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PART 6: THE MACROECONOMICS OF OPEN ECONOMIES
Chapter 12 Open-Economy Macroeconomics:
Basic Concepts A nation’s economic interactions with other nations are
described by its trade balance, net foreign investment, and
exchange rate.
Chapter 13 A Macroeconomic Theory of
the Small Open Economy A long-run model of the small open economy explains the
determinants of the trade balance, the real exchange rate, and
other variables.
PART 7: SHORT-RUN ECONOMIC FLUCTUATIONS

Chapter 14 Aggregate Demand and
Aggregate Supply
Chapter 15 The Influence of Monetary The model of aggregate demand and aggregate supply explains
and Fiscal Policy on Aggregate short-run economic fluctuations, the short-run effects of
Demand monetary and fiscal policy, and the short-run linkage between
real and nominal variables.
Chapter 16 The Short-Run Tradeoff between
Inflation and Unemployment
PART 8: FINAL THOUGHTS

Chapter 17 Five Debates over
Macroeconomic Policy A capstone chapter presents both sides of five major debates over
economic policy.
Seventh Canadian Edition
macro
PRINCIPLES OF
ECONOMICS
N. Gregory Mankiw
H A R VA R D U N I V E R S I T Y
Ronald D. Kneebone
U N I V E R S I T Y O F C A L G A RY
Kenneth J. McKenzie
U N I V E R S I T Y O F C A L G A RY
Principles of Macroeconomics, Seventh Canadian Edition
by N. Gregory Mankiw, Ronald D. Kneebone, and Kenneth J. McKenzie
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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,
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xxiv PREFACE
another new In the News feature discusses research being done at the Bank
of Canada that seeks to learn lessons from the 2008–09 financial crisis and to
understand how monetary policy might need to change to accommodate
innovations such as Bitcoin.
Chapter 11 A new FYI feature defines, discusses, and shows data on the
Bank of Canada’s measure of “core CPI inflation” and how it compares to the
rate of inflation measured using the total CPI. The distinction is important for
understanding the Bank’s monetary policy choices.
Chapter 13 In this edition we clarify our discussion of supply and demand in

the market for foreign-currency exchange.
Chapter 14 Our existing Case Study on the recession of 2008–09 now includes a
long quote from Bank of Canada Governor Stephen Poloz in which he emphasizes
that one of the lessons to be drawn from that recession is the need for the Bank to
be ever vigilant to excessive risk taking.
Chapter 15 With this edition we include in the opening paragraphs an

explanation of why it is important to treat all cases of aggregate demand policy—
fiscal and monetary policy in both open and closed economies—in a single
chapter.
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NETA Test Bank

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PREFACE xxv
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NETA Instructor’s Manual

The Instructor’s Manual to accompany Mankiw, Principles of Macroeconomics,
Seventh Canadian Edition, has been prepared by Phil Ghayad and Michel Mayer
at Dawson College. This manual contains sample lesson plans, learning objectives,
suggested classroom activities, and a resource integration guide to give instructors
the support they need to engage their students within the classroom.
Instructor’s Solutions Manual

This manual, prepared by the text authors Ron Kneebone and Ken McKenzie at
University of Calgary, has been independently checked for accuracy by Norm
Smith, Georgian College. It contains complete solutions to the text’s QuickQuizzes,
Questions for Review, Quick Check Multiple Choice questions, and Problems.
MindTap
Offering personalized paths of dynamic assignments and applications,
MindTap is a digital learning solution that turns cookie-cutter into cutting-
edge, apathy into engagement, and memorizers into higher-level thinkers.
MindTap enables students to analyze and apply chapter concepts within
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Instructors personalize the experience by customizing the presentation of these
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xxvi PREFACE
learning tools to their students, even seamlessly introducing their own content
into the Learning Path.
Aplia
Aplia™ is a Cengage Learning online homework system dedicated to improving
learning by increasing student effort and engagement. Aplia makes it easy for
instructors to assign frequent online homework assignments. Aplia provides
students with prompt and detailed feedback to help them learn as they work
through the questions, and features interactive tutorials to fully engage them in
learning course concepts. Automatic grading and powerful assessment tools give
instructors real-time reports of student progress, participation, and performance,
while Aplia’s easy-to-use course management features let instructors flexibly
administer course announcements and materials online. With Aplia, students will
show up to class fully engaged and prepared, and instructors will have more time
to do what they do best . . . teach.
Student Ancillaries
Study Guide
Revised by Peter Fortura, Algonquin College, and Shahram Manouchehri,
MacEwan University, this Study Guide was prepared to enhance student success.
Each chapter includes learning objectives, a description of the chapter’s context
and purpose, a chapter review, key terms and definitions, advanced critical
thinking questions, and helpful hints for understanding difficult concepts.
Students can develop their understanding by doing practical problems and short-
answer questions and then assess theory mastery of the key concepts with the
self-test, which includes true/false and multiple choice questions prepared and
edited under the NETA program for effective question construction. Solutions to
all problems are included in the study guide ISBN: 0-17-674541-6).
Student PowerPoint Slides

Microsoft® PowerPoint® lecture slides for every chapter average 35–45 slides
per chapter, many featuring key figures, tables, and photographs from Mankiw,
Principles of Macroeconomics, Seventh Canadian Edition. These slides will help to
develop students’ understanding and enhance their success.
MindTap
Stay organized and efficient with MindTap—a single destination with all the
course material and study aids you need to succeed. Built-in apps leverage social
media and the latest learning technology. For example:
● ReadSpeaker will read the text to you.

● Flashcards are pre-populated to provide you with a jump start for review—or
you can create your own.
● You can highlight text and make notes in your MindTap Reader. Your notes
will flow into Evernote, the electronic notebook app that you can access any-
where when it’s time to study for the exam.
● Self-quizzing allows you to assess your understanding.
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PREFACE xxvii
Visit http://www.nelson.com/student to start using MindTap. Enter the

Online Access Code from the card included with your text. If a code card is not
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Aplia
Founded in 2000 by economist and Stanford professor Paul Romer, Aplia™ is an
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ing student effort and engagement. Currently, Aplia products have been used by
more than a million students at over 1300 institutions. Aplia offers a way for you
to stay on top of your coursework with regularly scheduled homework assign-
ments that increase your time on task and give you prompt feedback. Interactive
tools and additional content are provided to further increase your engagement
and understanding. See http://www.aplia.com for more information. If Aplia
isn’t bundled with your copy of Mankiw, Principles of Macroeconomics, Canadian
seventh edition, you can purchase access separately at NELSONbrain.com. Be
better prepared for class with Aplia!
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ACKNOWLEDGMENTS
The success of each Canadian edition of Principles of Macroeconomics and Principles

of Microeconomics has been due, in part, to the reviewers who helped us shape this
text, edition after edition. We have benefited enormously from their advice and
suggestions.
Ather H. Akbari, Saint Mary’s University
Iris Au, University of Toronto
Collins Ayoo, Carleton University
Rauf Azhar, University of Guelph
Keith Baxter, Bishop’s University
Ugurhan G. Berkok, Queen’s University
Aurelia Best, Centennial College
Menouar Boulahfa, Dawson College
Bogdan Buduru, Concordia University
Bruce Cater, Trent University
Jyh-Yaw Joseph Chen, Kwantlen Polytechnic University
Saud Choudhry, Trent University
Nancy Churchman, Carleton University
Kevin Clinton, Bank of Canada
Daria Crisan, Mount Royal University
Weili Ding, Queen’s University
Wendy Doell, University of Saskatchewan
Martin Dooley, McMaster University
Peter Dungan, University of Toronto
Byron Eastman, Laurentian University
Herb Emery, University of Calgary
Pierre Fortin, University of Quebec at Montreal
Michael Francis, Carleton University
Alexander Gainer, University of Alberta
Samuel Gamtessa, University of Regina
Pierre-Pascal Gendron, Humber College

David Gray, University of Ottawa
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xxx ACKNOWL
NO
NOWL EDGMENTS
Michael Hare, University of Toronto

