Economics 19th Edition PDF

ECONOMICS Nineteenth Edition PAUL A. SAMUELSON Institute Professor Emeritus Massachusetts Institute of Technology WILLIAM D. NORDHAUS...

ECONOMICS Nineteenth Edition PAUL A. SAMUELSON Institute Professor Emeritus Massachusetts Institute of Technology WILLIAM D. NORDHAUS Sterling Professor of Economics Yale University sam11290_fm.indd iii 2/25/09 7:09:53 PM  ABOUT THE AUTHORS PAUL A. SAMUELSON, founder of the WILLIAM D. NORDHAUS is one of renowned MIT graduate department of economics, America’s eminent economists. Born in Albuquer- was trained at the University of Chicago and Harvard. que, New Mexico, he received his B.A. from Yale and His many scientific writings brought him world fame his Ph.D. in economics at MIT. He is Sterling Profes- at a young age, and in 1970 he was the first American sor of Economics at Yale University and on the staff to receive a Nobel Prize in economics. One of those of the Cowles Foundation for Research in Economics rare scientists who can communicate with the lay and the National Bureau of Economic Research. His public, Professor Samuelson wrote an economics col- research has spanned much of economics—including umn for Newsweek for many years and was economic the environment, energy, technological change, eco- adviser to President John F. Kennedy. He testifies nomic growth, and trends in profits and productivity. often before Congress and serves as academic con- In addition, Professor Nordhaus takes a keen inter- sultant to the Federal Reserve, the U.S. Treasury, and est in economic policy. He served as a member of various private, nonprofit organizations. Professor President Carter’s Council of Economic Advisers Samuelson, between researches at MIT and tennis from 1977 to 1979, serves on many government advi- games, is a visiting professor at New York University. sory boards and committees, and writes occasionally His six children (including triplet boys) have con- for The New York Review of Books and other periodi- tributed 15 grandchildren. cals. He regularly teaches the Principles of Econom- ics course at Yale. Professor Nordhaus lives in New Haven, Connecticut, with his wife, Barbara. When not writing or teaching, he devotes his time to music, travel, skiing, and family. sam11290_fm.indd ii 2/25/09 7:09:36 PM  To our families, students, and colleagues ECONOMICS Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020. Copyright © 2010, 2005, 2001, 1998, 1995, 1992, 1989, 1985, 1980, 1976, 1973, 1970, 1967, 1964, 1961, 1958, 1955, 1951, 1948 by The McGraw-Hill Companies, Inc. All rights reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 0 WCK / WCK 0 9 ISBN 978-0-07-351129-0 MHID 0-07-351129-3 Publisher: Douglas Reiner Developmental editor II: Karen L. Fisher Editorial coordinator: Noelle Fox Senior marketing manager: Jen Lambert Senior project manager: Susanne Riedell Full-service project manager: Lori Hazzard, Macmillan Publishing Solutions Lead production supervisor: Michael R. McCormick Lead designer: Matthew Baldwin Media project manager: Balaji Sundararaman, Hurix Systems Pvt. Ltd. Cover image: The globes on the front and back covers are courtesy of the GEcon Project, Yale University, and were created by Xi Chen and William Nordhaus. The height of the bars is proportional to output in each location. For more details on the data and methods, go to gecon.yale.edu. Typeface: 10/12 New Baskerville Compositor: Macmillan Publishing Solutions Printer: Quebecor World Versailles Inc. Library of Congress Cataloging-in-Publication Data Samuelson, Paul Anthony, 1915- Economics / Paul A. Samuelson, William D. Nordhaus. — 19th ed. p. cm.—(The McGraw-Hill series economics) Includes index. ISBN-13: 978-0-07-351129-0 (alk. paper) ISBN-10: 0-07-351129-3 (alk. paper) 1. Economics. I. Nordhaus, William D. II. Title. HB171.5.S25 2010 330—dc22 2009003178 www.mhhe.com sam11290_fm.indd iv 2/25/09 7:09:53 PM  Contents in Brief A Centrist Proclamation xvi Preface xviii For the Student: Economics and the Internet xxiii PART ONE BASIC CONCEPTS 1 Chapter 1 The Central Concepts of Economics 3 Appendix 1 How to Read Graphs 18 Chapter 2 The Modern Mixed Economy 25 Chapter 3 Basic Elements of Supply and Demand 45 PART TWO MICROECONOMICS: SUPPLY, DEMAND, AND PRODUCT MARKETS 63 Chapter 4 Supply and Demand: Elasticity and Applications 65 Chapter 5 Demand and Consumer Behavior 84 Appendix 5 Geometrical Analysis of Consumer Equilibrium 101 Chapter 6 Production and Business Organization 107 Chapter 7 Analysis of Costs 126 Appendix 7 Production, Cost Theory, and Decisions of the Firm 144 Chapter 8 Analysis of Perfectly Competitive Markets 149 Chapter 9 Imperfect Competition and Monopoly 169 Chapter 10 Competition among the Few 187 Chapter 11 Economics of Uncertainty 211 PART THREE FACTOR MARKETS: LABOR, LAND, AND CAPITAL 227 Chapter 12 How Markets Determine Incomes 229 Chapter 13 The Labor Market 248 Chapter 14 Land, Natural Resources, and the Environment 267 Chapter 15 Capital, Interest, and Profits 283 v sam11290_fm.indd v 2/25/09 7:09:54 PM  vi CONTENTS IN BRIEF PART FOUR APPLICATIONS OF ECONOMIC PRINCIPLES 301 Chapter 16 Government Taxation and Expenditure 303 Chapter 17 Efficiency vs. Equality: The Big Tradeoff 323 Chapter 18 International Trade 339 PART FIVE MACROECONOMICS: ECONOMIC GROWTH AND BUSINESS CYCLES 365 Chapter 19 Overview of Macroeconomics 367 Appendix 19 Macroeconomic Data for the United States 385 Chapter 20 Measuring Economic Activity 386 Chapter 21 Consumption and Investment 408 Chapter 22 Business Cycles and Aggregate Demand 428 Chapter 23 Money and the Financial System 453 Chapter 24 Monetary Policy and the Economy 475 PART SIX GROWTH, DEVELOPMENT, AND THE GLOBAL ECONOMY 499 Chapter 25 Economic Growth 501 Chapter 26 The Challenge of Economic Development 521 Chapter 27 Exchange Rates and the International Financial System 543 Chapter 28 Open-Economy Macroeconomics 564 PART SEVEN UNEMPLOYMENT, INFLATION, AND ECONOMIC POLICY 587 Chapter 29 Unemployment and the Foundations of Aggregate Supply 589 Chapter 30 Inflation 609 Chapter 31 Frontiers of Macroeconomics 630 Glossary of Terms 654 Index 677 sam11290_fm.indd vi 2/25/09 7:09:54 PM  Contents A Centrist Proclamation xvi Chapter 2 Preface xviii The Modern Mixed Economy 25 For the Student: Economics and A. The Market Mechanism 26 the Internet xxiii Not Chaos, but Economic Order How Markets Solve the Three Economic Problems The Dual Monarchy A Picture of Prices and Markets The Invisible Hand PART ONE BASIC CONCEPTS B. Trade, Money, and Capital 30 1 Trade, Specialization, and Division of Labor 31 Money: The Lubricant of Exchange 33 Capital 33 Chapter 1 Capital and Private Property The Central Concepts of Economics 3 C. The Visible Hand of Government 34 A. Why Study Economics? 