Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 YOUR FEEDBACK YOUR BOOK Our research never ends Continual feedback from you ensures that we keep up with your changing needs www.cengagebrain.com Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Inside Front Cover (8.5”) Inside Back Cover (8.5") YOUR FEEDBACK YOUR BOOK Our research never ends Continual feedback from you ensures that we keep up with your changing needs www.cengagebrain.com Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it micro ECON Principles of Microeconomics william a M c Eachern University of Connecticut Australia • Brazil • Mexico • Singapore • United Kingdom • United States Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it This is an electronic version of the print textbook Due to electronic rights restrictions, some third party content may be suppressed Editorial review has deemed that any suppressed content does not materially affect the overall learning experience The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest Important Notice: Media content referenced within the product description or the product text may not be available in the eBook version Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Micro ECON6 © 2019, 2017 Cengage Learning, Inc Will McEachern Unless otherwise noted, all content is © Cengage Senior Vice President, Higher Ed Product, Content, and Market Development: Erin Joyner Product Manager: Chris Rader ALL RIGHTS RESERVED No part of this work covered by 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Congress Control Number: 2017959260 Student Edition ISBN: 978-1-337-40806-6 Student Edition with MindTap ISBN: 978-1-337-40805-9 Cengage 20 Channel Center Street Boston, MA 02210 USA Cengage is a leading provider of customized learning solutions with employees residing in nearly 40 different countries and sales in more than 125 countries around the world Find your local representative at www.cengage.com Cengage products are represented in Canada by Nelson Education, Ltd To learn more about Cengage platforms and services, visit www.cengage.com To register or access your online learning solution or purchase materials for your course, visit www.cengagebrain.com Printed in the United States of America Print Number: 01 Print Year: 2017 Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it M cE ac h e r n ECONMICRO Brief Contents Part 1 Introduction to Economics 1 The Art and Science of Economic Analysis 2 Economic Tools and Economic Systems 24 3 Economic Decision Makers 40 4 Demand, Supply, and Markets 56 Part 2 Introduction to the Market System 5 Elasticity of Demand and Supply 74 6 Consumer Choice and Demand 92 7 Production and Cost in the Firm 104 Part 3 Market Structure and Pricing 8 Perfect Competition 120 9 Monopoly 142 10 Monopolistic Competition and Oligopoly 160 Part 4 Resource Markets 11 Resource Markets 180 12 Labor Markets and Labor Unions 196 13 Capital, Interest, Entrepreneurship, and Corporate Finance 216 14 Transaction Costs, Asymmetric Information, and Behavioral Economics 234 Shutterstock.com/Carlos Castilla, Maria Kazanova/Shutterstock.com Part 5 Market Failure and Public Policy 15 Economic Regulation and Antitrust Policy 252 16 Public Goods and Public Choice 268 17 Externalities and the Environment 284 18 Poverty and Redistribution 304 Part 6 International Economics 19 International Trade 324 20 International Finance 344 21 Economic Development 360 Index 380 BRIEF CONTENTS Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it iii Contents 2-4 Economic Systems 34 Part 2-5 Final Word 37 Introduction to economics 3 Economic Decision Makers 40 3-1 The Household 41 3-2 The Firm 43 © Cartoon Network /Everett Collection 3-3 The Government 47 3-4 The Rest of the World 53 3-5 Final Word 54 4 Demand, Supply, and Markets 56 4-1 Demand 57 4-2 What Shifts a Demand Curve? 60 4-3 Supply 62 1 The Art and Science of Economic Analysis 4-4 What Shifts a Supply Curve? 63 4-5 Demand and Supply Create a Market 65 4-6 Changes in Equilibrium Price and Quantity 67 1-1 The Economic Problem: Scarce Resources, Unlimited Wants 4-7 Disequilibrium 70 1-2 The Art of Economic Analysis 4-8 Final Word 71 1-3 The Science of Economic Analysis 10 1-4 Some Pitfalls of Faulty Economic Analysis 13 Part 1-5 If Economists Are So Smart, Why Aren’t They Rich? 14 Introduction to the Market System 1-6 Final Word 15 A1-1 Understanding Graphs 18 2-1 Choice and Opportunity Cost 25 2-2 Comparative Advantage, Specialization, and Exchange 27 2-3 The Economy’s Production Possibilities 30 iv Archive Photos/Getty Images Economic Tools and E conomic Systems 24 CONTENTS Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 5 Elasticity of Demand and Supply 74 Perfect Competition 120 5-2 Determinants of the Price Elasticity of Demand 80 8-1 An Introduction to Perfect Competition 121 5-3 Price Elasticity of Supply 83 8-2 Short-Run Profit Maximization 123 5-4 Other Elasticity Measures 86 8-3 Short-Run Loss Minimization 126 5-5 Final Word 88 8-4 Short-Run Supply Curves 129 A5-1 Price Elasticity and Tax Incidence 90 8-5 Perfect Competition in the Long Run 132 5-1 Price Elasticity of Demand 75 6 Consumer Choice and Demand 92 6-1 Utility Analysis 93 6-2 Measuring Utility 95 6-3 Applications of Utility Analysis 99 6-4 Final Word 102 7 Production and Cost in the Firm 104 8-6 Long-Run Industry Supply Curve 135 8-7 Perfect Competition and Efficiency 137 8-8 Final Word 139 Monopoly 142 9-1 Barriers to Entry 143 7-1 Cost and Profit 105 9-2 Revenue for a Monopolist 145 7-2 Production in the Short Run 107 9-3 Profit Maximization and Cost Minimization for a Monopolist 147 7-3 Costs in the Short Run 109 7-4 Costs in the Long Run 113 7-5 Final Word 117 Part Market Structure and Pricing 9-4 Perfect Competition and Monopoly Compared 152 9-5 Problems with Deadweight Loss Estimates 154 9-6 Price Discrimination 155 9-7 Final Word 158 10 Mandonopolistic Competition Oligopoly 160 10-1 Monopolistic Competition 161 10-2 Oligopoly 167 iStockphoto.com/Alle12 10-3 Three Approaches to Oligopoly 169 10-4 Comparison of Oligopoly and Perfect Competition 176 10-5 Final Word 177 CONTENTS Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it v 13-6 Corporate Finance 228 Part 13-7 Final Word 232 14 TInformation, ransaction Costs, Asymmetric and Behavioral Resource Markets Economics 234 14-1 The Firm’s Rationale and Scope of Operation 235 Richard Cavalleri/Shutterstock.com 14-2 Market Behavior with Imperfect Information 240 14-3 Asymmetric Information in Product Markets 242 14-4 Asymmetric Information in Labor Markets 246 14-5 Behavioral Economics 247 14-6 Final Word 249 Part 11 Resource Markets 180 Market Failure and Public Policy 11-1 The Once-Over 181 11-2 Demand and Supply of Resources 182 11-4 Opportunity Cost and Economic Rent 185 11-5 A Closer Look at Resource Demand 188 11-6 Final Word 193 12 LUnions abor Markets and Labor 196 12-3 Unions and Collective Bargaining 205 15 Eand conomic Regulation Antitrust Policy 252 12- 4 Union Wages and Employment 207 15-1 Types of Government Regulation 253 12-5 Final Word 213 15-2 Regulating a Natural Monopoly 254 13 Candapital, Interest, E