Ibrahim Hayania, Seneca College
Paul Hobson, Acadia University
Hannah Holmes, McMaster University
Ernie Jacobson, Northern Alberta Institute of Technology
Troy Joseph, Carleton University
Eric Kam, Ryerson University
Steven Lehrer, Queen’s University
Colin Mang, Nipissing University
Peter McCabe, McMaster University
Chris McDonnell, Malaspina University-College
Stan Miles, Thompson Rivers University
Lavinia Moldovan, Mount Royal University
Robin Neill, University of Prince Edward Island and Carleton University
Costas Nicolau, University of Manitoba
Umut Oguzoglu, University of Manitoba
Amy Peng, Ryerson University
Julien Picault, University of British Columbia Okanagan
Stephen Rakocsy, Humber College
Ashantha Ranasinghe, University of Manitoba
Neil Roberts, Kwantlen Polytechnic University
Christos Shiamptanis, Wilfrid Laurier University
Scott Skjei, Acadia University
Gregor Smith, Queen’s University
Xueda Song, York University
Kien Tran, University of Lethbridge
Mike Tucker, Fanshawe College
Maurice Tugwell, Acadia University
James Wishart, College of the Rockies
Canadianizing this book has been a team effort from the very start. We would like
to acknowledge the editorial, production, and marketing teams at Nelson for their
professionalism, advice, and encouragement throughout the process. Deserving
special attention are publisher Amie Plourde and developmental editor Katherine
Goodes for helping to ensure the timely completion of our work.
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ACKNOWL
NO
NOWL EDGMENTS xxxi
Special thanks go to Bill Scarth of McMaster University, who offered invaluable

advice regarding the structure and emphasis of the Canadian editions. Dr. Scarth
is an award-winning teacher and author, and to ignore his advice would have
been perilous indeed. His extensive comments were instrumental in helping us
formulate our approach to the Canadian editions.
Our thanks to Norm Smith, Georgian College, for the technical check to en-
sure the accuracy of content throughout this seventh Canadian edition and the
relevant supplements.
We would also like to thank our colleagues at the University of Calgary who
provided invaluable informal input and useful examples and applications. We, of
course, bear full responsibility for any misinterpretations and errors.
The student and instructor ancillaries are a key component of this book and we
gratefully acknowledge the work of the authors:
Peter Fortura, Algonquin College
Phil Ghayad, Dawson College
Michel Mayer, Dawson College
Eric Moon, University of Toronto
Shahram Manouchehri, MacEwan University
Marc Prud’Homme, University of Ottawa
Judith Street, Mount Royal University
Finally, we are grateful to our families for their indulgence and encouragement
throughout the research and writing process. Their patience and understanding
are greatly appreciated.
Ronald D. Kneebone
Kenneth J. McKenzie
August 2016
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PART 1 INTRODUCTION
© Lavinia Moldovan
CHAPTER
1 Ten Principles of Economics
LEARNING In this chapter, you will …

objectives 1 Learn that economics is about the allocation of scarce resources
2 Examine some of the tradeoffs that people face
3 Learn the meaning of opportunity cost
4 See how to use marginal reasoning when making decisions
5 Discuss how incentives affect people’s behaviour
6 Consider why trade among people or nations can be good for everyone
7 Discuss why markets are a good, but not perfect, way to allocate resources
8 Learn what determines some trends in the overall economy
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2 PART 1 INTRODUCTION
The word economy comes from the Greek word for “one who manages a house-
hold.” At first, this origin might seem peculiar. But, in fact, households and
economies have much in common.
A household faces many decisions. It must decide which members of the
household do which tasks and what each member gets in return: Who cooks the
meals? Who does the laundry? Who gets the extra dessert at dinner? Who gets to
choose what TV show to watch? In short, the household must allocate its scarce
resources among its various members, taking into account each member’s abili-
ties, efforts, and desires.
Like a household, a society faces many decisions. A society must decide what
jobs will be done and who will do them. It needs some people to grow food,
other people to make clothing, and still others to design computer software. Once
society has allocated people (as well as land, buildings, and machines) to various
jobs, it must also allocate the output of goods and services that they produce. It
must decide who will eat caviar and who will eat potatoes. It must decide who
will drive a Ferrari and who will take the bus.
The management of society’s resources is important because resources are
scarcity scarce. Scarcity means that society has limited resources and therefore cannot
the limited nature of society’s produce all the goods and services people wish to have. Just as each member of
resources a household cannot get everything he or she wants, each individual in a society
cannot attain the highest standard of living to which he or she might aspire.
economics Economics is the study of how society manages its scarce resources. In most
the study of how society societies, resources are allocated not by a single central planner but through the
manages its scarce combined actions of millions of households and firms. Economists, therefore, study
resources how people make decisions: how much they work, what they buy, how much
they save, and how they invest their savings. Economists also study how people
interact with one another. For instance, they examine how the multitude of buyers
and sellers of a good together determine the price at which the good is sold and
the quantity that is sold. Finally, economists analyze forces and trends that affect
the economy as a whole, including the growth in average income, the fraction
of the population that cannot find work, and the rate at which prices are rising.
The study of economics has many facets but it is unified by several central
ideas. In this chapter, we look at ten principles of economics. Don’t worry if
you don’t understand them all at first or if you aren’t completely convinced. We
explore these ideas more fully in later chapters. The ten principles are introduced
here just to give you an overview of what economics is all about. Consider this
chapter a “preview of coming attractions.”
1-1 How People Make Decisions

There is no mystery to what an economy is. Whether we are talking about the
economy of Vancouver, of Canada, or of the whole world, an economy is just a
group of people interacting with one another as they go about their lives. Because
the behaviour of an economy reflects the behaviour of the individuals who make
up the economy, we start our study of economics with four principles of indi-
vidual decision making.
1-1a Principle #1: People Face Tradeoffs

You may have heard the old saying, “There ain’t no such thing as a free lunch.”
Grammar aside, there is much truth to this adage. To get one thing that we like,
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we usually have to give up another thing that we like. Making decisions requires
trading off one goal against another.
Consider a student who must decide how to allocate her most valuable
resource—her time. She can spend all of her time studying economics, spend all
of it studying psychology, or divide it between the two fields. For every hour she
studies one subject, she gives up an hour she could have used studying the other.
And for every hour she spends studying, she gives up an hour that she could
have spent napping, bike riding, watching TV, or working at her part-time job for
some extra spending money.
Or consider parents deciding how to spend their family income. They can buy
food, clothing, or a family vacation. Or they can save some of the family income
for retirement or the children’s college or university education. When they choose
to spend an extra dollar on one of these goods, they have one less dollar to spend
on some other good.
When people are grouped into societies, they face different kinds of tradeoffs.
One classic tradeoff is between “guns and butter.” The more society spends on
national defence and security (guns) to protect its shores from foreign aggressors,
the less it can spend on consumer goods (butter) to raise the standard of living at
home. Also important in modern society is the tradeoff between a clean environ-
ment and a high level of income. Laws that require firms to reduce pollution raise
the cost of producing goods and services. Because of the higher costs, these firms
end up earning smaller profits, paying lower wages, charging higher prices, or
some combination of these three. Thus, while pollution regulations give us the
benefit of a cleaner environment and the improved health that comes with it, they
have the cost of reducing the incomes of the regulated firms’ owners, workers,
and customers.
Another tradeoff society faces is between efficiency and equity. Efficiency efficiency
means that society is getting the maximum benefits from its scarce resources. the property of society
Equity means that the benefits of those resources are distributed fairly among getting the most it can from
society’s members. In other words, efficiency refers to the size of the economic its scarce resources
pie, and equity refers to how the pie is divided into individual slices.
When government policies are designed, these two goals often conflict. Con- equity
sider, for instance, policies aimed at achieving a more equal distribution of the property of distributing
economic prosperity fairly
economic well-being. Some of these policies, such as the welfare system or
among the members of
Employment Insurance, try to help those members of society who are most in society
need. Others, such as the individual income tax, ask the financially successful to
contribute more than others to support the government. Although these policies
have the benefit of achieving greater equity, they have a cost in terms of reduced
efficiency. When the government redistributes income from the rich to the poor, it
reduces the reward for working hard; as a result, people work less and produce
fewer goods and services. In other words, when the government tries to cut the
economic pie into more equal slices, the pie gets smaller.
Recognizing that people face tradeoffs does not by itself tell us what decisions
they will or should make. A student should not abandon the study of psychology
just because doing so would increase the time available for the study of eco-
nomics. Society should not stop protecting the environment just because envi-
ronmental regulations reduce our material standard of living. The poor should
not be ignored just because helping them distorts work incentives. Nonetheless,
people are likely to make good decisions only if they understand the options that
they have available. Our study of economics, therefore, starts by acknowledging
life’s tradeoffs.
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1-1b Principle #2: The Cost of Something Is

