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ABOUT THE AUTHORS
N. Gregory Mankiw is Professor of Economics at

Harvard University. As a student, he studied economics
at Princeton University and MIT. As a teacher, he has
taught macroeconomics, microeconomics, statistics, and
principles of economics. He even spent one summer long
ago as a sailing instructor on Long Beach Island.
Professor Mankiw is a prolific writer and a regular
participant in academic and policy debates. His work
has been published in scholarly journals such as the
Kevin LeBlanc
American Economic Review, Journal of Political Economy,

and Quarterly Journal of Economics, and in more popular
forums such as The New York Times, The Financial Times,
The Wall Street Journal, and Fortune. He is also author of
the best-selling intermediate-level textbook Macroeconomics (Worth Publishing).
In addition to his teaching, research, and writing, Professor Mankiw has been a
research associate of the National Bureau of Economic Research, an adviser to
the Federal Reserve Bank of Boston and the Congressional Budget Office, and
a member of the Educational Testing Service (ETS) test development committee
for the advanced placement exam in economics. From 2003 to 2005, he served as
Chairman of the President’s Council of Economic Advisers.
Ronald D. Kneebone is Professor in the Department of Economics and the

School of Public Policy at the University of Calgary. He received his Ph.D. from
McMaster University. Professor Kneebone has taught courses in public finance
and in macroeconomics from principles through to the Ph.D. level, and he is a
two-time winner of the Faculty of Social Sciences Distinguished Teacher Award
at the University of Calgary. His research interests are primarily in the areas of
public-sector finances and fiscal federalism, but he has recently worked on the
problems of homelessness and poverty reduction. He shared with Ken McKenzie
the Douglas Purvis Memorial Prize for the best published work in Canadian
public policy in 1999. Since 2008, he has been Director of Economic and Social
Policy Research in The School of Public Policy at the University of Calgary.
Kenneth J. McKenzie is Professor in the Department of Economics and The

School of Public Policy at the University of Calgary. He received his Ph.D. from
Queen’s University. Specializing in public economics with an emphasis on taxa-
tion and political economy, Professor McKenzie has published extensively in
these areas. He is the winner of the 1996 Harry Johnson Prize (with University
of Calgary colleague Herb Emery) for the best article in the Canadian Journal of
Economics, a two-time winner of the Douglas Purvis Memorial Prize for a pub-
lished work relating to Canadian public policy (1999 with Ron Kneebone and 2011
with Natalia Sershun), and a Faculty of Social Sciences Distinguished Researcher
Award winner at the University of Calgary. Professor McKenzie has taught
microeconomics and public economics from the principles to the graduate level,
and has received several departmental teaching awards.
vi NEL
BRIEF CONTENTS
About the Authors vi PART 7 SHORT-RUN ECONOMIC FLUCTUAT

A IONS
AT
Preface xvii
14 Aggregate Demand and Aggregate Supply 310
Acknowledgments xxix
15 The Influence of Monetary and Fiscal Policy
on Aggregate Demand 350
16 The Short-Run Tradeoff between Inflation
PART 1 INTRODUCTION and Unemployment 391
1 Ten Principles of Economics 1
2 Thinking Like an Economist 18
Appendix—Graphing: A Brief Review 35 PART 8 FINAL THOUGHTS
3 Interdependence and the Gains from Trade 46
17 Five Debates over Macroeconomic
Policy 422
PART 2 SUPPLY AND DEMAND: HOW MARKETS WORK Glossary 443

4 The Market Forces of Supply and Demand 62 Index 449
Appendix—The Mathematics of
Market Equilibrium 86
PART 3 THE DAT

ATA
AT
TA OF MACROECONOMICS
5 Measuring a Nation’s Income 90
6 Measuring the Cost of Living 112
PART 4 THE REAL ECONOMY IN THE LONG RUN

7 Production and Growth 128
8 Saving, Investment, and the Financial System 153
9 Unemployment and Its Natural Rate 178
PART 5 MONEY AND PRICES IN THE LONG RUN

10 The Monetary System 206
11 Money Growth and Inflation 230
PART 6 THE MACROECONOMICS OF OPEN ECONOMIES

12 Open-Economy Macroeconomics:
Basic Concepts 256
13 A Macroeconomic Theory of the Small
Open Economy 284
NEL vii
CONTENTS
About the Authors vi 1-3b Principle #9: Prices Rise When the Government
Preface xvii Prints Too Much Money 13
1-3c Principle #10: Society Faces a Short-Run Tradeoff
Acknowledgments xxix
between Inflation and Unemployment 13
1-4 Conclusion 14
Summary 15
Key Concepts 15
Questions for Review 15
Quick Check Multiple Choice 16
Problems and Applications 16
CHAPTER 2
Thinking Like an Economist 18
2-1 The Economist as Scientist 19
© Lavinia Moldovan
2-1a The Scientific Method: Observation,
Theory, and More Observation 19
2-1b The Role of Assumptions 20
2-1c Economic Models 21
2-1d Our First Model: The Circular-Flow Diagram 21
PART 1 INTRODUCTION 2-1e Our Second Model: The Production Possibilities
Frontier 23
2-1f Microeconomics and Macroeconomics 26
CHAPTER 1 2-2 The Economist as Policy Adviser 26
Ten Principles of Economics 1 2-2a Positive versus Normative Analysis 27
2-2b Economists in Ottawa 27
1-1 How People Make Decisions 2 2-2c Why Economists’ Advice Is Not Always
1-1a Principle #1: People Face Tradeoffs 2 Followed 28
1-1b Principle #2: The Cost of Something Is What You 2-3 Why Economists Disagree 29
Give Up to Get It 4
2-3a Differences in Scientific Judgments 29
1-1c Principle #3: Rational People Think at the
2-3b Differences in Values 30
Margin 4
2-3c Perception versus Reality 30
FYI: The Opportunity Cost of Gasoline 5
1-1d Principle #4: People Respond to Incentives 6 2-4 Let’s Get Going 31
In The News: Even Criminals Respond to Summary 32
Incentives 8 Key Concepts 32
1-2 How People Interact 9 Questions for Review 32
1-2a Principle #5: Trade Can Make Everyone
Better Off 9
1-2b Principle #6: Markets Are Usually a Good Way
to Organize Economic Activity 9 Appendix Graphing: A Brief Review 35
1-2c Principle #7: Governments Can Sometimes Graphs of a Single Variable 35
Improve Market Outcomes 10 Graphs of Two Variables: The Coordinate System 36
FYI: Adam Smith and the Invisible Hand 11 Curves in the Coordinate System 37
Slope 39
1-3 How the Economy as a Whole Works 12 Graphing Functions 41
1-3a Principle #8: A Country’s Standard of Living Depends Cause and Effect 43
on Its Ability to Produce Goods and Services 12 Problems and Applications 45
NEL ix
x CONTENTS
CHAPTER 3 4-2 Demand 64

4-2a The Demand Curve: The Relationship between Price
Interdependence and the Gains and Quantity Demanded 64
from Trade 46 4-2b Market Demand versus Individual Demand 66
4-2c Shifts in the Demand Curve 67
3-1 A Parable for the Modern Economy 47 Case Study: Two Ways to Reduce the Quantity
3-1a Production Possibilities 48 of Smoking Demanded 69
3-1b Specialization and Trade 50
4-3 Supply 70
3-2 Comparative Advantage: The Driving 4-3a The Supply Curve: The Relationship between Price
Force of Specialization 52 and Quantity Supplied 70
3-2a Absolute Advantage 52 4-3b Market Supply versus Individual Supply 71
3-2b Opportunity Cost and Comparative Advantage 52 4-3c Shifts in the Supply Curve 72
3-2c Comparative Advantage and Trade 53
4-4 Supply and Demand Together
T 74
FYI: The Legacy of Adam Smith and David Ricardo 54
3-2d The Price of Trade 54 4-4a Equilibrium 74
In The News: Does Free Trade Create Jobs? 55 4-4b Three Steps to Analyzing Changes in Equilibrium 76
In The News: Supply, Demand, and Technology 81
3-3 Applications of Comparative Advantage 56
4-5 Conclusion: How Prices Allocate Resources 81
3-3a Should Sidney Crosby Shovel His Own Sidewalk? 56
3-3b Should Canada Trade with Other Countries? 56 Summary 82
Key Concepts 83
3-4 Conclusion 58 Questions for Review 83
Summary 58 Quick Check Multiple Choice 84
Key Concepts 58 Problems and Applications 84
Quick Check Multiple Choice 59 Appendix The Mathematics of Market
Problems and Applications 59 Equilibrium 86
Lilyana Vynogradova/Shutterstock.com
© Lavinia Moldovan
PART 2
SUPPLY AND DEMAND:
HOW MARKETS WORK PART 3
THE DATA OF
CHAPTER 4 MACROECONOMICS
The Market Forces of Supply and Demand 62 CHAPTER 5
4-1 Markets and Competition 63
Measuring a Nation’s Income 90
4-1a What Is a Market? 63
4-1b What Is Competition? 63 5-1 The Economy’s Income and Expenditure 91
NEL
CONTENTS xi
5-2 The Measurement of Gross Domestic Product 93 Questions for Review 126
5-2a “GDP Is the Market Value …” 93 Quick Check Multiple Choice 126
5-2b “… Of All …” 93 Problems and Applications 126
5-2c “… Final …” 94
5-2d “… Goods and Services …” 94
5-2e “… Produced …” 94
5-2f “… Within a Country …” 94
5-2g “… In a Given Period of Time” 95
5-3 The Components of GDP 95
5-3a Consumption 96
5-3b Investment 96
© IGphotography/iStockphoto.com
5-3c Government Purchases 96
5-3d Net Exports 97
Case Study: The Components of Canadian GDP 97
5-4 Real versus Nominal GDP 98
5-4a A Numerical Example 99
5-4b The GDP Deflator 100
Case Study: Real GDP over Recent History 101
Case Study: Foreign Ownership 102
5-5 GDP and Economic Well-Being 104 PART 4
THE REAL ECONOMY
Case Study: Measuring Economic Well-Being
in Canada 105
IN THE LONG RUN
Case Study: International Differences in GDP
and the Quality of Life 106 CHAPTER 7
5-6 Conclusion 107 Production and Growth 128
In The News: Identifying the 1 Percent 108
Summary 108 7-1 Economic Growth around the World 130
Key Concepts 110 FYI: Are You Richer Than the Richest American? 131
7-2 Productivity: Its Role and Determinants 132
Problems and Applications 111 7-2a Why Productivity Is So Important 132
7-2b How Productivity Is Determined 133
FYI: The Production Function 134
CHAPTER 6 Case Study: Are Natural Resources a Limit to Growth? 135
7-3 Economic Growth and Public Policy 136
Measuring the Cost of Living 112
7-3a The Importance of Saving, Investment,
6-1 The Consumer Price Index 113 and Stable Financial Markets 136
6-1a How the Consumer Price Index Is Calculated 113 7-3b Diminishing Returns and the Catch-Up Effect 137
FYI: What Is in the CPI’s Basket? 116 7-3c Investment from Abroad 138
6-1b Problems in Measuring the Cost of Living 116 7-3d Education 139
6-1c The GDP Deflator versus the Consumer Price Index 118 7-3e Health and Nutrition 140
In The News: Promoting Human Capital 141
6-2 Correcting Economic Variables for the 7-3f Property Rights and Political Stability 142
Effects of Inflation 119 7-3g Free Trade 143
6-2a Dollar Figures from Different Times 120 In The News: One Economist’s Answer 144
FYI: The Bank of Canada’s Inflation Calculator 120 7-3h Research and Development 144
Case Study: Mr. Index Goes to Hollywood 121 Case Study: Productivity Slowdowns and
6-2b Indexation 121 Speedups 146
6-2c Real and Nominal Interest Rates 121 7-3i Population Growth 147
Case Study: Interest Rates in the Canadian Economy 123 7-4 Conclusion: The Importance of Long-Run
6-3 Conclusion 124 Growth 149
Summary 125 Summary 150
Key Concepts 125 Key Concepts 150
NEL
xii CONTENTS
Questions for Review 150 9-3 Minimum-Wage Laws 194

