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Learning Basic Macroeconomics Economics Collection
SNARR
Philip J. Romero and Jeffrey A. Edwards, Editors
A Policy Perspective from Different
Schools of Thought
Hal Snarr
Macroeconomics is grounded in microeconomics and
Learning Basic
uses mathematical models to simplify and illustrate
complex processes, learning it can be difficult. And be­
cause of this, ­macroeconomic principles textbooks fail
Macroeconomics
to connect topics and models in a concise, cohesive,
and meaningful way. This book is a part of a series that
recognizes that the intense competition among emerg­
A Policy Perspective
ing markets and against advanced economies to capture
their share of the global economy. Most important to this
end is the study and practice of international business
and foreign trade. from Different
LEARNING BASIC MACROECONOMICS
Schools of Thought
The author details better topic selection and organi­
zation by building a model of the ­macroeconomy, and
utilizing a single hypothetical numerical example
­
throughout the book to teach you the key principles.
Keynesian economics, a school of economic thought
based on the views of the British economist John
Maynard Keynes, is used to construct the model of the
macroeconomy because it is elegant, simplistic, intuitive,
and politicians a
­ pply it when enacting stimulus bills.
(That said, the book is not an endorsement of Keynesian
economics, nor does it suggest that mathematical mod­
eling is the quintessential element of ­economic analysis.)
Hal W. Snarr is currently teaches at Westminster Col­
lege, which is located in Salt Lake City, Utah. He gradu­
ated from ­Naval Nuclear Power School, has bachelor’s
Hal W. Snarr
degrees in business and mathematics, and earned a
PhD in economics from ­Washington State University. His
teaching career began in the U.S. Navy; today, Hal has
a YouTube channel (The Snarr Institute) and website
(www.halsnarr.com) that are used to d
­ eliver lectures on
macroeconomic principles and other topics in statistics
and economics.
Economics Collection
Philip J. Romero and Jeffrey A. Edwards, Editors
ISBN: 978-1-63157-081-0
Learning Basic
Macroeconomics
Learning Basic
Macroeconomics
A Policy Perspective from
Different Schools of Thought

Hal W. Snarr
Learning Basic Macroeconomics: A Policy Perspective from Different Schools
of Thought
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 Abstract
Because macroeconomics is grounded in microeconomics and uses math-
ematical models to simplify and illustrate complex processes, learning it
can be difficult. Traditional macroeconomic-principles textbooks fail to
connect topics and models in a concise, cohesive, and meaningful way.
So, it should not surprise when a 2008 presidential candidate says, “Eco-
nomics is something that I’ve really never understood” (Zuckman 2008).
This book overcomes these shortcomings with better topic selection and
organization, by literally building a model of the macroeconomy, and uti-
lizing a single hypothetical numerical example throughout the book to
teach the principles. Keynesian economics, a school of economic thought
based on the views of the British economist John Maynard Keynes (1883
to 1946), is used to construct the model of the macroeconomy because
it is elegant, simplistic, intuitive, and politicians apply it when enacting
stimulus bills. That said, the book is not an endorsement of Keynesian
economics, nor does it suggest that mathematical modeling is the quintes-
sential element of economic analysis. Only by building this model upon a
Keynesian foundation can one truly appreciate the various perspectives in
economics, the limitations of mathematical modeling, and why politicians
tend to prescribe Keynesian solutions. This book allows business execu-
tives, graduate and undergraduate students, policy makers, and others to
gain a fuller understanding of how the macroeconomy reacts to economic
shocks and policy changes from several economic perspectives.

Keywords
aggregate demand, aggregate expenditure, austrian economics, consump-
tion function, crowding-out, demand and supply, discount rate, fiscal
policy, fiscal policy lags, fiscal policy multipliers, fractional reserve bank-
ing, free trade, interest on reserves, long run aggregate supply, monetary
policy, open market operations, rational expectations, required reserves
ratio, short run aggregate supply, supply-side economics, the chicago
school, the classical school, the federal funds market, the Keynesian
school
 Contents
Acknowledgments�����������������������������������������������������������������������������������ix

Chapter 1 Introduction����������������������������������������������������������������������1
Chapter 2 Macroeconomic Indicators����������������������������������������������21
Chapter 3 Aggregate Expenditure�����������������������������������������������������43
Chapter 4 The Aggregate Market Model������������������������������������������57
Chapter 5 Fiscal Policy���������������������������������������������������������������������73
Chapter 6 Monetary Policy��������������������������������������������������������������93
Chapter 7 What Have We Learned?�����������������������������������������������119

References�������������������������������������������������������������������������������������������131
Index�������������������������������������������������������������������������������������������������135
 Acknowledgments
I am indebted to my wife Lynn. Her encouragement and support is much
appreciated. I would like to thank Pratik Raghu, my research assistant
at Westminster College, and Amy Howard-Kurmanj for their helpful
­comments, suggestions, and edits.
 CHAPTER 1

Introduction
Joan Robinson (1903 to 1983), professor of economics at Cambridge
University, once remarked that you study economics to avoid being
fooled by economists (Mankiw 2010). An economist, according to
the Merriam-Webster dictionary, is a person who practices economy.
This definition suggests that anyone who is thrifty or uses material or
nonmaterial resources efficiently is an economist, which would include
everyone from good writers, who scrub unnecessary words from their
articles and books, to truck drivers, who map out the shortest delivery
paths.
Economics is a social science that studies the production, distribu-
tion, and consumption of commodities. Edmond Dantès, played by Jim
Caviezel in 2002’s The Count of Monte Cristo, translates this as, “Dig
first, money later.” Professional and academic economists would define
economics more precisely as the social science that studies how individ-
uals use limited resources to satisfy unlimited wants. Although this defi-
nition ignores the role of firms and government, both are populated by
self-interested individuals who tend to have conflicting objectives. For
example, in Moneyball, the owner of the Oakland Athletics and his gen-
eral manager, played by Brad Pitt, have very different aims. Pitt’s char-
acter is driven to win the last game of every season, the final game of the
World Series. To do this, he needs to keep the team intact, but cannot
because it has one of the lowest payrolls in Major League Baseball. The
owner seeks the highest profit possible, but his team’s revenue is limited
by being in a small television market. More and better players may win
more games, but they also cost more. Thus, winning the final game of
the World Series is less profitable than winning just enough to make the
playoffs.
Economics is broken into two major fields: microeconomics, which
analyzes issues that individuals and firms are concerned with, and
2 LEARNING BASIC MACROECONOMICS

macroeconomics, which studies issues affecting the economy as a whole.

Because macroeconomics is grounded in microeconomics, and uses math-
ematical models to simplify and illustrate complex processes, learning it
can be difficult, especially for those who struggle in mathematics. Com-
puter simulation can aid this, but Wetzstein (1988) asserts that it may do
more harm than good because such tools “stifle students’ imagination,
contribute to a dependent learning style, and fail to stimulate interest
in the subject matter.” The linear models developed herein are used to
literally build and analyze a model of the macroeconomy to gain a richer
understanding of how the economy reacts to various shocks.
This book is organized into three parts. Chapters 1 and 2 lay the foun-
dation of the aggregate market model that is constructed in Chapters 3
and 4. After this model is assembled using data, Keynesian economics,1
and simple linear equations, it is analyzed using hypothetical numeri-
cal values to understand how the macroeconomy responds to economic
shocks and policy changes. To aid in performing these numerical analy-
ses, I have written several EXCEL simulations that can be downloaded
from www.halsnarr.com/teaching.htm.2 The model is then used to study
the effectiveness of fiscal policy in Chapter 5 from different schools of
economic thought. In Chapter 6, money, banking, and monetary ­policy
are introduced, analyzed, and evaluated. After evaluating mainstream
economics, in the context of the 2008 financial collapse and subsequent
recovery, Chapter 7 presents and analyzes an alternative model of the
macroeconomy developed by Austrian macroeconomist Roger Garrison
(2001).
In the remainder of this chapter, macroeconomics is introduced.
However, before proceeding to this, microeconomics is introduced using
several interesting applications because it is the foundation of macroeco-
nomics (Lucas 1976).

1
Keynesian economics is a school of economic thought based on the views of the
British economist John Maynard Keynes (1883 to 1946).
2
The EXCEL simulations are downloaded by clicking on the links titled Simu-
lated Consumption, Simulated Consumer Expenditure, Simulated AE, Simulated
AD, Production Function and LRAS, SRAS and LRAS, AD-AS equilibrium,
Short-run Discretionary Policy, and Federal Funds Market.
 Introduction 3

Microeconomics
Microeconomics studies the behavior of individuals and firms. Firms seek
maximum profits and individuals seek maximum satisfaction, or utility,
but both are faced with constraints and scarce resources. For example, a
cheese maker cannot sell its cheddar for any price it wants even if it is a
monopolist, the only seller of a product. Likewise, it cannot buy milk
from dairy farmers at any price it wants even if it is a monopsonist, the
only buyer of a product.