What You Give Up to Get It
Because people face tradeoffs, making decisions requires comparing the costs and
benefits of alternative courses of action. In many cases, however, the cost of an
action is not as obvious as it might first appear.
Consider the decision whether to go to college or university. The main benefits
are intellectual enrichment and a lifetime of better job opportunities. But what are
the costs? To answer this question, you might be tempted to add up the money
you spend on tuition, books, and room and board. Yet this total does not truly
represent what you give up to spend a year in college or university.
There are two problems with the calculation. First, it includes some things that are
not really costs of going to college or university. Even if you quit school, you would
need a place to sleep and food to eat. Room and board are costs of going to college
or university only to the extent that they are more expensive there than elsewhere.
Second, this calculation ignores the largest cost of going to college or university—
your time. When you spend a year listening to lectures, reading textbooks, and
writing papers, you cannot spend that time working at a job. For most students, the
wages given up to attend school are the largest single cost of their education.
opportunity cost The opportunity cost of an item is what you give up to get that item. When
whatever must be given up making any decision, decision makers should be aware of the opportunity
to obtain some item costs that accompany each possible action. In fact, they usually are. College or
university-age athletes who can earn millions if they drop out of school and play
professional sports are well aware that their opportunity cost of a postsecondary
education is very high. It is not surprising that they often decide that the ben-
efit of this education is not worth the cost. Remember, an opportunity cost is an
opportunity lost.
1-1c Principle #3: Rational People Think at the Margin

Economists normally assume that people are rational. For the most part the
rational people assumption that people are rational serves us very well. Rational people system-
those who systematically atically and purposefully do the best they can to achieve their objectives, given
and purposefully do the best the opportunities they have. As you study economics, you will encounter firms
they can to achieve their that decide how many workers to hire and how much of their product to man-
objectives ufacture and sell to maximize profits. You will also encounter individuals who
decide how much time to spend working and what goods and services to buy
with the resulting income to achieve the highest possible level of satisfaction.
Rational people know that decisions in life are rarely black and white, but usu-
ally involve shades of grey. At dinnertime, the decision you face is not “Should I
fast or eat like a glutton?” More likely, you will be asking yourself “Should I take
that extra spoonful of mashed potatoes?” When exams roll around, your decision
is not between blowing them off or studying 24 hours a day, but whether to spend
an extra hour reviewing your notes instead of watching TV. Economists use the
marginal changes term marginal changes to describe small incremental adjustments to an existing
small incremental plan of action. Keep in mind that “margin” means “edge,” so marginal changes
adjustments to a plan of are adjustments around the edges of what you are doing. Rational people often
action make decisions by comparing marginal benefits and marginal costs.
For example, suppose you are considering calling a friend on your cell phone.
You decide that talking with her for 10 minutes would give you a benefit that you
value at about $7. Your cell phone service costs you $40 per month plus $0.50 per
minute for whatever calls you make. You usually talk for 100 minutes a month,
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FYI The Opportunity Cost of Gasoline
T he opportunity cost of an item is what you give up to get it. As dis-

cussed earlier, out of pocket monetary costs can be a misleading
indicator of opportunity cost. For example, consider the opportunity cost
26 cents per minute in 1997) and average fuel economy. For 1997 this
gives MWPKD 5 .56/(.26 3 8.5) 5 .2533. So, in 1997, in order to pay
for the gasoline required to drive a car one kilometre, an average indi-
of gasoline. The price of gasoline has increased quite significantly over vidual in Ontario had to work .2533 minutes, or 15.2 seconds. In 2014 the
the years. For example, the average price of gasoline in Ontario rose from MWPKD was .3043, or 18 seconds. So, the opportunity cost of gasoline
about 56 cents per litre in 1997 to over $1.28 in 2014, with several ups in 2014 measured in terms of the number of seconds of work needed to
and downs in between. This represents an increase of almost 130 percent drive one kilometre was 18 seconds compared to 15 seconds in 1997!
over this 17-year period. While the price of gasoline at the pump has indeed increased significantly
However, this is misleading. Gasoline is not something that is consumed since 1997, fuel economy has increased as well, as have wages, keeping
directly, but rather is used to drive your car. It is better to think of the price the opportunity cost of gasoline relatively constant. Figure 1.1 shows
of gasoline in terms of how much it costs per kilometre driven. To do this MWPKD for Ontario for every year from 1997 to 2014.
we need to take account of how the fuel efficiency of cars has changed The above calculations are based on fleet averages for cars in North
over this period. In 1997 the fuel efficiency of the average North American America. Of course if you drive a more fuel-efficient car, or earn a higher
car was about 8.5 kilometres per litre (KPL). By 2014 this had increased to than average wage, you have to work less to pay for the gasoline required
10.3 KPL. So it took about 17.5 percent less gasoline to drive a car in 2014 to drive your car. For example, the hybrid Toyota Prius gets about 21 KPL,
than it did in 1997. compared to the 2014 fleet average of 10.3. If you drive a Prius you have to
But this is not all. In order to buy the gasoline you need money. work just under nine seconds per kilometre driven to pay for the gasoline.
To earn that money you need to work. A useful way to think about the On the other hand, if you drive a Ford F150 truck (9.4 KPL), you have to
opportunity cost of gasoline, or any good for that matter, is in terms of the work almost 20 seconds.
amount of time you have to work in order to pay for it. In this regard, con- On his blog, Ed Dolan has undertaken similar calculations for the
sider the number of minutes you need to work in order to pay for gaso- United States. Fuel economy is the same in the two countries, as we drive
line on a per-kilometre basis. Let’s call this minutes worked per kilometre basically the same vehicles. However, gasoline prices are lower in the
driven (MWPKD). The average hourly wage in Ontario in 1997 was about United States (due largely to lower taxes) and average wages are higher.
$15.60 per hour; in 2014 it was $24.50, an increase of 57 percent. To For 2014 Dolan calculates that, on average, it costs a little under 7 seconds
calculate MWPKD, take the price of gasoline and divide it by the product of work in the United States to pay for a kilometre of driving, significantly
of the wage rate (measured in dollars per minute, so $15.60 per hour is less than the 18 seconds in Canada.
MWPKD FIGURE 1.1

0.4
Minutes Worked per
0.35 Kilometre Driven
0.3
0.25
0.2
0.15
0.1
0.05
0
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
19
19
19
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
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so your total monthly bill is $90 ($0.50 per minute times 100 minutes, plus the
$40 fixed fee). Under these circumstances, should you make the call? You might
be tempted to reason as follows: “Because I pay $90 for 100 minutes of calling
each month, the average minute on the phone costs me $0.90. So a 10-minute
call costs $9. Because that $9 cost is greater than the $7 benefit, I am going to
skip the call.” That conclusion is wrong, however. Although the average cost of
a 10-minute call is $9, the marginal cost—the amount your bill increases if you
make the extra call—is only $5. You will make the right decision only by com-
paring the marginal benefit and the marginal cost. Because the marginal benefit
of $7 is greater than the marginal cost of $5 (.50 3 10 5 $5), you should make the
call. This is a principle that people innately understand: Cell phone users with
unlimited minutes (that is, minutes that are free at the margin) are often prone to
make long and frivolous calls.
Thinking at the margin works for business decisions as well. Consider an air-
line deciding how much to charge passengers who fly standby. Suppose that
flying a 200-seat plane across Canada costs the airline $100 000. In this case, the
average cost of each seat is $100 000/200, which is $500. One might be tempted to
conclude that the airline should never sell a ticket for less than $500. Actually, a
rational airline can often find ways to raise its profits by thinking at the margin.
Imagine that a plane is about to take off with 10 empty seats, and a standby pas-
senger is waiting at the gate willing to pay $300 for a seat. Should the airline sell
the ticket? Of course it should. If the plane has empty seats, the cost of adding one
more passenger is tiny. Although the average cost of flying a passenger is $500, the
marginal cost is merely the cost of the bag of peanuts and can of soda that the extra
passenger will consume. As long as the standby passenger pays more than the
marginal cost, selling him a ticket is profitable.
Marginal decision making can help explain some otherwise puzzling eco-
nomic phenomena. Here is a classic question: Why is water so cheap, while
diamonds are so expensive? Humans need water to survive, while diamonds
are unnecessary; but, for some reason, people are willing to pay much more for
a diamond than for a cup of water. The reason is that a person’s willingness to
pay for a good is based on the marginal benefit that an extra unit of the good
will yield. The marginal benefit, in turn, depends on how many units a person
already has. Water is essential but the marginal benefit of an extra cup is small
because water is plentiful. By contrast, no one needs diamonds to survive, but
because diamonds are so rare people consider the marginal benefit of an extra
diamond to be large.
A rational decision maker takes an action if and only if the marginal benefit
of the action exceeds the marginal cost. This principle can explain why people
use their cell phones as much as they do, why airlines are willing to sell a ticket
below average cost, and why people are willing to pay more for diamonds than
for water. It can take some time to get used to the logic of marginal thinking, but
the study of economics will give you ample opportunity to practise.
1-1d Principle #4: People Respond to Incentives

