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Exploring
Macro
Fifth Canadian Edition
Economics
vi Detailed Contents
3.4 Shifts in the Supply Curve 79 Business Connection: Revisiting the Production Possibilities
What Is the Difference between a Change in Supply and a Curve from a Macroeconomic Perspective 140
Change in Quantity Supplied? 79 For Your Review 142
What Are the Determinants of Supply? 79
Business Connection: Using Demand and Supply 82
Debate: Is It Ethical to Grow Corn for Fuel? 83 CHAPTER 6
Can We Review the Distinction between a Change in Supply Measuring Economic Performance 147
and a Change in Quantity Supplied? 84 6.1 National Income Accounting: Measuring Economic
For Your Review 87 Performance 147
Why Do We Measure Our Economy’s Performance? 147
CHAPTER 4 What Is Gross Domestic Product (GDP)? 148
BRINGING SUPPLY AND DEMAND TOGETHER 94 6.2 The Expenditure Approach to Measuring GDP 150
4.1 Market Equilibrium Price and Quantity 94 What Is the Expenditure Approach to Measuring Gdp? 150
What Are the Equilibrium Price and the Equilibrium Quantity? 94 What Is Consumption (C )? 150
What Is a Shortage and What Is a Surplus? 95 What Is Investment (I )? 152
Debate: Where There’s a Market, Should People Be Allowed to What Are Government Purchases (G )? 153
Trade Freely, without State Limitations or Intervention? 96 What Are Net Exports (X  M )? 153
Business Connection: Has GDP Run Its Time? 154
4.2 Changes in Equilibrium Price and Quantity 97
What Happens to Equilibrium Price and Equilibrium Quantity 6.3 The Income Approach to Measuring GDP 155
When the Demand Curve Shifts? 97 What Is the Income Approach to Measuring GDP? 155
What Happens to Equilibrium Price and Equilibrium Quantity What Do Personal Income and Disposable Income Measure? 157
When the Supply Curve Shifts? 99 6.4 Issues with Calculating an Accurate GDP 158
What Happens When Both Supply and Demand Shift in the What Are the Problems with Gdp in Measuring Output? 158
Same Time Period? 100 How Is Real Gdp Calculated? 158
Business Connection: Equilibrium Determines Price 101 What Is Real Gdp per Capita? 160
4.3 Price Controls 104 6.5 Problems with GDP as a Measure of Economic
What Are Price Controls? 104 Welfare 162
What Are Price Ceilings? 104 What Are Some of the Deficiencies of GDP as a Measure of
What Are Price Floors? 105 Economic Welfare? 162
For Your Review 108 Debate: Should We Switch to Another Means of Measuring
Macroeconomic Performance That Captures a More
CHAPTER 5 Comprehensive View of Economic Well-Being? 164
For Your Review 165
Introduction to the Macroeconomy 115
5.1 Macroeconomic Goals 115

CHAPTER 7
What Are the Three Major Macroeconomic Goals in Canada? 115
Are These Macroeconomic Goals Universal? 116 Economic Growth in the Global Economy 172
5.2 Employment and Unemployment 117 7.1 Economic Growth 172

What Is the Unemployment Rate? 117 How Does Economic Growth Differ from the Business Cycle? 172
Are Unemployment Statistics Accurate Reflections of the What Is Economic Growth? 173
Labour Market? 120 What Is the Rule of 70? 173
How Long is Someone Typically Unemployed? 120 7.2 Determinants of Economic Growth 176
What Is the Labour Force Participation Rate? 121 What Factors Contribute to Economic Growth? 176
5.3 Different Types of Unemployment 123 7.3 Public Policy and Economic Growth 180
What Is Frictional Unemployment? 123 What Policies Can a Nation Pursue to Increase
What Is Structural Unemployment? 124 Economic Growth? 180
What Is Cyclical Unemployment? 125 Business Connection: Slow(er) Growth Economy Ahead 181
What Is the Natural Rate of Unemployment? 125 Can Rates of Economic Growth between Different
5.4 Inflation 128 Economies Converge? 184
Why Is the Overall Price Level Important? 128 7.4 Population and Economic Growth 185
How Is Inflation Measured Using the Consumer Price What Is the Effect of Population Growth on per Capita
Index (CpI)? 128 Economic Growth? 185
Is the CPI Accurate? 130 What Is the Malthusian Prediction? 186
Who Are the Winners and Losers during Inflation? 132 Debate: Should Sustainable Growth Be the Goal or Maximum
What Are the Costs of Inflation? 133 Growth? 187
What Is the Relationship between Inflation and Interest For Your Review 189
Rates? 134
Debate: Should the Government Stay Focused on Inflation Rather
than Unemployment Rates? 135 CHAPTER 8
Aggregate Demand 192
5.5 Economic Fluctuations 136
What Are Short-Term Economic Fluctuations? 136 8.1 The Determinants of Aggregate Demand 192
What Are the Four Phases of a Business Cycle? 137 What Is Aggregate Demand? 192
How Long Does a Business Cycle Last? 139 What Is Consumption? 192
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Detailed Contents vii
Debate: Should There Be a Guaranteed Annual Income Benefit? 193 Business Connection: Corporate Navigation for a Change in
What Is Investment? 194 Long-Term Fiscal Goals 246
What Are Government Purchases? 194 What Are the Major Sources of Government Revenue? 247
What Are Net Exports? 194 Debate: Should Canada Raise Corporate Taxes? 248
8.2 The Investment and Saving Market 195 10.3 The Multiplier Effect 249
What Is the Investment Demand Curve? 196 What Is the Multiplier Effect? 249
What Is the Saving Supply Curve? 198 What Impact Does the Multiplier Effect Have on the
How Is Equilibrium Determined in the Investment and Aggregate Demand Curve? 251
Saving Market? 199 What Impact Does the Multiplier Effect Have on
What Effect Do Budget Surpluses and Budget Deficits Tax Cuts? 251
Have on the Investment and Saving Market? 199 What Factors Can Potentially Reduce the Size of the
8.3 The Aggregate Demand Curve 201
Multiplier? 253
How Is the Quantity of Real GDP Demanded Affected 10.4 Fiscal Policy and the AD/AS Model 253
by the Price Level? 201 How Can Fiscal Policy Alleviate a Recessionary Gap? 253
Why Is the Aggregate Demand Curve Negatively Sloped? 201 How Can Fiscal Policy Alleviate an Inflationary Gap? 255
8.4 Shifts in the Aggregate Demand Curve 203 10.5 Automatic Stabilizers 256
What Variables Cause the Aggregate Demand Curve to Shift? 203 What Are Automatic Stabilizers? 256
Business Connection: Changes in GDP: The Long and the Short How Does the Tax System Stabilize the Economy? 256
of It 204
Can We Review the Determinants That Change Aggregate 10.6 Possible Obstacles to Effective Fiscal Policy 257
Demand? 206 How Does the Crowding-Out Effect Limit the Economic
For Your Review 207 Impact of Expansionary Fiscal Policy? 257
How Do Time Lags in Fiscal Policy Implementation Affect
CHAPTER 9 Policy Effectiveness? 259
Aggregate Supply and Macroeconomic 10.7 The Federal Government Debt 261
Equilibrium 211 How Is the Budget Deficit Financed? 261
9.1 The Aggregate Supply Curve 211 What Has Happened to the Federal Budget Balance? 261
What Is the Aggregate Supply Curve? 211 What Is the Impact of Reducing a Budget Deficit? 262
Why Is the Short-Run Aggregate Supply Curve Positively How Much Is the Burden of Government Debt in Canada? 263
Sloped? 211 or Your Review 266
F
Why Is the Long-Run Aggregate Supply Curve Vertical at the
Natural Rate of Output? 212 CHAPTER 11
9.2 Shifts in the Aggregate Supply Curve 214 Money and the Banking System 271
What Factors of Production Affect the Short-Run and Long- 11.1 What Is Money? 271
Run Aggregate Supply Curves? 214 What Is Money? 271
What Factors Exclusively Shift the Short-Run Aggregate What Are the Four Functions of Money? 271
Supply Curve? 215
Can We Review the Determinants That Change Aggregate 11.2 Measuring Money 273
Supply? 216 What Is Currency? 273
What Are Demand and Savings Deposits? 274
9.3 Macroeconomic Equilibrium 217
What Is Liquidity? 276
How Is Macroeconomic Equilibrium Determined? 217
How Is the Money Supply Measured? 276
What Are Recessionary and Inflationary Gaps? 218
What Backs the Money Supply? 278
How Can the Economy Self-Correct to a Recessionary Gap? 221
How Can the Economy Self-Correct to an Inflationary Gap? 223 11.3 How Banks Create Money 279
Price Level and RGDP Over Time 223 What Types of Financial Institutions Exist in Canada? 279
Business Connection: Facing the Storm Clouds: Low Inflation How Do Banks Create Money? 280
and Deflation 224 What Does a Bank Balance Sheet Look Like? 281
For Your Review 225 What Is a Desired Reserve Ratio? 282
Appendix: The Keynesian Aggregate Expenditure Model 231
Business Connection: Dancing with Debt and the Money
The Simple Keynesian Aggregate Expenditure Model 231 Supply 285
Consumption in the Keynesian Model 233 11.4 The Money Multiplier 286
Equilibrium in the Keynesian Model 235 How Does the Multiple Expansion of the Money Supply
Disequilibrium in the Keynesian Model 235 Process Work? 286
Adding Investment, Government Purchases, and Net Exports 237 What Is the Money Multiplier? 287
For Your Review 241 Why Is It Only “Potential” Money Creation? 288
Debate: Should Canada Become a Cashless Society? 289
CHAPTER 10 For Your Review 290
Fiscal Policy 243
10.1 Fiscal Policy 243 CHAPTER 12
What Is Fiscal Policy? 243 The Bank of Canada 296
How Does Fiscal Policy Affect the Government’s Budget? 244
12.1 The Bank of Canada 296
10.2 Government: Spending and Taxation 245 What Is the Bank of Canada? 296
What Are the Major Categories of Government Spending? 245 What Are the Main Responsibilities of the Bank of Canada? 298
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viii Detailed Contents
Debate: Should Canada, the United States, and Mexico Share a What International Trade Agreements Is Canada
Common Currency? 299 Involved In? 337
Debate: Should Canada Cut Back on Trade with China? 339
12.2 Tools of the Bank of Canada 300
What Are the Tools of the Bank of Canada? 300 14.3 Comparative Advantage and Gains from Trade 340
What Is the Bank of Canada’s Approach to Monetary Policy? 303 Why Do Economies Trade? 340
Business Connection: When the Bank Rate Increases, What Is the Principle of Comparative Advantage? 340
Beware! 303
14.4 Supply and Demand in International Trade 343
12.3 Money and Inflation 304 What Are Consumer Surplus and Producer Surplus? 343
What Is the Equation of Exchange? 305 Who Benefits and Who Loses When a Country Becomes an
What Is the Quantity Theory of Money and Prices? 306 Exporter? 344
For Your Review 308 Who Benefits and Who Loses When a Country Becomes an
Importer? 346
CHAPTER 13 14.5 Tariffs, Import Quotas, and Subsidies 347
Monetary Policy 310 What Is a Tariff? 347
What Is the Impact of Tariffs on the Domestic Economy? 347
13.1 Money, Interest Rates, and Aggregate Demand 310 What Are Some Arguments in Favour of Tariffs? 349
What Determines the Money Market? 310 What Are Import Quotas? 350
How Does the Bank of Canada Affect RGDP in the What Is the Impact of Import Quotas on the Domestic
Short Run? 312 Economy? 351
Does the Bank of Canada Target the Money Supply or the What Is the Economic Impact of Subsidies? 352
Interest Rate? 314 For Your Review 353
Which Interest Rate Does the Bank of Canada Target? 314
Does the Bank of Canada Influence the Real Interest Rate in
the Short Run? 315 CHAPTER 15
13.2 Expansionary and Contractionary Monetary Policy 316 International Finance 358
How Does Expansionary Monetary Policy Work in a 15.1 The Balance of Payments 358
Recessionary Gap? 316 What Is the Balance of Payments? 358
How Does Contractionary Monetary Policy Work in an What Is the Current Account? 358
Inflationary Gap? 318 What Is the Capital Account? 360
How Does Monetary Policy Work in the Open Economy? 319 What Is the Statistical Discrepancy? 361
Debate: Should Bank of Canada Appointments Remain out of
Voters’ Hands? 320 15.2 Exchange Rates 362
What Are Exchange Rates? 362
13.3 Problems in Implementing Monetary and Fiscal Debate: Is a Low Loonie Good for Canada’s Economy? 364
Policy 321 How Are Exchange Rates Determined? 365
What Problems Exist in Implementing Monetary and Business Connection: Managing Transaction Risks 366
Fiscal Policy? 321
15.3 Equilibrium Changes in the Foreign Exchange
13.4 The Phillips Curve 325 Market 367
What Is the Phillips Curve? 326 What Are the Major Determinants in the Foreign Exchange
How Does the Phillips Curve Relate to the Aggregate Supply Market? 367
and Demand Model? 327
Business Connection: Getting a Jump on Inflation in 15.4 Flexible Exchange Rates 371
Modern Times 328 How Are Exchange Rates Determined Today? 371
For Your Review 329 What Are the Advantages of a Flexible Exchange
Rate System? 372
CHAPTER 14 What Are the Disadvantages of a Flexible Exchange
Rate System? 373
International Trade 332
For Your Review 375
14.1 Canada’s Merchandise Trade 332
Who Are Canada’s Trading Partners? 332 Answers to Odd-Numbered Problems 379
What Does Canada Import and Export? 332
Business Connection: What a Difference a Few Years Make in Glossary 393
Business and Politics 334
14.2 International Trade Agreements 336 Index 396
What Has Been the Impact of International Trade
on Canada? 336 Chapters in Review
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About the Authors
Robert L. Sexton is Distinguished Professor of Economics at Pepperdine University.