Demand

Demand is the force that prevents a firm from charging any price it wants.
This is so because a product’s demand represents the maximum price con-
sumers are willing to pay for a given level of scarcity. The amount of a
good or service that is purchased by a consumer at a given price is referred
to as the quantity demanded, while demand is the set of prices that corre-
spond to a set of quantities demanded. Thus, demand refers to a curve,
and quantity demanded corresponds to a point on that curve.
The Law of Demand states that, all else being equal, the quantity
demanded of a product declines with its price. The law is tested in a
hypothetical experiment that asks people working near Main and Elm the
question: With tacos selling at $1.25,3 how many hot dogs will you buy
per week at a price of $6.50, or at $0.50? Table 1.1 displays hypothetical
data from 875 respondents. The middle column indicates that respon-
dents collectively demand 1,000 hot dogs when the price is $6.50, which
corresponds to point A in Figure 1.1. In the left column of Table 1.1,
survey participants collectively demand 7,000 hot dogs when the price
drops to $0.50, which corresponds to point B. The line that connects
points A and B represents the demand for hot dogs. It gives the expected
quantity of hot dogs demanded for a given price. The movement along
demand between points A and B indicates that the Law of Demand holds
true.
The equation for hot dog demand can be fit using the point-slope
formula. The slope is computed by dividing the change in price by a

3
All values, unless otherwise stated, are in U.S. dollars.
4 LEARNING BASIC MACROECONOMICS

Table 1.1 Consumer demand for hot dogs

Quantity demanded Quantity demanded
Name
at P = 6.50 at P = 0.50
Tonya 0 18
George 0 6
Harold 4 9
... ... ...
Velma 0 1
Total 1,000 7,000

7
A
6

4
Price

1
C B
0
0 2000 4000 6000 8000

Figure 1.1 Movement along and shifts in demand

corresponding change in quantity. From point A to point B, the change

in price equals −$6, and the change in quantity equals 6,000. Hence, the
slope of demand is −0.001. Substituting the slope and either point A or
B into the point-slope formula gives the equation for the black hot dog
demand curve in Figure 1.1:

Pd = 7.5 – 0.001Q

A product’s demand shifts when a factor other than its price changes.
Suppose the participants of the survey are asked how their responses
change if the taco price drops to $0.75, and their responses to these ques-
tions produce the gray line in Figure 1.1. With the hot dog price held at
$0.50 and the taco price falling from $1.25 to $0.75, the quantity of hot
dogs demanded declines by 1,000 (according to Figure 1.1) as the quan-
tity of tacos demanded rises (according to the law of demand). Therefore,
 Introduction 5

the gray and black lines in the figure model a decreased demand for hot
dogs. Thus, hot dogs and tacos are substitute goods. If the drop in taco
price had instead increased demand for hot dogs, the gray line in the figure
would lie to the right of the black line, and hot dogs and tacos would be
considered complement goods. If the decrease in demand had been caused
by an increase in income, hot dogs would be considered an inferior good.
If the decrease in demand had been caused by a decrease in income, hot
dogs would be considered a normal good. The decrease in hot dog demand
could have also been caused by a change in tastes and preferences or a
decline in the neighborhood’s population.
Price elasticity of demand measures consumer sensitivity to price
changes. At point B, the price is $0.50 and the quantity of hot dogs
demanded is 7,000. Dividing their ratio by demand’s slope (−0.001) gives
a price elasticity of demand equal to −0.07. This implies that a 1-percent
increase in price reduces hot dog consumption by 0.07 percent. Because
the percent change in consumption is smaller than the percent change
in price, consumers are very insensitive to the price change, and demand
is said to be inelastic. With a price-quantity ratio of $6.50 per 1,000 hot
dogs at point A, price elasticity of demand equals −6.5. At the higher
price, a 1-percent increase in price reduces hot dog consumption by
6.5 percent. Because the percent change in consumption is larger than the
percent change in price, consumers are very sensitive to the price change,
and demand is said to be elastic. The elasticities imply that consumers get
increasingly sensitive to rising prices.

Supply

While demand models consumer behavior, supply models firm behavior.

It is the section of the marginal cost curve that lies above the average
variable cost curve.4 Intuitively, it gives the minimum price firms are will-
ing to accept to produce a given amount of their product. The amount
produced is referred to as the quantity supplied, while supply is the set of

4
Marginal cost is the change in firm costs resulting from a 1-unit increase in
output, while average variable cost is the firm’s variable cost at a given level of
output divided by that output level.
6 LEARNING BASIC MACROECONOMICS

prices that corresponds to a set of quantities supplied. Thus, supply refers

to a curve, and quantity supplied corresponds to a point on that curve.
Supply slopes up because, according to the Law of Supply, a firm will
generally increase output as its product’s price rises. This is tested in the
following hypothetical experiment. Suppose that there is a database that
tracks U.S. hot dog production at the city level, and regression analysis5 is
applied to these data, which yields the following equation:

P = 0.995 – 0.1T + 0.7W + 0.01R + 1Pb + 0.001Q

Variable T indicates that a solar panel is installed on a hot dog cart’s roof,6
W is the wage paid to cart workers, R is the city regulation index, and Pb
is the price of hot dog buns. To graph supply, all variables but P and Q are
set equal to their averages. Suppose 60 percent of carts have solar panels,
the average wage is $7.25, the average city regulation index is 30 percent,
and the average price of buns is $0.13. Substituting these values into the
equation above gives the equation for hot dog supply.

Ps = 0.5 + 0.001Q

The black line passing through point A in Figure 1.2 is its graph.
The coefficient of Q indicates how quantity supplied responds to a
change in price, holding all other factors constant. Its value, 0.001, says
that the quantity supplied is expected to increase by 1,000 hot dogs if the
price increases by $1, which is demonstrated by the movement along sup-
ply from point A to B. At point A, 4,000 hot dogs are supplied at $4.50.
At point B, the price and quantity supplied have risen to $5.50 and 5,000
hot dogs. Thus, the Law of Supply holds true.
Supply’s other coefficients determine by how much and in what direc-
tion supply shifts. For example, the coefficient of Pb associates a 1-dollar
decrease in the price of buns with hot dog supply shifting downward by

5
Regression analysis is a statistical technique that is used to estimate linear
functions.
6
T equals 1 if a hot dog cart has a solar panel, but equals 0 if the panel is not
installed.
 Introduction 7

10 10

8 8

6 6
Price

Price
B

A A D
4 4
C

2 2

0 0
0 2000 4000 6000 8000 0 2000 4000 6000 8000
(a) (b)

Figure 1.2 Movement along and shifts in supply

$1, which is modeled by supply shifting from point A to C in Figure 1.2b.

Between these points, the quantity supplied is held constant at 4,000 hot
dogs. The downward shift in supply represents a decrease in marginal cost.
Because point D is on the same curve as point C, the price of hot dogs is
held constant at $4.50 from point A to D, and the quantity of hot dogs
supplied increases from 4,000 to 5,000, the decrease in marginal cost
(from point A to C) corresponds to an increase in supply (from point A
to D). The coefficients of R and W associate more regulation and higher
wages to lower supply, while T’s coefficient links technology adoption to
greater supply.
Price elasticity of supply measures firm sensitivity to a change in price.
At point B, the price is $5.50 and the quantity of hot dogs supplied is
5,000. Dividing their ratio by supply’s slope (0.001) gives a price elastic-
ity of supply equal to 1.1. This implies that a 1-percent increase in price
raises hot dog production by 1.1 percent. Since the percent change in
production is larger than the percent change in price, firms are sensitive
to the price change, and supply is said to be inelastic.

