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Original PDF Macroeconomics Second Canadian Edition PDF
Original PDF Macroeconomics Second Canadian Edition PDF
macroeconomics
serletis
childs
hubbard
second canadian edition
economics
o’brien
second canadian edition
serletis
www.pearsoncanada.ca
ISBN 978-0-13-456524-8
childs
9 780134 565248
Making the Connection Prices Will Rise 118 Small Differences in Growth Rates Are Important 154
Is the CPI Accurate? 119 Why Do Growth Rates Matter? 155
Don’t Let This Happen to You Don’t Don’t Let This Happen to You Don’t Confuse
Miscalculate the Inflation Rate 119 the Average Annual Percentage Change
The Producer Price Index 120 with the Total Percentage Change 155
5.5 Using Price Indexes to Adjust for “The Rich Get Richer and…” 156
the Effects of Inflation 120 Making the Connection Is Income All That Matters? 156
Solved Problem 5.1 Calculating 7.2 What Determines How Fast Economies Grow? 157
Real Hourly Wages 120 The Per-Worker Production Function 158
5.6 Real versus Nominal Interest Rates 121 Which Is More Important for Economic
5.7 Does Inflation Impose Costs on the Economy? 122 Growth: More Capital or Technological Change? 159
Inflation Affects the Distribution of Income 123 Technological Change: The Key to
The Problem with Anticipated Inflation 123 Sustaining Economic Growth 160
The Problem with Unanticipated Inflation 124 Making the Connection What Explains the
Conclusion 125 Economic Failure of the Soviet Union? 161
Solved Problem 7.1 Using the Economic
Chapter 6 Economic Growth, Growth Model to Analyze the Failure
the Financial System, of the Soviet Economy 162
New Growth Theory 162
and Business Cycles 129
Joseph Schumpeter and Creative Destruction 164
Economic Growth and the Business Cycle 7.3 Economic Growth in Canada 164
at Bombardier 129 Economic Growth in Canada since 1950 165
6.1 Long-Run Economic Growth 131 Is Canada Headed for a Long Period of
Making the Connection Economic Slow Growth? 165
Prosperity and Health 132 7.4 Why Isn’t the Whole World Rich? 168
Calculating Growth Rates and the Rule of 70 133 Catch-up: Sometimes but Not Always 168
What Determines the Rate of Solved Problem 7.2 The Economic
Long-Run Growth? 133 Growth Model’s Prediction of Catch-up 169
Making the Connection Can India Sustain Why Haven’t Most Western European
Its Rapid Growth? 135 Countries, Canada, and Japan Caught
Potential GDP 136 Up to the United States? 171
6.2 Saving, Investment, and the Financial System 137 Why Don’t More Low-Income Countries
An Overview of the Financial System 137 Experience Rapid Growth? 173
The Macroeconomics of Saving and Investment 138 Making the Connection Why Hasn’t Mexico
The Market for Loanable Funds 139 Grown as Fast as China? 174
Solved Problem 6.2 How Does a Consumption The Benefits of Globalization 176
Tax Affect Saving, Investment, the 7.5 Growth Policies 177
Interest Rate, and Economic Growth? 143 Enhancing Property Rights and the Rule of Law 177
6.3 The Business Cycle 144 Making the Connection Will China’s Standard
Some Basic Business Cycle Definitions 144 of Living Ever Exceed That of Canada? 177
How Do We Know When the Economy Improving Health and Education 179
Is in a Recession? 144 Policies That Promote Technological Change 179
What Happens during the Business Cycle 144 Policies That Promote Saving and Investment 179
Don’t Let This Happen to You Don’t Confuse Is Economic Growth Good or Bad? 180
the Price Level with the Inflation Rate 146 Conclusion 181
Conclusion 148 An Inside Look The Worries about
China’s Slowing Growth 187
Chapter 7 Long-Run Economic Growth:
Sources and Policies 151
PART 3 Short-Run Fluctuations
Will Economic Reforms in Mexico Boost Growth? 151
7.1 Economic Growth over Time and Chapter 8 Aggregate Expenditure and
around the World 153
Economic Growth from 1 000 000 bce to
Output in the Short Run 189
the Present 153 Fluctuating Demand at Tim Hortons 189
Making the Connection Why Did the Industrial 8.1 The Aggregate Expenditure Model 190
Revolution Begin in England? 153 Aggregate Expenditure 190
Using T-Accounts to Show How a Bank 11.4 Monetary Policy in the Dynamic Aggregate
