Transcript American History - Waverly-Shell Rock School District

American History
Introduction
to
Economics
Unit IVU.S. Economic
History
Handy Dandy Guide to
Economic Thinking
$ 1. People choose to do the things they think are best for
them.
$ 2. People’s choices have costs.
$ 3. People choose to do the things for which they are
rewarded. (People respond to incentives)- such as money.
$ 4. People create rules that affect their choices and how
they act. (People create ECONOMIC SYSTEMS that
influence individual choices and incentives.)
$ 5. People gain when they freely decide to trade with one
another. Free trade creates wealth.
$ 6. People’s choices today have future results. People often
live for tomorrow.
Economic Questions
$ What is economics?
$
Economics:The study of choice and decision-making in a world with limited
resources.
$
Economic Growth: A sustained increase in total output or output per person for an
economy over a long period of time.
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Economics is based on two facts:
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$
1. Society's material wants are virtually unlimited or insatiable
Utility is the economist's term for pleasure or satisfaction. Society has insatiable utility
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2. Economic resources are scarce
Economic resources are all natural, human, and manufactured resources that go into the
production of goods and services:
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$
$
$
1. Land and all "gifts of nature" (arable land, forests, mineral deposits)
2. Capital: all manufactured aids to production (tools, machinery)
3. Labor: all physical and mental talents of men and women.
4. Entrepreneurial Ability: entrepreneurs have initiative, make basic business-policy
decisions, be innovative, and take risks
Economic Questions
$ What is economics?
$ Economic Systems -The way a society organizes the
production, consumption, and distribution of goods and services.
$ Market Economy -An economic system where most goods and
services are exchanged through private transactions by private
households and businesses. Prices are determined by buyers
and sellers making exchanges in private markets.
Economic Questions
$ What are goods, services and resources?
• Goods-Objects that can be held or touched that can satisfy people’s
wants.
• Services- Activities that can satisfy people’s wants.
• Resources-All natural, human and human-made aids to the
production of goods and services. Also called productive resources.
• Natural Resources-"Gifts of nature" that are present without human
intervention (also called land).
Human Resources-The quantity and quality of human effort directed toward
producing goods and services (also called labor).
Capital Resources-Goods made by people and used to produce other
goods and services (also called intermediate goods).
Economic Questions
$ What is supply and demand?
$ Demand - A schedule of how much consumers are
willing and able to buy at all possible prices during
some time period.
$ Supply - A schedule of how much producers are willing
and able to produce and sell at all possible prices
during some time period.
$ Equilibrium Price - The market clearing price at which
the quantity demanded by buyers equals the quantity
supplied by sellers.
Economic Questions
$ What are unemployment, shortages
and surpluses?
$ Unemployment - The situation in which people are
willing and able to work at current wages but do not
have jobs.
$ Shortages- The situation resulting when the quantity
demanded exceeds the quantity supplied of a good,
service, or resource.
$ Surpluses -The situation resulting when the quantity
supplied exceeds the quantity demanded of a good,
service, or resource, usually because the price is for
some reason above the equilibrium price in the market
Economic Questions
$ What are producers, consumers and
markets?
• Production/Producers- People who use resources to
make goods and services, also called workers.
• Consumers-People whose wants are satisfied by using
goods and services.
• Markets-Any setting where buyers and sellers exchange
goods, services, resources, and currencies.
Economic Questions
$ What are stocks, bull markets and bear
markets?
• Stocks- Ownership of a corporation represented by shares
that are a claim on the corporation's earnings and assets.
• Bull Markets-prolonged period in which investment prices rise faster than
their historical average. Bull markets can happen as a result of an economic
recovery, an economic boom, or investor psychology. The longest and most
famous bull market is the one that began in the early 1990s in which the U.S.
equity markets grew at their fastest pace ever
• Bear Markets-A prolonged period in which investment prices fall,
accompanied by widespread pessimism. Bear markets usually occur when the
economy is in a recession and unemployment is high, or when inflation is rising
quickly. The most famous bear market in U.S. history was the Great
Depression of the 1930s
Economic Questions
$ What is Money?