Professor Sexton has also been a Visiting Professor at the University of California at
Los Angeles in the Anderson Graduate School of Management and the Department
of Economics.
Professor Sexton’s research ranges across many fields of economics: economics edu-
cation, labour economics, environmental economics, law and economics, and economic
history. He has written several books and been published in many top economic jour-
Pepperdine University
nals such as the American Economic Review, the Southern Economic Journal, Economics
Letters, the Journal of Urban Economics, and the Journal of Economic Education. Professor
Sexton has also written more than 100 other articles that have appeared in books, maga-
zines, and newspapers.
Professor Sexton received the Pepperdine Professor of the Year Award in 1991, the
Harriet and Charles Luckman Teaching Fellow in 1994, the Tyles Professor of the Year
in 1997, and the Howard A. White Award for Teaching Excellence in 2011.
Peter N. Fortura earned his undergraduate degree from Brock University, where he
was awarded the Vice-Chancellor’s Medal for academic achievement, and his Master
of Arts from the University of Western Ontario in London, Ontario. He has taught
economics at Algonquin College in Ottawa for over 20 years. Prior to that, he was an
economist in the International Department of the Bank of Canada in Ottawa.
Professor Fortura has published articles on Canadian housing prices, Canada’s auto-
motive industry, and Canada’s international competitiveness. As well, he is an author
of the Study Guide to accompany Principles of Macroeconomics by Mankiw, Kneebone,
Peter Fortura
and McKenzie (Nelson Education, 7th edition), and co-author of the statistics textbook
Contemporary Business Statistics with Canadian Applications (Pearson, 3rd edition).
He lives in Ottawa with his wife, Cynthia, and their children, Laura and Nicholas.
Colin C. Kovacs received his Master of Arts degree from Queen’s University after
completing his Bachelor of Arts degree at the University of Western Ontario. He has
taught economics, statistics, and finance for nearly 25 years at both the DeVry College
of Technology in Toronto and Algonquin College in Ottawa. His research papers have
included Determinants of Labour Force Participation Among Older Males in Canada and
Minimum Wage—The Past and Future for Ontario.
He lives in Ottawa with his wife, Lindsay, and their children, Rowan, Seth, and
Myles.
Algonquin College
NEL ix
Preface
Exploring Macroeconomics, Fifth Canadian Edition, offers students a lively, back-to-the-

basics approach designed to take the intimidation out of economics. With its short, self-
contained active learning units and its carefully chosen pedagogy, graphs, and photos, this
text helps students master and retain the principles of economics. In addition, the current-
events focus and modular format of presenting information makes Exploring Macroeconomics
a very student-accessible and user-friendly text. Driven by more than 70 years of combined
experience teaching the economic principles course, the d edication and enthusiasm of Bob
Sexton, Peter Fortura, and Colin Kovacs shine through in Exploring Macroeconomics.
New To The FIFTH Canadian Edition

Overall Highlights
As with previous editions of Exploring Macroeconomics, attention has been paid to the
structure and layout of each chapter to ensure that the material is presented in as clear
and consistent a manner as possible. In addition, special attention has been given to the
numerous examples and illustrations presented in each chapter to ensure they are mean-
ingful and relevant to today’s student.
The end-of-chapter For Your Review questions and problems have been continued
in this edition. Blueprint Problems, the review feature introduced in the previous edi-
tion, have been retained and have undergone revision to ensure they continue to pro-
vide relevant and meaningful insight into the methodologies surrounding key economic
concepts. As in the previous edition, all Blueprint Problems are accompanied by full and
annotated solutions.
Also returning in this fifth edition are the Debate and Business Connection features.
Both have undergone revision and updating. While their content has been revised, the
purpose of each feature remains the same—Debate features are designed to promote
in-class discussion and self-exploration, and Business Connection features are designed to
highlight the link between economic theory and business principles.
Finally, where relevant, Canadian content has been added and all statistical infor-
mation has been updated. For example, the data accompanying the discussion of
unemployment, inflation, and economic growth in Chapter 5 has been updated to
include the most recent figures available and expanded to cover a variety of other econ-
omies. The addition of international data gives the reader the opportunity to evaluate
the performance of the Canadian economy from a global perspective, thereby deepening
understanding of these central macroeconomic goals.
Chapter Highlights
Chapter 4: Bringing Supply and Demand Together
In this chapter, readers will find an expanded discussion of the existence of price con-
trols in the Canadian economy. An investigation of Canadian dairy production and the
pricing of dairy products in Canada are provided, giving the reader a more in-depth
understanding of this key topic and how it impacts the efficiency of market forces in
Canada.
x NEL
Preface xi
Chapter 5: Introduction to the Macroeconomy