Can Create Money 269 Demand and Aggregate Supply Model 304
The Simple Deposit Multiplier 271 The Effects of Monetary Policy on Real GDP
Don’t Let This Happen to You Don’t Confuse and the Price Level: A More Complete Account 305
Assets and Liabilities 272 Using Monetary Policy to Fight Inflation 306
Solved Problem 10.2 Showing How Banks Solved Problem 11.1 The Effects of
Create Money 273 Monetary Policy 307
The Simple Deposit Multiplier versus 11.5 A Closer Look at the Bank of Canada’s
the Real-World Deposit Multiplier 275 Setting of Monetary Policy Targets 309
10.4 The Bank of Canada 275 Should the Bank of Canada Target
The Establishment of the Bank of Canada 276 the Money Supply? 309
The Bank of Canada’s Operating Band for Why Doesn’t the Bank of Canada Target Both
the Overnight Interest Rate 276 the Money Supply and the Interest Rate? 310
How the Bank of Canada Implements The Taylor Rule 310
Monetary Policy 277 Making the Connection How Does the Bank
The Bank of Canada’s Approach to of Canada Measure Inflation? 311
Monetary Policy 279 11.6 Central Bank Policies during the
The “Shadow Banking System” and the 2007–2009 Global Financial Crisis 312
Global Financial Crisis of 2007–2009 279 The Inflation and Deflation of the
10.5 The Quantity Theory of Money 282 Housing Market Bubble in the United States 312
Connecting Money and Prices: The Changing Mortgage Market in
The Quantity Equation 282 the United States 314
The Quantity Theory Explanation of Inflation 283 The Role of Investment Banks in
How Accurate Are Estimates of the United States 314
Inflation Based on the Quantity Theory? 283 Why Didn’t Canada Have a Housing
High Rates of Inflation 284 Bubble and Banking Crisis in 2008? 315
Making the Connection The German Making the Connection The Wonderful
Hyperinflation of the Early 1920s 285 World of Leverage 315
Conclusion 286 The US Federal Reserve and the
US Treasury Department Respond 316
Chapter 11 Monetary Policy 291 The US Federal Reserve Adopts
Flexible Inflation Targeting 318
Why Would a Bank Pay a Negative Interest Rate? 291
Conclusion 319
11.1 What Is Monetary Policy? 292
The Goals of Monetary Policy 293
Chapter 12 Fiscal Policy 325
11.2 The Money Market and the Bank of
Canada’s Choice of Monetary Policy Targets 294 Fiscal Policy as a 2015 Canadian Election Issue 325
Monetary Policy Targets 294 12.1 What Is Fiscal Policy? 326
The Demand for Money 295 What Fiscal Policy Is and What It Isn’t 326
Shifts in the Money Demand Curve 296 Automatic Stabilizers versus Discretionary
How the Bank of Canada Manages Fiscal Policy 326
the Money Supply: A Quick Review 296 An Overview of Government
Equilibrium in the Money Market 297 Spending and Taxes 327
A Tale of Two Interest Rates 298 Where Does the Money Go? 328
Choosing a Monetary Policy Target 298 Where Does the Money Come From? 329
The Importance of the Overnight Interest Rate 299 Where Does Provincial revenue Come From? 329
11.3 Monetary Policy and Economic Activity 299 Where does Provincial revenue go? 329
How Interest Rates Affect Aggregate Demand 300 Making the Connection The Exploding
The Effects of Monetary Policy on Costs of Health Care 330
Real GDP and the Price Level 300 12.2 The Effects of Fiscal Policy on
Making the Connection Too Low for Zero: Real GDP and the Price Level 332
Central Banks Try “Quantitative Easing” 302 Expansionary and Contractionary
Can the Bank of Canada Eliminate Recessions? 303 Fiscal Policy 332
A Summary of How Monetary Policy Works 304 A Summary of How Fiscal Policy
Don’t Let This Happen to You Remember that Affects Aggregate Demand 333
with Monetary Policy, It’s the Interest 12.3 Fiscal Policy in the Dynamic Aggregate
Rates—Not the Money—That Counts 304 Demand and Aggregate Supply Model 333
12.4 Government Purchases and Tax Multipliers 335 Making the Connection Do Workers
The Effect of Changes in Tax Rates 337 Understand Inflation? 368
Taking into Account the Effects of 13.2 The Short-Run and Long-Run Phillips Curves 369
Aggregate Supply 338 Shifts in the Short-Run Phillips Curve 369
The Multipliers Work in Both Directions 338 How Does a Vertical Long-Run Phillips
