Economics (McConnell), 18th Edition

New to This Edition

One of the benefits of writing a successful text is the opportunity to revise—to delete the outdated and install the new, to rewrite misleading or ambiguous statements, to introduce more relevant illustrations, to improve the organizational structure, and to enhance the learning aids.

This is the most significant revision of Economics since the fourteenth edition. It has greatly benefited from the addition of our new coauthor. The more significant changes include the following.

Micro First Organization Perhaps most noticeably, we changed the book’s organization to micro first in keeping with how contemporary economists view the direction of linkage between the two parts of the subject. All the new principles texts introduced during the past two decades have been organized as micro-first texts and colleges have increasingly changed their course numbering (sequencing) to micro first.

As it relates to the actual principles course, however, this change in ordering is mainly symbolic. Micro and macro courses are still taught separately and independently, with no prerequisite on either. Also, students increasingly use the split micro and macro versions of our main text, even in schools that adopt our book for all sections of both micro and macro principles. We therefore think that most instructors will find it relatively easy to make the transition to the new ordering.

Fully Updated, Totally Contemporary Macroeconomics We recast the entire macro analysis in terms of the modern, dominant paradigm of macroeconomics, using economic growth as the central backdrop and viewing business fluctuations as significant and costly variations in the rate of growth. In this paradigm, business cycles result from demand shocks (or, less often, supply shocks) in conjunction with inflexible short-run product prices and wages. The degree of price and wage stickiness decreases with time. In our models, the immediate short run is a period in which the price level and wages are not only sticky, but stuck; the short run is a period in which product prices are flexible and wages are not; and the long run is a period in which both prices and wages are fully flexible. Each of these three periods—and thus each of the models based on them—is relevant to understanding the actual macro economy and its occasional difficulties.

New Chapter 23 introduces the macro framework in a lively, intuitive way, using an example of a hypothetical single-firm economy. It also makes a clear, critical distinction between the broader concept of financial investment and the narrower subset of investment called economic investment in a way that allows us to use both ideas. A chapter on the measurement of nominal and real GDP follows. With real GDP clearly defined and measured, we present a chapter on economic growth. This early placement of the growth chapter allows students to understand the importance of economic growth and the factors that drive it. This growth chapter is followed by a chapter that introduces business fluctuations along the economy’s growth path and the problems of unemployment and inflation that may result.

Following this set of core beginning chapters, we immediately begin to build models of the economy for the immediate short run and the short run. Students are therefore quickly introduced to models in which recessions and inflation can occur. This approach allows us to use the short-run AD-AS model to address fiscal policy and monetary policy relatively earlier in the macro. Students are made fully aware from the start of the macro that the rate of economic growth is fundamentally important for standards of living. Yet, the quick introduction of sticky price models enables students to understand demand shocks, recession, stimulatory fiscal policy, Fed monetary policy actions, and other topics that dominate the news about the macro economy.

Because Chapter 5 provides an early introduction to international trade and international finance, we are able to integrate the global economy from the start of the macro analysis. Then, after eventually developing the long-run AD-AS model, we directly link this long-run analysis back to our earlier discussions of growth. We finish the macro with two chapters that provide further analysis of international trade, balance of payments, exchange rates, and trade imbalances. The macro ends with a bonus Web chapter on the requisites for, and impediments to, economic growth in developing nations.

Although the framework in which the macro is built is extensively revised, the revisions were made to preserve the main elements of the chapters in the previous edition. We simply have wrapped the macroeconomics analysis into a modern package of growth, expectations, shocks, price stickiness, time horizons, and international linkages.

Our macro content is also fully modern in terms of its coverage of contemporary problems and policies. For example, we cover the mortgage debt crisis, the recent economic slowdown, the Fed’s reductions of the Federal funds rate, the Fed’s term auction facility, the stimulus tax package of 2008, and more.

 Four New Chapters Four chapters—two micro and two macro—are new to the print version of Economics. Our common purpose for all four chapters is to incorporate contemporary analytical themes and address current economic issues.

Chapter 15: Natural Resource and Energy Economics. This new micro chapter—brought from our Web site for the seventeenth edition—is now in Part 3 (Microeconomics of Resource Markets). This chapter addresses the question of whether the world is becoming overpopulated and rapidly running out of resources. It covers topics such as declining fertility rates, the optimal rate of resource extraction, resource substitution, resource sustainability, oil prices, and alternative energy sources. An understanding of the basic economic principles of natural resource economics will be critical to future voters and leaders. This micro treatment of natural resource and energy topics is particularly timely since many students are regularly exposed to alarmist views on these subjects.

Chapter 22: Immigration. This new micro chapter covers the economics of immigration—both legal and illegal—in an analytical and balanced way. Students are highly interested in this subject, yet often lack the economic knowledge and tools to grasp the issues and debates. This chapter provides that basic economic understanding. The chapter also serves as a timely application of the economic principles developed in the prior chapters on resource markets.

Chapter 23: An Introduction to Macroeconomics. As previously noted, this new chapter introduces the revised macroeconomic content in an interesting, concise way. It motivates the study of macroeconomics and establishes the analytical framework to the subject that we use throughout the macro portion of the book.