3 Efficiency 35 Imperfect Competition For Whom the Bell Tolls Scarcity and Efficiency: Externalities Public Goods Equity 38 The Twin Themes of Economics 3 Definitions of Macroeconomic Growth and Stability 39 The Rise of Economics Scarcity and Efficiency Microeconomics the Welfare State 40 Conservative Backlash and Macroeconomics The Logic of Economics 5 The Mixed Economy Today Cool Heads at the Service of Warm Hearts 6 Summary 41 Concepts for Review 42 Further B. The Three Problems of Economic Organization 7 Reading and Internet Websites 43 Questions for Market, Command, and Mixed Economies 8 Discussion 43 C. Society’s Technological Possibilities 8 Chapter 3 Inputs and Outputs 9 The Production-Possibility Basic Elements of Supply and Demand 45 Frontier 9 Applying the PPF to Society’s Choices Opportunity Costs Efficiency A. The Demand Schedule 46 Summary 15 Concepts for Review 15 Further The Demand Curve 47 Market Demand Forces Reading and Internet Websites 16 Questions for behind the Demand Curve Shifts in Demand Discussion 16 B. The Supply Schedule 51 The Supply Curve 51 Forces behind the Supply Appendix 1 Curve Shifts in Supply How to Read Graphs 18 C. Equilibrium of Supply and Demand 53 The Production-Possibility Frontier 18 Production- Equilibrium with Supply and Demand Curves 54 Effect Possibility Graph A Smooth Curve Slopes and of a Shift in Supply or Demand Interpreting Lines Slope of a Curved Line Slope as the Marginal Changes in Price and Quantity Supply, Demand, and Value Shifts of and Movement along Curves Some Immigration Rationing by Prices 59 Special Graphs Summary 60 Concepts for Review 61 Further Summary to Appendix 23 Concepts for Reading and Internet Websites 61 Questions for Review 24 Questions for Discussion 24 Discussion 61 vii sam11290_fm.indd vii 3/5/09 2:55:33 PM  viii CONTENTS PART TWO Appendix 5 MICROECONOMICS: SUPPLY, DEMAND, Geometrical Analysis of Consumer Equilibrium 101 AND PRODUCT MARKETS 63 The Indifference Curve 101 Law of Substitution The Indifference Map Budget Line or Budget Chapter 4 Constraint 103 The Equilibrium Position of Supply and Demand: Elasticity and Applications 65 Tangency 104 Changes in Income and Price 104 Income Change Single Price Change Deriving the Demand Curve 105 A. Price Elasticity of Demand and Supply 65 Price Elasticity of Demand 65 Calculating Elasticities Summary to Appendix 106 Concepts for Price Elasticity in Diagrams A Shortcut for Calculating Review 106 Questions for Discussion 106 Elasticities The Algebra of Elasticities Elasticity Is Not the Same as Slope Elasticity and Revenue 70 The Paradox of the Bumper Harvest Price Elasticity of Chapter 6 Supply 72 Production and Business Organization 107 B. Applications to Major Economic Issues 73 A. Theory of Production and Marginal Products 107 The Economics of Agriculture 73 Long-Run Relative Basic Concepts 107 The Production Function Total, Decline of Farming Impact of a Tax on Price and Average, and Marginal Product The Law of Diminishing Quantity 75 Minimum Floors and Maximum Returns Returns to Scale 111 Short Run and Long Ceilings 77 The Minimum-Wage Controversy Run 112 Technological Change 113 Productivity and Energy Price Controls Rationing by the Queue, by the Aggregate Production Function 116 Productivity Coupons, or by the Purse? Productivity Growth from Economies of Scale and Scope Empirical Estimates of the Aggregate Production Function Summary 81 Concepts for Review 82 Further B. Business Organizations 118 Reading and Internet Websites 82 Questions for The Nature of the Firm 118 Big, Small, and Discussion 82 Infinitesimal Businesses 119 The Individual Proprietorship The Partnership The Corporation Ownership, Control, and Executive Compensation Chapter 5 Demand and Consumer Behavior 84 Summary 123 Concepts for Review 124 Further Reading and Internet Websites 124 Questions for Choice and Utility Theory 84 Marginal Utility and Discussion 124 the Law of Diminishing Marginal Utility A Numerical Example Derivation of Demand Curves 87 The Chapter 7 Equimarginal Principle Why Demand Curves Slope Analysis of Costs 126 Downward Leisure and the Optimal Allocation of Time Analytical Developments in Utility A. Economic Analysis of Costs 126 Theory An Alternative Approach: Substitution Total Cost: Fixed and Variable 126 Fixed Cost Effect and Income Effect 89 Substitution Variable Cost Definition of Marginal Cost 127 Effect Income Effect From Individual to Average Cost 129 Average or Unit Cost Average Market Demand 91 Demand Shifts Substitutes Fixed and Variable Costs The Relation between and Complements Empirical Estimates of Price Average Cost and Marginal Cost The Link between and Income Elasticities The Economics of Production and Costs 132 Diminishing Returns Addiction 94 The Paradox of Value 95 and U-Shaped Cost Curves Choice of Inputs by the Consumer Surplus 96 Applications of Consumer Firm 134 Marginal Products and the Least-Cost Rule Surplus B. Economic Costs and Business Accounting 135 Summary 98 Concepts for Review 99 Further The Income Statement, or Statement of Profit and Reading and Internet Websites 99 Questions for Loss 135 The Balance Sheet 136 Accounting Discussion 99 Conventions Financial Finagling sam11290_fm.indd viii 2/25/09 7:09:54 PM  CONTENTS ix C. Opportunity Costs 139 Chapter 9 Opportunity Cost and Markets 140 Imperfect Competition and Monopoly 169 Summary 141 Concepts for Review 142 Further A. Patterns of Imperfect Competition 169 Reading and Internet Websites 142 Questions for Definition of Imperfect Competition Varieties of Discussion 142 Imperfect Competitors 171 Monopoly Oligopoly Monopolistic Competition Sources of Market Appendix 7 Imperfections 173 Costs and Market Imperfection Production, Cost Theory, and Decisions Barriers to Entry of the Firm 144 B. Monopoly Behavior 177 A Numerical Production Function 144 The Law of The Concept of Marginal Revenue 177 Price, Quantity, Diminishing Marginal Product 144 Least-Cost Factor and Total Revenue Marginal Revenue and Price Combination for a Given Output 145 Equal-Product Elasticity and Marginal Revenue Profit-Maximizing Curves Equal-Cost Lines Equal-Product and Conditions 180 Monopoly Equilibrium in Graphs Equal-Cost Contours: Least-Cost Tangency Least-Cost Perfect Competition as a Polar Case of Imperfect Conditions Competition The Marginal Principle: Let Bygones Be Bygones 183 Loss Aversion and the Marginal Principle Summary to Appendix 147 Concepts for Review 148 Questions for Discussion 148 Summary 184 Concepts for Review 185 Further Reading and Internet Websites 185 Questions for Discussion 186 Chapter 8 Analysis of Perfectly Competitive Markets 149 Chapter 10 A. Supply Behavior of the Competitive Firm 149 Competition among the Few 187 Behavior of a Competitive Firm 149 Profit Maximization Perfect Competition Competitive A. Behavior of Imperfect Competitors 187 Supply Where Marginal Cost Equals Price Total Cost Measures of Market Power The Nature of and the Shutdown Condition Imperfect Competition 189 Theories of Imperfect Competition 189 Collusive Oligopoly Monopolistic B. Supply Behavior in Competitive Industries 154 Competition Rivalry among the Few Price Summing All Firms’ Supply Curves to Get Market Discrimination 193 Supply 154 Short-Run and Long-Run Equilibrium 155 The Long Run for a Competitive Industry B. Game Theory 195 Thinking about Price Setting Basic Concepts 196 C. Special Cases of Competitive Markets 157 Alternative Strategies Games, Games, Everywhere... General Rules 157 Constant Cost Increasing Costs and Diminishing Returns Fixed Supply and Economic C. Public Policies to Combat Market Power 199 Rent Backward-Bending Supply Curve Shifts in Economic Costs of Imperfect Competition 199 The Supply Cost of Inflated Prices and Reduced Output The Static Costs of Imperfect Competition Public Policies D. Efficiency and Equity of Competitive Markets 160 on Imperfect Competition Regulating Economic Evaluating the Market Mechanism 160 The Concept Activity 201 Why Regulate Industry? Containing of Efficiency Efficiency of Competitive Equilibrium Market Power Remedying Information Failures Equilibrium with Many Consumers and Markets Antitrust Law and Economics 203 The Framework Marginal Cost as a Benchmark for Efficiency Statutes Basic Issues in Antitrust Law: Conduct and