This is the most significant revision of Macroeconomics since the fourteenth edition. It has greatly benefited from the addition of our new coauthor. One of the benefits of writing a successful text is the opportunity to revise—to delete the outdated and install the new, to rewrite misleading or ambiguous statements, to introduce more relevant illustrations, to improve the organizational structure, and to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. The more significant changes include the following.

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 6 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.

Two New Chapters

Two chapters are new to the print version of Macroeconomics. Our common purpose for both chapters is to incorporate contemporary analytical themes and address current economic issues.

Chapter 6: 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 in the book.

Chapter 17: 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.

In view of these added chapters, we have looked for places to consolidate elsewhere in Macroeconomics . 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. Also, 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.

New Appendix

An additional chapter appendix is available for optional assignment in this edition, and is supported by the supplementary materials. The concise new appendix is:

Chapter 3 Appendix: 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 pre-set prices, shortages, and surpluses.

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), patent reform in India (Chapter 8), and the relative returns on standard versus ethical investing (Chapter 17).

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); the role of inventory management in moderating recessions (Chapter 6); the Fed’s response to the mortgage debt crisis (Chapter 16); the relative performance of index funds versus actively managed funds (Chapter 17); and Bastiat’s “Petition of the Candlemakers” (Chapter 20).

Contemporary Discussions and Examples

The eighteenth edition refers to and discusses many current topics. Examples include the cost of the war in Iraq, offshoring of American jobs, trade adjustment assistance, the additions of countries to the European Union and to the euro zone, normal trade relations status, 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.