International unemployment, the inflation rate, and economic growth data have been
integrated into the domestic discussion of these three central economic topics. Their
inclusion provides a valuable global context in which the performance of the Canadian
economy can be better evaluated. A second feature added to Chapter 5 relates to the
accuracy of the Consumer Price Index (CPI) as a measure of prices and of price level
changes. This added discussion provides necessary insight into the complexities involved
in measuring changes to an economies price level using the CPI methodology.
Chapter 6: Measuring Economic Performance

The discussion detailing the income approach to calculating gross domestic product has
been re-worked in the latest edition of this chapter. This revised discussion provides
greater clarity and detail to this key measure of economic performance.
Chapter 7: Economic Growth in the Global Economy

An expanded discussion explaining the impact of physical capital on labour productivity
is now part of the Determinants of Economic Growth section of Chapter 7. In addition,
a detailed numerical example accompanies the discussion to provide valuable illustration
and clarification.
Chapter 11: Money and the Banking System

Greater detail has been added to the section outlining the evolution of the monetary
aggregates M2 and M2+ in Canada. This added detail provides valuable insight into the
evolving nature of savings among Canadian households.
Chapter 13: Monetary Policy

The nonconventional forms of monetary policy that emerged as a result of the global
financial crisis are acknowledged and detailed in the newly expanded discussion of
monetary policy.
Features Of The Book

The Section-by-Section Approach
Exploring Macroeconomics uses a section-by-section approach in which economic ideas
and concepts are presented in short, self-contained units rather than in large blocks of
text. Each chapter is composed of approximately four to six bite-sized sections, with
each section typically presented in two to eight pages that include all of the relevant
graphs, tables, applications, features, photos, and definitions for the topic at hand. Our
enthusiasm for and dedication to this approach stems from studying research on learning
theory, which indicates that students retain information much better when it is broken
down into short, intense, and exciting bursts of “digestible” information. Students prefer
information divided into smaller, self-contained sections that are less overwhelming,
more manageable, and easier to review before going on to new material. In short, stu-
dents will be more successful in mastering and retaining economic principles using this
approach, which is distinctly more compatible with modern communication styles.
But students aren’t the only ones to benefit from this approach. The self-contained
sections allow instructors greater ﬂexibility in planning their courses. They can simply
select or delete sections of the text as it fits their syllabus.
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xii Preface
Highlighted Learning Tools

Key Questions Each section begins with key questions
designed to preview ideas and to pique students’ interest in
the material to come. These questions are then used to struc-
ture the section material that follows, each question being
prominently displayed as a section heading, with additional
subheadings provided as needed. In addition to ensuring a
clear instructional layout of each section and chapter, these
key questions can also be used by students as a review resource.
After reading the section material, if students are able to answer
the key questions, they can go forward with confidence.
Section Checks A Section Check appears at the end of

each section and is designed to summarize the answers to
the key questions posed at the beginning of the section.
The summaries provided by the Section Check give students
an opportunity to evaluate their understanding of major
ideas before proceeding.
Debate Features Debate features are designed to

rovide students with an opportunity to develop and
p
express their opinions about a variety of economic issues.
The “For” and “Against” arguments that accompany each
debate topic make it easy to use these features to initiate
in-class discussions. By engaging in informal debate
regarding current economic policy, students will be able to
link course content to current events as well as to their own
personal lives. Questions have been added to encourage
critical thinking.
Business Connection Features Business Connection

features are designed to help students see the link between
economic theory and business fundamentals. They help
students better understand the reasoning behind the empirical
validity of economic theory and also aid in the grounding
of abstract economic theory in modern business principles.
Accompanying each Business Connection feature are questions
that can be used to either evaluate student understanding or
initiate in-class discussion.
NEL
Preface xiii
Photos Exploring Macroeconomics contains a large

number of colourful photos, which are an integral
part of the book for both learning and motivation.
The photos are carefully placed where they reinforce
important concepts, and they are accompanied by
captions designed to extend students’ understanding of
particular ideas.
For Your Review Provided at the end of each chapter,

these problems allow students to test their understanding
of chapter concepts. The For Your Review problems are
organized into sections to match the corresponding
sections in the text so that students and instructors can
easily identify particular topics. To assist in the learning
process, solutions to all odd-numbered problems are
provided at the back of the text. With a variety of both
problems and application-style questions to choose from,
this section can also be used by instructors to assign
homework directly from the text.
Blueprint Problems Integrated into the end-of-

chapter For Your Review sections, these fully annotated
problems and their solutions are intended to provide
additional insight into key economic topics and issues.
Intentionally designed to mirror the accompanying For
Your Review problems, each Blueprint Problem allows
students to “walk through” a complete solution, seeing
the essential steps necessary to successfully complete a
key economic question.
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xiv Preface
Chapter in Review Cards Located at the back of

the textbook, these detachable Chapter in Review cards
are designed to give students a summary overview of key
chapter concepts at a glance. Each Chapter in Review card
contains the following information:
• Chapter Summary A point-form summary response
to the section’s key questions, highlighting the most
important concepts of each section, is provided.
• Key Terms A list of key terms allows students to test
their mastery of new concepts. Both the definition and
the page number are included so that students can easily
find a key term in a chapter.
• Key Exhibits/Graphs Given the importance and
explanatory ability of exhibits and graphical representa-
tions in economics, a list of key figures is provided for
each chapter.
• Key Equations A list of key equations enables students
to quickly refer to important formulas.
INSTRUCTORS
The Nelson Education Teaching Advantage (NETA) program delivers research-based
instructor’s resources that promote student engagement and higher-order thinking
to enable the success of Canadian students and educators. Be sure to visit Nelson
Education’s Inspired Instruction website at www.nelson.com/inspired to find out more
about NETA. Don’t miss the testimonials of instructors who have used NETA supple-
ments and watched student engagement increase!
The following instructor’s resources have been created for Exploring Macroeconomics,
Fifth Canadian Edition. Access these ultimate tools for customizing lectures and presen-
tations at www.nelson.com/instructor.
Instructor’s Solutions Manual: Answers to all For Your Review questions in the textbook
are provided in this manual, now separated from the Instructor’s Manual for easier
reference. Students can access only the odd-numbered solutions in the Answer Key at the
back of the book. The solutions were prepared by the text co-author, Colin Kovacs, and
independently checked for accuracy by Racquel Lindsay, University of Toronto.
NETA Test Bank: This resource was prepared by Russell Turner, Fleming College. It
includes over 1775 multiple-choice questions written according to NETA guidelines
for effective construction and development of higher-order questions. Also included are
more than 290 true/false and more than 130 essay-type questions.
The NETA Test Bank is available in a new, cloud-based platform. Nelson Testing
Powered by Cognero® is a secure online testing system that allows you to author, edit,
and manage test bank content from any place you have Internet access. No special
installations or downloads are needed, and the desktop-inspired interface, with its
drop-down menus and familiar, intuitive tools, allows you to create and manage tests
with ease. You can create multiple test versions in an instant, and import or export
content into other systems. Tests can be delivered from your learning management
system, your classroom, or wherever you want. Nelson Testing Powered by Cognero for
NEL
Preface xv
Exploring Macroeconomics can also be accessed through http://www.nelson.com/login

and http://login.cengage.com. Printable versions of the Test Bank in Word and PDF
versions are available with the instructor’s resources for the textbook.
NETA PowerPoint: Microsoft® PowerPoint® lecture slides for every chapter have been
adapted by Ifeanyichukwu Uzoka of Sheridan College. We offer two separate collections.
The Basic PowerPoint collection contains an average of 40 slides per chapter. This col-
lection is a basic outline of the chapter and contains key figures, tables, and photographs
from the fifth Canadian edition of Exploring Macroeconomics. The Expanded PowerPoint
collection includes an average of 60 slides per chapter and provides a more complete
overview of the chapter. NETA principles of clear design and engaging content have
been incorporated throughout, making it simple for instructors to customize the deck
for their courses.
Image Library: This resource consists of digital copies of figures, short tables, and
photographs used in the book. Instructors may use these images to customize the NETA
PowerPoint or create their own PowerPoint presentations.
Instructor’s Manual: The Instructor’s Manual to accompany Exploring Macroeconomics,
Fifth Canadian Edition, has been prepared by Phil Ghayad and Michel Mayer of
Dawson College. This manual is organized according to the textbook chapters and
includes teaching tips and active learning exercises. (Answers to all For Your Review
exercises in the text are now provided in the separate Instructor’s Solutions Manual
supplement described earlier.)
DayOne: Day One—Prof InClass is a PowerPoint presentation that instructors can cus-
tomize to orient students to the class and their textbook at the beginning of the course.
Aplia 1 MindTap
MindTap is the digital platform that propels students from memorization to mastery,
helping to challenge them, build their confidence, and empower them to be unstop-
pable. ApliaTM is an application in the MindTap platform that has proven to significantly
improve outcomes and elevate thinking by increasing student effort and engagement.
Aplia makes it easy to assign frequent online homework assignments and assessments,
ensuring students master important concepts. Developed by teachers, Aplia assignments
connect concepts to the real world and focus on the unique course challenges faced by
students. The MindTap content for Exploring Macroeconomics, Fifth Canadian Edition,
was updated and revised by Jason Dean of Sheridan College. The Aplia problems for
Exploring Macroeconomics, Fifth Canadian Edition, were updated and revised by Hanika
Bhojwani-Chen of Centennial College.
The challenging and interactive activities within Aplia guide students through
assignments, moving them from basic knowledge and understanding to application and
practice. Look for the Aplia logo in the MindTap app dock to explore all that Aplia has
to offer. With Aplia, instructors can do the following:
• easily set their course with pre-built, flexible homework assignments;
• author questions (single choice, multiple choice, true/false, essay and numeric entry);
• create custom assignments and populate them with self-authored—and Aplia-
authored—questions; and
• inspire students to learn from their mistakes and reward them for effort with the Grade
It Now feature that enables three attempts at different versions of a question.
NEL
xvi Preface
Student Ancillaries
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NEL
Acknowledgments
Producing the fifth Canadian edition of Exploring Macroeconomics has truly been a
team effort. We would like to thank the editorial, production, and marketing teams at
Nelson Education for their hard work and effort. First, our appreciation goes to Claudine
O’Donnell, Vice President, Product Solutions, who has provided the vision and leader-
ship for the Canadian editions of the text.
We would like to thank Katherine Baker-Ross, publisher at Nelson, for her con-
tinuing support. Thank you to Katherine Goodes, Content Manager, for her helpful
advice and constant encouragement. Thanks also to Imoinda Romain, Senior Production
Project Manager; June Trusty, Copy Editor; Marcia Siekowski, Marketing Manager; and
all the marketing and sales representatives at Nelson. Special thanks are extended to
Darren Chapman at Fanshawe College for providing the engaging and insightful Business
Connection and Debate features.
We are grateful to our families for their patience and encouragement.
Finally, we would like to acknowledge the reviewers of the Canadian editions, past
and present, for their comments and feedback:
Sarah Arliss, Seneca College