 Medium of Exchange: Money allows people to avoid the
complications of barter. For example, a bookseller does not
want to be paid in bagels because others may not accept bagels
as a means of trade. Money is convenient because it is
accepted by all.
 What gives money it's value?
 Everybody accepts it
 Legal Tender - currency has been designated as legal tender
by government, which means it must be accepted as
payment
 Relative Scarcity - money derives its value from it's scarcity
relative to utility
What is the Federal Reserve? It manages the countries
money system; regulates the banking system; is a bankers
bank; and is the government’s bank.
Economic Questions
$ What is profit?
$ Profit - The difference between the total
revenue and total cost of a business;
entrepreneurial income- (The human
resource that assumes the risk of
organizing other productive resources to
produce goods and services.)
Economic Questions
$ What is GDP?
$ GDP is Gross domestic product. For a region, the GDP is “the
market value of all the goods and services produced by labor
and property located in the region, usually a country”.
GDP measures the market value of annual output
It is a monetary measure
GDP includes only market value of final goods and
ignores transactions involving intermediate goods to
avoid double counting. Intermediate sales of goods
are all the steps before the final selling of the good.
For an example the cotton to make a shirt may be sold
to the shirt manufacturer but it is not counted in the
GDP because the cotton was an intermediate
good…the final good is the shirt.
Economic Questions
$ What is inflation?
$ Inflation: Inflation is a sustained increase in the average
price level, or general rise in the price of the entire
economy.
 Tight Money Policy:This policy is exercised in times of inflation.
 Components:1). Selling securities to banks and the public. 2). Increase the
Federal Funds Rate. 3). Increasing the Discount Rate. 4). Increase the
Reserve Ratio
 Easy Money Policy: This monetary policy is used when the economy is faced
with recession and unemployment.
 Components: 1.) Buy Securities from commercial banks and public. 2.)
Reduce the Federal Funds Rate. 3.) Lowering the Discount Rate. 4.)
Reduce the Reserve Ratio
Economic Questions
$ What are Taxes?
$ Taxes- Required payments of money made to
governments by households and business firms.
$ Income Taxes - Taxes paid by households and
business firms on the income they receive.
$ Property Taxes - Taxes paid by households
and businesses on land and buildings.
$ Sales Taxes - Taxes paid on the goods and
services people buy.
Economic Questions
$ What is a depression?
•
There’s an old joke among economists that states: A recession is when your neighbor loses
his job. A depression is when you lose your job.
•
The difference between the two terms is not very well understood for one simple reason:
There isn’t a universally agreed upon definition. If you ask 100 different economists to define
the terms recession and depression, you’d get at least 100 different answers.
•
A depression is any economic downturn where real GDP declines by more than 10 percent.
A recession is an economic downturn that is less severe. By this yardstick, the last
depression in the United States was from May 1937 to June 1938, where real GDP declined
by 18.2 percent. A time of economic crisis or bad times in commerce, finance, and industry,
characterized by falling prices, restriction of credit, low output and investment, many
bankruptcies, and a high level of unemployment (many people without jobs).
•
A recession could be defined as the time when business activity has reached its peak and
starts to fall until the time when business activity bottoms out. When the business activity
starts to rise again it’s called an expansionary period. By this definition, the average
recession lasts about a year.
Economic Questions
$ What precisely is the national debt?
$
It's the total amount of funds that the federal government has borrowed over
the years and not yet repaid.
 And what about the deficit? That's the amount that the government spends each
year in excess of what its tax, tariff, and fee revenues bring in. The government
then must borrow to make up the difference. It's the accumulation of deficits year
after year that makes up the total national debt.
 Why do we have deficits? Because the government makes commitments to
spending programs without raising enough revenue to pay for them. Therefore, the
government has to borrow.
 How does the government borrow money? Does it just go to the bank? No.
