As we complete this nineteenth edition of Economics, the U.S. economy has fallen into a deep recession as well as the most serious financial crisis since the Great Depression of the 1930s. The federal government has invested hundreds of billions of dollars to protect the fragile network of the U.S. and indeed the world financial system. The new Obama administration is working with Congress on the largest stimulus package in American history. The economic turmoil, and the manner in which countries respond to it, will shape the American economy, its labor market, and the world financial system for years to come.

We should remember, however, that the financial crisis of 2007–2009 came after more than a half-century of spectacular increases in the living standards of most of the world, particularly those living in the affluent countries of North America, Western Europe, and East Asia. People are asking, "Will the twenty-first century repeat the successes of the last century? Will the affluence of the few spread to poor countries? Alternatively, will the four horsemen of the economic apocalypse—famine, war, environmental degradation, and depression—spread to the North? Do we have the wisdom to reshape our financial systems so that they can continue to provide the investments that have fueled economic growth up to now? And what should we think about environmental threats such as global warming?"

These are ultimately the questions we address in this new edition of Economics.

The Growing Role of Markets

You might think that prosperity would lead to a declining interest in economic affairs, but paradoxically an understanding of the enduring truths of economics has become even more vital in the affairs of people and nations. Those who remember history recognize that the crises that threatened financial markets in the twenty-first century were the modern counterpart of banking panics of an earlier era.

In the larger scene, the world has become increasingly interconnected as computers and communications create an ever more competitive global marketplace. Developing countries like China and India—two giants that relied heavily on central planning until recently—need a firm understanding of the institutions of a market economy if they are to attain the living standards of the affluent. At the same time, there is growing concern about international environmental problems and the need to forge agreements to preserve our precious natural heritage. All these fascinating changes are part of the modern drama that we call economics.

ECONOMICS Reborn

For more than half a century, this book has served as the standard-bearer for the teaching of introductory economics in classrooms in America and throughout the world. Each new edition distills the best thinking of economists about how markets function and about what countries can do to improve people's living standards. But economics has changed profoundly since the first edition of this text appeared in 1948. Moreover, because economics is above all a living and evolving organism, Economics is born anew each edition as the authors have the exciting opportunity to present the latest thinking of modern economists and to show how the subject can contribute to a more prosperous world.

Our task then is this: We strive to present a clear, accurate, and interesting introduction to the principles of modern economics and to the institutions of the American and world economies. Our primary goal is to emphasize the core economic principles that will endure beyond today's headlines.

THE NINETEENTH EDITION

As economics and the world around it evolve, so does this book. Our philosophy continues to emphasize six basic principles that underlie earlier editions and this revision:

1. The Core Truths of Economics. Often, economics appears to be an endless procession of new puzzles, problems, and dilemmas. But as experienced teachers have learned, there are a few basic concepts that underpin all of economics. Once these concepts have been mastered, learning is much quicker and more enjoyable. We have therefore chosen to focus on the central core of economics—on those enduring truths that will be just as important in the twenty-first century as they were in the twentieth. Microeconomic concepts such as scarcity, efficiency, the gains from specialization, and the principle of comparative advantage will be crucial concepts as long as scarcity itself exists. In macroeconomics, we emphasize the two central approaches: Keynesian economics to understand business cycles, and the neoclassical growth model to understand longer-term growth trends. Within these frameworks, established approaches such as the consumption function take place alongside new developments in financial macroeconomics.

2. Innovation in Economics. Economics has made many advances in understanding the role of innovation. We are accustomed to the dizzying speed of invention in software, where new products appear monthly. The Internet is revolutionizing communications and study habits and is making inroads into commerce.