The Law of Supply and Demand

The Law of Supply and Demand states that forces of supply and demand
push the price of a good toward the price at which quantity supplied and
quantity demanded are equal. The first step to finding this point, which is
called the equilibrium, is to graph hot dog demand against supply. Initial
8 LEARNING BASIC MACROECONOMICS

7 7 S′
S S
6 6
B
5 5

4 A 4 S A D
Price

Price
3 3
D′
2 2
D D
1 1

0 0
0 1000 2000 3000 4000 5000 6000 0 1000 2000 3000 4000 5000 6000
(a) (b)

Figure 1.3 The law of demand and supply

demand and supply are shown in Figure 1.3a, which give an initial equi-
librium at point A. To find the equilibrium quantity, demand is set equal
to supply:

7.5 – 0.001 Q = 0.5 + 0.001 Q

This result is then solved for equilibrium quantity, which equals 3,500
hot dogs. Substituting this value into either supply or demand gives an
equilibrium price $4. At this price, the number of hot dogs firms produce
equals the number consumers buy, and the market is said to have cleared.
In Figure 1.3b, hot dog demand has increased to D′ and supply has
decreased to S′. If the price remains at $4, the market will not clear, which
results in a shortage of 3,000 hot dogs, the difference in the quantities at
points D and S. To prevent a stock out, vendors must raise their prices to
the new market clearing price of $5.50. A surplus of hot dogs would have
resulted instead had price exceeded its equilibrium, which is not shown
in the figure. To shed a surplus, firms must lower their prices to clear the
market.
The law of supply and demand is analyzed with two meaningful
examples that follow. The effect of immigration is depicted in Figure 1.4a.
In free societies, people are free to migrate. An increase in immigration
shifts the supply of low-skilled laborers rightward. This reduces the low-
skilled wage by 50 percent. In the short run, immigration has a cost that
is borne by native low-skilled workers. However, what is not shown is the
effect of lower wages on product supply. Because lower wages reduce the
 Introduction 9

Low-skilled labor Cavaliers home games

S
LS LS′

$40.15 B
$38.53 A

A D′
$10

$5 B
D

LD

20,000 28,000 11,497 18,288

(a) (b)

Figure 1.4 Free market dynamics

marginal cost of production, product supply curves shift rightward. This

reduces prices and increases output. To increase their output, firms hire
more high-skilled workers due to them and low-skilled workers being
complements in production. If natives supply the high-skilled labor to
the economy, natives’ incomes rise, and so too does their consumption.
Higher consumption generally increases output, which causes firms to
hire even more labor. Higher low-skilled labor demand—not shown in
the figure—implies that low-skilled wages do not fall as much as oppo-
nents of immigration fear.
Figure 1.4b is used to illustrate why sports super stars like LeBron
James are paid so much. After a stellar high-school career, LeBron was
drafted in 2003 by the National Basketball Association’s Cleveland
Cavaliers. The average ticket price of the club’s home games increased
from $38.53 to $40.15,7 while its average attendance for its home games
soared from 11,497 to 18,288.8 Given that LeBron’s high-school games
were televised on local pay-per-view television and ESPN, attributing the
increase in demand, from D to D′ in Figure 1.4b, entirely to his addition
to the roster is realistic. After all, the 6,791 additional fans did not start
attending Cleveland’s home games to see the last guy off the bench sit
on the end of the bench. Because each NBA team hosts 41 home games,
Cavaliers ticket revenue rose from 18.2 million to 30.1 million dollars as

7
See www.leagueoffans.org/nbafancost03-04.html.
8
See www.nba.com/cavaliers/history/attendance.html.
10 LEARNING BASIC MACROECONOMICS

a result of drafting LeBron. In economics, the additional revenue accru-

ing to a firm for adding a unit of labor is called the marginal revenue
product of labor (MRPL), and labor is added until it equals the wage rate.
With LeBron’s MRPL at 11.9 million dollars a year, and his rookie salary
at 4.02 million dollars,9 Cleveland, if it could have, would have contin-
ued to hire LeBrons until the MRPL of the last LeBron hired equaled the
wage. Unfortunately, for Cleveland, there is only one LeBron, and unfor-
tunately for LeBron, the model suggests that he was underpaid.

Free Markets Versus Central Planning

Free market capitalism is the antithesis of central planning. To demon-
strate the difference, suppose Figure 1.3b represents the gasoline market
in the southern region of the United States just before (gray lines) and
just after (black lines) a hurricane strikes. The rise in demand is due to
consumer hoarding, while the decline in supply results from Gulf coast
oil rigs and gasoline refineries in the path of the hurricane being shut
down and evacuated. The storm further disrupts supply by interrupting
the distribution of gasoline over road and rail. Collectively, the shocks
push the market price of gasoline up to $5.50, and reduce overall gasoline
consumption from 3,500 (at point A) to 3,000 (at point B). The higher
price is an important consequence of free-market capitalism. In the wake
of a natural disaster, it encourages conservation and averts a shortage.
In Figure 1.3b, suppose the gray lines represent the gasoline market
in the West just after the hurricane hits the South, and the black lines
represent the gasoline market in the South at the same moment in time.
In a free-market economy, the large regional price differential encourages
gasoline producers to shift gasoline supplies from West to South. The
increase in southern supply and the decrease in western supply pushes the
regional price differential toward zero. Once the (cost-adjusted) differ-
ential is zeroed, suppliers adjust inventory replenishment rates to keep it
zero. The self-interested, profit-maximizing suppliers in a free market sup-
ply more gasoline to the storm-ravaged southern economy, which makes
western consumers share the burden of the natural disaster, and renders

9
See http://assets.espn.go.com/nba/news/2003/0703/1576436.html.
 Introduction 11

government disaster planning, like price controls, unnecessary. Adam

Smith explains why this is so in An Inquiry into the Nature & Causes of the
Wealth of Nations, writing “It is not from the benevolence of the butcher,
the brewer, or the baker that we expect our dinner, but from their regard
to their own self-interest.”
If the gasoline price remains elevated for an extended period of time,
consumers may trade gas guzzlers for fuel-efficient cars, and firms may
drill for more crude oil, or introduce vehicles that are less costly to oper-
ate. All of these reduce gasoline demand in the long run, which pushes
the gasoline price lower, holding all other factors constant.
Under central planning, prices are set by government decrees. These
can take the form of a price ceiling or price floor. Suppose Figure 1.3b
represents the southern gasoline market before (gray lines) and after (black
lines) the hurricane hits the coast, and Congress imposes a price ceiling of
$4. This well-intentioned policy has an unintended consequence. Accord-
ing to the figure, a 3,000-gallon gasoline shortage results from the mar-
ket clearing price being higher than the price ceiling. Although the price
ceiling is an easy political sell at the moment it is enacted, discontent will
build as the shortage it causes lingers. If the price ceiling is kept in place,
government may decide to ration gasoline by limiting the quantity of
gasoline purchased during a fill-up, or using the last character on license
plates to determine the day of the week drivers can purchase gas (Powell
2012). When policy-induced shortages are severe, consumers cannot buy
gasoline at the artificial price. This is why black markets10 form in cen-
trally planned economies.
Figure 1.5 models the effect of rent control. The city’s price ceiling,
$1,000 per month, is below the equilibrium rent of $1,600. Although
the policy is enacted to lower the rent for low-income families, the fig-
ure shows that it causes a shortage of 30,000 rental units. Because rent-
ers are willing to pay up to $1,600 per month, they may be willing to
bribe landlords as much as $7,200, the difference in the market and
government-decreed annual rent rates. In the fifth episode of Seinfeld’s
second season, Elaine applies for a rent-controlled apartment in Jerry’s

10
Examples of black markets include illegal services procured by pimps, or illegal
stimulants sold by drug dealers.
12 LEARNING BASIC MACROECONOMICS

City apartments Low-skilled labor

S
LS

$1600 A

$13 B C
$1000 B
D A
$8

LD

25,000 55,000 200 300 330

(a) (b)

Figure 1.5 Consequences of price ceilings and price floors

building. Although she is the first in line and the rent is just $400, the
bribe needed to get the apartment is $5,000. Unless low-income families
have friends like Jerry, they will lose out to those who can afford bribes.
Other unintended consequences include landlords evicting tenants for
the sole purpose of raising rents, or a rent-control neighborhood becom-
ing a slum because rents may not be sufficient to cover maintenance or
repair expenses.
Price floors have unintended consequences, too. Price floors can result
in excessive inventories. In low-skilled labor markets, hiking the minimum
wage can increase the number of unemployed workers. In Figure 1.5, the
minimum wage is set at $13 per hour, which is $5 higher than the market
clearing wage. As a result, firms shed 100 workers from their workforces,
30 low-skilled laborers enter the labor market to look for work, and the
number of unemployed workers rises from 0 to 130. The consequence
of a price floor on milk in the 1980s raised the government’s dehydrated
milk inventory to a problematic level. To alleviate the problem, warped
solutions like paying farmers to kill dairy cows or mixing dehydrated milk
into the fresh milk supply were tried (Bovard 1991).
Figure 1.6 illustrates the effect of ignoring free-market forces in the
labor markets of newly minted, certified high-school teachers. Figure 1.6a
shows college graduates with mathematics skills earning $60,000 per
year working in the private sector as engineers, economists, or financial
analysts. Figure 1.6b shows those not endowed with mathematical skill
 Introduction 13

Mathematics History

LS
LS

$60k A

$35k B C B C

LD A
$20k

LD

35 40 55 35 50 55
(a) (b)

