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On Journalists' use of macroeconomic concepts.


Five macroeconomic concepts are presented which are prominent in the business

sections of newspapers, but which are not given equivalent prominence in

macroeconomic textbooks. These are the discouraged worker phenomenon, the use of inventories

in forecasting, the effect of changes in the money supply on the bond market, and the

effects of inflation and nominal interest rates in the foreign exchange market. These

concepts are presented via news clips illustrating the way they typically appear in the

press. Instructors are urged to place extra emphasis on these concepts.


It has become common for economics textbooks and instructors to use newspaper clippings to illustrate the application of economic concepts to the "real world." In addition to several readings books of newspaper articles, a modest journal literature has appeared on this topic: Kelley [1983] advocates having students make up their own economics newspaper by cutting and pasting from regular news sources; Wood [1985] discusses many facets of the connection between news coverage of economic events and economic education, drawing on his experience as a former reporter; Grunin and Lindauer [1986] describe a course in economic journalism; Boynton and Deissenberg [1987] extract a macroeconomic model implicit in newspaper commentary; and Cochran and Brown [1989] warn instructors to be alert to journalists' errors, for example. This literature tries in a variety of ways to address a common complaint, expressed cogently by Fels [1970, 41]: "we neither try nor succeed in training students to use economic principles to evaluate critically what they read in the popular press." This paper extends this literature in a new direction.

One of the many good reasons for supplementing economic instruction with newspaper clippings is to ensure that students can interpret and evaluate newspaper commentary on economic issues. It is therefore important that economic concepts prominent in news articles be given adequate stress by instructors, and in a way which illustrates how these concepts are used in newspapers. In this paper I note five applications of macroeconomic concepts which play prominent roles in the financial pages of newspapers, primarily because of their practical implications for the business world, but which are not given an equally prominent treatment by textbooks. Since so many of our students will find themselves in the business world after graduation, and so many more will retain contact with macroeconomics solely through newspaper commentary, these five concepts seem worthy of extra emphasis by instructors.

A second point I wish to stress is that it is not enough to provide this extra emphasis within the context of the traditional textbook development of these macroeconomic concepts; the traditional presentation must be supplemented with concrete examples illustrating how they are used in newspaper commentary, with particular reference to their practical implications. It is not unusual for journalists to write in a cryptic, metaphor-laden style that can disguise the macroeconomic concept being exploited, and, unlike textbooks, explanations are seldom offered. For this reason, I present these five concepts accompanied by one- or two-sentence newspaper clips(1) illustrating the way they typically appear in the press.

Most of the macroeconomic concepts playing prominent roles in newspaper commentary, such as the multiplier, monetary policy, and the Phillips curve, play equally prominent roles in macroeconomics textbooks. The five macroeconomic concepts discussed below were singled out because their textbook treatments are not commensurate with their importance in news reports and do not stress the potential roles these concepts can play in the interpretation of business-world events.

Quantitative verification of the statements in the preceding paragraph is not feasible. "Importance in news reports" is based on my subjective evaluation of the economic content of newspaper clippings, gleaned from over ten years of searching for items suitable for inclusion in Kennedy and Dorosh [1990]. In the macroeconomics half of the most recent (fourth) edition of this book there are over four hundred short clippings illustrating the way in which macroeconomic concepts appear in newspapers. "Textbook treatment" is also subjective, but has been buttressed by a careful examination of ten principles textbooks.(2) For each of the concepts described below a subjective summary of its textbook treatment is presented.


1. Using the Discouraged/Encouraged Worker Phenomenon to Explain Paradoxical Changes in Unemployment

Newspaper reports invariably talk about the measured unemployment rate, rather than the theoretical rate of unemployment which is the focus of macroeconomics textbooks. A major factor creating differences between the two is the discouraged/encouraged worker phenomenon. Discouraged workers are particularly prominent in newspaper commentary, mainly because opposition politicians are continually pointing out that discouraged workers cause official government unemployment figures to be underestimates of the "true" unemployment rate. A corollary of this is that the discouraged/encouraged worker phenomenon can explain paradoxical (and therefore potentially misleading) changes in the measured rate of unemployment. Four of the texts surveyed contained nothing on discouraged workers; the remaining six defined the concept and noted that it caused underestimation of the unemployment rate. None drew attention to the role it plays in explaining paradoxical changes in the measured rate of unemployment. Students are therefore given little help in interpreting news clips such as the following.

