Economics / by Joseph E.Stiglitz and John Driffil

Introductory students should know the vitality of modern economics, and this book is intended to show it to them. It aims to provide an un derstanding of the principles of modern economics-both the princi ples that are necessary to understand how modern economists think about the world, and the principles that are required to understand current economic issues. But it is clear that the treatment of new topics, such as technological change, finance, incentives, and imperfect information, should be based upon the solid foundations of established fundamentals, such as the law of supply and demand, the theory of the firm, and traditional perspectives on unemployment, inflation, and growth.

The economic problems facing the world have changed dramatically in re cent decades, and students should also know today's economic issues Following the collapse of their Communist regimes, the countries of the for mer Soviet Union and eastern Europe are making slow and painful transitions to market economies. Several countries in East Asia, which had become known as the Tiger economies because of their unprecedented growth, found their progress abruptly interrupted in 1997 by waves of financial and subse quently real economic collapses, the Southeast Asian Crisis. The rapid devel opment of these economies is cause for optimism that development is indeed. possible. Their collapse into crisis in 1997 as a result of crony capitalism, weak regulation of financial markets, and the collapse of asset price bubbles ex poses the fragility of financial markets and the importance of regulation and sound public policy. International trade, both in goods and in financial capital, was essential to their growth and has become increasingly important throughout the world. But the potentially huge flows of private finance un leashed by capital market liberalization have revealed their dangerous side. When investors in a country lose confidence and withdraw finance as they did in Mexico in 1995, financial flows can precipitate a crisis that the most determined international cooperation may be able to stave off only with difficulty. The developed world is not immune to the consequences of inter national capital flows, as it found out in 1992 and 1993 when speculation substantially damaged the European Monetary System.