Principles of Macroeconomics - Gregory Mankiw  ## Metadata - Author: **Gregory Mankiw** - Full Title: Principles of Macroeconomics - Category: #books - Tags: #business #macroeconomic ## Highlights - Like a household, a society faces many decisions. A society must decide what jobs will be done and who will do them. It needs some people to grow food, other people to make clothing, and still others to design computer software (Location 7) - The opportunity cost of an item is what you give up to get that item. (Location 70) - Economists use the term marginal changes to describe small incremental adjustments to an existing plan of action. Keep in mind that “margin” means “edge,” so marginal changes are adjustments around the edges of what you are doing. (Location 76) - A rational decisionmaker takes an action if and only if the marginal benefit of the action exceeds the marginal cost. (Location 91) - You will learn that, in this case, regulating the price that the monopolist charges can potentially enhance economic efficiency. (Location 199) - A market economy rewards people according to their ability to produce things that other people are willing to pay for. (Location 201) - The tradeoff between inflation and unemployment is only temporary, but it can last for several years. The Phillips curve is, therefore, crucial for understanding many developments in the economy. (Location 268) - #1: People Face Tradeoffs #2: The Cost of Something Is What You Give Up to Get It #3: Rational People Think at the Margin #4: People Respond to Incentives #5: Trade Can Make Everyone Better Off #6: Markets Are Usually a Good Way to Organize Economic Activity #7: Governments Can Sometimes Improve Market Outcomes #8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services #9: Prices Rise When the Government Prints Too Much Money #10: Society Faces a Short-Run Tradeoff between Inflation and Unemployment (Location 282) - We consider many historical episodes. These episodes are valuable to study because they give us insight into the economy of the past and, more important, because they allow us to illustrate and evaluate economic theories of the present. (Location 383) - The production possibilities frontier shows one tradeoff that society faces. Once we have reached the efficient points on the frontier, the only way of getting more of one good is to get less of the other. When the economy moves from point A to point C, for instance, society produces more computers but at the expense of producing fewer cars. (Location 476) - The production possibilities frontier shows the opportunity cost of one good as measured in terms of the other good. When society reallocates some of the factors of production from the car industry to the computer industry, moving the economy from point A to point C, it gives up 100 cars to get 200 additional computers. (Location 479) - The field of economics is traditionally divided into two broad subfields. Microeconomics is the study of how households and firms make decisions and how they interact in specific markets. Macroeconomics is the study of economy wide phenomena. A microeconomist might study the effects of rent control on housing in New York City, the impact of foreign competition on the U.S. auto industry, or the effects of compulsory school attendance on workers’ earnings. (Location 504) - President Harry Truman once said that he wanted to find a one-armed economist. When he asked his economists for advice, they always answered, “On the one hand, . . . . On the other hand, . . . (Location 542) - An economist who says that all policy decisions are easy is an economist not to be trusted. (Location 546) - Practical men, who believe themselves to be quite exempt from intellectual influences, are usually the slaves of some defunct economist. (Location 561) - A minimum wage increases unemployment among young and unskilled workers. (Location 612) - Economists try to address their subject with a scientist’s objectivity. Like all scientists, they make appropriate assumptions and build simplified models in order to understand the world around them. Two simple economic models are the circular-flow diagram and the production possibilities frontier. (Location 629) - Tags: #science - is.A normative statement is an assertion about how the world ought to be.When economists make normative statements, they are acting more as policy advisers than scientists. (Location 633) - Economists use the term absolute advantagewhen comparing the productivity of one person, firm, or nation to that of another. The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good. (Location 944) - Comparative advantage reflects the relative opportunity cost. (Location 973) - A market is a group of buyers and sellers of a particular good or service. The buyers as a group determine the demand for the product, and the sellers as a group determine the supply of the product. (Location 1152) - Some markets fall between the extremes of perfect competition and monopoly. One such market, called an oligopoly,has a few sellers that do not always compete aggressively. (Location 1176) - In most free markets, however, surpluses and shortages are only temporary because prices eventually move toward their equilibrium levels. Indeed, this phenomenon is so pervasive that it is sometimes called the law of supply and demand:The price of any good adjusts to