Qualifications 163 Market Failures Two Cheers for Structure 204 Illegal Conduct Structure: Is Bigness the Market, but Not Three Badness? Antitrust Laws and Efficiency Summary 165 Concepts for Review 166 Further Summary 207 Concepts for Review 208 Further Reading and Internet Websites 166 Questions for Reading and Internet Websites 208 Questions for Discussion 166 Discussion 209 sam11290_fm.indd ix 2/25/09 7:09:54 PM  x CONTENTS Summary 244 Concepts for Review 245 Further Chapter 11 Reading and Internet Websites 245 Questions for Economics of Uncertainty 211 Discussion 245 A. Economics of Risk and Uncertainty 211 Speculation: Shipping Assets or Goods Across Space and Chapter 13 Time 212 Arbitrage and Geographic Price Patterns The Labor Market 248 Speculation and Price Behavior over Time Shedding Risks through Hedging The Economic Impacts of A. Fundamentals of Wage Determination 248 Speculation Risk and Uncertainty 215 The General Wage Level 248 Demand for Labor 249 Marginal Productivity Differences International B. The Economics of Insurance 216 Comparisons The Supply of Labor 251 Determinants Capital Markets and Risk Sharing Market Failures of Supply Empirical Findings Wage Differentials 253 in Information 217 Moral Hazard and Adverse Differences in Jobs: Compensating Wage Differentials Selection Social Insurance 218 Differences in People: Labor Quality Differences in People: The “Rents” of Unique Individuals Segmented C. Health Care: The Problem That Won’t Go Away 219 Markets and Noncompeting Groups The Economics of Medical Care 219 Special Economic Features of Health Care Health Care as a Social B. Labor Market Issues and Policies 257 Insurance Program Rationing Health Care The Economics of Labor Unions 257 Government and Collective Bargaining How Unions Raise D. Innovation and Information 221 Wages 258 Theoretical Indeterminacy of Collective Schumpeter’s Radical Innovation The Economics Bargaining Effects on Wages and Employment 259 of Information Intellectual Property Rights The Has Unionization Raised Wages? Unions and Classical Dilemma of the Internet Unemployment Discrimination 260 Economic Analysis of Discrimination 261 Definition of Summary 224 Concepts for Review 225 Further Discrimination Discrimination by Exclusion Taste Reading and Internet Websites 225 Questions for for Discrimination Statistical Discrimination Discussion 225 Economic Discrimination Against Women 263 Empirical Evidence 263 Reducing Labor Market PART THREE Discrimination 264 Uneven Progress FACTOR MARKETS: LABOR, LAND, AND CAPITAL Summary 264 Concepts for Review 265 Further Reading and Internet Websites 265 Questions for 227 Discussion 266 Chapter 12 Chapter 14 How Markets Determine Incomes 229 Land, Natural Resources, and the Environment 267 A. Income and Wealth 229 A. The Economics of Natural Resources 267 Income 230 Factor Incomes vs. Personal Incomes Resource Categories 268 Fixed Land and Rents 269 Role of Government Wealth 231 Rent as Return to Fixed Factors Taxing Land B. Input Pricing by Marginal Productivity 232 B. Environmental Economics 271 The Nature of Factor Demands 233 Demands for Externalities 271 Public vs. Private Goods Market Factors Are Derived Demands Demands for Factors Inefficiency with Externalities 272 Analysis of Are Interdependent Distribution Theory and Marginal Inefficiency Valuing Damages Graphical Analysis Revenue Product 235 Marginal Revenue Product of Pollution Policies to Correct Externalities 275 The Demand for Factors of Production 236 Factor Government Programs Private Approaches Climate Demands for Profit-Maximizing Firms Marginal Change: To Slow or Not to Slow 278 Quarrel and Revenue Product and the Demand for Factors Supply Pollute, or Reason and Compute? of Factors of Production 238 Determination of Factor Prices by Supply and Demand 239 The Distribution of Summary 280 Concepts for Review 281 Further National Income 241 Marginal-Productivity Theory with Reading and Internet Websites 281 Questions for Many Inputs An Invisible Hand for Incomes? 243 Discussion 281 sam11290_fm.indd x 2/25/09 7:09:54 PM  CONTENTS xi Compromises in Taxation Federal Taxation 314 Chapter 15 The Individual Income Tax Social Insurance Taxes Capital, Interest, and Profits 283 Corporation Taxes Consumption Taxes State and Local Taxes 317 Property Tax Other Taxes A. Basic Concepts of Interest and Capital 283 Efficiency and Fairness in the Tax System 318 The What Is Capital? Prices and Rentals on Investments Goal of Efficient Taxation Efficiency vs. Fairness Capital vs. Financial Assets The Rate of Return on Final Word 320 Investments Rates of Return and Interest Rates 284 Rate of Return on Capital Financial Assets and Summary 320 Concepts for Review 321 Further Interest Rates The Present Value of Assets 285 Reading and Internet Websites 321 Questions for Present Value for Perpetuities General Formula for Discussion 321 Present Value Acting to Maximize Present Value The Mysterious World of Interest Rates 287 Real vs. Nominal Interest Rates Chapter 17 B. The Theory of Capital, Profits, and Interest 291 Efficiency vs. Equality: The Big Tradeoff 323 Basic Capital Theory 291 Roundaboutness Diminishing Returns and the Demand for Capital A. The Sources of Inequality 323 Determination of Interest and the Return on Capital The Distribution of Income and Wealth 324 How Graphical Analysis of the Return on Capital Profits as to Measure Inequality among Income Classes a Return to Capital 295 Reported Profit Statistics Distribution of Wealth Inequality across Countries Determinants of Profits Empirical Evidence on Poverty in America 327 Who Are the Poor? Who Returns to Labor and Capital Are the Rich? Trends in Inequality Summary 297 Concepts for Review 298 Further B. Antipoverty Policies 330 Reading and Internet Websites 298 Questions for The Rise of the Welfare State The Costs of Discussion 299 Redistribution 331 Redistribution Costs in Diagrams How Big Are the Leaks? Adding Up the Leaks Antipoverty Policies: Programs and Criticisms 333 PART FOUR Income-Security Programs Incentive Problems of the APPLICATIONS OF ECONOMIC Poor The Battle over Welfare Reform 334 Two PRINCIPLES Views of Poverty Income-Support Programs in 301 the United States Today The Earned-Income Tax Credit The 1996 U.S. Welfare Reform Economic Policy for the 21st Century 336 Chapter 16 Government Taxation and Expenditure 303 Summary 336 Concepts for Review 337 Further Reading and Internet Websites 337 Questions for A. Government Control of the Economy 303 Discussion 338 The Tools of Government Policy 304 Trends in the Size of Government The Growth of Government Controls and Regulation The Functions of Government 306 Improving Economic Efficiency Reducing Economic Chapter 18 Inequality Stabilizing the Economy through International Trade 339 Macroeconomic Policies Conducting International Economic Policy Public-Choice Theory 308 A. The Nature of International Trade 339 International vs. Domestic Trade Trends in Foreign B. Government Expenditures 309 Trade The Reasons for International Trade in Goods Fiscal Federalism 309 Federal Expenditures State and Services 340 Diversity in Natural Resources and Local Expenditures Cultural and Technological Differences in Tastes Differences in Costs Impacts 311 B. Comparative Advantage among Nations 341 C. Economic Aspects of Taxation 312 The Principle of Comparative Advantage 341 Principles of Taxation 312 Benefit vs. Ability-to-Pay Uncommon Sense Ricardo’s Analysis of Comparative Principles Horizontal and Vertical Equity Pragmatic Advantage