Problems and Applications 151 9-4 Unions and Collective Bargaining 195
9-4a The Economics of Unions 195
CHAPTER 8 9-4b Are Unions Good or Bad for the Economy? 196
FYI: Who Earns the Minimum Wage? 197
Saving, Investment, and the Financial
9-5 The Theory of Efficiency Wages 198
System 153
9-5a Worker Health 199
8-1 Financial Institutions in the Canadian 9-5b Worker Turnover 199
Economy 154 9-5c Worker Effort 199
8-1a Financial Markets 155 9-5d Worker Quality 199
FYI: How to Read Stock Tables 157 Case Study: Henry Ford and the Very Generous
8-1b Financial Intermediaries 158 $5-a-Day Wage 200
8-1c Summing Up 159 FYI: Minimum, Efficiency, and Living Wages 201
8-2 Saving and Investment in the National Income 9-6 Conclusion 202
Accounts 159 Summary 202
Key Concepts 203
FYI: Financial Institutions in Crisis 160
8-2a Some Important Identities 161
8-2b The Meaning of Saving and Investment 162
8-3 The Market for Loanable Funds 163
8-3a Supply and Demand for Loanable Funds 163
8-3b Policy 1: Saving Incentives 165
8-3c Policy 2: Investment Incentives 167
8-3d Policy 3: Government Budget Deficits and Surpluses 168
Case Study: The Accumulation of Government
Debt in Canada 171
FYI: How Large Is Government Debt? 173
8-4 Conclusion 174
Summary 175
Key Concepts 175
CHAPTER 9
Unemployment and Its Natural Rate 178
© Masterfile
9-1 Identifying Unemployment 179
9-1a How Is Unemployment Measured? 180
Case Study: Labour-Force Participation of Men and
Women in the Canadian Economy 183
9-1b Does the Unemployment Rate Measure PART 5MONEY AND PRICES
What We Want It To? 184
9-1c How Long Are the Unemployed without Work? 185
IN THE LONG RUN
FYI: The Employment Rate 186
9-1d Why Are There Always Some People CHAPTER 10
Unemployed? 187
FYI: A Tale of Two Recessions 189 The Monetary System 206
9-2 Job Search 189 10-1 The Meaning of Money 208
9-2a Why Some Frictional Unemployment Is Inevitable 190 10-1a The Functions of Money 208
9-2b Public Policy and Job Search 191 10-1b The Kinds of Money 209
9-2c Employment Insurance 192 10-1c Money in the Canadian Economy 209
NEL
CONTENTS xiii
In The News: Why Gold? 210 Case Study: Money Growth, Inflation, and the
FYI: Credit Cards, Debit Cards, and Money 212 Bank of Canada 250
Case Study: Where Is All the Currency? 212 FYI: Total and Core Inflation and the Bank
of Canada’s Inflation Target 252
10-2 The Bank of Canada 213
10-2a The Bank of Canada Act 213 11-3 Conclusion 253
10-2b Monetary Policy 214 Summary 253
Key Concepts 254
10-3 Commercial Banks and the Money Supply 215
10-3a The Simple Case of 100 Percent-Reserve Banking 215 Quick Check Multiple Choice 254
10-3b Money Creation with Fractional-Reserve Problems and Applications 255
Banking 216
10-3c The Money Multiplier 217
10-3d Bank Capital, Leverage, and the Financial Crisis of
2007–09 218
10-3e The Bank of Canada’s Tools of Monetary Control 220
10-3f Problems in Controlling the Money Supply 224
FYI: The Bank of Canada’s Response to the 2007–09
Financial Crisis 224
Case Study: Bank Runs and the Money Supply 225
10-4 Conclusion 226
Summary 227
Key Concepts 227
CHAPTER 11
Thinkstock
Money Growth and Inflation 230
11-1 The Classical Theory of Inflation 232
11-1a The Level of Prices and the Value of Money 232
PART 6
THE MACROECONOMICS
11-1b Money Supply, Money Demand, and Monetary OF OPEN ECONOMIES
Equilibrium 233
11-1c The Effects of a Monetary Injection 235
11-1d A Brief Look at the Adjustment Process 235 CHAPTER 12
11-1e The Classical Dichotomy and Monetary Open-Economy Macroeconomics: Basic
Neutrality 236
11-1f Velocity and the Quantity Equation 238 Concepts 256
Case Study: Money and Prices during 12-1 The International Flows of Goods and
Hyperinflations 240
Capital 257
11-1g The Inflation Tax 241
11-1h The Fisher Effect 242 12-1a The Flow of Goods: Exports, Imports, and Net
In The News: A Recipe for Economic Disaster 243 Exports 257
Case Study: The Increasing Openness of the Canadian
11-2 The Costs of Inflation 244 Economy 258
11-2a A Fall in Purchasing Power? The Inflation Fallacy 245 In The News: Breaking Up the Chain of
11-2b Shoeleather Costs 245 Production 260
11-2c Menu Costs 246 12-1b The Flow of Financial Resources: Net Capital
11-2d Relative-Price Variability and the Misallocation Outflow 261
of Resources 247 12-1c The Equality of Net Exports and Net Capital
11-2e Inflation-Induced Tax Distortions 247 Outflow 262
11-2f Confusion and Inconvenience 248 FYI: The Current Account Balance 264
11-2g A Special Cost of Unexpected Inflation: 12-1d Saving, Investment, and Their Relationship
Arbitrary Redistributions of Wealth 249 to the International Flows 264
11-2h Inflation Is Bad, but Deflation May Be Worse 250 12-1e Summing Up 265
NEL
xiv CONTENTS
Case Study: Saving, Investment, and Net Capital In The News: The Open-Economy Trilemma 304
Outflow of Canada 266
13-4 Conclusion 306
12-2 The Prices for International Transactions:
T Summary 307
Real and Nominal Exchange Rates 268 Key Concepts 307
12-2a Nominal Exchange Rates 268 Questions for Review 308
12-2b Real Exchange Rates 270 Quick Check Multiple Choice 308
FYI: The Value of the Canadian Dollar 271 Problems and Applications 308
FYI: The Euro 273
12-3 A First Theory of Exchange-Rate
Determination: Purchasing-Power Parity 273
12-3a The Basic Logic of Purchasing-Power
Parity 274
12-3b Implications of Purchasing-Power Parity 274
Case Study: The Nominal Exchange Rate during a
Hyperinflation 276
12-3c Limitations of Purchasing-Power Parity 277
Case Study: The Hamburger Standard 277
12-4 Interest Rate Determination in a Small Open
Economy with Perfect Capital Mobility 278
12-4a A Small Open Economy 279
12-4b Perfect Capital Mobility 279
12-4c Limitations to Interest Rate Parity 279
12-5 Conclusion 281
iStockphoto.com/Devonyu
Summary 281
Key Concepts 281
CHAPTER 13 PART 7
SHORT-RUN ECONOMIC
A Macroeconomic Theory of the Small FLUCTUATIONS
Open Economy 284
13-1 Supply and Demand for Loanable Funds and CHAPTER 14
for Foreign-Currency Exchange 286
13-1a The Market for Loanable Funds 286
Aggregate Demand and Aggregate
13-1b The Market for Foreign-Currency Exchange 289 Supply 310
13-1c Disentangling Supply and Demand in the Market
14-1 Three Key Facts about Economic
for Foreign-Currency Exchange 291
FYI: Purchasing-Power Parity as a Special Case 292
Fluctuations 311
14-1a Fact 1: Economic Fluctuations Are Irregular
13-2 Equilibrium in the Small Open Economy 292 and Unpredictable 311
13-2a Net Capital Outflow: The Link between 14-1b Fact 2: Most Macroeconomic Quantities Fluctuate
the Two Markets 292 Together 312
13-2b Simultaneous Equilibrium in Two Markets 293 14-1c Fact 3: As Output Falls, Unemployment
Rises 314
13-3 How Policies and Events Affect a Small
Open Economy 295 14-2 Explaining Short-Run Economic
13-3a Increase in World Interest Rates 295 Fluctuations 314
FYI: Negative Values of Net Capital Outflow 295 14-2a The Assumptions of Classical Economics 314
13-3b Government Budget Deficits and Surpluses 297 14-2b The Reality of Short-Run Fluctuations 315
13-3c Trade Policy 299 In The News: The Social Influences of Economic
13-3d Political Instability and Capital Flight 301 Downturns 316
NEL
CONTENTS xv
14-2c The Model of Aggregate Demand 15-2b The Multiplier Effect 366
and Aggregate Supply 317 15-2c A Formula for the Spending Multiplier 367
15-2d Other Applications of the Multiplier Effect 369
14-3 The Aggregate-Demand Curve 318
15-2e The Crowding-Out Effect on Investment 370
14-3a Why the Aggregate-Demand Curve Slopes 15-2f Open-Economy Considerations 370
Downward 319 15-2g Changes in Taxes 377
14-3b Why the Aggregate-Demand Curve Might Shift 321 15-2h Deficit Reduction 378
Case Study: Housing Wealth 321 FYI: How Fiscal Policy Might Affect Aggregate Supply 379
14-4 The Aggregate-Supply Curve 324 15-3 Using Policy to Stabilize the Economy 379
14-4a Why the Aggregate-Supply Curve Is Vertical 15-3a The Case for Active Stabilization Policy 379
in the Long Run 325 15-3b The Case against Active Stabilization Policy 380
14-4b Why the Long-Run Aggregate-Supply 15-3c Automatic Stabilizers 381
Curve Might Shift 326 15-3d A Flexible Exchange Rate as an Automatic Stabilizer 381
14-4c Using Aggregate Demand and Aggregate Supply Case Study: The Recession of 2008–09 (again) 382
to Depict Long-Run Growth and Inflation 327
14-4d Why the Aggregate-Supply Curve Slopes 15-4 A Quick Summary 384
Upward in the Short Run 329 FYI: Interest Rates in the Long Run and the Short Run 386
14-4e Why the Short-Run Aggregate-Supply
Curve Might Shift 332
15-5 Conclusion 387
Summary 387
14-5 T
Two Causes of Economic Fluctuations 334 Key Concepts 388
14-5a The Effects of a Shift in Aggregate Demand 334 Questions for Review 388
FYI: Monetary Neutrality Revisited 337 Quick Check Multiple Choice 389
Case Study: Big Shifts in Aggregate Demand: Two Problems and Applications 389
Depressions and World War II 337
Case Study: The Recession of 2008–09 339
14-5b The Effects of a Shift in Aggregate Supply 341 CHAPTER 16
FYI: The Origins of Aggregate Demand and Aggregate
Supply 343 The Short-Run Tradeoff between Inflation
Case Study: Oil and the Economy 344 and Unemployment 391
14-6 Conclusion 346 16-1 The Phillips Curve 392
Summary 346 16-1a Origins of the Phillips Curve 392
Key Concepts 347 16-1b Aggregate Demand, Aggregate Supply,
Questions for Review 347 and the Phillips Curve 394
Problems and Applications 348 16-2 Shifts in the Phillips Curve: The Role of
Expectations 395
16-2a The Long-Run Phillips Curve 395
CHAPTER 15 16-2b The Meaning of “Natural” 398
The Influence of Monetary and Fiscal Policy 16-2c Reconciling Theory and Evidence 398
16-2d The Short-Run Phillips Curve 399
on Aggregate Demand 350 16-2e The Natural Experiment for the Natural-Rate
15-1 How Monetary Policy Influences Aggregate Hypothesis 401
Demand 352 16-3 Shifts in the Phillips Curve: The Role of
15-1a The Theory of Liquidity Preference 352 Supply Shocks 403
15-1b The Downward Slope of the Aggregate-Demand
Curve 356 16-4 The Cost of Reducing Inflation 406
15-1c Changes in the Money Supply 359 16-4a The Sacrifice Ratio 406
15-1d Open-Economy Considerations 360 16-4b Rational Expectations and the Possibility
FYI: The Zero Lower Bound 364 of Costless Disinflation 408
Case Study: Why Central Banks Watch the Stock Market FYI: Measuring Expectations of Inflation 409
(and Vice Versa) 365 16-4c Disinflation in the 1980s 409
16-4d The Zero-Inflation Target 411
15-2 How Fiscal Policy Influences Aggregate
In The News: How to Keep Expected Inflation Low 412
Demand 366 16-4e Anchored Expectations 414
15-2a Changes in Government Purchases 366 16-4f The 2008–09 Recession 415
NEL
xvi CONTENTS
16-5 Looking Ahead 416 17-2 Should Monetary Policy Be Made by an