incentive An incentive is something (such as the prospect of a punishment or a reward) that
something that induces a induces a person to act. Because rational people make decisions by comparing
person to act costs and benefits, they respond to incentives. You will see that incentives play
a central role in the study of economics. One economist went so far as to suggest
that the entire field could be summarized simply: “People respond to incentives.
The rest is commentary.”
NEL
Incentives are crucial to analyzing how markets work. For example, when the
price of an apple rises, people decide to eat fewer apples. At the same time, apple
orchards decide to hire more workers and harvest more apples. In other words,
a higher price in a market provides an incentive for buyers to consume less and
an incentive for sellers to produce more. As we will see, the influence of prices on
the behaviour of consumers and producers is crucial for how a market economy
allocates scarce resources.
Public policymakers should never forget about incentives. Many policies
change the costs or benefits that people face and, as a result, alter their behaviour.
A tax on gasoline, for instance, encourages people to drive smaller, more fuel-
efficient cars. That is one reason why people drive smaller cars in Europe, where
gasoline taxes are high, than in Canada, where gasoline taxes are lower. A gaso-
line tax also encourages people to carpool, take public transportation, and live
closer to where they work. If the tax were larger, more people would drive hybrid
cars, and if it were large enough, they would switch to electric cars.
When policymakers fail to consider how their policies affect incentives, they
often end up with unintended consequences. For example, consider public policy
regarding auto safety. Today all cars have seat belts, but that was not true 50 years
ago. In the 1960s, Ralph Nader’s book Unsafe at Any Speed generated much public
concern over auto safety. Parliament responded with laws requiring seat belts as
standard equipment on new cars.
How does a seat belt law affect auto safety? The direct effect is obvious:
When a person wears a seat belt, the probability of surviving an auto accident
rises. But that’s not the end of the story, because the law also affects behav-
iour by altering incentives. The relevant behaviour here is the speed and care
with which drivers operate their cars. Driving slowly and carefully is costly
because it uses the driver’s time and energy. When deciding how safely to drive,
rational people compare the marginal benefit from safer driving to the mar-
ginal cost. As a result, they drive more slowly and carefully when the benefit of
increased safety is high. For example, when road conditions are icy, people
drive more attentively and at lower speeds than they do when road conditions
are clear.
Consider how a seat belt law alters a driver’s cost–benefit calculation. Seat belts
make accidents less costly because they reduce the likelihood of injury or death.
In other words, seat belts reduce the benefits to slow and careful driving. People
respond to seat belts as they would to an improvement in road conditions—by
driving faster and less carefully. The result of a seat belt law, therefore, is a larger
number of accidents. The decline in safe driving has a clear, adverse impact on
pedestrians, who are more likely to find themselves in an accident but (unlike the
drivers) don’t have the benefit of added protection.
At first, this discussion of incentives and seat belts might seem like idle spec-
ulation. Yet in a classic 1975 study, economist Sam Peltzman argued that auto-
safety laws have had many of these effects. According to Peltzman’s evidence,
these laws produce both fewer deaths per accident and more accidents. He con-
cluded that the net result is little change in the number of driver deaths and an
increase in the number of pedestrian deaths.
Peltzman’s analysis of auto safety is an offbeat and controversial example of
the general principle that people respond to incentives. When analyzing any
policy, we must consider not only the direct effects but also the indirect effects
that work through incentives. If the policy changes incentives, it will cause people
to alter their behaviour.
NEL
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
By Todd Hirsch “Should I steal this car?” but something along
the lines of “Should I put in new bathroom tile
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
kinds of criminal activity are on the decline. dollars on the street; now they would fetch a few simply morphing. Traditional crime statistics tend
Contrary to the belief that evil thugs lurk around hundred bucks. Why buy a stolen iPod dock out to focus on activities such as robbery, property
every corner, we are actually safer than we of the back of some guy’s truck when you can theft and murder. Fewer long-term trend statis-
have been in decades. In today’s underground get a new one for less than $100? tics are available for crimes that are doubtless
economy, identity theft makes better economic Car theft is down dramatically, too. According increasing, such as identity theft and cyber-
sense than stealing a flat-screen television. to Statistics Canada, car theft in Ontario plunged to crime. Not only are they potentially more lucra-
The magazine’s editorial offers only guesses 141 per 100,000 people last year, down from 443 tive, they are global in scope and much more
as to why crime rates are falling. Aging demo- in 1998. Better technology, car alarm systems and difficult to track.
graphics may play a role, along with better theft- anti-theft devices have deterred most would-be Thieves are also getting smarter, using tech-
prevention technologies. Stiffer punishment and thieves. And lower-priced cars without car alarms nology for evil deeds. Internet scams abound,
“get tough on crime” policies might make for probably are not worth stealing anyway. The bad and bank-card skimming and credit-card fraud is
good political posturing, but they seem to have guys aren’t less bad, they’re just good economists. 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
stealing from a home is dwindling. What is there and as long as the PIN is secure, the thief gets signals—and doing a good job of it.
worth taking? Electronics are increasingly less away with nothing more than plastic cards and
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. Reproduced by permission of the author.
Describe an important tradeoff you recently faced. ● Give an example of some

QUICK action that has both a monetary and nonmonetary opportunity cost. ● Describe
Quiz an incentive your parents and/or guardians offered to you in an effort to influ-
ence your behaviour.
NEL
1-2 How People Interact

The first four principles discussed how individuals make decisions. As we go
about our lives, many of our decisions affect not only ourselves but other people
as well. The next three principles concern how people interact with one another.
1-2a Principle #5: Trade Can Make Everyone Better Off

You may have heard on the news that the Americans are our competitors in the
world economy. In some ways this is true, for Canadian and U.S. firms do pro-
duce many of the same goods. BlackBerry and Apple compete for the same cus-
tomers in the market for smart phones. Inniskillin and Gallo compete for the same
customers in the market for wine.
Yet it is easy to be misled when thinking about competition among countries.
Trade between Canada and the United States is not like a sports contest, where
one side wins and the other side loses. In fact, the opposite is true: Trade between
two countries can make each country better off.
To see why, consider how trade affects your family. When a member of your
family looks for a job, he or she competes against members of other families who
are looking for jobs. Families also compete against one another when they go
shopping because each family wants to buy the best goods at the lowest prices. In
a sense, each family in an economy competes with all other families.
Despite this competition, your family would not be better off isolating itself from
all other families. If it did, your family would need to grow its own food, make
its own clothes, and build its own home. Clearly, your family gains much from its
ability to trade with others. Trade allows each person to specialize in the activities
he or she does best, whether it is farming, sewing, or home building. By trading
with others, people can buy a greater variety of goods and services at lower cost.
Countries as well as families benefit from the ability to trade with one another.
Trade allows countries to specialize in what they do best and to enjoy a greater
variety of goods and services. The Americans, as well as the French and the Egyp-
tians and the Brazilians, are as much our partners in the world economy as they
are our competitors.
1-2b Principle #6: Markets Are Usually a Good Way

to Organize Economic Activity
The collapse of communism in the Soviet Union and Eastern Europe in the 1980s
was one of the last century’s most important changes. Communist countries
operated on the premise that government officials were in the best position to
allocate the economy’s scarce resources. These central planners decided what
goods and services were produced, how much was produced, and who produced
and consumed these goods and services. The theory behind central planning was
that only the government could organize economic activity in a way that pro-
moted economic well-being for the country as a whole.
Most countries that once had centrally planned economies have abandoned
market economy
this system and are trying to develop market economies. In a market economy,
an economy that allocates
the decisions of a central planner are replaced by the decisions of millions of resources through the
firms and households. Firms decide whom to hire and what to make. Households decentralized decisions of
decide which firms to work for and what to buy with their incomes. These firms many firms and households
and households interact in the marketplace, where prices and self-interest guide as they interact in markets
their decisions. for goods and services
NEL
At first glance, the success of market economies is puzzling. In a market

economy, no one is looking out for the economic well-being of society as a whole.
Free markets contain many buyers and sellers of numerous goods and services,
and all of them are interested primarily in their own well-being. Yet, despite
decentralized decision making and self-interested decision makers, market econo-
mies have proven remarkably successful in organizing economic activity to pro-
mote overall economic well-being.
In his 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations,
economist Adam Smith made the most famous observation in all of economics:
Households and firms interacting in markets act as if they are guided by an
“invisible hand” that leads them to desirable market outcomes. One of our goals
in this book is to understand how this invisible hand works its magic.
As you study economics, you will learn that prices are the instrument with
which the invisible hand directs economic activity. In any market, buyers look at
the price when determining how much to demand, and sellers look at the price
when deciding how much to supply. As a result of the decisions that buyers and
sellers make, market prices reflect both the value of a good to society and the
cost to society of making the good. Smith’s great insight was that prices adjust to
guide these individual buyers and sellers to reach outcomes that, in many cases,
maximize the well-being of society as a whole.
Smith’s insight has an important corollary: When the government prevents
prices from adjusting naturally to supply and demand, it impedes the invisible
hand’s ability to coordinate the millions of households and firms that make up
the economy. This corollary explains why taxes adversely affect the allocation of
resources: They distort prices and thus the decisions of households and firms.
It also explains the harm that can be caused by policies that directly control
prices, such as rent control. And it explains the failure of communism. In com-
munist countries, prices were not determined in the marketplace but were dic-
tated by central planners. These planners lacked the necessary information about
consumers’ tastes and producers’ costs, which in a market economy is reflected
in prices. Central planners failed because they tried to run the economy with one
hand tied behind their backs—the invisible hand of the marketplace.
1-2c Principle #7: Governments Can Sometimes Improve