The Economic Gains from Trade sam11290_fm.indd xi 2/25/09 7:09:54 PM  xii CONTENTS Outsourcing as Another Kind of Trade Graphical Chapter 20 Analysis of Comparative Advantage 344 America Measuring Economic Activity 386 without Trade Opening Up to Trade Extensions Gross Domestic Product: The Yardstick of an Economy’s to Many Commodities and Countries 347 Many Performance 386 Two Measures of National Product: Commodities Many Countries Triangular Goods Flow and Earnings Flow National Accounts and Multilateral Trade Qualifications and Derived from Business Accounts The Problem Conclusions 348 of “Double Counting” Details of the National Accounts 391 Real vs. Nominal GDP: “Deflating” C. Protectionism 349 GDP by a Price Index Consumption Investment Supply-and-Demand Analysis of Trade and Tariffs 350 and Capital Formation Government Purchases Free Trade vs. No Trade Trade Barriers The Net Exports Gross Domestic Product, Net Domestic Economic Costs of Tariffs The Economics of Product, and Gross National Product GDP and NDP: A Protectionism 355 Noneconomic Goals Unsound Look at Numbers From GDP to Disposable Income Grounds for Tariffs Potentially Valid Arguments for Saving and Investment Beyond the National Protection Other Barriers to Trade Multilateral Accounts 400 Price Indexes and Inflation 402 Price Trade Negotiations 359 Negotiating Free Trade Indexes Accounting Assessment 404 Appraisal Summary 405 Concepts for Review 406 Further Summary 361 Concepts for Review 362 Further Reading and Internet Websites 406 Questions for Reading and Internet Websites 362 Questions for Discussion 406 Discussion 363 Chapter 21 PART FIVE Consumption and Investment 408 MACROECONOMICS: ECONOMIC A. Consumption and Saving 408 GROWTH AND BUSINESS CYCLES Budgetary Expenditure Patterns Consumption, 365 Income, and Saving 411 The Consumption Function The Saving Function The Marginal Propensity to Consume The Marginal Propensity to Save Chapter 19 Brief Review of Definitions National Consumption Overview of Macroeconomics 367 Behavior 416 Determinants of Consumption The National Consumption Function Alternative Measures A. Key Concepts of Macroeconomics 368 of Saving The Birth of Macroeconomics 368 Objectives and Instruments of Macroeconomics 370 Measuring B. Investment 420 Economic Success The Tools of Macroeconomic Determinants of Investment 420 Revenues Costs Policy International Linkages 376 Expectations The Investment Demand Curve 421 Shifts in the Investment Demand Curve On to the B. Aggregate Supply and Demand 377 Theory of Aggregate Demand 424 Inside the Macroeconomy: Aggregate Supply and Demand 377 Definitions of Aggregate Supply and Summary 424 Concepts for Review 425 Further Demand Aggregate Supply and Demand Curves Reading and Internet Websites 425 Questions for Macroeconomic History: 1900–2008 380 The Role of Discussion 426 Macroeconomic Policy Summary 382 Concepts for Review 383 Further Chapter 22 Reading and Internet Websites 383 Questions for Business Cycles and Aggregate Demand 428 Discussion 384 A. What Are Business Cycles? 429 Features of the Business Cycle 429 Business- Appendix 19 Cycle Theories 431 Financial Crises and Business Macroeconomic Data for the United States 385 Cycles sam11290_fm.indd xii 2/25/09 7:09:54 PM  CONTENTS xiii B. Aggregate Demand and Business Cycles 432 Chapter 24 The Theory of Aggregate Demand 432 The Monetary Policy and the Economy 475 Downward-Sloping Aggregate Demand Curve 433 Shifts in Aggregate Demand Business Cycles and A. Central Banking and the Federal Reserve System 475 Aggregate Demand Is the Business Cycle Avoidable? The Essential Elements of Central Banking 476 History Structure Goals of Central Banks Functions of C. The Multiplier Model 437 the Federal Reserve Central-Bank Independence Output Determined by Total Expenditures 437 How the Central Bank Determines Short-Term Interest Reminder on the Meaning of Equilibrium The Rates 478 Overview of the Fed’s Operations Adjustment Mechanism A Numerical Analysis The Balance Sheet of the Federal Reserve Banks Operating Multiplier 440 The Multiplier Model Compared with Procedures How the Federal Reserve Affects the AS-AD Model Bank Reserves 479 Open-Market Operations Discount-Window Policy: A Backstop for Open-Market D. Fiscal Policy in the Multiplier Model 441 Operations The Role of Reserve Requirements How Government Fiscal Policies Affect Output 442 Determination of the Federal Funds Rate Impact of Taxation on Aggregate Demand A Numerical Example Fiscal-Policy Multipliers 446 B. The Monetary Transmission Mechanism 484 Impact of Taxes The Multiplier Model and the A Summary Statement The Effect of Changes in Business Cycle The Multiplier Model in Perspective Monetary Policy on Output The Challenge of a Liquidity Trap Monetary Policy in the AS-AD Summary 449 Concepts for Review 450 Further Framework Monetary Policy in the Long Run Reading and Internet Websites 451 Questions for Discussion 451 C. Applications of Monetary Economics 489 Monetarism and the Quantity Theory of Money and Prices 489 The Roots of Monetarism The Equation of Exchange and the Velocity of Money The Quantity Chapter 23 Theory of Prices Modern Monetarism The Money and the Financial System 453 Monetarist Platform: Constant Money Growth The Overview of the Monetary Transmission Mechanism Monetarist Experiment The Decline of Monetarism Monetary Policy in an Open Economy 493 A. The Modern Financial System 454 International Linkages Monetary Transmission in The Role of the Financial System The Functions of the Open Economy 494 From Aggregate Demand to the Financial System The Flow of Funds A Menu of Aggregate Supply 495 Financial Assets 456 Review of Interest Rates Summary 495 Concepts for Review 496 Further B. The Special Case of Money 458 Reading and Internet Websites 497 Questions for The Evolution of Money 458 The History of Money Discussion 497 Components of the Money Supply The Demand for Money 461 Money’s Functions The Costs of Holding Money Two Sources of Money Demand PART SIX GROWTH, DEVELOPMENT, C. Banks and the Supply of Money 463 AND THE GLOBAL ECONOMY How Banks Developed from Goldsmith Establishments 499 Fractional-Reserve Banking Final System Equilibrium A Modern Banking System Chapter 25 D. The Stock Market 465 Economic Growth 501 Risk and Return on Different Assets Bubbles and The Long-Term Significance of Growth Crashes Efficient Markets and the Random Walk Personal Financial Strategies 470 A. Theories of Economic Growth 502 The Four Wheels of Growth 502 Human Resources Summary 471 Concepts for Review 472 Further Natural Resources Capital Technological Change Reading and Internet Websites 473 Questions for and Innovation Theories of Economic Growth 506 Discussion 473 The Classical Dynamics of Smith and Malthus sam11290_fm.indd xiii 2/25/09 7:09:54 PM  xiv CONTENTS Economic Growth with Capital Accumulation: The A. The Balance of International Payments 545 Neoclassical Growth Model Geometrical Analysis Balance-of-Payments Accounts 545 Debits and of the Neoclassical Model The Central Role of Credits Details of the Balance of Payments Technological Change Technological Change as an Economic Output B. The Determination of Foreign Exchange Rates 548 Foreign Exchange Rates 548 The Foreign Exchange B. The Patterns of Growth in the United States 512 Market 549 Effects of Changes in Trade Exchange The Facts of Economic Growth Relationship of the Rates and the Balance of Payments Purchasing-Power Seven Trends to Economic-Growth Theories The Parity and Exchange Rates Sources of