In addition, we emphasize innovations in economics itself. Economists are innovators and inventors in their own way. History shows that economic ideas can produce tidal waves when they are applied to real-world problems. Among the important innovations we survey is the application of economics to our environmental problems through emissionstrading plans. We explain how behavioral economics has changed views of consumer theory and finance. One of the most important innovations for our common future is dealing with global public goods like climate change, and we analyze new ways to deal with international environmental problems, including approaches such as the Kyoto Protocol. We must also track innovations in policy, such as the changing approach to monetary policy in the Federal Reserve.

3. Small Is Beautiful. Economics has increased its scope greatly over the past half-century. The flag of economics flies over its traditional territory of the marketplace, but it also covers the environment, legal studies, statistical and historical methods, gender and racial discrimination, and even family life. But at its core, economics is the science of choice. That means that we, as authors, must choose the most important and enduring issues for this text. In a survey, as in a meal, small is beautiful because it is digestible.

Choosing the subjects for this text required many hard choices. To select these topics, we continually survey teachers and leading scholars to determine the issues most crucial for an informed citizenry and a new generation of economists. We drew up a list of key ideas and bid farewell to material we judged inessential or dated. At every stage, we asked whether the material was, as best we could judge, necessary for a student's understanding of the economics of the twenty-first century. Only when a subject passed this test was it included. The result of this campaign is a book that has lost more than one-quarter of its weight in the last few editions and has trimmed three chapters for this edition. Farm economics, the history of labor unions, Marxian economics, advanced treatment of general equilibrium, regulatory developments, and the lump-of-labor fallacy have been trimmed to make room for modern financial theory, real business cycles, and global public goods.

4. Policy Issues for Today. For many students, the lure of economics is its relevance to public policy. The nineteenth edition emphasizes policy in both microeconomics and macroeconomics. As human societies grow, they begin to overwhelm the environment and ecosystems of the natural world. Environmental economics helps students understand the externalities associated with economic activity and then analyzes different approaches to making human economies compatible with natural systems. New examples bring the core principles of microeconomics to life.

A second area of central importance is financial and monetary economics. We have completely revised our treatment here. Previous treatment emphasized the quantity of money as the prime channel through which the central bank influences the economy. This approach no longer reflects the realities of a modern financial system. Today, the Fed exercises its policies by targeting the short-run interest rate and providing liquidity to financial markets. With the nineteenth edition, we fully incorporate these changes in three central chapters.

5. Debates about Globalization. The last decade has witnessed pitched battles over the role of international trade in our economies. Some argue that "outsourcing" is leading to the loss of thousands of jobs to India and China. Immigration has been a hot-burner issue, particularly in communities with high unemployment rates. Whatever the causes, the United States was definitely faced with the puzzle of rapid output growth and a very slow growth in employment in the first decade of the twenty-first century.

One of the major debates of recent years has been over "globalization," which concerns the increasing economic integration of different countries. Americans have learned that no country is an economic island. Immigration and international trade have profound effects on the goods that are available, the prices we pay, and the wages we earn. Terrorism can wreak havoc on the economy at home, while war causes famines, migration, and reduced living standards in Africa. No one can fully understand the impact of growing trade and capital flows without a careful study of the theory of comparative advantage. We will see how the flow of financial capital has an enormous influence on trading patterns as well as understand why poor countries like China save while rich countries like the United States are borrowers. The nineteenth edition continues to increase the material devoted to international economics and the interaction between international trade and domestic economic events.

6. Clarity. Although there are many new features in the nineteenth edition, the pole star for our pilgrimage for this edition has been to present economics clearly and simply. Students enter the classroom with a wide range of backgrounds and with many preconceptions about how the world works. Our task is not to change students' values. Rather, we strive to help students understand enduring economic principles so that they may better be able to apply them—to make the world a better place for themselves, their families, and their communities. Nothing aids understanding better than clear, simple exposition. We have labored over every page to improve this survey of introductory economics. We have received thousands of comments and suggestions from teachers and students and have incorporated their counsel in the nineteenth edition.

