Economics For Dummies, 3rd Edition
3rd Edition
Published on 22. June 2018
Book
Paperback/Softback
432 pages
978-1-119-47638-2 (ISBN)
Description
Understand the science of wealth and prosperity
Find FREE quizzes for every chapter online
Learn about good markets, bad monopolies, and inflation
Decode budget deficits and trade gains
This book gives you everything you need to understand our rapidly evolving economy-as well as the economic fundamentals that never change. What's the best way to fight poverty? How can governments spur employment and wage growth? What can be done to protect endangered species and the environment? This book explains the answers to those questions-and many more-in plain English.
Inside...
Get the fascinating scoop on behavioral economics
Understand the model of supply and demand
See how governments use monetary and fiscal policy to fight recessions
Discover game theory and the secrets of cooperation
Find FREE quizzes for every chapter online
Learn about good markets, bad monopolies, and inflation
Decode budget deficits and trade gains
This book gives you everything you need to understand our rapidly evolving economy-as well as the economic fundamentals that never change. What's the best way to fight poverty? How can governments spur employment and wage growth? What can be done to protect endangered species and the environment? This book explains the answers to those questions-and many more-in plain English.
Inside...
Get the fascinating scoop on behavioral economics
Understand the model of supply and demand
See how governments use monetary and fiscal policy to fight recessions
Discover game theory and the secrets of cooperation
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Sean Flynn, PhD, is an associate professor of economics at Scripps College in Claremont, California. A specialist in behavioral economics, Dr. Flynn has provided economic commentary for numerous news outlets, including NPR, ABC, FOX Business, and Forbes.
Content
Introduction 1
About This Book 1
Foolish Assumptions 3
Icons Used in This Book 3
Beyond the Book 4
Where to Go from Here 4
Part 1: Economics: The Science of How People Deal With Scarcity 5
Chapter 1: What Economics is and Why You Should Care 7
Considering a Little Economic History 8
Pondering just how nasty, brutish, and short life used to be 8
Identifying the institutions that raise living standards 9
Looking toward the future 10
Framing Economics as the Science of Scarcity 10
Sending Microeconomics and Macroeconomics to Separate Corners 11
Getting up close and personal: Microeconomics 11
Zooming out: Macroeconomics and the big picture 14
Understanding How Economists Use Models and Graphs 16
Introducing your first model: The demand curve 17
Drawing your own demand curve 20
Chapter 2: Cookies Or Ice Cream? Exploring Consumer Choices 21
Describing Human Behavior with a Choice Model 22
Pursuing Personal Happiness 23
Using utility to measure happiness 23
Taking "selfless" actions into account 23
Self-interest can promote the common good 24
You Can't Have Everything: Examining Limitations 25
Resource constraints 25
Technology constraints 25
Time constraints 26
Opportunity cost: The unavoidable cost 26
Making Your Choice: Deciding What and How Much You Want 27
Exploring Violations and Limitations of the Economist's Choice Model 29
Understanding uninformed decision-making 29
Making sense of irrationality 30
Chapter 3: Producing Stuff To Maximize Happiness 33
Figuring Out What's Possible to Produce 34
Classifying resources 35
Clarifying human capital 35
Diminishing returns 36
Allocating resources 37
Graphing your production possibilities 38
Reaching new frontiers with better technology 41
Deciding What to Produce 42
Comparing market results and government interventions 43
Opting for a mixed economy 49
Promoting Technology and Innovation 52
Part 2: Microeconomics: The Science of Consumer and Firm Behavior 55
Chapter 4: Supply and Demand Made Easy 57
Deconstructing Demand 58
Prices and other stuff: Looking at what affects quantity demanded 59
Graphing the demand curve 60
Opportunity costs: Setting the slope of the demand curve 62
Elasticity: Looking at extreme demand cases 63
Sorting Out Supply 65
Graphing the supply curve 65
Using elasticity to understand extreme -supply cases 69
Bringing Supply and Demand Together 70
Market equilibrium: Seeking a balance 71
Demonstrating the stability of the market equilibrium 72