Market Outcomes
If the invisible hand of the market is so great, why do we need government? One
purpose of studying economics is to refine your view about the proper role and
scope of government policy.
One reason we need government is that the invisible hand can work its magic
only if the government enforces the rules and maintains the institutions that are
key to a market economy. Most important, market economies need institutions
property rights to enforce property rights so individuals can own and control scarce resources.
the ability of an individual to A farmer won’t grow food if she expects her crop to be stolen, a restaurant won’t
own and exercise control serve meals unless it is assured that customers will pay before they leave, and
over scarce resources an entertainment company won’t make their movie available for streaming if too
many potential customers avoid paying by making illegal copies. We all rely on
government-provided police and courts to enforce our rights over the things we
produce—and the invisible hand counts on our ability to enforce our rights.
Yet there is another reason we need government: The invisible hand is powerful,
but it is not omnipotent. There are two broad reasons for a government to intervene
NEL
FYI Adam Smith and the Invisible Hand
I t may be only a coincidence that Adam Smith’s great book The Wealth of
Nations was published in 1776, the exact year in which American revolu-
tionaries signed the Declaration of Independence. But the two documents
in this manner that we obtain from one another the far greater part
of those good offices which we stand in need of.
It is not from the benevolence of the butcher, the brewer, or the
share a point of view that was prevalent at the time: Individuals are usu- baker that we expect our dinner, but from their regard to their own
ally best left to their own devices, without the heavy hand of government interest. We address ourselves, not to their humanity but to their
guiding their actions. This political philosophy provides the intellectual basis self-love, and never talk to them of our own necessities but of their
for the market economy and for free society more generally. advantages. Nobody but a beggar chooses to depend chiefly upon
Why do decentralized market economies work so well? Is it because the benevolence of his fellow-citizens….
people can be counted on to treat one another with love and kindness? Not Every individual … neither intends to promote the public inter
inter-
at all. Here is Adam Smith’s description of how people interact in a market est, nor knows how much he is promoting it…. He intends only
economy: his own gain, and he is in this, as in many other cases, led by an
invisible hand to promote an end which was no part of his intention.
Man has almost constant occasion
Nor is it always the worse for the society that it was no part of it. By
for the help of his brethren, and it is
pursuing his own interest he frequently promotes that of the society
in vain for him to expect it from their
more effectually than when he really intends to promote it.
benevolence only. He will be more
likely to prevail if he can interest their Smith is saying that participants in the economy are motivated by
self-love in his favour, and show them self-interest and that the “invisible hand” of the marketplace guides this
© Bettmann/Corbis
that it is for their own advantage to do self-interest into promoting general economic well-being.
for him what he requires of them…. Many of Smith’s insights remain at the centre of modern economics.
Give me that which I want, and you Our analysis in the coming chapters will allow us to express Smith’s
shall have this which you want, is the conclusions more precisely and to analyze more fully the strengths and
Adam Smith meaning of every such offer; and it is weaknesses of the market’s invisible hand.
in the economy and change the allocation of resources that people would choose
on their own: to promote efficiency and to promote equity. That is, most policies
aim either to enlarge the economic pie or to change how the pie is divided.
Consider first the goal of efficiency. Although the invisible hand usually leads
markets to allocate resources to maximize the size of the economic pie, this is not
always the case. As discussed above, when resources are allocated so that the size
of the economic pie is maximized, economists refer to this as an efficient allocation market failure
of resources. Economists then use the term market failure to refer to a situation in a situation in which a market
which the market on its own fails to produce an efficient allocation of resources. left on its own fails to
As we will see, one possible cause of market failure is an externality, which is allocate resources efficiently
the impact of one person’s actions on the well-being of a bystander. The classic
example of an externality is pollution. When the production of a good pollutes the externality
the impact of one person’s
air and creates health problem for those who live near the factories, the market left
actions on the well-being of
to its own devices may fail to take this cost into account. Another possible cause a bystander
of market failure is market power, which refers to the ability of a single person or
firm (or a small group) to unduly influence market prices. For example, if everyone market power
in town needs water but there is only one well, the owner of the well is not subject the ability of a single
to the rigorous competition with which the invisible hand normally keeps self- economic actor (or small
interest in check; she may take advantage of this opportunity by restricting the group of actors) to have
output of water so she can charge a higher price. In the presence of externalities or a substantial influence on
market power, well-designed public policy can enhance economic efficiency. market prices
NEL
Another random document with
no related content on Scribd:
Päivä kallistui iltapuolelle, kun Hannes joutui tutuille maille.
Siinähän oli jo Hautalan ja Hakalan raja. Linja pohotti aukeana kauas
pohjoiseen.
Mieli heltyi ja lämpeni entistä perintömaata astuessa. Joka kivi ja

kanto ja tien mutka oli tuttua.
Maa oli joka paikassa samaa, mutta kaikesta huolimatta

synnyinseutu oli kaikista rakkainta. Kurjia ne, jotka siitä
vapaaehtoisesti luopuivat.
Hakalan lähellä, eräällä metsäpolulla, tuli Hautalaisen poika, Olli

häntä vastaan.
— Kas, Hanneshan se… taidat mennä isäukkoasi katsomaan,

puheli Olli.
— Niinpä aioin.
Tuossa oli siis riistäjän poika, ainoa Hautalassa. Hannes ei voinut

mitään, että tunsi kylmiä väreitä hänen läheisyydessään.
— Onkin isäsi sairastellut viime aikoina. Taitaa pian loppu

lähennellä…
— Taitaapa, taitaa… taisit olla menossa maitasi katselemaan,

virkkoi
Hannes kylmästi.
— Eipä minulle niin erikoista… aisapuita olisi pitänyt, mutta minä

voinkin tulla mukaasi.
Metsätiellä oli vähän vaikea kävellä rinnakkain ja Hannes jäi
askeleen jälemmäksi.
— Minulta se isä kuoli, kuului Olli sanovan. Et taida tietääkään.
— Kuoli? Isäsi! Ja milloinka? En ole kuullut.
— Johan siitä on pian kolmisen kuukautta. Pääsiäisenä olivat

hautajaiset.
Hanneksesta oli tieto kummallinen. Mies täysissä voimissa ja

tietysti viimeiseen asti halukas kokoomaan maallista tavaraa. Sai
jättää kaikki.
He kulkivat hetkisen vaieten. Hannes mietti, että nyt on pojalla

kaksi taloa, vaikka ei kykene viljelemään kunnollisesti yhtäkään.
— Asettuisit sinäkin kotitaloosi. En minä monia taloja tarvitse,

kuului
Olli sanovan. Paremminhan Hakala sinulle kuuluu kuin minulle.
Hannes astui Ollin rinnalle. Mitä hän nyt kuulikaan?
— Että mitä?
— Sitä vain, että ottaisit Hakalan hoteillesi. En minä sillä suuria

voittoja pyydä. Vai et ehkä halunnekaan maamieheksi?
Hannekselle oli Ollin puhe melkein outoa. Miten Hautalaisen poika

voisi saamansa noin vain luovuttaa. Mutta ehkäpä olikin pojasta polvi
muuttunut.
— Kyllähän minä maamieheksi aion, mutta taidat vaatia Hakalalla

siksi paljon, että on minunlaiseni mahdotonta ajatella.
— Mitäpä minä… talossa tosin teki isäukko korjauksia ja onhan
maan arvo muutenkin noussut. Sen hinta kai nousi
viiteenkymmeneen tuhanteen, mutta sinä saisit sen
kuudellakymmenellä… Sittenpähän näet, kun katselet.
— Onko sinulla ihan tosi aikomus talon myyntiin? tuli jo lämpimästi

Hannekselta. Miksi hän ei ottanut rahoja tehtaan konttorista. Siinä
setelipinossa olisi ollut melkein riittävä summa. Mutta ehkäpä Olli
puhuukin ilmaa vain.
— Mitä minä kahdella talolla… ja taisi isältäkin tulla suotta niin

kuin ahnasteltua sen talon kanssa.
Hyvä, että Olli myönsi sen. Monta muuta oli ukko aikoinaan
ahnastellut.
— Pysytkö siis tarjouksessasi? kysyi Hannes.
— Minun puolestani saat hakea kirjan tekijän vaikka paikalla.
— Mutta eihän minulla ole rahoja, virkkoi Hannes kuin

koetellakseen toisen aikomuksia.
— Mitä minä… jäihän noita vähän ukolta … tottapahan maksat.