Economic Growth Recent Trends in Productivity 516 The Productivity Rebound C. The International Monetary System 553 Fixed Exchange Rates: The Classical Gold Summary 518 Concepts for Review 519 Further Standard 554 Hume’s Adjustment Mechanism Reading and Internet Websites 519 Questions for Updating Hume to Modern Macroeconomics Discussion 520 International Monetary Institutions After World War II 557 The International Monetary Fund The World Bank The Bretton Woods System Chapter 26 Intervention Flexible Exchange Rates 559 Today’s The Challenge of Economic Development 521 Hybrid System 560 Concluding Thoughts A. Population Growth and Development 521 Summary 560 Concepts for Review 561 Further Malthus and the Dismal Science 521 Limits to Growth Reading and Internet Websites 562 Questions for and Neo-Malthusianism Discussion 562 B. Economic Growth in Poor Countries 524 Aspects of a Developing Country 524 Chapter 28 Human Development The Four Elements Open-Economy Macroeconomics 564 in Development 525 Human Resources Natural Resources Capital Technological Change and A. Foreign Trade and Economic Activity 564 Innovations Vicious Cycles to Virtuous Circles Net Exports and Output in the Open Economy Strategies of Economic Development 531 The Determinants of Trade and Net Exports Short-Run Backwardness Hypothesis Industrialization Impact of Trade on GDP 566 The Marginal Propensity vs. Agriculture State vs. Market Growth and to Import and the Spending Line The Open-Economy Outward Orientation Summary Judgment Multiplier Trade and Finance for the United States Under Flexible Exchange Rates 569 The Monetary C. Alternative Models for Development 533 Transmission Mechanism in an Open Economy 571 A Bouquet of “ISMS” 533 The Central Dilemma: Market vs. Command The Asian Models 534 Asian B. Interdependence in the Global Economy 574 Dragons The Rise of China Socialism 535 The Economic Growth in the Open Economy 574 Saving and Failed Model: Centrally Planned Economies 536 Investment in the Open Economy 574 Determination of Baleful Prophesies From Textbooks to Tactics: Soviet- Saving and Investment at Full Employment Promoting Style Command Economy From Marx to Market A Growth in the Open Economy 578 Final Note of Cautious Optimism C. International Economic Issues 580 Summary 539 Concepts for Review 540 Further Competitiveness and Productivity 580 “The Reading and Internet Websites 540 Questions for Deindustrialization of America” Trends in Discussion 541 Productivity The European Monetary Union 581 Toward a Common Currency: The Euro Costs and Benefits of Monetary Union Final Assessment 583 Chapter 27 Exchange Rates and the International Summary 583 Concepts for Review 585 Further Financial System 543 Reading and Internet Websites 585 Questions for Trends in Foreign Trade 544 Discussion 585 sam11290_fm.indd xiv 2/26/09 1:31:19 PM  CONTENTS xv PART SEVEN C. Dilemmas of Anti-Inflation Policy 624 UNEMPLOYMENT, INFLATION, How Long Is the Long Run? How Much Does It Cost AND ECONOMIC POLICY to Reduce Inflation? Credibility and Inflation 587 Policies to Lower Unemployment Summary 627 Concepts for Review 628 Further Chapter 29 Reading and Internet Websites 628 Questions for Unemployment and the Foundations Discussion 629 of Aggregate Supply 589 A. The Foundations of Aggregate Supply 589 Chapter 31 Determinants of Aggregate Supply 590 Potential Frontiers of Macroeconomics 630 Output Input Costs Aggregate Supply in the Short Run and Long Run 593 Sticky Wages and Prices and A. The Economic Consequences of the Upward-Sloping AS Curve the Government Debt 630 Fiscal History 631 Government Budget Policy 632 B. Unemployment 594 Actual, Structural, and Cyclical Budgets The Measuring Unemployment 595 Impact of Economics of the Debt and Deficits 633 The Short- Unemployment 595 Economic Impact Social Run Impact of Government Deficits 633 Short Impact Okun’s Law 597 Economic Interpretation Run vs. Long Run Fiscal Policy and the Multiplier of Unemployment 597 Equilibrium Unemployment Model Government Debt and Economic Growth 634 Disequilibrium Unemployment Microeconomic Historical Trends External vs. Internal Debt Foundations of Inflexible Wages Labor Market Efficiency Losses from Taxation Displacement of Issues 601 Who Are the Unemployed? Duration Capital Debt and Growth of Unemployment Sources of Joblessness Unemployment by Age B. Advances in Modern Macroeconomics 638 Classical Macroeconomics and Say’s Law 639 Say’s Law Summary 606 Concepts for Review 607 Further of Markets Modern Classical Macroeconomics 639 Reading and Internet Websites 607 Questions for Rational Expectations Real Business Cycles The Discussion 607 Ricardian View of Fiscal Policy Efficiency Wages Supply-Side Economics Policy Implications 642 Policy Ineffectiveness The Desirability of Fixed Rules A New Synthesis? Chapter 30 Inflation 609 C. Stabilizing the Economy 643 The Interaction of Monetary and Fiscal Policies 643 A. Definition and Impact of Inflation 609 Demand Management The Fiscal-Monetary Mix What Is Inflation? 609 The History of Inflation Rules vs. Discretion 646 Budget Constraints on Three Strains of Inflation Anticipated vs. Legislatures? Monetary Rules for the Fed? Unanticipated Inflation The Economic Impacts of Inflation 614 Impacts on Income and Wealth D. Economic Growth and Human Welfare 648 Distribution Impacts on Economic Efficiency The Spirit of Enterprise 649 Fostering Technological Macroeconomic Impacts What Is the Optimal Rate of Advance Inflation? Summary 650 Concepts for Review 652 Further B. Modern Inflation Theory 616 Reading and Internet Websites 652 Questions for Prices in the AS - AD Framework 617 Expected Discussion 652 Inflation Demand-Pull Inflation Cost-Push Inflation and “Stagflation” Expectations and Inflation Price Levels vs. Inflation The Phillips Curve 620 Short- Glossary of Terms 654 Run Phillips Curve The Nonaccelerating Inflation Rate of Unemployment From Short Run to Long Run Index 677 The Vertical Long-Run Phillips Curve Quantitative Estimates Doubts about the NAIRU Review sam11290_fm.indd xv 2/25/09 7:09:55 PM  A Centrist Proclamation Sciences advance. But they can also recede. That is true of economics as well. By the end of World War II, the leading introductory textbooks in economics had lost their vitality and relevance. Nature abhors a vacuum. The first edition of this textbook appeared as the 1948 edition of Samuelson’s ECONOMICS. It introduced macro- economics into our colleges and served as the gold standard for teaching economics in an increasingly globalized world. Both the economy and economics have changed greatly over the years. Successive editions of this textbook, which became Samuelson-Nordhaus ECONOMICS, have documented the evolutionary changes in the world economy and have provided the latest rigorous economic thinking at the frontier of the discipline. To our surprise, this nineteenth edition may be one of the most significant of all revisions. We call this the centrist edition. It proclaims the value of the mixed economy — an economy that combines the tough discipline of the market with fair- minded governmental oversight. Centrism is of vital importance today because the global economy is in a ter- rible meltdown — perhaps worse than any cyclical slump since the Great Depression of the 1930s. Alas, many textbooks have strayed too far toward over-complacent libertarianism. They joined the celebration of free-market finance and supported dismantling regulations and abolishing oversight. The bitter harvest of this celebra- tion