Figure 1.6 Consequences of wage setting

earning $20,000 in the private sector. The consequence of paying all

first-year teachers a salary of $35,000, according to the figure, results in
shortage of 20 math teachers, and a surplus of 20 history teachers. Math
teacher shortages are filled by school districts hiring experts from the pri-
vate sector or surplus nonmath teachers using conditional or emergency
teacher certification programs. Thus, the 20 surplus history teachers in
Figure 1.6 can be reallocated to temporarily cover the math shortage until
20 qualified math teachers can be hired. This was a long-term problem for
Guilford County, North Carolina schools until they began paying math
teachers compensating wage differentials of up to $10,000 per year (Sil-
berman 2006). The problem is not unique to that county. It is widespread
throughout the United States, especially in middle schools. According to
the National Center for Education Statistics, less than a third of math
teachers are qualified to teach middle-school math, and about 10 percent
of teachers are qualified to teach middle-school science (Koebler 2011).
Two very funny scenes in the movie Moscow on the Hudson, which is
set before the collapse of the U.S.S.R., humorously summarize the differ-
ence between free-market capitalism and central planning. The first scene
shows Robin Williams, who plays a saxophone player with the Moscow
Circus, freezing while standing in a block-long line for toilet paper.
Such shortages were common in the central-planning nation. In another
scene, Williams’s character, who had defected to the United States at
Bloomingdale’s, enters a New York City grocery store to buy coffee. After
14 LEARNING BASIC MACROECONOMICS

seeing shelves plentifully stocked with numerous varieties of coffees, he

collapses in shock, and is subsequently rushed to the hospital.

Macroeconomics
The Production Possibilities Frontier (PPF) is used to introduce macro-
economics, the study of issues affecting the economy as a whole. A PPF
depicts different combinations of two products that an economy can pro-
duce using the best available technology and all available resources. The
first PPF example is used to introduce gross domestic product (GDP),
potential output, unemployment, and the natural rate of unemployment.
In a second example, two linear PPFs are used to demonstrate the benefits
of free trade. The section concludes with a final PPF example that is used
to introduce government budget surpluses and deficits.

The Economics of Government Provided Healthcare

Figure 1.7 graphs a PPF for healthcare against the consumption of all
other products. Point A is inefficient because resources are underem-
ployed. Points B, C, and D are attainable and efficient because the econ-
omy is utilizing all of its available resources. The point on the PPF where
products’ prices equal their marginal costs is said to be allocatively efficient.
It can be shown that there can only be one such point on the PPF, which
is assumed to be point D. Although E is unattainable in the short run, it
is attainable in the long run if the PPF shifts outward after new resources
and technologies are discovered (or lands are conquered).

QHC
98 B E
90 C

74 A D

0 20 28 36 QNonHC

Figure 1.7 Modeling macroeconomic output using a PPF

 Introduction 15

If the economy is at point A, it is producing 74 units of healthcare

and 20 units of other goods. The dollar value of this is referred to as
GDP. Because it is less than the potential output, the value of economic
output at points along the PPF, the economy is said to be in a recessionary
gap. In this situation, the unemployment rate, the share of the labor force
that is unemployed and looking for work, exceeds the natural rate of
unemployment, the rate that prevails at points along the PPF. If the econ-
omy moves to point D, no healthcare is given up to get the additional
16 units of other products. This might seem like the society is getting
something for nothing, a free lunch if you will, but is not because high
unemployment at point A causes idle workers to bid down wages. This
reduces firms’ marginal costs and increases production, which pushes the
economy from A to B. Thus, GDP tends to hover near the PPF in a free
society.
With the economy at allocatively efficient point D, the decision
to produce more of a good involves a trade-off. If government directs
the economy to produce 16 more units of healthcare, society must give
up 8 units of other products. This puts the economy at point C. The
opportunity cost11 of healthcare is computed by dividing the number of
units of other goods that must be given up, 8 in this case, by the num-
ber of healthcare units gained, 16 in this case. Hence, from point D to
C, it costs society an average of 0.5 units of other goods to produce an
additional unit of healthcare. Suppose that the government nudges the
economy from C to B because it believes that even more healthcare is
better. The move from C to B means that the society gets 8 more units of
healthcare, but gives up 8 units of other products. Thus, on average, the
opportunity cost of an additional healthcare unit increases to one unit of
other goods. Thus, moving up along the PPF, from the right to the left,
increases the cost of healthcare. This results from the economy becoming
increasingly specialized as more and more resources that are poorly suited

11
More formally, opportunity cost is the value of the next-highest-valued alter-
native use of a resource. For example, the opportunity cost of college does not
include room and board because these expenses are paid whether or not a person
goes to college. It does, however, include the earnings from a job that is forgone
to attend college.
16 LEARNING BASIC MACROECONOMICS

to produce healthcare, such as economists with bad bedside manners, are

being used to produce it.

The Economics of Free Trade

Figure 1.8 depicts two PPFs that model trade between Mississippi and
Alabama. For simplicity, both economies produce tobacco or corn. The
PPFs are assumed to be linear because the resources used to produce these
goods are nearly identical. If both economies devote all of their resources
to the production of tobacco, neither economy produces corn. In this
situation, Mississippi produces 1,200 hogsheads of tobacco and Alabama
produces 1,000. Because Mississippi produces more tobacco when both
economies devote all of their resources to its production, Mississippi is
said to have an absolute advantage in tobacco. If, on the other hand, the
states devote all resources to the production of corn, Figure 1.8 indicates
that Mississippi produces 300 bushels of corn and Alabama produces
500. Thus, Alabama has an absolute advantage in corn. If an economy
has the absolute advantage in both goods, it has an absolute advantage in
trade, which is not the case here.
Trade and production decisions are based not on absolute advantage
but on comparative advantage, which is the ability of a state to produce a
product at the lowest cost. With regard to producing one more bushel of
corn, the slopes of the PPFs, −4 for Mississippi and −2 for Alabama, indi-
cate that Mississippi must give up 4 hogsheads of tobacco and Alabama
must give up 2. Hence, Alabama’s opportunity cost of corn production

1200 F
Mi
ssi

1000
ssi
pp
i

T
600 B
500 A
A
la
ba
m
a

E
150 250 300 500 C

Figure 1.8 The benefits of free trade

 Introduction 17

is lower, which gives it the comparative advantage in corn. With regard

to producing one more hogshead of tobacco, the inverses of the slopes,
−0.25 for Mississippi and −0.5 for Alabama, indicate that Mississippi
must give up 0.25 bushels of corn and Alabama must give up 0.5. Because
Mississippi’s cost of producing tobacco is lower than Alabama’s, it has the
comparative advantage in tobacco. Each state will have a comparative
advantage in an industry even if one of them has an absolute advantage
in trade, provided the PPFs are not parallel. When linear PPFs intersect,
as they do in Figure 1.8, the states do not have the absolute advantage in
trade, and the state with the absolute advantage in an industry has the
comparative advantage in that industry.
If Alabama and Mississippi have erected trade barriers (import tariffs
and quotas) in a trade war, the two states must devote resources to both
industries if their citizens wish to consume both goods. Assuming that
the resources are split equally, Alabama produces 250 bushels of corn
and 500 hogsheads of tobacco (point A), and Mississippi produces 150
bushels of corn and 600 hogsheads of tobacco (point B). If the prices of
corn and tobacco are $2.50 per bushel and $1 per hogshead, Alabama’s
GDP is $1,125, and Mississippi’s is $975. The combined GDP of both
economies is $2,100.
Suppose that the states sign a free-trade agreement. With Mississippi
having the comparative advantage in tobacco, it will produce 1,200
hogsheads of tobacco and 0 bushels of corn (point F). Because Alabama
has the comparative advantage in corn, it produces 500 bushels of corn
and 0 hogsheads of tobacco (point E). Thus, free trade increases Alabama’s
GDP to $1,250, Mississippi’s to $1,200, and total GDP to $2,450.
The costs of the free-trade agreement include Mississippi outsourcing
corn jobs to Alabama, and Alabama outsourcing tobacco jobs to Missis-
sippi. Opponents of free trade point this out when they argue against free
trade pacts. When making this argument, they fail to mention that free
trade grows the industries the economies have comparative advantages
in. In the example, Alabama’s corn and Mississippi’s tobacco industries
doubled in size, which provided employment opportunities to displaced
workers. Moreover, the additional income accruing in these states can be
used to buy potatoes from Idaho, oranges from Florida, and MBAs from
Massachusetts’s Harvard University.
18 LEARNING BASIC MACROECONOMICS

Government Budget Deficits Are the Norm

The budget balance is the difference between tax revenue (T  ) and govern-
ment expenditure (G ). When the budget balance is 0, expenditure equals
tax revenue. If expenditure exceeds tax revenue in a given year, the budget
balance is negative, and the amount is called a budget deficit. Because it
is financed with newly auctioned treasury bonds, running budget defi-
cits increases the national debt. If tax revenue exceeds expenditure in a
given year, the budget balance is positive, and is called a budget surplus.
Running budget surpluses pays down the national debt.
The budget line depicts the combinations of government services that
produce balanced budgets for a given level of tax revenue. Assuming that
the government provides Qh units of healthcare at $100 per unit and
Qm units of military protection at $120 per unit, and collects $24,000 in
taxes per citizen, budget balance T – G is given by

24,000 – 120Qm – 120Qh

If the budget is balanced, the expression above is equal to zero. Solving

the resulting equation for Qh yields the budget line below that is graphed
in Figure 1.9.