ntrepreneurship, Corporate Finance 216 15-3 Alternative Theories of Economic Regulation 256 12-1 Labor Supply 197 12-2 Why Wages Differ 202 13-1 The Role of Time in Production and Consumption 217 15-4 Antitrust Law and Enforcement 258 15-5 Competitive Trends in the U.S Economy 264 15-6 Final Word 266 13-3 Why Interest Rates Differ 222 16 PChoice ublic Goods and Public 268 13-4 Present Value and Discounting 224 16-1 Public Goods 269 13-5 Entrepreneurship 226 16-2 Public Choice in Representative Democracy 272 13-2 The Market for Loanable Funds 221 vi Zhao jian kang/Shutterstock.com 11-3 Temporary and Permanent Resource Price Differences 184 CONTENTS Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Economic Regulation and Antitrust Policy trust Any firm or group of firms that tries to monopolize a market (p. 258) Sherman Antitrust Act of 1890 First national legislation in the world against monopolies; prohibited trusts, restraint of trade, and monopolization, but the law was vague and, by itself, ineffective (p. 259) Clayton Act of 1914 Outlawed certain anticompetitive practices not prohibited by the Sherman Act, including price discrimination, tying contracts, exclusive dealing, interlocking directorates, and buying the corporate stock of a competitor (p. 259) tying contracts A seller of one good requires a buyer to purchase other goods as part of the deal (p. 259) Key Antitrust Legislation Year Act Provision 1890 Sherman Antitrust Act 1914 Clayton Act 1914 FTC Act 1950 Celler-Kefauver Anti-Merger Act Prohibits trusts, restraint of trade, and monopolization Outlaws price discrimination, tying contracts, exclusive dealing, and interlocking directorates Establishes agency to enforce antitrust laws Gives FTC power to block horizontal and vertical mergers Herfindahl-Hirschman Index (HHI) Based on Market Shares in Three Industries Each of the three industries shown has 44 firms The HHI is found by squaring each firm’s market share and then summing the squares Under each industry, each firm’s market share is shown in the left column and the square of the market share is shown in the right column For ease of exposition, only the market shares of the top four firms differ across industries The remaining 40 firms have 1 percent market share each The HHI for Industry III is nearly triple that for each of the other two industries Industry I Firm Industry II Industry III Market Share Market Share Market Share Market Share Market Share Market Share (percent) Squared (percent) Squared (percent) Squared A 23 529 15 225 57 3,249 B 18 324 15 225 1 C 13 169 15 225 1 D 36 15 225 1 Remaining 40 firms each 40 each 40 each 40 HHI exclusive dealing A supplier prohibits its customers from buying from other suppliers of the product (p. 259) interlocking directorate A person serves on the boards of directors of two or more competing firms (p. 259) Federal Trade Commission (FTC) Act of 1914 Established a federal body to help enforce antitrust laws; run by commissioners assisted by economists and lawyers (p. 259) horizontal merger A merger in which one firm combines with another that produces the same type of product (p. 259) 1,098 940 which it had purchased inputs or to which it had sold output (p. 259) consent decree The accused party, without admitting guilt, agrees not to whatever it was charged with if the government drops the charges (p. 259) per se illegal In antitrust law, business practices deemed illegal regardless of their economic rationale or their consequences (p. 260) rule of reason Before ruling on the legality of a business practice, a court examines why it was undertaken and what effect it has on competition (p. 260) vertical merger A merger in which one firm combines with another from 3,292 predatory pricing Pricing tactics employed by a dominant firm to drive competitors out of business, such as tem porarily selling below marginal cost or dropping the price only in certain markets (p. 260) Herfindahl-Hirschman Index, or HHI A measure of market concentration that squares each firm’s percentage share of the market, then sums these squares (p. 260) conglomerate merger A merger of firms in different industries (p. 262) Competitive Trends in the U.S Economy: 1939 to 2000 80 Evaluate whether the U.S economy has become 15-5 more competitive or less competitive since 1958, and explain why.As shown by the bar graph below, competition in U.S industries has been increasing since 1939 and particularly since 1958 Four sources of increased competition are greater international trade, industry deregulation, antitrust policy, and technological change © Cengage Learning 2000 70 Percentage share of each group CHAPTER 15 Key concepts / Key terms CHAPTER REVIEW 15 www.freebookslides.com 60 1939 1958 50 40 1939 1958 30 20 10 2000 1939 1958 2000 Pure monopoly 1939 1958 2000 Dominant firm Tight oligopoly Effective competition www.cengagebrain.com Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.freebookslides.com Differentiate four categories of goods in terms 16-1 of their exclusivity and rivalry.Private goods are rival and exclusive, such as a pizza Public goods are nonrival and nonexclusive, such as national defense Goods that are in between public and private goods include natural monopolies, which are nonrival but exclusive, such as cable TV, and openaccess goods, which are rival but nonexclusive, such as ocean fish Because private-sector producers cannot easily exclude nonpayers from consuming a public good, public goods are typically provided by government, which has the power to enforce tax collections 16 Market for Public Goods Because public goods, once produced, are available to all in identical amounts, the demand for a public good is the vertical sum of each individual’s demand Thus, the market demand for mosquito spraying is the vertical sum of Maria’s demand, Dm, and Alan’s demand, Da The efficient level of provision is found where the marginal cost of mosquito spraying equals its marginal benefit This occurs at point e, where the marginal cost curve intersects the market demand curve, D D Categories of Goods Exclusive Nonexclusive Nonrival 1. Private —Pizza —Crowded subway 2. Natural Monopolies —Cable TV —Uncrowded subway 3. Open Access —Ocean fish —Migratory birds 4. Public —National defense —Mosquito control Dollars per hour Rival e $60 Marginal cost Da 40 Dm 20 D open-access good A good such as ocean fish that is rival in consumption but from which nonpayers cannot be excluded easily (p. 270) Identify four categories of legislation based on the dis- 16-2 tribution of costs and the distribution of benefits, and provide examples of each.Public choice based on majority rule usually reflects the preferences of the median voter Costs and benefits of public choices are spread throughout the democracy The combinations of benefits and costs yield four possible categories of distributions: (1) widespread benefits and widespread costs (traditional public-goods legislation), (2) concentrated benefits Hours of mosquito spraying per week and widespread costs (special-interest legislation), (3) widespread benefits and concentrated costs (populist legislation), and (4) concentrated costs and concentrated benefits (competing- interest legislation) An important feature of representative democracy is the incentive and political power it offers interest groups to increase their wealth, either through direct transfers or through favorable public expenditures and regulations Categories of Legislation Based on the Distribution of Costs and Benefits Distribution of Benefits Distribution of Costs Widespread Concentrated Widespread Traditional Public Goods—National defense Special Interest —Farm subsidies Concentrated Populist —Tort reform Competing Interest —Labor union issues www.cengagebrain.com Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it CHAPTER REVIEW CHAPTER 16 Learning outcomes / Key terms Public Goods and Public Choice Public Goods and Public Choice Effects of Milk Price Supports In the absence of government intervention in this simplified example, the market price of milk is $1.50 per gallon, and 100 million gallons are sold per month If government establishes a floor price of $2.50 per gallon, then the quantity supplied increases and the quantity demanded decreases To maintain the higher price, the government must buy the excess quantity supplied at $2.50 per gallon or must otherwise pay farmers to limit their quantity supplied to only 75 million gallons a month Dollars per gallon CHAPTER 16 Key concepts / Key terms CHAPTER REVIEW 16 www.freebookslides.com S Excess quantity supplied $2.50 1.50 D free-rider problem Because nobody can be easily excluded from consuming a public good, some people may try to reap the benefits of the good without paying for it (p. 272) median-voter model Under certain conditions, the preferences of the median, or middle, voter will dominate the preferences of all other voters (p. 272) rational ignorance A stance adopted by voters when they realize that the cost of understanding and voting on a particular issue exceeds the benefit expected from doing so (p. 273) traditional public-goods legislation Legislation that involves widespread costs and widespread benefits—nearly everyone pays and nearly everyone b enefits (p. 274) special-interest legislation Legislation with concentrated benefits but widespread costs (p. 274) Explain why some people want to use government 16-3 power to increase their income, while others try to avoid government.Producers have an abiding interest in any legislation that affects their livelihood Consumers, however, purchase thousands of different goods and services and thus have no special interest in legislation affecting any particular product Most consumers adopt a stance of rational ignorance because the expected costs of keeping up with special-interest issues usually outweigh the expected benefits The intense interest that producer groups have in relevant legislation, coupled with the rational ignorance of voters regarding most Outline the differences between government 16-4 bureaus and for-profit firms.Bureaus differ from firms in the amount of consumer feedback they receive, in their incentives to minimize costs, and in the transferability of their ownership Because of these differences, bureaus may not be as efficient or as sensitive to consumer preferences as for-profit firms are Just because a good or service is funded by government doesn’t mean it must be produced by government A growing number of © Cengage Learning 75 100 150 Millions of gallons per month pork-barrel spending Specialinterest legislation that has narrow geographical benefits but is funded by all taxpayers (p. 274) populist legislation Legislation with widespread benefits but concentrated costs (p. 274) competing-interest legislation Legislation that confers concentrated benefits on one group by imposing concentrated costs on another group (p. 275) issues, leave government vulnerable to rent seeking by special interests Elected officials trying to maximize their political support sometimes serve special interests at the expense of the public interest Meanwhile some people resort to the underground economy to avoid government regulations and taxes underground economy Market activity that goes unreported either because it is illegal or because those involved want to evade taxes (p. 278) public goods and services are the result of competitive bidding by for-profit firms bureaus Government agencies charged with implementing legislation and financed by appropriations from legislative bodies (p. 279) www.cengagebrain.com Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.freebookslides.com Describe the common pool problem and summarize 17-1 ways to address it.An exhaustible resource is available in fixed supply, such as crude oil or coal A renewable resource can regenerate itself if used conservatively, such as a properly managed forest Some resources suffer from a common-pool problem because exhaustible resource A resource in fixed supply, such as crude oil or coal (p 285) 17 unrestricted access leads to overuse By imposing restrictions on resource use, government regulations may be able to reduce the common-pool problem Output restrictions or taxes could force people to use the resource at a rate that is socially optimal, at a rate that supports a sustainable use of the resource renewable resource A resource that regenerates itself and so can be used indefinitely if used conservatively, such as a well-managed forest (p 285) common-pool problem Unrestricted access to a renewable resource results in overuse (p 286) Determine the optimal level of pollution with fixed downward shift of its marginal cost curve increases the optimal level of environmental quality The Coase theorem argues that as long as amount of environmental quality occurs where the marginal social bargaining costs are low, assigning property rights to one party leads benefit of an improvement equals its marginal social cost An upward to an efficient solution to the externality problem The market for shift of the marginal benefit curve of environmental quality or a pollution permits reflects the Coase theorem in action 17-2 technology and with variable technology.The optimal Negative Externalities: The Market for Electricity in the Midwest If producers base their output on marginal private cost, 50 million kilowatt-hours of electricity are produced per month The marginal external cost of electricity is the cost of pollution imposed on society The marginal social cost curve includes both the marginal private cost and the marginal external cost If producers base their output decisions on marginal social cost, only 35 million kilowatt-hours are produced, which is the optimal output The total social gain from basing production on marginal social cost is reflected by the blue-shaded triangle The Optimal Reduction in Greenhouse Gas Emissions The optimal level of greenhouse gas emissions for a given rate of output is found at point a, where the marginal social benefit of reducing such emissions equals the marginal social cost If some lower level of emissions were dictated by the government, such as A’, the marginal social cost would exceed the marginal social benefit, and social waste would result The total