was seen in the irrationally exuberant housing and stock markets that collapsed and led to the current financial crisis. The centrism we describe is not a prescription that is intended to persuade readers away from their beliefs. We are analysts and not cult prescribers. It is not ideology that breeds centrism as our theme. We sift facts and theories to determine the consequences of Hayek-Friedman libertarianism or Marx-Lenin bureaucratic communism. All readers are free to make up their own minds about best ethics and value judgments. Having surveyed the terrain, this is our reading: Economic history confirms that neither unregulated capitalism nor overregulated central planning can organize a modern society effectively. The follies of the left and right both mandate centrism. Tightly controlled cen- tral planning, which was widely advocated in the middle decades of the last century, was abandoned after it produced stagnation and unhappy consumers in communist countries. What exactly was the road to serfdom that Hayek and Friedman warned us against? They were arguing against social security, a minimum wage, national parks, progressive taxation, and government rules to clean up the environment or slow global warming. People who live in high-income societies support these programs with great majorities. Such mixed economies involve both the rule of law and the limited liberty to compete. xvi sam11290_fm.indd xvi 2/25/09 7:09:55 PM  A CENTRIST PROCLAMATION xvii We survey the centrist approach to economics in the pages that follow. Millions of students in China, India, Latin America, and emerging societies have sought economic wisdom from these pages. Our task is to make sure that the latest and best thinking of economists is contained here, describing the logic of the modern mixed economy, but always presenting in a fair manner the views of those who criticize it from the left and the right. But we go a step further in our proclamation. We hold that there must be a limited centrism. Our knowledge is imperfect, and society’s resources are limited. We are also mindful of our current predicament. We see that unfettered capitalism has generated painful inequalities of income and wealth, and that supply-side fis- cal doctrines have produced large government deficits. We observe that the major innovations of modern finance, when operating in an unregulated system, have pro- duced trillions of dollars of losses and led to the ruin of many venerable financial institutions. Only by steering our societies back to the limited center can we ensure that the global economy returns to full employment where the fruits of progress are more equally shared. Paul A. Samuelson February 2009 sam11290_fm.indd xvii 2/25/09 7:09:55 PM  Preface As we complete this nineteenth edition of Econom- financial markets in the twenty-first century were ics, the U.S. economy has fallen into a deep reces- the modern counterpart of banking panics of an sion as well as the most serious financial crisis since earlier era. the Great Depression of the 1930s. The federal gov- In the larger scene, the world has become ernment has invested hundreds of billions of dol- increasingly interconnected as computers and lars to protect the fragile network of the U.S. and communications create an ever more competi- indeed the world financial system. The new Obama tive global marketplace. Developing countries like administration has worked with Congress to pass the China and India—two giants that relied heavily largest stimulus package in American history. The on central planning until recently—need a firm economic turmoil, and the manner in which coun- understanding of the institutions of a market tries respond to it, will shape the American economy, economy if they are to attain the living standards its labor market, and the world financial system for of the affluent. At the same time, there is growing years to come. concern about international environmental prob- We should remember, however, that the finan- lems and the need to forge agreements to preserve cial crisis of 2007–2009 came after more than a our precious natural heritage. All these fascinating half-century of spectacular increases in the living changes are part of the modern drama that we call standards of most of the world, particularly those economics. living in the affluent countries of North America, Western Europe, and East Asia. People are ask- ing, “Will the twenty-first century repeat the suc- ECONOMICS Reborn cesses of the last century? Will the affluence of For more than half a century, this book has served the few spread to poor countries? Alternatively, as the standard-bearer for the teaching of intro- will the four horsemen of the economic apoca- ductory economics in classrooms in America and lypse — famine, war, environmental degradation, throughout the world. Each new edition distills and depression — spread to the North? Do we have the best thinking of economists about how mar- the wisdom to reshape our financial systems so that kets function and about what countries can do to they can continue to provide the investments that improve people’s living standards. But economics have fueled economic growth up to now? And what has changed profoundly since the first edition of should we think about environmental threats such this text appeared in 1948. Moreover, because eco- as global warming?” nomics is above all a living and evolving organism, These are ultimately the questions we address in Economics is born anew each edition as the authors this new edition of Economics. have the exciting opportunity to present the latest thinking of modern economists and to show how the subject can contribute to a more prosperous world. The Growing Role of Markets You might think that prosperity would lead to a Our task then is this: We strive to present a clear, declining interest in economic affairs, but para- accurate, and interesting introduction to the prin- doxically an understanding of the enduring truths ciples of modern economics and to the institutions of economics has become even more vital in the of the American and world economies. Our primary affairs of people and nations. Those who remem- goal is to emphasize the core economic principles ber history recognize that the crises that threatened that will endure beyond today’s headlines. xviii sam11290_fm.indd xviii 2/25/09 7:09:55 PM  PREFACE xix THE NINETEENTH EDITION also track innovations in policy, such as the changing approach to monetary policy in the Federal Reserve. As economics and the world around it evolve, so does this book. Our philosophy continues to emphasize 3. Small Is Beautiful. Economics has increased its six basic principles that underlie earlier editions and scope greatly over the past half-century. The flag of this revision: economics flies over its traditional territory of the marketplace, but it also covers the environment, legal 1. The Core Truths of Economics. Often, economics studies, statistical and historical methods, gender and appears to be an endless procession of new puzzles, racial discrimination, and even family life. But at its problems, and dilemmas. But as experienced teach- core, economics is the science of choice. That means ers have learned, there are a few basic concepts that that we, as authors, must choose the most important underpin all of economics. Once these concepts and enduring issues for this text. In a survey, as in a have been mastered, learning is much quicker and meal, small is beautiful because it