Qh = 240 – 1.2Qm

Allocations of government services along the budget line, like points C

and L, balance the budget, but a point inside the line, such as S, results
in a budget surplus.

Qh

180 L D

60 S C

50 150 Qm

Figure 1.9 The fiscal budget balance

Another random document with
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Jökul, the south-east mountain ranges, on which we have long been gazing,
begin; the general character of the coast, north of this point, having been low
like the Guldbringu syssel. This district has been rendered classic ground, as
the scene of Njal’s Saga,[29] and we only wish it were permitted us to land and
visit Bergthorsknoll and Lithend, to cross the rivers, scamper over the plains,
or scale the Three-corner mountain. It is now clear, and one can take in the
general character of the whole district at a glance.
The colour of the sea now assumed a light green aspect, broken here and there
by white crested waves. Snow patches lay on the rugged purple hills; these,
again, were touched with lines of intense fiery gold, actually excandescent. Sea-
birds flitted past like white gleams; and, altogether, the scene, flooded with
golden light, presented a magnificent study of colour. I made jottings of the
outlines, tints, and atmospheric effects, for a water colour drawing; to be
painted “some day”—that unattainable period when so many things are to be
done, but which ever recedes from us like the horizon line; luring us on and
on, and cheating us from day to day with a vague phantom shadow of
“Something evermore about to be.”

The Skogar-foss—force or waterfall—yonder, falling sheer over the rock cliffs

into the sea, gently sways to and fro in the wind. It falls from so great a height
that it appears to lose itself in vapour or dust, like the Staubach. There is an
old tradition that an early colonist—Thrasi—before dying, buried a chest of
gold and jewels in the deep rock-basin into which this magnificent sheet of
water tumbles.[30]
Sun-gleams rest on the snow-mountains and play on the ice of the glaciers.
These are very numerous near the coast, the ice being generally of a light
whity-green colour and corrugated in wavy lines.
As the weather is clear and bright, we see the coast near Portland to more
advantage than on our first approach to the island. The wild fantastic
promontories, rock-islets, and needle shaped drongs—serrated, peaked and
hummocky—resemble the ruins of old castles and cathedrals. The likeness of
one of them to Iona, already remarked upon, is now even still more apparent.
Behind these rocks is a low range of hills, beyond which rise the jökuls.
The summits of these mountains are white with perpetual snow. The shoulders
shade downwards into pale green ice, which terminates abruptly at the edge of
a dark rugged precipitous line of rock that descends sheer into the valley
behind the low range of hills next the sea. The precipice looked as if the sides
of the mountains had, in some way, been sliced down, say from a third of their
height, leaving the snowy summits and icy shoulders untouched.
Glaciers were formed, wherever the nature of the slope would admit of them.
In some instances they seemed to approach the brink of the precipice and
overhang it; but more frequently they chose places where rents, chasms,
irregularities, or depressed spaces, occurring between any two mountains in
the range, broke the wall, and thus afforded an incline plane all the way down
to the valley.
Many whales continue to sport round the vessel, spouting up jets of water,
tumbling about and showing the whole of their large tails. At times they leap
nearly altogether out of the sea, and fall with a great splash. They often remain
perfectly motionless for a considerable time. When diving down, both the
rounded shape of the fish, and the peculiar parabolic motion with which it
rises and falls, make the ridge of the back with its dorsal fins resemble the
segment of a great black revolving disk, like a monster saw-wheel. Gulls, skuas,
and pheasant-tailed ducks are flying about.
A lot of beer-drinking and meerschaum-smoking Danes are on board, going to
Copenhagen. The smell of tobacco is felt everywhere, above, below, and at all
hours. Their voices are frequently heard during the day calling for “snaps.”
They consider a glass of this spirit indispensible for breakfast, and take it every
morning to begin with. However, the hours passed very pleasantly on
shipboard. The following
 ICELANDIC STATISTICS
will interest the reader. From the last census—1855—we learn that the
population of the island is 64,603; of that number 52,475 live by farming, and
5,055 by fishing, thus accounting for nearly three-fourths of the whole
population. In exact figures the number is only 923 short of that proportion.
There were then in the island 65 persons deaf and dumb, and 202 blind.
Curious to observe that, although there previously had been and again may be,
there was not then a single watchmaker on the island. The extreme paucity of
common tradesmen—less than 11 to the 1000—indicates a very primitive
pastoral state of society amongst the islanders; home wants being generally
supplied by home skill. The following table is constructed, from data
contained in the census, to show at a glance the various occupations of the
Icelanders, and also what relative proportion these bear to each thousand of
the population.
Total numbers in the Proportion to each 1000
island at census in 1855. of the whole population.
Clergymen, professors and teachers at
the college, and employés at churches 2,365 36.61
Civil officers 454 7.03
Do. out of office 140 2.17
Farmers who live by agriculture 52,475 812.27
Farmers who depend chiefly on the
fisheries 5,055 78.25
Tradesmen as follows:
Bakers 10 0.16
Coopers 35 0.55
Gold and silversmiths 80 1.24
Carpenters 61 0.94
Blacksmiths 80 1.24
Masons 6 0.09
Millers 4 0.07
Turners 8 0.13
Boat builders 38 0.59
Shoemakers 18 0.28
Tailors 27 0.41
 Joiners 174 2.69
Saddlers 46 0.71
Weavers 20 0.30
Men who live by other industrial
occupations 103 1.59
Merchants and innkeepers 730 11.30
Pensioners, and people living on
their own means 356 5.51
Day labourers 523 8.09
Miscellaneous occupations not
classed 586 9.07
Paupers 1,207 18.68
Prisoners 2 0.3
——— ———
64,603 1000

There are only sixty-three native Icelandic surnames. Few people have got any;
the custom is, after telling one’s own christian name, when asked whose son
are you? to answer in old Hebrew fashion, son of, or daughter of so and so.
There are 530 men’s christian names, and 529 women’s names in use; so that
there need be no lack for choice of names in a large family. Many of them,
slightly modified in spelling, are familiar to us, but chiefly as surnames, e.g.
Kettle, Halle, Ormur, Gils, Olafur, &c.
The number of individuals bearing certain names, is all duly recorded in the
last census. I note a few of them, from which the reader may infer that Casa’s
droll extravaganza, depreciating the name John under its various forms, is as
applicable to Iceland as to Italy; and that Sigridur, Kristin, and Helga, are
favourite names among the ladies.
The figures in the following list indicate the total number of persons, in the
whole island, who bear these respective names.
Andros, 136; Ausumunder, 125; Bjarni, 869; Einer, 878; Eiriken, 351; Gísli,
681; Gunnar, 150; Halldor, 428; Johann, 494; Johannus, 498; Jón, 4827;
Magnus, 1007; Odin, 169; Olafur, 992; Thordur, 445; Thorwaldsen, 106 &c.
Female names:—Anna, 869; Elin, 438; Elizabeth, 194; Gróa, 269; Halldóra,
515; Helga, 1135; Johanna, 630; Kristin, 1615; Rosa, 269; Sigridur, 2641; Lilja,
120; Soffia, 182; Thorbjörg, 436; Sessilja, 326 &c.
Half-past 6 P.M. Looking back to Portland Huk, over the light-green sea with
its white crested waves, the reddish brown fantastic islets, and the singular
arched opening in the rock—Dyrhólaey—show distinctly and beautifully
against the amber light of the horizon.
As we paced the deck, talking about the old Norse language—which is still
spoken in Iceland as it used to be in the eighth and ninth centuries in Norway,
Sweden, and Denmark, in the Orkney, Shetland, and Faröe islands, in the two
northern counties of Scotland, and in other Scandinavian settlements along the
British coast—Dr. Mackinlay remarked, that “so well had the language been
preserved, an Icelander of the present day had no difficulty in understanding
the most ancient writings of his country.” This can be said of no other tongue
in western Europe.
To this—the very language of the Vikings—both the old lowland Scotch, and,
at a further remove, our modern English, chiefly owe their directness,
expressiveness, and strength.
Many words, which we now use with a secondary or restricted meaning, still
retain their primitive signification in Icelandic. Thus the word “smith”—a
contraction for smiteth—which with us is restricted to a worker in metals, in
Icelandic still retains its old sense of handcraftsman. Hence the Icelander not
only talks of a goldsmith as a guldsmidr, a silversmith as silfursmidr, but of a
saddler as södlasmidr, a cooper as a koparsmidr, a shoemaker as a skórsmidr, a
joiner as a trésmidr, a builder as a husasmidr, a printer as a prentsmidr, a
blacksmith as a jarnsmidr, a cabinet-maker as a skrinsmidr, a watchmaker as an
ursmidr, and, in a metaphorical sense, of a poet or ode-writer as an odarsmidr;
just as the Anglo-Saxons talked of a warrior as a war-smidr.
Over a narrow strip of low sand-beach, the near snow-mountains and icefields,
like frosted silver burnished in parts, now lie gleaming with dazzling brightness
in the sun; coloured here and there with living gem-like streaks of opal, amber,
crimson, and orange which glow yet more intensely, as if the snow and ice had
been magically touched with an unextinguishable pencil of fire.
 PART OF MYRDALS JÖKUL AND KÖTLUGJÁ RANGE.