Vick Barylak, Sheridan College
Aurelia Best, Centennial College
Ramesh Bhardwaj, George Brown College
Michael Bozzo, Mohawk College
Jim Butko, Niagara College
Lewis Callahan, Lethbridge College
Darren Chapman, Fanshawe College
Robert Dale, Algonquin College
Carol Derksen, Red River College
Jeffrey Dzikowicz, Red River College
Bruno Fullone, George Brown College
Alexander Gainer, University of Alberta
Phillipe Ghayad, Dawson College
James Hnatchuk, Champlain College Saint-Lambert
Michael Leonard, Kwantlen Polytechnic University
Margaret Rose Olfert, University of Saskatchewan
Geoffrey Prince, Centennial College
Norm Smith, Georgian College
Martha Spence, Confederation College
Sarah J. Stevens, Georgian College
Carl Weston, Mohawk College
Their thoughtful suggestions were very important to us in providing input and useful
examples for the fifth Canadian edition of this book.
P.N.F.
c.c.k.
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chapter
1
The Role and Method
of Economics
1.1 ECONOMICS: A BRIEF INTRODUCTION 1.6 INCENTIVES MATTER (Page 19)

(Page 1)
1.7 SPECIALIZATION AND TRADE (Page 21)
1.2 ECONOMIC THEORY (Page 4)
1.8 THE THREE ECONOMIC QUESTIONS EVERY
1.3 SCARCITY (Page 10) SOCIETY FACES (Page 23)
1.4 OPPORTUNITY COST (Page 12) APPENDIX: WORKING WITH GRAPHS

(Page 32)
1.5 MARGINAL THINKING (Page 15)
section
Economics: A Brief Introduction 1.1
•• What is economics?
•• Why study economics?
•• What distinguishes macroeconomics from microeconomics?
What is Economics?
Some individuals think economics involves the study of the stock market and corpo-
rate finance, and it does—in part. Others think that economics is concerned with the
wise use of money and other matters of personal finance, and it is—in part. Still others
think that economics involves forecasting or predicting what business conditions will
be like in the future, and again, it does—in part.
Growing Wants and Scarce Resources economics

Precisely defined, economics is the study of the allocation of our limited resources to the study of the allocation of our
limited resources to satisfy our
satisfy our unlimited wants. Resources are inputs—such as land, human effort and unlimited wants
skills, and machines and factories—used to produce goods and services. The problem
is that our wants exceed our limited resources, a fact that we call scarcity. Scarcity forces resources
inputs used to produce goods
us to make choices on how to best use our limited resources. This is the economic and services
problem: Scarcity forces us to choose, and choices are costly because we must give
up other opportunities that we value. This economizing problem is evident in every the economic problem
Scarcity forces us to choose,
aspect of our lives. Choosing between a trip to the gym or the coffee shop, or between and choices are costly because
finishing an assignment or chatting online, can be understood more easily when one we must give up other oppor-
has a good handle on the “economic way of thinking.” tunities that we value.
NEL 1
Copyright 2020 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content
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Exploring Macroeconomics
2 Chapter one | The Role and Method of Economics
Economics Is All Around Us

Although many things that we desire in life are con-
sidered to be “noneconomic,” economics concerns
anything that is considered worthwhile to some
human being. For instance, love, sexual activity,
and religion have value for most people. Even these
have an economic dimension. Consider love and
sex, for example. One product of love—the insti-
Anatoliy Babiy/iStock/Thinkstock
tution of the family—is an important economic

decision-making unit. Also, sexual activity results
in the birth of children, one of the most impor-
tant “goods” that many humans want. Economic
forces have played a central role in the evolution
of the family unit, from the traditional “nuclear
family” (Dad, Mom, and two kids) to dual-income
Articles related to economics— families, to dual-income no-kids (DINKs) families. Concerns for spiritual matters
either directly or indirectly—
are common in the news
have likewise received economists’ scrutiny, as they have led to the development of
media. News headlines might institutions such as churches, mosques, and temples that provide religious and spiritual
trumpet: Gasoline Prices services. These services are goods that many people want.
Soar; Stocks Rise; Stocks Even time has an economic dimension. In fact, perhaps the most precious
Fall; Prime Minister Vows to
Increase National Defence single resource is time. We all have the same limited amount of time per day, and how
Spending; Health-Care Costs we divide our time between work and leisure (including perhaps study, sleep, exercise,
Continue to Rise. etc.) is a distinctly economic matter. If we choose more work, we must sacrifice leisure.
If we choose to study, we must sacrifice time with friends, or time spent sleeping or
watching TV. Virtually everything we decide to do, then, has an economic dimension.
Living in a world of scarcity involves trade-offs. As you are reading this text, you are
giving up other things you value, such as shopping, spending time on Facebook, text mes-
saging with friends, going to the movies, sleeping, or working out. When we know what
the trade-offs are, we can make better choices from the options all around us, every day.
Why Study Economics?

Among the many good reasons to study economics, perhaps the best reason is that so
many of the things of concern in the world around us are at least partly economic in
character. A quick look at media headlines reveals the vast range of problems that are
related to economics—global warming, health care, education, and social assistance.
The study of economics improves your understanding of these concerns. A student
of economics becomes aware that, at a basic level, much of economic life involves
choosing among alternative possible courses of action—making choices between
our conflicting wants and desires in a world of scarcity. Economics provides some clues
as to how to intelligently evaluate these options and determine the most appropriate
choices in given situations. But economists learn quickly that there are seldom easy,
clear-cut solutions to the problems we face: The easy problems were solved long ago!
Many students take introductory postsecondary economics courses because these
are part of the core curriculum requirements. But why do the committees that establish
these requirements include economics? In part, economics helps develop a disciplined
method of thinking about problems as opposed to simply memorizing solutions. The
problem-solving tools you will develop by studying economics will prove valuable to you
in both your personal and professional life, regardless of your career choice. In short, the
study of economics provides a systematic, disciplined way of thinking.
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Economics: A Brief Introduction 3
Using This Stuff

The basic tools of economics are valuable to people in all walks of life and in all career
paths. Journalists benefit from economics because the problem-solving perspective
it teaches trains them to ask intelligent questions whose answers will better inform
their readers. Engineers, architects, and contractors usually have alternative ways to
build. Architects learn to combine technical expertise and artistry with the limita-
tions imposed by finite resources. That is, they learn how to evaluate their options
from an economic perspective. Business owners face similar problems, because costs
are a constraint in both creating and marketing a new product. Will the added cost of
developing a new and improved product be outweighed by the added sales revenues
that are expected to result? Economists can, however, pose these questions and provide
criteria that business owners can use in evaluating the appropriateness of one design as
compared to another. The point is that the economic way of thinking causes those in
many types of fields to ask the right kind of questions.
What Distinguishes Macroeconomics from