bring the supply and demand for that good into balance. (Location 1422) - The increase in demand raises the equilibrium price from $2.00 to $2.50 and the equilibrium quantity from 7 to 10 cones. In other words, the hot weather increases the price of ice cream and the quantity of ice cream sold. (Location 1449) - In any economic system, scarce resources have to be allocated among competing uses. (Location 1534) - Supply and demand together determine the prices of the economy’s many different goods and services; prices in turn are the signals that guide the allocation of resources. (Location 1535) - The price elasticity of demand measures how much the quantity demanded responds to changes in the price. (Location 1996) - Minimumwage laws dictate the lowest wage that firms may pay workers. (Location 2070) - Of course, because buyers of any good always want a lower price while sellers want a higher price, the interests of the two groups conflict. If the Ice Cream Eaters are successful in their lobbying, the government imposes a legal maximum on the price at which ice cream can be sold. Because the price is not allowed to rise above this level, the legislated maximum is called a price ceiling.By contrast, if the Ice Cream Makers are successful, the government imposes a legal minimum on the price. Because the price cannot fall below this level, the legislated minimum is called a price floor.Let (Location 2087) - government imposes a price ceiling of $4 per cone. In this case, because the price that balances supply and demand ($3) is below the ceiling, the price ceiling is not binding.Market forces naturally move the economy to the equilibrium, and the price ceiling has no effect. (Location 2093) - In this case, the government imposes a price ceiling of $2 per cone. Because the equilibrium price of $3 is above the price ceiling, the ceiling is a binding constrainton the market. (Location 2096) - The forces of supply and demand tend to move the price toward the equilibrium price, but when the market price hits the ceiling, it can rise no further. Thus, the market price equals the price ceiling. At this price, the quantity of ice cream demanded (125 cones in the figure) exceeds the quantity supplied (75 cones). (Location 2105) - In developing countries, despite population growth, the percentage of people with access to safe drinking water has increased to 74 percent in 1994 from 44 percent in 1980. (Location 2151) - Data from every corner of the world show that when cities raise the price of water by 10 percent, water use goes down by as much as 12 percent. When the price of agricultural water goes up 10 percent, usage goes down by 20 percent. (Location 2156) - In free markets, landlords try to keep their buildings clean and safe because desirable apartments command higher prices. By contrast, when rent control creates shortages and waiting lists, landlords lose their incentive to be responsive to tenants’ concerns. Why should a landlord spend his money to maintain and improve his property when people are waiting to get in as it is? In the end, tenants get lower rents, but they also get lower-quality housing. (Location 2197) - In addition to altering the quantity of labor demanded, the minimum wage also alters the quantity supplied. Because the minimum wage raises the wage that teenagers can earn, it increases the number of teenagers who choose to look for jobs. (Location 2283) - Yet price controls often hurt those they are trying to help. Rent control may keep rents low, but it also discourages landlords from maintaining their buildings and makes housing hard to find. Minimum-wage laws may raise the incomes of some workers, but they also cause other workers to be unemployed. (Location 2304) - Lawmakers can decide whether a tax comes from the buyer’s pocket or from the seller’s, but they cannot legislate the true burden of a tax. Rather, tax incidence depends on the forces of supply and demand. (Location 2400) - A price ceiling is a legal maximum on the price of a good or service. An example is rent control. If the price ceiling is below the equilibrium price, the quantity demanded exceeds the quantity supplied. Because of the resulting shortage, sellers must in some way ration the good or service among buyers. (Location 2456) - A price floor is a legal minimum on the price of a good or service. An example is the minimum wage. If the price floor is above the equilibrium price, the quantity supplied exceeds the quantity demanded. Because of the resulting surplus, buyers’ demands for the good or service must in some way be rationed among sellers. (Location 2458) - When the government levies a tax on a good, the equilibrium quantity of the good falls. That is, a tax on a market shrinks the size of the market. (Location 2460) - A tax on a good places a wedge between the price paid by buyers and the price received by sellers. When the market moves to the new equilibrium, buyers pay more for the good and sellers receive less for it. In this sense, buyers and sellers share the tax burden. The incidence of a tax does not depend on whether the tax is levied on buyers or sellers. (Location 2461) - The incidence of a tax depends on the price elasticities of supply and demand. The burden tends to fall on the side of the market that is less elastic because that side of the market can respond less easily to the tax by changing