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| Preface |
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What makes the book unique?
This text reverses the usual priorities in intermediate macroeconomics instruction. Here, the ultimate goal is not to simply teach macroeconomic theories, models and concepts, with real-world applications sprinkled in for motivation. Instead, students work through this book towards an understanding of the macroeconomic issues and challenges facing the global economy and individual countries. Macroeconomic concepts are taught only as they serve this end.
What is new in the third edition?
Whenever possible, graphs, tables and information in general were updated. Countless explanations have been improved, case studies were brought up to date or replaced, and new exercises added. Beyond that, major innovations in this new edition are:
- The macroeconomics of the global economic crisis The third edition was prepared while this millennium's first global economic crisis, indisputably the harshest in generations, unfolded and gained momentum. In the Spring of 2009, the jury is still out on how deep incomes will plummet and how long the downturn may last. But as experts of many trades are trying to come to grips with what has happened and what is yet to come, it is becoming increasingly clear that current events will have a lasting impact on how we teach macroeconomics. Curriculums will not have to be scrapped. Textbooks must not be rewritten. But the startling speed and sheer magnitude at which demand and employment are receding has gravely tarnished beliefs in the self-healing power of markets. This calls for a revitalized interest in what can go wrong in financial and goods markets, and when and how the government should step in to augment private demand that is lacking. Acknowledging this, the text's business cycle chapters use the events of 2008-2009 very much as a running theme that features in several case studies and boxes. Key concepts that are given new emphasis, concepts that had drifted to the edge of or even off the radar of intermediate macroeconomics curriculums in recent decades, are liquidity traps, market psychology, and risk premiums in various guises. A related concept that must be taken seriously and makes an appearance, is deflation, with all the negative repercussions it may generate for the real economy.
- Monetary policy rules While the text retains its full treatment of money markets, where supply and demand interact in an explicit fashion and match on the LM curve, it now acknowledges that recent years saw many central banks adopt monetary policy rules. Chapter 3 has been thoroughly rewritten to lay out in detail how the two approaches relate, thus offering instructors the option to emphasize one or the other in later chapters.
- Extended bridge towards graduate macroeconomics Oftentimes, students struggle with the gap between what they learned in intermediate macroeconomics and the models that graduate macroeconomics has in store. The text's concluding chapters try to bridge this gap, with chapter 16 offering a serious introduction to the New Keynesian and Sticky Information Phillips Curves, and chapter 17 introducing the real business cycle approach. Here also, empirical facts are evaluated to motivate these concepts from current research. Nevertheless, these chapters do stray from the book's guiding philosophy, in that they focus on theory more than on issues. And since they include the book's most demanding sections, they may certainly be skipped in courses where a majority of students does not plan to proceed to graduate school.
- Glossary and notes on Nobel laureates In order to spare students the effort to search for explanations in the main text, a comprehensive glossary of all relevant technical terms has been appended to the book. Another new appendix titled Economics Nobel prize winners and earlier giants introduces students to the names and work of the greatest minds that have contributed to the concepts and models that form the backbone of this textbook.
Content
The text’s main body comprises 17 chapters. Chapters 1-9 are fairly conventional in content, amounting to a streamlined, no-frills introduction to the macroeconomic concepts that are useful for discussion of contemporary macroeconomic issues in the world economies. Essential macroeconomic concepts are introduced in the context of the circular-flow-of-income model. Then students are led via the Keynesian cross, the IS-LM, the Mundell-Fleming and the aggregate demand-aggregate supply model to a fully dynamic aggregate demand-aggregate supply framework for analyzing short- and medium-run macroeconomic issues. Chapters on the supply-side topics of unemployment and growth round out this predictable set of tools.
Chapters 10 and 11 extend the tool-box into areas that most intermediate macroeconomics textbooks barely mention in passing. The first refines and extends the Solow growth model (introduced in Chapter 9) for a discussion of human capital and poverty traps, and concludes with a first glimpse at endogenous growth. Under the heading ‘Endogenous economic policy’ Chapter 11 then shows that politicians may steer the economy along courses not considered desirable from society’s point of view, and how institutions should be shaped to reduce this risk.
Chapters 12–15 explore issues from the heart of European and global monetary and economic integration. All major topics are addressed in chapters on inflation, monetary unions, budget deficits and the public debt, and unemployment.
Chapters 16 and 17, thoroughly expanded for the third edition, offers a sneak preview of what students might expect in macroeconomics courses on the masters level. And they make a serious effort to motivate and explain why current macroeconomic research has moved beyond the workhorse models of intermediate macroeconomics to study the potential of macroeconomics models with explicit microfoundations – of the real-business-cycle mould, or with sticky prices and information. To this end, students learn about the co-movement of macroeconomic variables, and why sticky prices or sticky information may perform better than sticky wages in explaining empirically observed patterns. They also grasp the intuition behind real-business-cycle dynamics, without the elaborate formal apparatus that usually comes with it.
