Naked Economics

Chapter 1: The Power of Markets
•What are the two basic assumptions that economists make about individuals and firms?
•What is the role and significance of prices in the market economy?
•What’s so great about a market economy anyway?

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Market allocation 3 / Assume rational utility-maximizers 6 / Opportunity costs 9 / Profit max 11 / Prices allocate resources 12 / Barriers to entry 14 / Market price, pricing decision & price discrimination 15 / Lessons of markets 18

Chapter 2: Incentives Matter
•Explain how each of the following relates to efficient outcomes in a market economy:
-adverse selection
-“perverse incentives”
-principal-agent problem,
-the prisoner’s dilemma.

Wrong incentives lead to undesirable outcomes 23 / Creative destruction 36 / Tax & govt program disincentives 38

Chapter 3: Government and the Economy
•In your own words, explain what an externality is.
•Besides addressing externalities, what other important and beneficial roles does government play in our market economy?

Externalities 43 / Govt solutions to externalities 48 / Govt makes market economy possible – rights, laws / regulations 51 / Public goods 57 / Redistribution 59

Chapter 4: Government and the Economy II
•What are the main reasons why government should only take a limited role in a market economy?

Govt inefficiency 63 / Govt allocation vs private allocation 67 / Effects of regulation 69 / Effects of taxation 74 / Summary 78

Chapter 5: Economics of Information
Wheelan explains that basic economic models assume that all parties have “perfect information.” How does “informational asymmetry” undermine our market economy?

Adverse selection 81 / Firm screening 89 / Branding provides information 90 / Branding versus commodities 92 / Signaling mechanisms 93

Chapter 6: Productivity and Human Capital
•After reading Wheelan’s argument, do you agree that Bill Gates should be so much richer than you? •Evaluate the following statement from p. 113: “We should not care about the gap between rich and poor as long as everybody is living better.”

Human capital 98 / Job creation 103 / Effects of human capital on standard of living 105 / Productivity 107 / Income inequality 111

Chapter 7: Financial Markets
•Explain how get-rich-quick schemes violate the most basic principles of economics.
•What advice about investing in the stock market did you find most interesting and/or useful?

Purposes of financial instruments 118 / Efficient markets & index funds 126 / Investment guidelines 132

Chapter 8: The Power of Organized Interests
•Why have mohair farmers earned a subsidy from the federal government for decades?

Interest groups & politicians’ incentives 137 / Some regulations benefit business 142 / Tyranny of the status quo 144

Chapter 9: Keeping Score
•Why is a nation’s GDP a good measure of its economic well-being and progress?
•Why is a nation’s GDP a poor measure of its economic well-being and progress?

GDP: importance, real vs nominal, per capita 150 / GDP growth & wage growth 152 / GDP misses social progress 154 / Recessions 156 / Fiscal & monetary policy 158 / Other “vital signs”: unemployment, poverty, inequality, govt budget, deficit, current acct, national savings, demographics 160

Chapter 10: The Federal Reserve
•What is the primary role of the Federal Reserve?
•What is the significance of this role?
•What is deflation, and why is it worse than inflation?

Importance of Fed 168 / Easy money causes inflation 170 / FOMC & monetary policy tools 172/ Difficulty of policy decision-making 175 / Money 176 / Inflation & effects 179 / Political pressure to allow inflation 182 / Deflation 184

Chapter 11: Trade and Globalization
•What is the “good news about Asian sweatshops”?

Benefits of trade 187 / Comparative advantage & specialization 190 / Losers from trade 191/ Protectionism 193 / Trade raises real incomes 195 / Trade benefits for poor countries 196 / Cultural homogenization 199 / Sweatshops 201

Chapter 12: Development Economics
•After reading this chapter, what do you believe are the two greatest obstacles preventing poor countries from becoming rich?

Importance of policies (vs resources) 206 / Effective development policies 208 / Exchange rates 217 / IMF 225

Epilogue: Life in 2050
•What economic question do you have about life in 2050? About today’s economy? About life in general?

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