Adjusting to new market equilibriums when supply or demand changes 74
Price Controls: Keeping Prices Away from Market Equilibrium 76
Setting upper limits with price ceilings 77
Propping up prices with price floors 79
Chapter 5: Introducing Homo Economicus, The Utility-Maximizing Consumer 83
Choosing by Ranking 84
Getting Less from More: Diminishing Marginal Utility 85
Choosing Among Many Options When Facing a Limited Budget 88
Trying to buy as much (marginal) utility as you can 88
Purchasing the best combination of two goods to maximize total utility 91
Aiming for equal marginal utility per dollar 93
Deriving Demand Curves from Diminishing Marginal Utility 95
Seeing how price changes affect quantities demanded 96
Graphing the price and quantity changes to form a demand curve 97
Chapter 6: The Core of Capitalism: The Profitmaximizing Firm 101
A Firm's Goal: Maximizing Profits 102
Facing Competition 103
Listing the requirements for perfect competition 103
Taking prices but setting quantities 104
Distinguishing between accounting profits and economic profits 106
Analyzing a Firm's Cost Structure 107
Focusing on costs per unit of output 108
Examining average variable costs 110
Watching average fixed costs fall 111
Tracking the movement of average total costs 111
Focusing on marginal costs 112
Noticing where marginal cost equals average cost 113
Comparing Marginal Revenues with Marginal Costs 115
Finding where marginal revenue equals marginal cost 116
Visualizing profits 118
Visualizing losses 120
Pulling the Plug: When Producing Nothing Is Your Best Bet 121
Distinguishing between the short run and the long run in microeconomics 122
The short-run shutdown condition: Variable costs exceed total revenues 123
The long-run shutdown condition: Total costs exceed total revenues 125
Chapter 7: Why Economists Love Free Markets And Competition 127
Ensuring That Benefits Exceed Costs: Competitive Free Markets 128
Examining the traits of a properly functioning market 129
Analyzing the efficiency of free markets 130
Measuring everyone's gains with total surplus 132
When Free Markets Lose Their Freedom: Dealing with Deadweight Losses 138
Coming up short: The deadweight loss from a price ceiling 139
Death and taxes: Finding the deadweight loss of a tax 140
Hallmarks of Perfect Competition: Zero Profits and Lowest Possible Costs 143
Understanding the causes and consequences of perfect competition 144
Peering into the process of perfect -competition 145
Graphing how profits guide firm entry and exit 146
Chapter 8: Monopolies: Bad Behavior Without Competition 151
Examining Profit-Maximizing Monopolies 152
Zeroing in on the problems monopolies cause 152
Identifying the source of the problem: -Decreasing marginal revenues 153
Choosing an output level to maximize profits 158
Comparing Monopolies with Competitive Firms 161
Looking at output and price levels 162
Deadweight losses: Quantifying the harm caused by monopolies 163
Losing efficiency 164
Considering Good Monopolies 165
Encouraging innovation and investment with patents 165
Reducing annoyingly redundant -competitors 165
Keeping costs low with natural monopolies 166
Regulating Monopolies 167
Subsidizing a monopoly to increase output 167
Imposing minimum output requirements 167
Regulating monopoly pricing 168
Breaking up a monopoly into several -competing firms 171
Chapter 9: Oligopoly and Monopolistic Competition: Middle Grounds 173
Oligopolies: Looking at the Allure of Joining Forces 174
Sharing power over prices 174
Cartel behavior: Trying to imitate -monopolists 175
Considering the criteria for coordinating a cartel 176
Understanding Incentives to Cheat the Cartel 176
Fleshing out the Prisoner's Dilemma 177
Enforcing the agreement: Resolving the dilemma with credible threats 180
Seeing that OPEC is trapped in a Prisoner's Dilemma 181
Using an enforcer to help OPEC members stick to quotas 182
Regulating Oligopolies 183
Breaking up dominant firms 184
Attempting to apply antitrust laws 184
Studying a Hybrid: Monopolistic Competition 185
Benefiting from product differentiation 185
Facing profit limits 186
Part 3: Applying The Theories of Microeconomics 191
Chapter 10: Property Rights and Wrongs 193
Allowing Markets to Reach Socially Optimal Outcomes 194
Examining Externalities: The Costs and Benefits Others
Feel from Your Actions 195
Noting the effects of negative externalities 196