Microeconomics?
Like psychology, sociology, anthropology, and political science, economics is considered
a social science. Economics, like the other social sciences, is concerned with reaching
generalizations about human behaviour. Economics is the study of people. It is the
social science that studies the choices people make in a world of limited resources.
Economics and the other social sciences often complement one another. For
example, a political scientist might examine the process that led to the adoption of a
certain tax policy, whereas an economist might analyze the impact of that tax policy. Or,
whereas a psychologist may try to figure out what makes the criminal mind work, an
economist might study the factors causing a change in the crime rate. Social scientists, macroeconomics
then, may be studying the same issue but from different perspectives. the study of the aggregate
Conventionally, we distinguish two main branches of economics: macroeconomics economy, including the topics
and microeconomics. Macroeconomics is the study of the aggregate or total economy; of inflation, unemployment, and
economic growth
it looks at economic problems as they influence the whole of society. Topics covered
in macroeconomics include discussions of inflation, unemployment, business cycles, aggregate
and economic growth. Microeconomics is the study of the smaller units within the the total amount—such as the
aggregate level of output
economy. Topics include the decision-making behaviour of firms and households and
their interaction in markets for particular goods or services. Microeconomic topics also microeconomics
include discussions of health care, agricultural subsidies, the price of everyday items the study of the smaller units
within the economy, including
such as running shoes, the distribution of income, and the impact of labour unions on the topics of household and firm
wages. To put it simply, microeconomics looks at the trees whereas macroeconomics behaviour and how they interact
looks at the forest. in the marketplace
Section Check
■■ Economics is the study of the allocation of our limited resources to satisfy our
unlimited wants.
■■ Economics is a problem-solving social science that teaches you how to ask
intelligent questions.
■■ Macroeconomics deals with the aggregate, or total, economy, while micro-
economics focuses on smaller units within the economy.
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4 Chapter one | The Role and Method of Economics
section
1.2 Economic Theory
•• What are economic theories?
•• Why do we need to abstract?
•• What is a hypothesis?
•• What is the ceteris paribus assumption?
•• Why are observations and predictions harder in the social sciences?
•• What distinguishes between correlation and causation?
•• What are positive analysis and normative analysis?
What are Economic Theories?

theory A theory is an established explanation that accounts for known facts or phenomena.
an established explanation that Specifically, economic theories are statements or propositions about patterns of human
accounts for known facts or
behaviour that are expected to take place under certain circumstances. These theories
phenomena
help us to sort out and understand the complexities of economic behaviour. We expect
a good theory to explain and predict well. A good economic theory, then, should help
us to better understand and, ideally, predict human economic behaviour.
Why do we Need to Abstract?

How is economic theory like Economic theories cannot realistically include every event that has ever occurred. This is
a GPS? Because of the com- true for the same reason that a newspaper or history book does not include every world
plexity of human behaviour,
economists must abstract to
event that has ever happened. We must abstract. Without abstraction or simplification,
focus on the most important the world is too complex to analyze.
components of a particular Economic theories and models make some unrealistic assumptions. For example, we
problem. This is similar to
how a GPS highlights the
may assume there are only two countries in the world, producing two goods. Obviously,
important information (and this is an abstraction from the real world. But if we can understand trade in a simpli-
does not register many minor fied world, it will help us understand trade in a more complex world. Similarly, some-
details) to help people get times economists make very strong assumptions, such as the assumption that all people
from here to there.
seek self-betterment or all firms attempt to
maximize profits. That is, economists use
simplifying assumptions in their models to
make the world more comprehendible. But
only when we test our models using these
assumptions can we find out if they are too
simplified or too limiting.
How are economic theories and models
like a road map? A road map of Canada may
not include every creek, ridge, and valley
between Vancouver and Halifax—indeed,
Rafal Olechowski/iStock / Thinkstock
such an all-inclusive map would be too com-

plicated and confusing to be of much value.
However, a GPS programmed to guide
the traveller while referencing key details
encountered along the way, such as highways
and major attractions, will provide enough
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Economic Theory 5
information to travel by car from Vancouver to Halifax. Likewise, an economic theory

provides a broad view, not a detailed examination, of human economic behaviour.
What is a Hypothesis?
The beginning of any theory is a hypothesis, a testable proposition that makes some hypothesis
type of prediction about behaviour in response to certain changes in conditions. In eco- a testable proposition
nomic theory, a hypothesis is a testable prediction about how people will behave or react
to a change in economic circumstances. For example, if the price of iPads increased, we
might hypothesize that fewer iPads would be sold, or if the price of iPads fell, we might
hypothesize that more iPads would be sold. Once a hypothesis is stated, it is tested by
comparing what it predicts will happen to what actually happens.
Using Empirical Analysis

To see whether a hypothesis is valid, we must engage in an empirical analysis. That is, empirical analysis
we must examine the data to see whether the hypothesis fits well with the facts. If the the examination of data to see
whether the hypothesis fits well
hypothesis is consistent with real-world observations, it is accepted; if it does not fit
with the facts
well with the facts, it is “back to the drawing board.”
Determining whether a hypothesis is acceptable is more difficult in economics than
it is in the natural or physical sciences. Chemists, for example, can observe chemical
reactions under laboratory conditions. They can alter the environment to meet the
assumptions of the hypothesis and can readily manipulate the variables (chemicals, tem-
peratures, and so on) crucial to the proposed relationship. Such controlled experimenta-
tion is seldom possible in economics. The laboratory of economists is usually the real
world. Unlike a chemistry lab, economists cannot easily control all the other variables
that might influence human behaviour.
From Hypothesis to Theory

After gathering their data, economic researchers must then evaluate the results to
determine whether the hypothesis is supported or refuted. If supported, the hypothesis
can then be tentatively accepted as an economic theory.
Economic theories are always on probation. A hypothesis is constantly being tested
against empirical findings. Do the observed findings support the prediction? When a
hypothesis survives a number of tests, it is accepted until it no longer predicts well.
What is the Ceteris Paribus Assumption?