social waste resulting from a lower than optimal level of emissions is shown by the pinkshaded triangle $0.14 c b Marginal social cost a 0.10 Dollars per unit Dollars per kilowatt-hour Marginal social benefit of reducing emissions Marginal private cost Marginal social cost of reducing emissions c a b D 35 50 High Millions of kilowatthours of electricity per month A A9 Greenhouse gas emissions Low Effect of Changes in Costs or Benefits of Reducing Greenhouse Gas Emissions Either a reduction in the marginal social cost of cleaner air, as shown in panel (a), or an increase in the marginal social benefit of cleaner air, as shown in panel (b), increases the optimal level of air quality Dollars per unit Marginal social benefit Marginal social cost MSC A A9 Higher-quality air (b) Greater benefit of reducing emissions Marginal social benefit Dollars per unit (a) Lower cost of reducing emissions MSB9 Marginal social cost A A0 Higher-quality air www.cengagebrain.com Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it CHAPTER REVIEW CHAPTER 17 Learning outcomes / Key terms Externalities and the Environment Externalities and the Environment Optimal Allocation of Pollution Rights Suppose the demand for a river as a discharge service is D In the absence of any environmental controls, polluters dump 250 tons per day, where the marginal benefit of discharge is zero If regulatory authorities establish 100 tons as the maximum daily level of discharge and then sell the rights, the market for these pollution rights clears at $25 per ton If the demand for pollution rights increases to D’, the market-clearing price of pollution rights rises to $35 per ton Dollars per ton S $35 25 D9 D fixed-production technology Occurs when the relationship between the output rate and the generation of an externality is fixed; the only way to reduce the externality is to reduce the output (p 287) marginal social cost The sum of the marginal private cost and the marginal 17-3 250 Tons of discharge per day marginal external benefit of production or consumption (p 289) variable technology Occurs when the amount of externality generated at a given rate of output can be reduced by altering the production process (p 289) Coase theorem As long as bargaining costs are low, an efficient solution to the problem of externalities is achieved by assigning property rights to one party or the other, it doesn’t matter which (p 291) marginal social benefit The sum of the marginal private benefit and the Summarize how the federal government has regulated air, water, and land pollution.Federal efforts to address the common-pool problems of air, water, and soil pollution are coordinated by the Environmental Protection Agency (EPA) According command-and-control environmental regulations An inflexible approach that required polluters to adopt particular technologies to reduce emissions by specific amounts (p 293) 100 external cost of production or consumption (p 287) to EPA estimates, compliance with pollution- control regulations cost U.S producers and consumers about $300 billion in 2015 Governments have tried to stimulate demand for recycled material; however, recycling imposes its own environmental cost economic efficiency approach An approach that offers each polluter the flexibility to reduce emissions as costeffectively as possible, given its unique Outline government policies designed to promote the 17-4 production and consumption of goods that generate positive externalities.Positive externalities occur when consumption or production benefits other consumers or other firms When there are positive externalities, public policy aims to increase Positive Externalities of Education In the absence of government intervention, the equilibrium quantity of education is E, where the marginal private benefit of education equals the marginal cost as reflected by the supply curve Education also confers a positive externality on the rest of society, so the social benefit exceeds the private benefit At quantity E, the marginal social benefit, point b, exceeds the marginal cost, point e, so more education increases social welfare In this situation, government tries to increase education to E’, where the marginal social benefit equals the marginal cost cost conditions; the market for pollution rights is an example (p 293) recycling The process of converting waste products into reusable material (p 297) the equilibrium quantity beyond the private optimum For example, government tries to increase education by providing free primary and secondary education, by requiring students to stay in school until they reach a certain age, by subsidizing public higher education, and by offering tax deductions for some education expenses b Dollars per unit CHAPTER 17 Key concepts / Key terms CHAPTER REVIEW 17 www.freebookslides.com S Marginal cost e9 Marginal social benefit e D9 Marginal private benefit © Cengage Learning E E9 D Quantity of education www.cengagebrain.com Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.freebookslides.com 18 Identify reasons why incomes differ across house- 18-1 holds, and why the income gap has increased.In a market economy, income for most depends primarily on earnings, which depend on the productivity of one’s resources The problem with allocating income according to productivity is that some people have few resources to sell Incomes differ among households because households have different numbers median income The middle income when all incomes are ranked from smallest to largest (p 308) median wage The middle wage when wages of all workers are ranked from lowest to highest (p 309) Share of Aggregate Household Income by Quintile, 1980–2015 55 49.8 50 51.1 46.6 43.7 45 40 Share (percent) lorenz curve A curve showing the percentage of total income received by a given percentage of households when incomes are arrayed from smallest to largest (p 307) of workers and because of factors such as differences in education, ability, job experience, and age The income gap has grown because of the rise of households with just one parent, because of the growth in two-earner households, and because of a decline in well-paying jobs for those with less education The concentration of the ownership of stocks and other assets and property has also caused inequality to increase at the top of the income distribution 35 30 24.9 24.0 25 20 16.9 15.9 15 22.1 22.1 18.6 15.8 14.8 14.3 Top percent 10.3 9.6 8.9 8.2 10 23.0 23.2 4.3 3.9 3.6 3.1 1980 ’90 ’00 ’15 1980 ’90 ’00 ’15 1980 ’90 ’00 ’15 Lowest quintile Second quintile Third quintile the greatest progress was made in reducing poverty. The biggest decline in the poverty rate occurred before 1970 1980 ’90 ’00 ’15 Fourth quintile Highest quintile Because of a decline in unemployment and an increase in income assistance, the U.S poverty rate dropped from 22.4 percent in 1959 to 12.1 percent in 1969 Since that, the poverty rate has fluctuated but with no long-term trend Lorenz Curves Show That Income Was Less Evenly D istributed Across U.S Households in 2015 Than in 1980 The Lorenz curve is a convenient way of showing the percentage of total income