the quantity bought or sold. (Location 2464) - Consumer surplus equals buyers’ willingness to pay for a good minus the amount they actually pay for it, and it measures the benefit buyers get from participating in a market. Consumer surplus can be computed by finding the area below the demand curve and above the price. (Location 2817) - Producer surplus equals the amount sellers receive for their goods minus their costs of production, and it measures the benefit sellers get from participating in a market. Producer surplus can be computed by finding the area below the price and above the supply curve. (Location 2819) - An allocation of resources that maximizes the sum of consumer and producer surplus is said to be efficient. Policymakers are often concerned with the efficiency, as well as the equity, of economic outcomes. (Location 2821) - The equilibrium of supply and demand maximizes the sum of consumer and producer surplus. That is, the invisible hand of the marketplace leads buyers and sellers to allocate resources efficiently. (Location 2822) - Markets do not allocate resources efficiently in the presence of market failures such as market power or externalities. (Location 2824) - Tags: #market - When the government imposes taxes on buyers or sellers of a good, however, society loses some of the benefits of market efficiency. Taxes are costly to market participants not only because taxes transfer resources from those participants to the government, but also because they alter incentives and distort market outcomes. (Location 3140) - A tax on a good reduces the welfare of buyers and below the level that maximizes total surplus. Because sellers of the good, and the reduction in consumer and producer surplus usually exceeds the revenue raised by the government. The fall in total surplus—the sum of consumer surplus, producer surplus, and tax revenue— is called the deadweight loss of the tax. (Location 3142) - Taxes have deadweight losses because they cause buyers to consume less and sellers to produce less, and this change in behavior shrinks the size of the market the elasticities of supply and demand measure how much market participants respond to market conditions, larger elasticities imply larger deadweight losses. (Location 3145) - As a tax grows larger, it distorts incentives more, and its deadweight loss grows larger. Tax revenue first rises with the size of a tax. Eventually, however, a larger tax reduces tax revenue because it reduces the size of the market. (Location 3148) - Trade raises the economic well-being of a nation in the sense that the gains of the winners exceed the losses of the losers. (Location 3295) - If the world price is now higher than the Isolandian price, our price would rise. The higher price would reduce the amount of steel Isolandians consume and raise the amount of steel that Isolandians produce. Isoland would, therefore, become a steel exporter. This occurs because, in this case, Isoland would have a comparative advantage in producing steel. (Location 3441) - Our conclusions so far have been based on the standard analysis of international trade. As we have seen, there are winners and losers when a nation opens itself up to trade, but the gains to the winners exceed the losses of the losers. Yet the case for free trade can be made even stronger. There are several other economic benefits of trade beyond those emphasized in the standard analysis. (Location 3460) - Lower costs through economies of scale:Some goods can be produced at low cost only if they are produced in large quantities—a phenomenon called economies of scale.A (Location 3465) - Increased competition:A company shielded from foreign competitors is more likely to have market power, which in turn gives it the ability to raise prices above competitive levels. This is a type of market failure. Opening up trade fosters competition and gives the invisible hand a better chance to work its magic. (Location 3468) - Thus, free international trade increases variety for consumers, allows firms to take advantage of economies of scale, makes markets more competitive, and facilitates the spread of technology. (Location 3472) - Economists view the United States as an ongoing experiment that confirms the virtues of free trade. Throughout its history, the United States has allowed unrestricted trade among the states, and the country as a whole has benefited from the specialization that trade allows. (Location 3572) - When a country allows trade and becomes an exporter of a good, producers of the good are better off, and consumers of the good are worse off. (Location 3641) - An import quota has effects that are similar to those of a tariff. Under a quota, however, the holders of the import licenses receive the revenue that the government would collect with a tariff. (Location 3644) - Because every transaction has a buyer and a seller, the total expenditure in the economy must equal the total income in the economy. (Location 4048) - Gross domestic product (GDP) measures an economy’s total expenditure on newly produced goods and services and the total income earned from the production of these goods and services. (Location 4049) - GDP is divided among four components of expenditure: consumption, investment, government purchases, and net exports. (Location 4052) - GDP is a good measure of economic well-being because people prefer higher