Virtually all economic theories share a condition usually expressed by use of the
Latin expression ceteris paribus. This roughly means “let everything else be equal” ceteris paribus
or “holding everything else constant.” In trying to assess the effect of one variable on holding everything else constant
another, we must isolate their relationship from other events that might also influence
the situation that the theory tries to explain or predict. To make this clearer, we will
illustrate this concept with a couple of examples.
Suppose you develop your own theory describing the relationship between studying
and exam performance: If I study harder, I will perform better on the test. That sounds
logical, right? Holding other things constant (ceteris paribus), this is likely to be true.
However, what if you studied harder but inadvertently overslept the day of the exam?
What if you were so sleepy during the test that you could not think clearly? Or what if
you studied the wrong material? Although it may look as if additional studying did not
improve your performance, the real problem may lie in the impact of other variables,
such as sleep deficiency or how you studied.
NEL
Another random document with
no related content on Scribd:
Field-Marshal Oyama playing croquet during the Battle of Mukden,
the General in “Ole Luke Oie’s” brilliant sketch who fought and
worsted a trout in a pleasant garden whilst hundreds of men went to
their death—these are but the symbols of a state of mental
detachment which is essential in the modern General called upon to
handle vast masses of troops operating on a gigantic scale. To keep
his mind clear and unembarrassed by a host of details, to retain his
mental freshness against the moment when a supreme decision, or
maybe a series of supreme decisions, has to be taken, the modern
Commander-in-Chief must delegate much more of his powers than
formerly, must relinquish a great measure of his direct personal
influence on his men.
The influence of the great modern General will always be indirect
rather than direct. Comparatively few of the German troops fighting
on the Western front had ever set eyes on Field-Marshal von
Hindenburg, save in pictures, yet, when the rumour ran in the spring
that he was coming to assume the supreme command in Flanders,
the men in the trenches set up notices on the parapets announcing
to the Engländer that Hindenburg was coming, and that the Germans
would be in Calais in a week.
“Daily Mail” phot.
The Chief.
The influence of Sir John French on the British Army in France is
as a strong leaven leavening the whole mass. The conditions of life
of an army in the field, a great host of men working to the same end,
the monotony of existence undisturbed by sex antagonism, united by
the risk of death common to all, make men as sensitive to the
transmission of influences as African tribes are to the transmission of
news. In the field a strong character will make itself felt in a week.
Imperceptibly, the men will begin to lean on qualities of
determination, courage, intuition. All these are attributes of Sir John
French, and they are, I believe, responsible, in quite an astonishing
degree, for the splendid tenacity, the unshakable optimism, of the
British Army in France.
Within his power, Sir John French has always sought to keep in
personal contact with the men in the firing-line. More than once, on
the retreat from Mons, the Commander-in-Chief might have been
seen to leave his car and sit down beside the exhausted troops
resting by the roadside, so tired that they did not care whether the
whole German Army was in the next field. He would remain there on
the dusty grass, and tell the men that it was only so many miles to
the next halt for the night, and spur them on to fresh efforts by his
generous praise of the splendid endurance they had shown up to
then. In a little he would have them on their feet again, foot-sore and
weary as they were, ready to face the world, if needs be, to win a pat
on the shoulder, a word of appreciation, from “Sir John.”
But the British Army in France has grown immeasurably since
those days when four divisions was England’s entire contribution to
the war on land. With the army of Mons, the Commander-in-Chief
might yet hope to be the John French of South Africa, where the
cavalry hailed the trim little man on the white horse as the harbinger
of stern, swift blows against the Boer, as the incorporation of dash,
decision, and resourcefulness. But with the great citizen army of to-
day, in which he counts divisions where before he counted
battalions, the British Generalissimo could not hope to keep in
personal touch in the same degree as was possible with the cavalry
in South Africa or with the little Expeditionary Force of August, 1914.
Nevertheless, Sir John French has never failed in this war to visit
formations that have distinguished themselves, and to express to
them personally his appreciation of their good work. I remember,
after the second battle of Ypres, receiving word that the
Commander-in-Chief would inspect some brigades of cavalry that
had held our line round Ypres on May 13, when the Germans made
their last and most violent attempt to burst through to the sea. It was
a fine, warm morning in June, a regular Aldershot review day,
though, Heaven knows! there was little enough of the red and gold of
Cæsar’s Camp or Laffan’s Plain about the squadrons in their war-
worn khaki drawn up in a square in a meadow by a country road.
The Commander of the Cavalry Corps was there, and the Divisional
General and the Brigadiers, and just in front, beside a fine, broad
Union Jack fluttering from a flagstaff planted on a farm-cart, Sir John
French, exquisitely neat, as usual, in his trim khaki, with four rows of
medal-ribbons, and immaculate brown field-boots, and a cane that
he swung as he talked.
The men stood easy, Lifeguards and Hussars and Dragoons,
dismounted as they had been at Ypres, their eyes on the soldierly
figure before them, their thoughts, I wager, away among the poppies
and the cornflowers of the salient where in their graves dead
comrades smiled in their last sleep at the recollection of the good
fight well fought. The Commander-in-Chief indulged in no rhetorics.
He, like the plain man he is, likes plain speaking. So he stood up
there against the farm-cart, and talked to the men in a clear, soldierly
voice, and as he spoke, lo! it was not the Commander-in-Chief
addressing his troops, but just John French of the 19th talking to his
cavalry, that cavalry he loved and made his life-work. There were no
tears, no elegiacs, but heartening words of praise for good service
stoutly rendered. There was, indeed, such perfect frankness in much
of what the Field-Marshal said that I remember the blue pencil of the
Censor cut furrows in the report of it I sent to my newspaper in
London.
As soon as a new body of troops arrives in France, whether
Territorials or Colonials or New Army, you may be sure that, before
very long, the Rolls Royce, flying the Union Jack from the roof—the
only car that may fly the old flag in France—will appear outside their
billets, and the Commander-in-Chief will descend to see for himself
what the new material is like. One has only to glance at his
despatches to see that he never fails to pay a tribute to good
qualities in new troops out from home. Real soldier that he is, he
always has a keen eye to the general appearance of the men,
knowing that the best soldiers are the men who, even in the rigour of
winter in the trenches, managed to preserve a cleanly appearance,
and who, right up in the firing-line, are as punctilious about saluting
as they would be in barracks at home. The Brigade of Guards, who
always pride themselves upon their personal neatness, set a fine
example to the army in this respect, and earned the approval of
every good soldier.
Sir John French has had many residences since he came to
France in August. Châteaux, farms, colleges, or other public
buildings, and the villas or town-houses of such local notabilities as
the Mayor, the lawyer, or the doctor, have afforded him hospitality
from the battle of Mons and the subsequent retreat down to the
stalemate of the war of positions which brought our General
Headquarters to anchor for a spell. But no matter where the
Commander-in-Chief has lived, though his house were French, its
atmosphere has always been wholly and essentially English. Thus,
at G.H.Q. in the little town of which I wrote in my last chapter, though
the large and stately rooms and rather florid furniture, the pictures
and statuary of the house in which he lives are bourgeois of the
bourgeois, they are powerless to dissipate the pleasant family air of
the place, the atmosphere of an English country seat in the shires.
It is a restful place. Though it shelters the brain of the army, there
is no rush or flurry, even when heavy fighting is toward. Deep
thinking and hard work are going on day and night between the four
walls of this plain, unpretentious house; but, save for the whirr of a
telephone now and then, or the arrival of a Staff car or a cyclist, only
the sentries at the gateway betoken the presence of the
Commander-in-Chief.
You enter from the street under one of those arched entries,
known as a porte cochère, found in all French towns. A small door,
with panels of frosted glass on the left of the entrance, gives access
to the hall, where the first thing to meet the eye is a pyramid of
parcels, gifts from home for the Field-Marshal and his troops, mostly
from unknown admirers. By every post these presents pour in, vivid
testimony of the loving solicitude wherewith the folks at home hang
on the life of the army in the field. Every imaginable kind of gift is
there—Bibles, Books of Common Prayer, blessed medals and
rosaries, charms of all sorts, “woollies” galore, socks and waistcoats
and comforters and mitts.
One day even Russia sent her tribute of admiration in the shape of
a little ikon of the far-famed Madonna of Kazan, before whose
bejewelled image in the Kazan Cathedral at Petrograd thousands of
suppliants kneel daily in silent prayer for the safe return of their loved
ones from the war. Truly there is a great sameness about certain
aspects of the war on both sides. I remember reading an amusing
appeal by Field-Marshal von Hindenburg to the correspondent of the
Neue Freie Presse, my old friend, Dr. Paul Goldmann, begging him
to tell people he did not want any more mitts or remedies against
rheumatism and chilblains.
A small room to the right of the hall is the A.D.C.’s (Aide-de-
Camp’s) room, where one of the four A.D.C.’s to the Commander-in-
Chief is always present. He is known as the A.D.C. on duty. He
remains in this room all day in attendance on the Commander-in-
Chief, receiving and transmitting messages, answering the
telephone on the desk at his elbow, dealing with applications for
interviews with “The Chief,” as he is called by his Staff, and receiving
visitors. A huge map of the whole zone of the British Army in France
hangs on the wall, and portraits of Sir John French and some of his
Generals, cut from French and English illustrated papers, have been
nailed up.
In the corner is a white door marked “private”. When a bell whirrs
the A.D.C. disappears through this door. It leads to the workroom of
the Commander-in-Chief.
A perfectly plain room, spacious and lofty, with large windows,
from its white walls and massive marble mantelpiece and large
mirror obviously the drawing-room of the house in other days, the big
maps hung all round the walls and spread over the very large plain
deal table, lend it an essentially business-like air. On the mantelpiece
a handsome Empire clock and some candelabra are the sole
ornaments in the room.
There is also a little illuminated card, headed “Nelson’s Prayer,”
that finely inspired supplication for victory which they found in the
great Admiral’s cabin on board his famous flagship after he received
his mortal wound. I have placed this beautiful prayer at the head of
this chapter, because its plain, direct appeal, its confidence, and its
dignity seem to me to be characteristic of the man on whom once
again the hopes of the whole British race are fixed. That little English
prayer is the only visible link between Sir John French and home in
his workroom in France.
The Commander-in-Chief spends the greater part of the day in this
room. It is a place of hard work, of deep concentration, of lightning
decisions on which hang the lives of thousands of men. You will find
him there at all hours, dapper, fresh, as young as the youngest of his
Staff, eternally giving the lie to his white hair and moustache. It is in
this room that most of his despatches are written, those models of
precise English that, without rhodomontade, false pathos, or
exaggeration, set forth their plain tale of glory to make the Empire
ring.
Sir John French always writes his own despatches. His warm
words of praise, his frank words of criticism, are absolutely the
expression of his own thoughts. When he has a despatch to write he
will shut himself up in this reposeful room for hours at a time,
neglecting his meals, working far into the night, until the last word is
written and his name affixed:
“Your Lordship’s most obedient servant,
“J. D. P. FRENCH,
“Field Marshal, Commanding-in-Chief,
British Army in the Field.”
In an army of hard workers, in the centre of the hive of industry
that is G.H.Q., no man works harder than “The Chief.” Breakfast at
the Commander-in-Chief’s is from 7.45 to 8.30, but long before that
time Sir John French is at his table studying the reports which have
arrived from the different armies during the night, and are awaiting
his perusal when he comes down in the morning. Half-past eight
finds Sir John at his place at the head of the breakfast-table, with a
cheery greeting for everyone there.
At a fixed hour there takes place the daily conference between the
Commander-in-Chief and the different heads of the services at
G.H.Q. The Generals arrive singly or in pairs from their offices, a
portfolio under their arm—the Adjutant-General, the Quartermaster-
General, the Chief of the General Staff, the Chief of Intelligence. For
an hour or more they are closeted singly or together with “The
Chief.” Operations past or future are discussed, the whole situation
along our front reviewed, guns, men, supplies, the enemy’s situation,
and his probable plans.
The distribution of the rest of the day depends largely on the
situation at the front. Once a movement has started and is
progressing favourably, a Commander-in-Chief’s work is done for the
time. Broadly speaking, it is the Commander-in-Chief who conceives
the strategy of an operation, it is the Chief of the General Staff who
works it out, while its tactical execution lies in the hands of the
General commanding the army to which the operation is confided.
He in turn leaves the carrying out of more detailed operations to the
Corps Commander, who delegates part of the yet more detailed
execution to the Divisional General, and he in his turn relinquishes
the details of the work of the battalions on the ground to the brigade
and battalion commanders.
Visits to the different army commanders in the field, the inspection
of troops who have come out of action, of reinforcements, of new
guns or appliances in the war of the trenches, interviews with visitors
at G.H.Q., French Generals, British liaison officers with the French
Army, or distinguished visitors from England, fill in the remainder of
Sir John French’s day. The arrival in the afternoon of the King’s
Messenger from London with despatches from the War Office and
the morning newspapers absorbs the rest of the time until dinner,
and often makes the Commander-in-Chief late for this meal, which,
by his express orders, is never delayed for him.
Sir John French presides over his small household at G.H.Q. in a
benevolent and paternal manner. All the members of his Personal
Staff are old friends of his, and were with the Field-Marshal in South
Africa. He calls them all by their Christian names, and each vies with
the other in his devoted loyalty to “The Chief.”
The genial, courtly presence of the man pervades his whole
environment. Is the situation ever so desperate, the fighting never so
severe, there is no fuss or flurry at the Commander-in-Chief’s. Even
during the retreat from Mons, when Headquarters was frequently
moved, when for days at a time neither the Commander-in-Chief nor
his Staff got even a few hours of unbroken rest, Sir John diffused
about him the same calm atmosphere. He would not allow the
overwhelming responsibility resting on his shoulders to overcloud the
existence of the others. At meals he was cheery and debonair as
usual, guiding the conversation into pleasant English channels, and
illuminating it with many anecdotes and witty sayings which his great
and retentive memory has stored up from an exceptionally busy life
and wide and varied reading.
More than once he astonished his Staff, at a critical moment, by
announcing that he would go for a walk. Picking up his old riding-
crop, he would stroll forth with one of the A.D.C.’s and walk for an
hour through the country lanes, stopping to admire the view, or to
criticize a horse, or to look at the crops. But on his return he would
go straight to his maps again, and then like a flash he would
announce his decision. “I will do this and that!” And they would
realize that whilst he had strolled and chatted his mind had been
wrestling with the military problem that had obsessed them all.
Dinner is a pleasant meal at the Commander-in-Chief’s. Often
there is a distinguished visitor from London present, a member of the
Cabinet who has come out to get a glimpse for himself of conditions
at the front, a leading scientific authority despatched on some
mission or other, distinguished ecclesiastics like the Bishop of
London or the Archbishop of Westminster. For many months the
Prince of Wales, as A.D.C. to the Commander-in-Chief, dined nightly
at Sir John’s table, a very charming, extremely natural young officer,
who was simply addressed as “Prince,” and who was best pleased
when no notice whatsoever was taken of his exalted rank. There is
never any formality about precedence at the Commander-in-Chief’s,
save that the guest of the evening sits on the right of the Field-
Marshal.
Under the eye of “The Chief.” Troops marching past Sir