The U.S. Treasury issues securities, or IOUs, such as savings bonds and Treasury
bills, notes, and bonds. Lenders buy these securities and the money goes to the
government. In return, the government pays interest to the owners of the securities.
Economic Questions
$ National
$ Debt?
Economic Questions
$ The National debt
$ How large is the debt?
As of Jan. 13, 2005, the gross federal debt was
$7,607.526,534,472.54 trillion. The estimated population of the United States is 295,313,752 so each
citizen's share of this debt is $25,760.83. The National Debt has continued to increase an average of $2.17
billion per day since September 30, 2004
$ Wow! When did the debt get so big?
$
$
Well, for the past two decades the net debt has
risen very rapidly. At the end of fiscal 1973, it was about a third of a trillion dollars; in 1983, a little over
$1 trillion; and in 1993, it was more than $3 trillion. The government has been increasing its
spending ––particularly on such items as Social Security, Medicare, and, for a time, national
defense –– at a rate faster than revenues have been growing. Also, there is a snowball effect
resulting from each increase in the debt: as the debt expands, so do the interest payments.
Anything else? In addition, the inflation and high interest rates of the 1970s and early 1980s
contributed to the rapidly growing debt. Even with inflation and interest rates declining in recent
years, the debt has not been reduced, because spending has continued to outpace revenues.
Has the debt always been rising? The first great surge in the national debt was caused by
U.S. participation in World War I. By the time the war ended in 1918, the debt had increased
from a little over $1billion to about $15 billion. The second surge took place during the Great
Depression. There was high unemployment and, therefore, less taxable income. New social
programs meant that the government had to borrow in order to finance increased spending. As a
result, the debt climbed to almost $50 billion by the start of World War II.
$ What does "fiscal" mean?
For budget purposes, the government year runs from October 1
to September 30; this is a called a fiscal year. For example, the 1996 fiscal year starts October 1, 1995,
and ends September 30, 1996.
Test your economic IQ
How much do you know about our
how our economy works and how it
affects you? According to the
National Council on Economic
Education, the average graduating
H.S. student should be able to score
100% on the following quiz. Can
you?
#1
The town of Bedford Falls wants to buy
four new police cars. The opportunity
cost of buying the police cars is the:
(a) cost of buying the cars now vs. buying
them later.
(b) ability to make more arrests and reduce
the total annual crime rate.
(c) other desirable goods or services that
must be given up to buy the cars.
(d) dollar cost of the new cars.
Answer for #1
C
Opportunity Cost: the next best
alternative that must be given up
when a choice is made.
#2
The best measure of the economy’s
performance is:
(a) the unemployment rate.
(b) gross domestic product.
(c) consumer price index.
(d) Dow Jones industrial Average.
Answer for #2
B
Gross Domestic Product (GDP): The
market value of all final goods and
services produced in the economy in
a given period of time.
#3
The best definition of profit is:
(a) total assets minus total liabilities.
(b) total sales minus total taxes.
(c) total revenues minus total costs.
(d) total sales minus total wages.
Answer for #3
C
Profits: total revenues from exchange
minus total costs associated with
production of a good or service.
Profits are the resource payment to
the entrepreneur or the owners of a
business enterprise.
#4
Gross Domestic Product is a
measure of:
(a) total market value of all final goods and services
produced in one year.
(b) the price level of goods and services sold in one
year.
(c) the total amount of refrigerators, washing
machines and other household appliances
produced in one year.
(d) the total amount of goods and services
produced by private companies in one year.
Answer for #4
A
Gross Domestic Product (GDP): The
market value of all final goods and
services produced in the economy in
a given period of time.
#5
Who would benefit from an
unexpected 10% inflation rate?
(a) Sam, who has $5,000 in a savings
account.
(b) Maria, who has a $5,000 life insurance
policy.
(c) John, who loaned Bonnie $5,000 last
year.
(d) Bonnie, who borrowed $5,000 from John
and must pay it back this year.
Answer for #5
D
Bonnie would benefit. Inflation is a
sustained increase in the average
price level, or general rise in the
price of the entire economy. She
benefits because even though prices
go up, her loan rate and amount will
remain the same. Cheap money.