"We consider it entirely possible that

an 'encouraged worker effect' will set

in when employment picks up, which

could lead to a paradoxical rise in the

unemployment rate," he said.

For example, Canada's jobless rate fell

to 7.5 per cent last month, the lowest

number in two and a half years. But

if you think it's a sign that the

economy is suddenly moving up, look

again. In general, textbook discussions of unemployment tend to neglect the role played by the supply side of the labor market, particularly through changes in the participation rate, of which the discouraged/encouraged worker phenomenon is but one example. The following clips illustrate this, the second of which asks students to complete the logic being developed.

In any economic slowdown, the

unemployment rate rises, first and

foremost, because employment growth

slows or actually goes into negative

territory. But how high the jobless rate

goes can also depend very crucially

on exactly how fast the labor force

decides to grow.

The unemployment rate moved up to

7.8% (seasonally adjusted) from

April's 7.7%, but not because of job

losses. Indeed, employment rose by a

big 0.6% or 68,000 during the month.

However, that wasn't as big as...

2. Using Inventories to Forecast

In macroeconomic theory the most common role of inventories is as an ingredient in an economy's reaction to a demand shock--a change in inventories serves as a signal to producers to change their output level. Although this implies that inventory levels or changes could serve as a forecasting indicator, textbooks do not discuss this potential application. Three of the textbooks surveyed virtually ignored the role of inventories described above, five contained sketchy commentary on this role of inventories, and two provided a good discussion of how changing inventories fit into the reaction of an economy to a demand shock. Unfortunately, all of these texts, including the two spelling out clearly the role of inventories, failed to note that inventories can play a role in forecasting. This was true even for texts containing chapters on forecasting, of which there were two. In contrast, in newspaper commentary, inventory levels, and changes therein, are popular means of forecasting the future course of the economy, seemingly viewed with more confidence in this respect than are changes in either monetary or fiscal policy. The following clips illustrate the business world's use of inventory figures.

When the news of Wednesday's

numbers on the gross national product was

made public, stocks and bonds

immediately rose and the U.S. dollar

strengthened. Then, when analysis of

the numbers came in, the markets

went into reverse. The reason was that

the greater part of the improvement in

the quarter--$33.7 billion (U.S.) out of

a total GNP advance of $39.2

billion--came from additions to business


Until last week, the weight of

evidence seemed to be on the side of a

rapid cooling-off this winter of the

strong growth posted in the last three

months of 1987. A sharp downturn in

consumer spending in October and an

enormous build-up in inventories in

December caused many economists to

predict the five-year-long, consumer-led

recovery in the U.S. was running

out of gas.

Pedderson said the news on U.S.

growth and inflation "is cause for

some happiness." But he noted that

the latest gain was mainly due to an

increase of inventories, especially

unsold cars. This will translate into

slower growth in the second quarter,

he said.

3. The Impact of Changes in Money Supply Growth on the Bond Market.

Textbook macroeconomics is primarily concerned with the real rate of interest; the nominal rate follows by adding on the expected rate of inflation. In contrast, newspapers focus on the nominal rate of interest, because that is what is observed and because money can be made on the bond market by correctly predicting changes in the nominal interest rate. Furthermore, textbooks focus on the supply and demand for money, rather than on its mirror image, the bond market, which is the window through which the business community views the interest rate. Both these factors tend to isolate the economics textbooks from the business world.

Because of the potential for big capital gains and losses on the bond market, business sections of newspapers have frequent commentary on factors thought to affect the bond market. One prominent theme in this regard is the reaction of the business community to an increase in the supply of money. An increase in the money supply is extrapolated (rightly or wrongly) to an increase in the rate at which the money supply will be increased in the future, an increase in the inflation rate is therefore forecast, the nominal interest rate is predicted to rise because of this, and bond market activity results as agents seek to avoid the capital loss this would entail. Although textbooks provide the ingredients for this story, they do not draw any explicit connection between an increase in the rate of growth of the money supply and the bond market.