Onhan siinä nouseva metsä, kyllä sinä siinä alkuun pääset. Se iso
suokin on nyt laitettu.
He olivat tulleet talon pihaan. Navettakartano oli uusi ja

hauskannäköinen. Tuparakennuskin oli katettu ja korjailtu. Hannes
katseli kaikkea kuin ihmetellen. Vihdoin hän ojensi kätensä Ollille.
— Tuohon käteen siis. Minä haen illalla kirjan tekijän.

— Sama kai se on.
— Mennäänpä sitte isäukolle kertomaan… eiköhän ällisty, arveli

Hannes.
— Se taitaa vähät semmoisista… on jo kuulonsakin menettänyt.

Tulenpahan sitten illalla ja tuon vieraat miehet.
Hannes katseli portailla hetkisen poistuvaa naapuria. Olisi tehnyt

mieli juosta hänen jälkeensä ja sulkea hänet veljen syleilyyn.
*****
— Nyt minä tulin, huusi Hannes isänsä korvaan porstuakamarissa.
— Ka, niin, niin… minä tässä vain huonoudessani…
— Ja nyt en enää menekään… Olli myy Hakalan minulle… tänä

iltana tulee kirjan tekijä.
Ukko ei näyttänyt oikein käsittävän.
— Myy… ei se enää mitä myy… johan se kuopattiin…
— Olli myy talon minulle! huusi hän uudelleen ukon korvaan, ja

ukko näytti käsittävän.
— Vai myy… onko sulla rahaa? liekö sinusta talon mieheksi…
— On rahaakin… ja minusta on tullut mies… ymmärtääkö isä?
Mutta ukko turisi vain:
— … tässä huonoudessani… vai on sulla rahoja…

Hannes jätti isänsä ja meni pelloille. Suvilaiho lainehti viljavana ja
ruis teki tähkää. Nyt ei näkynyt missään surkastunutta, vaan kaikki
oli rehevää todistaen työn siunausta.
Hannes tunsi niin rajatonta kiitollisuutta, että hänen teki mieli

laskeutua polvilleen tuoksuvaan nurmeen. Hän oli sittenkin päässyt
maahan kiinni ja saanut samalla lapsuuskodin takaisin itselleen.
Hannes muisti pihaan palatessaan, että oli luvannut palata taloon

takaisin, josta lähti. Mitä he nyt sanovat, kun häntä ei kuulukaan.
Heitä minä kaipaan aina, ajatteli hän. Ja taloa myös. Siellä minä sain
suorittaa yhden luokan itsekasvatuksen kovaa koulua.
XIV.
Seuraavana päivänä oli talon työväki aamiaisella, kun Hannes palasi

kyytimästä kirjantekijää kirkonkylään. Hän oli keittiön kautta mennyt
kamariinsa ja kuuli tuvasta miesten keskustelun. Suvituuli leyhytteli
avonaisesta ikkunasta sisään.
— Se kuuluu siellä tehtaassa ollessaan keksineen jonkun koneen,

sanoi joku miehistä syöntinsä lomassa.
— Minkä koneen?
— Mikä lie peltovärkki… en häntä paremmin tiedä.
— Sanovat sen siitä saaneen rahoja niin paljon, ettei uskaltanut

yhdelläkertaa mukaansa ottaa.
— Elä… se on sitten rikas.
— Velkanapahan kuuluu talo olevan, sanoi joku tiukalla äänellä.

Eikö liene hävittänyt jos on saanutkin. Osasi sen isäkin ennen
hävittää.
Ja sitten seurasi pitkä juttu siitä, miten ukko ennen hävitti ja sai
rahoja menemään.
Hannes tunsi hieman masentuvansa. Tulisiko vastakin olemaan
niin, että arveltiin pojan seuraavan isänsä polkuja. Tämä ei tuntunut
hyvältä. Ja mitä heillä oli aina toisten asioissa tekemistä. Kun
omiaan ei kukaan kehdannut ajatella, niin oli mukava toisten
portinpieluksia penkoa.
Tuvasta kuului vielä ukkojen turina.
— On se käynyt riuskaksi liikkeiltään. Ei luulisikaan Hakalan Eeron

pojaksi.
— Taitaa hyvin tuntea oman arvonsa.
— Mistä sen tietää… mies on vasta ensimäistä päivää isäntänä,

kuului joku vanhempi mies sanovan.
Keskustelu tuntui saaneen ikävän käänteen. Enemmistöllä tuntui

olevan niinkuin jotain vanhaa muisteltavaa häntä vastaan.
Joku miehistä aloitti taas:
— Mutta mitenkähän tosiaankin on sen kanssa, että velaksi otti

talon, jos kerran oli rahoja.
Hannesta melkein nauratti. Hän oli istunut keinuun kädet pään

taakse ja jäänyt kuuntelemaan juttua.
Olipas niillä tekemistä hänen rahoistaan, joita ei edes voinut sanoa

olevankaan.
Setelipinkka oli jäänyt sinne pöydälle häneltä. Oli tosin sanottu,

että rahat talletetaan pankkiin, josta ne saisi.
Itse asiassa oli samantekevää, jos ei saisikaan niitä rahoja.
Parempi oli lähteä näin tyhjästä ponnistamaan. Hyvinvointi olisi vain
hyvä pohja veltolle elämälle. Hän voisi kyllä talon maksaa
muutenkin. Ison suon oli Hautalainen laittanut hyvään kuntoon ja
kasvoihan metsäkin.
Miehet olivat jo poistuneet töihinsä, kun Hannes meni tupaan ja

asettui aterialle.
Tuvassa liikehti nuori tyttö, jota vanha Saara kuului sanovan

Liisaksi.
Hannes oli nyt vasta huomannut tytön.
Liisa oli verevä ja sukkela liikkeissään ja Hannes huomasi, että

tyttö oli heti ensi näkemältä miellyttävä.
Liisa toi lisää ruokia pöytään ja Hannes huomasi, että tytöllä oli
siniset silmät ja somanmuotoinen suu.
— Mistä sinä olet? kysyi Hannes tytöltä.
Tyttö hymähti. Hannes ei tuntenut häntä, vaikka hän oli ollut kerran
ennenkin talossa.
— Haanpään mökistä minä olen.
— Haanpään Liisa, niinkö?
— Niin.
— Enpäs minä sinua tuntenut. Olet somistunut ja pyöristynyt.
Tyttö punastui.
— Mistäpähän isäntä olisi muistanut.
»Isäntä» kuulosti hieman vieraalta.
— Kun kerran olet Liisa, niin sano minua Hannekseksi.
Tyttö punastui vielä enemmän ja poistui askareilleen.
Hannes ei voinut aivan heti kääntää hänestä ajatuksiaan toisaalle.