Portland point is left astern, and over it, dark clouds, of a leaden hue and
ruddy edges, came down to within a short distance of the transparent glowing
horizon. The coast-range and islets, off the point, are deep purple, relieved
against a narrow golden belt of light below the leaden cloud. In it, hang
motionless a few cloud streaks—light, fleecy, purplish gray—and, lower down,
others of only a lighter amber than the pure ether in which they float.
The sea is of a light sap green; the level sun-glare slants across the wake of the
steamer, and touches the crested waves; while a line of light, like a silvery mist,
marks the edge of the sea, by running along the coast at the foot of the snow-
capped hills. Sea-gulls flying about are following the vessel, and screaming with
delight or expectation. All is a perfect study of colour—warm purples, glowing
ambers, fiery crimsons, and cool greens—each heightened by neutral tints in
the clouds, and crests of white foam, little more than a ripple, on the green sea.
I walked the deck for two hours with the captain, and turned in at eleven
o’clock.
 ORÆFA JÖKUL.

Friday morning. We are passing Oræfa Jökul, which, by the latest measurement,
rises 6,405 English feet above the sea level, and is the highest mountain in the
island. It is an immense mass, covered with snow and ice, and exhibiting
glaciers creeping down to the sea. Sometimes the internal heat of this volcano
melts and cracks the surface ice-mail, so that it splinters and rushes down the
sides as an avalanche of ice and water, filling up hollows and valleys. When in
action it only ejects ashes and pumice; never lava.[31] By the side of the
mountain is a gently sloping snow-field, with several pointed black peaks rising
abruptly out of it. This field stretches away far inland. Dr. Mackinlay tells me
that, from the land-side, Oræfa appears a double-peaked broad shouldered
mountain; one of the peaks or ridges presenting a deep scarped side like that
of Salisbury Crags.[32]
With but few interruptions, a chain of snow-mountains stretches across the
island, from Snæfells Jökul in the west, to Thrandar Jökul in the east; while the
central desert or plain, running across from sea to sea between this range and
that on the south-east, is nearly 100 miles broad, from 2000 to 2200 feet above
the sea level, and only 400 or 500 feet from the snow-line. The south-east
corner of the island is an enormous unexplored snow or ice plateau, called
Klofa or Vatna Jökul, of about 2400 square miles, chiefly covered with, or at all
events surrounded by ranges of jökuls, over which Oræfa, the most southern
jökul of this unexplored region and the king of Iceland mountains, keeps
watch and ward.
Away to the north-west, bounding this icy region on the west, rises Skaptár
Jökul, by far the most destructive volcano in the island.[33] And “in no part of
the world,” remarks Dr. Lindsay, “are volcano phenomena on so gigantic a
scale as in Iceland. In it there are lava streams fifty miles long, twelve to fifteen
miles broad and six hundred feet deep. Portions of these streams sometimes
form hills as high as Arthur’s Seat or Salisbury Crags; and such is the
persistence of the heat, that rents in the lava have been found still smoking, or
filled with hot water, so long as eleven years after an eruption. In no part of
the world of the same extent, are there so many widely separate vents or foci
—about twenty—of subterranean igneous action. The boiling springs which
are most numerous, show of themselves that such action is going on under the
whole island. The calculations of Professor Bischoff show, that the mass of
lava thrown up by the eruption of Skaptár Jökul, A.D. 1783, was greater in bulk
than Mont Blanc. A larger mass of lava by far, than was ever thrown out from
a single volcano, at any time, in any part of the world.”
As a particular example of the ravages produced by these terrible convulsions
of nature may give the reader a clearer and more vivid idea of their action, than
any general description, we shall select the
 ERUPTION OF SKAPTÁR JÖKUL,
in 1783; it having been not only very violent, but the one of which we possess
the fullest and most authentic accounts.
“The preceding winter and the spring of that year had been unusually mild,
and nothing seemed to foretell the approaching danger, till towards the end of
May, when a light bluish fog was seen floating along the ground, succeeded in
the beginning of June by earthquakes, which daily increased in violence till the
8th of that month. At nine in the morning of that day numerous pillars of
smoke were noticed rising in the hill country towards the north, which,
gradually gathering into a dark bank, obscured the atmosphere, and
proceeding in a southerly direction against the wind, involved the whole
district of Sida in darkness, showering down sand and ashes to the thickness of
an inch. This cloud continued to increase till the 10th, when fire-spouts were
observed in the mountains, accompanied by earthquakes. Next day the large
river Skaptaá, which in the spring had discharged a vast quantity of fetid water,
mixed with gravel or dust, and had lately been much swollen, totally
disappeared. This incident was fully accounted for on the 12th, when a huge
current of lava, burst from one side of the volcano, and rushed with a loud
crashing noise down the channel of the river, which it not only filled, but even
overflowed, though in many places from four to six hundred feet deep and
two hundred broad. The fiery stream after leaving the hills, threatened to
deluge the low country of Medalland, when a lake that lay in its way
intercepted it during several days. But at length the incessant torrents filled the
basin, and proceeded in two streams, one to the east, where its progress was
for a short time interrupted by the Skalarfiall, up which, however, the
accumulating flood soon forced its way, rolling the mossy covering over the
mountain before it like a large piece of cloth. The other current directed its
progress towards the south, through the district of Medalland, passing over
some old tracts of lava, which again began to burn, whilst the air in its cavities
escaped with a strange whistling noise, or suddenly expanding, threw up
immense masses into the air to the height of more than 120 feet. The waters
of the rivers, swollen by the melting of the Jökuls in the interior, and
intercepted in their course by the glowing lava, were thrown into a state of
violent ebullition, and destroyed many spots spared by the fire. In this district,
the liquid matter continued to flow to the 20th of July, following principally
the course of the Skaptaá, where it poured over the lofty cataract of Stapafoss,
filling up the enormous cavity the waters had been hollowing out for ages.
During the whole of this eruption, the atmosphere was filled with mephitic
vapours, or darkened with clouds of ashes, by which the sun was either
concealed from the miserable inhabitants, or appeared like a blood-red globe,
adding to their terror and consternation.
“The molten elements had so long confined their fury to the Skaptaá, that the
inhabitants of the eastern district on the Hverfisfliot, though much
incommoded by the showers of ashes, hoped to escape its more immediate
visitations. But on the 28th of June, a cloud of sand and smoke caused so thick
a darkness, that in the houses at noon, a sheet of white paper, held opposite
the window, could not be distinguished from the black walls, whilst red-hot
stones and dust burnt up the pastures, poisoned the waters, and threatened to
set fire to the dwellings. On the 3d of August a thick vapour rising from the
Hverfisfliot, the entire disappearance of its waters, and a foaming fire-stream,
which on the 9th rushed with indescribable fury down its bed, overflowing the
country in one night to the extent of more than four miles, converted the
fearful anticipations of the natives into dreadful realities. The eruptions of
sand, ashes, pumice, and lava continued till the end of August, when the
volcano appeared completely exhausted; but flames were still seen in February,
1784, and thick clouds of smoke, even in July of that year. The whole
catastrophe closed in August with an earthquake of such extreme violence that
men were thrown to the ground.
“The immediate source whence this enormous mass of matter issued is
entirely unknown, being situated in that great central desert of sand and snow
which none of the natives have ever penetrated; and no traditions of any
former occurrence of this kind have been preserved. Some persons who went
up into the mountains during the continuance of the eruption were, in
consequence of the thick smoke, compelled to return, and some subsequent
attempts met with no better success. It is not even known whether the current
that flowed from the Skaptaá and that in the Hverfisfliot proceeded from the
same crater; it is, however, probable their sources were different though closely
connected.
“The extent of the lava can only be accurately known in the inhabited districts.
The stream that flowed down the Skaptaá is calculated at about fifty miles in
length, by twelve or fifteen at its greatest breadth: that in the Hverfisfliot at
forty miles in length by seven in breadth. In the narrow channel of the Skaptaá
it rose to 500 or 600 feet; but in the plains its extreme height does not exceed
100, and in many places is only eight or ten feet. From its immense thickness,
it was a long time in cooling, being so hot in July 1784, twelve months after the
eruption, that Mr. Stephenson could not cross it, and even then sending up a
thick smoke or steam. In the year 1794 it still retained an elevated temperature,
emitting vapours from various places, and many of its crevices being filled with
warm water. This long retention of heat will appear more extraordinary, when
we consider the numerous globular cavities and fissures it contained,
permitting a free circulation of the water and atmosphere.
“The destructive effects of this volcano were not confined to its immediate
vicinity, vast quantities of sand and ashes being scattered over the remoter
parts of the country, and some were conveyed to the Faröe islands, a distance
of nearly 300 miles.[34] The noxious vapours that for many months infected the
air were equally pernicious to man and beast, and covered the whole island
with a dense fog which obscured the sun, and was perceptible even in England
and Holland. The steam rising from the crater, or exhaled from the boiling
waters, was condensed in the cooler regions of the atmosphere, and descended
in floods that deluged the fields and consolidated the ashes into a thick black
crust. A fall of snow in the middle of June, and frequent showers of hailstones
of unusual magnitude, accompanied with tremendous thunder-storms, tearing
up huge fragments of rock, and rolling them down into the plains, completed
the scene of desolation. The grass and other plants withered, and became so
brittle that the weight of a man’s foot reduced them to powder; and even
where the pastures seemed to have recovered, the cattle refused to touch them,
dying of actual starvation in the midst of the most luxuriant herbage. Small
unknown insects covered many of the fields, while other portions of the soil,
formerly the most fertile, were changed by the ashes into marshy wastes
overgrown with moss and equiseta. A disease resembling scurvy in its most
malignant type attacked both men and cattle, occasioned in the former no
doubt by the want of food, and the miserable, often disgusting, nature of that
which alone they could obtain. Many lived on the bodies of those animals
which had perished from hunger or disease, whilst others had recourse to
boiled skins, or substances still more nauseous and unwholesome. The
numerous earthquakes, with the ashes and other matter thrown into the sea,
caused the fish to desert many parts of the coast; whilst the fishermen, seldom
daring to leave the land enveloped in thick clouds during most of the summer,
were thus deprived of their usual stock of winter provisions. We cannot better
conclude this frightful catalogue of evils, than by the following summary of the
numbers of men and cattle more or less immediately destroyed by it in two
years. The most moderate calculation makes these amount to 1300 human
beings, 19,488 horses, 6,801 horned cattle, and 129,937 sheep.” Stephenson
makes these numbers still higher and says, “9,336 men, 28,000 horses, 11,461
cattle, and 190,488 sheep.”[35]
Fine dust and vapour from this terrific eruption overspread Asia, Europe, and
America during the whole summer. Franklin speculated on the cause of this
haze, and Dr. Mackinlay reminded me that Cowper, who frequently refers to it
in his letters, has, in the second Book of the “Task,” a beautiful allusion to it,
and also to the earthquake in Calabria which occurred nearly at the same time
as the Skaptár eruptions:
“Fires from beneath, and meteors from above,
Portentous, unexampled, unexplained,
Have kindled beacons in the skies; and th’ old
And crazy earth has had her shaking fits
More frequent, and foregone her usual rest.
Is it a time to wrangle, when the props
And pillars of our planet seem to fail,
And Nature, with a dim and sickly eye,
To wait the close of all?”