Accepting positive amounts of negative externalities 198
Dealing with negative externalities 199
Calculating the consequences of positive externalities 200
Subsidizing things that provide positive externalities 201
Tragedy of the Commons: Overexploiting Commonly Owned Resources 202
Overgrazing on a commonly owned field 202
Extinctions and poor property rights 203
Avoiding the tragedy 204
Chapter 11:Asymmetric Information And Public Goods 205
Facing Up to Asymmetric Information 206
Realizing that asymmetric information -limits trade 206
Souring on the lemons problem: The used car market 207
Issuing insurance when you can't tell individuals apart 211
Providing Public Goods 215
Taxing to provide public goods 216
Enlisting philanthropy to provide public goods 216
Providing a public good by selling a related private good 217
Ranking new technology as a public good 219
Chapter 12: Health Economics And Healthcare Finance 221
Defining Health Economics and Healthcare Finance 222
Noting the Limits of Health Insurance 222
Adverse selection: Looking at who buys insurance 223
Combating adverse selection 224
Comparing Healthcare Internationally 227
Inflated Demand: Suffering from "Free" and Reduced-Cost Healthcare 228
Diverting funds to lower-value uses 228
Rationing healthcare 229
Facing shortages and higher prices 230
Combatting inefficiency with bureaucracy 231
Investigating Singapore's Secrets 233
Exploring cost-saving features 233
Weighing costs and benefits of medical -procedures 234
Supporting cost-cutting innovations 234
Trying to copy Singapore's success 235
Chapter 13:Behavioral Economics: Investigating Irrationality 237
Explaining the Need for Behavioral Economics 238
Complementing Neo-Classical Economics with Behavioral Economics 239
Examining our Amazing, Efficient, and Error-Prone Brains 240
Deciphering heuristics 240
Deconstructing brain modularity 242
Cogitating on cognitive biases 242
Surveying Prospect Theory 244
Shrinking packages and loss aversion 245
Framing effects and advertising 245
Anchoring and credit card bills 246
Examining the endowment effect 247
Stipulating status quo bias 247
Countering Myopia and Time Inconsistency 248
Focusing on myopia 249
Tattling on time inconsistency 249
Beating self-control problems with -precommitments 250
Gauging Fairness and Self-Interest 251
Defining fairness 251
Examining the experimental evidence for fairness 251
Digesting the experimental evidence on fairness 253
Part 4: Macroeconomics: The Science of Economic Growth And Stability 255
Chapter 14: How Economists Measure the Macroeconomy 257
Getting a Grip on the GDP (and Its Parts) 258
Leaving some things out of GDP 259
Tallying up what counts in GDP 259
Accounting for streams of incomes, and assets 260
Following the funds, around and around 262
Counting stuff when it's made, not when it's sold 263
Watching GDP rise with the good, the bad, and the ugly 264
Diving In to the GDP Equation 265
"C" is for consumption (that's good enough for me!) 266
"I" is for investment in capital stock 268
The big "G" (government, that is) 269
Measuring foreign trade with "NX" 270
Making Sense of International Trade and Its Effect on the Economy 271
"Trade deficit" ain't fightin' words 272
Considering assets - not just cash 273
Wielding a comparative advantage 274
Chapter 15 : Inflation Frustration: Why More Money Isn't Always Good 277
Buying an Inflation: When Too Much Money Is a Bad Thing 279
Balancing money supply and demand 279
Giving in to the inflation temptation 282
Tallying up the effects of inflation 286
Measuring Inflation 287
Creating your very own market basket 288
Calculating the inflation rate 289
Setting up a price index 290
Determining the real standard of living with the price index 291
Identifying price index problems 292
Pricing the Future: Nominal and Real Interest Rates 293
Using the Fisher equation 294
Realizing that predictions aren't perfect 294
Chapter 16: Understanding Why Recessions Happen 297
Introducing the Business Cycle 298
Striving for Full-Employment Output 299
Returning to Y*: The Natural Result of Price Adjustments 300
Responding to Economic Shocks: -Short-Run and Long-Run Effects 301
Defining some critical terms 301
The tao of P: Looking at price adjustments in the long run 303
A shock to the system: Adjusting to a shift in aggregate demand 304
Dealing with fixed prices in the short run 305
Putting together the long and short of it 308