to lower incomes. (Location 4059) - The consumer price index shows the cost of a basket of goods and services relative to the cost of the same basket in the base year. (Location 4396) - The consumer price index is an imperfect measure of the cost of living for three reasons. (Location 4398) - Although the GDP deflator also measures the overall level of prices in the economy, it differs from the consumer price index because it includes goods and services produced rather than goods and services consumed. (Location 4402) - Various laws and private contracts use price indexes to correct for the effects of inflation. (Location 4407) - A correction for inflation is especially important when looking at data on interest rates. (Location 4409) - Workers are more productive if they have tools with which to work. The stock of equipment and structures that are used to produce goods and services is called physical capital,or just capital.For (Location 4560) - A fourth determinant of productivity is technological knowledge—the understanding of the best ways to produce goods and services. (Location 4587) - Women with the opportunity to receive good education and desirable employment tend to want fewer children than those with fewer opportunities outside the home. (Location 4817) - “little else is requisite to carry a state to the highest degrees of opulence from the lowest barbarism, but peace, easy taxes, and tolerable administration of justice.” (Location 4905) - The standard of living in an economy depends on the economy’s ability to produce goods and services. Productivity, in turn, depends on the amounts of physical capital, human capital, natural resources, and technological knowledge available to workers. (Location 4931) - The accumulation of capital is subject to diminishing returns: The more capital an economy has, the less additional output the economy gets from an extra unit of capital. (Location 4935) - Price.The single most important piece of information about a stock is the price of a share. The newspaper usually presents several prices. The “last” or “closing” price is the price of the last transaction that occurred before the stock exchange closed the previous day. (Location 5057) - Dividend.Corporations pay out some of their profits to their stockholders; this amount is called the dividend. (Location 5061) - Price-earnings ratio.A corporation’s earnings, or profit, is the amount of revenue it receives for the sale of its products minus its costs of production as measured by its accountants. (Location 5064) - U.S. financial system is made up of many types of financial institutions, such as the bond market, the stock market, banks, and mutual funds. All these institutions act to direct the resources of households who want to save some of their income into the hands of households and firms who want to borrow. (Location 5452) - One reason for unemployment is the time it takes for workers to search for jobs that best suit their tastes and skills. (Location 5969) - A second reason why our economy always has some unemployment is minimum-wage laws. By raising the wage of unskilled and inexperienced workers above the equilibrium level, minimum-wage laws raise the quantity of labor supplied and reduce the quantity demanded. (Location 5971) - A third reason for unemployment is the market power of unions. When unions push the wages in unionized industries above the equilibrium level, they create a surplus of labor. (Location 5973) - When you walk into a restaurant to buy a meal, you get something of value—a full stomach. To pay for this service, you might hand the restaurateur several worn-out pieces of greenish paper decorated with strange symbols, government buildings, and the portraits of famous dead Americans. (Location 6031) - Money has three functions in the economy: It is a medium of exchange,a unit of account,and a store of value.These (Location 6066) - A medium of exchangeis an item that buyers give to sellers when they purchase goods and services. (Location 6068) - A unit of accountis the yardstick people use to post prices and record debts. (Location 6071) - A store of valueis an item that people can use to transfer purchasing power from the present to the future. (Location 6075) - The term wealth is used to refer to the total of all stores of value, including both money and nonmonetary assets. (Location 6078) - Money without intrinsic value is called fiat money.Afiatis simply an order or decree, and fiat money is established as money by government decree. (Location 6126) - currency is not a particularly good way to hold wealth. Not only can currency be lost or stolen, but it also does not earn interest, whereas a bank deposit does. Thus, most people hold only small amounts of currency. (Location 6182) - Money serves three functions. As a medium of exchange, it provides the item used to make transactions. As a unit of account, it provides the way in which prices and other economic values are recorded. As a store of value, it provides a way of transferring purchasing power from the present to the future. (Location 6389) - Commodity money, such as gold, is money that has intrinsic value: It would be valued even if it were not used as money. Fiat money, such as paper dollars, is money without intrinsic value: It would be worthless if it were not used as money. (Location 6391) - In economics, the velocity