Macroeconomics, Third Edition
By Daron Acemoglu, David Laibson and John A. List
Contents:
About the Authors 6
Preface 17
PART I Introduction to Economics
Chapter 1: The Principles and Practice of Economics 30
1.1 The Scope of Economics 31
Economic Agents and Economic Resources 31
Definition of Economics 32
Positive Economics and Normative Economics 33
Microeconomics and Macroeconomics 34
1.2 Three Principles of Economics 34
1.3 The First Principle of Economics: Optimization 35
Trade-offs and Budget Constraints 36
Opportunity Cost 37
Cost-Benefit Analysis 38
Evidence-Based Economics: Is Facebook free? 39
1.4 The Second Principle of Economics: Equilibrium 41
The Free-Rider Problem 42
1.5 The Third Principle of Economics: Empiricism 43
1.6 Is Economics Good for You? 43
Summary 44
Key Terms 45
Questions 45
Evidence-Based Economics Problems 45
Problems 46
Chapter 2: Economic Science: Using Data and Models to
Understand the World 48
2.1 The Scientific Method 49
Models and Data 50
An Economic Model 51
Evidence-Based Economics: How much more does a worker with a 4-year college degree earn compared to a worker
with a high school degree? 52
Means and Medians 54
Argument by Anecdote 54
2.2 Causation and Correlation 55
The Red Ad Blues 55
Causation Versus Correlation 55
Choice & Consequence: Spend Now and Pay Later? 58
Experimental Economics and Natural Experiments 58
Evidence-Based Economics: What is the return to education? 59
2.3 Economic Questions and Answers 60
Summary 62
Key Terms 62
Questions 62
Evidence-Based Economics Problems 63
Problems 63
Appendix: Constructing and Interpreting Charts and Graphs 65
A Study about Incentives 65
Experimental Design 65
Describing Variables 66
Cause and Effect 68
Appendix Key Terms 71
Appendix Problems 71
Chapter 3: Optimization: Trying to Do the Best You Can 72
3.1 Optimization: Trying to Choose the Best Feasible Option 73
Choice & Consequence: Do People Actually Choose the Best Feasible Option? 74
3.2 Optimization Application: Renting the Optimal Apartment 74
Before and After Comparisons 77
3.3 Optimization Using Marginal Analysis 78
Marginal Cost 79
Evidence-Based Economics: How does location affect the rental cost of housing? 82
Summary 85
Key Terms 86
Questions 86
Evidence-Based Economics Problems 86
Problems 86
Chapter 4: Demand, Supply, and Equilibrium 90
4.1 Markets 91
Competitive Markets 92
4.2 How Do Buyers Behave? 93
Demand Curves 94
Willingness to Pay 94
From Individual Demand Curves to Aggregated Demand Curves 95
Building the Market Demand Curve 96
Shifting the Demand Curve 97
Evidence-Based Economics: How much more gasoline would people buy if its price were lower? 99
4.3 How Do Sellers Behave? 101
Supply Curves 101
Willingness to Accept 101
From the Individual Supply Curve to the Market Supply Curve 102
Shifting the Supply Curve 103
4.4 Supply and Demand in Equilibrium 105
Curve Shifting in Competitive Equilibrium 107
Letting the Data Speak: Technological Breakthroughs Drive Down the Equilibrium Price of Oil 108
Letting the Data Speak: The Day Oil
Became Garbage 109
4.5 What Would Happen If the Government Tried to Dictate the Price of Gasoline? 110
Choice & Consequence: The Unintended Consequences of Fixing Market Prices 112
Summary 113
Key Terms 114
Questions 114
Evidence-Based Economics Problems 115
Problems 115
PART II Introduction to Macroeconomics
Chapter 5: The Wealth of Nations: Defining and Measuring Macroeconomic Aggregates 118
5.1 Macroeconomic Questions 119
5.2 National Income Accounts: Production = Expenditure = Income 121
Production 121
Expenditure 122
Income 122
Circular Flows 123
National Income Accounts: Production 124
National Income Accounts: Expenditure 126
Evidence-Based Economics: In the United States, what is the total market value of annual economic production? 128
Letting the Data Speak: Saving versus Investment 130
National Income Accounting: Income 131