is digestible. more enjoyable. We have therefore chosen to focus on the Choosing the subjects for this text required many central core of economics—on those enduring truths that hard choices. To select these topics, we continually will be just as important in the twenty-first century as they survey teachers and leading scholars to determine were in the twentieth. Microeconomic concepts such the issues most crucial for an informed citizenry and as scarcity, efficiency, the gains from specialization, a new generation of economists. We drew up a list and the principle of comparative advantage will of key ideas and bid farewell to material we judged be crucial concepts as long as scarcity itself exists. inessential or dated. At every stage, we asked whether In macroeconomics, we emphasize the two central the material was, as best we could judge, necessary for a approaches: Keynesian economics to understand student’s understanding of the economics of the twenty-first business cycles, and the neoclassical growth model to century. Only when a subject passed this test was it understand longer-term growth trends. Within these included. The result of this campaign is a book that frameworks, established approaches such as the con- has lost more than one-quarter of its weight in the sumption function take place alongside new develop- last few editions and has trimmed three chapters for ments in financial macroeconomics. this edition. Farm economics, the history of labor unions, Marxian economics, advanced treatment 2. Innovation in Economics. Economics has made of general equilibrium, regulatory developments, many advances in understanding the role of inno- and the lump-of-labor fallacy have been trimmed to vation. We are accustomed to the dizzying speed of make room for modern financial theory, real busi- invention in software, where new products appear ness cycles, and global public goods. monthly. The Internet is revolutionizing communi- cations and study habits and is making inroads into 4. Policy Issues for Today. For many students, the commerce. lure of economics is its relevance to public policy. The In addition, we emphasize innovations in eco- nineteenth edition emphasizes policy in both micro- nomics itself. Economists are innovators and inven- economics and macroeconomics. As human societies tors in their own way. History shows that economic grow, they begin to overwhelm the environment and ideas can produce tidal waves when they are applied ecosystems of the natural world. Environmental eco- to real-world problems. Among the important inno- nomics helps students understand the externalities vations we survey is the application of economics associated with economic activity and then analyzes to our environmental problems through emissions- different approaches to making human economies trading plans. We explain how behavioral economics compatible with natural systems. New examples bring has changed views of consumer theory and finance. the core principles of microeconomics to life. One of the most important innovations for our com- A second area of central importance is financial mon future is dealing with global public goods like and monetary economics. We have completely revised climate change, and we analyze new ways to deal our treatment here. Previous treatment emphasized with international environmental problems, includ- the quantity of money as the prime channel through ing approaches such as the Kyoto Protocol. We must which the central bank influences the economy. This sam11290_fm.indd xix 2/25/09 7:09:55 PM  xx PREFACE approach no longer reflects the realities of a modern over every page to improve this survey of introductory financial system. Today, the Fed exercises its policies economics. We have received thousands of comments by targeting the short-run interest rate and providing and suggestions from teachers and students and have liquidity to financial markets. With the nineteenth incorporated their counsel in the nineteenth edition. edition, we fully incorporate these changes in three central chapters. Optional Matter Economics courses range from one-quarter surveys 5. Debates about Globalization. The last decade has to year-long intensive honors courses. This textbook witnessed pitched battles over the role of interna- has been carefully designed to meet all situations. tional trade in our economies. Some argue that “out- If yours is a fast-paced course, you will appreciate sourcing” is leading to the loss of thousands of jobs to the careful layering of the more advanced material. India and China. Immigration has been a hot-burner Hard-pressed courses can skip the advanced sections issue, particularly in communities with high unem- and chapters, covering the core of economic analysis ployment rates. Whatever the causes, the United without losing the thread of the economic reasoning. States was definitely faced with the puzzle of rapid This book will challenge the most advanced young output growth and a very slow growth in employment scholar. Indeed, many of today’s leading economists in the first decade of the twenty-first century. have written to say they have relied upon Economics One of the major debates of recent years has been all along their pilgrimage to the Ph.D. over “globalization,” which concerns the increasing economic integration of different countries. Ameri- Format cans have learned that no country is an economic The nineteenth edition employs in-text logos and island. Immigration and international trade have pro- material to help illustrate the central topics. You found effects on the goods that are available, the prices will find a distinctive logo indicating warnings for we pay, and the wages we earn. Terrorism can wreak the fledgling economist, examples of economics in havoc on the economy at home, while war causes fam- action, and biographical material on the great econo- ines, migration, and reduced living standards in Africa. mists of the past and present. But these central topics No one can fully understand the impact of growing are not drifting off by themselves in unattached boxes. trade and capital flows without a careful study of the Rather, they are integrated right into the chapter so theory of comparative advantage. We will see how the that students can read them and see how they illus- flow of financial capital has an enormous influence trate the core material. Keep these sections in mind on trading patterns as well as understand why poor as you read through the text. Each one is either: countries like China save while rich countries like the A warning that students should pause to ensure United States are borrowers. The nineteenth edition that they understand a difficult or subtle point. continues to increase the material devoted to interna- An interesting example or application of the tional economics and the interaction between inter- analysis, often representing one of the major national trade and domestic economic events. innovations of modern economics. A biography of an important economic figure. 