Don’t Let This Happen to You Don’t Curve Affect Monetary Policy? 370
Overestimate the Size of the Multiplier 339 Making the Connection Does the Natural Rate of
Solved Problem 12.1 Fiscal Policy Multipliers 339 Unemployment Ever Change? 371
12.5 The Limits of Fiscal Policy as a Stimulus 340 Solved Problem 13.1 Changing Views of
Does Government Spending Reduce the Phillips Curve 372
Private Spending? 340 13.3 Expectations of the Inflation Rate and
Crowding Out in the Short Run 340 Monetary Policy 373
Crowding Out in the Long Run 341 The Implications of Rational Expectations
Making the Connection Is Losing Your for Monetary Policy 374
Job Good for Your Health? 342 Is the Short-Run Phillips Curve Really Vertical? 375
12.6 Deficits, Surpluses, and Federal Real Business Cycle Models 375
Government Debt 343 13.4 Bank of Canada Policy from the 1970s
How the Federal Budget Can Serve to the Present 376
as an Automatic Stabilizer 344 The Effect of a Supply Shock on
Making the Connection The Greek the Phillips Curve 376
Debt Crisis and Austerity 345 The Canadian Disinflation, 1989–1993 377
Solved Problem 12.2 The Effect of Economic Don’t Let This Happen to You Don’t Confuse
Fluctuations on the Budget Deficit 346 Disinflation with Deflation 378
Should the Federal Budget Always Inflation Targeting, 1989–Present 379
Be Balanced? 346 Solved Problem 13.2 Using Monetary Policy
The Federal Government Debt 347 to Lower the Inflation Rate 379
Is Government Debt a Problem? 347 The 2007–2009 Global Recession and
12.7 The Effects of Fiscal Policy in the Long Run 348 the Crisis in Monetary Policy 381
The Long-Run Effects of Tax Policy 348 Conclusion 382
Tax Simplification 349 An Inside Look U.S. short sellers betting on
The Economic Effect of Tax Reform 349 Canadian housing crash: ‘An accident
How Big Are Supply-Side Effects? 350 waiting to happen’ 387
Conclusion 351
Appendix E: A Closer Look at the Multiplier Formula 357
A Closer Look at the Multiplier Formula 357 PART 5 The International Economy
An Expression for Equilibrium Real GDP 357
A Formula for the Government Purchases Multiplier 358 Chapter 14 Macroeconomics in
A Formula for the Tax Multiplier 359 an Open Economy 389
The “Balanced Budget” Multiplier 359
The Effects of Changes in Tax Rates on IBM Sings the Dollar Blues 389
the Multiplier 360 14.1 The Balance of Payments: Linking
The Multiplier in an Open Economy 360 Canada to the International Economy 390
Problems and Applications 361 The Current Account 391
The Financial Account 392
Chapter 13 Inflation, Unemployment, The Capital Account 393
Why Is the Balance of Payments Always Zero? 393
and Bank of Canada Policy 362
Don’t Let This Happen to You Don’t Confuse
Can the Bank of Canada Balance the Risks the Balance of Trade, the Current Account
in the Canadian Economy? 362 Balance, and the Balance of Payments 394
13.1 The Discovery of the Short-Run Solved Problem 14.1 Understanding the
Trade-off between Unemployment and Inflation 364 Arithmetic of the Balance of Payments 394
Explaining the Phillips Curve with Aggregate 14.2 The Foreign Exchange Market and
Demand and Aggregate Supply Curves 364 Exchange Rates 395
Is the Phillips Curve a Policy Menu? 365 Making the Connection Exchange Rate Listings 396
Is the Short-Run Phillips Curve Stable? 366 Equilibrium in the Market for Foreign Exchange 396
The Long-Run Phillips Curve 366 How Do Shifts in Demand and Supply Affect
The Role of Expectations of Future Inflation 366 the Exchange Rate? 397
There have been dramatic advances in macroeconomics over the past 40 years, and the field
is changing rapidly. Today, macroeconomics assumes that economic agents (i.e., people)
have rational expectations and are forward-looking, relies on market-clearing conditions for
households and firms, and relies on financial shocks and mechanisms that amplify and propa-
gate those shocks over time. Yet, in the aftermath of the global financial crisis, a number of
economists, the media, and policymakers have argued that modern macroeconomics can’t
capture the complexity of the world that is to be explained.