received by any given percentage of households when incomes are arrayed from smallest to largest For example, point a shows that in 1980, the bottom 80 percent of households received 56.3 percent of all income Point b shows that in 2015, the share of all income going to the bottom 80 percent of households was lower than in 1980 If income were evenly distributed across households, the Lorenz curve would be a straight line 100 Income (cumulative percent) Summarize what has happened to the incidence of 18-2 poverty since 1960, and determine when and why 1980 ’90 ’00 ’15 80 n 60 l a qu 40 tio bu tri s di a 1980 E b 2015 20 20 40 60 80 100 Households (cumulative percent) U.S official poverty level Benchmark level of income computed by the federal government to track poverty over time; initially based on three times the cost of a nutritionally adequate diet (p 310) social insurance Government programs designed to help make up for lost income of people who worked but are now retired, unemployed, or unable to work because of disability or work-related injury (p 312) social Security Social insurance program that supplements retirement income of those with a record of contributing to the program during their working years; by far the largest government redistribution program (p 312) medicare Social insurance program providing health insurance for short-term medical care to older Americans, regardless of income (p 312) Income assistance programs Welfare programs that provide money and in-kind assistance to the poor; benefits not depend on prior contributions (p 313) means-tested program A program in which, to be eligible, an individual’s income and assets must not exceed specified levels (p 313) temporary Assistance for Needy Families (TANF) An income assistance program funded largely by the federal government but run by the states to provide cash transfer payments to poor families with dependent children (p 313) supplemental Security Income (SSI) An income assistance program that provides cash transfers to the elderly poor and the disabled; a uniform federal payment is supplemented by transfers that vary across states (p 313) earned-income tax credit A federal program that supplements the wages of the working poor (p 313) medicaid An in-kind transfer program that provides medical care for poor people; by far the most costly welfare program (p 313) SNAP An in-kind transfer program that offers low-income households vouchers redeemable for food; benefit levels vary inversely with household income (p 314) www.cengagebrain.com Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it CHAPTER REVIEW CHAPTER 18 Learning outcomes / Key terms Poverty and Redistribution Poverty and Redistribution Describe a primary source of pov- 18-3 erty among families in the United Number and Percentage of U.S Population in Poverty Since 1959 States.Young, single motherhood is a recipe for poverty Often the young mother drops out of school, which reduces her future earning possibilities when and if she seeks work outside the home Growth in the number of female householders in the last four decades increased poverty among children, though the overall poverty rate among households headed by females has declined since peaking in 1991 More single mothers are working now Numbers in millions, rates in percent 50 Recession 45 40 40.6 million Number in poverty 35 30 25 20 Poverty rate 15 12.7% 10 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Percent of Population Living in Poverty by State in 2016 WA 11.3% OR 13.3% MT 13.3% ID 14.4% NV 13.8% CA 14.3 % UT 10.2% AZ 16.4% MN 9.9% IA 11.8% NE 11.4% CO 11% KS 12.1% OK 16.3% NM 19.8% WV 17.9% WI 11.8% SD 13.3% OH IL IN 14.6% 13% 14.1% MO 14% AR 17.2% 5% KY 18 TN 15.8% AL GA 17.1% 16% TX 15.6% HI 9.3% LA 20.2% AK 9.9% ME 12.5% NH VT 7.3% 11.9% MI 15% ND 10.7% WY 11.3% MS 20.8% NY 14.7% PA 12.9% VA 11% NC 15.4% MA 10.4% RI 12.8% CT 9.8% NJ 10.4% DE 11.7% MD 9.7% Washington D.C 18.6% SC 15.3% FL 14.7% 11.9% or less 12.0% to 15.4% 15.5% or more Outline some unintended consequences of efforts 18-4 to reduce poverty.One unintended consequence of income assistance is a high marginal tax rate on earned income, which Describe how the 1996 federal 18-5 welfare reforms affected the number of people on welfare. Welfare reforms introduced by the states set the stage for federal welfare reforms aimed at breaking the cycle of poverty and promoting the transition from welfare to work The states began experimenting with different systems to encourage more personal responsibility As a result of state reforms, federal welfare reform, and a s trengthening economy, AFDC/TANF recipients rolls as a share of the population dropped from 5.5 percent in 1994 to 0.8 percent in 2016 discourages employment and encourages welfare dependency Welfare dependency could also be passed on to the next generation AFDC/TANF Recipients as a Percentage of the U.S Population Declined Sharply After 1996 Welfare Reforms Percentage of population CHAPTER 18 Key concepts / Key terms CHAPTER REVIEW 18 www.freebookslides.com 1960 © Cengage Learning 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 www.cengagebrain.com Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.freebookslides.com Outline the gains from trade, and explain why 19-1 countries might still decide to trade even if no country had a comparative advantage.The law of comparative advantage says that the individual with the lowest opportunity cost of producing a particular good should specialize in that good Just as individuals benefit from specialization and 19 exchange, so states and, indeed, nations To reap the gains that arise from specialization, countries engage in international trade Each country specializes in making goods with the lowest opportunity cost Before countries can trade, however, they must agree on how much of one good exchanges for another (i.e., the terms of trade) Composition of U.S Exports and Imports in 2016 (a) U.S exports Other 3% (b) U.S imports Other 3% Food 6% Capital goods 24% Consumer goods Autos 9% 7% Industrial supplies 16% Services 19% Industrial supplies 18% Services 34% Food 5% Consumer goods 22% Capital goods 22% Autos 13% Composition of U.S Exports and Imports in 2016 Panel (a) shows the U.S production possibilities frontier; its slope indicates that the opportunity cost of an additional unit of clothing is units of food Panel (b) shows production possibilities for Izodia; an additional unit of clothing costs 1/2 unit of food Clothing has a lower opportunity cost in Izodia (a) The United States Food 500 400 300 200 100 U1 600 500 U2 U3 Food 600 (b) Izodia U4 400 300 200 U5 100 U6 100 200 300 400 Clothing I1 I2 I3 I4 I5 I6 100 200 300 400 Clothing www.cengagebrain.com Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it CHAPTER REVIEW CHAPTER 19 Learning outcomes / Key terms International Trade International Trade Production (and Consumption) Possibilities Frontiers with Trade (millions of units per day) If Izodia and the United States can specialize and trade at the rate of unit of clothing for unit of food, both can benefit as shown by the blue lines By trading with Izodia, the