Heading toward Recession: Getting Stuck with Sticky Prices 309
Cutting wages or cutting workers 310
Adding up the costs of wages and profits 310
Returning to Y* with and without -government intervention 311
Achieving Equilibrium with Sticky Prices: The Keynesian Model 312
Adjusting inventories instead of prices 314
Boosting GDP in the Keynesian model 322
Chapter 17: Fighting Recessions With Monetary And Fiscal Policy 325
Stimulating Demand to End Recessions 326
Aiming for full-employment output 326
Back to work: Shifting the AD curve right 328
Generating Inflation: The Risk of Too Much Stimulation 328
Trying to increase output beyond Y* 329
Tracing the movement of real wages 331
Failing to stimulate: What happens when a stimulus is expected 333
Figuring Out Fiscal Policy 336
Increasing government spending to help end recessions 337
Dealing with deficits 338
Dissecting Monetary Policy 340
Identifying the benefits of fiat money over the gold standard 341
Realizing you can have too much money! 342
Getting the basics about bonds 344
Seeing the link between bond prices and interest rates 345
Changing the money supply to change interest rates 346
Lowering interest rates to stimulate the economy 346
Understanding how rational expectations can limit monetary policy 348
Examining quantitative easing and the Great Recession 350
Chapter 18: Grasping Origins and Effects of Financial Crises 353
Understanding How Debt-Driven Bubbles Develop 354
Embracing borrowing in a booming economy 355
Offering larger loans as collateral -values rise 355
Relaxing lending standards 356
Borrowing more in hopes of profit 356
Watching the process gain momentum 357
Seeing the Bubble Burst 357
Deleveraging: Trying to ditch debt as -prices fall 358
Comprehending bank collapses caused by
bursting bubbles 358
Leading into a recession 359
After the Crisis: Looking at Recovery 360
Enduring a broken banking system 360
Struggling with structural mismatches 361
Noting the limits of government policy 362
Part 5: The Part of Tens 363
Chapter 19: Ten Seductive Economic Fallacies 365
The Lump of Labor 365
The World Is Facing Overpopulation 366
Sequence Indicates Causation 366
Protectionism Is the Best Solution to Foreign Competition 367
The Fallacy of Composition 368
If It's Worth Doing, Do It 100 Percent 368
Free Markets Are Dangerously Unstable 369
Low Foreign Wages Mean That Rich Countries Can't Compete 369
Tax Rates Don't Affect Work Effort 370
Forgetting Unintended Consequences 370
Chapter 20: Ten Economic Ideas to Hold Dear 371
Self-Interest Can Improve Society 371
Free Markets Require Regulation 372
Economic Growth Relies on Innovation 372
Freedom and Democracy Make Us Richer 372
Education Raises Living Standards 372
Intellectual Property Boosts Innovation 373
Weak Property Rights Cause All Environmental Problems 373
International Trade Is a Good Thing 373
Government Can Provide Public Goods 374
Preventing Inflation Is Easy 374
Chapter 21: Ten (Or So) Famous Economists 375
Adam Smith 375
David Ricardo 376
Karl Marx 376
Alfred Marshall 377
John Maynard Keynes 378
Kenneth Arrow and Gerard Debreu 378
Milton Friedman 378
Paul Samuelson 379
Robert Solow 379
Gary Becker 380
Robert Lucas 380
Appendix: Glossary 383
Index 389
About This Book 1
Foolish Assumptions 3
Icons Used in This Book 3
Beyond the Book 4
Where to Go from Here 4
Part 1: Economics: The Science of How People Deal With Scarcity 5
Chapter 1: What Economics is and Why You Should Care 7
Considering a Little Economic History 8
Pondering just how nasty, brutish, and short life used to be 8
Identifying the institutions that raise living standards 9
Looking toward the future 10
Framing Economics as the Science of Scarcity 10
Sending Microeconomics and Macroeconomics to Separate Corners 11
Getting up close and personal: Microeconomics 11
Zooming out: Macroeconomics and the big picture 14
Understanding How Economists Use Models and Graphs 16
Introducing your first model: The demand curve 17
Drawing your own demand curve 20
Chapter 2: Cookies Or Ice Cream? Exploring Consumer Choices 21
Describing Human Behavior with a Choice Model 22
Pursuing Personal Happiness 23
Using utility to measure happiness 23
Taking "selfless" actions into account 23
Self-interest can promote the common good 24
You Can't Have Everything: Examining Limitations 25
Resource constraints 25
Technology constraints 25
Time constraints 26
Opportunity cost: The unavoidable cost 26