There are three main ingredients in this story. First is the (monetarist) relationship between the rate of growth of the money supply and inflation, which all of the texts surveyed recognized in one form or another. Second is the relationship between a rise in the rate of inflation and the nominal rate of interest. All texts surveyed defined the difference between the real and the nominal interest rate, six had a reasonably complete discussion of this phenomenon, but none drew any explicit connection between the rate of growth of the money supply and the nominal interest rate. Third is the relationship between the price of bonds and the interest rate. Four of the texts surveyed had a complete discussion of this relationship, but none noted the relationship this implied between inflation and the price of bonds, let alone any relationship that might exist between the rate of money supply growth and the price of bonds.

The following clips illustrate the kind of newspaper commentary that relates changes in money supply growth to the bond market.

A smaller than expected decrease in

the U.S. money supply dealt the North

American capital market a hard blow,

as bond prices sagged across a broad


One view in the market has been that

because the U.S. economy seemed

weaker than it should be, the U.S.

central bank, the Federal Reserve Board,

would cut its discount rate from 7.5

per cent. This, of course, would be

positive for bonds. On the other hand,

there have been those thinking that

rising money supply growth would

rule out such a discount rate


...the shock of Thursday's flash

second-quarter news that the U.S.

economy has grown three whole percentage

points. You and I would say that's

good news. But the bond market's

terrified interpretation last Thursday

was that it might encourage the

private sector to borrow, nudging up

interest rates. Add that discomforting

prospect to the other horrifying

disclosure--that, at last reading, U.S.

money supply had climbed by a

mammoth US $4.8 billion--and you'll

know why people were heading for

the U.S. and Canadian bond market


As far as the separate ingredients of the relationship described above are concerned, the business sections of newspapers use them continually, always implicitly focussing on the nominal rather than the real interest rate, in contrast to the usual textbook treatment. The following clip illustrates this clearly.

Corporate treasurers should not be

frightened by the recent rise in

interest rates on bonds. Rates of even 13

percent will look like bargains if

inflation heats up over the next 18

months. Investors should continue to

shun the market for long-term

securities. On the policy side, this focus on the nominal interest rate yields a useful perspective on the dilemma faced by monetary authorities when trying to lower interest rates, as the following two clips illustrate.

This brings us back to the fears of

higher interest rates before the market

break. These fears are still potent,

especially if investors see through the

temporary reduction in interest rates

made possible by stepping up the rate

of creation of the money supply.

Bouey said last month of Canadian

interest rates that "the extent to which

we can get them down and keep them

down depends mainly on getting the

rate of inflation down."

4. The Impact of Inflation on the Foreign Exchange Market

Because large sums of money can be made or lost through speculation in the foreign exchange market, business sections of newspapers frequently comment on factors thought to affect the future course of the exchange rate. Such commentary is concerned with the nominal exchange rate, rather than the "real" exchange rate that is implicitly the focus of macroeconomic textbooks. The main link between the two exchange rate concepts is the rate of inflation, or to be more precise, the difference between domestic and trading-partners inflations, a link captured analytically by the purchasing power parity theorem. In light of how fundamental the concept of purchasing power parity is to understanding exchange rates, it is surprising that only five of the ten texts surveyed define and discuss this concept. Three of these discussions, however, were quite complete, with explicit links drawn to implications for speculation on the foreign exchange market, the focus of commentary in the business sections of newspapers. The role of inflation as an ingredient in predicting nominal exchange rate movements is illustrated in the following clips.

In three to five years, the U.S. dollar

will presumably resume its long-term

slide unless Washington reverses its

economic policies of the post-Second

World War period and takes a tough

stand against inflation. Observers

believe a Reagan administration may

take that tougher stand.

News that U.S. job creation in January

was more robust than anticipated sent

a signal to currency markets to expect

a stepped-up fight against inflation,

unleashing a bout of buying fervor for

the U.S. dollar. There are also practical conclusions for those not in the business world:

Hence, to the extent that the decline

of the foreign currency relative to the

C$ matches the differences in the two

countries' inflation rates, the traveler

probably isn't better off. The extra

foreign currency will be required just to

pay for the higher-priced goods and

services. Under a fixed exchange rate system, of course, inflation does not affect the exchange rate, instead forcing foreign inflation to match ours, as illustrated neatly by the following clip.