Independent Central Bank? 425
16-6 Conclusion 418
17-2a Pro: Monetary Policy Should Be Made by an
Summary 419 Independent Central Bank 425
Key Concepts 419 17-2b Con: Monetary Policy Should Not Be Made
Questions for Review 419 by an Independent Central Bank 426
Problems and Applications 420 17-3 Should the Central Bank Aim for Zero
Inflation? 427
17-3a Pro: The Central Bank Should Aim for Zero
Inflation 428
17-3b Con: The Central Bank Should Not Aim for Zero
Inflation 429
FYI: Price-Level Targeting 430
17-4 Should Governments Balance Their
THE CANADIAN PRESS/POOL-Fred Thornhill
Budgets? 431
17-4a Pro: Governments Should Balance Their
Budgets 431
17-4b Con: Governments Should Not Balance Their
Budgets 433
FYI: Progress on Debt Reduction? 435
17-5 Should the Tax
T Laws Be Reformed to
Encourage Saving? 435
17-5a Pro: The Tax Laws Should Be Reformed to
PART 8 FINAL THOUGHTS

Encourage Saving 435
17-5b Con: The Tax Laws Should Not Be Reformed
to Encourage Saving 437
CHAPTER 17 17-6 Conclusion 438

Summary 438
Five Debates over Macroeconomic Questions for Review 439
Policy 422 Quick Check Multiple Choice 439
17-1 Should Monetary and Fiscal Policymakers Try
T
to Stabilize the Economy? 423
Glossary 443
17-1a Pro: Policymakers Should Try to Stabilize the
Index 449
Economy 423
17-1b Con: Policymakers Should Not Try to Stabilize
the Economy 424
NEL
PREFACE
As soon as we got our hands on the first U.S. edition of Principles of Macroeconomics,
it was clear to us that “this one is different.” If other first-year economics textbooks
are encyclopedias, Gregory Mankiw’s was, and still is, a handbook.
Between us, we have many years of experience teaching first-year economics.
Like many instructors, we found it harder and harder to teach with each new
edition of the thick, standard texts. It was simply impossible to cover all of the
material. Of course, we could have skipped sections, features, or whole chapters,
but then, apart from the sheer hassle of telling students which bits to read and not
to read, and worries about the consistencies and completeness of the remaining
material, we ran the risk of leaving students with the philosophy that what
matters is only what’s on the exam.
We do not believe that the writers of these other books set out with the intention
of cramming so much material into them. It is a difficult task to put together the
perfect textbook—one that all instructors would approve of and that all students
would enjoy using. Therefore, to please all potential users, most of the books end
up covering a wide range of topics. And so the books grow and grow.
Professor Mankiw made a fresh start in the first U.S. edition. He included all the
important topics and presented them in order of importance. And in the seventh
U.S. edition, he has resisted the temptation to add more and more material. We
have, in adapting the text for Canadian students, taken a minimalist approach:
“If it isn’t broken, don’t fix it!” While the book is easily recognizable as Mankiw’s,
we have made changes that increase its relevance to Canadian students. Some
of these changes reflect important differences between the Canadian and U.S.
economies. For example, the Canadian economy is much smaller and more open
than the U.S. economy, and this fact is explicitly recognized in this edition. Other
changes reflect important institutional differences between the two countries,
including the structure of the tax system and the nature of competition policy.
Finally, the Canadian edition focuses on issues and includes examples that are
more familiar and relevant to a Canadian audience.
We would not have agreed to participate in the Canadian edition if we were
not extremely impressed with the U.S. edition. Professor Mankiw has done an
outstanding job of identifying the key concepts and principles that every first-
year student should learn.
It was truly a pleasure to work with such a well-thought-out and well-written
book. We have enjoyed teaching from the earlier Canadian editions and we look
forward to using the seventh Canadian edition. We hope you do, too.
How the Book Is Organized

To write a brief and student-friendly book, Mankiw considered new ways to
organize familiar material. What follows is a whirlwind tour of this text. This tour,
we hope, will give you a sense of how the pieces fit together.
NEL xvii
xviii PREFACE
Introductory Material
Chapter 1, “Ten Principles of Economics,” introduces students to the economist’s
view of the world. It previews some of the big ideas that recur throughout
economics, such as opportunity costs, marginal decision making, the role
of incentives, the gain from trade, and the efficiency of market allocations.
Throughout the text an effort is made to relate the discussion back to the ten
principles of economics introduced in Chapter 1. The interconnections of the
material with the ten principles are clearly identified throughout the text.
Chapter 2, “Thinking Like an Economist,” examines how economists approach
their field of study, discussing the role of assumptions in developing a theory
and introducing the concepts of an economic model. It also discusses the role of
economists in making policy. The appendix to this chapter offers a brief refresher
course on how graphs are used and how they can be abused.
Chapter 3, “Interdependence and the Gains from Trade,” presents the theory
of comparative advantage. This theory explains why individuals trade with their
neighbours, as well as why nations trade with other nations. Much of economics
is about how market forces coordinate many individual production and
consumption decisions. As a starting point for this analysis, students see in this
chapter why specialization, interdependence, and trade can benefit everyone.
The Fundamental Tools of Supply and Demand

The next chapter introduces the basic tools of supply and demand. Chapter 4,
“The Market Forces of Supply and Demand,” develops the supply curve, the
demand curve, and the notion of market equilibrium.
More Macroeconomics
Our overall approach to teaching macroeconomics is to examine the economy
in the long run (when prices are flexible) before examining the economy in the
short run (when prices are sticky). We believe that this organization simplifies
learning macroeconomics for several reasons. First, the classical assumption of
price flexibility is more closely linked to the basic lessons of supply and demand,
which students have already mastered. Second, the classical dichotomy allows
the study of the long run to be broken up into several more easily digested
pieces. Third, because the business cycle represents a transitory deviation from
the economy’s long-run growth path, studying the transitory deviations is more
natural after the long-run equilibrium is understood. Fourth, the macroeconomic
theory of the short run is more controversial among economists than the
macroeconomic theory of the long run. For these reasons, most upper-level
courses in macroeconomics now follow this long-run-before-short-run approach;
our goal is to offer introductory students the same advantage.
Returning to the detailed organization, we start the coverage of macroeconomics
with issues of measurement. Chapter 5, “Measuring a Nation’s Income,”
discusses the meaning of gross domestic product and related statistics from the
national income accounts. Chapter 6, “Measuring the Cost of Living,” discusses
the measurement and use of the consumer price index.
The next three chapters describe the behaviour of the real economy in the long
run. Chapter 7, “Production and Growth,” examines the determinants of the large
variation in living standards over time and across countries. Chapter 8, “Saving,
Investment, and the Financial System,” discusses the types of financial institutions
in our economy and examines their role in allocating resources. Chapter 9,
“Unemployment and Its Natural Rate,” considers the long-run determinants of
NEL
PREFACE xix
the unemployment rate, including job search, minimum-wage laws, the market
power of unions, and efficiency wages.
Having described the long-run behaviour of the real economy, the book then
turns to the long-run behaviour of money and prices. Chapter 10, “The Monetary
System,” introduces the economist’s concept of money and the role of the central
bank in controlling the quantity of money. Chapter 11, “Money Growth and
Inflation,” develops the classical theory of inflation and discusses the costs that
inflation imposes on a society.
The next two chapters present the macroeconomics of open economies,
maintaining the long-run assumptions of price flexibility and full employment.
Chapter 12, “Open-Economy Macroeconomics: Basic Concepts,” explains the
relationship among saving, investment, and the trade balance; the distinction
between the nominal and real exchange rate; and the theory of purchasing-power
parity. Chapter 13, “A Macroeconomic Theory of the Small Open Economy,”
presents a classical model of the international flow of goods and capital. The model
sheds light on various issues, including the link between budget deficits and trade
deficits and the macroeconomic effects of trade policies. Because instructors differ
their emphasis on this material, these chapters are written so that they can be
used in different ways. Some may choose to cover Chapter 12 but not Chapter 13,
others may skip both chapters, and still others may choose to defer the analysis of
open-economy macroeconomics until the end of their courses.
After fully developing the long-run theory of the economy in Chapters 5 through
13, the book turns to explaining short-run fluctuations around the long-run
trend. This organization simplifies teaching the theory of short-run fluctuations
because, at this point in the course, students have a good grounding in many
basic macroeconomic concepts. Chapter 14, “Aggregate Demand and Aggregate
Supply,” begins with some facts about the business cycle and then introduces the
model of aggregate demand and aggregate supply. Chapter 15, “The Influence of
Monetary and Fiscal Policy on Aggregate Demand,” explains how policymakers
can use the tools at their disposal to shift the aggregate-demand curve. Chapter 16,
“The Short-Run Tradeoff between Inflation and Unemployment,” explains why
policymakers who control aggregate demand face a tradeoff between inflation
and unemployment. It examines why this tradeoff exists in the short run, why it
shifts over time, and why it does not exist in the long run.
The book concludes with Chapter 17, “Five Debates over Macroeconomic
Policy.” This capstone chapter considers controversial issues facing policymakers:
the proper degree of policy activism in response to the business cycle, the choice
between rules and discretion in the conduct of monetary policy, the desirability
of reaching zero inflation, the importance of reducing the government’s debt, and
the need for tax reform to encourage saving. For each issue, the chapter presents
both sides of the debate and encourages students to make their own judgments.
NEL
walk-through
PART 2 SUPPLY AND DEMAND: HOW MARKETS WORK
The purpose of this text is

to help students learn the
fundamental lessons of
economics and to show
how such lessons can
be applied to the world in
which they live. T
Toward that
© Lavinia Moldovan
end, various learning tools
CHAPTER
recur throughout the book.