We believe that with the increasing complexity and interdependence of real economies,
macroeconomics must be relevant and applicable. Our approach in this book is to provide
students and instructors with an economics text that delivers complete economics coverage
in a “widget-free” way by using with real-world business and policy examples. We are grati-
fied by the enthusiastic response from students and instructors who have used the first edi-
tion of this book and who have made it one of the best-selling economics textbooks on the
market.
Much has happened in Canada and world economies since we prepared the previous
edition. We have incorporated many of these developments in the new real-world examples
in this edition and also in the digital resources.
xv
graph that shows new data plotted in the graph. Available in Assignment Manager are
real-time data exercises that use the latest data from FRED. The goal of these digital
features is to help students develop skills in interpreting data and understand how new
data affects graphs.
Inflation,” we provide students with an understanding of the uses and potential shortcom-
ings of the key macroeconomic statistics, without getting bogged down in the minutiae
of how the statistics are constructed.
• Early coverage of long-run topics. We place key macroeconomic issues in their
long-run context in Chapter 6, “Economic Growth, the Financial System, and Business
Cycles,” and Chapter 7, “Long-Run Economic Growth: Sources and Policies.” Chapter 6
puts the business cycle in the context of underlying long-run growth and discusses what
actually happens during the phases of the business cycle. We believe that this material is
important if students are to have the understanding of business cycles they will need to
interpret economic events; this material is often discussed only briefly or omitted entirely
in other books. We know that many instructors prefer to have a short-run orientation to
their macro courses, with a strong emphasis on policy. Accordingly, we have structured
Chapter 6 so that its discussion of long-run growth would be sufficient for instructors
who want to move quickly to short-run analysis. Chapter 7 uses a simple neoclassical
growth model to explain important economic growth issues. We apply the model to
topics such as the decline of the Soviet economy, the long-run prospects for growth in
China, and the failure of many developing countries to sustain high growth rates. And we
challenge students with the discussion “Why Isn’t the Whole World Rich?”
• A dynamic model of aggregate demand and aggregate supply. We take a fresh
approach to the standard aggregate demand and aggregate supply (AD–AS) model. We
realize there is no good, simple alternative to using the AD–AS model when explaining
movements in the price level and in real GDP. But we know that more instructors are
dissatisfied with the AD–AS model than with any other aspect of the macro principles
course. The key problem, of course, is that AD–AS is a static model that attempts to
account for dynamic changes in real GDP and the price level. Our approach retains
the basics of the AD–AS model but makes it more accurate and useful by making it
more dynamic. We emphasize two points: (1) Changes in the position of the short-run
(upward-sloping) aggregate supply curve depend mainly on the state of expectations of
the inflation and (2) the existence of growth in the economy means that the long-run
(vertical) aggregate supply curve shifts to the right every year. This “dynamic” AD–AS
model provides students with a more accurate understanding of the causes and conse-
quences of fluctuations in real GDP and the price level. We introduce this model in
Chapter 9, “Aggregate Demand and Aggregate Supply Analysis,” and use it to discuss
monetary policy in Chapter 11, “Monetary Policy,” and fiscal policy in Chapter 12,
“Fiscal Policy.” Instructors may safely omit the sections on the dynamic AD–AS model
without any loss in continuity to the discussion of macroeconomic theory and policy.
• Extensive coverage of monetary policy. Because of the central role monetary policy
plays in the economy and in students’ curiosity about business and financial news, we
devote two chapters—Chapters 11, “Monetary Policy,” and 13, “Inflation, Unemploy-
ment, and Bank of Canada Policy”—to the topic. We emphasize the issues involved in
the Bank of Canada’s choice of monetary policy targets, and we include coverage of the
Taylor rule. We also cover the Bank of Canada’s new policies aimed at dealing with the
bubble in the Canadian housing market and its effects on financial markets.
