Transcript Economic vocab

ECONOMIC VOCAB TERMS
WHAT IS AN
ECONOMY?
An economy is a system which tries to balance
the available resources of a country (land,
labor, capital, and enterprise) against the
wants and needs of consumers.
It deals with three key issues:
-What is produced
-How it is produced
-Who gets what is produced
DEPRESSION V
RECESSION
Depression – a long
period where the
economy goes
downhill; usually has
high unemployment,
lots of bankruptcies,
less trade, and
sometimes devaluation
Recession – a shorter,
less extreme
depression (technically,
when a country’s GDP
falls for two straight
quarters)
GDP?
GDP (gross domestic product) is basically the
ultimate measure of a country’s economy
The formula is:
GDP = exports –imports + consumption +
investments + government spending
GDP CONTINUED...
Exports = stuff we sell to other countries (exit)
Imports = stuff we buy from other countries (in)
Consumption = food, rent, clothing, medical expenses,
etc.
Investments = NOT money put into stocks or savings
banks… money spent by businesses to try to get more
business (such as a new warehouse, new computer
programs, a new ride at Six Flags)
Government spending = money spent by government
on salaries, supplies, war, etc.
GDP CHART
STOCK MARKET
Stock market – a system for buying and selling stocks in
corporations
• Let’s say you own a factory that makes really cool cell
phones
• You make a profit of about $100,000 a year
• To make even more money, you want to build a second
factory, but it will cost you $1 million
• Your options:
• 1. Save up to buy the second factory
• 2. Borrow money from a bank, at a high interest rate
• 3. Divide your company into shares of stock, and sell
them
STOCK MARKET
CONTINUED...
• Let’s say your company is worth about $2 million
now, based on your equipment, supplies, etc.
• If you divide into shares of stock, you could
probably sell them for a total of about $3 million
• Why?
• People who buy stock are investing that
you’ll be worth more later
• And if you sell for $3 million, you can buy
that new factory right away
STOCK MARKET
CONTINUED...
• Two downsides to “going public” (dividing your
company into stock shares)
• You have to disclose all your financial info to
all your stockholders
• Each share of stock allows its holder to have
a vote on what the company does
• For this reason, most companies make
sure to buy back 51 percent of their
shares if they “go public”
• Why do people buy stock?
• Investment or gambling (depending on your
point of view)
THE ANIMALS OF THE
STOCK MARKET
Bull market – a long
period of rising stock
prices
Bear market – a long
period of falling stock
prices
OTHER TERMS
Margin – buying a stock by paying only a fraction
of the stock price and borrowing the rest
Speculation – investing money at great risk with
the anticipation that the price will rise
Installment plan – buying an item on credit with a
monthly payment plan
Foreclosure – when a creditor takes possession
of a property because someone did not pay the
mortgage payments
https://www.youtube.com/watch?v=G6iRy-AISZs
“How the Economy Really Works”
“How the Stock Market Works” (9min)
https://www.youtube.com/watch?v=GnJCOof2HJk
What is a Stock (2min)
http://www.investopedia.com/video/play/what-arestocks/#axzz1pZssUhKl
THE STOCK
MARKET CRASH
OF 1929
UH-OH!
BEFORE THE STOCK
MARKET CRASHED…
• Good times! People in society were very
optimistic!
• 1929-Herbert Hoover was president
• The economy is in a bull market, or a long period
of rising stock prices
• People are buying stocks on margin
• $1,000 could get you $10,000 in stocks
• Good if stocks rise, disastrous if they fall
BAD STUFF IS ABOUT
TO HAPPEN!
In the weeks before the crash, the
market had been experiencing
many ups and downs
Investors were nervous because
Congress was debating the
Hawley-Smoot Act. This would
raise tariffs on imported goods.
HAWLEY-SMOOT
TARIFF OF 1930
• Raised average tariff rate (this is a
tax on imports) to highest level in
American history;
• the purpose was to protect
American goods (so people
wouldn’t buy foreign goods)
WHAT HAPPENS AS A
RESULT OF THE
HAWLEY-SMOOT TARIFF?
• As a result, Americans bought fewer
imports (because they cost more)
• But this meant foreign countries had less
money to buy American goods and less
inclination to do so (if you’re not letting
me sell to you, why should I buy from
you?)
So this cut US exports big time
• So ultimately, the tariff didn’t really help
anything
THE GREAT STOCK MARKET
CRASH
October 29, 1929 –
called Black
Tuesday because
everyone begins
selling!
• Stocks lose 10-15
billion dollars in
value.
BLACK TUESDAY
• This hurts banks
who loaned on
margin and
speculation.
• People can’t pay
back loans to
bank.
• Bank can’t
afford to give
out more loans.
• Banks begin to
close
completely.
WHAT ABOUT MY
MONEY?
What happened to a customer’s savings if
a bank closed?
• customer would lose it because there was
no insurance
• the result was many people were scared
they would lose all their money, and they
went to bank to take out their savings
• that caused a problem since banks only
keep some of savings in the actual bank
• So many people took out money that
banks closed
SO WHY DID IT BOMB??
REASONS 1 AND 2
1. Overconfidence
during the 1920s due to
steady gains throughout
the decade.
2. People were not very
wealthy to begin with
• Two-thirds of families
earned less than $2,500
per year
• Rich were getting richer,
poor getting poorer
SO WHY DID IT BOMB??
REASONS 3 AND 4
3. People were buying high priced things
despite having little money.
• Installment plans – paying small amounts
each month.
4. Interest rates were too low.
• Banks made risky loans.
• Businesses borrowed more money to
expand when people have less money to
spend and support them.
AND SO…
The prosperity of the 1920’s is
gone almost as quickly as it
started
The Great Depression would
define the 1930s.