4 The Market Forces
of Supply and Demand
LEARNING In this chapter, you will …

objectives
Chapter Openers Well-designed chapter 1 Learn the nature of a competitive market
2 Examine what determines the demand for a good in a competitive market
openers act as previews that summarize the 3 Examine what determines the supply of a good in a competitive market
4 See how supply and demand together set the price of a good and the quantity sold
major concepts to be learned in each chapter. 5 Consider the key role of prices in allocating scarce resources in market economies
62 NEL
CHAPTER 8 SAVING,
SAVING, INVESTMENT
INVESTMENT,, AND THE FINANCIAL SYSTEM 171
virtuous circle in the late 1990s and early 2000s. This enabled federal election cam-
paigns during the early to mid-2000s to be fought over the choices that a virtuous
circle provides: tax cuts versus spending increases versus debt reduction.
By 2008, the effects of a financial crisis that significantly slowed economic
growth around the world began to be felt in Canadian government budgets. After
12 straight years of surpluses, the federal budget fell into deficit in 2009. At the
time, most analysts believed the economy would require only a few years before
it improved enough to return the budget to surplus. Early in 2016, however, a
new government announced its intention to run large deficits in the hope of
stimulating economic activity. The return to balanced federal budgets now seems
unlikely for some years to come.
case The Accumulation of Government Debt in Canada

study Budget deficits became a chronic problem in Canada only in the mid-
1970s. From 1950 to 1974, the federal government ran budget surpluses
as often as it ran budget deficits. These budget imbalances were generally
small. In 1975, the federal government posted a large deficit and did so in
every year until 1997. Between 1975 and 1997, the federal government accumu-
lated about $550 billion in debt. In 1997, the string of deficits was broken and the
federal government reported a budget surplus of $3.0 billion—the first time in
28 years that the federal government has actually paid down a portion of its debt.
Between 1997 and 2008, the federal government ran a string of surpluses that
enabled it to reduce its debt by over $90 billion. After 2008, however, the federal
government returned to budget deficits. Between 2008 and 2014, the federal gov-
ernment added $166 billion to its net debt.
Figure 8.5 shows the net debt of the federal government and the combined net
debts of the provinces and territories as a percentage of GDP. Government net debt government net debt
is the difference between the value of the financial liabilities and the value of the the difference between the
financial assets it owns. Throughout the 1950s and until 1975, the federal govern- value of government financial
ment’s debt-to-GDP ratio declined. Although the federal government ran budget liabilities and financial assets
deficits during many of these years, the deficits were small enough that the govern-
ment’s debt grew less rapidly than the overall economy. Because GDP is a rough
measure of the government’s ability to raise tax revenue, a declining debt-to-GDP
ratio indicates that the economy is, in some sense, living within its means. By
contrast, in the years following 1975 when the federal government’s budget defi-
cit ballooned, the debt started rising more rapidly than the overall economy. As a
result, the debt-to-GDP ratio quickly increased. On three occasions—1982, 1989, and
Case Studies Economic theory is
1996—the federal government managed to halt the rise in its debt-to-GDP ratio. The
first two efforts managed to halt the rise only temporarily. On both occasions, an useful and interesting only if it can be
economic slowdown caused government spending to increase and tax revenues to
fall so that debt began to accumulate again. The effort initiated in 1996 proved more
successful, and the federal government actually managed to reduce its debt-to-GDP
applied to understanding actual events
and policies. Updated or replaced with
ratio from its high of 73 percent in 1996 to 32 percent in 2009. Unfortunately, as a
result of an economic slowdown that began in 2007, the federal budget returned
to deficit in 2009. This pushed the federal debt-to-GDP ratio up to 37 percent by
2010 (from 32 percent in 2009). By 2014, the debt-to-GDP ratio had stabilized at
36 percent. In 2016, the federal government announced its intention to introduce
significantly larger deficits than planned previously. Most analysts believe that
more current Canadian examples,
despite this, so long as at least modest economic growth can be maintained, the
debt-to-GDP ratio is not likely to rise significantly beyond what it was in 2014. the numerous case studies apply the
NEL
theory that has just been developed.
xx NEL
CHAPTER 5 MEASURING A NATION’S INCOME 103
Percentage 50
FIGURE 5.3
of GDP Foreign direct investment in Canada (FDI)
Foreign Ownership
Canadian direct investment abroad (CDIA)
The lines in this figure
Figures and Tables Colourful and eye-

40
plot values of foreign
direct investment (FDI)
and Canadian direct
catching visuals are used to make important 30
investment abroad
(CDIA) measured as a
economic points and to clarify Canadian

percentage of Canada’s
20
GDP. The bars show the
net amount of foreign
and other key economic concepts. They have 10

direct investment in
Canada. The fact that the
bars have in recent years
also proved to be valuable and memorable 0

Net foreign direct
fallen below zero is an
indication that Canadians
now own more of foreign
teaching aids. 10
investment in Canada
firms than foreigners own
of Canadian firms.
61
65
69
73
77
81
85
89
93
97
01
05
09
13
Source: Statistics Canada, CANSIM
19
19
19
19
19
19
19
19
19
19
20
20
20
20
Year database and authors’ calculations.
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 15
for designing and building the Canadarm used on U.S. space shuttle missions
and used at the International Space Station, and the debate in 2010 over the
How People Make Decisions
TABLE 1.1
#1: People face tradeoffs. Ten Principles of Economics
#2: The cost of something is what you give up to get it.
#3: Rational people think at the margin.
#4: People respond to incentives.
How People Interact

#5: Trade can make everyone better off.
#6: Markets are usually a good way to organize economic activity.
#7: Governments can sometimes improve market outcomes.
How the Economy as a Whole Works

8 PART 1
P INTRODUCTION
#8: A country’s standard of living depends on its ability to produce goods
and services.
#9: Prices rise when the government prints too much money.
#10: Society faces a short-run tradeoff between inflation and unemployment.
IN THE
news Even Criminals Respond to Incentives
Principle #4, people respond to incentives, is at the core of the study of
economics. As the following article explains, this principle applies to all sorts
of activities, even of the criminal kind.
Risk, Reward and the Criminals, like all of us, respond to market
Economics of the signals. If the potential payoff for any activity is
too low, we weigh the risks and decide it isn’t
Criminal Mind worth it. For noncriminals, the question isn’t
scyther5/Shutterstock.com
“In the News” Features One benefit that students
By Todd Hirsch “Should I steal this car?” but something along
the lines of “Should I put in new bathroom tile
gain from studying economics is a new perspective and L ast week’s Economist magazine carried
a headline reading, “The Curious Case of
the Fall in Crime.” It seems that all around the
before I list my house?” People are quite good at
reading and responding to market signals.
Still, we shouldn’t think that poor economic
industrialized world—including Canada—all incentives are making crime go away. Crime is
greater understanding about news from Canada and kinds of criminal activity are on the decline.
Contrary to the belief that evil thugs lurk around
dollars on the street; now they would fetch a few
hundred bucks. Why buy a stolen iPod dock out
simply morphing. Traditional crime statistics tend
to focus on activities such as robbery, property
around the world. To highlight this benefit, excerpts every corner, we are actually safer than we
have been in decades. In today’s underground
of the back of some guy’s truck when you can
get a new one for less than $100?
Car theft is down dramatically, too. According
theft and murder. Fewer long-term trend statis-
tics are available for crimes that are doubtless
economy, identity theft makes better economic increasing, such as identity theft and cyber-
from many Canadian news articles, including opinion sense than stealing a flat-screen television.
The magazine’s editorial offers only guesses
to Statistics Canada, car theft in Ontario plunged to
141 per 100,000 people last year, down from 443
crime. Not only are they potentially more lucra-
tive, they are global in scope and much more
columns written by prominent economists, show how as to why crime rates are falling. Aging demo-
graphics may play a role, along with better theft-
in 1998. Better technology, car alarm systems and
anti-theft devices have deterred most would-be
thieves. And lower-priced cars without car alarms
difficult to track.
Thieves are also getting smarter, using tech-
prevention technologies. Stiffer punishment and nology for evil deeds. Internet scams abound,
basic economic theory can be applied. “get tough on crime” policies might make for
good political posturing, but they seem to have
probably are not worth stealing anyway. The bad
guys aren’t less bad, they’re just good economists.
and bank-card skimming and credit-card fraud is
a serious problem. Banks have had to fight back
little impact: Crime rates are falling in countries Muggings and purse snatchings are increas- with their own technology and it has been costly.
where sentencing has become tougher as well ingly less common as well. But let’s not overthink Economic incentives play a huge role moti-
as where it has been loosened. the reasons why fewer thieves are snatching vating us in almost everything we do. Certain
The Economist failed to mention the most purses. It has nothing to do with the culprit’s actions are no doubt spurred by altruism and
obvious reason for the change: economic incen- age or job situation. Whether there was a father generosity, such as helping our neighbour shovel
tives. Thieves are simply doing what most of us do present in the thief’s childhood or whether he or snow or donating to charity (although we still
every day: They are responding to market signals. she played violent video games are irrelevant. want the tax receipt). Weighing the financial
This is particularly true of property crimes The reason is that there’s just not much of value incentives against the potential risks is the basis
such as residential break-and-enter, car theft inside purses or wallets anymore. Cash has of our economy. Criminals may not know they’re
and armed robbery. The possible payoff for been largely replaced by debit and credit cards, doing it, but they’re just responding to market
and as long as the PIN is secure, the thief gets
FYI The Employment Rate stealing from a home is dwindling. What is there
worth taking? Electronics are increasingly less away with nothing more than plastic cards and
signals—and doing a good job of it.
Source: “Risk, Reward and the Economics of the Criminal

valuable—a computer or a television in the chewing gum. Cellphones are more costly, but
Mind,” by Todd Hirsch, August 1, 2013, The Globe and Mail
Mail.
1980s would have been worth thousands of stolen ones are difficult to wipe and resell.
H this period, Saskatchewan and Ontario had virtually the same employment Reproduced by permission of the author.
ow does one evaluate the health of an economy? There are many
answers to this question, but a simple and reasonably comprehensive rates but over time the rates have diverged. Whereas in Saskatchewan the
measure of success is the employment ratio. The employment ratio mea- employment rate has increased more or less steadily from 66 percent to
sures the fraction of those of working age (aged 15–64 years) who have 77 percent, in Ontario the employment rate has grown much less quickly
found employment and so are able to support themselves or their families. and in 2014 was noticeably below that in Saskatchewan. But the biggest
It also provides insight into whether the community is able to fund social story is Newfoundland and Labrador. Starting from a woefully low level in
programs, a quality health care system, effective policing and courts, and 1976, when fewer than half of the working-age population were employed,
more without unduly high tax rates. In short, a high employment ratio is a the economy of Newfoundland and Labrador has undergone a remarkable
good indicator of a successful economy along many dimensions. transformation. In 2014, 65 percent of working-aged people had found
Alberta has typically had the highest employment rate amongst Canadian employment, a level not far below the Canadian average of 72 percent.
provinces. The employment rate in Alberta peaked at 80 percent in 2008. In that This transformation of the Newfoundland and Labrador economy has
year, then, 80 percent of those aged 15–64 years in Alberta were employed. taken place just in the period since 1996; a period that corresponds to
Figure 9.4 shows the employment rate for Saskatchewan, Ontario, the development of off-shore oil fields and which has occurred despite the
and Newfoundland and Labrador from 1976 to 2014. At the beginning of collapse of the cod fishery in 1992.
FIGURE 9.4 Employment Rate 85

(percentage) Saskatchewan
The Employment Rate
Ontario
in Three Provinces 80
Newfoundland and Labrador
since 1976
This figure shows the 75
percentage of the
working-age population
“FYI” Features These features provide

70
that is employed in
Saskatchewan, Ontario,
and Newfoundland 65
and Labrador. It shows
that since 1976 the
employment rate
60 additional material “for your information.”
has grown steadily in
Saskatchewan, less
quickly in Ontario, and,
55
Some of them offer a glimpse into the history
of economic thought. Others clarify technical
50
since 1996, remarkably
quickly in Newfoundland
and Labrador. 45
Sources: Statistics Canada, CANSIM
database and authors’ calculations. 40 issues. Still others discuss supplementary
19 6
19 8
19 0
19 2
19 4
19 6
19 8
19 0
19 2
19 4
19 6
20 8
20 0
20 2
20 4
20 6
20 8
20 0
20 2
14
topics that instructors might choose either to