This is the reason why the fixed

exchange rate system was scrapped in

1971. The U.S. had been pursuing an

inflationary monetary policy to help

pay for the Vietnam war and new

social programs, and its trading

partners did not all want to participate in


5. The Impact of Nominal Interest Rate Differences on Exchange Rates

The interest rate parity theorem suggests that economic forces of arbitrage will keep the real rate of interest in a small open economy close to the world real rate. Departures of an economy's real interest rate from the world rate affect its exchange rate; this is the focus of most macroeconomic textbook analysis. At times, however, a difference in nominal interest rates simply reflects a difference in inflation rates rather than a difference in real interest rates. Since news reporters, as noted earlier, focus on nominal interest rates, this can lend a different flavor to discussions of the relationship between interest rates and exchange rates. Four of the texts surveyed contained discussions of the relationship between the interest rate and the exchange rate, with only two of these noting the distinction between real and nominal interest rate differences in this respect. Once again, a practical note underlies newspaper commentary, as the following two clips attest:

At the same time that Secretary

Blumenthal was testifying to Congress,

the Treasury borrowed $1.6 billion in

Germany in the form of securities

denominated in marks. It offered to pay

an interest rate of roughly 6 percent

per year on mark-denominated three-and

four-year securities. On

comparable securities denominated in dollars,

the Treasury is currently paying a bit

over 9 percent--or 3 percentage

points per year more.

Hart can't understand why Canadians

would put their money in three-year

paper at 9%, when they can get

double-A rated New Zealand bonds at

19%. Discussing the role of interest rates in affecting the exchange rate requires drawing upon several elements of macroeconomic theory, particularly those concerning inflation. This integration of economic concepts can render newspaper commentary challenging for students. Consider the following three clips in this regard.

What would happen, for example, if

Michael Wilson adopted a deliberate

policy of deficit reduction and

lowering interest rates? Listen to the market

through the voice of Richard Kapsche,

vice president and futures floor

manager for E. F. Hutton at Chicago's

International Monetary Market: "We

would read that as an inflationary

policy and start selling off Canadian


The Bank has made occasional

attempts to narrow the gap between the

two sets of rates and accept some

lowering of the C$ as a trade-off.

Sometimes it works, and sometimes, like

last summer, we end up with the

worst of all possible worlds--higher

interest rates and a lower C$.

This does not mean there is a massive

flow of U.S. funds into Canada,

because the differentials are mitigated

by other factors. In the case of market

rates, the discount on the forward C$

has kept step with the interest rate

differential, and it is only on an

unhedged basis that the full advantage

of the differential can be gained.


The five concepts addressed in this paper are all found in macroeconomics textbooks; they are treated in those texts as being important, but their practical implications are not stressed. In contrast, in newspaper commentary these concepts play a central role, primarily because they deal with measured concepts having practical implications for the business world. One purpose of this paper is to pass along this perspective in the hope that textbook authors will react by making appropriate changes in future editions. A second purpose is to encourage instructors to place more emphasis on these concepts, in particular by focussing on practical implications. Ideally, classroom presentations should be supplemented with examples such as those presented above, and students should be given assignments in which they are asked to interpret news clips based on these concepts. For those interested in doing this, three words of warning are offered.

First, although it is easy to find news clippings that relate to macroeconomic concepts, in my experience it is difficult to find clippings that will be useful to students in that they can be exploited to enhance student learning. Too often such clips simply reiterate a macroeconomic concept, with little scope for student interpretation. Instructors will have to work hard to find suitable newspaper material.

Second, because journalists use metaphors so often, instructors must screen news clips to ensure that students can reasonably be expected to understand what is being said by the author. For example, if a journalist refers to inflation as the "Achilles heel" of bonds, will students understand what this means? Many students will, but those not conversant with Western mythology may not.

Third, although good students find this "real world" dimension of a macroeconomics course challenging and valuable, poor students find it frustrating and difficult. Their problem is best explained via an example. Consider the following four ways of asking students a question involving the discouraged/encouraged worker phenomenon:

1. What are "discouraged workers"?

2. Explain what impact an increase in

the number of "discouraged

workers" would have on the measured

level of unemployment.

3. An increase in the number of

"discouraged workers" will

a. raise the measured

unemployment rate;

b. leave employment unchange;

c. raise the participation rate; or

d. do all of the above.