Optional Matter

Economics courses range from one-quarter surveys to year-long intensive honors courses. This textbook has been carefully designed to meet all situations. If yours is a fast-paced course, you will appreciate the careful layering of the more advanced material. Hard-pressed courses can skip the advanced sections and chapters, covering the core of economic analysis without losing the thread of the economic reasoning. This book will challenge the most advanced young scholar. Indeed, many of today's leading economists have written to say they have relied upon Economics all along their pilgrimage to the Ph.D.

Format

The nineteenth edition employs in-text logos and material to help illustrate the central topics. You will find a distinctive logo indicating warnings for the fledgling economist, examples of economics in action, and biographical material on the great economists of the past and present. But these central topics are not drifting off by themselves in unattached boxes. Rather, they are integrated right into the chapter so that students can read them and see how they illustrate the core material. Keep these sections in mind as you read through the text. Each one is either:

• A warning that students should pause to ensure that they understand a difficult or subtle point.
• An interesting example or application of the analysis, often representing one of the major innovations of modern economics.
• A biography of an important economic figure.

New features in this edition include fresh end-of-chapter questions, with a special accent on short problems that reinforce the major concepts surveyed in the chapter.

Terms printed in bold type in the text mark the first occurrence and definition of the most important words that constitute the language of economics.

But these many changes have not altered one bit the central stylistic beacon that has guided Economics since the first edition: to use simple sentences, clear explanations, and concise tables and graphs.

For Those Who Prefer Macro First

Although, like the previous edition, this new edition has been designed to cover microeconomics first, many teachers continue to prefer beginning with macroeconomics. Many believe that the beginning student finds macro more approachable and will more quickly develop a keen interest in economics when the issues of macroeconomics are encountered first. We have taught economics in both sequences and find both sequences work well.

Whatever your philosophy, this text has been carefully designed for it. Instructors who deal with microeconomics first can move straight through the chapters. Those who wish to tackle macroeconomics first should skip from Part One directly to Part Five, knowing that the exposition and cross-references have been tailored with their needs in mind.

In addition, for those courses that do not cover the entire subject, the nineteenth edition is available in two paperback volumes, Microeconomics (Chapters 1 to 18 of the full text) and Macroeconomics (Chapters 1 to 3, 15, and 19 to 31 of the full text).

Auxiliary Teaching and Study Aids

Students of this edition will benefit greatly from the Study Guide. This carefully designed supplement was updated by Walter Park of the American University. When used alongside classroom discussions and when employed independently for self-study, the Study Guide has proved to be an impressive success. There is a full-text Study Guide, as well as micro and macro versions. The Study Guides are available electronically for online purchase or packaged with the text via code-card access.

In addition, instructors will find both the Instructor's Resource Manual, updated for this edition by Carlos Liard-Muriente of Central Connecticut State University, and the Test Bank, fully revised by Craig Jumper of Rich Mountain Community College. These supplements are incredibly useful for instructors planning their courses and preparing multiple sets of test questions in both print and computerized formats. The graphs and figures in this edition can also be viewed electronically as PowerPoint slides. The slides can be downloaded from our website (www.mhhe.com/samuelson19e). The website also contains chapter summaries, selfgrading practice quizzes, and links to the websites suggested for further research at the end of each chapter.

Economics in the Computer Age

The electronic age has revolutionized the way that scholars and students can access information. In economics, the information revolution allows us quick access to economic statistics and research. An important feature of the nineteenth edition is the section "Economics and the Internet," which appears just before Chapter 1. This little section provides a road map for the state of economics on the Information Superhighway.

In addition, each chapter has an updated section at the end with suggestions for further reading and addresses of websites that can be used to deepen student understanding or find data and case studies.