Making Your Choice: Deciding What and How Much You Want 27
Exploring Violations and Limitations of the Economist's Choice Model 29
Understanding uninformed decision-making 29
Making sense of irrationality 30
Chapter 3: Producing Stuff To Maximize Happiness 33
Figuring Out What's Possible to Produce 34
Classifying resources 35
Clarifying human capital 35
Diminishing returns 36
Allocating resources 37
Graphing your production possibilities 38
Reaching new frontiers with better technology 41
Deciding What to Produce 42
Comparing market results and government interventions 43
Opting for a mixed economy 49
Promoting Technology and Innovation 52
Part 2: Microeconomics: The Science of Consumer and Firm Behavior 55
Chapter 4: Supply and Demand Made Easy 57
Deconstructing Demand 58
Prices and other stuff: Looking at what affects quantity demanded 59
Graphing the demand curve 60
Opportunity costs: Setting the slope of the demand curve 62
Elasticity: Looking at extreme demand cases 63
Sorting Out Supply 65
Graphing the supply curve 65
Using elasticity to understand extreme -supply cases 69
Bringing Supply and Demand Together 70
Market equilibrium: Seeking a balance 71
Demonstrating the stability of the market equilibrium 72
Adjusting to new market equilibriums when supply or demand changes 74
Price Controls: Keeping Prices Away from Market Equilibrium 76
Setting upper limits with price ceilings 77
Propping up prices with price floors 79
Chapter 5: Introducing Homo Economicus, The Utility-Maximizing Consumer 83
Choosing by Ranking 84
Getting Less from More: Diminishing Marginal Utility 85
Choosing Among Many Options When Facing a Limited Budget 88
Trying to buy as much (marginal) utility as you can 88
Purchasing the best combination of two goods to maximize total utility 91
Aiming for equal marginal utility per dollar 93
Deriving Demand Curves from Diminishing Marginal Utility 95
Seeing how price changes affect quantities demanded 96
Graphing the price and quantity changes to form a demand curve 97
Chapter 6: The Core of Capitalism: The Profitmaximizing Firm 101
A Firm's Goal: Maximizing Profits 102
Facing Competition 103
Listing the requirements for perfect competition 103
Taking prices but setting quantities 104
Distinguishing between accounting profits and economic profits 106
Analyzing a Firm's Cost Structure 107
Focusing on costs per unit of output 108
Examining average variable costs 110
Watching average fixed costs fall 111
Tracking the movement of average total costs 111
Focusing on marginal costs 112
Noticing where marginal cost equals average cost 113
Comparing Marginal Revenues with Marginal Costs 115
Finding where marginal revenue equals marginal cost 116
Visualizing profits 118
Visualizing losses 120
Pulling the Plug: When Producing Nothing Is Your Best Bet 121
Distinguishing between the short run and the long run in microeconomics 122
The short-run shutdown condition: Variable costs exceed total revenues 123
The long-run shutdown condition: Total costs exceed total revenues 125
Chapter 7: Why Economists Love Free Markets And Competition 127
Ensuring That Benefits Exceed Costs: Competitive Free Markets 128
Examining the traits of a properly functioning market 129
Analyzing the efficiency of free markets 130
Measuring everyone's gains with total surplus 132
When Free Markets Lose Their Freedom: Dealing with Deadweight Losses 138
Coming up short: The deadweight loss from a price ceiling 139
Death and taxes: Finding the deadweight loss of a tax 140
Hallmarks of Perfect Competition: Zero Profits and Lowest Possible Costs 143
Understanding the causes and consequences of perfect competition 144
Peering into the process of perfect -competition 145
Graphing how profits guide firm entry and exit 146
Chapter 8: Monopolies: Bad Behavior Without Competition 151
Examining Profit-Maximizing Monopolies 152
Zeroing in on the problems monopolies cause 152
Identifying the source of the problem: -Decreasing marginal revenues 153
Choosing an output level to maximize profits 158
Comparing Monopolies with Competitive Firms 161
Looking at output and price levels 162
Deadweight losses: Quantifying the harm caused by monopolies 163
Losing efficiency 164
Considering Good Monopolies 165
Encouraging innovation and investment with patents 165
Reducing annoyingly redundant -competitors 165
Keeping costs low with natural monopolies 166
Regulating Monopolies 167