4. "For example, Canada's jobless rate

fell to 7% last month, the lowest

number in 2 years. But if you think

it's a sign that the economy is

suddenly moving up, look again." How

could a fall in the unemployment

rate not be a sign that the economy

is moving up? The first three are typical of questions asked of students. The fourth has a key difference: It does not identify for the student the relevant economic concept by mentioning "discouraged workers"--the student must search through an entire course worth of concepts to find the one that is relevant, and then apply it. Many students find this very difficult to do. But isn't this precisely what we should want our students to be able to do upon completion of a course?

(1)These examples are taken from Kennedy and Dorosh [1990], a source containing hundreds of similar such short clips, along with, for each, questions asking students to use their textbook theory to interpret the content of the clip. Thanks are due to the Financial Post, the Financial Times of Canada, the Toronto Globe and Mail, and the Vancouver Sun for permission to quote these clips without specific reference. (2)The textbooks reviewed were Baumol, Blinder and Scarth [1988], Blomqvist, Wonnacott and Wonnacott [1983], James [1987], Lipsey, Steiner and Purvis [1984], McConnell and Pope [1984], MacMillan [1989], Antler and Miller [1985], Stager [1988], Samuelson, Nordhaus and McCallum [1988], and Vogt and Dolan [1988]. All are written for the Canadian market. A preliminary examination of textbooks written for the U.S. market indicated that on the whole they do not have an adequate treatment of the international sector, in spite of widespread agreement that the U.S. economy should no longer be viewed as a closed economy. Because two of the macroeconomic concepts singled out in this paper relate to the international sector of the economy, it was felt that a fair assessment of the claims stated in this paper could only be undertaken by reviewing texts which contain extensive discussions of the international sector, as the Canadian texts all do. Since six of these texts are Canadian versions of U.S. texts, it seems fair to conclude that the points raised in this paper apply with at least equal strength to U.S. principles textbooks.


Antler, S. D. and R. L. Miller. Economics Today. New York: Harper and Row, 1985. Baumol, W. J., A. S. Blinder and W. M. Scarth. Econcomics, 2nd Canadian ed. Toronto: Harcourt Brace Jovanovich, 1988. Blomqvist, A., P. Wonnacott and R. Wonnacott. Economics. 1st Canadian ed. Toronto: McGraw-Hill, 1983. Boynton, G. R. and C. Deissenberg. "Models of the Economy Implicit in Public Discourse." Policy Sciences, 20(2), 1987, 129-51. Cochran, J. P. and R. M. Brown. "What's Wrong Here?" Economic Inquiry, July 1989, 541-5. Fels, R. "Multiple Choice Questions in Elementary Economics," in Recent Research in Economic Education, edited by K. G. Lumsden. Englewood Cliffs, N.J.: Prentice-Hall, 1970, 27-43. Grunin, L. and D. L. Lindauer. "Economic Analysis in Plain English: A Course in Economic Journalism." Journal of Economic Education, Summer 1986, 223-8. James. E. M. Economics. Scarborough: Prentice-Hall of Canada, 1987. Kelley, A. C. "The Newspaper Can Be an Effective Teaching Tool." Journal of Economic Education, Fall 1983, 56-8. Kennedy, P. and G. Dorosh. Dateline Canada, 4th ed. Scarborough: Prentice-Hall of Canada, 1990. Lipsey, R. G., P. O. Steiner and D. D. Purvis. Economics. 7th ed. New York: Harper and Row, 1984. MacMillan, A. Macroeconomics. 3rd ed. Scarborough: Prentice-Hall of Canada, 1989. McConnell, C. R. and W. H. Pope. Economics. 3rd Canadian ed. Toronto: McGraw-Hill, 1984. Samuelson, P. A., W. D. Nordhaus and J. McCallum. Economics. 6th Canadian ed. Toronto: McGraw-Hill, 1988. Stager D. Economic Analysis and Canadian Policy. 6th ed. Toronto: Butterworths, 1988. Vogt, R. and E. G. Dolan. Economics. 3rd Canadian ed. Toronto: Holt, Rinehart and Winston of Canada, 1988. Wood, W. C. "The Educational Potential of News Coverage of Economics." Journal of Economic Education, Winter 1985, 27-36.

PETER KENNEDY, Simon Fraser University.
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Author:Kennedy, Peter
Publication:Economic Inquiry
Date:Jan 1, 1992
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