John French at the Front.
Sir John French presides at his dinner-table with delightful
urbanity. Books and battlefields have been the study of his life. He
has, I believe, read all the histories of the campaigns of the world’s
great Generals, from Julius Cæsar’s Commentaries down to Ropes’s
History of the American Civil War, and the text-books on the Franco-
Prussian War, especially the German. But he does not believe in
reading alone. He is fond of quoting a saying of Lord Wolseley’s: “A
soldier ought to read little and think much.” In accordance with this
maxim, Sir John French has not only read but assimilated, and he
has done a great deal of both.
But the military authors have not alone engaged his attention. He
is a profound admirer of Dickens, and he can find suitable quotations
and similes from Dickens for the most varied situations of life. He is
not a great talker. He only speaks when he has something to say.
But that is always to the point, and often refreshingly original.
The Commander-in-Chief is a profound student of humanity. That
is why he admires Dickens. That is why he loves the British soldier,
with his whimsicalities and his contradictory ways. He knows the
British soldier as well as Lord Roberts knew him, and that is saying a
great deal. He understands the British soldier’s pride in his work, and
therefore he always gives credit where credit is due. When the
Suffolks under his command in South Africa walked into a hornets’
nest at Grassy Hill, Sir John French took the first opportunity that
presented itself—it was not until several months later that he met
them again—to tell them they were not to blame for what happened.
“It has come to my knowledge,” he said to them, “that there has
been spread about an idea that that event cast discredit of some sort
upon this gallant regiment. I want you to banish any such thoughts
from your mind as utterly untrue.... You must remember that, if we
always waited for an opportunity of certain success, we should do
nothing at all, and in war, fighting a brave enemy, it is absolutely
impossible to be sure of success. All we can do is to try our very best
to secure success—and that you did on the occasion I am speaking
of.” When the 2nd Worcesters saved the day at the first battle of
Ypres by recapturing Gheluvelt at the bayonet-point, the
Commander-in-Chief made every possible inquiry to find out the
name of the officer who had ordered the charge. The name of the
officer remained for a long time a regimental secret, but Sir John
French gave the gallant Worcesters a very fine “mention” all to
themselves in his despatch on the Ypres fighting. It was not until
months later that it was definitely established that the author of the
celebrated order was that most gallant soldier the late Brigadier-
General C. Fitzclarence, V.C., who was afterwards killed in action.
Thus, though Sir John French must fain deprive himself of the
privilege he would be the first to want to enjoy, of seeing his troops
actually at grips with the Germans, he is not simply a distant name, a
figure on an Olympic height, to the men in the trenches. He is a pillar
of strength, a man that soldiers trust, who voices to the great public
beyond this little zone of war the deeds that have won a soldier’s
approbation, or who gives vent in carefully chosen words to the
soldier’s execration of the cynical treachery of the enemy. The bond
uniting the Commander-in-Chief with the men in the field is not to be
analyzed, for it is intangible. But it is nevertheless a very real tie of
mutual esteem, trust, and affection.
Yet the army which in the fulness of time Sir John French has
been called upon to command is no longer the army of South Africa,
a small, highly trained band of professional soldiers whom the
Germans, on first meeting with them at Mons, dubbed in despair “an
army of non-commissioned officers.” Since the days of the Civil War
it is the first national army that England has ever had, and the
England that has put it in the field is the greater England of the
twentieth century, the British Empire, whose pioneers sprang from
that selfsame doughty stock that did not fear to lay hands on the
Lord’s Anointed if thereby liberty might live.
The army has flung wide its portals to the civilian. All barriers of
caste or wealth are broken down. The officer is no longer a member
of a small military oligarchy, nor the soldier the tough old
professional fighter of whom Kipling delighted to write. Mulvaney,
Learoyd, and Ortheris have not vanished from the army. But they
have vanished as average types. If they had escaped the destiny of
so many of the magnificent fighters of our original Expeditionary
Force, which was the quintessence of our standing army—six feet of
earth in Flanders or a long visit to Germany—the three friends of
Kipling’s tales would have passed out of their former sphere of
action. The incorrigible Mulvaney, maybe, might yet be a sergeant,
the backbone of his platoon, putting the new-comers, officers and
men alike, up to all the dodges of the trenches. But the other two
would surely be officers, with suspiciously new Sam Browne belts, a
little uncertain of their social position, but treated with all the more
deference for that by their fellow-officers.
Socially it is a topsy-turvy army. Learoyd is brigade machine-gun
officer with the Military Cross, and has already learned the proper
degree of nonchalance in returning the salutes of men who, in
civilian life, maybe, themselves were wont to command, who
perhaps even shared in that incomprehensible English prejudice
against the military which refused the red-coat a seat in the stalls of
a London theatre or a drink in the saloon bar of a public-house.
“When I went to see the old people in Yorkshire in my uniform for the
first time,” a fine old soldier of my acquaintance, a sergeant of the
Coldstreams with twenty-two years’ service, told me once, “my father
said: ‘I never thought boy of mine would disgrace the family by going
for a soldier. Get out of here, and never darken my doors again until
you have taken that red coat off!’”
Nous avons changé tout ça! The last shall be first and the first last
in this citizen army of ours. I know of a peer of the realm, an Earl
who is the head of one of the oldest families in the British Isles, who
is serving as orderly in a clearing hospital at the front. When last
seen he was whitewashing and whistling a little tune as he worked,
the bearer of one of our greatest names at the beck and call of the
humblest medical student with a commission in the R.A.M.C., but,
like the latter, filling his niche in the service of the State.
Could one imagine a more difficult task, amongst all the manifold
problems which have confronted us in this war, than the expansion
of the framework of our little Expeditionary Force to embrace these
hundreds of thousands of men, from England, Scotland, Wales, and
Ireland, from India and Canada, from South Africa and Australia,
from Fiji and the West Indies, with their varying ideas of personal
liberty and discipline? That this task has been successfully
accomplished is due, for one thing, to the fact that every man in our
army is an apostle, bearing within him a message of liberty to the
world, ready to subordinate every personal feeling to the end of
victory; for another, to the astonishing adaptability of our race, which
has enabled Lord Kitchener to stamp an army from the earth, and Sir
John French and his Generals to breathe into it the spirit of our great
military past.
If you took a small haberdasher in a London suburb and suddenly
increased his modest establishment until it reached the dimensions
of William Whiteley’s or of Harrod’s, would you blame the man if,
even with unlimited resources, he showed himself incapable of
achieving the same relative measure of success as he had attained
with his little shop? You know that you would not. You would rather
blame the lack of organization that had suddenly thrust enormously
increased responsibilities on a man who, had the process been
gradual, might have adapted himself to the growing dimensions of
his business. Yet this is what the country has thrust upon Sir John
French. He, a General, like all save the Balkan and Turkish
Generals, without any experience of modern European war, has
been called upon to meet in unequal combat the finest military brains
that the application of forty years can produce, with a sword that has
constantly changed its weight and balance and length and
sharpness.
He has sustained the ordeal. His adaptability of temperament and
breadth of outlook, for which all Britons may thank God, has enabled
him to cope with an army ten times the size of the little force which
he originally led out to France, and to surround himself with Generals
who have shown themselves able to handle divisions where before
they were dealing with battalions. Not only have the numbers of our
army increased; the quality of our men has changed. The sturdy
fighters of Mons and the Marne have been reinforced by Territorials
who are, generally speaking, of a higher stamp of intelligence, and
accordingly endowed with the good and bad fighting qualities which
the more trained intellect bestows, and the men of the New Army, in
which all types and classes of Briton are found side by side in the
ranks. Not only has the question of the right leading of these new
formations proved all-important, the problem of their assimilation into
the existing organization was one requiring tact and a fine
appreciation of the Imponderabilia of the situation. That it has been
successfully solved History, when it comes to review the world-
shaking events of our days, beside which man seems but the puniest
of pygmies, cannot fail to count to the merit of Sir John French.
To our citizen army, then, Sir John French is more than a
Commander-in-Chief. He is a national leader, the man to whom it is
given to direct that fount of ardent patriotism which has inspired
Britons, wherever the Union Jack flies, to lay down their work and
follow the drum. No man is more conscious of the responsibility
resting on his shoulders than Sir John French. No man is more
profoundly convinced of the justice of our cause. No man could
appreciate more gratefully the immense confidence which the nation
has reposed in him by entrusting to his care the greatest army that
the British Empire has ever put in the field.
CHAPTER IX
INTO THE FIRING-LINE
I never come upon the firing-line without a sense of surprise. Upon