Sillä oli hiuksetkin kuin kultaa.
Mutta mitäpä nyt siitä. Oli mentävä pelloille.
Taloon oli jäänyt entiset hevoset eri kaupassa ja Hanneksen vanha

ajokas oli vielä säilynyt ajokunnossa. Hannes kävi suitsimassa sen
haasta ja meni kynnökselle.
Astuessaan auran jälessä mietti Hannes viime päivien menoa. Oli

tapahtunut paljon kahdessa päivässä. Hän oli saanut
perintömaansa, oman kotinsa kuin ihmeen kautta. Ja sitten oli
talossa tyttö, josta hän tunsi ensi näkemältä pitävänsä.
Vaikka eihän Liisa tietysti ollutkaan talossa sitä varten, että hänen
pitäisi tyttöä omakseen katsella. Kukaan ei taas kieltäisi
katselemastakaan.
Liisa oli ollut kiltti jo pienenä tyttönä ja näytti suorittavan nytkin

hyvin tehtävänsä.
Hän oli ehtinyt mietteissään jo toiselle sarkapalstalle. Aura tuntui

kuin värisevän työntyessään maahan. Hän painoi sitä syvemmälle.
Tämä oli toista kuin tehtaassa rehkiminen ja sitten kaikkein
alkuperäisintä ja ihaninta työtä. Miksi tätä halveksittiin? Miksi talojen
pojat ja tyttäret olivat kansoittaneet kaupunkeja ja tehdasalueita?
Yhteiskunta taisi sittenkin olla suuria parannuksia vailla. Elettiin

ehkä murrosajan kynnyksellä. Maatyö ja vähäväkisen luokan maasta
eläminen oli joutunut huonoon huutoon. Jos oli tätä luokkaa kohtaan
vaatimuksia, täytyisi olla samalla velvollisuuksiakin. Olojen
pakottamana oli kovin monen täytynyt jättää perkkiönsä ja lähteä
kaupunkiin tai tehtaaseen.
Se oli taas häpeä, että maataomistavan luokan pojat ja tyttäret

unohtivat ihanimman ja kunniakkaimman: maatyön. Hän ei
huomannutkaan, että ilta oli käsissä, ennen kuin näki miesten
riisuvan hevosiaan.
Hänen taluttaessaan hevosta pihan poikki hakaan kulki Liisa siinä

hänen edellään maitohuoneeseen. Käänsi päänsä ja hymyili jo kuin
tuttavalle.
Hannes olisi tahtonut tietää, oliko kukaan onnellisempi kuin hän

päivätyön päätyttyä omalla pihallaan.
XV.
Heinäkuu oli tullut kuin huomaamatta. Hannes ajeli kirkonkylästä.

Maantie muuttui huonoksi ja kuoppaiseksi, kun kylätielle käännyttiin.
Siinä oli tienvarressa kylä siellä, toinen täällä. Muutamien ulkoasu

oli ränsistynyt ja näiden omistajilla oli asiatkin huonosti. Kunnan
pankki ja paremmin asutut naapurit olivat saamamiehinä. Omistajat
kävelivät askareissaan velttoina ja allapäin.
He eivät ole oppineet tekemään työtä, ja siinä koko juttu, mietti

Hannes ohi ajellessaan. He eivät ymmärrä, että työllä voidaan
pelastaa kaikki. Ei ainoastaan kannattavat ja huonosti tuottavat
vainiot, vaan myöskin ihminen.
Hannes muisteli menneisyyttään. Työ oli ollut joskus sangen

vaikeata suorittaa. Se tuli tehdyksi hutiloimalla, mutta se ei antanut
tyydytystä. Kaipasi huveja ja muuta semmoista.
Ja niin seurasi onnettomat harha-askeleet. Joskus oli saanut

työstä jonkunlaista nautintoa, mutta se särkyi, kun sairas veri vaati
rikosta jatkamaan.
Kuin ihmeen kautta oli hän pelastunut.

Entinen sukutalo nousi nyt kuin tuhkasta. Vieläkin oli paljon
voitettavana, vaan kaikki oli leikkiä entisyyteen verraten.
Kylällä juoruiltiin hänestä kaikenlaista. Kansaparka ravitsi itseään

ja naapureitaan juoruilla. Ja oli vanha tapa, että ei ennusteltu hyvää
pojalle, jonka isä oli tehnyt haaksirikon, tai ottanut vain harha-
askeleitakin.
Hänkin oli saanut juoruista runsaan osansa. Jotkut sattuivat niistä

kipeästi, mutta työssä löysi rauhallisen mielen.
Äskettäin oli hän yrittänyt tehdä jotain kylän edistyspyrintöjen

herättämiseksi. Kylässä oli ollut ennen nuorisoseura, mutta se oli
vuoden elettyään jäänyt siihen. Hannes oli esittänyt kylän nuorille,
että pantaisiin seura pystyyn uudelleen.
Siitäkös syntyi elämä! Muutamat nauroivat vasten naamaa ja kylän

kellot soittivat suutaan.
— Vai rupeisi tämä Eeron poika nuorisoseuraa puuhaamaan,

mukamas…
Mikähän se on olevinaan. Kaikki tässä!
— Saisi tyttöjen kanssa siellä puuhata ja halailla niitä. On sillä

isänsä metkut.
— Kunhan se äityy nyt siinä, niin rupeaa vielä papiksi!
Nämä puheet oli Hannes saanut kuulla kerran kylällä käydessään.

Joku isäntämieskin oli naureskellen veistellyt:
— Se tämä Hannu taitaa puuhata sitä nuorisoseuraansa vielä…

eiköhän olisi parasta, kun sonniyhtiön perustaisit. Niitä
sonniasioitahan se isäsikin ennen harrasti.
Ja sitten oli mies livauttanut silmää naapurilleen ja pirullisesti

nauranut.
Se koski kipeästi.
Jääköön vain hänen puolestaan kaikki yhteisharrastukset

kyläläisten kanssa. Hän tiesi kumminkin, että vaikka olisi yrittänyt
jotain muutakin, olisi tulos ollut sama. Ei kannattanut.
Ja Hannes oli päättänyt tämän jälkeen sulkeutua kokonaan omaan

elämäänsä. Hänen omilla alueillaan olisi hänelle työalaa.
Hakalan mailla oli autiomökkejä ja hän oli päättänyt ne asuttaa ja

panna kuntoon uudelleen.
Oli sellaisiakin mäkitupia ja torppia, joissa elettiin kituvaa elämää.

Niissä olisi hänen edistyshalullaan työalaa, ränsistyneitten tupien
sijalle uusia ja pellot voimaperäisiksi. Pian asukkaat tuntisivat, että
maatyö voi elättää suurenkin perheen ja antaa onnea, jota muuten ei
ollut löydettävissä.
Näin hänellä olisi onnea maailmassa ja hän saisi tuntea iloa sen
edistymisestä.
Hannes oli ehtinyt kotipihalle. Renki Kalle, joka oli ollut yhtämittaa
Hakalassa, tuli ottamaan hevosen.
— Menehän saunaan, me muut olemme jo kylpeneet.
Nyt vasta Hannes muisti, että olikin lauantai-ilta. Miten hän oli sen
saattanut kotimatkalla unohtaa.
Tuvassa lepäilivät miehet saunan jälkeen valkoisissaan.
Heinäkuun ilta oli valoisa ja tuvan etäisimmässä nurkassa oli vain
varjoisaa.
Miten viihtyisä on kesäinen lauantai-ilta maalaistalossa saunan

jälkeen. Valo viipyy vielä pihamailla ja pelloilla ja tulvehtii sisään
ikkunoista. Ja vaikka miehiltä tarinat loppuvat, ei ole kiirettä
nukkumaan. On pyhäistä päivää levätä, katseleepahan siinä vain
ikkunasta valoisaa pihamaata ja vaaleaa taivasta. Ja siinä
katsellessa kulkevat ajatukset viikon kuluessa suoritetuissa töissä,
eikä minkäänlainen murhe paina mieltä.
Hanneskaan ei olisi malttanut lähteä saunaan. Oli niin kauan siitä,

kun oli heinäkuun lauantaina ollut kotipirtissä saunaan
hankkiutumassa. Tuli mieleen kaikenlaisia muistoja, joita ei olisi
hennonut karistaa pois.
— Mutta nyt sauna jäähtyy.
Se oli Liisa, joka siitä hymyillen huomautti.
Kas, Liisallahan oli kaksi somaa hymykuoppaa, joita hän ei ollut

ennen huomannutkaan. Hiukset oli somasti sitaistu niskaan.
Mukavapa oli häntä siinä puuhaillessaan katsella lauantaiehtoon
pehmeässä valossa.
Saunaan mennessä oli niin kuin joku olisi nykäissyt häntä hihasta.
Sinä katselet Liisaa ja hän miellyttää sinua. Liisa on hyvä tyttö.
Liisaa minä olen tosin katsellut, myönteli Hannes. Hän on sen

joskus huomannut ja lievästi punastunut, mutta mitään
lähentelemisyrityksiä ei hän ole puolestaan tehnyt. Kas, se on jotain
se. Mitäpä se paranee katselemisesta. Kysyn kerran tytöltä, eikö hän
pikkuisen pitäisi minusta ja, jos se on niin menevä, niin tulkoon
hänestä Hakalan emäntä.
Ilta oli jo hämärtynyt, kun Hannes palasi saunasta. Miehet olivat

menneet jo makuutiloilleen ja tuvassa valvoi vain Liisa, korjatakseen
Hanneksen illallisen pois.
Kun Hannes oli aterioinut, meni hän karsinaikkunan ääreen, jossa

