Transcript M08_Madura6468_02_CH08

Chapter 8
The Economy
and You
Essential Question:
Why is an understanding of
economic conditions
important to your financial
plan?
Learning Objectives
• Explain how economic factors impact
financial decisions
• Understand how demographic changes will
impact your future
• Analyze how events in the national and
global economy might affect you
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Economics and Your Financial
Plan
• Economics
– The study of
choices
• People must decide:
– what they will seek
– how they will seek it
– what they will do without
• Economists seek to
understand ways that:
– these decisions are made
– the factors that influence them
– the impact those decisions on
others
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Economics and Your Financial
Plan
• Each of you makes economic decisions
every day
• How much did you spend on lunch today?
• What options did you pass up when you
made that decision?
• Larger decisions might include what kind of
education or job training you seek
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Economics and Your Financial
Plan
• Economy
– The system in
which businesses,
governments and
the world as a
whole interact
• In economics, we study:
– choices made by individuals
– decisions of business and
governments
– the world as a whole
• Economics is important to your
financial plan because it
involves making choices
• Good financial plans prepare for
unexpected economic events
• Economics trends can impact
financial decision making
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Economics and Your Financial
Plan
• Macroeconomics
– Deals with broad issues
that impact the economy
as a whole.
• Microeconomics
– Focuses on the study of
individual choices or
decisions made by
smaller units, such as a
firm.
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• Economics is broken into
two categories:
– Macroeconomics
– Microeconomics
• Most issues in this chapter
are macroeconomics issues
presented how they will
impact you on a micro
level
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What does the study of economics have to do
with your financial plan?
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Good financial plans prepare for
unexpected economic events and some
economic trends can impact financial
decision making
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8-8
Math for Personal Finance
• Jill needs to decide about whether to spend
$10,000 on a two-year degree that will qualify her
for a $28,000 a year job or go to work and make
$18,000 a year. She will work part-time while in
college and make about $8,000 a year. (For
purposes of this exercise disregard the effects of
interest or inflation.)
• How long will it take Jill to recover her investment if
she goes to college?
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Math for Personal Finance
• Solution: Jill is giving up $10,000 a year in
income for two years and spending another
$10,000, so she will have a total of $30,000
invested in her education. Since the job with
the degree will pay $10,000 per year more,
she will need three working years to
recover her investment of $30,000.
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Demographic Factors
• Demographics
– The study of human
populations
• Demographers look at groups of
people and their unique
combination of features such as:
– Race
– Education
– Age
• Understanding demographics can
help us predict certain needs in
advance
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The Graying of America
• The number of older people in
the US is increasing at a faster
– A period of very
rate than other age groups
high birthrates that
occurred between
• Families started after WW2
1946 and 1964
produced children in large
numbers.
• Baby boomers make up about
½ of the US labor force today
• The leading edge of this group
is beginning to reach
retirement age.
• Baby boom
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The Graying of America
• Job opportunities will open up as boomers
begin to leave their jobs
• Jobs in health care and other services that
serve older people will be in high demand.
• Historically, many retired people relocate to
warmer locations
• How will this affect housing prices where
you live?
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Immigration
• Immigration changes have produced
important demographic changes in the US
• Hispanic Americans are a rapidly growing
share of the population
• Jobs that cater to the needs of Hispanic
Americans will be in high demand.
• Learning to speak Spanish might help create
more job opportunities for your career
advancement
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Social Security
• FICA taxes are deducted from your
paycheck
• These taxes pay for the Social Security
system
• Many retirees rely on Social Security
payments for at least part of their living
expenses when they stop working
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Social Security
• When the US first established Social
Security, there were a lot of people paying
into the system and very few drawing out
• Today about 3.3 workers are paying taxes
for every one person drawing retirement
• Take a look at Figure 8.1 to see how there
will be just over 2 workers for every one
person drawing social security
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Figure 8.1: Workers per
Beneficiary Declining
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Social Security
• Within the next 20 years, 76 million baby
boomers will retire
• Who will pay for their retirement?
• FICA taxes might increase to cover these
promised benefits
• Your benefits might be reduced for future retirees
• What does that mean to your financial plan?
• In Figure 8.2, see how even a small investment
can help accumulate a large sum of money for
retirement
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Figure 8.2: Relationship Between
Investment and Savings
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Math for Personal Finance
• Assume that by 2040 there are 110 million
workers in the labor force and 61 million
retirees drawing Social Security
• How many workers will be paying in per
retiree in 2040?
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Math for Personal Finance
• Solution: 110/61 = 1.8 workers per retiree
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What are some demographic trends that
may affect your financial future?