United States can produce only food and still consume combination U, which has more food and more clothing than U4 Likewise, Izodia can attain preferred combination I by producing only clothing, then trading some clothing for U.S food (b) Izodia (a) The United States 600 600 500 500 U 400 Food Food CHAPTER 19 Key concepts / Key terms CHAPTER REVIEW 19 www.freebookslides.com 300 U4 200 400 300 I 200 100 100 100 200 300 400 Clothing Countries export products they can produce more cheaply in return for products that are unavailable domestically or are cheaper elsewhere If production is subject to economies of scale (i.e., if the long-run average cost of production falls as a firm I3 100 200 300 400 Clothing expands its scale of operation), countries can gain from trade if each nation specializes Consumption patterns differ across countries, and some of this results from differences in tastes, a situation that allows countries to gain from trade U.S Production as a Percentage of U.S Consumption for Various Resources If U.S production is less than 100 percent of U.S consumption, then imports make up the difference If U.S production exceeds U.S consumption, then the amount by which production exceeds 100 percent of consumption is exported Coffee Aluminum Crude Oil Copper Sugar Zinc Natural Gas Coarse Grains Coal Oil Seeds Wheat Cotton 20 40 60 80 100 120 140 160 180 200 220 240 260 500 Percent terms of trade How much of one good exchanges for a unit of another good (p. 328) autarky National self-sufficiency; no economic interaction with foreigners (p 328) www.cengagebrain.com Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.freebookslides.com 19 Explain how trade restrictions harm an economy, and surplus resulting from tariffs is divided three ways: a portion goes or a bonus, for both consumers and producers Governments try to regulate surpluses by imposing tariffs (either specific or ad valorem) and import quotas, granting export subsidies, or extending low-interest loans to foreign buyers Loss in U.S consumer and the last portion represents net losses in domestic social welfare Welfare loss occurs when consumers must pay a higher price for products that could have been imported and sold at a lower price 19-2 why they persist.Market exchange usually generates a surplus, to domestic producers; a portion becomes government revenue; Consumer Surplus and Producer Surplus Consumer surplus, shown by the blue triangle, indicates the net benefits consumers reap from buying 60 pounds of apples at $1.00 per pound Some consumers would have been willing to pay $3.00 or more per pound for the first few pounds Consumer surplus measures the difference between the maximum sum of money consumers would pay for 60 pounds of apples and the actual sum they pay Producer surplus, shown by the gold triangle, indicates the net benefits producers reap from selling 60 pounds at $1.00 per pound Some producers would have supplied apples for $0.50 per pound or less Producer surplus measures the difference between the actual sum of money producers receive for 60 pounds of apples and the minimum amount they would accept for this amount Dollars per pound $3.00 2.00 S Consumer surplus 1.00 0.50 Producer surplus D 60 Apples (pounds per day) Effect of a Tariff At a world price of $0.10 per pound, U.S consumers demand 70 million pounds of sugar per month, and U.S producers supply 20 million pounds per month; the difference is imported After the imposition of a $0.05 per pound tariff, the U.S price rises to $0.15 per pound U.S producers supply 30 million pounds, and U.S consumers cut back to 60 million pounds At the higher U.S price, consumers are worse off; their loss of consumer surplus is the sum of areas a, b, c, and d The net welfare loss to the U.S economy consists of areas b and d Price per pound S $0.15 a c b 0.10 d f D 20 30 60 70 Sugar (millions of pounds per month) www.cengagebrain.com Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it CHAPTER REVIEW CHAPTER 19 Learning outcomes / Key terms International Trade International Trade Effect of a Quota In panel (a), D is the U.S demand curve and S is the supply curve of U.S producers If the government establishes a sugar quota of 30 million pounds per month, the supply curve combining U.S production and imports becomes horizontal at the world price of $0.10 per pound and remains horizontal until the quantity supplied reaches 50 million pounds For higher prices, the new supply curve equals the horizontal sum of the U.S supply curve, S, plus the quota of 30 million pounds The new U.S price, $0.15 per pound, is determined by the intersection of the new supply curve, S9, with the U.S demand curve, D Panel (b) shows the welfare effect of the quota As a result of the higher U.S price, consumer surplus is cut by the shaded area The blue-shaded areas illustrate the loss in consumer surplus that is captured by domestic producers and by those who are permitted to fulfill the quota, and the pink-shaded triangles illustrate the net welfare cost of the quota on the U.S economy (b) (a) S' S Price per pound S Price per pound CHAPTER 19 Key concepts / Key terms CHAPTER REVIEW 19 www.freebookslides.com e $0.15 0.10 $0.15 e a 0.10 D 20 Sugar 50 70 (millions of pounds per month) S' c b d D Sugar 20 30 60 70 (millions of pounds per month) world price The price at which a good is traded on the world market; determined by the world demand and world supply for the good (p 333) Identify international efforts to reduce trade bar- 19-3 riers Trade restrictions impose a variety of strains on the economy besides the higher costs to consumers, so countries have worked to create free trade agreements and common markets to reduce or eliminate trade barriers The General Agreement bilateral agreement Trade agreement between two countries (p 336) multilateral agreement Trade agreement among more than two countries (p 336) General Agreement on Tariffs and Trade (GATT) An international tariff-reduction treaty adopted in 1947 that resulted in a series of negotiated “rounds” aimed at freer trade; the Uruguay Round created GATT’s successor, the World Trade Organization (WTO) (p 336) Trade Organization (WTO), and will eventually eliminate quotas (p 337) dumping Selling a product abroad for less than charged in the home market or for less than the cost of production (p 336) World Trade Organization (WTO) The legal and institutional foundation of the multilateral trading system that succeeded GATT in 1995 (p 337) Uruguay Round The final multilateral trade negotiation under GATT; this 1994 agreement cut tariffs, formed the World common market Group of countries that have few or no trade restrictions with one another (p 337) Summarize five arguments often used to justify 19-4 trade restrictions, and describe some unintended consequences of protecting certain industries from international competition Arguments used by producer groups to support trade restrictions include promoting national defense, nurturing infant industries, preventing foreign producers from dumping goods in domestic markets, protecting domestic jobs, and allowing declining industries