Acknowledgments

This book has two authors but a multitude of collaborators. We are profoundly grateful to colleagues, reviewers, students, and McGraw-Hill's staff for contributing to the timely completion of the nineteenth edition of Economics. Colleagues at MIT, Yale, and elsewhere who have graciously contributed their comments and suggestions over the years include William C. Brainard, E. Cary Brown, John Geanakoplos, Robert J. Gordon, Lyle Gramley, Gerald Jaynes, Paul Joskow, Alfred Kahn, Richard Levin, Robert Litan, Barry Nalebuff, Merton J. Peck, Gustav Ranis, Herbert Scarf, Robert M. Solow, James Tobin, Janet Yellen, and Gary Yohe.

In addition, we have benefited from the tireless devotion of those whose experience in teaching elementary economics is embodied in this edition. We are particularly grateful to the reviewers of the nineteenth edition. They include:

Esmael Adibi, Chapman University
Abu Dowlah, Saint Francis College
Adam Forest, University of Washington, Tacoma
Harold Horowitz, Touro College
Jui-Chi Huang, Harrisburg Area Community College
Carl Jensen, Iona College, New Rochelle
Craig Jumper, Rich Mountain Community College
Carlos Liard-Muriente, Central Connecticut State University
Phillip Letting, Harrisburg Area Community College
Ibrahim Oweiss, Georgetown University
Walter Park, American University
Gordana Pesakovic, Argosy University, Sarasota
Harold Peterson, Boston College
David Ruccio, University of Notre Dame
Derek Trunkey, George Washington University
Mark Witte, Northwestern University
Jiawen Yang, George Washington University

Students at MIT, Yale, and other colleges and universities have served as an "invisible college." They constantly challenge and test us, helping to make this edition less imperfect than its predecessor. Although they are too numerous to enumerate, their influence is woven through every chapter. Nancy King helped in logistics at the New Haven end of the operation. We are particularly grateful for the contribution of Caroleen Verly, who read the manuscript and made many suggestions for improvement.

This project would have been impossible without the skilled team from McGraw-Hill who nurtured the book at every stage. We particularly would like to thank, in chronological order to their appearance on the scene: Douglas Reiner, Karen Fisher, Noelle Fox, Susanne Reidell, Lori Hazzard, Matt Baldwin, and Dean Karampelas. This group of skilled professionals turned many megabytes and a mountain of paper into a finely polished work of art.

A WORD TO THE SOVEREIGN STUDENT

You have read in history books of revolutions that shake civilizations to their roots—religious conflicts, wars for political liberation, struggles against colonialism and imperialism. Two decades ago, economic revolutions in Eastern Europe, in the former Soviet Union, in China, and elsewhere tore those societies apart. Young people battered down walls, overthrew established authority, and agitated for democracy and a market economy because of discontent with their centralized socialist governments.

Students like yourselves were marching, and even going to jail, to win the right to study radical ideas and learn from Western textbooks like this one in the hope that they may enjoy the freedom and economic prosperity of democratic market economies.

The Intellectual Marketplace

Just what is the market that students in repressed societies are agitating for? In the pages that follow, you will learn about the promise and perils of globalization, about the fragility of financial markets, about unskilled labor and highly trained neurosurgeons. You have probably read in the newspaper about the gross domestic product, the consumer price index, the Federal Reserve, and the unemployment rate. After you have completed a thorough study of this textbook, you will know precisely what these words mean. Even more important, you will also understand the economic forces that influence and determine them.

There is also a marketplace of ideas, where contending schools of economists fashion their theories and try to persuade their scientific peers. You will find in the chapters that follow a fair and impartial review of the thinking of the intellectual giants of our profession—from the early economists like Adam Smith, David Ricardo, and Karl Marx to modern-day titans like John Maynard Keynes, Milton Friedman, and James Tobin.

Skoal!

As you begin your journey into the land of the mixed economy, it would be understandable if you are anxious. But take heart. The fact is that we envy you, the beginning student, as you set out to explore the exciting world of economics for the first time. This is a thrill that, alas, you can experience only once in a lifetime. So, as you embark, we wish you bon voyage!

Paul A. Samuelson
William D. Nordhaus