Subsidizing a monopoly to increase output 167
Imposing minimum output requirements 167
Regulating monopoly pricing 168
Breaking up a monopoly into several -competing firms 171
Chapter 9: Oligopoly and Monopolistic Competition: Middle Grounds 173
Oligopolies: Looking at the Allure of Joining Forces 174
Sharing power over prices 174
Cartel behavior: Trying to imitate -monopolists 175
Considering the criteria for coordinating a cartel 176
Understanding Incentives to Cheat the Cartel 176
Fleshing out the Prisoner's Dilemma 177
Enforcing the agreement: Resolving the dilemma with credible threats 180
Seeing that OPEC is trapped in a Prisoner's Dilemma 181
Using an enforcer to help OPEC members stick to quotas 182
Regulating Oligopolies 183
Breaking up dominant firms 184
Attempting to apply antitrust laws 184
Studying a Hybrid: Monopolistic Competition 185
Benefiting from product differentiation 185
Facing profit limits 186
Part 3: Applying The Theories of Microeconomics 191
Chapter 10: Property Rights and Wrongs 193
Allowing Markets to Reach Socially Optimal Outcomes 194
Examining Externalities: The Costs and Benefits Others
Feel from Your Actions 195
Noting the effects of negative externalities 196
Accepting positive amounts of negative externalities 198
Dealing with negative externalities 199
Calculating the consequences of positive externalities 200
Subsidizing things that provide positive externalities 201
Tragedy of the Commons: Overexploiting Commonly Owned Resources 202
Overgrazing on a commonly owned field 202
Extinctions and poor property rights 203
Avoiding the tragedy 204
Chapter 11:Asymmetric Information And Public Goods 205
Facing Up to Asymmetric Information 206
Realizing that asymmetric information -limits trade 206
Souring on the lemons problem: The used car market 207
Issuing insurance when you can't tell individuals apart 211
Providing Public Goods 215
Taxing to provide public goods 216
Enlisting philanthropy to provide public goods 216
Providing a public good by selling a related private good 217
Ranking new technology as a public good 219
Chapter 12: Health Economics And Healthcare Finance 221
Defining Health Economics and Healthcare Finance 222
Noting the Limits of Health Insurance 222
Adverse selection: Looking at who buys insurance 223
Combating adverse selection 224
Comparing Healthcare Internationally 227
Inflated Demand: Suffering from "Free" and Reduced-Cost Healthcare 228
Diverting funds to lower-value uses 228
Rationing healthcare 229
Facing shortages and higher prices 230
Combatting inefficiency with bureaucracy 231
Investigating Singapore's Secrets 233
Exploring cost-saving features 233
Weighing costs and benefits of medical -procedures 234
Supporting cost-cutting innovations 234
Trying to copy Singapore's success 235
Chapter 13:Behavioral Economics: Investigating Irrationality 237
Explaining the Need for Behavioral Economics 238
Complementing Neo-Classical Economics with Behavioral Economics 239
Examining our Amazing, Efficient, and Error-Prone Brains 240
Deciphering heuristics 240
Deconstructing brain modularity 242
Cogitating on cognitive biases 242
Surveying Prospect Theory 244
Shrinking packages and loss aversion 245
Framing effects and advertising 245
Anchoring and credit card bills 246
Examining the endowment effect 247
Stipulating status quo bias 247
Countering Myopia and Time Inconsistency 248
Focusing on myopia 249
Tattling on time inconsistency 249
Beating self-control problems with -precommitments 250
Gauging Fairness and Self-Interest 251
Defining fairness 251
Examining the experimental evidence for fairness 251
Digesting the experimental evidence on fairness 253
Part 4: Macroeconomics: The Science of Economic Growth And Stability 255
Chapter 14: How Economists Measure the Macroeconomy 257
Getting a Grip on the GDP (and Its Parts) 258
Leaving some things out of GDP 259
Tallying up what counts in GDP 259
Accounting for streams of incomes, and assets 260
Following the funds, around and around 262
Counting stuff when it's made, not when it's sold 263
Watching GDP rise with the good, the bad, and the ugly 264
Diving In to the GDP Equation 265
"C" is for consumption (that's good enough for me!) 266
"I" is for investment in capital stock 268
The big "G" (government, that is) 269
Measuring foreign trade with "NX" 270
Making Sense of International Trade and Its Effect on the Economy 271
"Trade deficit" ain't fightin' words 272