7
7
8
8
8
8
8
9
9
9
9
9
0
0
0
0
0
1
1
19
Year
discuss or skip in their lectures.
NEL xxi
Canadian savers would have to offer to lend their savings at 5 percent, the world
interest rate. As long as the Canadian and the foreign assets are close substitutes,
the difference in interest rates provides an arbitrage opportunity for either bor- Why is a country better off not isolating itself from all other countries? ● Why
QUICK
rowers or savers. do we have markets and, according to economists, what roles should
Quiz
The logic by which the real interest rates in Canada should adjust to equal the government play in them?
interest rate parity
real interest rate in the rest of the world should remind you of our discussion of
a theory of interest rate
the law of one price and purchasing-power parity. This is because the concepts are
determination whereby
closely related. Just as we discussed earlier in the context of the prices of goods, the real interest rate on
people taking advantage of arbitrage opportunities will ensure that price differ-
entials disappear. The only difference is that here the price we are talking about is
comparable financial assets
should be the same in all
QuickQuizzes After each major
the price of borrowing: the real interest rate. The theory that the real interest rate in
Canada should equal that in the rest of the world is known as interest rate parity.
economies with full access
to world financial markets
section, students are offered a quick
12-4c Limitations to Interest Rate Parity quiz to check their comprehension of
Just as there are limitations to purchasing-power parity explaining how exchange
rates are determined, there are also limitations to interest rate parity explaining
what they have just learned. If students
cannot readily answer these quizzes,
Key Concept Definitions When key concepts are they should stop and reread the material
introduced in the chapter, they are presented in bold before continuing.
typeface. In addition, their definitions are placed in
the margin and in the Glossary at the back of the book.
This treatment helps students learn and review the
material.
summary
● The fundamental lessons about individual decision markets are usually a good way of coordinating trade
making are that people face tradeoffs among alterna- among people, and that the government can poten-
tive goals, that the cost of any action is measured in tially improve market outcomes if there is some market
Chapter Summaries Each chapter ends with a brief

terms of forgone opportunities, that rational people failure or if the market outcome is inequitable.
make decisions by comparing marginal costs and mar-
ginal benefits, and that people change their behaviour
● The fundamental lessons about the economy as a
whole are that productivity is the ultimate source of
summary that reminds students of the most important

in response to the incentives they face.
living standards, that money growth is the ultimate
● The fundamental lessons about interactions among source of inflation, and that society faces a short-run
people are that trade can be mutually beneficial, that tradeoff between inflation and unemployment.
lessons that they have just learned. Later in their study,

it offers an efficient way to review for exams. KEY concepts
scarcity, p. 2 marginal changes, p. 4 market power, p. 11

economics, p. 2 incentive, p. 6 productivity, p. 12
efficiency, p. 3 market economy, p. 9 inflation, p. 13
equity, p. 3 property rights, p. 10 business cycle, p. 14
opportunity cost, p. 4 market failure, p. 11
rational people, p. 4 externality, p. 11
126 PART 3
P THE DA
DATA
TA OF MACROECONOMICS
QUESTIONS FOR review List of Key Concepts A list of key concepts at the
1. Which do you think has a greater ef effect on the consumer
price index: a 10 percent increase in the price of chicken
4. Over a long period of time, the price of a candy bar
rose from $0.10 to $0.60. Over the same period, the end of each chapter offers students a way to test their
or a 10 percent increase in the price of caviar? Why? consumer price index rose from 150 to 300. Adjusted
2. Describe the three problems that make the consumer
price index an imperfect measure of the cost of living.
for overall inflation, how much did the price of the
candy bar change? understanding of the new terms that have been intro-
duced. Page references are included so that students
3. If the price of a military aircraft rises, is the consumer 5. Explain the meaning of nominal inter
interest rate and real
price index or the GDP deflator affected more? Why? interest rate. How are they related?
can review terms they do not understand in the origi-

QUICK CHECK multiple choice
1. The consumer price index measures approximately 4. Which of the following occurs because consumers nal context.
the same economic phenomenon as which of the can sometimes substitute cheaper goods for those
following? that have risen in price?
a. nominal GDP a. the CPI overstates inflation
b. real GDP b. the CPI understates inflation
c. the GDP deflator
d. the unemployment rate
c. the GDP deflator overstates inflation
d. the GDP deflator understates inflation Questions for Review At the end of each chapter
questions for review cover the chapter’s primary les-
2. What is the largest component in the basket of goods 5. If the consumer price index was 200 in 1980 and
and services used to compute the CPI? 300 today
today, then $600 in 1980 has the same
a. food and beverages purchasing power as what amount today?
sons. Students can use these questions to check their

b. housing a. $400
c. transportation b. $500
d. apparel c. $700
comprehension and to prepare for exams.

3. If a Manitoba gun manufacturer raises the price d. $900
of rifles it sells to the Canadian Army, which 6. You deposit $2000 in a savings account, and a year later
of the following will be increased by the price you have $2100. Meanwhile, the consumer price index
hikes? rises from 200 to 204. In this case, what are the nominal
a. both the CPI and the GDP deflator interest rate and the real interest rate, respectively?
b. neither the CPI nor the GDP deflator a. 1 percent; 5 percent
c. the CPI but not the GDP deflator
d. the GDP deflator but not the CPI
b. 3 percent; 5 percent
c. 5 percent; 1 percent
d. 5 percent; 3 percent
Quick Check Multiple Choice New in this edi-
tion, these end-of-chapter questions provide a quick
PROBLEMS AND applications
1. Suppose that people consume only three goods, as a. What is the percentage change in the price of each of
check of the student’s understanding of the material
shown in this table:
Tennis Tennis
the three goods? What is the percentage change in
the overall price level?
b. Do tennis racquets become more or less expensive
in a multiple-choice format.
Balls Racquets Gatorade relative to Gatorade? Does the well-being of
some people change relative to the well-being of
2014 price $2 $40 $1
others? Explain.
Problems and Applications Each chapter also

2014 quantity 100 10 200
2. Suppose that the residents of V
Vegopia spend all of their
2015 price $2 $60 $2 income on cauliflower, broccoli, and carrots. In 2014
2015 quantity 100 10 200 they buy 100 heads of cauliflower for $200, 50 bunches
contains a variety of problems and applications that

ask students to apply the material they have learned.
NEL
Some instructors may use these questions for home-

work assignments. Others may introduce them as a
starting point for classroom discussion.
xxii NEL
PREFACE xxiii
New in This Seventh Canadian Edition

The seventh Canadian edition of Principles of Macroeconomics has been carefully
revised to ensure its contents are current and its examples reflect the interests
and concerns of the student market. In the sixth edition, responding to reviewer
requests for more emphasis on math, we added a new appendix “The Mathematics
of Market Equilibrium” at the end of Chapter 4. With this new edition we have
built on this foundation by including technical questions in the chapters 2 and 4
end-of-appendix assignments to raise the difficulty level. New topics discussed in
this edition include the employment ratio and Statistics Canada’s new definitions
of the income components in national income accounting. Sections have been
updated to include more analyses of the implications of the financial challenges
experienced in 2008–09. Case Studies have been revised and updated to reflect
current world trends. New FYI and In the News boxes address such issues as core
inflation and why gold has been used as money throughout history. Examples,
key figures, and graphs have been updated throughout the text. Most photos
have been replaced and many new photos are added throughout the new edition.
As well, the text’s interior has a fresh new design.
Here is a chapter-by-chapter list of significant changes:
Chapter 1 A new FYI feature on the opportunity cost of gasoline has been provided.
Chapter 2 A new Graphing Functions section has been included in the appendix.
Chapter 4 The appendix “The Mathematics of Market Equilibrium,” which guides

the student through the process of solving market equilibrium for linear demand
and supply curves, has been simplified using a strictly numerical approach.
Chapter 5 W With this edition we adopt Statistics Canada’s new categories of total
income for deriving GDP and include data on the UN’s Human Development
Index in our case study of international differences in the quality of life.
Chapter 8 The existing case study “The Accumulation of Government Debt in

Canada” has been adjusted to discuss the reversal of movements toward lower
levels of government debt caused by the slowing of the Canadian economy in 2015.
Chapter 9 A new FYI feature discusses the employment rate as a measure of

the health of an economy and reports on the remarkable transformation of the
economy of Newfoundland and Labrador since 1996. Our discussion of frictional
unemployment has been supplemented with a new Table 9.4 that reports rates
of job creation and destruction in periods of recession and expansion. Finally,
the existing FYI feature on the minimum wage now includes a discussion of
how taking taxes into consideration affects the ranking of provinces according to
which offers the highest minimum wage.
Chapter 10 A new In the News feature explains why throughout history it

