210–211 Workweek, 225 World Bank, 496 World trade, 436 World Trade Organization (WTO), 441, 446–447, 479, 492 Y Yap, 375 Yugoslavia, 270–271 Z Zero association, 20 Zimbabwe, 271 ... 1960 1970 $ 526 1,039 $2, 501 3,7 72 21.03 27 .54 1980 2, 789 5,1 62 54.03 1990 20 00 5,803 9,817 7,1 12 9,817 81.59 100.00 20 02 2004 10,487 11,733 10,075 10,8 42 104.09 108 .22 20 06 13 ,24 7 11,415 116.05... billions of dollars as GDP ẳ C ỵ I þ G þ ðX À MÞ For 20 06 (see Exhibit 11 .2) , $13; 24 7 ẳ $9; 26 9 ỵ $2; 21 3 ỵ $2; 25 8 ỵ $1; 466 $2; 22 9ị This simple equation plays a central role in macroeconomics... about three times the size of Japans GDP and about five times the GDP of China 14 $13 ,24 7 13 12 11 10 GDP (billions of dollars) $4,367 $2, 897 $2, 630 $2, 373 $2, 231 $1 ,26 9 $979 $845 United States