A.D.1784, the year after the outbreak of Skaptár, which left the whole island in
mourning, was almost as memorable for earthquakes, not only in Iceland, but
in many parts of the world widely separated from each other, as 1755 had been
in connection with the eruption of Kötlugjá.
Most of the Icelandic mountains are volcanic, and, from the native history, we
learn the frequency with which they have manifested this character. Let us
glance at the following brief sketch of their
 VOLCANIC HISTORY,
chiefly compiled by the author of “Iceland, Greenland, and the Faröe Islands.”
Of these mountains, this writer says, “most of them seem now to be in the
state of intermittent activity, in which more or less violent paroxysms occur at
intervals of longer or shorter duration; and, but for the uncertainty of these
periods, we might consider some as in a state of complete repose. These
alternations of movement and rest seem common to the separate members
and to the whole system; there being many years in which the island remains
undisturbed, whilst at other epochs it appears as if entirely devoted to the fury
of contending elements. The most terrible of the volcanoes known in ancient
times were Hekla, Oræfa-Jökul, and the Kötlugjá; to which have recently[36]
been added Krabla, Leirhnukr, and Skaptáfells, which commenced only in the
18th century. The earliest record of such an occurrence is that of Eldborg,[37]
in the western part of the island, said to have happened in the 9th or 10th
century. This was followed by the eruption from the mountains in Guldbringu
syssel in the year 1000, at the time when the althing was deliberating as to the
reception of the Christian religion. In the 11th century Hekla appeared in a
state of violent commotion, which extending, in the middle of the 12th, to
many others, devastated the land from north to south, and was accompanied
by destructive earthquakes. In the beginning and at a later period of the 13th
century, the south-western quarter was particularly excited; whilst in the
middle of the succeeding one, the island was desolated by the most terrible
convulsions, concluding in 1391 with a violent earthquake, felt over the whole
country. From this date till the beginning of the 16th, the volcanoes were
comparatively quiet; but at that period, and in the end of the century, they
raged both in the south and the north. The 17th was again an interval of
repose, in which only the southern ones were active; but the eighteenth age
proved that their energies had undergone no diminution, by eruptions even
more violent than those of the fourteenth. Between 1720 and 1730 the same
mountains were in incessant action, accompanied by earthquakes; whilst in the
north, Krabla and Leirhnukr began their devastations. In the years 1753 and
1755 the Skeidará and Kötlugjá Jökuls poured out every variety of volcanic
matter. In 1766 Hekla again commenced, and the destructive outbreak of the
Skaptár in 1783 closed these frightful scenes. From that time till 1821, with the
exception of some slight agitations, and probably a few inconsiderable
eruptions in the desert part of the country, no displays of volcanic action
occurred.”
Eyafialla Jökul continued in eruption from A.D. 1821 till 1822. In July 1823 it
again began to burn. In the same month Kötlugjá, covered nearly 100 miles of
ground with sand and ashes. “In July 1825, both sides of the island were
visited by earthquakes, accompanied by destructive hurricanes and floods;
whilst on the 13th of February 1827, there was an eruption of the Skeidará
Jökul.”
The subjoined list of Icelandic volcanoes, with the dates of their eruptions, is
transcribed from the same source, and presented to the reader, not by any
means as complete, but as the best to which I at present have access. It will aid
him in realizing the fearful results of these terrific energies so frequently at
work.
“Hekla, 1004, 1029, 1105, 1113, 1157, 1206, 1222, 1294, 1300, 1340, 1374, 1390,
1436, 1510, 1554, 1583, 1619, 1625, 1636, 1693, 1728, 1754, 1766.
Guldbringu Syssel, 1000.
Eyafialla Jökul, 1821.
Solheima Jökul, about 900, 1245, 1262, 1717.
Kötlugjá or Myrdals-Jökul, 894, 1311, 1416, 1580, 1625, 1661, 1721, 1727, 1755,
1823.
Skaptár-Jökul, 1783.
Sida-Jökul, in tenth century, and in 1753.
Skeidarár-Jökul, 1725, 1727, 1827.
Oræfa-Jökul, 1362, 1720, 1727, 1755.
Hnappafell’s-Jökul, 1332, 1772.
Heinaberg’s-Jökul, 1362.
Trolladynger, 1151, 1188, 1340, 1359, 1475, 1510.
Herdubreid, 1340, 1510, 1717.
Krabla, and Leirhnukr, 1725-1730.
Grimsvatn, 1716.
Eldborg, end of ninth or beginning of tenth century.
Submarine eruption, Breida fiord, 1345.
Submarine Reykjanes, 1211, 1226, 1238, 1240, 12—, 1340, 1422, 1583, 1783,
1831.”
Here are records of nineteen vents and seventy-seven eruptions. “These have
occurred in about ten centuries, or, on an average, one in thirteen years. The
most violent paroxysms seem to have occurred in 1340, 1362, 1725-1730, and
1754-1755. To complete this view of internal activity, we may add, that the
following years were distinguished by violent earthquakes; 1181, 1182, 1211,
1260, 1261, 1294, 1300, 1311, 1313, 1339, 1370, 1390, 1391, 1552, 1554, 1578,
1597, 1614, 1633, 1657, 1661, 1706, 1755, 1784, 1789, 1808, 1815, 1825.”

