Economics and Personal Finance/Income and Economic Goals
What factors affect income?
- Human Capital: Level of education, training and work experience.
- Market Value: The level of demand that exists for the type of labor you are trained to provide.
- Production Value: Higher skilled workers = Increase in productivity and lowers production costs.
- Derived Demand: When the demand for a good or service affects the demand for a good or service related to it.
Economic Goals
[edit | edit source]What is a country's economic goals?
- Full Employment
- Stable Prices
- Economic Growth
The two biggest threats to a nation's "health" are unemployment and inflation.
The government tries its best to accommodate its citizens. The government...
- lower taxes
- offer tax breaks/credits to any new businesses
- job training programs to help the unemployed people
- increase gov't spending
- FRS
- Minimum wages increase
- Less money printed
- Encourage innovation by accommodating patents and copyright laws
- Promote research through grants
When the economy is under a recession, the government reduces spending and raises taxes.
Unemployment
[edit | edit source]The unemployment rate is the percentage of the labor force who are not currently working and are actively trying to find work. Unemployment is negative to a country's health as countries are not able to produce as much as it should [with employment].
Full employment is harmful to the economy of a nation because:
- A shortage of people to hire --> Employers have to increase wages to keep their workers.
- This results in increases in prices of goods/services --> money's value reduces and purchasing power declines (inflation).
Types
[edit | edit source]Unemployment | Description |
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Cyclical |
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Structural |
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Seasonal |
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Frictional |
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Inflation
[edit | edit source]A safe unemployment rate: 4-6%.
Inflation means that the consumers' purchasing power significantly decreases, which takes more dollars off the same goods/services. Consumers experience a bad standard of living, especially for the consumers who depend upon fixed incomes. If the:
- Interest rates for savings are lower than the inflation rate (3% --> Inflation of 5%)...
- ...saving accounts lose value!
Business Cycle
[edit | edit source]The business cycle is the pattern of alternating periods of growth and decrease in an economy.
Types
[edit | edit source]Phase | Description |
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Expansionary |
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Peak |
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Contractionary |
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Trough |
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Recession |
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Depression |
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Money
[edit | edit source]Money is an item that is widely accepted as a payment for goods and services.
Functions
[edit | edit source]- Medium of exchange: An item buyer gives to a seller.
- Unit of Account: The method that people use to post prices/record debts.
- Store of Value: Must retain its value over time.
Types
[edit | edit source]- Commodity Money
- Has value even if it is wasn't being used as money. This is like gold and silver.
- Fiat Money
- Has value because the government declared it acceptable, an example being the US Dollar
Characteristics
[edit | edit source]- Durability: Objects used as money must withstand physical wear and tear.
- Portability: People need to be able to carry it.
- Divisibility: Easy mathematics.
- Uniformity: Has to be BOTH same.
- Limited supply: Only in limited quantities.
- Acceptability: Must be the same value as the goods and services in an exchange.
The Federal Reserve
[edit | edit source]When would the Federal Reserve expand the economy?
- When there are a slow growth period and high unemployment.
- The government would increase federal spending and/or reduce taxes.
The risk that exists is prices rise up and interest rates increase.
When would the Federal Reserve contract the economy?
- When inflation is evident.
- The government would decrease federal funding and/or increase taxes to lower the prices and interest rates.
The current chairman of the Board of Governors (see below) is Jerome Powell.
- Created in 1913.
- Relugates and monitors financial institutions, like banks.
- Provide services to depository institutions, the federal government, and the public.
- Monitors interest rates.
- Makes sure that inflation is low.
- Supplies paper money and coins to banks.
Structure
[edit | edit source]- 12 regional banks
- Board of Governors: This is made up of 7 governors who each serve 14-year terms. They're appointed by the president and are confirmed by the Senate.
Price Elasticity
[edit | edit source]What affects price elasticity?
- Proportion of income spent.
- Substitutes.
- Time
- Necessities (lower) and Luxuries (higher)
Elasticity is the measurement of the change in demand for a good when its price changes.
Elastic Good
[edit | edit source]Consumers and producers are sensitive to price changes
- If the price of an elastic good increases, people will buy less.
- If the price of an elastic good decreases, people will buy more.
^This is for luxury items and non-necessities.
Represented by a flatter demand curve.
Inelastic good
[edit | edit source]These are essential goods.