of money refers to the speed at which the typical dollar bill travels around the economy from wallet to wallet. (Location 6623) - When prices rise, buyers of goods and services pay more for what they buy. At the same time, however, sellers of goods and services get more for what they sell. Because most people earn their incomes by selling their services, such as their labor, inflation in incomes goes hand in hand with inflation in prices. Thus, inflation does not in itself reduce people’s real purchasing power. (Location 6742) - The overall level of prices in an economy adjusts to N bring money supply and money demand into balance. When the central bank increases the supply of money, it causes the price level to rise. Persistent growth in the quantity of money supplied leads to continuing inflation. (Location 6951) - The principle of monetary neutrality asserts that changes in the quantity of money influence nominal variables but not real variables. Most economists believe that monetary neutrality approximately describes the behavior of the economy in the long run. (Location 6953) - Net exports are the value of domestic goods and countries. When the nominal exchange rate changes so services sold abroad minus the value of foreign goods and services sold domestically. Net foreign investment is the acquisition of foreign assets by domestic residents minus the acquisition of domestic assets by foreigners. Because every international transaction involves an exchange of an asset for a good or service, an economy’s net foreign investment always equals its net exports. (Location 7429) - An economy’s saving can be used either to finance investment at home or to buy assets abroad. Thus, national saving equals domestic investment plus net foreign investment. (Location 7433) - According to the theory of purchasing-power parity, a dollar (or a unit of any other currency) should be able to buy the same quantity of goods in all countries. This theory implies that the nominal exchange rate between the currencies of two countries should reflect the price levels in those countries. As a result, countries with relatively high inflation should have depreciating currencies, and countries with relatively low inflation should have appreciating currencies. (Location 7438) - A policy that reduces national saving, such as a government budget deficit, reduces the supply of loanable funds and drives up the interest rate. The higher interest rate reduces net foreign (Location 7810) - There are, therefore, three distinct but related reasons why a fall in the price level increases the quantity of goods and services demanded: (1) Consumers feel wealthier, which stimulates the demand for consumption goods. (2) Interest rates fall, which stimulates the demand for investment goods. (3) The exchange rate depreciates, which stimulates the demand for net exports. For all three reasons, the aggregate-demand curve slopes downward. (Location 8035) - Any policy or event that raised real GDP in previous chapters can now be viewed as increasing the quantity of goods and services supplied and shifting the long-run aggregate-supply curve to the right. (Location 8154) - Any policy or event that lowered real GDP in previous chapters can now be viewed as decreasing the quantity of goods and services supplied and shifting the long-run aggregate-supply curve to the left. (Location 8155) - All societies experience short-run economic fluctuations around long-run trends. These fluctuations are irregular and largely unpredictable. When recessions do occur, real GDP and other measures of income, spending, and production fall, and unemployment rises. (Location 8471) - The wealth effect:A lower price level raises the real value of households’ money holdings, and higher real wealth stimulates consumer spending. (Location 8563) - interest rate is the opportunity cost of holding money. That is, when you hold wealth as cash in your wallet, instead of as an interest-bearing bond, you lose the interest you could have earned. (Location 8616) - Advocates of a zero-inflation target emphasize that inflation has many costs and few if any benefits. Moreover, the cost of eliminating inflation—depressed output and employment—is only temporary. Even this cost can be reduced if the central bank announces a credible plan to reduce inflation, thereby directly lowering expectations of inflation. Critics of a zeroinflation target claim that moderate inflation imposes only small costs on society, whereas the recession necessary to reduce inflation is quite costly. (Location 10025) - automatic stabilizers —changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action (Location 10086) - capital flight —a large and sudden reduction in the demand for assets located in a country (Location 10089) - catch-up effect —the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich (Location 10090) - closed economy —an economy that does not interact with other economies in the world (Location 10094) - comparative advantage —the comparison among producers of a good according to their opportunity cost (Location 10097) - depreciation —a decrease in the value of a currency as measured (Location 10110) - rational expectations —the theory according to which people optimally use all the information they have, including information about government policies, when forecasting the future (Location 10186)