5.3 What Isn’t Measured by GDP? 131
Physical Capital Depreciation 132
Home Production 132
The Underground Economy 133
Externalities 134
Gross Domestic Product versus Gross National Product 134
The Increase in Income Inequality 135
Leisure 135
Does GDP Buy Happiness? 136
5.4 Real versus Nominal 137
The GDP Deflator 139
The Consumer Price Index 141
Inflation 142
Adjusting Nominal Variables 142
Summary 143
Key Terms 143
Questions 144
Evidence-Based Economics Problems 144
Problems 145
Chapter 6: Aggregate Incomes 148
6.1 Inequality Around the World 149
Measuring Differences in GDP per Capita 149
Letting the Data Speak: The Big Mac Index 151
Cross-Country Differences in GDP per capita 151
GDP per Worker 152
Productivity 153
Incomes and the Standard of Living 154
Choice & Consequence: Dangers of Just Focusing on GDP per Capita 155
6.2 Productivity and the Aggregate Production Function 156
Productivity Differences 157
The Aggregate Production Function 157
Labor 158
Physical Capital and Land 158
Technology 158
Representing the Aggregate Production Function 158
6.3 The Role and Determinants of Technology 160
Technology 160
Dimensions of Technology 161
Letting the Data Speak: Moore’s Law 162
Choice & Consequence: Academic Misallocation in Nazi Germany 163
Letting the Data Speak: Efficiency of Production and Productivity at the
Company Level 163
Entrepreneurship 164
Letting the Data Speak: Monopoly and GDP 164
Evidence-Based Economics: Why is the average American so much richer than the average Indian? 165
Summary 167
Key Terms 167
Questions 167
Evidence-Based Economics Problems 168
Problems 168
Appendix: The Mathematics of Aggregate Production Functions 171
PART III Long-Run Growth
and Development
Chapter 7: Economic Growth 174
7.1 The Power of Economic Growth 175
A First Look at U.S. Growth 175
Exponential Growth 177
Choice & Consequence: The Power of Exponential Growth 178
Patterns of Growth 179
Letting the Data Speak: Levels versus Growth 182
7.2 How Does a Nation’s Economy Grow? 184
Optimization: The Choice Between Saving and Consumption 184
What Brings Sustained Growth? 185
Choice & Consequence: Is Increasing the Saving Rate Always a Good Idea? 186
Knowledge, Technological Change, and Growth 186
Letting the Data Speak: Technology and Life Expectancy 188
7.3 The History of Growth and Technology 188
Growth Before Modern Times 188
Letting the Data Speak: The Great Productivity Puzzle 189
Evidence-Based Economics: Why are you so much more prosperous than your great-grandparents were? 190
Malthusian Limits to Growth 193
The Industrial Revolution 193
Growth and Technology Since the Industrial Revolution 194
7.4 Growth, Inequality, and Poverty 194
Growth and Inequality 194
Growth and Poverty 194
Letting the Data Speak: Income Inequality in the United States 195
Choice & Consequence: Inequality versusn Poverty 196
How Can We Reduce Poverty? 197
Summary 198
Key Terms 198
Questions 198
Evidence-Based Economics Problems 199
Problems 199
Appendix: The Solow Growth Model 201
The Three Building Blocks of the Solow Model 201
Steady-State Equilibrium in the Solow Model 202
Determinants of GDP 203
Dynamic Equilibrium in the Solow Model 205
Sources of Growth in the Solow Model 206
Calculating Average (Compound) Growth Rates 207
Appendix Key Terms 209
Appendix Problems 209
Chapter 8: Why Isn’t the Whole World Developed? 210
8.1 Proximate Versus Fundamental Causes of Prosperity 211
Geography 212
Culture 213
Institutions 213
A Natural Experiment of History 214
8.2 Institutions and Economic Development 216
Inclusive and Extractive Economic Institutions 217
How Economic Institutions Affect Economic Outcomes 217
Letting the Data Speak: Democracy and Growth 218
Letting the Data Speak: Divergence and Convergence in Eastern Europe 220
The Logic of Extractive Economic Institutions 223
Inclusive Economic Institutions and the Industrial Revolution 223