• Coverage of both the demand-side and supply-side effects of fiscal policy. Our
discussion of fiscal policy in Chapter 12, “Fiscal Policy,” carefully distinguishes between
automatic stabilizers and discretionary fiscal policy. We also provide significant coverage
of the supply-side effects of fiscal policy.
• A self-contained but thorough discussion of the Keynesian income-expendi-
ture approach. The Keynesian income-expenditure approach (the “45°-line diagram,”
or “Keynesian cross”) is useful for introducing students to the short-run relationship
between spending and production. Many instructors, however, prefer to omit this mate-
rial. Therefore, we use the 45°-line diagram only in Chapter 8, “Aggregate Expenditure
and Output in the Short Run.” The discussion of monetary and fiscal policy in later
chapters uses only the AD–AS model, which makes it possible to omit Chapter 8.
Chapter 1
• NEW Solved Problem 1.1
• NEW Making the Connection box on central planning
• NEW Making the Connection box on the efficiency equity trade-off
Chapter 2
• Update to discussion of the circular flow model
• NEW Making the Connection box on making a smartphone
• NEW Making the Connection box on the role of government
Chapter 3
• NEW Making the Connection box on lobster as an inferior good
• Reworked subsection on population and demographics
• NEW Making the Connection box on transparent solar panels
Chapter 4
• NEW chapter opener
• Added more explanation to the circular flow model
• Rewrote and updated portions of nominal and real GDP
• Updated GDP deflator example
• Rewrote much of the section on national income accounting to reflect changed report-
ing standards of StatsCan
• Updated section on division of income and included a comparator from 10 years ago
Chapter 5
• Updated chapter opener
• Replaced Economics in Your Life
• New explanation of Structural unemployment
• Re-wrote Making the Connection box on categorizing unemployment
• New Making the Connection box: Comparing Prices from 100 Years Ago to Now
Chapter 6
• Chapter opener example updated to reflect Bombardier’s recent troubles
• Updated Making the Connection box with one on India’s growth
Chapter 7
• NEW chapter opener
• NEW Making the Connection box: Why Hasn’t Mexico Grown as Fast as China?
Chapter 8
• Updated chapter opener
• Added autonomous consumption
Chapter 9
• NEW Making the Connection box on Canada’s mini recession in 2015
• Updated Making the Connection box on predicting shifts
• Updated Making the Connection box on government intervention and recession
Chapter 10
• NEW chapter opener
• NEW Making the Connection box: Apple Didn’t Want my Cash
• NEW Making the Connection box: Are Bitcoins Money?
• NEW Making the Connection box: Would You Borrow from an Online Peer-to-Peer
Lender?
Chapter 11
• NEW chapter opener
Chapter 12
• NEW chapter opener
• Updated Making the Connection box on recession and health
• Updated Making the Connection box on Greece
Chapter 13
• Improved the chapter opener
Chapter 14
• NEW chapter opener
• Updated Making the Connection box: Exchange Rate Listings
• NEW Making the Connection box: Is a Strong Currency Good for a Country?
• NEW Solved Problem 14.2: Subaru Benefits from a Weak Yen
Chapter 15
• NEW chapter opener
• Changed the Economics in Your Life box
• Deleted the Making the Connection box: The Canadian Province of … Arizona?
• Updated the Making the Connection box: The Big Mac Theory of Exchange Rates
• Updated Solved Problem 15.1
• NEW Making the Connection box: Greece and Germany: Diverse Economies,
Common Currency
• NEW Making the Connection box: The Chinese Yuan: The World’s Most Controversial
Currency
These problems indicate that the Mexican government has failed to fully establish
the rule of law, which is critical for the long-term prospects of the Mexican economy.
Without the rule of law, entrepreneurs cannot fulfill their role in the market system of
bringing together the factors of production—labour, capital, and natural resources—to
Sollina Images/Blend Images/Getty Images
produce goods and services. Mexican entrepreneurs also suffer from problems in the
banking system that make it difficult to obtain the funding needed to finance expansion.