has made sense for societies to use gold as money. Our discussion of the tools
available to the Bank of Canada to control the money supply now includes
Figure 10.2, showing how the central bank’s overnight rate responded to the
onset of recession in 2008 and the halting recovery since that time. Finally,
NEL
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outside, when we pushed on in a north-easterly direction. But Nature
has provided so well for the defence of these poor pagans, that they
are not easily taken by surprise.
We succeeded, with the dawn of day, in passing the first broad
sheet of water of the wide “ngáljam” of Wúliya, but found great
difficulty in passing another water with a deep, argillaceous soil of so
boggy a nature that several of the horses fell, even those whose
riders had dismounted; and I felt not a little anxiety on account of my
own restless and fiery horse, which was snorting like a
hippopotamus. At length we left also this morass behind us, and
indulged in the hope of having overcome every difficulty, when
suddenly we had before us another and far deeper water, which
delayed us for a long time. But bad as was our situation whilst we
were thus sticking fast in the mud, I could scarcely help laughing
heartily, as this very delay enabled the poor pagans to escape with
their wives and property to a place of safety. As for most of the
horses, the water went over their backs, while I on my stately
charger had the water three inches above my knee. A courageous
enemy, led on by a clever commander, might at this moment have
easily captured most of the horses, and put all the host to flight. At
length, after two hours’ exertion, we emerged from this broad sheet
of water, which, when full, must present the appearance of an
extensive central lake three or four miles in breadth, and many more
in length, and now entered upon green pasture-ground, which,
however, during the highest state of the inundation is itself under
water. Here the army divided into three bodies, and pushed on
vigorously, although a great many had retraced their steps upon
seeing the deep water.
Proceeding in this way, we reached the first hamlets, and here
formed a regular line of battle, while the greater part of the army
rushed on in advance, at the sound of the drum and the horns of the
kashéllas, to see if there was anything left for them; but all the
inhabitants had made their escape. Another delay occurred owing to
one of the followers of Bú-Bakr falling into a ditch or hollow twelve
feet in depth and the same in breadth, from which he was extricated
with some difficulty, while the horse died on the spot. But there was
plenty of leisure, the pagans having long ago had sufficient time to
make their escape beyond the river. If those simple people had
followed the same stratagem which the Bórnu people employ against
the Tuarek, digging a quantity of holes and covering them over with
bushes, they might have done a great deal of mischief to the cavalry.
This whole tract of country still belongs to the extensive district of
Wúliya; but the villages have separate names, which, owing to the
unfortunate circumstances under which I visited the country, I was
not able to learn. Having passed a considerable village, we reached,
a little before eleven o’clock, the furthermost line which the waters of
the river Serbéwuel attain during its highest state of inundation, while
when they recede they leave extensive ponds of stagnant water
behind, which nourish a rich supply of the most succulent herbage.
The shore was here about eight feet high, while at the other point,
where we had visited the river a few days previously, it was not so
well marked. Of course, where the inner shore consists of steeper
banks, so that the river does not rise over the higher level to a
considerable height, the outward shore cannot be marked so
distinctly.
About thirteen hundred yards beyond this grassy outward shore
we reached the inner bank of the river, which consisted of sand, and
was here only ten feet high. The river at present was confined to this
bank, running at this spot from S. 25° E.; but a little lower down it
changed its direction, running west by north. Higher up, the opposite
shore was richly overgrown with trees, among which deléb- and
dúm-palms were conspicuous; but no villages were to be seen,
although a place named Kár is said to lie on the eastern shore. The
reason we had directed our march to this point seemed to be, that
the river is here rather broad, being about eight hundred yards
across, and forming a large sandbank, so that my friends had
entertained the hope that they would be enabled to ford it, which in
some years, when the rains have not been very considerable, may
be possible at this season, and even this year might probably be
effected in two months’ time. But at present this was not the case,
and the rapacious Shúwa Arabs were hurrying about in despair, to
and fro, between the island and the western shore.
I too took the direction of the island, as the most interesting point,
although I became aware that it was not possible to penetrate further
on. The first branch of the river on this side of the island, which was
the broader of the two, was not more than from eighteen to nineteen
inches deep, and could not but become dry in a short time, when the
island, or rather sandbank, should form the knee of the bend of the
river; but the eastern branch, though apparently only about one
hundred and twenty or one hundred and thirty yards broad, seemed
to be of considerable depth, running along with a strong current, and
my old friend Abú Dáúd, one of the principal Shúwa chiefs, whom I
encountered at the southern point of the sandbank, with a sad
countenance, indicated the whole nature of this stream with the
laconic and significant expression, “Yákul” (“It eats”),—that is to say,
it is not fordable.
It would have been the more dangerous to attempt to force the
passage, as the opposite shore, which was so near, and only four
feet high, was occupied by a number of stalwart pagans, who
mocked at our inability to cross the river, and seemed to be quite
ready to receive in a satisfactory manner anybody who should make
the attempt. It would have been easy to have blown away these
people, and thus to clear the place of descent; but for such an
undertaking my friends had not sufficient courage or energy. I did not
see a single Kanúri on the island, but only Shúwa, who always
expose themselves to the greatest risk, and push on the furthest.
The pagans had not only occupied the opposite bank, but even kept
afloat four canoes at some distance above the island, in order to run
down, with the assistance of the current, any one who should dare to
cross the river. Three of these canoes were small; but the fourth was
of a larger size, and manned by ten Músgu.
These canoes were the only craft visible on the river, and probably
constituted the whole naval force of these pagans. Of course in a
country politically rent into so many petty principalities, where every
little community, as in ancient times in Latium and Greece, forms a
separate little state in opposition to its neighbours, no considerable
intercourse is possible, and those natural highroads with which
Nature has provided these countries, and the immense field
therefore which is open in these regions to human industry and
activity, must remain unproductive under such circumstances; but it
will be turned to account as soon as the restless spirit of the
European shall bring these countries within the sphere of his activity.
This period must come. Indeed I am persuaded that in less than fifty
years European boats will keep up a regular annual intercourse
between the great basin of the Tsád and the Bay of Biyáfra.
An almost uninterrupted communication has been opened by
Nature herself; for, from the mouth of the Kwára to the confluence of
the river Bénuwé with the Máyo Kébbi, there is a natural passage
navigable without further obstruction for boats of about four feet in
depth, and the Máyo Kébbi itself, in its present shallow state, seems
to be navigable for canoes, or flat-bottomed boats like those of the
natives, which I have no doubt may, during the highest state of the
inundation, go as far as Dáwa in the Túburi country, where Dr. Vogel
was struck by that large sheet of water which to him seemed to be
an independent central lake, but which is in reality nothing but a
widening of the upper part of the Máyo Kébbi.
It is very probable that from this place there may be some other
shallow watercourse, proceeding to join the large ngáljam of
Démmo, so that there would exist a real bifurcation between the
basin of the Niger and that of the Tsád. But even if this should not be
the case, the breadth of the water-parting between these two basins
at the utmost cannot exceed twenty miles, consisting of an entirely
level flat, and probably of alluvial soil, while the granitic region
attached to that isolated rocky mountain which I have mentioned
above may, most probably, be turned without difficulty. The level of
the Tsád and that of the river Bénuwé near Géwe, where it is joined
by the Máyo Kébbi, seem to be almost identical; at least, according
to all appearance, the Bénuwé at the place mentioned is not more
than eight hundred and fifty or nine hundred feet above the level of
the sea. All this bounty of Nature will, I trust, one day be turned to
account, though many changes must take place in this country
before a regular and peaceful intercourse can be established. The
very scenes which I witnessed are an unmistakable proof of the
misery into which these regions are plunged.
But, as I have carried away the reader’s attention from the thread
of the narrative, so I myself had almost forgotten where I was, and it
required an admonition from my friend Abú Dáúd to induce me to
look after my own safety; for already the greater part of the Shúwa
had returned to the western shore, and threatened to leave us alone,
and it did not seem very agreeable to be taken in the rear by the
pagans, and perhaps even to be cut off by the boats. I therefore
returned to the western shore, where the army was scattered about,
not knowing what to do, being rather disinclined to retrace their steps
without having enriched themselves with booty of some kind.
Following then the course of the river, I witnessed an interesting
and animated scene,—a dozen courageous natives occupying a
small elevated island, with steep banks, separated from the shore by
a narrow but deep channel, setting at defiance a countless host of
enemies, many of whom were armed with firearms. But African
muskets are not exactly like Minié rifles, and a musketeer very often
misses his aim at a distance of thirty or forty yards. It was
astonishing to see that none of this small band of heroes was
wounded, notwithstanding the repeated firing of a number of Kanúri
people. Either the balls missed their aim entirely, or else, striking
upon the shields of these poor pagans, which consisted of nothing
but wickerwork, were unable to pierce this slight defence; for not only
was the powder of a bad quality, making a great deal of noise
without possessing any strength, but even the balls were of
extremely light weight, consisting of pewter, as is generally the case
here. However, it was not prudent of me to witness this scene (which
was so little flattering to my friends) for too long a time; for when they
saw that I had my gun with me, they called upon me urgently to fire
at these scoffers, and when I refused to do so, reproached me in
terms which very often fell to my lot—“ʿAbd el Kerím fáida nsé bágo,”
meaning that I was a useless sort of person.
It is a remarkable fact that in almost the whole of the Músgu
country, except near a few isolated granite mountains, there is not a
single stone, else it would have been almost more profitable to have
thrown stones at these people, than to fire at them with the pewter
balls. With regard to those peculiar shields of wickerwork with which
these courageous Músgu people managed to protect themselves so
adroitly, I had afterwards an opportunity of examining them, and
found them to be about sixteen inches broad at the top, twenty-two
at the bottom, and about forty in length, but hollow. The material
consists of the same kind of reed with which their huts are thatched.
About noon the army began its march homewards. Certainly it was
not overburdened with spoil; for scarcely fifteen slaves had been
taken, mostly decrepit old women, who either could not or would not
leave their comfortable cottages. The anger and disappointment of
the army was vented upon the habitations of these people; and all
the cheerful dwellings which we passed were destroyed by fire. This
certainly was a heavy loss to the inhabitants, not so much on
account of the huts, which they might easily rebuild, as on account of
the granaries, the grain having been harvested some time
previously; and, as far as I became aware, there being no
subterranean magazines or catamores, as I had observed with the
Marghí, and the fugitives in the hurry of their escape mostly probably
having only been able to save a small portion of their store. In
estimating, therefore, the miseries of these slave-hunts, we ought
not only to take into account the prisoners led into slavery, and the
full-grown men who are slaughtered, but also the famine and
distress consequent upon these expeditions, although nature has
provided this peculiar tribe with innumerable shallow watercourses
swarming with fish, which must tend greatly to alleviate their
sufferings under such circumstances. The forest intervening between
these villages consisted almost exclusively of “kindín” or talha-trees,
which were just in flower, diffusing a very pleasant fragrance, while
here and there they were overshadowed by isolated dúm-palms. As
for déleb-palms, I did not observe a single specimen in the whole of
this district; but beyond the river to the south-east, as I have
mentioned above, I had seen several in the distance.
After a march of four hours, we again reached the broad ngáljam
of Démmo, but at a different point from where we had crossed it in
the morning with so much delay. It seemed almost providential that
we had not taken this route in the morning, as the poor Músgu
people would have had less time to make their escape. Leaving the
main body of the cavalry behind me, I pursued my march towards
my homely tent without delay; for, having been on horseback for
more than twelve hours without anything to eat, I was quite ready for
some repose and refreshment. But it took me full an hour and a half
to cross this peculiar basin, which at present was dry in most places,
and overgrown with tall rank grass, but swampy in some parts, and
intersected by holes caused by the footprints of the elephant. A mile
further along the north-western border of this swamp brought me to
my tent, and to the several dishes which awaited me; and this was
one of those rare occasions, during my travels in Negroland, on
which I dined with a truly European appetite.
The vizier was very gracious, and praised my courage in having
accompanied this distant expedition quite by myself; but the Kanúri,
who had taken part in it, detracted from my praise, using the very
terms which I have mentioned above—“Fáida nsé bágo.” Indeed,
this became one of my nicknames during my stay in Bórnu, and was
the reason why I was less popular with most of the people than my
companion. It is very natural that the motto “Afí fáida nsé?” (“Of what
use is he?”) should be the guiding principle, not only of Europeans,
but barbarians and semi-barbarians.
The following day we remained on the same spot, probably for no
other purpose than to give some repose to the people who had
accompanied the expedition the preceding day; and the vizier, who
was fully aware of my ardent desire to push further southward, at
least as far as the equator, took occasion to make merry at my
expense, and, to the great horror of the effeminate courtiers,
suddenly proclaimed that it was his firm intention to lead the
expedition into those unknown regions in the interior. At times,
indeed, he could be exceedingly amiable; and he was clever enough
to conceive how Europeans could be induced to undertake such
hazardous journeys, although he was scarcely able to appreciate the
amount of courage which such an undertaking is able to inspire. He
had often spoken with me concerning my project of pushing on
towards the east coast; and he thought that a troop of ten Europeans
would be able to accomplish it, though he anticipated great
obstructions from the quantity of watercourses in those equatorial
regions; and there can be no doubt that this would be one of the
greatest obstacles to such an undertaking.
In order to console me, and soothe my disappointment on finding
that this was to be the furthest point of the expedition, and that we
should retrace our steps from hence without even visiting the country
of the Túburi, he ordered Mʿallem Jýmma to be called, in order to
inform me how far the enterprising Púllo conqueror Búba had
penetrated beyond Búban-jídda; but he found that I was already fully
acquainted with this fact from other sources. The very interesting
route of the Mʿallem Jýmma from Démmo, by the village of the
Túburi to Láka and Láme, I have already communicated on a former
occasion. It is to be hoped that these regions will soon become
better known, when English steamers shall go annually up the river
Bénuwé, and enable travellers to start afresh from thence for those
inland regions.
CHAPTER XLV.
RETURN TO BÓRNU.
Wednesday, Jan. 7.—This was the day when we were to bid