Learning features
The book has a user-friendly design, featuring margin notes and definitions that emphasize important concepts. Exercises geared towards each chapter’s central ideas consolidate the acquired knowledge. An extensive and innovative use of graphs facilitates access and enhances learning success. Every chapter contains one or more case studies that apply core concepts to recent experiences in Europe and in other parts of the world. And all chapters feature links to our elaborate online material that includes interactive graphical versions of the book's key models, guided exercises, online tests, macroeconomic data, and much more.
What courses does the book accommodate?
The organization of the book gives instructors various options:
- Primarily, the text is designed for courses in undergraduate or intermediate macroeconomics that on the one hand insist on providing a sound theoretical foundation, but on the other also want to make a point of emphasizing applications in the form of case studies or even, if so desired, elementary statistical work.
- The book’s first half can also be used for a self-contained short course in macroeconomic theory whenever time does not permit working through a voluminous 600–900 page macroeconomics text which has become the standard.
- Also, the book readily accommodates courses in Economic policy and Applied macroeconomics. Such courses may be organized around an appropriate selection from the several dozen case studies and empirical applications. Conveniently, as deemed necessary, students can be referred to the required theoretical tools in the same textbook.
- Finally, the book accommodates European studies courses that can be organized around the applied topics discussed in Chapters 12–15. Here also, should it be necessary to freshen up or expand previously acquired theoretical knowledge, such material is readily available in the same textbook.
Prerequisites
Ideally, students should approach this book with a Principles of economics course under their belt. The formal mathematical requirements are mild: anything close to the most basic mathematics training in high school should do. In fact, most of the formal manipulations are optional and either shown in margin notes or in separate sections that supplement graphical arguments.
I am quite confident, though, that the book can also be adopted and used successfully if a principles course is missing and algebraic manipulations are avoided altogether. Dozens of case studies, some brief, some rather elaborate, provide ample ammunition for keeping up motivation, and the big payoff waits in the later chapters of the book.
Finally, and though it may sound frivolous: I believe that the book is even suited for self-study. The acquired knowledge will definitely be more fragile and lack depth compared with what can be achieved under the guidance of an experienced instructor. But it should provide an up-to-date first foundation for informed discussion of today’s national and global macroeconomic issues.
Acknowledgements
This brings me to the people I want to thank for their contributions to whatever merits this text may have. In the very first place, these are my students, who amaze me time and again. Most of all, teaching teaches the teacher. Students’ questions and curiosity constantly force me to refine explanations, and in the process very often make me understand things better myself.
It has been a joy to work with the professionals at Pearson Education, to whom I owe a great thank you. They helped and guided me, with unmatched skill and great patience, in preparing this thoroughly extended third edition, and brought the book into its final shape: Georgina Clark-Mazo (senior editor), Linda Dhondy (proof reader), Pauline Gillett (editorial administrator), Robin Lupton (editorial assistant), Ellen Morgan (acquisitions editor) and Chris Bessant (copy editor).
More than any other book of mine, this one would not even be close to what it is without the talents and the enthusiasm of the people working with me at the University of St. Gallen's Institute of Economics. This new edition owes more than I can express to Susanne Burri. She updated numerous graphs and tables, often with data for more than a dozen countries, scrutinized exercises and case studies, prepared most of the new glossary, and, playing the devil's advocate, challenged me on virtually everything I say between the front and the back cover. In the course of joint teaching ventures based on this textbook, Florian Jung offered criticism and many constructive suggestions that improved this edition. He also accepted the responsibility for proofreading along with Pascal Bischof, Hanna Köpper, Björn Griesbach, Andreas Kleiner and Thomas Seiler. Frode Brevik performed the simulations reported in Chapter 17. And the interactive online material that augments the textbook continued to grow and shine thanks to the programming magic of Christian Busch and the math skills of Frode Brevik. I am deeply indebted to all of them; and to Gudrun Forster, for unparalleled administrative support and her eye for the big and the little things that contribute to a work atmosphere which helps us all deliver our very best.
I have also benefitted from the reviews commissioned by Pearson Education. Both those that offered applause and encouragement, and those that were more reserved, helped shape the book into a better teaching tool.
The mere writing of a textbook may mostly happen at the desk. But the enthusiasm, the creativity and the discipline that are essential for such a project come from beyond office doors. In this respect I owe much more to my wife Louise and to our sons Dennis, Kai, Chris and David than they can possibly know.
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