6. Clarity. Although there are many new features in the nineteenth edition, the pole star for our pilgrim- New features in this edition include fresh end- age for this edition has been to present economics of-chapter questions, with a special accent on short clearly and simply. Students enter the classroom with problems that reinforce the major concepts surveyed a wide range of backgrounds and with many precon- in the chapter. ceptions about how the world works. Our task is not to Terms printed in bold type in the text mark the change students’ values. Rather, we strive to help stu- first occurrence and definition of the most important dents understand enduring economic principles so words that constitute the language of economics. that they may better be able to apply them—to make But these many changes have not altered one bit the world a better place for themselves, their families, the central stylistic beacon that has guided Economics and their communities. Nothing aids understanding since the first edition: to use simple sentences, clear better than clear, simple exposition. We have labored explanations, and concise tables and graphs. sam11290_fm.indd xx 2/25/09 7:09:55 PM  PREFACE xxi For Those Who Prefer Macro First CourseSmart eTextbook Although, like the previous edition, this new edition For roughly half the cost of a print book, you can has been designed to cover microeconomics first, reduce your impact on the environment by purchas- many teachers continue to prefer beginning with ing the electronic edition of the nineteenth edition macroeconomics. Many believe that the beginning of Samuelson and Nordhaus, Economics. CourseSmart student finds macro more approachable and will eTextbooks, available in a standard online reader, more quickly develop a keen interest in economics retain the exact content and layout of the print text, when the issues of macroeconomics are encountered plus offer the advantage of digital navigation to first. We have taught economics in both sequences which students are accustomed. Students can search and find both sequences work well. the text, highlight, take notes, and use e-mail tools to Whatever your philosophy, this text has been share notes with their classmates. CourseSmart also carefully designed for it. Instructors who deal with includes tech support in case help is ever needed. To microeconomics first can move straight through the buy Economics, 19e as an eTextbook, or to learn more chapters. Those who wish to tackle macroeconomics about this digital solution, visit www.CourseSmart.com first should skip from Part One directly to Part Five, and search by title, author, or ISBN. knowing that the exposition and cross-references have been tailored with their needs in mind. Economics in the Computer Age In addition, for those courses that do not cover The electronic age has revolutionized the way that the entire subject, the nineteenth edition is avail- scholars and students can access information. In eco- able in two paperback volumes, Microeconomics nomics, the information revolution allows us quick (Chapters 1 to 18 of the full text) and Macroeconomics access to economic statistics and research. An impor- (Chapters 1 to 3, 15, and 19 to 31 of the full text). tant feature of the nineteenth edition is the section “Economics and the Internet,” which appears just Auxiliary Teaching and Study Aids before Chapter 1. This little section provides a road Students of this edition will benefit greatly from the map for the state of economics on the Information Study Guide. This carefully designed supplement was Superhighway. updated by Walter Park of the American University. In addition, each chapter has an updated section When used alongside classroom discussions and at the end with suggestions for further reading and when employed independently for self-study, the addresses of websites that can be used to deepen stu- Study Guide has proved to be an impressive success. dent understanding or find data and case studies. There is a full-text Study Guide, as well as micro and macro versions. The Study Guides are available elec- tronically for online purchase or packaged with the Acknowledgments text via code-card access. This book has two authors but a multitude of col- In addition, instructors will find both the laborators. We are profoundly grateful to colleagues, Instructor’s Resource Manual, updated for this edition reviewers, students, and McGraw-Hill’s staff for con- by Carlos Liard-Muriente of Central Connecticut tributing to the timely completion of the nineteenth State University, and the Test Bank, fully revised by edition of Economics. Colleagues at MIT, Yale, and Craig Jumper of Rich Mountain Community College. elsewhere who have graciously contributed their com- These supplements are incredibly useful for instruc- ments and suggestions over the years include William tors planning their courses and preparing multiple C. Brainard, E. Cary Brown, John Geanakoplos, sets of test questions in both print and computerized Robert J. Gordon, Lyle Gramley, Gerald Jaynes, formats. The graphs and figures in this edition can Paul Joskow, Alfred Kahn, Richard Levin, Robert also be viewed electronically as PowerPoint slides. Litan, Barry Nalebuff, Merton J. Peck, Gustav Ranis, The slides can be downloaded from our website Herbert Scarf, Robert M. Solow, James Tobin, Janet (www.mhhe.com/samuelson19e ). The website also con- Yellen, and Gary Yohe. tains chapter summaries, self-grading practice quiz- In addition, we have benefited from the tireless zes, and links to the websites suggested for further devotion of those whose experience in teaching ele- research at the end of each chapter. mentary economics is embodied in this edition. We sam11290_fm.indd xxi 2/26/09 3:38:40 PM  xxii PREFACE are particularly grateful to the reviewers of the nine- colonialism and imperialism. Two decades ago, eco- teenth edition. They include: nomic revolutions in Eastern Europe, in the former Soviet Union, in China, and elsewhere tore those Esmael Adibi, Chapman University societies apart. Young people battered down walls, Abu Dowlah, Saint Francis College overthrew established authority, and agitated for Adam Forest, University of Washington, Tacoma democracy and a market economy because of discon- Harold Horowitz, Touro College tent with their centralized socialist governments. Jui-Chi Huang, Harrisburg Area Community College Students like yourselves were marching, and even Carl Jensen, Iona College, New Rochelle going to jail, to win the right to study radical ideas Craig Jumper, Rich Mountain Community College and learn from Western textbooks like this one in the Carlos Liard-Muriente, Central Connecticut State University hope that they may enjoy the freedom and economic Phillip Letting, Harrisburg Area Community College prosperity of democratic market economies. Ibrahim Oweiss, Georgetown University Walter Park, American University Gordana Pesakovic, Argosy University, Sarasota The Intellectual Marketplace Harold Peterson, Boston College Just what is the market that students in repressed David Ruccio, University of Notre Dame societies are agitating for? In the pages that follow, Derek Trunkey, George Washington University you will learn about the promise and perils of global- Mark Witte, Northwestern University ization, about the fragility of financial markets, about Jiawen Yang, George Washington University unskilled labor and highly trained neurosurgeons. You have probably read in the newspaper about the Students at MIT, Yale, and other colleges and uni- gross domestic product, the consumer price index, versities have served as an “invisible college.” They the Federal Reserve, and the unemployment rate. constantly challenge and test us, helping to make this After you have completed a thorough study of this edition less imperfect than its predecessor. Although textbook, you will know precisely what these words they are too numerous to enumerate, their influence mean. Even m