farewell to all projects of penetrating further towards the south or
south-east. It was rather remarkable, that, early in the morning, at
the very moment when the drum was beating, the moon was
eclipsed; but our commander-in-chief was too much enlightened to
be frightened at such a phenomenon like the Athenian general
before Syracuse. He requested Mr. Overweg to explain it to him; but
otherwise he was not much concerned about it.
We this time kept a little more towards the east than on our
outward march, approaching closer to the river of Logón. Only a
short tract of clear forest separated the cultivated grounds of Démmo
from another village, where, besides Negro corn, we found tobacco
and cotton in friendly community on the same piece of ground. We
had already seen much cultivation of tobacco in this country, and
were impressed with the opinion, however strange it may seem, that
it was an indigenous plant, and not introduced at a recent period; we
had moreover been informed, that not only the men, but even the
women in this country, are passionately fond of smoking. But as for
cotton, we had not yet seen any in the whole tract of the Músgu
country which we had travelled over; and its appearance here
seemed to be a step in advance towards civilization, caused,
probably, by the influence of the neighbouring town of Logón.
After a short interruption, there followed another village, which was
succeeded by forest, and then another swamp, at present dry, and
overgrown with tall rank grass, but difficult to pass on account of
innumerable holes. Shortly afterwards the country on our right
assumed an open and very pleasant appearance, a river with a clear
sheet of water, but apparently without a current, winding through it in
tortuous meanderings, and closely approaching the higher ground
along which the numerous host was pursuing its march. The slope
was adorned with wild fig-trees and acacias, which were
overshadowed by two fine deléb-palms. This open country was
succeeded by the well-cultivated and shaded fields which lay
stretched out between the scattered courtyards of another village;
and here we encamped, my companion and I pitching our tents near
a beautiful sort of fig-tree of the species called “báure” by the Háusa,
and “kágo” by the Kanúri, or at least the Mánga.
The whole village was deserted; only a few neglected members of
the poultry tribe were running about, endeavouring to escape from
the hands of their greedy pursuers. It was a very hot day, the hottest
we had on this expedition, the thermometer, at half-past one in the
afternoon, indicating 100° in the cool shade of our fine fig-tree. The
encampment was cheerful and pleasant; but in the evening a frightful
alarm arose—the rumour being spread that the pagans were
attacking the “ngáufate,”—the great drum of the commander-in-chief
keeping up a tremendous din, and all the people hurrying along in
every direction. The alarm was so great that my companion gave up
his tent, and retreated with his people to that of the vizier; and I
found myself obliged to allow my two servants to follow him also. As
for myself, I remained where I was, for I felt little inclination to have
my tent once more plundered, as had been the case on our
expedition to Kánem. It soon proved to be nothing but a false alarm.
In these predatory incursions, the rapacious Shúwa suffer the
greatest loss, as it is they who always push on furthest, and run the
greatest risk; but, on the other hand, they also succeed in carrying
off secretly a great deal of spoil to their native villages without its
becoming subject to the general partition. None of them have
firelocks, being only armed with missiles usually consisting of one
large spear, or kasákka, and four small javelins, or bállem; very few
of them have shields.
Thursday, Jan. 8.—The country through which we passed was
extremely fertile and beautiful, the scenery during the first part of our
march preserving in general the same features which it exhibited on
the preceding day. We ourselves kept along the high ground, at the
foot of which a clear open sheet of water was meandering along,
while beyond, towards the east, an unbounded grassy plain
stretched out, with a scanty growth of trees in the background, and
only broken towards the south-east by a low chain of hills. At the
distance of a mile we reached some hamlets where dúm- and deléb-
palms were grouped together in a remarkable manner, starting forth
from, and illuminated by, the sea of flames which was devouring the
village, the whole forming a very picturesque spectacle.
Further on we made a halt on the slope of the rising ground, the
various troops, distinguished by the diversity of colours of their
dresses, grouping themselves around some buildings which were
almost consumed by the flames, while I found leisure to sketch the
fertile country before us. The people themselves were struck with its
beauty; and when we continued our march, I took an opportunity to
enter into a conversation with our friend the vizier, with regard to the
policy which they pursued with these people, and the way in which
they desolated these regions; and I asked him whether they would
not act more prudently in allowing the natives to cultivate their fertile
country in tranquillity, only levying a considerable tribute upon them.
But the vizier answered me, that it was only by the most violent
means that they were able to crush these pagans, who cherished
their independence and liberty above everything, and that this was
the reason why he burnt all the granaries, in order to subdue them
by famine; and he added that even of famine they were less sensible
than he could wish, as the water in this region afforded them an
unlimited supply of fish.
Slaves are the only articles which the conquerors want from the
subjected tribes; by carrying into slavery great numbers of them they
force them into subjection, and even the tribute which they levy, after
having subdued them, consists of slaves. All this will be changed as
soon as a regular and legitimate intercourse has been opened along
the river Bénuwé into the heart of these regions, when the natural
produce of the soil will be in constant request—such as cotton,
indigo, vegetable butter, ground-nuts, ivory, rhinoceros’ horns, wax,
hides, and many other articles. The vizier himself, although a strict
Moslim, was too enlightened to lay much stress upon the spreading
of Islám; but nevertheless the idea that these unfortunate creatures
fully deserve such treatment, in their character as pagans (kofár or
“kérdi”), blunted his feelings to their sufferings.
Further on we crossed the water where it was shallower, and, a
little beyond, another meadow-water of greater breadth but not so
deep, and then entered a fine undulating country, while an arm of the
water remained on our left. The whole country was extremely well
cultivated, and densely inhabited, village succeeding village, while
large trees, mostly of the ngábbore and karáge kind, enveloped the
whole in the finest vegetation. Some of the huts were distinguished
by a natural ornamental network or covering, formed by that kind of
Cucurbitacea which I have mentioned before as named “ságade” by
the natives, and which is probably identical with the species called
Melopepo. The aspect of the country was the more pleasing, and left
the impression of a certain degree of industry, owing to the tobacco-
plants just standing in flower.
Amidst such scenery, we took up our encampment at an early
hour in the morning, a beautifully winding watercourse, which was
bordered by a fine grassy slope about twenty feet high, closely
approaching on our right. The watercourse was about sixty yards
broad, but of considerable depth, at least in this place, and full of
clear fresh water, which was gently gliding along, and disappeared
further down in the plain. Here I lay down for an hour in the cool
shade of a large karáge-tree, and allowed myself to be carried away
by the recollections caused by the ever-varying impressions of such
a wandering life, which repays the traveller fully for all the hardships
and privations which he has to endure, and endows him with
renewed energy to encounter fresh dangers.
I have before observed what trouble the hard alluvial soil caused
us in pitching our tents; but here the argillaceous soil was succeeded
by loose sand, which forms the border of the river. The light troops,
soon after our arrival to-day, had dispersed in all directions and
brought a considerable quantity of cattle from the neighbouring
villages; the cattle, however, hereabouts are only of middle size, and
the cows yield little milk, and that of very poor quality.
It seems remarkable that the Músgu, as well as the Marghí, and
several divisions of the kindred Kótoko, call the cattle by a name
which closely approaches that given to it by the Háusa people, while
the Bátta call it by a name which is certainly derived from the
Fulfúlde, or the language of the Fúlbe. Such linguistic relations are
not without interest, as they afford some little insight into the history
of the civilization of these regions. A little variety was given to the
monotonous proceedings of our rather inglorious expedition, by the
fact of one of the Shúwa, who was supposed to have been killed a
few days previously, being found under a tree in the forest, severely
wounded, but still alive, after having undergone great hardships and
privations.
Friday, Jan. 9.—The whole district in which we had been roving
about since the 30th December belongs to Wúliya, which is
decidedly one of the most fertile and best-irrigated regions in the
world.
A desolate border-district, consisting at times of green swampy
ground uprooted by the footprints of the elephant, and on this
account affording a very difficult passage for cavalry, at others of
dense forest, the one following the other in rapid succession,
separated Wúliya from another principality, of the name of Bárea,
and inhabited by a tribe of the Músgu of the name of Ábare. It was
characteristic of the little peaceful intercourse which exists among
these various petty tribes, that the Ábare did not seem to have had
the slightest information of the approach of the expedition, till we
suddenly came upon them through the dense forest, so that they had
scarcely time to escape with their families from the village, and
endeavour to hide themselves in the dense covert of the forest
towards the east. They were pursued and overpowered, after a short
resistance, by the continually increasing numbers of the enemy; and
the booty of that day, chiefly in cattle, was rather considerable.
Slaves were also brought in in considerable numbers, principally
young boys and girls. The distance of the field of battle spared us the
sight of the slaughter of the full-grown men.
We chose our camping-ground on the stubble-fields between the
straggling groups of the village, which were beautifully adorned by
some fine specimens of the deléb-palm; and I took the opportunity of
making a sketch of this scene of natural fertility, and wanton
destruction of human happiness. The huts in general were of the
same construction and arrangement as those described above; but
in one of them I found a kind of three-pointed harpoon or spear very
similar to a hay-fork, with this difference, that the middle point was
rather longer. The handle also was rather long, measuring about
eight feet. It probably was used for catching fish, rather than as a
weapon, otherwise it would scarcely have been left behind; but it
may easily have served both purposes.
Thus by very short marches we again approached Bórnu, keeping
mostly at a short distance eastward from our former route, and
encamped the following day in the midst of another straggling
village, the fields of which were especially shaded by fine bíto-trees
(Balanites Ægyptiaca), the soil being as hard as iron. I had scarcely
pitched my tent when Hámed, the son of Íbrahím Wádáy, one of the
courtiers with whom I was on friendly terms, sent to me, begging I
would pay him a visit; and, upon complying with his wish, he
introduced into my presence a female slave who had been taken the
day before, telling me that I might make a drawing of her; for he
knew that I was making strict inquiries after the origin and customs of
these tribes, and that I was making occasional sketches. This female
slave was certainly worthy of a sketch, as she was one of the most
stately women I saw here. But I entertained some suspicion that she
was not of Músgu origin, but belonged to the Marghí; for in the whole
of the Músgu country I had not observed a single individual of red
colour, but all were of the same dirty black, approaching to what the
French call café-au-lait, while this woman was of a red complexion.
She certainly wore in her under lip the large bone, the national
emblem of the Músgu females; but this custom she might have
adopted. As for herself, she would neither give me any information
with respect to her origin, nor sit still in order to allow me to finish my
sketch. She was tall and well grown, with the exception of the legs,
which were rather crooked; and being still a young woman, her
breasts had not attained that bag-like shape which is so disgusting in
the elder females of this country. Her features were only a little
disfigured by the bone in the under lip. Her neck was richly
ornamented with strings of beads; but these were as
little peculiar to her as the cotton cloth round her
loins, having been given her by the new master into
whose hands she had fallen. The national dress of
the Músgu females consists of nothing but a narrow
bandage, formed of bast, twisted like a rope, which
is fastened between the legs and round the waist
like a T bandage.
A circumstance happened here which caused a
great sensation, particularly among the courtiers.
The last messengers who had been sent from
Kúkawa with despatches for the commander-in-
chief, as I have observed, had been destroyed by
the pagans; and it was on this day, and in this place,
that, while all the cottages were being pillaged and
ransacked, three of the letters of which those
messengers had been the bearers, were found in
the pocket of a shirt which had been hid in a clay jar.
This was evidently the shirt of the messenger
himself; and the blood with which it had been
stained had been washed out without taking the
letters out of the pocket. Devoid as the expedition
was of feats of valour and interest, the greatest
importance was attached to this little incident.
Sunday, Jan. 11.—When we left this place our
friends just barely escaped punishment for their
barbarous proceeding of burning the villages, in
which we had encamped, as soon as we left them;
for the conflagration spread before we had gained the open country,
and a most horrible crushing took place among the burning huts.
Had there been any wind, great part of the army might have been
severely scorched. The country which we passed to-day was
intersected by numerous watercourses; and we had to cross and
recross them several times. Here we passed a place where the poor
natives, in the consciousness of their weakness, seemed to have
been aroused to new and unwonted energy for building a large
fortification, but had been obliged to leave it half finished. Our march
was extremely short, and scarcely extended to three miles, when we
encamped in a village which seemed to have been ransacked at a
former period. It lay straggling over a wide extent of ground, in
separate groups of cottages, which were surrounded by stubble-
fields shaded by karáge-trees of a richness and exuberance which I
had not seen before, and surpassing even those fine trees of the
same species which I have described near the village Kadé.
Of course every one was desirous of having his tent pitched in the
shade of one of these beautiful trees, when suddenly the intruders
were attacked by swarms of large bees, which, settling behind their
ears, tormented them to the utmost, as if they wanted to take
revenge for the mischief that had been done to their masters, and to
defend their favourite resting-places, against these cruel intruders. It
is well known that swarms of bees had almost caused the
destruction of Mungo Park’s, as well as Major Gray’s expedition; but
here a whole army was running away from these little creatures.
Even those who had encamped at a greater distance were only able
to protect themselves by the large volumes of smoke which issued
from the fires they had lighted. Before this, we had not observed the
rearing of bees in this country; but here the larger trees were full of
beehives, made of large-sized blocks. Even flocks of turtle-doves
were not wanting in this fertile region so rich in water and vegetation.
In this pleasant spot we remained encamped the following day,
while part of the army was sent out in a southerly direction towards
our former encampment, Kákala, which was only at a few miles’
distance, in order to try their fortune thereabouts; but the pagans
being upon their guard, they returned empty-handed in the evening.
Our food to-day was varied, to our great satisfaction, by an excellent
fish of considerable size, which we obtained from the neighbouring
pond. Fish seems to be plentiful in this quarter; but whether the
number of small ridges and channels which we observed on our
march the following day were intended for catching fish, which might
enter them at the highest level of the inundation, or for preparing the
fields for cultivation, I am not quite sure; but the former seemed to be
the case, there being no signs whatever of the fields being brought
under labour. Dense forest and open pasture-ground alternated, the
forest, consisting of middle-sized acacias, interrupted now and then
by the kálgo-tree, with its ash-coloured leaves and its dark red pods,
or by the kókia.
The country, however, became exceedingly interesting and
pleasant when we reached one of the numerous watercourses of
these African Netherlands, an open and clear river about seventy
yards broad, which being fringed on each bank with a border of
slender deléb-palms, or kamelútu, in the clear magnificent morning
sky, afforded a most picturesque view. We here crossed this water,
and passed a village on our left, and, keeping along the fresh turf of
the western bank a mile further on, reached a spot where another
branch, running eastward apparently, though no current is visible,
and fringed likewise by palms of the same description, joins the main
channel. The country being without any perceptible inclination, it is
extremely difficult, nay almost impossible, to decide about the
direction of these watercourses, except during the period of their
highest inundation. But the fertile and picturesque landscape beyond
this narrow sheet of water, which stretched along in a regular line like
an artificial canal, did not seem at all to be deserted, natives being
seen in every direction. The commander of the expedition therefore
ordered a short halt, the army presenting their front to the enemy,
and preventing the stragglers from crossing the river, which, owing to
their greediness for spoil, they seemed to have not a little inclination
to do. But the great men of Bórnu at the present day do not like any
unusual exertion; and it was decided to await the arrival of the
camels, to encamp at ease, and to take luncheon. We then turned
off a little to the westward, entered a village, and encamped in the
stubble-fields.
Suddenly, just about noon, without my having any previous
knowledge of it, the vizier and his officers mounted on horseback, in
order to attack the pagans on the other side of the water; but these
poor people, to whom had been given full opportunity of estimating
the strength of the army, had thought it prudent to make use of the
leisure thus afforded them, not by the mercy, but by the cowardly
disposition of their enemies, to convey their families and property
into a place of safety; for the river of Logón passed at a distance of
only four miles from this place, and in its present state was capable
of affording perfect security to the persecuted natives, their pursuers
having no boats. But although the army did not go to a great
distance, and returned after an absence of three hours, I was rather
sorry for having neglected this opportunity of obtaining a sight of the
river of Logón again at another place, and likewise of visiting once
more that picturesque district, so rich in deléb-palms, which was
evidently one of the finest in the whole country. Mr. Overweg, who
had received previous information of the intention of the vizier, was
this time more fortunate than myself, and afterwards informed me
that they had been obliged to keep first along the smaller river, in
order to reach the ford where we had crossed it in the morning. The
great river, which they reached about three miles beyond, exhibited a
single bed, and was not fordable.
While remaining behind in the empty encampment, I lamented the
misery of accompanying such an expedition; for nothing can be more
disheartening to the feelings of a traveller who is desirous of
knowledge, than to visit these beautiful countries under such
circumstances, when the original inhabitants are either exterminated,
or obliged to seek their safety in flight, when all traces of their
cheerful life are destroyed, and the abodes of human happiness
converted into desolation, when no one is left to acquaint him with all
the significant names which the various characteristic features of the
country must necessarily bear, especially those numberless creeks,
swamps, and rivers which intersect this country in all directions. The
stranger who intrudes upon the natives in this hostile manner is
scarcely able to make out a few dry names of the principal dwelling-
places, and, being placed under such disadvantageous
circumstances, is at least justified in speaking more emphatically of
the endless misery into which the finest and most populous regions
of this continent are plunged by these slave-hunting expeditions of
their merciless Mohammedan neighbours. This fertile district, which
is enclosed by the river of Logón on the east, and by the narrow
channel-like watercourse on the west side, seems to be that very
dominion of “Fúss,” the power of which, as I have related before,
was greatly dreaded by our friends.
This was the coolest day we had as yet experienced on our
expedition, the thermometer, in the cool shade of a tree, at half-past
one o’clock in the afternoon, indicating only 84°. This was probably
attributable to the fresh northerly breeze which sprung up about
noon; for during the night it was not so cold as we felt it afterwards,
the thermometer during this time indicating, at sunrise, between 56°
and 59°, and at sunset between 74° and 77°.
Wednesday, Jan. 14.—We made a longer march than usual, while
the character of the country changed entirely, and not, as it seemed,
to its advantage; for instead of a fertile landscape, clothed with rich
verdure, we entered upon bleak alluvial plains scantily overgrown
with stunted mimosas, and to all appearance almost unfit for
producing grain. It was one of those remarkable days in January
which, in the whole of Central Africa, form a distinct season by
themselves. A thick fog enveloped the whole country, and excluded
any distant view, and, while subsequently it helped to increase the
dismal character of the country, in the beginning of our march it
prevented us from enjoying once more the rich scenery of the
preceding day; for we had first to return to the bank of that beautiful
clear sheet of water along which our march had led the day before.
Its banks here also were quite flat, but the sheet of water was wider
than at the place where we had seen it before. Proceeding a little in
advance of the army, I obtained a sight of a river-horse just at the
moment when it raised its immense head above the surface of the
watery element.
But as soon as we left this fine clear sheet of water the character
of the country changed entirely, assuming an exceedingly sombre
aspect, and we passed a hamlet more cheerless and miserable than
any I had seen in the whole of this country. Not a single trace of
cultivation was seen on the bleak, black, argillaceous soil; and it was
evident that the inhabitants of this hamlet subsisted solely on the fish
which they were able to catch; and these may be abundant, as the
whole configuration of the ground evidently shows that this entire
tract is reached by the inundation during the rainy season.
The country preserved the same aspect as we proceeded
onwards; and the hamlets which we passed were not of a more
inviting appearance than the first. Only now and then an isolated
deléb-palm, or kamelútu, raised its magnificent tuft into the air, and
served, by the contrast it afforded, to make this spot appear more
gloomy. A large piece of ground was entirely covered with aghúl
(Hedysarus alhajji) which seemed to me not a little remarkable, as I
did not remember to have seen this plant, which is so much liked by
the camel, since I had left Taganáma.
The country assumed more and more the appearance of a swamp
at present dry; and we were even obliged to change our direction
frequently, in order to avoid spots where the bog had not dried up,
while everywhere we observed the same kind of small ridges which I
have mentioned before. Further on, the ground became a little drier,
but presented only a monotonous waste, with detached bunches of
rank grass, overshadowed now and then by scanty and stunted
karáge-trees scarcely fifteen feet high, while we had been
accustomed, in the Músgu country, to see this kind of tree assume
the size of the most magnificent specimens of the vegetable
kingdom, with an elevation of from seventy to eighty feet, and a
crown of not less diameter. As far as the eye could reach, the
character of the country presented the same poor appearance; but,
as I have mentioned before, the sky was not very clear, and the view
was therefore rather limited. The bush of the fan-palm seemed to be
quite solitary, without there being a full-grown specimen to be seen.
At length this swampy ground seemed to have an end; but nothing
but poor stubble-fields, where the crop had failed, took its place, with
here and there a few detached poor-looking huts, the few trees
which were visible exhibiting the same scanty growth that we had
observed in the district through which we had just passed. At last the
eye, fatigued by the length of this gloomy tract, was refreshed by the
sight of a field with a fresh crop of másakuwá, or Holcus cernuus,
though it was far from being a rich one. Already here, besides the
huts common in this country, others, of a remarkable and peculiar
style, became visible, such as I shall describe further on, and as only
the most excellent clay soil can enable the natives to build.
Entering for a while a grassy plain, we reached an open water,
such as the Kanúri people call komádugu, about thirty yards broad,