Liisa luki sanomalehteä.
— Eikö sinua väsytä, kun saat näin myöhään valvoa? kysyi hän
tytöltä, istuen ikkunan toiseen pieleen.
— Ei yhtään. Johan nyt, jos tällä iällä väsyttäisi.
— Saat melkein yksin raataa koko talon työt. Pitäisi saada edes
nuorempi apulainen sinulle.
— Kyllä minä jaksan.
Tyttö naurahti ja aikoi lähteä korjaamaan illallista pois.
— Et nyt menisi vielä, pyyteli Hannes.
Tyttö istui jälleen ja näytti niin kuin jotain odottavan. Ehkäpä

Hannes tahtoisi jostain erikoisemmin huomauttaa.
— Tahtoisin, että olisimme oikein hyviä ystäviä. Minä olen niin

yksin, eikä minulla ole ketään…
Hanneksen sanat katkesivat. Hän muisti ilottoman nuoruutensa,

muisti viime kesän muutamat päivät Jokivarren talossa. Jos Liisakin
nyt hylkäisi hänen pyyntönsä…
Liisa oli noussut seisomaan ja nojasi ikkunapieleen katsellen ulos.
Puna peitti somat kasvot.
— Jos minä olen mielestäsi ystävyytesi arvoinen, jatkoi Hannes ja

ojensi kätensä tytölle.
Tytön sormet värisivät hänen kädessään, mutta katse oli kirkas ja

lämmin.
— Jos minä vain olen, mutta koetanhan olla, sanoi tyttö hiljaa.
Ei puhuttu sen enempää. Ikkuna jäi ihmetellen katsomaan. Niin

lyhyeenkö se kävi ja keskenkö se jäi. Mutta olihan tytön katse niin
ihmeen kirkas.
Hannes valvoi vielä vuoteessaan. Hän tunsi ihanan rauhan

soluvan suoniinsa ja hän oli varma, että tulevalle polvelle voisi jättää
perinnöksi hyvin paljon.
XVI.
Oli taaskin lanantainehtoo, mutta ulkona pelloilla ja metsissä oli jo

elokuu. Viljavainiot olivat kypsyneet ja talon ruispellosta oli jo osa
kuhilailla.
Järvi lepäsi tyvenenä. Siitä näkyi pieni pala pirtin lasista siihen,
missä Hannes istui keinutuolissa saunan jälkeen viihdytellen.
Tuvassakin oli elokuun tuntua. Liisa oli tuonut ruislyhteen orsille.

Se oli vanha perinnäistapa, ja se tuoksui nyt siellä oljelta ja
kärsämöltä.
Hannes keinahteli siinä yksin onnellisissa mietteissään.

Kaappikello nurkassa mittasi verkalleen kahdeksatta tuntia, mutta
valo viipyi vielä tuvassa. Miehet olivat poistuneet kylälle, kissa vain
kehräsi keskilattialla.
Viikko sitten oli käynyt muuan vieras talossa. Hän oli ollut pellon
aitaa korjaamassa, kun Liisa tuli sanomaan, että vieras on tullut ja
odottaa.
Se oli yksi Rauta-yhtiön vanhemmista kirjanpitäjistä. Mies oli

noussut kohteliaasti tervehtimään häntä. Kamarissa kertoi hän
vartavasten tulleensa tuomaan rahoja, jotka Hannes oli silloin
jättänyt ottamatta. Toimitusjohtaja oli usein ihmetellyt, miksi ei
Hannes mitään kirjoita, vaikka on talon ostanut ja tiettävästi tarvinnut
rahoja. Sitten oli huhuna kuullut kerrottavan, että Hannesta ahdistaa
rahoista talon myyjä ja heti oli käskenyt hänen, konttoristi Helomaan
lähtemään. Oli samalla käskenyt tuomaan terveiset Hannekselle,
että joskus kävisi tehtaalla, että hän saisi vielä kiittää keksinnöstä.
Sitten oli Helomaa laskenut pöydän kulmalle setelitukun.
— Siinä pitäisi olla viisikymmentätuhatta.
Hannes oli mielihyvin korjannut rahat ja Melomaa oli vielä kertonut

toimitusjohtajan arvelleen, että kai hänen keksintönsä oli tarpeen
omillekin perkkiöille, ja kone oli nyt lähiasemalla, kun vaan kävisi
noutamassa.
Siitä päivästä oli tullut sitten juhlapäivä taloon. Melomaa oli jättänyt
matkansa seuraavaan päivään ja Liisa oli häntä kestinyt parhaansa
mukaan.
Rahat olivatkin tulleet hyvään aikaan. Kyläläisten painostuksesta

oli Olli muuttanut mieltään ja käynyt vaatimassa talon hintaa
Hannekselta. Hyvät naapurit olivat saaneet vielä keksityksi
lisäkoukun. Hannesta oli vaadittu kaivattamaan syvä viemäri eräältä
kohdalta maansa läpi, kun muka vesi seisoi keväällä heidän
viljelyksillään. Oli uhattu käräjöidä, jollei viemäriä heti aloitettaisi.
Tämän hankkeen johdosta oli Hanneksella ollut melkoista

päänvaivaa. Tehtaalta voisi saada rahat talon hintaan, mutta mistä
otti ne viemäriin?
Kylällä oli jo puhuttu, että myyttäjän vasara heiluu Hakalassa vielä
toisenkin kerran. Taisikin vain Hautalan Olli ilman leikitellä
Hanneksen kanssa hänelle talon myydessään, kun tiesi sen pian
takaisin saavansa.
Hannes keinahteli hieman voitonriemuisesti ja puhalsi pitkän

savukiemuran piipustaan.
Samana päivänä, kun Helomaa tuli, oli rahat viety Ollille ja

lähetetty sana kylälle, että viemäri aloitetaan heti. Siihen tarvittavia
varoja liikeneisi nyt kyllä talosta.
Olli oli ollut häpeissään ja pyydellyt anteeksi. Kyläläisten

kiusaamana oli tullut rahoja vaatineeksi.
Ja sitten muutamien päivien perästä oli Kalle tuonut kylän läpi

uutta muokkauskonetta asemalta. Oli herja omassa kylässä huutanut
joka talon pihassa, että »tulkaa katsomaan Hakalan sampoa, se on
sen »Eeron pojan» keksimä.»
Oli katseltu ja ihmetelty ja nenät olivat venähtäneet, kun saivat

tietää, että siitä Hannes rahaa sai.
Hannes hymähti keinussaan ja sysäsi sen liikkeeseen. Mitä varten

naapurit kadehtivat häntä ja yleensä ihmiset toisiaan. Sehän tappoi
kaiken muun hyvän harrastuksen ihmisestä. Taisi sekin kateus olla
sukuperintöä ihmisissä. Kukaan ei sitä huomannut juuria pois
itsestään ja se meni perintönä polvesta polveen.
Liisa tuli tupaan ja lopetteli astiain pesua karsinapuolella. Ei

kuulunut vähään aikaan muuta kuin kellon verkkainen käynti
nurkassa ja karjan kellojen hiljainen helähtely ulkoa tarhasta.
Oli onnellinen tuokio Hanneksen elämässä. Lauantaiehtoon rauha
ympäröi hänet eikä minkäänlaiset huolet painaneet mieltä. Liisa oli
siinä askareissaan liikkumassa. Hän vain ojentaisi kätensä ja tyttö
olisi hänen.
Miten se siinä taas puuhasikin sukkelana. Kelpasipa katsella sen

käyntiä ja kädenliikkeitä. Eipähän arvannut mitä muuan mies
keinussa hänen lähellään ajatteli. Jos olisi arvannut, miten sen
poskille olisikaan puna karehtinut.
— Liisa.
— No?
— Tulehan vähän lähemmäksi.
Tyttö seisoi siinä katse alas luotuna. Yritti hymyillä, mutta tuli
jälleen totiseksi. Ei vetänyt pois kättään, johon Hannes oli tarttunut.
— Nyt minä sen sanon.
— Minkä?
Jopahan tyttö karahti punaiseksi.
— Että sinä olet minun.
Hannes veti tytön polvelleen.
— Teet vain pilkkaa minusta.
Hannes kaivoi liivinsä laskusta pienen esineen. Oli tullut sen jo

hankkineeksi kaupungissa käydessään.

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PART 7: SHORT-RUN ECONOMIC FLUCTUATIONS

PART 8: FINAL THOUGHTS

VP, Product and Partnership Photo and Permissions Indexer:

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

Chapter 13 In this edition we clarify our discussion of supply and demand in

Chapter 15 With this edition we include in the opening paragraphs an

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