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

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

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

Unemployment	Description
Cyclical	Associated with ups/downs of the business cycle Increases during recessions and depressions; Decreases during recoveries and booms
Structural	Caused by changes in the economy, such as technological advances and an increase in natural resources Structural jobs will never return to the labor force as they are not necessary anymore.
Seasonal	Caused by changes in weather Ex.: Construction/Migrant workers
Frictional	Fired Temporary unemployment during a job transition Ongoing and is only for a short time

Inflation

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

The business cycle is the pattern of alternating periods of growth and decrease in an economy.

Types

Phase	Description
Expansionary	Increase in employment, production, sales, income. Prices, CC [Consumer Confidence], Investments, Stock Values, and possibly inflation increase.
Peak	Low unemployment and inflation. Demand over supply. Economy overheats.
Contractionary	Decrease in employment, production, sales, income, prices, demand/spending, CC, stock values. Inflation increases.
Trough	Slow growth Low prices Unemployment
Recession	Contraction that goes on for 6-18 months.
Depression	Longer recession. Great Depression

Money

Money is an item that is widely accepted as a payment for goods and services.

Functions

1. Medium of exchange: An item buyer gives to a seller.
2. Unit of Account: The method that people use to post prices/record debts.
3. Store of Value: Must retain its value over time.

Types

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

1. Durability: Objects used as money must withstand physical wear and tear.
2. Portability: People need to be able to carry it.
3. Divisibility: Easy mathematics.
4. Uniformity: Has to be BOTH same.
5. Limited supply: Only in limited quantities.
6. Acceptability: Must be the same value as the goods and services in an exchange.

The Federal Reserve

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

• 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

What affects price elasticity?

1. Proportion of income spent.
2. Substitutes.
3. Time
4. Necessities (lower) and Luxuries (higher)

Elasticity is the measurement of the change in demand for a good when its price changes.

Elastic Good

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

These are essential goods.