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Baby boomer retirements and immigration
issues may affect your financial future
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Factors in the Larger Economy
• Overall trends in the economy can have a
big impact on our financial decisions
• It is important to have a basic
understanding of how the economy behaves
and the significant factors that can shape its
future
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Business Cycles
• Gross
• One way we measure national
domestic
economic activity is by keeping
product (GDP)
track of the GDP
– The total dollar
• Observing the GDP and how it
amount of all
changes helps show how strong
final goods and
the economy is
services
purchased in a
• Refer to Figure 8.3 to see how
given year
the economy has grown over the
past several decades.
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Figure 8.3: Current-Dollar and
“Real” GDP
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Business Cycles
• When GDP is higher, it means businesses
and individuals are selling more goods and
the economy is growing
• When GDP is lower, it means fewer goods
are being sold and the economy is shrinking
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Business Cycles
• Recession
– Period of time in
which the economy is
shrinking
• Depression
– A severe recession
• Business Cycle
– Alternating periods of
shrinking and growth
or expansion, in the
economy
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• Recessions are characterized
by fewer goods being sold
and higher levels of
unemployment
• The risk of job loss is much
higher
• Look at Figure 8.4 for an
example of a business cycle
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Figure 8.4: The Business Cycle
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Math for Personal Finance
• Factory X in the United States pays 200
workers a total of $7 million each year to
produce 1.5 million widgets. Foreign factory
Y employs 150 workers at a total cost of
$750,000 to produce 750,000 widgets.
• How do the costs per widget of the
American and foreign factory compare?
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Math for Personal Finance
• The cost per widget in the United States in
$7 million/1.5 million, or $4.67 per widget
• The cost per widget overseas is
$750,000/750,000, or $1 per widget
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Business Cycle
• How does the business cycle affect you?
• You need to prepare for the next recession
during good times
• Understanding the business cycle can help
you make basic life decisions
• Finding a new job during a recession is more
difficult than during a time of expansion
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Inflation and Purchasing Power
• Inflation
– A sustained
increase in the
general level of
prices
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• Things get more expensive
during a time of inflation
• The purchasing power of
your money also goes down
• $20 will not buy as much
today as it bought a few
years ago
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Inflation and Purchasing Power
• Economics measures inflation by looking up
prices on a set of about 300 goods and
services that most people consume during
the year
• Clothing, groceries, and electronic goods
are all part of this “market basket” of
goods
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Inflation and Purchasing Power
• Consumer price
index
– The formal measure of
inflation that tells us
whether things overall
are more expensive now
than in the past
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• This price data is then
used to construct the CPI
• The CPI is compared to
previous periods to tell us
if prices are going up and
by how much
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Inflation and Purchasing Power
• Inflation reduces the value of our money
• Inflation is a fairly steady presence in our
economy at some level
• Some of you may be protected by receiving
regular increases in your paychecks
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Inflation and Purchasing Power
• Another way to protect against inflation is to hold
some of your wealth in assets that tend to increase
in value by more than the rate of inflation
• Real estate is an investment that can be a good
protection against inflation
• These assets also involve a higher degree of risk
• It is not good practice to place all your savings and
investments in such assets
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Globalization
• Global economy
– The world in which
all economies of all
countries interact
and depend on each
other
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• Today we live in a global
economy
• Look at the typical products you
buy
• Few items are made solely in the
US
• A large and growing share of
what we buy and sell is imported
or exported
• Take a look at Figure 8.5 to see
evidence of our global economy
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Figure 8.5: Top U.S. Trade
Partners
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Globalization
• Wherever you work, the global nature of
today’s economy will affect you
• You will deal with imported products or be
involved in exporting products to other
countries
• You will compete for customers and jobs
with people from countries around the world
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Globalization
• Develop the ability to adapt to a rapidly
changing work force and business
environment
• Recognize what types of skills are in
demand
• Learn new skills as the environment
changes
• Jobs, such as plumbers, electricians, or
health-care-related jobs will be difficult to
outsource
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Globalization
• New issues will continue to emerge that
will create new opportunities
• Some issues might cause you to revise
your plan
• Economic issues, such as demographic
trends and inflation, will just be a few
issues that will affect this
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What are some broad economic factors
that might affect your financial future?
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Economic growth or recession,
globalization, and inflation might affect
your future
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Summary
• Understanding broad economic issues and
concepts help you formulate plans and
make better financial decisions
• Understanding demographics help you
predict certain needs in advance and make
informed career choices
• Two important demographic trends that will
impact everyone in the US are the graying
of America and increased immigration
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Summary
• Economic activity can be measured by the
gross domestic product (GDP)
• The economy goes through alternating
periods of shrinking and growth (business
cycle)
• Understanding the business cycle helps you
make basic life decisions
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Key Terms and Concepts
• Baby boom
• Business cycle
• Consumer price
index
• Demographics
• Depression
• Economics
• Economy
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• Global economy
• Gross domestic
product
• Inflation
• Macroeconomics
• Microeconomics
• Recession
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Websites
• www.bls.gov
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