#6
Who would benefit if the U.S.
dollar becomes stronger against the
Japanese Yen?
(a) a Japanese company selling products in the U.S.
(b) a U.S. company buying a building in Japan.
(c) a U.S. tourist taking a two week vacation in
Japan.
(d) all of the above.
(e) none of the above.
Answer for #6
D
They all benefit. This has to do with
exchange rates: the price of a
nation’s currency in terms of the
currency of another nation.
#7
The limit of the economy’s real
output at any time is set by:
(a) the quantity and quality of human and
natural resources and capital goods.
(b) the total amount of money, stocks, and
bonds in circulation.
(c) business demand for goods and
services.
(d) the amount of government spending and
taxes.
Answer for #7
A
Economic resources: land, labor,
capital goods and entrepreneurs.
#8
If your annual money income goes
up 10%, while the prices of what you
buy go up 20% then:
(a) your real income has risen.
(b) your real income is unchanged.
(c) your real income has fallen.
(d) you’re shopping in the wrong stores.
Answer for #8
C
Real Income: money income adjusted
to compensate for inflation.
#9
Three major productive resources
are natural and human resources and
capital goods. Which best illustrates
these three productive resources?
(a) rent, workers and money.
(b) iron ore, taxi drivers and bonds.
(c) farmers, importers, and exporters.
(d) oil, engineers, and drills.
Answer for #9
D
Economic resources: land, labor,
capital goods and entrepreneurs.
#10
Nation A grows bananas and
Nation B produces cheese. If they
exchange bananas and cheese:
(a)
Nation A gains and Nation B loses.
(b) Nation B gains and Nation A loses.
(c) Both Nations lose.
(d) Both Nations gain.
Answer for #10
D
They both benefit. This has to do with
international trade: the exchange of
goods and services between people
and institutions in different
countries.
#11
True or False: Most
millionaires are college
graduates
Answer for #11
True
Four of five millionaires are college
graduates. Eighteen percent have
Master’s degrees, eight percent law
degrees, six percent medical degrees
and six percent Ph.D.’s.
#12
Most millionaires work
fewer than 40 hours a
week.
Answer for #12
False
About 2/3 of millionaires work 45-55
hours a week.
#13
More than half of all
millionaires never received
money from a trust fund or
estate.
Answer for #13
True
Only 19% of millionaires received any
income or wealth of any kind from a
trust fund or an estate. Fewer than
10 % of millionaires inherited 10% or
more of their wealth.
#14
Most millionaires work in
glamorous jobs, such as
sports, entertainment, or high
tech.
Answer for #14
False
A majority of millionaires are in
ordinary industries and jobs. They
are proficient in targeting marketing
opportunities.
#15
Many poor people
become millionaires by
winning the lottery.
Answer for #15
False
Few people get rich the easy way. If you play the
lottery, the chances of winning are about 1 in 12
million. The average person who plays the lottery
every day would have to live about 33,000 years
to win once. In contrast, you have a 1 in 9 million
chance of being struck by lightning. A pregnant
woman has one chance in 750,000 births to have
quadruplets. How many sets of quadruplets do
you know?
Time spent on the job
If you work from the time you’re 21 years old, until you’re 70
years old, you’ll work 49 years.
If you work an average of 50 weeks for each of those 49 years,
you’ll work 2450 weeks.
If you average 40 hours for each of those 2450 weeks, you’ll
work 98,000 hours minimum. (A high school dropout works
10 hours a week more to earn the same pay as a high
school graduate.)
And that doesn’t include your lunch hour, the time it will take
to get to and from work, overtime hours and time you will
spend keeping up to date on new skills required for your
career.
Rules for improving your
financial life
1) Get a good education.
2)
3)
4)
5)
6)
Work long, hard and smart.
Learn money management skills.
Spend less than you can spend.
Save early and often.
Invest in common stocks for the long
term.
7) Gather information before making
decisions.