Although Mexico has experienced some increases in real GDP per capita during the
past 30 years, its record of economic growth has been disappointing, particularly in com-
parison with China and other rapidly growing countries in the developing world. Being
able to attain faster rates of growth would benefit people in Mexico—particularly those
with low incomes—and the wider world economy.
Based on Damien Cave, “As Ties with China Unravel, U.S. Companies Head to Mexico,”
New York Times, May 31, 2014; Dolia Estevez, “U.S. Warns against Rising Costs of Doing
Business in Mexico Due to Criminal Activity,” Forbes, June 5, 2014; and Laura Dawson,
Long-Run
“Canada’s Trade with Mexico: Where We’ve Been, Where We’re Going and Why It Matters,”
7
CHAPTER Canadian Council of Chief Executives, February, 2014.
Policies
introduced economic reforms, which spurred rapid economic growth. Suppose that you could choose to live and
work in a world with the Chinese economy growing very rapidly or in a world with the Chinese economy growing
as slowly as it did before 1978. Which world would you choose to live in? How does the current high-growth,
high-export Chinese economy affect you as a consumer? How does it affect you as someone about to start a
career? As you read the chapter, try to answer these questions. You can check your answers against the one we
Chapter Outline and provide on page 180 at the end of this chapter.
Will Economic Reforms Learning Objectives
in Mexico Boost Growth?
E
Founded in 1944, Palliser Furniture Upholstery Ltd. is a Canadian 7.1 Economic Growth over Time and around the World, conomic growth is not inevitable. For most of human history, no sustained
firm based in Winnipeg, Manitoba, that makes customized furni- page 155 increases in output per capita occurred, and, in the words of the philosopher
ture using high-end materials and specialized designs. In recent Define economic growth, calculate economic Thomas Hobbes, the lives of most people were “poor, nasty, brutish, and short.”
years, the company has faced strong competition and has sought growth rates, and describe global trends in Sustained economic growth first began with the Industrial Revolution in England
ways to reduce costs. The firm considered building a factory in economic growth. in the late eighteenth century. From there, economic growth spread to the United States,
China but chose instead to go to Mexico, because it was closer 7.2 What Determines How Fast Economies Grow? page 159 Canada, and the countries of Western Europe. Following the end of World War II in 1945,
and managers from the company could more easily oversee pro- Use the economic growth model to explain why rapid economic growth also began in Japan and, eventually, in several other Asian countries,
duction. Today, Palliser’s manufacturing for the Canadian market growth rates differ across countries. but the economies of many other countries stagnated, leaving their people trapped in poverty.
takes place in Winnipeg, while its three Mexican plants in the 7.3 Economic Growth in Canada, page 166 Real GDP per capita is the best measure of a country’s standard of living because it rep-
state of Coahuila service the Mexico, Latin America, and United Discuss fluctuations in productivity growth in
States markets. resents the ability of the average person to buy goods and services. Economic growth occurs
Canada.
Palliser is not alone in choosing to locate plants in Mexico when real GDP per capita increases. In this chapter we will develop a model of economic growth
7.4 Why Isn’t the Whole World Rich? page 170 that will help us answer important questions like these:
rather than China. More than 2500 Canadian companies, including
Explain economic catch-up and discuss why
Bombardier, Linamar, and Scotiabank, and more than 18 000 U.S.
many poor countries have not experienced rapid • Why have countries such as Canada, the United States, and the United Kingdom, which had
companies, including many Fortune 500 firms, have operations in
economic growth. high standards of living at the beginning of the twentieth century, continued to grow rapidly?
Mexico. As Christopher Wilson, an economist at the Woodrow
Wilson International Center for Scholars in Washington, observed: 7.5 Growth Policies, page 179 • Why have countries such as Argentina, which at one time had relatively high standards of
“Mexico has become the most competitive place to manufacture Discuss government policies that foster economic living, failed to keep pace?
goods for the North American market.” While proximity to the growth. • Why was the Soviet Union unable to sustain the rapid growth rates of its early years?