time to wind down and exit the market © Cengage Learning on Tariffs and Trade (GATT) was an international treaty ratified in 1947 to reduce trade barriers Subsequent negotiations lowered tariffs and reduced trade restrictions The Uruguay Round, ratified in 1994, lowered tariffs, phased out quotas, and created the World Trade Organization (WTO) as the successor to GATT Trade restrictions impose a variety of strains on the economy besides the higher costs to consumers These include (1) the need to protect downstream stages of production as well, (2) expenditures made by favored domestic industries to seek and perpetuate trade protection, (3) costs incurred by the government to enforce trade restrictions, (4) the inefficiency and lack of innovation that result when an industry is insulated from foreign competition, and (5) most important, the trade restrictions imposed by other countries in retaliation www.cengagebrain.com Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.freebookslides.com 20 Summarize the major accounts in the balance of income from holdings of foreign assets; and (d) unilateral transfers, or public and private transfer payments to and from foreign resipayments reflects all economic transactions between one country dents The financial account measures international transactions in and the rest of the world The current account measures flows real and financial assets from (a) goods; (b) services, including consulting and tourism; (c) 20-1 trade, and explain how they balance out.The balance of U.S Balance of Payments for 2016 (billions of dollars) Current Account Merchandise exports 11,455.7 Merchandise imports 22,208.2 U.S Merchandise Exports Have Exceeded I mports Since 1976 Note that since 1980, merchandise exports remained in the range of about 5–10 percent of GDP But merchandise imports have trended up from about percent in 1980 to about 15 percent in 2008, before dropping off to 11 percent in 2009, the year following the financial crisis The decrease in imports over the past several years is mainly due to decreased oil imports 2752.5 Service exports 1752.4 16 Service imports 2504.7 14 Goods and services balance (3 5) 2504.8 Net investment income from abroad 1173.2 Net unilateral transfers 2120.1 Current account balance (6 8) 2451.7 Percent of GDP Merchandise trade balance (1 2) Merchandise trade surplus Merchandise exports 14 11 20 08 20 05 20 02 20 99 20 96 19 93 19 90 19 87 19 84 19 81 19 78 19 75 19 72 19 69 66 19 19 63 1377.7 19 1741.4 12 Financial account balance (10 11) 19 11 Change in foreign-owned assets in the United States 60 2363.7 19 10 Change in U.S.-owned assets abroad TOTAL (9 12 13) Merchandise trade deficit Merchandise imports 10 Financial Account 13 Statistical discrepancy 12 Source: Developed from merchandise trade data from the Bureau of Economic Analysis, U.S Department of Commerce 174.0 0.0 Source: Computed from estimates by the Bureau of Economic Analysis, U.S Department of Commerce at https://bea.gov/international/index.htm Note: Net derivatives transactions are included in line 10 U.S Merchandise Trade in 2016 with Five Largest Trading Partners 500 Exports 450 Imports Billions of dollars 400 350 300 250 200 150 100 50 China Canada Mexico Japan Germany Source: U.S Census Bureau, https://www.census.gov/foreign-trade/statistics/ highlights/top/top1612yr.html balance on goods and services The portion of a country’s balance-of-payments account that measures the value of a country’s exports of goods and services minus the value of its imports of goods and services (p 347) net investment income from abroad Investment earnings by U.S residents from their foreign assets minus investment earnings by foreigners from their assets in the United States (p 348) net unilateral transfers abroad The unilateral transfers (gifts and grants) received from abroad by U.S residents minus the unilateral transfers U.S residents send abroad (p 348) balance on current account The portion of the balance-of-payments account that measures a country’s balance on goods and services, net investment income from abroad, plus net unilateral transfers abroad (p 348) financial account The record of a country’s international transactions involving purchases and sales of financial and real assets (p 348) www.cengagebrain.com Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it CHAPTER REVIEW CHAPTER 20 Learning outcomes / Key terms International Finance International Finance shapes of the curves.Because the exchange rate is usually a The Foreign Exchange Market The fewer dollars needed to purchase one unit of foreign exchange, the lower the price of foreign goods and the greater the quantity of foreign goods demanded Thus, the demand curve for foreign exchange slopes downward An increase in the exchange rate makes U.S products cheaper for foreigners This implies an increase in the quantity of foreign exchange supplied The supply curve of foreign exchange slopes upward S $1.15 1.10 1.05 D 800 Foreign exchange (billions of euros per day) exchange rate The cost, measured in one country’s currency, of one unit of another country’s currency (p 350) Describe the purchasing power parity theory.According between two countries will adjust in the long run to equalize the cost of a basket of internationally traded goods A given basket of Trace the evolution of exchange rate regimes from the the international financial system operated under a gold standard, whereby the major currencies of the world were convertible into gold at a fixed rate During World War I, many countries could no longer convert their currencies into gold, so the gold standard © Cengage Learning S 1.12 1.10 D9 D 800 Foreign exchange 820 (billions of euros per day) appreciation With respect to the dollar, a decrease in the number of dollars needed to purchase one unit of foreign exchange in a flexible rate system (p 350) internationally traded goods should, therefore, sell for about the same around the world (except for differences reflecting transportation costs and the like) between two countries will adjust in the long run to equalize the cost of a basket of internationally traded goods (p 354) flexible exchange rates Rate determined in foreign exchange markets by the forces of demand and supply without government intervention (p 354) fixed exchange rates Rate of exchange between currencies pegged within a narrow range and 20-4 gold standard to the current system.From 1879 to 1914, gold standard An arrangement whereby the currencies of most countries were convertible into gold at a fixed rate (p 355) international Monetary Fund (IMF) An international organization Effect on the Foreign Exchange Market of an Increased Demand for Euros The intersection of the demand curve for foreign exchange, D, and the supply curve for foreign exchange, S, determines the exchange rate At an exchange rate of $1.10 per euro, the quantity of euros demanded equals the quantity supplied An increase in the demand for euros from D to D9 increases the exchange rate from $1.10 to $1.12 per euro depreciation With respect to the dollar, an increase in the number of dollars needed to purchase one