Principles of Economics
Dominick Salvatore and Eugene A. Diulio · 2003 · 159 pages
A condensed college macroeconomics outline, not a market book. It hands you the vocabulary behind Fed statements, GDP releases, and CPI prints, but never once connects any of it to a position, a portfolio, or a trade.
The one idea
This is a Schaum's Easy Outline: a stripped-down study guide built for exam cramming, covering the standard first-year macroeconomics sequence in 159 pages. It walks through how GDP is measured, why real GDP oscillates around potential GDP in business cycles, the three sources of unemployment, the two causes of inflation, and how fiscal and monetary policy try to close the gap between the two.
The chapters that matter most to a reader who follows markets are the ones on the Federal Reserve and monetary policy. The book explains what the Fed actually is (twelve regional banks, a seven-member Board of Governors on staggered fourteen-year terms, and the twelve-member FOMC that sets policy), which of its tools it actually uses day to day, and how a change in bank reserves is supposed to work its way through interest rates into spending and output.
None of this is packaged as investing advice. There are no chapters on stocks, bonds, portfolios, or asset prices. The value is entirely in the plumbing: knowing what 'reserve requirement,' 'open-market operations,' 'GDP gap,' and 'demand-pull inflation' actually mean when they show up in a headline.
What it actually teaches
The book is not sequential steps toward a decision; it is a set of definitions and mechanisms a reader should be able to name and use when reading economic news.
MEASURE THE GDP GAP
The book distinguishes nominal GDP (current prices), real GDP (constant prices), and potential GDP (the maximum output the economy can produce without pushing up prices). The GDP gap is potential minus real GDP: a positive gap means slack and rising unemployment, a negative gap means the economy is running hot above its normal capacity.
SORT UNEMPLOYMENT BY CAUSE
The unemployment rate is broken into frictional (temporary, between jobs), structural (skills mismatch, usually longer-lasting), and cyclical (caused by weak aggregate demand, and the only one tied to the business cycle). Full employment is defined as zero cyclical unemployment plus the normal amount of frictional and structural, which the book calls the natural rate, an unemployment rate greater than zero even when the economy is at full strength.
SEPARATE DEMAND-PULL FROM COST-PUSH INFLATION
Demand-pull inflation happens when aggregate spending outruns full-employment output, pushing both prices and output up together. Cost-push inflation comes from rising input costs (wages, raw materials) and produces the combination the book calls stagflation: higher prices, falling output, and unemployment above the natural rate. The consumer price index (CPI) tracks roughly 400 goods and services against a reference period; the producer price index (PPI) and the GDP deflator are the other two indexes covered.
KNOW THE FED'S THREE LEVERS
The book names three monetary tools: the reserve requirement on checking deposits (10 percent, or r = 0.10, at time of writing), open-market operations (buying and selling government securities, described as the Fed's primary, near-daily tool), and the discount rate the Fed charges banks that borrow reserves directly. In the book's model, a $500,000 increase in bank reserves at a 10 percent reserve requirement supports a maximum of $5,000,000 in new check-writing deposits, using the formula Dmax = R/r.
What it looks like Monday morning
A reader who finishes this book will not have a trading system. What changes is that Fed statements and economic releases stop being noise. When a jobs report breaks out cyclical versus structural unemployment, when a CPI print gets called demand-pull versus cost-push, when the FOMC discusses reserves or the discount rate, those words now mean something specific instead of sounding like generic financial-news filler.
The practical use is reading comprehension for macro headlines, not a rule to act on. Nothing in the book tells you what to do with that vocabulary once you have it; that translation into a position is a separate skill this book does not attempt to teach.
| Reserve requirement | Multiplier (1/r) | Bank reserves | Max check-writing deposits |
|---|---|---|---|
| 10% (0.10) | 10 | $500,000 | $5,000,000 |
| 20% (0.20) | 5 | $1,000 | $5,000 |
| 16% (0.16) | 6.25 | $1,000 | $6,250 |
| 10% (0.10) | 10 | $1,000 | $10,000 |
This math described 2003-era Fed operations; the Fed set reserve requirements to zero in March 2020, so the multiplier no longer governs bank lending the way this chapter presents it.
Open-market operations are the primary tool of the Fed and are used practically daily to accomplish the Fed's goals.Salvatore and Diulio, Principles of Economics
Where it fails
- Its central Fed mechanism is now obsolete. The book's money-multiplier math (Dmax = R/r, with r = 0.10) depends on a reserve requirement that no longer exists. The Federal Reserve cut reserve requirements to zero in March 2020, so the entire worked-example chain in Chapter 7, built around a 10 percent ratio, no longer describes how bank reserves actually constrain lending.
- It never mentions a market, a security, or a trade. There is no chapter, section, or example that connects any of this to stocks, bonds, currencies, or portfolio decisions. It is written for a college economics course, not for someone trying to use macro data to inform positions.
- Every worked example uses invented numbers. Example 7.1, Example 7.2, and the solved problems in Chapter 7 use round hypothetical figures (reserves of $500,000, a reserve requirement of 0.20) rather than any actual historical Fed data. There is nothing here to backtest or check against what really happened.
- It is an abridgement of an abridgement. The title page states it is 'Based on Schaum's Outline of Theory and Problems of Principles of Economics (Second Edition)' and lists a separate 'Abridgement Editor.' The content has already been condensed twice for exam review, which is why depth is thin everywhere, including in the monetary policy chapters that matter most to a market reader.
- The business cycle chapter admits it has no forecasting model. The book states plainly that 'no one theory is able to explain why some business cycles are more severe than others,' and offers investment spending and durable-goods purchases as loose contributing factors rather than a framework for calling a turn.
- The fiscal-deficit numbers are a different fiscal era. The worked example in Chapter 6 puts a full-employment structural deficit at $200 and a cyclical deficit at $100. Those figures illustrate the mechanics fine, but they are nowhere near the scale of federal deficits an investor has had to price in since 2008, let alone since 2020.
Who it is for
Buy it if
You want the vocabulary of macroeconomics fast, GDP gap, the three types of unemployment, demand-pull versus cost-push inflation, the Fed's org chart and tools, and you are willing to treat it purely as glossary and refresher, not as investing guidance.
Skip it if
You already took an intro economics course, or you are looking for anything that touches markets, portfolios, or trade decisions. There is no bridge here from the concepts to a position, and the reserve-requirement math is out of date.
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