Chapter 34: Financial Economics. This new macro chapter examines ideas such as compound interest, present value, arbitrage, risk, diversification, and the risk-return relationship. Students need a better grounding in such ideas to truly understand the modern economy. In view of the problems in the financial markets over the recent past, we think that integrating financial economics more directly in the macro principles course makes good sense. For many students, this course will be their only (classroom!) opportunity to learn that promises of high, unguaranteed returns reflect high, uninsured risk. Even if instructors cannot find time to assign and cover the entire chapter, they may want to discuss the beginning portion, which addresses the time value of money and provides easy-to-understand real-world examples of present value.

To make room for our four new chapters, we had to make certain accommodations. Specifically, we moved our micro chapter “Technology, R & D, and Efficiency” to the book’s Web site, where it joins the chapter “The Economics of Developing Countries.” Both chapters are available free to students for full-color viewing and can be printed for off-computer study. Furthermore, these chapters are fully supported by all the supplementary materials such as the Study Guide and Test Banks. Instructors who wish to cover the R&D chapter, rather than, for example, the new resource chapter, can easily make the substitution.

We also deleted the chapter “Labor Market Issues and Institutions: Unions, Discrimination, and Immigration.” The core of the union content is now is an appendix to the wage determination chapter; the discrimination material is consolidated and placed in the chapter “Income Inequality, Poverty, and Discrimination,” and the immigration content now is part of the full new chapter on this subject.

Also, we deleted the mainly macro chapter on the balance of payments, exchanges rates, and trade deficits from the micro split version of Economics. It continues to be in Economics and the macro split.

Our explicit discussion of Keynesian versus Classical macroeconomics in the chapter on macro theories and issues has been deleted since we integrated the graphical analysis into earlier chapters. Finally, we have deleted the lengthy historical discussions of the gold standard and the Bretton Woods System from the chapter on exchange rates and placed it as supplemental material for the chapter at our Web site. Other, lesser deletions or abridgements have occurred throughout the book.

Three New Appendixes Three additional chapter appendixes are available for optional assignment in this edition. All are supported by the supplementary materials. The concise new appendixes are:

Chapter 3: Additional Examples of Supply and Demand. At the end of Chapter 3 we provide several additional examples of supply and demand, including concrete examples of simultaneous shifts in supply and demand curves. Products covered include lettuce, corn and ethanol, pink salmon, gasoline, and sushi. We also use the Olympic Games to illustrate examples of preset prices, shortages, and surpluses.

Chapter 11: Additional Game Theory Applications. We placed several applications of game theory in a new appendix at the end of the micro chapter on monopolistic competition and oligopoly. Instructors who like to stress game theory in dealing with oligopoly now have strong backup support from the textbook for their efforts. The appendix discusses concepts such as dominant strategies, Nash equilibrium, repeated games, and first-mover advantages.

Chapter 13: Labor Unions and Their Impacts. This compact appendix covers union membership, the decline of unions, collective bargaining, and the economic effects of unions.

New (or Relocated) “Consider This” and “Last Word” Boxes Our “Consider This” boxes are used to provide analogies, examples, or stories that help drive home central economic ideas in a student-oriented, real-world manner. For instance, the idea of trade secrets is described with the legend of “cat gut” and violin strings, while McDonald’s “McHits” and “McMisses” demonstrate the idea of consumer sovereignty. These brief vignettes, each accompanied by a photo, illustrate key points in a lively, colorful, and easy-to-remember way.

New or relocated “Consider This” boxes include such disparate topics as an economic comparison of the two Koreas (Chapter 2), “buying American” (Chapter 5), the prisoner’s dilemma (Chapter 11), government policies and birth rates (Chapter 15), turning (Chapter 19), consumption inequality (Chapter 20), the cancer fight that is going nuclear (Chapter 21), the contributions of past immigrants to the U.S. economy (Chapter 22), patent reform in India (Chapter 25), and the relative returns on standard versus ethical investing (Chapter 34).

Our “Last Word” pieces are lengthier applications and case studies located toward the end of chapters. New or relocated Last Words include those on fair trade products (Chapter 5); insights from behavioral economics (Chapter 7); the link between economic growth and environmental protection (Chapter 15); past and current, and proposed U.S. immigration laws (Chapter 22); the role of inventory management in moderating recessions (Chapter 23); the Fed’s response to the mortgage debt crisis (Chapter 33); the relative performance of index funds versus actively managed funds (Chapter 34); and Bastiat’s “Petition of the Candlemakers” (Chapter 37).

Contemporary Discussions and Examples The eighteenth edition refers to and discusses many current topics. Examples include the cost of the war in Iraq; surpluses and shortages of tickets at the Olympics; the myriad impacts of ethanol subsides; offshoring of American jobs; trade adjustment assistance; the additions of countries to the European Union and to the euro zone; normal trade relations status; aspects of behavioral economics; game theory; the most rapidly expanding and disappearing U.S. jobs; oil and gasoline prices; climate change; The Food, Conservation, and Energy Act of 2008; consumption versus income inequality; prescription drug coverage under Medicare; Health Savings Accounts (HSAs); comprehensive immigration reform; China’s rapid growth rate; the business downturn of late 2007 and early 2008; the stimulus package of 2008; Federal budget deficits; the mortgage debt crisis; recent Fed monetary policy; the Fed’s new term auction facility; the Taylor rule; U.S. trade deficits; and many more.

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