Letting the Data Speak: Blocking the Railways 224
Evidence-Based Economics: Are tropical and semitropical areas condemned to poverty by their geographies? 225
8.3 Is Foreign Aid the Solution to World Poverty? 230
Choice & Consequence: Foreign Aid and Corruption 231
Summary 232
Key Terms 232
Questions 232
Evidence-Based Economics Problems 233
Problems 233
PART VI Equilibrium in the Macroeconomy
Chapter 9: Employment and Unemployment 236
9.1 Measuring Employment and Unemployment 237
Classifying Potential Workers 237
Calculating the Unemployment Rate 238
Trends in the Unemployment Rate 239
9.2 Equilibrium in the Labor Market 240
The Demand for Labor 240
Shifts in the Labor Demand Curve 242
The Supply of Labor 243
Shifts in the Labor Supply Curve 244
Letting the Data Speak: Who Is Unemployed? 245
Letting the Data Speak: Racial Disparities in Unemployment and the Existence of Racial Discrimination 245
Equilibrium in a Competitive Labor Market 246
9.3 Why Is There Unemployment? 247
Voluntary Unemployment 247
Job Search and Frictional Unemployment 248
9.4 Wage Rigidity and Structural Unemployment 248
Minimum Wage Laws 249
Choice & Consequence: Luddites and Robots 250
Labor Unions and Collective Bargaining 251
Efficiency Wages 251
Choice & Consequence: Minimum Wage Laws and Employment 252
Downward Wage Rigidity 253
9.5 Cyclical Unemployment and the Natural Rate of Unemployment 255
Evidence-Based Economics: How did unemployment and wages respond to the COVID-19 pandemic in the United
States? 256
Summary 258
Key Terms 259
Questions 259
Evidence-Based Economics Problems 259
Problems 260
Chapter 10: Credit Markets 264
10.1 What Is the Credit Market? 265
Borrowers and the Demand for Loans 265
Real and Nominal Interest Rates 266
The Credit Demand Curve 267
Saving Decisions 269
The Credit Supply Curve 269
Choice & Consequence: Why Do People Save? 271
Equilibrium in the Credit Market 272
Credit Markets and the Efficient Allocation of Resources 272
10.2 Banks and Financial Intermediation: Putting Supply and Demand Together 273
Letting the Data Speak: Financing Start-ups 275
Assets and Liabilities on the Balance Sheet of a Bank 275
10.3 What Banks Do 277
Identifying Profitable Lending Opportunities 277
Maturity Transformation 278
Management of Risk 278
Bank Runs 280
Bank Regulation and Bank Solvency 280
Evidence-based Economics: How often do banks fail? 281
Choice & Consequence: Too Big to Fail 283
Choice & Consequence: Asset Price Fluctuations and Bank Failures 284
Summary 285
Key Terms 285
Questions 286
Evidence-Based Economics Problems 286
Problems 287
Chapter 11: The Monetary System 290
11.1 Money 291
The Functions of Money 291
Types of Money 292
The Money Supply 292
Choice & Consequence: Non-Convertible Currencies in U.S. History 293
11.2 Money, Prices, and GDP 294
Nominal GDP, Real GDP, and Inflation 294
The Quantity Theory of Money 294
11.3 Inflation 295
What Causes Inflation? 295
The Consequences of Inflation 296
The Social Costs of Inflation 297
The Social Benefits of Inflation 298
Evidence-Based Economics: What caused the German hyperinflation of 1922–1923? 299
11.4 The Federal Reserve 300
The Central Bank and the Objectives of
Monetary Policy 300
What Does the Central Bank Do? 301
11.5 Bank Reserves and the Plumbing of the Monetary System 302
Bank Reserves and Liquidity 303
The Demand Side of the Federal Funds Market 304
The Supply Side of the Federal Funds Market and Equilibrium in the Federal Funds Market 305
Two Ways That the Fed Controls the Federal Funds Rate 306
Choice & Consequence: Obtaining Reserves Outside the Federal Funds Market 309
The Fed’s Influence on the Money Supply and the Inflation Rate 309
The Relationship Between the Federal Funds Rate and the Long-Term Real Interest Rate 310
Letting the Data Speak: Two Models of Inflation Expectations 311
Summary 314
Key Terms 315
Questions 315
Evidence-Based Economics Problems 316