Considering assets - not just cash 273
Wielding a comparative advantage 274
Chapter 15 : Inflation Frustration: Why More Money Isn't Always Good 277
Buying an Inflation: When Too Much Money Is a Bad Thing 279
Balancing money supply and demand 279
Giving in to the inflation temptation 282
Tallying up the effects of inflation 286
Measuring Inflation 287
Creating your very own market basket 288
Calculating the inflation rate 289
Setting up a price index 290
Determining the real standard of living with the price index 291
Identifying price index problems 292
Pricing the Future: Nominal and Real Interest Rates 293
Using the Fisher equation 294
Realizing that predictions aren't perfect 294
Chapter 16: Understanding Why Recessions Happen 297
Introducing the Business Cycle 298
Striving for Full-Employment Output 299
Returning to Y*: The Natural Result of Price Adjustments 300
Responding to Economic Shocks: -Short-Run and Long-Run Effects 301
Defining some critical terms 301
The tao of P: Looking at price adjustments in the long run 303
A shock to the system: Adjusting to a shift in aggregate demand 304
Dealing with fixed prices in the short run 305
Putting together the long and short of it 308
Heading toward Recession: Getting Stuck with Sticky Prices 309
Cutting wages or cutting workers 310
Adding up the costs of wages and profits 310
Returning to Y* with and without -government intervention 311
Achieving Equilibrium with Sticky Prices: The Keynesian Model 312
Adjusting inventories instead of prices 314
Boosting GDP in the Keynesian model 322
Chapter 17: Fighting Recessions With Monetary And Fiscal Policy 325
Stimulating Demand to End Recessions 326
Aiming for full-employment output 326
Back to work: Shifting the AD curve right 328
Generating Inflation: The Risk of Too Much Stimulation 328
Trying to increase output beyond Y* 329
Tracing the movement of real wages 331
Failing to stimulate: What happens when a stimulus is expected 333
Figuring Out Fiscal Policy 336
Increasing government spending to help end recessions 337
Dealing with deficits 338
Dissecting Monetary Policy 340
Identifying the benefits of fiat money over the gold standard 341
Realizing you can have too much money! 342
Getting the basics about bonds 344
Seeing the link between bond prices and interest rates 345
Changing the money supply to change interest rates 346
Lowering interest rates to stimulate the economy 346
Understanding how rational expectations can limit monetary policy 348
Examining quantitative easing and the Great Recession 350
Chapter 18: Grasping Origins and Effects of Financial Crises 353
Understanding How Debt-Driven Bubbles Develop 354
Embracing borrowing in a booming economy 355
Offering larger loans as collateral -values rise 355
Relaxing lending standards 356
Borrowing more in hopes of profit 356
Watching the process gain momentum 357
Seeing the Bubble Burst 357
Deleveraging: Trying to ditch debt as -prices fall 358
Comprehending bank collapses caused by
bursting bubbles 358
Leading into a recession 359
After the Crisis: Looking at Recovery 360
Enduring a broken banking system 360
Struggling with structural mismatches 361
Noting the limits of government policy 362
Part 5: The Part of Tens 363
Chapter 19: Ten Seductive Economic Fallacies 365
The Lump of Labor 365
The World Is Facing Overpopulation 366
Sequence Indicates Causation 366
Protectionism Is the Best Solution to Foreign Competition 367
The Fallacy of Composition 368
If It's Worth Doing, Do It 100 Percent 368
Free Markets Are Dangerously Unstable 369
Low Foreign Wages Mean That Rich Countries Can't Compete 369
Tax Rates Don't Affect Work Effort 370
Forgetting Unintended Consequences 370
Chapter 20: Ten Economic Ideas to Hold Dear 371
Self-Interest Can Improve Society 371
Free Markets Require Regulation 372
Economic Growth Relies on Innovation 372
Freedom and Democracy Make Us Richer 372
Education Raises Living Standards 372
Intellectual Property Boosts Innovation 373
Weak Property Rights Cause All Environmental Problems 373
International Trade Is a Good Thing 373
Government Can Provide Public Goods 374
Preventing Inflation Is Easy 374
Chapter 21: Ten (Or So) Famous Economists 375
Adam Smith 375
David Ricardo 376
Karl Marx 376
Alfred Marshall 377
John Maynard Keynes 378
Kenneth Arrow and Gerard Debreu 378
Milton Friedman 378
Paul Samuelson 379
Robert Solow 379
Gary Becker 380
Robert Lucas 380
Appendix: Glossary 383
Index 389