eye and imagination alike it breaks with a sudden shock. You
emerge from a long communication trench, driven right through all
obstacles, now across a deserted highway with a vista of grass-
grown cobbles stretching away on either hand; now straight through
the vitals of a stricken farm, where the head is on a level with a floor
littered with rubbish, discarded equipment, rags, or empty ration-tins;
through the silent basse cour with its empty chicken-run, its deserted
pigeon-coop, its barns gaunt and blasted, its forlorn carts and rusting
machinery; through cornfields waist-high in a self-sown crop gay with
poppies and cornflowers.
Up these trenches, you may reflect as you trudge along with what
one might call a rabbit’s-eye view on either side, reliefs and rations
go up at dark, long files of silent men plodding through the summer
night with the frogs croaking in the marshes and the night-jars
creaking in the trees. Down these trenches come the men who have
done their spell of duty in the firing-line, muddy and unshaven and
laden with all kinds of personal belongings from a month-old copy of
the Sketch to a German cooking-pot, silently delighted at the
prospect of a few days’ respite from trench mortars and “whizz-
bangs” and bullets and vermin. Here, when fighting is toward, there
is a crush in the Strand on a Saturday night. In one direction go the
men bearing boxes of bombs and ammunition swiftly forward to the
firing-line, squeezing themselves back against the muddy walls on
the cry of “Gangway there!” to let orderlies with messages past; in
the other direction the wounded, roughly bandaged, make their
painful way back to the regimental aid-post or field ambulance. The
shells come crashing over in and around the trench, and the bullets
from the front line snap and whinny and whistle in the air as though
to proclaim to all men still alive that their mission is not yet
accomplished. But a little rain, and these trenches become first
quagmires of mud, the sticky whitish clay of Flanders, of which our
men speak with horror, or the browner soil of France, then stagnant
ponds, knee or even waist deep, in which men, walking alone and
struck down by shell or bullet, have been known to drown before
help could reach them.
But sombre thoughts have no place in the communication
trenches. The men you meet, passing up and down, are smiling. The
Adjutant, descending with mud-covered boots and puttees, his stout
broomstick in his hand, from his morning walk round his battalion’s
section of the line, gives you a cheery “Good-day!” after the etiquette
of officers when they meet out here. A working party, laden with
spades and saws and beams, who are marching in Indian file ahead
of you, are joking as they plod. One of them has a mouth-organ, and
is softly playing a little music-hall jingle as he walks:
“I’d like to be, I’d like to be,
I’d like to be right home in Dixie....”
As, with a whistling “whoosh,” a shell comes over from the deep
blue sky ahead, the music stops, the party stops, and the men,
turning with a common movement, crane their heads out of the
trench to see where the shell has fallen. Boom! ... the report comes
back, and a cloud of dense black smoke eddies out above a clump
of trees. “My word!” says the sergeant, “the brigade’s catching it to-
day and no mistake!” Then the party trudges on again down the
trench, while the crickets chirp noisily in the corn, and the musician
resumes his little tune:
“I’d like to be, I’d like to be,
I’d like to be right home in Dixie....”
Cheery and confident like all our men, they heed neither the
menace of death which those whistling shells convey nor the grim
signs that meet them on their way of the harvest the Reaper has
gathered in those peaceful cornfields. Here the trench passes a little
burial-ground in an orchard, lying between an old farm-house and its
deep broad moat, the branches of the apple and pear trees leaning
down until they seem to caress with their gnarled fingers the little
white crosses of the graves. Now the trench stops by a sunken ditch,
where a faint and horrible odour speaks of fallen Germans buried in
the slime. The men cross the ditch by its little bridge with
exaggerated sounds expressive of disgust, with a joke, in which
horror has no place. “Heute Dir, morgen mir” is the philosophy of the
trenches, and a laughing philosophy it is.
Some day a poet shall sing the song of the communication trench,
when peace has come back to the land and the long grasses,
springing up, have smothered the narrow way that once upon a time
led up to the fiery ordeal of battle. He shall tell of the men who dug
the trench by night, toiling in the silver radiance of the moon among
the eerie shadows flitting in and out of ruined hamlets and deserted
farms. He shall conjure up the hard, black silhouette of the group,
standing out against the light of the German star-shells soaring
skyward with a hissing screech, making the countryside as bright as
day.
His verse shall carry in its swing the dull thud of pick and shovel
on the soft ground blending with the hurried gasping of the machine-
guns and the crack of the rifles in the firing-line. He shall sing of the
men who have trodden the marshy bottom of the trench going gladly
forth into battle—of those who went up and came down, of those
who went up and were presently laid to rest in that earth to which, by
the Heavenly Will, all men must return. And for the brave smiles and
calm resolution those narrow ditches have seen, my poet shall sing
of them, not as a place of horror, not as the ante-chamber of death,
but as the strait path that leads to glory.
Imperceptibly the winding course of the communication trench
brings you nearer to noises of which you are aware without seeking
to fathom their meaning. There are sounds like those produced by
running a stick along an iron railing, there are individual, crisp noises
like the smack of a mass of butter on a marble slab, vague echoes in
the air like the rustling of gigantic wings, and here and there
explosions, now loud and insistent and close and terrifying, now
distant and muffled like the bark of an old dog. Then, as you realize
with a flash that these are the sounds of war, and begin to
distinguish between the rap-rap of the machine-gun, the hard
crepitation of the rifle-bullet, and the dull boom of a shell, you find
you are in the firing-line.
What the eye focusses is merely a scene of some disorder, where
the communication trench debouches into the open and fades away
opposite a line of sandbags. Here is all the bustle of the bivouac,
soldiers grouped about fires on which pots are simmering, others
polishing accoutrements, “cleaning up,” writing letters. But the eye
does not take in this picture. It is looking farther afield to where, on a
low platform behind a neat row of sandbags, the sentries are
standing immobile beside their rifles. Their bandoliers are strapped
across them, their bayonets are fixed. Their backs are turned to you.
They look forward with an air of strained attention. They are the look-
out men in the fire-trench.
Piles of sandbags and a great deal of timber-work, timber flooring,
and timber supports, as neat and prosaic as a street excavation in
London, is what the eye sees. But my first view of that line of men
standing on guard at the parapet stimulated my imagination more
than any other picture I have seen in this war; for I realized that
these quiet figures behind their stout rampart are the bulwark of our
civilization, an infinitesimal fraction of the line which the Allies have
flung from the Channel to the Alps.
“Our world has passed away,
In wantonness o’erthrown.
There is nothing left to-day
But steel and fire and stone.”
Here, in the firing-line, one stands on the ruins of that world of
ours, in Kipling’s fine symbolism, that passed away at the menace of
the Hun. The little strip of parapet before us, like all the rest of the
line winding its way from the sands of Nieuport to the frontier of
Switzerland, is the boundary-line between civilization and barbarism,
the bourne which marks the frontier between idealism and
materialism.
Beyond the parapet is broken ground, utterly uninteresting, utterly
prosaic, for all that it is the realm of death. Immediately in front of the
trench is barbed wire, new and taut and cleanly grey, fastened in a
perplexing criss-cross work to lines of stout wooden posts driven
deep in the ground; beyond that a stretch of flat field, of corn or
grass or stubble, with a ditch here and a tree there, and maybe a pile
of blackened bricks that once was a farm. Between corn and grass
and stubble the earth has been turned up in places—you may see it
brown or white beneath its cloak of scarlet poppies or azure
cornflowers. An irregular cluster of posts from which hang jagged
fragments of barbed wire, a whitish line in the ground marking an old
trench, something like an old grey coat lying humped up on the grass
or a pair of boots thrust out from a hole in the ground, which, if you
have seen a battlefield before, you know to be unburied corpses—all
these are relics of former fighting.
This sordid patch of ravaged fields is the theatre of war. These
crumbling ditches and broken posts, these obliterated farmsteads,
these lamentable dead, and, always opposite, the long, low line of
sandbags marking the German trenches, make up the setting of so
many great dramas in our history of to-day. On this scene our young
men gaze as they take a final look about them before plunging
forward to the assault that is to lead them to their death. In these
surroundings are performed those great deeds of gallantry which stir
our race to the core. Whether you are in Flanders or the Argonne, in
flat or undulating country, the space between the lines is always the
same. It is as dead as the castle of la Belle au Bois dormant, the
only truly neutral ground in Europe to-day.
An extraordinarily untidy-looking jumble of multi-coloured
sandbags, white and blue and green and stripey (like the ticking of a
mattress), marks the German line.
You will be disposed to think that the German trenches must be ill-
constructed until you have seen our line from the outside. Then you
will understand that, under the weight of the parapet and the
influence of the wet, sandbags get squeezed out of their regular line,
many besides being constantly ripped open by the bullets plunging
through their canvas into the mud within with a sharp smack.

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