United States and Central and South America is an advantage • Why are some countries that were very poor at the beginning of the twentieth century
of doing business in Mexico, rather than China or India, invest- still very poor?
ing in Mexico can be risky. Organized crime and corruption are
major concerns. Coca-Cola, for example, suspended its operations
in Chilpancingo because of attacks on its employees. Some local
Mexican firms have been reluctant to expand because they fear
coming to the attention of criminal gangs who might demand pay-
ments or government inspectors who might demand bribes. M07A_HUBB1260_02_SE_C07.indd 152 18/11/16 4:56 pm
An Inside Look is a two-page feature that shows students how to apply the concepts
from the part to the analysis of a news article. The articles selected deal with policy issues and
are titled An Inside Look. Articles are from sources such as the Economist, National Post, and
Toronto Star. An Inside Look presents an excerpt from an article, an analysis of the article, and
critical thinking questions.
(Y/L)2019 Production
(Y/L)2018 function
(Y/L)2002
(Y/L)2001
Continuous increases in capital per hour worked lead to smaller and smaller increases in output per hour worked.
82 83
U
nemployment and inflation are the macroeconomic problems most discussed
in the media and during political campaigns. For many people, the state of
the economy can be described by just two measures: the unemployment
rate and the inflation rate. In the 1960s, Arthur Okun, an American econo-
mist, coined the term misery index, which adds the inflation rate and the unemployment
rate together to give a rough measure of the state of the economy. As we will see in later
chapters, although inflation and unemployment are important problems, the long-run suc-
cess of an economy is generally judged by its ability to generate high levels of real GDP
per person. We devote this chapter to discussing how unemployment and inflation rates are
Unemployment rate The
percentage of the labour force that is measured. In particular, we’ll look closely at the measures produced by Statistics Canada on a
unemployed. monthly basis.
At the end of the chapter, we use the chapter concepts to answer the questions asked at
the beginning of the chapter.
Here are a few examples of the topics featured in Economics in Your Life:
• What’s the best country for you to work in? (Chapter 4)
• Should you change your career plans if you graduate during a recession? (Chapter 5)
• When consumer confidence falls, is your job at risk? (Chapter 8)
• Should you buy a house during a recession? (Chapter 11)
• Exchange rate risk can affect your savings (Chapter 15)
Solved Problems
Many students have great difficulty handling applied economics problems. We help students
overcome this hurdle by including two or three worked-out problems tied to select chapter-
opening learning objectives. Our goals are to keep students focused on the main ideas of each
chapter and to give students a model of how to solve an economic problem by breaking it
down step by step. Additional exercises in the end-of-chapter Problems and Applications sec-
tion are tied to every Solved Problem. Additional Solved Problems appear in the Instructor’s
Manual and the print Study Guide. In addition, the Test Item Files include problems tied to
the Solved Problems in the main book.
4 Chapter 1 Economics: Foundations and Models The Economic Problems All Societies Must Solve 5
that is no longer received from the government, even if the person doesn’t pay him- or Opportunity cost The highest-
Binge Watching and Decisions herself a salary in the new business. valued alternative that must be given
Since all societies face trade-offs, they must make choices when answering the fol- up to engage in an activity.
at the Margin lowing three fundamental economic questions:
Suppose you’ve decided to take a break from studying eco- watch one more episode because you’ll receive a decent mark
1. What goods and services will be produced?
nomics to watch an episode of your favourite show on Net- (say 70%) if you watch and don’t study anymore that night.
2. How will the goods and services be produced?
flix. The episode ends on a cliff-hanger and you now have Do you agree with your friend’s reasoning? What, if any,
3. Who will receive the goods and services produced?
approximately 12 seconds to decide if you should watch the additional information do you need to have to decide if you
next episode to find out what happens or get back to study- should watch the extra episode? When would watching the Throughout this book, we’ll return to these questions. For now, we briefly intro-
ing. Your friend sitting beside you argues that you should extra episode be a good idea? When would it be a bad idea? duce each one.