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Principles of Macroeconomics 7th Edition Mankiw - eBook

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N. Gregory Mankiw is Professor of Economics at

American Economic Review, Journal of Political Economy,

Ronald D. Kneebone is Professor in the Department of Economics and the

Kenneth J. McKenzie is Professor in the Department of Economics and The

About the Authors vi PART 7 SHORT-RUN ECONOMIC FLUCTUAT

PART 2 SUPPLY AND DEMAND: HOW MARKETS WORK Glossary 443

PART 3 THE DAT

PART 4 THE REAL ECONOMY IN THE LONG RUN

PART 5 MONEY AND PRICES IN THE LONG RUN

PART 6 THE MACROECONOMICS OF OPEN ECONOMIES

CHAPTER 3 4-2 Demand 64

Questions for Review 150 9-3 Minimum-Wage Laws 194

16-5 Looking Ahead 416 17-2 Should Monetary Policy Be Made by an

PART 8 FINAL THOUGHTS

CHAPTER 17 17-6 Conclusion 438

How the Book Is Organized

The Fundamental Tools of Supply and Demand

The purpose of this text is

recur throughout the book.

LEARNING In this chapter, you will …

case The Accumulation of Government Debt in Canada

theory that has just been developed.

Figures and Tables Colourful and eye-

economic points and to clarify Canadian

and other key economic concepts. They have 10

also proved to be valuable and memorable 0

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 15

How People Interact

How the Economy as a Whole Works

Source: “Risk, Reward and the Economics of the Criminal

FIGURE 9.4 Employment Rate 85

“FYI” Features These features provide

topics that instructors might choose either to

discuss or skip in their lectures.

Chapter Summaries Each chapter ends with a brief

summary that reminds students of the most important

lessons that they have just learned. Later in their study,

scarcity, p. 2 marginal changes, p. 4 market power, p. 11

can review terms they do not understand in the origi-

sons. Students can use these questions to check their

comprehension and to prepare for exams.

Problems and Applications Each chapter also

contains a variety of problems and applications that

Some instructors may use these questions for home-

New in This Seventh Canadian Edition

Chapter 4 The appendix “The Mathematics of Market Equilibrium,” which guides

Chapter 8 The existing case study “The Accumulation of Government Debt in

Chapter 9 A new FYI feature discusses the employment rate as a measure of

Chapter 10 A new In the News feature explains why throughout history it

Wednesday, Jan. 7.—This was the day when we were to bid

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