unit of foreign exchange in a flexible rate system (p 350) 20-3 to the theory of purchasing power parity (PPP), the exchange rate arbitrageurs Someone who takes advantage of tiny differences in the exchange rate across markets by simultaneously purchasing currency in one market and selling it in another market (p 353) speculators Someone who buys or sells foreign exchange in hopes of profiting from fluctuations in the exchange rate over time (p 353) purchasing power parity (PPP) theory The idea that the exchange rate market price, it is determined by demand and supply The equilibrium exchange rate is one that equates quantity demanded with quantity supplied (see the diagrams below) Exchange rate (dollars per euro) Describe how the foreign exchange rate is determined 20-2 using demand and supply curves and explain the Exchange rate (dollars per euro) CHAPTER 20 Key concepts / Key terms CHAPTER REVIEW 20 www.freebookslides.com maintained by the central bank’s ongoing purchases and sales of currencies (p 354) devaluation An increase in the official pegged price of foreign exchange in terms of the domestic currency (p 355) revaluation A reduction in the official pegged price of foreign exchange in terms of the domestic currency (p 355) eventually collapsed, disrupting international trade during the 1930s and 1940s From 1945 to 1973 fixed exchange rates were in effect, and since 1973 a managed float has been in effect, a system that combines features of freely fluctuating rates with sporadic market intervention by central banks that establishes rules for maintaining the international monetary system and makes loans to countries with temporary balance-of-payments problems (p 356) managed float system An exchange rate system that combines features of freely floating rates with sporadic intervention by central banks (p 356) www.cengagebrain.com Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.freebookslides.com Besides income, identify ways that low-income econ- 21-1 omies differ from high-income economies.The most common measure of comparison of standards of living between 21 different countries is output per capita Developing countries are distinguished by low output per capita, poor health and nutrition, high fertility rates, and poor education Share of World Population and World Output from High-, Middle-, and Low-Income Economies as of 2016 (a) Share of world population from high-, middle-, and low-income economies High (16%) (b) Share of world output from high-, middle-, and low-income economies Low (1%) Low (9%) High (64%) Middle (35%) Middle (75%) Per Capita Income for Selected Countries in 2016 United States $58,030 Germany $49,530 Japan $42,870 United Kingdom $42,100 Mexico $17,740 $15,500 China Brazil High-income economies $14,810 India $6,490 Bangladesh $3,790 Kenya $3,130 Ethiopia Middle-income economies Low-income economies $1,730 Congo $730 $16,095 World average $0 $10,000 $20,000 $30,000 $40,000 $50,000 industrial market countries Economically advanced capitalist countries also known as developed countries and highincome economies (p. 361) developing countries Low-income and middle-income economies; most are also known as emerging market economies (p. 362) Describe the factors that help make workers in high- productivity, developing nations must stimulate investment, support education and training programs, provide sufficient infrastructure, and foster supportive rules of the game 21-2 income economies more productive than workers in other economies.Labor productivity, measured in terms of output per worker, is by definition low in low-income countries, as it depends on the quality of the labor and other inputs that combine with labor, such as capital and natural resources The key to a rising standard of living is increased productivity To foster privatization The process of turning government enterprises into private enterprises (p. 370) www.cengagebrain.com Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it CHAPTER REVIEW CHAPTER 21 Learning outcomes / Key terms Economic Development CHAPTER 21 Key concepts / Key terms CHAPTER REVIEW 21 www.freebookslides.com Economic Development 21-3 Explain how trade restrictions can slow economic development in poorer countries.Developing countries need to trade with developed countries to acquire the capital and technology that will increase labor productivity Exports usually generate more than half of the annual flow of foreign exchange in developing countries Foreign aid and private investment make up the rest Developing countries often use either import substitution or export promotion strategies to improve production With import substitution, domestic manufacturers make products that had previously been imported and the government supports them with tariffs and quotas Export promotion concentrates on producing for the export market Export promotion has proven generally more successful import substitution A development strategy that emphasizes domestic manufacturing of products that had been imported (p. 373) export promotion A development strategy that concentrates on producing for the export market (p. 373) Outline some unintended consequences of foreign aid aid has simply increased consumption and insulated government from painful but necessary reforms Worse still, subsidized food blessing for most developing countries In some cases, that aid has from abroad has undermined domestic agriculture, hurting poor helped countries build the roads, bridges, schools, and other capital farmers And subsidized clothing from abroad has undermined the infrastructure necessary for development In other cases, foreign textile industries in poor countries 21-4 on economic development.Foreign aid has been a mixed GDP per Capita for Transitional Economies in 2016 Czech Republic $34,700 Lithuania $30,000 Poland $27,800 Hungary $26,700 Romania $23,600 Russia $23,200 Bulgaria $19,200 China Ukraine $8,300 Vietnam $6,400 $0 $5,000 foreign aid An international transfer made on especially favorable terms for the purpose of promoting economic development (p. 375) © Cengage Learning High-income economies Middle-income economies $15,500 $10,000 $15,000 $20,000 $25,000 convergence A theory predicting that the standard of living in economies around the world will grow more similar over time, $30,000 $35,000 with poorer countries eventually catching up with richer ones (p. 376) www.cengagebrain.com Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Copyright 2019 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it ... 264 15 -6 Final Word 266 13-3 Why Interest Rates Differ 222 16 PChoice ublic Goods and Public 268 13-4 Present Value and Discounting 224 16- 1 Public Goods 269 13-5 Entrepreneurship 2 26 16- 2 Public... production, employment, and economic growth Macroeconomics studies the performance of the economy as a whole Whereas microeconomics studies the individual pieces of the economic puzzle, as reflected... experiencing economic variable eight recessions since then, including the Great Recesmicroeconomics The study of the economic behavior sion of 2007–2009 TO REVIEW: The art of economic analysis