As we features
nection have seen thatfrom the circular
provide real-worldflow model, total incomeConnection
reinforcement and total expenditure When economists describe a product as being inferior they
aren’t saying it is poor quality, they’re just saying that consum
will both be equal to GDP. This means that there are two ways
ers buy less of to
it whenmeasure
their incomesGDP rise. The same product can be an inferior good to
of key concepts and help students learn how to inter- some and a normal good to others. It all depends on the attitudes of people in a given
based on the circular flow, the expenditure approach andtimethe income
and place approach.
and these attitudes can change. Expenditure approach Measuring
pret whatexpenditure
In the they read on the web
approach, alland
the in newspapers.
spending on domestically A lobster dinner in Toronto or Calgary can easilyGDP
produced goods and cost $50byor adding up all
more. In many fancythe different
hasweatfocus on the
least one expenditure
supporting approach inproblem
end-of-chapter modellingto GDP cheap
throughout
source of protein,the rather text, the meal forreceived
than as a fancy
won’t brag about having a lobster sandwich for lunch.production.
the wealthy.by the owners
Maritimers generally of factors of
cises appear
Pension on Employment
Plan, the book’s supporting
Insurance, website. We usecare
and any health four devices
uct decreases,to
premiums the demand curve for the product will shift to the left.
paid to the govern-
(millions of
cans per month)
at point A to 80 million cans at point C.
help
ment students read and
or a private interpret
health graphs:Social contributions amounted
plan provider. Population and Demographics. Population and demographics can affect the
to
demand for a product. 13.9 percent
increase Population
in each of the
of thedecrease
determines
variables. A total number of consumers
in these variables would who
causecould
the demand
employee compensation and 7.2 percent of GDP. demand a product. curveAstopopulation
shift in the increases, the number of consumers grows and so does
opposite direction.
demand. An increase in population will shift the demand curve to the right.
A Change in Demand versus a Change in Quantity
Demanded
It is important to understand the difference between a change in demand and a change in
quantity demanded. A change in demand refers to a shift of the demand curve. A shift
occurs if there is a change in one of the variables, other than the price of the product, that
M03A_HUBB1260_02_SE_C03.indd 55 affects the willingness of consumers to buy the product. A change in quantity demanded 18/11/16 2:59 PM
refers to a movement along the demand curve as a result of a change in the product’s
price. Figure 3.3 illustrates this important distinction. If the price of energy drinks falls
from $3.00 to $2.50 per can, the result will be a movement along the demand curve
A01_HUBB1260_02_SE_FM.indd 23 from point A to point B—an increase in quantity demanded from 60 million to 70 mil- 22/11/16 6:47 PM
The Demand Side of the Market 57
xxiv P R E FA C E
suggest. This is because you expect that your income will be higher in the future, mean-
ing that you believe you can afford to consume more now. When the economy slows
down1. and Detailed
people expectcaptions
their incomes to be lower in the future, they often put off
major purchases or buy different things. How an expected income change affects the
2. forNotes
demand a productindepends
the graphs
on whether the product is a normal or an inferior good.
When incomes are generally falling (e.g., when the economy is doing poorly), people
3. Colour-coded
tend to buy more inferior goods,curves
even if their incomes haven’t actually changed.
Table 3.1 summarizes the most important variables that cause market demand curves
4. Summary tables with
to shift. Note that the table shows graphs
the shift in the(see pages
demand curve57,
that61, andfrom
results 234
an for examples)
D1 D2
0 Quantity
D1 D2
0 Quantity
D1 D2
0 Quantity
D1 D2
0 Quantity
D1 D2
0 Quantity
D1 D2
0 Quantity
D1 D2
0 Quantity
Old
Court Life in Spain
By Frances M. Elliot
Author of “Old Court Life in France,” etc.
By Frances Elliot
Author of “Old Court Life in Spain,” etc.
The Crises
in the History of
The Papacy
By
Joseph McCabe
Author of “Peter Abélard,” “A Candid History of the Jesuits,”
etc.
This volume comprises a study of twenty of the most famous
of the Popes whose careers and whose influence was most
important in the development of the Church as it was in the
history of the world.
848–899 A. D.
By
Beatrice A. Lees
Of Somerville College, Oxford
8vo. $2.50
Few royal lives have been richer in fulfillment and more
decisive in their influence upon the course of history than that
of Alfred. Under his leadership, Wessex became the nucleus of
England’s expansion, the Danish invader was checked, and the
first beginnings of a royal navy were made. His is the most
important name in English history prior to the coming of the
Normans.
New York G. P. Putnam’s Sons London
TRANSCRIBER’S NOTES
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variations in spelling.
3. Retained archaic, non-standard, and uncertain spellings
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CASTILE AND THE MAKING OF THE SPANISH NATION, 1451-
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