ENTRANCE TO REYDARFIORD.
 THE EAST COAST. BREIDAMERKR—
SEYDISFIORD.

Sailing north-east along the coast, we see the Breidamerkr ice-plains, and the
mouth of the river Jökulsá, which is only a mile or two long. Dr. Mackinlay
informs us that the most dangerous rivers in Iceland are the shortest. They
spring, full formed, from the bosom of the thick-ribbed ice. The Jökulsá,
which crosses Breidamerkr-sandr, is one of the most dreaded of these. It
springs from Breidamerkr-Jökul, which, however, is not a snow-mountain, but
only a high field of ice projected southward into the plain from the great
snow-range to the north. Some years it is eight or ten miles from the sea, in
others only one; the length of the river varies accordingly. It is half a mile
broad. Sometimes this river gets dammed up, then bursts from caverns of ice
with a noise like thunder, carrying along with it masses of ice with
uncontrollable fury to the sea. Sunshine melting the ice swells such rivers more
rapidly than rain. The near view of this cold icy region—so dreary, lone and
still—made one almost feel cold, although the sun was bright and the
thermometer, at noon, stood at 100 degrees.[38] The dazzling whiteness of the
snow and the ice-blink, made our eyes ache. It was literally
“A waste land where no one comes
Or hath come since the making of the world.”
 NEAR THE ENTRANCE TO HORNAFIORD.

As we approach Hornafiord the character of the mountains changes; instead

of great white massive ranges, many isolated, sharp-pointed, rugged peaks,
called horns, now rise. They are almost free from snow, and of richly varied
tints, chiefly lilacs and browns, glowing in the sunshine.
The general character of the mountain-ranges at this point, and indeed along
the entrances to the fiords of the east coast, as far as Seydisfiord, resembles
Goatfell and the Holy Island in Arran—firth of Clyde—only it is higher,
wilder, even more serrated, and, in addition, exhibits many curious fantastic
pointed rocks or drongs. Fleecy clouds often rested on the peaks, or rolled,
incense-like, among them.
The western half of the island is diversified by a great network of lakes, on
whose lonely waters, Dr. Mackinlay remarked, “thousands of milk white swans
sport in the summer sunshine,” while the eastern half is broken up by isolated
volcanoes whose smouldering fires are capped with snow.
The western coast is scooped out into two enormous gulfs, the Faxa and
Breida fiords; while that portion of the east coast, to which we have referred,
viz.: from Hornafiord to Seydisfiord, is all along closely indented with little
fiords or arms of the sea. These run inland for a distance of from ten to
eighteen miles, and average say about two miles in breadth. They are separated
from each other by lofty mountain ridges, such as we have described, running
far out into the sea, and ending in sheer precipitous headlands or lofty horns.
Let the reader lay his hand flat down on this page with his fingers stretched
apart, let him then suppose each of the fingers to represent a mountain range,
and the interspaces fiords, and he will be able to form an idea of the way in
which the coast is indented. At Reydar and Berufiords, these ridges appear to
be about 2000 feet high, with many sheer precipices, half that height, from
which a stone could be pitched into the sea. It will thus be seen, that the fiords
are shut in on both sides by steep mountain ridges like walls of rock, the
summits of which are often veiled in dark clouds, and in some places are
covered with perpetual snow. These rocky heights are as bare as if they had
newly been splintered—not a tree or shrub on their sides—and the lone
stillness of the fiords is only broken by the wild “water lapping on the crag,”
the cataract roaring and leaping down rock gulleys, or the streamlet trickling
down the broad stair-like ledges of the trap, dripping from step to step like a
white glassy fringe. These fiords appear to have been rents formed when the
island was first heaved up; and, where the arm of the sea terminates, they are
continued further into the interior as green valleys down which rivers flow. In
places where mountain-tracks are utterly impracticable, these river-courses
serve for bridle-paths in passing from one valley or fiord to another.
The tender herbage affords delightful pasture for sheep; fish, chiefly cod, are
to be had in abundance in the fiords, and the streams abound in trout. Vessels
can sail up and find sheltered havens in which to lie, thus affording water
carriage for the exchange of commodities, and bringing the advantages of the
coast to the interior.
In the country one never meets anything approaching to a village. It is a
populous district where you see a farm in a valley, another group of turf
hovels, called a thorpe, a few miles further up, and perhaps, a homestead of
some kind perched on the green slope of a neighbouring hill-side. Should
there be, in addition to these, a black wood building near the edge of the water,
with a white flagstaff before it—it is a merchant’s factory and gives to the
place the importance of a market-town.
It was now between 2 and 3 o’clock in the morning, but as the sky was clear
and lovely, and we were sailing along a coast, the striking features of which,
although singularly picturesque, we had never seen described in books, I
remained on deck most of the night, and only, from a forced sense of duty, lay
down for a short time without undressing.
These fiords on the east coast are very similar in character; most of the
features we have noted being common to them all. I shall therefore simply
enumerate, in their order, the names of those we passed between Hornafiord
and Seydisfiord, a distance of about 100 miles, for the first 75 of which the
steamer’s course lay north-east, and for the remaining 25 nearly due north:—
Skardsfiord, Papafiord, Lonfiord, Altafiord, Hamarsfiord, Berufiord,
Stödvarfiord, Faskrudsfiord, Reydarfiord, Nordfiord, and Mjofifiord.
On Saturday morning, between 5 and 6 o’clock, we entered Seydisfiord, sailed
up to the head of it and dropped anchor, having now reached the extreme
point of our destination.
This lonely fiord on the north-east of Iceland, is land-locked like Lochgoil or
Teignabraich in Scotland. The valley at the head, with hills on either side,
makes a bend to the north, so that there are high hills all round us. Those on
the south—our left hand side—sweep round, forming an amphitheatre, till
they are apparently met by those of the north-side; the fiord is thus shut in on
the west, and the continuation of the valley, beyond it, shut out.
The hill-sides are terraced with sixteen or eighteen trap-steps, which run in
regular horizontal layers and yet further complete the resemblance of the head
of the fiord to a great amphitheatre. From these steps, water, glassy-white, may
be seen trickling down, every little way, all round; with here and there a
mountain cataract which has made a deep gully for itself. The hill-range on the
left, which sweeps round and bounds the view, is capped with a series of
singular rocky cones, occurring at regular intervals, and in shape resembling
the chimneys of a glass work. They are mottled with snow-patches; mist
streaks float athwart them; while in the west, not only those chimneys, but the
top of the ridge itself is now hid from view, muffled up in dense clouds which
form the curtain of the amphitheatre. A river flows into the fiord from the
valley, which, although green and yielding a hay-crop, is marshy and much in
want of draining. From the sloping nature of the ground, this could easily be
done at little expense, and would, we doubt not, prove a highly remunerative
investment.
 MR. HENDERSON’S FACTORY AT SEYDISFIORD.

Near the beach are three stores, or factories as they are called; two belong to
Danes, and the other to Mr. Henderson, one of the owners of the Arcturus,
who has been here for sometime but is going south with us to-night. The
factories are one-storey houses, built of wood. A traffic in produce, chiefly fish
and wool, is carried on with the farmers, whose sod-covered dwellings are
sparsely scattered along the neighbouring coast, or in valleys above the fiords.
Customers are sometimes attracted from much greater distances; we saw long
strings of ponies riding down water-courses, and crossing the shoulders of
bare hills where one would think there was scarcely footing for a goat.
Before breakfast Dr. Mackinlay and I had a swim in the fiord, and found the
water much warmer than we anticipated; indeed, it was pleasanter in this
respect than the last bath I had in the sea at Teignabraich. We then breakfasted
with Mr. Henderson, who gave us a most cordial welcome. The steamer was
several days later in arriving than the time he had expected her, so that he had
almost begun to despair of her ever coming for him, and was conjuring up
gloomy visions of being obliged to winter here, and fancying all sorts of things.
Now, for him, all was changed and bright. I tried to masticate a bit of raw
dried stock-fish, which the Icelanders commonly use, eating it as we do bread.
I also tasted “snaps,” of which the Danes are so fond, for the first and last
time; it seemed like a mixture of gin and kirchen-wasser, flavoured with