Problems 316
PART V Short-Run Fluctuations and Macroeconomic Policy
Chapter 12: Short-Run Fluctuations 318
12.1 Economic Fluctuations and Business Cycles 319
Patterns of Economic Fluctuations 321
The Great Depression 323
12.2 Macroeconomic Equilibrium and Economic Fluctuations 325
Labor Demand and Fluctuations 325
Sources of Fluctuations 327
Letting the Data Speak: Unemployment and the Growth Rate of Real GDP: Okun’s Law 328
Multipliers and Economic Fluctuations 332
Equilibrium in the Medium Run: Partial Recovery and Full Recovery 333
12.3 Modeling Expansions 337
Evidence-Based Economics: What caused the recession of 2007–2009? 338
Evidence-Based Economics: What caused the recession of 2020? 342
Summary 345
Key Terms 346
Questions 347
Evidence-Based Economics Questions 347
Problems 347
Chapter 13: Countercyclical
Macroeconomic Policy 350
13.1 The Role of Countercyclical
Policies in Economic Fluctuations 351
13.2 Countercyclical Monetary Policy 352
Controlling the Federal Funds Rate 353
Other Tools of the Fed 356
Expectations, Inflation, and Monetary Policy 357
Zero Lower Bound 357
Letting the Data Speak: Managing Expectations in Monetary Policy 358
Contractionary Monetary Policy: Reducing Inflation 360
Policy Trade-Offs 362
Choice & Consequence: Policy Mistakes 362
13.3 Countercyclical Fiscal Policy 363
Fiscal Policy over the Business Cycle: Automatic and Discretionary Components 364
Analysis of Expenditure-Based Fiscal Policy 366
Analysis of Taxation-Based Fiscal Policy 368
Letting the Data Speak: The Response of Consumption to Tax Cuts 370
Fiscal Policies That Directly Target the Labor Market 370
Policy Waste and Policy Lags 370
Letting the Data Speak: Hybrid Policies
That Involve Cooperation Between Fiscal
and Monetary Policymakers 371
Evidence-Based Economics: How much
does government expenditure stimulate GDP? 373
Summary 374
Key Terms 375
Questions 375
Evidence-Based Economics Problems 375
Problems 376
PART VI M acroeconomics in a Global Economy
Chapter 14: Macroeconomics and International Trade 378
14.1 Why and How We Trade 379
Absolute Advantage and Comparative Advantage 379
Comparative Advantage and International Trade 382
Efficiency and Winners and Losers from Trade 383
How We Trade 385
Letting the Data Speak: Living in an Interconnected World 386
Choice & Consequence: Trade Policy and Politics 387
Trade Barriers: Tariffs 387
14.2 The Current Account and the Financial Account 388
Trade Surpluses and Trade Deficits 388
International Financial Flows 388
The Workings of the Current Account and the Financial Account 390
14.3 International Trade, Technology Transfer, and Economic Growth 393
Letting the Data Speak: From IBM to Lenovo 395
Evidence-Based Economics: Are
companies like Nike harming workers in Vietnam? 395
Summary 398
Key Terms 399
Questions 399
Evidence-Based Economics Problems 399
Problems 400
Chapter 15: Open Economy Macroeconomics 402
15.1 Exchange Rates 403
Nominal Exchange Rates 403
Flexible, Managed, and Fixed Exchange Rates 404
15.2 The Foreign Exchange Market 406
How Do Governments Intervene in the Foreign Exchange Market? 408
Defending an Overvalued Exchange Rate 409
Choice & Consequence: Fixed Exchange Rates and Corruption 411
Evidence-Based Economics: How did
George Soros make $1 billion? 412
15.3 The Real Exchange Rate and Exports 413
From the Nominal to the Real Exchange Rate 414
Co-Movement Between the Nominal and the Real Exchange Rates 415
The Real Exchange Rate and Net Exports 416
Letting the Data Speak: Why Did the Chinese Authorities Keep the Yuan Undervalued? 417
15.4 GDP in the Open Economy 418
Revisiting Black Wednesday 418
Interest Rates, Exchange Rates, and Net Exports 419
Letting the Data Speak: The Costs of Fixed Exchange Rates 421
Summary 422
Key Terms 422
Questions 422
Evidence-Based Economics Problems 423
Problems 423
Endnotes 427
Glossary 431
Credits 439
Index 440